10-K/A

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

_____________________________

FORM 10-K/A
(Amendment No. 1)
_____________________________

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2008
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No.: 0-24611
CFS Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Indiana	35-2042093
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification Number)
707 Ridge Road
Munster, Indiana	46321
(Address of Principal Executive Offices)	(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:
Not Applicable

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

Common Stock (par value $0.01 per share)
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

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

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

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

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

Large accelerated filer o  Accelerated filer þ  Non-accelerated filer o  Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

As of June 30, 2008, the aggregate value of the 10,668,489 shares of Common Stock of the Registrant outstanding on such date, which excludes 536,438 shares held by affiliates of the Registrant as a group, was approximately $119.5 million. This figure is based on the closing sale price of $11.79 per share of the Registrant’s Common Stock reported on the NASDAQ National Market on June 30, 2008.

Number of shares of Common Stock outstanding as of February 28, 2009: 10,591,680

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the definitive proxy statement for the Annual Meeting of Stockholders to be held on April 28, 2009 are incorporated by reference into Part III.

CFS BANCORP, INC. AND SUBSIDIARIES

FORM 10-K/A

INDEX

		Page
	Explanatory Note	1
	PART II
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	32
Signature Page		33
Certifications for Principal Executive Officer and Principal Financial Officer		35

EXPLANATORY NOTE

     CFS Bancorp, Inc. (the Company) is filing this Amendment No. 1 on Form 10-K/A (Amended 10-K) to amend its Annual Report on Form 10-K for the fiscal year ended December 31, 2008 that was filed with the Securities and Exchange Commission (SEC) on March 9, 2009 (Original 10-K). This Amended 10-K is being filed to revise the following:

• Part II, Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) to correct the inadvertent mislabeling of the columns entitled “Trust Preferred Securities” and “State and Municipal” in the table relating to maturities and yields of the Company’s securities located on page 49 of the Original 10-K. The table can be found on page 18 of this Amended 10-K.
• Exhibit 23.0 (Consent of BKD, LLP) to correct a typographical error with respect to a reference date. Exhibit 23.0 is also filed with the Amended 10-K.

This Amended 10-K includes Part II, Item 7 in its entirety, including those portions of the Original 10-K that have not been amended.

As a consequence of these changes, the Company is also filing new certifications of its Chief Executive Officer and its Chief Financial Officer, with conforming changes, as Exhibits 31.1 and 31.2.

Except as described above, this Amended 10-K does not amend, modify or update the Original 10-K in any respect. Any information not affected by this Amended 10-K is unchanged and reflects the disclosures made at the time of the Original 10-K.

This Amended 10-K does not reflect events occurring after the filing of the Original 10-K. This Amended 10-K should be read in conjunction with the Company’s filings made with the SEC subsequent to the date of the Original 10-K.

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

RECENT MARKET DEVELOPMENTS

     In response to the financial crisis affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (EESA) was signed into law, giving the United States Department of the Treasury (Treasury Department) broad authority to implement certain actions to help restore confidence, stability and liquidity to U.S. financial markets and to encourage financial institutions to increase their lending to customers and to each other. The EESA authorized the Treasury Department to purchase from financial institutions and their holding companies up to $700.0 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies in a troubled asset relief program (TARP). The Treasury Department has allocated $250.0 billion to the Voluntary Capital Purchase Program under the TARP (CPP). The TARP also includes direct purchases or guarantees of troubled assets of financial institutions by the U.S. government.

     Under the CPP, the Treasury Department will purchase debt or equity securities from participating financial institutions in an amount equal to not less than 1% of the participating financial institution’s risk-weighted assets and not more than the lesser of (i) $25.0 billion or (ii) 3% of the participating financial institution’s risk-weighted assets. In connection therewith, each participating financial institution will be required to issue to the Treasury Department a warrant to purchase a number of shares of common stock having a market price equal to 15% of the senior preferred stock on the date of the Treasury Department’s investment. During such time as the Treasury Department holds securities issued under the Voluntary Capital Purchase Program, the participating financial institutions will be required to comply with the Treasury Department’s standards for executive compensation and will have limited ability to increase the amounts of dividends paid on, or to repurchase, their common stock.

     On December 23, 2008, the Company announced that it withdrew its application for funds available through the CPP. The Company’s Board of Directors determined that it would not be in the best long-term interests of the Company and its shareholders to participate in the CPP. Upon further analysis subsequent to the original application, the Company believes that its capital position is sufficient for its growth opportunities in the foreseeable future and that the costs, regulatory considerations and potential dilution to shareholders which accompany this government capital infusion outweigh any potential benefits of participating in the CPP. 

1

     The EESA also increased FDIC deposit insurance on most accounts from $100,000 to $250,000. This increase is in place until the end of 2009 and is not covered by deposit insurance premiums paid by the banking industry.

     Following a systemic risk determination under the FDIC Improvement Act of 1991, on October 14, 2008, the FDIC established the Temporary Liquidity Guarantee Program (TLGP). The TLGP includes the Transaction Account Guarantee Program (TAGP), which provides unlimited deposit insurance coverage through December 31, 2009 for non-interest bearing transaction accounts (typically business checking accounts) and certain funds swept into non-interest bearing savings accounts. Institutions participating in the TAGP pay a 10 basis points fee (annualized) on the balance of each covered account in excess of $250,000, while the extra deposit insurance is in place. The TLGP also includes the Debt Guarantee Program (DGP), under which the FDIC guarantees certain senior unsecured debt of FDIC-insured institutions and their holding companies. The unsecured debt must be issued on or after October 14, 2008 and not later than June 30, 2009, and the guarantee is effective through the earlier of the maturity date or June 30, 2012. The DGP coverage limit is generally 125% of the eligible entity’s eligible debt outstanding on September 30, 2008 and scheduled to mature on or before June 30, 2009 or, for certain insured institutions, 2% of their total liabilities as of September 30, 2008. Depending on the term of the debt maturity, the nonrefundable DGP fee ranges from 50 to 100 basis points (annualized) for covered debt outstanding until the earlier of maturity or June 30, 2012. The TAGP and DGP are in effect for all eligible entities, unless the entity opted out on or before December 5, 2008. The Company has elected to participate in both guarantee programs.

OVERVIEW

     Unprecedented market conditions during 2008 presented unforeseen challenges to the Company, the entire financial services sector and the economy in general. Decreased liquidity and declining market values have negatively affected all lending segments nationwide. The action taken on September 7, 2008 by the Treasury Department and the Federal Housing Finance Authority to place Fannie Mae and Freddie Mac into conservatorship caused a significant decrease in the market value of the securities issued by these government sponsored enterprises. Declining market interest rates to near zero negatively affected yields on interest-earning assets. These declining rates had a positive decrease on interest-bearing liabilities, although it was not as apparent due to increased competition for deposits throughout the industry. During 2008, it became significantly less costly for banks to strengthen their liquidity through certificate of deposit funding rather than issuing debt into illiquid credit markets.

     The Company incurred a net loss for 2008 of $11.3 million, or $(1.10) per share compared to net income of $7.5 million, or $0.69 per diluted share for 2007. During 2008, the Company’s financial results were negatively affected by provisions for losses on loans totaling $26.3 million, other-than-temporary impairments totaling $4.3 million on its investments in Fannie Mae and Freddie Mac preferred stock and a goodwill impairment of $1.2 million. Combined, these charges reduced 2008 net income by $19.9 million and reduced diluted earnings per share by $1.90.

     The Bank’s risk-based capital was 13.21% at December 31, 2008 compared to 13.93% at December 31, 2007 and continues to be in excess of the regulatory requirements of 10% to be considered “well-capitalized.” At December 31, 2008, the Bank’s risk-based capital was $27.2 million in excess of amounts required by regulatory agencies to be “well-capitalized.”

     The Bank’s Tier 1 capital also continues to be in excess of the regulatory requirements of 5% to be considered “well-capitalized.” At December 31, 2008, the Bank’s Tier 1 capital was 9.07% and was $45.4 million in excess of the amounts required by regulatory agencies to be “well-capitalized.”

     The Company’s net interest margin expanded for the fifth consecutive year to 3.32% for the year ended December 31, 2008, an increase of 30 basis points from 3.02% for the comparable 2007 period. The expansion of the net interest margin primarily resulted from decreases in short-term interest rates which decreased the Company’s cost of deposits and borrowed money.

2

     The financial results of the Company for 2008 were negatively affected by $4.3 million of other-than-temporary impairment (OTTI) charges on its Fannie Mae and Freddie Mac preferred stock investments. The OTTI charge was a direct result of the actions taken by the U.S. Treasury relating to these government sponsored enterprises as previously discussed. In addition, the Company incurred a $1.2 million goodwill impairment as a result of the Company’s year-end impairment analysis required under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

     The Company’s provision for losses on loans increased to $26.3 million for the year ended December 31, 2008 compared to $2.3 million for the 2007 period. The increase in the 2008 provision reflects reduced collateral valuations on non-performing loans as well as increased general reserves. Net charge-offs for 2008 totaled $18.8 million as compared to $5.5 million for 2007. This increase primarily reflects the deteriorating market conditions, declines in collateral values and a lack of activity in residential housing and land development. During 2008, the Company realized $13.3 million of partial charge-offs related to impaired commercial construction and land development loans that previously totaled $34.1 million in the aggregate. Of these partial charge-offs, one was transferred to other real estate owned at $2.4 million. In addition, the Company realized $430,000 of partial charge-offs related to certain non-owner occupied commercial real estate loans that previously totaled $2.8 million. An additional $2.6 million was realized by the Company as full charge-offs related to certain non-owner occupied commercial real estate loans.

     In conjunction with the hiring of an Executive Vice President – Business Banking, the Company reorganized its Business Banking group and during 2008 added ten new Business Banking Relationship Managers to accelerate the diversification of the commercial loan portfolio and to increase business deposits. This group has over 150 years of combined banking experience in the Company’s existing markets and will focus on building market presence within the Business Banking segment. The group is responsible for rebalancing the Company’s loan portfolio to reduce its exposure to commercial construction and land development by focusing on commercial and industrial, owner occupied commercial estate and multifamily loans. In addition, Business Bankers work with the borrowers to build the Company’s deposit balances by pricing deals to include the operating and personal deposit accounts of the borrowers.

     During the fourth quarter of 2008, the Company strengthened its Asset Management group by re-assigning a Business Banker with twenty years of experience and an Assistant Credit Manager with thirty years of experience in order to be proactive in this current economic environment. In addition, larger problem loans are being managed by the Bank’s President and Chief Operating Officer and the Executive Vice President and two Senior Vice Presidents of Business Banking. The changes in this area have allowed the Bank to more proactively manage and resolve problem assets and potential problem assets while allowing management to keep up to date on the progress related to these loans.

CRITICAL ACCOUNTING POLICIES

     The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP), which require the Company to establish various accounting policies. Certain of these accounting policies require management to make estimates, judgments or assumptions that could have a material effect on the carrying value of certain assets and liabilities. The estimates, judgments and assumptions used by management are based on historical experience, projected results, internal cash flow modeling techniques and other factors which management believes are reasonable under the circumstances.

     The Company’s significant accounting policies are presented in Note 1 to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. These policies, along with the disclosures presented in other financial statement notes and in this management’s discussion and analysis, provide information on the methodology used for the valuation of significant assets and liabilities in the Company’s financial statements. Management views critical accounting policies to be those that are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant impact on the financial statements. Management currently views the determination of the allowance for losses on loans, valuations and impairments of securities and the accounting for income taxes to be critical accounting policies.

     Allowance for Losses on Loans. The Company maintains an allowance for losses on loans at a level management believes is sufficient to absorb credit losses inherent in the loan portfolio. The allowance for losses on loans represents management’s estimate of probable incurred losses in the loan portfolio at each statement of condition date and is based on the review of available and relevant information. 

3

     One component of the allowance for losses on loans contains allocations for probable inherent but undetected losses within various pools of loans with similar characteristics pursuant to Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies. This component is based in part on certain loss factors applied to various loan pools as stratified by the Company. In determining the appropriate loss factors for these loan pools, management considers historical charge-offs and recoveries; levels of and trends in delinquencies, impaired loans and other classified loans; concentrations of credit within the commercial loan portfolios; volume and type of lending; and current and anticipated economic conditions.

     The second component of the allowance for losses on loans contains allocations for probable losses that have been identified relating to specific borrowing relationships pursuant to SFAS No. 114, Accounting by Creditors for Impairment of a Loan. This component consists of expected losses resulting in specific credit allocations for individual loans not considered within the above mentioned loan pools. The analysis of each loan involves a high degree of judgment in estimating the amount of the loss associated with the loan, including the estimation of the amount and timing of future cash flows and collateral values.

     Loan losses are charged off against the allowance when the loan balance or a portion of the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value, while recoveries of amounts previously charged off are credited to the allowance. The Company assesses the adequacy of the allowance for losses on loans on a quarterly basis and adjusts the allowance for losses on loans by recording a provision for losses on loans in an amount sufficient to maintain the allowance at a level deemed appropriate by management. The evaluation of the adequacy of the allowance for losses on loans is inherently subjective as it requires estimates that are susceptible to significant revision as additional information becomes available or as future events occur. To the extent that actual outcomes differ from management estimates, an additional provision for losses on loans could be required which could adversely affect earnings or the Company’s financial position in future periods. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the allowance for losses on loans for the Bank and the carrying value of its other non-performing loans, based on information available to them at the time of their examinations. Any of these agencies could require the Bank to make additional provisions for losses on loans.

     Securities. Under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, investment securities must be classified as held-to-maturity, available-for-sale or trading. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Debt securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity. Securities not classified as held-to-maturity are classified as available-for-sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and do not effect earnings until realized.

     The fair values of the Company’s securities are generally determined by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of the Company’s fair values of securities are determined using models whose significant value drivers or assumptions are unobservable and are significant to the fair value of the securities. These models are utilized when quoted prices are not available for certain securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities.

     The Company evaluates all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if an other-than-temporary impairment (OTTI) exists pursuant to guidelines established in Financial Accounting Standards Board (FASB) Staff Position (FSP) 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial conditions and near-term prospects of the issuer, and the ability and intent of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The Company may also evaluate securities for OTTI more frequently when economic or market concerns warrant additional evaluations. If management determines that an investment experienced an OTTI, the loss is recognized in the income statement as a realized loss. Any recoveries related to the value of these securities are recorded as an unrealized gain (as other comprehensive income (loss) in stockholders’ equity) and not recognized in income until the security is ultimately sold. 

4

     The Company from time to time may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.

     Income Tax Accounting. Income tax expense recorded in the Company’s consolidated statements of operations involves management’s interpretation and application of certain accounting pronouncements and federal and state tax codes. As such, the Company has identified income tax accounting as a critical accounting policy. The Company is subject to examination by various regulatory taxing authorities. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment of tax liabilities, the impact of which could be significant to the consolidated results of operations and reported earnings. Management believes the tax liabilities are adequately and properly recorded in the Company’s consolidated financial statements.

     In addition, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109 (FIN 48) effective January 1, 2007. FIN 48 requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position. Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate and consequently, affect the Company’s operating results. Management believes the tax liabilities are adequately and properly recorded in the Company’s consolidated financial statements.

5

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

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

	Year Ended December 31,
	2008						2007						2006
	Average				Average		Average				Average		Average				Average
	Balance		Interest		Yield/Cost		Balance		Interest		Yield/Cost		Balance		Interest		Yield/Cost
	(Dollars in thousands)
Interest-earning assets:
Loans receivable (1)	$	753,500	$	45,213	6.00	%	$	806,626	$	56,678	7.03	%	$	854,268	$	59,852	7.01	%
Securities (2)		251,785		12,673	4.95			265,116		12,684	4.72			292,140		12,713	4.29
Other interest-earning assets (3)		45,330		1,653	3.65			59,215		2,879	4.86			59,753		2,982	4.99
Total interest-earning assets		1,050,615		59,539	5.67			1,130,957		72,241	6.39			1,206,161		75,547	6.26
Non-interest earning assets		85,178						79,370						74,433
Total assets	$	1,135,793					$	1,210,327					$	1,280,594
Interest-bearing liabilities:
Deposits:
Checking accounts	$	105,481		612	0.58		$	100,781		955	0.95		$	102,049		1,024	1.00
Money market accounts		181,852		3,768	2.07			176,538		5,947	3.37			145,756		4,306	2.95
Savings accounts		121,920		589	0.48			142,018		941	0.66			159,936		693	0.43
Certificates of deposit		374,834		13,130	3.50			400,607		18,379	4.59			391,844		16,140	4.12
Total deposits		784,087		18,099	2.31			819,944		26,222	3.20			799,585		22,163	2.77
Borrowings:
Other short-term
borrowings (4)		25,743		430	1.67			19,828		811	4.09			19,353		902	4.66
FHLB borrowings (5)(6)(7)		119,369		6,127	5.05			158,667		11,101	6.90			248,211		19,579	7.78
Total borrowed money		145,112		6,557	4.44			178,495		11,912	6.58			267,564		20,481	7.55
Total interest-bearing
liabilities		929,199		24,656	2.65			998,439		38,134	3.82			1,067,149		42,644	4.00
Non-interest bearing deposits		63,276						64,315						61,350
Non-interest bearing liabilities		16,779						17,475						17,158
Total liabilities		1,009,254						1,080,229						1,145,657
Stockholders’ equity		126,539						130,098						134,937
Total liabilities and
stockholders’ equity	$	1,135,793					$	1,210,327					$	1,280,594
Net interest-earning assets	$	121,416					$	132,518					$	139,012
Net interest income/ interest rate spread			$	34,883	3.02	%			$	34,107	2.57	%			$	32,903	2.26	%
Net interest margin					3.32	%					3.02	%					2.73	%
Ratio of average interest-earning assets to
average interest-bearing liabilities					113.07	%					113.27	%					113.03	%

____________________
 

(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 Repo Sweeps.
(5)	The 2008 period includes an average of $120.1 million of contractual FHLB borrowings reduced by an average of $763,000 of unamortized deferred premium on the early extinguishment of debt. Interest expense on borrowings for the 2008 period includes $1.5 million of amortization of the deferred premium on the early extinguishment of debt. The amortization of the deferred premium for the 2008 period increased the average cost of borrowed money as reported to 4.44% compared to an average contractual rate of 2.41%.
(6)	The 2007 period includes an average of $162.4 million of contractual FHLB borrowings reduced by an average of $3.7 million of unamortized deferred premium on the early extinguishment of debt. Interest expense on borrowings for the 2007 period includes $4.5 million of amortization of the deferred premium on the early extinguishment of debt. The amortization of the deferred premium for the 2007 period increased the average cost of borrowed money as reported to 6.58% compared to an average contractual rate of 4.14%.
(7)	The 2006 period includes an average of $259.1 million of contractual FHLB borrowings reduced by an average of $10.9 million of unamortized deferred premium on the early extinguishment of debt. Interest expense on borrowings for the 2006 period includes $9.6 million of amortization of the deferred premium on the early extinguishment of debt. The amortization of the deferred premium for the 2006 period increased the average cost of borrowed money as reported to 7.55% compared to an average contractual rate of 3.93%.

6

RATE/VOLUME ANALYSIS

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

	Year Ended December 31,
	2008 Compared to 2007												2007 Compared to 2006
	Increase (Decrease) Due to												Increase (Decrease) Due to
								Rate/		Total Net									Rate/			Total Net
	Rate			Volume				Volume		Inc/(Dec)			Rate			Volume			Volume			Inc/(Dec)
	(Dollars in thousands)
Interest-earning assets:
Loans receivable	$	(8,277	)	$	(3,733	)	$	545		$	(11,465	)	$	174		$	(3,338	)	$	(10	)	$	(3,174	)
Securities		660			(638	)		(33	)		(11	)		1,263			(1,175	)		(117	)		(29	)
Other interest-earning assets		(720	)		(675	)		169			(1,226	)		(79	)		(25	)		1			(103	)
Total net change in income on interest-
earning assets		(8,337	)		(5,046	)		681			(12,702	)		1,358			(4,538	)		(126	)		(3,306	)
Interest-bearing liabilities:
Deposits:
Checking accounts		(371	)		45			(17	)		(343	)		(57	)		(13	)		1			(69	)
Money market accounts		(2,289	)		179			(69	)		(2,179	)		604			909			128			1,641
Savings accounts		(255	)		(133	)		36			(352	)		367			(78	)		(41	)		248
Certificates of deposit		(4,347	)		(1,182	)		280			(5,249	)		1,837			361			41			2,239
Total deposits		(7,262	)		(1,091	)		230			(8,123	)		2,751			1,179			129			4,059
Borrowings:
Other short-term borrowings		(480	)		242			(143	)		(381	)		(110	)		22			(3	)		(91	)
FHLB borrowings		(2,957	)		(2,749	)		732			(4,974	)		(2,213	)		(7,063	)		798			(8,478	)
Total borrowings		(3,437	)		(2,507	)		589			(5,355	)		(2,323	)		(7,041	)		795			(8,569	)
Total net change in expense on interest-
bearing liabilities		(10,699	)		(3,598	)		819			(13,478	)		428			(5,862	)		924			(4,510	)
Net change in net interest income	$	2,362		$	(1,448	)	$	(138	)	$	776		$	930		$	1,324		$	(1,050	)	$	1,204

RESULTS OF OPERATIONS

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Net Income

     The Company reported a net loss of $11.3 million, or $(1.10) per share, for 2008 compared to net income of $7.5 million, or $0.69 diluted earnings per share, for 2007. The Company’s 2008 earnings were impacted by provisions for losses on loans totaling $26.3 million, other-than-temporary impairments on its investments in Fannie Mae and Freddie Mac preferred stock totaling $4.3 million and a goodwill impairment of $1.2 million. Combined, these charges reduced net income by $19.9 million and reduced diluted earnings per share by $1.90.

Net Interest Income

     Net interest income before the provision for losses on loans is the principal source of earnings for the Company and consists of interest income received on loans and investment securities less interest expense paid on deposits and borrowed money. The Company’s net interest income totaled $34.9 million for 2008 compared to $34.1 million for 2007. The Company’s net interest margin (net interest income as a percentage of average interest-earning assets) for 2008 improved 30 basis points to 3.32% from 3.02% for 2007. The increases in net interest income and net interest margin were primarily a result of a reduction in the average cost of deposits and a decrease in the average balance of borrowings for 2008 when compared to 2007.

Interest Income

     The Company’s interest income was $59.5 million for 2008 compared to $72.2 million for 2007. The weighted-average yield on interest-earning assets decreased 72 basis points to 5.67% for 2008 from 6.39% for the comparable 2007 period.

7

     The decrease in interest income was primarily caused by a decrease in interest rates earned on the Bank’s loans receivable and a $53.1 million decrease in the average balance of loans receivable. The Bank’s variable rate loans totaled $449.8 million at December 31, 2008 and were negatively affected by the decrease in current market rates throughout 2008. In addition, a $25.1 million increase in the Company’s non-performing loans negatively affected the interest income and weighted-average yield recognized on loans receivable during 2008.

Interest Expense

     The Company’s total interest expense decreased to $24.7 million for 2008 from $38.1 million for the 2007 period. The Company’s average cost of interest-bearing liabilities decreased to 2.65% for 2008 when compared to 3.82% for 2007 as a result of decreases in the average balance of deposits and borrowings coupled with the positive affect of lower market interest rates during 2008.

     Interest expense on interest-bearing deposits decreased to $18.1 million for 2008 from $26.2 million for 2007. The Company’s weighted-average cost of deposits decreased 89 basis points due to the Company’s disciplined pricing on these products as market interest rates decreased throughout 2008. In addition, the Company’s average balance on interest-bearing deposits decreased 4.4% from 2007 primarily due to a decrease in the balance of certificate of deposit accounts. Tightening liquidity in the financial services sector has resulted in increased interest rates paid by other institutions on certificates of deposit. These balances are more vulnerable to above market rates paid by institutions facing liquidity issues while the Company continues to be disciplined in pricing these deposits.

     The Company’s interest expense on borrowed money for 2008 decreased 45.0% to $6.6 million for 2008 from $11.9 million for 2007 primarily as a result of lower rates on the repricing of the Company’s FHLB debt. The Company’s average balances of FHLB debt also decreased during 2008 as the Company was able to utilize its excess liquidity to repay maturing advances. The amortization of the deferred premium on the early extinguishment of debt (Premium Amortization) that was included in the Company’s total interest expense on borrowings decreased to $1.5 million for 2008 from $4.5 million for 2007 which resulted in a decrease in the Company’s cost of borrowings to 4.44% for 2008 from 6.58% for 2007.

     The Company continues to experience the positive effects of its 2004 FHLB debt restructuring through the reduction of the amount of FHLB borrowings outstanding and the contractual interest rates paid; however, the related Premium Amortization continues to adversely affect the Company’s net interest margin. The Premium Amortization reduced the net interest margin by 14 basis points in 2008 and 40 basis points in 2007. The Company’s interest expense on borrowings is detailed in the tables below for the periods indicated.

	Year Ended
	December 31,
	2008		2007		$ change			% change
	(Dollars in thousands)
Interest expense on short-term borrowings at contractual rates	$	430	$	811	$	(381	)	(47.0	)%
Interest expense on FHLB borrowings at contractual rates		4,675		6,561		(1,886	)	(28.7	)
Amortization of deferred premium		1,452		4,540		(3,088	)	(68.0	)
Total interest expense on borrowings	$	6,557	$	11,912	$	(5,355	)	(45.0	)

      The interest expense related to the Premium Amortization is expected to be $175,000 before taxes in the year ended December 31, 2009. The Premium Amortization will be fully recognized as of December 31, 2009.

Provision for Losses on Loans

     The Company’s provision for losses on loans was $26.3 million for 2008 compared to $2.3 million in 2007 reflecting reduced collateral valuations on impaired loans as well as an increase of $2.8 million in general reserves in the allowance for losses on loans as determined by its quarterly analysis of the adequacy of the allowance for losses on loans. For more information, see “Changes in Financial Condition – Allowance for Losses on Loans” below in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

8

Non-Interest Income

The following table identifies the changes in non-interest income for the periods presented:

	Year Ended
	December 31,
	2008			2007		$ change			% change
	(Dollars in thousands)
Service charges and other fees	$	6,051		$	6,795	$	(744	)	(10.9	)%
Card-based fees		1,600			1,489		111		7.5
Commission income		341			147		194		132.0
Subtotal fee based revenues		7,992			8,431		(439	)	(5.2	)
Income from bank-owned life insurance		1,300			1,634		(334	)	(20.4	)
Other income		566			892		(326	)	(36.5	)
Subtotal		9,858			10,957		(1,099	)	(10.0	)
Securities gains, net		69			536		(467	)	(87.1	)
Impairment on securities, available-for-sale		(4,334	)		—		(4,334	)	NM
Other asset gains, net		30			22		8		36.4
Total non-interest income	$	5,623		$	11,515	$	(5,892	)	(51.2	)%

     Non-interest income before securities gains, impairments and other asset gains decreased 10.0% for 2008 from 2007 due to decreases in the following:

• service charges and other fees from lower volume of non-sufficient funds items and lower fee income from letters of credit and credit enhancements;
• income from bank-owned life insurance due to other-than-temporary impairments on certain investments recognized by the underwriters and decreases in overall market rates on investments underlying the policy; and 
• other income from a decrease in the profit earned on the sale of loans and the related loan servicing rights as the Company retained the one-to-four family mortgage loans it originated during 2008.

     The Company realized an other-than-temporary impairment on its investments in Fannie Mae and Freddie Mac preferred stock totaling $4.3 million. The market for investments in these government sponsored enterprises deteriorated throughout the second half of 2008 when the Treasury Department and the Federal Housing Finance Authority placed these enterprises into conservatorship. As a result, the Company’s investment in these preferred stocks was zero at December 31, 2008.

9

Non-Interest Expense

The following table identifies the changes in non-interest expense for the periods presented:

	Year Ended
	December 31,
	2008		2007		$ change			% change
	(Dollars in thousands)
Compensation and mandatory benefits	$	15,160	$	16,236	$	(1,076	)	(6.6	)	%
Retirement and stock related compensation		783		1,054		(271	)	(25.7	)
Medical and life benefits		1,450		1,025		425		41.5
Other employee benefits		105		91		14		15.4
Subtotal compensation and employee benefits		17,498		18,406		(908	)	(4.9	)
Net occupancy expense		3,175		2,847		328		11.5
Furniture and equipment expense		2,362		2,241		121		5.4
Data processing		1,749		2,169		(420	)	(19.4	)
Professional fees		1,341		1,540		(199	)	(12.9	)
Marketing		1,002		842		160		19.0
Goodwill impairment		1,185		—		1,185		NM
Other general and administrative expenses		5,866		5,414		452		8.3
Total non-interest expense	$	34,178	$	33,459	$	719		2.1		%

The Company’s non-interest expense for 2008 increased when compared to 2007 due to increases in the following:

• medical and life benefits as the number of and the amount paid for medical claims increased;
• net occupancy expense as a result of vacating certain leased space and additional expenses relating to higher utility and snow removal costs; and
• other general and administrative expenses relating to loan collection expense for the workout of the Company’s problem loans and an increase in recruiting expense related to the above mentioned new employees.

     In addition, the $1.2 million of goodwill the Company had acquired through its 2003 acquisition of a bank branch in Illinois was determined to be fully impaired based on management’s goodwill impairment analysis at December 31, 2008. The analysis was conducted pursuant to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, as a result of the continued disruption in the public capital markets and the Company’s market capitalization falling below its book value.

     During 2008, compensation and mandatory benefits decreased due to the absence of separation expenses from 2007 totaling $625,000 which were related to the separation of two senior officers and the consolidation of its retail lending operations during the fourth quarter of 2007 and the reduction in force of other employees during the first quarter of 2007. The Company also incurred lower incentive costs as a result of not meeting its 2008 performance goals for key officers and employees.

     Retirement and stock related benefits decreased during 2008 due to a $1.4 million decrease in compensation for the Rabbi Trust deferred compensation plans. The value of the Company’s common stock held in these plans declined as a result of the change in the Company’s stock price of $3.90 at December 31, 2008 compared to $14.69 at December 31, 2007. This decrease was partially offset by a $417,000 increase in pension expense during 2008 based on information the Company received from is plan administrator with respect to its annual funding requirements. During the fourth quarter of 2008, the Bank also made a principal prepayment of $2.8 million on its Employee Stock Ownership Plan (ESOP) loan. The additional principal payment was made to satisfy the 4.1% minimum funding requirement the Company agreed to upon the modification of the ESOP loan in March 2007 and to minimize the impact of this funding requirement in 2009. As a result of the principal payment, the Company’s ESOP expense in 2008 increased to $1.1 million from $288,000 in 2007. During the first quarter of 2009, the Bank paid the remaining $1.2 million ESOP loan which resulted in $235,000 in ESOP expense. The remaining 83,519 shares will be allocated to the ESOP participants in early 2010. With the loan paid in full, the minimum funding requirement is eliminated.

10

     The Company’s efficiency ratio was 84.4% and 73.3%, respectively, for 2008 and 2007. The Company’s core efficiency ratio was 71.4% and 67.5%, respectively, for 2008 and 2007. The efficiency ratio and core efficiency ratio during 2008 were impacted by the decreases in net interest income and non-interest income and the increase in non-interest expense as discussed above. The Company’s core efficiency ratio was negatively affected by the increased non-interest expense coupled with lower revenues when compared to the prior period. For the Company’s reconciliation of its efficiency ratio and core efficiency ratio, see “Item 6. Selected Financial Data” of this Annual Report on Form 10-K.

     Management has historically used an efficiency ratio that is a non-GAAP financial measure of operating expense control and operating efficiency. The efficiency ratio is typically defined as the ratio of non-interest expense to the sum of non-interest income and net interest income before the provision for losses on loans. Many financial institutions, in calculating the efficiency ratio, adjust non-interest income (as calculated under GAAP) to exclude certain component elements, such as gains or losses on sales of securities and assets. Management follows this practice to calculate its core efficiency ratio and utilizes this non-GAAP measure in its analysis of the Company’s performance. The core efficiency ratio is different from the GAAP-based efficiency ratio. The GAAP-based measure is calculated using non-interest expense, net interest income before the provision for losses on loans and non-interest income as presented on the consolidated statements of operations.

     The Company’s core efficiency ratio is calculated as non-interest expense less goodwill impairment divided by the sum of net interest income, excluding the Premium Amortization, and non-interest income, adjusted for gains or losses on the sale of securities and other assets and other-than-temporary impairments. Management believes that the core efficiency ratio enhances investors’ understanding of its business and performance. The measure is also believed to be useful in understanding the Company’s performance trends and to facilitate comparisons with the performance of others in the financial services industry. Management further believes the presentation of the core efficiency ratio provides useful supplemental information, a clearer understanding of the Company’s financial performance, and better reflects the Company’s core operating activities.

     The risks associated with utilizing operating measures (such as the efficiency ratio) are that various persons might disagree as to the appropriateness of items included or excluded in these measures and that other companies might calculate these measures differently. Management of the Company compensates for these limitations by providing detailed reconciliations between GAAP information and its core efficiency ratio as noted above; however, these disclosures should not be considered as an alternative to GAAP.

Income Tax Expense

     The Company’s income tax benefit was $8.7 million for 2008 compared to income tax expense of $2.3 million for 2007. The effective income tax rate was (43.4)% and 23.5%, respectively, for 2008 and 2007. The significant change from income tax expense to an income tax benefit during 2008 was mainly a result of the pre-tax losses recognized during 2008. The overall effective tax rates continue to benefit from the Company’s investment in bank-owned life insurance and the application of available tax credits.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Net Income

     The Company’s net income for 2007 increased by 40.9% to $7.5 million from $5.3 million in 2006. Diluted earnings per share increased by 46.8% to $0.69 per share from $0.47 in 2006. The Company’s 2007 earnings were positively impacted by an increase in net interest income of 3.7% and a decrease in non-interest expense of 7.5% from the 2006 period which were offset in part by an increase in the provision for losses on loans and income tax expense.

Net Interest Income

     The Company’s net interest income totaled $34.1 million for 2007 representing a 3.7% increase from $32.9 million for 2006. The Company’s net interest margin for 2007 improved 29 basis points to 3.02% from 2.73% for 2006. The increases in net interest income and net interest margin were primarily a result of an increase in the weighted-average yields on interest-earning assets coupled with a reduction in the average balances of borrowed money and the amortization of the deferred premium on the early extinguishment of debt. Partially offsetting these favorable impacts was an increase in deposit costs.

11

Interest Income

     The Company’s interest income was $72.2 million for 2007 compared to $75.5 million for 2006. The decrease was primarily due to a 6.2% decrease in the average balance of interest-earning assets to $1.1 billion for 2007 from $1.2 billion for 2006 as a result of (i) the Company utilizing proceeds from security sales and maturities and other interest-earning assets to fund the repayment of maturing FHLB debt, and Company stock repurchases and (ii) the managed run-off of single-service, high-rate certificates.

     The weighted-average yield on interest-earning assets increased 13 basis points to 6.39% for 2007 from 6.26% for the comparable 2006 period as a result of the Company’s reinvestment of proceeds from sales and maturities of relatively low rate securities into higher yielding securities.

Interest Expense

     The Company’s total interest expense decreased to $38.1 million for 2007 from $42.6 million for the 2006 period. The Company’s average cost of interest-bearing liabilities decreased to 3.82% for 2007 when compared to 2006 as increases in the cost of deposits were more than offset by decreases in the cost of borrowed money.

     Interest expense on interest-bearing deposits increased to $26.2 million for 2007 from $22.2 million for 2006. The average cost of interest-bearing deposits increased 43 basis points for 2007 from 2006 due to the upward repricing of money market accounts and certificates of deposit as a result of higher market interest rates existing since early 2006. To mitigate the impact of increasing market interest rates, the Company continues to focus on growing non-interest bearing deposits.

     The Company’s total interest expense for 2007 was positively impacted by a 41.8% decrease in interest expense on borrowed money to $11.9 million for 2007 from $20.5 million for 2006. The decrease was primarily the result of lower average balances of the Company’s FHLB debt as a result of the maturities and repayments. In addition, Premium Amortization that was included in the Company’s total interest expense on borrowings decreased to $4.5 million for 2007 from $9.6 million for 2006 which resulted in a decrease in the Company’s cost of borrowings to 6.58% for 2007 from 7.55% for 2006.

     The Premium Amortization reduced the net interest margin by 40 basis points in 2007 and 80 basis points in 2006. The Company’s interest expense on borrowings is detailed in the tables below for the periods indicated.

	Year Ended
	December 31,
	2007		2006		$ change			% change
	(Dollars in thousands)
Interest expense on short-term borrowings at contractual rates	$	811	$	902	$	(91	)	(10.1	)%
Interest expense on FHLB borrowings at contractual rates		6,561		9,955		(3,394	)	(34.1	)
Premium Amortization		4,540		9,624		(5,084	)	(52.8	)
Total interest expense on borrowings	$	11,912	$	20,481	$	(8,569	)	(41.8	)

Provision for Losses on Loans

     The Company’s provision for losses on loans was $2.3 million for 2007 compared to $1.3 million in 2006 reflecting required changes to the allowance for losses on loans as determined by its quarterly analysis of the adequacy of the allowance for losses on loans. For more information, see “Changes in Financial Condition – Allowance for Losses on Loans” below in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

12

Non-Interest Income

The following table identifies the changes in non-interest income for the periods presented:

	Year Ended
	December 31,
	2007		2006			$ change			% change
	(Dollars in thousands)
Service charges and other fees	$	6,795	$	6,739		$	56		0.8	%
Card-based fees		1,489		1,313			176		13.4
Commission income		147		197			(50	)	(25.4	)
Subtotal fee based revenues		8,431		8,249			182		2.2
Income from bank-owned life insurance		1,634		1,592			42		2.6
Other income		892		945			(53	)	(5.6	)
Subtotal		10,957		10,786			171		1.6
Securities gains, net		536		750			(214	)	(28.5	)
Other asset gains (losses), net		22		(994	)		1,016		NM
Total non-interest income	$	11,515	$	10,542		$	973		9.2	%

     Non-interest income before securities and other asset gains (losses) increased 1.6% for 2007 from 2006 primarily due to increased income from card-based fees. Card-based fees increased during 2007 as a result of an increase in the Company’s number of active ATM and debit cards and the related usage. The Company’s service charges and other fees have been impacted by lower volume of overdrafts during 2007 as deposit customers continue to change their behavior patterns related to overdrafts and fees. Commission income from the Company’s third-party service provider for the sale of investment products was lower for 2007 as rates offered on certificates of deposit have become more competitive relative to the yields available on non-deposit products.

     The change in other asset gains (losses) from 2006 to 2007 was primarily related to the $1.3 million loss on the 2006 sale of property that was collateral for an impaired commercial real estate loan which was transferred to other real estate owned. Partially offsetting the 2006 loss was a $285,000 gain on the sale of another property that had been held in other real estate owned.

Non-Interest Expense

The following table identifies the changes in non-interest expense for the periods presented:

	Year Ended
	December 31,
	2007		2006		$ change			% change
	(Dollars in thousands)
Compensation and mandatory benefits	$	16,236	$	15,655	$	581		3.7	%
Retirement and stock related compensation		1,054		3,453		(2,399	)	(69.5	)
Medical and life benefits		1,025		1,412		(387	)	(27.4	)
Other employee benefits		91		270		(179	)	(66.3	)
Subtotal compensation and employee benefits		18,406		20,790		(2,384	)	(11.5	)
Net occupancy expense		2,847		2,533		314		12.4
Furniture and equipment expense		2,241		2,013		228		11.3
Data processing		2,169		2,404		(235	)	(9.8	)
Professional fees		1,540		1,514		26		1.7
Marketing		842		1,332		(490	)	(36.8	)
Other general and administrative expenses		5,414		5,592		(178	)	(3.2	)
Total non-interest expense	$	33,459	$	36,178	$	(2,719	)	(7.5	)%

13

The Company’s non-interest expense for 2007 when compared to 2006 was positively impacted by the following:

• reduced retirement and stock-related compensation expense pertaining to the Company’s 2007 ESOP loan modification totaling $1.1 million;
• reduced pension expense totaling $1.5 million due to higher 2006 voluntary contributions to its multi-employer defined benefit plan;
• decreased medical and life benefits expense of $387,000 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 $235,000 primarily as a result of bringing items processing in-house; and
• reduced marketing expenses totaling $490,000 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.

     The above decreases were partially offset by an increase in compensation and mandatory benefits due to separation expenses totaling $345,000 during the fourth quarter of 2007 related to the separation of two senior officers as previously disclosed in separate regulatory filings and the consolidation of retail lending operations. The Company also incurred separation expense of $280,000 during the first quarter of 2007 related to its reduction in force. In addition, net occupancy expense and furniture and equipment expense increased during 2007 as a result of the opening of two new full service banking centers in Tinley Park, Illinois and Merrillville, Indiana combined with the implementation of the Company’s new digital phone system.

     The Company’s efficiency ratio was 73.3% and 83.3%, respectively, for 2007 and 2006. The Company’s core efficiency ratio was 67.5% and 67.9%, respectively, for 2007 and 2006. The efficiency ratio and core efficiency ratio during 2007 were positively impacted by the increases in net interest income and non-interest income and by the decrease in non-interest expense as discussed above. For the Company’s reconciliation of its efficiency ratio and core efficiency ratio, see “Item 6. Selected Financial Data” of this Annual Report on Form 10-K.

Income Tax Expense

     The Company’s income tax expense was $2.3 million and $618,000, respectively, for 2007 and 2006 and the effective income tax rate was 23.5% and 10.4%. The increase in the effective tax rate was mainly a result of a decrease in the percentage of permanent tax items to pre-tax income and the recognition in 2006 of tax benefits relating to certain tax positions taken on prior year tax returns that had not been recognized for financial reporting purposes. During the fourth quarter of 2006, management determined that the tax liabilities established for these tax uncertainties were no longer required. The Company’s effective tax rate remains lower than the statutory tax rate primarily due to the Company’s investment in bank-owned life insurance and the application of available tax credits.

CHANGES IN FINANCIAL CONDITION FOR 2008

General

     During 2008, the Company’s total assets decreased by $28.4 million to $1.12 billion from $1.15 billion at December 31, 2007. The significant changes in the composition of the Company’s statement of condition during 2008 include a net decrease in:

• cash and cash equivalents of $19.8 million;
• gross loans receivable of $43.2 million; and
• total deposits of $39.2 million.

     These decreases were partially offset by an increase in securities available-for-sale of $26.7 million and an increase in borrowed money of $37.5 million.

14

Securities

     The Company manages its securities portfolio to adjust balance sheet interest rate sensitivity to insulate net interest income against the impact of changes in market interest rates, to maximize the return on invested funds within acceptable risk guidelines and to meet pledging and liquidity requirements.

     The Company adjusts the size and composition of its securities portfolio according to a number of factors including expected loan growth, the interest rate environment and projected liquidity. The amortized cost of the Company’s available-for-sale securities and their fair values were as follows for the dates indicated:

	December 31,
	2008							2007					2006
	Par		Amortized		Fair		Par		Amortized		Fair		Par		Amortized		Fair
	Value		Cost		Value		Value		Cost		Value		Value		Cost		Value
	(Dollars in thousands)
Available-for-sale securities:
Government sponsored entity
securities (GSE)	$	98,400	$	97,987	$	102,345	$	141,300	$	140,301	$	143,146	$	268,655	$	267,148	$	266,914
Mortgage-backed securities		10,881		10,774		10,856		12,545		12,587		12,563		20,119		20,234		19,988
Collateralized mortgage
obligations		118,787		116,175		113,936		57,635		56,672		57,180		10,591		10,612		10,522
Trust preferred securities		30,966		27,668		24,133		10,000		8,900		8,900		—		—		—
Equity securities		—		—		—		3,176		3,344		2,805		1,218		1,385		1,501
	$	259,034	$	252,604	$	251,270	$	224,656	$	221,804	$	224,594	$	300,583	$	299,379	$	298,925

     Securities available-for-sale were $251.3 million at December 31, 2008 compared to $224.6 million at December 31, 2007. As a result of opportunities created during 2008 by market imbalances associated with fears surrounding securities with mortgage related collateral or tied to the mortgage industry, the Company purchased over $6.1 million of agency issued collateralized mortgage obligations; $25.8 million of seasoned AAA-rated senior tranches of collateralized mortgage obligations; and $42.3 million of seasoned, senior, AAA-rated commercial mortgage-backed securities. The Company also purchased $6.9 million of agency issued mortgage-backed securities and $21.1 million in discounted, AAA-rated, super-senior pooled trust preferred securities during 2008.

     The collateralized mortgage obligation portfolio is comprised of AAA-rated securities mainly backed by conventional residential mortgages, with 15-year, fixed-rate, prime loans originated prior to 2005, low historical delinquencies, weighted-average credit scores in excess of 725 and loan-to-values under 50%. The underlying collateral of the collateralized mortgage obligation portfolio had a weighted-average 90-day delinquency ratio of 0.17% at December 31, 2008.

     The commercial mortgage-backed securities portfolio consists mainly of short-term, senior (A1, A2, and A3) tranches of seasoned issues with extensive subordination and limited balloon risk. All bonds are rated AAA. The majority of the tranches owned can withstand 100% default rates at 50% severities with no risk to principal. The weighted-average debt service coverage ratio of the collateral backing this portfolio, excluding 100% defeased tranches, was 1.88x at December 31, 2008. The weighted-average loan-to-value of the collateral backing this portfolio, excluding 100% defeased tranches, was 59% at December 31, 2008.

     The Company’s pooled trust preferred securities are all super senior and backed by senior securities issued mainly by bank and thrift holding companies. Internally and externally produced analysis suggests immediate default rates of 50% on the original collateral are necessary before a break in yield occurs. Additionally, as deferrals and defaults on the underlying collateral increase, cash flows are increasingly diverted from mezzanine and subordinate tranches to pay down principal on the super senior tranches.

     Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157) which defines and establishes a framework for measuring fair value, when required or elected, and expands fair value disclosure requirements. At the same time, the Company also adopted Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115 (SFAS 159) which permits the election of the fair value measurement method for certain financial assets and liabilities.

15

     SFAS 157 establishes a fair value hierarchy that prioritizes the inputs used in valuation techniques, but not the valuation techniques themselves. The fair value hierarchy is designed to indicate the relative reliability of the fair value measure. The highest priority is given to quoted prices in active markets and the lowest to unobservable data such as the Company’s internal information. SFAS 157 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” There are three levels of inputs into the fair value hierarchy (Level 1 being the highest priority and Level 3 being the lowest priority):

Level 1 – Unadjusted quoted prices for identical instruments in active markets;

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable; and

Level 3 – Instruments whose significant value drivers or assumptions are unobservable and that are significant to the fair value of the assets or liabilities.

     A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

     The following table sets forth the Company’s financial assets by level within the fair value hierarchy that were measured at fair value on a recurring basis during 2008.

		Fair Value Measurements Using
		Quoted Prices in
		Active Markets for	Significant Other	Significant Unobservable
		Identical Assets	Observable Inputs	Inputs
	Fair Value	(Level 1)	(Level 2)	(Level 3)
	(Dollars in thousands)
Securities available-for-sale	$251,270	$—	$227,137	$24,133

     Securities available-for-sale are measured at fair value on a recurring basis. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features. Changes in the fair market value of the Company’s securities available-for-sale are recorded in other comprehensive income.

     Level 3 models are utilized when quoted prices are not available for certain securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities.

     The Company determined that Level 3 pricing models should be utilized for valuing its investments in pooled trust preferred securities. The market for these securities at December 31, 2008 was not active and markets for similar securities were also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which pooled trust preferred securities trade and then by a significant decrease in the volume of trades relative to historical levels. During 2008, bid-ask spreads on these securities climbed as high as $25.00 from bid-ask spreads of less than $1.00 from when securities were actively traded. The new issued market is also inactive as no new trust preferred securities have been issued since 2007. There are currently very few market participants who are willing and or able to transact for these securities.

16

     The market values for these securities (and any securities other than those issued or guaranteed by the U.S. Treasury) were very depressed at December 31, 2008 relative to historical levels. For example, the yield spreads for the broad market of investment grade and high yield corporate bonds reached all time wide levels versus U.S. Treasury securities at the end of November 2008 and remained near those levels at December 31, 2008. Thus in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general versus being an indicator of credit problems with a particular issuer.

     Given conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, management determined:

• the few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at December 31, 2008; and
• an income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique.

     All pooled trust preferred securities were issued between November 2004 and November 2007 and mature between December 2035 and March 2038. Of the five pooled trust preferred securities held by the Company, all are “Super Senior” and at December 31, 2008 are rated AAA. Subsequent to year end, four were downgraded to AA- and one was downgraded to A+. Each of the securities held has at least one AAA-rated subordinate tranche and several other subordinate tranches supporting the Company’s “Super Senior” tranches. Interest payments are current on all of the securities held. Principal returns are increasingly directed to senior tranches as deferrals and defaults on the underlying collateral increase.

     The Company’s internal model estimates expected future cash flows discounted using a rate management believes is representative of current market conditions. In determining expected cash flows, the Company assumed any defaulted underlying issues will not have any recovery and underlying issues that are currently deferring or in receivership or conservatorship will eventually default and not have any recovery. In addition, the Company’s internal model estimates cash flows to maturity and assumes no early redemptions of principal due to call options or successful auctions.

     The Company’s held-to-maturity securities had an amortized cost of $6.9 million and $3.9 million, respectively, at December 31, 2008 and 2007 with $161,000 and $38,000, respectively, of gross unrealized holding gains.

     The Company evaluates all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, to determine if an other-than-temporary impairment (OTTI) exists pursuant to guidelines established in FSP 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial conditions and near-term prospects of the issuer, and the ability and intent of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. If management determines that an investment experienced an OTTI, the loss is recognized in the income statement as a realized loss. Any recoveries related to the value of these securities are recorded as an unrealized gain (as other comprehensive income (loss) in stockholders’ equity) and not recognized in income until the security is ultimately sold.

     On September 7, 2008, the Treasury Department and the Federal Housing Finance Authority placed Fannie Mae and Freddie Mac into conservatorship. This action caused the Company’s investment in Fannie Mae and Freddie Mac preferred stocks to significantly decline during the second half of 2008. At December, 31, 2008, the Company’s investment in these preferred stocks was zero after management determined the declines in market value to be other than temporary resulting in OTTI charges totaling $582,000, $3.5 million and $282,000, respectively, during the second, third and fourth quarters of 2008.

17

     At December 31, 2008, the remainder of the Company’s securities available-for-sale with an unrealized loss position was in management’s belief primarily due to differences in market interest rates coupled with an illiquid fixed-income market. Management does not believe any of these securities are other-than-temporarily impaired. At December 31, 2008, the Company has both the intent and ability to hold these impaired securities for a period of time necessary to recover the unrealized losses; however, the Company may from time to time dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds could be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.

     The following table sets forth certain information regarding the maturities and weighted average yield of the Company’s securities as of December 31, 2008. The amounts and yields listed in the table are based on amortized cost.

					Mortgage				Collateralized				Commercial				State				Trust
					Backed				Mortgage				Mortgage-Backed				and				Preferred
	GSE Securities				Securities (1)				Obligations (1)				Securities (2)				Municipal				Securities (3)				Total
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
	(Dollars in thousands)
Maturities:
Less than 1
year	$	38,616	4.81	%	$	927	3.67	%	$	4,965	5.65	%	$	10,128	6.06	%	$	1,940	2.89	%	$	—	—	%	$	56,576	5.03	%
1 to less than 5
years		59,371	5.05			9,847	4.39			61,871	5.41			29,541	6.05			5,000	3.34			—	—			165,630	5.27
5 to less than
10 years		—	—			—	—			9,670	5.87			—	—			—	—			—	—			9,670	5.87
10 years and
over		—	—			—	—			—	—			—	—			—	—			27,668	3.35			27,668	3.35
Total securities	$	97,987	4.95	%	$	10,774	4.33	%	$	76,506	5.49	%	$	39,669	6.05	%	$	6,940	3.21	%	$	27,668	3.35	%	$	259,544	5.04	%
Average months to
maturity		14				38				42				18				25				334				69

____________________
 

(1)	The Company’s mortgage-backed securities and collateralized mortgage obligations are amortizing in nature. As such, the maturities presented in the table for these securities are based on historical and estimated prepayment rates for the underlying mortgage collateral and were calculated using prepayment speeds based on the trailing three-month CPR (Constant Prepayment Rate). The estimated average lives may differ from actual principal cash flows since cash flows include prepayments and scheduled principal amortization.
(2)	The Company’s commercial mortgage-backed securities are amortizing in nature. As such, the maturities presented in the table for these securities are based on contractual payment assumptions for the underlying collateral and were calculated using a prepayment speed of 0 CPY (Constant Prepayment Yield).
(3)	The Company’s pooled trust preferred securities have floating rates. The projected yields are calculated to the contractual maturity and are based on the coupon rates at December 31, 2008 and fourth quarter of 2008 prepayment rates.

18

LOANS

     The following table sets forth the composition of the Bank’s loans receivable and the percentage of loans by category as of the dates indicated.

	2008				2007				2006				2005				2004
			Percent				Percent				Percent				Percent				Percent
	Amount		of Total		Amount		of Total		Amount		of Total		Amount		of Total		Amount		of Total
	(Dollars in thousands)
Commercial loans:
Commercial and industrial	$	64,021	8.5	%	$	60,398	7.6	%	$	35,743	4.5	%	$	61,956	6.8	%	$	58,682	5.9	%
Commercial real estate – owner
occupied		85,565	11.4			82,382	10.4			—	—			—	—			—	—
Commercial real estate – non-owner
occupied		222,048	29.6			207,270	26.1			339,110	42.2			381,956	41.6			396,420	40.1
Commercial real estate – multifamily		40,503	5.4			38,775	4.9			—	—			—	—			—	—
Commercial construction and land
development		70,848	9.5			117,453	14.8			128,529	16.0			136,558	14.9			145,162	14.7
Total commercial loans		482,985	64.4			506,278	63.8			503,382	62.7			580,470	63.3			600,264	60.7
Retail loans:
One-to-four family residential		203,797	27.2			212,598	26.8			225,007	28.1			235,359	25.7			277,501	28.1
Home equity lines of credit		58,918	7.8			60,326	7.6			70,527	8.8			96,403	10.5			102,981	10.5
Retail construction and land
development		2,650	0.4			11,131	1.4			—	—			—	—			—	—
Other		1,623	0.2			2,803	0.4			3,467	0.4			5,173	0.5			7,339	0.7
Total retail loans		266,988	35.6			286,858	36.2			299,001	37.3			336,935	36.7			387,821	39.3
Total loans receivable, net of unearned fees	$	749,973	100.0	%	$	793,136	100.0	%	$	802,383	100.0	%	$	917,405	100.0	%	$	988,085	100.0	%

     During the fourth quarter of 2008, the Bank revised its classification of commercial real estate loans to provide a better understanding of the types of commercial real estate loans within its loan portfolio. The new method of presentation identifies commercial real estate loans that are owner occupied, non-owner occupied and multifamily loans. Loans to owner occupied businesses are generally engaged in manufacturing, sales and/or services. Management believes that these loans have a lower risk profile than traditional commercial real estate loans since they are primarily dependant on the borrower’s business-generated cash flows for repayment, not on the conversion of real estate that may be pledged as collateral. Loans related to rental income producing properties, properties intended to be sold and properties collateralizing hospitality loans will continue to be classified as commercial real estate – non-owner occupied loans. Loans related to residential rental properties such as apartment complexes are now classified as commercial real estate loans – multifamily. Completing these changes in presentation involved a loan-by-loan review of the Bank’s commercial real estate loans. The new presentation methodology is being implemented only as of December 31, 2007 and prospectively, as it is impractical to apply it to data from 2006, 2005 and 2004. The classification of construction and land development and one-to-four family residential loans was also reviewed resulting in a reclassification of all one-to-four family construction and lot loans previously identified in construction and land development as retail construction loans within the Bank’s retail loan category since these loans are typically loans on single lots for the construction of the borrower’s primary residence.

     The Company’s loans receivable totaled $750.0 million at December 31, 2008 compared to $793.1 million at December 31, 2007. The commercial loan portfolio decreased $23.3 million (4.6%) primarily as a result of a $46.6 million (39.7%) decrease in commercial construction and land development loans partially offset by a $14.8 million (7.1%) increase in non-owner occupied commercial real estate loans. The decrease in commercial construction and land development loans is due to the Company continuing to reduce its exposure in this portion of the loan portfolio in addition to $13.3 million of partial charge-offs resulting from management’s review of specific collateral dependent loans. Also contributing to the decrease in commercial construction and land development loans is the $2.5 million transfer of one loan to other real estate owned in the third quarter of 2008. The $14.8 million (7.1%) increase in non-owner occupied commercial real estate loans is partially the result of $28.5 million commercial construction and land development loans converted to permanent non-owner occupied commercial real estate loans during 2008.

19

     The Company has experienced increased loan production as a result of the realignment of its Business Banking team. For 2008, the Company originated $84.6 million of commercial loans, which included $18.2 million of commercial and industrial loans, $14.9 million of owner occupied commercial real estate loans and $42.1 million of other commercial real estate loans. In addition, the Company originated $64.1 million of commercial lines of credit during the same period. This activity net of principal repayments resulted in an overall increase of $23.3 million in the Company’s commercial loan portfolio since December 31, 2007. At December 31, 2008, the Company had $27.5 million in the approved but not yet closed commercial loan pipeline, of which, $9.4 million are commercial and industrial loans, $2.1 million are owner occupied commercial real estate loans and lines of credit, $10.7 million are other commercial real estate and $5.3 million are commercial construction projects.

     The Bank has also invested, on a participating basis, in loans originated by other lenders and loan syndications. The Bank has historically invested in these types of loans to supplement the direct origination of its commercial loan portfolio. Based on the Bank’s recent experience with margin contraction and detected credit risks in excess of the Bank’s risk tolerances in the opportunities being presented in this portion of the loan portfolio, it is reducing its reliance on these types of loans and has not been involved in investing in any new syndications and participations during 2008. The Company had participations and syndication loans outstanding at December 31, 2008 totaling $30.8 million in construction and land development; $28.7 million in loans secured by non-owner occupied commercial real estate and $1.1 million in commercial and industrial loans. The Bank’s total participations and syndications by state are presented in the table below for the dates indicated.

	December 31, 2008				December 31, 2007
	Amount		% of Total		Amount		% of Total		% Change
	(Dollars in thousands)
Illinois	$	25,012	41.3	%	$	39,459	47.8	%	(36.6	)%
Indiana		13,474	22.3			11,361	13.8		18.6
Ohio		9,734	16.1			15,759	19.1		(61.8	)
Florida		6,590	10.9			7,375	8.9		(10.6	)
Colorado		3,103	5.1			2,834	3.4		9.5
Texas		1,473	2.4			3,808	4.6		(38.7	)
New York		1,150	1.9			1,957	2.4		(58.8	)
Total participations and syndications	$	60,536	100.0	%	$	82,553	100.0	%	(26.7	)%

     The retail loan portfolio decreased $19.9 million (6.9%) primarily as a result of a decrease of $8.8 million (4.1%) in one-to-four family residential loans and an $8.5 million (76.2%) decrease in retail construction and land development loans. The Company’s decrease in these retail loans is due to the reduction in marketing focus on these types of loans attributable to the current economic environment.

Loan Concentrations

     Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. At December 31, 2008, the Company had a concentration of loans secured by office and/or warehouse buildings of $195.8 million or 26.1% of its total loan portfolio. Loans secured by these types of collateral involve higher principal amounts. The repayment of these loans generally is dependent, in large part, on the successful operation of the property securing the loan or the business conducted on the property securing the loan. These loans may be more adversely affected by general conditions in the real estate market or in the economy. The Company’s previous concentration of loans secured by properties utilized in the hospitality industry continued to decrease to $64.7 million, or 8.6% of the Company’s total loan portfolio at December 31, 2008. At December 31, 2007 the balance of these loans was $77.9 million, or 9.8% of the total loan portfolio, and $79.0 million, or 9.8% of the total loan portfolio, at December 31, 2006. Included are loans to resort hotels, corporate meeting hotels and travel hotels/motels. At December 31, 2008, the Company had no other concentrations of loans to any industry exceeding 10% of its total loan portfolio.

Contractual Principal Repayments and Interest Rates

     The following table sets forth scheduled contractual amortization of the Bank’s commercial loans at December 31, 2008, as well as the dollar amount of such loans which are scheduled to mature after one year which have fixed or adjustable interest rates. Demand loans and loans having no scheduled repayments and no stated maturity are reported as due in one year or less.

20

	Total at		Principal Repayments Contractually Due
	December 31,		in Year(s) Ended December 31,
	2008 (1)		2009		2010-2012 (2)		Thereafter (2)
	(Dollars in thousands)
Commercial loans:
Commercial and industrial	$	63,829	$	28,247	$	17,422	$	18,160
Commercial real estate – owner occupied		85,628		8,709		15,778		61,141
Commercial real estate – non-owner occupied		222,244		28,378		110,931		82,935
Commercial real estate – multifamily		40,553		2,163		12,960		25,430
Commercial construction and land development		70,903		55,095		12,327		3,481
Total commercial loans	$	483,157	$	122,592	$	169,418	$	191,147

____________________
 

(1)	Gross loans receivable does not include deferred fees and costs of $171,000 as of December 31, 2008.
(2)	Of the $360.6 million of loan principal repayments contractually due after December 31, 2009, $166.4 million have fixed interest rates and $194.2 million have variable interest rates which reprice from one month up to five years.

     Scheduled contractual loan amortization does not reflect the expected term of the Bank’s loan portfolio. The average life of loans is substantially less than their contractual terms because of prepayments and due-on-sale clauses, which give the Bank the right to declare a conventional loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current market rates of interest for mortgage loans are higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans are higher than current market rates as borrowers refinance adjustable-rate and fixed-rate loans at lower rates. Under the latter circumstance, the yield on loans decreases as higher yielding loans are repaid or refinanced at lower rates.

ALLOWANCE FOR LOSSES ON LOANS

     The allowance for losses on loans is maintained at a level management believes is sufficient to absorb credit losses inherent in the loan portfolio. The allowance for losses on loans represents management’s estimate of probable incurred losses in the loan portfolio at each statement of condition date and is based on the review of available and relevant information. Management’s quarterly evaluation of the adequacy of the allowance is based in part on the Company’s historical charge-offs and recoveries; levels of and trends in delinquencies; impaired loans and other classified loans; concentrations of credit within the commercial loan portfolio; volume and type of lending; and current and anticipated economic conditions. In addition, management considers expected losses resulting in specific credit allocations for individual loans not considered above. The analysis of each loan involves a high degree of judgment in estimating the amount of the loss associated with the loan, including the estimation of the amount and timing of future cash flows and collateral values.

     Loan losses are charged off against the allowance when the loan balance or a portion of the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value, while recoveries of amounts previously charged off are credited to the allowance. The Company assesses the adequacy of the allowance for losses on loans on a quarterly basis and adjusts the allowance for losses on loans by recording a provision for losses on loans in an amount sufficient to maintain the allowance at a level deemed appropriate by management. While management believes that at December 31, 2008 the allowance for losses on loans was adequate, it is possible that further deterioration in the economy, devaluations of collateral held or requirements from regulatory agencies may require future provisions to the allowance. See further analysis in the “Critical Accounting Policies” previously discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as “Note 1. Summary of Significant Accounting Policies” in the notes to consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

21

The following table sets forth the activity in the Bank’s allowance for losses on loans during the periods indicated:

	Year Ended December 31,
	2008 (1)			2007 (1)			2006			2005			2004
	(Dollars in thousands)
Allowance at beginning of period	$	8,026		$	11,184		$	12,939		$	13,353		$	10,453
Provision		26,296			2,328			1,309			1,580			8,885
Charge-offs:
Commercial loans:
Commercial and industrial		(74	)		(231	)		(241	)		(505	)		(903	)
Commercial real estate – owner occupied		(1,699	)		—			—			—			—
Commercial real estate – non-owner occupied		(3,054	)		(4,260	)		(2,987	)		(877	)		(3,635	)
Commercial real estate – multifamily		—			—			—			—			—
Commercial construction and land development		(13,255	)		(776	)		—			—			(1,206	)
Total commercial loans		(18,082	)		(5,267	)		(3,228	)		(1,382	)		(5,744	)
Retail loans:
One-to-four family residential		(376	)		(1	)		(109	)		(320	)		(217	)
Home equity lines of credit		(243	)		(208	)		(80	)		(201	)		—
Retail construction and land development		—			—			—			—			—
Other		(197	)		(200	)		(211	)		(270	)		(268	)
Total retail loans		(816	)		(409	)		(400	)		(791	)		(485	)
Total charge-offs		(18,898	)		(5,676	)		(3,628	)		(2,173	)		(6,229	)
Recoveries:
Commercial loans:
Commercial and industrial		10			9			110			2			105
Commercial real estate – owner occupied		—			—			—			—			—
Commercial real estate – non-owner occupied		14			102			318			21			7
Commercial real estate – multifamily		—			—			—			—			—
Commercial construction and land development		61			18			43			73			—
Total commercial loans		85			129			471			96			112
Retail loans:
One-to-four family residential		1			—			18			1			104
Home equity lines of credit		5			14			12			29			3
Retail construction and land development		—			—			—			—			—
Other		43			47			63			53			25
Total retail loans		49			61			93			83			132
Total recoveries		134			190			564			179			244
Net loans charged-off to allowance for losses on loans		(18,764	)		(5,486	)		(3,064	)		(1,994	)		(5,985	)
Allowance at end of period	$	15,558		$	8,026		$	11,184		$	12,939		$	13,353
Allowance for losses on loans to total non-performing loans at end of
period		28.44	%		27.11	%		40.64	%		61.49	%		48.25	%
Allowance for losses on loans to total loans at end of period		2.07			1.01			1.39			1.41			1.35
Ratio of net loans charged-off to average loans outstanding for the period		2.49			0.68			0.36			0.21			0.60

____________________

(1) At December 31, 2007, the Bank segmented its commercial real estate portfolio into owner occupied, non-owner occupied and multifamily loans. The new presentation methodology is being implemented only as of December 31, 2007 and prospectively, as it is impractical to apply it to data from 2006, 2005 and 2004. See further discussion in “Loans” within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.

     At December 31, 2008, the allowance for losses on loans increased by $7.5 million, or 93.8%, from 2007. The allowance for losses on loans represented 28.4% and 27.1%, respectively, of the Bank’s non-performing loans and 2.07% and 1.01%, respectively, of its total loans receivable at December 31, 2008 and 2007. When management evaluates a non-performing collateral dependent loan and identifies a collateral shortfall, management will charge-off the collateral shortfall. As a result, the Company is not required to maintain an allowance for losses on loans on these loans as the loan balance has already been written down to its net realizable value (fair value less estimated costs to sell the collateral). The above ratios have been negatively affected by partial charge-offs of $16.8 million on $26.0 million of collateral dependent non-performing loans through December 31, 2008 and impairment reserves totaling $5.9 million on other non-performing loans at December 31, 2008.

22

     The provision for losses on loans increased to $26.3 million in 2008 from $2.3 million in 2007 and $1.3 million in 2006. The increase in the 2008 provision reflects reduced collateral valuations on non-performing loans as well as an increase in general reserves.

     Net charge-offs for 2008 totaled $18.8 million, or 2.5% of average loans outstanding, as compared to $5.5 million, or 0.7% of average loans outstanding, for 2007. Gross charge-offs in 2008 totaled $18.9 million, an increase of $13.2 million from 2007. This increase primarily reflects the deteriorating market conditions, declines in collateral values and a lack of activity in residential housing and land development. During 2008, the Company realized $13.3 million of partial charge-offs related to certain impaired commercial construction and land development loans that previously totaled $34.1 in the aggregate. Of these partial charge-offs, one loan totaling $2.4 million was transferred to other real estate owned. An additional $2.6 million was realized by the Company as full charge-offs related to certain non-owner occupied commercial real estate loans.

Allocation of the Allowance for Losses on Loans

     The Bank allocates its allowance for losses on loans by loan category. Various percentages are assigned to the loan categories based on their historical loss factors. These historical loss factors are adjusted for various qualitative factors including trends in delinquencies and impaired loans; charge-offs and recoveries; volume and terms of loans; underwriting practices; lending management and staff; economic trends and conditions; industry conditions; and credit concentrations. The allocation of the allowance for losses on loans is reviewed and approved by the Bank’s Loan Committee. The following table shows the allocation of the allowance for losses on loans by loan type for each of the last five years:

	December 31,
	2008				2007				2006				2005				2004
			Allowance				Allowance				Allowance				Allowance				Allowance
	Allowance		as a % of		Allowance		as a % of		Allowance		as a % of		Allowance		as a % of		Allowance		as a % of
	Allocation		Category		Allocation		Category		Allocation		Category		Allocation		Category		Allocation		Category
	(Dollars in thousands)
Residential real estate:
One-to-four family
owner occupied	$	1,744	0.68	%	$	1,266	0.46	%	$	1,395	0.47	%	$	1,064	0.33	%	$	730	0.20	%
One-to-four family
non-owner occupied		186	0.59			127	0.46			129	0.47			88	0.33			56	0.20
Multifamily		611	1.52			430	1.15			437	1.09			362	0.67			1,005	1.20
Business/Commercial
real estate		10,894	3.75			3,944	1.33			7,437	2.53			9,711	2.45			9,368	2.34
Business/Commercial
non-real estate		1,241	1.97			659	1.15			653	1.34			1,137	2.28			1,412	3.36
Developed Lots		352	0.98			319	0.62			224	0.39			105	0.36			125	0.36
Land		252	0.58			1,069	2.12			695	1.34			149	0.36			289	0.63
Consumer non-real estate		278	4.60			212	4.35			214	3.90			323	3.89			368	3.55
Total allowance for losses
on loans	$	15,558			$	8,026			$	11,184			$	12,939			$	13,353

ASSET QUALITY

General

     All of the Bank’s assets are subject to review under its classification system. See discussion on “Potential Problem Assets” below. Impaired loans are reviewed quarterly by the Bank’s Loan Committee. The Board of Directors reviews the Bank’s classified assets (including impaired loans) on a quarterly basis. When a borrower fails to make a required payment on a loan, the Bank attempts to cure the deficiency by contacting the borrower and seeking payment. Contacts are generally made prior to 30 days after a payment is due. Late charges are generally assessed after 15 days with additional efforts being made to collect the past due payments. While the Bank generally prefers to work with borrowers to resolve delinquency problems, when the account becomes 90 days delinquent, the Bank may institute foreclosure or other proceedings, as deemed necessary, to minimize any potential loss.

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     Loans are placed on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income. The Bank generally does not accrue interest on loans past due 90 days or more.

     Real estate acquired by the Bank as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned until sold. Foreclosed assets are held for sale and such assets are carried at the lower of fair value minus estimated costs to sell the property or cost (generally the balance of the loan on the property at the date of acquisition). After the date of acquisition, all costs incurred in maintaining the property are expensed, and costs incurred for the improvement or development of such property are capitalized up to the extent of the property’s net realizable value.

Non-Performing Assets

     The following table summarizes the Company’s non-accrual loans as well as information relating to the Company’s non-performing assets at the dates indicated. Loans are placed on non-accrual status when, in management’s judgment, the probability of collection of interest is deemed to be insufficient to warrant further accrual.

	December 31,
	2008 (1)			2007 (1)			2006			2005			2004
	(Dollars in thousands)
Non-accrual loans:
Commercial loans:
Commercial and industrial	$	2,551		$	281		$	455		$	94		$	236
Commercial real estate – owner occupied		4,141			5,871			—			—			—
Commercial real estate – non-owner occupied		22,337			3,506			15,863			17,492			19,197
Commercial real estate – multifamily		342			229			—			—			—
Commercial construction and land		20,428			15,960			7,192			77			1,895
Total commercial loans		49,799			25,847			23,510			17,663			21,328
Retail loans:
One-to-four family residential		3,048			2,706			3,177			2,929			5,855
Home equity lines of credit		1,570			749			772			429			460
Retail construction and land		279			279			—			—			—
Other		5			19			58			20			32
Total retail loans		4,902			3,753			4,007			3,378			6,347
Total non-accrual loans		54,701			29,600			27,517			21,041			27,675
Other real estate owned, net		3,242			1,162			321			540			525
Total non-performing assets	$	57,943		$	30,762		$	27,838		$	21,581		$	28,200
90 days past due loans still accruing interest		605			—			—			—			—
Total non-performing assets plus 90 days past due
loans still accruing interest	$	58,548		$	30,762		$	27,838		$	21,581		$	28,200
Non-performing assets to total assets		5.16	%		2.67	%		2.22	%		1.74	%		2.14	%
Non-performing loans to total loans		7.29			3.73			3.43			2.29			2.80

____________________

(1) At December 31, 2007, the Bank segmented its commercial real estate portfolio into owner occupied, non-owner occupied and multifamily loans. The new presentation methodology is being implemented only as of December 31, 2007 and prospectively, as it is impractical to apply it to data from 2006, 2005 and 2004. See further discussion in “Loans” within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.

     Due to the current economic conditions and the lack of activity in the real estate and construction and land development sectors, the Company experienced a $25.1 million increase in its non-accrual loans from December 31, 2007 to $54.7 million at December 31, 2008. The increase is primarily a result of a $24.0 million increase in the Company’s commercial loans of which $18.8 million related to commercial real estate – non-owner occupied and $4.5 million related to commercial construction and land development loans. The increase in non-performing commercial real estate – non-owner occupied loans was primarily due to the fourth quarter transfer to non-accrual status of $11.2 million of loans as the Company identified borrowers who were not currently able to generate sufficient cash flows to repay the loans according to the original terms. During the third quarter of 2008, three loans in this category totaling $10.8 million were transferred to non-accrual status. The increase in non-performing commercial construction and land development was primarily related to the 2008 transfers to non-accrual status of certain loans totaling $20.2 million and $13.1 million in subsequent partial charge-offs, a $1.5 million payoff and the transfer of a $2.4 million loan to other real estate owned during 2008.

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     Included in the above non-performing loan totals are non-performing syndications and purchased participations as identified by loan category in the table below.

	December 31, 2008			December 31, 2007			% Change
	(Dollars in thousands)
Commercial real estate – non-owner occupied	$	10,354		$	—		—	%
Commercial construction and land		10,973			12,572		(12.7	)
Total non-performing syndications and purchased
participations	$	21,327		$	12,572		69.6	%
Percentage of total non-performing loans		39.0	%		42.5	%
Percentage of total syndications and purchased
participations		35.2			15.2

     The table below provides the detail for the Company’s non-accrual syndications and purchased participations by state as of the dates indicated.

	December 31, 2008		December 31, 2007		% Change
	(Dollars in thousands)
Illinois	$	12,261	$	7,484	63.8	%
Indiana		5,423		—	—
Florida		3,643		2,627	38.7
Texas		—		2,461	(100.0	)
Total non-performing syndications and purchased
participations	$	21,327	$	12,572	69.6	%

     The Company continues to explore ways to reduce its overall exposure in these non-performing loans through various alternatives, including the potential sale of certain of these non-performing assets. Any future impact to the Company’s allowance for losses on loans in the event of such sales or other similar actions cannot be reasonably determined at this time.

     The interest income that would have been recorded during 2008, if all of the Bank’s non-performing loans at the end of the year had been current in accordance with their terms during the year, was $3.0 million. The actual amount of interest recorded as income (on a cash basis) on these loans during the year totaled $188,000.

     The Company’s disclosure with respect to impaired loans is contained in “Note 3. Loans Receivable” in the notes to consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

Potential Problem Assets

     Federal regulations require that each insured institution maintain an internal classification system as a means of reporting problem and potential problem assets. Furthermore, in connection with examinations of insured institutions, federal examiners have the authority to identify problem assets and, if appropriate, classify them. There are three adverse classifications for problem assets:

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• Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected.
• Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high probability of loss.
• Loss assets are considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.

     Federal examiners have designated another category as “special mention” for assets which have some identified weaknesses but do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss.

     The Company’s potential problem assets are defined as loans classified substandard, doubtful or loss pursuant to the Company’s internal loan grading system that do not meet the definition of a non-performing asset. These loans are identified as a potential problem asset due to the borrowers’ financial operations or financial condition which caused the Bank’s management to question the borrowers’ future ability to comply with their contractual repayment terms. Management’s decision to include performing loans in potential problem assets does not necessarily mean that it expects losses to occur but that it recognizes potential problem assets carry a higher probability of default. Potential problem assets totaled $6.1 million at December 31, 2008 and $4.4 million at December 31, 2007. The increase from 2007 was related to the downgrade of one commercial construction and land development loan totaling $2.8 million to substandard during 2008 over concerns about the ability to fund the underlying project as originally intended. During the fourth quarter of 2008, a $1.2 million multifamily loan was brought current.

DEPOSITS

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

	December 31,
	2008				2007				2006
	Amount		Percentage		Amount		Percentage		Amount		Percentage
	(Dollars in thousands)
Checking accounts:
Non-interest bearing	$	64,809	7.9	%	$	62,306	7.2	%	$	58,547	6.5	%
Interest-bearing		105,758	12.8			107,467	12.5			100,912	11.1
Money market accounts		163,205	19.8			171,470	19.9			182,153	20.1
Savings accounts		114,633	13.9			127,297	14.7			148,707	16.4
Core deposits		448,405	54.4			468,540	54.3			490,319	54.1
Certificates of deposit:
Less than $100,000		253,989	30.8			263,134	30.5			281,810	31.1
$100,000 or more		121,703	14.8			131,598	15.2			134,966	14.9
Time deposits		375,692	45.6			394,732	45.7			416,776	45.9
Total deposits	$	824,097	100.0	%	$	863,272	100.0	%	$	907,095	100.0	%

     As of December 31, 2008, the aggregate amount of outstanding time certificates of deposit in amounts greater than or equal to $100,000 was $121.7 million. The following table presents the maturity of these time certificates of deposit.

	December 31, 2008
	(Dollars in thousands)
3 months or less		$	44,043
Over 3 months through 6 months			33,079
Over 6 months through 12 months			30,489
Over 12 months			14,092
		$	121,703

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     The Company’s total deposits decreased 4.5% to $824.1 million at December 31, 2008 from $863.3 million at December 31, 2007. Total core deposits decreased by $20.1 million, or 4.3%, primarily due to a decrease in money market and savings accounts. Total certificates of deposit decreased by $19.0 million. Tightening liquidity in the financial services sector has resulted in increased interest rates paid on certificates of deposit and money market accounts and made balances in these types of accounts more vulnerable to above market rates paid by institutions facing liquidity issues. The Company continues to be disciplined in pricing these deposits.

     The Company offers specific deposit agreements to local municipalities and other public entities. The following table identifies the dollar amount of municipal deposits in each deposit category for the dates indicated.

	December 31,
	2008				2007				2006
	Amount		Percentage		Amount		Percentage		Amount		Percentage
	(Dollars in thousands)
Checking accounts:
Non-interest bearing	$	1,325	2.2	%	$	1,028	1.6	%	$	59	0.1	%
Interest-bearing		9,688	16.5			13,022	20.9			369	0.7
Money market accounts		28,208	48.1			31,610	50.6			46,321	85.0
Core deposits		39,221	66.8			45,660	73.1			46,749	85.8
Certificates of deposit		19,465	33.2			16,803	26.9			7,728	14.2
Total municipal deposits	$	58,686	100.0	%	$	62,463	100.0	%	$	54,477	100.0	%

     In addition, the Company offers a repurchase sweep agreement (Repo Sweep) account which allows public entities and other business depositors to earn interest with respect to checking and savings deposit products offered. The depositor’s excess funds are swept from a deposit account and are used to purchase an interest in securities owned by the Bank. The swept funds are not recorded as deposits by the Bank and instead are classified as other short-term borrowings which provide a lower-cost funding alternative for the Company as compared to FHLB advances. At December 31, 2008, the Company had $17.5 million in Repo Sweeps which are not included in the above deposit totals, of which $8.7 million were Repo Sweeps with municipalities and other public entities.

BORROWED MONEY

The Company’s borrowed money consisted of the following at the dates indicated:

	December 31,
	2008					2007
	Weighted					Weighted
	Average					Average
	Contractual					Contractual
	Rate		Amount			Rate		Amount
	(Dollars in thousands)
Repo sweep accounts	0.82	%	$	17,512		3.42	%	$	18,014
Overnight federal funds purchased	0.45			10,800		4.50			6,000
FHLB – Indianapolis advances	2.41			144,800		4.14			113,072
Less: deferred premium on early extinguishment of debt				(175	)				(1,627	)
Total borrowed money	2.13		$	172,937		4.06		$	135,459

     The Company’s Repo Sweeps are treated as financings; the obligations to repurchase securities sold are reflected as short-term borrowings. The securities underlying these Repo Sweeps continue to be reflected as assets of the Company.

     During the first quarter of 2008, the Company took advantage of a steepening yield curve and market imbalances and borrowed $60.0 million of FHLB debt and invested in higher yielding securities. Subsequently, the Company has repaid $85.0 million of FHLB debt maturing during 2008 by utilizing its excess liquidity. During the third and fourth quarter of 2008, the Company took advantage of the lower interest rates and borrowed an additional $41.9 million of FHLB advances to fund increased loan originations.

27

     The Company’s FHLB advances are reduced by the deferred premium on the early extinguishment of debt as a result of its 2004 FHLB debt restructure. As a result of the restructuring, the Company paid $42.0 million of prepayment penalties related to the restructured advances, a portion of which is deferred over the life of the new borrowings. The deferred premium on the early extinguishment of debt totaled $32.2 million and is being amortized as a charge to interest expense over the remaining life of the new borrowings. The Company internally computed the effect of the amortization on interest expense over the life of each of the new advances. For the years ended December 31, 2008 and 2007, the Company’s increase in interest expense related to the Premium Amortization was $1.5 million and $4.5 million, respectively. The increase in interest expense related to the remaining unamortized deferred premium is expected to be $175,000 in the year ended December 31, 2009. The Premium Amortization will be fully recognized as of December 31, 2009.

CAPITAL RESOURCES

     Stockholders’ equity at December 31, 2008 was $111.8 million compared to $130.4 million at December 31, 2007. The decrease during 2008 was primarily due to:

• net loss of $11.3 million;
• cash dividends declared during 2008 totaling $4.2 million;
• repurchases of shares of the Company’s common stock during 2008 totaling $3.0 million; and
• a decrease in accumulated other comprehensive income of $2.6 million.

The following increases in stockholder’s equity during 2008 partially offset the aforementioned decreases:

• shares earned under the Employee Stock Ownership Program (ESOP) totaling $1.1 million; and
• stock option exercises totaling $830,000.

     During 2008, the Company repurchased 208,113 shares of its common stock at an average price of $14.40 per share pursuant to its share repurchase programs. At December 31, 2008, the Company had 448,612 shares remaining to be repurchased under its current program. Since its initial public offering in 1998, the Company has repurchased an aggregate of 14,054,160 shares of its common stock at an average price of $12.23 per share.

     At December 31, 2008, the Bank was deemed to be well-capitalized based on its internal calculations with tangible and core regulatory capital ratios of 9.07% and a risk-based capital ratio of 13.21%. For further information on the Bank’s regulatory capital see “Note 12. Stockholders’ Equity and Regulatory Capital” in the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

LIQUIDITY AND COMMITMENTS

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

• 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;
• federal funds lines of credit; and
• borrowings from the FHLB and Federal Reserve Bank.

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     The Bank’s Asset Liability Committee is responsible for measuring and monitoring the Bank’s liquidity profile. The Bank manages its liquidity to ensure stable, reliable and cost-effective sources of funds to satisfy demand for credit, deposit withdrawals and investment opportunities. The Bank’s general approach to managing liquidity involves preparing a monthly “funding gap” report which forecasts cash inflows and cash outflows over various time horizons and rate scenarios to identify potential cash imbalances. The Bank supplements its funding gap report with the monitoring of several liquidity ratios to assist in identifying any trends that may have an effect on available liquidity in future periods.

     The Bank maintains a liquidity contingency plan that outlines the process for addressing a liquidity crisis. The plan assigns specific roles and responsibilities for effectively managing liquidity through a problem period.

     Scheduled payments from the amortization of loans, mortgage-backed securities, maturing investment securities and short-term investments are relatively predictable sources of funds, while deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions and competitive rate offerings.

     At December 31, 2008, the Company had cash and cash equivalents of $19.1 million, a decrease from $38.9 million at December 31, 2007. The decrease was mainly the result of:

• purchases of available-for-sale securities totaling $102.9 million;
• decreases in deposit accounts totaling $39.3 million; and
• repayment of FHLB debt totaling $279.3 million.

The above cash outflows were partially offset by:

• proceeds from sales, maturities and paydowns of securities aggregating $69.9 million and
• proceeds from FHLB variable advances totaling $311.0 million.

     The Company uses its sources of funds primarily to meet its ongoing commitments, fund loan commitments, fund maturing certificates of deposit and savings withdrawals, and maintain a securities portfolio. The Company anticipates that it will continue to have sufficient funds to meet its current commitments. The Bank was notified that one of its $15.0 million unsecured overnight federal funds line of credit was discontinued on March 5, 2009 at the corresponding bank’s discretion. The Bank has recently been approved to borrow from the Federal Reserve Bank.

     The liquidity needs of the Company consist primarily of operating expenses, dividend payments to stockholders and stock repurchases. The primary sources of liquidity are cash and cash equivalents and dividends from the Bank. The Company also has $5.0 million of available liquidity under a line of credit. The line of credit was obtained by the Company and is secured by all of the stock of the Bank held by the Company. The Company has not borrowed any funds under this line of credit. The Company received notice on December 31, 2008 from the lender that it will not be renewing the line which matures on March 21, 2009. The Company is currently in discussions with other potential lenders to replace the maturing line; however, given current economic conditions and the de-leveraging taking place in the financial services industry, there are no assurances that the Company will be able to secure a replacement facility.

     Under OTS regulations, without prior approval, the dividends from the Bank are limited to the extent of the Bank’s cumulative earnings for the year plus the net earnings (adjusted by prior distributions) of the prior two calendar years. During 2008, the parent company received $7.8 million in dividends from the Bank. At December 31, 2008, the parent company had $3.7 million in cash and cash equivalents. The parent company did not have securities available-for-sale at December 31, 2008. See also “Note 12. Stockholders’ Equity and Regulatory Capital” in the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for a further discussion of the Bank’s ability to pay dividends.

29

Contractual Obligations

     The following table presents significant fixed and determinable contractual obligations to third parties by payment date as of December 31, 2008.

	Payments Due by Period
			Over One
			through		Over Three		Over
	One Year		Three		through		Five
	or Less		Years		Five Years		Years		Total
	(Dollars in thousands)
Federal Home Loan Bank advances (1)	$	104,290	$	30,644	$	737	$	9,129	$	144,800
Short-term borrowings (2)		28,312		—		—		—		28,312
Operating leases		574		735		427		2,241		3,977
Dividends payable on common stock		432		—		—		—		432
	$	133,608	$	31,379	$	1,164	$	11,370	$	177,521

(1)	Does not include interest expense at the weighted-average contractual rate of 2.87% for the periods presented.
(2)	Does not include interest expense at the weighted-average contractual rate of 0.68% for the periods presented.

     See the “Borrowed Money” section for further discussion surrounding the Company’s FHLB advances. The Company’s operating lease obligations reflected above include the future minimum rental payments, by year, required under the lease terms for premises and equipment. Many of these leases contain renewal options, and certain leases provide options to purchase the leased property during or at the expiration of the lease period at specific prices. See also “Note 4. Office Properties and Equipment” in the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for further discussion related to the Company’s operating leases.

     The Company also has commitments to fund certificates of deposit which are scheduled to mature within one year or less. These deposits totaled $325.2 million at December 31, 2008. Based on historical experience and the fact that these deposits are at current market rates, management believes that a significant portion of the maturing deposits will remain with the Bank.

Off-Balance-Sheet Obligations

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

30

The following table details the amounts and expected maturities of significant commitments at December 31, 2008.

			Over One		Over Three		Over
	One Year		through		through		Five
	or Less		Three Years		Five Years		Years		Total
	(Dollars in thousands)
Commitments to extend credit:
Commercial	$	17,083	$	5	$	83	$	450	$	17,621
Commercial real estate – non-owner occupied		9,549		84		—		8		9,641
Commercial real estate – owner occupied		2,115		—		—		—		2,115
Commercial real estate – multifamily		1,350		—		—		—		1,350
Commercial construction and land development		5,260		—		—		—		5,260
Retail		3,329		—		—		—		3,329
Commitments to fund unused construction loans		15,421		1,789		—		380		17,590
Commitments to fund unused lines of credit		35,129		6,367		208		47,179		88,883
Letters of credit		8,037		263		199		3,439		11,938
Credit enhancements		21,632		406		—		5,048		27,086
	$	118,905	$	8,914	$	490	$	56,504	$	184,813

     The commitments listed above do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon. Letters of credit expire at various times through 2012. Credit enhancements expire at various times through 2018.

     The Company also has commitments to fund community investments through investments in various limited partnerships, which represent future cash outlays for the construction and development of properties for low-income housing, small business real estate, and historic tax credit projects that qualify under the Community Reinvestment Act. These commitments include $793,000 to be funded over six years. The timing and amounts of these commitments are projected based upon the financing arrangements provided in each project’s partnership agreement, and could change due to variances in the construction schedule, project revisions, or the cancellation of the project. These commitments are not included in the commitment table above. See additional disclosures in “Note 14. Variable Interest Entities” in the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

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

IMPACT OF INFLATION AND CHANGING PRICES

     The consolidated financial statements and related financial data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results generally in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the Company’s assets and liabilities are monetary in nature. Monetary items, such as cash, loans and deposits, are those assets and liabilities which are or will be converted into a fixed number of dollars regardless of changes in prices. As a result, changes in interest rates generally have a more significant impact on a financial institution’s performance than general inflation. Over short periods of time, interest rates may not necessarily move in the same direction or of the same magnitude as inflation.

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PART IV.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

       (a)(3) The following exhibits are filed with the SEC as part of this Form 10-K/A.

23.0	Consent of BKD, LLP
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

SIGNATURES

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

		CFS BANCORP, INC.
Date: March 13, 2009	By:	/s/ THOMAS F. PRISBY
		THOMAS F. PRISBY
		Chairman of the Board and
		Chief Executive Officer

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

Name	Title	Date
/s/ THOMAS F. PRISBY	Chairman of the Board and Chief Executive Officer
THOMAS F. PRISBY	(principal executive officer)	March 13, 2009
/s/ CHARLES V. COLE	Executive Vice President and Chief Financial Officer
CHARLES V. COLE	(principal financial and accounting officer)	March 13, 2009
/s/ GREGORY W. BLAINE	Director	March 13, 2009
GREGORY W. BLAINE
/s/ GENE DIAMOND	Director	March 13, 2009
GENE DIAMOND
/s/ FRANK D. LESTER	Director	March 13, 2009
FRANK D. LESTER
/s/ ROBERT R. ROSS	Director	March 13, 2009
ROBERT R. ROSS
/s/ JOYCE M. SIMON	Director	March 13, 2009
JOYCE M. SIMON

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EX-23.0

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the registration statements of CFS Bancorp, Inc. on Form S-8, as amended (File Nos. 333-62053, 333-62049, 333-84207, 333-105687), of our reports dated March 5, 2009 on the consolidated financial statements of CFS Bancorp, Inc. as of December 31, 2008 and 2007, and for each of the years in the three-year period ended December 31, 2008, and on our audit of internal control over financial reporting of CFS Bancorp, Inc. as of December 31, 2008, which reports are included in this Annual Report on Form 10-K.

/s/ BKD, LLP 

Indianapolis, Indiana
March 5, 2009

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EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Thomas F. Prisby, Chairman of the Board and Chief Executive Officer, certify that:

1. I have reviewed this annual report on Form 10-K/A of CFS Bancorp, Inc. (the “Registrant”);

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

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

/s/ THOMAS F. PRISBY 

THOMAS F. PRISBY Chairman of the Board and Chief 

Executive Officer 

Date: March 13, 2009

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EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Charles V. Cole, Executive Vice President and Chief Financial Officer certify that:

1. I have reviewed this annual report on Form 10-K/A of CFS Bancorp, Inc. (the “Registrant”);

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

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

/s/ CHARLES V. COLE 

CHARLES V. COLE Executive Vice President and Chief 

Financial Officer 

Date: March 13, 2009

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EX-32.0

EXHIBIT 32.0

SECTION 1350 CERTIFICATIONS

I, Thomas F. Prisby, Chairman of the Board and Chief Executive Officer, and Charles V. Cole, Executive Vice President and Chief Financial Officer, of CFS Bancorp, Inc. (the “Company”), hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

     (1) The Amendment No. 1 to the Annual Report on Form 10-K/A of the Company for the year ended December 31, 2008 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C 78m(a) or 78o(d); and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	By:	/s/ THOMAS F. PRISBY
		THOMAS F. PRISBY
		Chairman of the Board and
		Chief Executive Officer
Date: March 13, 2009
	By:	/s/ CHARLES V. COLE
		CHARLES V. COLE
		Executive Vice President and
		Chief Financial Officer

Date: March 13, 2009

     A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act has been provided to CFS Bancorp, Inc. and will be retained by CFS Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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