Prospectus Supplement No. 1	Filed Pursuant to Rule 424(b)(3)
(To Post-Effective Amendment No. 1 to	Registration No. 333-190679

Registration Statement on Form S-1 Dated May 12, 2014)

Community Financial Shares, Inc.

Up to 1,622,100 Shares of Common Stock

This prospectus supplement relates to the offer and sale from time to time of up to 1,622,100 shares of common stock of Community Financial Shares, Inc., a Maryland corporation (the “Company”), by the selling stockholders named in the prospectus (the “Prospectus”) included in Registration Statement No. 333-190679. You should read this prospectus supplement in conjunction with the Prospectus, and this prospectus supplement is qualified in its entirety by reference to the Prospectus, except to the extent that the information contained in this prospectus supplement supersedes or supplements the information contained in the Prospectus.

The information contained herein supplements the information in the Prospectus by including our unaudited financial statements for the three months ended March 31, 2014, as well as the other information included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (the “Form 10-Q”). The text of the Form 10-Q is attached hereto.

Investing in our common stock involves risks, including the possible loss of principal. See “Risk Factors” beginning on page 9 of the Prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if the Prospectus or this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus supplement is May 16, 2014.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2014

OR

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

For the transition period from ____________ to ____________

Commission file number: 0-51296

COMMUNITY FINANCIAL SHARES, INC.

(Exact name of registrant as specified in its charter)

Maryland	36-4387843
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
357 Roosevelt Road Glen Ellyn, Illinois	60137
(Address of principal executive offices)	(Zip Code)

(630) 545-0900

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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.

Yes x   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x   No ¨

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 the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer ¨	Accelerated Filer ¨
Non-Accelerated Filer ¨	Smaller Reporting Company x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨   No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at May 8, 2014
Common Stock, $0.01 par value per share	10,781,988 shares

Form 10-Q Quarterly Report

Table of Contents

	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4	Controls and Procedures	35
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	36
	Signatures	37

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	March 31,			December 31,
	2014			2013
	(Unaudited)
ASSETS
Cash and due from banks	$	4,604		$	4,485
Interest-bearing deposits		26,867			25,068
Cash and cash equivalents		31,471			29,553
Interest-bearing time deposits		447			945
Securities available for sale		93,347			95,829
Loans held for sale		924			804
Loans, less allowance for loan losses of $2,707 and $2,500 at March 31, 2014 and December 31, 2013, respectively		195,740			193,451
Foreclosed assets, net		2,094			2,269
Federal Home Loan Bank stock		926			926
Premises and equipment, net		14,803			14,862
Cash value of life insurance		6,698			6,644
Interest receivable and other assets		3,341			3,688
Total assets	$	349,791		$	348,971
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits	$	315,783		$	315,709
Federal Home Loan Bank advances		4,500			4,500
Subordinated debentures		3,609			3,609
Interest payable and other liabilities		3,560			3,526
Total liabilities		327,452			327,344
Commitments and contingent liabilities
Shareholders' equity
Common stock - $0.01 par value, 75,000,000 shares authorized; 10,781,988 shares issued and outstanding		-			-
Preferred stock - $1.00 par value, $100 liquidation preference 1,000,000 shares authorized; 191,246 shares issued and outstanding		191			191
Paid-in capital		30,389			30,386
Accumulated deficit		(6,898	)		(7,133	)
Accumulated other comprehensive loss		(1,343	)		(1,817	)
Total shareholders' equity		22,339			21,627
Total liabilities and shareholders' equity	$	349,791		$	348,971

See Notes to Condensed Consolidated Financial Statements

3

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended March 31, 2014 and 2013

(In thousands, except share and per share data)

(Unaudited)

	Three Months
	Ended March 31,
	2014			2013
Interest and dividend income
Interest and fees on loans	$	2,548		$	2,604
Securities:
Taxable		332			236
Exempt from federal income tax		90			41
Other interest income		16			42
Total interest and dividend income		2,986			2,923
Interest expense
Deposits		311			401
Federal Home Loan Bank advances and other borrowed funds		27			39
Subordinated debentures		17			17
Total interest expense		355			457
Net interest income		2,631			2,466
Provision for loan losses		136			1,030
Net interest income after provision for loan losses		2,495			1,436
Non-interest income
Service charges on deposit accounts		83			86
Gain on sale of loans		112			483
Gain on sale of securities		-			7
Loss on sale of foreclosed assets		(21	)		(320	)
Other non-interest income		230			229
Total non-interest income		404			485
Non-interest expense
Salaries and employee benefits		1,450			1,596
Net occupancy and equipment expense		356			327
Data processing expense		245			330
Advertising and promotions		38			54
Professional fees		198			318
FDIC insurance premiums		135			206
Write-down on other real estate owned		-			842
Other real estate owned expenses		48			163
Other operating expenses		194			349
Total non-interest expense		2,664			4,185
Income (Loss) before income taxes		235			(2,264	)
Income taxes		-			45
Net income (loss)	$	235		$	(2,309	)
Earnings (loss) per share
Basic	$	0.01		$	(0.41	)
Diluted	$	0.01		$	(0.41	)
Average shares outstanding basic		10,781,988			5,576,671
Average shares outstanding diluted		10,782,043			5,576,671
Dividends per share	$	0.00		$	0.00

See Notes to Condensed Consolidated Financial Statements

4

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three Months Ended March 31, 2014 and 2013

(In thousands, except share and per share data)

(Unaudited)

	Three Months
	Ended March 31,
	2014			2013
Net income (loss)	$	235		$	(2,309	)
Other comprehensive income/(loss):
Unrealized holding gains/(losses) arising during the period:
Unrealized net gains/(losses)		774			(109	)
Related income tax benefit/(expense)		(300	)		42
Net unrealized gains/(losses)		474			(67	)
Less: reclassification adjustment for net gains realized during the period
Realized net gains		-			7
Related income tax expense		-			(3	)
Net realized gains		-			4
Other comprehensive income/(loss)		474			(71	)
Comprehensive income/(loss)	$	709		$	(2,380	)

See Notes to Condensed Consolidated Financial Statements

5

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Three Months Ended March 31, 2014 and 2013

(In thousands, except share and per share data)

(Unaudited)

	Number									Accumulated
	of									Other			Total
	Common		Preferred		Paid-In		Accumulated			Comprehensive			Shareholders'
	Shares		Stock		Capital		Deficit			Income (loss)			Equity
Balance at January 1, 2014		10,781,988	$	191	$	30,386	$	(7,133	)	$	(1,817	)	$	21,627
Net income		-		-		-		235			-			235
Other comprehensive income		-		-		-		-			474			474
Amortization of stock option expense		-		-		3		-			-			3
Balance at March 31, 2014		10,781,988	$	191	$	30,389	$	(6,898	)	$	(1,343	)	$	22,339
Balance at January 1, 2013		5,560,567	$	197	$	26,270	$	(4,346	)	$	231		$	22,352
Net loss		-		-		-		(2,309	)		-			(2,309	)
Other comprehensive loss		-		-		-		-			(71	)		(71	)
Net proceeds of rights offering		483,121		-		483		-			-			483
Amortization of stock option expense		-		-		3		-			-			3
Balance at March 31, 2013		6,043,688	$	197	$	26,756	$	(6,655	)	$	160		$	20,458

See Notes to Condensed Consolidated Financial Statements

6

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2014 and 2013

(In thousands)

(Unaudited)

	Three Months
	Ended March 31,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	235		$	(2,309	)
Adjustments to reconcile net loss to net cash from (used in) operating activities
Amortization on securities, net		235			102
Depreciation		150			155
Provision for loan losses		136			1,030
Gain on sale of securities		-			(7	)
Write-down on other real estate owned		-			842
Loss on sale of foreclosed assets		21			320
Gain on sale of loans		(112	)		(483	)
Originations of loans for sale		(4,113	)		(15,548	)
Proceeds from sales of loans		4,105			21,245
Compensation cost of stock options		3			3
Change in cash value of life insurance		(54	)		(57	)
Change in interest receivable and other assets		34			(927	)
Change in interest payable and other liabilities		34			188
Net cash from operating activities		674			4,554
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing time deposits		498			(249	)
Purchases of securities available for sale		(451	)		(36,762	)
Proceeds from maturities and calls of securities available for sale		3,472			3,391
Proceeds from sales of securities available for sale		-			8,003
Proceeds from sale of other real estate owned		167			1,620
Net change in loans		(2,425	)		(3,634	)
Property and equipment expenditures, net		(91	)		(11	)
Net cash used in (provided by) investing activities		1,170			(27,642	)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in:
Non-interest bearing and interest-bearing demand deposits and savings		3,023			4,964
Certificates and other time deposits		(2,948	)		536
Proceeds of capital raises		-			483
Repayments of borrowings		-			(4,500	)
Net cash from financing activities		75			1,483
Change in cash and cash equivalents		1,919			(21,605	)
Cash and cash equivalents at beginning of period		29,552			71,021
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	31,471		$	49,416
Supplemental disclosures
Interest paid	$	343		$	641
Income taxes paid		-			-
Transfers from loans to foreclosed assets		-			916

See Notes to Condensed Consolidated Financial Statements

7

 COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands)

March 31, 2014 and 2013

NOTE 1 – BASIS OF PRESENTATION

The accounting policies followed in the preparation of the interim condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are consistent with those used in the preparation of annual consolidated financial statements. The interim condensed consolidated financial statements reflect all normal and recurring adjustments, which are necessary, in the opinion of management of Community Financial Shares, Inc. (the “Company”), for a fair statement of results for the interim periods presented. Results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or any other period.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for the interim financial period and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the U.S. Securities and Exchange Commission on March 28, 2014. The condensed consolidated balance sheet of the Company as of December 31, 2013 has been derived from the audited consolidated balance sheet as of that date.

NOTE 2 – EARNINGS (LOSS) PER SHARE

The following is an analysis of the Company’s basic and diluted earnings (loss) per common share, reflecting the application of the two-class method as of March 31, 2014 and 2013:

	Three Months Ended March 31, 2014			Three Months Ended  March 31, 2013
Net income (loss) available for distribution	$	235		$	(2,309	)
Dividends and undistributed loss allocated to participating securities		(150	)		-
Income (loss) attributable to common shareholders	$	85		$	(2,309	)
Average common shares outstanding for basic earnings per share		10,781,988			5,576,671
Effect of dilutive convertible preferred stock		-			-
Effect of dilutive stock options		55			-
Average common and common-equivalent shares for dilutive earnings per share		10,782,043			5,576,671
Basic	$	0.01		$	(0.41	)
Diluted	$	0.01		$	(0.41	)

The Company’s preferred stockholders are entitled to participate in all common stock dividends on an as-converted basis, and no dividends may be paid on shares of the Company’s common stock unless an identical dividend is payable to preferred stockholders on an as-converted basis.

There were 23,580 and 30,180 anti-dilutive shares at March 31, 2014 and 2013, respectively.

8

NOTE 3 – CAPITAL ADEQUACY AND REGULATORY AND SUPERVISORY MATTERS

At the dates indicated, the capital ratios of Community Bank-Wheaton/Glen Ellyn (the “Bank”), the wholly owned subsidiary of the Company, were as follows:

	March 31, 2014					December 31, 2013
	Amount		Ratio			Amount		Ratio
Total capital (to risk-weighted assets)	$	26,497		12.0	%	$	25,990		11.9	%
Tier I capital (to risk-weighted assets)		23,790		10.8	%		23,490		10.8	%
Tier I capital (to average assets)		23,790		7.0	%		23,490		6.8	%

At March 31, 2014, regulatory approval is required for all dividend declarations by both the Bank and the Company.

On January 10, 2014, the Bank received notification from the Federal Deposit Insurance Corporation (the “FDIC”) and the Division of Banking of the Illinois Department of Financial and Professional Regulation (the “IDFPR”) that the Consent Order (the “Order”) issued to the Bank by the FDIC and IDFPR on January 21, 2011 was terminated effective January 10, 2014. The material terms and conditions of the Order were previously disclosed in the Company’s Current Report on Form 8-K filed on January 26, 2011. In connection with the termination of the Order, the Bank agreed to achieve Tier 1 capital at least equal to 8% of total assets and total capital at least equal to 12% of risk-weighted assets.At March 31, 2014, these capital ratios were 7.0% and 12.0%, respectively.

Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If undercapitalized, capital distributions are limited, as are asset growth and expansion, and plans for capital restoration are required.

NOTE 4 - SECURITIES AVAILABLE FOR SALE

The fair value of securities available for sale at March 31, 2014 and December 31, 2013 are as follows:

	March 31, 2014
	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. government agency debt securities	$	11,278	$	-	$	(1,195	)
State and political subdivisions		16,279		123		(253	)
U.S. government agency mortgage-backed securities		58,017		176		(991	)
Preferred stock		45		41		-
SBA securities		7,728		1		(94	)
	$	93,347	$	341	$	(2,533	)

9

	December 31, 2013
	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U.S. government agency debt securities	$	11,059	$	-	$	(1,414	)
State and political subdivisions		16,367		50		(419	)
U.S. government agency mortgage-backed securities		60,065		124		(1,235	)
Preferred stock		35		31		-
SBA securities		8,303		1		(104	)
	$	95,829	$	206	$	(3,172	)

Securities classified as U. S. government agency debt securities include notes issued by government-sponsored enterprises such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Federal Home Loan Bank. The SBA securities are pools of loans guaranteed by the Small Business Administration.

The following tables show gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2014 and December 31, 2013:

	March 31, 2014
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. government agency debt securities	$	6,849	$	(642	)	$	4,429	$	(553	)	$	11,278	$	(1,195	)
State and political subdivisions		7,915		(241	)		284		(12	)		8,199		(253	)
U.S. government agency mortgage-backed securities		38,203		(900	)		3,996		(91	)		42,199		(991	)
SBA securities		5,501		(62	)		1,752		(32	)		7,253		(94	)
Total temporarily impaired securities	$	58,468	$	(1,845	)	$	10,461	$	(688	)	$	68,929	$	(2,533	)

	December 31, 2013
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Government agency debt securities	$	6,694	$	(797	)	$	4,365	$	(617	)	$	11,059	$	(1,414	)
State and political subdivisions		10,027		(419	)		-		-			10,027		(419	)
U.S. government agency mortgage-backed securities		48,023		(1,234	)		16		(1	)		48,039		(1,235	)
SBA securities		7,987		(104	)		-		-			7,987		(104	)
Total temporarily impaired securities	$	72,731	$	(2,554	)	$	4,381	$	(618	)	$	77,112	$	(3,172	)

Unrealized gains and losses within the investment portfolio are determined to be temporary. The Company performed an evaluation of its investments for other than temporary impairment and there was no impairment identified during the three months ended March 31, 2014. The entire portfolio is classified as available for sale, however, management has no specific intent to sell any securities, and it is more likely than not that the Company will not have to sell any security before recovery of its amortized cost basis.

10

The fair values of securities available for sale at March 31, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity are shown separately.

	Amortized Cost		Fair Value
Due in one year or less	$	1,504	$	1,505
Due after one year through five years		2,216		2,186
Due after five years through ten years		8,983		8,817
Due after ten years		16,180		15,049
U.S. government agency mortgage-backed securities		58,832		58,017
SBA securities		7,820		7,728
Preferred stock		4		45
	$	95,539	$	93,347

Securities with a carrying value of approximately $12.7 million at March 31, 2014 were pledged to secure public deposits and Federal Home Loan Bank advances as well as for other purposes as required or permitted by law.

Sales activities for securities for the three months ended March 31, 2014 are shown in the following table:

	Three Months Ended
	March 31,
	2014		2013
Sales proceeds	$	-	$	8,003
Gross gains on sales		-		7

NOTE 5 – LOANS

Loans and Loan Income: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances as adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Discounts and premiums on purchased residential real estate loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Discounts and premiums on purchased consumer loans are recognized over the expected lives of the loans using methods that approximate the interest method.

11

Allowance for Loan Losses: The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

The Company has a geographic concentration of loan and deposit customers within the Chicago metropolitan area. Most of the Company’s loans are secured by specific items of collateral including commercial and residential real estate and other business and consumer assets. Commercial loans are expected to be repaid from cash flow from operations of businesses.

12

Loans consisted of the following at March 31, 2014 and December 31, 2013, respectively:

	March 31,			December 31,
	2014			2013
Real estate
Commercial	$	101,485		$	97,813
Construction		999			1,856
Residential		24,463			26,240
Home equity		48,399			47,050
Total real estate loans		175,346			172,959
Commercial		21,650			21,379
Consumer		1,208			1,384
Total loans		198,204			195,722
Deferred loan costs, net		243			229
Allowance for loan losses		(2,707	)		(2,500	)
Loans, net	$	195,740		$	193,451

The risk characteristics of each loan portfolio segment are as follows:

Commercial

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial Real Estate

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Construction

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

13

Residential and Consumer, including Home Equity Lines of Credit (HELOC)

With respect to residential loans that are secured by one-to-four family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and may require private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in one-to-four family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Policy for charging off loans:

Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral.

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except one-to-four family residential loans and consumer loans, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges-off one-to-four family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of one-to-four family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.

Policy for determining delinquency:

The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.

Period utilized for determining historical loss factors:

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior three years. Management believes the three year historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed.

Policy for recognizing interest income on impaired loans:

Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

14

Policy for recognizing interest income on non-accrual loans:

Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.

The Bank has entered into transactions, including the making of direct and indirect loans, with certain directors and their affiliates (related parties). Such transactions were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons not related to the Company or the Bank. Further, in management’s opinion, these loans did not involve more than normal risk of collectibility or present other unfavorable features.

The aggregate amount of loans, as defined, to such related parties were as follows:

Balances, January 1, 2014	$	1,006
New loans including renewals		-
Payments including renewals		(91	)
Balances, March 31, 2014	$	915

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method for the three months ended March 31, 2014 and 2013:

	Three Months Ended March 31, 2014
	Commercial			Commercial Real Estate		Construction			Consumer			Residential			HELOC		Total
Balance at beginning of period	$	483		$	1,336	$	44		$	41		$	266		$	330	$	2,500
Provision for loan losses		(16	)		90		(31	)		(23	)		(13	)		129		136
Charge-offs		-			-		-			(2	)		-			-		(2	)
Recoveries		66			6		-			-			1			-		73
Balance at end of period	$	533		$	1,432	$	13		$	16		$	254		$	459	$	2,707
Ending balance: individually evaluated for impairment	$	-		$	28	$	-		$	-		$	-		$	110	$	138
Ending balance: collectively evaluated for impairment	$	533		$	1,404	$	13		$	16		$	255		$	348	$	2,569
Total Loans:
Ending balance	$	21,650		$	101,485	$	999		$	1,208		$	24,463		$	48,399	$	198,204
Ending balance: individually evaluated for impairment	$	-		$	437	$	-		$	-		$	-		$	655	$	1,092
Ending balance: collectively evaluated for impairment	$	21,650		$	101,048	$	999		$	1,208		$	24,463		$	47,744	$	197,112

15

	Three Months Ended March 31, 2013
	Commercial			Commercial Real Estate			Construction			Consumer			Residential		HELOC			Total
Balance at beginning of period	$	621		$	1,386		$	53		$	21		$	305	$	646		$	3,032
Provision for loan losses		(44	)		288			(5	)		2			501		288			1,030
Charge-offs		-			(122	)		-			(2	)		-		(242	)		(366	)
Recoveries		-			8			-			2			2		-			12
Balance at end of period	$	577		$	1,560		$	48		$	23		$	808	$	692		$	3,708
Ending balance: individually evaluated for impairment	$	-		$	399		$	-		$	-		$	611	$	414		$	1,424
Ending balance: collectively evaluated for impairment	$	577		$	1,161		$	48		$	23		$	197	$	278		$	2,284
Total Loans:
Ending balance	$	24,890		$	97,014		$	3,233		$	1,299		$	24,022	$	49,140		$	199,598
Ending balance: individually evaluated for impairment	$	1,788		$	3,586		$	-		$	-		$	3,013	$	1,389		$	9,776
Ending balance: collectively evaluated for impairment	$	23,102		$	93,428		$	3,233		$	1,299		$	21,009	$	47,751		$	189,822

The following table presents the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2013:

	December 31, 2013
	Commercial			Commercial Real Estate			Construction			Consumer			Residential			HELOC			Total
Balance at beginning of period	$	621		$	1,386		$	53		$	21		$	305		$	646		$	3,032
Provision for loan losses		129			221			(9	)		34			773			279			1,427
Charge-offs		(267	)		(357	)		-			(15	)		(835	)		(600	)		(2,074	)
Recoveries		-			86			-			1			23			5			115
Balance at end of period	$	483		$	1,336		$	44		$	41		$	266		$	330		$	2,500
Ending balance: individually evaluated for impairment	$	-		$	126		$	-		$	-		$	-		$	46		$	72
Ending balance: collectively evaluated for impairment	$	483		$	1,310		$	44		$	41		$	266		$	284		$	2,428
Total Loans:
Ending balance	$	21,379		$	97,813		$	1,856		$	1,384		$	26,240		$	47,050		$	195,722
Ending balance: individually evaluated for impairment	$	1,566		$	437		$	-		$	-		$	398		$	505		$	2,906
Ending balance: collectively evaluated for impairment	$	19,813		$	97,376		$	1,856		$	1,384		$	25,842		$	46,545		$	192,816

The following table summarizes the Company’s nonaccrual loans by class at March 31, 2014 and December 31, 2013.

	March 31, 2014		December 31, 2013
Real estate loans:
Commercial	$	437	$	437
Home equity		655		505
Total	$	1,092	$	942

16

The following tables present information regarding impaired loans as of March 31, 2014:

							Three Months Ended March 31,
							2014				2013
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
With no related allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-	$	1,823	$	19
Commercial real estate		-		-		-		-		-		1,898		9
Residential		-		-				-		-		1,065		5
HELOC		100		100		-		100		-		166		-
Subtotal		100		100		-		100		-		4,952		33
With an allowance recorded:
Commercial real estate		437		812		28		812		-		1,848		-
Residential		-		-		-		-		-		2,009		-
HELOC		555		555		110		555		-		1,226		-
Subtotal		992		1,367		138		1,367		-		5,083		-
Total Impaired Loans	$	1,092	$	1,467	$	138	$	1,467	$	-	$	10,035	$	33

The following table presents information regarding impaired loans as of December 31, 2013:

	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
With no related allowance recorded:
Commercial real estate	$	1,566	$	1,566	$	-	$	1,549	$	62
Residential		398		398		-		402		21
HELOC		166		166		-		165		-
Subtotal		2,130		2,130		-		2,116		83
With an allowance recorded:
Commercial real estate		437		812		26		834		-
HELOC		339		396		46		396		-
Subtotal		776		1,208		72		1,230		-
Total Impaired Loans	$	2,906	$	3,338	$	72	$	3,346	$	83

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed during the loan approval process and is updated as circumstances warrant. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well- defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

17

The following tables summarize the credit quality of the Company at March 31, 2014 and December 31, 2013:

	March 31, 2014
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial	$	21,583	$	—	$	67	$	—	$	—	$	21,650
Real estate loans:
Construction		999		—		—		—		—		999
Commercial real estate		98,344		2,243		898		—		—		101,485
Residential		24,463		—		—		—		—		24,463
Home equity		47,715		29		655		—		—		48,399
Consumer		1,208		—		—		—		—		1,208
Total	$	194,312	$	2,272	$	1,620	$	—	$	—	$	198,204

	December 31, 2013
	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial	$	19,536	$	209	$	1,634	$	—	$	—	$	21,379
Real estate loans:
Construction		1,856		—		—		—		—		1,856
Commercial real estate		93,679		3,235		899		—		—		97,813
Residential mortgage		24,763		1,477		—		—		—		26,240
Home equity		46,515		29		506		—		—		47,050
Consumer		1,384		—		—		—		—		1,384
Total	$	187,733	$	4,950	$	3,039	$	—	$	—	$	195,722

The following tables summarize past due aging of the Company’s loan portfolio at March 31, 2014 and December 31, 2013:

	March 31, 2014
	30-59 Days  Past Due		60-89 Days Past Due		Greater  Than 90 Days		Total Past Due		Current		Total Loans		Loans >  90 Days and Accruing
Commercial	$	—	$	225	$	—	$	225	$	21,425	$	21,650	$	—
Real estate loans:
Construction		—		—		—		—		999		999		—
Commercial real estate		2,510		38		437		2,985		98,500		101,485		—
Residential		532		—		9		541		23,922		24,463		9
Home equity		569		200		555		1,324		47,075		48,399		—
Consumer		—		—		—		—		1,208		1,208		—
Total	$	3,611	$	463	$	1,001	$	5,075	$	193,129	$	198,204	$	9

18

	December 31, 2013
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		Loans > 90 Days and Accruing
Commercial	$	100	$	—	$	—	$	100	$	21,279	$	21,379		$—
Real estate loans:
Construction		—		—		—		—		1,856		1,856		—
Commercial real estate		—		569		169		737		97,076		97,813		168
Residential mortgage		687		1,342		11		2,040		24,200		26,240		11
Home equity		445		328		555		1,328		45,722		47,050		50
Consumer		—		1		1		2		1,382		1,384		1
Total	$	1,232	$	2,240	$	735	$	4,207	$	191,515	$	195,722	$	230

The Company may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition that it would not otherwise consider resulting in a modified loan which is then identified as a troubled debt restructuring (“TDR”). The Company may modify loans through interest rate reductions, short-term extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers’ operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Company’s allowance for loan losses.

The Company identifies loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future.

For one-to-four family residential and home equity lines of credit, a restructure often occurs with past due loans and may be offered as an alternative to foreclosure. There are other situations where borrowers, who are not past due, experience a sudden job loss, become overextended with credit obligations, or other problems, have indicated that they will be unable to make the required monthly payment and request payment relief.

When considering a loan restructure, management will determine if: (i) the financial distress is short or long term; (ii) loan concessions are necessary; and (iii) the restructure is a viable solution.

When a loan is restructured, the new terms often require a reduced monthly debt service payment. No TDRs that were on non-accrual status at the time the concessions were granted have been returned to accrual status.

For commercial loans, management completes an analysis of the operating entity’s ability to repay the debt. If the operating entity is capable of servicing the new debt service requirements and the underlying collateral value is believed to be sufficient to repay the debt in the event of a default, the new loan is generally placed on accrual status.

For retail loans, an analysis of the individual’s ability to service the new required payments is performed. If the borrower complies with the terms of the newly restructured debt for at least six consecutive months and the underlying collateral value is believed to be sufficient to repay the debt in the event of a future default, the new loan is generally placed on accrual status. The reason for the TDR is also considered, such as paying past due real estate taxes or payments caused by a temporary job loss, when determining whether a retail TDR loan could be returned to accrual status. Retail TDRs remain on non-accrual status until sufficient payments have been made to bring the past due principal and interest current at which point the loan would be transferred to accrual status.

19

There were no loans restructured as TDRs during the three months ended March 31, 2014 and 2013.

The following table sets forth the Company’s TDRs that had payment defaults during the three months ended March 31, 2014 and 2013. A default occurs when a TDR is 90 days or more past due, transferred to non-accrual status, or transferred to other real estate owned within twelve months of restructuring.

	Three months ended March 31, 2014				Three months ended March 31, 2013
			Default				Default
	Count		Balance		Count		Balance
Real estate loans:
Commercial		-		-		2	$	2,713
Residential		-		-		3		1,936
Total		-	$	-		5	$	4,649

NOTE 6 – DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

The Company measures fair value according to the Financial Accounting Standards Board Accounting Standards Codification (ASC) Fair Value Measurements and Disclosures (ASC 820-10). ASC 820-10 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 given to quoted prices in active markets and the lowest to unobservable data such as the Company’s internal information. ASC 820-10 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 Quoted prices in active markets for identical assets or liabilities.

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-sale Securities

If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 1 security includes preferred stock. Level 2 securities include certain collateralized mortgage and debt obligations, municipal securities, U.S. government agencies and SBA securities. Third party vendors compile prices from various sources and may apply techniques such as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather on the investment securities’ relationship to other benchmark quoted investment securities. The following tables are as of March 31, 2014 and December 31, 2013, respectively:

20

			At March 31, 2014
			Fair Value Measurements Using
	Fair
Available-for-sale securities:	Value		Level 1		Level 2		Level 3
U.S. government agency debt securities	$	11,278	$	-	$	11,278	$	-
State and political subdivisions		16,279		-		16,279		-
U.S. government agency mortgage-backed securities		58,017		-		58,017		-
Preferred stock		45		45		-		-
SBA securities		7,728		-		7,728		-
Total available-for-sale securities	$	93,347	$	45	$	93,302	$	-

			At December 31, 2013
			Fair Value Measurements Using
	Fair
Available-for-sale securities:	Value		Level 1		Level 2		Level 3
U.S. government agency debt securities	$	11,059	$	-	$	11,059	$	-
State and political subdivisions		16,367		-		16,367		-
U.S. government agency mortgage-backed securities		60,065		-		60,065		-
Preferred stock		35		35		-		-
SBA securities		8,303		-		8,303		-
Total available-for-sale securities	$	95,829	$	35	$	95,794	$	-

The following is a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying March 31, 2014 and December 31, 2013 balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

			At March 31, 2014
			Fair Value Measurements Using
	Fair
	Value		Level 1		Level 2		Level 3
Impaired loans (collateral dependent)	$	1,091		-		-	$	1,091
Other real estate owned		2,094		-		-		2,094

			At December 31, 2013
			Fair Value Measurements Using
	Fair
	Value		Level 1		Level 2		Level 3
Impaired loans (collateral dependent)	$	2,906		-		-	$	2,906
Other real estate owned		2,269		-		-		2,269

21

The following table presents quantitative information about unobservable inputs in recurring and nonrecurring Level 3 fair value measurements:

	As of March 31, 2014
	Fair		Valuation	Unobservable
	Value		Technique	Inputs	Range
Impaired loans (collateral dependent)	$	1,091	Market comparable properties	Marketability discount		5% - 30%
Other real estate owned	$	2,094	Fair value appraisals

	As of December 31, 2013
	Fair		Valuation	Unobservable
	Value		Technique	Inputs	Range
Impaired loans (collateral dependent)	$	2,906	Market comparable properties	Marketability discount		5% - 30.7%
Other real estate owned	$	2,269	Fair value appraisals

Impaired Loans (Collateral Dependent)

Loans for which it is probable that the Bank will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans, based on current appraisals. If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect fair value. The Company’s practice is to obtain new or updated appraisals on the loans subject to initial impairment review and then to generally update on an annual basis thereafter. The Company discounts the appraisal amount as necessary for selling costs and past due real estate taxes. If a new or updated appraisal is not available at the time of a loan’s impairment review, the Company typically applies a discount to the value of an old appraisal to reflect the property’s current estimated value if there is believed to be deterioration in either (i) the physical or economic aspects of the subject property or (ii) any market conditions. These discounts are developed by the Company’s Chief Credit Officer. The results of the impairment review results in an increase in the allowance for loan loss or in a partial charge-off of the loan, if warranted. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method based on current appraisals.

Other Real Estate Owned

Other real estate owned (“OREO”) is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of OREO is based on appraisals or evaluations. OREO is classified within Level 3 of the fair value hierarchy. Appraisals of OREO are obtained when the real estate is acquired and subsequently as deemed by the Company’s Chief Credit Officer. Appraisals are reviewed for accuracy and consistency by the Chief Credit Officer. Appraisers are selected from the list of approved appraisers maintained by management.

22

The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2014:

			At March 31, 2014
			Fair Value Measurements Using
	Carrying
	Amount		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	31,471	$	31,471	$	-	$	-
Interest-bearing time deposits		447		447		-		-
Securities available for sale		93,347		45		93,302		-
Loans held for sale		924		-		924		-
Loans receivable, net		195,740		-		-		196,711
Federal Home Loan Bank stock		926		-		926		-
Interest receivable		887		-		887		-
Financial liabilities
Deposits		315,783		-		302,481		-
Federal Home Loan Bank advances		4,500		-		4,556		-
Subordinated debentures		3,609		-		-		1,267
Interest payable		181		-		181		-

The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2013:

			At December 31, 2013
			Fair Value Measurements Using
	Carrying
	Amount		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	29,553	$	29,553	$	-		-
Interest-bearing time deposits		945		945		-		-
Securities available for sale		95,829		35		95,794		-
Loans held for sale		804		-		804		-
Loans receivable, net		193,451		-		-		193,864
Federal Home Loan Bank stock		926		-		926		-
Interest receivable		884		-		884		-
Financial liabilities
Deposits		315,709		-		303,199		-
Federal Home Loan Bank advances		4,500		-		4,478		-
Subordinated debentures		3,609		-		-		1,259
Interest payable		169		-		169		-

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

Carrying amount is the estimated fair value for cash and cash equivalents, interest-bearing time deposits, loans held for sale, Federal Home Loan Bank stock, interest receivable and payable, deposits due on demand, variable rate loans and other borrowings. Security fair values are based on market prices or dealer quotes and, if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans and time deposits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using a discounted cash flow analysis or underlying collateral values. The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW and money market accounts, is equal to the carrying amount. There is however, additional value to the deposits of the Company, a significant portion of which has not been recognized in the consolidated financial statements. This value results from the cost savings of these core-funding sources versus obtaining higher-rate funding in the market. The fair values of fixed rate Federal Home Loan Bank advances, other borrowings and subordinated debentures are based on current rates for similar financing. The fair value of off-balance-sheet items, which is based on the current fees or cost that would be charged to enter into or terminate such arrangements, is immaterial.

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While the above estimates are based on management's judgment of the most appropriate factors, there is no assurance that were the Company to have disposed of these items on the respective dates, the fair values would have been achieved, because the market value may differ depending on the circumstances. The estimated fair values at year end should not necessarily be considered to apply at subsequent dates.

Other assets and liabilities that are not financial instruments, such as premises and equipment, are not included in the above disclosures. Also, nonfinancial instruments typically not recognized on the balance sheets may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposits, the trained workforce, customer goodwill, and similar items.

NOTE 7 – RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Update No. 2013-11 - Income Taxes (Topic 740) – In July 2013, FASB issued ASU 2013-11. This update pertains to the unrecognized tax benefit when a net operating loss carry forward, a similar tax loss or a tax credit carry forward exists. The ASU is intended to end the varying ways that entities present these situations since GAAP is non-specific and leads to diversity in practice. The new standard deems that any unrecognized tax benefit or portion of an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit carry forward except for certain defined situations.

The amendments in this Update are effective for fiscal years beginning after December 15, 2013. Early adoption is permitted. The Company adopted the methodologies prescribed by this ASU and it did not have a material effect on its financial position or results of operations.

In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” to reduce diversity by clarifying when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014.  Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

In January 2014, the FASB issued ASU 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects,” to permit entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met.  The ASU modifies the conditions that an entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014.  Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

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

The following discussion and analysis is intended as a review of significant factors affecting the financial condition and results of operations of the Company for the periods indicated. The discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes included in this Form 10-Q. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed elsewhere in this report.

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Safe Harbor Statement

This report (including information incorporated herein by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following:

· The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, an escalation in problem assets and foreclosures, a deterioration in the credit quality and value of the Company’s assets, especially real estate, which, in turn would likely reduce our customers’ borrowing power and the value of assets and collateral associated with our existing loans;

· The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters;

· The failure of assumptions underlying the establishment of our allowance for loan losses, that may prove to be materially incorrect or may not be borne out by subsequent events;

· The success and timing of our business strategies and our ability to effectively carry out our business plan and capital restoration plan;

· An inability to meet our liquidity needs;

· The effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setters;

· The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations;

· The risks of changes in interest rates on the level and composition of deposits, loan demand and the values of loan collateral, securities and interest sensitive assets and liabilities;

· Our ability to effectively manage market risk, credit risk and operational risk;

· The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector;

· The inability of the Company to obtain new customers and to retain existing customers;

· The timely development and acceptance of products and services including services, products and services offered through alternative delivery channels such as the Internet;

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· Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers;

· The ability of the Company to develop and maintain secure and reliable electronic systems;

· The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner;

· Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected;

· The costs, effects and outcomes of existing or future litigation; and

· The ability of the Company to manage the risks associated with the foregoing as well as anticipated.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company’s financial results, is included in the Company’s filings with the Securities and Exchange Commission, including in the Section entitled “Risk Factors” in this form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the U.S. Securities and Exchange Commission on March 28, 2014.

Overview

Community Financial Shares, Inc. (the “Company”) is the holding company for Community Bank- Wheaton/Glen Ellyn (the “Bank”). The Company is headquartered in Glen Ellyn, Illinois and operates four offices in its primary market area, which is comprised of Glen Ellyn, Illinois and Wheaton, Illinois. One location is in Glen Ellyn and three are located in Wheaton.

The Company’s principal business is conducted by the Bank and consists of offering a full range of community-based financial services, including commercial and retail banking services.  The profitability of the Company’s operations depends primarily on its net interest income, provision for loan losses, other income, and other expenses.  Net interest income is the difference between the income the Company receives on its loan and securities portfolios and its cost of funds, which consists of interest paid on deposits and borrowings.  The provision for loan losses reflects the cost of credit risk in the Company’s loan portfolio.  Other income consists of service charges on deposit accounts, gains on loan sales, securities gains (losses), and other income.  Other expenses include salaries and employee benefits expenses, as well as occupancy and equipment expenses and other noninterest expenses.

Net interest income is dependent on the amounts and yields of interest-earning assets as compared to the amounts and rates of interest-bearing liabilities.  Net interest income is sensitive to changes in market rates of interest and the Company’s asset/liability management procedures in coping with such changes.  The provision for loan losses is dependent upon management’s assessment of the collectibility of the loan portfolio under current economic conditions.

Regulatory Matters

As previously disclosed, on January 10, 2014, the Bank received notification from the Federal Deposit Insurance Corporation (the “FDIC”) and the Division of Banking of the Illinois Department of Financial and Professional Regulation (the “IDFPR”) that the Consent Order (the “Order”) issued to the Bank by the FDIC and IDFPR on January 21, 2011 was terminated effective January 10, 2014. The material terms and conditions of the Order were previously disclosed in the Company’s Current Report on Form 8-K filed on January 26, 2011. In connection with the termination of the Order, the Bank agreed to achieve Tier 1 capital at least equal to 8% of total assets and total capital at least equal to 12% of risk-weighted assets. At March 31, 2014 our Tier 1 and total capital ratios were 7.0% and 12.0%, respectively, compared to 6.8% and 11.9%, at December 31, 2013 and 6.8% and 11.4% at September 30, 2013, 6.7% and 11.4% at June 30, 2013, 6.8% and 11.8% at March 31, 2013 and 7.7% and 12.6% at December 31, 2012, respectively.

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Comparison of Financial Condition at March 31, 2014 and December 31, 2013

Total assets at March 31, 2014 were $349.8 million, which represented an increase of $800,000, or 0.2%, compared to $349.0 million at December 31, 2013. The increase in total assets was primarily due to an increase in cash and cash equivalents and loans. Cash and cash equivalents increased $1.9 million, or 6.5%, to $31.5 million at March 31, 2014 from $29.6 million at December 31, 2013. Loans increased $2.2 million, or 1.2%, to $195.7 million at March 31, 2014 from $193.5 million at December 31, 2013 primarily as a result of the net effect of a $3.7 million increase in commercial real estate loans, a $1.3 million increase in home equity lines of credit, a $1.8 million decrease in residential real estate loans and a $900,000 decrease in construction loans. The increase in cash and cash equivalents and loans was partially offset by a decrease in investment securities. Investment securities decreased $2.5 million, or 2.6%, to $93.3 million at March 31, 2014 from $95.8 million at December 31, 2013 primarily as a result of the net effect of a $2.0 million decrease in mortgage-backed securities and a $575,000 decrease in SBA securities. In addition, foreclosed assets decreased $175,000 to $2.1 million as of March 31, 2014 from $2.3 million as of December 31, 2013. Included in foreclosed assets at March 31, 2014 are nine one-to-four family residences and two parcels of land.

Total liabilities at March 31, 2014 were $327.5 million, which represented a slight increase of $108,000, compared to $327.3 million at December 31, 2013. Borrowed money, consisting solely of Federal Home Loan Bank advances, remained unchanged at $4.5 million at both March 31, 2014 and December 31, 2013. Deposits increased $74,000 to $315.8 million at March 31, 2014 from $315.7 million at December 31, 2013. This slight increase in deposits primarily consisted of increases in money market accounts of $1.3 million, or 3.1%, to $43.7 million at March 31, 2014 from $42.4 million at December 31, 2013 and regular savings accounts of $1.0 million, or 1.3%, to $75.4 million at March 31, 2014 from $74.4 million at December 31, 2013. These increases were partially offset by a decrease in certificates of deposits of $2.9 million, or 8.9%, to $83.8 million at March 31, 2014 from $86.7 million at December 31, 2013. The percentage of regular savings accounts to total deposits increased to 23.9% at March 31, 2014 from 23.6% at December 31, 2013 and the percentage of certificates of deposit to total deposits decreased to 26.5% at March 31, 2014 from 27.5% at December 31, 2013.

Stockholders’ equity increased $712,000, or 3.3%, to $22.3 million at March 31, 2014 from $21.6 million at December 31, 2013. The increase in stockholders’ equity was due to the Company’s $235,000 net income for the three months ended March 31, 2014 and the increase in the Company’s accumulated other comprehensive income of $474,000 to a loss of $1.3 million for the three months ended March 31, 2014 due to changes in the fair value of the Company’s available-for-sale investment portfolio.

Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013

General. The Company’s net income for the three months ended March 31, 2014 totaled $235,000 compared to a net loss of $2.3 million for the three months ended March 31, 2013. This represents basic and diluted earnings per share of $0.01 for the three months ended March 31, 2014 compared to a basic and diluted loss per share of $0.41 for the three months ended March 31, 2013. The improvement in operating results of the Company for the three months ended March 31, 2014 is primarily the result of the combined effect of an $894,000 decrease in provision for loan losses, a $165,000 increase in net interest income, a $1.5 million decrease in noninterest expense and an $81,000 decrease in noninterest income.

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Net interest income. The following table summarizes interest and dividend income and interest expense for the three months ended March 31, 2014 and 2013.

	Three Months Ended March 31,
	2014		2013		$ Change			% Change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	2,548	$	2,604	$	(56	)		(2.15	)%
Securities:
Taxable		332		236		96			40.68
Exempt from federal tax		90		41		49			119.51
Other interest income		16		42		(26	)		(61.91	)
Total interest and dividend income		2,986		2,923		63			2.16
Interest expense:
Deposits		311		401		(90	)		(22.44	)
Federal Home Loan Bank advances and other borrowings		27		39		(12	)		(30.77	)
Subordinated debentures		17		17		-			-
Total interest expense		355		457		(102	)		(22.32	)
Net interest income	$	2,631	$	2,466	$	165			6.69

Average Balance Sheet. The following table sets forth certain information relating to the Company’s average balance sheets and reflects the yield on average earning assets and cost of average interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing interest income or expense by the average balance of assets or liabilities. The average balance sheet amounts for loans include balances for non-accrual loans. The yields and costs include fees that are considered adjustments to yields.

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The following table summarizes average balances and annualized average yields or costs for the three months ended March 31, 2014 and 2013.

	Three Months Ended March 31,
	2014							2013
					Average								Average
	Average				Yield/			Average					Yield/
	Balance		Interest		Cost			Balance			Interest		Cost
	(Dollars in thousands)
Interest-earning assets:
Taxable securities	$	80,344	$	332		1.68	%	$	55,525	$		241		1.76	%
Tax-exempt securities (1)		15,379		136		3.59			4,048			63		6.32
Loan receivables (2)		197,445		2,548		5.23			199,076			2,604		5.31
Interest-bearing deposits,
FHLB stock and other		24,513		16		0.24			57,000			37		0.26
Total interest-earning assets		317,681		3,032		3.87			315,649			2,945		3.78
Interest-bearing liabilities:
NOW accounts		72,741		32		0.18			75,367			50		0.27
Regular savings		74,435		48		0.26			66,683			55		0.33
Money market accounts		42,650		30		0.29			44,085			50		0.46
Certificates of deposit		85,817		201		0.95			94,617			246		1.06
FHLB advances and other		5,229		27		2.08			7,244			39		2.16
Subordinated debentures		3,609		17		1.89			3,609			17		1.95
Total interest-bearing liabilities	$	284,481		355		0.51		$	291,605			457		0.64
Net interest income/interest rate spread (3)			$	2,677		3.36	%				$	2,488		3.14	%
Less: Taxable equivalent adjustment				46								22
Net interest income as reported			$	2,631							$	2,466
Net interest margin (4)						3.36	%							3.17	%
Tax equivalent effect						0.06	%							0.03	%
Net interest margin on a fully tax equivalent basis						3.42	%							3.20	%

(1) Tax-exempt investment income is presented on a fully taxable equivalent basis assuming a 35% tax rate.

(2) Includes fees that are considered adjustments to yield and the average balance of loans receivable includes non-performing loans, interest on which is recognized on a cash basis.

(3) Interest rate spread represents the difference between the average yield on interest earning assets and average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.

(4) Net interest margin represents net interest income as a percentage of average interest earning assets.

Interest Income. Interest income increased $63,000 to $3.0 million for the three months ended March 31, 2014. The average yield on interest-earning assets increased 9 basis points to 3.87% for the three months ended March 31, 2014 from 3.78% for the comparable prior year period. In addition, interest-earning assets increased $2.1 million to $317.7 million for the three months ended March 31, 2014 from $315.6 million for the comparable prior year period.

Interest and fees on loans decreased $56,000, or 2.2%, to $2.5 million for the three months ended March 31, 2014, compared to $2.6 million for the comparable prior year period. This decrease resulted from a decrease in the average balance of loans of $1.6 million to $197.4 million for the three months ended March 31, 2014 from $199.1 million for the comparable prior year period. In addition, the average loan yield decreased 8 basis points to 5.23% for the three months ended March 31, 2014 compared to 5.31% for the three months ended March 31, 2013. Interest on taxable securities increased $96,000 for the three months ended March 31, 2014 compared to the comparable prior year period. This increase is primarily due to an increase in the average balance of taxable securities of $24.8 million to $80.3 million for the three months ended March 31, 2014 from $55.5 million for the comparable prior year period. Partially offsetting this increase was a decrease in the average yield on taxable securities of 8 basis points to 1.68% for the three months ended March 31, 2014 from 1.76% for the comparable prior year period.

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Interest Expense. Interest expense decreased by $102,000, or 22.3%, to $355,000 for the three months ended March 31, 2014, from $457,000 for the three months ended March 31, 2013. This decrease resulted from a decrease in the average rate paid on interest bearing liabilities of 13 basis points to 0.51% for the three months ended March 31, 2014 from 0.64% for the comparable prior year period, which is primarily due to a decrease in overall market rates. In addition, the average balance of interest bearing liabilities decreased $7.1 million to $284.5 million for the three months ended March 31, 2014 from $291.6 million for the comparable prior year period. Interest expense resulting from Federal Home Loan Bank advances, subordinated debentures and other borrowings decreased $12,000 during the three months ended March 31, 2014. The average balance on these borrowings decreased $2.1 million to $8.8 million for the three months ended March 31, 2014 from $10.9 million for the comparable prior year period. In addition, there was a decrease in the average cost of these borrowings of 9 basis points to 2.00% for the three months ended March 31, 2014 from 2.09% for the comparable period in 2013.

Net Interest Income before Provision for Loan Losses. Net interest income before provision for loan losses increased $165,000, or 6.7%, to $2.6 million for the three months ended March 31, 2014 compared to $2.5 million for the comparable period in 2013. The Company’s net interest margin expressed as a percentage of average interest-earning assets increased to 3.36% for the three months ended March 31, 2014 as compared to 3.17% for the three months ended March 31, 2013. The average yield on interest-earning assets increased 9 basis points to 3.87% for the three months ended March 31, 2014 from 3.78% for the comparable period ended March 31, 2013. The average balance of interest earning assets increased $2.1 million to $317.7 million for the three months ended March 31, 2014 from $315.6 million for the three months ended March 31, 2013. The yield on taxable securities decreased 8 basis points to 1.68% for the three months ended March 31, 2014 from 1.76% for the comparable prior year period. The yield on average loans decreased 8 basis points to 5.23% for the three months ended March 31, 2014 from 5.31% for the three months ended March 31, 2013. In addition, there was a 13 basis point decrease in the cost of average interest-bearing liabilities to 0.51% for the three months ended March 31, 2014 as compared to 0.64% for the comparable 2013 period.

Provision for Loan Losses. The Bank’s provision for loan losses decreased to $136,000 for the three months ended March 31, 2014 from $1.0 million for the comparable period in 2013. The $894,000 decrease in the provision was the result of management’s quarterly analysis of the allowance for loan losses. At March 31, 2014, December 31, 2013 and March 31, 2013, nonperforming loans totaled $1.1 million, $942,000 and $6.7 million, respectively. At March 31, 2014, the ratio of the allowance for loan losses to nonperforming loans was 287.9% compared to 213.3% at December 31, 2013 and 55.4% at March 31, 2013. The ratio of the allowance to total loans was 1.36%, 1.28% and 1.85%, at March 31, 2014, December 31, 2013 and March 31, 2013, respectively. The decrease from March 31, 2013 to March 31, 2014 is primarily due to reserves established in prior periods on loans which were charged off in 2013.

Nonperforming loans increased $150,000, or 15.9%, to $1.1 million at March 31, 2014 from $942,000 at December 31, 2013. The largest component of nonperforming loans is home equity lines of credit, which increased $150,000, or 29.7%, to $655,000, or 60.0% of total nonperforming loans, at March 31, 2014, from $505,000, or 53.6% of total nonperforming loans at December 31, 2013. Nonperforming commercial real estate loans remained unchanged at $437,000 at March 31, 2014 and December 31, 2013. Charge-offs, net of recoveries, totaled ($72,000) for the three months ended March 31, 2014 compared to $354,000 for the three months ended March 31, 2013. Nonperforming loans are loans that are ninety days past due and placed on nonaccrual status. Management continues to take aggressive actions in identifying and disposing of problem credits.

The amounts of the provision and allowance for loan losses are influenced by a number of factors, including current economic conditions, actual loss experience, industry trends and other factors, including real estate values in the Company’s market area and management’s assessment of current collection risks within the loan portfolio. Should the local economic climate continue to deteriorate, borrowers may experience increased difficulties paying off loans and the level of non-performing loans, charge-offs, and delinquencies could continue to rise, which would require us to further increase the provision. The allowance for loan losses represents management’s estimate of probable incurred losses based on information available as of the date of the financial statements. The allowance for loan losses is based on management’s evaluation of the collectibility of the loan portfolio, including past loan loss experience, known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, and economic conditions. Management believes that, based on information available at March 31, 2014, the Bank’s allowance for loan losses was adequate to cover probable incurred losses inherent in its loan portfolio at that time. However, no assurances can be given that the Bank’s level of allowance for loan losses will be sufficient to cover loan losses incurred by the Bank or that future adjustments to the allowance will not be necessary if economic or other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance. In addition, the FDIC and IDFPR, as an integral part of their examination processes, periodically reviews the Bank’s allowance for loan losses and may require the Bank to make additional provisions for estimated loan losses based upon judgments different from those of management.

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Noninterest Income

	Three Months Ended March 31,
	2014			2013			$ Change			% Change
	(Dollars in thousands)
Non-interest income:
Service charges on deposit accounts	$	83		$	86		$	(3	)		(3.49	)%
Gain on sale of loans		112			483			(371	)		(76.81	)
Loss on sale of foreclosed assets		(21	)		(320	)		299			93.44
Gain on sale of securities		-			7			(7	)		100.00
Other non-interest income		230			229			1			0.44
Total non-interest income	$	404		$	485		$	(81	)		(16.70	)

Noninterest income totaled $404,000 and $485,000 for the three months ended March 31, 2014 and 2013, respectively. Gain on sale of loans decreased $371,000 to $112,000 for the three months ended March 31, 2014 from $483,000 for the comparable prior year period. Loss on sale of foreclosed assets increased $299,000 to a loss of $21,000 for the three months ended March 31, 2014 as compared to the prior year period.

Noninterest Expense

	Three Months Ended March 31,
	2014		2013		$ Change			% Change
	(Dollars in thousands)
Non-interest expenses:
Salaries and employee benefits	$	1,450	$	1,596	$	(146	)		(9.15	)%
Net occupancy and equipment expense		356		327		29			8.87
Data processing expense		245		330		(85	)		(25.76	)
Advertising and promotions		38		54		(16	)		(29.63	)
Professional fees		198		318		(120	)		(37.74	)
FDIC insurance premiums		135		206		(71	)		(34.47	)
Write-down on other real estate owned		-		842		(842	)		(100.00	)
Other real estate owned expenses		48		163		(115	)		(70.55	)
Other operating expenses		194		349		(155	)		(44.41	)
Total non-interest expenses	$	2,664	$	4,185	$	(1,521	)		(36.34	)

Noninterest expense decreased by $1.5 million to $2.7 million for the three months ended March 31, 2014 from $4.2 million for the comparable prior year period. Salaries and employee benefits expenses decreased by $146,000, or 9.2%, to $1.5 million for the three months ended March 31, 2014. This decrease is primarily due to a lower level of full-time equivalents as the Bank gained efficiencies as the result of a core processing conversion. Professional fees decreased $120,000, or 37.7%, to $198,000 for the three months ended March 31, 2014 from $318,000 for the comparable prior year period. This decrease is primarily due to lower attorney’s fees related to resolving problem credits. FDIC insurance premiums decreased by $71,000, or 34.5%, to $135,000 for the three months ended March 31, 2014 compared to $206,000 for the prior year period. Other real estate owned expenses decreased to $48,000 for the three months ended March 31, 2014 compared to $163,000 for the comparable prior year period. In addition, write-downs on foreclosed assets decreased to zero for the three months ended March 31, 2014 from $842,000 for the comparable prior year period. Data processing expenses decreased $85,000, or 25.7%, to $245,000 for the three months ended March 31, 2014 from $330,000 for the three months ended March 31, 2013. This decrease is primarily due to the savings from the recent core processing conversion the Bank completed. Advertising expenses decreased $16,000 to $38,000 for the three months ended March 31, 2014 compared to the prior year period. Offsetting these decreases was an increase of $29,000 in occupancy expense primarily related to snow removal costs for the three months ended March 31, 2014. Management continues to emphasize the importance of expense management and control in order to continue to provide expanded banking services to its market.

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Income Tax Expense. The Company recorded income tax expense of zero for the three months ended March 31, 2014. As of March 31, 2014 the Company’s deferred tax assets related to net operating losses are fully reserved. Under generally accepted accounting principles, income tax benefits and the related tax assets may only be allowed to be recognized if they will more likely than not be fully utilized. In each future accounting period, the Company’s management will consider both positive and negative evidence when considering the ability of the Company to utilize its net deferred tax asset. Any subsequent reduction in the valuation allowance would lower the amount of income tax expense recognized in the Company’s consolidated statements of operations in future periods. However, if operating losses continue into the future, there can be no guarantee that additional valuation allowances will be necessary. Income tax expense totaled $45,000 for the three months ended March 31, 2013.

Critical Accounting Policies

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The Company’s significant accounting policies are described in detail in the notes to the consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2013, which was filed with the U.S. Securities and Exchange Commission on March 28, 2014. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company’s financial condition and results, and they require management to make estimates that are difficult, subjective, or complex.

Allowance for Credit Losses. The allowance for credit losses provides coverage for probable losses inherent in the Company’s loan portfolio. Management evaluates the adequacy of the allowance for credit losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management’s estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs.

The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on the loan’s observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan’s effective interest rate.

Regardless of the extent of the Company’s analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customer’s financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company’s evaluation of imprecision risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment.

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Deferred Taxes. Realization of deferred tax assets is dependent on generating sufficient taxable income to cover net operating losses generated by the reversal of temporary differences. A partial or total valuation allowance is provided by way of a charge to income tax expense if it is determined that it is more likely than not that some of or all of the deferred tax asset will not be realized. Under generally accepted accounting principles, income tax benefits and the related tax assets are only allowed to be recognized if they will more likely than not be fully utilized. In each future accounting period, the Company’s management will consider both positive and negative evidence when considering the ability of the Company to utilize its net deferred tax asset. Any subsequent reduction in the valuation allowance would lower the amount of income tax expense recognized in the Company’s consolidated statements of operations in future periods.

Valuation of Securities. The Company’s available-for-sale security portfolio is reported at fair value. The fair value of a security is determined based on quoted market prices. If quoted market prices are not available, fair value is determined based on quoted prices of similar instruments. Available-for-sale securities are reviewed quarterly for possible other-than-temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the length of time the fair value has been below cost, the expectation for that security’s performance, the credit worthiness of the issuer and the Company’s ability to hold the security to maturity. A decline in value that is considered to be other-than-temporary is recorded as a loss within other operating income in the consolidated statement of income.

Liquidity and Capital Resources

The Company's primary sources of funds are deposits, FHLB advances, and proceeds from principal and interest payments on loans and securities. While maturities, and scheduled amortization of loans and securities, and calls of securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. The Company generally manages the pricing of its deposits to be competitive and to increase core deposit relationships.

Liquidity management is both a daily and long-term responsibility of management. The Company adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities, and (iv) the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits and short- and intermediate-term U.S. government and agency obligations.

The Company's most liquid assets are cash and short-term investments. The levels of these assets are dependent on the Company's operating, financing, lending, and investing activities during any given year. The Company has other sources of liquidity if a need for additional funds arises, including securities maturing within one year and the repayment of loans. The Company may also utilize the sale of securities available for sale, federal funds lines of credit from correspondent banks, and borrowings from the Federal Home Loan Bank of Chicago.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders. The Company’s primary source of funds is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company is generally restricted under applicable law to net profits in the current year plus those for the previous two years. At March 31, 2014, the Company had liquid assets of $3.5 million.

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Contractual Obligations

The following table discloses contractual obligations of the Company as of March 31, 2014:

	Payments Due By Year
											2019
(Dollars in Thousands)	2014		2015		2016		2017		2018		and after		Total
Federal Home Loan Bank advances	$	2,500	$	2,000	$	-	$	-	$	-	$	-	$	4,500
Subordinated debentures		-		-		-		-		-		3,609		3,609
Data Processing (1), (2)		495		660		660		660		660		1,980		4,785
Total	$	2,995	$	2,660	$	2,660	$	660	$	660	$	5,589	$	12,894

(1) Estimated contract amount based on transaction volume. Actual expense was $750,000 and $737,000 in 2013 and 2012, respectively.

(2) A new contract was signed and is effective until October 14, 2020.

Off-balance-sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, letters of credit and lines of credit. For information about our loan commitments and unused lines of credit, see Note 15 of the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC on March 28, 2014. We currently have no plans to engage in hedging activities in the future. For the year ended December 31, 2013 and for the three months ended March 31, 2014, we engaged in no off-balance-sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on the operations of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

For a discussion of the potential impact of interest rate changes upon the market value of the Company’s portfolio equity, see Item 7A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Management, as part of its regular practices, performs periodic reviews of the impact of interest rate changes upon net interest income and the market value of the Company’s portfolio equity. Based on, among other factors, such reviews, management believes that there have been no material changes in the market risk of the Company’s asset and liability position since December 31, 2013.

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ITEM 4: CONTROLS AND PROCEDURES

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the three months ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

ITEM 1.          LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company or its subsidiaries are a party other than ordinary routine litigation incidental to their respective businesses.

ITEM 1A.     RISK FACTORS

There are no material changes to the risk factors disclosed in the Company’s Form 10-K for the year ended December 31, 2013.

ITEM 2.        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3.        DEFAULTS UPON SENIOR SECURITIES

 None

ITEM 4.        MINE SAFETY DISCLOSURES

Not applicable

ITEM 5.        OTHER INFORMATION

None

ITEM 6.        EXHIBITS

4.1	Form of Common Stock Certificate of Community Financial Shares, Inc. (1)
4.2	Form of Stock Certificate for Series C Convertible Noncumulative Perpetual Preferred Stock of Community Financial Shares, Inc. (1)
4.3	Form of Stock Certificate for Series D Convertible Noncumulative Perpetual Preferred Stock of Community Financial Shares, Inc. (1)
4.4	Form of Stock Certificate for Series E Convertible Noncumulative Perpetual Preferred Stock of Community Financial Shares, Inc. (1)
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant   to Section 906 of the Sarbanes-Oxley Act of 2002.
101.0	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Loss, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to the Consolidated Financial Statements.

(1) Incorporated by reference to the exhibits to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.

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SIGNATURES

Pursuant to the requirements 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.

COMMUNITY FINANCIAL SHARES, INC.

(Registrant)

/s/ Donald H. Wilson

Donald H. Wilson

Dated: May 14, 2014

President and Chief Executive Officer

(Principal Executive Officer)

/s/ Eric J. Wedeen

Eric J. Wedeen

Dated:  May 14, 2014

Chief Financial Officer

(Principal Financial Officer)

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