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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 |
|--------|---------------------------------------------------------------------------------------------------------------------------------------|

|   | 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 Consolidated Financial Statements                                                 | 7      |
|                                                                                                         |                                                                                                                |   |
| Item                2.                                                                                       | Management's                Discussion and Analysis of Financial Condition and Results of                Operations | 11     |
|                                                                                                         |                                                                                                                |   |
| Item                3.                                                                                       | Quantitative                and Qualitative Disclosures About Market Risk                                           | 33     |
|                                                                                                         |                                                                                                                |   |
| Item                4.                                                                                       | Controls                and Procedures                                                                              | 36     |
|                                                                                                         |                                                                                                                |   |
|                                                                                                         |                                                                                                                |   |
|                                                                                                         | **PART                II - OTHER INFORMATION**                                                                      |   |
|                                                                                                         |                                                                                                                |   |
| Item                1.                                                                                       | Legal                Proceedings                                                                                    | 37     |
|                                                                                                         |                                                                                                                |   |
| Item                1A.                                                                                      | Risk                Factors                                                                                         | 37     |
|                                                                                                         |                                                                                                                |   |
| Item                2.                                                                                       | Unregistered                Sales of Equity Securities and Use of Proceeds                                          | 37     |
|                                                                                                         |                                                                                                                |   |
| Item                3.                                                                                       | Defaults                upon Senior Securities                                                                      | 37     |
|                                                                                                         |                                                                                                                |   |
| Item                4.                                                                                       | Submission                of Matters to a Vote of Security Holders                                                  | 38     |
|                                                                                                         |                                                                                                                |   |
| Item                5.                                                                                       | Other                Information                                                                                    | 38     |
|                                                                                                         |                                                                                                                |   |
| Item                6.                                                                                       | Exhibits                                                                                                            | 39     |
|                                                                                                         |                                                                                                                |   |
| Signature                Page                                                                                | 40                                                                                                                  |
|                                                                                                         |                                                                                                                |   |
| Certifications                for Principal Executive Officer and Principal Financial                Officer |                                                                                                                |
|                                                                                                         |  Exhibit              31.1                                                                                     |   |
|                                                                                                         |  Exhibit              31.2                                                                                     |   |
|                                                                                                         |  Exhibit              32.0                                                                                     |   |

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*table          of contents*

**CFS      BANCORP, INC.**

**Condensed      Consolidated Statements of Condition**

|                                                                                                                                                                           |   | **September                30, 2007** |      |   | **December                31, 2006** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|-----------|--------|--------------------------------------|------------|
|                                                                                                                                                                           |   | (Unaudited)                           |      |   |                                 |       |
|                                                                                                                                                                           |   | (Dollars                in thousands) |      |
| **ASSETS**                                                                                                                                                                     |   |                                  |      |   |                                 |       |
| Cash                and amounts due from depository institutions                                                                                                               |   | $                                     | 15,934    |   |                                 | $          | 33,194 |   |
| Interest-bearing                deposits                                                                                                                                       |   |                                  | 9,772     |   |                                 |       | 20,607 |   |
| Federal                funds sold                                                                                                                                              |   |                                  | 2,942     |   |                                 |       | 13,366 |   |
| Cash                and cash                equivalents                                                                                                                        |   |                                  | 28,648    |   |                                 |       | 67,167 |   |
|                                                                                                                                                                           |   |                                  |      |   |                                 |       |   |   |
| Securities                available-for-sale, at fair value                                                                                                                    |   |                                  | 232,580   |   |                                 |       | 298,925 |   |
| Investment                in Federal Home Loan Bank stock, at cost                                                                                                             |   |                                  | 23,944    |   |                                 |       | 23,944 |   |
|                                                                                                                                                                           |   |                                  |      |   |                                 |       |   |   |
| Loans                receivable                                                                                                                                                |   |                                  | 820,832   |   |                                 |       | 802,383 |   |
| Allowance                for losses on                loans                                                                                                                    |   |                                  | (11,277   | )      |                                 |       | (11,184 | ) |
| Net                loans                                                                                                                                                       |   |                                  | 809,555   |   |                                 |       | 791,199 |   |
|                                                                                                                                                                           |   |                                  |      |   |                                 |       |   |   |
| Interest                receivable                                                                                                                                             |   |                                  | 6,654     |   |                                 |       | 7,523 |   |
| Other                real estate owned                                                                                                                                         |   |                                  | 1,140     |   |                                 |       | 321 |   |
| Office                properties and equipment                                                                                                                                 |   |                                  | 19,177    |   |                                 |       | 17,797 |   |
| Investment                in bank-owned life insurance                                                                                                                         |   |                                  | 36,052    |   |                                 |       | 35,876 |   |
| Other                assets                                                                                                                                                    |   |                                  | 10,300    |   |                                 |       | 10,339 |   |
| Goodwill                and intangible assets                                                                                                                                  |   |                                  | 1,250     |   |                                 |       | 1,299 |   |
| Total                assets                                                                                                                                                    |   | $                                     | 1,169,300 |   |                                 | $          | 1,254,390 |   |
|                                                                                                                                                                           |   |                                  |      |   |                                 |       |   |   |
| **LIABILITIES                AND STOCKHOLDERS’ EQUITY**                                                                                                                  |   |                                  |      |   |                                 |       |   |   |
| Deposits                                                                                                                                                                       |   | $                                     | 859,856   |   |                                 | $          | 907,095 |   |
| Borrowed                money                                                                                                                                                  |   |                                  | 161,208   |   |                                 |       | 202,275 |   |
| Advance                payments by borrowers for taxes and insurance                                                                                                           |   |                                  | 7,639     |   |                                 |       | 4,194 |   |
| Other                liabilities                                                                                                                                               |   |                                  | 10,995    |   |                                 |       | 9,020 |   |
| Total                liabilities                                                                                                                                               |   |                                  | 1,039,698 |   |                                 |       | 1,122,584 |   |
|                                                                                                                                                                           |   |                                  |      |   |                                 |       |   |   |
| 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;                10,756,189 and 11,134,331 sharesoutstanding |   |                                  | 234       |   |                                 |       | 234 |   |
| Additional                paid-in capital                                                                                                                                      |   |                                  | 191,086   |   |                                 |       | 190,825 |   |
| Retained                earnings                                                                                                                                               |   |                                  | 96,250    |   |                                 |       | 94,344 |   |
| Treasury                stock, at cost; 12,542,341 and 12,164,754 shares                                                                                                       |   |                                  | (154,074  | )      |                                 |       | (148,108 | ) |
| Treasury                stock held in Rabbi Trust, at cost; 124,776 and 124,221                shares                                                                          |   |                                  | (1,636    | )      |                                 |       | (1,627 | ) |
| Unallocated                common stock held by Employee Stock Ownership Plan                                                                                                  |   |                                  | (3,204    | )      |                                 |       | (3,564 | ) |
| Accumulated                other comprehensive income (loss), net of tax                                                                                                       |   |                                  | 946       |   |                                 |       | (298 | ) |
| Total                stockholders’                equity                                                                                                                 |   |                                  | 129,602   |   |                                 |       | 131,806 |   |
| Total                liabilities and                stockholders’ equity                                                                                                 |   | $                                     | 1,169,300 |   |                                 | $          | 1,254,390 |   |

*See      accompanying notes.*

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*table          of contents*

**CFS      BANCORP, INC.**

**Condensed      Consolidated Statements of Income**

|                                                                                           |   | **Three                Months Ended****September 30,**            |       |   | **Nine                Months Ended****September                30,** |   |
|------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------|------------|--------|----------------------------------------------------------------------|--------|
|                                                                                           |   | **2007**                                                               |       |   | **2006**                                                             |   |   | **2007** |   |   | **2006** |   |
|                                                                                           |   | (Unaudited)                                                            |       |
|                                                                                           |   | (Dollars                in thousands, except share and per share data) |       |
| Interest                income:                                                                |   |                                                                   |       |   |                                                                 |   |   |   |   |   |   |   |
| Loans                                                                                          |   | $                                                                      | 14,362     |   |                                                                 | $      | 14,798 |   |   | $ | 42,818 |   |   | $ | 45,027 |   |
| Securities                                                                                     |   |                                                                   | 3,036      |   |                                                                 |   | 3,482 |   |   |   | 10,034 |   |   |   | 9,123 |   |
| Other                                                                                          |   |                                                                   | 468        |   |                                                                 |   | 625 |   |   |   | 2,149 |   |   |   | 1,674 |   |
| Total                interest                income                                            |   |                                                                   | 17,866     |   |                                                                 |   | 18,905 |   |   |   | 55,001 |   |   |   | 55,824 |   |
| Interest                expense:                                                               |   |                                                                   |       |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                                       |   |                                                                   | 6,516      |   |                                                                 |   | 5,752 |   |   |   | 19,829 |   |   |   | 15,309 |   |
| Borrowed                money                                                                  |   |                                                                   | 2,800      |   |                                                                 |   | 5,300 |   |   |   | 9,460 |   |   |   | 15,694 |   |
| Total                interest                expense                                           |   |                                                                   | 9,316      |   |                                                                 |   | 11,052 |   |   |   | 29,289 |   |   |   | 31,003 |   |
| Net                interest income                                                             |   |                                                                   | 8,550      |   |                                                                 |   | 7,853 |   |   |   | 25,712 |   |   |   | 24,821 |   |
| Provision                for losses on loans                                                   |   |                                                                   | 884        |   |                                                                 |   | 413 |   |   |   | 1,197 |   |   |   | 971 |   |
| Net                interest income after provision for losses on loans                         |   |                                                                   | 7,666      |   |                                                                 |   | 7,440 |   |   |   | 24,515 |   |   |   | 23,850 |   |
| Non-interest                income:                                                            |   |                                                                   |       |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Service                charges and other                fees                                   |   |                                                                   | 1,786      |   |                                                                 |   | 1,730 |   |   |   | 5,025 |   |   |   | 5,042 |   |
| Card-based                fees                                                                 |   |                                                                   | 382        |   |                                                                 |   | 327 |   |   |   | 1,104 |   |   |   | 980 |   |
| Commission                income                                                               |   |                                                                   | 40         |   |                                                                 |   | 32 |   |   |   | 107 |   |   |   | 149 |   |
| Net                realized gains (losses)                on available-for-salesecurities |   |                                                                   | (1         | )      |                                                                 |   | 877 |   |   |   | 9 |   |   |   | 750 |   |
| Net                gains (losses) on sale of                other assetsother assets           |   |                                                                   | 3          |   |                                                                 |   | (1,339 | ) |   |   | 13 |   |   |   | (1,291 | ) |
| Income                from bank-owned life                insurance                            |   |                                                                   | 404        |   |                                                                 |   | 401 |   |   |   | 1,212 |   |   |   | 1,189 |   |
| Other                income                                                                    |   |                                                                   | 228        |   |                                                                 |   | 241 |   |   |   | 674 |   |   |   | 716 |   |
| Total                non-interest                income                                        |   |                                                                   | 2,842      |   |                                                                 |   | 2,269 |   |   |   | 8,144 |   |   |   | 7,535 |   |
| Non-interest                expense:                                                           |   |                                                                   |       |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Compensation                and employee                benefits                               |   |                                                                   | 4,343      |   |                                                                 |   | 5,027 |   |   |   | 14,005 |   |   |   | 15,246 |   |
| Net                occupancy                expense                                            |   |                                                                   | 766        |   |                                                                 |   | 609 |   |   |   | 2,213 |   |   |   | 1,923 |   |
| Data                processing                                                                 |   |                                                                   | 540        |   |                                                                 |   | 559 |   |   |   | 1,669 |   |   |   | 1,910 |   |
| Furniture                and equipment                expense                                  |   |                                                                   | 557        |   |                                                                 |   | 548 |   |   |   | 1,657 |   |   |   | 1,516 |   |
| Professional                fees                                                               |   |                                                                   | 240        |   |                                                                 |   | 319 |   |   |   | 1,200 |   |   |   | 1,083 |   |
| Marketing                                                                                      |   |                                                                   | 214        |   |                                                                 |   | 442 |   |   |   | 615 |   |   |   | 1,031 |   |
| Amortization                of core deposit                intangibles                         |   |                                                                   | 16         |   |                                                                 |   | 16 |   |   |   | 49 |   |   |   | 49 |   |
| Other                general and                administrative expenses                        |   |                                                                   | 1,349      |   |                                                                 |   | 1,408 |   |   |   | 3,953 |   |   |   | 4,138 |   |
| Total                non-interest                expense                                       |   |                                                                   | 8,025      |   |                                                                 |   | 8,928 |   |   |   | 25,361 |   |   |   | 26,896 |   |
| Income                before income taxes                                                      |   |                                                                   | 2,483      |   |                                                                 |   | 781 |   |   |   | 7,298 |   |   |   | 4,489 |   |
| Income                tax expense                                                              |   |                                                                   | 587        |   |                                                                 |   | 1 |   |   |   | 1,808 |   |   |   | 779 |   |
| Net                income                                                                      |   | $                                                                      | 1,896      |   |                                                                 | $      | 780 |   |   | $ | 5,490 |   |   | $ | 3,710 |   |
|                                                                                           |   |                                                                   |       |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Per                share data:                                                                 |   |                                                                   |       |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Basic                earnings per                share                                         |   | $                                                                      | 0.18       |   |                                                                 | $      | 0.07 |   |   | $ | 0.52 |   |   | $ | 0.33 |   |
| Diluted                earnings per                share                                       |   |                                                                   | 0.18       |   |                                                                 |   | 0.07 |   |   |   | 0.50 |   |   |   | 0.32 |   |
| Cash                dividends declared per                share                                |   |                                                                   | 0.12       |   |                                                                 |   | 0.12 |   |   |   | 0.36 |   |   |   | 0.36 |   |
| Weighted-average                shares outstanding                                             |   |                                                                   | 10,460,716 |   |                                                                 |   | 10,899,012 |   |   |   | 10,591,832 |   |   |   | 11,134,491 |   |
| Weighted-average                diluted shares outstanding                                     |   |                                                                   | 10,741,093 |   |                                                                 |   | 11,248,382 |   |   |   | 10,892,853 |   |   |   | 11,491,605 |   |

*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** |   |   | **Unallocated                Common****Stock                Held****By                ESOP** |     |   | **Unearned****Common                Stock Acquired****By                RRP** |   |    | **Accumulated                Other Compre-hensive Income/****(Loss)** |   |   | **Total** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|---------|--------|-----------------------------------------------|--------|---------|--------------------------------------|--------|--------|-----------------------------------|--------|--------|----------------------------------------------------------------------------------------------|----------|--------|-------------------------------------------------------------------------------|--------|---------|-----------------------------------------------------------------------|--------|--------|-----------|--------|
|                                                                                                                                                                                                                                                                                                                                   |   | (Unaudited)                                                  |    |
|                                                                                                                                                                                                                                                                                                                                   |   | (Dollars                in thousands, except per share data) |    |
| 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 | ) |
| Cumulative                effect of change in accounting for  Rabbi Trust                shares                                                                                                                                                                                                                                   |   |                                                         | – |   |                                          |   | – |                                 |   |   | (92                               | )      |   |                                                                                         | (1,609   | )      |                                                                          |   | – |                                                                  |   |   | –   |   |   |   | – |   |   |   | (1,701 | ) |
| Net                purchases of Rabbi Trust shares                                                                                                                                                                                                                                                                                     |   |                                                         | – |   |                                          |   | – |                                 |   |   | –                           |   |   |                                                                                         | (11      | )      |                                                                          |   | – |                                                                  |   |   | –   |   |   |   | – |   |   |   | (11 | ) |
| Shares                earned under ESOP                                                                                                                                                         |   |                                                         | – |   |                                          |   | 424     |                                 |   |   | –                           |   |   |                                                                                         | –  |   |                                                                          |   | 898     |                                                                  |   |   | –   |   |   |   | – |   |   |   | 1,322 |   |
| Reclassification                of unearned compensation to additional paid-in capital upon the adoption                of SFAS 123(R)                                                                                                                                                                                                 |   |                                                         | – |   |                                          |   | (111    | )                                    |   |   | –                           |   |   |                                                                                         | –  |   |                                                                          |   | – |                                                                  |   |   | 111       |   |   |   | – |   |   |   | – |   |
| Amortization                of award under RRP                                                                                                                                                                                                                                                                                         |   |                                                         | – |   |                                          |   | 48      |                                 |   |   | –                           |   |   |                                                                                         | –  |   |                                                                          |   | – |                                                                  |   |   | –   |   |   |   | – |   |   |   | 48 |   |
| Exercise                of stock                options                                               |   |                                                         | – |   |                                          |   | (474    | )                                    |   |   | –                           |   |   |                                                                                         | 3,417    |   |                                                                          |   | – |                                                                  |   |   | –   |   |   |   | – |   |   |   | 2,943 |   |
| Tax                benefit related to stock options exercised                                                                                                                                                                                                                                                                          |   |                                                         | – |   |                                          |   | 403     |                                 |   |   | –                           |   |   |                                                                                         | –  |   |                                                                          |   | – |                                                                  |   |   | –   |   |   |   | – |   |   |   | 403 |   |
| Dividends                declared on common stock ($0.36 per share)                                                                                                                                                                                                                                                                    |   |                                                         | – |   |                                          |   | – |                                 |   |   | (3,988                            | )      |   |                                                                                         | –  |   |                                                                          |   | – |                                                                  |   |   | –   |   |   |   | – |   |   |   | (3,988 | ) |
| Balance                at September 30, 2006                                                                                                                                                                                                                                                                                           |   | $                                                            | 234     |   |                                          | $      | 190,692 |                                 |   | $      | 94,009                            |   |   | $                                                                                            | (149,137 | )      |                                                                          | $      | (3,864  | )                                                                     |   | $      | –   |   |   | $ | (624 | ) |   | $ | 131,310 |   |
|                                                                                                                                                                                                                                                                                                                                   |   |                                                         |    |   |                                          |   |    |                                 |   |   |                              |   |   |                                                                                         |     |   |                                                                          |   |    |                                                                  |   |   |      |   |   |   |   |   |   |   |   |   |
| Balance                at January 1,                2007                                              |   | $                                                            | 234     |   |                                          | $      | 190,825 |                                 |   | $      | 94,344                            |   |   | $                                                                                            | (149,735 | )      |                                                                          | $      | (3,564  | )                                                                     |   | $      | –   |   |   | $ | (298 | ) |   | $ | 131,806 |   |
| Net                income                                                                             |   |                                                         | – |   |                                          |   | – |                                 |   |   | 5,490                             |   |   |                                                                                         | –  |   |                                                                          |   | – |                                                                  |   |   | –   |   |   |   | – |   |   |   | 5,490 |   |
| Other                comprehensive income, net of tax: Change in unrealized loss on                available-for-sale securities, net of reclassification                adjustment                                                                                                                                                    |   |                                                         |    |   |                                          |   |    |                                 |   |   |                              |   |   |                                                                                         |     |   |                                                                          |   |    |                                                                  |   |   |      |   |   |   | 1,244 |   |   |   | 1,244 |   |
| Total                comprehensive income                                                                                                                                                                                                                                                                                    |   |                                                         |    |   |                                          |   |    |                                 |   |   |                              |   |   |                                                                                         |     |   |                                                                          |   |    |                                                                  |   |   |      |   |   |   |   |   |   |   | 6,734 |   |
| Purchase                of treasury stock                                                                                                                                                                                                                                                                                         |   |                                                         | – |   |                                          |   | – |                                 |   |   | –                           |   |   |                                                                                         | (7,837   | )      |                                                                          |   | – |                                                                  |   |   | –   |   |   |   | – |   |   |   | (7,837 | ) |
| Net                purchases of Rabbi Trust shares                                                                                                                                                                                                                                                                                     |   |                                                         | – |   |                                          |   | – |                                 |   |   | –                           |   |   |                                                                                         | (9       | )      |                                                                          |   | – |                                                                  |   |   | –   |   |   |   | – |   |   |   | (9 | ) |
| Shares                earned under ESOP                                                                                                                                                                                                                                                                                                |   |                                                         | – |   |                                          |   | 168     |                                 |   |   | –                           |   |   |                                                                                         | –  |   |                                                                          |   | 360     |                                                                  |   |   | –   |   |   |   | – |   |   |   | 528 |   |
| Amortization                of award under RRP                                                                                                                                                                                                                                                                                         |   |                                                         | – |   |                                          |   | 48      |                                 |   |   | –                           |   |   |                                                                                         | –  |   |                                                                          |   | – |                                                                  |   |   | –   |   |   |   | – |   |   |   | 48 |   |
| Cumulative                change in accounting principle under the adoption of FIN                48                                                                                                                                                                                                                                   |   |                                                         | – |   |                                          |   | – |                                 |   |   | 240                               |   |   |                                                                                         | –  |   |                                                                          |   | – |                                                                  |   |   | –   |   |   |   | – |   |   |   | 240 |   |
| Exercise                of stock                options                                               |   |                                                         | – |   |                                          |   | (161    | )                                    |   |   | –                           |   |   |                                                                                         | 1,871    |   |                                                                          |   | – |                                                                  |   |   | –   |   |   |   | – |   |   |   | 1,710 |   |
| Tax                benefit related to stock options exercised                                                                                                                                                                                                                                                                          |   |                                                         | – |   |                                          |   | 206     |                                 |   |   | –                           |   |   |                                                                                         | –  |   |                                                                          |   | – |                                                                  |   |   | –   |   |   |   | – |   |   |   | 206 |   |
| Dividends                declared on common stock ($0.36 per share)                                                                                                                                                                                                                                                                    |   |                                                         | – |   |                                          |   | – |                                 |   |   | (3,824                            | )      |   |                                                                                         | –  |   |                                                                          |   | – |                                                                  |   |   | –   |   |   |   | – |   |   |   | (3,824 | ) |
| Balance                at September 30, 2007                                                                                                                                                                                                                                                                                           |   | $                                                            | 234     |   |                                          | $      | 191,086 |                                 |   | $      | 96,250                            |   |   | $                                                                                            | (155,710 | )      |                                                                          | $      | (3,204  | )                                                                     |   | $      | –   |   |   | $ | 946 |   |   | $ | 129,602 |   |

*See      accompanying      notes.*

** **

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*table          of contents*

**CFS      BANCORP, INC.**

**Condensed      Consolidated Statements of Cash Flows**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | **Nine Months                Ended****September                30,** |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | **2007**                                                                  |    |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | (Unaudited)                                                               |    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | (Dollars                in thousands)                                     |    |
| Operating                activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                      |    |   |   |   |
| Net                income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | $                                                                         | 5,490   |   |   | $ | 3,710 |   |
| Adjustments                to reconcile net                income to net cash provided byoperating                activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                                      |    |   |   |   |   |   |
| Provision                for losses on                loans                                                                                                                                                       |   |                                                                      | 1,197   |   |   |   | 971 |   |
| Depreciation                and                amortization                                                                                                                                                       |   |                                                                      | 1,274   |   |   |   | 1,130 |   |
| Premium                amortization on the                early extinguishment of debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                      | 3,689   |   |   |   | 7,587 |   |
| Net                premium amortization on                securities available-for-sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                                                      | (476    | ) |   |   | (361 | ) |
| Deferred                income tax expense                (benefit)                                                                                                                                               |   |                                                                      | 2,204   |   |   |   | (493 | ) |
| Amortization                of cost of stock                benefit                plans                                                                                                                          |   |                                                                      | 576     |   |   |   | 1,370 |   |
| Proceeds                from sale of loans                held-for-sale                                                                                                                                           |   |                                                                      | 8,973   |   |   |   | 7,809 |   |
| Origination                of loans                held-for-sale                                                                                                                                                  |   |                                                                      | (8,850  | ) |   |   | (7,664 | ) |
| Net                realized gains on sale                of securities available-for-sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                                      | (9      | ) |   |   | (750 | ) |
| Net                realized (gains) losses on                sale of other assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                      | (13     | ) |   |   | 1,291 |   |
| Increase                in cash surrender                value of bank-owned life insurance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                      | (1,212  | ) |   |   | (1,189 | ) |
| Increase                in prepaid expenses                and other                assets                                                                                                                        |   |                                                                      | (3,651  | ) |   |   | (4,849 | ) |
| Increase                in other                liabilities                                                                                                                                                       |   |                                                                      | 4,484   |   |   |   | 4,659 |   |
| Net                cash provided by operating                activities                                                                                                                                                          |   |                                                                      | 13,676  |   |   |   | 13,221 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                      |    |   |   |   |   |   |
| Investing                activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                      |    |   |   |   |   |   |
| Securities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                      |    |   |   |   |   |   |
| Proceeds                from                sales                                                                                                                                                       |   |                                                                      | 65,236  |   |   |   | 24,826 |   |
| Proceeds                from maturities and                paydowns                                                                                                                                     |   |                                                                      | 78,884  |   |   |   | 17,064 |   |
| Purchases                                                                                                                                                                                               |   |                                                                      | (75,315 | ) |   |   | (140,721 | ) |
| Net                loan (fundings) and                principal payments received                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                      | (33,327 | ) |   |   | 66,457 |   |
| Proceeds                from sales of loans                and loan                participations                                                                                        |   |                                                                      | 11,988  |   |   |   | 8,754 |   |
| Proceeds                from sale of other                real estate                owned                                                                                               |   |                                                                      | 521     |   |   |   | 4,162 |   |
| Proceeds                from bank owned life                insurance                                                                                                                    |   |                                                                      | 1,036   |   |   |   | 604 |   |
| Purchases                of property and                equipment                                                                                                                        |   |                                                                      | (2,605  | ) |   |   | (2,602 | ) |
| Disposal                of property and                equipment                                                                                                                         |   |                                                                      | – |   |   |   | 84 |   |
| Net                cash provided by (used for)                investing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                                                                      | 46,418  |   |   |   | (21,372 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                      |    |   |   |   |   |   |
| Financing                activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                      |    |   |   |   |   |   |
| Proceeds                from exercises of                stock                options                                                                                                    |   |                                                                      | 1,710   |   |   |   | 2,943 |   |
| Tax                benefit from exercises of                nonqualified stock options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                      | 206     |   |   |   | 403 |   |
| Dividends                paid on common                stock                                                                                                                             |   |                                                                      | (4,006  | ) |   |   | (4,249 | ) |
| Purchase                of treasury                stock                                                                                                                                 |   |                                                                      | (7,837  | ) |   |   | (14,705 | ) |
| Net                purchase of Rabbi Trust                shares                                                                                                                         |   |                                                                      | (9      | ) |   |   | (11 | ) |
| Net                (decrease) increase in                deposit                accounts                                                                                                 |   |                                                                      | (47,366 | ) |   |   | 42,057 |   |
| Net                increase (decrease) in                advance payments by borrowers for taxes and insurance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                                      | 3,445   |   |   |   | (2,248 | ) |
| Net (decrease)                increase in                other short-term borrowings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                      | (9,559  | ) |   |   | 20,322 |   |
| Repayments                of Federal Home Loan                Bank                debt                                                                                                   |   |                                                                      | (35,197 | ) |   |   | (10,184 | ) |
| Net                cash flows (used for)                provided by financing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                                                      | (98,613 | ) |   |   | 34,328 |   |
| Net                (decrease) increase in                cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                                                                      | (38,519 | ) |   |   | 26,177 |   |
| Cash                and cash equivalents at beginning of                period                                                                                                 |   |                                                                      | 67,167  |   |   |   | 24,177 |   |
| Cash                and cash equivalents at end of                period                                                                                                       |   | $                                                                         | 28,648  |   |   | $ | 50,354 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                                      |    |   |   |   |   |   |
| Supplemental                disclosures:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                                                      |    |   |   |   |   |   |
| Loans                transferred to real                estate                owned                                                                                                      |   | $                                                                         | 1,376   |   |   | $ | 5,487 |   |
| Cash                paid for interest on                deposits                                                                                                                         |   |                                                                      | 19,805  |   |   |   | 15,259 |   |
| Cash                paid for interest on                borrowed                money                                                                                                    |   |                                                                      | 5,850   |   |   |   | 8,149 |   |
| Cash                paid for                taxes                                                                                                                                        |   |                                                                      | 1,400   |   |   |   | 1,020 |   |

*See      accompanying notes.*

----

*table          of contents*

**CFS      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*

*RRP*

|                                                     |   | **Number                of****Shares** |    |   | **Weighted-Average****Exercise                Price** |   |
|----------------------------------------------------------|--------|----------------------------------------|---------|--------|-------------------------------------------------------|--------|
| Options                outstanding at January 1, 2007    |   |                                   | 1,496   |   |                                                  | $      | 12.09 |   |
| Granted                                                  |   |                                   | – |   |                                                  |   | – |   |
| Exercised                                                |   |                                   | (154    | )      |                                                  |   | 11.14 |   |
| Forfeited                                                |   |                                   | – |   |                                                  |   | – |   |
| Options                outstanding at September 30, 2007 |   |                                   | 1,342   |   |                                                  |   | 12.20 |   |
| Options                exercisable at September 30, 2007 |   |                                   | 1,342   |   |                                                  |   | 12.20 |   |

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*table          of contents*

|                                             |   | **Number                of****Shares** |    |   | **Weighted-Average****Grant-Date                Fair Value** |   |
|--------------------------------------------------|--------|----------------------------------------|---------|--------|--------------------------------------------------------------|--------|
| Unvested                at December 31, 2006     |   |                                   | 7,115   |   |                                                         | $      | 13.84 |   |
| Granted                                          |   |                                   | – |   |                                                         |   | – |   |
| Vested                                           |   |                                   | (3,505  | )      |                                                         |   | 13.83 |   |
| Forfeited                                        |   |                                   | – |   |                                                         |   | – |   |
| Unvested                as of September 30, 2007 |   |                                   | 3,610   |   |                                                         | $      | 13.85 |   |

**3.  Other      Comprehensive Income**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **Nine                Months Ended****September                30,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **2007**                                                             |   |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | (Dollars                in thousands)                                |   |
| Unrealized                holding gains arising during theperiod:                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                                 |   |   |   |   |
| Unrealized                net securities                gains                                                                                           |   | $                                                                    | 1,984  |   |   | $ | 2,229 |   |
| Related                tax                expense                                                                                                       |   |                                                                 | (735   | ) |   |   | (846 | ) |
| Net                                                                                                                                                     |   |                                                                 | 1,249  |   |   |   | 1,383 |   |
| Less:  reclassification                adjustment for net gains    realized                during the period:                                                                                                                                                                                                                                                                                                                    |   |                                                                 |   |   |   |   |   |   |
| Realized                net securities                gains                                                                                             |   |                                                                 | 9      |   |   |   | 750 |   |
| Related                tax                expense                                                                                                       |   |                                                                 | (4     | ) |   |   | (289 | ) |
| Net                                                                                                                                                     |   |                                                                 | 5      |   |   |   | 461 |   |
| Total                other comprehensive                income                                                                 |   | $                                                                    | 1,244  |   |   | $ | 922 |   |

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*table          of contents*

**4.  Earnings      Per Share**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | **Three                Months Ended****September                30,** |       |   | **Nine                Months Ended****September                30,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|------------|--------|----------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | **2007**                                                              |       |   | **2006**                                                             |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | (Dollars                in thousands, except per share data)          |       |
| Net                income                                                                                                |   | $                                                                     | 1,896      |   |                                                                 | $      | 780 |   |   | $ | 5,490 |   |   | $ | 3,710 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                                                  |       |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Weighted-average                common shares outstanding                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                                  | 10,460,716 |   |                                                                 |   | 10,899,012 |   |   |   | 10,591,832 |   |   |   | 11,134,491 |   |
| Weighted-average                common share equivalents (1)                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                                  | 280,376    |   |                                                                 |   | 349,370 |   |   |   | 301,021 |   |   |   | 357,114 |   |
| Weighted-average                common shares and commonshare equivalents                outstanding                                                                                                                                                                                                                                                                                                                                                |   |                                                                  | 10,741,093 |   |                                                                 |   | 11,248,382 |   |   |   | 10,892,853 |   |   |   | 11,491,605 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                                                  |       |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Basic                earnings per                share                                                                   |   | $                                                                     | 0.18       |   |                                                                 | $      | 0.07 |   |   | $ | 0.52 |   |   | $ | 0.33 |   |
| Diluted                earnings per                share                                                                 |   |                                                                  | 0.18       |   |                                                                 |   | 0.07 |   |   |   | 0.50 |   |   |   | 0.32 |   |

|   |   |
|--------|--------|

|   | (1)  Assumes                exercise of dilutive stock options and also a portion of the unearned                awards under the RRP. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|

**5.       Change in Accounting Principle**

*FASB*
*FIN 48*
*Accounting for Uncertainty in Income Taxes - an      interpretation of FASB Statement No. 109*

----

*table          of contents*

**6.  Recent      Accounting Pronouncements**

*SFAS*
*Fair      Value Measurements*

*The Fair Value Option for Financial Assets and Financial      Liabilities – Including an Amendment of FASB Statement No. 115 *
*Fair Value Option*
*Fair Value Measurements*

**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,” “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 *

----

*table            of            contents*

*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,      2006.  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*
*Premium Amortization*

*Analysis of Statements of Income - Non-Interest      Expense*
*Management’s Discussion and Analysis of      Financial Condition and Results of Operations*

----

*table          of contents*

**Critical      Accounting Policies**

*GAAP*

*Allowance      for Losses on      Loans.*

*SFAS*
*Accounting for      Contingencies.  *

----

*table          of contents*

*Accounting by Creditors for Impairment of a Loan.*

*Income      Tax      Accounting.  *

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

----

*table          of contents*

|                                                                                                                                                                                                                                                                                                                                                                                                       |   | **Three                Months Ended September 30,** |      |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|-----------|
|                                                                                                                                                                                                                                                                                                                                                                                                       |   | **2007**                                            |      |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                       |   | **Average****Balance**                              |      |   | **Interest** |   |   | **Average****Yield/Cost** |   |   | **Average****Balance** |   |   | **Interest** |   |   | **Average****Yield/Cost** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                       |   | (Dollars                in thousands)               |      |
| Interest-earning                assets:                                                                                                                                                                                                                                                                                                                                                                    |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                receivable                (1)                                                                                                         |   | $                                                   | 815,081   |   |   | $ | 14,362 |   |   |   | 6.99 | % |   | $ | 836,357 |   |   | $ | 14,798 |   |   |   | 7.02 | % |
| Securities                (2)                                                                                                                              |   |                                                | 251,463   |   |   |   | 3,036 |   |   |   | 4.72 |   |   |   | 316,459 |   |   |   | 3,482 |   |   |   | 4.31 |   |
| Other                interest-earning assets                (3)                                                                                                                                                                                                                                                                                                                                            |   |                                                | 39,691    |   |   |   | 468 |   |   |   | 4.68 |   |   |   | 49,174 |   |   |   | 625 |   |   |   | 5.04 |   |
| Total                interest-earning                assets                                                                                                                                                                                                                                                                                                                                                |   |                                                | 1,106,235 |   |   |   | 17,866 |   |   |   | 6.41 |   |   |   | 1,201,990 |   |   |   | 18,905 |   |   |   | 6.24 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest                earning                assets                                                                                   |   |                                                | 78,313    |   |   |   |   |   |   |   |   |   |   |   | 77,637 |   |   |   |   |   |   |   |   |   |
| Total                assets                                                                                                                 |   | $                                                   | 1,184,548 |   |   |   |   |   |   |   |   |   |   | $ | 1,279,627 |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                liabilities:                                                                                                                                                                                                                                                                                                                                                               |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Checking                accounts                                                                                                                                     |   | $                                                   | 97,737    |   |   |   | 218 |   |   |   | 0.88 |   |   | $ | 99,450 |   |   |   | 262 |   |   |   | 1.05 |   |
| Money                market                accounts                                                                                                                  |   |                                                | 167,068   |   |   |   | 1,390 |   |   |   | 3.30 |   |   |   | 135,766 |   |   |   | 1,008 |   |   |   | 2.95 |   |
| Savings                accounts                                                                                                                                      |   |                                                | 139,438   |   |   |   | 245 |   |   |   | 0.70 |   |   |   | 157,105 |   |   |   | 194 |   |   |   | 0.49 |   |
| Certificates                of                deposit                                                                                                                |   |                                                | 400,990   |   |   |   | 4,663 |   |   |   | 4.61 |   |   |   | 397,482 |   |   |   | 4,288 |   |   |   | 4.28 |   |
| Total                deposits                                                                                                                                                       |   |                                                | 805,233   |   |   |   | 6,516 |   |   |   | 3.21 |   |   |   | 789,803 |   |   |   | 5,752 |   |   |   | 2.89 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     Borrowed                money:                                                                                                                                                                                                                                                                                                                                                     |   |                                                |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|        Other                short-term borrowings (4)                                                                                                                                                                                                                                                                                                                   |   |                                                | 19,139    |   |   |   | 200 |   |   |   | 4.15 |   |   |   | 24,633 |   |   |   | 294 |   |   |   | 4.74 |   |
|        FHLB                debt                (5)(6)                                                    |   |                                                | 147,153   |   |   |   | 2,600 |   |   |   | 6.91 |   |   |   | 252,908 |   |   |   | 5,006 |   |   |   | 7.75 |   |
|        Total                borrowed                money                                                               |   |                                                | 166,292   |   |   |   | 2,800 |   |   |   | 6.59 |   |   |   | 277,541 |   |   |   | 5,300 |   |   |   | 7.47 |   |
| Total                interest-bearing                liabilities                                                                                                                                                                                                                                                                                                                                           |   |                                                | 971,525   |   |   |   | 9,316 |   |   |   | 3.80 |   |   |   | 1,067,344 |   |   |   | 11,052 |   |   |   | 4.11 |   |
| Non-interest                bearing                deposits                                                                                 |   |                                                | 66,043    |   |   |   |   |   |   |   |   |   |   |   | 61,173 |   |   |   |   |   |   |   |   |   |
| Non-interest                bearing liabilities                                                                                                                                                                                                                                                                                                                                                            |   |                                                | 18,112    |   |   |   |   |   |   |   |   |   |   |   | 18,528 |   |   |   |   |   |   |   |   |   |
| Total                liabilities                                                                                                            |   |                                                | 1,055,680 |   |   |   |   |   |   |   |   |   |   |   | 1,147,045 |   |   |   |   |   |   |   |   |   |
| Stockholders'                equity                                                                                                         |   |                                                | 128,868   |   |   |   |   |   |   |   |   |   |   |   | 132,582 |   |   |   |   |   |   |   |   |   |
| Total                liabilities and stockholders' equity                                                                                                                                                                                                                                                                                                                                                  |   | $                                                   | 1,184,548 |   |   |   |   |   |   |   |   |   |   | $ | 1,279,627 |   |   |   |   |   |   |   |   |   |
| Net                interest-earning                assets                                                                                   |   | $                                                   | 134,710   |   |   |   |   |   |   |   |   |   |   | $ | 134,646 |   |   |   |   |   |   |   |   |   |
| Net                interest income / interest rate spread                                                                                                                                                                                                                                                                                                                                                  |   |                                                |      |   |   | $ | 8,550 |   |   |   | 2.61 | % |   |   |   |   |   | $ | 7,853 |   |   |   | 2.13 | % |
| Net                interest                margin                                                                                           |   |                                                |      |   |   |   |   |   |   |   | 3.07 | % |   |   |   |   |   |   |   |   |   |   | 2.59 | % |
| Ratio                of average interest-earning assetsto                average interest-bearing                liabilities                                                                                                                                                                                                                                                                               |   |                                                |      |   |   |   |   |   |   |   | 113.87 | % |   |   |   |   |   |   |   |   |   |   | 112.62 | % |

|   |   |
|--------|--------|

| (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                cost. |
|-----|-------------------------------------------------------------------------------------------|

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

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

| (5) | The                2007 period includes an average of $150.2 million of contractual                FHLB                borrowings reduced by an average of $3.1 million of unamortized deferred                premium on the early extinguishment of debt.  Interest expense                on borrowed money includes $1.1 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 6.59% compared to an average contractual rate of                4.02%. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | 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%. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*table          of contents*

|                                                                                                                                                                                                                                                                                                                                                                                                       |   | **Nine                Months Ended September 30,** |      |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|-----------|
|                                                                                                                                                                                                                                                                                                                                                                                                       |   | **2007**                                           |      |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                       |   | **Average****Balance**                             |      |   | **Interest** |   |   | **Average****Yield/Cost** |   |   | **Average****Balance** |   |   | **Interest** |   |   | **Average****Yield/Cost** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                       |   | (Dollars                in thousands)              |      |
| Interest-earning                assets:                                                                                                                                                                                                                                                                                                                                                                    |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                receivable                (1)                                                                                                         |   | $                                                  | 805,831   |   |   | $ | 42,818 |   |   |   | 7.10 | % |   | $ | 863,874 |   |   | $ | 45,027 |   |   |   | 6.97 | % |
| Securities                (2)                                                                                                                              |   |                                               | 282,244   |   |   |   | 10,034 |   |   |   | 4.69 |   |   |   | 283,383 |   |   |   | 9,123 |   |   |   | 4.25 |   |
| Other                interest-earning assets                (3)                                                                                                                                                                                                                                                                                                                                            |   |                                               | 57,435    |   |   |   | 2,149 |   |   |   | 5.00 |   |   |   | 45,845 |   |   |   | 1,674 |   |   |   | 4.88 |   |
| Total                interest-earning                assets                                                                                                                                                                                                                                                                                                                                                |   |                                               | 1,145,510 |   |   |   | 55,001 |   |   |   | 6.42 |   |   |   | 1,193,102 |   |   |   | 55,824 |   |   |   | 6.26 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest                earning                assets                                                                                   |   |                                               | 77,897    |   |   |   |   |   |   |   |   |   |   |   | 73,411 |   |   |   |   |   |   |   |   |   |
| Total                assets                                                                                                                 |   | $                                                  | 1,223,407 |   |   |   |   |   |   |   |   |   |   | $ | 1,266,513 |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                liabilities:                                                                                                                                                                                                                                                                                                                                                               |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Checking                accounts                                                                                                                                     |   | $                                                  | 100,354   |   |   |   | 729 |   |   |   | 0.97 |   |   | $ | 102,837 |   |   |   | 773 |   |   |   | 1.00 |   |
| Money                market                accounts                                                                                                                  |   |                                               | 178,252   |   |   |   | 4,549 |   |   |   | 3.41 |   |   |   | 133,275 |   |   |   | 2,647 |   |   |   | 2.66 |   |
| Savings                accounts                                                                                                                                      |   |                                               | 145,837   |   |   |   | 721 |   |   |   | 0.66 |   |   |   | 163,261 |   |   |   | 479 |   |   |   | 0.39 |   |
| Certificates                of                deposit                                                                                                                |   |                                               | 402,156   |   |   |   | 13,830 |   |   |   | 4.60 |   |   |   | 383,416 |   |   |   | 11,410 |   |   |   | 3.98 |   |
| Total                deposits                                                                                                                                                       |   |                                               | 826,599   |   |   |   | 19,829 |   |   |   | 3.21 |   |   |   | 782,789 |   |   |   | 15,309 |   |   |   | 2.61 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     Borrowed                money:                                                                                                                                                                                                                                                                                                                                                     |   |                                               |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|        Other                short-term borrowings (4)                                                                                                                                                                                                                                                                                                                   |   |                                               | 20,771    |   |   |   | 655 |   |   |   | 4.22 |   |   |   | 12,421 |   |   |   | 424 |   |   |   | 4.56 |   |
|        FHLB                debt                (5)(6)                                                    |   |                                               | 165,940   |   |   |   | 8,805 |   |   |   | 7.00 |   |   |   | 256,152 |   |   |   | 15,270 |   |   |   | 7.86 |   |
|        Total                borrowed                money                                                               |   |                                               | 186,711   |   |   |   | 9,460 |   |   |   | 6.68 |   |   |   | 268,573 |   |   |   | 15,694 |   |   |   | 7.71 |   |
| Total                interest-bearing                liabilities                                                                                                                                                                                                                                                                                                                                           |   |                                               | 1,013,310 |   |   |   | 29,289 |   |   |   | 3.86 |   |   |   | 1,051,362 |   |   |   | 31,003 |   |   |   | 3.94 |   |
| Non-interest                bearing                deposits                                                                                 |   |                                               | 63,438    |   |   |   |   |   |   |   |   |   |   |   | 61,859 |   |   |   |   |   |   |   |   |   |
| Non-interest                bearing liabilities                                                                                                                                                                                                                                                                                                                                                            |   |                                               | 16,723    |   |   |   |   |   |   |   |   |   |   |   | 17,276 |   |   |   |   |   |   |   |   |   |
| Total                liabilities                                                                                                            |   |                                               | 1,093,471 |   |   |   |   |   |   |   |   |   |   |   | 1,130,497 |   |   |   |   |   |   |   |   |   |
| Stockholders'                equity                                                                                                         |   |                                               | 129,936   |   |   |   |   |   |   |   |   |   |   |   | 136,016 |   |   |   |   |   |   |   |   |   |
| Total                liabilities and stockholders' equity                                                                                                                                                                                                                                                                                                                                                  |   | $                                                  | 1,223,407 |   |   |   |   |   |   |   |   |   |   | $ | 1,266,513 |   |   |   |   |   |   |   |   |   |
| Net                interest-earning                assets                                                                                   |   | $                                                  | 132,200   |   |   |   |   |   |   |   |   |   |   | $ | 141,740 |   |   |   |   |   |   |   |   |   |
| Net                interest income / interest rate spread                                                                                                                                                                                                                                                                                                                                                  |   |                                               |      |   |   | $ | 25,712 |   |   |   | 2.56 | % |   |   |   |   |   | $ | 24,821 |   |   |   | 2.32 | % |
| Net                interest                margin                                                                                           |   |                                               |      |   |   |   |   |   |   |   | 3.00 | % |   |   |   |   |   |   |   |   |   |   | 2.78 | % |
| Ratio                of average interest-earning assetsto                average interest-bearing                liabilities                                                                                                                                                                                                                                                                               |   |                                               |      |   |   |   |   |   |   |   | 113.05 | % |   |   |   |   |   |   |   |   |   |   | 113.48 | % |

|   |   |
|--------|--------|

| (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                cost. |
|-----|-------------------------------------------------------------------------------------------|

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

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

| (5) | The                2007 period includes an average of $170.2 million of contractual                FHLB                borrowings reduced by an average of $4.3 million of unamortized deferred                premium on the early extinguishment of debt.  Interest expense                on borrowed money includes $3.7 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 6.68% compared to an average contractual rate of                3.99%. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | 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%. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*table          of contents*

**Rate      /      Volume Analysis**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **Three                Months Ended September 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **2007                compared to 2006**            |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **Increase                (decrease) due to**       |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **Rate**                                            |   |   | **Volume** |   |   | **Rate/****Volume** |   |   | **Total                Net Increase / (Decrease)** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | (Dollars                in thousands)               |   |
| Interest-earning                assets:                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                |   |   |   |   |   |   |   |   |   |   |
| Loans                receivable                                                                                                                                       |   | $                                                   | (62    | ) |   | $ | (376 | ) |   | $ | 2 |   |   | $ | (436 | ) |
| Securities                                                                                                                                                            |   |                                                | 339    |   |   |   | (715 | ) |   |   | (70 | ) |   |   | (446 | ) |
| Other                interest-earning                assets                                                                                                           |   |                                                | (45    | ) |   |   | (121 | ) |   |   | 9 |   |   |   | (157 | ) |
| Total                net change in income on                interest-earning                assets                                                                                                  |   |                                                | 232    |   |   |   | (1,212 | ) |   |   | (59 | ) |   |   | (1,039 | ) |
| Interest-bearing                liabilities:                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Checking                accounts                                                                                                                                                     |   |                                                | (40    | ) |   |   | (5 | ) |   |   | 1 |   |   |   | (44 | ) |
| Money                market                accounts                                                                                                                                  |   |                                                | 122    |   |   |   | 232 |   |   |   | 28 |   |   |   | 382 |   |
| Savings                accounts                                                                                                                                                      |   |                                                | 82     |   |   |   | (22 | ) |   |   | (9 | ) |   |   | 51 |   |
| Certificates                of                deposit                                                                                                                                |   |                                                | 334    |   |   |   | 38 |   |   |   | 3 |   |   |   | 375 |   |
| Total                deposits                                                                                                                                                                  |   |                                                | 498    |   |   |   | 243 |   |   |   | 23 |   |   |   | 764 |   |
|     Borrowed                money:                                                                                                                                                                                                                                                                                                                                                                                              |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|        Other                short-term                borrowings                                                         |   |                                                | (36    | ) |   |   | (66 | ) |   |   | 8 |   |   |   | (94 | ) |
|        FHLB                debt                                                                                          |   |                                                | (538   | ) |   |   | (2,093 | ) |   |   | 225 |   |   |   | (2,406 | ) |
|                        Total borrowed                money                                                                         |   |                                                | (574   | ) |   |   | (2,159 | ) |   |   | 233 |   |   |   | (2,500 | ) |
| Total                net change in expense on                interest-bearing                liabilities                                                                             |   |                                                | (76    | ) |   |   | (1,916 | ) |   |   | 256 |   |   |   | (1,736 | ) |
| Net                change in net interest                income                                                                                             |   | $                                                   | 308    |   |   | $ | 704 |   |   | $ | (315 | ) |   | $ | 697 |   |

----

*table          of contents*

|                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **Nine                Months Ended September 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **2007                compared to 2006**           |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **Increase                (decrease) due to**      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **Rate**                                           |   |   | **Volume** |   |   | **Rate/****Volume** |   |   | **Total                Net Increase / (Decrease)** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | (Dollars                in thousands)              |   |
| Interest-earning                assets:                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                               |   |   |   |   |   |   |   |   |   |   |
| Loans                receivable                                                                                                                                       |   | $                                                  | 875    |   |   | $ | (3,025 | ) |   | $ | (59 | ) |   | $ | (2,209 | ) |
| Securities                                                                                                                                                            |   |                                               | 951    |   |   |   | (36 | ) |   |   | (4 | ) |   |   | 911 |   |
| Other                interest-earning                assets                                                                                                           |   |                                               | 40     |   |   |   | 425 |   |   |   | 10 |   |   |   | 475 |   |
| Total                net                change in income on interest-earning                assets                                                                                                                                                                                                                                                                                                                                                  |   |                                               | 1,866  |   |   |   | (2,636 | ) |   |   | (53 | ) |   |   | (823 | ) |
| Interest-bearing                liabilities:                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Checking                accounts                                                                                                                                                     |   |                                               | (26    | ) |   |   | (19 | ) |   |   | 1 |   |   |   | (44 | ) |
| Money                market                accounts                                                                                                                                  |   |                                               | 754    |   |   |   | 893 |   |   |   | 255 |   |   |   | 1,902 |   |
| Savings                accounts                                                                                                                                                      |   |                                               | 328    |   |   |   | (51 | ) |   |   | (35 | ) |   |   | 242 |   |
| Certificates                of                deposit                                                                                                                                |   |                                               | 1,775  |   |   |   | 558 |   |   |   | 87 |   |   |   | 2,420 |   |
| Total                deposits                                                                                                                                                                  |   |                                               | 2,831  |   |   |   | 1,381 |   |   |   | 308 |   |   |   | 4,520 |   |
|     Borrowed                money:                                                                                                                                                                                                                                                                                                                                                                                              |   |                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|        Other                short-term                borrowings                                                         |   |                                               | (32    | ) |   |   | 285 |   |   |   | (22 | ) |   |   | 231 |   |
|        FHLB                debt                                                                                          |   |                                               | (1,678 | ) |   |   | (5,378 | ) |   |   | 591 |   |   |   | (6,465 | ) |
|                        Total borrowed                money                                                                         |   |                                               | (1,710 | ) |   |   | (5,093 | ) |   |   | 569 |   |   |   | (6,234 | ) |
| Total                net change in expense on interest-bearing                liabilities                                                                                                                                                                                                                                                                                                                                                           |   |                                               | 1,121  |   |   |   | (3,712 | ) |   |   | 877 |   |   |   | (1,714 | ) |
| Net                change in net interest                income                                                                                             |   | $                                                  | 745    |   |   | $ | 1,076 |   |   | $ | (930 | ) |   | $ | 891 |   |

**Analysis      of Statements of Income**

*Net      Interest      Margin.*

*Interest      Income.*

----

*table          of contents*

*Interest      Expense.*

*Premium Amortization*

*Provision      for losses on loans.*

----

*table          of contents*

*Changes      in Financial Condition – Allowance for Losses on Loans*
*Management’s Discussion and Analysis of Financial Condition and Results of      Operations*

*Non-interest      income.  *

|                                                      |   | **Three                Months Ended September 30,** |   |   | **Nine                Months Ended September 30,** |   |
|-----------------------------------------------------------|--------|-----------------------------------------------------|--------|--------|----------------------------------------------------|--------|
|                                                      |   | **2007**                                            |   |   | **2006**                                           |   |   | **%                Change** |   |   | **2007** |   |   | **2006** |   |   | **%                Change** |   |
|                                                      |   | (Dollars                in thousands)               |   |
| Service                charges and other fees             |   | $                                                   | 1,786  |   |                                               | $      | 1,730 |   |   |   | 3.2 | % |   | $ | 5,025 |   |   | $ | 5,042 |   |   |   | (0.3 | )% |
| Card-based                fees                            |   |                                                | 382    |   |                                               |   | 327 |   |   |   | 16.8 |   |   |   | 1,104 |   |   |   | 980 |   |   |   | 12.7 |   |
| Commission                income                          |   |                                                | 40     |   |                                               |   | 32 |   |   |   | 25.0 |   |   |   | 107 |   |   |   | 149 |   |   |   | (28.2 | ) |
| Subtotal                fee based                revenues |   |                                                | 2,208  |   |                                               |   | 2,089 |   |   |   | 5.7 |   |   |   | 6,236 |   |   |   | 6,171 |   |   |   | 1.1 |   |
| Income                from bank-owned life insurance      |   |                                                | 404    |   |                                               |   | 401 |   |   |   | 0.7 |   |   |   | 1,212 |   |   |   | 1,189 |   |   |   | 1.9 |   |
| Other                income                               |   |                                                | 228    |   |                                               |   | 241 |   |   |   | (5.4 | ) |   |   | 674 |   |   |   | 716 |   |   |   | (5.9 | ) |
| Subtotal                                                  |   |                                                | 2,840  |   |                                               |   | 2,731 |   |   |   | 4.0 |   |   |   | 8,122 |   |   |   | 8,076 |   |   |   | 0.6 |   |
| Securities                gains (losses), net             |   |                                                | (1     | )      |                                               |   | 877 |   |   | NM |   |   |   | 9 |   |   |   | 750 |   |   | NM |   |
| Other                asset gains (losses), net            |   |                                                | 3      |   |                                               |   | (1,339 | ) |   | NM |   |   |   | 13 |   |   |   | (1,291 | ) |   | NM |   |
| Total                non-interest                income   |   | $                                                   | 2,842  |   |                                               | $      | 2,269 |   |   |   | 25.3 | % |   | $ | 8,144 |   |   | $ | 7,535 |   |   |   | 8.1 | % |

*Non-interest      expense.  *

|                                                                      |   | **Three                Months Ended September 30,** |   |   | **Nine                Months Ended September 30,** |   |
|---------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|--------|----------------------------------------------------|--------|
|                                                                      |   | **2007**                                            |   |   | **2006**                                           |   |   | **%                Change** |   |   | **2007** |   |   | **2006** |   |   | **%                Change** |   |
|                                                                      |   | (Dollars                in thousands)               |   |
| Compensation                and mandatory benefits                        |   | $                                                   | 3,784  |   |                                               | $      | 3,916 |   |   |   | (3.4 | )% |   | $ | 12,396 |   |   | $ | 11,691 |   |   |   | 6.0 | % |
| Retirement                and stock related compensation                  |   |                                                | 289    |   |                                               |   | 733 |   |   |   | (60.6 | ) |   |   | 855 |   |   |   | 2,181 |   |   |   | (60.8 | ) |
| Medical                and life benefits                                  |   |                                                | 250    |   |                                               |   | 317 |   |   |   | (21.1 | ) |   |   | 675 |   |   |   | 1,167 |   |   |   | (42.2 | ) |
| Other                employee benefits                                    |   |                                                | 20     |   |                                               |   | 61 |   |   |   | (67.2 | ) |   |   | 79 |   |   |   | 207 |   |   |   | (61.8 | ) |
| Subtotal                compensation and employee                benefits |   |                                                | 4,343  |   |                                               |   | 5,027 |   |   |   | (13.6 | ) |   |   | 14,005 |   |   |   | 15,246 |   |   |   | (8.1 | ) |
| Net                occupancy expense                                      |   |                                                | 766    |   |                                               |   | 609 |   |   |   | 25.8 |   |   |   | 2,213 |   |   |   | 1,923 |   |   |   | 15.1 |   |
| Data                processing                                            |   |                                                | 540    |   |                                               |   | 559 |   |   |   | (3.4 | ) |   |   | 1,669 |   |   |   | 1,910 |   |   |   | (12.6 | ) |
| Furniture                and equipment expense                            |   |                                                | 557    |   |                                               |   | 548 |   |   |   | 1.6 |   |   |   | 1,657 |   |   |   | 1,516 |   |   |   | 9.3 |   |
| Professional                fees                                          |   |                                                | 240    |   |                                               |   | 319 |   |   |   | (24.8 | ) |   |   | 1,200 |   |   |   | 1,083 |   |   |   | 10.8 |   |
| Marketing                                                                 |   |                                                | 214    |   |                                               |   | 442 |   |   |   | (51.6 | ) |   |   | 615 |   |   |   | 1,031 |   |   |   | (40.3 | ) |
| Other                general and administrative expense                   |   |                                                | 1,365  |   |                                               |   | 1,424 |   |   |   | (4.1 | ) |   |   | 4,002 |   |   |   | 4,187 |   |   |   | (4.4 | ) |
| Total                non-interest                expense                  |   | $                                                   | 8,025  |   |                                               | $      | 8,928 |   |   |   | (10.1 | )% |   | $ | 25,361 |   |   | $ | 26,896 |   |   |   | (5.7 | )% |

----

*table          of contents*

|   | • | reduced                retirement and stock-related compensation expense pertaining to the                Company’s 2007 ESOP loan modification totaling $280,000 and $571,000,                respectively; |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | reduced pension expense totaling $165,000 and                $755,000,                respectively; |
|--------|---------|-----------------------------------------------------------------------------------------------------|

|   | • | decreased                medical and life benefits expense of $67,000 and $492,000, respectively,                due to the realization of cost savings from switching the Company’s                service provider during 2006 and a reduction in the number of large                medical claims during 2007; |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | decreased data processing expenses totaling $19,000                and                $241,000, respectively, primarily as a result of bringing items processing                in-house; and |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | reduced                marketing expenses totaling $228,000 and $416,000, respectively,                primarily                due to the elimination of certain legacy marketing initiatives no                longer                deemed to be effective and the reassessment of current marketing                strategies and outsourcing                arrangements. |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*table          of contents*

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **Three                Months Ended****September 30,** |   |   | **Nine                Months Ended****September                30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------|--------|--------|----------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **2007**                                                    |   |   | **2006**                                                             |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | (Dollars                in thousands)                       |   |
| Efficiency                ratio:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                                        |   |   |                                                                 |   |   |   |   |   |   |   |
| Non-interest                expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | $                                                           | 8,025  |   |                                                                 | $      | 8,928 |   |   | $ | 25,361 |   |   | $ | 26,896 |   |
| Net                interest income plus non-interest income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | $                                                           | 11,392 |   |                                                                 | $      | 10,122 |   |   | $ | 33,856 |   |   | $ | 32,356 |   |
| Efficiency                ratio                                                                                                                                                                                     |   |                                                        | 70.44  | %      |                                                                 |   | 88.20 | % |   |   | 74.91 | % |   |   | 83.13 | % |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                        |   |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Core                efficiency ratio:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                        |   |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest                expense                                                                                                                                                                                 |   | $                                                           | 8,025  |   |                                                                 | $      | 8,928 |   |   | $ | 25,361 |   |   | $ | 26,896 |   |
| Net                interest income plus non-interest income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | $                                                           | 11,392 |   |                                                                 | $      | 10,122 |   |   | $ | 33,856 |   |   | $ | 32,356 |   |
| Adjustments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                                        |   |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
| Net                realized (gains) losses on                sale of securities   available-for-sale                                                                                                 |   |                                                        | 1      |   |                                                                 |   | (877 | ) |   |   | (9 | ) |   |   | (750 | ) |
| Net                realized (gains) losses on                sales of other           assets                                                                 |   |                                                        | (3     | )      |                                                                 |   | 1,339 |   |   |   | (13 | ) |   |   | 1,291 |   |
| Amortization                of deferred                premium on the earlyextinguishment                of                debt                                                                                                                        |   |                                                        | 1,062  |   |                                                                 |   | 2,465 |   |   |   | 3,689 |   |   |   | 7,587 |   |
| Net                interest income plus                non-interest income –as                adjusted                                                                                                                                                          |   | $                                                           | 12,452 |   |                                                                 | $      | 13,049 |   |   | $ | 37,523 |   |   | $ | 40,484 |   |
| Core                efficiency                ratio                                                                                                                                                                 |   |                                                        | 64.45  | %      |                                                                 |   | 68.42 | % |   |   | 67.59 | % |   |   | 66.44 | % |

----

*table          of contents*

*Income      Tax      Expense.*

**Changes      in Financial Condition**

*Securities.  *

|                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | **Amortized**** Cost**           |    |   | **Gross****Unrealized****Gains** |   |   | **Gross**** Unrealized                Losses** |   |   | **Fair****Value** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|--------|----------------------------------|--------|--------|-----------------------------------------------------|--------|--------|-------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | (Dollars                in thousands) |    |
| At                September 30, 2007:                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                  |    |   |                             |   |   |                                                |   |   |              |   |
| Government                sponsored entity                (*GSE*) securities (1)                                                                                                                                                                                                                                                                                                                                                                            |   | $                                     | 191,918 |   |                             | $      | 1,636  |                                                |   | $      | (84               | )      |   | $ | 193,470 |   |
| Mortgage-backed                securities                                                                                        |   |                                  | 13,986  |   |                             |   | 3      |                                                |   |   | (120              | )      |   |   | 13,869 |   |
| Collateralized                mortgage                obligations                                                                |   |                                  | 22,495  |   |                             |   | 168    |                                                |   |   | (33               | )      |   |   | 22,630 |   |
| Equity                securities                                                                                                 |   |                                  | 2,660   |   |                             |   | -      |                                                |   |   | (49               | )      |   |   | 2,611 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | $                                     | 231,059 |   |                             | $      | 1,807  |                                                |   | $      | (286              | )      |   | $ | 232,580 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                  |    |   |                             |   |   |                                                |   |   |              |   |   |   |   |   |
| At                December 31, 2006:                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                  |    |   |                             |   |   |                                                |   |   |              |   |   |   |   |   |
| Government                sponsored entity                (*GSE*) securities (1)                                                                                                                                                                                                                                                                                                                                                                            |   | $                                     | 267,148 |   |                             | $      | 905    |                                                |   | $      | (1,139            | )      |   | $ | 266,914 |   |
| Mortgage-backed                securities                                                                                        |   |                                  | 20,234  |   |                             |   | 8      |                                                |   |   | (254              | )      |   |   | 19,988 |   |
| Collateralized                mortgage                obligations                                                                |   |                                  | 10,612  |   |                             |   | 22     |                                                |   |   | (112              | )      |   |   | 10,522 |   |
| Equity                securities                                                                                                 |   |                                  | 1,385   |   |                             |   | 116    |                                                |   |   | –           |   |   |   | 1,501 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | $                                     | 299,379 |   |                             | $      | 1,051  |                                                |   | $      | (1,505            | )      |   | $ | 298,925 |   |

*OTTI*
*FSP*
*The Meaning of Other-Than-Temporary      Impairment and Its *

----

*table          of contents*

*Application      to Certain Investments *

----

*table          of contents*

*Loans.  *

|                                                                 |   | **September                30, 2007** |    |   | **December                31, 2006** |   |   |       |   |
|----------------------------------------------------------------------|--------|---------------------------------------|---------|--------|--------------------------------------|--------|--------|------------|--------|
|                                                                 |   | **Amount**                            |    |   | **%                of Total**        |   |   | **Amount** |   |   | **%                of Total** |   |   | **%                Change** |   |
|                                                                 |   | (Dollars                in thousands) |    |
| Commercial                and construction loans:                    |   |                                  |    |   |                                 |   |   |       |   |   |   |   |   |   |   |
| Commercial                real                estate                 |   | $                                     | 346,361 |   |                                 |   | 42.2   | %          |   | $ | 339,110 |   |   |   | 42.2 | % |   |   | 2.1 | % |
| Construction                and land                development      |   |                                  | 130,963 |   |                                 |   | 15.9   |       |   |   | 128,529 |   |   |   | 16.0 |   |   |   | 1.9 |   |
| Commercial                and                industrial              |   |                                  | 62,304  |   |                                 |   | 7.6    |       |   |   | 35,743 |   |   |   | 4.5 |   |   |   | 74.3 |   |
| Total                commercial and                constructionloans |   |                                  | 539,628 |   |                                 |   | 65.7   |       |   |   | 503,382 |   |   |   | 62.7 |   |   |   | 7.2 |   |
|                                                                 |   |                                  |    |   |                                 |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Retail                loans:                                         |   |                                  |    |   |                                 |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family                residential                             |   |                                  | 216,289 |   |                                 |   | 26.4   |       |   |   | 225,007 |   |   |   | 28.1 |   |   |   | (3.9 | ) |
| Home                equity lines of                credit            |   |                                  | 61,805  |   |                                 |   | 7.5    |       |   |   | 70,527 |   |   |   | 8.8 |   |   |   | (12.4 | ) |
| Other                                                                |   |                                  | 3,110   |   |                                 |   | 0.4    |       |   |   | 3,467 |   |   |   | 0.4 |   |   |   | (10.3 | ) |
| Total                retail                loans                     |   |                                  | 281,204 |   |                                 |   | 34.3   |       |   |   | 299,001 |   |   |   | 37.3 |   |   |   | (6.0 | ) |
|                                                                 |   |                                  |    |   |                                 |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                loans receivable, net of unearnedfees           |   | $                                     | 820,832 |   |                                 |   | 100.0  | %          |   | $ | 802,383 |   |   |   | 100.0 | % |   |   | 2.3 | % |

*Allowance      for Losses on      Loans.*

----

*table          of contents*

|                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **Three                Months Ended****September                30,** |   |   | **Nine                Months Ended****September                30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **2007**                                                              |   |   | **2006**                                                             |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | (Dollars                in thousands)                                 |   |
| Balance                at beginning of                period                                                              |   | $                                                                     | 10,624 |   |                                                                 | $      | 11,690 |   |   | $ | 11,184 |   |   | $ | 12,939 |   |
| Provision                for losses on                loans                                                               |   |                                                                  | 884    |   |                                                                 |   | 413 |   |   |   | 1,197 |   |   |   | 971 |   |
| Charge-offs                                                                                                               |   |                                                                  | (246   | )      |                                                                 |   | (1,473 | ) |   |   | (1,281 | ) |   |   | (3,457 | ) |
| Recoveries                                                                                                                |   |                                                                  | 15     |   |                                                                 |   | 62 |   |   |   | 177 |   |   |   | 239 |   |
| Balance                at end of                period                                                                    |   | $                                                                     | 11,277 |   |                                                                 | $      | 10,692 |   |   | $ | 11,277 |   |   | $ | 10,692 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **September                30,**** 2007** |   |   | **December                31, 2006** |   |   | **September                30,**** 2006** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|--------|--------------------------------------|--------|--------|------------------------------------------------|--------|
| Allowance                for losses on loans to total                loans                                                                                 |   |                                           | 1.37   | %      |                                 |   | 1.39   | %                                              |   |   | 1.28 | % |
| Allowance                for losses on loans to non-performing loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                           | 34.50  |   |                                 |   | 40.64  |                                           |   |   | 49.09 |   |

*Non-performing      Assets.  *

----

*table          of contents*

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | **September                30,****2007** |    |   | **December                31,****2006** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------|--------|-----------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | (Dollars                in thousands)    |    |
| Non-accrual                loans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                     |    |
| Commercial                and construction                loans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                     |    |   |                                    |   |
| Commercial                real                estate                                                                                                                                               |   | $                                        | 19,038  |   |                                    | $      | 15,863 |   |
| Construction                and land                development                                                                                                                                    |   |                                     | 9,395   |   |                                    |   | 7,192 |   |
| Commercial                and                industrial                                                                                                                                            |   |                                     | 301     |   |                                    |   | 455 |   |
| Total                commercial and                construction                loans                                                                                                               |   |                                     | 28,734  |   |                                    |   | 23,510 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                     |    |   |                                    |   |   |   |
| Retail                loans:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                                     |    |   |                                    |   |   |   |
| Single-family                residential                                                                                                                                                           |   |                                     | 2,906   |   |                                    |   | 3,177 |   |
| Home                equity lines of                credit                                                                                                                                          |   |                                     | 966     |   |                                    |   | 772 |   |
| Other                                                                                                                                                                                              |   |                                     | 78      |   |                                    |   | 58 |   |
| Total                retail                loans                                                                                                                                                   |   |                                     | 3,950   |   |                                    |   | 4,007 |   |
| Total                non-accrual                loans                                                                                                                                              |   |                                     | 32,684  |   |                                    |   | 27,517 |   |
| Other                real estate owned,                net                                                                                                                |   |                                     | 1,140   |   |                                    |   | 321 |   |
| Total                non-performing                assets                                                                                                                           |   |                                     | 33,824  |   |                                    |   | 27,838 |   |
| 90                days past due and still accruing                interest                                                                                                |   |                                     | – |   |                                    |   | – |   |
| Total                non-performing assets                plus 90 days past due loans stillaccruing                interest                                                                        |   | $                                        | 33,824  |   |                                    | $      | 27,838 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                     |    |   |                                    |   |   |   |
| Asset                Quality Ratios:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                     |    |   |                                    |   |   |   |
| Non-performing                assets to total                assets                                                                                                                 |   |                                     | 2.89    | %      |                                    |   | 2.22 | % |
| Non-performing                loans to total                loans                                                                                                                   |   |                                     | 3.98    | %      |                                    |   | 3.43 | % |

*Potential      Problem      Assets.  *

----

*table          of contents*

*Deposits      and Borrowed      Money.  *

|                                              |   | **September                30, 2007** |    |   | **December                31, 2006** |   |   |       |   |
|---------------------------------------------------|--------|---------------------------------------|---------|--------|--------------------------------------|--------|--------|------------|--------|
|                                              |   | **Amount**                            |    |   | **%                of Total**        |   |   | **Amount** |   |   | **%                of Total** |   |   | **%                Change** |   |
|                                              |   | (Dollars                in thousands) |    |
| Checking                accounts:                 |   |                                  |    |   |                                 |   |   |       |   |   |   |   |   |   |   |
| Non-interest                bearing               |   | $                                     | 67,626  |   |                                 |   | 7.9    | %          |   | $ | 58,547 |   |   |   | 6.5 | % |   |   | 15.5 | % |
| Interest-bearing                                  |   |                                  | 95,360  |   |                                 |   | 11.1   |       |   |   | 100,912 |   |   |   | 11.1 |   |   |   | (5.5 | ) |
| Money                market accounts              |   |                                  | 163,392 |   |                                 |   | 19.0   |       |   |   | 182,153 |   |   |   | 20.1 |   |   |   | (10.3 | ) |
| Savings                accounts                   |   |                                  | 134,205 |   |                                 |   | 15.6   |       |   |   | 148,707 |   |   |   | 16.4 |   |   |   | (9.8 | ) |
| Core                deposits                      |   |                                  | 460,583 |   |                                 |   | 53.6   |       |   |   | 490,319 |   |   |   | 54.1 |   |   |   | (6.1 | ) |
| Certificates                of deposit:           |   |                                  |    |   |                                 |   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Less                than                $100,000  |   |                                  | 264,191 |   |                                 |   | 30.7   |       |   |   | 281,810 |   |   |   | 31.0 |   |   |   | (6.3 | ) |
| $100,000                or                greater |   |                                  | 135,082 |   |                                 |   | 15.7   |       |   |   | 134,966 |   |   |   | 14.9 |   |   |   | 0.1 |   |
| Time                deposits                      |   |                                  | 399,273 |   |                                 |   | 46.4   |       |   |   | 416,776 |   |   |   | 45.9 |   |   |   | (4.2 | ) |
| Total                deposits                     |   | $                                     | 859,856 |   |                                 |   | 100.0  | %          |   | $ | 907,095 |   |   |   | 100.0 | % |   |   | (5.2 | ) |

*Repo Sweep*

----

*table          of contents*

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **September                30, 2007**                      |   |   | **December                31, 2006** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|--------|--------|--------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **Weighted****Average****Contractual                Rate** |   |   | **Amount**                           |   |   | **Weighted                Average****Contractual                Rate** |   |   | **Amount** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | (Dollars                in thousands)                      |   |
| Other                short-term borrowings                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                       |   |   |                                 |   |   |   |   |   |   |   |
| Repo                Sweeps                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                       | 3.80   | %      |                                 | $      | 13,558 |   |   |   | 4.75 | % |   | $ | 23,117 |   |
| Secured                advances from FHLB – Indianapolis:                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                                       |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Maturing                in 2007 –                fixed-rate                                                                                         |   |                                                       | 3.67   |   |                                 |   | 52,000 |   |   |   | 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   |   |                                 |   | 1,169 |   |   |   | 6.71 |   |   |   | 1,190 |   |
| Maturing                in 2018 – fixed-rate                (1)                                                                                     |   |                                                       | 5.54   |   |                                 |   | 2,763 |   |   |   | 5.54 |   |   |   | 2,763 |   |
| Maturing                in 2019 – fixed-rate                (1)                                                                                     |   |                                                       | 6.31   |   |                                 |   | 7,196 |   |   |   | 6.31 |   |   |   | 7,372 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                       |   |   |                                 |   | 150,128 |   |   |   |   |   |   |   | 185,325 |   |
| Less:  deferred                premium                on early extinguishmentof                debt                                                            |   |                                                       |   |   |                                 |   | (2,478 | ) |   |   |   |   |   |   | (6,167 | ) |
| Net                FHLB – Indianapolis                advances                                                                                           |   |                                                       |   |   |                                 |   | 147,650 |   |   |   |   |   |   |   | 179,158 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                       |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Total                borrowed                money                                                                                              |   |                                                       |   |   |                                 | $      | 161,208 |   |   |   |   |   |   | $ | 202,275 |   |
| Weighted-average                contractual interest rate                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                                                       | 3.99   | %      |                                 |   |   |   |   |   | 4.02 | % |   |   |   |   |

----

*table          of contents*

*Capital      Resources.  *

*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, 2007:                                                                                                                                                       |   |                                  |    |   |                                             |   |   |                                                                                               |   |   |   |   |   |   |   |   |
| Risk-based                               |   | $                                     | 131,974 |   |                                             |   | 13.82  | %                                                                                                  |   | $ | 76,396 |   | >8.00 |  % |   | $ | 95,495 |   | >10.00 |  % |
| Tangible                                 |   |                                  | 120,733 |   |                                             |   | 10.36  |                                                                                               |   |   | 17,487 |   | >1.50 |   |   |   | 23,316 |   | >2.00 |   |
| Core                                     |   |                                  | 120,733 |   |                                             |   | 10.36  |                                                                                               |   |   | 46,632 |   | >4.00 |   |   |   | 58,290 |   | >5.00 |   |
|                                                                                                                                                                                           |   |                                  |    |   |                                             |   |   |                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| As                of December 31, 2006:                                                                                                                                                        |   |                                  |    |   |                                             |   |   |                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |
| Risk-based                               |   | $                                     | 132,762 |   |                                             |   | 14.10  | %                                                                                                  |   | $ | 75,332 |   | >8.00 |  % |   | $ | 94,165 |   | >10.00 |  % |
| Tangible                                 |   |                                  | 121,599 |   |                                             |   | 9.71   |                                                                                               |   |   | 18,780 |   | >1.50 |   |   |   | 25,040 |   | >2.00 |   |
| Core                                     |   |                                  | 121,599 |   |                                             |   | 9.71   |                                                                                               |   |   | 50,080 |   | >4.00 |   |   |   | 62,600 |   | >5.00 |   |

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*table          of contents*

**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; |
|--------|---------|---------------------------------------------------------------------------------------------------------------|

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

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

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

|   | • | purchases                of available-for-sale securities totaling $75.3                million; |
|--------|---------|--------------------------------------------------------------------------------------------------|

|   | • | repayments of borrowed money totaling $35.2                million; |
|--------|---------|---------------------------------------------------------------------|

|   | • | decreases                in the balances of deposit accounts totaling $47.4                million; |
|--------|---------|-----------------------------------------------------------------------------------------------------|

|   | • | repurchases of the Company’s common stock totaling $7.8                million; and |
|--------|---------|-------------------------------------------------------------------------------------------|

|   | • | net                loan fundings totaling $33.3                million. |
|--------|---------|-------------------------------------------------------------------------|

|   | • | proceeds                from sales, maturities and paydowns of securities aggregating $144.1                million; |
|--------|---------|----------------------------------------------------------------------------------------------------------------------|

|   | • | proceeds from sales of loans and loan participations                totaling $12.0 million; and |
|--------|---------|-------------------------------------------------------------------------------------------------|

|   | • | net                cash provided by operating activities totaling $13.7                million. |
|--------|---------|-------------------------------------------------------------------------------------------------|

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*table          of contents*

*Contractual      Obligations.*
** **

|                                                                                                                                                                                                                                                                                                                                            |   | **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)                                                 |   | $                                                     | 92,268  |   |   | $ | 47,593 |   |   | $ | 679 |   |   | $ | 9,588 |   |   | $ | 150,128 |   |
| Repo                Sweeps                (2)                                                   |   |                                                  | 13,558  |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 13,558 |   |
| Operating                leases                                                                 |   |                                                  | 617     |   |   |   | 572 |   |   |   | 152 |   |   |   | - |   |   |   | 1,341 |   |
| Dividends                payable on common stock                                                                                                                                                                                                                                                                                                |   |                                                  | 1,306   |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,306 |   |
|                                                                                                                                                                                                                                                                                                                                            |   | $                                                     | 107,749 |   |   | $ | 48,165 |   |   | $ | 831 |   |   | $ | 9,588 |   |   | $ | 166,333 |   |

*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                                                   |   | $                                                     | 42,194  |   |                                                                 | $      | 3,382   |                                                               |   | $      | 1,953                                 |   |   | $         | 663     |   |   | $ | 48,192 |   |
| Retail                                                       |   |                                                  | 12,393  |   |                                                                 |   | – |                                                               |   |   | –                               |   |   |      | – |   |   |   | 12,393 |   |
| Commitments                to fund unused construction loans |   |                                                  | 20,685  |   |                                                                 |   | 28,618  |                                                               |   |   | 7,953                                 |   |   |      | 7,478   |   |   |   | 64,734 |   |
| Commitments                to fund unused lines of credit:   |   |                                                  |    |   |                                                                 |   |    |                                                               |   |   |                                  |   |   |      |    |   |   |   |   |   |
| Commercial                                                   |   |                                                  | 22,133  |   |                                                                 |   | 12,157  |                                                               |   |   | –                               |   |   |      | 247     |   |   |   | 34,537 |   |
| Retail                                                       |   |                                                  | 12,675  |   |                                                                 |   | – |                                                               |   |   | 260                                   |   |   |      | 57,097  |   |   |   | 70,032 |   |
| Letters                of credit                             |   |                                                  | 4,870   |   |                                                                 |   | 427     |                                                               |   |   | 577                                   |   |   |      | – |   |   |   | 5,874 |   |
| Credit                enhancements                           |   |                                                  | 3,439   |   |                                                                 |   | 37,475  |                                                               |   |   | –                               |   |   |      | 5,300   |   |   |   | 46,214 |   |
|                                                         |   | $                                                     | 118,389 |   |                                                                 | $      | 82,059  |                                                               |   | $      | 10,743                                |   |   | $         | 70,785  |   |   | $ | 281,976 |   |

*IDPLOC*

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

*IRR*
*NPV*

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*table          of contents*

*ALCO*

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*table          of contents*

|                                                           |    |   | **Net                Portfolio Value**    |   |
|----------------------------------------------------------------|---------|--------|-------------------------------------------|--------|
|                                                           |    |   | **At                June 30, 2007**       |   |   | **At                December 31, 2006** |   |
|                                                           |    |   | **$                Amount**               |   |   | **$                Change** |   |   | **%                Change** |   |   | **$                Amount** |   |   | **$                Change** |   |   | **%                Change** |   |
|                                                           |    |   | **(Dollars                in thousands)** |   |
| Assumed                change in interest rates (basis points) |    |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                           | +300    |   |                                      | $      | 147,632 |   |   | $ | (30,940 | ) |   |   | (17.3 | )% |   | $ | 145,688 |   |   | $ | (32,565 | ) |   |   | (18.3 | )% |
|                                                           | +200    |   |                                      |   | 159,949 |   |   |   | (18,622 | ) |   |   | (10.4 | ) |   |   | 157,889 |   |   |   | (20,364 | ) |   |   | (11.4 | ) |
|                                                           | +100    |   |                                      |   | 170,600 |   |   |   | (7,972 | ) |   |   | (4.5 | ) |   |   | 168,493 |   |   |   | (9,760 | ) |   |   | (5.5 | ) |
|                                                           |  0 |   |                                      |   | 178,572 |   |   |   | – |   |   |   | – |   |   |   | 178,253 |   |   |   | – |   |   |   | – |   |
|                                                           | -100    |   |                                      |   | 185,574 |   |   |   | (7,002 | ) |   |   | 3.4 |   |   |   | 185,481 |   |   |   | 7,228 |   |   |   | 4.1 |   |
|                                                           | -200    |   |                                      |   | 190,639 |   |   |   | (12,067 | ) |   |   | 6.8 |   |   |   | 192,248 |   |   |   | 13,995 |   |   |   | 7.9 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | **Percentage                of Deposits Repricing****In                First Year** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | **September 30,                2007**                                          |   |   | **December                31, 2006** |   |
| Deposit                category:                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                                                                |   |   |   |   |
| Business                checking                accounts                                                                       |   |                                                                                | 20     | % |   |   | 20 | % |
| Interest                checking                accounts                                                                       |   |                                                                                | 20     |   |   |   | 20 |   |
| High-yield                checking                accounts                                                                     |   |                                                                                | 95     |   |   |   | 95 |   |
| Savings                accounts                                                                                                |   |                                                                                | 30     |   |   |   | 30 |   |
| Money                market                accounts                                                                            |   |                                                                                | 50     |   |   |   | 50 |   |

*rate shocks*

|                                                                                |                       |   | **Percentage                Change in Net Interest Income****Over                a Twelve Month Time Period** |   |
|-------------------------------------------------------------------------------------|----------------------------|--------|---------------------------------------------------------------------------------------------------------------|--------|
|                                                                                |                       |   | **September 30,                2007**                                                                    |   |   | **December                31, 2006** |   |
| Assumed                change in interest rates (basis                points): |                       |   |                                                                                                          |   |   |   |   |
|                                                                                |                  +200 |   |                                                                                                          |   | 0.1 | % |   |   | (0.8 | )% |
|                                                                                |                  +100 |   |                                                                                                          |   | 0.3 |   |   |   | (0.2 | ) |
|                                                                                |                  -100 |   |                                                                                                          |   | (0.8 | ) |   |   | (0.6 | ) |
|                                                                                |                  -200 |   |                                                                                                          |   | (2.3 | ) |   |   | (3.1 | ) |

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*table          of contents*

**Item      4.   Controls and      Procedures**

*the 1934 Act*

----

*table          of contents*

**Part      II.   OTHER INFORMATION**

**Item      1.   Legal      Proceedings**

**Legal      Proceedings**

**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, 2007                     |   |                                                | 34,942 |   |                                            | $      | 14.61  |                                                                                                               |   |   | 34,942                                                                                                                    |   |   |   | 316,025 |   |
| August                1-31,                2007    |   |                                                | 52,680 |   |                                            |   | 14.18  |                                                                                                               |   |   | 52,680                                                                                                                    |   |   |   | 263,345 |   |
| September                1-30,                2007 |   |                                                | 6,155  |   |                                            |   | 14.03  |                                                                                                               |   |   | 6,155                                                                                                                     |   |   |   | 257,190 |   |
| Total                                              |   |                                                | 93,777 |   |                                            |   | 14.33  |                                                                                                               |   |   | 93,777                                                                                                                    |   |   |   | 257,190 |   |

| (1) | The                Company publicly announced on February 27, 2007 a repurchase program                for                600,000 shares.  Prior to July 1, 2007, 249,033 shares had been                repurchased under that program.  From October 1, 2007 through                October 29, 2007, the Company has not repurchased any shares under                this                program. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Item      3.   Defaults Upon Senior      Securities**

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*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. (2)                                                                                                                 |
|   | 4.0    |   | Form                of Stock Certificate of CFS Bancorp, Inc. (3)                                                                                              |
|   | 10.1   |   | Employment                Agreement entered into between Citizens Financial Bank and Thomas                F.                Prisby (4)                        |
|   | 10.2   |   | Employment                Agreement entered into between CFS Bancorp, Inc. and Thomas F. Prisby                (4)                                             |
|   | 10.3   |   | CFS                Bancorp, Inc. Amended and Restated 1998 Stock Option Plan                (5)                                                                |
|   | 10.4   |   | CFS                Bancorp, Inc. Amended and Restated 1998 Recognition and Retention                Plan and                Trust Agreement (5)                |
|   | 10.5   |   | CFS                Bancorp, Inc. 2003 Stock Option Plan (6)                                                                                                    |
|   | 10.6   |   | Employment                Agreement entered into between Citizens Financial Bank and Charles                V. Cole                (4)                         |
|   | 10.7   |   | Employment                Agreement entered into between Citizens Financial Bank and Thomas                L.                Darovic (4)                       |
|   | 10.8   |   | Employment                Agreement entered into between CFS Bancorp, Inc. and Charles V. Cole                (4)                                              |
|   | 10.9   |   | Employment                Agreement entered into between CFS Bancorp, Inc. and Thomas L. Darovic                (4)                                            |
|   | 10.10  |   | Employment                Agreement entered into between Citizens Financial Services, FSB and                Zoran                Koricanac (7)                |
|   | 10.11  |   | Employment                Agreement entered into between CFS Bancorp, Inc. and Zoran Koricanac                (7)                                              |
|   | 10.12  |   | Amended                and Restated Supplemental ESOP Benefit Plan of CFS Bancorp, Inc.                and                Citizens Financial Services, FSB (7) |
|   | 10.13  |   | CFS                Bancorp, Inc. Directors’ Deferred Compensation Plan (7)                                                                               |
|   | 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                                                                                                                     |
|   | 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 Form 8-K filed on October 25,              2007. |
|-----|------------------------------------------------------------------------------------------------------------------|
| (3) | Incorporated                by reference from the Company’s Annual Report on Form 10-K for the year                ended December 31, 2005. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Incorporated by reference from the Company’s Form 8-K                filed on July 7, 2006. |
|-----|---------------------------------------------------------------------------------------------------|

| (5) | Incorporated by reference from the Company’s Definitive                Proxy Statement for the Annual Meeting of Stockholders filed with                the SEC                on March 23, 2001. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | Incorporated                by reference from the Company’s Definitive Proxy Statement for the Annual                Meeting of Stockholders filed with the SEC on March 31,                2003. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7) | 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:  October                30, 2007 | By:    | /s/                Thomas F. Prisby                          |
|--------------------------------------------------|--------|--------------------------------------------------------------|
|                                             |   | Thomas                F. Prisby, Chairman and                |
|                                             |   | Chief                Executive Officer                       |
|                                             |   |                                                         |
| Date:  October                30, 2007 | By:    | /s/                Charles V. Cole                           |
|                                             |   | Charles                V. Cole, Executive Vice President and |
|                                             |   | Chief                Financial Officer                       |

----