10-K

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, 2009

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

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	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 the voting and non-voting common equity held by non-affiliates of the registrant was $15,815,000 based upon the average bid and asked price of such common equity as of the last business day of the 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 21, 2010
Common Stock, no par value per share	1,245,267 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 on May 26, 2010 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	16
Item 1B.	Unresolved Staff Comments	23
Item 2.	Properties	23
Item 3.	Legal Proceedings	23
Item 4.	Reserved	23
PART II		23
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23
Item 6.	Selected Financial Data	24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 8.	Financial Statements and Supplementary Data	36
Item 9.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	65
Item 9A(T).	Controls and Procedures	65
Item 9B.	Other Information	65
PART III		66
Item 10.	Directors, Executive Officers and Corporate Governance	66
Item 11.	Executive Compensation	66
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	66
Item 13.	Certain Relationships, Related Transactions and Director Independence	67
Item 14.	Principal Accountant Fees and Services	67
PART IV		67
Item 15.	Exhibits and Financial Statement Schedules	67
Signatures		68
Exhibits		69

Forward-Looking Statements

Community Financial Shares, Inc. (“the Company”) from time to time includes forward-looking statements in its oral and written communications. The Company may include forward-looking statements in filings with the Securities and Exchange Commission, such as this Form 10-K and Form 10-Q, 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:

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

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

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

• 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 risks discussed in Item 1A of this Form 10-K and the following important factors which could affect the actual outcome of future events:

• 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;

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

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

• changes in the banking legislation or the regulatory requirements of federal and state agencies applicable to bank holding companies and banks such as 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. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date such forward-looking statement is made.

PART I

Item 1. Business

General

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”).

2

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 was opened on November 21, 2007 in north Wheaton. 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.

Market Area

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 930,000 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 whom are nearby, are likely the largest. The local economy remains stable however, real estate values have been negatively impacted which is reflected in the local real estate market.

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.

Lending Activities

General. The Bank’s loan portfolio is comprised primarily of real-estate mortgage loans, which include 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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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.

	2009			2008			2007			2006			2005
	(In thousands)
Real estate
Commercial	$	99,416		$	84,103		$	87,746		$	85,598		$	83,744
Construction		21,341			31,243			39,016			27,903			23,020
Residential		25,424			18,790			21,279			21,526			23,007
Home Equity		63,758			59,727			51,498			38,132			35,413
Total real estate		209,939			193,863			199,539			173,159			165,184
Commercial		25,907			27,175			28,228			26,318			26,334
Consumer		1,662			1,762			1,895			1,876			2,576
Total loans		237,508			222,800			229,662			201,353			194,094
Deferred loan costs, net		276			115			44			16			(50	)
Allowance for loan losses		(4,812	)		(3,300	)		(1,970	)		(1,549	)		(1,381	)
Loans, net	$	232,972		$	219,615		$	227,736		$	199,820		$	192,663

Loan Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table shows the amount of total loans outstanding as of December 31, 2009 which, based on remaining scheduled repayments of principal, are due in the periods indicated.

	Maturing
	Within One Year		After One But Within Five Years		After Five Years		Total
	(Dollars in thousands)
Commercial	$	19,375	$	6,532	$	—	$	25,907
Real Estate		46,797		97,986		65,157		209,939
Consumer		633		1,029		—		1,662
Totals	$	66,805	$	105,547	$	65,157	$	237,508

Below is a schedule of loan amounts maturing or re-pricing, classified according to sensitivity to changes in interest rates, as of December 31, 2009.

	Interest Sensitivity
	Fixed Rate		Variable Rate		Total
	(Dollars in thousands)
Due within three months	$	5,748	$	14,773	$	20,521
Due after three months but within one year		13,540		31,083		44,623
Due after one but within five years		103,260		2,471		105,731
Due after five years		4,771		61,862		66,633
Total	$	127,319	$	110,189	$	237,508

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Residential – One-to-Four Family. In 1999 the Bank 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. Loans for amounts between 80% and 85% of appraised value or sale price may also be granted 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 totaled approximately $25.4 million, or 10.7% of the Bank’s total loan portfolio, as of December 31, 2009.

Commercial Real Estate Lending. Loans secured by commercial real estate totaled approximately $99.4 million, or 41.9% of the Bank’s total loan portfolio, at December 31, 2009. 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, 2009, most are secured by properties 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, 2009, the Bank had $21.3 million in construction loans outstanding, which represented 9.0% of the Bank’s loan portfolio at such date. 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.

5

Consumer Lending. As a community-oriented lender, 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 $1.7 million, or 0.7% of the Bank’s total loan portfolio, at December 31, 2009. 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.

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 generally made for five-year terms and are generally revolving credit lines with minimum payment structures of interest only. 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, 2009, the outstanding home equity loan balance was $63.8 million, or 26.8% of the Bank’s total loan portfolio.

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 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 December 31, 2009 totaled $1.5 million. Commercial loans totaled approximately $25.9 million or 10.9% of the Bank’s total loan portfolio at December 31, 2009.

Loan Concentration

At December 31, 2009, the Company did not have any concentration of loans exceeding 10% 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.

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 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 environmental 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.

6

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.

The allowance for loan losses was $4.8 million, representing 2.03% of total loans, as of December 31, 2009, compared to an allowance of $3.3 million or 1.48% of total loans at year-end 2008 and $2.0 million or 0.86% of total loans at year-end 2007. The increase in the provision was the result of the Bank’s loan growth during the year as well as management’s quarterly analysis of the allowance for loan losses. Management believes that, based on information available at December 31, 2009, the Bank’s allowance for loan losses was adequate to cover probable incurred losses inherent in its loan portfolio at that time. However, no assurances can be given that the Bank’s level of allowance for loan losses will be sufficient to cover loan losses incurred by the Bank or that future adjustments to the allowance for loan losses will not be necessary if economic or other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance. In addition, the FDIC and Illinois Department of Financial and Professional Regulation, as an integral part of their examination processes, periodically review the Bank’s allowance for loan losses and may require the Bank to make additional provisions for estimated loan losses based upon judgments different from those of management.

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, (Dollars in thousands)
	2009			2008			2007			2006			2005
Net Total Loans at Year-end	$	232,972		$	219,615		$	227,736		$	199,820		$	192,663
Average daily balances for loans for the year		228,676			225,245			205,326			197,410			178,373
Allowance for loan losses at beginning of period	$	3,300		$	1,970		$	1,549		$	1,381		$	1,367
Loan charge-offs during the period
Commercial		(5	)		(771	)		(14	)		(20	)		(200	)
Commercial construction		(407	)		0			0			0			0
Residential construction		(366	)		0			0			0			0
Real Estate		0			(125	)		0			0			(53	)
Consumer		(59	)		(9	)		0			0			(18	)
Total Charge-offs		(837	)		(905	)		(14	)		(20	)		(271	)
Loan recoveries during the period
Commercial		4			20			15			23			7
Consumer		1			0			0			0			13
Total recoveries		5			20			15			23			20
Net recoveries (charge-offs)		(832	)		(885	)		1			3			(251	)
Provision charged to expense		2,344			2,215			420			165			265
Allowance for loan losses at end of period	$	4,812		$	3,300		$	1,970		$	1,549		$	1,381
Ratio of net recoveries/(charge-offs) during the period to average loans outstanding		(0.36	)%		(0.39	)%		0.00	%		0.00	%		0.14	%
Allowance for loan losses to loans outstanding at year-end		2.03	%		1.48	%		0.86	%		0.77	%		0.71	%

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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 as of the dates indicated:

	2009				2008				2007
	(Dollars in thousands)
	Amount		Percent		Amount		Percent		Amount		Percent
Balance at December 31:
Commercial and industrial (1)	$	1,268	26.4	%	$	349	10.6	%	$	872	12.3	%
Real estate mortgage (2)		2,177	45.2			2,920	88.5			844	86.9
Construction and land		950	19.7			—	—			—	—
HELOC		389	8.1			—	—			—	—
Individuals’ loans for household and other personal expenditures, including other loans		24	0.5			31	0.9			36	0.8
Unallocated		4	0.1			—				218
Totals	$	4,812	100.0	%	$	3,300	100.0	%	$	1,970	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 commercial, farmland and residential real estate loans.

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 the dates indicated.

	At December 31, (Dollars in thousands)
	2009			2008			2007			2006			2005
Non-accrual loans	$	14,555		$	2,725		$	62		$	25		$	115
Other loans 90 days past due		480			32			635			645			752
Total nonperforming loans		15,035			2,757			697			670			867
Other real estate		2,396			198			—			—			—
Total nonperforming assets	$	17,431		$	2,955		$	697		$	670		$	867
Nonperforming loans to total loans		6.33	%		1.24	%		0.30	%		0.34	%		0.45	%
Allowance for loan losses
To nonperforming loans		32.00	%		119.70	%		282.64	%		231.19	%		159.28	%
Total nonperforming assets
To total stockholders’ equity		69.92	%		17.79	%		3.77	%		3.25	%		4.70	%
Total nonperforming assets
To total assets		5.11	%		1.01	%		0.23	%		0.25	%		0.32	%

Nonperforming assets consisted of $14.6 million of nonaccrual loans, $480,000 of loans 90 days past due and still accruing interest and other real estate owned of $2.4 million. In addition, nonaccrual loans included $7.5 million of participating interests with other area community banks all of which are secured by commercial real estate. The largest component of nonperforming assets was commercial real estate. This sector represented $9.2 million, or 53.0%, of total nonperforming assets. At December 31, 2009, one to four family residences totaled $4.6 million, or 26.1%, of nonperforming assets, loans secured by land totaled $2.4 million, or 13.7%, of total nonperforming assets and commercial loans totaled $1.2 million, or 7.1%, of nonperforming assets. The ratio of the allowance for loan losses to nonperforming loans was 32.0% as of

8

December 31, 2009 as compared to 119.7% for December 31, 2008. While this ratio has decreased as compared to December 31, 2008, management believes the allowance coverage is sufficient due to the estimated loss potential.

Other real estate owned (“OREO”) increased $2.3 million to $2.4 million at December 31, 2009 from $112,000 at December 31, 2008. OREO consists of five properties that were acquired through foreclosure or deed in lieu of foreclosure. Included in the total are two single-family residences, two condominium projects and a commercial real estate property.

The provision for loan losses in 2009 totaled $2.3 million, which represents a $129,000 increase from the amount provided for in 2008. This increase is the result of management’s quarterly analysis of the allowance for loan losses. Levels of nonperforming loans are considered manageable at year end 2009. Total nonperforming loans as a percentage of total loans totaled 6.33% at December 31, 2009 compared to 1.24% for the prior year. 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, 2009 to cover any potential losses.

Net (charge-offs) recoveries for the years ended December 31, 2009 and 2008 totaled ($832,000) and ($885,000), respectively. The current year’s charge-offs are in part due to deteriorating economic conditions and the effect that has upon smaller businesses within the marketplace. In 2005 management formed a credit quality committee that was charged with monitoring problem credits and directing their resolution. The committee has been successful in identifying existing problem credits and 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 processes have been identified and addressed.

Investment Securities

The Board of Directors sets the investment policy and procedures of the Bank. This policy generally provides that investment decisions will be made based on the safety of the investment, liquidity requirements of the Bank and, to a lesser extent, potential return on the investments. In pursuing these objectives, the Bank considers the ability of an investment to provide earnings consistent with factors of quality, maturity, marketability and risk diversification. The Bank does not participate in hedging programs or other activities involving the use of derivative financial instruments. Similarly, the Bank does not invest in mortgage-related securities which are deemed to be “high risk,” or purchase bonds which are not rated investment grade.

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

	2009		2008		2007
U.S. Government Agencies	$	17,691	$	10,110	$	12,773
Mortgage-backed Securities		11,131		4,724		6,748
States and Political Subdivisions		15,339		10,745		12,780
Agency Preferred Stock SBA Guaranteed Pool		20 363		6 387		380 482
Total Investment Securities	$	44,544	$	25,972	$	33,163

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The following table shows the weighted average yield for each security group by term to final maturity as of December 31, 2009.

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	0.00	%	$	1,000	3.10	%	$	3,911	4.66	%	$	12,780	5.25	%
Mortgage-Backed Securities		427	2.91	%		147	4.32	%		171	3.52	%		10,386	3.92	%
States and Political Subdivisions(1)		132	5.18	%		1,197	6.14	%		2,308	6.67	%		11,702	5.96	%
Agency Preferred Stock		0	0.00	%		0	0.00	%		0	0.00	%		20	0.00	%
SBA Guaranteed Pool		0	0.00	%		0	0.00	%		113	2.42	%		250	2.57	%
Total Investment Securities	$	559	3.45	%	$	2,344	4.73	%	$	6,503	5.30	%	$	35,138	5.07	%

¹ Fully taxable equivalent

At December 31, 2009, 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.

Deposits

The Bank offers a variety of deposit accounts with a range of interest rates and terms. The Bank’s deposit accounts consist of regular savings accounts, retail checking/NOW accounts, commercial checking accounts, money market accounts and certificate of deposit accounts. The Bank offers certificate of deposit accounts with balances in excess of $100,000 at preferential rates (jumbo certificates) and also offers Individual Retirement Accounts (“IRAs”) and other qualified plan accounts.

At December 31, 2009, the Bank’s deposits totaled $298.3 million, or 94.2% of interest-bearing liabilities. This represents a significant increase from December 31, 2008 when the Bank’s deposits of $253.5 million represented 91.8% of interest-bearing liabilities. For the year ended December 31, 2009, the average balance of core deposits (savings, NOW, money market and non-interest bearing accounts) totaled $162.1 million, or 59.2% of total average deposits compared to $140.8 million or 56.6% of total average deposits for the prior year. Although the Bank has a significant portion of its deposits in core deposits, management monitors activity on the Bank’s core deposits and, based on historical experience and the Bank’s current pricing strategy, believes it will continue to retain a large portion of such accounts.

The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and local competition. The Bank’s deposits are obtained predominantly from the areas in which its facilities are located. The Bank relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions affect the Bank’s ability to attract and retain deposits. The Bank uses traditional means of advertising its deposit products and generally does not solicit deposits from

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outside its market area. While certificates of deposit in excess of $100,000 are accepted by the Bank, and may be subject to preferential rates, the Bank does not actively solicit such deposits as such deposits are more difficult to retain than core deposits.

The following table sets forth the distribution of the Bank’s deposit accounts for the periods indicated and the weighted average rates on each category presented.

	At December 31, 2009				At December 31, 2008
	(Dollars in thousands)
	Balance		Weighted Average Rate		Balance		Weighted Average Rate
Non interest-bearing accounts	$	29,962	—	%	$	27,271	—	%
NOW accounts		77,525	1.04	%		55,801	1.09	%
Regular savings accounts		26,140	0.16	%		23,043	0.28	%
Money market accounts		42,894	1.47	%		38,776	2.38	%
Certificates of deposit		121,790	2.84	%		108,624	3.98	%
Total deposits	$	298,311	1.84	%	$	253,515	2.34	%

The following table shows the maturity schedule for the Company’s time deposits of $100,000 or more as of December 31, 2009 and December 31, 2008.

	2009		2008
	(In thousands)
Three months or less	$	18,189	$	6,997
Three months through six months		13,763		20,139
Six months through twelve months		15,757		10,167
Over twelve months		4,466		6,298
	$	52,175	$	43,601

Personnel

As of December 31, 2009, the Company and its subsidiaries had a total of 74 full-time employees and 21 part-time employees. This compares to 70 full-time and 19 part-time employees as of December 31, 2008. None of these employees are subject to a collective bargaining agreement. We believe our relationship with our employees is good.

REGULATION AND SUPERVISION

The Company and the Bank 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.

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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 and enforcement authority 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 activities that the Federal Reserve Board has 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. As a result of the Gramm-Leach-Bliley Act amendments to the BHC Act, a bank holding company that meets certain requirements and opts to become a “financial holding company” may engage in any activity, or acquire and retain 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 U.S. Secretary of the Treasury) 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.

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.

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. The Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies which provides that dividends should only be paid out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality, and overall financial condition. The Federal Reserve Board’s policies also provide that a bank holding company should serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. These policies could also impact the Company’s ability to pay dividends

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.

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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 Federal Deposit Insurance Corporation (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 Deposit 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. Both the Illinois Department of Financial and Professional Regulation and the FDIC have enforcement authority over the Bank, including the authority to appoint a conservator or receiver under certain circumstances.

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.

The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The Deposit Insurance Fund is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged in 2006.

Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned. For calendar 2008, assessments ranged from five to forty-three basis points of each institution’s deposit assessment base. Due to losses incurred by the Deposit Insurance Fund in 2008 as a result of failed institutions, and anticipated future losses, the FDIC adopted an across the board seven basis point increase in the assessment range for the first quarter of 2009. The FDIC made further refinements to its risk-based assessment that were effective April 1, 2009 and that effectively made the range seven to 77.5 basis points. The FDIC may adjust rates uniformly from one quarter to the next, except that no adjustment can deviate more than three basis points from the base scale without notice and comment rulemaking. No institution may pay a dividend if in default of the FDIC assessment.

The FDIC has imposed on each insured institution a special emergency assessment of five basis points of total assets minus tier 1 capital, as of June 30, 2009 (capped at ten basis points of an institution’s deposit assessment base on the same date) in order to cover losses to the Deposit Insurance Fund. That special assessment was collected on September 30, 2009. The FDIC provided for similar special assessments during the fiscal two quarters of 2009, if deemed necessary. However, in lieu of further special assessments, the FDIC required insured institutions to prepay estimated quarterly risk-based assessments for the fourth quarter of 2009 through the fourth quarter of 2012. The estimated assessments, which include an assumed annual assessment base increase of 5%, were recorded as a prepaid expense asset as of December 30, 2009. As of December 31, 2009, and each quarter thereafter, a charge to earnings will be recorded for each regular assessment with an offsetting credit to the prepaid asset.

Due to the recent difficult economic conditions, deposit insurance per account owner has been raised to $250,000 for all types of accounts until January 1, 2014. In addition, the FDIC adopted an optional Temporary Liquidity Guarantee Program by which, for a fee, noninterest bearing transaction accounts would receive unlimited insurance coverage until December 31, 2009, subsequently extended until June 30, 2010. Certain senior unsecured debt issued by institutions and their holding companies between specified time frames could also be guaranteed by the FDIC through June 30, 2012, or in some cases, December 31, 2012. The Bank opted to participate in the unlimited noninterest bearing transaction account coverage and the Bank and the Company opted not to participate in the unsecured debt guarantee program.

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In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the financing corporation to recapitalize a predecessor deposit insurance funds. That payment is established quarterly and for the four quarters ended December 31, 2009 averaged 1.06 basis points of assessable deposits.

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the Office of Thrift Supervision. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.

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 agencies also apply leverage requirements which establish a required ratio of Tier 1 capital to total adjusted assets. As a result of discussions with the Bank’s regulators, management has agreed to maintain a ratio of total capital to risk-weighted assets of 11.5% at December 31, 2009. As of December 31, 2009 this ratio totaled 11.5%.

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 and such capital plan must be guaranteed by any parent holding company in an amount of the lesser of 5% of the institution’s assets or the amount of the capital deficiency. 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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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.

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.

Federal Taxation

The Company files a consolidated federal income tax return. To the extent a member incurs a net loss that is utilized to reduce the consolidated federal tax liability, that member will be reimbursed for the tax benefit utilized from the member incurring federal tax liabilities.

Amounts provided for income tax expense are based upon income reported for financial statement purposes and do not necessarily represent amounts currently payable to federal and state tax authorities. Deferred income taxes, which principally arise from the temporary difference related to the recognition of certain income and expense items for financial reporting purposes and the period in which they affect federal and state tax income, are included in the amounts provided for income taxes.

State Taxation

The Bank is required to file Illinois income tax returns and pay tax at an effective tax rate of 7.30% of Illinois taxable income. For these purposes, Illinois taxable income generally means federal taxable income subject to certain modifications the primary one of which is the exclusion of interest income on United States obligations.

As a Delaware holding company not earning income in Delaware, the Company is exempt from Delaware Corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware.

Regulatory Restructuring Legislation

The Obama Administration has proposed, and the House of Representatives and Senate are currently considering, legislation that would restructure the regulation of depository institutions. Proposals range from the merger of the Office of Thrift Supervision with the Office of the Comptroller of the Currency, which regulates national banks, to the creation of an independent federal agency that would assume the regulatory responsibilities of the Office of Thrift Supervision, FDIC, Office of the Comptroller of the Currency and Federal Reserve Board. Also proposed is the creation of a new federal agency to administer and enforce consumer and fair lending laws, a function that is now performed by the depository institution regulators. The federal preemption of state laws currently accorded federally chartered depository institutions would be reduced

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under certain proposals as well. Enactment of any of these proposals would revise the regulatory structure imposed on the Bank, which could result in more stringent regulation. At this time, management has no way of predicting the contents of any final legislation, or whether any legislation will be enacted at all.

Item 1A. Risk Factors

An investment in the Company’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.

A continued deterioration in national and local economic conditions may negatively impact our financial condition and results of operations.

We currently are operating in a challenging and uncertain economic environment, both nationally and in the local markets that we serve. Financial institutions continue to be affected by sharp declines in financial and real estate values. Continued declines in real estate values and home sales, and an increase in the financial stress on borrowers stemming from an uncertain economic environment, including rising unemployment, could have an adverse effect on our borrowers or their customers, which could adversely impact the repayment of the loans we have made. The overall deterioration in economic conditions also could subject us to increased regulatory scrutiny. In addition, a prolonged recession, or further deterioration in local economic conditions, could result in an increase in loan delinquencies; an increase in problem assets and foreclosures; and a decline in the value of the collateral for our loans. Furthermore, a prolonged recession or further deterioration in local economic conditions could drive the level of loan losses beyond the level we have provided for in our loan loss allowance, which could necessitate increasing our provision for loan losses, which would reduce our earnings. Additionally, the demand for our products and services could be reduced, which would adversely impact our liquidity and the level of revenues we generate.

The current economic recession could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which would lead to lower revenue, higher loan losses and lower earnings.

Our business activities and earnings are affected by general business conditions in the United States and in our primary market area. These conditions include short-term and long-term interest rates, inflation, unemployment levels, monetary supply, consumer confidence and spending, fluctuations in both debt and equity capital markets and the strength of the economy in the United States generally and in our primary market area in particular. In the current recession, the national economy has experienced general economic downturns, with rising unemployment levels, declines in real estate values and an erosion in consumer confidence. The current economic recession has also had a negative impact on our primary market area, which has experienced a softening of the local real estate market and reductions in local property values. A prolonged or more severe economic downturn, continued elevated levels of unemployment, further declines in the values of real estate, or other events that affect household and/or corporate incomes could impair the ability of our borrowers to repay their loans in accordance with their terms. The economic downturn could also result in reduced demand for credit or fee-based products and services, which also would decrease our revenues.

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.

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We are subject to credit risks in connection with the concentration of adjustable rate loans in our portfolio.

A majority of our loans held for investment are adjustable rate loans. Borrowers with adjustable rate mortgage loans are exposed to increased monthly payments when the related mortgage interest rate adjusts upward under the terms of the loan from the initial fixed rate or low introductory rate, as applicable, to the rate computed in accordance with the applicable index and margin. Any rise in prevailing market interest rates may result in increased payments for borrowers who have adjustable rate mortgage loans, increasing the possibility of default. Borrowers seeking to avoid these increased monthly payments by refinancing their mortgage loans may no longer be able to find available replacement loans at comparably low interest rates. In addition, a decline in housing prices may also leave borrowers with insufficient equity in their homes to permit them to refinance. Borrowers who intend to sell their homes on or before the expiration of the fixed rate periods on their mortgage loans may also find that they cannot sell their properties for an amount equal to or greater than the unpaid principal balance of their loans. These events, along or in combination, may contribute to higher delinquency rates and negatively impact earnings.

Fluctuations in interest rates could reduce our profitability and affect the value of our assets.

Short-term market interest rates (which we use as a guide to price our deposits) have until recently risen from historically low levels, while longer-term market interest rates (which we use as a guide to price our longer-term loans) have not. This “flattening” of the market yield curve has had a negative impact on our interest rate spread and net interest margin. For the years ended December 31, 2009 and 2008 our net interest margin was 3.13%. If short-term interest rates rise, and if rates on our deposits re-price upwards faster than the rates on our long-term loans and investments, we would experience compression of our interest rate spread and net interest margin, which would have a negative effect on our profitability. During 2008, however, the U.S. Federal Reserve decreased its target for the federal funds rate to a range of zero to 0.25%. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such loan or securities proceeds into lower-yielding assets, which might also negatively impact our income. For further discussion of how changes in interest rates could impact us, see “Interest Rate Risk” under Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”

Our emphasis on commercial and construction lending may expose us to increased lending risks.

At December 31, 2009, our loan portfolio included $99.4 million, or 41.9% of commercial real estate loans, $21.3 million, or 9.0% of construction loans and $25.9 million, or 10.9% of commercial loans. We intend to continue to increase our emphasis on the origination of commercial type lending. However, this type of loan generally exposes a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property, the income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Commercial loans expose us to additional risks since they typically are made on the basis of the borrower’s ability to make repayments from the cash flow of the borrower’s business and are secured by non-real estate collateral that may depreciate over time. In addition, since such loans generally entail greater risk than one- to four-family residential mortgage loans, we may need to increase our allowance for loan losses in the future to account for the likely increase in probable incurred credit losses associated with the growth of such loans. Also, many of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.

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Our regulators may require us to increase capital levels in the future and our continued pace of growth may require us to raise additional capital to support our operations, but additional capital may not be available when needed.

We are required by regulatory authorities to maintain adequate levels of capital to support our operations. In addition to such requirements, we have agreed with our regulators to maintain a ratio of total capital to risk-weighted assets of 11.5% at December 31, 2009. In the event that our regulators increase our minimum capital levels, or in the event that we need to increase funds to support our continued growth, we may need to raise additional capital in the future. If we raise capital through the issuance of additional shares of our common stock or other securities, it would dilute the ownership interests of current investors and may dilute the per share book value of our common stock. New investors may also have rights, preferences, and privileges senior to our current shareholders, which may adversely impact our current shareholders.

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to comply with any increased regulatory capital requirements or to further expand our operations through internal growth and acquisitions could be materially impaired.

Special FDIC assessments and increased base assessment rates by the FDIC will decrease our earnings.

Beginning in late 2008, the economic environment caused higher levels of bank failures, which dramatically increased FDIC resolution costs and led to a significant reduction in the Deposit Insurance Fund. As a result, the FDIC has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. The base assessment rate was increased by seven basis points (7 cents for every $100 of deposits) for the first quarter of 2009. Effective April 1, 2009, initial base assessment rates were changed to range from 12 basis points to 45 basis points across all risk categories with possible adjustments to these rates based on certain debt-related components. These increases in the base assessment rate will increase our deposit insurance costs and negatively impact our earnings. In addition, in May 2009, the FDIC imposed a special assessment on all insured institutions due to recent bank and savings association failures. The emergency assessment amounts to 5 basis points on each institution’s assets minus Tier 1 capital as of June 30, 2009, subject to a maximum equal to 10 basis points times the institution’s assessment base. The assessment was collected on September 30, 2009. Based on our assets and Tier 1 capital as of June 30, 2009, our special assessment was approximately $148,000. The special assessment decreased our earnings. In addition, the FDIC may impose additional emergency special assessments after June 30, 2009, of up to 5 basis points per quarter on each institution’s assets minus Tier 1 capital if necessary to maintain public confidence in federal deposit insurance or as a result of deterioration in the Deposit Insurance Fund reserve ratio due to institution failures. Any additional emergency special assessment imposed by the FDIC will further decrease our earnings.

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 the origination of new deposits. We also have access to secured borrowings, Federal Home Loan Bank 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.

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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 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.

The limitations on executive compensation imposed through our participation in the TARP Capital Purchase Program may restrict our ability to attract, retain and motivate key employees, which could adversely affect our operations.

As part of our participation in the TARP Capital Purchase Program, we agreed to be bound by certain executive compensation restrictions, including limitations on severance payments and the clawback of any bonus and incentive compensation that were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria. To the extent that any of these compensation restrictions do not permit us to provide a comprehensive compensation package to our key employees that is competitive in our market area, we have difficulty in attracting, retaining and motivating our key employees, which could have an adverse effect on our results of operations.

Future dividend payments and common stock repurchases are restricted by the terms of the U.S. Treasury’s equity investment in us.

Under the terms of the TARP Capital Purchase Program, until the earlier of the third anniversary of the date of issuance of the Company’s Series A preferred stock (the “Series A Preferred Stock”) and the date on which the Series A Preferred Stock has been redeemed in whole or the U.S. Treasury has transferred all of the Series A Preferred Stock to third parties, we are prohibited from increasing dividends on our common stock from the last quarterly cash dividend per share declared on the common stock prior to May 15, 2009, as adjusted for subsequent stock dividends and other similar actions, and from making certain repurchases of equity securities, including our common stock, without the consent of the U.S. Treasury. Furthermore, as long as the Series A Preferred Stock is outstanding, dividend payments and repurchases or redemptions relating to certain equity securities, including our common stock, are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions.

The terms governing the issuance of the preferred stock to the U.S. Treasury may be changed, the effect of which may have an adverse effect on our operations.

The terms of the Securities Purchase Agreement in which we entered into with U.S. Treasury pursuant to the TARP Capital Purchase Program provides that the U.S. Treasury may unilaterally amend any provision of the Purchase Agreement to the extent required to comply with any changes in applicable federal law that may occur in the future. We have no assurances that changes in the terms of the transaction will not occur in the future. Such changes may place restrictions on our business or results of operation, which may adversely affect the market price of our common stock.

If we lose 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.

19

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 Chicago metropolitan 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

• savings banks

• thrifts

• credit unions

• consumer finance companies

• securities brokerage firms

• mortgage brokers

• insurance companies

• mutual funds

• 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.

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 Corporation 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, is also subject to regulation and examination by 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.

20

Our stock trading volume has been low compared to larger bank holding companies. Accordingly, the value of your common stock may be subject to sudden decreases due to the volatility of the price of our common stock.

Although our common stock trades on the OTC Electronic Bulletin Board, it is not traded as regularly as the common stock of larger bank holding companies listed on other stock exchanges, such as the New York Stock Exchange, the Nasdaq Stock Market or the American Stock Exchange. We cannot predict the extent to which investor interest in us will lead to a more active trading market in our common stock or how liquid that market might become. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of willing buyers and sellers of our common stock at any given time, which presence is dependent upon the individual decisions of investors, over which we have no control.

The market price of our common stock may be highly volatile and subject to wide fluctuations in response to numerous factors, including, but not limited to, the factors discussed in other risk factors and the following:

• actual or anticipated fluctuations in our operating results;

• changes in interest rates;

• changes in the legal or regulatory environment in which we operate;

• press releases, announcements or publicity relating to us or our competitors or relating to trends in our industry;

• changes in expectations as to our future financial performance, including financial estimates or recommendations by securities analysts and investors;

• future sales of our common stock;

• changes in economic conditions in our marketplace, general conditions in the U.S. economy, financial markets or the banking industry; and

• other developments affecting our competitors or us.

These factors may adversely affect the trading price of our common stock, regardless of our actual operating performance. In addition, the stock markets, from time to time, experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. These broad fluctuations may adversely affect the market price of our common stock, regardless of our trading performance.

We rely on technology to conduct many transactions with our customers and are therefore subject to risks associated with systems failures, interruptions or breaches of security.

Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger, our deposits, and our loans. While we have established policies and procedures to prevent or limit the impact of systems failures, interruptions, and security breaches, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, any compromise of our security systems could deter customers from using our website and our online banking services, both of which involve the transmission of confidential information. Although we rely on commonly used security and processing systems to provide the security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.

21

In addition, we outsource certain of our data processing to certain third-party providers. If our third-party providers encounter difficulties, or if we have difficulty in communicating with them, our ability to adequately process and account for customer transactions could be affected, and our business operations could be adversely impacted. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

The occurrence of any systems failure, interruption, or breach of security could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to civil litigation and possible financial liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.

Recent legislative and regulatory initiatives to address difficult market and economic conditions may not stabilize the U.S. banking system. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition, results of operations, and cash flows.

The legislation that established U.S. Treasury’s Troubled Assets Relief Program (“TARP”), was signed into law on October 3, 2008. As part of TARP, the U.S. Treasury established the TARP Capital Purchase Program (“CPP”) to provide up to $700 billion of funding to eligible financial institutions through the purchase of capital stock and other financial instruments for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Then, on February 17, 2009, further legislation was signed into law as a sweeping economic recovery package intended to stimulate the economy and provide for broad infrastructure, energy, health, and education needs. There can be no assurance as to the actual impact any of this legislation will have on the national economy or financial markets. The failure of these significant legislative measures to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.

There have been numerous actions undertaken in connection with or following the recent legislation by the Federal Reserve, Congress, U.S. Treasury, the SEC and the federal bank regulatory agencies in efforts to address the current liquidity and credit crisis in the financial industry that followed the sub-prime mortgage market meltdown which began in late 2007. These measures include homeowner relief that encourages loan restructuring and modification; the temporary increase in FDIC deposit insurance from $100,000 to $250,000, the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; emergency action against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; and coordinated international efforts to address illiquidity and other weaknesses in the banking sector. The current administration has also proposed comprehensive legislation intended to modernize regulation of the United States financial system. The proposed legislation contains several provisions that would have a direct impact on the Company and the Bank. Among other things, the proposed legislation would create a new federal agency, the Consumer Financial Protection Agency, that would be dedicated to administering and enforcing fair lending and consumer compliance laws with respect to financial products and services, which could result in new regulatory requirements and increased regulatory costs for us. If enacted, the legislation may have a substantial impact on our operations. However, because any final legislation may differ significantly from the current administration’s proposal, the specific effects of the legislation cannot be evaluated at this time.

The purpose of these legislative and regulatory actions is to help stabilize the U.S. banking system. The recent legislation and the other regulatory initiatives described above may not have their desired effects. If the volatility in the markets continues and economic conditions fail to improve or worsen, our business, financial condition and results of operations could be materially and adversely affected.

22

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

The following table sets forth information related to the offices from which the Company conducts its business at December 31, 2009. 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	4,700	Owned

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. Reserved

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

As of March 1, 2010, the Company’s stock was held by approximately 513 shareholders of record. The Company’s stock is quoted on the Over-the-Counter Electronic Bulletin Board (“OTCBB”) under the symbol “CFIS”. The following table sets forth quarterly high and low sales information reported on the OTCBB for the Company’s common stock for the years ended December 31, 2009 and 2008. These quotes reflect inter-dealer prices without mark-ups, mark-downs or commissions and may not necessarily reflect actual transactions.

23

On February 27, 2008, the Company purchased 6,333 shares at $26.00 for a total cost of $165,000 under a previously announced repurchase program.

Common Stock Price and Dividend History

	High		Low		Dividend (per share)
2009
First Quarter	$	17.50	$	11.50	$	0.00
Second Quarter		20.00		11.50		0.00
Third Quarter		15.25		12.00		0.00
Fourth Quarter		14.50		7.55		0.00
2008
First Quarter	$	26.00	$	25.00	$	0.06
Second Quarter		25.00		15.00		0.06
Third Quarter		20.00		16.50		0.00
Fourth Quarter		17.50		17.50		0.00

It has been a policy of the Company to pay only small to moderate dividends so as to retain earnings to support growth. However, on October 15, 2008 the board of directors voted to suspend the payment of the quarterly cash dividend on the Company’s common stock in an effort to conserve capital. As a result there were no dividends paid on the common stock of the Company in 2009. Dividends declared in 2008 totaled approximately $150,000.

Item 6. Selected Financial Data

Not Applicable.

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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. (the “Company”) 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.

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. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date such forward-looking statement is made.

Overview

The Company is a bank holding company. Through its wholly-owned subsidiary bank, Community Bank–Wheaton/Glen Ellyn, (the “Bank”) 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 and a fourth full-service facility was opened in north Wheaton on November 21, 2007.

25

TARP Capital Purchase Program

On May 15, 2009, the Company entered into a Letter Agreement and related Securities Purchase Agreement with the United States Department of the Treasury (the “Department of Treasury”) in accordance with the terms of the Department of Treasury’s TARP Capital Purchase Program. Pursuant to the Letter Agreement and Securities Purchase Agreement, the Company issued 6,970 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and a warrant for the purchase of 349 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “warrant”) to the Department of Treasury for an aggregate purchase price of $6,970,000 in cash.

The Series A preferred stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum until February 15, 2014. Beginning February 16, 2014, the dividend rate will increase to 9% per annum. The Series A preferred stock may be redeemed, in whole or in part, at any time from time to time, at the option of the Company, subject to consultation with the Company’s primary federal banking regulator, provided that any partial redemption must be for at least 25% of the issue price of the Series A preferred stock.

As part of the transaction, the Department of Treasury exercised the Warrant and received 349 shares of Series B preferred stock. The Series B preferred stock will pay cumulative dividends at a rate of 9% per annum. The Series B preferred stock may also be redeemed, in whole or in part, at any time from time to time, at the option of the Company, subject to consultation with the Company’s primary federal regulator, provided that any partial redemption must be for at least 25% of the liquidation value of the Series B preferred stock. The Series B preferred stock cannot be redeemed until all of the outstanding shares of Series A preferred stock have been redeemed.

The Purchase Agreement also subjects the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (the “EESA”), as modified by the American Recovery and Reinvestment Act of 2009. The Company will take all necessary action to ensure that its benefit plans with respect to senior executive officers continue to comply with Section 111(b) of the EESA and has agreed to not adopt any benefit plans with respect to, or which cover, its senior executive officers that do not comply with the EESA, and the applicable executives have consented to the foregoing.

Analysis of Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends on the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them.

26

Average Balance Sheet. The following table sets forth certain information relating to the Company’s average balance sheets and reflects the yield on average earning assets and cost of average interest-bearing liabilities for the 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. The yields and costs include fees that are considered adjustments to yields.

	2009						2008						2007
(Dollars in thousands)	Average Balance		Interest		Rate		Average Balance		Interest		Rate		Average Balance		Interest		Rate
Interest-earning assets:
Federal funds sold	$	—	$	—	0.00	%	$	321	$	1	0.37	%	$	629	$	33	5.18	%
Taxable securities		25,231		1,144	4.52	%		17,688		931	5.26	%		23,363		1,191	5.10	%
Tax-exempt securities		11,834		506	4.28	%		12,204		520	4.26	%		14,537		627	4.32	%
Loans		228,676		12,550	5.49	%		227,759		13,705	6.02	%		206,884		15,164	7.33	%
Interest-bearing deposits		18,371		49	0.29	%		1,102		27	2.46	%		2,096		111	5.25	%
FHLB stock		5,398		—	0.00	%		5,398		—	0.00	%		5,398		86	1.60	%
Total interest-earning assets		289,510		14,249	4.92	%		264,472		15,184	5.74	%		252,907		17,212	6.81	%
Total non-interest-earning assets		27,249						28,746						26,812
Total assets	$	316,759					$	293,218					$	279,719
Interest-bearing liabilities:
Deposits
NOW	$	67,609		704	1.04	%	$	46,910		513	1.09	%	$	35,162		223	0.63	%
Savings		24,880		40	0.16	%		25,412		72	0.28	%		26,067		181	0.69	%
Money market		41,112		603	1.47	%		39,917		950	2.38	%		41,031		1,207	2.94	%
Time		111,521		3,168	2.84	%		108,014		4,304	3.98	%		107,384		5,357	4.99	%
FHLB advances and other		18,418		583	3.17	%		18,971		838	4.42	%		13,810		707	5.12	%
Federal funds purchased and Repurchase agreements		—		—	0.00	%		1,883		55	2.90	%		1,481		77	5.18	%
Subordinated debentures		3,609		95	2.64	%		3,609		178	4.93	%		3,668		291	7.93	%
Total interest-bearing
Liabilities		267,149		5,193	1.94	%		244,716		6,910	2.82	%		228,603		8,043	3.52	%
Non-interest-bearing liabilities:		28,782						30,268						30,415
Stockholders’ equity		20,828						18,234						20,701
Total liabilities and stockholders’ equity	$	316,759					$	293,218					$	279,719
Net interest income			$	9,056					$	8,274					$	9,169
Net interest spread					2.98	%					2.92	%					3.29	%
Net interest income to average interest-earning assets					3.13	%					3.13	%					3.63	%

27

Rate/Volume Analysis. The following table allocates changes in interest income and interest expense in 2009 compared to 2008 and in 2008 compared to 2007 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.

	2009 Compared to 2008									2008 Compared to 2007
(Dollars in thousands)	Change Due to Rate			Change Due to Volume			Total Change			Change Due to Rate			Change Due to Volume			Total Change
Interest Earning Assets:
Federal funds sold	$	0		$	(1	)	$	(1	)	$	(21	)	$	(11	)	$	(32	)
Taxable securities		(147	)		360			213			38			(298	)		(260	)
Tax exempt securities		2			(16	)		(14	)		(8	)		(99	)		(107	)
Loans receivable		(1,210	)		55			(1,155	)		(2,891	)		1,431			(1,460	)
FHLB stock and other		(17	)		39			22			(146	)		(23	)		(169	)
Total interest-earning assets		(1,372	)		437			(935	)		(3,028	)		1,000			(2,028	)
Interest-bearing liabilities
Deposits		(1,930	)		605			(1,325	)		(1,467	)		338			(1,129	)
FHLB advances and other borrowed funds		(214	)		(96	)		(310	)		(144	)		253			109
Subordinated debentures		(82	)		0			(82	)		(108	)		(5	)		(113	)
Total int.-bearing liabilities		(2,226	)		509			(1,717	)		(1,719	)		586			(1,133	)
Change in net interest income	$	854		$	(72	)	$	782		$	(1,309	)	$	414		$	(895	)

Comparison of Financial Condition for the Years Ended December 31, 2009 and December 31, 2008

Total assets as of December 31, 2009 were $341.5 million, which represented an increase of $46.9 million, or 15.9%, compared to $294.7 million at December 31, 2008. The change in total assets was primarily due to increases in loans receivable and investment securities. Loans receivable, net, increased by $13.4 million, or 6.1%, to $233.0 million at December 31, 2009 as compared to $219.6 million at December 31, 2008. The increase in loans receivable was attributable to a $15.3 million increase in the commercial real estate loans, a $6.6 million increase in residential real estate loans and a $4.0 million increase in home equity lines of credit. Partially offsetting these increases were decreases of $9.9 million in real estate construction loans and $1.3 million in the commercial loan portfolio. The overall net increase in loans is due to continued strong lending and business relationships within our community maintained by our loan staff. Investment securities increased by $18.6 million, or 71.5%, to $44.5 million at December 31, 2009. This increase is primarily due to increases of $7.6 million in government agency securities, $6.4 million in mortgage backed securities and $4.6 million in securities issued by state and political subdivisions. Cash and cash equivalents increased by $10.0 million, or 63.3%, to $25.8 million at December 31, 2009 as compared to $15.8 million at December 31, 2008. This increase is due to an increase in deposits and a strategic decision to increase the Bank’s liquidity position. Other real estate owned (“OREO”) increased $2.3 million to $2.4 million at December 31, 2009 from $112,000 at December 31, 2008. The balance of OREO at the end of 2009 consisted of two newly constructed single family residences, two mixed commercial and residential buildings and a six unit multi-family structure. In addition, as of December 31, 2009 the Bank recorded a $2.1 million prepayment to the FDIC for insurance premiums covering the next 12 quarters.

Deposits increased $44.8 million, or 17.7%, to $298.3 million at December 31, 2009 as compared to $253.5 million at December 31, 2008. This increase primarily consisted of increases in the Bank’s core deposit accounts, including (1) an increase in interest bearing demand deposit accounts of $21.7 million, or 38.9%, to $77.5 million at December 31, 2009 from $55.8 million at December 31, 2008; (2) an increase in money market accounts of $4.1 million, or 10.6%, to $42.9 million at December 31, 2009 from $38.8 million at December 31, 2008; and (3) an increase in savings accounts of $3.1 million, or 13.4%, to $26.1 million at December 31, 2009 from $23.0 million at December 31, 2008. Contributing to the increase in deposits are the competitively priced products that are offered through our four facilities. Deposits from our newest facility, which opened in North Wheaton in November 2007, increased 54.5% in 2009 to $24.1 million at December 31, 2009 from $15.6 million at December 31, 2008. Federal Home Loan Bank (“FHLB”) advances and other borrowed money decreased $4.2 million, or 22.1%, to $14.8 million at December 31, 2009 from $19.0 million at December 31, 2008.

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Stockholders’ equity increased $6.1 million, or 36.7%, to $22.7 million at December 31, 2009 from $16.6 million at December 31, 2008. The increase in stockholders’ equity was primarily the result of the receipt of the $6.97 million investment from the U.S. Department of the Treasury in May 2009 pursuant to the TARP Capital Purchase Program and an increase of $213,000 in the Company’s accumulated other comprehensive income relating to the change in fair value of its available-for-sale investment portfolio. Partially offsetting these increases was the Company’s net loss for the year ended December 31, 2009 and $190,000 dividends paid on the preferred stock issued under the TARP Capital Purchase Program.

Comparison of Operating Results for the Years Ended December 31, 2009 and December 31, 2008

General. The Company’s net loss improved $367,000 to $912,000 for the year ended December 31, 2009, from $1.3 million for the year ended December 31, 2008. In addition, net loss available to common shareholders improved $94,000 to $1.2 million for the year ended December 31, 2009 from $1.3 million for the year ended December 31, 2008. This represents a 7.8% improvement in diluted loss per share to $0.95 per share for the year ended December 31, 2009 from $1.03 per share for the year ended December 31, 2008. The improvement in the operating results is partially the result of the combined effect of i) a $782,000 increase in net interest income; ii) a $129,000 increase in provision for loan losses; iii) an $884,000 increase in noninterest income and iv) a $940,000 increase in noninterest expenses.

Net interest income. The following table summarizes interest and dividend income and interest expense for the year ended December 31, 2009 and 2008.

	Year Ended December 31,
	2009		2008		$ Change			% Change
	(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	12,550	$	13,705	$	(1,155	)	(8.43	)%
Securities:
Taxable		1,144		931		213		22.88
Exempt from federal tax		506		520		(14	)	(2.69	)
Federal funds sold		—		1		(1	)	(100.00	)
Federal Home Loan Bank dividends and other		49		27		22		81.48
Total interest and dividend income		14,249		15,184		(935	)	(6.16	)
Interest expense:
Deposits		4,515		5,839		(1,324	)	(22.67	)
Federal funds purchased		—		55		(55	)	(100.00	)
Federal Home Loan Bank advances and other borrowings		583		838		(255	)	(30.43	)
Subordinated debentures		95		178		(83	)	(46.63	)
Total interest expense		5,193		6,910		(1,717	)	(24.85	)
Net interest income	$	9,056	$	8,274	$	782		9.45

Interest Income. Interest income decreased $935,000, or 6.2%, to $14.2 million for the year ended December 31, 2009, compared to $15.2 million for the year ended December 31, 2008. This decrease resulted primarily from a decrease in average yield. The largest component was a decrease of $1.2 million in interest income on loans for the year ended December 31, 2009 compared to the comparable prior year.

29

Loan interest income decreased $1.1 million, or 8.4%, to $12.6 million for the year ended December 31, 2009, compared to $13.7 million for the prior year. This decrease resulted from a decrease in the average yield of 53 basis points to 5.49% for the year ended December 31, 2009 from 6.02% for the year ended December 31, 2008. This decrease was partially offset by an increase in the average balance of $917,000 to $228.7 million for the year ended December 31, 2009 from $227.8 million for the comparable prior year period. The decrease in yield is primarily due to a low interest rate environment caused by a 400 basis point decrease in the federal funds interest rate since January 2008, and the effect such decreases have had on the Bank’s loan portfolio, approximately one half of which is comprised of adjustable rate loans. In addition, interest on taxable securities increased $213,000 for the year ended December 31, 2009 compared to the comparable prior year period. This increase is primarily due to an increase in the average balance of $7.5 million to $25.2 million for the year ended December 31, 2009 from $17.7 million for the year ended December 31, 2008. This increase was partially offset by a decrease in average yield on taxable securities of 74 basis points to 4.52% for the year ended December 31, 2009 from 5.26% for the comparable prior year period.

Interest Expense. Interest expense decreased by $1.7 million, or 24.8%, to $5.2 million for the year ended December 31, 2009, from $6.9 million for the year ended December 31, 2008. This decrease resulted from a decrease in the average rate paid on interest bearing liabilities of 88 basis points to 1.94% for the year ended December 31, 2009 from 2.82% for the comparable prior year period. This decrease was partially offset by an increase in the average balance of interest bearing liabilities of $22.4 million, or 9.2%, to $267.1 million for the year ended December 31, 2009 from $244.7 million for the comparable prior year period. Interest expense resulting from FHLB advances and other borrowings decreased $255,000 during the year ended December 31, 2009. The average balance on these borrowings decreased $553,000 to $18.4 million for the year ended December 31, 2009 from $19.0 million for the comparable prior year period. Partially offsetting this increase was a decrease in average cost of 125 basis points to 3.17% for the year ended December 31, 2009 from 4.42% for the comparable period in 2008.

Net Interest Income before Provision for Loan Losses. Net interest income before provision for loan losses increased $782,000, or 9.5%, to $9.1 million for the year ended December 31, 2009 from $8.3 million for the comparable period in 2008. The Company’s net interest margin expressed as a percentage of average earning assets remained unchanged at 3.13% for the year ended December 31, 2009 as compared to the year ended December 31, 2008. The yield on average earning assets decreased to 4.92% for the year ended December 31, 2009 from 5.74% for the comparable period ended December 31, 2008, an 82 basis point decrease. This decrease in the yield on average earning assets was primarily due to a decrease in loan yield, which resulted from the 400 basis point decrease in the federal funds interest rate since January 2008. The yield on average loans decreased to 5.49% for the year ended December 31, 2009 from 6.02% for the year ended December 31, 2008. In addition, there was an 88 basis point decrease in the cost of interest-bearing liabilities to 1.94% for the year ended December 31, 2009 as compared to 2.82% a year earlier. Increasing net interest margin is dependent on the Bank’s ability to generate higher yielding assets and lower-cost deposits. Management continues to closely monitor the net interest margin.

Provision for Loan Losses. The Bank’s provision for loan losses increased to $2.3 million for the year ended December 31, 2009 from $2.2 million for 2008. The increase in the provision was the result of management’s quarterly analysis of the allowance for loan loss. At December 31, 2009, September 30, 2009 and December 31, 2008, non-performing loans totaled $15.0 million, $10.0 million and $2.8 million, respectively. At December 31, 2009, the ratio of the allowance for loan losses to non-performing loans was 32.0% compared to 38.4% at September 30, 2009 and 119.7% at December 31, 2008. While this ratio has decreased as compared to December 31, 2008, management believes the allowance coverage is sufficient due to the estimated loss potential. The ratio of the allowance to total loans was 2.03%, 1.62% and 1.48%, at December 31, 2009, September 30, 2009 and December 31, 2008, respectively. Charge-offs, net of recoveries, totaled $832,000 for the year ended December 31, 2009 compared to $885,000 for the year ended December 31, 2008. As of December 31, 2009, $7.5 million, or 49.6%, of the nonperforming loans consist of interests in loan participations with other banks. Management periodically performs an allowance sufficiency analysis based on the portfolio composition, asset classifications, loan-to-value ratios, impairments in the current portfolio, and other factors. This analysis is designed to reflect credit losses for specifically identified loans, as well as credit losses in the remainder of the portfolio. The reserve methodology employed by management reflects the difference in degree of risk between the various categories of loans in the Bank’s portfolio. The reserve methodology also critically assesses those loans adversely classified in the portfolio by management. While

30

management estimates loan losses using the best available information, no assurance can be given that future additions to the allowance will not be necessary based on changes in economic and real estate market conditions, further information obtained regarding problem loans, identification of additional problem loans and other factors, both within and outside of management’s control. In addition, the FDIC and Illinois Department of Financial and Professional Regulation as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. As a result of their review the FDIC and Illinois Department of Financial and Professional Regulation may require the Bank to make additional provisions for estimated losses based upon judgments different from those of management.

	Year Ended December 31,
	2009			2008			$ Change			% Change
	(Dollars in thousands)
Non-interest income:
Service charges on deposit accounts	$	597		$	680		$	(83	)	(12.21	)%
Gain on sale of loans		1,005			512			493		96.29
Gain on sale of securities		50			79			(29	)	(36.71	)
Loss on impairment		—			(485	)		485		100.00
Loss on sale of foreclosed assets		(62	)		—			(62	)	—
Other non-interest income		652			572			80		13.99
Total non-interest income	$	2,242		$	1,358		$	884		65.10

Noninterest Income. Noninterest income consists primarily of service charges on customer deposit accounts, gain on sale of loans, and other service charges and fees. Noninterest income increased $884,000, or 65.1%, to $2.2 million for the year ended December 31, 2009 as compared to the prior year period primarily due to an increase in gain on sale of mortgage loans, and a decrease in loss on impairment of securities of $485,000. These items were partially offset by decreases of $83,000 in service charges on deposit accounts, $29,000 in gain on sale of securities and a $62,000 loss on sale of foreclosed assets. The loss on impairment relates to the $485,000 other than temporary impairment write-down of our investment in FHLMC preferred stock during fiscal 2008. Gain on sale of loans increased $493,000 to $1.0 million for the year ended December 31, 2009 from $512,000 for the comparable prior year period. This increase is primarily due to a reduction in the mortgage interest rates during 2009. Gain on sale of securities decreased $29,000 to $50,000 for the year ended December 31, 2009 from $79,000 for the comparable prior year period. In addition, service charges on deposit accounts decreased $83,000 to $597,000 for the year ended December 31, 2009 from $680,000 for the comparable prior year period. This decrease was primarily due to a lower volume of overdraft fees.

31

	Year Ended December 31,
	2009		2008		$ Change			% Change
	(Dollars in thousands)
Non-interest expenses:
Salaries and employee benefits	$	5,491	$	5,254	$	237		4.51	%
Net occupancy and equipment expense		1,386		1,377		9		0.65
Data processing expense		937		904		33		3.65
Advertising and promotions		295		353		(58	)	(16.43	)
FDIC insurance premiums		861		277		584		210.83
Professional fees		681		470		211		44.89
Other operating expenses		1,230		1,306		(76	)	(5.82	)
Total non-interest expenses	$	10,881	$	9,941	$	940		9.46

Noninterest Expense. Noninterest expense increased by $940,000, to $10.9 million for the year ended December 31, 2009 from $9.9 million for the comparable prior year period. This increase is partially due to an increase in FDIC premiums of $584,000 for the year ended December 31, 2009 as compared to the prior year period. Salaries and employee benefits increased by $237,000, or 4.5%, to $5.5 million for the year ended December 31, 2009 compared to $5.3 million for the year months ended December 31, 2008. This increase is primarily the result of annual merit increases and an increased amount of commissions paid to mortgage department loan personnel. Other operating expenses, including occupancy, data processing, and marketing and advertising expenses, remained basically unchanged decreasing by a combined $16,000, or 0.61%, to $2.6 million for the year ended December 31, 2009. Of this decrease, $33,000 is related to data processing expense and $9,000 is related to occupancy expenses, which increased only slightly due to a successful petition to lower the real estate tax assessments on two Bank properties. These increases were partially offset by lower advertising and promotion expenses, which decreased $58,000 from the prior year period. Professional fees, including legal and audit expenses, increased by $211,000 to $681,000 for the year ended December 31, 2009. This increase is partially due to higher legal fees associated with foreclosure actions. Management continues to emphasize the importance of expense management and control in order to continue to provide expanded banking services to a growing market base.

Income Tax Expense. Income tax benefit totaled $1.0 million for the year ended December 31, 2009 compared to $1.2 million for the comparable prior year period. The decrease in income tax benefit is primarily the result of an improvement in loss before income taxes of $597,000 to $1.9 million for the year ended December 31, 2009 compared to $2.5 million for the comparable prior year period.

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 source of funds is dividends it receives from the Bank. Without prior approval, current regulations allow the Bank to pay dividends to the Company not exceeding net profits for the current year plus those of the previous two years. 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 totaled $25.3 million at December 31, 2009. The Bank’s primary sources of funds are deposits, proceeds from principal and interest payments on loans, maturities of securities, federal funds purchased, and to a lesser extent 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.

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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. 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 $16.0 million in 2009, ($4.3) million in 2008 and $28.9 million in 2007. The Company’s strongest loan growth was in the commercial real estate lending sector with the loans in this category increasing by $15.3 million. In 2009, construction loans decreased by $9.9 million and commercial loans decreased by $1.3 million.

Deposits grew by $44.8 million, $4.5 million and $14.3 million in 2009, 2008 and 2007, 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 2009, the Company reduced the outstanding balance of advances with the FHLB by $4.0 million bringing the total FHLB borrowings to $13.0 million. In addition, the Company reduced the amount owed on a line of credit with M & I Bank to $1.8 million at December 31, 2009 from $2.0 million at December 31, 2008.

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 includes 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

33

options available to the Company. Included in the review of individual loans are those that are impaired as provided in ASC 310-40, 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.

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 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 June 2009, the FASB issued new a new standard regarding accounting for transfers and servicing of financial assets and extinguishments of liabilities, and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures.

At the same time, FASB also issued another new standard regarding consolidation of variable interest entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance.

The new standards will require a number of new disclosures. The first enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets. The second will require a reporting entity to

34

provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements.

The Federal Reserve is reviewing regulatory capital requirements associated with the adoption of the new accounting standards by financial institutions. In conducting this review, the Federal Reserve is considering a broad range of factors including the maintenance of prudent capital levels, the record of recent bank experiences with off-balance sheet vehicles, and the results of the recent Supervisory Capital Assessment Program (SCAP). As part of the SCAP, participating banking organizations’ capital adequacy was assessed using assumptions consistent with standards ultimately included in these two new standards.

The two new standards discussed above will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early application is not permitted. The Company is currently evaluating the potential impact, if any, of the adoption of these two statements on the Company.

In January 2010, the FASB issued an accounting standard providing additional guidance relating to fair value measurement disclosures. Specifically, companies will be required to separately disclose significant transfers into and out of Level 1 and Level 2 measurements in the fair value hierarchy including when such transfers were recognized and the reasons for those transfers. For Level 3 fair value measurements, the new guidance requires presentation of separate information about purchases, sales, issuances and settlements. Additionally, the FASB also clarified existing fair value measurement disclosure requirements relating to the level of disaggregation, inputs, and valuation techniques. This accounting standard will be effective at the beginning of 2010, except for the detailed Level 3 disclosures, which will be effective at the beginning of 2011. The company is currently evaluating the impact of this standard on its 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, 2009. As of December 31, 2008, these effects totaled -2.9%, 3.7% and 11.2% for net interest income and -6.3%, -8.1% and -8.8% for economic value of equity.

	100 Basis Point Rate Shift Up		200 Basis Point Rate Shift Up		300 Basis Point Rate Shift Up
Net interest income	-2.0	%	-3.7	%	+0.8	%
Economic value of equity	-6.4	%	-13.7	%	-20.4	%

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, 2009. As of December 31, 2008, these effects totaled -4.1% for net interest income and 18.2% for economic vale of equity. Due to the current interest rate environment being at historic lows, a 200 and 300 a basis point decrease is considered unlikely and therefore not presented. All other measures of interest rate risk are within policy guidelines.

	100 Basis Point Rate Shift Down		200 Basis Point Rate Shift Down	300 Basis Point Rate Shift Down
Net interest income	-2.3	%	N/A	N/A
Economic value of equity	+17.0	%	N/A	N/A

35

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, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. The Company’s management is responsible for these financial statements. 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits also included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and 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, 2009, and 2008, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Indianapolis, Indiana

March 31, 2010

36

COMMUNITY FINANCIAL SHARES, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2009 and 2008

(Dollars in thousands)

	2009			2008
ASSETS
Cash and due from banks	$	7,186		$	7,286
Interest-bearing deposits		18,662			8,539
Cash and cash equivalents		25,848			15,825
Interest-bearing time deposits		618			992
Securities available for sale		44,544			25,972
Loans held for sale		1,698			1,410
Loans, less allowance for loan losses of $4,812 and $3,300		232,972			219,615
Foreclosed assets		2,396			112
Prepaid FDIC assessment		2,160			—
Federal Home Loan Bank stock		5,398			5,398
Premises and equipment, net		15,864			16,112
Cash value of life insurance		5,700			5,469
Interest receivable and other assets		4,332			3,772
Total assets	$	341,530		$	294,677
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits	$	298,311		$	253,515
Federal Home Loan Bank advances		13,000			17,000
Other borrowings		1,800			2,000
Subordinated debentures		3,609			3,609
Interest payable and other liabilities		2,103			1,940
Total liabilities		318,823			278,064
Commitments and contingencies
Stockholders’ equity
Common stock—no par value, 5,000,000 shares authorized; 1,245,267 shares issued and outstanding		—			—
Preferred stock—$1.00 par value, 1,000,000 shares authorized; 7,319 shares outstanding at December 31, 2009, no shares outstanding at December 31, 2008		7			—
Paid-in capital		11,877			4,866
Retained earnings		11,064			12,201
Accumulated other comprehensive loss		(241	)		(454	)
Total stockholders’ equity		22,707			16,613
Total liabilities and stockholders’ equity	$	341,530		$	294,677

See accompanying notes to consolidated financial statements.

37

COMMUNITY FINANCIAL SHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31, 2009 and 2008

(Dollars in thousands, except per share data)

	2009			2008
Interest and dividend income
Interest and fees on loans	$	12,550		$	13,705
Securities
Taxable		1,144			931
Exempt from federal income tax		506			520
Federal Home Loan Bank dividends and other		49			28
Total interest income		14,249			15,184
Interest expense
Deposits		4,515			5,839
Federal Home Loan Bank advances and other borrowed funds		583			893
Subordinated debentures		95			178
Total interest expense		5,193			6,910
Net interest income		9,056			8,274
Provision for loan losses		2,344			2,215
Net interest income after provision for loan losses		6,712			6,059
Noninterest income
Service charges on deposit accounts		597			680
Gain on sale of loans		1,005			512
Loss on impairment of securities		—			(485	)
Loss on sale of foreclosed assets		(62	)		—
Gain on sale of securities		50			79
Bank owned life insurance		231			222
Other service charges and fees		421			350
Total noninterest income		2,242			1,358
Noninterest expense
Salaries and employee benefits		5,491			5,254
Net occupancy expense		840			851
Equipment expense		546			525
Data processing		937			904
Advertising and marketing		295			353
Professional fees		681			470
FDIC premiums		861			204
Other operating expenses		1,230			1,380
Total noninterest expense		10,881			9,941
Loss before income taxes		(1,927	)		(2,524	)
Income tax benefit		(1,015	)		(1,245	)
Net loss		(912	)		(1,279	)
Preferred stock dividend and accretion		(274	)		—
Net loss available to common shareholders	$	(1,186	)	$	(1,279	)
Loss per share
Basic	$	(0.95	)	$	(1.03	)
Diluted	$	(0.95	)	$	(1.03	)

See accompanying notes to consolidated financial statements.

38

COMMUNITY FINANCIAL SHARES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years ended December 31, 2009 and 2008

(Dollars in thousands, except share data)

	Number of Common Shares		Preferred Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
Balance at January 1, 2008	1,250,880			—	$	4,999		$	13,630		$	(124	)	$	18,505
Comprehensive loss
Net loss	—			—		—			(1,279	)		—			(1,279	)
Change in unrealized loss on securities available for sale, net of tax of $208	—			—		—			—			(330	)		(330	)
Total comprehensive loss															(1,609	)
Cash dividends ($0.12 per share)	—			—		—			(150	)		—			(150	)
Stock repurchase	(6,333	)		—		(165	)		—			—			(165	)
Tax benefit of stock options exercised	—			—		1			—			—			1
Amortization of stock option compensation	—			—		16			—			—			16
Exercise of stock options, net of tax	720			—		15			—			—			15
Balance at December 31, 2008	1,245,267			—		4,866			12,201			(454	)		16,613
Comprehensive loss
Net loss	—			—		—			(912	)		—			(912	)
Change in unrealized loss on securities available for sale, net of tax of $134	—			—		—			—			213			213
Total comprehensive loss															(699	)
Preferred stock dividends (5%)	—			—		—			(190	)		—			(190	)
Preferred stock issued	—			7		6,963			—			—			6,970
Discount on preferred stock	—			—		35			(35	)		—			—
Amortization of stock option compensation	—			—		13			—			—			13
Balance at December 31, 2009	1,245,267		$	7	$	11,877		$	11,064		$	(241	)	$	22,707

See accompanying notes to consolidated financial statements.

39

COMMUNITY FINANCIAL SHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2009 and 2008

(Dollars in thousands)

	2009			2008
Cash flows from operating activities
Net loss	$	(912	)	$	(1,279	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Amortization on securities, net		106			14
Depreciation		661			665
Provision for loan losses		2,344			2,215
Gain on sale of securities		(50	)		(79	)
Impairment loss on securities		—			485
Gain on sale of loans		(1,005	)		(512	)
Originations of loans for sale		(55,961	)		(23,531	)
Proceeds from sales of loans		56,966			23,233
Loss on sale of foreclosed assets		62			—
Deferred income taxes		(887	)		(801	)
Tax benefit of stock options exercised		—			(1	)
Compensation cost of stock options		13			16
Change in cash value of life insurance		(231	)		(222	)
Change in interest receivable and other assets		(1,967	)		(222	)
Change in interest payable and other liabilities		163			(224	)
Net cash used in operating activities		(698	)		(243	)
Cash flows from investing activities
Purchases of securities available for sale		(34,778	)		(8,195	)
Proceeds from maturities and calls of securities available for sale		13,443			12,310
Proceeds from sales of securities available for sale		3,054			2,118
Net change in interest-bearing time deposits		374			(992	)
Net change in loans		(18,335	)		5,906
Premises and equipment expenditures, net		(413	)		(977	)
Net cash provided by (used in) investing activities		(36,655	)		10,170
Cash flows from financing activities
Change in
Non-interest bearing and interest bearing demand deposits and savings		31,629			13,236
Certificates and other time deposits		13,167			(8,753	)
Short-term borrowings		(200	)		(7,500	)
Proceeds from borrowings		12,500			10,500
Repayment of borrowings		(16,500	)		(9,000	)
Proceeds from issuance of preferred stock		6,970			—
Purchase of stock		—			(165	)
Exercise of stock options		—			15
Tax benefit of stock options exercised		—			1
Dividends paid on preferred stock		(190	)		—
Dividends paid on common stock		—			(225	)
Net cash provided by (used in) financing activities		47,376			(1,891	)
Net change in cash and cash equivalents		10,023			8,036
Cash and cash equivalents at beginning of year		15,825			7,789
Cash and cash equivalents at end of year	$	25,848		$	15,825
Supplemental disclosures
Interest paid	$	5,317		$	7,231
Income taxes paid		—			—
Transfers from loans to foreclosed assets		2,346			—

See accompanying notes to consolidated financial statements.

40

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008 and 2007

(Table dollar amounts in thousands, except share data)

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 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: Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Effective April 1, 2009, the Company adopted new accounting guidance related to recognition and presentation of other-than-temporary impairment (ASC 320-10). When the Company does not intend to sell a debt security, and it is more likely than not, the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

Prior to the adoption of the recent accounting guidance on April 1, 2009, management considered, in determining whether other-than-temporary impairment exists, (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

For equity securities, when the Company has decided to sell an impaired available-for-sale security and the entity does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other than temporary even if a decision to sell has not been made.

41

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.

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.

Federal Home Loan Bank Stock: Federal Home Loan Bank (FHLB) stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula.

The Bank owned $5,398,000 of FHLB stock as of December 31, 2009 and 2008. During the third quarter of 2007, the FHLB of Chicago received a Cease and Desist Order from their regulator, the Federal Housing Finance Board. The FHLB will continue to provide liquidity and funding through advances; however, the draft order prohibits capital stock repurchases and redemptions until a time to be determined by the Federal Housing Finance Board. The FHLB of Chicago did not pay a dividend during 2009 or 2008. The FHLB will continue to assess their dividend capacity each quarter, and will obtain the necessary approval if a dividend is to be made. Management performed an analysis and deemed the investment in FHLB stock was not impaired.

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

42

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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, 2009, the Company has a stock-based employee compensation plan, which is described more fully in Note 13.

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.

The Company or one of its subsidiaries files income tax returns in the U.S. federal and Illinois jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, and local examinations by tax authorities for years before 2005.

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.

Statements 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 available to common shareholders 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 or Loss: Comprehensive income or loss consists of net income or loss and other comprehensive income or loss. Other comprehensive income or loss 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.

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.

43

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued Accounting Standards: In June 2009, the FASB issued new a new standard regarding accounting for transfers and servicing of financial assets and extinguishments of liabilities, and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures.

At the same time, FASB also issued another new standard regarding consolidation of variable interest entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance.

The new standards will require a number of new disclosures. The first enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets. The second will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements.

The Federal Reserve is reviewing regulatory capital requirements associated with the adoption of the new accounting standards by financial institutions. In conducting this review, the Federal Reserve is considering a broad range of factors including the maintenance of prudent capital levels, the record of recent bank experiences with off-balance-sheet vehicles, and the results of the recent Supervisory Capital Assessment Program (SCAP). As part of the SCAP, participating banking organizations’ capital adequacy was assessed using assumptions consistent with standards ultimately included in these two new standards.

The two new standards discussed above will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early application is not permitted. The Company is currently evaluating the potential impact, if any, of the adoption of these two statements on the Company.

In January 2010, the FASB issued an accounting standard providing additional guidance relating to fair value measurement disclosures. Specifically, companies will be required to separately disclose significant transfers into and out of Level 1 and Level 2 measurements in the fair value hierarchy including when such transfers were recognized and the reasons for those transfers. For Level 3 fair value measurements, the new guidance requires presentation of separate information about purchases, sales, issuances and settlements. Additionally, the FASB also clarified existing fair value measurement disclosure requirements relating to the level of disaggregation, inputs, and valuation techniques. This accounting standard will be effective at the beginning of 2010, except for the detailed Level 3 disclosures, which will be effective at the beginning of 2011. The company is currently evaluating the impact of this standard on its financial statements.

Current Economic Conditions: The current protracted economic decline continues to present financial institutions with circumstances and challenges that in many cases have resulted in large and unanticipated declines in the fair values of investments and other assets, constraints on liquidity and capital and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans. The financial statements have been prepared using values and information currently available to the Company.

44

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

At December 31, 2009, the Company held $99.4 million in commercial real estate loans. Due to the national, state and local economic conditions, values for commercial real estate have declined significantly and the market for these properties is depressed.

Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses, capital that could negatively impact the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.

NOTE 2 - CASH AND CASH EQUIVALENTS

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

The financial institutions holding the Company’s cash accounts are participating in the FDIC’s Transaction Account Guarantee Program. Under that program, through June 30, 2010, all noninterest bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account.

Effective October 3, 2008, the FDIC insurance limits increased to $250,000. The increase in federally insured limits is currently set to expire December 31, 2013. At December 31, 2009, the Company’s cash accounts exceeded the federally insured limit by approximately $579,000. At December 31, 2009, the Company had cash balances of $19,961,000 at the FRB and FHLB that did not have FDIC insurance coverage.

Cash on hand or on deposit with the Federal Reserve Bank of $2,923,000 was required to meet regulatory reserve and clearing requirements at year-end 2009.

45

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 3 - SECURITIES AVAILABLE FOR SALE

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

2009	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U. S. government agencies	$	17,691	$	21	$	(326	)
States and political subdivisions		15,339		213		(425	)
Mortgage-backed		11,131		136		(17	)
Preferred stock		20		5		—
SBA guaranteed		363		1		(2	)
	$	44,544	$	376	$	(770	)

2008	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
U. S. government agencies	$	10,110	$	107	$	—
States and political subdivisions		10,745		75		(892	)
Mortgage-backed		4,724		21		(37	)
Preferred stock		6		—		(9	)
SBA guaranteed		387		—		(6	)
	$	25,972	$	203	$	(944	)

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, 2009, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity are shown separately.

	Amortized Cost		Fair Value
Due in one year or less	$	130	$	132
Due after one year through five years		2,068		2,092
Due after five years through ten years		4,069		4,008
Due after ten years		27,280		26,798
Mortgage-backed		11,012		11,131
Preferred stock		15		20
SBA guaranteed		364		363
	$	44,938	$	44,544

46

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 3 - SECURITIES AVAILABLE FOR SALE (Continued)

Securities with a carrying value of approximately $14,180,000 and $19,276,000 at December 31, 2009 and 2008, respectively, were pledged to secure public deposits, Federal Home Loan Bank advances and for other purposes as required or permitted by law.

The Company experienced an other-than-temporary write-down on an investment in Federal Home Loan Mortgage Corporation preferred stock. This write-down, which was recognized in the third quarter of 2008, totaled $485,000.

Sales of securities were as follows:

	2009		2008
Proceeds	$	3,054	$	2,118
Gross gains		50		79
Gross losses		—		—
Tax expense		10		27

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, 2009 and 2008 was $25,257,000 and $8,994,000, respectively, which is approximately 56.7% and 34.6% of the Company’s investment portfolio, respectively. These declines primarily resulted from changes in market interest rates and current depressed market conditions. 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.

47

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 3 - SECURITIES AVAILABLE FOR SALE (Continued)

The following tables show gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2009 and 2008:

2009 Description of Securities	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. government agencies	$	12,665	$	(326	)	$	—		—		$	12,665	$	(326	)
State and political subdivisions		4,456		(85	)		4,558		(340	)		9,014		(425	)
Mortgage-backed		3,315		(16	)		99		(1	)		3,414		(17	)
SBA guaranteed		—		—			164		(2	)		164		(2	)
Total temporarily impaired securities	$	20,436	$	(427	)	$	4,821	$	(343	)	$	25,257	$	(770	)
2008 Description of Securities	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
State and political subdivisions	$	5,493	$	(624	)	$	1,101	$	(268	)	$	6,594	$	(892	)
Mortgage-backed		757		(5	)		1,303		(32	)		2,060		(37	)
Preferred stock		6		(9	)		—		—			6		(9	)
SBA guaranteed		233		(4	)		101		(2	)		334		(6	)
Total temporarily impaired securities	$	6,489	$	(642	)	$	2,505	$	(302	)	$	8,994	$	(944	)

U.S. Government Agencies

The unrealized losses on the Company’s investments in direct obligations of U.S. government agencies were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2009.

State and Political Subdivisions

The unrealized losses on the Company’s investments in securities of state and political subdivisions were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2009.

48

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 4 - LOANS

The Company has a geographic concentration of loan and deposit customers within the Chicago metropolitan 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:

	2009			2008
Real estate
Commercial	$	99,416		$	84,103
Construction		21,341			31,243
Residential		25,424			18,790
Home equity		63,758			59,727
Total real estate loans		209,939			193,863
Commercial		25,907			27,175
Consumer		1,662			1,762
Total loans		237,508			222,800
Deferred loan costs, net		276			115
Allowance for loan losses		(4,812	)		(3,300	)
Loans, net	$	232,972		$	219,615

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

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

Balances, January 1, 2009	$	1,619
New loans including renewals		162
Payments, etc., including renewals		(852	)
Balances, December 31, 2009	$	929

Activity in the allowance for loan losses is summarized below:

	2009			2008
Balance at beginning of year	$	3,300		$	1,970
Provision for loan losses		2,344			2,215
Charge-offs		(837	)		(905	)
Recoveries		5			20
Balance at end of year	$	4,812		$	3,300

49

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 4 - LOANS (Continued)

Impaired loans totaled $13,100,000 and $3,651,000 at December 31, 2009 and 2008, respectively. An allowance for loan losses of $1,256,000 and $1,065,000 relates to impaired loans of $7,221,000 and $3,636,000 at December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008, impaired loans of $5,879,000 and $15,000 had no related allowance for loan losses.

Interest income of $513,000 and $193,000 was recognized on average impaired loans of $12,956,000 and $3,944,000 for 2009 and 2008. Interest income of $513,000 and $31,000 was recognized on the cash basis during 2009 and 2008.

Nonperforming loans were as follows:

	2009		2008
Loans past due over 90 days still on accrual	$	480	$	32
Nonaccrual loans		14,555		2,725

NOTE 5 - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following at year end:

	2009			2008
Land	$	3,908		$	3,908
Building		12,358			12,220
Construction in progress		—			32
Furniture and equipment		3,019			2,831
Total cost		19,285			18,891
Accumulated depreciation		(3,421	)		(2,879	)
Net book value	$	15,864		$	16,112

NOTE 6 - DEPOSITS

	2009		2008
Non-interest bearing DDA	$	29,962	$	27,271
NOW		77,525		55,801
Money market		42,894		38,776
Regular savings		26,140		23,043
Certificates and time deposits, $100,000 and over		52,175		43,601
Other certificates and time deposits		69,615		65,023
Total deposits	$	298,311	$	253,515

50

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 6 - DEPOSITS (Continued)

At December 31, 2009, scheduled maturities of certificates of deposit are as follows:

2010	$	108,765
2011		7,701
2012		4,447
2013		691
2014		186
	$	121,790

Deposits from related parties, as defined in Note 4, held by the Company at December 31, 2009 and 2008 totaled $5,126,000 and $3,230,000, respectively.

NOTE 7 - ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS

Advances from the Federal Home Loan Bank of Chicago totaled $13,000,000 and $17,000,000 at December 31, 2009 and 2008. Advances, at interest rates from 2.69% to 3.57%, 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, 2009, scheduled maturities of advances are as follows:

2010	$	6,500
2011		—
2012		2,000
2013		4,500

The Company has a loan with Marshall & Ilsley Bank (“M&I Bank”) with a fixed rate of 6.0% and a balance of $1,800,000 at December 31, 2009. As a condition of the Company’s loan agreement with M&I Bank, the Bank must maintain a nonperforming assets to tangible capital ratio of not more than 65% measured quarterly and not incur a net loss of more than $250,000 for the calendar year ended December 31, 2009. As of December 31, 2009 the Company was not in compliance with these debt covenants. These covenants have been waived by M&I Bank.

51

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 8 - SUBORDINATED DEBENTURES

The Company and its financing trust subsidiary, Community Financial Shares Trust II, a Delaware statutory trust, consummated the issuance and sale of an aggregate amount of $3,500,000 of the Trust’s floating rate capital securities in a pooled trust preferred transaction. The subordinated debentures accrue interest at a variable rate based on three-month LIBOR plus 1.62%, reset and payable quarterly. The interest rate at December 31, 2009 was 1.87%. The debentures will mature on September 21, 2037, at which time the preferred securities must be redeemed. In addition, the Company may redeem the preferred securities in whole or part, beginning June 21, 2012 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.

NOTE 9 - TARP CAPITAL PURCHASE PROGRAM

On May 15, 2009, the Company entered into a Letter Agreement and related Securities Purchase Agreement with the United States Department of the Treasury (the “Department of Treasury”) in accordance with the terms of the Department of Treasury’s TARP Capital Purchase Program. Pursuant to the Letter Agreement and Securities Purchase Agreement, the Company issued 6,970 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and a warrant for the purchase of 349 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “warrant”) to the Department of Treasury for an aggregate purchase price of $6,970,000 in cash.

The Series A preferred stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum until February 15, 2014. Beginning February 16, 2014, the dividend rate will increase to 9% per annum. The Series A preferred stock may be redeemed, in whole or in part, at any time from time to time, at the option of the Company, subject to consultation with the Company’s primary federal banking regulator, provided that any partial redemption must be for at least 25% of the issue price of the Series A preferred stock.

As part of the transaction, the Department of Treasury exercised the Warrant and received 349 shares of Series B preferred stock. The Series B preferred stock will pay cumulative dividends at a rate of 9% per annum. The Series B preferred stock may also be redeemed, in whole or in part, at any time from time to time, at the option of the Company, subject to consultation with the Company’s primary federal regulator, provided that any partial redemption must be for at least 25% of the liquidation value of the Series B preferred stock. The Series B preferred stock cannot be redeemed until all of the outstanding shares of Series A preferred stock have been redeemed.

The Purchase Agreement also subjects the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (the “EESA”), as modified by the American Recovery and Reinvestment Act of 2009. The Company will take all necessary action to ensure that its benefit plans with respect to senior executive officers continue to comply with Section 111(b) of the EESA and has agreed to not adopt any benefit plans with respect to, or which cover, its senior executive officers that do not comply with the EESA, and the applicable executives have consented to the foregoing.

52

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 10 - CAPITAL REQUIREMENTS

The Bank is 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

53

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 10 - CAPITAL REQUIREMENTS (Continued)

The actual capital levels and minimum required levels for 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
2009
Total capital (to risk-weighted assets)	$	28,647	11.5	%	$	19,869	8.0	%	$	24,837	10.0	%
Tier 1 capital (to risk-weighted assets)		25,532	10.3			9,935	4.0			14,902	6.0
Tier 1 capital (to average assets)		25,532	7.7			13,272	4.0			16,590	5.0
2008
Total capital (to risk-weighted assets)	$	24,930	10.5	%	$	18,951	8.0	%	$	23,689	10.0	%
Tier 1 capital (to risk-weighted assets)		21,965	9.3			9,476	4.0			14,214	6.0
Tier 1 capital (to average assets)		21,965	7.6			11,525	4.0			14,407	5.0

Without prior approval, current regulations allow the Bank to pay dividends to the Company not exceeding net profits (as defined in such regulations) for the current year plus those for the previous two years. The Bank normally restricts dividends to a lesser amount because of the need to maintain an adequate capital structure. At December 31, 2009, regulatory approval is required for all dividend declarations by both the Bank and the Company. As a result of informal discussions with the regulators, management has agreed to maintain a ratio of total capital to risk-weighted assets of 11.5% at December 31, 2009.

At December 31, 2009, the Bank was categorized by its regulators as well capitalized in accordance with the regulatory criteria discussed above for all capital measurements.

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 $31,000 and $30,000 in 2009 and 2008, respectively.

The Company also maintains a nonqualified retirement program for directors. Expense for the directors’ retirement program was $41,000 and $49,000 in 2009 and 2008, respectively.

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 $912,000 and $816,000 at December 31, 2009 and 2008, respectively. 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 3.02%.

54

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 12 - INCOME TAXES

Income tax benefit consists of the following:

	2009			2008
Currently payable tax
Federal	$	(143	)	$	(459	)
State		15			15
Deferred tax		(887	)		(801	)
Income tax benefit	$	(1,015	)	$	(1,245	)

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

	2009			2008
Federal rate of 34 percent	$	(655	)	$	(858	)
Add (subtract) effect of
Tax-exempt income, net of nondeductible interest expense		(159	)		(158	)
State income tax, net of federal benefit		(119	)		(149	)
Cash value of life insurance		(79	)		(75	)
Other items, net		(3	)		(5	)
Income tax benefit	$	(1,015	)	$	(1,245	)

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

	2009			2008
Deferred tax assets
Allowance for loan losses	$	1,809		$	1,243
Deferred compensation		501			449
Other-than-temporary-impairment		200			200
Loss carryforward		254			107
AMT carryover		273			66
Net unrealized losses on securities available for sale		153			287
Other		135			87
Total		3,325			2,439
Deferred tax liabilities
Accumulated depreciation		(548	)		(526	)
Deferred loan fees and costs, net		(146	)		(76	)
Prepaid expenses		(63	)		(89	)
Federal Home Loan Bank stock dividends		(522	)		(522	)
Other		(149	)		(88	)
Total		(1,428	)		(1,301	)
Net deferred tax asset	$	1,897		$	1,138

The deferred tax asset is in other assets on the Company’s balance sheet.

55

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 13 - LOSS PER SHARE

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

	2009			2008
Basic
Net loss	$	(912	)	$	(1,279	)
Less: Accretion of discount on preferred stock		(36	)		—
Dividends on preferred stock		(238	)		—
Net loss available to common shareholders	$	(1,186	)	$	(1,279	)
Weighted-average common shares outstanding		1,245,267			1,246,025
Basic loss per share	$	(0.95	)	$	(1.03	)
Diluted
Net loss	$	(912	)	$	(1,279	)
Less: Accretion of discount on preferred stock		(36	)		—
Dividends on preferred stock		(238	)		—
Net loss available to common shareholders	$	(1,186	)	$	(1,279	)
Weighted-average common shares outstanding for basic earnings per share		1,245,267			1,246,025
Add dilutive effects of assumed exercise of stock options		—			—
Average shares and dilutive potential common shares		1,245,267			1,246,025
Diluted loss per share	$	(0.95	)	$	(1.03	)

There were 32,630 and 42,030 anti-dilutive shares at December 31, 2009 and 2008, respectively.

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.

56

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 14 - STOCK OPTIONS (Continued)

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 as a result of the 2-for-1 stock split which became effective December 27, 2006.

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.

A summary of the activity in the Plan follows:

	2009	2008
Expected volatility	14.89% - 16.77%	10.62% - 14.40%
Weighted-average volatility	16.08%	13.82%
Expected dividends	0.00% - 0.60%	0.89% - 1.02%
Expected term (in years)	5	5
Risk-free rate	1.60% - 2.38%	3.00% - 3.57%

A summary of option activity under the Plan as of December 31, 2009, and changes during the year then ended, is presented below:

	2009
	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding, beginning of year	42,030		$	19.73
Granted	5,700			14.92
Exercised	—			—
Forfeited or expired	(11,400	)		15.36
Outstanding, end of year	36,330		$	20.35	6.0	—
Exercisable, end of year	9,340		$	20.22	4.5

The weighted-average grant-date fair value of options granted during the years 2009 and 2008 was $2.47 and $4.06, respectively. The total intrinsic value of options exercised during the years ended December 31, 2009 and 2008, was $0 and $16,900, respectively.

As of December 31, 2009, there was $103,000 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.

57

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 14 - STOCK OPTIONS (Continued)

During 2009, the Company recognized approximately $13,000 of share-based compensation expense and approximately $5,000 of tax benefit related to the share based compensation expense.

Cash received from option exercise under all share-based payment arrangements for the years ended December 31, 2009 and 2008 was $0 and $14,000, respectively. The actual tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $0 and $1,000, respectively, for the years ended December 31, 2009 and 2008.

NOTE 15 - OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) components and related taxes were as follows:

	2009			2008
Net unrealized gain (loss) on securities available-for-sale	$	397		$	(944	)
Less reclassification adjustment for realized (gains) losses included in income		(50	)		406
Other comprehensive loss, before tax effect		347			(538	)
Tax (benefit) expense		134			(208	)
Other comprehensive income (loss)	$	213		$	(330	)

NOTE 16 - 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.

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

	2009		2008
Financial standby letters of credit	$	1,534	$	1,460
Commitments to originate loans		1,948		1,094
Unused lines of credit and letters of credit		69,356		72,127
Performance standby letters of credit		136		240

58

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company measures fair value according to the Financial Accounting Standards Board Accounting Standards Codification (ASC) Fair Value Measurements and Disclosures (ASC 820-10). ASC 820-10 establishes a fair value hierarchy that prioritizes the inputs used in valuation techniques, but not the valuation techniques themselves. The fair value hierarchy is designed to indicate the relative reliability of the fair value measure. The highest priority given to quoted prices in active markets and the lowest to unobservable data such as the Company’s internal information. ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs into the fair value hierarchy (Level 1 being the highest priority and Level 3 being the lowest priority):

Level 1	Quoted prices in active markets for identical assets or liabilities.
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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

59

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Available-for-sale Securities

If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include all available-for-sale securities. Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather on the investment securities’ relationship to other benchmark quoted investment securities. The following tables are as of December 31, 2009 and December 31, 2008, respectively:

			At December 31, 2009
			Fair Value Measurements Using
	Fair Value
			Level 1	Level 2		Level 3
Available for sale securities:
U.S. government agencies	$	17,691		$	17,691
State and political subdivisions		15,339			15,339
Mortgage-backed securities		11,131			11,131
Preferred stock		20			20
SBA guaranteed		363			363
Total available for sale securities	$	44,544	—	$	44,544	—
			At December 31, 2008
			Fair Value Measurements Using
	Fair Value
			Level 1	Level 2		Level 3
Available for sale securities:
U.S. government agencies	$	10,110		$	10,110
State and political subdivisions		10,745			10,745
Mortgage-backed securities		4,724			4,724
Preferred stock		6			6
SBA guaranteed		387			387
Total available for sale securities	$	25,972	—	$	25,972	—

The following is a description of the valuation methodologies used for instruments measured at fair value on a non-recurring basis and recognized in the accompanying December 31, 2009 and December 31, 2008 balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

60

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Impaired Loans (Collateral Dependent)

Loans for which it is probable that the Bank will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method. The following tables are as of December 31, 2009 and December 31, 2008, respectively:

			At December 31, 2009
			Fair Value Measurements Using
	Fair Value
			Level 1	Level 2	Level 3
Impaired loans	$	5,965	—	—	$	5,965
			At December 31, 2008
			Fair Value Measurements Using
	Fair Value
			Level 1	Level 2	Level 3
Impaired loans	$	2,572	—	—	$	2,572

61

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

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

	2009				2008
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets
Cash and cash equivalents	$	25,848	$	25,848	$	15,825	$	15,825
Interest-bearing time deposits		618		618		992		992
Securities available for sale		44,544		44,544		25,972		25,972
Loans held for sale		1,698		1,698		1,410		1,410
Loans receivable, net		232,972		233,261		219,615		220,502
Federal Home Loan Bank stock		5,398		5,398		5,398		5,398
Interest receivable		1,266		1,266		1,089		1,089
Financial liabilities
Deposits		298,311		299,075		253,515		253,792
Federal Home Loan Bank advances		13,000		13,209		17,000		17,097
Other borrowings		1,800		1,800		2,000		2,000
Subordinated debentures		3,609		1,138		3,609		3,609
Interest payable		403		403		499		499

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

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

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.

62

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 18 - 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,
	2009		2008
Assets
Cash on deposit with the Bank	$	2,450	$	339
Investment in common stock of the Bank		25,296		21,511
Other assets		375		381
Total assets	$	28,121	$	22,231
Liabilities
Other borrowings	$	1,800	$	2,000
Long-term debt		3,609		3,609
Other liabilities		5		9
Total liabilities		5,414		5,618
Stockholders’ Equity		22,707		16,613
Total liabilities and stockholders’ equity	$	28,121	$	22,231

Condensed Statements of Operations

	Years Ended December 31,
	2009			2008
Income	$	7		$	357
Expenses
Interest expense		176			257
Other expenses		212			244
Total expenses		388			501
Loss Before Income Tax and (Distributions in Excess of) Undistributed Income of the Bank		(381	)		(144	)
Income Tax Benefit		(147	)		(191	)
Income (Loss) Before Equity in Undistributed Loss of the Bank		(234	)		47
Equity in Undistributed Loss of the Bank		(678	)		(1,326	)
Net Loss	$	(912	)	$	(1,279	)

63

COMMUNITY FINANCIAL SHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

(Table dollar amounts in thousands, except share data)

NOTE 18 - CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (Continued)

Condensed Statements of Cash Flows

	Years Ended December 31,
	2009			2008
Operating Activities
Net loss	$	(912	)	$	(1,279	)
Equity in undistributed loss of the Bank		678			1,326
Compensation cost of stock options		13			16
Tax benefit of stock options exercised		—			(1	)
Other changes		2			(20	)
Net cash provided by (used in) operating activities		(219	)		42
Investing Activity
Investment in Bank		(4,250	)		(2,000	)
Financing Activities
Proceeds from issuance of preferred stock		6,970			—
Proceeds from borrowings		—			2,000
Repayment of borrowings		(200	)		—
Purchase of stock		—			(165	)
Exercise of stock options		—			14
Tax benefit of stock options exercised		—			1
Dividends paid on common stock		—			(225	)
Dividends paid on preferred stock		(190	)		—
Net cash provided by financing activities		6,580			1,625
Net Change in Cash on Deposit With the Bank		2,111			(333	)
Cash on Deposit With the Bank at Beginning of Year		339			672
Cash on Deposit With the Bank at End of Year	$	2,450		$	339

NOTE 19 - SUBSEQUENT EVENT

On January 29, 2010, the Bank took possession of and transferred three properties into other real estate owned. These properties totaled $2,225,000 and consisted of a single-family residence, a three unit commercial real estate property and an eight unit condominium construction project. As a result of taking possession of these three properties, they were written down a total of $109,000, which was previously reserved for as of December 31, 2009.

64

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A(T). 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, 2009. 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, 2009, that have materially affected or are reasonably likely to materially 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, 2009, 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 controls may vary over time.

• Management evaluated the Company’s internal control over financial reporting as of December 31, 2009. 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, 2009.

This annual report does not include an attestation report of the Company’s independent 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.

65

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Board of Directors

For information relating to the Company’s directors, the section captioned “Proposal 1—Election of Directors” in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held May 26, 2010 is incorporated herein by reference.

Executive Officers

For information relating to officers of the Company, the section captioned “Executive Officers” in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held May 26, 2010 is incorporated herein by reference.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

For information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, the cover page to this Annual Report on Form 10-K and the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held May 26, 2010 are incorporated by reference.

Disclosure of Code of Ethics

The Company has adopted a formal Code of Business Conduct and Ethics. The Code of Business Conduct and Ethics applies to all directors and employees of the Company and the Bank and sets forth the ethical standards that we expect all of our directors and employees to follow, including our Chief Executive Officer and Chief Financial Officer. A copy of the Code of Ethics and Business Conduct is incorporated herein by reference to Exhibit 14.0 to the Company’s Form 10-K for the year ended December 31, 2006.

Corporate Governance

For information regarding the Audit Committee and its composition and the Audit Committee financial expert, the section captioned “Meetings and Committees of the Board – Audit Committee” in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held May 26, 2010 is incorporated herein by reference.

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 Company’s Proxy Statement for the Annual Meeting of Stockholders to be held May 26, 2010.

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 sections titled “Voting Security Ownership of Certain Beneficial Owners and Management” contained in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 26, 2010. The Company’s management knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.

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Equity Compensation Plan information as of December 31, 2009:

	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	36,330	$	20.35	77,695
Equity compensation plans not approved by security holders	0		N/A	0
Total	36,330	$	20.35	77,695

* Excluding securities reflected in column A.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Certain Relationships and Related Transactions

For information regarding certain relationships and related transactions, the section captioned “Review, Approval or Ratification of Transactions with Related Persons” in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held May 26, 2010 is incorporated by reference.

Corporate Governance

For information regarding director independence, the section captioned “Corporate Governance—Director Independence” in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held May 26, 2010 is incorporated by reference.

Item 14. Principal Accountant Fees and Services

The information relating to the principal accountant fees and expenses is incorporated herein by reference to the section captioned “Relationship with Independent Registered Public Accounting Firm” in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held May 26, 2010.

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, 2009 and 2008.

Consolidated Statements of Operations for the years ended December 31, 2009 and 2008.

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2009 and 2008.

Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008.

(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 31, 2010

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 31, 2010 by the following persons on behalf of the registrant and in the capacities indicated.

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

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EXHIBIT INDEX

Exhibit Number	Exhibit
3.1.1	Certificate of Incorporation of Community Financial Shares, Inc. (Incorporated by reference to Exhibit 3.1.1 to the Company’s Form 10-K for the year ended December 31, 2006)
3.1.2	Certificate of Amendment to the Certificate of Incorporation of Community Financial Shares, Inc. as amended November 29, 2006. (Incorporated by reference to Exhibit 3.1.2 to the Company’s Form 10-K for the year ended December 31, 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 to Exhibit 4.1 to the Company’s 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. (Incorporated by reference to Exhibit 4.2 to the Company’s Form 10-K for the year ended December 31, 2006)*
10.0	Form of Community Bank Directors Retirement Plan agreement (Incorporated by reference to Exhibit 10.0 to the Company’s Form 10-KSB for the year ended December 31, 2000)*
10.1	Form of Community Bank Directors Deferred Compensation Agreement (Incorporated by reference to Exhibit 10.1 to the Company’s Form 10-K for the year ended December 31, 2005)*
10.2	Form of change of control letter agreement (Incorporated by reference to Exhibit 10.0 to the Company’s Form 10-QSB for the quarterly period ended June 30, 2002)*
10.3	Employment agreement between Community Financial Shares, Inc., Community Bank Wheaton/Glen Ellyn and Donald H. Fischer dated November 28, 2006. (Incorporated by reference to Exhibit 10.3 to the Company’s Form 10-K for the year ended December 31, 2006)*
10.4	Change in Control Agreement between Community Bank-Wheaton/Glen Ellyn and Eric Wedeen dated March 27, 2009* (Incorporated by reference to Exhibit 10.4 to the Company’s Form 10-K for the year ended December 31, 2008)
*10.5	Long-Term Restricted Stock Unit Agreement between Community Financial Shares, Inc. and Scott W. Hamer* (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on February 23, 2010)

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EXHIBIT INDEX (Continued)

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 incorporated herein. (Incorporated by reference to Exhibit 14.0 to the Company’s Form 10-K for the year ended December 31, 2006)
**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.
**99.1	31 C.F.R. Section 30.15 Certification of Chief Executive Officer
**99.2	31 C.F.R. Section 30.15 Certification of Chief Financial Officer

* Denotes management contract or compensatory plan.

** Exhibit filed herewith.

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EX-21.0

Exhibit 21.0

COMMUNITY FINANCIAL SHARES, INC. AND SUBSIDIARIES

SUBSIDIARIES

Name	State of Organization	Ownership
Community Bank – Wheaton/Glen Ellyn	Illinois	100% of stock owned by Community Financial Shares, Inc.
Community Financial Shares Statutory Trust II	Delaware	100% of stock owned by Community Financial Shares, Inc.

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EX-23.0

Exhibit 23.0

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statement of Community Financial Shares, Inc. on Form S-8 (File No. 333-133662) of our report dated March 31, 2010, on our audits of the consolidated financial statements of Community Financial Shares, Inc. as of December 31, 2009 and 2008 and for the years then ended, which report is included in the Annual Report on Form 10-K of Community Financial Shares, Inc. for the year ended December 31, 2009.

Indianapolis, Indiana

March 31, 2010

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EX-31.1

Exhibit 31.1

CERTIFICATION OF CEO PURSUANT TO

SECTION 302 OF THE SARBANES OXLEY ACT OF 2002

I, Scott W. Hamer, certify that:

1. I have reviewed this Form 10-K for the year-ending December 31, 2009 of Community Financial Shares, Inc.;

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

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

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

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

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

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

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

Date:	March 31, 2010
By	/s/ Scott W. Hamer, CEO
(Principal Executive Officer)

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EX-31.2

Exhibit 31.2

CERTIFICATION OF CFO PURSUANT TO

SECTION 302 OF THE SARBANES OXLEY ACT OF 2002

I, Eric J. Wedeen, certify that:

1. I have reviewed this Form 10-K for the year-ending December 31, 2009 of Community Financial Shares, Inc.;

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

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

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

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

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

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

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

Date:	March 31, 2010
By	/s/ Eric J. Wedeen, CFO
(Principal Financial and Accounting Officer)

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EX-32.1

Exhibit 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

In connection with the Annual Report of Community Financial Shares, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scott W. Hamer, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ Scott W. Hamer, CEO

Scott W. Hamer

Chief Executive Officer

March 31, 2010

* This certification shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, or the Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act. Such certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

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EX-32.2

Exhibit 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

In connection with the Annual Report of Community Financial Shares, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eric J. Wedeen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ Eric J. Wedeen, CFO

Eric J. Wedeen

Chief Financial Officer

March 31, 2010

* This certification shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, or the Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act. Such certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

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EX-99.1

Exhibit 99.1

CERTIFICATION

PURSUANT TO 31 C.F.R. § 30.15

I, Scott W. Hamer, certify, based on my knowledge, that:

(i) The compensation committee of Community Financial Shares, Inc. has discussed, reviewed, and evaluated with senior risk officers at least every six months during the period beginning on the later of September 14, 2009, or ninety days after the closing date of the agreement between the TARP recipient and Treasury and ending with the last day of the TARP recipient’s fiscal year containing that date (the applicable period), the senior executive officer (SEO) compensation plans and the employee compensation plans and the risks these plans pose to Community Financial Shares, Inc.;

(ii) The compensation committee of Community Financial Shares, Inc. has identified and limited during the applicable period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Community Financial Shares, Inc., and during that same applicable period has identified any features in the employee compensation plans that pose risks to Community Financial Shares, Inc. and has limited those features to ensure that Community Financial Shares, Inc. is not unnecessarily exposed to risks;

(iii) The compensation committee has reviewed, at least every six months during the applicable period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Community Financial Shares, Inc. to enhance the compensation of an employee, and has limited any such features;

(iv) The compensation committee of Community Financial Shares, Inc. will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;

(v) The compensation committee of Community Financial Shares, Inc. will provide a narrative description of how it limited during any part of the most recently completed fiscal year that included a TARP period the features in

(A) SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Community Financial Shares, Inc.;

(B) Employee compensation plans that unnecessarily expose Community Financial Shares, Inc. to risks; and

(C) Employee compensation plans that could encourage the manipulation of reported earnings of Community Financial Shares, Inc. to enhance the compensation of an employee;

(vi) Community Financial Shares, Inc. has required that bonus payments, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), of SEOs and twenty next most highly compensated employees be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;

(vii) Community Financial Shares, Inc. has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to a SEO or any of the next five most highly compensated employees during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(viii) Community Financial Shares, Inc. has limited bonus payments to its applicable employees in accordance with Section 111 of EESA and the regulations and guidance established thereunder during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

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(ix) The board of directors of Community Financial Shares, Inc. has established an excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, by the later of September 14, 2009, or ninety days after the closing date of the agreement between the TARP recipient and Treasury; this policy has been provided to Treasury and its primary regulatory agency; Community Financial Shares, Inc. and its employees have complied with this policy during the applicable period; and any expenses that, pursuant to this policy, required approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility, were properly approved;

(x) Community Financial Shares, Inc. will permit a non-binding shareholder resolution in compliance with any applicable federal securities rules and regulations on the disclosures provided under the federal securities laws related to SEO compensation paid or accrued during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(xi) Community Financial Shares, Inc. will disclose the amount, nature, and justification for the offering during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii);

(xii) Community Financial Shares, Inc. will disclose whether Community Financial Shares, Inc., the board of directors of Community Financial Shares, Inc., or the compensation committee of Community Financial Shares, Inc. has engaged during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date, a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;

(xiii) Community Financial Shares, Inc. has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(xiv) Community Financial Shares, Inc. has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Community Financial Shares, Inc. and Treasury, including any amendments;

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(xv) Community Financial Shares, Inc. has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year and the most recently completed fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and the most highly compensated employee identified; and

(xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both.

Date: March 31, 2010

By	/s/ Scott W. Hamer, CEO
(Principal Executive Officer)

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EX-99.2

Exhibit 99.2

CERTIFICATION

PURSUANT TO 31 C.F.R. § 30.15

I, Eric J. Wedeen, certify, based on my knowledge, that:

(i) The compensation committee of Community Financial Shares, Inc. has discussed, reviewed, and evaluated with senior risk officers at least every six months during the period beginning on the later of September 14, 2009, or ninety days after the closing date of the agreement between the TARP recipient and Treasury and ending with the last day of the TARP recipient’s fiscal year containing that date (the applicable period), the senior executive officer (SEO) compensation plans and the employee compensation plans and the risks these plans pose to Community Financial Shares, Inc.;

(ii) The compensation committee of Community Financial Shares, Inc. has identified and limited during the applicable period any features of the SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Community Financial Shares, Inc., and during that same applicable period has identified any features in the employee compensation plans that pose risks to Community Financial Shares, Inc. and has limited those features to ensure that Community Financial Shares, Inc. is not unnecessarily exposed to risks;

(iii) The compensation committee has reviewed, at least every six months during the applicable period, the terms of each employee compensation plan and identified any features of the plan that could encourage the manipulation of reported earnings of Community Financial Shares, Inc. to enhance the compensation of an employee, and has limited any such features;

(iv) The compensation committee of Community Financial Shares, Inc. will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii) above;

(v) The compensation committee of Community Financial Shares, Inc. will provide a narrative description of how it limited during any part of the most recently completed fiscal year that included a TARP period the features in

(A) SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Community Financial Shares, Inc.;

(D) Employee compensation plans that unnecessarily expose Community Financial Shares, Inc. to risks; and

(E) Employee compensation plans that could encourage the manipulation of reported earnings of Community Financial Shares, Inc. to enhance the compensation of an employee;

(vi) Community Financial Shares, Inc. has required that bonus payments, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), of SEOs and twenty next most highly compensated employees be subject to a recovery or “clawback” provision during any part of the most recently completed fiscal year that was a TARP period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;

(vii) Community Financial Shares, Inc. has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to a SEO or any of the next five most highly compensated employees during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(viii) Community Financial Shares, Inc. has limited bonus payments to its applicable employees in accordance with Section 111 of EESA and the regulations and guidance established thereunder during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

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(ix) The board of directors of Community Financial Shares, Inc. has established an excessive or luxury expenditures policy, as defined in the regulations and guidance established under section 111 of EESA, by the later of September 14, 2009, or ninety days after the closing date of the agreement between the TARP recipient and Treasury; this policy has been provided to Treasury and its primary regulatory agency; Community Financial Shares, Inc. and its employees have complied with this policy during the applicable period; and any expenses that, pursuant to this policy, required approval of the board of directors, a committee of the board of directors, an SEO, or an executive officer with a similar level of responsibility, were properly approved;

(x) Community Financial Shares, Inc. will permit a non-binding shareholder resolution in compliance with any applicable federal securities rules and regulations on the disclosures provided under the federal securities laws related to SEO compensation paid or accrued during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(xi) Community Financial Shares, Inc. will disclose the amount, nature, and justification for the offering during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date of any perquisites, as defined in the regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for any employee who is subject to the bonus payment limitations identified in paragraph (viii);

(xii) Community Financial Shares, Inc. will disclose whether Community Financial Shares, Inc., the board of directors of Community Financial Shares, Inc., or the compensation committee of Community Financial Shares, Inc. has engaged during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date, a compensation consultant; and the services the compensation consultant or any affiliate of the compensation consultant provided during this period;

(xiii) Community Financial Shares, Inc. has prohibited the payment of any gross-ups, as defined in the regulations and guidance established under section 111 of EESA, to the SEOs and the next twenty most highly compensated employees during the period beginning on the later of the closing date of the agreement between the TARP recipient and Treasury or June 15, 2009 and ending with the last day of the TARP recipient’s fiscal year containing that date;

(xv) Community Financial Shares, Inc. has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Community Financial Shares, Inc. and Treasury, including any amendments;

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(xv) Community Financial Shares, Inc. has submitted to Treasury a complete and accurate list of the SEOs and the twenty next most highly compensated employees for the current fiscal year and the most recently completed fiscal year, with the non-SEOs ranked in descending order of level of annual compensation, and with the name, title, and employer of each SEO and the most highly compensated employee identified; and

(xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both.

Date: March 31, 2010

By	/s/ Eric J. Wedeen, CFO
(Principal Financial and Accounting Officer)

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