----

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**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-Q**

| R  | QUARTERLY                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934 |
|---------|--------------------------------------------------------------------------------------------------------------------------------------|

**OR**

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

**CFS      Bancorp, Inc.**

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

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**CFS      BANCORP, INC.**

**TABLE      OF CONTENTS**

|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                     | Page   |
|----------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                     | **PART                I - FINANCIAL INFORMATION**                                                                                                                                                                                                                                                                                                        |   |
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                     |   |
| Item                1.                                                                                   | Financial                Statements (Unaudited)                                                                                                                                                                                                                                                                                                          |   |
|                                                                                                     | Condensed                Consolidated Statements of Condition                                                                                                                                                                                                                                                                                            | 3      |
|                                                                                                     | Condensed                Consolidated Statements of Income                                                                                                                                                                                                                                                                                               | 4      |
|                                                                                                     | Condensed                Consolidated Statements of Changes in Stockholders' Equity                                                                                                                                                                                                                                                                      | 5      |
|                                                                                                     | Condensed                Consolidated Statements of Cash Flows                                                                                                                                                                                                                                                                                           | 6      |
|                                                                                                     | Notes                to Condensed Condolidated Financial Statements                                                                                                                                                                                                                                                                                      | 7      |
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                     |   |
| Item                2.                                                                                   | Management's                Discussion and Analysis of Financial Condition and Results of                Operations                                                                                                                                                                                                                  | 12     |
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                     |   |
| Item                3.                                                                                   | Quantitative                and Qualitative Disclosures About Market Risk                                                                                                                                                                                                                                                                                | 34     |
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                     |   |
| Item                4.                                                                                   | Controls                and Procedures                                                                                                                                                                                                                                                                                                                   | 37     |
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                     |   |
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                     |   |
|                                                                                                     | **PART                II - OTHER INFORMATION**                                                                                                                                                                                                                                                                                                           |   |
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                     |   |
| Item                1.                                                                                   | Legal                Proceedings                                                     | 37     |
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                     |   |
| Item                1A.                                                                                  | Risk                Factors                                                                                                                                                                                                                                                                                                                              | 38     |
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                     |   |
| Item                2.                                                                                   | Unregistered                Sales of Equity Securities and Use of Proceeds                                                                                                                                                                                                                                                                               | 38     |
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                     |   |
| Item                3.                                                                                   | Defaults                upon Senior Securities                                                                                                                                                                                                                                                                                                           | 38     |
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                     |   |
| Item                4.                                                                                   | Submission                of Matters to a Vote of Security Holders                                                                                                                                                                                                                                                                                       | 39     |
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                     |   |
| Item                5.                                                                                   | Other                Information                                                                                                                                                                                                                                                                                                                         | 39     |
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                     |   |
| Item                6.                                                                                   | Exhibits                                                                                                                                                                                                                                                                                                                                                 | 40     |
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                     |   |
| Signature                Page                                                                            | 41                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                     |                                                                                                                                                                                                                                                                                                                                                     |   |
| Certifications              for Principal Executive Officer and Principal Financial              Officer |
|                                                                                                     |  Exhibit              31.1                                                                                                                                                                                                                                                                                                                          |   |
|                                                                                                     |  Exhibit              31.2                                                                                                                                                                                                                                                                                                                          |   |
|                                                                                                     |  Exhibit              32                                                                                                                                                                                                                                                                                                                            |   |

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*Table          of Contents*

**CFS      BANCORP, INC.**

**Condensed      **
**Consolidated      Statements of Condition**

|                                                                                                                                                                                        |   | **September                30, 2006** |        | **December                31, 2005** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|-------------|--------------------------------------|--------|
|                                                                                                                                                                                   |   |                                  | (Unaudited) |                                 |   |   |   |
|                                                                                                                                                                                   |   | (Dollars                in thousands) |
| **Assets**                                                                                                                                                                             |   |                                  |        |                                 |   |   |   |
| Cash                and amounts due from depository institutions                                                                                                                  |   | $                                     | 16,399      |                                 | $      | 17,600 |   |
| Interest-bearing                deposits                                                                                                                                          |   |                                  | 15,853      |                                 |   | 1,785 |   |
| Federal                funds sold                                                                                                                                                 |   |                                  | 18,102      |                                 |   | 4,792 |   |
| Cash                and cash equivalents                                                                                                                                          |   |                                  | 50,354      |                                 |   | 24,177 |   |
|                                                                                                                                                                                   |   |                                  |        |                                 |   |   |   |
| Securities                available-for-sale, at fair value                                                                                                                       |   |                                  | 322,770     |                                 |   | 218,550 |   |
| Investment                in Federal Home Loan Bank stock, at cost                                                                                                                |   |                                  | 25,455      |                                 |   | 28,252 |   |
|                                                                                                                                                                                   |   |                                  |        |                                 |   |   |   |
| Loans                receivable                                                                                                                                                   |   |                                  | 833,010     |                                 |   | 917,405 |   |
| Allowance                for losses on loans                                                                                                                                      |   |                                  | (10,692     | )                                    |   | (12,939 | ) |
| Net                loans                                                                                                                                                          |   |                                  | 822,318     |                                 |   | 904,466 |   |
|                                                                                                                                                                                   |   |                                  |        |                                 |   |   |   |
| Interest                receivable                                                                                                                                                |   |                                  | 7,922       |                                 |   | 6,142 |   |
| Office                properties and equipment                                                                                                                                    |   |                                  | 16,454      |                                 |   | 15,017 |   |
| Investment                in bank-owned life insurance                                                                                                                            |   |                                  | 35,474      |                                 |   | 34,889 |   |
| Prepaid                expenses and other assets                                                                                                                                  |   |                                  | 10,318      |                                 |   | 10,031 |   |
| Goodwill                and intangible assets                                                                                                                                     |   |                                  | 1,315       |                                 |   | 1,364 |   |
| Total                assets                                                                                                                                                       |   | $                                     | 1,292,380   |                                 | $      | 1,242,888 |   |
|                                                                                                                                                                                   |   |                                  |        |                                 |   |   |   |
| **Liabilities                and Stockholders’ Equity**                                                                                                                          |   |                                  |        |                                 |   |   |   |
| Deposits                                                                                                                                                                          |   | $                                     | 870,830     |                                 | $      | 828,635 |   |
| Borrowed                money, net of unamortized deferred premium on earlyextinguishment                of debt                                                                  |   |                                  | 275,051     |                                 |   | 257,326 |   |
| Advance                payments by borrowers for taxes and insurance                                                                                                              |   |                                  | 4,393       |                                 |   | 6,641 |   |
| Other                liabilities                                                                                                                                                  |   |                                  | 9,084       |                                 |   | 7,919 |   |
| Total                liabilities                                                                                                                                                  |   |                                  | 1,159,358   |                                 |   | 1,100,521 |   |
|                                                                                                                                                                                   |   |                                  |        |                                 |   |   |   |
| 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; 11,293,170 and 12,005,431 shares outstanding                  |   |                                  | 234         |                                 |   | 234 |   |
| Additional                paid-in capital                                                                                                                                         |   |                                  | 190,692     |                                 |   | 190,402 |   |
| Retained                earnings                                                                                                                                                  |   |                                  | 94,101      |                                 |   | 94,379 |   |
| Treasury                stock, at cost; 12,130,136 and 11,417,875 shares                                                                                                          |   |                                  | (147,517    | )                                    |   | (136,229 | ) |
| Unallocated                common stock held by ESOP                                                                                                                              |   |                                  | (3,864      | )                                    |   | (4,762 | ) |
| Unearned                common stock acquired by RRP                                                                                                                              |   |                                  | **-**       |                                 |   | (111 | ) |
| Accumulated                other comprehensive loss, net of tax                                                                                                                   |   |                                  | (624        | )                                    |   | (1,546 | ) |
| Total                stockholders’ equity                                                                                                                                   |   |                                  | 133,022     |                                 |   | 142,367 |   |
| Total                liabilities and stockholders’ equity                                                                                                                   |   | $                                     | 1,292,380   |                                 | $      | 1,242,888 |   |

*See      accompanying notes.*

----

*Table          of Contents*

**CFS      **
**BANCORP,      INC.**

**Condensed**
**Consolidated      Statements of Income**

|                                                                              |   | **Three                Months Ended****September                30,**  | **Nine                Months Ended****September                30,** |
|-----------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|----------------------------------------------------------------------|
|                                                                              |   | **2006**                                                                    |                                                                 | **2005** |   | **2006** |   | **2005** |
|                                                                              |   | (Unaudited)                                                            |
|                                                                              |   | (Dollars                in thousands, except share and per share data)      |
| Interest                income:                                                   |   |                                                                        |                                                                 |   |   |   |   |   |   |   |   |   |   |
| Loans                                                                        |   | $                                                                           | 14,798                                                               |   | $ | 15,165 |   | $ | 45,027 |   | $ | 44,896 |   |
| Securities                                                                   |   |                                                                        | 3,482                                                                |   |   | 1,776 |   |   | 9,123 |   |   | 5,348 |   |
| Other                                                                        |   |                                                                        | 625                                                                  |   |   | 267 |   |   | 1,674 |   |   | 969 |   |
| Total                interest income                                         |   |                                                                        | 18,905                                                               |   |   | 17,208 |   |   | 55,824 |   |   | 51,213 |   |
| Interest                expense:                                                  |   |                                                                        |                                                                 |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                     |   |                                                                        | 5,752                                                                |   |   | 3,494 |   |   | 15,309 |   |   | 9,706 |   |
| Borrowed                money                                                |   |                                                                        | 5,300                                                                |   |   | 5,801 |   |   | 15,694 |   |   | 20,340 |   |
| Total                interest expense                                        |   |                                                                        | 11,052                                                               |   |   | 9,295 |   |   | 31,003 |   |   | 30,046 |   |
| Net                interest income                                           |   |                                                                        | 7,853                                                                |   |   | 7,913 |   |   | 24,821 |   |   | 21,167 |   |
| Provision                for losses on loans                                 |   |                                                                        | 413                                                                  |   |   | 545 |   |   | 971 |   |   | 1,312 |   |
| Net                interest income after provision for losses on loans       |   |                                                                        | 7,440                                                                |   |   | 7,368 |   |   | 23,850 |   |   | 19,855 |   |
| Non-interest                income:                                               |   |                                                                        |                                                                 |   |   |   |   |   |   |   |   |   |   |
| Service                charges and other fees                                |   |                                                                        | 1,730                                                                |   |   | 1,956 |   |   | 5,042 |   |   | 5,592 |   |
| Commission                income                                             |   |                                                                        | 32                                                                   |   |   | 159 |   |   | 149 |   |   | 428 |   |
| Net                realized gains (losses) on available-for-sale securities  |   |                                                                        | 877                                                                  |   |   | (25 | ) |   | 750 |   |   | (113 | ) |
| Impairment                of available-for-sale securities                   |   |                                                                        | **-**                                                                |   |   | - |   |   | **-** |   |   | (240 | ) |
| Net                gains (losses) on sale of other assets                    |   |                                                                        | (1,339                                                               | ) |   | 287 |   |   | (1,291 | ) |   | 369 |   |
| Income                from bank-owned life insurance                         |   |                                                                        | 401                                                                  |   |   | 409 |   |   | 1,189 |   |   | 1,138 |   |
| Other                income                                                  |   |                                                                        | 568                                                                  |   |   | 563 |   |   | 1,696 |   |   | 1,558 |   |
| Total                non-interest income                                     |   |                                                                        | 2,269                                                                |   |   | 3,349 |   |   | 7,535 |   |   | 8,732 |   |
| Non-interest                expense:                                              |   |                                                                        |                                                                 |   |   |   |   |   |   |   |   |   |   |
| Compensation                and employee benefits                            |   |                                                                        | 5,092                                                                |   |   | 4,625 |   |   | 15,419 |   |   | 13,751 |   |
| Net                occupancy expense                                         |   |                                                                        | 609                                                                  |   |   | 628 |   |   | 1,923 |   |   | 2,055 |   |
| Data                processing                                               |   |                                                                        | 559                                                                  |   |   | 646 |   |   | 1,910 |   |   | 1,998 |   |
| Furniture                and equipment expense                               |   |                                                                        | 548                                                                  |   |   | 433 |   |   | 1,516 |   |   | 1,288 |   |
| Professional                fees                                             |   |                                                                        | 319                                                                  |   |   | 413 |   |   | 1,083 |   |   | 1,228 |   |
| Marketing                                                                    |   |                                                                        | 442                                                                  |   |   | 245 |   |   | 1,031 |   |   | 640 |   |
| Amortization                of core deposit intangibles                      |   |                                                                        | 16                                                                   |   |   | 16 |   |   | 49 |   |   | 49 |   |
| Other                general and administrative expenses                     |   |                                                                        | 1,343                                                                |   |   | 1,192 |   |   | 3,965 |   |   | 3,828 |   |
| Total                non-interest expense                                    |   |                                                                        | 8,928                                                                |   |   | 8,198 |   |   | 26,896 |   |   | 24,837 |   |
| Income                before income taxes                                    |   |                                                                        | 781                                                                  |   |   | 2,519 |   |   | 4,489 |   |   | 3,750 |   |
| Income                tax expense                                            |   |                                                                        | 1                                                                    |   |   | 632 |   |   | 779 |   |   | 585 |   |
| Net                income                                                    |   | $                                                                           | 780                                                                  |   | $ | 1,887 |   | $ | 3,710 |   | $ | 3,165 |   |
|                                                                              |   |                                                                        |                                                                 |   |   |   |   |   |   |   |   |   |   |
| Per                share data:                                                    |   |                                                                        |                                                                 |   |   |   |   |   |   |   |   |   |   |
| Basic                earnings per share                                      |   | $                                                                           | 0.07                                                                 |   | $ | 0.16 |   | $ | 0.33 |   | $ | 0.27 |   |
| Diluted                earnings per share                                    |   |                                                                        | 0.07                                                                 |   |   | 0.16 |   |   | 0.32 |   |   | 0.26 |   |
| Cash                dividends declared per share                             |   |                                                                        | 0.12                                                                 |   |   | 0.12 |   |   | 0.36 |   |   | 0.36 |   |
| Weighted-average                shares outstanding                           |   |                                                                        | 11,023,626                                                           |   |   | 11,718,907 |   |   | 11,258,651 |   |   | 11,778,729 |   |
| Weighted-average                diluted shares outstanding                   |   |                                                                        | 11,248,382                                                           |   |   | 11,943,913 |   |   | 11,491,604 |   |   | 12,015,243 |   |

*See      accompanying notes.*

----

*Table          of Contents*

**CFS      BANCORP, INC.**

**Condensed**
**Consolidated      Statements of Changes in Stockholders' Equity**

|                                                                                                                                                                                                                         |   | **Common****Stock**                                                |   | **Additional****Paid-In****Capital** |   | **Retained****Earnings** |   | **Treasury****Stock** |   | **Unalloc.                Common****Stock                Held****By                ESOP** |   | **Unearned****Common                Stock Acquired****By                RRP** |   | **Accum.                Other Compre-hensive****Loss** |   | **Total** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|--------------------------------------|--------|--------------------------|--------|-----------------------|--------|-------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|--------|--------------------------------------------------------|--------|-----------|--------|
|                                                                                                                                                                                                                         |   | (Unaudited)                                                   |
|                                                                                                                                                                                                                         |   | (Dollars                in thousands, except per share data)  |
| Balance                at January 1, 2005                                                                                                                                                                               |   | $                                                                  | 234    |                                 | $      | 189,991                  |   | $                     | 94,904 |                                                                                      | $      | (130,689                                                                      | )      | $                                                      | (5,959 | )         | $      | (148 | ) | $ | (422 | ) | $ | 147,911 |   |
| Net                income                                                                                                                                                                                               |   |                                                               | -      |                                 |   | -                        |   |                  | 3,165  |                                                                                      |   | -                                                                             |   |                                                   | -      |      |   | - |   |   | - |   |   | 3,165 |   |
| Other                comprehensive loss, net of tax: Change                in unrealized loss on available-for-sale                securities, net of reclassification                adjustment                        |   |                                                               |   |                                 |   |                     |   |                  |   |                                                                                      |   |                                                                          |   |                                                   |   |      |   |   |   |   | (821 | ) |   | (821 | ) |
| Total                comprehensive income                                                                                                                                                                               |   |                                                               |   |                                 |   |                     |   |                  |   |                                                                                      |   |                                                                          |   |                                                   |   |      |   |   |   |   |   |   |   | 2,344 |   |
| Purchase                of treasury stock                                                                                                                                                                               |   |                                                               | -      |                                 |   | -                        |   |                  | -      |                                                                                      |   | (4,256                                                                        | )      |                                                   | -      |      |   | - |   |   | - |   |   | (4,256 | ) |
| Shares                earned under ESOP                                                                                                                                                                                 |   |                                                               | -      |                                 |   | 333                      |   |                  | -      |                                                                                      |   | -                                                                             |   |                                                   | 898    |      |   | - |   |   | - |   |   | 1,231 |   |
| Amortization                of awards under RRP                                                                                                                                                                         |   |                                                               | -      |                                 |   | 12                       |   |                  | -      |                                                                                      |   | -                                                                             |   |                                                   | -      |      |   | 37 |   |   | - |   |   | 49 |   |
| Exercise                of stock options                                                                                                                                                                                |   |                                                               | -      |                                 |   | (255                     | )      |                  | -      |                                                                                      |   | 727                                                                           |   |                                                   | -      |      |   | - |   |   | - |   |   | 472 |   |
| Tax                benefit related to stock options exercised                                                                                                                                                           |   |                                                               | -      |                                 |   | 134                      |   |                  | -      |                                                                                      |   | -                                                                             |   |                                                   | -      |      |   | - |   |   | - |   |   | 134 |   |
| Dividends                declared on common stock ($0.36                per share)                                                                                                                                      |   |                                                               | -      |                                 |   | -                        |   |                  | (4,170 | )                                                                                         |   | -                                                                             |   |                                                   | -      |      |   | - |   |   | - |   |   | (4,170 | ) |
| Balance                at September 30, 2005                                                                                                                                                                            |   | $                                                                  | 234    |                                 | $      | 190,215                  |   | $                     | 93,899 |                                                                                      | $      | (134,218                                                                      | )      | $                                                      | (5,061 | )         | $      | (111 | ) | $ | (1,243 | ) | $ | 143,715 |   |
|                                                                                                                                                                                                                         |   |                                                               |   |                                 |   |                     |   |                  |   |                                                                                      |   |                                                                          |   |                                                   |   |      |   |   |   |   |   |   |   |   |   |
| Balance                at January 1, 2006                                                                                                                                                                               |   | $                                                                  | 234    |                                 | $      | 190,402                  |   | $                     | 94,379 |                                                                                      | $      | (136,229                                                                      | )      | $                                                      | (4,762 | )         | $      | (111 | ) | $ | (1,546 | ) | $ | 142,367 |   |
| Net                income                                                                                                                                                                                               |   |                                                               | -      |                                 |   | -                        |   |                  | 3,710  |                                                                                      |   | -                                                                             |   |                                                   | -      |      |   | - |   |   | - |   |   | 3,710 |   |
| Other                comprehensive income, net of tax: Change                in unrealized                loss on available-for-sale                securities, net of reclassification                adjustment  |   |                                                               |   |                                 |   |                     |   |                  |   |                                                                                      |   |                                                                          |   |                                                   |   |      |   |   |   |   | 922 |   |   | 922 |   |
| Total                comprehensive income                                                                                                                                                                               |   |                                                               |   |                                 |   |                     |   |                  |   |                                                                                      |   |                                                                          |   |                                                   |   |      |   |   |   |   |   |   |   | 4,632 |   |
| Purchase                of treasury stock                                                                                                                                                                               |   |                                                               | -      |                                 |   | -                        |   |                  | -      |                                                                                      |   | (14,705                                                                       | )      |                                                   | -      |      |   | - |   |   | - |   |   | (14,705 | ) |
| Shares                earned under ESOP                                                                                                                                                                                 |   |                                                               | -      |                                 |   | 424                      |   |                  | -      |                                                                                      |   | -                                                                             |   |                                                   | 898    |      |   | - |   |   | - |   |   | 1,322 |   |
| Reclassification                of unearnedcompensation                to additional                paid-incapital                upon the adoption of SFAS123(R)                                                            |   |                                                               | -      |                                 |   | (111                     | )      |                  | -      |                                                                                      |   | -                                                                             |   |                                                   | -      |      |   | 111 |   |   | - |   |   | - |   |
| Amortization                of awards under RRP                                                                                                                                                                         |   |                                                               | -      |                                 |   | 48                       |   |                  | -      |                                                                                      |   | -                                                                             |   |                                                   | -      |      |   | - |   |   | - |   |   | 48 |   |
| Exercise                of stock options                                                                                                                                                                                |   |                                                               | -      |                                 |   | (474                     | )      |                  | -      |                                                                                      |   | 3,417                                                                         |   |                                                   | -      |      |   | - |   |   | - |   |   | 2,943 |   |
| Tax                benefit related to stock optionsexercised                                                                                                                                                            |   |                                                               | -      |                                 |   | 403                      |   |                  | -      |                                                                                      |   | -                                                                             |   |                                                   | -      |      |   | - |   |   | - |   |   | 403 |   |
| Dividends                declared on common stock ($0.36                per share)                                                                                                                                      |   |                                                               | -      |                                 |   | -                        |   |                  | (3,988 | )                                                                                         |   | -                                                                             |   |                                                   | -      |      |   | - |   |   | - |   |   | (3,988 | ) |
| Balance                at September 30, 2006                                                                                                                                                                            |   | $                                                                  | 234    |                                 | $      | 190,692                  |   | $                     | 94,101 |                                                                                      | $      | (147,517                                                                      | )      | $                                                      | (3,864 | )         | $      | - |   | $ | (624 | ) | $ | 133,022 |   |

*See      accompanying notes.*

----

*Table          of Contents*

**CFS      BANCORP, INC.**

**Condensed**
**Consolidated      Statements of Cash Flows**

|                                                                                                            |   | **Nine                Months Ended****September                30**, |
|-----------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|
|                                                                                                            |   | **2006**                                                             |   | **2005** |   |
|                                                                                                            |   | (Unaudited)                                                     |
|                                                                                                            |   | (Dollars                in thousands)                           |
| Operating                activities:                                                                            |   |                                                                 |   |   |   |   |   |
| Net                income                                                                             |   | $                                                                    | 3,710 |   | $ | 3,165 |   |
| Adjustments                to reconcile net income to net cash provided by operating                activities: |   |                                                                 |   |   |   |   |   |
| Provision                for losses on loans                                                               |   |                                                                 | 971 |   |   | 1,312 |   |
| Depreciation                and amortization                                                               |   |                                                                 | 1,130 |   |   | 1,224 |   |
| Premium                amortization on the early extinguishment of debt                                    |   |                                                                 | 7,587 |   |   | 11,581 |   |
| Net                premium amortization on securities available-for-sale                                   |   |                                                                 | (361 | ) |   | 690 |   |
| Impairment                of securities available-for-sale                                                 |   |                                                                 | - |   |   | 240 |   |
| Benefit                for deferred income taxes                                                           |   |                                                                 | (493 | ) |   | (1,193 | ) |
| Amortization                of cost of stock benefit plans                                                 |   |                                                                 | 1,370 |   |   | 1,280 |   |
| Proceeds                from sale of loans held-for-sale                                                   |   |                                                                 | 7,809 |   |   | 18,599 |   |
| Origination                of loans held-for-sale                                                          |   |                                                                 | (7,664 | ) |   | (22,231 | ) |
| Net                (gain) loss realized on sale of securities                                              |   |                                                                 | (750 | ) |   | 113 |   |
| Dividends                received on Federal Home Loan Bank stock                                          |   |                                                                 | - |   |   | (587 | ) |
| Net                (gain) loss realized on sale of other assets                                            |   |                                                                 | 1,291 |   |   | (369 | ) |
| Net                increase in cash surrender value of bank-owned life insurance                           |   |                                                                 | (585 | ) |   | (1,138 | ) |
| (Increase)                decrease in prepaid expenses and other assets                                    |   |                                                                 | (4,873 | ) |   | 3,713 |   |
| Increase                in other liabilities                                                               |   |                                                                 | 4,672 |   |   | 563 |   |
| Net                cash provided by operating activities                                                        |   |                                                                 | 13,814 |   |   | 16,962 |   |
|                                                                                                            |   |                                                                 |   |   |   |   |   |
| Investing                activities:                                                                            |   |                                                                 |   |   |   |   |   |
| Securities:                                                                                                     |   |                                                                 |   |   |   |   |   |
| Proceeds                from sales                                                                         |   |                                                                 | 24,826 |   |   | 49,149 |   |
| Proceeds                from maturities and paydowns                                                       |   |                                                                 | 17,064 |   |   | 33,258 |   |
| Purchases                                                                                                  |   |                                                                 | (140,721 | ) |   | (78,615 | ) |
| Net                loan fundings and principal payments received                                           |   |                                                                 | 66,457 |   |   | 23,766 |   |
| Proceeds                from sales of loans and loan participations                                        |   |                                                                 | 8,754 |   |   | 22,632 |   |
| Proceeds                from sale of real estate owned                                                     |   |                                                                 | 4,162 |   |   | 715 |   |
| Purchases                of property and equipment                                                         |   |                                                                 | (2,602 | ) |   | (920 | ) |
| Disposal                of property and equipment                                                          |   |                                                                 | 84 |   |   | 467 |   |
| Net                cash provided by (used for) investing activities                                        |   |                                                                 | (21,976 | ) |   | 50,452 |   |
|                                                                                                            |   |                                                                 |   |   |   |   |   |
| Financing                activities:                                                                            |   |                                                                 |   |   |   |   |   |
| Proceeds                from exercises of stock options                                                    |   |                                                                 | 2,943 |   |   | 472 |   |
| Tax                benefit from exercises of nonqualified stock options                                    |   |                                                                 | 403 |   |   | 134 |   |
| Dividends                paid on common stock                                                              |   |                                                                 | (4,249 | ) |   | (4,327 | ) |
| Purchase                of treasury stock                                                                  |   |                                                                 | (14,705 | ) |   | (4,256 | ) |
| Net                increase (decrease) in deposit accounts                                                 |   |                                                                 | 42,057 |   |   | (38,187 | ) |
| Net                decrease in advance payments by borrowers for taxes and                insurance        |   |                                                                 | (2,248 | ) |   | (87 | ) |
| Net                increase in other short-term borrowings                                                 |   |                                                                 | 20,322 |   |   | - |   |
| Net                decrease in FHLB debt                                                                   |   |                                                                 | (10,184 | ) |   | (24,172 | ) |
| Net                cash flows provided by (used for) financing activities                                  |   |                                                                 | 34,339 |   |   | (70,423 | ) |
| Net                increase (decrease) in cash and cash equivalents                                             |   |                                                                 | 26,177 |   |   | (3,009 | ) |
| Cash                and cash equivalents at beginning of period                                            |   |                                                                 | 24,177 |   |   | 38,094 |   |
| Cash                and cash equivalents at end of period                                                  |   | $                                                                    | 50,354 |   | $ | 35,085 |   |
|                                                                                                            |   |                                                                 |   |   |   |   |   |
| Cash                paid for:                                                                                   |   |                                                                 |   |   |   |   |   |
| Interest                on deposits                                                                        |   | $                                                                    | 15,259 |   | $ | 9,683 |   |
| Interest                on borrowed money                                                                  |   |                                                                 | 15,735 |   |   | 8,831 |   |
| Taxes                                                                                                 |   |                                                                 | 1,020 |   |   | - |   |

*See      accompanying notes.*

----

*Table          of Contents*

**C**
**FS      BANCORP, INC.**

**NOTES      TO CONDENSED CONSOLIDATED FINANCIAL      STATEMENTS**

**(Unaudited)**

**1.      Basis of Financial Statements Presentation**

*Company*

**2.      Share-Based Compensation **

*Share-Based      Payment*
*SFAS      123(R)*

----

*Table          of Contents*

*Options*
*Accounting      for Stock Issued to Employees*
*APB      25*

*RRP*

*Accounting      for Stock-Based Compensation *
*SFAS      123*

|                                                                                                              |   | **Three                Months Ended****September                30,** |   | **Nine                Months Ended****September                30,** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|
|                                                                                                              |   | **2005**                                                              |   | **2005**                                                             |   |
|                                                                                                                   |   | (Dollars                in thousands except per share data)      |
| Net                income (as reported)                                                                      |   | $                                                                     | 1,887  |                                                                 | $      | 3,165 |   |
| Stock-based                compensation expense determined using fair value method, net of tax                (1) |   |                                                                  | (1,899 | )                                                                    |   | (2,176 | ) |
| Pro                forma net income                                                                          |   | $                                                                     | (12    | )                                                                    | $      | 989 |   |
|                                                                                                              |   |                                                                  |   |                                                                 |   |   |   |
| Basic                earnings per share (as reported)                                                        |   | $                                                                     | 0.16   |                                                                 | $      | 0.27 |   |
| Pro                forma basic earnings per share                                                            |   |                                                                  | -      |                                                                 |   | 0.08 |   |
| Diluted                earnings per share (as reported)                                                      |   |                                                                  | 0.16   |                                                                 |   | 0.26 |   |
| Pro                forma diluted earnings per share                                                          |   |                                                                  | -      |                                                                 |   | 0.08 |   |

----

*Table          of Contents*

| Dividend                yield         |   |   | 3.6                    | %      |
|---------------------------------------|--------|--------|------------------------|--------|
| Expected                volatility    |   |   | 25.9                   |   |
| Risk-free                interest     |   |   | 4.1                    |   |
| Original                expected life |   |   | 6                years |   |

|                                                |   | **Number                of****Shares** |   | **Weighted-Average****Exercise                Price** |   |
|----------------------------------------------------------|--------|----------------------------------------|--------|-------------------------------------------------------|--------|
| Options                outstanding at January 1, 2006    |   |                                   | 1,823  |                                                  | $      | 11.78 |   |
| Granted                                                  |   |                                   | -      |                                                  |   | - |   |
| Exercised                                                |   |                                   | (285   | )                                                     |   | 10.32 |   |
| Forfeited                                                |   |                                   | (6     | )                                                     |   | 13.48 |   |
| Options                outstanding at September 30, 2006 |   |                                   | 1,532  |                                                  |   | 12.04 |   |
| Options                exercisable at September 30, 2006 |   |                                   | 1,532  |                                                  |   | 12.04 |   |

----

*Table          of Contents*

|                                        |   | **Number                of****Shares** |   | **Weighted-Average****Grant-Date                Fair****Value** |   |
|--------------------------------------------------|--------|----------------------------------------|--------|-----------------------------------------------------------------|--------|
| Unvested                at December 31, 2005     |   |                                   | 10,620 |                                                            | $      | 13.83 |   |
| Granted                                     |   |                                   | -      |                                                            |   | - |   |
| Vested                                      |   |                                   | (3,505 | )                                                               |   | 13.83 |   |
| Forfeited                                   |   |                                   | -      |                                                            |   | - |   |
| Unvested                as of September 30, 2006 |   |                                   | 7,115  |                                                            | $      | 13.84 |   |

**3.      Other Comprehensive Income**

|                                                                                                               |   | **Nine                Months Ended****September                30,** |   |
|--------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|
|                                                                                                               |   | **2006**                                                             |   | **2005** |   |
|                                                                                                               |   | (Dollars                in thousands)                                |   |
| Unrealized                holding gains (losses) arising during the period:                                        |   |                                                                 |   |   |   |   |   |
| Unrealized                net securities gains (losses)                                                            |   | $                                                                    | 2,229  |   | $ | (1,674 | ) |
| Related                tax (expense) benefit                                                                       |   |                                                                 | (846   | ) |   | 635 |   |
| Net                                                                                                                |   |                                                                 | 1,383  |   |   | (1,039 | ) |
| Less:                reclassification adjustment for net gains (losses)                realized during the period: |   |                                                                 |   |   |   |   |   |
| Realized                net securities gains (losses)                                                              |   |                                                                 | 750    |   |   | (353 | ) |
| Related                tax (expense) benefit                                                                       |   |                                                                 | (289   | ) |   | 135 |   |
| Net                                                                                                                |   |                                                                 | 461    |   |   | (218 | ) |
| Total                other comprehensive income (loss)                                                        |   | $                                                                    | 922    |   | $ | (821 | ) |

----

*Table          of Contents*

**4.      Earnings Per Share**

|                                                                                                             |   | **Three                Months Ended****September                30,** |       | **Nine                Months Ended****September                30,** |   |
|------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------|--------|
|                                                                                                             |   | **2006**                                                              |       | **2005**                                                             |   | **2006** |   | **2005** |   |
|                                                                                                             |   | (Dollars                in thousands, except per share data)          |       |
| Net                income                                                                                   |   | $                                                                     | 780        |                                                                 | $      | 1,887 |   | $ | 3,710 |   | $ | 3,165 |   |
|                                                                                                             |   |                                                                  |       |                                                                 |   |   |   |   |   |   |   |   |   |
| Weighted-average                common shares outstanding                                                   |   |                                                                  | 11,023,626 |                                                                 |   | 11,718,907 |   |   | 11,258,651 |   |   | 11,778,729 |   |
| Weighted-average                common share equivalents (1)                                                |   |                                                                  | 224,756    |                                                                 |   | 225,006 |   |   | 232,953 |   |   | 236,514 |   |
| Weighted-average                common shares and common share equivalents                outstanding  |   |                                                                  | 11,248,382 |                                                                 |   | 11,943,913 |   |   | 11,491,604 |   |   | 12,015,243 |   |
|                                                                                                             |   |                                                                  |       |                                                                 |   |   |   |   |   |   |   |   |   |
| Basic                earnings per share                                                                     |   | $                                                                     | 0.07       |                                                                 | $      | 0.16 |   | $ | 0.33 |   | $ | 0.27 |   |
| Diluted                earnings per share                                                                   |   |                                                                  | 0.07       |                                                                 |   | 0.16 |   |   | 0.32 |   |   | 0.26 |   |

**5.      New Accounting Pronouncements**

*FASB*
*Accounting      for Uncertainty in Income Taxes, an interpretation of SFAS 109 *
*FIN      48*
*Accounting      for Income Taxes*

----

*Table          of Contents*

*Fair      Value Measurements *
*SFAS      157*

*Considering      the Effects of Prior Year Misstatements When Quantifying Misstatements in      Current Year Financial Statements *
*SAB      108*

*Employers’      Accounting for Defined Benefit Pension and Other Postretirement Plans, an      amendment of FASB Statements No. 87, 88, 106 and 132 (R) *
*SFAS      158*

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

**Forward      Looking Statements**

*Certain      statements contained in this Form 10-Q, in other filings made by the Company      with the U.S. Securities and Exchange Commission (SEC), and in the Company’s      press releases or other stockholder communications are forward-looking      statements, as that term is defined in U.S. federal securities laws. Generally,      these statements relate to business plans or strategies, projections involving      anticipated revenues, earnings, profitability or other aspects of operating      results or other future developments in the Company’s affairs or the industry in      which it conducts business. Forward-looking statements may be identified by      reference to a future period or periods or by the use of forward-looking      terminology such as “anticipate,” “believe,” *

----

*Table          of Contents*

*“expect,”      “intend,” “plan,” “estimate,” “would be,” “will,” “intends to,” “project” or      similar expressions or the negative thereof.*

*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. The Company      also advises 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, changes in the      demand for loan products and financial services, unexpected legal developments,      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. For further discussion of risks and uncertainties that could cause      actual results and events to differ materially from such forward-looking      statements see “Part II. Item 1A. Risk Factors” of this Form 10-Q as well as“Part I. Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for      the year ended December 31, 2005. 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**

*FHLB*

----

*Table          of Contents*

**Critical      Accounting Policies**

*GAAP*

*Allowance      for Losses on Loans. *

*Accounting      for Contingencies *
*SFAS      5*
*.*

----

*Table          of Contents*

*Accounting      by Creditors for Impairment of a Loan*
*SFAS      114*
*.*

*      Bank*
* *

*Income      Tax Accounting. *

----

*Table          of Contents*

**Average      Balances, Net Interest Income, Yields Earned and Rates      Paid**

|                                                                                                                             |   | **Three                Months Ended September 30,** |      |
|----------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|-----------|
|                                                                                                                             |   | **2006**                                            |      | **2005** |   |
|                                                                                                                             |   | **Average****Balance**                              |      | **Interest** |   | **Average****Yield/Cost** |   | **Average****Balance** |   | **Interest** |   | **Average****Yield/Cost** |   |
|                                                                                                                                  |   | (Dollars                in thousands)               |
| Interest-earning                assets:                                                                                          |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                receivable (1)                                                                                         |   | $                                                   | 836,357   |   | $ | 14,798 |   |   | 7.02 | % | $ | 957,232 |   | $ | 15,165 |   |   | 6.29 | % |
| Securities                (2)                                                                                               |   |                                                | 316,459   |   |   | 3,482 |   |   | 4.31 | % |   | 200,124 |   |   | 1,776 |   |   | 3.47 | % |
| Other                interest-earning assets (3)                                                                            |   |                                                | 49,174    |   |   | 625 |   |   | 5.04 | % |   | 35,050 |   |   | 267 |   |   | 3.02 | % |
| Total                interest-earning assets                                                                                |   |                                                | 1,201,990 |   |   | 18,905 |   |   | 6.24 | % |   | 1,192,406 |   |   | 17,208 |   |   | 5.73 | % |
|                                                                                                                             |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest                earning assets                                                                                  |   |                                                | 77,422    |   |   |   |   |   |   |   |   | 75,111 |   |   |   |   |   |   |   |
| Total                assets                                                                                                 |   | $                                                   | 1,279,412 |   |   |   |   |   |   |   | $ | 1,267,517 |   |   |   |   |   |   |   |
|                                                                                                                             |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                liabilities:                                                                                     |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                                                                        |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Checking                accounts                                                                                            |   | $                                                   | 99,450    |   |   | 262 |   |   | 1.05 | % | $ | 111,460 |   |   | 271 |   |   | 0.96 | % |
| Money                market accounts                                                                                        |   |                                                | 135,766   |   |   | 1,008 |   |   | 2.95 | % |   | 123,396 |   |   | 430 |   |   | 1.38 | % |
| Savings                accounts                                                                                             |   |                                                | 157,105   |   |   | 194 |   |   | 0.49 | % |   | 185,668 |   |   | 158 |   |   | 0.34 | % |
| Certificates                of deposit                                                                                      |   |                                                | 397,482   |   |   | 4,288 |   |   | 4.28 | % |   | 342,485 |   |   | 2,635 |   |   | 3.05 | % |
| Total                deposits                                                                                               |   |                                                | 789,803   |   |   | 5,752 |   |   | 2.89 | % |   | 763,009 |   |   | 3,494 |   |   | 1.82 | % |
|                                                                                                                             |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Borrowed                money:                                                                                                   |   |                                                |      |   |   |   |   |   |   |   |   |  |   |   |   |   |   |   |   |
| Other                short-term borrowings (4)                                                                              |   |                                                | 24,633    |   |   | 294 |   |   | 4.74 | % |   | 2,199 |   |   | 20 |   |   | 3.61 | % |
| FHLB                debt (5)(6)                                                                                             |   |                                                | 252,908   |   |   | 5,006 |   |   | 7.75 | % |   | 285,070 |   |   | 5,781 |   |   | 7.94 | % |
| Total                borrowed money                                                                                         |   |                                                | 277,541   |   |   | 5,300 |   |   | 7.47 | % |   | 287,269 |   |   | 5,801 |   |   | 7.90 | % |
| Total                interest-bearing liabilities                                                                           |   |                                                | 1,067,344 |   |   | 11,052 |   |   | 4.11 | % |   | 1,050,278 |   |   | 9,295 |   |   | 3.51 | % |
| Non-interest                bearing deposits                                                                                |   |                                                | 61,173    |   |   |   |   |   |   |   |   | 55,502 |   |   |   |   |   |   |   |
| Non-interest                bearing liabilities                                                                             |   |                                                | 16,665    |   |   |   |   |   |   |   |   | 16,564 |   |   |   |   |   |   |   |
| Total                liabilities                                                                                            |   |                                                | 1,145,182 |   |   |   |   |   |   |   |   | 1,122,344 |   |   |   |   |   |   |   |
| Stockholders'                equity                                                                                         |   |                                                | 134,230   |   |   |   |   |   |   |   |   | 145,173 |   |   |   |   |   |   |   |
| Total                liabilities and stockholders' equity                                                                        |   | $                                                   | 1,279,412 |   |   |   |   |   |   |   | $ | 1,267,517 |   |   |   |   |   |   |   |
| Net                interest-earning assets                                                                                  |   | $                                                   | 134,646   |   |   |   |   |   |   |   | $ | 142,128 |   |   |   |   |   |   |   |
| Net                interest income / interest rate spread                                                                        |   |                                                |      |   | $ | 7,853 |   |   | 2.13 | % |   |   |   | $ | 7,913 |   |   | 2.22 | % |
| Net                interest margin                                                                                          |   |                                                |      |   |   |   |   |   | 2.59 | % |   |   |   |   |   |   |   | 2.63 | % |
| Ratio                of average interest-earning assets   to                average interest-bearing liabilities  |   |                                                |      |   |   |   |   |   | 112.62 | % |   |   |   |   |   |   |   | 113.53 | % |

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

| (2) | Average                balances of securities are based on amortized                costs. |
|-----|--------------------------------------------------------------------------------------------|

| (3) | Includes                Federal Home Loan Bank stock, money market accounts, federal funds                sold                and interest-earning bank deposits. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Includes                federal funds purchased and Repo                Sweeps. |
|-----|---------------------------------------------------------------------------------|

----

*Table          of Contents*

| (5) | The                2006 period includes an average of $262.5 million of contractual                FHLB                borrowings reduced by an average of $9.6 million of unamortized deferred                premium on the early extinguishment of debt. Interest expense on                borrowed                money includes $2.5 million of amortization of the deferred premium                on the                early extinguishment of debt. The amortization of the deferred premium                increased the average cost of borrowed money as reported to 7.47%                compared                to an average contractual rate of 3.86%. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | The                2005 period includes an average of $305.5 million of contractual                FHLB                borrowings reduced by an average of $20.4 million of unamortized                premium                on early extinguishment of debt. Interest expense on borrowings for                the                2005 period includes $2.9 million of amortization of the deferred                premium                on early extinguishment of debt. The amortization of the deferred                premium                for the 2005 period increased the average cost of borrowed money                as                reported to 7.90% compared to an average contractual rate of 3.75%. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                |   | **Nine                Months Ended September 30,** |      |
|---------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|-----------|
|                                                                                                                |   | **2006**                                           |      | **2005** |   |
|                                                                                                                |   | **Average****Balance**                             |      | **Interest** |   | **Average****Yield/Cost** |   | **Average****Balance** |   | **Interest** |   | **Average****Yield/Cost** |   |
|                                                                                                                |   | (Dollars                in thousands)              |      |
| Interest-earning                assets:                                                                             |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                receivable (1)                                                                            |   | $                                                  | 863,874   |   | $ | 45,027 |   |   | 6.97 | % | $ | 970,883 |   | $ | 44,896 |   |   | 6.18 | % |
| Securities                (2)                                                                                  |   |                                               | 283,383   |   |   | 9,123 |   |   | 4.25 | % |   | 205,534 |   |   | 5,348 |   |   | 3.43 | % |
| Other                interest-earning assets (3)                                                               |   |                                               | 45,845    |   |   | 1,674 |   |   | 4.88 | % |   | 36,109 |   |   | 969 |   |   | 3.59 | % |
| Total                interest-earning assets                                                                   |   |                                               | 1,193,102 |   |   | 55,824 |   |   | 6.26 | % |   | 1,212,526 |   |   | 51,213 |   |   | 5.65 | % |
|                                                                                                                |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest                earning assets                                                                     |   |                                               | 73,192    |   |   |   |   |   |   |   |   | 75,009 |   |   |   |   |   |   |   |
| Total                assets                                                                                    |   | $                                                  | 1,266,294 |   |   |   |   |   |   |   | $ | 1,287,535 |   |   |   |   |   |   |   |
|                                                                                                                |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                liabilities:                                                                        |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                                                           |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Checking                accounts                                                                               |   | $                                                  | 102,837   |   |   | 773 |   |   | 1.00 | % | $ | 107,602 |   |   | 574 |   |   | 0.71 | % |
| Money                market accounts                                                                           |   |                                               | 133,275   |   |   | 2,647 |   |   | 2.66 | % |   | 133,861 |   |   | 1,199 |   |   | 1.20 | % |
| Savings                accounts                                                                                |   |                                               | 163,261   |   |   | 479 |   |   | 0.39 | % |   | 191,587 |   |   | 482 |   |   | 0.34 | % |
| Certificates                of deposit                                                                         |   |                                               | 383,416   |   |   | 11,410 |   |   | 3.98 | % |   | 349,375 |   |   | 7,451 |   |   | 2.85 | % |
| Total                deposits                                                                                  |   |                                               | 782,789   |   |   | 15,309 |   |   | 2.61 | % |   | 782,425 |   |   | 9,706 |   |   | 1.66 | % |
|                                                                                                                |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Borrowed                money:                                                                                      |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other                short-term borrowings (4)                                                                 |   |                                               | 12,421    |   |   | 424 |   |   | 4.56 | % |   | 1,327 |   |   | 34 |   |   | 3.43 | % |
| FHLB                debt (5)(6)                                                                                |   |                                               | 256,152   |   |   | 15,270 |   |   | 7.86 | % |   | 288,151 |   |   | 20,306 |   |   | 9.29 | % |
| Total                borrowed money                                                                            |   |                                               | 268,573   |   |   | 15,694 |   |   | 7.71 | % |   | 289,478 |   |   | 20,340 |   |   | 9.27 | % |
| Total                interest-bearing liabilities                                                              |   |                                               | 1,051,362 |   |   | 31,003 |   |   | 3.94 | % |   | 1,071,903 |   |   | 30,046 |   |   | 3.75 | % |
| Non-interest                bearing deposits                                                                   |   |                                               | 61,859    |   |   |   |   |   |   |   |   | 51,959 |   |   |   |   |   |   |   |
| Non-interest                bearing liabilities                                                                |   |                                               | 15,426    |   |   |   |   |   |   |   |   | 17,341 |   |   |   |   |   |   |   |
| Total                liabilities                                                                               |   |                                               | 1,128,647 |   |   |   |   |   |   |   |   | 1,141,203 |   |   |   |   |   |   |   |
| Stockholders'                equity                                                                            |   |                                               | 137,647   |   |   |   |   |   |   |   |   | 146,332 |   |   |   |   |   |   |   |
| Total                liabilities and stockholders' equity                                                           |   | $                                                  | 1,266,294 |   |   |   |   |   |   |   | $ | 1,287,535 |   |   |   |   |   |   |   |
| Net                interest-earning assets                                                                     |   | $                                                  | 141,740   |   |   |   |   |   |   |   | $ | 140,623 |   |   |   |   |   |   |   |
| Net                interest income / interest rate spread                                                      |   |                                               |      |   | $ | 24,821 |   |   | 2.32 | % |   |   |   | $ | 21,167 |   |   | 1.90 | % |
| Net                interest margin                                                                             |   |                                               |      |   |   |   |   |   | 2.78 | % |   |   |   |   |   |   |   | 2.33 | % |
| Ratio                of average interest-earning assetsto                average interest-bearing liabilities  |   |                                               |      |   |   |   |   |   | 113.48 | % |   |   |   |   |   |   |   | 113.12 | % |

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

| (2) | Average                balances of securities are based on amortized                costs. |
|-----|--------------------------------------------------------------------------------------------|

----

*Table          of Contents*

| (3) | Includes                Federal Home Loan Bank stock, money market accounts, federal funds                sold                and interest-earning bank deposits. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Includes                federal funds purchased and Repo                Sweeps. |
|-----|---------------------------------------------------------------------------------|

| (5) | The                2006 period includes an average of $268.3 million of contractual                FHLB                borrowings reduced by an average of $12.1 million of unamortized                deferred                premium on the early extinguishment of debt. Interest expense on                borrowed                money includes $7.6 million of amortization of the deferred premium                on the                early extinguishment of debt. The amortization of the deferred premium                increased the average cost of borrowed money as reported to 7.71%                compared                to an average contractual rate of 3.84%. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | The                2005 period includes an average of $312.2 million of contractual                FHLB                borrowings reduced by an average of $24.0 million of unamortized                premium                on early extinguishment of debt. Interest expense on borrowings for                the                2005 period includes $11.6 million of amortization of the deferred                premium                on early extinguishment of debt. The amortization of the deferred                premium                for the 2005 period increased the average cost of borrowed money                as                reported to 9.27% compared to an average contractual rate of 3.71%. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Rate      / Volume Analysis**

|                                                                                                 |   | **Three                Months Ended September 30,**  |
|-------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|
|                                                                                            |   | **2006                compared to 2005**             |
|                                                                                            |   | **Increase                (decrease) due to**        |
|                                                                                            |   | **Rate**                                                  |   | **Volume** |   | **Rate/****Volume** |   | **Total                Net Increase /****(Decrease)** |   |
|                                                                                                 |   | (Dollars                in thousands)                |
| Interest-earning                assets:                                                         |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |
| Loans                receivable                                                            |   | $                                                         | 1,772 |   | $ | (1,915 | ) | $ | (224 | ) | $ | (367 | ) |
| Securities                                                                                 |   |                                                      | 426 |   |   | 1,032 |   |   | 248 |   |   | 1,706 |   |
| Other                interest-earning assets                                               |   |                                                      | 178 |   |   | 108 |   |   | 72 |   |   | 358 |   |
| Total                net change in income on interest-earning                assets        |   |                                                      | 2,376 |   |   | (775 | ) |   | 96 |   |   | 1,697 |   |
| Interest-bearing                liabilities:                                                    |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                                       |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |
| Checking                accounts                                                           |   |                                                      | 22 |   |   | (29 | ) |   | (2 | ) |   | (9 | ) |
| Money                market accounts                                                       |   |                                                      | 486 |   |   | 43 |   |   | 49 |   |   | 578 |   |
| Savings                accounts                                                            |   |                                                      | 71 |   |   | (24 | ) |   | (11 | ) |   | 36 |   |
| Certificates                of deposit                                                     |   |                                                      | 1,060 |   |   | 423 |   |   | 170 |   |   | 1,653 |   |
| Total                deposits                                                              |   |                                                      | 1,639 |   |   | 413 |   |   | 206 |   |   | 2,258 |   |
| Borrowed                money:                                                                  |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |
| Other                short-term borrowings                                                 |   |                                                      | 6 |   |   | 204 |   |   | 64 |   |   | 274 |   |
| FHLB                debt                                                                   |   |                                                      | (138 | ) |   | (653 | ) |   | 16 |   |   | (775 | ) |
| Total                borrowed money                                                        |   |                                                      | (132 | ) |   | (449 | ) |   | 80 |   |   | (501 | ) |
| Total                net change in expense on interest-bearing                liabilities  |   |                                                      | 1,507 |   |   | (36 | ) |   | 286 |   |   | 1,757 |   |
| Net                change in net interest income                                           |   | $                                                         | 869 |   | $ | (739 | ) | $ | (190 | ) | $ | (60 | ) |

----

*Table          of Contents*

|                                                                                      |   | **Nine                Months Ended September 30,** |   |
|-------------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                                      |   | **2006                compared to 2005**           |   |
|                                                                                      |   | **Increase                (decrease) due to**      |   |
|                                                                                      |   |  **Rate**                                     |   |  **Volume** |   | **Rate/****Volume** |   | **Total                Net Increase /****(Decrease)** |   |
|                                                                                      |   | (Dollars                in thousands)              |   |
| Interest-earning                assets:                                                   |   |                                               |   |   |   |   |   |   |   |   |   |   |   |
| Loans                receivable                                                      |   | $                                                  | 5,708  |   | $ | (4,948 | ) | $ | (629 | ) | $ | 131 |   |
| Securities                                                                           |   |                                               | 1,269  |   |   | 2,025 |   |   | 481 |   |   | 3,775 |   |
| Other                interest-earning assets                                         |   |                                               | 350    |   |   | 261 |   |   | 94 |   |   | 705 |   |
| Total                net change in income on interest-earning                assets       |   |                                               | 7,327  |   |   | (2,662 | ) |   | (54 | ) |   | 4,611 |   |
| Interest-bearing                liabilities:                                              |   |                                               |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                                 |   |                                               |   |   |   |   |   |   |   |   |   |   |   |
| Checking                accounts                                                     |   |                                               | 234    |   |   | (25 | ) |   | (10 | ) |   | 199 |   |
| Money                market accounts                                                 |   |                                               | 1,459  |   |   | (5 | ) |   | (6 | ) |   | 1,448 |   |
| Savings                accounts                                                      |   |                                               | 80     |   |   | (71 | ) |   | (12 | ) |   | (3 | ) |
| Certificates                of deposit                                               |   |                                               | 2,946  |   |   | 726 |   |   | 287 |   |   | 3,959 |   |
| Total                deposits                                                        |   |                                               | 4,719  |   |   | 625 |   |   | 259 |   |   | 5,603 |   |
| Borrowed                money:                                                            |   |                                               |   |   |   |   |   |   |   |   |   |   |   |
| Other                short-term borrowings                                           |   |                                               | 11     |   |   | 285 |   |   | 94 |   |   | 390 |   |
| FHLB                debt                                                             |   |                                               | (3,128 | ) |   | (2,255 | ) |   | 347 |   |   | (5,036 | ) |
| Total                borrowed money                                                  |   |                                               | (3,117 | ) |   | (1,970 | ) |   | 441 |   |   | (4,646 | ) |
| Total                net change in expense on interest-bearing                liabilities |   |                                               | 1,602  |   |   | (1,345 | ) |   | 700 |   |   | 957 |   |
| Net                change in net interest income                                     |   | $                                                  | 5,725  |   | $ | (1,317 | ) | $ | (754 | ) | $ | 3,654 |   |

**Analysis      of Statements of Income **

*Net      Interest Income. *

*Interest      Income.*

----

*Table          of Contents*

*Wall      Street Journal *

*Interest      Expense.*

*Premium      Amortization*

----

*Table          of Contents*

*Provision      for losses on loans.*
*Changes      in Financial Condition - Allowance for Losses on Loans*
*Management’s      Discussion and Analysis of Financial Condition and Results of      Operations*

*Non-interest      income. *

*Non-interest      expense. *

*Act*

----

*Table          of Contents*

|                                                                                               |   | **Three                Months Ended****September                30,** |   | **Nine                Months Ended****September                30,** |   |
|----------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|
|                                                                                               |   | **2006**                                                              |   | **2005**                                                             |   | **2006** |   | **2005** |   |
|                                                                                               |   | (Dollars                in thousands)                                 |
| Efficiency                ratio:                                                                   |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Non-interest                expense                                                      |   | $                                                                     | 8,928  |                                                                 | $      | 8,198 |   | $ | 26,896 |   | $ | 24,837 |   |
| Net                interest income plus non-interest income                                   |   | $                                                                     | 10,122 |                                                                 | $      | 11,262 |   | $ | 32,356 |   | $ | 29,899 |   |
| Efficiency                ratio                                                               |   |                                                                  | 88.20  | %                                                                    |   | 72.79 | % |   | 83.13 | % |   | 83.07 | % |
|                                                                                               |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Core                efficiency ratio:                                                              |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Non-interest                expense                                                           |   | $                                                                     | 8,928  |                                                                 | $      | 8,198 |   | $ | 26,896 |   | $ | 24,837 |   |
| Net                interest income plus non-interest income                                   |   | $                                                                     | 10,122 |                                                                 | $      | 11,262 |   | $ | 32,356 |   | $ | 29,899 |   |
| Adjustments:                                                                                       |   |                                                                  |   |                                                                 |   |   |   |   |   |   |   |   |   |
| Net                realized (gains) losses on sale of securities available-for-sale           |   |                                                                  | (877   | )                                                                    |   | 25 |   |   | (750 | ) |   | 113 |   |
| Impairment                of securities available-for-sale                                         |   |                                                                  | -      |                                                                 |   | - |   |   | - |   |   | 240 |   |
| Net                realized (gains) losses on sales of other assets                           |   |                                                                  | 1,339  |                                                                 |   | (287 | ) |   | 1,291 |   |   | (369 | ) |
| Amortization                of deferred premium on the early extinguishment                of debt |   |                                                                  | 2,465  |                                                                 |   | 2,865 |   |   | 7,587 |   |   | 11,581 |   |
| Net                interest income plus non-interest income - as                adjusted      |   | $                                                                     | 13,049 |                                                                 | $      | 13,865 |   | $ | 40,484 |   | $ | 41,464 |   |
| Core                efficiency ratio                                                          |   |                                                                  | 68.42  | %                                                                    |   | 59.13 | % |   | 66.44 | % |   | 59.90 | % |

----

*Table          of Contents*

*Income      Tax Expense.*

**Financial      Condition**

*Securities.      *

----

*Table          of Contents*

|                                                                                                                  |   | **Amortized****Cost**                  |    | **Gross****Unrealized****Gains** |   | **Gross****Unrealized****Losses** |   |   | **Fair****Value** |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|---------|----------------------------------|--------|-----------------------------------|--------|--------|-------------------|--------|
|                                                                                                                            |   | (Dollars                in thousands)  |
| At                September 30, 2006:                                                                                      |   |                                        |    |                             |   |                              |   |   |              |   |   |   |   |
| Government                sponsored entity (*GSE*)                securities and                commercial paper (1)  |   | $                                           | 287,072 |                             | $      | 922                               |   | $      | (1,486            | )      | $ | 286,508 |   |
| Mortgage-backed                securities                                                                                  |   |                                        | 21,670  |                             |   | 6                                 |   |   | (347              | )      |   | 21,329 |   |
| Collateralized                mortgage obligations                                                                         |   |                                        | 13,611  |                             |   | 24                                |   |   | (153              | )      |   | 13,482 |   |
| Equity                securities                                                                                           |   |                                        | 1,386   |                             |   | 65                                |   |   | -                 |   |   | 1,451 |   |
|                                                                                                                       |   | $                                           | 323,739 |                             | $      | 1,017                             |   | $      | (1,986            | )      | $ | 322,770 |   |
|                                                                                                                       |   |                                        |    |                             |   |                              |   |   |              |   |   |   |   |
| At                December 31, 2005:                                                                                       |   |                                        |    |                             |   |                              |   |   |              |   |   |   |   |
| Government                sponsored entity (*GSE*)                securities (1)                                           |   | $                                           | 167,047 |                             | $      | 94                                |   | $      | (1,932            | )      | $ | 165,209 |   |
| Mortgage-backed                securities                                                                                  |   |                                        | 29,927  |                             |   | 29                                |   |   | (500              | )      |   | 29,456 |   |
| Collateralized                mortgage obligations                                                                         |   |                                        | 22,553  |                             |   | 7                                 |   |   | (222              | )      |   | 22,338 |   |
| Trust                preferred securities                                                                                  |   |                                        | 85      |                             |   | 51                                |   |   | -                 |   |   | 136 |   |
| Equity                securities                                                                                           |   |                                        | 1,386   |                             |   | 25                                |   |   | -                 |   |   | 1,411 |   |
|                                                                                                                       |   | $                                           | 220,998 |                             | $      | 206                               |   | $      | (2,654            | )      | $ | 218,550 |   |

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

----

*Table          of Contents*

*Loans.      *

|                                                              |   | **September                30, 2006**       |    | **December                31, 2005** |   |
|-------------------------------------------------------------------|--------|---------------------------------------------|---------|--------------------------------------|--------|
|                                                              |   | **Amount**                                  |    | **Percentage**                       |   | **Amount** |   | **Percentage** |   |
|                                                                   |   | (Dollars                in thousands)  |
| Commercial                and construction loans:                 |   |                                        |    |                                 |   |   |   |   |   |   |   |   |   |
| Commercial                real estate                        |   | $                                           | 334,411 |                                 |   | 40.2 | % | $ | 381,956 |   |   | 41.6 | % |
| Construction                and land development             |   |                                        | 133,108 |                                 |   | 16.0 |   |   | 136,558 |   |   | 14.9 |   |
| Commercial                and industrial                     |   |                                        | 48,687  |                                 |   | 5.8 |   |   | 61,956 |   |   | 6.8 |   |
| Total                commercial loans                        |   |                                        | 516,206 |                                 |   | 62.0 |   |   | 580,470 |   |   | 63.3 |   |
|                                                              |   |                                        |    |                                 |   |   |   |   |   |   |   |   |   |
| Retail                loans:                                      |   |                                        |    |                                 |   |   |   |   |   |   |   |   |   |
| Single-family                residential                     |   |                                        | 235,198 |                                 |   | 28.2 |   |   | 235,359 |   |   | 25.7 |   |
| Home                equity lines of credit                   |   |                                        | 77,594  |                                 |   | 9.3 |   |   | 96,403 |   |   | 10.5 |   |
| Other                                                   |   |                                        | 4,012   |                                 |   | 0.5 |   |   | 5,173 |   |   | 0.5 |   |
| Total                retail loans                            |   |                                        | 316,804 |                                 |   | 38.0 |   |   | 336,935 |   |   | 36.7 |   |
|                                                              |   |                                        |    |                                 |   |   |   |   |   |   |   |   |   |
| Total                loans receivable, net of unearned fees  |   | $                                           | 833,010 |                                 |   | 100.0 | % | $ | 917,405 |   |   | 100.0 | % |

*Allowance      for Losses on Loans.*
The      following is a summary of changes in the allowance for losses on loans for      the      periods presented: 

----

*Table          of Contents*

|                                          |   | **Three                Months Ended****September                30,** |   | **Nine                Months Ended****September                30,** |   |
|-----------------------------------------------|--------|-----------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|
|                                          |   | **2006**                                                              |   | **2005**                                                             |        | **2006** |   | **2005** |   |
|                                               |   | (Dollars                in thousands)                            |
| Balance                at beginning of period |   | $                                                                     | 11,690 |                                                                 | $      | 13,892 |   | $ | 12,939 |   | $ | 13,353 |   |
| Provision                for losses on loans  |   |                                                                  | 413    |                                                                 |   | 545 |   |   | 971 |   |   | 1,312 |   |
| Charge-offs                                   |   |                                                                  | (1,473 | )                                                                    |   | (812 | ) |   | (3,457 | ) |   | (1,117 | ) |
| Recoveries                                    |   |                                                                  | 62     |                                                                 |   | 86 |   |   | 239 |   |   | 163 |   |
| Balance                at end of period       |   | $                                                                     | 10,692 |                                                                 | $      | 13,711 |   | $ | 10,692 |   | $ | 13,711 |   |

|                                                      |   | ****Se**ptember                30, 2006**  |   | **December                31, 2005** |   |
|------------------------------------------------------|--------|-------------------------------------------------|--------|--------------------------------------|--------|
|                                                      |   | (Dollars                in thousands)           |
|                                                 |   |                                            |   |                                 |   |   |   |
| Total                impaired loans             |   | $                                               | 12,936 |                                 | $      | 22,156 |   |
| Aggregate                impairment allocation  |   | $                                               | 4,571  |                                 | $      | 5,824 |   |
| Number                of impaired loans         |   |                                            | 7      |                                 |   | 8 |   |

*Non-performing      Assets. *

----

*Table          of Contents*

|                                                             |   | **September                30,****2006**  |   | **December                31,****2005** |   |
|------------------------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                  |   | (Dollars                in thousands)          |
| Non-accrual                loans:                                |   |                                           |
| Commercial                and construction loans:                |   |                                           |   |                                    |   |   |   |
| Commercial                real estate                       |   | $                                              | 12,314 |                                    | $      | 17,492 |   |
| Construction                and land development            |   |                                           | 4,176  |                                    |   | 77 |   |
| Commercial                and industrial                    |   |                                           | 718    |                                    |   | 94 |   |
| Total                commercial and construction loans      |   |                                           | 17,208 |                                    |   | 17,663 |   |
|                                                             |   |                                           |   |                                    |   |   |   |
| Retail                loans:                                     |   |                                           |   |                                    |   |   |   |
|    Single-family                residential  |   |                                           | 3,817  |                                    |   | 2,929 |   |
| Home                equity lines of credit                  |   |                                           | 705    |                                    |   | 429 |   |
| Other                                                       |   |                                           | 49     |                                    |   | 20 |   |
| Total                retail loans                           |   |                                           | 4,571  |                                    |   | 3,378 |   |
| Total                non-accruing loans                     |   |                                           | 21,779 |                                    |   | 21,041 |   |
| Other                non-performing assets                  |   |                                           | 579    |                                    |   | 540 |   |
| Total                non-performing assets                  |   | $                                              | 22,358 |                                    | $      | 21,581 |   |
|                                                             |   |                                           |   |                                    |   |   |   |
| Non-performing                assets to total assets        |   |                                           | 1.73   | %                                       |   | 1.74 | % |
| Non-performing                loans to total loans          |   |                                           | 2.61   | %                                       |   | 2.29 | % |

*Deposits      and Borrowed Money. *

----

*Table          of Contents*

|                                       |   | **September                30, 2006**       |    | **December                31, 2005** |   |
|--------------------------------------------|--------|---------------------------------------------|---------|--------------------------------------|--------|
|                                       |   | **Amount**                                  |    | **Percentage**                       |   | **Amount** |  | **Percentage** |   |
|                                       |   | (Dollars                in thousands)  |
| Checking                accounts:          |   |                                        |
| Non-interest                bearing   |   | $                                           | 59,399  |                                 |   | 6.7 | % | $ | 66,116 |   |   | 8.0 | % |
| Interest-bearing                      |   |                                        | 98,149  |                                 |   | 11.3 |   |   | 106,938 |   |   | 12.9 |   |
| Money                market accounts  |   |                                        | 143,297 |                                 |   | 16.5 |   |   | 121,667 |   |   | 14.7 |   |
| Savings                accounts       |   |                                        | 152,259 |                                 |   | 17.5 |   |   | 170,619 |   |   | 20.6 |   |
| Core                deposits          |   |                                        | 453,104 |                                 |   | 52.0 |   |   | 465,340 |   |   | 56.2 |   |
| Certificates                of deposit:    |   |                                        |    |                                 |   |   |   |   |   |   |   |   |   |
| Less                than $100,000     |   |                                        | 284,526 |                                 |   | 32.7 |   |   | 261,977 |   |   | 31.6 |   |
| $100,000                or greater    |   |                                        | 133,200 |                                 |   | 15.3 |   |   | 101,318 |   |   | 12.2 |   |
| Time                deposits          |   |                                        | 417,726 |                                 |   | 48.0 |   |   | 363,295 |   |   | 43.8 |   |
| Total                deposits         |   | $                                           | 870,830 |                                 |   | 100.0 | % | $ | 828,635 |   |   | 100.0 | % |

*Repo      Sweep*

----

*Table          of Contents*

|                                                                                 |   | **September                30, 2006**      |   | **December                31, 2005** |   |
|--------------------------------------------------------------------------------------|--------|-------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                 |   | **Weighted-****Average****Contractual****Rate** |   | **Amount**                           |   | **Weighted-****Average****Contractual****Rate** |   | **Amount** |   |
|                                                                                      |   | (Dollars                in thousands)      |
| Short-term                variable-rate borrowings:                                  |   |                                            |   |                                 |   |   |   |   |   |   |   |   |   |
| Repo                Sweep accounts                                                   |   |                                            | 4.75   | %                                    | $      | 20,876 |   |   | 3.75 | % | $ | 555 |   |
|                                                                                 |   |                                            |   |                                 |   |   |   |   |   |   |   |   |   |
| Secured                advances from FHLB - Indianapolis:                            |   |                                            |   |                                 |   |   |   |   |   |   |   |   |   |
| Maturing                in 2006 - fixed-rate                                         |   |                                            | 3.43   |                                 |   | 77,000 |   |   | 3.41 |   |   | 87,000 |   |
| Maturing                in 2007 - fixed-rate                                         |   |                                            | 3.65   |                                 |   | 87,000 |   |   | 3.65 |   |   | 87,000 |   |
| Maturing                in 2008 - fixed-rate                                         |   |                                            | 3.89   |                                 |   | 72,000 |   |   | 3.89 |   |   | 72,000 |   |
| Maturing                in 2009 - fixed-rate                                         |   |                                            | 4.09   |                                 |   | 15,000 |   |   | 4.09 |   |   | 15,000 |   |
| Maturing                in 2014 - fixed-rate (1)                                     |   |                                            | 6.71   |                                 |   | 1,190 |   |   | 6.71 |   |   | 1,209 |   |
| Maturing                in 2018 - fixed-rate (1)                                     |   |                                            | 5.54   |                                 |   | 2,816 |   |   | 5.54 |   |   | 2,816 |   |
| Maturing                in 2019 - fixed-rate (1)                                     |   |                                            | 6.31   |                                 |   | 7,372 |   |   | 6.31 |   |   | 7,537 |   |
|                                                                                 |   |                                            |   |                                 |   | 262,378 |   |   |   |   |   | 272,562 |   |
| Less:                deferred premium on early extinguishment of                debt |   |                                            |   |                                 |   | (8,203 | ) |   |   |   |   | (15,791 | ) |
| Net                FHLB - Indianapolis advances                                 |   |                                            |   |                                 |   | 254,175 |   |   |   |   |   | 256,771 |   |
|                                                                                 |   |                                            |   |                                 |   |   |   |   |   |   |   |   |   |
| Total                borrowed money                                             |   |                                            |   |                                 | $      | 275,051 |   |   |   |   | $ | 257,326 |   |
| Weighted-average                contractual interest rate                       |   |                                            | 3.86   | %                                    |   |   |   |   | 3.77 | % |   |   |   |

*Capital      Resources. *

----

*Table          of Contents*

*Part      II. Item 2. Unregistered Sales of Equity Securities and Use of      Proceeds.*

*OTS*

|                                     |   | **Actual**                                  |    | **For                Capital Adequacy****Purposes** |   | **To                Be Well-Capitalized Under Prompt Corrective****Action                Provisions** |   |
|------------------------------------------|--------|---------------------------------------------|---------|-----------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|
|                                          |   | **Amount**                                  |    | **Ratio**                                           |   | **Amount**                                                                                            |   | **Ratio** |   | **Amount** |   | **Ratio** |  |
|                                          |   | (Dollars                in thousands)  |
| As                of September 30, 2006: |   |                                        |    |                                                |   |                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Risk-based                               |   | $                                           | 133,974 |                                                |   | 13.70                                                                                                 | %      | $ | 78,210 |   |   | >8.00 | % | $ | 97,763 |   |   | >10.00 | % |
| Tangible                                 |   |                                        | 123,307 |                                                |   | 9.58                                                                                                  |   |   | 19,309 |   |   | >1.50 |   |   | 25,745 |   |   | >2.00 |   |
| Core                                     |   |                                        | 123,307 |                                                |   | 9.58                                                                                                  |   |   | 51,490 |   |   | >4.00 |   |   | 64,362 |   |   | >5.00 |   |
|                                     |   |                                        |    |                                                |   |                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| As                of December 31, 2005:  |   |                                        |    |                                                |   |                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Risk-based                               |   | $                                           | 140,102 |                                                |   | 13.63                                                                                                 | %      | $ | 82,244 |   |   | >8.00 | % | $ | 102,806 |   |   | >10.00 | % |
| Tangible                                 |   |                                        | 128,884 |                                                |   | 10.38                                                                                                 |   |   | 18,624 |   |   | >1.50 |   |   | 24,832 |   |   | >2.00 |   |
| Core                                     |   |                                        | 128,884 |                                                |   | 10.38                                                                                                 |   |   | 49,665 |   |   | >4.00 |   |   | 62,080 |   |   | >5.00 |   |

**Liquidity      and Commitments **

|   | • | deposits                and Repo Sweeps; |
|--------|---------|------------------------------------------|

|   | • | scheduled                payments of amortizing loans and mortgage-backed                securities; |
|--------|---------|------------------------------------------------------------------------------------------------------|

|   | • | prepayments                and maturities of outstanding loans and mortgage-backed                securities; |
|--------|---------|---------------------------------------------------------------------------------------------------------------|

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*Table          of Contents*

|   | • | maturities                of investment securities and other short-term                investments; |
|--------|---------|-----------------------------------------------------------------------------------------------------|

|   | • | funds                provided from operations; and |
|--------|---------|----------------------------------------------------|

|   | • | borrowings                from the FHLB. |
|--------|---------|------------------------------------------|

|   | • | significant                net repayments of loans totaling $66.5 million; |
|--------|---------|----------------------------------------------------------------------------|

|   | • | proceeds                from sales, maturities and paydowns of securities aggregating $41.9                million; |
|--------|---------|---------------------------------------------------------------------------------------------------------------------|

|   | • | increases                in the balances of Repo Sweeps totaling $20.3 million; and |
|--------|---------|-------------------------------------------------------------------------------------|

|   | • | increases                in the balances of deposit accounts totaling $42.1 million. |
|--------|---------|--------------------------------------------------------------------------------------|

*Contractual      Obligations.*
** **

----

*Table          of Contents*

|                                                   |   | **Payments                Due By Period**             |    |
|--------------------------------------------------------|--------|-------------------------------------------------------|---------|
|                                                   |   | **One                Year****Or                Less** |         | **Over                One****Through****Three                Years** |   | **Over                Three Through****Five                Years** |   | **Over                Five****Years** |  | **Total** |   |
|                                                   |   | (Dollars                in thousands)            |
| FHLB                advances (1)                  |   | $                                                     | 112,250 |   | $ | 134,554 |   | $ | 5,634 |   | $ | 9,940 |   | $ | 262,378 |   |
| Repo                Sweeps (2)                    |   |                                                  | 20,876  |   |   | - |   |   | - |   |   | - |   |   | 20,876 |   |
| Operating                leases                   |   |                                                  | 470     |   |   | 345 |   |   | 26 |   |   | - |   |   | 841 |   |
| Dividends                payable on common stock  |   |                                                  | 1,355   |   |   | - |   |   | - |   |   | - |   |   | 1,355 |   |
|                                                   |   | $                                                     | 134,951 |   | $ | 134,899 |   | $ | 5,660 |   | $ | 9,940 |   | $ | 285,450 |   |

*Deposits      and Borrowed Money*

*Off-Balance      Sheet Obligations. *

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*Table          of Contents*

|                                                               |   | **One                Year****or                Less** |    | **Over                One****Through****Three                Years** |   | **Over                Three Through****Five                Years** |   | **Over                Five****Years** |   | **Total** |   |
|--------------------------------------------------------------------|--------|-------------------------------------------------------|---------|----------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|---------------------------------------|--------|-----------|--------|
|                                                                    |   | (Dollars                in thousands)            |
| Commitments                to extend  credit:                 |   |                                                  |    |                                                                 |   |                                                               |   |                                  |   |      |   |   |   |   |   |   |
| Commercial                                                         |   | $                                                     | 56,296  |                                                                 | $      | 2,997                                                              |   | $                                     | 985    |      | $      | 327 |   | $ | 60,605 |   |
| Retail                                                             |   |                                                  | 16,704  |                                                                 |   | -                                                                  |   |                                  | -      |      |   | - |   |   | 16,704 |   |
| Commitments                to purchase loans:                      |   |                                                  |    |                                                                 |   |                                                               |   |                                  |   |      |   |   |   |   |   |   |
| Commercial                                                         |   |                                                  | 13,638  |                                                                 |   | -                                                                  |   |                                  | -      |      |   | - |   |   | 13,638 |   |
| Retail                                                             |   |                                                  | -       |                                                                 |   | -                                                                  |   |                                  | -      |      |   | - |   |   | - |   |
| Commitments                to fund unused construction loans  |   |                                                  | 17,898  |                                                                 |   | 17,636                                                             |   |                                  | 11,417 |      |   | 9,084 |   |   | 56,035 |   |
| Commitments                to fund unused lines of credit:         |   |                                                  |    |                                                                 |   |                                                               |   |                                  |   |      |   |   |   |   |   |   |
| Commercial                                                         |   |                                                  | 13,298  |                                                                 |   | 9,536                                                              |   |                                  | 351    |      |   | - |   |   | 23,185 |   |
| Retail                                                             |   |                                                  | 14,184  |                                                                 |   | 709                                                                |   |                                  | 5      |      |   | 62,859 |   |   | 77,757 |   |
| Letters                of credit                              |   |                                                  | 3,498   |                                                                 |   | 8,450                                                              |   |                                  | 529    |      |   | - |   |   | 12,477 |   |
| Credit                enhancements                            |   |                                                  | 500     |                                                                 |   | 9,248                                                              |   |                                  | 24,557 |      |   | 8,839 |   |   | 43,144 |   |
|                                                               |   | $                                                     | 136,016 |                                                                 | $      | 48,576                                                             |   | $                                     | 37,844 |      | $      | 81,109 |   | $ | 303,545 |   |

*CRA*

*FHLB-IN*
*IDPLOC*

----

*Table          of Contents*

**Item      3.**
**Quantitative      and Qualitative Disclosures about Market Risk**

*IRR*
*NPV*

*ALCO*

----

*Table            of            Contents*

|                                                           |   | **Net                Portfolio Value**  |
|----------------------------------------------------------------|--------|----------------------------------------------|
|                                                           |   | **At                June 30, 2006**          |   | **At                December 31, 2005** |   |
|                                                           |   |  **$****Amount**                   |   | **$****Change** |   | **%****Change** |   | **$****Amount** |   | **$****Change** |   | **%**** Change** |   |
|                                                           |   | (Dollars                in thousands)   |
| Assumed                change in interest rates (basis points) |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| +300                                                           |   | $                                            | 147,760 |   | $ | (28,798 | ) |   | (16.3 | )% | $ | 156,592 |   | $ | (12,288 | ) |   | (7.3 | )% |
| +200                                                           |   |                                         | 159,182 |   |   | (17,376 | ) |   | (9.8 | ) |   | 162,507 |   |   | (6,373 | ) |   | (3.8 | ) |
| +100                                                           |   |                                         | 168,931 |   |   | (7,627 | ) |   | (4.3 | ) |   | 166,875 |   |   | (2,005 | ) |   | (1.2 | ) |
|                      0                |   |                                         | 176,558 |   |   | - |   |   | - |   |   | 168,880 |   |   | - |   |   | - |   |
| -100                                                           |   |                                         | 181,601 |   |   | 5,043 |   |   | (2.9 | ) |   | 168,938 |   |   | 58 |   |   | (0.0 | ) |
| -200                                                           |   |                                         | 183,910 |   |   | (7,352 | ) |   | (4.2 | ) |   | 166,802 |   |   | (2,078 | ) |   | (1.2 | ) |

----

*Table          of Contents*

|                                        |   | **Percentage                of Deposits Repricing****In                First Year**  |
|---------------------------------------------|--------|-------------------------------------------------------------------------------------------|
|                                        |   | **September                30, 2006**                                                     |   | **December                31, 2005** |   |
| Deposit                category:            |   |                                                                                      |   |   |   |   |   |
| Business                checking accounts   |   |                                                                                      | 20 | % |   | 20 | % |
| Interest                checking accounts   |   |                                                                                      | 20 |   |   | 20 |   |
| High-yield                checking accounts |   |                                                                                      | 95 |   |   | 95 |   |
| Savings                accounts             |   |                                                                                      | - |   |   | 20 |   |
| Money                market accounts        |   |                                                                                      | 50 |   |   | 50 |   |

*rate      shocks*

|                                                                          |   | **Percentage                Change in Net Interest Income****Over                a Twelve Month Time Period** |   |
|-------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------|--------|
|                                                                          |   | **September                30, 2006**                                                                         |   | **December                31, 2005** |   |
| Assumed                change in interest rates(basis                points): |   |                                                                                                          |   |   |   |
| +200                                                                          |   |                                                                                                          | 2.3    | % |   | 1.2 | % |
| +100                                                                          |   |                                                                                                          | 1.4    |   |   | 0.9 |   |
| -100                                                                          |   |                                                                                                          | (2.3   | ) |   | (3.4 | ) |
| -200                                                                          |   |                                                                                                          | (6.1   | ) |   | (9.6 | ) |

----

*Table          of Contents*

**Item      4.**
**Controls      and Procedures**

*the      1934 Act*

**Part      II. **
**OTHER      INFORMATION**

**Item      1.**
**Legal      Proceedings**

**Legal      Proceedings**

----

*Table          of Contents*

**Item      1A.**
 
**Risk      Factors**

*Management’s      Discussion and Analysis of Financial Condition and Results of Operations -      Forward Looking Statements*

**Item      2.**
**                  Unregistered Sales of Equity Securities and Use of Proceeds**
** **

| **Period**                          |   | **Total                Number of****Shares****Purchased** |    | **Average                Price****Paid                Per Share** |   | **Total                Number of Shares Purchased as Part of Publicly                Announced****Plans                or Programs** |   | **Maximum                Number of****Shares                that May Yet Be****Purchased                Under the****Plans                or Programs (1)** |    |
|-------------------------------------|--------|-----------------------------------------------------------|---------|-------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
| July                1-31, 2006      |   |                                                      | 50,863  |                                                              | $      | 14.76                                                                                                                                |   |                                                                                                                                                             | 50,863  |   |   | 495,194 |   |
| August                1-31, 2006    |   |                                                      | 25,322  |                                                              |   | 14.93                                                                                                                                |   |                                                                                                                                                             | 25,322  |   |   | 469,872 |   |
| September                1-30, 2006 |   |                                                      | 211,271 |                                                              |   | 15.01                                                                                                                                |   |                                                                                                                                                             | 211,271 |   |   | 258,601 |   |
| Total                               |   |                                                      | 287,456 |                                                              |   | 14.96                                                                                                                                |   |                                                                                                                                                             | 287,456 |   |   | 258,601 |   |

| (1) | The                Company publicly announced on June 15, 2006 a repurchase program                for                600,000 shares. Prior to July 1, 2006, 53,943 shares had been repurchased                under that program. A total of 5,258 shares were purchased in October                2006                under this program. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Item      3.**
**Defaults      Upon Senior Securities**

----

*Table          of Contents*

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

**Item      5.         **
**Other      Information**

----

*Table          of Contents*

**Item      6.           **
**Exhibits**

|   | (a)    |   | List                of exhibits (filed herewith unless otherwise noted).                                                                                       |
|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                           |
|   | 3.1    |   | Certificate                of Incorporation of CFS Bancorp, Inc. (1)                                                                                           |
|   | 3.2    |   | Bylaws                of CFS Bancorp, Inc. (1)                                                                                                                 |
|   | 4.0    |   | Form                of Stock Certificate of CFS Bancorp, Inc. (2)                                                                                              |
|   | 10.1   |   | Employment                Agreement entered into between Citizens Financial Bank and Thomas                F.                Prisby (3)                        |
|   | 10.2   |   | Employment                Agreement entered into between CFS Bancorp, Inc. and Thomas F. Prisby                (3)                                             |
|   | 10.3   |   | CFS                Bancorp, Inc. Amended and Restated 1998 Stock Option Plan                (4)                                                                |
|   | 10.4   |   | CFS                Bancorp, Inc. Amended and Restated 1998 Recognition and Retention                Plan and                Trust Agreement (4)                |
|   | 10.5   |   | CFS                Bancorp, Inc. 2003 Stock Option Plan (5)                                                                                                    |
|   | 10.6   |   | Employment                Agreement entered into between Citizens Financial Bank and Charles                V. Cole                (3)                         |
|   | 10.7   |   | Employment                Agreement entered into between Citizens Financial Bank and Thomas                L.                Darovic (3)                       |
|   | 10.8   |   | Employment                Agreement entered into between CFS Bancorp, Inc. and Charles V. Cole                (3)                                              |
|   | 10.9   |   | Employment                Agreement entered into between CFS Bancorp, Inc. and Thomas L. Darovic                (3)                                            |
|   | 10.10  |   | Employment                Agreement entered into between Citizens Financial Services, FSB and                Zoran                Koricanac (6)                |
|   | 10.11  |   | Employment                Agreement entered into between CFS Bancorp, Inc. and Zoran Koricanac                (6)                                              |
|   | 10.12  |   | Amended                and Restated Supplemental ESOP Benefit Plan of CFS Bancorp, Inc.                and                Citizens Financial Services, FSB (6) |
|   | 10.13  |   | CFS                Bancorp, Inc. Directors’ Deferred Compensation Plan (6)                                                                               |
|   | 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                                                                                                                     |

| (1) | Incorporated                by reference from the Company's Definitive Proxy Statement from the                Annual                Meeting of Stockholders filed with the SEC on March 25, 2005. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Incorporated                by reference from the Company’s Annual Report on Form 10-K for the year                ended December 31, 2005. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Incorporated                by reference from the Company’s Form 8-K filed with the SEC on July 7,                2006. |
|-----|-------------------------------------------------------------------------------------------------------------------------------|

| (4) | Incorporated                by reference from the Company’s Definitive Proxy Statement for the Annual                Meeting of Stockholders filed with the SEC on March 23,                2001. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Incorporated                by reference from the Company’s Definitive Proxy Statement for the Annual                Meeting of Stockholders filed with the SEC on March 31,                2003. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | Incorporated                by reference from the Company’s Annual Report on Form 10-K for the year                ended December 31, 2004. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------|

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*Table          of Contents*

**SIGNATURES**

**CFS      BANCORP, INC.**

| Date:                November 9, 2006 | By:    | /s/                Thomas F. Prisby                          |
|---------------------------------------|--------|--------------------------------------------------------------|
|                                  |   | Thomas                F. Prisby, Chairman and                |
|                                  |   | Chief                Executive Officer                       |
|                                  |   |                                                         |
| Date:                November 9, 2006 | By:    | /s/                Charles V. Cole                           |
|                                  |   | Charles                V. Cole, Executive Vice President and |
|                                  |   | Chief                Financial Officer                       |

----