UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 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)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

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

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

The aggregate market value of voting stock held by non-affiliates of the registrant i.e. persons other than directors and executive officers was $27,100,000 based upon the average bid and asked price of such common equity as of the last business day of registrant’s most recently completed second fiscal quarter.

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 March 1, 2007
Common Stock, no par value per share	1,375,278 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held May 23, 2007 are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

		Page
PART I		2
ITEM 1.	BUSINESS	2
ITEM 1A.	RISK FACTORS	8
ITEM 1B.	UNRESOLVED STAFF COMMENTS	11
ITEM 2.	PROPERTIES	11
ITEM 3.	LEGAL PROCEEDINGS	11
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	11
PART II		12
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY , RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	12
ITEM 6.	SELECTED FINANCIAL DATA	13
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	14
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	32
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	33
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	54
ITEM 9A.	CONTROLS AND PROCEDURES	54
ITEM 9B.	OTHER INFORMATION	54
PART III		55
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	55
ITEM 11.	EXECUTIVE COMPENSATION	57
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	57
ITEM 13.	CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE	58
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	58
PART IV		58
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	58
SIGNATURES		59
EXHIBITS

PART I

ITEM 1. - BUSINESS

Community Financial Shares, Inc. (the “Company”) is a registered bank holding company. The operations of the Company and its banking subsidiary consist primarily of those financial activities common to the commercial banking industry and are explained more fully below under the heading “LENDING ACTIVITIES”. Unless the context otherwise requires, the term “Company” as used herein includes the Company and its banking subsidiary on a consolidated basis. All of the operating income of the Company is attributable to its wholly-owned banking subsidiary, Community Bank-Wheaton/Glen Ellyn (the “Bank”).

The Company was incorporated in the State of Delaware in July 2000 as part of an internal reorganization whereby the stockholders of the Bank exchanged all of their Bank stock for all of the issued and outstanding stock of the Company. The reorganization was completed in December 2000. As a result of the reorganization the former stockholders of the Bank acquired 100% of the Company’s stock and the Company acquired (and still holds) 100% of the Bank’s stock. The former Bank stockholders received two shares of the Company’s common stock for each share of Bank common stock exchanged in the reorganization. The Company was formed for the purpose of providing financial flexibility as a holding company for the Bank. At the present time, the Company has no specific plans of engaging in any activities other than operating the Bank as a subsidiary.

The Bank was established as a state chartered federally insured commercial bank on March 1, 1994 and opened for business November 21, 1994 on Roosevelt Road in Glen Ellyn. The Bank opened a second location in downtown Wheaton on November 21, 1998. A third location was opened in northwest Wheaton on March 24, 2005. A fourth full service branch is planned for Wheaton in the fall of 2007. The Bank provides banking services common to the industry, including but not limited to, demand, savings and time deposits, loans, mortgage loan origination for investors, cash management, electronic banking services, Internet banking services including bill payment, Community Investment Center services, and debit cards. The Bank serves a diverse customer base including individuals, businesses, governmental units, and institutional customers located primarily in Wheaton and Glen Ellyn and surrounding communities in DuPage County, Illinois. The Bank has banking offices in Glen Ellyn, and Wheaton, Illinois.

The Company is located in the village of Glen Ellyn in DuPage County in Illinois. Glen Ellyn is a suburb of Chicago and is located approximately 20 miles directly west of the city. The combined population of Wheaton and Glen Ellyn is approximately 82,000 while the county of DuPage currently has approximately 900,000 residents. The median household income within the Bank’s market area is above $65,000 which is higher than the area average. The economic base of both communities is comprised primarily of professionals and service related industry. There are no dominant employers in the area however, the DuPage County offices as well as the College of DuPage, both of which are nearby, are likely the largest. The local economy remains strong and this strength is reflected in the local real estate values which have been rising steadily over the past several years.

COMPETITION

Active competition exists in all principal areas where the Bank operates, not only with other commercial banks, finance companies and mortgage bankers, but also with savings and loan associations, credit unions, and other financial service companies serving the Company’s market area. The principal methods of competition between the Company and its competitors are price and service. Price competition, primarily in the form of interest rate competition, is a standard practice within the Company’s market place as well as the financial services industry. Service, expansive banking hours, and product quality are also significant factors in competing and allow for differentiation from competitors.

Deposits in the Bank are well balanced, with a large customer base and no dominant segment of accounts. The Bank’s loan portfolio is also characterized by a large customer base, including loans to commercial, not-for-profit and consumer customers, with no dominant relationships. There is no readily available source of information that delineates the market for financial services offered by non-bank competitors in the Company’s market.

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REGULATION AND SUPERVISION

The Company and its bank subsidiary are subject to an extensive system of banking laws and regulations that are intended primarily for the protection of the customers and depositors of the Company’s bank subsidiary rather than holders of the Company’s securities. These laws and regulations govern such areas as permissible activities, reserves, loans and investments, and rates of interest that can be charged on loans. Described below are material elements of selected laws and regulations applicable to the Company and its subsidiary. The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described. Changes in applicable laws or regulation, and in their application by regulatory agencies, cannot be predicted, but they may have a material effect on the business and results of the Company and its subsidiary.

The Company is regulated as a bank holding company under the Bank Holding Company Act of 1956, as amended by the 1999 financial modernization legislation known as the Gramm-Leach-Bliley Act (the “BHC Act”). As such, it is subject to the supervision of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks, performing certain servicing activities for subsidiaries, and as a result of the Gramm-Leach-Bliley Act amendments to the BHC Act, engaging in any activity, or acquiring and retaining the shares of any company engaged in any activity, that is either (1) financial in nature or incidental to such financial activity (as determined by the Federal Reserve Board in consultation with the Office of the Comptroller of the Currency (the “OCC”)) or (2) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the Federal Reserve Board). Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments in commercial and financial companies. They also include activities that the Federal Reserve Board had determined, by order of regulation in effect prior to the enactment of the BHC Act, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

Further, under the BHC Act, the Company is required to file annual reports and such additional information as the Federal Reserve Board may require and is subject to examination by the Federal Reserve Board. The Federal Reserve Board has jurisdiction to regulate virtually all aspects of the Company’s business. See “The Company’s Banking Subsidiary” below for discussion of regulators of the Bank.

The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board before merging with or consolidating into another bank holding company, acquiring substantially all the assets of any bank or acquiring directly or indirectly any ownership or control of more than 5% of the voting shares of any bank.

The BHC Act also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks, or furnishing services to banks and their subsidiaries. The Company, however, may engage in certain businesses determined by the Federal Reserve Board to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. See “Financial Modernization Legislation” below for a discussion of expanded activities permissible to bank holding companies that become financial holding companies.

Deposits of the Bank are insured by the Federal Deposit Insurance Corporation (the “FDIC”) and are subject to the provisions of the Federal Deposit Insurance Act. Under the FDIC’s risk-based insurance assessment system, each insured bank is placed in one of nine risk categories based on its level of capital and other relevant information. Each insured bank’s insurance assessment rate is then determined by the risk category in which it has been classified by the FDIC.

Banking regulations restrict the amount of dividends that a bank may pay to its stockholders. Thus, the Company’s ability to pay dividends to its shareholders will be limited by statutory and regulatory restrictions. Illinois’ banking laws restrict the payment of cash dividends by a state bank by providing, subject to certain exceptions, that dividends may be paid only out of net profits then on hand after deducting its losses and bad debts. Federal law generally prohibits a bank from making any capital distribution (including payment of a dividend) or paying any management fee to its parent company if the depository institution would thereafter be undercapitalized.

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The FDIC may prevent an insured bank from paying dividends if the Bank is in default of payment of any assessment due to the FDIC. In addition, the FDIC may prohibit the payment of dividends by a bank, if such payment is determined, by reason of the financial conditions of the bank, to be an unsafe and unsound banking practice.

For additional information on the lender covenants that potentially restrict the declaration of dividends, see the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Dividends”.

THE COMPANY’S BANKING SUBSIDIARY

The Bank is regulated by the FDIC, as its primary federal regulator. The Bank is subject to the provisions of the Federal Deposit Insurance Act and examination by the FDIC. As an Illinois state–chartered bank, the Bank is also subject to examination by the Illinois Department of Financial and Professional Regulation. The examinations by the various regulatory authorities are designed for the protection of bank depositors and the solvency of the FDIC Bank Insurance Fund.

The federal and state laws and regulations generally applicable to the Bank regulate, among other things, the scope of business, its investments, reserves against deposits, the nature and amount of and collateral for loans, and the location of banking offices and types of activities which may be performed at such offices.

Subsidiaries of a bank holding company are subject to certain restrictions under the Federal Reserve Act and the Federal Deposit Insurance Act on loans and extensions of credit to the bank holding company or to its other subsidiaries, investments in the stock or other securities of the bank holding company or its other subsidiaries, or advances to any borrower collateralized by such stock or other securities.

CAPITAL REQUIREMENTS

The Federal Reserve Board and the FDIC have established guidelines for risk-based capital of bank holding companies and banks. These guidelines establish a risk adjusted ratio relating total capital to risk-weighted assets and off-balance sheet exposures. These capital guidelines primarily define the components of capital, categorize assets into different risk classes, and include certain off-balance sheet items in the calculation of capital requirements. Generally, Tier 1 capital consists of shareholders’ equity less intangible assets and unrealized gain or loss on securities available for sale, and Tier 2 capital consists of Tier 1 capital plus qualifying loan loss reserves.

The FDIC Improvement Act of 1991 established a system of prompt corrective action to resolve the problems of undercapitalized depository institutions. Under this system, federal banking regulators have established five capital categories, well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The federal banking agencies have also specified by regulation the relevant capital levels for each of the categories. Each depository institution is placed within one of these categories and is subject to differential regulation corresponding to the capital category within which it falls.

Federal banking regulators are required to take specified mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. An institution in any of the undercapitalized categories is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized institution is also generally prohibited from paying any dividends, increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval.

Failure to meet capital guidelines could subject a bank or a bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. In addition, such a bank would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless the bank could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time.

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The capital ratios of the Company and the Bank exceed the regulatory guidelines for well-capitalized institutions, and in conjunction with regulatory ratings, have qualified the bank for the lowest FDIC insurance rate available to insured financial institutions.

MONETARY POLICY AND ECONOMIC CONDITIONS

The earnings of commercial banks and bank holding companies are affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities. In particular, the Federal Reserve Board influences conditions in the money and capital markets, which affect interest rates and growth in bank credit and deposits. Federal Reserve Board monetary policies have had a significant effect on the operating results of commercial banks in the past and this is expected to continue in the future. The general effect, if any, of such policies on future business and earnings of the Company and its Bank cannot be predicted.

SECURITIES AND EXCHANGE COMMISSION REGULATIONS

Sarbanes Oxley Act. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the “S-O Act”) implementing legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of the Public Company Accounting Oversight Board which is charged with the enforcement of auditing, quality control and independence standards, and is funded by fees from all publicly traded companies, the law restricts provision of both auditing and consulting services by accounting firms. To ensure auditor independence, any permissible non-audit services being provided to an audit client require pre-approval by a company’s audit committee members. In addition, the audit partners must be rotated. Chief executive officers and chief financial officers, or their equivalent, are required to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission (“SEC”), subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the S-O Act, counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself. Longer prison terms and increased penalties will be applied to corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods. In addition, loans to company directors and executives are restricted, although loans made by an insured depository institution to the directors and executive officers of its publicly traded parent bank holding company are exempt from the prohibition. It should be noted that this exception covers only loans made by banks and other insured depository institutions and does not cover loans made by a public bank holding company (or its nonblank subsidiaries) to the directors and executive officers of the public bank holding company.

The S-O Act also increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with a company’s “registered public accounting firm” (“RPAF”). Audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer. In addition, companies must disclose whether at least one member of the committee is an “audit committee financial expert” and if not, why not. Under the S-O Act, a RPAF is prohibited from performing statutorily mandated audit services for a company if such company’s chief executive officer, chief financial officer, comptroller, general accounting officer, or any person serving in equivalent positions has been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. The S-O Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the audit of a company’s financial statements for the purpose of rendering the financial statement’s materially misleading.

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CONSUMER PROTECTION LAWS

The Company’s business includes making a variety of types of loans to individuals. In making these loans, we are subject to State usury and regulatory laws and to various federal statutes, including the privacy of consumer information provisions of the Graham-Leach-Bliley Act and regulations promulgated thereunder, the Equal Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Real Estate Settlement Procedures Act, and the Home Mortgage Disclosure Act, and the regulations promulgated thereunder, which prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage servicing activities of the Company, including the maintenance and operation of escrow accounts and the transfer of mortgage loan servicing. In receiving deposits, the Company is subject to extensive regulation under state and federal law and regulations, including the Truth in Savings Act, the Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds Transfer Act, the USA Patriot Act of 2001, and the Federal Deposit Insurance Act. Violation of these laws could result in the imposition of significant damages and fines upon the Company and its directors and officers.

USA PATRIOT ACT

As part of the USA Patriot Act of 2001, signed into law on October 26, 2001, Congress adopted the International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001 (the “Act”). The Act authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to financial institutions such as banks, bank holding companies, broker-dealers and insurance companies. Among its other provisions, the Act requires financial institutions: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering in United States private banking accounts and correspondent accounts maintained for non-United States persons or their representatives; and (iii) to avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign shell bank that does not have a physical presence in any country. In addition, the Act expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours.

Treasury regulations implementing the due diligence requirements were issued in 2002. These regulations require minimum standards to verify customer identity, encourage cooperation among financial institutions, federal banking agencies, and law enforcement authorities regarding possible money laundering or terrorist activities, prohibited the anonymous use of “concentration accounts,” and require all covered financial institutions to have in place an anti-money laundering compliance program

The Act also amended the Bank Holding Company Act and the Bank Merger Act to require federal banking agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing an application under these Acts.

EMPLOYEES

As of December 31, 2006, the Company and its subsidiaries had a total of 70 full-time equivalent employees. This compares to 65 full-time equivalents as of December 31, 2005. None of these employees are subject to a collective bargaining agreement.

LENDING ACTIVITIES

General

The Bank’s loan portfolio is comprised primarily of real-estate mortgage loans, which includes loans secured by residential, multi-family and nonresidential properties. The Bank originates loans on real estate generally located in the Bank’s primary lending area in central DuPage County, Illinois. In addition to portfolio mortgages, the Bank routinely originates and sells residential mortgage loans and servicing rights for other investors in the secondary market. The Bank services all of its portfolio loans and the Bank has not purchased mortgage servicing rights.

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Residential Lending - One-to-Four Family

The Bank, in 1999, established a dedicated secondary mortgage department to assist local residents in obtaining mortgages with reasonable terms, conditions, and rates. The Bank offers various fixed and adjustable rate one-to-four family residential loan products the majority of which are sold, along with servicing rights, to a variety of investors in the secondary market. Interest rates are essentially dictated by the Bank’s investors and origination fees on secondary mortgage loans are priced to provide a reasonable profit margin and are dictated to a degree by regional competition.

The Bank, for secondary market residential loans, generally makes one-to-four family residential mortgage loans in amounts not to exceed 80% of the appraised value or sale price, whichever is less, of the property securing the loan, or up to 95% if the amount in excess of 80% of the appraised value is secured by private mortgage insurance, or 80% to 85% with an increased interest rate. The Bank usually receives a service release fee of 1.0% to 1.5 % on one-to-four family residential mortgage loans.

In addition to loans originated for the secondary market, the Bank has portfolio loans secured by one-to-four family residential real estate that total approximately $21.5 million or 10.7% of the Bank’s total loan portfolio as of December 31, 2006.

Commercial Real Estate Lending

Loans secured by commercial real estate totaled approximately $85.6 million, or 42.5% of the Bank’s total loan portfolio, at December 31, 2006. Commercial real estate loans are generally originated in amounts up to 80% of the appraised value of the property. Such appraised value is generally determined by independent appraisers previously approved by the Board of Directors of the Bank.

The Bank’s commercial real estate loans are permanent portfolio loans secured by improved property such as office buildings, retail stores, warehouses, churches, and other non-residential buildings. Of the commercial real estate loans outstanding at December 31, 2006, most are located within 10 miles of the Bank’s offices in Wheaton and Glen Ellyn and were made to local customers of the Bank. In addition, borrowers generally must personally guarantee loans secured by commercial real estate. Commercial real estate loans generally have a 10 to 25 year amortization period and are made at rates based upon competitive local market rates, specific loan risk, and structure usage and type. Such loans generally have a five-year maturity.

Commercial real estate loans are both adjustable and fixed, with fixed rates generally limited to no more than five years. Loans secured by commercial real estate properties are generally larger and involve a greater degree of risk than residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on successful operation or management of the properties, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by lending to established customers and generally restricting such loans to its primary market area.

Construction Lending

The Bank is actively engaged in construction lending. Such activity is generally limited to individual new residential home construction, residential home additions, and new commercial buildings. Currently, the majority of the Bank’s new construction activity is in new commercial construction.

At December 31, 2006, the Bank had $27.9 million in construction loans outstanding or 13.9% of the loan portfolio of the Bank. The Bank presently charges both fixed and variable interest rates on construction and end loans. Loans, with proper credit, may be made for up to 80% of the anticipated value of the property upon completion. Funds are usually disbursed based upon percentage of completion generally verified by an on-site inspection by bank personnel and generally through a local title company construction escrow account.

Consumer Lending

As community-oriented lenders, the Bank offers consumer loans for any worthwhile purpose. Although the Bank offers signature unsecured loans, consumer loans are generally secured by automobiles, boats, mobile homes, stocks, bonds, and other personal property. Consumer loans totaled $1.9 million or 0.9% of the total loan portfolio of the Bank at December 31, 2006. Consumer loans generally have higher yields than residential mortgage loans since they involve a higher credit risk and smaller volumes with which to cover basic costs.

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Home Equity Lending

Home equity loans are generally made not to exceed 80% of the first and second combined mortgage loan to value. These loans, for the most part are revolving credit lines with minimum payment structure of interest only and a five-year term. The interest rate on these lines of credit adjusts at a rate based on the prime rate of interest. Additionally, the Bank offers five-year amortizing fixed rate home equity balloon loans for those who desire to limit interest rate risk. At December 31, 2006, the outstanding home equity loan balance was $38.1 million or 18.9% of the total loan portfolio of the Bank.

Commercial Lending

The Bank actively engages in general commercial lending within its market area. These loans are primarily revolving working capital lines, inventory loans, and equipment loans. The commercial loans are generally based on serving the needs of small businesses in the Bank’s market area while limiting the Bank’s business risks to reasonable bank lending standards. Commercial loans are made with both fixed and adjustable rates and are generally secured by equipment, accounts receivable, inventory, and other assets of the business. Personal guarantees generally support these credit facilities. The Bank also provides commercial and standby letters of credit to assist small businesses in their financing of special purchasing or bonding needs. Standby letters of credit outstanding at year end totaled $3.6 million. Commercial loans totaled approximately $26.3 million or 13.1% of the Bank’s total loan portfolio at December 31, 2006.

ITEM 1A – RISK FACTORS

An investment in the registrant’s common stock involves a number of risks. We urge you to read all of the information contained in this annual report on Form 10-K. In addition, we urge you to consider carefully the following factors before you invest in shares of the registrant’s common stock.

We may not be able to maintain and manage our growth, which may adversely affect our results of operations and financial conditions and the value of our common stock.

Our strategy has been to increase the size of our company by opening new offices and by pursuing business development opportunities. We have grown rapidly since we commenced operations. We can provide no assurance that we will continue to be successful in increasing the volume of loans and deposits at acceptable risk levels and upon acceptable terms while managing the costs and implementation risks associated with our growth strategy. There can be no assurance that our further expansion will be profitable or that we will continue to be able to sustain our historical rate of growth, either through internal growth or through successful expansion of our markets, or that we will be able to maintain capital sufficient to support our continued growth. If we grow too quickly, however, and are not able to control costs and maintain asset quality, rapid growth also could adversely affect our financial performance.

Changes in interest rates affect our interest margins, which can adversely affect our profitability.

We may not be able to effectively manage changes in interest rates that affect what we charge as interest on our earning assets and the expense we must pay on interest-bearing liabilities, which may significantly reduce our earnings. Since rates charged on our loans often tend to react to market conditions faster than do rates paid on our deposit accounts, these rate cuts have had a negative impact on our earnings until we could make appropriate adjustments in our deposit rates. Fluctuations in interest rates are not predictable or controllable and, therefore, there can be no assurances of our ability to continue to maintain a consistent positive spread between the interest earned on our earning assets and the interest paid on our interest-bearing liabilities.

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We need to generate liquidity to fund our lending activities.

We must have adequate cash or borrowing capacity to meet our customers’ needs for loans and demand for their deposits. We generate liquidity primarily through new deposits. We also have access to secured borrowings, FHLB borrowings and various other lines of credit. The inability to increase deposits or to access other sources of funds would have a negative effect on our ability to meet customer needs, could slow loan growth and could adversely affect our results of operations.

Our profitability depends significantly on economic conditions in our market.

Our success depends to a large degree on the general economic conditions in our market areas. The local economic conditions in these areas have a significant impact on the amount of loans that we make to our borrowers, the ability of our borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control would impact these local economic conditions and could negatively affect our financial condition and performance.

If we lost key employees with significant business contacts in our market area, our business may suffer.

Our success is largely dependent on the personal contacts of our officers and employees in our market area. If we lose key employees temporarily or permanently, our business could be hurt. We could be particularly hurt if our key employees went to work for our competitors. Our future success depends on the continued contributions of our existing senior management personnel.

If we experience greater loan losses than anticipated, it will have an adverse effect on our net income.

While the risk of nonpayment of loans is inherent in banking, if we experience greater nonpayment levels than we anticipate, our earnings and overall financial condition, as well as the value of our common stock, could be adversely affected.

We cannot assure you that our monitoring procedures and policies will reduce certain lending risks or that our allowance for loan losses will be adequate to cover actual losses. In addition, as a result of the rapid growth in our loan portfolio, loan losses may be greater than management’s estimates. Loan losses can cause insolvency and failure of a financial institution and, in such an event, our shareholders could lose their entire investment. In addition, future provisions for loan losses could materially and adversely affect our profitability. Any loan losses will reduce the loan loss allowance. A reduction in the loan loss allowance will be restored by an increase in our provision for loan losses. This would reduce our earnings which could have an adverse effect on our stock price.

In order to be profitable, we must compete successfully with other financial institutions which have greater resources than we do.

The banking business in the Chicagoland area, in general, is extremely competitive. Several of our competitors are larger and have greater resources than we do and have been in existence a longer period of time. We must overcome historical bank-customer relationships to attract customers away from our competition. We compete with the following types of institutions:

- other commercial banks	- securities brokerage firms
- savings banks	- mortgage brokers
- thrifts	- insurance companies
- credit unions	- mutual funds
- consumer finance companies	- trust companies

Some of our competitors are not regulated as extensively as we are and, therefore, may have greater flexibility in competing for business. Some of these competitors are subject to similar regulation but have the advantage of larger established customer bases, higher lending limits, extensive branch networks, numerous automated teller machines, greater advertising-marketing budgets or other factors.

9

Our legal lending limit is determined by law. The size of the loans which we offer to our customers may be less than the size of the loans than larger competitors are able to offer. This limit may affect to some degree our success in establishing relationships with the larger businesses in our market.

New or acquired branch facilities and other facilities may not be profitable.

We may not be able to correctly identify profitable locations for new branches and the costs to start up new branch facilities or to acquire existing branches, and the additional costs to operate these facilities, may increase our non-interest expense and decrease earnings in the short term. It may be difficult to adequately and profitably manage our growth through the establishment of these branches. In addition, we can provide no assurance that these branch sites will successfully attract enough deposits to offset the expenses of operating these branch sites. Any new branches will be subject to regulatory approval, and there can be no assurance that we will succeed in securing such approvals.

Government regulations may prevent or impair our ability to pay dividends, engage in additional acquisitions or operate in other ways.

Current and future legislation and the policies established by federal and state regulatory authorities will affect our operations. We are subject to supervision and periodic examination by the Federal Deposit Insurance Company as well as the Illinois Department of Financial and Professional Regulation (the “IDFPR”). Our principal subsidiary, Community Bank Wheaton/ Glen Ellyn, as a state chartered commercial bank, also receives regulatory scrutiny from the FDIC and the IDFPR. Banking regulations are designed primarily for the protection of depositors rather than stockholders, and they may limit our growth and the return to you as an investor by restricting its activities, such as:

• the payment of dividends to stockholders;

• possible transactions with or acquisitions by other institutions;

• desired investments;

• loans and interest rates;

• interest rates paid on deposits’

• the possible expansion of branch offices; and

• the ability to provide securities or trust services.

We are registered with the Federal Reserve Board as a bank holding company. We cannot predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on our business. The cost of compliance with regulatory requirements may adversely affect our ability to operate profitably.

Our stock trading volume has been low compared to larger bank holding companies.

The trading volume in our common stock on the Over-the-Counter Electronic Bulletin Board (the “OTCBB”) has been comparable to other similarly sized bank holding companies since trading began in September 2005. Nevertheless, this trading volume does not compare with more seasoned companies listed on other exchanges. Thus, the market in our common stock is limited in scope relative to some other companies. In addition, we can provide no assurance that a more active and liquid trading market for our stock will develop in the future.

Our securities are not FDIC insured.

Our common stock is not a savings or deposit account or other obligation of the Bank, and is not insured by the Federal Deposit Insurance Corporation or any other governmental agency and is subject to investment risk, including the possible loss of principal.

We rely on technology to conduct many transactions with our customers.

Our internal and outsourced technology, including communications and information systems, support our business operations. A significant disruption in those systems could adversely affect our ability to deliver products and services to our customers. A material security breach of our information systems or date could harm our reputation, cause a decrease in the number of customers, and adversely affect our financial condition or results of operations.

10

ITEM 1B. - UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. - PROPERTIES

The following table sets forth information related to the Company’s properties utilized in the Company’s business. These properties are suitable and adequate for the Company’s business needs.

Entity	Description	Address	City/State	Approximate Square Feet	Owned/ Leased
Community Bank-Wheaton/Glen Ellyn	Main office	357 Roosevelt Road	Glen Ellyn, IL	10,000	Owned
Community Bank-Wheaton/Glen Ellyn	Wheaton office	100 N. Wheaton Ave.	Wheaton, IL	12,500	Owned
Community Bank-Wheaton/Glen Ellyn	County Farm office	370 S. County Farm Rd.	Wheaton, IL	7,000	Owned
Community Bank-Wheaton/Glen Ellyn	North Wheaton office	1901 Gary Ave.	Wheaton, IL	Under Construction	Owned

In 2001, the Company purchased a commercial office building in Glen Ellyn, Illinois from a partnership comprised of all of the directors of the Company. In 2005, the commercial building on this site was demolished and the main office expanded, the expansion was completed in early 2006. None of the properties owned by the Company are subject to mortgages or liens. Information regarding the Bank’s investments in real estate mortgages can be found above under “Business Lending Activities”. Land was purchased in 2006 for a fourth full-service branch location at 1901 Gary Avenue, Wheaton, Illinois. Construction began in the first quarter with completion expected in the fall of 2007.

ITEM 3. - LEGAL PROCEEDINGS

Neither the Company nor the Bank is a party to, and none of their property is subject to, any material legal proceedings at this time.

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

At a Special Meeting of Stockholders on November 29, 2006, the stockholders of the Company voted on a proposal to amend the Certificate of Incorporation of the Company so as to affect an increase in the number of authorized shares of common stock from 900,000 to 5,000,000.

VOTING RESULTS:	FOR	AGAINST	ABSTAIN
	550,293	14,310	814

11

PART II

ITEM 5. - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

As of March 1, 2007, the Company’s stock was held by approximately 525 shareholders. The Company’s stock is quoted on the Over-the-Counter Electronic Bulletin Board (“OTCBB”) under the symbol: “CFIS.PK”. The following table sets forth high and low sales information reported on the OTCBB for the Common Stock for each quarter since the Common Stock began trading on September 22, 2005. These quotes reflect inter-dealer prices without mark-ups, mark-downs or commissions and may not necessarily reflect actual transactions.

There were no purchases by the Company of its common stock during 2006 or 2005. While there was no established market for the Company’s securities prior to September 22, 2005, there were a limited number of trades which occurred in prior quarters. The share prices of these trades are reflected in the data below. The share prices and dividends paid shown below have been adjusted for a two-for-one stock split, which was effective December 27, 2006.

COMMON STOCK PRICE AND DIVIDEND HISTORY

	High		Low		Dividend (per share)
2006
First Quarter	$	23.50	$	22.50	$	0.035
Second Quarter		23.75		22.75		0.035
Third Quarter		23.50		23.00		0.035
Fourth Quarter		24.13		23.00		0.060
2005
First Quarter	$	22.50	$	21.50	$	0.025
Second Quarter		22.50		17.50		0.025
Third Quarter		24.00		22.50		0.025
Fourth Quarter		24.50		22.13		0.025

It has been a policy of the Company to pay only small to moderate dividends so as to retain earnings to support growth. Dividends for 2006 were approximately $227,000 or 10.4% of after tax earnings. In 2005, dividends of $136,000 represented 6.7% of after tax earnings. Dividends are paid quarterly.

12

ITEM 6. - SELECTED FINACIAL DATA

The following is a summary of certain consolidated financial information relating to the Company as of December 31 of each year shown. The summary has been derived in part from, and should be read in conjunction with, the Company’s Consolidated Financial Statements and the Notes thereto included elsewhere in this report. Per share and book value data along with weighted average common shares outstanding have been adjusted to reflect the two-for-one stock split effective December 27, 2006.

(Dollar amounts in thousands, except per share data)

	2006		2005		2004		2003		2002
Statement of Income
Interest income	$	16,147	$	13,491	$	11,500	$	10,850	$	11,011
Interest expense		6,414		4,169		2,648		3,107		3,558
Net interest income		9,733		9,322		8,852		7,743		7,453
Provision for loan losses		165		265		50		30		1,544
Noninterest income		1,290		1,319		1,191		1,349		1,266
Noninterest expense		7,754		7,458		6,629		6,122		5,335
Income before income taxes		3,104		2,918		3,364		2,940		1,840
Income tax expense		918		887		1,073		995		632
Net income	$	2,186	$	2,031	$	2,291	$	1,945	$	1,208
Balance sheet – year-end balances
Total assets	$	271,741	$	267,529	$	239,395	$	234,547	$	203,806
Securities available for sale		34,924		37,888		40,710		54,592		25,604
Loans, net		199,820		192,663		165,056		149,037		143,307
Deposits		234,725		229,704		211,373		212,778		184,314
Subordinated debentures		3,609		3,609		3,609		3,609		3,609
Stockholders’ equity		20,601		18,469		16,723		14,755		13,036
Balance sheet - average balances
Total assets	$	268,015	$	253,547	$	234,974	$	222,063	$	190,536
Securities		33,469		39,089		43,931		41,560		22,000
Loans, net		197,410		174,521		158,568		140,452		142,071
Deposits		232,089		223,437		210,862		201,409		171,864
Federal Home Loan Bank advances		10,396		6,110		2,829		2,000		2,303
Subordinated debentures		3,609		3,609		3,609		3,609		1,812
Stockholders’ equity		19,675		17,720		15,955		14,124		12,629
Per share data
Basic earnings per share	$	1.59	$	1.49	$	1.68	$	1.43	$	0.89
Diluted earnings per share		1.59		1.48		1.67		1.42		0.88
Cash dividends per share		0.165		0.10		0.095		0.07		0.06
Book value per share at year end		14.96		13.52		12.24		10.81		9.58
Cash dividends and average shares outstanding
Cash dividends	$	227	$	136	$	130	$	95	$	82
Weighted average common shares outstanding		1,375,228		1,367,114		1,364,004		1,365,222		1,361,788

13

Selected financial ratios
Average loans to average deposits	85.06	%	78.32	%	74.42	%	69.73	%	82.67	%
Allowance for loan losses to total loans	0.77	%	0.71	%	0.82	%	1.11	%	1.21	%
Nonperforming loans to total loans	0.35	%	0.45	%	0.72	%	1.75	%	2.04	%
Average equity to average assets	7.34	%	6.87	%	6.72	%	6.08	%	6.63	%
Return on average assets	0.82	%	0.78	%	0.98	%	0.85	%	.63	%
Return on average equity	11.11	%	11.42	%	14.51	%	14.13	%	9.57	%
Net interest margin (1)	4.00	%	4.14	%	4.02	%	3.75	%	4.12	%
Dividend payout ratio (2)	10.38	%	6.73	%	5.67	%	4.88	%	6.79	%

(1) Net interest income divided by average interest-earning assets

(2) Cash dividends per share divided by net income per share.

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

(All table dollar amounts in Item 7 are in thousands, except share data)

The following presents management’s discussion and analysis of the results of operations and financial condition of Community Financial Shares, Inc. as of the dates and for the periods indicated. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes thereto and other financial data appearing elsewhere in this document.

The statements contained in this management’s discussion and analysis that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. 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 subsidiary bank include, but are not limited to, changes in: interest rates; general economic conditions; legislation; regulations; monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the Federal Reserve Board; the quality or composition of the loan or securities portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Company’s market area; and accounting principles, policies, and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

OVERVIEW

The Company is a bank holding company. Through its wholly-owned subsidiary bank, Community Bank–Wheaton/Glen Ellyn, the Company provides financial and other banking services to customers located primarily in Wheaton and Glen Ellyn and surrounding communities in DuPage County, Illinois. The Company was formed in July 2000 for the purpose of providing financial flexibility as a holding company for the Bank.

The Company’s principal source of revenue is loans made within the Company’s geographic market area. The Company has experienced consistent loan growth, balancing increased competition from other lending sources with the Company’s desire to remain “well capitalized” under bank regulatory guidelines.

The Bank was established as a state-chartered federally insured commercial bank on March 1, 1994 and opened for business November 21, 1994 on Roosevelt Road in Glen Ellyn. The Bank opened a second location in downtown Wheaton on November 21, 1998. A third location was opened on County Farm Road in Wheaton on March 24, 2005. A fourth full-service branch located in Wheaton is under construction with completion expected in the fall of 2007.

14

FINANCIAL CONDITION

AVERAGE ASSETS AND LIABILITIES

Since its opening, the Bank has experienced considerable growth in deposits, earning assets, and total assets. Over the period from 2001 through 2006, total assets have grown by 59.3% or an annual average of 11.8%. After experiencing an average rate of growth in 2005 of 7.9%, average assets grew at a slower annual average of 5.7% in 2006 which is below the historical average. An improvement in this growth rate is anticipated for 2007. Part of the growth will be attributed to the opening of the new North Wheaton location. This facility is expected to open in the fall of 2007. Economic and demographic factors continued to be generally positive in the Company’s market area in 2006, but the local competition continues to increase at a high rate making growth increasingly harder to achieve. Once again, during 2006, competitors opened several new banking facilities within the Company’s market area. Along with the asset growth, the Company experienced a substantial increase in loan demand reflected in a 13.1% increase over 2005. This marks the second consecutive year of strong growth in new loans. Average annual loan growth since 2001 of 12.4% has proved to be beneficial to the Company’s financial performance. The average annual growth in deposits of 10.9% historically has provided a ready means by which to fund the growth in loans. The rate of growth of deposits has slowed, however, and the bank had to rely on other borrowings to fund part of the loan growth in 2006.

Total average assets for the year ending December 31, 2006 were $268.4 million. Average earning assets in 2006 were $243.5 million, an increase of $11.2 million, or 4.8%, over 2005. The average earning asset growth in 2006 is primarily due to an increase of $23.2 million in the loan portfolio, a 13.2% increase over 2005. This significant loan growth was partially funded by an increase in average deposits which grew by $6.3 million since 2005. During the same period investments have fallen by $5.6 million as securities are allowed to run-off as they mature. The proceeds from the maturing securities have been reinvested in higher yielding loans.

While average deposits grew by $6.3 million during 2006, the underlying changes in specific deposit categories behaved differently. Average demand and NOW deposits increased by $2.0 million and savings balances fell by $4.1 million. More significant variations were seen in money market balances, which fell by $15.3 million and certificates of deposit, which increased by $23.7 million. The decline in money market deposits was not totally unexpected as these types of deposits typically grow as rates fall and decline as rising rates provide more attractive investment opportunities. Some of this disintermediation effect is evident by the large increase in certificates of deposit. The net effect has been that the growth in deposits has been centered in higher yielding deposits which have a negative impact on the Company’s interest margin. However, overall the Company has been able to maintain a relatively low cost of funding as compared to its peers despite the change in deposit mix that occurred during 2006.

Average interest-bearing liabilities for 2006 were $216.7 million, an increase of 5.4% over 2005. Advances from the FHLB have begun to play a more significant role in funding, increasing to $10.4 million from $6.1 million over the same period. The increase in FHLB borrowing has become necessary due to the funding need created by the rapid growth in loans. The $3.6 million in subordinated debentures issued in 2002 remain on the books as an alternative funding source. The issuance of subordinated debentures is described more fully in the Company’s quarterly report on Form 10-QSB filed with the Securities Exchange Commission on August 14, 2002.

15

AVERAGE CONSOLIDATED BALANCE SHEETS

The following table sets forth certain information relating to the Company’s average balance sheets and reflects the yield on average earning assets and cost of average interest-bearing liabilities for the years indicated. Such yields and costs are derived by dividing interest income or expense by the average balance of assets or liabilities. The average balance sheet amounts for loans include balances for nonperforming loans.

	2006				2005				2004
	Average Balance		Yield/ Rate (%)		Average Balance		Yield/ Rate (%)		Average Balance		Yield/ Rate (%)
Interest-earning assets:
Federal funds sold	$	681	4.95	%	$	2,734	2.76	%	$	2,596	1.15	%
Taxable securities		19,091	3.83	%		26,959	3.37	%		33,367	3.09	%
Tax-exempt securities		14,378	4.30	%		12,130	4.27	%		10,564	4.21	%
Loans		199,015	7.25	%		175,789	6.38	%		158,568	5.69	%
Interest-bearing deposits		1,640	4.56	%		4,151	3.09	%		5,139	1.38	%
FHLB stock		8,688	3.00	%		10,496	4.37	%		9,886	7.62	%
Total interest-earning assets	$	243,493	6.63	%	$	232,259	5.73	%	$	220,120	5.16	%
Total non-interest-earning assets		24,917				21,287				14,854
Total assets	$	268,410			$	253,546			$	234,974
Interest-bearing liabilities:
Deposits
NOW	$	36,177	0.56	%	$	34,166	0.41	%	$	31,518	0.35	%
Savings		30,872	0.74	%		34,937	0.55	%		38,217	0.55	%
Money market		42,308	2.30	%		57,620	1.69	%		74,216	1.44	%
Time		92,135	4.49	%		68,443	3.43	%		39.090	2.46	%
FHLB advances		10,396	4.74	%		6,110	3.44	%		2,829	3.46	%
Federal funds purchased and Repurchase agreements		1,224	5.28	%		675	3.25	%		17	1.82	%
Subordinated debentures		3,609	8.66	%		3,609	7.14	%		3,609	5.16	%
Total interest-bearing Liabilities	$	216,721	2.96	%	$	205,560	2.01	%	$	189,496	1.39	%
Non-interest-bearing liabilities:		32,014				30,266				29,523
Stockholders’ equity		19,675				17,720				15,955
Total liability and Stockholders’ equity	$	268,410			$	253,546			$	234,974
Net interest spread			3.67	%			3.72	%			3.77	%
Net interest income to average interest-earning assets			4.00	%			3.94	%			4.02	%

16

SECURITIES

The Company’s securities portfolio can be divided into five categories of debt instruments, as shown below. The securities portfolio is managed to provide liquidity and earnings in various interest rate cycles. The carrying value of these securities is detailed below.

	2006		2005		2004		2003
U.S. Treasury Bills	$	0	$	0	$	0	$	4,994
U.S. Government Agencies		10,631		9,338		11,995		16,144
Mortgage-backed Securities		9,316		12,521		17,156		20,228
States and Political Subdivisions		14,347		15,507		10,309		11,728
SBA Guaranteed Pool		630		972		1,250		1,498
Total Investment Securities	$	34,924	$	37,888	$	40,710	$	54,592

The following table shows the weighted average yield for each security group by term to final maturity as of December 31, 2006.

Security Type	Less than 1 year		Yield		1 to 5 years		Yield		5 to 10 years		Yield		Over 10 years		Yield
U.S. Government Agencies	$	0	0.0	%	$	3,473	4.67	%	$	4,161	5.72	%	$	2,996	6.01	%
Mortgage-Backed Securities		0	0.0	%		1,522	3.31	%		1,122	3.30	%		6,672	4.52	%
States and Political Subdivisions1		1,793	5.24	%		2,985	5.42	%		4,666	6.62	%		4,904	6.86	%
SBA Guaranteed Pool		0	0.0	%		0	0.0	%		66	7.49	%		564	6.60	%
Total Investment Securities	$	1,793	5.24	%	$	7,980	4.69	%	$	10,015	5.88	%	$	15,136	5.65	%

¹Fully taxable equivalent

At December 31, 2006, the Company did not own any security of any one issuer where the aggregate carrying value of such securities exceeded 10 percent of the Company’s stockholder’s equity, except for certain debt securities of the U.S. Government Agencies and Corporations.

17

LOANS

Loans represent the principal source of revenue for the Company. Risk is controlled through loan portfolio diversification and the avoidance of credit concentrations. Loans are made primarily within the Company’s geographic market area. The loan portfolio is distributed among general business loans, commercial real estate, residential real estate, and consumer installment loans. The Company has no foreign loans, no highly leveraged transactions, and no syndicated purchase participations.

The Company’s loan portfolio by major category as of December 31 for each of the past five years is shown below.

	2006			2005			2004			2003			2002
Real estate
Commercial	$	85,598		$	83,744		$	74,769		$	65,514		$	59,206
Construction		27,903			23,020			9,580			10,530			7,295
Residential		21,526			23,007			24,962			17,799			10,964
Home Equity		38,132			35,413			28,790			28,612			29,261
Total real estate		173,159			165,184			138,101			122,455			106,726
Commercial		26,318			26,334			26,309			25,988			35,839
Consumer		1,876			2,576			1,991			2,239			2,470
Total loans		201,353			194,094			166,401			150,679			145,035
Deferred loan costs, net		16			(50	)		22			34			29
Allowance for loan losses		(1,549	)		(1,381	)		(1,367	)		(1,676	)		(1,757	)
Loans, net	$	199,820		$	192,663		$	165,056		$	149,037		$	143,307

LOAN MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES (IN $000)

The following table shows the amount of total loans outstanding as of December 31, 2006 which, based on remaining scheduled repayments of principal, are due in the periods indicated.

	Maturing
	Within one		After one but Within		After five
	Year		Five years		Years		Total
Commercial	$	19,566	$	7,221	$	1	$	26,788
Real Estate		57,232		92,255		23,046		172,533
Consumer		778		1,254		—		2,032
Totals	$	77,576	$	100,730	$	23,047	$	201,353

18

Below is a schedule of the loan amounts maturing or repricing and are classified according to their sensitivity to changes in interest rates.

	Interest Sensitivity
	Fixed Rate		Variable Rate		Total
Due within three months	$	10,978	$	18,367	$	29,345
Due after three months within 1 year		11,455		36,809		48,264
Due after one but within five years		87,153		13,544		100,697
Due after five years		8,163		14,884		23,047
Total	$	117,749	$	83,604	$	201,353

DEPOSITS

The following table shows the maturity schedule for the Company’s time deposits of $100,000 or more as of December 31, 2006 and December 31, 2005.

	2006		2005
Three months or less	$	10,234	$	9,072
Three months through six months		11,096		8,271
Six months through twelve months		10,078		5,390
Over twelve months		2,107		3,523
	$	33,515	$	26,256

19

CAPITAL

For the purposes of measuring capital adequacy, the federal banking regulators have set parameters around which to measure capital in relation to assets. Approvals of new activities, the amount of FDIC insurance premiums, and general capital supervision are based on these ratios.

Management’s continuing goal is to maintain Bank capital at “well capitalized” levels under all three of the prompt corrective action regulatory capital measures.

In 2002, the Company issued $3.6 million in variable-rate subordinated debentures at the 3-month LIBOR plus 3.45%. As of December 31, 2006, $3.5 million of these proceeds qualified as Tier 1 capital.

The transaction described above, in addition to retained earnings, allowed the Bank to be categorized as well capitalized under all three of the banking regulators’ prompt corrective action criteria at December 31, 2006 and 2005.

STOCKHOLDERS’ EQUITY

The Company’s stockholders’ equity increased $2.1 million, or 11.5%, from December 31, 2005 to December 31, 2006. Earnings of $2.2 million were the primary source of this growth. This follows the trend from the previous period when the Company’s stockholders’ equity grew by 10.4% also due to earnings of $2.0 million during 2005.

The accumulated other comprehensive income, net of deferred taxes, increased $90,000 at December 31, 2006. Dividends of approximately $227,000 representing $0.165 per share were paid to stockholders during 2006 representing an increase over 2005 total dividends of $136,000 and $0.20 per share. The dividends per share for 2006 reflect the two-for-one stock split effective December 27, 2006.

Adjusted for the stock split stockholders’ equity (book value) per share increased from $13.52 at December 31, 2005 to $14.96 per share at year-end 2006, a 10.7% increase. Over the period from December 31, 2004 to December 31, 2005 an increase in book value of 10.4% occurred. Book value as of December 2006 of $14.96 represents an increase of 75.4% from December 2001’s value of $8.53 per share. These are adjusted to reflect the stock split.

20

RESULTS OF OPERATIONS

OVERVIEW

For the year ended December 31, 2006, the Company earned $2.2 million or $1.59 per diluted share, compared to $2.0 million or $1.48 per share in 2005, in each case calculated on a post-split basis. This represents a 7.6% increase in net income from 2005. Comparing 2005 results to the prior period shows a decrease in earnings of 11.3% or $0.19 per diluted share. Overall earnings have increased 62.2% from 2001, resulting in post split earnings of $1.59 per share up from $0.98 per share. During this period the company has experienced an average annual increase in earnings of 12.4% per year. For the year ended December 31, 2006 net interest income totaled $9.7 million, which represents an increase of $411,000, or 4.4%. As in past years, net interest income remains the driving force behind the Company’s earnings. Looking back and comparing 2006 net interest income to 2001 results shows an increase of 61.2%, or 12.2% on an average annual basis.

SIGNIFICANT RATIOS

Following are a number of significant ratios and other information generally used to examine performance of banks and bank holding companies. The consolidated ratios for the Company follow:

	2006		2005		2004
Return on average assets (1)	0.82	%	0.78	%	0.98	%
Return on average equity (2)	11.11	%	11.42	%	14.51	%
Net loan growth (3)	3.71	%	16.73	%	10.75	%
Deposit growth (3)	2.19	%	8.68	%	4.69	%
Net interest spread (4)	3.67	%	3.72	%	3.77	%
Efficiency ratio (5)	70.34	%	70.09	%	66.01	%

⁽¹⁾ Net income divided by average total assets

⁽²⁾ Net income divided by average stockholders’ equity

⁽³⁾ Based on 2006, 2005 and 2004 year-end totals

⁽⁴⁾ Yield on total average interest-earning assets minus the rate on total interest-bearing liabilities

⁽⁵⁾ Total noninterest expense divided by the sum of net interest income and noninterest income (excluding gains and losses on sales of securities and other real estate)

Explanations for increased earnings, as well as other significant changes in income and expense, are summarized below.

NET INTEREST INCOME

Net interest income, the difference between total interest earned on earning assets and total interest expense on interest-bearing liabilities, is the Company’s principal source of income. Net interest income is influenced by changes in the volume and yield on earning assets as well as changes in the volume and rates paid on interest-bearing liabilities. The Company attempts to favorably impact net interest income through investment decisions and monitoring interest rates offered to customers, including both loan and deposit products.

Net interest income in 2006 was $9.7 million, compared to $9.3 million in 2005, and $8.9 million in 2004. The Company’s net interest income expressed as a percentage of average interest-earning assets (net interest margin) was 4.00% in 2006 compared to 4.01% in 2005 and 4.02% in 2004. An $836,000 increase in net interest income in 2006 resulted from favorable changes in interest-earning asset and interest-bearing liability volumes while the effect of rising interest rates had a negative impact, reducing this amount by $425,000 resulting in the net change from 2005 of $411,000. The $470,000 increase in 2005 from 2004 resulted from favorable changes in interest-earning asset and interest-bearing liability volumes of $570,000 and unfavorable rate variances of $100,000.

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The following table allocates changes in interest income and interest expense in 2006 compared to 2005 and in 2005 compared to 2004 between amounts attributable to changes in rate and changes in volume for the various categories of interest-earning assets and interest-bearing liabilities. The changes in interest income and interest expense due to both volume and rate have been allocated proportionally.

	2006 Compared to 2005									2005 Compared to 2004
	Change			Change						Change			Change
	Due to			Due to			Total			Due to			Due to			Total
	Rate			Volume			Change			Rate			Volume			Change
Interest Earning Assets:
Federal Funds Sold	$	37		$	(79	)	$	(42	)	$	43		$	2		$	45
Taxable securities		94			(293	)		(199	)		99			(214	)		(115	)
Tax exempt securities		3			97			100			6			67			73
Loans receivable		1,436			1,600			3,036			1,171			1,053			2,224
FHLB stock and other		(88	)		(151	)		(239	)		(216	)		(20	)		(236	)
Total interest-earning assets		1,482			1,174			2,656			1,104			887			1,991
Interest-bearing liabilities
Deposits		1,768			118			1,886			1,149			164			1,313
FHLB Advances and other borrowed funds		76			220			296			(14	)		153			139
Subordinated Debentures		63			0			63			69			0			69
Total int.-bearing liabilities		1,907			338			2,245			1,204			317			1,521
Change in net interest income	$	(425	)	$	836		$	411		$	(100	)	$	570		$	470

Growth in average loans, the Company’s highest yielding assets, was 13.2% in 2006. The yield on loans rose to 7.25% compared to 6.38% in 2005. The yield of 6.38% in 2005 represented an increase of 69 basis points from 2004’s yield of 5.69%. The increase in loan yield is generally reflective of the rise in general interest rates experienced in 2005 and 2006. The yield on total earning assets was 6.63% in 2006 and 5.73% in 2005. Growth in average earning assets of 4.8% along with higher yields resulted in increased interest income of $2.7 million, or 20.0%, over the previous year. This is an improvement over last year’s gain of 17.3% which followed a slight improvement of 6.0% in interest income in 2004. As the Company’s main source of revenue, the increase in interest income has had a positive impact on 2006 earnings.

On the other hand, the steady rise in interest rates during 2006 had an adverse impact on interest expense. At $6.4 million, interest expense increased by $2.2 million, or 53.8%, over 2005. The results mark the second consecutive year of over 50% increase in interest expense. For the year ended 2005 interest expense totaled $4.2 million, which represented a 57.4% increase from the prior year end. As was the case with interest income, generally rising interest rates were the primary factor in increasing interest expense. In addition, competitive forces along with funding requirements have caused a shift in the Company’s deposit mix. During 2006 there has been a second consecutive year of a significant increase in time deposits which at $92.1 million represent growth of $23.7 million, or 34.6%, from 2005. Time deposits increase $29.4 million, or 75.1%, to $68.4 million for 2005. In 2006 some of the growth has come at the expense of money market balances which fell by $15.3 million, or 26.6%, over the same period. Some of this change has occurred as depositors seek to lock in higher rates as general rates have risen. The Company has also begun to more aggressively market its time deposit products. While average deposits grew by $6.3 million during 2006, this increase was insufficient to keep pace with loan growth which necessitated an increase in borrowed funds. The borrowed funds are represented as FHLB advances on the balance sheet and at $10.5 million on average have increased by $4.3 million over 2005 borrowings. The cost of the borrowed funds at 4.74% represents an increase from 2005 at 3.44%. The rate on the $3.6 million in subordinated debentures is tied to the 3 month LIBOR rate and has increased from 5.16% in 2004 to 7.14% in 2005 and ending at 8.66% in 2006. The cost of total interest-bearing liabilities increased 95 basis points to 2.96% from 2.01% in 2006 after having increased by 62 basis points from 1.39% in 2005. While the cost of funding liabilities has increased, at 2.96%, the Company’s funding expense is within expected results.

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The average national prime rate was approximately 7.96% in 2006 and 6.19% in 2005. During a year of continued interest rate increases, the Company saw its net interest spread fall to 3.67% in 2006 from 3.72% in 2005 after having fallen by 5 basis points from 3.77% in 2004. Net interest spread is defined as the yield on total interest-earning assets minus the rate on total interest-bearing liabilities. The Company maintained the ratio of average earning assets to average interest-bearing liabilities relatively stable for 2006, 2005 and 2004 respectively.

PROVISION FOR LOAN LOSSES

The provision for loan losses is determined by management through a quarterly evaluation of the adequacy of the allowance for loan losses. This evaluation takes various factors into consideration. The provision is based on management’s judgment of the amount necessary to maintain the allowance for loan losses at an adequate level for probable incurred credit losses. In determining the provision for loan losses, management considers the Company’s consistent loan growth and the amount of net charge-offs each year. Other factors, such as changes in the loan portfolio mix, delinquency trends, current economic conditions and trends, reviews of larger loans and known problem credits and the results of independent loan review and regulatory examinations are also considered by management in assessing the adequacy of the allowance for loan losses.

The allowance for loan losses was $1.5 million, representing 0.77% of total loans, as of December 31, 2006, compared to an allowance of $1.4 million or 0.71% of total loans at year-end 2005 and $1.4 million or 0.83% of total loans at year-end 2004.

One measurement used by management in assessing the risk inherent in the loan portfolio is the level of nonperforming loans. Nonperforming loans are comprised of non-accrual loans and other loans 90 days or more past due. Nonperforming loans and other assets were as follows at year end.

NON-PERFORMING ASSETS

	2006			2005			2004			2003			2002
Non-accrual loans	$	25		$	115		$	21		$	727		$	2,925
Other loans 90 days past due		645			752			1,168			1,905			—
Total nonperforming loans		670			867			1,189			2,632			2,925
Other real estate		—			—			—			711			82
Total nonperforming assets	$	670		$	867		$	1,189		$	3,343		$	3,007
Nonperforming loans to total loans		0.34	%		0.45	%		0.72	%		1.75	%		2.04	%
Allowance for loan losses
To nonperforming loans		231.19	%		159.28	%		114.97	%		63.68	%		60.07	%
Total nonperforming assets
To total stockholders’ equity		3.25	%		4.70	%		7.11	%		22.66	%		23.07	%
Total nonperforming assets
To total assets		0.25	%		0.32	%		0.50	%		1.43	%		1.48	%

The provision for loan losses in 2006 totaled $165,000, which represents a $100,000 decrease from the amount provided for in 2005. This reduction is the result of management’s fourth quarter calculation, which reflected an appropriate amount of loan loss provision after adjusting the allowance by $150,000. Levels of nonperforming loans are considered manageable at year end 2006. Total nonperforming loans as a percentage of total loans has fallen steadily over the past three years. From a high of 1.75% this ratio ended at 0.35% in 2006. Based on its analysis of the loan portfolio risks discussed above, including historical loss experience and levels of nonperforming loans, management believes that the allowance for loan losses is adequate at December 31, 2006 to cover any potential losses.

Net charge-offs for the year ended December 31, 2006 totaled a positive $3,000. This is significant improvement from previous years. Net charges-offs for 2005 and 2004 total $251,000 and $359,000, respectively. The previous years charge-offs was in part, due to deteriorating economic conditions and the effect that has upon smaller businesses within the marketplace. In response to the identified weaknesses in both the process and customer base, management formed a credit quality committee in 2002 charged with monitoring

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problem credits and directing their resolution. The committee has been successful in identifying existing problem credits. This committee meets on a monthly basis to monitor troubled credits. The management of the Company is confident that any past problems which resulted from weaknesses in process have been identified and addressed.

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided and future results could differ.

The allowance for loan losses is particularly subject to change as it is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans may be collectively evaluated for impairment.

Assets acquired through or instead of loan foreclosure such as other real estate are initially recorded at fair value when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed.

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The following table details the component changes in the Company’s allowance for loan losses for each of the past five years:

	Amount as of December 31,
	2006			2005			2004			2003			2002
Net Total Loans at Year-end	$	199,820		$	192,663		$	165,056		$	149,037		$	143,307
Average daily balances for loans for the year		197,410			178,373			158,568			140,452			140,578
Allowance for loan losses at beginning of period	$	1,381		$	1,367		$	1,676		$	1,757		$	1,140
Loan charge-offs during the period
Commercial		(20	)		(200	)		(365	)		(100	)		(860	)
Real Estate		0			(53	)		(46	)		0			(55	)
Consumer		0			(18	)		(73	)		(16	)		(19	)
Total Charge-offs		(20	)		(271	)		(484	)		(116	)		(934	)
Loan recoveries during the period
Commercial		23			7			108			3			4
Real Estate		0			0			0			0			0
Consumer		0			13			17			2			3
Total recoveries		23			20			125			5			7
Net recoveries (charge-offs)		3			(251	)		(359	)		(111	)		(927	)
Provision charged to expense		165			265			50			30			1,544
Allowance for loan losses at end of period	$	1,549		$	1,381		$	1,367		$	1,676		$	1,757
Ratio of net recoveries/(charge-offs) during the period to average loans outstanding		0.002	%		0.14	%		0.23	%		0.08	%		0.65	%
Allowance for loan losses to loans outstanding at year - end		0.78	%		0.71	%		0.83	%		1.18	%		1.23	%

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

Presented below is an analysis of the composition of the allowance for loan losses and percent of loans in each category to total loans:

	2006				2005				2004
	Amount		Percent		Amount		Percent		Amount		Percent
Balance at December 31:
Commercial and industrial 1	$	658	13.1	%	$	925	13.6	%	$	1,066	21.6	%
Real estate mortgage 2		802	86.0			371	85.1			200	77.2
Individuals’ loans for household and other personal expenditures, including other loans		39	0.9			62	1.3			48	1.2
Unallocated		50				23				53
Totals	$	1,549	100.0	%	$	1,381	100.0	%	$	1,367	100.0	%

(1) Category also includes lease financing, loans to financial institutions, tax-exempt loans, agricultural production financing and other loans to farmers and construction real estate loans.

(2) Category includes for commercial and farmland and residential real estate loans.

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LOAN CONCENTRATION

At December 31, 2006, the Company did not have any concentration of loans exceeding 10 percent of total loans which are otherwise not disclosed. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions.

NONINTEREST INCOME

Noninterest income consists primarily of service charges on customer deposit accounts, mortgage loan origination fees, and other service charges and fees. Total noninterest income for 2006 decreased $29,000, or 2.2%, over the prior year. Noninterest income of $1,290,000 in 2006 represents 13.3% of revenues, net of interest expense, compared to 14.1% in 2005 and 13.5% in 2004. The decrease in 2006 reverses the increase in noninterest income experienced in 2005 of $128,000 from the previous year. The majority of the decrease in noninterest income resulted from the income earned on mortgage origination fees. This income totaled $170,000 for 2006 compared to $218,000 and $243,000 in 2005 and 2004, respectively. The decrease in these fees is largely attributed to rising interest rates, which caused a reduced number of mortgage loans originated for other investors. This decrease was partially offset by an increase in debit card transaction fees of approximately $15,000. Service charge income continued to decline ending at $509,000 down from $517,000 in 2005 and $537,000 in 2004. The continued decline has been precipitated by the intensified competition and the prevalence of a tendency towards offering service charge free accounts within the Company’s market.

NONINTEREST EXPENSE

Noninterest expense consists of compensation, occupancy and equipment expense, data processing and other costs such as advertising and professional fees. Total noninterest expense of $7,754,000 in 2006 represents an increase of $296,000, or 4.0%, over 2005. This increase comes on top of an increase of $829,000, or 12.5%, from 2004 to 2005. A major reason for the increase in noninterest expense during 2006 has been attributed to realizing the costs associated with the opening of the County Farm facility along with the operating costs thereafter for an entire year. The facility opened in late March of 2005. This as well as other significant factors contributing to the expense increase are discussed below.

Salaries and employee benefits, which represent the largest component of noninterest expense, were $4,354,000 and $4,154,000 in 2006 and 2005, respectively. Of the $200,000 in additional expense, total salaries accounted for $80,000, or 40.0%, of the increase with increased group health insurance costs accounting for an additional $120,000, or 60.0%. The Company had 70 and 65 full-time equivalent employees at December 31, 2006 and 2005, respectively. Other factors affecting increased compensation costs in 2006 were inflation and merit pay increases, recruitment expense, and rising health insurance costs.

Occupancy expense increased by $94,000, or 24.3%, in 2006 after increasing by $86,000 in 2005. The 2006 results included a full twelve months of costs associated with the County Farm office, which opened in March 2005. Similarly, equipment expense was higher by $11,000, or 2.4%. In 2005 the increase was also attributed to the opening and equipping the County Farm branch location.

In other areas, data processing costs showed a slight increase to $606,000 from $600,000 in 2006 and 2005, respectively. The increase in data processing reflects rising costs due to increased volume in deposit and loan accounts and also the Company’s continued commitment to keep pace with technology. The Company’s core processing contract was renegotiated during 2005 for a seven year term and will result in some cost savings over the life of the agreement as well as provide the Company with new services to improve efficiency and to provide a higher level of service delivery to its client base. The cost associated with consumer and business internet banking also is included in this expense category. Advertising and marketing costs decreased $34,000, or 8.2%, in 2006 after increasing $145,000, or 54.1%, to $413,000 for 2005. The increased cost in 2005 was associated with advertising expenses for the County Farm grand opening as well as an increased marketing effort designed to attract new deposits.

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INCOME TAXES

Income tax expense increased by $31,000, or 3.5%, in 2006 after decreasing by $186,000, or 17.3%, in 2005. Income tax expense was 29.6%, 30.4% and 31.9% of pre-tax income in 2006, 2005 and 2004, respectively. The lower effective tax rate in 2005 compared to 2004 is partially attributable to the tax-free earnings on the Company’s BOLI investment.

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ASSET/LIABILITY MANAGEMENT

The primary objectives of the Company’s asset/liability management policies are to:

a) Manage and minimize interest rate risk;

b) Manage the investment portfolio to maximize yield;

c) Assess and monitor general risks of operations; and

d) Maintain adequate liquidity to meet the withdrawal requirements of depositors and the financing needs of borrowers.

LIQUIDITY

The Company’s primary sources of funds are deposits, proceeds from principal and interest payments on loans, maturities of securities, federal funds sold, short-term investments, and advances from the Federal Home Loan Bank. While maturities and scheduled amortization of loans and securities are generally predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition.

The Company’s liquidity, represented by cash and cash equivalents, is generally a product of its operating, investing, and financing activities. Liquidity is monitored frequently by management and quarterly by the asset/liability management/investment committee and Board of Directors. This monitoring includes a review of net non-core funding dependency, loans to deposits, and short-term investments to total assets ratios, including trends in these ratios. Cash flows from general banking activities are reviewed for their ability to handle unusual liquidity needs. Management also reviews a liquidity/dependency report covering measurements of liquidity ratio, net potential liabilities, and dependency ratios.

Management expects ongoing operating activities to continue to be a primary source of cash flows for the Company. For example, cash flows from operating activities exceeded accrual basis net income by $241,000 in 2006 and by $773,000 in 2005. In addition, the Bank maintains open lines of credit for federal funds purchased, and secured borrowing facilities at the Federal Home Loan Bank of Chicago, Marshall & Isley Bank (M&I), and US Bank. Management is confident that the Bank has adequate liquidity for normal banking activities.

A primary investing activity of the Company is the origination of loans. Loans made to customers, net of principal collections, were $7.3 million in 2006, $27.9 million in 2005 and $16.1 million in 2004. The Company’s strongest loan growth was in the construction lending sector with the loans in this category increasing by $4.9 million. Total Consumer Loans including residential mortgages and Home Equity grew by $646,000 over the same period.

Deposits grew by $5.0 million, $18.3 million and decreased by $1.4 million in 2006, 2005 and 2004, respectively. Despite intense competition for deposits from the many financial institutions in the Company’s market area, the Company has been successful in attracting sufficient deposits to provide for the majority of its funding needs. However, funding through retail deposits continues to grow more challenging as well as more expensive than in past years.

During 2006, the Company took out an additional $2.0 million in fixed rate advance with the Federal Home Loan Bank of Chicago bringing the total FHLB borrowings to $10.5 million. The advances were taken to provide for immediate funding needs as well as for future loan growth.

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DIVIDENDS

It has been a policy of the Company to pay only small to moderate dividends so as to retain earnings to support growth. Dividends for 2006 were $227,000 or 10.38% of net income. In 2005, dividends of $136,000 represented 6.70% of earnings. Dividends are paid quarterly.

CONTRACTUAL OBLIGATIONS

The following tables disclose contractual obligations and commercial commitments of the Company as of December 31, 2006:

	2007		2008		2009		2010		2011		2012 and after		Total
Federal Home Loan Bank
Advances	$	4,000	$	2,500	$	4,000		—		—		—	$	10,500
Subordinated debentures		—		—		—		—		—		3,609		3,609
Data Processing1,2		504		523		541		561		581		601		3,311
Total	$	4,504	$	3,023	$	4,541	$	561	$	581	$	4,210	$	17,420

(1) Estimated contract amount based on transaction volume. Actual expense was $444,000 and $500,000 in 2006 and 2005, respectively.

(2) Contract expires September 30, 2012.

The Company’s purchase obligations have no material impact on its cash flow or liquidity and, accordingly, have not been included in the above table.

FORWARD-LOOKING STATEMENTS

Community Financial Shares, Inc. (“Company”) from time to time includes forward-looking statements in its oral and written communication. The Company may include forward-looking statements in filings with the Securities and Exchange Commission, such as this Form 10-K and Form 10-QS, in other written materials and in oral statements made by senior management to analysts, investors, representatives of the media and others. The Company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and the Company is including this statement for purposes of these safe harbor provisions. Forward-looking statements can often be identified by the use of words like “estimate,” “project,” “intend,” “anticipate,” “expect” and similar expressions. These forward-looking statements include:

o statements of the Company’s goals, intentions and expectations;

o statements regarding the Company’s business plan and growth strategies;

o statements regarding the asset quality of the Company’s loan and investment portfolios; and

o estimates of the Company’s risks and future costs and benefits.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors which could affect the actual outcome of future events;

o fluctuations in market rates of interest and loan and deposit pricing, which could negatively affect the Company’s net interest margin, asset valuations and expense expectations;

o adverse changes in the economy, which might affect the Company’s business prospects and could cause credit-related losses and expenses;

o competitive factors in the banking industry, such as the trends towards consolidation in the Company’s market; and

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o changes in the banking legislation or the regulatory requirements of federal and state agencies applicable to bank holding companies and banks like the Company’s affiliate banks.

Because of these and other uncertainties, the Company’s actual future results may be materially different from the results indicated by these forward-looking statements. In addition, the Company’s past results of operations do not necessarily indicate its future results.

CRITICAL ACCOUNTING POLICIES

Generally accepted accounting principles require management to apply significant judgment to certain accounting, reporting and disclosure matters. Management must use assumptions and estimates to apply those principles where actual measurement is not possible or practical. For a complete discussion of the Company’s significant accounting policies, see the notes to the consolidated financial statements and discussion throughout this Annual Report. Below is a discussion of the Company’s critical accounting policies. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the Company’s financial statements. Management has reviewed the application of these policies with the Company’s Audit Committee.

Allowance for Loan Losses. The allowance for loan losses represents management’s estimate of probable losses inherent in the Company’s loan portfolio. In determining the appropriate amount of the allowance for loan losses, management makes numerous assumptions, estimates and assessments.

The Company’s strategy for credit risk management include conservative credit policies and underwriting criteria for all loans, as well as an overall credit limit for each customer significantly below legal lending limits. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit quality reviews and management reviews of large credit exposures and loans experiencing deterioration of credit quality.

Larger commercial loans that exhibit probable or observed credit weaknesses are subject to individual review. Where appropriate, reserves are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Company. Included in the review of individual loans are those that are impaired as provided in SFAS No. 114, Accounting by Creditors for Impairment of a Loan. Any allowances for impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or fair value of the underlying collateral. The Company evaluates the collectibility of both principal and interest when assessing the need for a loss accrual.

Historical loss rates are applied to other commercial loans not subject to specific reserve allocations.

Homogenous loans, such as consumer installment and residential mortgage loans are not individually risk graded. Rather, credit scoring systems are used to assess credit risks. Reserves are established for each pool of loans using loss rates based on a five year average net charge-off history by loan category.

Historical loss rates for commercial and consumer loans may be adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition. Factors which management considers in the analysis include the effects of the national and local economies, trends in the nature and volume of loans (delinquencies, charge-offs and nonaccrual loans,) changes in mix, asset quality trends, risk management and loan administration, changes in the internal lending policies and credit standards, collection practices and examination results from bank regulatory agencies and the Company’s internal loan review. An unallocated reserve, primarily based on the factors noted above, is maintained to recognize the imprecision in estimating and measuring loss when evaluating reserves for individual loans or pools of loans. Allowances on individual loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience.

The Company’s primary market area for lending is the county of DuPage in northeastern Illinois. When evaluating the adequacy of allowance, consideration is given to this regional geographic concentration and the closely associated effect changing economic conditions have on the Company’s customers.

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The Company has not substantively changed any aspect of its overall approach in the determination of the allowance for loan losses. There have been no material changes in assumptions or estimation techniques as compared to prior periods that impacted the determination of the current period allowance.

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

ACCOUNTING MATTERS

In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156 (SFAS No. 156), Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable and permits the entities to elect either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of SFAS No. 140 for subsequent measurement. The subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value eliminates the necessity for entities that manage the risks inherent in servicing assets and servicing liabilities with derivatives to qualify for hedge accounting treatment and eliminates the characterization of declines in fair value as impairments or direct write–downs. SFAS No. 156 is effective for the Company beginning January 1, 2007. We have evaluated the requirements of SFAS No. 156 and determined that it will not have a material effect on our financial condition or results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting standards, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not expect that the adoption of SFAS No. 157 will have a material impact on our financial condition or results of operations.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes (Interpretation No. 48). Interpretation No. 48 clarifies the accounting for uncertainty in income taxes in financial statements and prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Interpretation No. 48 is effective for the Company beginning January 1, 2007. We have evaluated the requirements of Interpretation No. 48 and determined that it will not have a material effect on our financial condition or results of operations.

In September 2006, the SEC Staff issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, which addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB No. 108 will require registrants to quantify misstatements using both the balance sheet and income–statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the effect of initial adoption is determined to be material, SAB No. 108 allows registrants to record that effect as a cumulative effect adjustment to beginning retained earnings. The requirements are effective for the Company beginning January 1, 2007. We have evaluated the requirements of SAB No. 108 and determined that it will not have a material effect on our financial condition or results of operations.

31

In September 2006, the Emerging Issues Task Force Issue 06–4 (EITF 06-4), Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split–Dollar Life Insurance Arrangements, was ratified. EITF 06-4 addresses accounting for separate agreements which split life insurance policy benefits between an employer and employee. The Issue requires the employer to recognize a liability for future benefits payable to the employee under these agreements. The effects of applying EITF 06-4 must be recognized through either a change in accounting principle through an adjustment to equity or through the retrospective application to all prior periods. For calendar year companies, EITF 06-4 is effective beginning January 1, 2008. Early adoption is permitted as of January 1, 2007. We do not expect the adoption of EITF 06-4 to have a material effect on our consolidated financial statements.

ITEM 7A. - 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 December 31, 2006:

	100 Basis Point Rate Shift Up		200 Basis Point Rate Shift Up		300 Basis Point Rate Shift Up
Net interest income	+3.9	%	+7.8	%	+11.7	%
Market value of securities	-4.4	%	-8.4	%	-12.1	%

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 December 31, 2006:

	100 Basis Point Rate Shift Down		200 Basis Point Rate Shift Down		300 Basis Point Rate Shift Down
Net interest income	-0.9	%	-3.7	%	-7.2	%
Market value of securities	+4.3	%	+9.0	%	+14.0	%

All measures of interest rate risk are within policy guidelines.

32

ITEM 8. - FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders

Community Financial Shares, Inc.

Glen Ellyn, Illinois

We have audited the accompanying consolidated balance sheets of Community Financial Shares, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Community Financial Shares, Inc. as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

Indianapolis, Indiana

March 27, 2007

33

COMMUNITY FINANCIAL SHARES, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2006 and 2005

(Dollars in thousands)

	2006		2005
ASSETS
Cash and due from banks	$	6,532	$	7,494
Interest bearing deposits		2,097		300
Federal funds sold		2,000		—
Cash and cash equivalents		10,629		7,794
Securities available for sale		34,924		37,888
Loans, less allowance for loan losses of $1,549 and $1,381		199,820		192,663
Federal Home Loan Bank stock		5,398		10,742
Premises and equipment, net		13,544		11,559
Cash value of life insurance		5,462		5,240
Interest receivable and other assets		1,964		1,643
Total assets	$	271,741	$	267,529
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits	$	234,725	$	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		2,306		2,247
Total liabilities		251,140		249,060
Stockholders’ equity
Common stock - no par value, 5,000,000 and 1,800,000 shares authorized; 1,375,228 and 1,371,078 issued and outstanding		—		—
Paid-in capital		8,231		8,148
Retained earnings		12,361		10,402
Accumulated other comprehensive income (loss)		9		(81	)
Total stockholders’ equity		20,601		18,469
Total liabilities and stockholders’ equity	$	271,741	$	267,529

34

COMMUNITY FINANCIAL SHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2006, 2005 and 2004

(Dollars in thousands, except per share data)

	2006		2005		2004
Interest income
Loans	$	14,429	$	11,394	$	9,170
Securities
Taxable		731		930		1,045
Exempt from federal income tax		618		518		445
Federal funds sold		34		75		30
Federal Home Loan Bank dividends and other		335		574		810
Total interest income		16,147		13,491		11,500
Interest expense
Deposits		5,544		3,658		2,345
Federal Home Loan Bank advances and other borrowed funds		557		261		122
Subordinated debentures		313		250		181
Total interest expense		6,414		4,169		2,648
Net interest income		9,733		9,322		8,852
Provision for loan losses		165		265		50
Net interest income after provision for loan losses		9,568		9,057		8,802
Noninterest income
Service charges on deposit accounts		509		517		537
Mortgage origination fees		170		218		243
Other service charges and fees		608		583		378
Gain on sale of fixed assets		3		1		—
Gain on sale of securities		—		—		33
Total noninterest income		1,290		1,319		1,191
Noninterest expense
Salaries and employee benefits		4,354		4,154		3,723
Net occupancy expense		481		387		301
Equipment expense		472		461		398
Data processing		606		600		562
Advertising and marketing		379		413		268
Professional fees		326		335		310
Other operating expenses		1,136		1,108		1,067
Total noninterest expense		7,754		7,458		6,629
Income before income taxes		3,104		2,918		3,364
Income tax expense		918		887		1,073
Net income	$	2,186	$	2,031	$	2,291
Earnings per share
Basic	$	1.59	$	1.49	$	1.68
Diluted		1.59		1.48		1.67

35

COMMUNITY FINANCIAL SHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years ended December 31, 2006, 2005 and 2004

(Dollars in thousands, except share data)

	Number Of Common Shares		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance at January 1, 2004	1,365,608		$	8,131		$	6,346		$	278		$	14,755
Comprehensive income
Net income	—			—			2,291			—			2,291
Change in unrealized gain on securities available for sale, net of tax of $105	—			—			—			(165	)		(165	)
Total comprehensive Income													2,126
Cash dividends ($.010 per share)	—			—			(130	)		—			(130	)
Purchase of stock	(2,460	)		(48	)		—			—			(48	)
Exercise of stock options, net of tax	2,990			20			—			—			20
Balance at December 31, 2004	1,366,138			8,103			8,507			113			16,723
Comprehensive income
Net income	—			—			2,031			—			2,031
Change in unrealized gain on securities available for sale, net of tax of $123	—			—			—			(194	)		(194	)
Total comprehensive Income													1,837
Cash dividends ($.10 per share)							(136	)					(136	)
Exercise of stock options, net of tax	4,940			45			—			—			45
Balance at December 31, 2005	1,371,078			8,148			10,402			(81	)		18,469
Comprehensive income
Net income	—			—			2,186			—			2,186
Change in unrealized gain on securities available for sale, net of tax of $5	—			—			—			90			90
Total comprehensive Income													2,276
Cash dividends ($.165 per share)	—			—			(227	)		—			(227	)
Tax benefit of stock options exercised				20									20
Amortization of stock option compensation				13									13
Exercise of stock options, net of tax	4,150			50			—			—			50
Balance at December 31, 2006	1,375,228			8,231			12,361			9			20,601

36

COMMUNITY FINANCIAL SHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2006, 2005 and 2004

(Dollars in thousands)

	2006			2005			2004
Cash flows from operating activities
Net income	$	2,186		$	2,031		$	2,291
Adjustments to reconcile net income to net cash provided by operating activities
Amortization on securities, net		123			181			307
Federal Home Loan Bank stock dividends		—			(510	)		(599	)
Depreciation		482			382			300
Provision for loan losses		165			265			50
Gain on sale of securities		—			—			(33	)
Gain on sale of other real estate owned		—			—			(72	)
Deferred income taxes		(427	)		167			384
Compensation cost of stock options		13			—			—
Change in cash value of life insurance		(223	)		(234	)		—
Change in interest receivable and other assets		(321	)		7			(32	)
Change in interest payable and other liabilities		429			515			513
Net cash provided by operating activities		2,427			2,804			3,109
Cash flows from investing activities
Purchases of securities available for sale		(7,144	)		(5,118	)		(8,712	)
Maturities and calls of securities available for sale		10,133			7,440			16,522
Proceeds from sales of securities available for sale		—			—			5,530
Net increase in loans		(7,322	)		(27,872	)		(16,069	)
Purchase of life insurance		—			—			(5,006	)
Proceeds from sales of other real estate owned		—			—			360
Federal Home Loan Bank stock redemptions		5,344			—			—
Premises and equipment expenditures, net		(2,467	)		(3,709	)		(1,488	)
Net cash used in investing activities		(1,456	)		(29,259	)		(8,863	)
Cash flows from financing activities
Change in
Non-interest bearing and interest bearing demand deposits and savings		(17,391	)		(24,441	)		(3,859	)
Certificates and other time deposits		22,412			42,772			2,454
Short-term borrowings		(5,000	)		5,000			(125	)
Proceeds from Federal Home Loan Bank advances		2,000			2,500			6,000
Repayment of FHLB advances		—			—			(2,000	)
Purchase of stock		—			—			(48	)
Exercise of stock options		50			45			20
Tax benefit of stock options exercised		20			—			—
Dividends paid		(227	)		(136	)		(130	)
Net cash provided by financing activities		1,864			25,740			2,312
Net change in cash and cash equivalents		2,835			(715	)		(3,442	)
Cash and cash equivalents at beginning of year		7,794			8,509			11,951
Cash and cash equivalents at end of year	$	10,629		$	7,794		$	8,509
Supplemental disclosures
Interest paid	$	6,035		$	3,977		$	2,637
Income taxes paid		1,105			396			697

37

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation: The consolidated financial statements include Community Financial Shares, Inc. (the Holding Company) and its wholly owned subsidiary, Community Bank—Wheaton/Glen Ellyn (the Bank) together referred to herein as the Company.

The Bank was chartered by the Illinois Commissioner of Banks and Real Estate in 1994. The Bank provides a range of banking and financial services through its operation as a commercial bank with offices located in Wheaton and Glen Ellyn, Illinois. The Bank’s primary activities include deposit services and commercial and retail lending. Interest income is also earned on investments in debt securities, Federal Home Loan Bank stock, federal funds sold, and short-term investments.

Significant intercompany transactions and balances have been eliminated in consolidation.

Internal financial information is reported and aggregated as one line of business.

Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided and future results could differ. The allowance for loan losses and fair values of financial instruments are particularly subject to change.

Securities: Securities are classified as available for sale because they might be sold before maturity. Securities available for sale are carried at fair value. Unrealized holding gains and losses on securities available for sale are reported in other comprehensive income. Gains and losses on the sale of securities available for sale are determined using the specific identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Federal Home Loan Bank stock is carried at cost.

Loans and Loan Income: Loans are stated net of the allowance for loan losses and deferred origination fees and costs. Interest on loans is accrued over the term of the loan based on the amount of principal outstanding. Loan origination fees and costs are amortized over the loan term as a yield adjustment. When serious doubt exists as to the collectibility of a loan, the accrual of interest is discontinued, typically when the loan is impaired or when payments are past due over 90 days (180 days for residential mortgages). Payments received on such loans are reported as principal reductions. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

38

Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 10 to 50 years. Furniture, fixtures, and equipment are depreciated using the straight-line (or accelerated) method with useful lives ranging from 3 to 10 years.

Long-Term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate that their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Stock Compensation: At December 31, 2006, the Company has a stock-based employee compensation plan, which is described more fully in Note 14. Prior to 2006, 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. Accordingly, in 2005, no stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock at the grant date.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment. The Company selected the modified prospective application. Accordingly, after January 1, 2005, the Company began expensing the fair value of stock options granted, modified, repurchased or cancelled.

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities, computed using enacted tax rates.

Off-Balance-Sheet Financial Instruments: Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Statement of Cash Flows: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Most federal funds are sold for one-day periods. Net cash flows are reported for customer loan and deposit transactions.

Earnings Per Share: Basic earnings per share is net income divided by the weighted average number of shares outstanding during the year. Diluted earnings per share include the dilutive effect of additional potential shares issuable under stock options.

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, which are also recognized as a separate component of equity.

Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Holding Company or by the Holding Company to the stockholders. These restrictions pose no practical limit on the ability of the Bank or the Holding Company to pay dividends at historical levels.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of active markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

39

Reclassifications: Some items in the prior year financial statements have been reclassified to conform with the current year presentation.

NOTE 2 - CASH AND CASH EQUIVALENTS

The Company considers all liquid investments with original maturities of three months or less to be cash equivalents.

Cash on hand or on deposit with the Federal Reserve Bank of $2,211,000 was required to meet regulatory reserve and clearing requirements at year-end 2006.

NOTE 3 - SECURITIES AVAILABLE FOR SALE

The fair value of securities available for sale at year end is as follows:

	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
2006
U. S. government agencies	$	10,631	$	—	$	(84	)
States and political subdivisions		14,347		288		(49	)
Mortgage-backed		9,316		14		(164	)
SBA guaranteed		630		10		—
	$	34,924	$	312	$	(297	)
2005
U. S. government agencies	$	9,338	$	—	$	(162	)
States and political subdivisions		15,057		346		(55	)
Mortgage-backed		12,521		11		(288	)
SBA guaranteed		972		16		—
	$	37,888	$	373	$	(505	)

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

The fair values of securities available for sale at December 31, 2006, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity are shown separately.

40

	Amortized Cost		Fair Value
Due in one year or less	$	1,797	$	1,793
Due after one year through five years		6,511		6,458
Due after five years through ten years		8,756		8,827
Due after ten years		7,759		7,900
Mortgage-backed		9,467		9,316
SBA guaranteed		619		630
	$	34,909	$	34,924

Securities with a carrying value of approximately $14,972,000 and $10,974,000 at December 31, 2006 and 2005 were pledged to secure public deposits, Federal Home Loan Bank advances and for other purposes as required or permitted by law.

Sales of securities were as follows:

	2006		2005		2004
Proceeds	$	—	$	—	$	5,530
Gross gains		—		—		33
Gross losses		—		—		—
Tax expense		—		—		13

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2006 and 2005 was $18,931,000 and $25,795,000, which is approximately 54 and 68 percent of the Company’s investment portfolio. These declines primarily resulted from increases in market interest rates.

Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

The following tables shows gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2006 and 2005:

41

	Less than 12 Months					12 Months or More					Total
2006 Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U. S. government agencies	$	2,770	$	(5	)	$	5,863	$	(79	)	$	8,633	$	(84	)
State and political subdivisions		363		(3	)		2,746		(46	)		3,109		(49	)
Mortgage-backed securities		200		(1	)		6,989		(163	)		7,189		(164	)
Total temporarily impaired securities	$	3,333	$	(9	)	$	15,598	$	(288	)	$	18,931	$	(297	)

	Less than 12 Months					12 Months or More					Total
2005 Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U. S. government agencies	$	2,434	$	(39	)	$	6,904	$	(123	)	$	9,338	$	(162	)
State and political subdivisions		4,646		(39	)		891		(16	)		5,537		(55	)
Mortgage-backed securities		731		(13	)		10,189		(275	)		10,920		(288	)
Total temporarily impaired securities	$	7,811	$	(91	)	$	17,984	$	(414	)	$	25,795	$	(505	)

NOTE 4 - LOANS

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

Loans consisted of the following at December 31:

	2006			2005
Real estate
Commercial	$	85,598		$	83,744
Construction		27,903			23,020
Residential		21,526			23,007
Home equity		38,132			35,413
Total real estate loans		173,159			165,184
Commercial		26,318			26,334
Consumer		1,876			2,576
Total loans		201,353			194,094
Deferred loan costs, net		16			(50	)
Allowance for loan losses		(1,549	)		(1,381	)
Loans, net	$	199,820		$	192,663

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

42

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

Balances, January 1, 2006	$	2,222
New loans including renewals		21
Payments, etc., including renewals		(579	)
Balances, December 31, 2006	$	1,664

Activity in the allowance for loan losses is summarized below:

	2006			2005			2004
Balance at beginning of year	$	1,381		$	1,367		$	1,676
Provision for loan losses		165			265			50
Charge-offs		(20	)		(271	)		(484	)
Recoveries		23			20			125
Balance at end of year	$	1,549		$	1,381		$	1,367

Impaired loans were not material in 2006 or 2005. Interest income recognized on impaired loans in 2006, 2005 and 2004 was not material.

Nonperforming loans were as follows:

	2006		2005		2004
Loans past due over 90 days still on accrual	$	645	$	752	$	1,168
Nonaccrual loans		25		115		21

NOTE 5 - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following at year end:

	2006			2005
Land	$	4,028		$	2,602
Building		9,187			6,606
Construction in progress		217			2,083
Furniture and equipment		2,046			1,897
Total cost		15,478			13,188
Accumulated depreciation		(1,934	)		(1,629	)
Net book value	$	13,544		$	11,559

At December 31, 2006, the Company’s estimated costs to complete construction of the fourth branch location totaled approximately $2.3 million.

43

NOTE 6 - DEPOSITS

	2006		2005
Non-interest bearing DDA	$	29,186	$	32,202
NOW		37,579		37,484
Money market		33,954		43,787
Regular savings		27,490		32,127
Certificates and time deposits, $100,000 and over		33,515		26,256
Other certificates and time deposits		73,001		57,848
Total deposits	$	234,725	$	229,704

At December 31, 2006, scheduled maturities of certificates of deposits are as follows:

2007	$	97,293
2008		5,811
2009		1,979
2010		828
2011		605
	$	106,510

NOTE 7 - ADVANCES FROM THE FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan Bank of Chicago totaled $10,500,000 and $8,500,000 at December 31, 2006 and 2005. Advances, at interest rates from 3.33 to 5.44 percent, are subject to restrictions or penalties in the event of prepayment.

The Company maintains a collateral pledge agreement covering advances whereby the Company has agreed to at all times keep on hand, free of all other pledges, liens, and encumbrances, whole first mortgage loans on improved residential property not more than 90 days delinquent, aggregating no less than 167 percent of the outstanding advances from the Federal Home Loan Bank of Chicago. As noted in Note 3, the Company has also pledged securities on these advances.

At December 31, 2006, scheduled maturities of advances are as follows:

2007	$	4,000
2008		2,500
2009		4,000
	$	10,500

NOTE 8 - ISSUANCE OF SUBORDINATED DEBENTURES

In June 2002, the Company formed Trust I, a statutory business trust formed under the laws of the state of Connecticut. In June 2002, Trust I issued variable rate preferred securities with an aggregate liquidation amount of $3,500,000 ($1,000 per preferred security) to a third-party investor. The Company then issued variable rate junior subordinated debentures aggregating $3,609,000 to Trust I. The junior subordinated debentures are the sole assets of Trust I. The junior subordinated debentures and the preferred securities pay interest and dividends, respectively, on a quarterly basis. These junior subordinated debentures pay interest at a fixed rate of 5.336% through September 26, 2002 and a variable rate thereafter based on the 3-month LIBOR plus 3.45%. The interest rate at December 31, 2006 and 2005 was 8.82% and 7.97%, respectively. Until June 26, 2007, the interest will not exceed 11.95%. The debentures will mature on

44

June 26, 2032, at which time the preferred securities must be redeemed. In addition, the Company may redeem the preferred securities in whole or part, beginning July 26, 2007 at a redemption price of $1,000 per preferred security.

The Company has provided a full, irrevocable, and unconditional guarantee on a subordinated basis of the obligations of the Trust under the preferred securities in the event of the occurrence of an event of default, as defined in such guarantee. Debt issuance costs of $106,000 were capitalized and are being amortized over the estimated life of the subordinated debentures.

NOTE 9 - CAPITAL REQUIREMENTS

The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If undercapitalized, capital distributions are limited, as are asset growth and expansion, and plans for capital restoration are required. The minimum requirements are:

	Capital to Risk Weighted Assets				Tier 1 Capital to Average Assets
	Total		Tier 1
Well capitalized	10	%	6	%	5	%
Adequately capitalized	8		4		4
Undercapitalized	6		3		3

45

The actual capital levels and minimum required levels for the Company and the Bank were as follows at December 31:

	Actual				Minimum for Capital Adequacy Purposes				Minimum to Be Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
2006
Total capital (to risk-weighted assets)
Consolidated	$	25,641	12.0	%	$	17,133	8.0	%			N/A
Bank		24,392	11.4			17,115	8.0		$	21,394	10.0	%
Tier 1 capital (to risk-weighted assets)
Consolidated		24,092	11.2			8,566	4.0				N/A
Bank		22,843	10.7			8,557	4.0			12,836	6.0
Tier 1 capital (to average assets)
Consolidated		24,092	8.9			10,870	4.0				N/A
Bank		22,843	8.5			10,776	4.0			13,470	5.0
2005
Total capital (to risk-weighted assets)
Consolidated	$	23,413	11.7	%	$	16,035	8.0	%			N/A
Bank		22,390	11.2			16,021	8.0		$	20,026	10.0	%
Tier 1 capital (to risk-weighted assets)
Consolidated		22,032	11.0			8,017	4.0				N/A
Bank		21,009	10.5			8,010	4.0			12,016	6.0
Tier 1 capital (to average assets)
Consolidated		22,032	7.8			11,347	4.0				N/A
Bank		21,009	8.0			10,471	4.0			13,089	5.0

Without prior approval, current regulations allow the Bank to pay dividends to the Company not exceeding net profits (as defined) for the current year plus the previous year. The Bank normally restricts dividends to a lesser amount because of the need to maintain an adequate capital structure. Total stockholder’s equity of the Bank at December 31, 2006 was $22,853,000, of which $19,079,000 was restricted from dividend distribution to the Company.

At December 31, 2006, the Bank was categorized by its regulators as well capitalized in accordance with the regulatory criteria discussed above. Management is not aware of any conditions or events since the most recent notification that would change the Bank’s category.

NOTE 10 - STOCK SPLIT

The Company declared a 2 for 1 stock split on December 27, 2006. Accordingly all share and per share data have been restated to reflect the stock split for all years presented.

NOTE 11 - RETIREMENT PLANS

The Company maintains a profit sharing/401(k) plan, which covers substantially all employees. Employees may make contributions to the plan. Employer contributions to the plan are determined at the discretion of the Board of Directors. Annual employer contributions are charged to expense. Profit sharing/401(k) expense was $251,000, $228,000 and $253,000 in 2006, 2005 and 2004.

The Company also maintains a nonqualified retirement program for directors. Expense for the directors’ retirement program was $41,000, $35,000 and $33,000 in 2006, 2005 and 2004.

46

Under agreements with the Company, certain members of the Board of Directors have elected to defer their directors’ fees. The cumulative amount of deferred directors’ fees (included in other liabilities on the Company’s balance sheet) was $601,000 and $487,000 at December 31, 2006 and 2005. The liabilities for the nonqualified retirement program for directors and for directors’ deferred fees are not secured by any assets of the Company. Deferred directors’ fees accounts are credited with interest at 5 percent.

NOTE 12 - INCOME TAXES

Income tax expense consists of the following:

	2006			2005		2004
Currently payable tax
Federal	$	1,036		$	559	$	541
State		309			161		148
Deferred tax		(427	)		167		384
Income tax expense	$	918		$	887	$	1,073

Income tax expense differs from federal statutory rates applied to financial statement income due to the following:

	2006			2005			2004
Federal rate of 34 percent	$	1,055		$	992		$	1,144
Add (subtract) effect of
Tax-exempt income, net of nondeductible interest expense		(188	)		(163	)		(144	)
State income tax, net of federal benefit		152			128			146
Cash value of life insurance		(75	)		(79	)		—
Other items, net		(26	)		9			(73	)
Income tax expense	$	918		$	887		$	1,073

Year end deferred tax assets and liabilities were due to the following:

	2006			2005			2004
Deferred tax assets
Allowance for loan losses	$	470		$	415		$	426
Deferred compensation		346			280			239
Net unrealized losses on securities available for sale		—			51			—
Other		17			38			32
Total		833			784			697
Deferred tax liabilities
Accumulated depreciation		(288	)		(172	)		(180	)
Deferred loan fees and costs, net		(33	)		(24	)		(24	)
Prepaid expenses		(100	)		(40	)		(40	)
Federal Home Loan Bank stock dividends		(522	)		(1,038	)		(827	)
Net unrealized gains on securities available for sale		(6	)		—			(72	)
Other		(7	)		(3	)		(3	)
Total		(956	)		(1,277	)		(1,146	)
Net deferred tax liabilities	$	(123	)	$	(493	)	$	(449	)

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NOTE 13 - EARNINGS PER SHARE

The factors used in the earnings per common share computation follow:

	2006		2005		2004
Basic
Net income	$	2,186	$	2,031	$	2,291
Weighted-average common shares outstanding		1,373,205		1,367,114		1,364,004
Basic earnings per share	$	1.59	$	1.49	$	1.68
Diluted
Net income	$	2,186	$	2,031	$	2,291
Weighted-average common shares outstanding for basic earnings per share		1,373,205		1,367,114		1,364,004
Add dilutive effects of assumed exercise of stock options		5,382		6,465		8,358
Average shares and dilutive potential common shares		1,378,587		1,373,579		1,372,362
Diluted earnings per share	$	1.59	$	1.48	$	1.67

NOTE 14 - STOCK OPTIONS

The Company has a nonqualified stock option plan (“Plan”) to attract, retain, and reward senior officers and directors and provide them with an opportunity to acquire or increase their ownership interest in the Company.

Under terms of the Plan, options for 40,400 shares of common stock were authorized for grant with an additional 4,600 options authorized in 2004. Options cannot be granted at exercise prices less than the fair market value of the stock at the grant date. Options granted under the Plan vest incrementally over periods of 5 to 10 years. The options also vest when the recipient attains age 72 or in the event of a change of control (as defined). The term of each option is ten years.

The Plan was amended at the November 29, 2006 Special Meeting of Stockholders. The number of shares reserved for issuance under the Plan was increased to 100,000.

The fair value of each option award is estimated on the date of grant using a closed-form option valuation model that uses the assumptions in the following table. Expected volatility is based on the historical volatility of the Company’s stock. The expected term of options granted represents the average period of time that options are expected to be outstanding. The risk-free rate for the options granted is based on the U.S. Treasury rate for a similar term as the average expected term of the option.

48

A summary of the activity in the Plan follows:

	2006	2005		2004
Expected volatility	11.22% - 11.44%	11.45	%	1.00	%
Weighted-average volatility	11.28%	11.45	%	1.00	%
Expected dividends	.44% - .52%	.44	%	.47	%
Expected term (in years)	5	5		5
Risk-free rate	4.28% - 5.19%	3.73	%	3.78	%

A summary of option activity under the Plan as of December 31, 2006 and 2005, and changes during the years then ended, is presented below:

	2006
	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding, beginning of year	40,950		$	16.84
Granted	8,600			23.45
Exercised	(4,150	)		12.14
Forfeited or expired	(3,650	)		18.08
Outstanding, end of year	41,750		$	18.50	6.0	$	218,195
Exercisable, end of year	6,470		$	14.96	5.0	$	56,555

The weighted-average grant-date fair value of options granted during the years 2006, 2005 and 2004 was $4.96, $4.20 and $2.75, respectively. The total intrinsic value of options exercised during the years ended December 31, 2006, 2005 and 2004, was $46,300, $69,900 and $42,300, respectively.

As of December 31, 2006, there was $129,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of six years.

During 2006, the Company recognized approximately $13,000 of share-based compensation expense and approximately $4,000 of tax benefit related to the share based compensation expense.

NOTE 15 - OFF-BALANCE-SHEET ACTIVITIES

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

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The contractual amount of financial instruments with off-balance-sheet risk was as follows at year end.

	2006		2005
Financial standby letters of credit	$	325	$	150
Commitments to originate loans		40,683		5,054
Unused lines of credit and letters of credit		38,466		57,247
Performance standby letters of credit		3,274		618

NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount and estimated fair value of financial instruments at year end are as follows:

	2006				2005
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets
Cash and cash equivalents	$	10,629	$	10,629	$	7,794	$	7,794
Securities available for sale		34,924		34,924		37,888		37,888
Loans receivable, net		199,820		200,109		192,663		191,257
Federal Home Loan Bank stock		5,398		5,398		10,742		10,742
Interest receivable		1,320		1,320		1,381		1,381
Financial liabilities
Deposits		234,725		234,780		229,704		229,593
Federal Home Loan Bank advances		10,500		10,511		8,500		8,462
Subordinated debentures		3,609		3,609		3,609		3,609
Interest payable		761		761		362		362

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

Carrying amount is the estimated fair value for cash and cash equivalents, Federal Home Loan Bank stock, interest receivable and payable, deposits due on demand, variable rate loans, and subordinated debentures. Security fair values are based on market prices or dealer quotes and, if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans and time deposits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. The fair value of fixed rate Federal Home Loan Bank advances is based on current rates for similar financing. The fair value of off-balance-sheet items, which is based on the current fees or cost that would be charged to enter into or terminate such arrangements, is immaterial.

50

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

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

NOTE 17 - CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)

Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company:

Condensed Balance Sheets

	December 31,
	2006		2005
Assets
Cash on deposit with the Bank	$	901	$	658
Investment in common stock of the Bank		22,853		20,928
Other assets		463		498
Total assets	$	24,217	$	22,084
Liabilities
Long-term debt	$	3,609	$	3,609
Other liabilities		7		6
Total liabilities		3,616		3,615
Stockholders’ Equity		20,601		18,469
Total liabilities and stockholders’ equity	$	24,217	$	22,084

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Condensed Statements of Income

	Years Ending December 31,
	2006			2005			2004
Income	$	654		$	291		$	10
Expenses
Interest expense		313			250			180
Other expenses		123			68			43
Total expenses		436			318			223
Loss Before Income Tax and Equity in Undistributed Income of the Bank		218			(27	)		(213	)
Income Tax Benefit		(133	)		(119	)		(83	)
Income/(Loss) Before Equity in Undistributed Income of the Bank		351			92			(130	)
Equity in Undistributed Income of the Bank		1,835			1,939			2,421
Net Income	$	2,186		$	2,031		$	2,291

Condensed Statements of Cash Flows

	Years Ending December 31,
	2006			2005			2004
Operating Activities
Net income	$	2,186		$	2,031		$	2,291
Equity in undistributed income of the Bank		(1,835	)		(1,939	)		(2,421	)
Compensation cost of stock options		13			—			—
Other changes		36			(111	)		(77	)
Net cash used in by operating activities		400			(19	)		(207	)
Financing Activities
Purchase of stock		—			—			(48	)
Exercise of stock options		50			45			20
Tax benefit of stock options exercised		20			—			—
Dividends paid		(227	)		(136	)		(130	)
Net cash used in financing activities		(157	)		(91	)		(158	)
Net Change in Cash on Deposit With the Bank		243			(110	)		(365	)
Cash on Deposit With the Bank at Beginning of Year		658			768			1,133
Cash on Deposit With the Bank at End of Year	$	901		$	658		$	768

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NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table sets forth certain quarterly results for the years ended December 31, 2006 and 2005:

					Net		Provision			Securities
	Interest		Interest		Interest		for Loan			Gains		Net		Earnings Per Share
Quarter Ended	Income		Expense		Income		Losses			(Losses)		Income		Basic		Diluted
2006
March	$	3,829	$	1,438	$	2,391	$	135		$	—	$	462	$	0.33	$	0.33
June		4,060		1,565		2,495		135			—		547		0.40		0.40
September		4,095		1,631		2,464		45			—		572		0.42		0.42
December		4,163		1,780		2,383		(150	)		—		605		0.44		0.44
	$	16,147	$	6,414	$	9,733	$	165		$	—	$	2,186	$	1.59	$	1.59
2005
March	$	3,020	$	777	$	2,243	$	—		$	—	$	575	$	0.42	$	0.42
June		3,279		1,010		2,269		20			—		412		0.30		0.30
September		3,522		1,145		2,377		150			—		522		0.38		0.38
December		3,670		1,237		2,433		95			—		522		0.39		0.38
	$	13,491	$	4,169	$	9,322	$	265		$	—	$	2,031	$	1.49	$	1.48

53

ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. - 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 Exchange Act) as of December 31, 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 changes in the Company’s internal controls over financial reporting during the Company’s last fiscal quarter ending December 31, 2006, that have affected or are reasonably likely to affect, the Company’s internal controls over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Company management has always understood and accepted responsibility for our financial statements and related disclosures and the effectiveness of internal control over financial reporting (“internal control”). Just as we do throughout all aspects of our business, we continuously strive to identify opportunities to enhance the effectiveness and efficiency of internal control.

Based on our assessment as of December 31, 2006, we make the following assertion:

- Management is responsible for establishing and maintaining effective internal control over financial reporting of the Company. The internal control contains monitoring mechanisms, and actions are taken to correct deficiencies identified.

- There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

- Management evaluated the Company’s internal control over financial reporting as of December 31, 2006. The assessment was based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Framework.

Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2006.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

ITEM 9B. - OTHER INFORMATION

None.

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PART III

ITEM 10. - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information relating to Executive Officers of the Registrant is incorporated herein by reference to the section titled “Executive Officers” contained in the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held May 23, 2007.

The Company’s Board of Directors is currently comprised of ten directors who were elected to a one year term on May 18, 2006. Information about the directors is set forth below.

Name and Background	Director Since
William F. Behrmann, age 64, has been owner and President of McChesney & Miller, Inc., located in Glen Ellyn, Illinois (a grocery store and market) since October 2002, employed there since 1959	1994
Penny A. Belke, DDS, age 55, has been a dentist and has owned and operated her practice in Glen Ellyn since 1980	2004
H. David Clayton, DVM, age 68, has been a veterinarian in Glen Ellyn since 1966. Dr. Clayton was listed in Who’s Who in Veterinary Medicine and Science in the United States. He is currently President of Clayton Consulting, a veterinary management and consulting firm, and is owner of Fox Valley Veterinary Hospital, P.C. in Ottawa, Illinois	1994
Raymond A. Dieter, Jr., MD, age 71, has been a surgeon with the DuPage Medical Group, located in Glen Ellyn, Illinois (a surgery and health care clinic) since 1969. Dr. Dieter has also been President of the Center for Surgery, located in Naperville, Illinois (an outpatient and surgery clinic) since 1990	1994
Donald H. Fischer, age 71, has been Chairman, President and Chief Executive Officer of Community Financial Shares, Inc., located in Glen Ellyn, Illinois (a bank holding company) since July, 2000. Mr. Fischer has also been Chairman, President and Chief Executive Officer of Community Bank-Wheaton/Glen Ellyn, located in Wheaton, Illinois and Glen Ellyn Illinois (an Illinois state-chartered bank) since March 1994	1994
Harold W. Gaede, age 77, has been the owner and President of Gaede’s, Inc. located in Wheaton, Illinois (a chain of retail stores) since March 1954	1994
Robert F. Haeger, age 57, is a partner with Langan, Haeger, Vincent & Born, an Illinois insurance company located in Wheaton, Illinois since 1971	2005
Mary Beth Moran, age 37, is a certified public accountant and registered Investment Advisor. She has been a partner in the CPA firm of Kirkby, Phelan and Associates, located in Bloomingdale, Illinois since 1994	2004
Joseph S. Morrissey, DDS, age 68, has been a Wheaton dentist since 1969	1994
John M. Mulherin, age 64, is of-counsel to Mulherin, Rehfeldt & Varchetto P.C., Attorneys at Law, located in Wheaton, Illinois (a professional corporation engaged in the practice of law) since 1972. Mr. Mulherin continues to practice law with the firm, but no longer has an ownership interest	1995

55

Board Committees

Executive Committee

The independent directors of the Company meet periodically as the Executive Committee of the Board, as circumstances warrant. The function of the Executive Committee is to consider in executive session any matters where management may have a personal interest. The Executive Committee met five times in 2006.

Compensation Committee

The Compensation Committee of the Board of Directors comprises Mrs. Belke and Messrs. Behrmann, Dieter, Fischer and Morrissey. The Compensation Committee reviews executive compensation and performance and establishes compensation policies and incentives. None of the members of the committee other than Mr. Fischer are officers or employees of the Company, in 2006, and none of these individuals are former officers or employees of the Company. In addition, during 2006 none of our executive officers served on the board of directors or compensation committee of any other company with respect to which any member of our Compensation Committee was engaged as an executive officer. The committee meets independently of Mr. Fischer in matters involving his compensation. The Compensation Committee held six meetings in 2006.

Nominating Committee

The Nominating Committee of the Board of Directors is comprised of Messrs. Mulherin, Morrissey, Clayton and Fischer. The Nominating Committee is responsible for nominating qualified candidates for Board membership and recommending to the Board the directors to serve on each committee of the Board. Each member of the Nominating Committee is independent other than Mr. Fischer; the committee meets independently of Mr. Fischer when considering matters relating to his Board service. The Nominating Committee held one meeting in 2006. The Nominating Committee does not have a charter.

While the Nominating Committee has not yet adopted a specific policy with regard to consideration of director candidates recommended by stockholders, it will carefully consider all director candidates recommended by stockholders provided such candidates and their credentials are submitted within the time period for stockholder proposals. Written recommendations should be submitted to the Company at 357 Roosevelt Road, Glen Ellyn, Illinois 60137.

In evaluating candidates for Board membership, the Nominating Committee assesses the contribution that the candidate’s skills and expertise, together with his or her knowledge of the markets served by the Company’s operations, will make with respect to the Company’s strategy and operations. Final consideration of the nominees is conducted by the entire Board.

Audit Committee

The Audit Committee of the Board of Directors operates under a charter that was approved by the full Board of Directors. The members of the Audit Committee are William H. Behrmann, Harold W. Gaede, Mary Beth Moran, John Mulherin and Joseph S. Morrissey (chair). The Board of Directors has determined that Mrs. Mary Beth Moran is an “audit committee financial expert” as that term is defined by the Securities and Exchange Commission. The Board of Directors has examined the composition of the Audit Committee in light of applicable federal law and the rules of the National Association of Securities Dealers, Inc. governing audit committees, and has confirmed that all members of the Audit Committee are “independent” within the meaning of those rules. The Audit Committee held four meetings during 2006.

56

CODE OF BUSINESS CONDUCT AND ETHICS

The Company has a formal Code of Business Conduct Ethics. The code of business conduct and ethics applies to all directors and employees of the Company. The code sets forth the standard of ethics that we expect all of our directors and employees to follow, including the Chief Executive Officer and Chief Financial Officer.

ITEM 11. - EXECUTIVE COMPENSATION

The information relating to director and executive compensation is incorporated herein by reference to the section titled “Executive Compensation” contained in the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held May 23, 2007.

ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the section titled “Voting Security Ownership of Certain Beneficial Owners and Management” contained in the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 2007.

Equity Compensation Plan information as of December 31, 2006:

	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted Average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans*
	A	B		C
Equity compensation plans approved by security holders	41,750	$	18.50	30,795
Equity compensation plans not approved by security holders	0		N/A	0
Total	41,750	$	18.50	30,795

* Excluding securities reflected in column A.

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ITEM 13. - CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Certain directors and executive officers of the Company and its subsidiaries and their associates are customers of, and have had transactions with, the Company’s subsidiary banks from time to time in the ordinary course of business. Each member of the Board of Directors is independent other than Mr. Fischer. Additional transactions may be expected to take place in the ordinary course of business in the future. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features. John M. Mulherin, a director of the Company, is a principal of the law firm of Mulherin, Rehfeldt and Varchetto P.C., which the Company has retained as legal counsel during 2006 and proposes to retain as such during 2007.

ITEM 14. - PRINCIPAL ACCOUNTING FEES

The information relating to the principal accountant fees and expenses is incorporated herein by reference to the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held May 23, 2007.

PART IV

ITEM 15. - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) and (2) The following is a list of the financial statements of Community Financial Shares, Inc. included in this annual report on Form 10-K which are filed herewith in response to Part II Item 8:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2006 and 2005.

Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004.

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004.

Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004.

(a)(3) The exhibits listed on the Exhibit Index of this Form 10-K are filed herewith or are incorporated herein by reference to other filings. Each management contract or compensatory plan or arrangement of the Company listed on the Exhibit Index is separately identified by an asterisk.

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SIGNATURES

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

COMMUNITY FINANCIAL SHARES, INC.
Registrant
By	/s/ Scott W. Hamer
	President and Chief Executive Officer
Date	March 30, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March xx, 2007 by the following persons on behalf of the registrant and in the capacities indicated.

Signature	Title
/s/ Donald H. Fischer Donald H. Fischer	Chairman of the Board
/s/ Scott W. Hamer Scott W. Hamer	President and Chief Executive Officer (Principal Executive)
/s/ Christopher P. Barton Christopher P. Barton	Vice President and Secretary
/s/ William F. Behrmann William F. Behrmann	Director
/s/ Penny A. Belke Penny A. Belke	Director
/s/ H. David Clayton H. David Clayton	Director
/s/ Raymond A. Dieter, Jr. Raymond A. Dieter, Jr.	Director
/s/ Robert F. Haeger Robert F. Haeger	Director
/s/ Mary Beth Moran Mary Beth Moran	Director
/s/ Joseph S. Morrissey Joseph S. Morrissey	Director
/s/ John M. Mulherin John M. Mulherin	Director

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EXHIBITS INDEX

EXHIBIT NUMBER	EXHIBIT
**3.1.1	Certificate of Incorporation of Community Financial Shares, Inc.
**3.1.2	Certificate of Amendment to the Certificate of Incorporation of Community Financial Shares, Inc. as amended November 29, 2006.
3.2	Bylaws of Community Financial Shares, Inc. (Incorporated by reference to Annex B to the Company’s Registration Statement on Form S-4, File No. 333-46622, filed September 26, 2000)
4.1	Specimen Common Stock certificate (Incorporated by reference from Community Financial Shares, Inc., Form 10-K for the year ended December 31, 2005)
**4.2	Community Bank–Wheaton/Glen Ellyn Non-Qualified Stock Option Plan, as amended effective November 29, 2006.*
10.0	Form of Community Bank Directors Retirement Plan agreement (Incorporated by reference from Community Financial Shares, Inc., Form 10-KSB for the year ended December 31, 2000, Exhibit 10.0)*
10.1	Form of Community Bank Directors Deferred Compensation Agreement (Incorporated by reference from Community Financial Shares, Inc., Form 10-K for the year ended December 31, 2005, Exhibit 10.1)
10.2	Form of change of control letter agreement (Incorporated by reference from Community Financial Shares, Inc., Form 10-QSB for the quarterly period ended June 30, 2002, Exhibit 10.)*
**10.3	Employment agreement between Community Financial Shares, Inc., Community Bank Wheaton/Glen Ellyn and Donald H. Fischer dated November 28, 2006.*
11.0	Statement re: Computation of Per Share Earnings is incorporated herein by reference to Part II, Item 8, “Financial Statements”
**14.0	Code of Ethics – A copy of the Code of Ethics is filed herein.
**21.0	Subsidiaries of the Company.
**23.0	Consent of Independent Registered Public Accounting Firm (filed herein)
**31.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
**31.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
**32.1	Certification of CEO 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 CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.

* Denotes management contract or compensatory plan.

** Exhibit filed herewith.

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