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 June 30, 2006

OR

¨ 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)

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)

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.    Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  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 issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at August 1, 2006
Common Stock, no par value per share	687,164 shares

DOCUMENTS INCORPORATED BY REFERENCE

None.

Form 10-Q Quarterly Report

Table of Contents

PART I
Item 1.	Condensed Consolidated Financial Statements	3
Item 1a.	Risk Factors	8
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	21
Item 6.	Exhibits	21
Item 7.	Signatures	22

2.

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

	June 30, 2006			December 31, 2005
	(Unaudited)
ASSETS
Cash and due from banks	$	6,806		$	7,494
Interest bearing deposits		7			300
Cash and cash equivalents		6,813			7,794
Securities available-for-sale		32,444			37,888
Loans, less allowance for loan losses of $1,667 and $1,381		199,578			192,663
Federal Home Loan Bank stock		7,073			10,742
Premises and equipment, net		13,387			11,559
Cash value of life insurance		5,349			5,240
Interest receivable and other assets		2,036			1,643
Total assets	$	266,680		$	267,529
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits	$	231,196		$	229,704
Federal Home Loan Bank advances		10,500			8,500
Federal funds purchased		—			5,000
Subordinated debentures		3,609			3,609
Interest payable and other liabilities		2,115			2,247
Total liabilities		247,420			249,060
Commitments and contingent liabilities
Shareholders’ equity
Common stock - no par value, 900,000 shares authorized; 685,639 and 685,539 issued and outstanding		—			—
Paid-in capital		8,189			8,148
Retained earnings		11,314			10,402
Accumulated other comprehensive loss		(243	)		(81	)
Total shareholders’ equity		19,260			18,469
Total liabilities and shareholders’ equity	$	266,680		$	267,529

See accompanying notes to condensed consolidated financial statements.

3.

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three and Six Months ended June 30, 2006 and 2005

(In thousands, except share and per share data)

(Unaudited)

	Three months Ended June 30,				Six months Ended June 30,
	2006		2005		2006		2005
Interest income
Loans	$	3,643	$	2,694	$	7,049	$	5,174
Securities
Taxable		176		239		378		505
Exempt from federal income tax		154		113		308		218
Federal funds sold		—		43		—		54
Federal Home Loan Bank dividends and other		87		190		154		348
Total interest income		4,060		3,279		7,889		6,299
Interest expense
Deposits		1,346		888		2,581		1,541
Federal Funds Purchased		25		—		47		13
Federal Home Loan Bank advances and other borrowed funds		117		58		226		115
Subordinated debentures		77		64		149		118
Total interest expense		1,565		1,010		3,003		1,787
Net interest income		2,495		2,269		4,886		4,512
Provision for loan losses		135		20		270		20
Net interest income after provision for loan losses		2,360		2,249		4,616		4,492
Non-interest income
Service charges on deposit accounts		121		130		237		251
Mortgage origination fees		48		61		83		97
Securities gains		—		—		—		—
Other non-interest income		132		111		262		272
Total non- interest income		301		302		582		620
Non-interest expense
Salaries and employee benefits		1,056		1,040		2,130		2,045
Net Occupancy and equipment expense		236		213		477		394
Data processing expense		145		170		274		331
Advertising and promotions		87		109		166		169
Professional fees		89		86		177		167
Other operating expenses		280		300		575		529
Total non interest expense		1,893		1,918		3,799		3,635
Income before income taxes		768		633		1,399		1,477
Provision for Income taxes		221		221		390		490
Net income	$	547	$	412	$	1,009	$	987
Earnings per Share
Basic		0.80		0.60		1.47		1.44
Diluted	$	0.79	$	0.60	$	1.46	$	1.43
Average shares outstanding		686,361		683,188		685,973		683,069
Dividends per share	$	0.07	$	0.05	$	0.14	$	0.10

See accompanying notes to condensed consolidated financial statements.

4.

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Six Months ended June 30, 2006 and 2005

(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, 2006	685,539	$	8,148	$	10,402		$	(81	)	$	18,469
Net income	—		—		1,009			—			1,009
Unrealized net loss on securities available-for-sale, net of reclassi- fications and tax effects	—		—		—			(162	)		(162	)
Total comprehensive income											847
Cash dividends	—				(95	)		—			(95	)
Stock options exercised	1,625		41		—			—			41
Balance at June 30, 2006	687,164	$	8,189	$	11,314		$	(243	)	$	19,260
Balance at January 1, 2005	683,069	$	8,103	$	8,507		$	113		$	16,723
Net income	—		—		987			—			987
Unrealized net loss on securities available-for-sale, net of reclassi- fications and tax effects	—		—		—			14			14
Total comprehensive income											1,001
Cash dividends					(68	)					(68	)
Stock options exercised	770		4		—			—			4
Balance at June 30, 2005	683,839	$	8,107	$	9,426		$	127		$	17,660

See accompanying notes to condensed consolidated financial statements.

5.

COMMUNITY FINANCIAL SHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months ended June 30, 2006 and 2005

(In thousands)

(Unaudited)

	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,009		$	987
Adjustments to reconcile net income to net cash from operating activities
Provision for loan losses		270			20
Depreciation and amortization		237			169
Premium amortization on securities, net		67			106
Federal Home Loan Bank stock dividends		—			(280	)
Change in interest receivable and other assets		(399	)		(299	)
Change in interest payable and other liabilities		(133	)		608
Net cash from operating activities		1,051			1,311
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities		5,369			4,146
Purchases of securities available-for-sale		(257	)		(3,262	)
Proceeds from maturities of certificates of deposit		—			495
Proceeds from Federal Home Loan Bank stock redemptions		3,669			—
Net change in loans receivable		(7,185	)		(12,814	)
Property and equipment expenditures		(2,065	)		(1,578	)
Net cash provided by (used in) investing activities		(469	)		(13,013	)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in deposits		1,491			17,306
Change in federal funds purchased		(5,000	)		—
Change in borrowings		2,000			—
Exercise of stock options		42			4
Dividends paid		(96	)		(67	)
Net cash from financing activities		(1,563	)		17,243
Change in cash and cash equivalents		(981	)		5,541
Cash and cash equivalents at beginning of period		7,794			8,509
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	6,813		$	14,050

See accompanying notes to condensed consolidated financial statements.

6.

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands)

June 30, 2006 and 2005

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, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006.

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 2005 filed with the U.S. Securities and Exchange Commission. The condensed consolidated balance sheet of the Company as of December 31, 2005 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 June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Net income (in thousands)	$	547	$	412	$	1,009	$	987
Weighted Average Shares outstanding		686,361		683,188		685,973		683,069
Effect of dilutive securities:
Stock options		2,841		5,453		2,846		5,453
Shares used to compute diluted earnings per share		689,202		688,641		688,819		688,582
Earnings per share:
Basic	$	0.80	$	0.60	$	1.47	$	1.44
Diluted		0.79		0.60		1.46		1.43

7.

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Table dollars in thousands)

June 30, 2006 and 2005

NOTE 3 – CAPITAL RATIOS

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

	June 30, 2006				December 31, 2005
	Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets)	$	24,670	11.8	%	$	23,413	11.7	%
Tier I capital (to risk-weighted assets)		23,003	11.0	%		22,032	11.0	%
Tier I capital (to average assets)		23,003	8.6	%		22,032	7.8	%

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 purchased land for the construction of a new branch facility at the corner of Gary and Geneva Roads in Wheaton, Illinois on April 7, 2006 for $1,424,591. The new facility will be part of a development containing a bank building, a medical office and a strip mall. The Company will be sharing in the common area development costs of the project on a pro rata basis. Total shared costs are estimated to be approximately $450,000. The contract for building construction has not yet been negotiated.

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, 2005.

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 Company is headquartered in Glen Ellyn, Illinois and operates three offices in its market. One location is in Glen Ellyn and two are located in Wheaton. The most recently opened facility in Wheaton was established on March 26, 2005. The Company also recently completed a remodeling and addition to its main facility in Glen Ellyn.

The Company has entered into a contract to purchase land to build a fourth full-service banking facility at the corner of Gary and Geneva Avenues in the Northwest portion of Wheaton, Illinois. Construction of the new facility is not expected to begin until the third quarter of 2006 with a projected opening date in the second or third quarter of 2007. The new facility will help to solidify the Company’s market presence in Wheaton as well as provide access to the Carol Stream and Winfield markets.

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.

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, 2005. 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.

CHANGE IN ACCOUNTING PRINCIPLE

The Company has a stock-based employee compensation plan, which is described in Notes of Financial Statements included in the December 31, 2005 Annual Report to shareholders.

10.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share–Based Payment (SFAS 123(R)). SFAS 123(R) addresses all forms of share–based payment awards, including shares under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS 123(R) requires all share-based payments to be recognized as expense, based upon their fair values, in the financial statements over the vesting period of the awards. The Company has elected the modified prospective application and, as a result, has recorded compensation expense related to vested stock options less estimated forfeitures in 2006. Certain disclosures required by 123(R) have been omitted due to their immaterial nature.

Prior to the adoption of SFAS 123(R), the Company accounted for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost was reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the grant date.

NEW ACCOUNTING ISSUES

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 156. This Statement amends SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities.

SFAS No. 156 requires an entity to initially recognize a servicing asset or servicing liability at fair value each time it undertakes an obligation to service a financial asset by entering into a servicing contract in other specific situations.

In addition, SFAS No. 156 permits an entity to choose either of the following subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities:

• Amortization method—Amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date.

• Fair value measurement method—Measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur.

SFAS No. 156 is effective at the beginning of an entity’s first fiscal year that begins after September 15, 2006 and should be applied prospectively for recognition and initial measurement of servicing assets and servicing liabilities. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements, for any period of that fiscal year.

The Company has not elected early adoption of SFAS No. 156. The Company is currently evaluating the effect of adoption of this Statement on the Company’s financial condition or results of operations.

11.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

CONSOLIDATED FINANCIAL CONDITION

Total assets at June 30, 2006 were $266.7 million contrasted to $267.5 million at December 31, 2005, a decrease of $0.8 million, or 0.3%. While second quarter results show a slight decline in total assets as compared with year-end 2005, total loans at June 30, 2006 were $199.6 million reflecting an increase of $6.9 million, or 3.6%, from December 31, 2005. The growth in loans was partially funded by a reduction in securities available-for-sale which at $32.4 million reflects a decline of $5.4 million, or 16.7%, from December 31. The decrease in securities held came about through scheduled maturities as well as call options exercised during the first two quarters. Cash and due from bank balances of $6.8 million reflects a drop of $0.7 million, or 9.2%, from December 31. This change is primarily due to timing differences associated with the settling of incoming cash letters. Interest bearing deposits fell by $0.3 million during the first two quarters of 2006 due to maturing certificates of deposit. A partial redemption of the company’s holdings of Federal Home Loan Bank stock in June resulted in a decrease of $3.7 million, or 34.2%, of total holdings which now stand at $7.0 million. The purchase of land for the company’s new branch facility contributed to an increase of $1.8 million, or 15.8%, in premises and equipment.

Total liabilities at June 30, 2006 were $247.4 million compared to $249.1 million at December 31, 2005, a decrease of $1.7 million, or 0.7%. While deposits grew by $1.5 million during the first six months of 2006, the rate of increase has been tempered by the continued pressure of competition from other financial institutions as well as more attractive market investments for consumers. The opening of the County Farm facility in March 2005 provided a significant upsurge in new deposits. Having been open for over one year now the rate of growth has moderated as anticipated. With deposit growth lagging behind the growth in loans, additional borrowings from the Federal Home Loan Bank (FHLB) were needed to satisfy the funding need. Total FHLB borrowings as of June 30 were $10.5 million, an increase of $2.0 million, or 23.5%, from December 31. In addition, the proceeds from the FHLB stock redemption and maturing investments provided enough liquidity to reduce outstanding federal fund purchases to $0 from $5.0 million at December 31.

Total shareholders’ equity was $19.3 million at June 30, 2006 compared to $18.5 million at December 31, 2005 an increase of $0.8 million, or 4.3%. The increase in shareholders’ equity was primarily the result of $912,000 of additional retained earnings from net income for the period ended June 30, 2006 less dividends of $96,000 and an increase of $162,000 in accumulated other comprehensive loss, net of tax, caused by a reduction in the valuation of the Company’s investment portfolio.

CONSOLIDATED RESULTS OF OPERATIONS

Net income for the first two quarters of 2006 was $1,009,000, or $1.47 per share, an increase of $22,000, or 2.2%, over the same period in 2005. Second quarter earnings of $547,000, or $0.80 per share, reflect an increase of $135,000, or $0.20 per share over second quarter 2005 results. The increase in net income for the quarter was primarily the result of improved net interest income. This improvement was partially offset by an increase in the provision for loan loss which at $135,000 represents an increase of $115,000 over the same period last year.

NET INTEREST INCOME

Net interest income was $4.9 million for the six months ended June 30, 2006 as compared to $4.5 million for the same period in 2005, an increase of $0.4 million, or 8.3%. Total interest income increased to $7.9

12.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

million for the six months ended June 30, 2006 from $6.3 million in 2005, an increase of $1.6 million, or 25.2%. This increase was primarily the result of increased loan demand as well as rising interest rates. Interest income from loans of $7.0 million in the first two quarters represents an increase of $1.9 million, or 36.2%, over the same period in 2005.

Total interest expense was also impacted by the rising rate environment as well as an increased emphasis on acquiring certificate of deposit accounts increasing to $3.0 million for the six months ended June 30, 2006 up $1.2 million, or 68.0%, from $1.8 million in 2005. The major portion of interest expense is comprised of interest expense on deposits which at $2.6 million represents an increase of $1.1 million, or 67.5%, over the same period last year. In addition to rising rates, interest rate expense has been impacted by increased competition as well as a general migration from lower cost deposits to higher cost certificates of deposits. As the need for additional funding to support loan growth became necessary, the associated expense of Federal Home Loan Bank advances and other borrowed funds increased by $0.1 million, or 96.5%, over the same period last year.

Due to the significant increase in interest expense, the Company’s net interest margin fell to 4.11% for the six months ended June 30, 2006 as compared to 4.14% a year earlier. The yield on average earning assets increased to 6.43% for the six months ended June 30, 2006 from 5.62% for the period ended June 30, 2005, an 81 basis point increase. This increase in yield on earning assets was due to an increase in higher yielding loans. The increase in yield on earning assets was partially offset by an increase in the cost of funds during the quarter which at 2.24% is up 81 basis points from 1.43% for the corresponding period in 2005.

PROVISION FOR LOAN LOSSES

There was a provision for loan losses in the first two quarters of 2006 of $270,000 as compared to a $20,000 provision in 2005. As of June 30, 2006, the allowance for loan losses totaled $1.7 million, or 0.84% of total loans, which is up slightly from 0.71% as of December 31, 2005. The increase in provision is a result of changing economic conditions. While no specific issues have been identified, the recent rapid rise in interest rates combined with a slowing economy could have a negative impact on credit quality. As of the end of the second quarter nonaccrual loans decreased from $200,000 at December 31, 2005 to $109,000 at June 30, 2006 and remain a very small percentage of total loans at 0.05%.

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. Management shares a concern for the possibility of a weakened economy for the remainder of 2006. Even though there have been various signs of continued strength in the economy, it is not certain that this strength will be sustainable. Should the economic climate begin to 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 June 30, 2006. However, there can be no assurance that the allowance for loan losses will be adequate to cover all losses.

13.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

NONINTEREST INCOME

The Company’s noninterest income totaled $582,000 for the six months ended June 30, 2006 compared to $620,000 for the same period in 2005, a decrease of $38,000 or 6.1%. The decrease in non-interest income was primarily due to a general decline in fees from multiple sources including service charges on deposits, debit card income and income from the bank owned life insurance among others. Income generated through mortgage origination fees of $83,000 through June 30, 2006 is down $14,000, or 14.4%, from the same period last year reflecting the slow down in the market due to the rise in interest rates. Service charges on deposit accounts of $237,000 are down $14,000 or 5.6% from last year reflecting the continued competitive pressure to reduce fees to the consumer.

NONINTEREST EXPENSE

The Company’s noninterest expense was $3.8 and $3.6 million for the six months ended June 30, 2006 and 2005. The $164,000 increase in expenses was primarily due to the increased expenses associated with the operations of the County Farm facility which opened late in the first quarter of 2005. Salaries and benefits, the largest component of non interest expense, increased $85,000, or 4.2%, to $2.1 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. The increases in occupancy and equipment expense of $83,000 is partially due to expenses associated with the expansion of the Glen Ellyn facility as well as the timing issue of the County Farm facility opening. Data processing costs ended the second quarter at $274,000 a decrease of $57,000, or 17.2%, over last year due to savings gained from the renegotiation of the Company’s core processing contract.

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 and Bank One.

14.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following table discloses contractual obligations of the Company as of June 30, 2006:

(Dollars in Thousands)	2006		2007		2008		2009		2010		2011 and after		Total
Federal Home Loan Bank
Advances		—	$	4,000	$	2,500	$	2,000		—	$	2,000	$	10,500
Subordinated debentures												3,609		3,609
Data Processing1,2	$	244		504		523		541		561		1,183		3,556
Total	$	244	$	2,504	$	3,023	$	2,541	$	561	$	6,792	$	17,665

(1) Estimated contract amount based on transaction volume. Actual expense was $500,000 and $484,000 in 2005 and 2004 respectively.

(2) Contract expires September 31, 2012.

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.

• 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.

16.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

SAFE HARBOR STATEMENT (Continued)

• 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

QUANITATIVE 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 June 30, 2006:

	100 Basis Point Rate Shift Up		200 Basis Point Rate Shift Up		300 Basis Point Rate Shift Up
Net interest income	+5.1	%	+10.5	%	+15.2	%
Market value of securities	-3.8	%	-7.4	%	-10.6	%

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 June 30, 2006:

	100 Basis Point Rate Shift Down		200 Basis Point Rate Shift Down		300 Basis Point Rate Shift Down
Net interest income	-0.7	%	-3.9	%	-7.9	%
Market value of securities	+4.0	%	+8.2	%	+12.8	%

All measures of interest rate risk are within policy guidelines.

18.

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

QUANITATIVE 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 June 30, 2006. 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 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, 2005.

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

The Annual Meeting of Shareholders was held on May 18, 2006. The Board of Directors nominated in the Company’s April 7, 2006 proxy statement to its shareholders was elected in its entirety. There was no solicitation in opposition to management’s nominees.

The following proposals were adopted [by the margins indicated]:

1. To elect a Board of Directors to hold office until the next annual meeting of shareholders and until their successors are elected and qualified.

	FOR	AGAINST	WITHHELD
William F. Behrmann	549,924	0	0
Penny A. Belke	546,372	0	3,552
H. David Clayton	549,924	0	0
Raymond A. Dieter	546,472	0	3,452
Donald H. Fischer	547,722	0	2,202
Harold W. Gaede	547,650	0	2,274
Robert F. Haeger	549,924	0	0
Mary Beth Moran	549,924	0	0
Joseph S. Morrissey	549,580	0	344
John M. Mulherin	549,924	0	0

20.

2. To ratify selection of BKD LLP as the Company’s independent auditor for fiscal year 2006.

FOR	AGAINST	WITHHELD
546,894	274	2,756

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.

21.

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. Fischer

Donald H. Fischer         Dated: August 14, 2006

President and Chief Executive Officer

(Principal Executive Officer)

/s/ Scott W. Hamer

Scott W. Hamer         Dated: August 14, 2006

Chief Financial Officer

(Principal Financial Officer)

22.