10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2005

OR

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

For transition period from              to             

Commission file number 0-51296

COMMUNITY FINANCIAL SHARES, INC.

(Exact name of Registrant as specified in its charter)

Delaware	36-4387843
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer 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)

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 is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

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 Registrant’s classes of common stock as of the latest practicable date: As of October 29, 2005, the Registrant had outstanding 684,014 shares of common stock, no par value per share.

COMMUNITY FINANCIAL SHARES, INC.

Form 10-Q Quarterly Report

Table of Contents

	PART I
Item 1.	Condensed Consolidated Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	18
Item 4.	Controls and Procedures	19
	PART II
Item 1.	Legal Proceedings	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	20
Item 4.	Submission of Matters to a Vote of Security Holders	20
Item 5.	Other Information	20
Item 6.	Exhibits	20
Item 7.	Signatures	21

2.

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

	September 30, 2005		December 31, 2004
	(Unaudited)
ASSETS
Cash and due from banks	$	8,181	$	5,354
Interest bearing deposits		3,842		2,655
Federal funds sold		—		500
Cash and cash equivalents		12,023		8,509
Securities available-for-sale		39,405		40,710
Loans, less allowance for loan losses of $1,285 and $1,367		179,404		165,056
Federal Home Loan Bank stock		10,642		10,232
Premises and equipment, net		10,397		8,232
Cash value of life insurance		5,180		5,006
Interest receivable and other assets		2,121		1,650
Total assets	$	259,172	$	239,395
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	228,985	$	211,373
Federal Home Loan Bank advances		6,000		6,000
Subordinated debentures		3,609		3,609
Interest payable and other liabilities		2,468		1,690
Total liabilities		241,062		222,672
Commitments and contingent liabilities
Shareholders’ equity
Common stock - no par value, 900,000 shares authorized; 684,014 and 683,069 issued and outstanding		—		—
Paid-in capital		8,128		8,103
Retained earnings		9,914		8,507
Accumulated other comprehensive income		68		113
Total shareholders’ equity		18,110		16,723
Total liabilities and shareholders’ equity	$	259,172	$	239,395

See accompanying notes to condensed consolidated financial statements.

3.

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three and Nine Months ended September 30, 2005 and 2004

(In thousands, except share and per share data)

(Unaudited)

	Three months Ended September 30,				Nine months Ended September 30,
	2005		2004		2005		2004
Interest income
Loans	$	3,006	$	2,297	$	8,180	$	6,756
Securities
Taxable		213		254		718		788
Exempt from federal income tax		143		110		361		337
Federal funds sold		17		5		71		15
Federal Home Loan Bank dividends and other		144		167		492		489
Total interest income		3,523		2,833		9,822		8,385
Interest expense
Deposits		1,022		585		2,563		1,747
Federal Funds Purchased		—		—		13		—
Federal Home Loan Bank advances and other borrowed funds		60		21		175		64
Subordinated debentures		63		47		181		131
Total interest expense		1,145		653		2,932		1,942
Net interest income		2,378		2,180		6,890		6,443
Provision for loan losses		150		—		170		—
Net interest income after provision for loan losses		2,228		2,180		6,720		6,443
Non-interest income
Service charges on deposit accounts		136		141		387		425
Mortgage origination fees		76		45		173		200
Securities gains		—		—		—		44
Other non-interest income		134		137		406		255
Total non - interest income		346		323		966		924
Non-interest expense
Salaries and employee benefits		1,063		944		3,108		2,767
Net Occupancy and equipment expense		219		180		613		512
Data processing expense		126		146		457		407
Advertising and promotions		103		63		272		191
Professional fees		83		67		250		197
Other operating expenses		284		233		813		795
Total non interest expense		1,878		1,633		5,513		4,869
Income before income taxes		696		870		2,173		2,498
Provision for Income taxes		174		279		664		774
Net income	$	522	$	591	$	1,509	$	1,724
Earnings per Share
Basic	$	0.76	$	0.87	$	2.21	$	2.53
Diluted		0.76		0.86		2.19		2.51
Average shares outstanding		683,902		682,009		683,389		681,921
Dividends per share	$	0.05	$	0.05	$	0.15	$	0.14

See accompanying notes to condensed consolidated financial statements.

4.

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Nine Months ended September 30, 2005 and 2004

(In thousands, except per share data)

(Unaudited)

	Number of Common Shares		Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at January 1, 2005	683,069		$	8,103		$	8,507		$	113		$	16,723
Net income	—			—			1,509			—			1,509
Unrealized net loss on securities available-for-sale, net of reclassifications and tax effects	—			—			—			(45	)		(45	)
Total comprehensive income													1,464
Cash dividends	—						(102	)		—			(102	)
Stock options exercised	945			25			—			—			25
Balance at September 30, 2005	684,014		$	8,128		$	9,914		$	68		$	18,110
Balance at January 1, 2004	682,804		$	8,131		$	6,346		$	278		$	14,755
Net income	—			—			1,724			—			1,724
Unrealized net loss on securities available-for-sale, net of reclassifications and tax effects	—			—			—			(33	)		(33	)
Total comprehensive income													1,690
Cash dividends	—			—			(96	)		—			(96	)
Purchase of stock	(1,230	)		(48	)								(48	)
Stock options exercised	445			8			—			—			8
Balance at September 30, 2004	682,019		$	8,091		$	7,974		$	245		$	16,310

See accompanying notes to condensed consolidated financial statements.

5.

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months ended September 30, 2005 and 2004

(In thousands)

(Unaudited)

	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,509		$	1,724
Adjustments to reconcile net income to net cash from operating activities
Provision for loan losses		170			—
Depreciation and amortization		273			224
Premium amortization on securities, net		157			246
Gain on sales of securities		—			(33	)
Federal Home Loan Bank stock dividends		(410	)		(448	)
Change in interest receivable and other assets		(634	)		588
Change in interest payable and other liabilities		778			144
Net cash from operating activities		1,843			2,445
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available-for-sale		—			5,527
Proceeds from maturities and calls of securities		5,698			13,829
Purchases of securities available-for-sale		(5,119	)		(5,538	)
Proceeds from maturities of certificates of deposit		495			—
Net change in loans receivable		(14,500	)		(10,868	)
Property and equipment expenditures		(2,439	)		(677	)
Net cash provided (used) in investing activities		(15,865	)		2,273
CASH FLOWS FROM FINANCING ACTIVITIES
Change in deposits		17,612			(6,307	)
Change in securities sold under agreements to repurchase		—			(125	)
Change in borrowings		—			4,000
Exercise of stock options		25			8
Purchases of common shares		—			(48	)
Dividends paid		(101	)		(95	)
Net cash provided (used) in financing activities		17,536			(2,567	)
Change in cash and cash equivalents		3,514			2,150
Cash and cash equivalents at beginning of period		8,509			11,851
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	12,023		$	14,001

See accompanying notes to condensed consolidated financial statements.

6.

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands)

NOTE 1 – BASIS OF PRESENTATION

The accounting policies followed in the preparation of the interim condensed consolidated financial statements 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 six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005.

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 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 consolidated financial statements and notes included in the Company’s annual report on Form 10-K for 2004 filed with the U.S. Securities and Exchange Commission. The condensed consolidated balance sheet of the Company as of December 31, 2004 has been derived from the audited consolidated balance sheet as of that date.

NOTE 2 – EARNINGS PER SHARE

The number of shares used to compute basic and diluted earnings per share were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Net income (in thousands)	$	522	$	591	$	1,509	$	1,724
Weighted Average Shares outstanding		683,902		682,009		683,389		681,921
Effect of dilutive securities:
Stock options		5,409		4,548		5,388		4,401
Shares used to compute diluted earnings per share		689,311		686,557		688,777		686,322

7.

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands)

September 30, 2005 and 2004

NOTE 2 – EARNINGS PER SHARE (Continued)

Earnings per share:
Basic	$	0.76	$	0.87	$	2.21	$	2.53
Diluted		0.76		0.86		2.19		2.51

NOTE 3 – CAPITAL RATIOS

At the dates indicated, the Company’s capital ratios were:

	September 30, 2005				December 31, 2004
	Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets)	$	22,826	12.1	%	$	21,477	12.3	%
Tier I capital (to risk-weighted assets)		21,541	11.5	%		20,110	11.5	%
Tier I capital (to average assets)		21,541	8.3	%		20,110	7.9	%

At the dates indicated, the Company and the Bank were categorized as well capitalized and management is not aware of any conditions or events since the most recent notification that would change the Company’s or Bank’s categories.

NOTE 4 – COMMITMENTS

The Company entered into a contract agreement to construct the addition to the bank’s main facility located at 367 Roosevelt Road, Glen Ellyn, Illinois on April 15, 2005 in the amount of $2,262,000. As of September 30, 2005, $1,112,283 of the contracted amount has been paid leaving a balance due of $1,149,717.

8.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

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. 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.

Overview

Community Financial Shares, Inc. is the holding company for Community Bank Wheaton/ Glen Ellyn (the Bank). The Company is headquartered in Glen Ellyn, Illinois and operates three offices in its market. One location is in Glen Ellyn and two, including a recently completed facility, are located in Wheaton. The new Wheaton location was opened on March 26, 2005.

The Company is in the construction phase of remodeling and expanding its main headquarters located in Glen Ellyn. It is anticipated that the construction project will be completed by first quarter 2006. The Company continues to explore expansion opportunities within its designated market area as opportunities arise.

The Company’s principal business is conducted by the Bank and consists of a full range of community-based financial services, including commercial and retail banking. 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, mortgage origination fees, securities gains (losses), and other income. Other expenses include salaries and employee benefits, 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 of and rates on 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.

The Company’s net income for the nine months ended September 30, 2005, was $1,509,000, or $2.21 per basic common share, compared to net income of $1,724,000, or $2.53 per basic common share for the nine months ended September 30, 2004.

9.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

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 Company’s consolidated financial statements for the year ended December 31, 2004. 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.

10.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Stock Compensation- Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The effect on net income and earnings per share if expense was measured using the fair value recognition provisions of the Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation, was not material.

In December 2004, the Financial Accounting Standards Board (FASB) issued an amendment to SFAS 123 (SFAS 123R) which eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and generally requires that such transactions be accounted for using a fair value-based method. SFAS 123R will be effective for the Company beginning January 1, 2006. SFAS 123R applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying this Statement, if any, is recognized as of the required effective date.

As of the required effective date, the Company will apply SFAS 123R using either the modified version of prospective application or the modified version of retrospective application. Under the prospective transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS 123 for either recognition or pro forma disclosures. For periods before the required effective date, a company may elect to apply a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by SFAS 123.

The Company is currently evaluating the effect of the recognition and measurement provisions of SFAS 123R but believes the adoption of SFAS 123R will not result in a material impact on the Company’s results of operations or financial condition.

NEW ACCOUNTING ISSUES

The FASB has issued a proposed amendment to SFAS No. 128, Earnings per Share, to clarify guidance for mandatorily convertible instruments, the treasury stock method, contingently issuable shares, and contracts that may be settled in cash or shares. The primary impact on the Company of the proposed Statement is the change to the treasury stock method for year-to-date diluted earnings per share.

Currently SFAS No. 128 requires that the number of incremental shares included in the denominator be determined by computing a year-to-date weighted average of the number of incremental shares included in each quarterly diluted EPS computation. Under this proposed Statement, the number of incremental shares included in year-to-date diluted earnings per share

11.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

would be computed using the average market price of common shares for the year-to-date period, independent of the quarterly computations. This computational change is not expected to have a significant impact on the Company’s diluted earnings per share.

CONSOLIDATED FINANCIAL CONDITION

Total assets at September 30, 2005 were $259.2 million contrasted to $239.4 million at December 31, 2004, an increase of $19.8 million, or 8.3%. This increase in total assets is reflected in the growth of total loans which grew by $14.3 million, or 8.7%, ending at $179.4 million. Interest bearing deposits grew by $1.1 million while federal funds sold have declined to $0. Securities available-for-sale reflected a small decline of $1.3 million over December 31 ending at $39.4 million. This decline was due to maturities and call options being exercised during the period.

Total liabilities at September 30, 2005 were $241.1 million compared to $222.7 million at December 31, 2004, an increase of $18.4 million, or 8.3%. This increase in total liabilities was a result of increases in deposits of $17.6 million, or 8.3%, primarily due to a premium rate certificate of deposit promotion during the second quarter and the opening of the County Farm Road facility in the first quarter. While the pace of deposit growth has moderated over the last quarter, it is anticipated that future growth will be sufficient to meet loan demand.

Total equity was $18.1 million at September 30, 2005 compared to $16.7 million at December 31, 2004. This increase in equity was primarily the result of $1,509,000 of additional retained earnings from net income for the period ended September 30, 2005, less dividends declared. A reduction in unrealized gains on available-for-sale securities of $45,000 and cash dividends of $102,000 had minimal impact on total equity for the period.

CONSOLIDATED RESULTS OF OPERATIONS

Net income for the first three quarters of 2005 was $1,509,000, or $2.21 per basic share, a $215,000, or 12.5%, decrease compared to $1,724,000, or $2.53 per basic share, through the same period in 2004. The primary reason for the decline in net income was the increase in operating expenses associated with the opening of the County Farm facility. Total County Farm expenses through September 30, 2005 totaled approximately $424,000. Total net income for the quarter ended September 30, 2005 was $522,000 down $69,000, or 11.7% from the same period last year. As was the case with the year to date results, this variation can be attributed to the operational expense related to the new facility.

The most recent 3 month period comparisons exhibit a similar pattern of fluctuations to the YTD comparisons and for similar reasons.

The annualized return on average assets was 0.78% as of September 30, 2005 compared to 0.98% through the same period in 2004. The annualized return on average equity decreased to 11.4% in the first three quarters of 2005 from 14.8% as of September 30, 2004.

12.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

NET INTEREST INCOME

Net interest income was $6.9 million for the nine months ended September 30, 2005 and $6.4 million for the same period in 2004. Despite the decline in net income for the period, the $6.9 million in current net interest income represents an increase of $447,000, or 6.9%, over 2004. Total interest income increased to $9.8 million for the nine months ended September 30, 2005 from $8.4 million in 2004. This increase was primarily the result of increased loan demand as well as rising interest rates. Net interest income for the third quarter of $2.4 million represents an increase of $198,000 or 9.1% over the same period in 2004 while interest income rose $690,000 or 24.4% during this time.

Total interest expense was also impacted by the rising rate environment increasing to $2.9 million, up $990,000, or 50.1%, for the nine months ended September 30, 2005, from $1.9 million in 2004. The interest expense associated with the premium rate certificates of deposit offered earlier in the year also impacted the results. This marketing effort brought in approximately $16 million in new deposits at a rate of 4% for an 11 month term. The results for the third quarter show interest expense rising $492,000 or 75.3% from third quarter 2004. Again this change can be attributed to rising rates and the deposit promotion which ran throughout the second quarter of 2005. As previously mentioned the 50.1% increase in interest expense is a general reflection of rising rates which is reflected in the current cost of funds at September 30, 2005 of 1.80% as compared with 1.24% in December 2004. During this same period the average federal funds rate has increased from 2.16% to 3.62%.

Despite the significant increase in interest expense, the Company’s net interest margin was 4.13% for the nine months ended September 30, 2005 and 3.98% a year earlier. The yield on average earning assets increased to 5.94% for the nine months ended September 30, 2005 from 5.15% for the same period ended September 30, 2004, a 79 basis point increase. This increase was partially offset by an increase in the cost of funds to 1.80% from 1.17% paid for the same period ended September 30, 2004, a 63 basis point increase.

The most recent 3 month period comparisons exhibit a similar pattern of fluctuations to the YTD comparisons and for similar reasons.

PROVISION FOR LOAN LOSSES

There was a provision for loan losses of $170,000 through the first nine months of 2005 as compared to no provision in 2004. As of September 30, 2005, the allowance for loan losses totaled $1.3 million, or .71% of total loans, this is down from .82% as of December 31, 2004. Non-accrual loans increased from $21,000 at December 31, 2004 to $89,000 at September 30, 2005. The drop in allowance for loan losses as a percentage of loans is primarily due to charged-off loans totaling $269,000 through the end of the third quarter. In addition, the significant growth in total loans has necessitated additional reserves. It is anticipated that additional provisions will be made at current levels throughout the remainder of 2005 as loans continue to grow.

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

13.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

assessment of current collection risks within the loan portfolio. Along with other financial institutions, management shares a concern for the continued uncertainty surrounding the economy for the remainder of 2005. Even though there have been various signs of emerging strength in the economy, it is still not certain that this strength will be sustainable. Should the economic climate deteriorate, borrowers may experience difficulty, and the level of non-performing loans, charge-offs, and delinquencies could rise and require increases in 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 has concluded that the allowance for loan losses is adequate at September 30, 2005. However, there can be no assurance that the allowance for loan losses will be adequate to cover all losses.

NON-INTEREST INCOME

The Company’s non-interest income totaled $966,000 for the nine months ended September 30, 2005 compared to $924,000 for the same period in 2004, an increase of $42,000 or 4.5%. The increase in non-interest income resulted primarily from income generated by the bank owned life insurance investment made in December 2004. Mortgage origination fees of $173,000 represent a decline of $27,000, or 13.5%, from the same period in 2004. The decline in mortgage origination is mostly a reflection of the changes in the market due to rising interest rates. Service charges on deposit accounts of $387,000 are down $38,000 or 8.9% from last year primarily due to competitive pressure to hold the line on fees.

The most recent 3 month period comparisons exhibit a similar pattern of fluctuations to the YTD comparisons and for similar reasons.

NON-INTEREST EXPENSE

The Company’s non-interest expense was $5.5 and $4.9 million for the nine months ended September 30, 2005 and 2004. Salaries and benefits, the largest component of non interest expense, increased $341,000, or 12.3%, to $3.1 million. The increased expense was a result of additions to staff for the new facility as well as increased costs associated with group health insurance. Increases in expenditures occurred in occupancy and equipment expense, up $100,000, data processing expense, up $50,000, and advertising expense which was up $81,000. Equipment, data processing and advertising expenses continue to increase as a result of the Company’s commitment to staying on top of new technology as well as expenses related to the County Farm facility. Increased professional fees of $53,000 reflect the increasing cost associated with regulatory and compliance matters. The provision for income taxes for the three month period ending September 30, 2005 of $174,000 represents a decline of $105,000, or 37.6%, which has lowered the bank’s effective tax rate from 32% to 25%. A primary factor in this decline has been the non-taxable earnings from the bank owned-life insurance investment which totaled $194,000 through September 30, 2005.

The most recent 3 month period comparisons exhibit a similar pattern of fluctuations to the YTD comparisons and for similar reasons.

14.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of funds are deposits, repurchase agreements, 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. At September 30, 2005, cash and short-term investments totaled $12.0 million. 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.

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.

15.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

SAFE HARBOR STATEMENT

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in 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, a deterioration in the credit quality and value of the Company’s assets.

• The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks.

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

• The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company’s assets) and the policies of the Board of Governors of the Federal Reserve System.

• 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.

16.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

SAFE HARBOR STATEMENT (Continued)

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

• 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.

• Consumer spending and saving habits which may change in a manner that affects the Company’s business adversely.

• 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.

• Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board.

• 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.

17.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

The Company monitors and manages risks associated with changes in interest rates and mismatched asset and deposit maturities. Significant changes in rates can adversely affect net interest income, market value of securities, and the economic value of equity. Based on the Company’s current simulation model, the following schedule indicates the estimated effects of an immediate upward rate shift of 100, 200 and 300 basis points as of September 30, 2005:

	100 Basis Point Rate Shift Up		200 Basis Point Rate Shift Up		300 Basis Point Rate Shift Up
Net interest income	+4.0	%	+8.1	%	+12.2	%
Market value of securities	-3.1	%	-6.0	%	-8.7	%

Based on the Company’s current simulation model, the following schedule indicates the estimated effects of an immediate downward rate shift of 100, 200, 300 basis points as of September 30, 2005:

	100 Basis Point Rate Shift Down		200 Basis Point Rate Shift Down		300 Basis Point Rate Shift Down
Net interest income	-0.7	%	-3.8	%	-7.0	%
Market value of securities	+3.1	%	+6.2	%	+9.6	%

All measures of interest rate risk are within policy guidelines.

18.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4: CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2005. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls.

19.

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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibits
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.

20.

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.

Date: November 14, 2005

COMMUNITY FINANCIAL SHARES, INC.

(Registrant)

/s/ Donald H. Fischer

Donald H. Fischer

President and Chief Executive Officer

(Principal Executive Officer)

/s/ Scott W. Hamer

Scott W. Hamer

Chief Financial Officer

(Principal Financial Officer)

21.

EX-31.1

Exhibit 31.1

I, Donald H. Fischer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Community Financial Shares, Inc.;

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2005	/s/ Donald H. Fischer
	Donald H. Fischer
	Chief Executive Officer

EX-31.2

Exhibit 31.2

I, Scott W. Hamer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Community Financial Shares, Inc.;

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2005	/s/ Scott W. Hamer
	Scott W. Hamer
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Community Financial Shares, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Donald H. Fischer, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

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

/s/ Donald H. Fischer

Donald H. Fischer

Chief Executive Officer

November 14, 2005

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Community Financial Shares, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scott W. Hamer, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

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

/s/ Scott W. Hamer

Scott W. Hamer

Chief Financial Officer

November 14, 2005