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

Safe Harbor Statement

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

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

• The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company's assets.

• The potential impact of the Company's participation in the U.S.
Department of Treasury's Troubled Asset Relief Program's Capital Purchase Program.

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

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

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

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

• The inability of the Company to obtain new customers and to retain existing customers.

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

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

• The ability of the Company to develop and maintain secure and reliable electronic systems.

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

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

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

• The costs, effects and outcomes of existing or future litigation.

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

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

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission.

Overview

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

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

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

Comparison of Financial Condition at September 30, 2009 and December 31, 2008

Total assets at September 30, 2009 were $322.7 million, which represented an increase of $28.0 million, or 9.5%, compared to $294.7 million at December 31, 2008. The change in total assets was primarily due to increases in investment securities and loans receivable. Investment securities increased by $15.5 million, or 59.5%, to $41.4 million at September 30, 2009. The increase in investment securities is primarily due to a $20.8 million increase in deposits and a decrease in loan demand in early 2009 however, the Company experienced an increase in overall loan demand. Loans receivable increased by $12.4 million, or 5.6%, to $232.0 million at September 30, 2009 from $219.6 million at December 31, 2008. This increase is primarily due to continued strong lending and business relationships within our community maintained by our loan staff. Partially offsetting these increases was a decrease in cash and cash equivalents of $1.4 million, or 9.1%, to $14.4 million at September 30, 2009 from $15.8 million at December 31, 2008.

Total liabilities at September 30, 2009 were $298.9 million, which represented an increase of $20.8 million, or 7.5%, compared to $278.1 million at December 31, 2008. Deposits increased $20.8 million, or 8.2%, to $274.3 million at September 30, 2009 as compared to $253.5 million at December 31, 2008. The increase in deposits primarily consists of increases in the Bank's core deposit accounts. Interest bearing demand deposit accounts increased by $13.2 million, or 23.7%, to $69.0 million at September 30, 2009 from $55.8 million at December 31, 2008 and money market accounts increased $4.1 million, or 10.6%, to $42.9 million at September 30, 2009 from $38.8 at December 31, 2008. The Bank's commercial loan staff continues to place an emphasis on developing and maintaining deposit relationships with our current commercial loan clients. The percentage of interest bearing deposit accounts to total deposits increased to 24.9% at September 30, 2009 from 22.0% at December 31, 2008 and the percentage of certificates of deposit decreased to 39.7% at September 30, 2009 from 42.8% at December 31, 2008. Borrowed money, consisting of Federal Home Loan Bank ("FHLB") advances and other borrowings, decreased $100,000, or 0.53%, to $18.9 million at September 30, 2009 from $19.0 million at December 31, 2009.

Shareholders' equity increased by $7.3 million, or 43.6%, to $23.9 million at September 30, 2009 as compared to $16.6 million at December 31, 2008. The increase in shareholders' equity was primarily the result of the receipt of a $6.97 million investment from the U.S. Department of the Treasury in May 2009 in exchange for 6,970 shares of the Company's preferred stock pursuant to the TARP Capital Purchase Program provided for under the Emergency Economic Stabilization Act of 2008 and an increase of $580,000 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 nine months ended September 30, 2009.

Comparison of Operating Results for the Three Months Ended September 30, 2009 and 2008

General. The Company's net income (loss) improved $886,000 to $86,000 for the three months ended September 30, 2009, from ($800,000) for the three months ended September 30, 2008. This represents a 96.9% improvement in basic and diluted loss per share to ($0.02) per share for the three months ended September 30, 2009 from ($0.64) per share for the three months ended September 30, 2008. The increase in net income during the third quarter of 2009 is the result of the combined effect of i) a $571,000 increase in non interest income; ii) a $675,000 decrease in the Bank's provision for loan losses; iii) a $213,000 increase in net interest income and iv) a $323,000 increase in noninterest expenses.

Net interest income. The following table summarizes interest and dividend income and interest expense for the three months ended September 30, 2009 and 2008.

                                                          Three Months Ended September 30,
                                                    2009        2008       $ Change        % Change
                                                               (Dollars in thousands)
Interest and dividend income:
Interest and fees on loans                        $   3,148    $ 3,314    $     (166 )        (5.00 %)
Securities:
Taxable                                                 339        243            96          39.51
Exempt from federal tax                                 129        129            -              -
Other interest income                                    10          2             8         400.00

Total interest and dividend income                    3,626      3,688           (62 )        (1.68 )

Interest expense:
Deposits                                              1,080      1,275          (195 )       (15.29 )
Federal funds purchased                                  -          10           (10 )      (100.00 )
Federal Home Loan Bank advances and other
borrowings                                              156        205           (49 )       (23.90 )
Subordinated debentures                                  20         41           (21 )       (51.22 )

Total interest expense                                1,256      1,531          (275 )       (17.96 )

Net interest income                               $   2,370    $ 2,157    $      213           9.88

The following table summarizes average balances and annualized average yields or costs for the three months ended September 30, 2009 and 2008.

                                                           Three Months Ended September 30,
                                                      2009                                  2008
                                                                 Average                               Average
                                         Average                 Yield/        Average                 Yield/
                                         Balance     Interest     Cost         Balance     Interest     Cost
                                                                (Dollars in thousands)
Interest-earning assets:
Taxable securities                      $  30,639   $      339      4.39 %    $  18,868   $      243      5.10 %
Tax-exempt securities                      12,092          129      4.21         12,241          129      4.19
Loan receivables, net                     234,077        3,148      5.34        224,840        3,314      5.85
Interest-bearing deposits                  12,580           10      0.31            153            2      5.23
FHLB stock                                  5,398           -       0.00          5,398           -       0.00

Total interest-earning assets             294,786        3,626      4.88        261,500        3,688      5.60

Interest-bearing liabilities:
NOW accounts                               68,994          175      1.01         48,121          138      1.14
Regular savings                            24,514            9      0.15         25,745           16      0.25
Money market accounts                      42,880          157      1.45         39,989          235      2.33
Certificates of deposit                   110,637          739      2.65        101,862          886      3.45
FHLB advances and other                    18,966          156      3.25         19,000          205      4.28
Federal funds purchased                        -            -         -           1,947           10      2.08
Subordinated debentures                     3,609           20      2.23          3,609           41      4.46

Total interest-bearing deposits         $ 269,600        1,256      1.85      $ 240,273        1,531      2.53

Net interest income                                 $    2,370                            $    2,157

Net interest spread                                                 3.03 %                                3.07 %

Net interest income to average
interest-earning assets                                             3.19 %                                3.27 %

Interest Income. Interest income decreased $62,000, or 1.7%, to $3.6 million for the three months ended September 30, 2009, compared to $3.7 million for the same period in 2008. This decrease resulted primarily from a decrease in average loan yield, which was primarily the result of a $166,000 decrease in interest income on loans for the three months ended September 30, 2009 compared to the comparable prior year period.

Loan interest income decreased $166,000, or 5.0%, to $3.1 million for the three months ended September 30, 2009, compared to $3.3 million for the comparable prior year period. This decrease resulted from a decrease in the average loan yield of 51 basis points to 5.34% for the three months ended September 30, 2009 from 5.85% for the comparable prior year period. Partially offsetting this decrease was an increase in the average balance of loans of $9.3 million to $234.1 million for the three months ended September 30, 2009 from $224.8 million for the comparable prior year period. There was a 225 basis point decrease in the federal funds interest rate since April 2008, which has negatively impacted interest income due to approximately one half of the Bank's portfolio being comprised of adjustable rate loans. In addition, interest on taxable securities increased $96,000 for the three months ended September 30, 2009 compared to the comparable prior year period. This increase is primarily due to an increase in the average balance of taxable securities of $11.7 million to $30.6 million for the three months ended September 30, 2009 from $18.9 million for the three months ended September 30, 2008. Partially offsetting the increase in the average balance of loans was a decrease in the average yield on taxable securities of 71 basis points to 4.39% for the three months ended September 30, 2009 from 5.10% for the comparable prior year period.

Interest Expense. Interest expense decreased by $275,000, or 18.0%, to $1.3 million for the three months ended September 30, 2009, from $1.5 million for the three months ended September 30, 2008. This decrease resulted from a decrease in the average rate paid on interest bearing liabilities of 68 basis points to 1.85% for the three months ended September 30, 2009 from 2.53% for the comparable prior year period. This decrease was partially offset by an increase in the average balance of interest bearing liabilities of $29.3 million to $269.6 million for the three months ended September 30, 2009 from $240.3 million for the three months ended September 30, 2008. Interest expense resulting from Federal Home Loan Bank advances and other borrowings decreased $49,000 during the three months ended September 30, 2009. The average cost on these borrowings decreased 103 basis points to 3.25% for the three months ended September 30, 2009 from 4.28% for the comparable period in 2008.

Net Interest Income before Provision for Loan Losses. Net interest income before provision for loan losses increased $213,000, or 9.9%, to $2.4 million for the three months ended September 30, 2009 compared to the comparable period in 2008. The Company's net interest margin expressed as a percentage of average earning assets decreased to 3.19% for the three months ended September 30, 2009 as compared to 3.27% for the three months ended September 30, 2008. The yield on average earning assets decreased 72 basis points to 4.88% for the three months ended September 30, 2009 from 5.60% for the comparable period ended September 30, 2008. This decrease in the yield on average earning assets was primarily due to a decrease in loan yield, which resulted from the 225 basis point decrease in the federal funds interest rate since April 2008. The yield on average loans decreased to 5.34% for the three months ended September 30, 2009 from 5.85% for the three months ended September 30, 2008. In addition, there was a 68 basis point decrease in the cost of average interest-bearing liabilities to 1.85% for the three months ended September 30, 2009 as compared to 2.53% for the comparable 2008 period.

Provision for Loan Losses. The Bank's provision for loan losses decreased to $120,000 for the three months ended September 30, 2009 from $795,000 for the comparable period in 2008. The decrease in the provision was the result of management's quarterly analysis of the allowance for loan loss. At September 30, 2009, December 31, 2008 and September 30, 2008, non-performing loans totaled $10.0 million, $2.8 million and $5.0 million, respectively. At September 30, 2009, the ratio of the allowance for loan losses to non-performing loans was 38.4% compared to 119.7% at December 31, 2008 and 69.8% at September 30, 2008. The ratio of the allowance to total loans was 1.62%, 1.48% and 1.55%, at September 30, 2009, December 31, 2008 and September 30, 2008, respectively.

The amounts of the provision and allowance for loan losses are influenced by a number of factors, including current economic conditions, actual loss experience, industry trends and other factors, including real estate values in the Company's market area and management's assessment of current collection risks within the loan portfolio. Should the local economic climate continue to deteriorate, borrowers may experience increased difficulties paying off loans and the level of non-performing loans, charge-offs, and delinquencies could continue to rise, which would require us to further increase the provision. The allowance for loan losses represents

management's estimate of probable incurred losses based on information available as of the date of the financial statements. The allowance for loan losses is based on management's evaluation of the collectibility of the loan portfolio, including past loan loss experience, known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, and economic conditions. Management believes that, based on information available at September 30, 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 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 as an integral part of its examination processes, periodically reviews the Bank's allowance for loan losses and may require the Bank to make additional provisions for estimated loan losses based upon judgments different from those of management. The FDIC examines the Bank periodically and, accordingly, as part of this examination the allowance is reviewed utilizing specific guidelines. Based upon its review, the FDIC may accordingly from time to time require reserves in addition to those previously provided.

Noninterest Income



                                               Three Months Ended September 30,
                                         2009       2008        $ Change       % Change
                                                    (Dollars in thousands)
  Non-interest income:
  Service charges on deposit accounts   $   149    $   190      $     (41 )      (21.58 %)
  Gain on sale of loans                     233        116            117        100.86
  Loss on impairment                         -        (485 )          485       (100.00 )
  Other non-interest income                 162        152             10          6.58

  Total non-interest income             $   544    $   (27 )    $     571      2,114.82

Noninterest income (loss) totaled $544,000 and ($27,000) for the three months ended September 30, 2009 and 2008, respectively. For the three months ended September 30, 2008 the loss on impairment relates to the $485,000 other than temporary write-down of our investment in Federal Home Loan Mortgage Corporation preferred stock. Gain on sale of loans increased $117,000 to $233,000 for the three months ended September 30, 2009 from $116,000 for the comparable prior year period. The Bank's mortgage department has experienced an increase in loan applications during the third quarter of 2009 due to the lower interest rate environment for mortgage loans. Partially offsetting these increases was a decrease in service charges on deposit accounts of $41,000 to $149,000 for the three months ended September 30, 2009 from $190,000 for the comparable prior year period. This decrease was primarily due to lower volume of overdraft fees.

Noninterest Expense



                                                Three Months Ended September 30,
                                           2009        2008     $ Change       % Change
                                                     (Dollars in thousands)
   Non-interest expenses:
   Salaries and employee benefits        $   1,406    $ 1,292   $     114          8.82 %
   Net occupancy and equipment expense         365        353          12          3.40
   Data processing expense                     237        218          19          8.72
   Advertising and promotions                   75         90         (15 )      (16.67 )
   FDIC insurance premiums                     166         97          69         71.13
   Professional fees                           164         63         101        160.32
   Other operating expenses                    353        330          23          6.97

   Total non-interest expenses           $   2,766    $ 2,443   $     323         13.22

Noninterest expense increased by $323,000 to $2.8 million for the three months ended September 30, 2009 from $2.4 million for the comparable prior year period. This increase is partially due to an increase in FDIC premiums of $69,000 for the three months ended September 30, 2009 as compared to the prior year period. Salaries and employee benefits expenses increased by $114,000, or 8.8%, to $1.4 million for the three months ended September 30, 2009. This increase is the result of annual merit increases and higher commissions paid to mortgage department personnel. Professional fees, including legal and audit expenses, increased by $101,000 to $164,000 for

the three months ended September 30, 2009. This increase is partially due to higher legal fees associated with foreclosure actions. Other operating expenses, including occupancy, data processing, and marketing and advertising expenses, increased by a net $16,000, or 2.4%, to $677,000 for the three months ended September 30, 2009 from $661,000 for the prior year period. Of this increase, $19,000 is related to data processing expense, which is primarily due to increased volume resulting from deposit account growth, and $12,000 is related to occupancy expense, which is primarily due to higher real estate taxes. These increases were partially offset by lower advertising and promotion expenses, which decreased $15,000 from the prior year period. 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 $58,000 and $308,000 for the three months ended September 30, 2009 and 2008, respectively. The decrease in income tax benefit is the result of an increase in income (loss) before income taxes of $1.1 million to $28,000 for the three months ended September 30, 2009 compared to ($1.1 million) for the comparable prior year period.

Comparison of Operating Results for the Nine Months Ended September 30, 2009 and 2008

General. The Company's net loss improved $824,000 to ($222,000) for the nine months ended September 30, 2009, from ($1.0 million) for the nine months ended September 30, 2008. This represents a 63.1% improvement in basic and diluted loss per share to ($0.31) per share for the nine months ended September 30, 2009 from ($0.84) per share for the nine months ended September 30, 2008. The improvement in net loss during the nine months of 2009 is the result of the . . .