UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(mark one)

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

For the quarterly period ended March 31, 2011

¨	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 000-53989

COVENANT BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Illinois		80-0092089
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

7306 West Madison Street

Forest Park, Illinois 60130

(Address of principal executive offices)

(773) 533-5208

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x

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 (Section 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer	¨	Accelerated Filer	¨

Non-Accelerated Filer	¨ (Do not check if a smaller reporting company)	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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class		Outstanding as of December 31, 2012
Common Stock, $4.50 par value		770,346

COVENANT BANCSHARES, INC.

FORM 10-Q

For the quarterly period ended March 31, 2011

INDEX

		Page
PART I – FINANCIAL INFORMATION

Item 1	Financial Statements
	Consolidated Balance Sheet	3
	Consolidated Statement of Operations	4
	Consolidated Statement of Comprehensive Income	5
	Consolidated Statement of Changes in Stockholders’ Equity	6
	Consolidated Statement of Cash Flows	7
	Notes to Consolidated Financial Statements	9

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3	Quantitative and Qualitative Disclosures about Market Risk	38

Item 4	Controls and Procedures	39

PART II – OTHER INFORMATION

Item 1	Legal Proceedings	39

Item 1A	Risk Factors	39

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3	Defaults upon Senior Securities	39

Item 4	[Removed and Reserved]	39

Item 5	Other Information	39

Item 6	Exhibits	40

SIGNATURES		41

COVENANT BANCSHARES, INC.

Consolidated Balance Sheet

(in thousands, except share and per share data)	March 31, 2011 (Unaudited)			December 31, 2010 (1)
Assets
Cash and due from banks	$	1,868		$	1,711
Interest bearing deposits		6,378			2,293
Total cash and cash equivalents		8,246			4,004
Federal funds sold		435			1,105
Securities available for sale		4,712			5,225
Non-marketable equity securities		439			439
Loans, net		49,730			52,812
Premises and equipment, net		2,726			2,739
Accrued interest receivable		309			274
Foreclosed real estate		650			319
Intangible Assets		260			277
Prepaid FDIC premiums		465			526
Other assets		313			519
Total assets	$	68,285		$	68,239

Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing	$	7,760		$	6,922
Interest bearing		56,492			55,959
Total deposits		64,252			62,881
Notes payable		700			365
Federal Home Loan Bank advances		-			1,250
Accrued interest payable		54			56
Other liabilities		213			286
Total liabilities		65,219			64,838
Stockholders’ Equity
Common stock, $4.50 par value, 10,000,000 shares authorized; with 765,777 shares issued and outstanding		3,444			3,444
Additional paid-in-capital		4,059			4,059
Accumulated deficit		(4,488	)		(4,155	)
Accumulated other comprehensive income		51			53
Total stockholders’ equity		3,066			3,401
Total liabilities and stockholders’ equity	$	68,285		$	68,239

(1) Derived from audited financial statements

See accompanying notes to these unaudited consolidated financial statements.

COVENANT BANCSHARES, INC.

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended March 31,
(Dollars in thousands, except share and per share data)	2011			2010
Interest and dividend income:
Interest and fees on loans	$	896			$	928
Securities:
Mortgage-backed and related securities		-				7
Debt securities		19				41
Fed Funds Sold		-				1
Interest-bearing deposits		4				6
Total interest income		919				983
Interest expense:
Deposits		195				277
Other Borrowed Funds		1				-
Interest on Notes		7				16
Total interest expense		203				293
Net interest income		716				690
Provision for loan losses		241				-
Net interest income after provision for loan losses		475				690
Other income:
Gain on value of trading assets		23				-
Customer service fees		40				47
Other		32				24
Total other income		95				71
Other expenses:
Salaries and employee benefits		374				414
Directors fees		2				2
Occupancy		114				163
Deposit insurance premium		61				58
Legal and professional services		35				1
Data processing		68				62
Expenses on foreclosed real estate		12				-
Other		237				196
Total other expenses		903				896
Income/(loss), before income taxes		(333	)			(135	)
Income tax expense		-				(18	)
Net income (loss)	$	(333	)		$	(117	)
Losses per share - basic	$	(0.43	)		$	(0.17	)
Losses per share - diluted	$	(0.43	)		$	(0.17	)
Weighted average shares		765,777				689,749

See accompanying notes to these unaudited consolidated financial statements.

COVENANT BANCSHARES, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended March 31,
(Dollars in thousands)	2011			2010
Comprehensive income:
Net income (loss)	$	(333	)	$	(117	)
Other comprehensive income:
Unrealized (loss) gain on securities available for sale arising during period		(2	)		(6	)
Comprehensive income (loss)	$	(334	)	$	(123	)

See accompanying notes to these unaudited consolidated financial statements.

COVENANT BANCSHARES, INC.

Consolidated Statements of Stockholders Equity

(Unaudited)

(in thousands,except share data)	Shares of Preferred Stock		Preferred Stock		Shares of Common Stock		Common Stock		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income			Total
Balance, December 31, 2010		-	$	-		765,777	$	3,444	$	4,059	$	(4,155	)	$	53		$	3,401
Issuance of shares of preferred stock																		-
Comprehensive loss:
Net loss												(333	)					(333	)
Dividends Paid on Preferred																		-
Unrealized loss on securities available for sale															(2	)		(2	)
Total comprehensive loss																		(335	)
Balance, March 31, 2011		-	$	-		765,777	$	3,444	$	4,059	$	(4,488	)	$	51		$	3,066

See accompanying notes to these unaudited consolidated financial statements.

COVENANT BANCSHARES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
(Dollars in thousands)		2011			2010
Cash Flows from Operating Activities
Net Loss	$	(333	)	$	(117	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		57			86
Provision for loan losses		241			-
Net amortization of securities		11			3
Amortization of prepaid FDIC insurance premiums		61			58
Valuation reserves on other real estate owned		-			-
Amortization of Core deposit Intangible		17			17
Change in assets and liabilities:
Accrued interest receivable		(35	)		(48	)
Other assets		206			(540	)
Accrued interest payable and other liabilities		(75	)		476
Net cash provided by (used in) operating activities		150			(65	)
Cash Flows from Investing Activities
Securities available for sale:
Net purchases of securities available for sale		-			(2,500	)
Proceeds from maturities, prepayments and calls of securities available for sale		500			-
Securities held to maturity:
Paydowns and sales		-			110
Net decrease (increase) in loans		2,510			(2,537	)
Net decrease in federal funds sold		670			1,441
Purchases of premises and equipment		(44	)		(12	)
Net cash provided by (used in) investing activities		3,636			(3,498	)

See accompanying notes to these unaudited consolidated financial statements.

COVENANT BANCSHARES, INC.

Consolidated Statements of Cash Flows

(Continued)

	Three Months Ended March 31,
		2011			2010
Cash Flows from Financing Activities
Net increase in deposits		1,371			2,834
Net decrease in borrowed funds		(915	)		-
Net cash provided by financing activities		456			2,834
Net increase (decrease) in cash and cash equivalents		4,242			(730	)
Cash and cash equivalents:
Beginning		4,004			4,026
Ending	$	8,246		$	3,296
Supplemental Disclosures of Cash Flow Information
Cash paid during period for:
Interest	$	205		$	262
Supplemental Schedule of Noncash Investing and Financing Activities
Real estate acquired through or in lieu of foreclosure		331			-
Notes payable and accrued interest converted to common stock		-			-

See accompanying notes to these unaudited consolidated financial statements

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

NOTE 1 – REGULATORY ACTIONS, LIQUIDITY AND GOING CONCERN CONSIDERATIONS

Covenant Bancshares, Inc. (the “Company”) is a holding company for Covenant Bank (the “Bank” or “Covenant Bank”). As a result of the deepening problems related to our loan portfolio and our current financial condition, the Company announced in June 2011 that, in coordination with, and at the request of both the Federal Deposit Insurance Corporation (the “FDIC”) and the Illinois Department of Financial and Professional Regulation (the “IDFPR”), the Bank entered into a Consent Order (the “Order”) with the FDIC and IDFPR. The Order contains a list of strict requirements ranging from a capital directive, which requires the Bank to achieve and maintain minimum regulatory capital levels (in excess of the statutory minimums to be classified as well-capitalized) to developing a Liquidity plan.

On August 28, 2012, the Bank was notified by the IDFPR that the Bank must increase its Tier 1 leverage capital ratio to not less than 5%. The notice indicated that if the Bank does not increase its Tier 1 leverage capital ratio to such level to the satisfaction of the IDFPR, then the IDFPR has authority to take additional regulatory action against the Bank. Additionally, on August 28, 2012 the IDFPR issued to the Bank an Order to Cease and Desist (the “C&D”). The C&D provides that the Bank must: (i) cease and desist from soliciting or knowingly accepting any uninsured deposits, (ii) make contracts with each account holder and discuss methods of restructuring or retitling accounts that would eliminate any uninsured deposits and (iii) submit to the Division each Friday during the life of the C&D, or at any other times the IDFPR may request, a written uninsured deposit report including the total uninsured deposit amounts, the identity of each depositor maintaining any uninsured deposits and the amount of each depositor’s uninsured deposit.

On November 5, 2012, the Bank received a Prompt Corrective Action Directive (the “PCA”) from the FDIC. The Bank was directed that with 45 days of the PCA, the Bank shall: (i) increase the volume of capital to a level sufficient to restore the Bank to an “adequately capitalized” capital category, or (ii) accept an offer to be acquired by a depository institution holding company or to combine with another insured depository institution.

While the Company intends to take such actions as may be necessary to enable the Bank to comply with the requirements of the Order, there can be no assurance the Bank will be able to comply fully with the provisions of the Order, the C&D and the PCA or that compliance with the Order, particularly the regulatory capital requirements, will not have material and adverse effects on the operations and financial condition of the Company and the Bank. Any material failure to comply with the provisions of the Order could result in further enforcement actions by both the FDIC and the IDFPR, or the placing of the Bank into conservatorship or receivership.

REGULATORY ACTIONS

The Order with the FDIC and IDFPR restricts the taking of dividends or any other payment representing a reduction in capital from the Bank, without the prior approval of the FDIC. The Order also requires the Bank to develop a capital plan by July 30, 2011, which shall address, among other things, the Bank’s current and future capital requirements, compliance with minimum capital ratios and the source and timing of additional funds necessary to meet future capital requirements. Notice would be required regarding the appointment of any new director or senior executive officer. Finally, the Board of Directors of the Company is required to submit written progress reports to the FDIC within 30 days after the end of each fiscal quarter.

CONSENT ORDER

The Order with the FDIC and the IDFPR requires the Bank, among other things:

• to establish a compliance committee to monitor and coordinate compliance with the Order;

• to achieve and maintain Tier 1 capital at least equal to 9% of adjusted total assets and at least equal to 13% of risk-weighted assets by July 30, 2011;

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

• to develop a profit plan for the Bank by July 30, 2011, which shall, among other things, include specific plans to for maintaining adequate capital;

• to revise and maintain by July 30, 2011, a liquidity risk management program, which assesses, on an ongoing basis, the Bank’s current and projected funding needs, and ensures that sufficient funds exist to meet those needs;

• to revise by July 30, 2011, the Bank’s loan policy and commercial real estate concentration management program. The Bank also must establish a new loan review program to ensure the timely and independent identification of problem loans and modify its existing program for the maintenance of an adequate allowance for loan and lease losses; and

• to revise and maintain by July 30, 2011 a plan to protect the Bank’s interest in certain assets identified by the FDIC and IDFPR or any other bank examiner.

GOING CONCERN

The Bank is suffering from the extraordinary effects of what may ultimately be the worst economic downturn since the Great Depression. The effects of the current environment are being felt across many industries, with financial services and residential real estate being particularly hard hit. The Bank, with a portfolio consisting primarily of single-family rental property loans, has seen a rapid and precipitous decline in the value of the collateral securing our loan portfolio. Thus, we are experiencing significant loan quality issues. The Company reported a net loss of $333,000, and $135,000 for the three months ended March 31, 2011 and 2010, respectively; primarily the result of significant increases in the provision for credit losses. The impact of the current financial crisis in the U.S. and abroad is having far-reaching consequences and it is difficult to say at this point when the economy will begin to recover. As a result, we cannot assure you that we will be able to resume profitable operations in the near future, or at all.

We have determined that significant additional sources of capital will be required for us to continue operations through 2011 and beyond. The Company’s Board of Directors is working to address this situation; there can be no assurances the Company will succeed in the endeavor and be able to comply with the aforementioned regulatory requirements. In addition, a transaction, which would likely involve equity financing, would result in substantial dilution to our current stockholders and could adversely affect the price of our common stock. If the Company does not comply with the new capital requirements contained in the Order, the regulators may take additional enforcement action against the Company and the Bank, or the placing of the Bank into conservatorship or receivership.

It remains to be seen if those efforts will be successful, either on a short-term or long-term basis. As a result of our financial condition, our regulators are continually monitoring our liquidity and capital adequacy. Based on their assessment of our ability to operate in a safe and sound manner, our regulators may take other and further actions, including placing the Bank into conservatorship or receivership, to protect the interests of depositors insured by the FDIC.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible future effects on the recoverability or classification of assets, and the amounts or classification of liabilities that may result from the outcome of any regulatory action, which would affect our ability to continue as a going concern.

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 2 – BASIS OF PRESENTATION

The consolidated financial statements presented in this quarterly report include the accounts of the Company and the Bank. The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and predominant practices followed by the financial services industry, and are unaudited. In the opinion of the Company’s management, all adjustments, consisting of normal recurring adjustments, which the Company considers necessary to fairly state the Company’s financial position and the results of operations and cash flows have been recorded. Certain amounts in the accompanying financial statements and footnotes for 2010 have been reclassified with no effect on net income or stockholders’ equity to be consistent with the 2011 classifications.

NOTE 3 – USE OF ESTIMATES

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the consolidated financial statements and, thus, actual results could differ from the amounts reported and disclosed herein.

At March 31, 2011, there were no material changes in the Company’s significant accounting policies from those disclosed in the 2010 Form 10-K filed with the Securities and Exchange Commission on May 30, 2012.

NOTE 4 – SIGNIFICANT ACCOUNTING POLICIES

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the allowance for loan losses to be our critical accounting policy.

Allowance for Loan Losses. For all portfolio segments, the allowance for loan losses is an amount necessary to absorb known and inherent losses that are both probable and reasonably estimable through a provision for loan losses charged to earnings. Loan losses, for all portfolio segments, are charged against the allowance when management believes the uncollectability of a loan balance has been confirmed. Subsequent recoveries, if any, are credited to the allowance. For all portfolio segments, the allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review by portfolio segment of the collectability of the loans in light of historical experience over the most recent eight quarters with heavier weighting given to most recent quarters, the nature and volume of the loan portfolio, adverse situations that may affect each borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. This actual loss experience is supplemented with other economic factors based on risks present for each portfolio segment. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

Other real estate owned (‘OREO’). Real estate acquired through foreclosure or deed in lieu of foreclosure ‘OREO’ represents specific assets to which the Bank has acquired legal title in satisfaction of indebtedness. Such real estate is initially recorded at the property’s fair value at the date of foreclosure less estimated selling costs. Initial valuation adjustments, if any, are charged against the allowance for loan losses. Property is evaluated regularly to ensure the recorded amount is supported by its current fair value. Subsequent changes to the estimated fair value are recorded as charges (or credits) to expense when updated valuations are received. Revenues and expense related to holding and operating these properties are included in operations.

NOTE 5 – EARNINGS PER SHARE

Basic earnings per share is based on net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share show the dilutive effect, if any, of additional common shares issuable under stock options and awards.

(Dollars in thousands, except per share data)	Three Months ended March 31,
	2011		2010
Net income (loss) available to common stockholders	$	(333)	$	(117)
Basic potential common shares:
Weighted average shares outstanding		765,777		689,749
Common shares outstanding		765,777		689,749
Dilutive potential common shares:
Weighted average shares outstanding - diluted		765,777		689,749
Basic earnings per share	$	(0.43)	$	(0.17)
Weighted average earnings per share - diluted	$	(0.43)	$	(0.17)

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 6 – INVESTMENT SECURITIES

The amortized cost and fair values of securities, with gross unrealized gains and losses, follows:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2011:
Available for Sale
U.S. Treasuries	$	2,019	$	34	$	-	$	2,053
U.S. agency securities		2,642		17		-		2,659
Total	$	4,661	$	51	$	-	$	4,712
December 31, 2010:
Available for Sale
U.S. Treasuries	$	2,023	$	21	$	-	$	2,044
U.S. agency securities		3,149		32		-		3,181
Total	$	5,172	$	53	$	-	$	5,225

The amortized cost and fair value at March 31, 2011, by contractual maturity, are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or prepaid without penalties. Therefore, stated maturities of mortgage-backed securities are not disclosed.

	Securities Available for Sale
(Dollars in thousands)	Amortized Cost		Fair Value
Due within one year	$	517	$	520
Due after one year through five years		4,144		4,192
Due after five years through ten years		-		-
Due after ten years		-		-
	$	4,661	$	4,712

At March 31, 2011 and December 31, 2010 the Company held no investments with gross unrealized losses.

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (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 to retain and whether it is not more likely than not the Company will be required to sell its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports.

There were no proceeds from the sales of securities, and no gross realized gains or losses for the three months ended March 31, 2011and 2010, respectively.

NOTE 7 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

On July 21, 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This new accounting guidance under FASB ASC 310, Receivables, requires disclosure of additional information about the credit quality of an entity’s financing receivables and the allowance for credit losses.

The new guidance only relates to financial statement disclosures and does not affect the Company’s financial condition or results of operations. The following disclosures incorporate the new guidance.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining the impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the fair value of collateral if the loan is collateral dependent, the present value of expected future cash flows discounted at the loan’s effective interest rate, or the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependant.

Residential real estate and consumer loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

The accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The components of loans, net of deferred loan costs (fees), are as follows:

(Dollars in thousands)	March 31, 2011				December 31, 2010
Mortgage loans:
One-to-four family residential loans		$	25,062		$	25,828
Multi-family residential loans			15,997			17,431
Commercial			8,036			8,621
Total mortgage loans			49,095			51,880
Other loans:
Construction			1,439			1,758
Commercial loans			453			383
Consumer direct			515			539
Total other loans			2,407			2,680
Gross loans			51,502			54,560
Less: Deferred Loan Fees			(155	)		(153	)
Less: Allowance for loan losses			(1,617	)		(1,595	)
Loans, net		$	49,730		$	52,812

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table presents the activity in the allowance for loan losses by portfolio segment for the periods indicated:

(Dollars in thousands)	One-to-Four Family				Multi-family		Non-residential			Commercial		Consumer Direct			Construction				Total
March 31, 2011
Balance at beginning of year		$	693		$	265	$	514		$	-		$	7		$	116		$	1,595
Provision charged to income			264			11		(3	)		-			27			(58	)		241
Loans charged off			(66	)		-		(153	)		-			-			-			(219	)
Recoveries of loans previously charged off			-			-		-			-			-			-			-
Balance at end of period		$	891		$	276	$	358		$	-		$	34		$	58		$	1,617
Period-end amount allocated to:
Loans individually evaluated for impairment		$	356		$	212	$	325		$	-		$	33		$	58		$	984
Loans collectively evaluated for impairment			535			64		33			-			1			-			633
Balance at end of period		$	891		$	276	$	358		$	-		$	34		$	58		$	1,617

	One-to-Four Family		Multi-family		Non-residential		Commercial			Consumer Direct			Construction		Total
March 31, 2010
Balance at beginning of year	$	425	$	45	$	401	$	8		$	12		$	29	$	919
Provision charged to income																-
Loans charged off		-		-		-		(3	)		(1	)		-		(4	)
Recoveries of loans previously charged off		-		-		-		-			-			-		-
Balance at end of period	$	425	$	45	$	401	$	5		$	11		$	29	$	915
Period-end amount allocated to:
Loans individually evaluated for impairment	$	141	$	-	$	312	$	5		$	1		$	-	$	460
Loans collectively evaluated for impairment		284		45		89		-			10			29		455
Balance at end of period	$	425	$	45	$	401	$	5		$	11		$	29	$	915

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table presents the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2011 and December 31, 2010:

(Dollars in thousands)	One-to-four Family		Multi-family		Nonresidential		Commercial		Consumer Direct		Construction		Total
March 31, 2011
Loans individually evaluated for impairment	$	2,476	$	747	$	2,008	$	-	$	33	$	382	$	5,646
Loans collectively evaluated for impairment		22,028		15,577		6,217		490		326		1,218		45,856
Ending Balance	$	24,504	$	16,324	$	8,225	$	490	$	359	$	1,600	$	51,502

	One-to-fourFamily		Multi-family		Nonresidential		Commercial		Direct		Construction		Total
December 31, 2010
Loans individually evaluated for impairment	$	1,914	$	797	$	3,093	$	-	$	29	$	383	$	6,216
Loans collectively evaluated for impairment		23,914		16,634		5,528		383		510		1,375		48,344
Ending Balance	$	25,828	$	17,431	$	8,621	$	383	$	539	$	1,758	$	54,560

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.

The following table presents loans individually evaluated for impairment, by class of loans, as of March 31, 2011 and December 31, 2010:

(Dollars in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
March 31,2011
One-to-four family	$	2,476	$	1,587	$	889	$	2,476	$	356	$	2,195
Multi-family		747		214		533		747		212		772
Non-residential		2,008		843		1,165		2,008		324		2,551
Commercial		-		-		-		-		-		-
Consumer direct		33		-		33		33		34		31
Construction		382		80		302		382		58		383
	$	5,646	$	2,724	$	2,922	$	5,646	$	984	$	5,931
December 31, 2010
One-to-four family	$	1,914	$	708	$	1,206	$	1,914	$	518	$	1,067
Multi-family		797		324		473		797		179		499
Non-residential		3,093		1,563		1,530		3,093		472		2,220
Commercial		-		-		-		-		-		-
Consumer direct		29		1		28		29		1		16
Construction		383		79		304		383		106		192
	$	6,216	$	2,675	$	3,541	$	6,216	$	1,276	$	3,994

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

For year ended December 31, 2011, the Company recognized $95,720 in interest income on impaired loans.

Of the $5.6 million of impaired loans at March 31, 2011, there are $996,000 whose terms have been modified in troubled debt restructurings, $445,000 of loans whose terms have been modified in troubled debt restructurings that are performing in accordance with their modified terms and are being monitored as they have not attained per accounting guidelines the performance requirements for the set time period to achieve being placed on accrual status. At December 31, 2010 there was $6.2 million of impaired loans, of which $1.1 million of loans had been modified in troubled debt restructurings.

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual, by class of loans, as of March 31, 2011 and December 31, 2010:

(Dollars in thousands)	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
March 31, 2011
One-to-four family	$	1,226	$	-
Multi-family		473		-
Non-residential		1,772		101
Commercial		-		-
Consumer direct		-		3
Construction		159		97
	$	3,630	$	201

	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
December 31, 2010
One-to-four family	$	835	$	1,014
Multi-family		279		-
Non-residential		1,443		730
Commercial		109		-
Consumer direct		-		-
Construction		-		80
	$	2,666	$	1,824

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following table presents the aging of the recorded investment in loans, by class of loans, as of March 31, 2011 and December 31, 2010:

(Dollars in thousands)	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans
March 31, 2011
One-to-four family	$	909	$	966	$	1,226	$	3,101	$	21,403	$	24,504
Multi-family		726		-		473		1,199		15,125		16,324
Non-residential		808		285		1,873		2,965		5,260		8,225
Commercial						-		-		490		490
Consumer direct		-		-		3		3		356		359
Construction		-		-		256		256		1,344		1,600
	$	2,442	$	1,251	$	3,831	$	7,524	$	43,978	$	51,502

	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans
December 31, 2010
One-to-four family	$	1,528	$	166	$	1,849	$	3,543	$	22,285	$	25,828
Multi-family		1,648		146		377		2,171		15,260		17,431
Non-residential		269		341		2,074		2,684		5,937		8,621
Commercial		-		-		110		110		273		383
Consumer direct		3		-		-		3		536		539
Construction		-		-		80		80		1,678		1,758

	$	3,448	$	653	$	4,490	$	8,591	$	45,969	$	54,560

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. For commercial and non-residential real estate loans, the Company’s credit quality indicator is internally assigned risk ratings. Each commercial loan is assigned a risk rating upon origination. The risk rating is reviewed on as needed basis depending on the specific circumstances of the loan.

For residential real estate loans, multi-family, consumer direct and purchased auto loans, the Company’s credit quality indicator is performance determined by delinquency status. Delinquency status is updated regularly by the Company’s loan system for real estate loans, multi-family and consumer direct loans.

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The Company uses the following definitions for risk ratings:

•	Pass – loans classified as pass are of a higher quality and do not fit any of the other “rated” categories below (e.g. special mention, substandard or doubtful). The likelihood of loss is considered remote.

•

Special Mention – loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

•

Substandard – loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

•	Doubtful – loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

•	Not Rated – loans in this bucket are not evaluated on an individual basis (currently the bank has no unrated loans).

As of March 31, 2011 and December 31, 2010, the risk category of loans by class is as follows:

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
March 31, 2011
One-to-four family	$	22,133	$	129	$	2,243	$	-	$	24,504
Multi-family		14,644		91		1,589		-		16,324
Non-residential		6,722		-		1,503		-		8,225
Commercial		432		58		-		-		490
Consumer direct		356		-		3		-		359
Construction		1,600		-		-		-		1,600
Total	$	45,886	$	278	$	5,338	$	-	$	51,502

	Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2010
One-to-four family	$	23,985	$	1	$	1,842	$	-	$	25,828
Multi-family		17,054		16		361		-		17,431
Non-residential		6,124		212		2,285		-		8,621
Commercial		273		-		110		-		383
Consumer direct		539		-		-		-		539
Construction		1,678		-		80		-		1,758
Total	$	49,653	$	229	$	4,678	$	-	$	54,560

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

NOTE 8 – RECENT ACCOUNTING DEVELOPMENTS

The following accounting standards were recently issued relating to the financial services industry:

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires new disclosures on transfers into an out of Level 1 and 2 measurements of the fair value hierarchy and requires separate disclosures about purchases, sales, issuances, and settlements relating to the level of disaggregation and inputs and valuation techniques used to measure fair value. It is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Lever 3 activity of purchase, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010. The adoption of this pronouncement related to Level 1 and 2 measurements did not have a material impact on the Company’s consolidated financial statements. The adoption of this pronouncement related to Level 3 measurements is not expected to have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires new disclosures that facilitate financial statement users’ evaluation of the following: (1) the nature of credit risk inherent in the entity’s portfolio of financing receivables; (2) how that risk is analyzed and assessed in arriving at the allowance for credit losses; and (3) the changes and reasons for those changes in the allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The adoption of this guidance significantly expanded existing disclosure requirements but did not and will not have an impact on the Company’s consolidated financial position, results of operations or cash flows. The Company will adopt the disclosures provisions related to loans modified in a troubled debt restructuring on July 1, 2011.

In April 2011, the FASB issued ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 amends ASC Topic 310, Receivables, by clarifying guidance for creditors in determining whether a concession has been granted and whether a debtor is experiencing financial difficulties. ASU 2011-2 is effective for annual periods ending on or after December 15, 2012, and is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements. ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 removes from the assessments of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (ii) the collateral maintenance guidance related to that criterion. ASU 2011-03 is effective for the Company on January 1, 2012, and is not expected to have a material impact on the Company’s consolidated financial statements.

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

In May 2011, the FASB issued ASU 2011-02, Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 amends ASC Topic 820, Fair Value Measurements and Disclosures, to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods beginning after December 15, 2011, and the adoption is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income. ASU 2011-05 amends Topic 220, Comprehensive Income, to require that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented.

The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU 2011-05 is effective for annual periods beginning after December 15, 2012, and is not expected to have a material impact on the Company’s consolidated financial statements. In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05. ASU 2011-12 defers the specific requirement to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income. This standard does not defer the requirement to report comprehensive income either in a single continuous statement or in two separate but consecutive financial statements. While the FASB is considering the operational concerns about the presentation requirements for classification adjustments, entities will continue to report reclassifications out of accumulated comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. ASU 2011-12 is effective for the Company concurrent with ASU 2011-05.

NOTE 9 – FAIR VALUE MEASUREMENT AND DISCLOSURE

The Company applies the accounting standard, Fair Value Measurements and Disclosures (Standards), for assets and liabilities measured and reported at fair value. The Standard defines fair value, establishes a framework for measuring fair value and disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value requires the use of valuation techniques that are consistent with the market approach, the income approach and/or cost approach in the determination of fair value. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the Standard establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other 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.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below:

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Securities Available for Sale: The fair value of the Bank’s securities available for sale are determined using Level 1 and Level 2 inputs from independent pricing services. Level 1 fair value measurements consider quoted prices. Level 2 inputs consider observable data that may include dealer quotes, market spread, cash flows, treasury yield curve, trading levels, credit information and terms, among other factors.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were not recognized at fair value below cost at the end of the period.

Impaired Loans: Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable and is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. At March 31, 2011 and December 31, 2010, there were $5,646,000 and $6,216,000, respectively, in impaired loans valued at $4,662,000 and $4,940,000, respectively, using Level 3 inputs.

Other Real Estate Owned: Other real estate owned, upon initial recognition, are measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the real estate. Upon initial recognition, the fair value of foreclosed assets, are estimated using Level 3 inputs. At March 31, 2011 and December 31, 2010, there was $650,000 and $319,000 in other real estate owned valued using Level 3 inputs, respectively.

Disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet is required. Fair value is determined under the framework established by Fair Value Measurements, based upon criteria noted above. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following methods and assumptions were used by the Company in estimating the fair value disclosures for financial instruments:

Cash and Due from Banks and Federal Funds Sold. The carrying amounts of cash and short-term instruments approximate fair values.

Securities. For U.S. Treasury, U.S. Government agency, and Mortgage-backed securities, fair values are based on market prices or dealer quotes. For other securities, fair value equals quoted

market price if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Federal Home Loan Bank Stock. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Loans. The fair value of all non impaired loans is estimated by discounting the future cash flows adjusted for credit risk using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposits. The fair value of demand deposits, savings accounts, NOW and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

Federal Home Loan Bank advances and notes payable: Fair values for Federal Home Loan Bank advances are estimated using discounted cash flow analysis based on interest rates currently being offered for advances with similar terms. The carrying amount of the Company’s note payable approximates fair value.

Accrued interest: The carrying amounts of accrued interest receivable and payable approximate their fair values.

Off-balance-sheet instruments: Fair values for the Company’s off-balance-sheet instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining term of the agreements and the counterparties’ credit standing. There is no material difference between the notional amount and the estimated fair value of off-balance-sheet items, which are primarily comprised of commitments to extend credit, which are generally priced at market at the time of funding.

The Company did not have any transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the first quarter of 2011.

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The tables below present the recorded amount of assets measured at fair value on a recurring basis at March 31, 2011 and December 31, 2010.

(Dollars in thousands)	Level 1		Level 2		Level 3		Total Fair Value
March 31, 2011
U.S. Treasuries	$	-	$	2,053	$	-	$	2,053
U.S. agency securities available for sale	$	-		2,659	$	-	$	2,659
Total	$	-	$	4,712	$	-	$	4,712

	Level 1		Level 2		Level 3		Total Fair Value
December 31, 2010
U.S. Treasuries		-	$	2,058		-		2,058
U.S. agency securities available for sale	$	-		3,167	$	-	$	3,167
Total	$	-	$	5,225	$	-	$	5,225

The tables below present the recorded amount of assets measured at fair value on a non-recurring basis at March 31, 2011 and December 31, 2010.

	Level 1		Level 2		Level 3		Total Fair Value
March 31, 2011
Foreclosed assets	$	-	$	-	$	650	$	650
Impaired loans, net of allowance		-		-		4,662		4,662

	Level 1		Level 2		Level 3		Total Fair Value
December 31, 2010
Foreclosed assets	$	-	$	-	$	319	$	319
Impaired loans, net		-		-		4,940		4,940

COVENANT BANCSHARES, INC.

Notes to Unaudited Consolidated Financial Statements

(continued)

The following information presents estimated fair value of the Company’s financial instruments as of March 31, 2011 and December 31, 2010:

	March 31, 2011					December 31, 2010
	Carrying Amount			Fair Value		Carrying Amount		Fair Value
(Dollars in thousands)
Financial Assets:
Cash and cash equivalents		$	8,246	$	8,246	$	4,004	$	4,004
Federal funds sold			435		435		1,105		1,105
Securities			4,712		4,712		5,225		5,225
Accrued interest receivable			309		309		274		274
Loans, net			49,730		50,318		52,812		52,921

Financial Liabilities:
Deposits			64,252		64,020		62,881		62,319
Notes payable			700		700		365		365
Accrued interest payable			54		54		56		56

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of the financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and footnotes appearing in Part I, Item 1 of this document.

FORWARD-LOOKING INFORMATION

Statements contained in this report that are not historical facts may constitute forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended), which involve significant risks and uncertainties. The Company intends such 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 is including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by the use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “plan,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results may differ from those predicted. The Company undertakes no obligation to update these forward-looking statements in the future. The Company cautions readers of this report that a number of important factors could cause the Company’s actual results subsequent to March 31, 2011 to differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from those predicted and could affect the future prospects of the Company include, but are not limited to, fluctuations in market rates of interest and loan and deposit pricing, changes in the securities or financial market, a deterioration of general economic conditions either nationally or locally, delays in obtaining the necessary regulatory approvals, our ability to consummate proposed transactions in a timely manner, legislative or regulatory changes that adversely affect our business, adverse developments or changes in the composition of our loan or investment portfolios, significant increases in competition, changes in real estate values, difficulties in identifying attractive acquisition opportunities or strategic partners to complement our Company’s approach and the products and services the Company offers, the possible dilutive effect of potential acquisitions or expansion, and our ability to raise new capital as needed and the timing, amount and type of such capital raises. These risks and uncertainties should be considered in evaluating forward-looking statements.

COVENANT BANCSHARES, INC.

Item 2: Management’s Discussion and Analysis of Financial Condition and

Results of Operations

(continued)

Covenant Bancshares, Inc.

Covenant Bancshares, Inc. (the “Company”) is a holding company for Covenant Bank (the “Bank” or “Covenant Bank”). The business of Covenant Bancshares, Inc. consists of holding all of the outstanding common stock of Covenant Bank. Covenant Bancshares, Inc. is an Illinois corporation and is registered as a bank holding company with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) pursuant to the Bank Holding Company Act of 1956, as amended. Covenant Bancshares, Inc. has 770,346 issued and outstanding shares to the public at September 30, 2012. At September 30, 2012, Covenant Bancshares had total consolidated assets of $60.0 million, total deposits of $59.0 million and stockholders’ equity of $36,000. Our executive offices are located at 7306 West Madison Street, Forest Park, Illinois 60130, and our telephone number is (773) 533-5208.

Recent Developments

Covenant Bank is suffering from the extraordinary effects of what may ultimately be the worst economic downturn since the Great Depression. The effects of the current environment are being felt across many industries, with financial services and residential real estate being particularly hard hit. Covenant Bank, with a loan portfolio consisting primarily of loans secured by single family residences has seen a rapid and precipitous decline in the value of the collateral securing its loan portfolio and a sharp decrease in the Bank’s capital, and as a result, no assurances can be made about the Company’s ability to continue as a going concern.

This quarterly report on Form 10-Q includes the Company’s unaudited financial statements for the quarter ended March 31, 2011. Set forth below are certain selected unaudited financial results as of and for both the three and nine months ended September 30, 2012 compared to unaudited financial results as of and for both the three and nine months ended September 30, 2011. As of September 30, 2012, the Company’s total assets were $60.0 million as compared to $62.2 million as of September 30, 2011. Loans, net of allowance for loan losses, were $40.2 million as of September 30, 2012 as compared to $44.1 million as of September 30, 2011. Nonperforming assets, including OREO, were $7.4 million as of September 30, 2012 as compared to $5.9 million as of September 30, 2011. Net interest income was $532,000 for the quarter ended September 30, 2012 as compared to $557,000 million for the quarter ended September 30, 2011. Net income for the quarter ended September 30, 2012 was $382,000 as compared to a net loss of $436,000 for the quarter ended September 30, 2011. Net interest income was $1.5 million for the nine months ended September 30, 2012 as compared to $1.9 million for the nine months ended September 30, 2011. Net loss for the nine months ended September 30, 2012 was $1.1 million as compared to a net loss of $2.2 million for the nine months ended September 30, 2011.

On August 28, 2012, the Bank was notified by the Illinois Department of Financial and Professional Regulation, Division of Banking (the “IDFPR”) that the Bank must increase its Tier 1 leverage capital ratio to not less than 5%. If the Bank does not increase its Tier 1 leverage capital ratio to such level to the satisfaction of the IDFPR, then the IDFPR has authority to take additional regulatory action against the Bank. As of September 30, 2012, the Bank’s reported Tier 1 leverage capital ratio was 1.06%, which is considered to be impaired and inadequate by the Division.

COVENANT BANCSHARES, INC.

Item 2: Management’s Discussion and Analysis of Financial Condition and

Results of Operations

(continued)

Additionally, on August 28, 2012, the Division also issued to the Bank an Order to Cease and Desist (the “Order”). The Order provides that the Bank must (i) cease and desist from soliciting or knowingly accepting any uninsured deposits, (ii) make contact with each account holder and discuss methods of restructuring or re-titling accounts that would eliminate any uninsured deposits and (iii) submit to the Division each Friday during the life of the Order, or at any other time as the Division may request, a written uninsured deposit report, including the total uninsured deposit amount, the identity of each depositor maintaining any uninsured deposit and the amount of each depositor’s uninsured deposit.

As previously disclosed, the Bank, the Federal Deposit Insurance Corporation (the “FDIC”) and the IDFPR entered into a final joint Consent Order on June 6, 2011. Pursuant to the Consent Order, among other things, the Bank has agreed to achieve and maintain a Tier 1 capital to total assets ratio of at least 9% and a total risk-based capital ratio of at least 13%. As of September 30, 2012, the Bank’s Tier 1 capital to total assets ratio was 1.67% as compared to 4.89% as of September 30, 2011, and the total risk-based capital ratio was 2.95% as of September 30, 2012 as compared to 6.17% as of September 30, 2011. As of September 30, 2012, these ratios were below the significantly undercapitalized level set by the federal bank regulators as well as below the levels set by the Consent Order.

An immediate capital infusion is needed as the ongoing viability of the Company and the Bank is threatened. To the extent the Bank’s loan losses and operating losses exceed its capital, the Bank could be found insolvent. Even before all of the Bank’s capital might be depleted, the IDFPR could find the Bank’s capital to be impaired, and as a result, place the Bank in receivership. Without a capital infusion that would return the Bank’s Tier 1 capital ratio to at least 5% in the near term, the IDFPR may determine the capital of the Bank to be impaired. If the Bank is not successful in reversing the continued deterioration in its financial condition, the Bank will likely be placed into receivership by the IDFPR, with the FDIC appointed as receiver. If the Bank is placed in receivership, the Company would suffer a complete loss of the value of its ownership interest in the Bank. Any such event would result in a loss of all or substantially all of the value of the Company’s outstanding securities, including its common stock.

As previously disclosed, the Company’s Board of Directors is pursuing strategic alternatives, including a capital infusion. To date it has not received any commitment for a new capital investment, and there can be no assurance that the Company will be able to raise a sufficient amount of new capital in a timely manner, or on acceptable terms. In addition, any transaction that would involve equity financing would most probably result in a substantial dilution to the Company’s current stockholders and could adversely affect the value of the Company’s common stock.

Any material failure to comply with the provisions of the Consent Order, including a failure to achieve the capital ratios required by the Consent Order, could result in additional enforcement actions by the FDIC as allowed by 12 U.S.C. §1818 and the IDFPR. There can be no assurance that the Bank will be able to comply fully with the provisions of the Consent Order, or that efforts to comply with the Consent Order will not have adverse effects on the results of operations and financial condition of the Company and the Bank. Nor can there be any assurance that the Company will be able to raise the capital necessary to enable the Bank to continue its operations.

See also “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2010.

COVENANT BANCSHARES, INC.

Item 2: Management’s Discussion and Analysis of Financial Condition and

Results of Operations

(continued)

The Company’s mission is to promote economic development and opportunity in the communities the Bank serves by offering high-quality financial products and services. The Company considers the greater Chicago, Illinois metropolitan area as its primary market area, although, most of the Bank’s customers reside in the west-side Chicago neighborhood of North Lawndale, and focuses its business on serving minority populations and those who have not traditionally had relationships with financial institutions. As minority-owned institutions, the Company and the Bank are designated by the U.S. Treasury as community development financial institutions and anticipate maintaining these designations. Because of its designation as a community development financial institution, the Bank may earn Bank Enterprise Awards for lending activity in economically distressed communities. The Company earned $600,000 in awards during 2010, based upon 2009 activity, and was awarded $500,000 in November 2011 based upon 2010 lending activity. The Bank has also applied to the U.S. Treasury for additional grants to increase lending to businesses and homeowners in these economically distressed communities.

The Company’s primary business activity is the origination of one- to four family and multi-family real estate loans (both owner occupied and non-owner occupied investment properties). To a lesser extent, the Company also originates business loans. The Company invests in securities, primarily United States Government Agency securities and mortgage-backed securities. Since the purchase of Community Bank of Lawndale, the Company has utilized wholesale funding sources to help fund operations. During the year ended December 31, 2010, the Company’s goal was to reduce losses and the volume of problem loans, and concentrate on operations and maintain market share. Accordingly, during the first quarter of 2011, the Company reduced the dollar size of loans and restricted multiple credits to individual borrowers.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2011 AND DECEMBER 31, 2010

The Company’s total assets increased $45,000, or .07%, to $68.3 million at March 31, 2011 from $68.2 million at December 31, 2010. Drivers of the change include: decrease in loans of $3.1 million, or 5.9%; an increase in cash and cash equivalents of $4.2 million, or 106.0%; a decrease in federal funds sold of $670,000, or 60.6%; a decrease in securities available for sale of $0.5 million, or 9.8%; an increase in foreclosed real estate of $331,000, or 103.8%; a decrease in other assets of $207,000, or 39.8%; a decrease in prepaid FDIC insurance premiums of $61,000, or 11.6%; and a increase in accrued interest receivable of $35,000, or 12.8%.

More specifically, cash and cash equivalents increased $4.2 million, or 106.0%, to $8.2 million at March 31, 2011 from $4.0 million at December 31, 2010, primarily the result of a net increase in cash provided by investing and financing activities for the three months ended March 31, 2011.

Securities available for sale decreased $0.5 million, or 9.8%, to $4.7 million at March 31, 2011 from $5.2 million at December 31, 2010. The decrease was primarily the result of $0.5 million in calls of maturities due.

Loans, net of the allowance for loan losses, decreased $3.1 million, or 5.9%, to $49.7 million at March 31, 2011 from $52.8 million at December 31, 2010. The decrease in loans, net of the allowance for loan losses, was primarily due to attrition, pay-downs, principal reductions, and charge-offs which exceeded the level of originations during the first quarter of 2011.

Foreclosed real estate increased $331,000, or 103.8%, to $650,000 at March 31, 2011 from $319,000 at December 31, 2010. The increase was due to the addition of property acquired through loan foreclosure (deed in lieu) due to the continued stress the economic environment has placed on the Company’s customers.

COVENANT BANCSHARES, INC.

Item 2: Management’s Discussion and Analysis of Financial Condition and

Results of Operations

(continued)

The Company’s total liabilities increased $381,000, or .60%, to $65.2 million at March 31, 2011, from $64.8 million at December 31, 2010. Drivers of the change include: increase in total deposits of $1.4 million, or 2.1%; increase in notes payable of $335,000, or 91.9%; decrease in Federal Home Loan Bank Advances of $1.25 million, or 100%; and a decrease in accrued interest payable and other liabilities of $75,000, or 22.1%.

More specifically, total deposits increased $1.4 million, or 2.1%, to $64.3 million at March 31, 2011 from $62.8 million at December 31, 2010. The increase is primarily due to increases in market deposits as non-interest bearing deposits of $.8 million, and interest earning checking, money market and savings accounts of $.6 million, as a result of customers moving funds into non-term products.

Accrued interest payable decreased $2,000 or 4.1% to $54,000 at March 31, 2011 from $56,000 at December 31, 2010. Other liabilities decreased $73,000, or 25.6%, to $213,000 at March 31, 2011 from $286,000 at December 31, 2010. The decrease was primarily due to a decrease in accrued expenses of $51,000, and a decrease in accounts payable of $29,000, offset by an increase in other liabilities of $7,000.

Stockholders Equity decreased $335,000, or 9.9%, to $3.1 million at March 31, 2011 from $3.4 million at December 31, 2010. The decrease in equity is primarily related to net loss of $333,000 and a net decrease in accumulated other comprehensive income from unrealized losses on available for sale securities of $2,000.

The continuing economic downturn continues to affect our asset quality. We have witnessed a decrease in the market values of homes in our market area in general and also on specific properties held as collateral. In addition, high unemployment locally continues to affect some of our borrowers’ ability to timely repay their obligations to the Company.

The Company’s nonperforming assets consist of non-accrual loans, foreclosed real estate and other repossessed assets. Loans are generally placed in non-accrual status when it is apparent all of the contractual payments (i.e. principal and interest) will not be received; they may be placed in non-accrual status sooner if management has significant doubt as to the collection of all amounts due. Interest previously accrued but uncollected is reversed and charged against interest income.

Non-performing assets decreased to $4.5 million on March 31, 2011 from $4.8 million on December 31, 2010. This number includes $650,000 in foreclosed real estate and $3.8 million in non-performing loans. The primary reason for this decline in non-performing assets was due to charge-offs of $219,000.

COVENANT BANCSHARES, INC.

Item 2: Management’s Discussion and Analysis of Financial Condition and

Results of Operations

(continued)

The following table summarizes nonperforming assets at March 31, 2011 and December 31, 2010:

	March 31, 2011		December 31, 2010
(Dollars in thousands)
Non-accrual:
One-to-four family	$	1,226	$	835
Multi-family		473		279
Non-residential real estate		1,772		1,443
Commercial		-		109
Consumer		-		-
Construction		159		-

Total non-accrual loans		3,630		2,666
Past due greater than 90 days and still accruing:
One-to-four family	$	-	$	1,014
Multi-family		-		-
Non-residential real estate		101		730
Commercial		-		-
Consumer		3		-
Construction		97		80
Total nonperforming loans		3,831		4,490
Foreclosed real estate		650		319
Other repossessed assets		-		-
Total nonperforming assets	$	4,481	$	4,809

The table below presents selected asset quality ratios at March 31, 2011 and December 31, 2010.

	March 31,			December 31,
	2011			2010
Allowance for loan losses as a percent of gross loans receivable		3.14	%		2.92	%
Allowance for loan losses as a percent of total nonperforming loans		42.21	%		35.52	%
Nonperforming loans as a percent of gross loans receivable		7.44	%		8.23	%
Nonperforming loans as a percent of total assets		5.61	%		6.58	%
Nonperforming assets as a percent of total assets		6.56	%		7.05	%

COVENANT BANCSHARES, INC.

Item 2: Management’s Discussion and Analysis of Financial Condition and

Results of Operations

(continued)

COMPARISON OF RESULTS OF OPERATION FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

General. Net income/ (loss) for the three months ended March 31, 2011 was ($333,000) compared to net income/(loss) of ($135,000) for the three months ended March 31, 2010.

Net Interest Income: The following table summarizes interest and dividend income and interest expense for the three months ended March 31, 2011 and 2010.

	Three Months Ended
	March 31,
	2011		2010		$ change			% change
(Dollars in thousands)
Interest and dividend income:
Interest and fees on loans	$	896	$	928		(32	)		-3	%
Securities:
Residential mortgage-backed and related securities		-		7		(7	)		-
U.S. agency securities		11		39		(28	)		-72	%
U.S. Treasuries		8		2		6			300	%
Federal Funds Sold		0		1		(1	)		0	%
Interest-bearing deposits		4		6		(2	)		-33	%
Total interest and dividend income		919		983		(64	)		-6	%
Interest expense:
Deposits		196		277		(81	)		-29	%
Interest on notes		7		16		(9	)		-56	%
Total interest expense		203		293		(90	)		-31	%
Net interest income	$	716		690		26			4	%

COVENANT BANCSHARES, INC.

Item 2: Management’s Discussion and Analysis of Financial Condition and

Results of Operations

(continued)

The following table presents for the periods indicated the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were made. All average balances are monthly average balances. Non-accruing loans have been included in the table as loans carrying a zero yield. The amortization of loan fees is included in computing interest income; however, such fees are not material.

	Three Months Ended March 31,
	2011								2010
(Dollars in thousands)	Average Balance			Interest		Average Yield/Cost			Average Balance		Interest		Average Yield/Cost
Interest-earning assets
Loans receivable, net (1)		$	52,450	$	896		6.93	%	$	57,195	$	928		6.58	%
Securities, net (2)			5,644		19		1.35	%		5,018		48		3.87	%
Non-marketable equity securities			439		-		0.00	%		439		-		0.00	%
Interest-bearing deposits			6,436		4		0.25	%		5,151		6		0.46	%
Fed Funds Sold			760		-		0.00	%		2,231		1		0.16	%
Total interest-earning assets			65,729		919		5.67	%		70,034		983		5.69	%
Interest-bearing liabilities
Money Market accounts		$	3,743	$	8		0.91	%	$	1,736	$	6		1.40	%
Savings Acoounts			8,974		14		0.64	%		9,228		14		0.62	%
Certificates of Deposit accounts			40,210		178		1.79	%		48,797		271		2.25	%
Checking accounts			4,476		2		0.22	%		4,103		2		0.21	%
Other Borrowed Funds			416		1		0.49	%		-		-
Total interest-bearing liabilities			57,819		203		1.42	%		63,864		293		1.86	%
NET INTEREST INCOME				$	716						$	690
NET INTEREST RATE SPREAD (3)							4.25	%						3.83	%
NET INTEREST MARGIN (4)							4.42	%						4.00	%
RATIO OF AVERAGE INTEREST-EARNING ASSETS TO AVERAGE INTEREST-BEARING LIABILITIES							113.68	%						109.66	%

(1) Amount is net of deferred loan origination (costs) fees, undisbursed loan funds, unamortized discounts and allowance for loan losses includes non-performing loans.

(2) Includes unamortized discounts and premiums.

(3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the average cost of interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average interest-earning assets.

COVENANT BANCSHARES, INC.

Item 2: Management’s Discussion and Analysis of Financial Condition and

Results of Operations

(continued)

The following table summarizes the changes in net interest income due to rate and volume for the three months ended March 31, 2011 and 2010. The column “Net” is segmented into the changes attributable to variations in volume and the changes attributable to changes in interest rates. The variations attributable to simultaneous volume and rate changes have been proportionately allocated to rate and volume.

	Three Months Ended March 31, 2011 Compared to 2010 (Increase) Decrease Due to
	VOLUME			RATE			NET
(Dollars in thousands)
Interest and dividends earned on
Loans receivable, net	$	81		$	(49	)	$	32
Securities, net		(2	)		31			29
Non-marketable equity securities		-			-			-
Interest-bearing deposits		(1	)		4			3
Total interest-earning assets	$	78		$	(14	)	$	64
Interest expense on
Money Market accounts	$	(4	)	$	2		$	(2	)
Passbook accounts		-			-			-
Certificates of Deposit accounts		38			55			93
Checking & other borrowed funds		(1	)		-			(1	)
Total interest-bearing liabilities	$	33		$	57		$	90
Change in net interest income	$	45		$	(71	)	$	(26	)

Interest income decreased $64,000, or 6.5%, to $919,000 for the three months ended March 31, 2011 compared to $983,000 for the three months ended March 31, 2010. For the three months ended March 31, 2011, interest and dividend income decreased due to the decline in average interest earning assets of $4.3 million to $65.7 million, and the decrease in average yield on interest earning assets from 5.69% to 5.67%, as compared to amounts reported at March 31, 2010. The decline in the loan portfolio contributed to a significant amount of the decline in earning assets. The yield on the investment portfolio and the loan portfolio continued to decline as the low rate environment continued during the first quarter of 2011. This decline in interest income was offset by $90,000, or 31.0%, reduction in interest expense. The cost of funds declined 44 basis points, or 24% for the first quarter of 2011 compared to the first quarter of 2010, due to the continued low rate environment. The average balance of interest bearing liabilities remained stable between these periods.

Provision for Loan Losses. Management recorded a loan loss provision of $241,000 for the three months ended March 31, 2011, compared to $0 for the three months ended March 31, 2010. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect each borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. Based on its review at March 31, 2011, management believes that the allowance is maintained at a level that represents its best estimate of inherent losses in the loan portfolio that were both probable and reasonably estimable.

COVENANT BANCSHARES, INC.

Item 2: Management’s Discussion and Analysis of Financial Condition and

Results of Operations

(continued)

Other Income. The following table summarizes other income for the three months ended March 31, 2011 and 2010:

	Three Months Ended March 31,
	2011		2010		$ change			% change
(Dollars in thousands)
Other income:
Gain (loss) on value of trading assets	$	23		-	$	23			-
Customer service fees		40		46		(6	)		-12.71	%
BEA/Misc awards		-		-		-
Other		32		25		7			27.32	%
Total other income	$	95	$	71	$	24			33.65	%

The increase in total other income was primarily due to unrealized gains on the trading commodities held by the company during the first quarter of 2011.

Other Expenses. The following table summarizes other expenses for the three months ended March 31, 2011 and 2010.

	Three Months Ended March 31,
	2011			2010			$ change			% change
(Dollars in thousands)
Other expenses:
Salaries and employee benefits	$	374		$	414		$	(40	)		-10	%
Directors fees		2			2			-			-
Occupancy		114			163			(48	)		-30	%
Deposit insurance premium		61			58			2			4	%
Legal and professional services		35			1			34			3374	%
Data processing		68			62			6			10	%
Valuation adjustments and expenses on foreclosed real estate		12			-			12			-
Loss on sale of foreclosed real estate		-			-						-
Other		237			196			41			21	%
Total other expenses	$	903		$	896		$	7			1	%
Efficiency ratio (1)		111.34	%		117.72	%

(1)	Computed as other expenses divided by the sum of net interest income and other income.

COVENANT BANCSHARES, INC.

Item 2: Management’s Discussion and Analysis of Financial Condition and

Results of Operations

(continued)

Total other expenses increased $7,000, or 1% for the three months ended March 31, 2011, as compared to the three months ended March 31, 2010. Drivers of the change include $34,000 increase in legal and professional fees related primarily to loan collection matters during the first quarter of 2011 as compared to the first quarter of 2010, an increase of $41,000, or 21% in other expenses, primarily due to the increase in consultant and CPA fees totaling $17,000 relating to audit and regulatory financial reporting services during the first quarter of 2011 as compared to the first quarter of 2010. The increase in total other expenses was offset by a decrease in occupancy expense on foreclosed real estate of 30%, or $48,000 for the three months ended March 31, 2011, as compared to the three months ended March 31, 2010, and a 10%, or $40,000 decrease in salaries and employee benefits as a result of a decrease in compensation expenses relating to changes in personnel from March 2010 to March 2011.

Income Taxes. The Company recorded no income tax expense or benefit for the three months ended March 31, 2011 or 2010 due to the inability to determine if these amounts would be realizable.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity. Liquidity management for the Bank is measured and monitored on both a short and long-term basis, allowing management to better understand and react to emerging balance sheet trends. After assessing actual and projected cash flow needs, management seeks to obtain funding at the most economical cost to the Bank. Our primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans and mortgage-backed and related securities, other short-term investments, and funds provided from operations. While scheduled payments from amortization of loans and mortgage-backed related securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. We invest excess funds in short-term interest-earning assets, including federal funds sold, which enable us to meet lending requirements or long-term investments when loan demand is low.

The Bank, as noted earlier, is operating under a Consent Order (the “Order”). Within the Order of the Bank is required to adopt, implement, and adhere to a written contingency funding plan (the “Liquidity Plan”). The Bank’s current liquidity practices involve adhering to the written contingency funding plan.

As of March 31, 2011, the Bank had outstanding commitments to originate loans and unfunded lines of credit of $831,000, compared to $1.1 million at December 31, 2010. In addition, as of March 31, 2011, the total amount of certificates of deposit that were scheduled to mature in the next 12 months was $4.9 million, compared to $5.5 million at December 31, 2010. Based on prior experience, management believes that a significant portion of such deposits will remain with the Bank, although there can be no assurance that this will be the case. In the event a significant portion of our deposits are not retained by the Bank, the Bank will have to utilize other funding sources. Alternatively, management could reduce the level of liquid assets, such as cash and cash equivalents. Moreover, the cost of such deposits may be significantly higher if market interest rates are higher at the time of renewal. There were no Federal Home Loan Bank advances outstanding at March 31, 2011, compared with $1.25 million outstanding as of December 31, 2010.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders and for any repurchased shares of its common stock. The Company’s primary source of interest income is dividends received from the Bank. Currently the Bank is operating under a Consent Order, entered into June 6, 2011, which among other items forbids the payment of dividends to the Company without prior approval from the FDIC and IDFPR.

COVENANT BANCSHARES, INC.

Item 2: Management’s Discussion and Analysis of Financial Condition and

Results of Operations

(continued)

Capital. To be considered ‘well capitalized’ within the meaning of the capital adequacy guidelines of the FDIC, the Bank is required to maintain regulatory capital sufficient to meet Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios of at least 4.0%, 4.0% and 8.0%, respectively. The Bank exceeded each of the aforementioned capital requirements with ratios at March 31, 2011 of 5.01%, 7.96% and 9.24%, respectively, compared to ratios at December 31, 2010 of 4.81%, 8.09% and 9.37%, respectively; however, as previously disclosed, the Bank, the Federal Deposit Insurance Corporation (the “FDIC”) and the IDFPR entered into a final joint Consent Order on June 6, 2011. Pursuant to the Consent Order, among other things, the Bank has agreed to achieve and maintain a Tier 1 capital to total assets ratio of at least 9% and a total risk-based capital ratio of at least 13%. As of September 30, 2012, the Bank’s Tier 1 leverage capital ratio, Tier 1 capital to total assets ratio, and total risk-based capital ratio was 1.06%, 1.67% and 2.95%, respectively. As of September 30, 2012, these ratios were below the significantly undercapitalized level set by the federal bank regulators as well as below the levels set by the Consent Order.

OFF-BALANCE SHEET ARRANGEMENTS

For the three months ended March 31, 2011, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

COVENANT BANCSHARES, INC.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

COVENANT BANCSHARES, INC.

Item 4: Controls and Procedures

ITEM 4: CONTROLS AND PROCEDURES

Controls and Procedures:

As of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are not effective in timely alerting them to material information to be included in the Company’s periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

The material weaknesses in the Company’s internal control over financial reporting have not been corrected at December 31, 2011. Moreover, there have been changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that are expected to materially affect, or are reasonably likely to materially affect and improve, the Company’s internal control over financial reporting beginning with reporting period ending March 31, 2012. Management has continued to focus on improving controls associated with reconciliation of key accounts to ensure financial information is accurate and reported in a timely manner. Additionally, the Company utilized an independent consultant with extensive external financial reporting experience in preparing the March 30, 2011 Form 10-Q.

Part II – Other Information

ITEM 1 - LEGAL PROCEEDINGS

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business that, in the aggregate, are believed by management to be material to the financial condition and results of operations of the Company.

ITEM 1A - RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, financial condition or future results. As of March 31, 2011, the risk factors of the Company have not changed materially from those reported in the Company’s Annual Report on Form 10-K. However, the risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 - [REMOVED AND RESERVED]

ITEM 5 - OTHER INFORMATION

Not applicable.

COVENANT BANCSHARES, INC.

Item 6 - Exhibits

ITEM 6 - EXHIBITS

Exhibit No.		Description

3.1		Amended Articles of Incorporation of Covenant Bancshares, Inc.

3.2		Bylaws of Covenant Bancshares, Inc. (incorporated by reference to the Company’s Form 10 Registration Statement filed on November 16, 2010 (File. No. 000-53989)).

3.3		Certificate of Designations of Fixed Rate Cumulative Perpetual Preferred Stock, Series A

4.1		Form of Unsecured Promissory Note (incorporated by reference to Exhibit 4.1 to the Company's Form 10-K by reference to Exhibit 4.1 to the Company's Form 10-K for the year ended December 31, 2010 filed with the SEC on May 30, 2012 (File No. 000-53989)).

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

COVENANT BANCSHARES, INC.

Signatures

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	COVENANT BANCSHARES, INC.
	Registrant

Date: February 6, 2013	/s/ William S. Winston
	William S. Winston
	Chief Executive Officer
	(Principal Executive Officer)

Date: February 6, 2013	/s/ Herman L. Davis
	Herman L. Davis
	Senior Vice President, Chief Financial Officer
	(Principal Financial Officer)

COVENANT BANCSHARES, INC. 10-Q