UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, ~~2010~~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)

(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 No.)

7306 West Madison Street, Forest Park, Illinois		60130
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code

(773) 533-5208

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

Securities registered pursuant to Section 12(g) of the Act:

Common stock, par value of $4.50 per share (Title of class)

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

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act

Yes ¨ No ý

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 ý

Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes ¨ No ¨ý

Indicate by check mark if disclosures of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this ~~Form 10-K ¨~~

Form 10-K ¨

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 ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý

No active trading market exists for the Company’s common stock. There is no public market for the Company’s common stock, nor is one likely to develop or exist in the immediate future. The Company has no present plan to list or qualify its common stock on any securities exchange. Accordingly, the book value was used as a proxy for the market value cost in determining the value of the Company's public float of common stock as of 12/31/11, equivalent to $3.94/per share of common stock as of June 30, 2011. The value of the Company's public float as of 12/31/11 was calculated to be $2,600,171. Although the Company has knowledge of a recent sale on ~~March~~October 272, 2012 of 50800 shares of its common stock at $10.00 per share, no assurances can be made that its shares could be sold at such price in the future, if at all. Given subsequent events, including but not limited to, the Company'’s subsidiary bank being designated as ~~adequately~~critically ~~capitalized~~undercapitalized for the quarter ended ~~June~~September 30, 2011 and significantly undercapitalized as of ~~March~~December 31, 2012, the Company can give no assurances that its shares of common stock could be sold at such prices.

As of ~~April 6~~December 31, 2012, there was issued and outstanding ~~765~~770,~~427~~346 shares of the Registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

None.

TABLE OF CONTENTS

Page

		Page

PART I		1

Item 1.	Business	1
Item 1A.	Risk Factors.	32
Item 1B.	Unresolved Staff Comments	42
Item 2.	Properties	42
Item 3.	Legal Proceedings	42
Item 4.	Mine Safety Disclosures	42

PART II		42

Item 5.	Market Price for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	42
Item 6.	Selected Financial Data	43
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	56
Item 8.	Financial Statements and Supplementary Data	62
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	100
Item 9A.	Controls and Procedures	100
Item 9B.	Other Information	101

PART III		101

Item 10.	Directors, Executive Officers and Corporate Governance	101
Item 11.	Executive Compensation	103
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	104
Item 13.	Certain Relationships and Related Transactions, and Director Independence	105
Item 14.	Principal Accountant Fees and Services	106

PART IV		107

Item 15.	Exhibits and Financial Statement Schedules	108

PART I		1
Item 1.	Business	1
Item 1A.	Risk Factors	26
Item 1B.	Unresolved Staff Comments	34
Item 2.	Properties	34
Item 3.	Legal Proceedings	34
Item 4.	Removed and Reserved	35
PART II		35
Item 5.	Market Price for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	35
Item 6.	Selected Financial Data	36
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	47
Item 8.	Financial Statements and Supplementary Data	50
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	81
Item 9A.	Controls and Procedures	81
Item 9B.	Other Information	82
PART III		83
Item 10.	Directors, Executive Officers and Corporate Governance	83
Item 11.	Executive Compensation	85
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	86
Item 13.	Certain Relationships and Related Transactions, and Director Independence	86
Item 14.	Principal Accountant Fees and Services	87
PART IV		87
Item 15.	Exhibits, Financial Statement Schedules	87

Table of Contents

PART I

Item 1. Business.

Forward-Looking Statements

This Annual Report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements are not historical facts but instead represent only management’s beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. Although the Company believes the expectations reflected in any forward-looking statements are reasonable, it is possible that actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in such statements. In some cases, these statements can be identified by forward-looking words such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” and the negative of these terms and other comparable terminology. These forward-looking statements include statements relating to projected growth, anticipated future financial performance and management’s long-term performance goals. Forward-looking statements also include statements that anticipate the effects on the Company’s financial condition and results of operations from expected developments or events, such as the implementation of internal and external business and growth plans and strategies.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, and they could be affected by many factors. Factors that could have a material adverse effect on financial condition, results of operations and future prospects include, but are not limited to:

uncertainties about our ability to continue as a going concern;

the failure to obtain on terms acceptable to the Company, or at all, the capital necessary to fund growth and to restore the Company’s regulatory capital ratios, or those of the Bank, above the “adequately capitalized” threshold;

the ability to satisfy the requirements of the FDIC under its Prompt Corrective Action Directive (“PCA”)

the ability to develop and implement a capital plan that satisfies its obligations under the Consent Order with the FDIC and IDFPR;

ability to adequately address articles of the Consent Order;

· the ability to satisfy the standards necessary to be considered “~~well~~adequately capitalized” under the elevated standards contained in the Consent Order;

uncertainties about our ability to raise sufficient capital in a timely manner to increase Bank capital ratios;

the success of the “turnaround” plan and business strategy;

competitive pressures could intensify and affect our profitability, including as a result of industry consolidation, the increased availability of financial services from non-banks, technological developments and bank regulatory reform;

changes in economic conditions, including interest rates;

the sufficiency of the allowance for loan losses;

· the failure to obtain on terms acceptable to the Company, or at all, the capital necessary to fund growth and to maintain the Company’s regulatory capital ratios, or those of the Bank, above the “well-capitalized” threshold;

management’s ability to manage interest rate and credit risks;

1· continuing weakness of U.S. economic conditions;

Table of Contents

· continuing deterioration of U.S. economic conditions;

legislative or regulatory changes, particularly changes in the regulation of financial services companies and/or products and services offered by financial services companies;

risk and other factors set forth in Item 1A of this Annual Report on Form 10-K, including the section entitled “Risk Factors” as well as subsequent periodic and current reports filed with the SEC;

· our ~~ability~~challenges relating to ~~address~~maintaining ~~our~~sufficient ~~own~~ liquidity ~~issues~~;

dilution of existing shareholders;

· uncertainties about our ability to raise sufficient capital in a timely manner to increase Bank capital ratios;

changes in technology;

security breaches of our information system;

challenges relating to recruiting and retaining key employees; and

· ~~unprecedented~~ volatility in the market and fluctuations in the value of our common stock.

Because of these and other uncertainties, actual future results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, past results of operations do not necessarily indicate future results.

The reader should not place undue reliance on any forward-looking statements, which speak only as of the dates on which they were made. The Company is not undertaking an obligation to update these forward-looking statements, even though its situation may change in the future, except as required under federal securities law. The Company qualifies all forward-looking statements by these cautionary statements.

General

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 ~~765~~770,~~427~~346 issued and outstanding shares to the public at ~~December 31~~September 30, ~~2010~~2012. At ~~December 31~~September 30, ~~2010~~2012, Covenant Bancshares had total consolidated assets of $6860.20 million, total deposits of $6259.90 million and stockholders’ equity of $336,000.~~4 million.~~ Our executive offices are located at 7306 West Madison Street, Forest Park, Illinois 60130, and our telephone number is (773) 533-5208.

The Company began active operations when it acquired its sole subsidiary, Community Bank of Lawndale, now known as Covenant Bank, on March 12, 2008. Since 2009, the Company has issued $1,268,500 of senior convertible notes. In 2010, $593,075 of this debt and the related accrued interest of $23,320 was converted to 75,678 shares of the Company’s common stock. In 2011, 25,000 of this debt and the related accrued interest of $2,000 was converted to 4,569 shares of the Company’s common stock. As of September 30, 2012, $675,425 in senior convertible notes remains outstanding.

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 annual report on Form 10-K includes the Company’s audited financial statements for the year ended December 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 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.

~~Table~~The Federal Deposit Insurance Corporation (the “FDIC”) and the Illinois Department of ~~Contents~~Financial and Professional Regulation, Division of Banking (the “IDFPR”) entered into a final joint Consent Order with the bank 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 December 31, 2011, the Bank’s Tier 1 leverage capital to total assets ratio was 2.42%, compared to 4.81% as of December 31, 2010, and the total risk-based capital ratio was 5.20% as of December 31, 2011, compared to 9.37% as of December 31, 2010. Furthermore, as of September 30, 2012, the Bank’s Tier 1 leverage capital to total assets ratio was 1.06% compared to 3.32% 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 “critically undercapitalized” level set by the federal bank regulators as well as below the levels set by the Consent Order.

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 annual report on Form 10-K includes the Company’s audited financial statements for the year ended December 31, 2010; however, the Company’s audited financial statements for the year ended December 31, 2011 are not complete. Accordingly, set forth below are certain unaudited financial results as of and for the year ended December 31, 2011 as compared to audited results as of and for the year ended December 31, 2010. As of December 31, 2011, the Company’s total assets were $63.5 million as compared to $68.2 million for the year ended December 31, 2010. Loans, net of allowance for loan losses was $43.7 million as of December 31, 2011 as compared to $52.8 million as of December 31, 2010. Nonperforming assets, including OREO were $6.6 million as of December 31, 2011 as compared to $4.8 million as of December 31, 2010. Net interest income was $2.4 million for the year ended December 31, 2011 as compared to $2.7 million for the year ended December 31, 2010. Net loss for the year ended December 31, 2011 was $1.8 million as compared to a net loss of $1.1 million for the year ended December 31, 2010.

As of March 31, 2012, the Company’s total assets were $61.1 million. Loans, net of allowance for loan losses was $41.8 million as of March 31, 2012. Nonperforming assets, including OREO were $7.5 million as of March 31, 2012. Net interest income was $0.5 million for the period ended March 31, 2012. Net loss for the period ended March 31, 2012 was $0.3 million.

As previously disclosed, the Bank, the Federal Deposit Insurance Corporation (the “FDIC”) and the Illinois Department of Financial and Professional Regulation (the “IDFPR”) entered into a final joint Consent Order (the “Order”) on June 6, 2011. The Order requires the Bank to achieve and maintain minimum regulatory capital levels in excess of the statutory minimums to be classified as well-capitalized, and require the Bank to develop a liquidity risk management and contingency funding plan. In particular, the Order contained a requirement that the Bank to develop capital plans. Under the Order, the Bank is prohibited from paying any dividends without, among other things, prior FDIC or IDFPR approval.

Pursuant to the Order, among other things, the Bank has agreed to achieve and maintain a Tier 1 leverage capital to total assets ratio of at least 9% and a total risk-based capital ratio of at least 13%. As of December 31, 2011, the Bank’s Tier 1 leverage capital to total assets ratio was 4.43% as compared to 4.81% as of December 31, 2010, and the total risk-based capital ratio was 8.32% as of December 31, 2011 as compared to 9.37% as of December 31, 2010. As of March 31, 2012, such ratios were 3.91% and 7.57%, respectively, causing the Bank to be designated as undercapitalized under the interagency capital adequacy guidelines. These capital levels are also less than those specified in the Order, causing the Bank to be in noncompliance with the Order.

Any material failure to comply with the provisions of the Order, including a failure to achieve the capital ratios required by the Order, could result in additional enforcement actions by the FDIC as allowed by 12 U.S.C. §1818. The continued erosion of capital at the Bank could result in the Bank being placed into FDIC receivership by its regulators, or a sale of the Company to a third party in a transaction in which the Company receives no value for its interest in the Bank. Either of these events would be expected to result in a loss of all or a substantial portion of the value of the Company’s outstanding securities. There can be no assurance that the Bank will be able to comply fully with the provisions of the Order, or that efforts to comply with the

~~Table~~On August 28, 2012, the Bank was notified by the Illinois Department of ~~Contents~~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, including placing the Bank into receivership. 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.

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.

~~The Company began active operations when it acquired its sole subsidiary~~Additionally, ~~Community~~on ~~Bank~~August ~~of Lawndale~~28, ~~now known as Covenant Bank~~2012, ~~on March 12, 2008. Since 2009,~~ the ~~Company~~Division ~~has~~also issued ~~$1,268,500~~to ~~of senior convertible debt. In 2010, $593,075 of this debt and~~ the ~~related~~Bank ~~accrued~~an ~~interest~~Order ~~of $23,320 was converted~~ to ~~75,678~~Cease ~~shares~~and ofDesist (the ~~Company’s common stock~~“Order”). AsThe ofOrder ~~March 31,~~provides ~~2012,~~that ~~$675,425~~the ofBank ~~this~~must ~~senior~~(i) ~~convertible~~cease ~~debt~~and ~~remains~~desist ~~outstanding. Beginning~~from insoliciting ~~April 2011,~~or ~~the~~knowingly ~~Company~~accepting ~~sold~~any ~~shares~~uninsured ofdeposits, ~~series A~~(ii) ~~preferred~~make ~~stock~~contact ~~and~~with aseach ofaccount ~~March 31,~~holder ~~2012, $575,000 was issued~~ and ~~outstanding. Most~~discuss methods of ~~the~~restructuring ~~proceeds~~or ~~from~~re-titling ~~the~~accounts ~~issuance~~that ofwould ~~these~~eliminate ~~securities~~any ~~was~~uninsured ~~injected~~deposits ~~into~~and ~~the~~(iii) ~~Bank~~submit ~~in order~~ to ~~increase~~the ~~its~~Division ~~capital~~each ~~position. Since~~Friday ~~beginning~~during ~~operations with~~ the ~~purchase~~life of the ~~Bank in March 2008~~Order, ~~the~~or ~~Company~~at ~~has~~any ~~accumulated~~other ~~approximately~~time ~~$6.2~~as ~~million~~the inDivision ~~net~~may ~~losses through March 31~~request, ~~2012. To~~a ~~the~~written ~~extent~~uninsured ~~that~~deposit ~~the current conditions in the housing market and the general economy continue or worsen~~report, ~~the~~including ~~Company believes that~~ the ~~level~~total ofuninsured ~~problem~~deposit ~~assets and losses is likely to increase~~amount, ~~which could result in Covenant Bank being placed into receivership. Because~~ the ~~Bank~~identity ~~is the only asset~~ of ~~the~~each ~~Company,~~depositor ~~such~~maintaining anany ~~occurrence~~uninsured ~~could~~deposit ~~render~~and the ~~securities~~amount of ~~the~~each ~~Company~~depositor’s ~~worthless~~uninsured deposit.

InOur ~~addition~~existing tocapital ~~the~~may ~~Company’s~~not ~~financial~~be ~~challenges,~~sufficient ~~its~~to ~~management~~absorb ~~and~~our ~~Board~~future ~~of Directors has changed since December 2010~~losses. In ~~December,~~order ~~2010,~~to ~~John~~successfully ~~Sorensen~~operate, ~~the~~we ~~President~~need ~~and~~to ~~CEO~~stem ofour ~~the~~loan ~~Company~~losses and ~~Senior~~raise ~~Loan~~capital ~~Officer~~immediately ofin ~~Covenant~~an ~~Bank,~~amount ~~resigned~~sufficient for us to ~~pursue~~achieve ~~other~~an ~~opportunities~~“adequately capitalized” level. ~~Dr. William~~As ~~(Bill)~~of ~~Winston~~September 30, 2012, the ~~Chairman~~Bank’s ofTier ~~the~~1 ~~Board~~leverage ofcapital ~~Directors~~ratio ofwas 1.06% and the ~~Company~~total ~~served~~risk-based ascapital ~~interim~~ratio ~~CEO~~was of2.95%. Subsequently, the FDIC had notified the Bank ~~from~~that ~~December~~it ~~2010~~was ~~until~~“critically ~~January 3~~undercapitalized.” On November 2, 2012 ~~when~~and ~~Belinda~~November ~~Whitfield~~5, a2012, ~~Director~~the ofCompany injected capital in the ~~Company~~amounts of $750,000 and $25,000, respectively, into the Bank. ~~was~~With ~~appointed~~the bycapital ~~the~~infusions, ~~Board~~as of ~~Directors~~November to5, ~~act~~2012, as the Bank’s ~~interim~~Tier ~~President~~1 ~~and~~leverage ~~CEO~~capital ~~until~~ratio awas ~~permanent CEO can be hired~~2. It05% ~~should~~and bethe ~~noted~~total ~~that~~risk-based ~~Belinda~~capital ~~Whitfield’s~~ratio ~~role~~was is4.52%. ~~subject~~With tothis ~~review~~capital byinfusion, ~~the FDIC~~ on ~~June 30~~November 6, 2012~~. Addie Husbands~~, athe ~~director~~Bank ofwas ~~the~~notified ~~Company~~by ~~and~~ the ~~Bank~~FDIC ~~since~~that ~~September~~it ~~2010,~~moved ~~resigned~~ from ~~the~~“critically ~~both~~undercapitalized” ~~Boards~~to on“significantly ~~February 29, 2012~~undercapitalized.”

~~Because~~In addition, the Bank’s ~~loan~~was ~~portfolio~~issued isa ~~concentrated~~Supervisory inPrompt ~~loans~~Corrective ~~secured~~Action byDirective ~~single~~(“PCA”) ~~family~~by ~~rental property loans,~~ the ~~Bank’s~~FDIC. ~~asset~~The ~~quality~~PCA isprovides ~~significantly~~that ~~impacted by~~ the ~~continued~~Bank, ~~weakening~~in ofconjunction with the ~~housing~~Company, ~~market~~must ~~and~~increase ~~the~~its ~~general~~capital ~~economy. This~~to ~~has~~a ~~contributed~~level sufficient to ~~increased~~restore ~~levels~~the ofBank ~~nonperforming~~to ~~assets,~~at ~~charge-offs,~~least ~~and~~an ~~credit~~“adequately ~~loss~~capitalized” ~~reserves. As~~level aas ~~result,~~defined in the ~~Company~~FDIC ~~reported~~regulations aor ~~net~~accept ~~loss~~an ofoffer ~~$1.1~~to ~~million~~be ~~for~~acquired ~~the~~by ~~year~~a ~~ended~~depository ~~December 31,~~institution ~~2010,~~holding ~~compared~~company or to acombine ~~net~~with ~~loss~~another ofinsured $1depository institution.8 If ~~million for~~ the ~~year~~Bank ~~ended~~is ~~December 31,~~unable ~~2009~~to ~~and~~satisfy athe ~~net~~requirements ~~loss~~ of ~~$1.2~~the ~~million~~PCA, ~~for~~then the ~~period~~FDIC ~~from~~has ~~inception,~~authority ~~March 12,~~to ~~2008,~~take toadditional ~~December 31,~~regulatory ~~2008~~action against the Bank.

~~In summary~~Moreover, weto ~~are experiencing significant loan quality issues. The impact of~~ the ~~downturn~~extent of the ~~economy~~Bank’s inloan ~~the~~losses ~~U.S.~~and asoperating ~~well~~losses asexceed inits ~~the~~capital, ~~communities we serve is having far-reaching consequences making it difficult to assess when~~ the ~~operating environment for the~~ Bank ~~will~~could ~~improve,~~be iffound ~~at all~~insolvent. ~~The~~Any ~~Bank’s~~such ~~loan~~event ~~portfolio~~could ~~continues~~be expected to ~~deteriorate,~~result ~~resulting~~ in ~~significant~~a ~~loan~~loss ~~losses. These~~of ~~loan~~all ~~losses~~or ~~have~~a ~~caused~~substantial ~~capital~~portion ~~levels~~of tothe ~~decline~~value ~~sharply. The~~of ~~Bank~~the Company’s ~~capital~~outstanding ~~may not be sufficient to offset future losses. As a result~~securities, noincluding ~~assurances~~its ~~can~~common ~~be made about the Company’s continued viability~~stock.

Covenant Bank

The Bank was established in 1977 and has its headquarters in the west-side Chicago neighborhood of North Lawndale. The Bank also leases property at 7306 W. Madison Street, Forest Park, Illinois 60130. As of December 31, 2010, the Bank had 28 full-time equivalent employees. The total assets of the Bank were approximately $68.3 million and $71.6 million as of December 31, 2010 and 2009, respectively.

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 Bank and the Company are designated by the

~~Table~~Our Board of ~~Contents~~Directors is pursuing strategic alternatives, including a capital infusion. While the Company continues to pursue new capital, 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, on acceptable terms or at all.

~~U.S.~~If ~~Treasury~~the asCompany ~~community~~ultimately ~~development~~is ~~financial~~unsuccessful ~~institutions~~in ~~and~~raising ~~anticipate~~a ~~maintaining~~sufficient ~~these~~amount ~~designations. Because~~ of ~~its~~new ~~designation~~capital asor, aalternatively, ~~community~~executing ~~development~~another ~~financial~~strategic ~~institution~~initiative, the Bank ~~may~~could ~~earn~~be placed into FDIC receivership by its regulators, or the Bank ~~Enterprise~~could ~~Awards~~be ~~for~~acquired ~~lending~~by ~~activity~~a third party in ~~economically~~a ~~distressed~~transaction ~~communities. The~~in which the Company ~~earned~~receives ~~$430,000~~no value for its interest in ~~awards~~the ~~during~~Bank. We ~~2009,~~expect ~~based~~that onany ~~2008~~third ~~activity~~party transaction, ~~and~~which ~~was~~would ~~awarded~~likely ~~$600~~involve equity financing,~~000~~ inwould ~~2010~~result ~~based~~in onsubstantial ~~2009~~dilution ~~lending~~to ~~activity. The~~our ~~Bank~~current ~~has~~stockholders ~~also~~and ~~applied~~could toadversely affect the Uprice of our common stock.S. If ~~Treasury~~we ~~for~~are ~~additional~~unable ~~grants~~to return to ~~increase~~profitability ~~lending~~and if we are unable to ~~businesses~~identify and ~~homeowners~~execute ina ~~these~~viable ~~economically~~strategic ~~distressed~~alternative, ~~communities~~we may be unable to continue as a going concern.

~~Our~~An ~~primary~~immediate ~~business~~capital ~~activity~~infusion is needed as the ~~origination~~ongoing viability of ~~one-~~the toCompany ~~four~~and ~~family~~the ~~and~~Bank ~~multi-family~~is ~~real~~threatened. To ~~estate~~the ~~loans~~extent ~~(both~~the ~~owner~~Bank’s ~~occupied~~loan losses and ~~non-owner~~operating ~~occupied~~losses ~~investment~~exceed ~~properties). To~~its acapital, ~~lesser~~the ~~extent,~~Bank wecould ~~originate~~be ~~business~~found ~~loans~~insolvent. WeEven ~~also~~before ~~invest~~all inof ~~securities~~the Bank’s capital might be depleted, ~~primarily~~the ~~United~~IDFPR ~~States~~could ~~Government~~find ~~Agency~~the ~~securities~~Bank’s capital to be impaired, and ~~mortgage-backed~~as ~~securities~~a result, place the Bank in receivership. ~~Since~~Without ~~the~~a ~~purchase~~capital ofinfusion ~~Community~~that would return the Bank’s ofTier ~~Lawndale~~1 capital ratio to at least 5% in the near term, wethe ~~have~~IDFPR ~~utilized~~may ~~wholesale~~determine ~~funding~~the ~~sources~~capital toof ~~help~~the ~~fund~~Bank ~~our~~to ~~operations~~be impaired. ~~During~~If the ~~year~~Bank ~~ended~~is ~~December 31,~~not ~~2010,~~successful ~~the~~in ~~Company’s~~reversing ~~goal~~the ~~was~~continued todeterioration ~~reduce~~in ~~losses~~its ~~and~~financial condition, the ~~volume~~Bank ofwill ~~problem~~likely ~~loans,~~be ~~and~~placed ~~concentrate~~into onreceivership ~~operations~~by ~~and~~the ~~maintain~~IDFPR, ~~our~~with ~~market~~the ~~share~~FDIC appointed as receiver. ~~During~~If ~~2010,~~the weBank ~~reduced~~is placed in receivership, the ~~dollar~~Company ~~size~~would suffer a complete loss of ~~loans~~the ~~and~~value ~~restricted~~of ~~multiple~~its ~~credits~~ownership tointerest ~~individual~~in ~~borrowers~~the Bank. WeAny ~~believe~~such ~~that~~event ~~these~~would ~~measures~~result ~~will~~in ~~improve~~a ~~the~~loss ~~credit~~of ~~quality~~all or substantially all of the ~~Bank~~value of the Company’s ~~portfolio~~outstanding securities, including its common stock.

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.

Beginning in April 2011, the Company sold shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $25,000 per share and as of November 5, 2012, $1,450,000 was issued and outstanding. Most of the proceeds from the issuance of these securities was injected into the Bank in order to increase its capital position. Since beginning operations with the purchase of the Bank in March 2008, the Company has accumulated approximately $8.2 million in net losses through September 30, 2012. To the extent that the current conditions in the housing market and the general economy continue or worsen, the Company believes that the level of problem assets and losses is likely to increase, which could result in Covenant Bank being placed into receivership. Because the Bank is the only asset of the Company, such an occurrence could render the securities of the Company worthless.

In addition to the Company’s financial challenges, its management and Board of Directors has changed since December 2010. In December, 2010, John Sorensen, the President and CEO of the Company and Senior Loan Officer of Covenant Bank, resigned to pursue other opportunities. Dr. William (Bill) Winston, the Chairman of the Board of Directors of the Company served as interim CEO of the Bank from December 2010 until January 3, 2012 when Belinda Whitfield, a Director of the Company and the Bank was appointed by the Board of Directors to act as the Bank’s interim President and CEO. Because of the Bank’s troubled financial condition and under the terms of Consent Order, Ms. Whitfield’s appointment as the permanent President and CEO was subject to the non-objection of the FDIC and IDFPR. On June 30, 2012, the FDIC and IDFPR advised of their non-objection. Accordingly, Ms. Whitfield now serves as President and CEO of the Bank. Additionally, Addie Husbands, a director of the Company and the Bank since September 2010, resigned from the both Boards effective February 29, 2012.

Because the Bank’s loan portfolio is concentrated in loans secured by single family rental property loans, the Bank’s asset quality is significantly impacted by the continued weakening of the housing market and the general economy. This has contributed to increased levels of nonperforming assets, charge-offs, and credit loss reserves. As a result, the Company reported a net loss of $2.9 million and $1.1 million for the years ended December 31, 2011 and 2010, respectively.

In summary, we are experiencing significant loan quality and capital adequacy issues. The impact of the downturn of the economy in the U.S. as well as in the communities we serve is having far-reaching consequences making it difficult to assess when the operating environment for the Bank will improve, if at all. The Bank’s loan portfolio continues to deteriorate, resulting in significant loan losses. These loan losses have caused capital levels to decline sharply. The Bank’s capital may not be sufficient to offset future losses. As a result, no assurances can be made about the Company’s continued viability.

Covenant Bank

The Bank was established in 1977 and has its headquarters in the west-side Chicago neighborhood of North Lawndale. The Bank also leases property at 7306 W. Madison Street, Forest Park, Illinois 60130. The total assets of the Bank were approximately $62.5 million and $68.3 million as of December 31, 2011 and 2010, respectively.

The Bank has developed a strategic plan, as further discussed below. However, as a result of the current challenges, especially those related to achieving and maintaining the capital ratios being required by the FDIC and the IDFPR, the Bank and the Company have had little opportunity in recent months to focus on the Bank’s strategic plan. Rather, the current focus of the Company and the Bank is exploring avenues that will raise capital to levels at or above the Consent Order levels. On November 6, 2012, the Bank was notified by the FDIC that the Bank falls within the “significantly undercapitalized” capital category. Moreover, as previously mentioned, the Bank was issued a PCA by the FDIC providing the Bank, in conjunction with the Company, increase its capital to a level sufficient to restore the Bank to at least an “adequately capitalized” level as defined in the FDIC regulations or accept an offer to be acquired by a depository institution holding company or to combine with another insured depository institution.

The Company continues to explore various strategic alternatives, including a recapitalization by third parties that would result in a change in control. A recapitalization would most probably result in a substantial dilution to the Company’s common stock. The Company can give no guarantee that it will be able to comply with the PCA and meet all of the requirements imposed by regulators, especially those related to liquidity risk management and minimum capital standards. If the Bank is unable to satisfy the requirements of the PCA, then the FDIC has authority to take additional regulatory actions against the Bank, including, without limitation, the issuance of additional cease and desist orders or supervisory actions (which may, among other things, further restrict business activities or result in the imposition of civil monetary penalties), or the placing of the Bank into receivership. Nonetheless, if the Bank is placed in receivership, the Company would suffer a complete loss of the value of its ownership interest in the Bank. As previously disclosed, the Company’s Board of Directors is pursuing strategic alternatives, including a capital infusion. To date, the Company 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.

The Bank’s mission is to promote economic development and opportunity in the communities the Bank serves by offering high-quality financial products and services. The Bank 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 Bank and the Company 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 did not receive a Bank Enterprise Award in 2012 for its lending activity in 2011. Nonetheless, the Bank will continue to apply to the U.S. Treasury for additional grants to increase lending to businesses and homeowners in these economically distressed communities. There can be no assurances that these or any other grants will be awarded.

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, 2011, the Company’s goal was to reduce losses and the volume of problem loans, concentrating on stabilizing operations, while working to address problems within the existing loan portfolio.

Employees

As of December 31, ~~2010~~2011, the Company and its subsidiary had 2625 full-time ~~employees and 3 part~~-~~time employees, which together equate to 28 full-time-~~equivalent employees. None of the employees are represented by a collective bargaining group.

Business Strategy

The immediate strategy of the Bank is to stabilize its condition by focusing on ~~the~~raising capital, collection of the Bank’s problem loans, and disposition of non-performing assets. In addition, the Bank has sought to control expenses.

The Company’s ~~longer~~long term business strategy is to operate a well-capitalized and profitable community bank while promoting economic development and opportunity in the community. After the initial acquisition of the Community Bank of Lawndale, a management team was established to execute the Company’s long-term business strategy. To provide a stream of income, the Company purchased seasoned loans from other financial institutions, and funded the purchase of these loans with brokered deposits. The following are the key aspects of the Company’s business strategy.

~~Core~~Capital ~~Lending~~Raising Strategy. The Company, ~~through~~is ~~its~~working ~~officers~~to ~~and~~find ~~staff,~~additional ~~works~~investors toand/or ~~attract~~merge ~~core~~with, ~~deposits~~or ~~from~~sell ~~local~~itself ~~markets~~or bythe ~~offering~~Bank ~~competitive~~subsidiary ~~rate~~to ~~and~~another ~~fee~~financial ~~structures~~institution. Because ~~and~~of aits ~~high~~importance ~~level~~to ofboth ~~service~~the Company and ~~by marketing~~ the Bank, tocapital ~~consumers~~raising ~~through~~has ~~multiple~~preoccupied ~~channels~~the activities of senior management. ~~The~~Management ~~Bank~~ has ~~maintained~~discussed aboth ~~strong~~the ~~presence~~infusion inof ~~its~~new ~~immediate~~capital ~~West~~by ~~Side~~investor ~~Chicago~~groups ~~community,~~and ~~with~~the apossible ~~deposit~~sale ~~share~~and merger of ~~over~~the ~~75%~~Bank to other financial organizations. ~~The~~In ~~Bank~~another ~~also~~scenario, ~~maintains~~management aremains ~~loan~~open ~~production~~to ~~office~~a change in ~~Forest~~control ~~Park,~~of ~~Illinois~~the Company.

Core Lending Strategy. The Company, through its officers and staff, works to attract core deposits from local markets by offering competitive rate and fee structures and a high level of service and by marketing the Bank to consumers through multiple channels. The Bank has maintained a strong presence in its immediate West Side Chicago community, with a deposit share of approximately 75%. The Bank also maintains a loan production office in Forest Park, Illinois.

The Company’s lending philosophy is to provide a full-service lending and deposit relationship to each customer. Part of the lending focus is on small- to medium-sized, owner-operated businesses. After entering into a lending relationship, the Company seeks to expand the relationship through extensive cross-selling efforts to the business owners, their families, associates and employees, including special loan programs, direct payroll deposits, special deposit packages and customized service programs.

Since the acquisition of the Bank in 2008, the Company’s New Business Development Officer and Residential Mortgage Representatives have focused marketing efforts in low- to moderate-income communities and have developed working relationships with community organizations whose missions include community development. These community organizations include: Chicago Community Ventures; Chicago Urban League; Community Investment Corporation; Community Reinvestment Organizing Project; Englewood Black Chamber of Commerce; Greater North West Chicago Industrial League; Hull House-Parkway Community House; Lawndale Business Development Corporation; Lawndale Christian Development Corporation; Neighborhood Housing Services; Nobel Neighbors; North Lawndale Chamber of Commerce; West Humboldt Park Family Community Development Corporation; and Quad City Developers. Additionally, the Board of Directors is encouraged to engage with many community groups in volunteer leadership roles in order to build awareness of the Bank.

5While the Company has pursued these strategies, the nationwide economic crisis beginning in 2008 has had an impact on the credit quality of the loan portfolio. The Company had significant loan loss provisions and non-performing assets that were the primary cause for the Company’s net loss for the years ended December 31, 2011 and 2010. The Company believes it has identified and accounted for its problem loans over the past four years, and is working to increase its capital and follow regulatory directives; however, no assurances can be made that such efforts will be successful, that all problem loans have been identified, or that previously identified problem loans will not continue to deteriorate.

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League; Hull House-Parkway Community House; Lawndale Business Development Corporation; Lawndale Christian Development Corporation; Neighborhood Housing Services; Nobel Neighbors; North Lawndale Chamber of Commerce; West Humboldt Park Family Community Development Corporation; and Quad City Developers. Additionally, the Board of Directors is encouraged to engage with many community groups in volunteer leadership roles in order to build awareness of the Bank.

While the Company has pursued these strategies, the nationwide economic crisis beginning in 2008 has had an impact on the credit quality of the loan portfolio. The Company had significant loan loss provisions and non-performing assets that were the primary cause for the Company’s net loss in 2010. In addition, in 2009 the Company determined goodwill was fully impaired, which resulted in a charge of $1,186,000. Goodwill represents the excess of cost over fair value of net assets acquired which arose in the acquisition of Community Bank of Lawndale during March 2008. The Company believes it has identified and accounted for its problems over the past three years, and is working to position itself for improvement as the economy recovers; however, no assurances can be made that such efforts will be successful.

Operating Strategy. The Company offers products and services, such as internet banking with bill pay, service-charge-free checking, remote deposit capture, account analysis statements, electronic bank statements, and telephone banking, similar to those offered by larger financial institutions.

The Company is geared toward building banking relationships with its customers, as opposed to processing individual transactions. The Company focuses on attracting and retaining customers to promote cross-selling activities and to decrease acquisition costs. As a small community bank, the Company emphasizes its service level to create an environment in which the customer is the most important element of the business. The Company believes that a high degree of personal service is one of the important competitive advantages of smaller banks.

The Bank works closely with small businesses, including small businesses owned by African Americans, Hispanics and women. The Bank offers complete banking services to these businesses, including start-up businesses.

The Company intends to maintain a strong commitment to community banking. The Company has formed an advisory board, which is composed of members who are active in community development. The Bank has ~~worked~~an ongoing relationship with The Joseph Center, an affiliate of the Living Word Christian Center, which provides training for business owners and managers. The Company has also conducted classes concerning financial literacy, home ownership, business ownership and other subjects designed to promote economic development.

Market Area

The Company is primarily focused on Chicago and western Cook County. The Bank is located in the North Lawndale neighborhood of Chicago, Illinois, approximately six miles from the center of the Chicago business district. The North Lawndale community encompasses an area slightly larger than 3 square miles on Chicago’s west side. The community has seen its population drop from 125,000 in 1960 to 42,000 in 2000, with a decrease of 9,000 between 1990 and 2000, as large employers, including Sears and International Harvestor, have left the area. As a way to diversify its loan concentration, the Bank has marketed it loan products to the whole city of Chicago.

As of June 30, 2011, the Company has accumulated 76approximately 75% of the local deposits (within the 60624 zip code) according to the FDIC’s Summary of Deposits (“SOD”),. ~~the~~The Company has looked beyond its neighborhood for funding its operations. The Company has ~~recently established~~ an office of the Bank in Forest Park, Illinois. Currently, the Forest Park office serves as a loan production office. The Company is evaluating opening a branch at this site. The establishment of such a branch would be subject to the Bank significantly improving its capital position and applications to and approvals by both the IDFPR and FDIC.

6The Company’s share of the 60624 zip code market at 75% is the largest of the 5 FDIC-insured institutions located in that market. The source of the deposit data and corresponding market shares is the FDIC SOD web link. The SOD contains deposit data for all branches and offices of FDIC-insured institutions. The FDIC collects deposit balances for commercial and savings banks as of June 30 of each year.

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The establishment of such a branch would be subject to applications to and approvals by both the IDFPR and FDIC.

The Company’s share of the 60624 zip code market at 76% is the largest of the 5 FDIC-insured institutions located in that market. The source of the deposit data and corresponding market shares is the FDIC SOD web link. The SOD contains deposit data for all branches and offices of FDIC-insured institutions. The FDIC collects deposit balances for commercial and savings banks as of June 30 of each year.

Competition

The Company does business in the highly competitive financial services industry and competes against large national banks, other commercial and community banks, savings institutions, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial institutions operating within the market. The Company’s non-bank competitors may not be subject to the same degree of regulation as that imposed on FDIC-insured banks and Illinois-chartered banks. As a result, such non-bank competitors may have advantages over the Bank in providing certain services.

The Company has addressed these competitive challenges through its business strategy and by maintaining an independent community bank presence with local decision-making. Additionally, the Company and the Bank will continue to compete for qualified personnel by offering competitive levels of compensation. The Company believes attracting and retaining high-quality employees is important in enabling the Bank to compete effectively for market share with both its large and small competitors.

Products and Services

General. The Company, through its subsidiary, conducts a full-service consumer and commercial banking business, which includes mainly deposit gathering, safekeeping and distribution; lending for commercial purposes and real estate purposes (including construction and mortgages) and consumer purposes. These products and services are provided in the Company’s market through its main office and loan production office.

Lending Activities. The Company’s objective is to offer the commercial and residential customers in its market a variety of products and services, including a full array of loan products. The Company’s bank subsidiary makes real estate loans (including construction and mortgage loans), commercial loans and consumer loans. The Company strives to do business in the area served by its ~~bank~~Bank and all of the Company’s marketing efforts, and the vast majority of its loan customers are located within its existing market area.

The Bank tries to reduce its interest rate risk by making its loan portfolio more interest rate sensitive. Accordingly, the Bank offers adjustable rate mortgage loans and short- and medium-term mortgage loans. In addition, the Bank offers shorter-term consumer loans. Lending activities are subject to a variety of lending limits imposed by state and federal law. Illinois law generally requires that loans to an individual may not exceed in the aggregate 25 percent of a bank’s capital and surplus. Federal law imposes a lower lending limit on loans to executive officers, directors, principal shareholders and the related interests of all such persons, and also requires that such loans not be preferential.

At December 31, 2011 and 2010, the Company had no sub-prime or Alt-A loans. ~~The Company has no intention of offering sub-prime products.~~

Real Estate Loans. The ~~following~~Bank ismakes areal ~~discussion~~estate loans for construction and mortgage purposes as more thoroughly described below. Collectively, these loans comprise the largest category of ~~each~~the ~~major~~Company’s ~~type~~loans. At December 31, 2011, the Company had approximately $43.7 in such loans, representing 96.9% of ~~lending~~total loans. At December 31, 2010, the Company had approximately $53.6 in such loans, representing 98.3% of total loans.

7Construction Real Estate Loans. The Bank also makes loans to finance the re-habilitation of existing residential and non-residential properties. At December 31, 2011 and 2010, the Company had $160,000 in such loans representing 0.4% of total loans, and $1.8 million representing 3.2% of total loans, all respectively. Construction loans generally are secured by first liens on real estate. The Bank conducts periodic inspections, either directly or through an agent, prior to approval of periodic draws on these loans. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Due to uncertainties inherent is estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan-to-value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If a bank is forced to foreclose on a project prior to completion, there is no assurance that the bank will be able to recover the entire unpaid portion of the loan. In addition, the Bank may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time. While the Bank has underwriting procedures designed to identify what management believes to be acceptable levels of risk in construction lending, these procedures may not prevent losses from the risks described above.

~~Table~~The Bank secures a valid lien on construction real estate loans and obtains a mortgage title insurance policy that insures that the property is free of ~~Contents~~encumbrances prior to the Bank lien. The Bank requires hazard insurance, insurance bonding on a contractor, and if the property is in a flood plain as designated by FEMA or HUD, the Bank requires flood insurance. Typically, the Bank requires full investment of the borrower’s equity in construction projects prior to injecting funds. Generally, the Bank does not allow borrowers to recoup equity from the sale proceeds of finished product (if applicable) until the Bank has recovered all funds.

Residential and Commercial Real Estate Loans. ~~The~~ A ~~Bank~~significant ~~makes~~portion ~~real~~of ~~estate~~the ~~loans~~Company’s ~~for~~lending ~~construction~~activity ~~and~~consists ~~mortgage~~of ~~purposes~~the asorigination ~~more~~of ~~thoroughly~~mortgage ~~described below. Collectively, these~~ loans ~~comprise~~collateralized ~~the~~by ~~largest~~properties ~~category~~located ofin the Company’s ~~loans~~market area. At December 31, ~~2010~~2011, the Company had ~~approximately~~ $5337.62 million in such loans, representing 9882.35% of total loans. At December 31, ~~2009~~2010, the Company had ~~approximately~~ $5543.32 million in such loans, representing 9779.3% of total loans. The Bank offers a variety of residential mortgage loan products that generally amortize over five to thirty years. Residential loans collateralized by mortgage real estate generally have been originated in amounts of no more than 80% of the lower of cost or appraised value or the Bank requires private mortgage insurance. The Bank has retained all of its loan origination in its portfolio.

Construction Real Estate Loans. The Bank also makes loans to finance the re-habilitation of existing residential and non-residential properties. Construction loans generally are secured by first liens on real estate. The Bank conducts periodic inspections, either directly or through an agent, prior to approval of periodic draws on these loans. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. Due to uncertainties inherent is estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan-to-value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If a bank is forced to foreclose on a project prior to completion, there is no assurance that the bank will be able to recover all of the unpaid portion of the loan. In addition, the bank may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time. While the Bank has underwriting procedures designed to identify what management believes to be acceptable levels of risk in construction lending, these procedures may not prevent losses from the risks described above.10

The Bank ~~secures~~offers a ~~valid~~variety ~~lien~~of oncommercial ~~construction~~ real estate ~~loans~~mortgage ~~and~~loan ~~obtains~~products athat ~~mortgage~~generally ~~title~~are ~~insurance~~amortized ~~policy~~up ~~that~~to ~~insures~~thirty ~~that~~years. The ~~the~~rates ~~property~~on isthese ~~free~~loans ofusually ~~encumbrances~~range ~~prior~~from a daily variable rate to ~~the~~a ~~Bank~~fixed ~~lien~~rate for no more than five years. The ~~Bank~~commercial ~~requires~~real ~~hazard~~estate ~~insurance,~~mortgage ~~insurance~~loans ~~bonding~~are oncollateralized aby ~~contractor,~~owner/operator ~~and~~real ifestate ~~the~~mortgages, ~~property~~as iswell inas ainvestment ~~flood~~real ~~plain~~estate asmortgages. Loans ~~designated~~collateralized by ~~FEMA~~commercial orreal ~~HUD,~~estate ~~the~~mortgages ~~Bank~~are ~~requires~~generally ~~flood~~originated ~~insurance. Typically,~~in ~~the~~amounts ~~Company~~of ~~requires~~no ~~full~~more ~~investment~~than 75% of the ~~borrower’s~~lower ~~equity~~of incost ~~construction~~or ~~projects~~appraised ~~prior to injecting funds~~value. ~~Generally~~At December 31, 2011, the ~~Bank~~Company ~~does~~had ~~not~~$6.3 ~~allow~~million ~~borrowers~~in tosuch ~~recoup~~loans, ~~equity~~representing ~~from~~14.1% ~~the~~of ~~sale~~total ~~proceeds~~loans. At ofDecember 31, ~~finished~~2010, ~~product~~the ~~(if~~Company ~~applicable)~~had ~~until~~$8.6 ~~the~~million ~~Bank~~in ~~has~~such ~~recovered~~loans, ~~all~~representing ~~funds~~15.8% of total loans.

Construction real estate loans have generated the following approximate dollar amounts and represented the following percentages of the Company’s consolidated revenues for the years indicated: $197,000 or 4.2% for 2010, $171,000 or 4.1% for 2009, and less than 0.1% for 2008. At December 31, 2010, the Company had $1.8 million in such loans, representing 3.2% of total loans. At December 31, 2009, the Company had $3.1 million in such loans, representing 5.5% of total loans.

Residential and Commercial Real Estate Loans. A significant portion of the Company’s lending activity consists of the origination of mortgage loans collateralized by properties located in the Company’s market area. The Bank offers a variety of residential mortgage loan products that generally amortize over five to thirty years. Residential loans collateralized by mortgage real estate generally have been originated in amounts of no more than 80% of the lower of cost or appraised value or the Bank requires private mortgage insurance. The Bank has retained all of its loan origination in its portfolio.

The Bank offers a variety of commercial real estate mortgage loan products that generally are amortized up to thirty years. The rates on these loans usually range from a daily variable rate to a fixed rate for no more than five years. The commercial real estate mortgage loans are collateralized by owner/operator real estate mortgages, as well as investment real estate mortgages. Loans collateralized by commercial real estate mortgages are generally originated in amounts of no more than 75% of the lower of cost or appraised value.

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The Bank secures a valid lien on mortgage real estate loans and obtains a mortgage title insurance policy that insures the property is free of encumbrances prior to the Bank’s lien. The Bank requires hazard insurance in the amount of the loan and, if the property is in a flood plain as designated by FEMA or HUD, the Bank requires flood insurance.

Residential real estate loans ~~have~~are ~~generated~~ the ~~following~~largest ~~approximate~~loan ~~dollar~~category ~~amounts~~on ~~and~~the ~~represented~~balance sheet. Of the ~~following~~$37.2 ~~percentages~~million ofin ~~the~~residential ~~Company’s~~real ~~consolidated~~estate ~~revenues~~loans ~~for~~at ~~the~~December 31, ~~years~~2011, ~~indicated:~~ multi-family (5 or more units) loans accounted for $313.08 million, or 6437.42%; ~~for~~non-owner ~~2010,~~occupied 1-4 family real estate comprised $216.49 million, or 5745.85%; ~~for~~and ~~2009,~~owner ~~and~~occupied 1-4 family real estate comprised $~~568~~6.4 million,~~000~~ or 2917.63%. Of ~~for~~the ~~2008~~$43. At2 million in residential real estate loans at December 31, 2010, ~~the~~multi-family ~~Company~~(5 ~~had~~or ~~$43.2~~more ~~million~~units) inloans ~~such~~accounted ~~loans~~for $17.4 million, ~~representing~~or 7940.3%, ofnon-owner ~~total~~occupied ~~loans~~1-4 family real estate comprised $18. At4 ~~December 31~~million, ~~2009~~or 42.6%, ~~the~~and ~~Company~~owner ~~had~~occupied ~~$43.~~1-4 ~~million~~family inreal ~~such~~estate ~~loans,~~comprised ~~representing 75~~$7.9%4 ofmillion, ~~total~~or ~~loans~~17.1%.

~~Residential~~In addition to non-payment, one of the most significant risks concerning mortgage real estate loans ~~are~~is the ~~largest~~fluctuation ~~loan~~in ~~category~~market onvalue of the ~~balance~~real ~~sheet. Of~~estate collateralizing the ~~$43~~loans.3 A ~~million~~decrease in ~~residential~~market value of real estate ~~loans~~securing ata ~~December 31,~~loan ~~2010,~~may ~~multi-family~~jeopardize (5the orBank’s ~~more~~ability ~~units)~~to ~~loans~~recover ~~accounted~~the ~~for~~entire ~~$17~~unpaid portion of the loan if the Bank is forced to foreclose.4 If ~~million~~there were significant decreases in market value throughout the Company’s market, orthe 40Company could experience multiple losses.~~3%,~~ The ~~non-owner~~risk ~~occupied~~of ~~1-4~~nonpayment ~~family~~is ~~real~~also ~~estate~~a ~~comprised~~significant ~~$18~~risk.4 In ~~million~~Cook County, orIllinois ~~42.6%~~where the Bank is located, it is often two years between the time a residential loan customer defaults on a loan and ~~owner~~the ~~occupied~~time ~~1-4~~a ~~family~~creditor ~~real~~is ~~estate~~able ~~comprised~~to $7obtain title to the property through foreclosure.4 During ~~million~~this time, the creditor typically receives no interest or 17principal payments.~~1%.~~ OfWhile the ~~$43.1~~Bank ~~million~~has inunderwriting ~~residential~~procedures ~~real~~designed ~~estate~~to ~~loans~~identify atwhat ~~December 31,~~management ~~2009,~~believes ~~multi-family~~to (5be oracceptable ~~more~~lender ~~units)~~risks ~~loans~~in ~~accounted~~mortgage ~~for $20.1 million~~lending, orthese ~~46.5%,~~procedures ~~non-owner~~may ~~occupied~~not ~~1-4~~prevent ~~family~~losses ~~real~~from ~~estate~~the ~~comprised~~risks ~~$14~~described above.8 It ~~million,~~is ornot 34the Company’s practice to make subprime loans.3 Approximately 99%, ~~and~~of ~~owner~~all ~~occupied~~of 1the Company’s net charge-4offs ~~family~~for ~~real~~the ~~estate~~year ~~comprised~~ended ~~$8.3~~December ~~million~~31, or2011 19was related to loans secured by real estate.~~2%.~~

Commercial ~~real~~Loans. These ~~estate~~ loans ~~have~~are ~~generated~~primarily ~~the~~made ~~following~~within ~~approximate~~the ~~dollar~~Company’s ~~amounts~~market area and ~~represented~~are ~~the~~underwritten ~~following~~on ~~percentages~~the basis of the ~~Company~~borrower’s ~~consolidated~~ability ~~revenues~~to ~~for~~service the ~~years~~debt ~~indicated:~~from income. ~~$485~~The Company is an approved Small Business Administration (“SBA”) 750 lender. As a general practice,~~000~~ the Bank takes as collateral a lien on any available equipment, accounts receivable or 10other assets owned by the borrower and often obtains the personal guaranty of the borrower.4% In ~~for~~general, ~~2010~~these loans involve more credit risk than residential mortgage loans and commercial mortgage loans and, ~~$482~~therefore,~~000~~ orusually 11yield a higher return.5% The ~~for~~increased ~~2009~~risk in commercial loans is due to the type of collateral securing these loans. The increased risk also derives from the expectation that the loan generally will be serviced principally from the operations of the business, and ~~$24,000~~those oroperations 1may not be successful.3% As ~~for~~a ~~2008~~result of these additional complexities, variables and risks, commercial loans require more thorough underwriting and servicing than other types of loans. At December 31, ~~2010~~2011, the Company had $~~8.6~~1,037,000 ~~million~~ in such loans, representing 152.83% of total loans. At December 31, ~~2009~~2010, the Company had $~~9.1~~383,000 ~~million~~ in such loans, representing ~~16.~~0.7% of total loans.

The most significant risk concerning mortgage real estate loans is the fluctuation in market value of the real estate collateralizing the loans. A decrease in market value of real estate securing a loan may jeopardize the Bank’s ability to recover all of the unpaid portion of the loan if the Bank is forced to foreclose. If there were significant decreases in market value throughout the Company’s market, the Company could experience multiple losses. While the Bank has underwriting procedures designed to identify what management believes to be acceptable lender risks in mortgage lending, these procedures may not prevent losses from the risks described above. It is not the Company’s practice to make subprime loans. Approximately 94.0% of all of the Company’s net charge-offs for the years 2008 through 2010 were related to loans secured by real estate.11

~~Commercial~~Consumer Loans. ~~These~~The ~~loans~~Company ~~are~~provides ~~primarily~~a ~~made~~variety ~~within~~of ~~the~~consumer ~~Company’s~~loans ~~market~~(also ~~area~~referred ~~and~~to ~~are~~in ~~underwritten~~this onreport ~~the~~as ~~basis~~installment ofloans ~~the~~to ~~borrower’s~~individuals) ~~ability~~including tomotor ~~service~~vehicle, ~~the~~personal ~~debt~~(collateralized ~~from~~and ~~income~~non-collateralized) and deposit account collateralized loans. The ~~Company~~terms isof anthese ~~approved~~loans ~~Small~~typically ~~Business~~range ~~Administration~~from ~~(“SBA”)~~12 ~~750~~to ~~lender. As~~72 amonths ~~general~~and ~~practice,~~vary ~~the~~based ~~Bank~~upon ~~takes~~the asnature of collateral aand ~~lien~~size onof ~~any~~loan. Consumer ~~available~~loans ~~equipment,~~entail ~~accounts~~greater ~~receivable~~risk orthan ~~other~~do ~~assets~~residential ~~owned~~mortgage byloans, particularly in the ~~borrower~~case ~~and~~of ~~often~~consumer ~~obtains~~loans ~~the~~that ~~personal~~are ~~guaranty~~unsecured ofor ~~the~~secured ~~borrower~~by rapidly depreciating assets such as automobiles. In ~~general~~such cases, ~~these~~any ~~loans~~repossessed ~~involve~~collateral ~~more~~for ~~credit~~a ~~risk~~defaulted ~~than~~consumer ~~residential~~loan ~~mortgage~~may ~~loans~~not ~~and~~provide ~~commercial~~an ~~mortgage~~adequate ~~loans~~source ~~and,~~of ~~therefore,~~repayment ~~usually~~for ~~yield~~the aoutstanding ~~higher~~loan ~~return~~balance. The ~~increased~~remaining ~~risk~~deficiency inoften ~~commercial~~does ~~loans~~not iswarrant ~~due~~further tosubstantial collection efforts against the ~~type~~borrower ofbeyond ~~collateral~~obtaining ~~securing~~a ~~these~~deficiency ~~loans~~judgment. ~~The~~In ~~increased~~addition, ~~risk~~consumer ~~also~~loan ~~derives~~collections ~~from~~are dependent on the ~~expectation~~borrower’s ~~that~~continuing ~~the~~financial ~~loan~~stability, ~~generally~~and ~~will~~thus are more likely to be ~~serviced~~affected ~~principally~~by ~~from~~job loss, divorce, illness or personal bankruptcy. Furthermore, the ~~operations~~application of ~~the~~various ~~business,~~federal and ~~those~~state ~~operations~~laws may ~~not~~limit bethe ~~successful. As~~amount athat ~~result~~can ofbe ~~these~~recovered ~~additional~~on ~~complexities~~such loans. At December 31, ~~variables~~2011 and ~~risks~~2010, ~~commercial~~the ~~loans~~Company ~~require~~had ~~more~~$365,000 ~~thorough~~and ~~underwriting~~$539,000 ~~and~~in ~~servicing~~such ~~than~~loans, ~~other~~representing ~~types~~0.81% and 1.0% of total loans, all respectively.

Commercial loans have generated the following approximate dollar amounts and represented the following percentages of the Company’s consolidated revenues for the years indicated: $54,000 or 1.1% for 2010, $79,000 or 1.9% for 2009, and $215,000 or 11.2% for 2008. At December 31, 2010, the Company had $383,000 in such loans, representing 0.7% of total loans. At December 31, 2009, the Company had $987,000 in such loans, representing 1.7% of total loans.

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Consumer Loans. The Company provides a variety of consumer loans (also referred to in this report as installment loans to individuals) including motor vehicle, personal (collateralized and non-collateralized) and deposit account collateralized loans. The terms of these loans typically range from 12 to 72 months and vary based upon the nature of collateral and size of loan. Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount that can be recovered on such loans. Approximately 6.0% of all of the Company’s net charge-offs for the years 2008 through 2010 were related to commercial loans.

Consumer loans have generated the following approximate dollar amounts and represented the following percentages of the Company’s consolidated revenues for the years indicated: $20,000 or 0.4% for 2010, $29,000 or 0.7% for 2009, and $20,000 or 1.0% for 2008. At December 31, 2010, the Company had $539,000 in such loans, representing 1.0 % of total loans. At December 31, 2009, the Company had $552,000 in such loans, representing 1.0% of total loans.

Underwriting Strategy

The ~~Company~~Bank’s lending activities reflect an underwriting strategy that emphasizes asset quality and fiscal prudence in order to keep capital resources available for the most attractive lending opportunities in the ~~Company~~Bank’s market. All loan requests are approved by the Bank’s loan committee. The ~~Company~~Bank’s strategy for approving or disapproving loans is to follow conservative loan policies and underwriting practices, which include:

granting loans on a sound and collectible basis;

· investing funds properly for the benefit of the ~~Company’s~~ shareholders and the protection of its depositors;

· serving the legitimate needs of the community in the ~~Company’s~~ market while maintaining a balance between maximum yield and minimum risk;

ensuring that primary and secondary sources of repayment are adequate in relation to the amount of the loan;

developing and maintaining adequate diversification of the loan portfolio as a whole and of the loans within each category; and

· ensuring that each loan is properly documented and, if appropriate, insurance coverage is adequate. The ~~Company~~Bank’s loan review personnel and compliance officer interact on a regular basis with commercial, mortgage and consumer lenders to identify potential underwriting or technical exception variances.

In addition, the ~~Company~~Bank has placed increased emphasis on the early identification of problem loans to aggressively seek resolution of the situation and thereby keep loan losses at a minimum.

The following table sets forth the composition of the Company’s loan portfolio:

	December 31,
	2011			2010
	(in thousands)
Commercial and industrial	$	1,037		$	383
Real estate
Construction		158			1,758
1-4 family owner occupied		6,412			7,424
1-4 family non-owner occupied		16,933			18,404
Multi-family		13,834			17,431
Commercial		6,331			8,621
Consumer and other		365			539
		45,070			54,560
Net deferred loan fees		(125	)		(153	)
Allowance for loan losses		(1,783	)		(1,595	)
Total	$	43,162		$	52,812

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	December 31, 2010			December 31, 2009
	(in thousands)
Commercial	$	383		$	987
Construction		1,758			3,099
Real estate
Residential		43,259			43,178
Commercial		8,621			9,117
Consumer		539			552
Total loans	$	54,560		$	56,933
Net deferred loan fees		(153	)		(117	)
Allowance for loan losses		(1,595	)		(915	)
Net loans	$	52,812		$	55,901

The following table sets forth the dollar amount of all loans due after the dates indicated, which have fixed interest rates or floating or adjustable interest rates.

December 31, 2010

December 31, 2011

Fixed Rates

Floating/ or Adjustable Rates

Total

(in thousands)

Commercial

352

383

Commercial and industrial

1,037

Construction

~~1,455~~79

~~303~~79

~~1,758~~158

Real estate

Real estate:

Residential

3119,~~844~~881

1117,~~415~~298

4337,~~259~~179

Commercial

75,~~724~~272

~~897~~1,059

86,~~621~~331

Consumer

~~518~~365

21-

~~539~~365

Total loans

4226,~~048~~634

1218,~~667~~436

5445,~~560~~070

Maturity of Loan Portfolio. The following table presents certain information at December 31, ~~2010~~2011 regarding the dollar amount of loans, before net items, maturing in the portfolio based on contractual terms to maturity or scheduled amortization, however, does not include potential prepayments. Scheduled contractual maturities of loans do not necessarily reflect the actual expected term of the loan portfolio. The average life of mortgage loans is substantially less than their average contractual terms because of prepayments. The average life of mortgage loans tends to increase when current mortgage loan rates are higher than rates on existing mortgage loans and, conversely, it tends to decrease when rates on current mortgage loans are lower than existing mortgage loan rates (due to prepayments as a result of the refinancing of adjustable-rate and fixed-rate loans at lower rates). ~~Loan balances do not include undisbursed loan proceeds or the allowance for loan losses.~~

	December 31, 2010
	1 Year or Less		1 to 5 Years		Over 5 Years		Total
	(in thousands)
Commercial	$	303	$	80	$	—	$	383
Construction		382		1,340		36		1,758
Real estate
Residential		21,201		17,020		5,038		43,259
Commercial		1,768		6,177		676		8,621
Consumer		362		60		117		539
Total loans	$	24,016	$	24,677	$	5,867	$	54,560

The loan balances below do not include undisbursed loan proceeds or the allowance for loan losses.

	December 31, 2011
	1 Year or Less		1 to 5 Years		Over 5 Years		Total
	(in thousands)
Commercial and industrial	$	440	$	524	$	73	$	1,037
Construction		-		158		-		158
Real estate:
Residential		4,186		16,133		16,860		37,179
Commercial		1,094		4,872		365		6,331
Consumer		63		163		139		365
Total loans	$	5,783	$	21,850	$	17,437	$	45,070

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Non-Performing Loans. A loan is non-performing when it is more than ninety days past due. Specific allocations are made for loans that are determined to be non-performing. Loans past due less than ninety days may also be classified as non-performing when management does not expect to collect all amounts due according to the contractual terms of the loan agreement. Specific allocations are measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses as compared to the loan carrying value.

	December 31, 2010
	Loans Delinquent For:
	60-89 Days							Over 90 Days							Total Delinquent Loans
	Total Number of Credits		Total Amount		Percent of Loan Category			Total Number of Credits		Total Amount		Percent of Loan Category			Total Number of Credits		Total Amount		Percent of Loan Category
	(dollars in thousands)
Commercial		—	$	—		0	%		2	$	110		50	%		3	$	110		50	%
Construction		—		—		0	%		1		80		0	%		1		80		0	%
Real estate:
Residential		3		312		1	%		15		2,226		5	%		18		2,538		6	%
Commercial		2		341		4	%		8		2,074		24	%		10		2,415		28	%
Consumer		—		—		0	%		—		—		0	%		—		—		0	%
Total loans		5		653		1	%		26		4,490		8	%		31		5,143		9	%

	December 31, 2009
	Loans Delinquent For:
	60-89 Days							Over 90 Days							Total Delinquent Loans
	Total Number of Credits		Total Amount		Percent of Loan Category			Total Number of Credits		Total Amount		Percent of Loan Category			Total Number of Credits		Total Amount		Percent of Loan Category
	(dollars in thousands)
Commercial		—	$	—		0	%		1	$	31		3	%		1	$	31		3	%
Construction		—		—		0	%		1		79		3	%		1		79		3	%
Real estate:
Residential		1		30		0	%		3		1,327		3	%		4		1,357		3	%
Commercial		2		155		2	%		7		477		5	%		9		632		7	%
Consumer		—		—		0	%		1		2		0	%		1		2		0	%
Total loans		3		185		0	%		13		1,916		3	%		16		2,101		4	%

	Non-performing loans
	December 31,
	2010			2009
	(dollars in thousands)
Commercial	$	110		$	31
Construction		80			79
Real estate
Residential		2,226			1,327
Commercial		2,074			477
Consumer		—			2
Total	$	4,490		$	1,916
Total as a percentage of total assets		6.58	%		2.68	%
Non-performing loans as a percentage of gross loans		8.23	%		3.37	%

The loan loss allowance as a percentage of nonperforming loans was 35.5% at December 31, 2010 compared to 47.8% at December 31, 2009.

Potential Problem Loans. Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor

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to continue to comply with repayment terms because of the obligor’s potential operating or financial difficulties. Management monitors these loans closely and reviews their performance on a regular basis.

Analysis of Allowance for Loan Losses

The Company has established an allowance for loan losses to provide for those loans that may not be repaid in their entirety. The allowance for loan losses is currently maintained at a level considered by management to be adequate to provide for probable loan losses. The allowance is increased by provisions charged to earnings and is reduced by charge-offs, net of recoveries. The provision for loan losses is based on management’s evaluation of the loan portfolio under current economic conditions. Loans are charged to the allowance for loan losses when, and to the extent, they are deemed by management to be uncollectible. The allowance for loan losses is composed of allocations for specific loans and a general reserve for all other loans.

The following table sets forth loans charged off and recovered and an analysis of the allowance for loan losses for the years ended December 31, 2010 and 2009.

	As of and for the year ended December 31,
	2010			2009
	(dollars in thousands)
Average total loans	$	57,500		$	51,380
Total loans at end of period		54,560			56,933
Total nonperforming loans		4,490			1,916
Allowance at beginning of period	$	915		$	467
Loans charged-off:
Commercial		—			—
Construction		—			—
Real estate
Residential		(236	)		(45	)
Commercial		—			—
Consumer		(9	)		(4	)
Total		(245	)		(49	)
Recoveries:
Commercial		—			—
Construction		—			—
Real estate
Residential		—			—
Commercial		—			—
Consumer		—			—
Total		—			—
Net recoveries (charge offs)		(245	)		(49	)
Provision for loan losses		925			497
Allowance at end of period	$	1,595		$	915
Net recoveries (charge offs) to average total loans		(0.43	%)		(0.10	%)
Allowance to total loans		2.93	%		1.61	%
Allowance to nonperforming loans		35.55	%		47.76	%

____________

(1) Nonperforming loans include those loans past due 90 or more days and loans that are on a non-accrual status.

The Bank relies, among other things, on its experienced senior management in determining the appropriate allowance for loan losses on the loan portfolio. In general, management reviews delinquency trends, impaired loans, loan-to-value ratios and types of collateral. Based on these factors, we believed

~~Table~~Non-Performing Loans. A loan is non-performing when it is more than ninety days past due except for loans that are well secured and in the process of ~~Contents~~collection. Specific allocations are made for loans that are determined to be non-performing. Loans past due less than ninety days may also be classified as non-performing when management does not expect to collect all amounts due according to the contractual terms of the loan agreement. Specific allocations are measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses as compared to the loan carrying value.

that the allocation of the allowance for loan losses for these types of loans was appropriate at December 31, 2010.

	December 31, 2011
	Loans Delinquent For:
	60-89 Days							Over 90 Days								Total Delinquent Loans
	Total Number of Credits		Total Amount		Percent of Loan Category			Total Number of Credits		Total Amount		Percent of Loan Category			Total Number of Credits		Total Amount		Percent of Loan Category
		(dollars in thousands)
Commercial and industrial		-	$	-		0	%		-	$	-		0	%		-	$	-		0	%
Construction		-		-		0	%		1		79		50	%		1		79		50	%
Real estate:				-
Residential		-		-		0	%		22		3,447		9	%		22		3,447		9	%
Commercial		1		219		3	%		9		1,623		26	%		10		1,842		29	%
Consumer		-		-		0	%		1		5		1	%		1		5		1	%
Total loans		1		219		0	%		33		5,154		11	%		34		5,373		11	%

While management believes that it determines the amount of the allowance based on the best information available at the time, the allowance will need to be adjusted as circumstances change and assumptions are updated. Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are determined based on a variety of factors, including specific reserves, current loan risk ratings, delinquent loans, historical loss experience and economic conditions in our market area. In addition, federal regulatory authorities, as part of the examination process, periodically review our allowance for loan losses. The regulators may require us to record adjustments to the allowance level based upon their assessment of the information available to them at the time of examination. Although management believes the allowance for loan losses is sufficient to cover probable losses inherent in the loan portfolio, there can be no assurance that the allowance will prove sufficient to cover actual loan losses.

	December 31, 2010
	Loans Delinquent For:
	60-89 Days							Over 90 Days							Total Delinquent Loans
	Total Number of Credits		Total Amount		Percent of Loan Category			Total Number of Credits		Total Amount		Percent of Loan Category			Total Number of Credits		Total Amount		Percent of Loan Category
		(dollars in thousands)
Commercial and industrial		-	$	-		0	%		2	$	110		50	%		2	$	110		50	%
Construction		-		-		0	%		1		80		0	%		1		80		0	%
Real estate:				-
Residential		3		312		1	%		15		2,226		5	%		18		2,538		6	%
Commercial		2		341		4	%		8		2,074		24	%		10		2,415		28	%
Consumer		-		-		0	%		-		-		0	%		-		-		0	%
Total loans		5		653		1	%		26		4,490		8	%		31		5,143		9	%

~~Our allowance increased to $1.6 million at December 31, 2010 after increasing to $915,000 as of December 31, 2009 and up from $467,000 as of December 31, 2008.~~ The ~~ratio~~following oftable ~~the~~presents ~~reserve~~non-performing ~~for loan losses to~~ loans ~~was~~by ~~2.93%~~loan asclass ~~of December 31, 2010 compared to 1.61%~~ as of December ~~31,~~ ~~2009, and 1.18% as of December~~ 31, ~~2008. The~~2011 ~~provision for loan losses was $925,000 for the year ended December 31, 2010, versus $497,000 for the year ended December 31, 2009,~~ and $347,000 in the period from inception, March 12, 2008, to December 31, 2008. The key factors in determining the level of provision is the composition of our loan portfolio, loan growth, risk rating distribution within each major loan category, historical loss experience, and internal and external factors. Weakness in the general economy and, in particular, higher vacancy rates in commercial real estate, sponsor bankruptcies, declining real estate values, limited sales activity and low financing activity severely impacted our portfolio.2010:

During the year ended December 31, 2010, net charge-offs totaled $245,000 compared to $49,000 for the year ended December 31, 2009 and $5,000 in the period from inception, March 12, 2008, to December 31, 2008. The increase in charge-offs reflects real estate collateral values, particularly land values, which have remained low. The provision for loan losses at December 31, 2010 totaled $925,000 and exceeded net charge-offs of $245,000.

	Non-performing loans
	December 31,
	2011			2010
	(dollars in thousands)
Commercial and industrial	$	0		$	110
Construction		79			80
Real estate:
Residential		3,687			2,226
Commercial		1,623			2074
Consumer		5			-
Total	$	5,394		$	4,490
Total as a percentage of total assets		8.63	%		6.58	%
Non-performing loans as a percentage of gross loans		12.00	%		8.23	%

The ~~following~~loan ~~table~~loss ~~sets~~allowance ~~forth~~as ~~information~~a ~~concerning~~percentage ~~the~~of ~~allocation~~nonperforming ofloans ~~the~~was ~~allowance~~33.1% ~~for~~at ~~loan~~December 31, ~~losses~~2011 bycompared ~~loan~~to ~~category~~35.5% at ~~the~~December 31, ~~dates indicated~~2010.

	December 31
	2010					2009
	Amount		Percentage of Loans to Total Loans			Amount			Percentage of Loans to Total Loans
Commercial	$	—		0.71	%	$	55			1.73	%
Construction		116		3.22	%		38			5.46	%
Real estate
Residential		958		79.28	%		461			75.85	%
Commercial		514		15.80	%		352			16.00	%
Consumer		7		0.99	%		10			0.97	%
Total allocated reserves		1,595		100.00	%		916			100.00	%
Unallocated (unfunded) reserve		—					(1	)
Total allowance for loan losses	$	1,595		100.00	%	$	915			100.00	%

~~Table~~Potential Problem Loans. Potential problem loans consist of ~~Contents~~loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or financial difficulties. Management monitors these loans closely and reviews their performance on a regular basis. At December 31, 2011 the Company had $923,000 in such loans, or 2.05% of total loans.

Impaired Loans. 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.

Analysis of 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 collectability of a loan balance in unlikely. 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. Moreover, the allowance for loan losses is composed of allocations for specific loans and a general reserve for all other loans. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance for credit losses is comprised of an allowance for loan losses, which is determined with respect to loans that we have issued, and an allowance for lending-related commitments. Our allowance for lending-related commitments is determined with respect to funds that we have committed to lend but for which funds have not yet been disbursed and is computed using a methodology similar to that used to determine the allowance for loan losses. Additions to the allowance for loan losses are charged to earnings through the provision for credit losses. Charge-offs represent the amount of loans that have been determined to be uncollectible during a given period, and are deducted from the allowance for loan losses, and recoveries represent the amount of collections received from loans that had previously been charged off, and are credited to the allowance for loan losses.

Determination of the Allowance for Credit Losses: The allowance for loan losses includes an element for estimated probable but undetected losses and for imprecision in the credit risk models used to calculate the allowance. As part of the Problem Loan Reporting system review, the Bank analyzes the loan for purposes of calculating our specific impairment reserves and a general reserve.

Specific Impairment Reserves: Loans with a credit risk rating of a 6, 7 or 8 are reviewed on a quarterly or more frequent basis to determine if (a) an amount is deemed uncollectible (a charge-off) or (b) there is an amount with respect to which it is probable that the Bank will be unable to collect amounts due in accordance with the original contractual terms of the loan (a specific impairment reserve). Loans which are not assigned a specific reserve are included in the determination of the general reserve.

General Reserves: For loans with a credit risk rating of 5 or better and loans with a risk rating of 6, 7 or 8 with no specific reserve, reserves are established based on the type of loan collateral, if any, and the assigned credit risk rating. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, and consideration of current environmental factors and economic trends, all of which may be susceptible to significant change.

We determine this component of the allowance for loan losses by classifying each loan into a category based on the type of collateral that secures the loan (if any) each category is then assigned a specific loss factor that incorporates the following factors:

	•	historical underwriting loss factor;

	•	changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

	•	changes in national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio;

	•	changes in the nature and volume of the portfolio and in the terms of the loans;

	•	changes in the experience, ability, and depth of lending management and other relevant staff;

	•	changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans;

	•	changes in the quality of the bank’s loan review system;

	•	changes in the underlying collateral for collateral dependent loans;

	•	the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and

	•	the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the bank’s existing portfolio

The following table presents loans charged off and recovered by loan class and an analysis of the allowance for loan losses for the years ended December 31, 2011 and 2010.

	Years Ended December 31,
(dollars in thousands)	2011			2010
Average total loans	$	49,815		$	57,500
Total loans at end of period		45,070			54,560
Total non-performing loans(1)		5,394			4,490
Allowance at beginning of period		1,595			915

Loan charge-offs:
Commercial and industrial		-			-
Real estate:
Residential		(898	)		(236	)
Construction		(33	)		-
Commercial		(394	)		-
Consumer		(15	)		(9	)
Total		(1,340	)		(245	)
Recoveries:
Commercial and industrial		-			-
Construction		-			-
Real estate		-			-
Consumer		-			-
Total		-			-
Net recoveries (charge-offs)		(1,340	)		(245	)
Provision for loan losses:
Commercial and industrial		1			(5	)
Real estate:
Residential		1,445			725
Construction		(82	)		88
Commercial		147			112
Consumer		17			5
Total		1,528			925
Allowance at end of period	$	1,783		$	1,595

Net recoveries (charge-offs) to average total loans		-2.69	%		-0.43	%
Allowance to total loans		3.96	%		2.92	%
Allowance to non-performing loans		33.06	%		35.52	%

(1)	Non-performing loans include those loans past due 90 or more days and loans that are on a non-accrual status.

The Company relies, among other things, on its experienced senior management in determining the appropriate allowance for loan losses on the loan portfolio. In general, management reviews delinquency trends, impaired loans, loan-to-value ratios and types of collateral. Based on these factors, we believed that the allocation of the allowance for loan losses for these types of loans was appropriate at December 31, 2011.

While management believes that it determines the amount of the allowance based on the best information available at the time, the allowance will need to be adjusted as circumstances change and assumptions are updated. Additions to the allowance for loan losses, are determined based on a variety of factors, including specific reserves, current loan risk ratings, delinquent loans, historical loss experience and economic conditions in our market area. In addition, federal regulatory authorities, as part of the examination process, periodically review our allowance for loan losses. The regulators may require us to record adjustments to the allowance level based upon their assessment of the information available to them at the time of examination. Although management believes the allowance for loan losses is sufficient to cover probable losses inherent in the loan portfolio, there can be no assurance that the allowance will prove sufficient to cover actual loan losses.

Allowance for loan losses increased $200,000 to $1.8 million at December 31, 2011, from $1.6 million as of December 31, 2010. Allowance for loan losses as a percent of total loans increased to 3.96% as of December 31, 2011, from 2.92% at December 31, 2010. The provision for loan losses increased $575,000 to $1.5 million for the year ended December 31, 2011, from $925,000 for the year ended December 31, 2010. The key factors in determining the level of provision are reserves for specifically identified problem credits, the composition of our loan portfolio, loan growth, risk rating distribution within each major loan category, historical loss experience, and internal and external factors. Weakness in the general economy and, in particular, higher vacancy rates in commercial real estate, bankruptcies, declining real estate values, limited sales activity and low financing activity severely impacted our portfolio.

Net charge-offs for the years ended December 31, 2011 and 2010 totaled $1.3 million and $245,000, respectively. The increase in charge-offs reflects real estate collateral values, particularly land values, which have remained low. The provision for loan losses at December 31, 2011 totaled $1.5 million and exceeded net charge-offs of $1.3 million.

The following table sets forth information concerning the allocation of the allowance for loan losses by loan category at the dates indicated.

	December 31, 2011					December 31, 2010
	Amount		Percentage of Loans to Total Loans			Amount		Percentage of Loans to Total Loans
	(dollars in thousands)
Commercial	$	1		1.05	%	$	-		0.71	%
Construction		5		0.48	%		116		3.22	%
Real estate:
Residential		1,295		83.23	%		958		79.28	%
Commercial		473		14.11	%		514		15.80	%
Consumer		9		1.12	%		7		0.99	%
Total loans	$	1,783		100.00	%	$	1,595		100.00	%

Correspondent Banking

The Company has maintained, and intends to continue to maintain, correspondent relationships with several large financial institutions. A correspondent bank is used to provide products and services a smaller bank will need in its daily operations, or to assist in delivering the desired services to its customers. Correspondent bank services needed in a community bank’s daily operation include check collections and clearing, purchase and sale of federal funds, investment services, wire transfer services, and coin and currency supplies. To assist in delivering its products and services to customers, it is necessary to have a correspondent bank to assist a bank with loans over its lending limit, purchase of fixed-rate residential mortgage loans and equipment leasing.

Investments

The Company makes investments from time to time, subject to the investment limitations of state and federal laws and safe and sound banking practices and internal banking policies. The Company’s objective is to maintain a sound investment portfolio which provides earnings and liquidity, while also providing for reinvestment in the community.

Securities

Securities are classified as held to maturity ~~when~~and acarried ~~company~~at amortized cost when management has the positive intent ~~and ability~~ to hold ~~those~~them ~~securities~~ to maturity. ~~These~~ ~~securities~~At ~~are~~December ~~carried at cost~~31, ~~adjusted~~2011 ~~for~~and ~~amortization~~2010, ofthere ~~premiums~~were ~~and~~no ~~accretion~~securities ofheld ~~discounts~~to maturity. Securities are classified as available for sale ifwhen athey ~~company~~are ~~decides~~non-strategic, toare ~~sell~~neither ~~those~~held ~~securities~~for ~~before~~trading, ~~maturity. These~~nor ~~securities~~held ~~are~~to ~~carried at fair value~~maturity, ~~adjusted~~and for ~~amortization~~which ofthere ~~premiums~~is ~~and~~a ~~accretion~~readily ofavailable ~~discounts~~market price. ~~Unrealized~~Securities ~~gains~~available ~~and~~for ~~losses~~sale onare ~~securities~~carried ~~available~~at ~~for~~fair ~~sale~~value, ~~are~~with ~~recognized~~unrealized inholding agains ~~valuation~~and ~~allowance~~losses ~~that~~net isof ~~included~~tax, reported as a separate component of ~~stockholders’~~accumulated ~~equity,~~other ~~net~~comprehensive income in separate component of ~~taxes~~stockholders’ equity.

At December 31, ~~2010~~2011 and ~~2009~~2010, ~~all~~securities ~~investment~~were comprised of U.S. Treasury, Government Sponsored Agencies, and corporate bonds. The Company’s securities ~~were~~portfolio ~~either~~increased ~~issued~~$50,000 byto ~~the~~$5.3 USmillion ~~Treasury~~at orDecember 31, by2011, afrom ~~Government~~$5.2 ~~Sponsored~~million ~~Agency~~at December 31, 2010.

The ~~Bank’s securities portfolio increased $900,000 from $4.3 million at December 31, 2009 to $5.2 million at December 31, 2010. The~~ following table sets forth the composition of the securities portfolio at the dates indicated.:

	December 31, 2010				December 31, 2009
	December 31, 2011				December 31, 2010
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(dollars in thousands)
	(in thousands)
Securities held to maturity (at amortized cost)
Government-sponsored agencies	$	—	$	—	$	3,186	$	3,227
Residential mortgage-backed securities		—		—		752		757
						3,938		3,984
Securities available for sale (at fair value)
US Treasury securities		2,023		2,058		—		—
U.S. Treasury securities	$	505	$	506	$	2,023	$	2,058
Government-sponsored agencies		3,~~149~~279		3,~~167~~301		~~401~~3,149		~~402~~3,167
Total securities	$	5,172	$	5,225	$	4,339	$	4,386
U.S. Government agencies		1,097		1,083		-		-
Other debt securities		400		386		-		-
Total securities	$	5,281	$	5,276	$	5,172	$	5,225

The maturity distribution of the securities portfolio as of the date indicated is shown below:

	Available for sale
December 31, 2011	Amortized Cost		Fair Value
	(in thousands)
Due in one year or less	$	1,005	$	1,009
Due after one year through five years		3,179		3,185
Due after five years through ten years		-		-
Due after ten years		1,097		1,082
Total	$	5,281	$	5,276

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	December 31, 2010
	Amortized Cost		Fair Value
	(in thousands)
Due in one year or less	$	—	$	—
Due after one year through five years		5,172		5,225
Due after five years through ten years		—		—
Due after ten years		—		—
Mortgage-backed and related securities		—		—
Total	$	5,172	$	5,225

Source of Funds

Deposit Products. The Company’s lending and investing activities are funded primarily by deposits. A variety of deposit accounts are available, with a wide range of interest rates, terms and product features. Deposits consist of non-interest-bearing demand, interest-bearing demand, savings, money market and time accounts. The Company relies primarily on competitive pricing policies and customer service to attract and retain these deposits.

Deposits Composition. As of December 31, 2011 and 2010, the ~~Bank~~Company had total deposits of $56.7 million and $62.9 million, respectively. Of these deposits, approximately 36.1% ~~percent~~ were transaction accounts and savings deposits. ~~The~~Certificates ~~following~~of ~~table~~deposits ~~sets~~include ~~forth~~brokered ~~the~~deposits ~~composition~~which oftotaled ~~the~~$7.0 ~~total~~million at December 31, 2011, and $11.9 million at December 31, 2010. Brokered time deposits ~~for~~have ~~the~~been ~~Bank~~a ~~prior~~part toof the ~~Company~~company’s ~~acquisition~~overall ofliability ~~the~~management ~~Bank~~strategy onand ~~March 12,~~provide ~~2008~~a ~~and~~reliable source for ~~the~~meeting ~~Bank~~specific ~~subsequent~~funding needs in an efficient and timely manner. Currently, due to the ~~Company’s~~Consent ~~acquisition~~Order, of the Bank is prohibited from accepting or renewing brokered deposits.

	December 31, 2010					December 31, 2009
	Amount		Percentage of Deposits			Amount		Percentage of Deposits
	(dollars in thousands)
Non-interest bearing demand accounts	$	6,922		11.01	%	$	5,569		8.37	%
Money market and NOW demand accounts		7,234		11.50			4,739		7.12
Savings accounts		8,532		13.57			10,036		15.08
Time deposits
Certificates of deposit under $100,000		19,136		30.43			32,336		48.58
Certificates of deposit over $100,000		21,057		33.49			13,881		20.85
Total deposits	$	62,881		100.00	%	$	66,561		100.00	%

~~____________~~ The following table presents the composition of total deposits held by the Company as of December 31, 2011 and 2010:

(1) Certificates of deposit under $100,000 includes brokered deposits which totaled $11.9 million at December 31, 2010, $25.6 million at December 31, 2009 and $23.0 at December 31, 2008. Brokered time deposits are a part of the company’s overall liability management strategy and provide a reliable source for meeting specific funding needs in an efficient and timely manner.

	December 31, 2011					December 31, 2010
	Amount		Percentage of Deposits			Amount		Percentage of Deposits
	(dollars in thousands)
Non-interest bearing demand accounts	$	6,349		11.20	%	$	6,922		11.01	%
Money market and NOW demand accounts		6,229		10.99	%		7,234		11.50	%
Savings accounts		8,685		15.32	%		8,532		13.57	%
Time deposits:
Certificates of deposit under $100,000(1)		13,997		24.69	%		19,136		30.43	%
Certificates of deposit over $100,000		21,424		37.80	%		21,057		33.49	%
Total deposits	$	56,684		100.00	%	$	62,881		100.00	%

(1) Certificates of deposit under $100,000 includes brokered deposits which totaled $7.0 million at December 31, 2011, and $11.9 million at December 31, 2010. Brokered time deposits have been a part of the Company’s overall liability management strategy and provide a reliable source for meeting specific funding needs in an efficient and timely manner. Currently the Bank is prohibited from accepting or renewing brokered deposits.

The following table summarizes the maturity distribution of certificates of deposit as of the dates indicated. These deposits were made by individuals, businesses and public and other not-for-profit entities, most of which are located within the Company’s market area.

2011	$	18,739
2012	$	23,426
2012		13,765
2013		11,117
2013		6,934
2014		31
2014		302
2015		249
2015		453
2016		598
	$	4035,~~193~~421

16Borrowings. We may obtain advances from the FHLB of Chicago upon the security of the common stock we own in the FHLB and our qualifying residential mortgage loans and securities, provided certain standards related to creditworthiness are met. These advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. FHLB advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending. As of December 31, 2011 and 2010 FHLB advances totaled $3.75 million and $1.25 million, respectively.

~~Table~~Additionally, the Company has issued senior convertible notes that pay interest at maturity at a fixed rate of ~~Contents~~8.00% per annum. The scheduled maturities of the notes is twelve months from the issue date and are convertible under certain circumstances into shares of the Company’s common stock at a conversion ratio of one and one-half times the book value per share. In 2011 and 2010, certain notes were converted upon maturity to 4,569 and 76,028 shares of the Company’s common stock respectively. As of December 31, 2011, senior convertible notes outstanding totaled $675,000. Furthermore, the Company is currently prohibited from paying interest on maturing notes.

Borrowings. We may obtain advances from the FHLB of Chicago upon the security of the common stock we own in the FHLB and our qualifying residential mortgage loans and securities, provided certain standards related to creditworthiness are met. These advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. FHLB advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending.20

The Company has also issued senior convertible notes that pay interest at maturity at a fixed rate of 8.00% per annum. The scheduled maturity of the notes is twelve months from the issue date and are convertible under certain circumstances into shares of common stock at a conversion ratio of one and one-half times the book value per share. In 2010, certain notes were converted upon maturity to 75,678 shares of common stock. Other notes were renewed on similar terms.

The following table sets forth the distribution of short-term borrowings and weighted average interest rates thereon at the end of each of the last three years.

	Short-term borrowings			Short-term Federal Home Loan Bank borrowings
	(in thousands)
	(dollars in thousands)
2011
Balance, December 31, 2011	$	675		$	3,750
Weighted average interest rate at end of year		8.00	%		0.50	%
Maximum amount outstanding at any month end	$	700		$	3,750
Average daily balance	$	688		$	3,750
Weighted average interest rate during year(1)		8.00	%		0.50	%
2010
Balance, December 31, 2010	$	365		$	1,250
Weighted average interest rate at end of year		8.00	%		0.50	%
Maximum amount outstanding at any month end	$	792		$	3,000
Average daily balance	$	579		$	46
Weighted average interest rate during year(1)		8.00	%		0.51	%
2009
Balance, December 31, 2009	$	792		$	0
Weighted average interest rate at end of year		8.00	%		0.00	%
Maximum amount outstanding at any month end	$	792		$	0
Average daily balance	$	639		$	0
Weighted average interest rate during year(1)		8.00	%		0.00	%

____________

(1) The weighted average interest rate is computed by dividing total interest for the year by the average daily balance outstanding.

Supervision and Regulation

General

Banks and bank holding companies are extensively regulated under both federal and state law. To the extent the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutes and regulations. Any significant change in applicable law or regulation may have an effect on the business and prospects of the Company and the Bank. The supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of customers, rather than stockholders of banks and bank holding companies.

The Company is registered as a bank holding company under the Bank Holding Company Act of 1956 (the “Bank Holding Company Act”), as amended, and is regulated by the Federal Reserve. Under the Bank Holding Company Act, the Company is required to file periodic reports and such additional information as the Federal Reserve may require, and is subject to examination by the Federal Reserve.

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the Bank Holding Company Act, the Company is required to file periodic reports and such additional information as the Federal Reserve may require, and is subject to examination by the Federal Reserve.

The Bank is an Illinois-chartered, non-Federal-Reserve-member bank. Deposits of the Bank are insured by the FDIC under the provisions of the Federal Deposit Insurance Act. The Bank is subject to regulation and supervision by the FDIC and the IDFPR, and both agencies conduct periodic examinations of the Bank. The federal and state laws and regulations generally applicable to the Bank regulate, among other things, the scope of the Bank’s business, its investments, its reserves against deposits, the nature and amount of and collateral for its loans, and the location of its banking offices and types of activities that it may perform at such offices.

Recent Regulatory Actions

On August 28, 2012, Covenant Bank, the wholly-owned subsidiary of Covenant Bancshares, Inc. (the “Company”), was notified by the Illinois Department of Financial and Professional Regulation, Division of Banking (the “Division”) 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 Division, then the Division 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.

In addition, on August 28, 2012, the Division also issued to the Bank an Order to Cease and Desist (the “Order”). The Order provides 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 retitling 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.

On June 6, 2011, the Bank entered into the Order with the FDIC and IDFPR that imposes several material conditions on our operations and management. The Agreement restricts the payment of dividends by the Bank, as well as the taking of dividends or any other payment representing a reduction in capital from the Bank without the prior approval of the FDIC and IDFPR. The Order also requires the Bank to develop a capital plan within 60 days, which plan shall address, among other things, the Bank’s current and future capital requirements, including compliance with the minimum capital ratios. The Bank is also required to submit a liquidity plan to the FDIC and IDFPR within 60 days. The Bank is also be required to provide notice to the FDIC and IDFPR regarding the appointment of any new director or senior executive officer. Finally, the Board of Directors of the Bank is required to submit written progress reports within 30 days after the end of each fiscal quarter.

The Order requires the Bank, among other things:

· to establish a compliance committee to monitor and coordinate compliance with ~~the~~that Order ~~within 10 days~~;

· to achieve and maintain Tier 1 leverage capital to total assets ratio of at least 9% and total risk-based capital ratio of at least 13% by July 30, 2011; within 60 days;

· to develop, within 60 days, a profit plan for the Bank by July 30, 2011, which shall, among other things, include specific plans for maintaining adequate capital;

· to revise and maintain by July 30, 2011, within 60 days, 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 develop revise by July 30, 2011 within 60 days, athe Bank’s loan policy, aand commercial real estate concentration management program. ~~and~~The Bank must also 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 take immediate and continuing action 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.

As noted above, 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 December 31, 2011, the Bank’s Tier 1 capital to total assets ratio was 4.43% as compared to 4.81% as of December 31, 2010, and the total risk-based capital ratio was 8.32% as of December 31, 2011 as compared to 9.37% as of December 31, 2010. As of March 31, 2012, such ratios were 3.91% and 7.57%, respectively, below the targets set by22

18As noted above, 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 December 31, 2011, the Bank’s Tier 1 capital to total assets ratio was 3.90% as compared to 8.09% as of December 31, 2010, and the total risk-based capital ratio was 5.20% as of December 31, 2011 as compared to 9.37% as of December 31, 2010. As of September 30, 2012, such ratios were 1.67% and 2.95%, respectively, critically below the targets set by the Order. For bank regulatory purposes, the Bank is designated as undercapitalized by the FDIC. See Note 1 to the consolidated financial statements for additional disclosures concerning the Order.

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the Order. For bank regulatory purposes, the Bank is designated as undercapitalized by the FDIC. See Note 2 to the consolidated financial statements for additional disclosures concerning the Order.

The Order will remain in force until terminated by the FDIC and IDFPR. Since becoming subject to the Order, the Bank has devoted substantial resources to complying with its requirements and limitations, and we have created a compliance committee as required by the Order, and otherwise strengthened our management supervision and oversight capabilities.

~~There~~On ~~can~~November ~~be no assurance~~6, ~~however~~2012, ~~that~~ the Bank ~~can~~was ~~meet~~notified ~~all~~by of the ~~requirements~~Federal ~~imposed~~Deposit byInsurance Corporation (the ~~Order,~~“FDIC”) ~~especially~~that ~~those~~the ~~related~~Bank tofalls ~~liquidity~~within ~~risk~~the ~~management~~“significantly ~~and~~undercapitalized” ~~minimum~~ capital ~~standards~~category. If In addition, the Bank ~~does~~was ~~not~~issued ~~comply~~a ~~with~~Supervisory ~~the~~Prompt ~~Order,~~Corrective weAction ~~could~~Directive be(“PCA”) ~~subject~~by tothe ~~further~~FDIC. ~~regulatory~~The ~~enforcement~~PCA ~~action,~~provides ~~including,~~that ~~without~~the ~~limitation~~Bank, in conjunction with the ~~issuance~~Company, ofmust ~~additional~~increase ~~cease~~its ~~and~~capital ~~desist~~to ~~orders~~a orlevel ~~supervisory~~sufficient ~~actions~~to ~~(which~~restore ~~may,~~the ~~among~~Bank ~~other~~to ~~things,~~at ~~further~~least ~~restrict~~an ~~our~~“adequately ~~business~~capitalized” ~~activities~~level oras ~~result~~defined in the ~~imposition~~FDIC ofregulations ~~civil~~or ~~monetary~~accept ~~penalties),~~an oroffer ~~even~~to ~~the~~be ~~placing~~acquired ofby ~~the~~a ~~Bank~~depository ~~into~~institution ~~receivership. If~~holding ~~the~~company ~~Bank~~or isto ~~placed~~combine ~~into~~with ~~receivership~~another insured depository institution. Previously, the FDIC ~~would~~had benotified ~~appointed~~ the ~~receiver~~Bank ofthat ~~the~~it ~~Bank~~was “critically undercapitalized.” InOn ~~all~~November ~~likelihood~~2, ~~Covenant~~and ~~would~~November ~~suffer~~5, a2012, ~~complete loss of~~ the ~~value~~Company ofinjected ~~our~~capital ~~ownership interest~~ in the ~~Bank~~amounts of $750,000 and ~~consequently~~$25,000, arespectively, ~~complete~~into ~~loss~~the ofBank. With ~~value~~the ofcapital ~~all~~infusion ofas ~~our outstanding shares~~ of ~~stock. The~~November ~~Company~~5, ~~subsequently~~2012, ~~may~~the beBank’s ~~exposed~~Tier to1 ~~significant~~leverage ~~claims~~capital byratio ~~the~~was ~~FDIC~~2. ~~Further,~~05% aand ~~failure~~the tototal ~~comply~~risk ~~with~~based ~~the~~capital ~~Order~~ratio ~~could~~was ~~result~~4.52%. With inthis ~~termination~~capital ofinfusion, the Bank’s ~~federal~~moved ~~deposit~~from ~~insurance,~~“critically ~~subject~~undercapitalized to a“significantly ~~number of other conditions~~undercapitalized.”

The Company continues to explore various strategic alternatives, including a recapitalization by third parties that would result in a change in control. A recapitalization 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. The Company can give no guarantee that it will be able to comply with the PCA. If the Bank is unable to satisfy the requirements of the PCA, then the FDIC has authority to take additional regulatory action against the Bank.

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 critically 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 and the PCA, including a failure to achieve the capital ratios required, 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

There can be no assurance, however, that the Bank can meet all of the requirements imposed by the regulators, especially those related to liquidity risk management and minimum capital standards. If the Bank does not comply with the regulatory directives, the Bank, could be subject to further regulatory enforcement action, including, without limitation, the issuance of additional cease and desist orders or supervisory actions (which may, among other things, further restrict our business activities or result in the imposition of civil monetary penalties), or even the placing of the Bank into receivership. If the Bank is placed into receivership, the FDIC would be appointed the receiver of the Bank. In all likelihood Covenant would suffer a complete loss of the value of our ownership interest in the Bank, and consequently a complete loss of value of all of our outstanding shares of stock. The Company subsequently may be exposed to significant claims by the FDIC. Further, a failure to comply with the regulatory directives could result in termination of the Bank’s federal deposit insurance, subject to a number of other conditions.

Permitted Bank Holding Company Investments and Acquisitions

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

The Bank Holding Company Act also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks, or furnishing services to banks and their subsidiaries. The Company, however, may engage in certain businesses determined by the Federal Reserve to be so closely related to banking or managing and controlling banks as to be a proper incident thereto, such as owning and operating an escrow company or trust company, acting as an investment or financial adviser, providing management consulting services to depository institutions, or providing investment management services. Each of these permitted activities is subject to certain constraints specified by regulation, order, or policy of the Federal Reserve. A bank holding company that meets certain criteria related to capital, management and performance under the Community Reinvestment Act may certify its performance to the Federal Reserve and elect to become a financial holding company. A financial holding company is permitted to engage in a broader range of activities than is otherwise permitted for bank holding companies, including insurance activities, securities underwriting and merchant banking. The Company has elected not to become a financial holding company.

Capital Requirements; Prompt Corrective Action

The Federal Reserve has adopted risk-based capital requirements for assessing the capital adequacy of bank holding companies. Bank holding companies with consolidated assets of more than $500 million are required to comply with the Federal Reserve’s capital guidelines on risk-based capital. Bank holding companies that are below this threshold and otherwise qualify as “small bank holding companies” under applicable regulations need not comply with the Federal Reserve’s risk-based capital guidelines on a consolidated basis. The Company’s assets as of December 31, ~~2010~~2011 were below $500 million and the Company otherwise qualified as a small bank holding company. Accordingly, the Company is not required to comply with the Federal Reserve Board’s risk-based capital requirements. Instead, the Company must comply with the Federal Reserve Board’s Small Bank Holding Company Policy Statement, which requires the Company to maintain a certain debt-to-equity ratio and to maintain appropriate capital levels at insured depository subsidiaries of the Company.

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million and the Company otherwise qualified as a small bank holding company. Accordingly, the Company is not required to comply with the Federal Reserve Board’s risk-based capital requirements. Instead, the Company must comply with the Federal Reserve Board’s Small Bank Holding Company Policy Statement, which requires the Company to maintain a certain debt-to-equity ratio and to maintain appropriate capital levels at insured depository subsidiaries of the Company.

Bank regulatory agencies have adopted risk-based capital requirements applicable to FDIC-insured banks, which establish certain capital ratios banks are required to maintain. Capital is divided into two components: Tier 1 capital, which includes common stock, additional paid-in capital, retained earnings and certain types of perpetual preferred stock, less certain items, such as certain intangible assets, servicing rights and certain credit-enhancing interest-only strips; and Tier 2 capital, which includes, among other things, perpetual preferred stock, subordinated debt, limited amounts of unrealized gains on marketable equity securities, and the allowance for loan losses. These components of capital are calculated as ratios to average assets as reported on the balance sheet and assets that have been adjusted to compensate for associated risk to the organization.

Under the FDIC’s capital requirements for insured banks, a bank is considered well capitalized for regulatory purposes if it has a total risk-based capital of 10 percent or greater; has Tier 1 risk-based capital of 6 percent or greater; has a leverage ratio of 5 percent or greater; and is not subject to any written agreement, order, capital directive or prompt corrective action directive.

The Federal Deposit Insurance Corporation Improvements Act of 1991 (“FDICIA”) requires the federal banking regulators, including the FDIC, to take prompt corrective action with respect to depository institutions that fall below certain capital standards and prohibits any depository institution from making any capital distribution that would cause it to be undercapitalized. Institutions that are not adequately capitalized may be subject to a variety of supervisory actions, including, but not limited to, restrictions on growth, investment activities, capital distributions and affiliate transactions, and will be required to submit a capital restoration plan which, to be accepted by the regulators, must be guaranteed in part by any company having control of the institution (such as the Company). In other respects, the FDICIA provides for enhanced supervisory authority, including greater authority for the appointment of a conservator or receiver for undercapitalized institutions. The capital-based prompt corrective action provisions of the FDICIA and their implementing regulations apply to FDIC-insured depository institutions. However, federal banking agencies have indicated that, in regulating bank holding companies, the agencies may take appropriate action at the holding company level based on their assessment of the effectiveness of supervisory actions imposed upon subsidiary-insured depository institutions pursuant to the prompt corrective action provisions of the FDICIA.

Interstate Banking and Branching Legislation

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking Act”), bank holding companies that are adequately capitalized and managed are allowed to acquire banks across state lines subject to certain limitations. States may prohibit interstate acquisitions of banks that have not been in existence for at least five years. The Federal Reserve is prohibited from approving an application for acquisition if the applicant controls more than 10 percent of the total amount of deposits of insured depository institutions nationwide. In addition, interstate acquisitions may also be subject to statewide concentration limits.

Furthermore, under the Interstate Banking Act, banks are permitted, under some circumstances, to merge with one another across state lines and thereby create a main bank with branches in separate states. Approval of interstate bank mergers is subject to certain conditions, including: adequate capitalization, adequate management, CRA compliance, deposit concentration limits, compliance with federal and state antitrust laws and compliance with applicable state consumer protection laws. After establishing branches in a state through an interstate merger transaction, a bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger could have established or acquired branches under applicable federal and state law.

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branches in a state through an interstate merger transaction, a bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger could have established or acquired branches under applicable federal and state law.

Dividends

Bank holding companies operating under the Federal Reserve’s Small Bank Holding Company Policy Statement may not pay dividends to their stockholders unless (i) the bank holding company’s debt-to-equity ratio is at or below 1.0:1, (ii) the dividends are reasonable in amount, (iii) the dividends do not adversely affect the ability of the bank holding company to service its debt in an orderly manner, (iv) the dividends do not adversely affect the ability of the holding company’s subsidiary banks to be well capitalized, (v) the bank holding company is considered to be “well managed” by the Federal Reserve, and (vi) during a specified time period, there have been no supervisory actions taken or pending against the bank holding company or any subsidiary bank.

In addition, Federal Reserve policy provides that, as a general matter, a bank holding company should eliminate, defer or severely limit the payment of dividends if (i) the bank holding company’s net income over the prior four quarters is not sufficient to fully fund the dividends, (ii) the bank holding company’s prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition, and (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve may find that the bank holding company is operating in an unsafe and unsound manner if the bank holding company does not comply with the Federal Reserve dividend policy, and may use its enforcement powers to limit or prohibit the payment of dividends by bank holding companies. Covenant Bancshares, Inc. was notified by the Federal Reserve on August 21, 2012 that it is not permitted to declare or pay dividends without the prior written consent of the Federal Reserve.

Banking regulations restrict the amount of dividends that a bank may pay to its shareholders. Under the Illinois Banking Act, an Illinois-chartered bank may not pay dividends of an amount greater than its current net profits after deducting losses and bad debt. The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. Notwithstanding compliance with applicable capital requirements and the availability of funds for dividends, however, the applicable banking regulators may prohibit the payment of any dividends if it is determined that such payment would constitute an unsafe or unsound practice.

As of the effective date of the Order, the Bank is not permitted to declare or pay any dividend without the prior written consent of the FDIC and the IDFPR. Without first achieving and then showing the capacity to maintain the capital ratios required under the Order, we believe that it is unlikely that the Bank be able to obtain the consent of the FDIC and the IDFPR to pay a dividend.

Stock Repurchases

The Federal Reserve requires a bank holding company to give prior written notice to the Federal Reserve before repurchasing its equity securities if the gross consideration for the purchase or redemption, when aggregated with the net consideration paid for all such purchases or redemptions during the preceding 12-month period is equal to 10 percent or more of the bank holding company’s consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order, or any condition imposed by written agreement with the Federal Reserve. This prior notice requirement does not apply to any bank holding company that meets certain well-capitalized and well-managed standards and is not subject to any unresolved supervisory issues.

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Deposit Insurance

As an FDIC-insured institution, the Bank is required to pay deposit insurance premiums based on the risk it poses to the Deposit Insurance Fund (“DIF”). The FDIC has authority to raise or lower assessment rates on insured deposits in order to achieve required revenue ratios in the insurance fund and to impose special additional assessments. To determine an institution’s assessment rate, each insured bank is placed into one of four risk categories using a two-step process based on capital and supervisory information. First, each insured bank is assigned to one of the following three capital groups: “well capitalized,” “adequately capitalized” or “undercapitalized.” Each institution is then assigned one of three supervisory ratings: “A” (institutions with minor weaknesses), “B” (institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration of the institution) or “C” (institutions that pose a substantial probability of loss to the Deposit Insurance Fund unless effective corrective action is taken). Banks classified as strongest by the FDIC are subject to the lowest insurance assessment rate; banks classified as weakest by the FDIC are subject to the highest insurance assessment rate. In addition to its insurance assessment, each insured bank is subject to quarterly debt service assessments in connection with bonds issued by a government corporation that financed the federal savings and loan bailout. Deposit insurance may be terminated by the FDIC upon a finding that an institution has engaged in an unsafe or unsound practice, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance of the Bank.

In October 2008, the FDIC published a restoration plan to reestablish the DIF to the statutory required minimum percentage of deposits, and has amended the restoration plan from time to time thereafter. As part of the restoration plan, the FDIC increased risk-based assessment rates and may continue to do so. In November 2009, the FDIC approved a final rule that required insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid assessments were recorded as a prepaid expense against which future quarterly assessments will be applied.

During 2009, the Bank paid deposit insurance premiums in the aggregate amount of $829,000, which included $760,000 in deposit insurance prepayments through 2012 and special assessments in the amount of $31,000, which were applicable to all insured institutions.

Transactions with Affiliates

Federal and state statutes place certain restrictions and limitations on transactions between banks and their affiliates, which include holding companies. Among other provisions, these laws place restrictions upon: (i) extensions of credit to affiliates; (ii) the purchase of assets from affiliates; (iii) the issuance of guarantees, acceptances or letters of credit on behalf of affiliates; and (iv) investments in stock or other securities issued by affiliates or the acceptance thereof as collateral for an extension of credit.

Standards for Safety and Soundness

The Federal Deposit Insurance Act (“FDIA”), as amended by the FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994, requires the FDIC, together with the other federal bank regulatory agencies, to prescribe standards of safety and soundness, by regulations or guidelines, relating generally to operations and management, asset growth, asset quality, earnings, stock valuation, and compensation. The FDIC and the other federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards pursuant to the FDIA, as amended. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the federal bank regulatory agencies adopted regulations that authorize, but do not require, the agencies to order an institution that has been given notice that it is not satisfying the safety and soundness guidelines to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the FDICIA. If an institution fails to comply with such an order, the agency may seek to enforce its order in judicial proceedings and to impose civil money penalties. The federal bank regulatory agencies have also adopted guidelines for asset quality and earnings standards.

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systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the federal bank regulatory agencies adopted regulations that authorize, but do not require, the agencies to order an institution that has been given notice that it is not satisfying the safety and soundness guidelines to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the FDICIA. If an institution fails to comply with such an order, the agency may seek to enforce its order in judicial proceedings and to impose civil money penalties. The federal bank regulatory agencies have also adopted guidelines for asset quality and earnings standards.

Community Reinvestment

Under the Community Reinvestment Act (“CRA”), a financial institution has a continuing and affirmative obligation, consistent with the safe and sound operation of such institution, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires each federal banking agency, in connection with its examination of a financial institution, to assess and assign one of four ratings to the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the institution, including applications for charters, branches and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and savings and loan holding company acquisitions. The CRA also requires that all institutions make public disclosure of their CRA ratings.

Regulatory Approvals and Enforcement Actions

Federal and state laws require banks to seek approval by the appropriate federal or state banking agency (or agencies) for any merger and/or consolidation by or with another depository institution, as well as for the establishment or relocation of any bank or branch office and, in some cases to engage in new activities or form subsidiaries.

Federal and state statutes and regulations provide financial institution regulatory agencies with great flexibility to undertake enforcement actions against an institution that fails to comply with regulatory requirements, particularly capital requirements. Possible enforcement actions include the imposition of a capital plan and capital directive, receivership, conservatorship or the termination of deposit insurance.

Monetary Policy

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

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to continue in the future. The general effect, if any, of such policies on future business and earnings of the Company and the Bank cannot be predicted.

Anti-Money Laundering and the Bank Secrecy Act

Under the Bank Secrecy Act (“BSA”), a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transactions. Financial institutions are generally required to report to the United States Treasury cash transactions involving more than $10,000. In addition, financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and that the financial institution knows, suspects, or has reason to suspect involve illegal funds, are designed to evade the requirements of the BSA, or have no lawful purpose. The USA PATRIOT Act of 2001 (the “PATRIOT Act”), which amended the BSA, contains anti-money laundering and financial-transparency laws, as well as enhanced information collection tools and enforcement mechanisms for the U.S. government. PATRIOT Act provisions include the following: standards for verifying customer identification when opening accounts; rules to promote cooperation among financial institutions, regulators and law enforcement agencies; and due diligence requirements for financial institutions that administer, maintain or manage certain bank accounts. The Bank is subject to BSA and PATRIOT Act requirements. Bank regulators carefully review an institution’s compliance with these requirements when examining an institution and consider the institution’s compliance when evaluating an application submitted by an institution. Bank regulators may require an institution to take various actions to ensure that it is meeting the requirements of these acts.

Brokered Deposits

Well-capitalized institutions are not subject to limitations on brokered deposits. An adequately capitalized institution is able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and is subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are not permitted to accept, renew or roll over brokered deposits. Under the current ~~Order~~regulatory requirements, the Bank may not accept or renew brokered deposits without the prior written consent of the FDIC and the IDFPR.

Acquisition and Ownership of Common Stock May Be Restricted by Bank Regulators

Any person or group that purchases 10 percent or more of the Company’s common stock, or hereafter acquires additional securities such that its interest in the Company exceeds 10 percent, may be required to obtain approval of the Federal Reserve pursuant to the Change in Bank Control Act and the FDIA as well as the approval of the IDFPR. Further, any corporation, partnership, trust or organized group that acquires a controlling interest in the Company may have to obtain approval of the Federal Reserve to become a bank holding company and thereafter be subject to regulation as such.

Consumer Laws

In addition to the CRA, other federal and state laws regulate various lending and consumer aspects of the banking business. These laws include the Equal Credit Opportunity Act, the Fair Housing Act, Truth in Lending Act, the Truth in Savings Act, the Real Estate Settlement Procedures Act and the Electronic Funds Transfer Act.

2008 Emergency Economic Stabilization Act

On October 3, 2008, the U.S. Congress enacted the Emergency Economic Stabilization Act (“EESA”) in response to the financial turmoil in the banking industry. EESA authorized the Secretary of the U.S. Department of the Treasury to purchase up to $700 billion in troubled assets from qualifying financial institutions pursuant to the Troubled Asset Relief Program (“TARP”). On October 14, 2008, the

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U.S. Department of the Treasury (“US Treasury”), pursuant to its authority under EESA, announced the Capital Purchase Program (“CPP”). Pursuant to the CPP, qualifying small bank financial institutions, with assets totaling less than $500 million, were permitted to issue senior preferred stock to the US Treasury in an amount not less than 1 percent of the institution’s risk-weighted assets and not more than 5 percent of the institution’s risk-weighted assets. Financial institutions participating in the CPP must agree and comply with certain restrictions, including restrictions on dividends, stock redemptions, stock repurchases and executive compensation. Pursuant to the CPP, the US Treasury may unilaterally amend any provision of the CPP to comply with changes in applicable federal statutes. Neither the Company nor the Bank is participating in the CPP.

FDIC Temporary Liquidity Guarantee Program

In October 2008, the FDIC announced the Temporary Liquidity Guarantee Program (“TLGP”) to strengthen confidence and encourage liquidity in the banking system. The program consists of two components: the Transaction Account Guarantee Program (“TAGP”) and the Debt Guarantee Program (“DGP”).

Transaction Account Guarantee Program. Pursuant to the TAGP, the FDIC will fully insure, without limit, qualifying transaction accounts held at qualifying depository institutions through December 31, 2010 (extended from December 31, 2009 provided the institution did not previously opt out of the TAGP). Qualifying transaction accounts include non-interest-bearing transaction accounts, Interest on Lawyers Trust Accounts (IOLTAs) and NOW accounts with interest rates less than 0.5 ~~percent~~%. The FDIC assessed a fee equal to 10 basis points on transaction account deposit balances in excess of the $250,000 insured limit. During the six-month extension period in 2010, the fee assessment increased to 15 basis points, 20 basis points or 25 basis points, based on an institution’s risk category. On April 13, 2010, the board of directors of the FDIC approved an interim rule that ~~would~~extended ~~extend~~ the TAGP until December 31, 2010, with ~~further~~additionally extensions ~~until~~through December 31, ~~2011~~2012, ~~possible~~altering ~~without~~the ~~further~~reporting ~~rulemaking. The~~requirements ~~interim~~under ~~rule,~~TAGP ifand ~~approved,~~requirements ~~would~~for ~~also alter~~ the ~~reporting~~inclusion ~~requirements~~of ~~required~~NOW ~~under~~accounts in the TAGP. On ~~and~~December ~~alter~~13, 2012, the ~~requirements~~U.S. ~~for~~Senate ~~the~~failed ~~inclusion~~to ofadvance ~~NOW~~a ~~accounts~~procedural inmotion on an additional two-year extension of the TAGP Program, and it expired on December 31, 2012.

Debt Guarantee Program. Pursuant to the DGP, eligible entities were permitted to issue FDIC-guaranteed senior unsecured debt up to 125 percent of the entity’s senior unsecured debt outstanding as of September 30, 2008. The Company did not issue any guaranteed debt under the DGP.

Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010. This legislation may have an adverse impact on the Company’s financial results upon full implementation. Among other impacts, this legislation establishes a Consumer Financial Protection Bureau, changes the base for deposit insurance assessments, introduces regulatory rate-setting for interchange fees charged to merchants for debit card transactions, and excludes certain instruments currently included in determining the Tier 1 regulatory capital ratio. The capital instrument exclusion will be phased in over a three-year period beginning in 2013. Most of the legislation’s other provisions require rulemaking by various regulatory agencies. The Company cannot currently quantify the future impact of this legislation and the related future rulemaking on its business, financial condition or results of operations.

Future Regulatory Uncertainty

Because federal regulation of financial institutions changes regularly and is the subject of constant legislative debate regarding issues such as the evolving structure of financial institutions and the evolving competitive relationship among financial institutions and other, similar service providers such as securities firms and insurance companies, we cannot predict how federal regulation of financial institutions may change in the future. Due to the recent financial and real estate market turmoil, the US Government has implemented numerous programs designed to stabilize the financial markets and economy. Although we cannot predict what new policies or programs will impact the Company or the Bank, we fully expect that the financial institution industry will remain heavily regulated and that additional laws or regulations will likely be adopted that will impact the operations of the Company and the Bank.

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securities firms and insurance companies, we cannot predict how federal regulation of financial institutions may change in the future. Due to the recent financial and real estate market turmoil, the US Government has implemented numerous programs designed to stabilize the financial markets and economy. Although we cannot predict what new policies or programs will impact the Company or the Bank, we fully expect that the financial institution industry will remain heavily regulated and that additional laws or regulations will likely be adopted that will impact the operations of the Company and the Bank.

Concentrations in Commercial Real Estate Lending

In December 2006, the OCC, together with the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (the “Agencies”), issued guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (the “Guidance”). The Guidance indicates it is intended to “reinforce and enhance the Agencies’ existing regulations and guidelines for real estate lending” and, to “remind institutions that strong risk management practices and appropriate levels of capital are important elements of a sound Commercial Real Estate (“CRE”) lending program, particularly when an institution has a concentration in CRE loans.” Importantly, the Guidance states that it, “...does not establish specific CRE lending limits; rather, it promotes sound risk management practices and appropriate levels of capital that will enable institutions to continue to pursue CRE lending in a safe and sound manner.”

While the ~~Guidance~~guidance states that it, “...does not define a CRE concentration,” it does outline ‘supervisory monitoring criteria’ that, “...the Agencies will use as high-level indicators to identify institutions potentially exposed to CRE concentration risk.” Those criteria are: “(1) Total loans for construction, land development, and other land representing 100 percent or more of the institution’s total capital, or (2) Total commercial real estate loans representing 300% or more of the institution’s total capital, and the outstanding balance of the institution’s commercial real estate portfolio increasing by 50% or more during the prior 36 months.”

As of December 31, ~~2010~~2011, the Bank had balances outstanding for construction, land development, and other land-secured loans totaling $~~1.8 million~~160,000 ~~which~~representing ~~represented 50~~9.1% of the Bank’s total capital. ~~The~~As ~~Bank’s~~of ~~capital~~December is31, ~~essentially~~2010, ~~equal~~balances tooutstanding ~~its~~for ~~shareholder~~construction, ~~equity~~land ~~plus~~development, ~~loan~~and ~~loss~~other ~~reserves~~land-secured loans totaled $1.8 million, which represented 50% of the Bank’s total capital. ~~Also~~Additionally, as of December 31, ~~2010~~2011, the Bank had outstanding commercial real estate ~~loan balances~~loans, including multifamily housing loans totaling $20.2 million, ~~outstanding~~1170% ~~totaling~~of the Bank’s total capital, compared to $26.1 million, ~~which represented 502~~740% of the Bank’s total capital as of December 31, 2010. As a result, the Bank’s commercial real estate loan ratio was significantly greater than the regulatory criteria as of December 31, 2011 and 2010.

The Order issued by the FDIC and IDFPR includes a requirement that the Bank “adopt, implement and thereafter ensure Bank adherence to” a revised written commercial real estate (“CRE”) concentration management program (the “Program”) designed to manage the risk in the Bank’s CRE portfolio in accordance with regulatory guidelines. While Covenant intends to comply with the FDIC and IDFPR’s request, we will not be able to change the Bank’s commercial real estate concentration until such time as we originate new loans outside of the commercial real estate sector.31

The regulatory directives issued by the FDIC and IDFPR include a requirement that the Bank “adopt, implement and thereafter ensure Bank adherence to” a revised written commercial real estate (“CRE”) concentration management program (the “Program”) designed to manage the risk in the Bank’s CRE portfolio in accordance with regulatory guidelines. While Covenant intends to comply with the FDIC and IDFPR’s request, the Bank will not be able to change its commercial real estate loan concentration significantly until such time as the Bank’s capital level is increased, the Bank originates new loans outside of the commercial real estate sector, and until it experiences repayment on the existing balances in this concentration.

Item 1A. Risk Factors.

There is uncertainty about our ability to continue operations. In order to successfully operate, we need to stem our loan losses and raise capital in an amount sufficient for us to achieve profitability. Our existing capital may not be sufficient to absorb our future losses. To the extent the Bank’s loan losses and operating losses exceed its capital, the Bank could be found insolvent. Any such event could be expected to result in a loss of all or a substantial portion of the value of the Company’s outstanding securities, including its common stock.

26Our existing capital may not be sufficient to absorb our future losses. In order to successfully operate, we need to stem our loan losses and raise capital immediately in an amount sufficient for us to achieve an “adequately capitalized” level. As of September 30, 2012, the Bank’s Tier 1 leverage capital ratio was 1.06% and the total risk-based capital ratio was 2.95%. Subsequently, the FDIC had notified the Bank that it was “critically undercapitalized.” On November 2, 2012 and November 5, 2012, the Company injected capital in the amounts of $750,000 and $25,000, respectively, into the Bank. With the capital infusions, as of November 5, 2012, the Bank’s Tier 1 leverage capital ratio was 2.05% and the total risk-based capital ratio was 4.52%. With this capital infusion, on November 6, 2012, the Bank was notified by the FDIC that it moved from “critically undercapitalized” to “significantly undercapitalized.”

~~Table~~In addition, the Bank was issued a Supervisory Prompt Corrective Action Directive (“PCA”) by the FDIC. The PCA provides that the Bank, in conjunction with the Company, must increase its capital to a level sufficient to restore the Bank to at least an “adequately capitalized” level as defined in the FDIC regulations or accept an offer to be acquired by a depository institution holding company or to combine with another insured depository institution. If the Bank is unable to satisfy the requirements of ~~Contents~~the PCA, then the FDIC has authority to take additional regulatory action against the Bank.

~~Our Board of Directors is pursuing strategic alternatives~~Moreover, ~~including~~to athe ~~capital~~extent ~~infusion. While~~ the ~~Company~~Bank’s ~~continues~~loan tolosses ~~pursue~~and ~~new~~operating ~~capital,~~losses itexceed ~~has~~its ~~not received any commitment for a new~~ capital ~~investment~~, ~~and~~the ~~there~~Bank ~~can~~could be nofound ~~assurance~~insolvent. Any ~~that~~such ~~the~~event ~~Company~~could ~~will~~ be ~~able~~expected to ~~raise~~result ~~a sufficient amount of new capital~~ in a ~~timely~~loss ~~manner,~~of onall ~~acceptable terms~~ or ~~at all. If the Company ultimately is unsuccessful in raising~~ a ~~sufficient~~substantial ~~amount~~portion of ~~new capital or, alternatively, executing another strategic initiative,~~ the ~~Bank~~value ~~could~~of ~~be placed into FDIC receivership by its regulators, or~~ the ~~Bank could be acquired by a third party in a transaction in which the~~ Company’s ~~receives~~outstanding nosecurities, ~~value~~including ~~for~~ its interest in the Bank. We expect that any third party 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 we are unable to return to profitability and if we are unable to identify and execute a viable strategic alternative, we may be unable to continue as a going concern.~~

~~The~~Our ~~Bank~~Board ~~has been experiencing performance issues that may be irreversible. The Company has incurred cumulative losses since it acquired its sole subsidiary, the Community Bank~~ of ~~Lawndale,~~Directors ~~now~~is ~~known~~pursuing asstrategic ~~Covenant Bank~~alternatives, onincluding ~~March~~a ~~12,~~capital ~~2008 and expects to incur losses in the future~~infusion. ~~Since~~While ~~March 12, 2008,~~ the Company ~~has~~continues ~~incurred~~to ~~losses~~pursue ofnew ~~approximately $6.2 million through March 31~~capital, ~~2012. The~~it ~~Bank~~ has ~~incurred~~not ~~net~~received ~~losses~~any incommitment ~~each of the last ten calendar years. There are multiple reasons~~ for ~~these~~a ~~losses,~~new ~~which~~capital ~~include losses on loans~~investment, ~~goodwill impairment,~~ and ~~high~~there ~~operating~~can ~~expenses. The~~be ~~correction~~no ofassurance ~~these~~that ~~problems is a difficult task. Although~~ the Company ~~has~~will ~~established~~be aable ~~new~~to ~~management~~raise ~~team, developed~~ a ~~“turnaround”~~sufficient ~~plan~~amount ~~and~~of ~~implemented a~~ new ~~business~~capital ~~strategy~~in ~~and~~a ~~risk~~timely ~~management process~~manner, ~~there~~on isacceptable noterms ~~assurance that the Company~~ or ~~the~~at ~~Bank will ever be able to operate profitably~~all.

~~The~~If ~~Bank~~the ~~may~~Company beultimately ~~placed~~is ~~into~~unsuccessful ~~receivership~~in ifraising ita ~~cannot~~sufficient ~~comply~~amount ~~with~~of ~~the~~new ~~FDIC~~capital ~~and~~or, ~~IDFPR Order~~alternatively, orexecuting ifanother ~~its~~strategic ~~condition continues to deteriorate. As noted above~~initiative, the ~~FDIC and IDFPR Order requires the~~ Bank tocould ~~create~~be ~~and~~placed ~~implement~~into aFDIC ~~capital~~receivership ~~plan,~~by ~~including~~its ~~provisions for contingency funding arrangements. Pursuant to the Order~~regulators, ~~among~~or ~~other things,~~ the Bank ~~has~~could ~~agreed~~be toacquired ~~achieve~~by ~~and maintain~~ a ~~Tier~~third 1party ~~capital~~in ~~to total assets ratio of at least 9% and~~ a ~~total~~transaction ~~risk-based~~in ~~capital~~which ~~ratio~~the ofCompany atreceives ~~least~~no ~~13%. As~~value offor ~~December~~its ~~31,~~interest ~~2011,~~in the Bank~~’s Tier 1 capital to total assets ratio was 4~~.~~43%~~ We asexpect ~~compared~~that toany ~~4.81%~~third asparty ~~of December 31~~transaction, ~~2010,~~which ~~and~~would ~~the~~likely ~~total~~involve ~~risk-based~~equity ~~capital ratio was 8.32% as of December 31~~financing, ~~2011~~would asresult ~~compared~~in tosubstantial ~~9.37%~~dilution ~~as of December 31, 2010. As of December 31, 2011, these ratios were below the targets set by the Consent Order. In addition, the condition of the Bank’s loan portfolio may continue~~ to ~~deteriorate~~our ~~in the~~ current ~~economic~~stockholders ~~environment~~ and ~~thus~~could ~~continue~~adversely toaffect ~~deplete~~ the ~~Bank’s~~price ~~capital~~of ~~and~~our ~~other~~common ~~financial resources~~stock. ~~Should~~If ~~the~~we ~~Bank~~are ~~fail~~unable to ~~comply~~return ~~with~~to ~~the~~profitability ~~Order’s capital~~ and ~~liquidity~~if ~~funding~~we ~~requirements,~~are orunable ~~suffer a continued deterioration in its financial condition, the Bank may be subject~~ to ~~being~~identify ~~placed into receivership by the FDIC~~ and~~/or~~ ~~IDFPR,~~execute ~~with the FDIC appointed as receiver. If these events occur, the Company probably would suffer~~ a ~~complete~~viable ~~loss~~strategic ~~of the value of our ownership interest in the Bank~~alternative, ~~and~~ we ~~subsequently~~ may be ~~exposed~~unable to ~~significant~~continue ~~claims~~as ~~by the FDIC and the IDFPR. Any such event could be expected to result in~~ a ~~loss~~going ~~of all or a substantial portion of the value of the Company’s outstanding securities~~concern.

The Order imposes significant restrictions on our operations, and the cost of compliance, as well as any possible failure to comply, could have a material adverse effect on our business, financial condition and results of operations. The Order contains a list of strict requirements, including 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) and an obligation to develop a liquidity risk management and contingency funding plan. The Order also includes several requirements related to loan administration as well as procedures for managing the Bank’s growing portfolio of foreclosed real estate assets.32

27The Bank has been experiencing performance issues that may be irreversible.

~~Table~~The Company has incurred cumulative losses since it acquired its sole subsidiary, the Community Bank of ~~Contents~~Lawndale, now known as Covenant Bank, on March 12, 2008 and expects to incur losses in the future. Since March 12, 2008, the Company has incurred losses of approximately $8.3 million through September 30, 2012. As of December 31, 2011, the Bank has incurred net losses in each of the last eleven calendar years. There are multiple reasons for these losses, which include losses on loans, goodwill impairment, and high operating expenses. The correction of these problems is a difficult task. Although the Company has established a new management team, developed a “turnaround” plan and implemented a new business strategy and risk management process, there is no assurance that the Company or the Bank will ever be able to operate profitably.

~~Any~~The ~~material~~Bank ~~failure~~may tobe ~~comply~~placed ~~with~~into ~~the~~receivership ~~provisions~~if ofit ~~the~~cannot ~~Order~~comply ~~could~~with ~~result in further enforcement actions by~~ the FDIC and~~/or~~ IDFPR~~. While~~ weConsent ~~are~~Order, ~~attempting~~satisfy ~~to take such actions as may be necessary to comply with~~ the requirements of the ~~Order,~~PCA weissued ~~may~~by bethe ~~unable to comply fully with its provisions~~FDIC, or ~~our~~if ~~efforts~~it’s ~~to comply with the Order may have adverse effects on our operations and~~ financial condition~~. There~~ ~~can~~continues ~~be no assurance that the Company will be able~~ to ~~raise the amount of capital necessary to comply with the Order or to maintain the solvency of the Bank~~deteriorate.

~~Non-performing~~As ~~assets~~noted ~~take~~above, ~~significant~~the ~~time~~FDIC toand ~~resolve~~IDFPR ~~and~~Consent ~~adversely~~Order ~~affect~~requires the ~~Company’s~~Bank ~~results~~to ofcreate ~~operations~~ and ~~financial~~implement ~~condition~~a capital plan, and ~~could~~a ~~result~~liquidity inplan ~~further~~including ~~losses~~provisions infor ~~the~~contingency ~~future~~funding arrangements. AtPursuant ~~December 31,~~to ~~2010~~the ~~and~~Consent ~~2009~~Order, ~~our~~among ~~non-performing~~other ~~loans~~things, ~~(which~~the ~~consist~~Bank ofhas ~~non-accrual~~agreed ~~loans~~to ~~and~~achieve ~~loans past due 90 days or more~~ and ~~still-accruing~~maintain ~~loans)~~a ~~totaled~~Tier ~~$4.5 million and $~~1.9 ~~million,~~capital orto ~~8.2%~~total ~~and~~assets ~~3.4%~~ratio of ~~our~~at ~~loan~~least ~~portfolio,~~9% ~~respectively. At December 31, 2010~~ and ~~2009,~~a total ~~non~~risk-~~performing~~based ~~loans~~capital ~~plus~~ratio ~~other~~of ~~real~~at ~~estate~~least ~~owned were $4~~13%.~~8 million and $1.9 million, respectively.~~ As of ~~March~~ December 31, ~~2012~~2011, the ~~total~~Bank’s ~~non-performing~~Tier ~~loans~~1 ~~plus~~capital ~~other~~to ~~real~~total ~~estate~~assets ~~owned~~ratio was $73.~~5 million, or 13.2~~90% ofas ~~our~~compared ~~total~~to ~~loan portfolio~~8. ~~Non-performing~~09% ~~assets~~as ~~adversely~~of ~~affect~~December ~~net income in various ways. While the Company pays interest expense to fund non-performing assets~~31, ~~no interest income is recorded on non-performing loans or other real estate owned~~2010, ~~thereby adversely affecting income~~ and ~~returns~~the ontotal ~~assets~~risk-based ~~and~~capital ~~equity, while loan administration costs increase and the efficiency~~ ratio iswas ~~adversely affected~~5. ~~When~~20% ~~the~~as ~~Company~~of ~~takes~~December ~~collateral in foreclosures and similar proceedings~~31, it2011 isas ~~required to mark the collateral to its then-fair market value, which, when~~ compared to ~~the~~9.37% ~~value~~as of ~~the~~December ~~loan~~31, ~~may result in a loss~~2010. ~~These~~Furthermore, ~~non-performing~~as ~~loans~~of ~~and~~September ~~other~~30, ~~real~~2012, ~~estate owned also increase~~ the ~~Company~~Bank’s ~~risk~~Tier ~~profile~~1 ~~and~~leverage ~~increase~~capital ~~the~~ratio, ~~amount~~Tier of1 capital ~~that~~to ~~regulators~~total ~~believe~~assets isratio, ~~appropriate for us to achieve~~ and ~~maintain~~total ~~in light of such risks. The resolution of non~~risk-~~performing~~based ~~assets~~capital ~~requires~~ratio ~~significant~~was ~~time commitments from management~~1.06%, ~~which can be detrimental to the performance of their other responsibilities~~1. ~~There~~67% isand ~~no assurance that the Company will not experience further increases in non-performing loans in the future~~2.95%, ~~or that non-performing assets will not result in further losses to come~~respectively.

~~Commercial~~As ~~and~~of ~~residential~~December ~~real~~31, ~~estate~~2011 ~~markets~~and ~~continue~~September to30, ~~experience~~2012, ~~extraordinary~~these ~~challenges~~ratios ~~following~~were below the ~~downturn~~targets inset ~~recent~~by ~~years~~the Consent Order. ~~Because~~In addition, the condition of the ~~Company~~Bank’s ~~substantial~~loan ~~reliance~~portfolio onmay ~~real~~continue ~~estate~~to ~~lending,~~deteriorate ~~these~~in ~~challenges increase~~ the ~~risk~~current ~~that~~economic ~~the~~environment ~~Company’s~~and ~~loans~~thus ~~may~~continue ~~not~~to bedeplete ~~repaid. At~~the ~~December 31,~~Bank’s ~~2011~~capital and ~~2010,~~other ~~approximately~~financial 14resources.2 Should ~~percent~~the ~~and~~Bank ~~15.8~~fail ~~percent~~to ofcomply with the ~~Bank~~Order’s ~~loans~~capital ~~are~~and ~~commercial~~liquidity ~~real~~funding ~~estate loans~~requirements, ~~and~~or ~~97.2~~suffer ~~and~~a ~~98.3~~continued ~~percent~~deterioration ofin ~~total~~its ~~loans~~financial ~~are~~condition, ~~real~~the ~~estate~~Bank ~~loans,~~may ~~respectively. Economic~~be ~~factors~~subject ~~have~~to ~~caused~~being ~~and~~placed ~~may~~into ~~continue~~receivership toby ~~cause~~the ~~deterioration~~FDIC toand/or IDFPR, with the ~~value~~FDIC ofappointed ~~real~~as ~~estate~~receiver. If these events occur, the Company ~~uses~~probably towould ~~secure~~suffer ~~its~~a ~~loans. The~~complete ~~continued~~loss ~~weakness~~ of the ~~economy~~value ~~and~~of our ownership interest in the ~~deterioration~~Bank, ofand ~~our~~we ~~real~~subsequently ~~estate~~may ~~loan~~be ~~portfolio~~exposed ~~could~~to ~~result~~significant inclaims ~~additional~~by ~~increases~~the inFDIC and the ~~provision~~IDFPR. ~~for~~Any ~~loan~~such ~~losses,~~event ~~higher~~could ~~delinquencies~~be ~~and~~expected ~~additional~~to ~~charge-offs~~result in ~~future~~a ~~periods~~loss ~~that~~of ~~may~~all ~~materially~~of ~~affect~~the value of the Company’s ~~financial~~outstanding ~~condition and results of operations~~securities.

The Consent Order imposes significant restrictions on our operations, and the cost of compliance, as well as any possible failure to comply, could have a material adverse effect on our business, financial condition and results of operations.

The Consent Order contains a list of strict requirements, including that the Bank achieve and maintain minimum regulatory capital levels (in excess of the statutory minimums to be classified as well-capitalized) and an obligation to develop a liquidity risk management and contingency funding plan. The Consent Order also includes several requirements related to loan administration as well as procedures for managing the Bank’s growing portfolio of foreclosed real estate assets.

Any material failure to comply with the provisions of the Consent Order could result in further enforcement actions by the FDIC and/or IDFPR. While we are attempting to take such actions as may be necessary to comply with the requirements of the Consent Order, we may be unable to comply fully with its provisions, or our efforts to comply with the Consent Order may have adverse effects on our operations and financial condition. There can be no assurance that the Company will be able to raise the amount of capital necessary to comply with the Consent Order or to maintain the solvency of the Bank.

The Company’s current capital needs require the raising of additional capital immediately, which may not be available.

The Company is required by federal and state regulatory authorities to maintain adequate levels of capital to support operations. As previously disclosed, the Consent Order requires the Bank to achieve and maintain a Tier 1 leverage capital to total assets ratio of at least 9% and a total risk-based capital ratio of at least 13%. As of December 31, 2011, the Bank’s Tier 1 leverage capital to total assets ratio was 2.42% as compared to 4.81% as of December 31, 2010, and the total risk-based capital ratio was 5.20% as of December 31, 2011 as compared to 9.37% as of December 31, 2010. As of September 30, 2012, such ratios were 1.06% and 2.95%, respectively, below the requirements set by the Consent Order. Further, this level of capital means that the Bank is considered critically undercapitalized according to the capital adequacy guidelines adopted by the federal bank regulators, including the FDIC. As previously disclosed, the Bank was issued a PCA by the FDIC, providing that the Bank, in conjunction with the Company, increase its capital to a level sufficient to restore the Bank to at least an “adequately capitalized” level as defined in the FDIC regulations or accept an offer to be acquired by a depository institution holding company or to combine with another insured depository institution. If the Company raises capital through the issuance of additional shares of common stock or other securities, it will dilute the ownership interests of existing shareholders and may dilute the per-share book value of its common stock. If the Company chooses to raise capital through the issuance of a preferred class of stock, new investors may also have rights, preferences and privileges senior to the Company’s current shareholders which may adversely impact current shareholders.

The Company’s ability to raise additional capital depends on conditions in the capital markets at that time, which are outside the Company’s control, and on the Company’s current financial condition, its past financial performance and its perceived future performance. Accordingly, the Company cannot guarantee that it will have the ability to raise additional capital on terms acceptable to it, or at all.

Non-performing assets take significant time to resolve and adversely affect the Company’s results of operations and financial condition, and could result in further losses in the future.

At December 31, 2011 and 2010, our non-performing loans (which consist of non-accrual loans and loans past due 90 days or more and still-accruing loans) totaled $5.4 million and $4.5 million, or 12.0% and 8.2% of our loan portfolio, respectively. At December 31, 2011 and 2010, total non-performing loans plus other real estate owned were $6.5 million and $4.8 million, respectively. As of September 30, 2012, total non-performing loans plus other real estate owned was $7.4 million, or 18.4% of our total loan portfolio. Non-performing assets adversely affect net income in various ways. While the Company pays interest expense to fund non-performing assets, no interest income is recorded on non-performing loans or other real estate owned, thereby adversely affecting income and returns on assets and equity, while loan administration costs increase and the efficiency ratio is adversely affected. When the Company takes collateral in foreclosures and similar proceedings, it is required to mark the collateral to its then-fair market value, which, when compared to the value of the loan, may result in a loss. These non-performing loans and other real estate owned also increase the Company’s risk profile and increase the amount of capital that regulators believe is appropriate for us to achieve and maintain in light of such risks. The resolution of non-performing assets requires significant time commitments from management, which can be detrimental to the performance of their other responsibilities. There is no assurance that the Company will not experience further increases in non-performing loans in the future, or that non-performing assets will not result in further losses to come.

Commercial and residential real estate markets continue to experience extraordinary challenges following the downturn in recent years. Because of the Company’s substantial reliance on real estate lending, these challenges increase the risk that the Company’s loans may not be repaid.

At December 31, 2011 and 2010, approximately 14.1% and 15.8% of the Bank’s loans are commercial real estate loans, and 96.9% and 98.3% of total loans are real estate loans, respectively. Economic factors have caused and may continue to cause deterioration to the value of real estate the Company uses to secure its loans. The continued weakness of the economy and the deterioration of our real estate loan portfolio could result in additional increases in the provision for loan losses, higher delinquencies and additional charge-offs in future periods that may materially affect the Company’s financial condition and results of operations.

Although the Company makes various types of loans, including commercial, consumer, residential mortgage and construction loans, a significant percentage of the Company’s loans are commercial loans. Commercial lending is more risky than residential lending because loan balances are greater and the borrower’s ability to repay is dependent on the success of the borrower’s business.

Weak economic conditions could continue to have a material effect on the Company’s financial condition and results of operations. Sustained weakness in the real estate market, reduced business activity, high unemployment, instability in the financial markets, less available credit and lack of confidence in the financial sector, among other factors, have adversely affected the Company and the financial services industry in general over the last four years. Declines in the housing market over the past four years, with falling prices and increasing foreclosures and unemployment, have negatively impacted the credit performance of real estate-related loans and resulted in significant write-downs of asset values by financial institutions. These write-downs have caused many financial institutions to seek additional capital, to reduce or eliminate dividends, to merge with larger and stronger institutions and in some cases, to fail. Continuing economic deterioration that affects household and/or corporate incomes could also result in reduced demand for loan or fee-based products and services. An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net charge-offs, provision for loan losses, and valuation adjustments on loans held for sale, which would materially adversely affect the Company’s financial condition and results of operations.

28The Company’s financial condition and results of operations could be negatively affected if the Company fails to execute its “turnaround” plan.

~~Table~~The success of ~~Contents~~the “turnaround” plan depends on effectively executing management’s business strategy, which includes plans to obtain additional capital, continue to work to significantly decrease non-performing assets, grow core deposits, and reduce reliance on non-core funding. The Company’s ability to successfully execute its “turnaround” plan will depend on a variety of factors, including its ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, the competitive response from other financial institutions in the market and the Company’s ability to manage disposition of problem assets effectively. There can be no assurance that these opportunities will be available or that the Company will successfully execute the “turnaround” plan or business strategy. If the Company does not successfully execute the “turnaround” plan or business strategy, its business and prospects could be harmed. Executing the “turnaround” plan includes risks such as:

~~additional~~· ~~capital,~~failure to ~~reduce~~meet orexisting ~~eliminate~~regulatory dividends, to merge with larger and stronger institutions and in some cases, to fail. Continuing economic deterioration that affects household and/or corporate incomes could also result in reduced demand for loan or fee-based products and services. An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net charge-offs, provision for loan losses, and valuation adjustments on loans held for sale, which would materially adversely affect the Company’s financial condition and results of operations.requirements;

~~The~~· ~~Company’s~~failure ~~financial condition and results of operations could be negatively affected if the Company fails~~ to execute its “turnaround” plan. The Company has, since its acquisition of the Bank, embarked on a “turnaround” plan to cause the Company and the Bank to achieve profitability. The success of the “turnaround” plan depends on effectively executing management’s business strategy, which includes plans to continue to grow total assets, the level of deposits and the scale of operations. Achieving growth targets requires the Company, in part, to attract ~~customers~~additional ~~who~~capital ~~currently bank with other financial institutions in the Company’s markets, thereby increasing the Company’s share in these markets. The Company’s ability~~ to ~~successfully~~stabilize execute its “turnaround” plan will depend on a variety of factors, including its ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, the competitive response from other financial institutions in the market and the Company’s ability to manage growth effectively. There can be no assurance that these opportunities will be available or that the Company will successfully execute the “turnaround” plan or business strategy. If the Company does not successfully execute the “turnaround” plan or business strategy, its business and prospects could be harmed. Executing the “turnaround” plan includes risks such as:operations;

· failure to attract additional capital to support expansion;

· inability to achieve a level of growth that is translated into profitable operations;

failure to adequately address problem credits; and

failure to achieve economies of scale and anticipated cost savings.

Additional issuance of common stock may result in dilution to our existing stockholders. As of March 31, 2012, the Company had $675,425 of its senior convertible notes issued and outstanding, including $565,425 issued and outstanding to Dr. Winston, $340,425 of which will mature in 2012 and $335,000 will mature in 2013. As of March 31, 2012, the aggregate amount of the outstanding notes is convertible into 587,871 shares of the Company’s common stock at maturity based upon the book value of the Company’s stock at 1.5 times the dollar amount of the debt. The decision of whether to convert the senior convertible notes into common stock of the Company is at the option of the Company.35

AsAdditional ofissuance ~~March 31, 2012, the Company had 765,427 shares~~ of common stock ~~outstanding. The issuance of any such additional shares~~ may result in adilution ~~reduction~~to ~~of the book value or price of the then outstanding shares of~~ our ~~common~~existing ~~stock. If we do issue any such additional shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other~~ stockholders. ~~As a result of such dilution, your proportionate ownership interest and voting power will be decreased accordingly.~~

~~The~~As ~~Company~~of isSeptember ~~dependent~~30, ~~upon~~2012, the ~~management~~Company ~~team. The~~had ~~successful~~$675,425 ~~operation~~ of ~~the~~its ~~Company~~senior ~~will~~convertible benotes ~~greatly~~issued ~~influenced~~and byoutstanding, ~~its~~including ~~ability~~$565,425 toissued ~~retain~~and ~~the~~outstanding ~~services~~to ofDr. ~~existing~~Winston ~~senior~~the ~~management~~Company’s ~~and~~largest toshareholder, ~~attract~~$135,000 ~~and~~of ~~retain~~which ~~additional~~matured ~~qualified~~in ~~senior~~2012 and ~~middle~~$540,425 ~~management~~will mature in 2013. ~~The~~As ~~unexpected~~September ~~loss~~30, of2012, the ~~services~~aggregate amount of ~~any~~the ~~key~~outstanding ~~management~~notes ~~personnel~~is convertible into 587,871 orshares of the ~~inability~~Company’s tocommon ~~recruit~~stock ~~and~~at ~~retain~~maturity ~~qualified~~based ~~personnel~~upon inthe book value of the ~~future,~~Company’s ~~could~~stock ~~have~~at an1.5 ~~adverse~~times ~~effect~~the ondollar amount of the book value of the Company’s ~~business~~common ~~and~~stock ~~financial~~on ~~results~~the conversion date (at current book value; conversion not available). NoThe ~~key-man~~decision ~~life~~of ~~insurance~~whether ~~policy~~to isconvert ~~maintained~~the onsenior ~~any~~convertible notes into common stock of ~~our~~the ~~directors,~~Company ~~officers~~is orat ~~employees~~the option of the Company.

~~Unless~~As ~~economic~~of ~~conditions~~September ~~improve~~30, 2012, the Company ishad ~~expected~~770,346 toshares ~~continue~~of tocommon ~~suffer~~stock ~~from~~outstanding. Assuming ~~credit losses and~~ the Company’s ~~allowance~~could ~~for~~find ~~loan~~buyers ~~losses~~for ~~may~~its ~~not~~common bestock, ~~adequate~~one tomeans ~~cover~~of ~~actual~~addressing ~~losses. Credit risk is~~ the ~~risk~~Bank’s ~~that~~need ~~loan~~for ~~customers~~additional orcapital ~~other~~would ~~counter-parties will~~ be ~~unable~~ to ~~perform~~issue ~~their~~new ~~contractual~~shares ~~obligations~~and ~~resulting~~then incontribute athe ~~negative~~proceeds ~~impact~~from ~~on earnings. Like all financial institutions,~~ the ~~Company~~stock ~~maintains~~sale ~~an allowance for loan losses~~ to ~~provide~~the ~~for~~capital ~~loan~~of ~~defaults~~the ~~and non-performance~~bank. ~~The~~Accordingly, ~~allowance~~the ~~for~~issuance ~~loan~~of ~~losses~~any issuch ~~based~~additional onshares ~~historical~~may ~~loss~~result ~~experience~~in asa ~~well~~reduction ~~as an evaluation~~ of the ~~risks~~book ~~associated~~value ~~with~~or ~~the~~price ~~loan~~of ~~portfolio, including~~ the ~~size~~then ~~and~~outstanding ~~composition~~shares of ~~the~~our ~~portfolio,~~common ~~current economic conditions and geographic concentrations within the portfolio~~stock. If ~~the~~we ~~economy~~do inissue ~~the~~any ~~Company’s~~such ~~primary~~additional ~~geographic market area~~shares, ~~which~~such ~~primarily~~issuance ~~includes~~also ~~the~~will ~~west-side~~cause ~~Chicago~~a ~~neighborhood~~reduction ofin ~~North~~the ~~Lawndale,~~proportionate ~~should~~ownership ~~fail~~and tovoting ~~improve~~power orof ~~worsen,~~all ~~this~~other ~~may have an adverse impact on the loan portfolio~~stockholders. IfAs ~~for~~a ~~any~~result ~~reason the quality~~ of ~~the~~such ~~loan portfolio should weaken~~dilution, ~~the~~your ~~allowance~~proportionate ~~for~~ownership ~~loan~~interest ~~losses may not be adequate to cover actual loan losses,~~ and ~~future~~voting ~~provisions~~power ~~for~~will ~~loan~~be ~~losses~~decreased ~~could materially and adversely affect the Company’s financial results~~accordingly.

29The Company is dependent upon the management team.

~~Table~~ The successful operation of ~~Contents~~the Company will be greatly influenced by its ability to retain the services of existing senior management and to attract and retain additional qualified senior and middle management. The unexpected loss of the services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on the Company’s business and financial results. No key-man life insurance policy is maintained on any of our directors, officers or employees.

~~The~~Unless ~~Company~~economic ~~may~~conditions ~~continue~~improve, tothe ~~suffer increased losses in its loan portfolio and in foreclosed assets held for sale despite its underwriting practices. The~~ Company ~~seeks~~is expected to ~~mitigate~~continue ~~the risks inherent in its loan portfolio by adhering~~ to ~~specific~~suffer ~~underwriting~~from ~~practices. These practices often include: analysis of a borrower’s~~ credit ~~history,~~losses ~~financial statements, tax returns~~ and ~~cash flow projections; valuations of collateral based on reports of independent appraisers; and verification of liquid assets. Although~~ the Company’s ~~believes~~allowance ~~that its underwriting criteria are, and historically have been, appropriate~~ for ~~the~~loan ~~various kinds of loans it makes, the Company has already incurred higher-than-expected levels of~~ losses onmay ~~loans~~not ~~that~~be ~~have~~adequate ~~met these criteria, and the Company may continue~~ to ~~experience~~cover ~~higher-than-expected~~actual losses ~~depending on economic factors and consumer behavior~~.

NoCredit ~~active~~risk ~~trading~~is ~~market~~the ~~exists~~risk ~~for~~that loan customers or other counter-parties will be unable to perform their contractual obligations resulting in a negative impact on earnings. Like all financial institutions, the Company’s ~~common~~maintains ~~stock~~an allowance for loan losses to provide for loan defaults and non-performance. ~~There~~The allowance for loan losses is nobased ~~public~~on ~~market~~historical ~~for~~loss experience as well as an evaluation of the ~~Company’s~~risks ~~common~~associated ~~stock,~~with ~~nor~~the isloan ~~one~~portfolio, ~~likely~~including tothe ~~develop~~size orand ~~exist~~composition inof the ~~immediate~~portfolio, ~~future~~current economic conditions and geographic concentrations within the portfolio. ~~The~~If the economy in the Company’s ~~has~~primary nogeographic ~~present~~market ~~plan~~area, which primarily includes the west-side Chicago neighborhood of North Lawndale, should fail to ~~list~~improve or ~~qualify~~worsen, ~~its~~this ~~common~~may ~~stock~~have an adverse impact on ~~any~~the ~~securities~~loan ~~exchange~~portfolio. ~~Therefore,~~If ~~shares~~for any reason the quality of the ~~Company’s~~loan ~~common~~portfolio ~~stock~~should weaken, the allowance for loan losses may not be ~~readily~~adequate ~~marketable~~to incover ~~the~~actual ~~case~~loan oflosses, ~~financial~~and ~~emergency~~future orprovisions ~~otherwise~~for loan losses could materially and adversely affect the Company’s financial results.

Changes in the domestic interest rate environment could negatively affect the Company’s net interest income. Interest rate risk is the risk that changes in market rates and prices will adversely affect financial condition or results of operations. Net interest income is the Company’s largest source of revenue and is highly dependent on achieving a positive spread between the interest earned on loans and investments and the interest paid on deposits and borrowings. The Company’s net interest spread depends on many factors which are partly or entirely outside of its control, including competition, federal economic, monetary and fiscal policies, and economic conditions generally. The Federal Reserve regulates the supply of money and credit in the United States. Its policies determine in large part the cost of funds for lending and investing and the return earned on those loans and investments, both of which affect our net interest margin. Changes in interest rates affect the Company’s operating performance and financial condition in diverse ways. There are no assurances that the Company’s efforts to mitigate such risks will be successful.36

The Company ~~faces~~may ~~strong~~continue competition. The Company faces strong competition for deposits, loans and other financial services from numerous banks, thrifts, credit unions and other financial institutions, as well as other entities that provide financial services. The banking business is highly competitive. Some of the financial institutions and financial services organizations with which the Company competes are not subject to ~~the~~suffer ~~same~~increased ~~degree~~losses ~~of regulation as the Company. Most of these competitors have been~~ in ~~business~~its ~~for~~loan ~~many~~portfolio ~~years, have established customer bases, are substantially larger, have greater financial~~ and ~~personnel~~in ~~resources,~~foreclosed ~~have~~assets ~~substantially~~held higher lending limits than the Company and are able to offer certain services, including extensive branch networks, trust services and international banking services, that the Company either does not expect to provide or will not provide for ~~some~~sale ~~time,~~despite orits ~~can~~underwriting ~~offer only through correspondents, if at all~~practices. Moreover, most of these entities have greater capital resources than the Company has, which, among other things, may allow them to price their services at levels more favorable to the customer and to provide larger credit facilities than the Company.

The Company isseeks ~~significantly~~to ~~smaller~~mitigate ~~than~~the ~~most~~risks ofinherent in its ~~competitors. The~~loan ~~Company~~portfolio isby ~~one~~adhering ofto ~~the~~specific ~~smallest~~underwriting ~~financial~~practices. These ~~institutions~~practices inoften ~~the~~include: analysis ~~metropolitan~~of ~~Chicago~~a ~~area. As~~borrower’s ~~such~~credit history, ~~the~~financial ~~Company~~statements, ~~has~~tax areturns ~~smaller~~and ~~lending~~cash ~~limit~~flow ~~than~~projections; ~~other~~valuations ~~institutions~~of incollateral ~~the~~based ~~market~~on ~~area. As~~reports of ~~December 31,~~independent ~~2010,~~appraisers; ~~the~~and ~~Company’s~~verification ~~legal~~of ~~lending~~liquid ~~limit was approximately $1~~assets.~~1 million.~~ ~~The~~Although the Company’s ~~inability~~believes tothat ~~lend~~its ~~larger~~underwriting ~~sums~~criteria ofare, ~~money~~and ~~may~~historically ~~impact~~have ~~its~~been, ~~ability~~appropriate tofor ~~attract~~the ~~larger~~various ~~businesses. We~~kinds ~~intend~~of ~~to accommodate~~ loans init ~~excess~~makes, of the Company’s ~~lending~~has ~~limit~~already ~~through~~incurred ~~the~~higher-than-expected ~~sale~~levels of ~~participations~~losses inon ~~those~~ loans tothat ~~other~~have ~~banks. However,~~met ~~other~~these ~~banks~~criteria, ~~may~~and ~~not be willing to purchase loan participations from~~ the Company, ~~thereby~~may ~~limiting~~continue ~~our ability~~ to ~~service~~experience ~~customers~~higher-than-expected ~~whose~~losses ~~credit~~depending ~~needs~~on ~~exceed~~economic ~~the~~factors ~~lending~~and ~~limit~~consumer ~~of the Company~~behavior.

30No active trading market exists for the Company’s common stock.

~~Table~~There is no public market for the Company’s common stock, nor is one likely to develop or exist in the immediate future. The Company has no present plan to list or qualify its common stock on any securities exchange. Therefore, shares of ~~Contents~~the Company’s common stock may not be readily marketable in the case of financial emergency or otherwise.

~~Many~~Changes ~~of the Company’s competitors have substantially greater resources to invest~~ in technological improvements. The banking industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to providing for better customer service, the ~~effective~~domestic ~~use~~interest ofrate ~~technology~~environment ~~increases~~could ~~efficiency~~negatively ~~and~~affect ~~enables financial institutions to reduce costs. The Company’s success depends in part on its ability to address~~ the needs of its customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in its operations. Many of the Company’s ~~competitors~~net ~~have~~interest ~~substantially greater resources to invest in technological improvements~~income.

~~The~~ Interest ~~Company~~rate ~~may~~risk ~~have~~is tothe ~~pay~~risk ~~above-market~~that ~~interest~~changes ~~rates~~in ~~to attract depositors and charge below-~~market ~~interest~~ rates toand ~~attract~~prices ~~borrowers~~will ~~compared~~adversely toaffect ~~our~~financial ~~competitors~~condition inor ~~our~~results ~~primary~~of ~~service area~~operations. ~~Thus~~Net ~~far,~~interest income is the Company’s ~~has~~largest ~~been~~source ~~able~~of torevenue ~~pay~~and ~~market~~is ~~interest~~highly ~~rates~~dependent toon ~~attract~~achieving ~~depositors,~~a ~~and~~positive ~~has~~spread ~~been~~between ~~able~~the tointerest ~~charge~~earned ~~market~~on ~~interest~~loans ~~rates~~and toinvestments ~~attract~~and ~~borrowers~~the ininterest ~~its~~paid ~~primary~~on ~~service~~deposits ~~area~~and borrowings. ~~However,~~The ~~the~~Company’s ~~banking~~net ~~business~~interest isspread ~~highly~~depends ~~competitive,~~on ~~and~~many ~~profitability~~factors ~~depends~~which onare ~~the~~partly ~~ability~~or entirely outside of ~~the~~its ~~Company~~control, toincluding ~~attract~~competition, ~~depositors~~federal economic, monetary and ~~borrowers~~fiscal policies, and economic conditions generally. The ~~Company~~Federal ~~competes~~Reserve ~~with~~regulates ~~numerous~~the ~~other~~supply ~~lenders~~of money and ~~deposit-takers~~credit in the ~~area,~~United ~~including~~States. Its ~~other~~policies ~~commercial~~determine ~~banks,~~in ~~savings~~large ~~and~~part ~~loan~~the ~~associations~~cost ~~and~~of ~~credit~~funds ~~unions. Compared~~for tolending ~~competitors~~and ininvesting and the ~~primary~~return ~~service~~earned ~~area,~~on ~~the~~those ~~Company~~loans ~~may~~and ~~have~~investments, toboth ~~pay~~of ~~above-market~~which ~~interest~~affect ~~rates~~our tonet ~~attract~~interest ~~depositors~~margin. Changes ~~and~~in ~~charge~~interest ~~below~~rates ~~market~~affect ~~interest~~the ~~rates~~Company’s tooperating ~~attract~~performance ~~borrowers~~and financial condition in ~~the~~diverse ~~future,~~ways. There ~~which~~are ~~may~~no ~~have~~assurances athat ~~material~~the ~~effect~~Company’s onefforts ~~financial~~to ~~condition~~mitigate ~~and~~such ~~results~~risks ofwill ~~operations~~be successful.

The ~~creditworthiness of other financial institutions could adversely affect the~~ Company~~. The~~ ~~Company’s~~faces ~~ability~~strong ~~to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions~~competition. Financial institutions are interrelated as a result of lending, clearing, counterparty and other relationships. As a result, defaults by, or even rumors or questions about, one or more banks, or the banking industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by the Company or by other institutions. Many of the transactions engaged in by the Company in the ordinary course of business expose the Company to credit risk in the event of default of our counterparty or customer. In such instances, the collateral held by the Company may be insufficient to mitigate losses, as the Company may be unable to realize upon or liquidate at prices sufficient to recover the full amount of the Company’s exposure. Such losses could have a material and adverse effect on results of operations.

The Company isfaces ~~highly~~strong ~~regulated~~competition ~~and~~for ~~may~~deposits, beloans ~~adversely~~and ~~affected~~other byfinancial ~~changes~~services infrom ~~banking~~numerous ~~laws~~banks, ~~regulations~~thrifts, credit unions and ~~regulatory~~other ~~practices~~financial institutions, ~~including~~as ~~the~~well ~~extraordinary~~as ~~actions~~other ~~being~~entities ~~taken~~that byprovide ~~the~~financial Uservices.S. The ~~government~~banking inbusiness ~~response~~is tohighly competitive. Some of the ~~recent~~financial institutions and financial ~~crises. The~~services organizations with which the Company iscompetes are not subject to ~~extensive~~the ~~state~~same ~~and~~degree ~~federal~~of ~~legislation~~regulation as the Company. Most of these competitors have been in business for many years, ~~regulation~~have ~~and~~established ~~supervision~~customer bases, ~~including~~are ~~regulation~~substantially bylarger, ~~state~~have greater financial and ~~federal~~personnel ~~banking~~resources, ~~regulators. As~~have asubstantially ~~bank~~higher ~~holding~~lending ~~company,~~limits than the Company isand ~~also~~are ~~subject~~able to ~~regulation~~offer bycertain ~~the~~services, ~~IDFPR~~including extensive branch networks, trust services and ~~the~~international ~~Federal~~banking ~~Reserve. Changes~~services, inthat ~~legislation~~the ~~and~~Company ~~regulations~~either ~~may~~does ~~continue~~not expect to ~~have~~provide aor ~~significant~~will ~~impact~~not onprovide ~~the~~for ~~banking~~some ~~industry~~time, or can offer only through correspondents, if at all. ~~Although~~Moreover, ~~some~~most ~~legislative~~of ~~and~~these ~~regulatory~~entities ~~changes~~have ~~may~~greater ~~benefit~~capital resources than the Company has, ~~others~~which, among other things, may ~~increase~~allow ~~the~~them ~~costs~~to ofprice ~~doing~~their ~~business~~services ~~and~~at ~~assist~~levels ~~competitors~~more ~~which~~favorable ~~are~~to ~~not~~the ~~subject~~customer and to ~~similar~~provide ~~regulation~~larger credit facilities than the Company.

Changes in laws, regulations and regulatory practices affecting the financial services industry, and the effects of such changes, including the federal government’s response or lack of response to the ongoing financial crises affecting the banking system and financial markets, are difficult to predict and may have unintended consequences. New regulations or changes in the regulatory environment could subject the Company to additional costs, limit the types of financial services and products the Company may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. These changes also can adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans. Any failure on the Company’s part to comply with or adapt to37

31The Company is significantly smaller than most of its competitors.

~~Table~~The Company is one of ~~Contents~~the smallest financial institutions in the metropolitan Chicago area. As such, the Company has a smaller lending limit than other institutions in the market area. As of December 31, 2011 and 2010, the Company’s legal lending limit was approximately $560,000 and $1.1 million, respectively. The Company’s inability to lend larger sums of money may impact its ability to attract larger businesses. We intend to accommodate loans in excess of the Company’s lending limit through the sale of participations in those loans to other banks. However, other banks may not be willing to purchase loan participations from the Company, thereby limiting our ability to service customers whose credit needs exceed the lending limit of the Company.

~~changes~~Many inof the ~~regulatory~~Company’s ~~environment~~competitors ~~could~~ have asubstantially ~~material~~greater ~~adverse~~resources ~~effect~~to oninvest ~~its~~in ~~business,~~technological ~~financial condition and results of operations~~improvements.

~~Higher~~The ~~FDIC~~banking ~~deposit~~industry ~~insurance~~is ~~premiums~~undergoing ~~and~~rapid ~~assessments~~technological ~~could adversely affect the Company’s financial condition. FDIC insurance premiums increased substantially in 2010~~changes, ~~and~~with ~~the~~frequent ~~Company~~introductions ~~expects to pay significantly higher FDIC premiums in the future. Bank failures have significantly depleted the FDIC’s Deposit Insurance Fund and reduced the Deposit Insurance Fund’s ratio~~ of ~~reserves~~new ~~to insured deposits. The FDIC adopted a revised risk~~technology-~~based~~driven ~~deposit~~products ~~insurance~~and ~~assessment schedule on February 27, 2009, which raised deposit insurance premiums~~services. OnIn ~~May 22,~~addition ~~2009, the FDIC also implemented a special assessment equal~~ to ~~five~~providing ~~basis~~for ~~points~~better ofcustomer ~~each insured depository institution’s assets minus Tier 1 capital as of June 30~~service, ~~2009, but no more than 10 basis points times~~ the ~~institution’s~~effective ~~assessment~~use ~~base for the second quarter~~ of ~~2009,~~technology ~~which~~increases ~~was~~efficiency ~~paid~~and onenables ~~September 30,~~financial ~~2009. Additional~~institutions ~~special~~to ~~assessments~~reduce ~~may be imposed by the FDIC for future periods~~costs. The Company ~~participates in the FDIC~~’s ~~Temporary~~success ~~Liquidity~~depends ~~Guarantee Program (“TLGP”), for noninterest-bearing transaction deposit accounts. Banks that participate~~ in ~~the~~part ~~TLGP’s~~on ~~noninterest-bearing~~its ~~transaction~~ability ~~account~~to ~~guarantee~~address ~~will pay~~ the ~~FDIC~~needs ~~an annual assessment~~ of 10its ~~basis~~customers ~~points on the amounts in such accounts above the amounts covered~~ by ~~FDIC~~using ~~deposit~~technology ~~insurance. To the extent that these TLGP assessments are insufficient~~ to ~~cover~~provide ~~any~~products ~~loss~~and orservices ~~expenses~~that ~~arising~~will ~~from~~satisfy ~~the~~customer ~~TLGP,~~demands ~~the FDIC is authorized to impose an emergency special assessment on all FDIC-insured depository institutions. The FDIC has authority to impose charges~~ for ~~the TLGP upon depository institution holding companies~~convenience, as well~~. The~~ ~~TLGP~~as ~~was scheduled~~ to ~~end~~create onadditional ~~December 31,~~efficiencies 2009, but the FDIC extended it to June 30, 2010 at an increased charge of 15 to 25 basis points, depending on the depository institution’s risk assessment category rating assigned with respect to regular FDIC assessments if the institution elects to remain in ~~the~~its ~~TLGP~~operations. ~~These~~Many ~~changes~~of ~~have caused~~ the ~~premiums and TLGP assessments charged by the FDIC to increase. These actions significantly increased the~~ Company’s ~~noninterest~~competitors ~~expense~~have insubstantially ~~2010~~greater ~~and~~resources ~~are expected~~ to ~~increase~~invest ~~costs~~in ~~for~~technological ~~the foreseeable future~~improvements.

The ~~banking regulators’ supervisory framework could materially impact the conduct, growth and profitability of operations. The~~ Company’s ~~primary~~may ~~regulatory agencies~~ have ~~broad discretion~~ to ~~impose~~pay ~~restrictions~~above-market ~~and~~interest ~~limitations~~rates ~~on the Company’s operations if they determine, among other things, that operations are unsafe or unsound, fail~~ to ~~comply~~attract ~~with~~depositors ~~applicable law or are otherwise inconsistent with laws~~ and ~~regulations~~charge orbelow-market ~~with~~interest ~~the~~rates supervisory policies of these agencies. This supervisory framework could materially impact the conduct, growth and profitability of the Company’s operations. Any failure on the Company’s part to ~~comply~~attract ~~with~~borrowers ~~current~~compared laws, regulations, other regulatory requirements or safe and sound banking practices, or any concerns about the Company’s financial condition, or any related regulatory sanctions or adverse actions against it, could increase costs or restrict the Company’s ability to ~~operate~~our ~~the~~competitors ~~business and result~~ in ~~damage~~our toprimary ~~the~~service ~~Company’s reputation~~area.

Thus far, the Company has been able to pay market interest rates to attract depositors, and has been able to charge market interest rates to attract borrowers in its primary service area. However, the banking business is highly competitive, and profitability depends on the ability of the Company to attract depositors and borrowers. The Company competes with numerous other lenders and deposit-takers in the area, including other commercial banks, savings and loan associations and credit unions. Compared to competitors in the primary service area, the Company may have to pay above-market interest rates to attract depositors and charge below market interest rates to attract borrowers in the future, which may have a material effect on financial condition and results of operations. However, because of the Bank’s capital position, it is limited by the FDIC national rate cap as to how much interest it may offer depositors.

The creditworthiness of other financial institutions could adversely affect the Company.

The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial institutions are interrelated as a result of lending, clearing, counterparty and other relationships. As a result, defaults by, or even rumors or questions about, one or more banks, or the banking industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by the Company or by other institutions. Many of the transactions engaged in by the Company in the ordinary course of business expose the Company to credit risk in the event of default of our counterparty or customer. In such instances, the collateral held by the Company may be insufficient to mitigate losses, as the Company may be unable to realize upon or liquidate at prices sufficient to recover the full amount of the Company’s exposure. Such losses could have a material and adverse effect on results of operations.

The Company is highly regulated and may be adversely affected by changes in banking laws, regulations and regulatory practices, including the extraordinary actions being taken by the U.S. government in response to the recent financial crises.

The Company is subject to extensive state and federal legislation, regulation and supervision, including regulation by state and federal banking regulators. As a bank holding company, the Company is also subject to regulation by the IDFPR and the Federal Reserve. Changes in legislation and regulations may continue to have a significant impact on the banking industry. Although some legislative and regulatory changes may benefit the Company, others may increase the costs of doing business and assist competitors which are not subject to similar regulation.

Higher FDIC deposit insurance premiums and assessments could adversely affect the Company’s financial condition.

FDIC insurance premiums increased substantially in 2010, and the Company expects that it could be required to pay significantly higher FDIC premiums in the future. Bank failures have significantly depleted the FDIC’s Deposit Insurance Fund and reduced the Deposit Insurance Fund’s ratio of reserves to insured deposits. The FDIC adopted a revised risk-based deposit insurance assessment schedule on February 27, 2009, which raised deposit insurance premiums. On May 22, 2009, the FDIC also implemented a special assessment equal to five basis points of each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009, but no more than 10 basis points times the institution’s assessment base for the second quarter of 2009, which was paid on September 30, 2009. Additional special assessments may be imposed by the FDIC for future periods.

The banking regulators’ supervisory framework could materially impact the conduct, growth and profitability of operations.

The Company’s primary regulatory agencies have broad discretion to impose restrictions and limitations on the Company’s operations if they determine, among other things, that operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies. This supervisory framework could materially impact the conduct, growth and profitability of the Company’s operations. Any failure on the Company’s part to comply with current laws, regulations, other regulatory requirements or safe and sound banking practices, or any concerns about the Company’s financial condition, or any related regulatory sanctions or adverse actions against it, could increase costs or restrict the Company’s ability to operate the business and result in damage to the Company’s reputation.

The Company cannot predict the impact of recently enacted legislation, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and its implementing regulations, and actions by the FDIC.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010. This legislation may have an adverse impact on the Company’s financial results upon full implementation. Among other impacts, this legislation establishes a Consumer Financial Protection Bureau, changes the base for deposit insurance assessments, introduces regulatory rate-setting for interchange fees charged to merchants for debit card transactions, and excludes certain instruments currently included in determining the Tier 1 regulatory capital ratio. The capital instrument exclusion will be phased-in over a three-year period beginning in 2013. Most of the legislation’s other provisions require rulemaking by various regulatory agencies. The Company cannot currently quantify the future impact of this legislation and the related future rulemaking on the Company’s business, financial condition and results of operation.

Table of Contents

Similarly, programs established by the FDIC under the systemic-risk exception to the Federal Deposit Insurance Act may have an adverse effect on the Company, including the payment of additional deposit insurance premiums to the FDIC. Due to the recent depletion of the Deposit Insurance Fund, the FDIC has increased rates on deposit insurance premiums and has required banks to prepay deposit insurance premiums for three years. The FDIC may continue to increase deposit insurance premiums in the future, which may have a material effect on the Company’s financial condition and results of operations.

Continued tightening of credit markets and instability in financial markets could adversely affect the Company’s industry, business and results of operations. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases ceased, their provision of funding to borrowers including other financial institutions. This has resulted in less available credit, a lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity. A sustained period of such conditions could materially and adversely affect the Company’s business, financial condition and results of operations.

~~The~~Reflecting ~~Company’s~~concern ~~current~~about ~~capital needs require~~ the ~~raising~~stability of ~~additional~~the ~~capital,~~financial ~~which~~markets ~~may~~generally ~~not be available. The Company is required by federal~~ and ~~state~~the ~~regulatory~~strength ~~authorities to maintain adequate levels~~ of ~~capital to support operations. As previously disclosed~~counterparties, ~~the~~many ~~Order~~lenders ~~requires the Bank to achieve~~ and ~~maintain~~institutional ainvestors ~~Tier 1~~have ~~leverage~~reduced, ~~capital to total assets ratio of at least 9%~~ and ain ~~total~~some ~~risk-based~~cases ~~capital ratio of at least 13%. As of December 31~~ceased, ~~2011,~~their ~~the~~provision ~~Bank’s Tier 1 capital to total assets ratio was 4.43% as compared to 4.81% as~~ of ~~December~~funding ~~31, 2010, and the total risk-based capital ratio was 8.32% as of December 31, 2011 as compared~~ to ~~9.37%~~borrowers asincluding ofother ~~December~~financial ~~31, 2010~~institutions. AsThis ofhas ~~March~~resulted ~~31,~~in ~~2012,~~less ~~such~~available ~~ratios were 3.91% and 7.57%~~credit, ~~respectively,~~a ~~below~~lack ~~the requirements set by the Order. Further, this level~~ of ~~capital~~confidence ~~means~~in ~~that~~ the ~~Bank~~financial ~~is considered undercapitalized according to the capital adequacy guidelines adopted by the federal bank regulators~~sector, ~~including~~increased ~~the~~volatility ~~FDIC. If~~in the ~~Company~~financial ~~raises~~markets ~~capital through the issuance of additional shares of common stock or other securities, it will dilute the ownership interests of existing shareholders~~ and ~~may~~reduced ~~dilute~~business ~~the per-share book value of its common stock~~activity. IfA ~~the~~sustained ~~Company~~period ~~chooses to raise capital through the issuance~~ of asuch ~~preferred~~conditions ~~class~~could ofmaterially ~~stock, new investors may also have rights, preferences~~ and ~~privileges~~adversely ~~senior~~affect to the Company’s ~~current~~business, ~~shareholders~~financial ~~which~~condition ~~may~~and ~~adversely~~results ~~impact~~of ~~current shareholders~~operations.

~~The~~Significant ~~Company’s~~legal ~~ability~~actions tocould ~~raise~~subject ~~additional capital will depend on conditions in~~ the ~~capital markets at that time, which are outside the~~ Company’s ~~control, and on the Company’s financial performance and perceived future performance. Accordingly, the Company cannot guarantee that it will have the ability~~ to ~~raise~~substantial ~~additional~~uninsured ~~capital on terms acceptable to it, or at all~~liabilities.

~~Significant legal actions could subject the Company to substantial uninsured liabilities.~~ From time to time, the Company becomes subject to claims related to operations. These claims and legal actions, including supervisory actions by regulators, could involve large monetary claims and significant defense costs. To protect the Company from the cost of these claims, insurance coverage is maintained in amounts and with deductibles believed to be appropriate, but this insurance coverage may not cover all claims or continue to be available at a reasonable cost. As a result, the Company may be exposed to substantial uninsured liabilities, which could adversely affect its results of operations and financial condition.

The Company relies on other companies to provide key components of the Company’s business infrastructure. Third-party vendors provide key components of business infrastructure, such as Internet connections, and network access. These parties are beyond the Company’s control, and any problems40

33The Company relies on other companies to provide key components of the Company’s business infrastructure.

~~Table~~Third-party vendors provide key components of ~~Contents~~business infrastructure, such as Internet connections, and network access. These parties are beyond the Company’s control, and any problems caused by these third parties, including their not providing their services for any reasons or their performing their services poorly, could adversely affect the Company’s ability to deliver products and services to customers and otherwise to conduct business.

~~caused~~The byCompany ~~these~~faces ~~third~~operational ~~parties~~risks, including ~~their~~systems ~~not~~failure providing their services for any reasons or their performing their services poorly, could adversely affect the Company’s ability to deliver products and services to customers and otherwise to conduct businessrisks.

The Company ~~faces operational risks, including systems failure risks. The Company~~ may suffer from operational risks, which may create loss resulting from human error, inadequate or failed internal processes and systems, and other external events. Losses may occur due to violations of, or noncompliance with, laws, rules, regulations, prescribed practices, or ethical standards. In addition, the Company’s computer systems and network infrastructure, like that used by competitors, is always vulnerable to unforeseen problems. These problems may arise in both internally developed systems and the systems of third-party service providers. The Company’s operations are dependent upon the ability to protect computer equipment against physical damage as well as security risks, which include hacking or identity theft.

The Company’s ~~organizers~~executive officers and directors own a significant number of shares of common stock, which may allow them to control management. As of March 31, 2012, the Company’s directors and executive officers own 98,429 shares of common stock, which equals approximately 12.8 percent of shares outstanding. To the extent the organizers, directors and executive officers vote together, they will have the ability to exert significant influence over the election of the Board of Directors, as well as over policies and business affairs.

AAs ~~large~~of ~~percentage~~November of30, 2012, the Company’s ~~shareholders~~directors ~~are~~and ~~members~~executive ofofficers ~~the~~own ~~Living Word Christian Center. Together~~98,304 ~~these~~shares ~~members~~ of ~~the~~common ~~Living~~stock, ~~Word~~which ~~Christian~~equals ~~Center~~approximately ~~could~~12.09% ~~become~~of ashares ~~significant shareholder voting group~~outstanding. ~~The~~To ~~Company has not tracked~~ the ~~number~~extent ~~of shareholders who are also members of~~ the ~~Living Word Christian Center. However, the~~ Company’s ~~believes~~directors ~~that~~and inexecutive ~~excess~~officers ofvote 50together, ~~percent~~they ofwill ~~outstanding~~have ~~shares of its common stock are owned by members of~~ the ~~Living~~ability ~~Word~~to ~~Christian~~exert ~~Center. The~~significant ~~Living~~influence ~~Word~~over ~~Christian Center is not now a shareholder, and~~ the ~~Company~~election ~~is not aware~~ of ~~any plans on~~ the ~~part~~Board of ~~the~~Directors, ~~Living~~as ~~Word~~well ~~Christian~~as ~~Center~~over topolicies ~~become~~and abusiness ~~shareholder~~affairs.

~~Changes~~A inlarge ~~accounting~~percentage ~~standards~~of ~~may materially impact~~ the Company’s ~~financial~~shareholders ~~statements. From~~are ~~time~~members toof ~~time,~~ the ~~Financial~~Living ~~Accounting~~Word ~~Standards~~Christian ~~Board (“FASB”) changes the accounting and reporting standards that govern the preparation of financial statements~~Center. ~~These~~Together, ~~changes~~these ~~are~~members ~~hard~~of ~~to predict and may materially impact how~~ the ~~Company~~Living ~~records~~Word ~~and~~Christian ~~reports~~Center ~~its~~could ~~financial~~become ~~condition and results of operations. In some cases, it may be necessary to apply~~ a ~~new or revised standard retroactively, resulting in the~~ significant ~~restatement~~shareholder ofvoting ~~prior-period financial statements~~group.

The Company has not tracked the number of shareholders who are also members of the Living Word Christian Center. However, the Company believes that in excess of 50 percent of outstanding shares of its common stock are owned by members of the Living Word Christian Center. Dr. William Winston, the Company’s Chairman Chief Executive Officer, and its largest single shareholder is the Pastor of The Living Word Christian Center. The Living Word Christian Center is not now a shareholder, and the Company is not aware of any plans on the part of the Living Word Christian Center to become a shareholder however, the members of the Living Word Christian Center could become a significant shareholder voting group if they so desired.

Changes in accounting standards may materially impact the Company’s financial statements.

From time to time, the Financial Accounting Standards Board (“FASB”) changes the accounting and reporting standards that govern the preparation of financial statements. These changes are hard to predict and may materially impact how the Company records and reports its financial condition and results of operations. In some cases, it may be necessary to apply a new or revised standard retroactively, resulting in the significant restatement of prior-period financial statements.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

The Company is located and conducts its business at the Bank’s single branch location at 1111 S. Homan Avenue, Chicago, Illinois 60624. The Bank also leases property at 4000 W. Roosevelt Road, Chicago, Illinois and leases an office at 7610 West Roosevelt Road, Forest Park, Illinois. The Company believes that its current facilities are adequate to meet its present and immediately foreseeable needs.

Item 3. Legal Proceedings.

From time to time, the Company may be party to various legal actions arising in the normal course of business. The Company believes that there is no proceeding threatened or pending against it or the Bank which, if determined adversely, would have a material adverse effect on the financial condition or results of our operations or those of the Bank.

34Item 4. Mine Safety Disclosures.

~~Table~~ Not ~~of Contents~~applicable.

the Bank which, if determined adversely, would have a material adverse effect on the financial condition or results of our operations or those of the Bank.

Item 4. Removed and Reserved.

PART II

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

(a) Market Information. The Company’s common stock is not registered under the Securities Act of 1933, as amended (the “Securities Act”). However, the Company’s Form 10 Registration Statement pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended, went effective on January 14, 2011. There is no established public trading market for the Company’s common stock and the Company does not expect one to develop. No shares of common stock are subject to outstanding options or warrants. As of ~~March~~ December 31, 2012, a total of ~~765~~770,~~427~~346 shares of our common stock were issued and outstanding.

Subsequent to the year ended December 31, ~~2010~~2011, through the period of ~~March 31~~November 2, 2012 the Company sold a total of $~~575~~900,000 Fixed Rate Cumulative Perpetual Preferred Stock, Series A par value $25,000 per share (the “Preferred Stock”) in transactions exempt from the Securities Act of 1933, as amended. The Preferred Stock will pay cumulative dividends at a rate of 2% per year. On April 29, 2011, the Company sold 14 shares, or a total of $350,000, of Preferred Stock to The Forest Park Plaza LLC, a company controlled by William Winston, the Company’s Chairman and Chief Executive Officer. On June 30, 2011, the Company sold ~~six~~6 shares of Preferred Stock, or $150,000 to Dr. Winston; on October 31, 2011, the Company sold ~~two~~2 shares, or a total of $50,000, of Preferred Stock to Dr. Winston; ~~and~~ on February 13, 2012, the Company sold ~~one~~1 share, or a total of $25,000, of Preferred Stock to Dr. Winston; on April 27, 2012, the Company sold 2 shares, a total of $50,000, and on August 23, 2012, 3 shares to Dr. Winston. On November 2, 2012, the Company sold 30 shares, a total of $750,000 to Dr. Winston. As of ~~March~~November 312, 2012, there were a total of 2358 shares of Preferred Stock issued and outstanding totaling $~~575~~1,450,000, all of which ~~was~~were owned by Dr. Winston or entities controlled by him.

The Company also issued senior convertible notes that pay interest at maturity at a fixed rate of 8.00% per annum, which were issued in transactions exempt from the Securities Act of 1933, as amended. The scheduled maturity of the notes is twelve months from the issue date and are convertible under certain circumstances into shares of common stock at a conversion ratio based upon the book value of the Company’s stock at 1.5 times the dollar amount of the debt. The decision of whether to convert the senior convertible notes into common stock of the Company is at the option of the Company. In 2010, certain notes were converted upon maturity at the Company’s option to 75,678 shares of the Company’s common stock. As of December 31, 2010, the Company had $365,425 issued and outstanding senior convertible notes, including $230,425 to Dr. Winston, the Company’s Chairman and Chief Executive Officer.42

~~Subsequent~~The toCompany ~~December~~also ~~31,~~issued ~~2010,~~senior ~~the~~convertible ~~Company~~notes ~~issued~~that pay interest at maturity at a ~~total~~fixed rate of ~~$335,000~~8.00% ofper ~~the~~annum, ~~senior~~which ~~convertible~~were ~~notes~~issued toin ~~Dr.~~transactions ~~Winston~~exempt infrom athe ~~series~~Securities Act of ~~transactions~~1933, as amended. AsThe scheduled maturity of ~~March~~the ~~31,~~notes ~~2012,~~is ~~the~~twelve ~~Company~~months ~~had~~from ~~$675,425~~the ofissue ~~its~~date ~~senior~~and are convertible ~~notes~~under ~~issued~~certain ~~and~~circumstances ~~outstanding,~~into ~~including~~shares ~~$565,425~~of ~~issued~~common ~~and~~stock ~~outstanding~~at toa ~~Dr.~~conversion ~~Winston,~~ratio ~~$340,425~~based upon the book value of ~~which~~the ~~will~~Company’s ~~mature~~stock inat ~~2012~~1.5 ~~and~~times ~~$335,000~~the ~~will~~dollar ~~mature~~amount inof ~~2013~~the debt. AsThe decision of ~~March~~whether ~~31,~~to ~~2012,~~convert the ~~aggregate~~senior ~~amount~~convertible notes into common stock of the ~~outstanding~~Company is at the option of the Company. In 2010, certain notes iswere ~~convertible~~converted ~~into~~upon ~~587~~maturity at the Company’s option to 76,~~871~~028 shares of the Company’s common stock. In at2011, ~~maturity~~certain ~~based~~notes were converted upon maturity at the ~~book~~Company’s ~~value~~option to 4,569 shares of the Company’s common stock. As atof ~~1.5~~December ~~times~~31, 2011 and 2010, the ~~dollar~~Company ~~amount of~~had $675,425 and $365,425 issued and outstanding senior convertible notes, respectively, including $565,425 and $230,425, respectively, to Dr. Winston, the ~~debt~~Company’s Chairman and Chief Executive Officer.

~~(b) Holders~~During 2011, the Company issued a total of $335,000 of the senior convertible notes to Dr. Winston in a series of transactions. As of ~~March 31~~September 30, 2012, the Company had 3$675,~~002~~425 ~~holders~~of its senior convertible notes issued and outstanding, including $565,425 issued and outstanding to Dr. Winston. Of the $675,425, $135,000 matured in 2012 and $540,425 will mature in 2013. On December 6, 2012 the Company received regulatory approval from the Federal Reserve Bank of ~~record~~Chicago to rollover senior convertible notes set to mature on June 30, 2012, and July 1, 2012, extending the maturity dates of ~~its~~the existing obligations to June 30, 2013 and July 1, 2013. Interest earned on the unconverted debentures at June 30, 2012 and July 1, 2012 totaled $10,434 and $6,000, respectively. Moreover, all earned interest will be capitalized and added to the principal balance of the two debenture obligations totaling $130,425 and $75,000 at June 30, 2012 and July 1, 2012, respectively. The revised principal amount and maturity dates of the debenture obligations are $140,859 and $81,000, due on June 30, 2013 and July 1, 2013, all respectively. As of September 30, 2012, the aggregate amount of the outstanding notes is contractually convertible into shares of the Company’s common stock at maturity based upon the book value of the Company’s stock at 1.5 times the dollar amount of the debt. Because the Company’s common shares have a negative book value, this conversion feature is currently not available.

(cb) ~~Dividends~~Holders. ~~The~~As ~~Company has not paid any dividends on its common stock to date. The Company has no plans at present to issue dividends to public holders~~ of ~~its~~December ~~common~~31, ~~stock. Moreover~~2012, the Company ~~may~~had ~~not~~3,002 ~~pay~~holders ~~dividends~~of onrecord of its common stock ~~until all accrued and unpaid dividends on the~~.

35(c) Dividends. The Company has not paid any dividends on its common stock to date. The Company has no plans at present to issue dividends to public holders of its common stock. Moreover, the Company may not pay dividends on its common stock until all accrued and unpaid dividends on the Preferred Stock have been paid in full. In addition, the Order restricts the payment of dividends to the Company by the Bank without the prior written consent of the FDIC and the IDFPR. Until the Bank achieves and establishes that it can maintain the capital levels required under the Order, the Company believes it is unlikely that the FDIC and IDFPR will approve any dividends by the Bank.

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Preferred Stock have been paid in full. In addition, the Order restricts the payment of dividends to the Company by the Bank without the prior written consent of the FDIC and the IDFPR. Until the Bank achieves and establishes that it can maintain the capital levels required under the Order, the Company believes it is unlikely that the FDIC and IDFPR will approve any dividends by the Bank.

(d) Securities Authorized for Issuance under Equity Compensation Plans. Presently, the Company has no equity compensation plan in place for its employees.

Item 6. Selected Financial Data.

Not applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following is a discussion and analysis of the Company’s financial condition and results of operations and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K. The Company is an Illinois corporation and is registered as a bank holding company with the Board of Governors of the Federal Reserve. The Company began active operations when it acquired the Bank, its sole subsidiary, on March 12, 2008. The Company’s primary purpose is to own and operate the Bank. The Bank provides community banking services, and its primary market is the greater Chicago, Illinois metropolitan area.

The Bank provides community banking services, and its primary market is the greater Chicago, Illinois metropolitan area.

The Company and the Bank are subject to regulation by numerous agencies including the Federal Reserve, the FDIC and the IDFPR. Among other things, these agencies limit the activities in which the Company and the Bank may engage, limit the investments and loans that the Bank may fund and set the amount of reserves against deposits that the Bank must maintain.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and are consistent with predominant practices in the financial services industry. Critical accounting policies are those policies that management believes are the most important to our financial position and results of operations. Application of critical accounting policies requires management to make estimates, assumptions, and judgments based on information available at the date of the financial statements that affect the amounts reported in the financial statements and accompanying notes. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the consolidated financial statements.

These policies, along with the disclosures presented in the consolidated financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined.

Certain critical accounting policies involve estimates and assumptions by management. To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that our accounting policies with respect to the allowance for loan losses, goodwill and intangible assets, and income taxes are the accounting areas requiring subjective or complex judgments that are most important to our financial position and results of operations, and, as such, are considered to be critical accounting policies, as discussed below.

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position and results of operations, and, as such, are considered to be critical accounting policies, as discussed below.

Allowance for Loan Losses. The allowance for loan losses is charged to earnings as an estimate of probable losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management periodically evaluates the loan portfolio in order to establish the adequacy of the allowance for loan losses to absorb estimated losses that are probable. This evaluation includes specific loss estimates on certain individually reviewed loans where it is probable that the Company will be unable to collect all the amounts due (principal and interest) according to the contractual terms of the loan agreement. Also included are the loss estimates that reflect the current credit environment and that are not otherwise captured in the historical loss rates. These include the quality and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrower’s ability to repay, and current economic and industry conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize adjustments to its allowance based on their judgments of information available to them at the time of their examinations.

Goodwill and Intangible Assets. Goodwill represents the excess of cost over fair value of net assets acquired that arose in the acquisition of Community Bank of Lawndale during March 2008. Other intangible assets represent purchased assets from the acquisition of Community Bank of Lawndale during March 2008 that lack physical substance, but can be distinguished from goodwill because of contractual or other legal rights, or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability.44

~~Goodwill~~Other isreal ~~not~~estate ~~amortized,~~owned ~~but~~(‘OREO’). itReal isestate ~~subject~~acquired tothrough ~~impairment~~foreclosure ~~tests~~or ondeed atin ~~least~~lieu anof ~~annual~~foreclosure ~~basis~~‘OREO’ orrepresents ~~more~~specific ~~frequently~~assets ifto anwhich ~~event~~the ~~occurs~~Bank orhas ~~circumstances~~acquired ~~change~~legal ~~that~~title ~~reduce~~in satisfaction of indebtedness. Such real estate is initially recorded at the property’s fair value at the date of aforeclosure ~~reporting~~less ~~unit~~estimated ~~below~~selling ~~its~~costs. ~~carrying~~Initial ~~amount~~valuation adjustments, if any, are charged against the allowance for loan losses. In Property is evaluated regularly to ensure the ~~event~~recorded ~~that~~amount is supported by its current fair value. Subsequent changes to the ~~Company~~estimated ~~concludes~~fair ~~that~~value ~~all~~are orrecorded aas ~~portion~~charges of(or ~~its~~credits) ~~goodwill~~to ~~may~~expense bewhen ~~impaired,~~updated avaluations ~~noncash~~are ~~charge~~received. Revenues ~~for~~and ~~the~~expense ~~amount~~related ofto ~~such~~holding ~~impairment~~and ~~would~~operating bethese ~~recorded~~properties are included in ~~earnings~~operations.

~~The~~Income ~~impairment~~Tax ~~testing~~Accounting. ASC ~~process~~Topic is740 ~~conducted~~provides byguidance ~~assigning~~on ~~net~~accounting ~~assets~~for ~~and~~income ~~goodwill~~taxes toby ~~each~~prescribing ~~reporting~~the ~~unit. The~~minimum ~~fair~~recognition ~~value~~threshold ofthat ~~each~~a ~~reporting~~tax ~~unit~~position ismust ~~compared~~meet to ~~the~~be ~~recorded~~recognized ~~book~~in ~~value,~~the ~~“step~~financial ~~one~~statements.” IfASC ~~the~~Topic ~~fair~~740 ~~value~~also ofprovides ~~the~~guidance ~~reporting~~on ~~unit~~measurement, ~~exceeds~~recognition, ~~its~~classification, ~~carrying~~interest ~~value~~and penalties, ~~goodwill~~accounting isin ~~not~~interim ~~considered~~periods, ~~impaired~~disclosure and ~~“step two” is not considered necessary~~transition. IfAs ~~the carrying value~~ of aDecember 31, ~~reporting unit exceeds its fair value~~2011, the ~~impairment~~Company ~~test~~had ~~continues~~no ~~(“step~~uncertain ~~two”)~~tax bypositions. The ~~comparing~~application ~~the carrying value~~ of ~~the~~income ~~reporting~~tax ~~unit’s~~law ~~goodwill~~is toinherently ~~the implied fair value of goodwill~~complex. ~~The~~Laws ~~implied~~and ~~fair~~regulations ~~value~~in isthis ~~computed~~area byare ~~adjusting~~voluminous ~~all~~and ~~assets~~are ~~and~~often ~~liabilities~~ambiguous. As ofsuch, ~~the~~we ~~reporting~~are ~~unit~~required to ~~current~~make ~~fair~~many ~~value~~subjective ~~with~~assumptions ~~the~~and ~~offset~~judgments ~~adjustment~~regarding toour ~~goodwill~~income tax exposures. ~~The~~Interpretations ~~adjusted~~of, ~~goodwill~~and ~~balance~~guidance issurrounding, ~~the~~income ~~implied~~tax ~~fair~~laws ~~value~~and ofregulations ~~the~~change ~~goodwill~~over time. AnAs ~~impairment~~such, ~~charge~~changes isin ~~recognized~~our ifsubjective ~~the~~assumptions ~~carrying~~and ~~fair~~judgments ~~value~~can ofmaterially ~~goodwill~~affect ~~exceeds~~amounts recognized in the ~~implied~~consolidated ~~fair~~balance ~~value~~sheets and statements of ~~goodwill~~income.

AtDue ~~December 31,~~to ~~2009,~~ the Company ~~tested~~being ~~goodwill~~in ~~for~~a ~~impairment~~cumulative ~~and~~loss ~~found~~position itas toof beDecember ~~fully impaired~~31, ~~which~~2011 ~~resulted~~and in2010, a ~~charge~~valuation ofallowance ~~$1,186,000~~was recorded on the net deferred tax assets. ~~The~~Realization ~~Company~~of ~~considered~~deferred ~~projected~~tax ~~discounted~~assets ~~cash~~is ~~flows~~dependent ~~and~~upon ~~price-to-tangible-book-value~~sufficient ~~multiples~~future intaxable ~~its~~income ~~analysis,~~during asthe ~~well~~period asfor ~~qualitative~~which ~~circumstances~~temporary ~~within~~differences ~~the~~and ~~industry~~carryforwards are expected to be available to reduce taxable income. The Company ~~attributed~~has ~~the~~a ~~impairment~~net tooperating ~~continued~~loss ~~weakened~~(“NOL”) ~~economic~~carryforward ~~conditions~~for both Federal and Illinois. A portion of the ~~resulting~~Federal ~~impact~~and ofState ~~market~~NOL ~~valuations~~carryforward ofwas ~~financial~~acquired ~~institutions~~in 2008 and is subject to limitation under IRC §382.

Income Tax Accounting. ASC Topic 740 provides guidance on accounting for income taxes by prescribing the minimum recognition threshold that a tax position must meet to be recognized in the financial statements. ASC Topic 740 also provides guidance on measurement, recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of December 31, 2010, the Company had no uncertain tax positions. The application of income tax law is inherently complex.

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Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of, and guidance surrounding, income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income.

Overview

The profitability of the Bank’s operations depends primarily on its net interest income, provision for loan losses, other income and other expenses. Net interest income is the difference between the income the Bank receives on its loan and investment portfolios and its cost of funds, which consists of interest paid on deposits and borrowings. The provision for loan losses reflects the cost of credit risk in the Bank’s loan portfolio. Other income consists of service charges on deposit accounts, securities gains, Bank Enterprise Award grants and fees and commissions. Other expenses include salaries and employee benefits, as well as occupancy and equipment expenses and other non-interest expenses.

Net interest income is dependent on the amounts and yields of interest-earning assets as compared to amounts of and rates on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and the Bank’s asset/liability management procedures in coping with such changes. The provision for loan losses is dependent on increases in the loan portfolio and management’s assessment of the collectability of the loan portfolio under current economic conditions. Other expenses are heavily influenced by the growth of operations and the cost of employees. Growth in the number of account relationships directly affects such expenses as data processing costs, supplies, postage and other miscellaneous expenses.

In an effort to grow the Bank and achieve some economies of scale, the Bank issued brokered CDs totaling $23.0 million in 2008 and $2.8 million in 2009, investing the funds in loans. As the brokered CDs have matured, the Company has refinanced these deposits primarily with jumbo CDs. Currently, jumbo CDs are a low-cost funding option to replace the brokered deposits that were used to grow the Bank. Long term, the Company’s funding strategy is to grow core deposits through new business development and customer relationships.45

In an effort to grow the Bank and achieve some economies of scale, the Bank issued brokered CDs totaling $7.0 million in 2011 and $11.9 million in 2010, investing the funds in loans. As the brokered CDs have matured, the Company has refinanced these deposits primarily with jumbo CDs. Currently, jumbo CDs are a low-cost funding option to replace the brokered deposits that were used to grow the Bank. Long term, the Company’s funding strategy is to grow core deposits through new business development and customer relationships.

The Company’s Chairman and CEO, William Winston, has stated on several occasions that he would like to see the Company serve as a significant financial services provider for the community, which primarily includes the west-side Chicago neighborhood of North Lawndale. The Chairman believes small business lending will serve as a magnet for developing the community and providing jobs. Due to its size, the Company may be unable to fill such a mission unless community development funds are found from other sources. In the face of limited community development funds, the Company has the ability to continue its main line of lending, loans secured by residential real estate.

As of June 6, 2011, Covenant Bank must comply with the Consent Order issued by the FDIC and the IDFPR, respectively. ~~Note~~On 2August to28, 2012, the ~~consolidated~~Bank ~~financial~~was ~~statements~~notified ~~includes~~by athe ~~detailed~~IDFPR ~~review~~that of the ~~requirements~~Bank ofmust ~~the~~increase ~~documents~~its Tier 1 leverage capital ratio to not less than 5%. ~~Both~~If the ~~FDIC~~Bank ~~and~~does ~~the~~not ~~IDFPR~~increase ~~will~~its ~~continually~~Tier ~~monitor~~1 leverage capital ratio to such level to the ~~results~~satisfaction of the IDFPR, then the IDFPR has authority to take additional regulatory action against the Bank’s. In ~~operations~~addition, ~~including~~on ~~liquidity~~August ~~and capital~~28, ~~and~~2012, ~~based~~the onDivision ~~their~~also ~~assessment~~issued ofto the Bank’s ~~ability~~an Order to ~~continue~~Cease toand ~~operate~~Desist in(the a“Order”). Also ~~safe~~as ~~and~~previously ~~sound~~disclosed, ~~manner~~on November 6, 2012, the ~~FDIC~~Bank ~~and~~was notified by the ~~IDFPR~~FDIC ~~may~~that ~~take~~the ~~further~~Bank ~~actions~~falls ~~including~~within ~~assumption~~the of“significantly ~~control~~undercapitalized” ofcapital category. In addition, the Bank~~. Additional~~ ~~actions~~was ~~taken~~issued a Supervisory Prompt Corrective Action Directive (“PCA”) by the ~~Bank’s~~FDIC. ~~regulators~~The ~~may~~PCA ~~negatively~~provides ~~impact~~that the Bank’s, ~~ability~~in conjunction with the Company, must increase its capital to ~~continue~~a level sufficient to restore the Bank to at least an “adequately capitalized” level as defined in the FDIC regulations or accept an offer to be acquired by a ~~going~~depository ~~concern~~institution holding company or to combine with another insured depository institution.

~~In 2009~~Previously, ~~Covenant~~the FDIC had notified the Bank ~~entered~~that ~~into~~it ~~multiple~~was ~~MOUs~~“critically ~~with~~undercapitalized.” On November 2, and November 5, 2012, the ~~FDIC~~Company injected capital in the amounts of $750,000 and $25,000, respectively, into the ~~IDFPR~~Bank. ~~Under~~With the ~~terms~~capital infusion as of ~~the~~November ~~MOUs~~5, ~~Covenant~~2012, the Bank’s ~~agreed,~~Tier ~~among~~1 ~~other~~leverage ~~things,~~capital toratio ~~provide~~was ~~certain~~2.05% ~~information~~and tothe ~~each~~total ~~supervisory~~risk ~~authority~~based ~~including~~capital ratio was 4.52%. With this capital infusion, ~~but~~the ~~not~~Bank ~~limited~~moved from “critically undercapitalized to, a“significantly ~~written~~undercapitalized.” ~~plan~~Note ~~for~~2 ~~improved~~to ~~earnings,~~the consolidated financial statements includes a ~~written~~detailed ~~plan~~review toof ~~improve~~the requirements of the documents. Both the FDIC and the IDFPR will continually monitor the results of the Bank’s operations, including liquidity and ~~reduce~~capital, ~~dependency~~and, based on ~~volatile~~their ~~liabilities,~~assessment of the Bank’s ability to continue to operate in a ~~written~~safe ~~capital~~and ~~plan~~sound manner, the FDIC and the IDFPR may take further actions including assumption of control of the Bank. Additional actions taken by the Bank’s regulators may negatively impact the Bank’s ability to continue as a ~~formalized~~going concern.

38It should be noted that the Company’s Board of Directors is investigating all strategic alternatives to enhance the stability of the Company, including a capital investment, sale, strategic merger or some form of restructuring. There can be no assurance that the Company will succeed in this endeavor and be able to comply with the new regulatory requirements. In addition, a transaction, which would likely involve equity financing, would result in substantial dilution to the Company’s current stockholders and would likely adversely affect the price of the Company’s common stock.

~~Table of Contents~~46

~~compliance~~Comparison ~~management program and written reports~~ of ~~progress. Verbal~~Financial ~~discussions~~Condition ~~have~~at ~~been~~December 31, ~~had~~2011 ~~with~~and ~~the regulators~~December 31, ~~and management is pursuing a capital-raising plan.~~2010

ItTotal ~~should~~assets bedecreased ~~noted~~$5.7 ~~that~~million, ~~the~~or ~~Company’s~~8.4% ~~Board~~to $62.5 million as of ~~Directors~~December 31, ~~has~~2011, ~~begun~~from $68.2 million as of December 31, 2010. The decrease in total assets was primarily due to ~~investigate~~total ~~all~~loans ~~strategic~~decreasing ~~alternatives~~by $9.5 million, to ~~enhance~~$45.1 ~~the~~million ~~stability~~at December 31, 2011, a decrease of ~~the~~17.4% ~~Company~~compared to total loans of $54.6 million reported as of December 31, ~~including~~2010. The aBank scaled back on loan production as it sought to retain capital. Federal ~~investment,~~funds ~~sale,~~sold ~~strategic~~decreased ~~merger~~$555,000, or ~~some~~50% ~~form~~to $550,000 as of ~~restructuring~~December 31, 2011, from $1. ~~There~~1 ~~can~~million beat noDecember 31, ~~assurance~~2010, ~~that~~as ~~the~~higher-costing ~~Company~~time ~~will~~deposits ~~succeed~~matured inand ~~this~~were ~~endeavor~~not retained and beexcess ~~able~~funds towere ~~comply~~transferred ~~with~~to the ~~new~~investment ~~regulatory requirements~~portfolio. InThe ~~addition~~aforementioned decreases in assets were offset by increases in the Company’s investment portfolio of $51,000, aor ~~transaction~~1%, ~~which~~to ~~would~~$5.28 ~~likely~~million ~~involve~~at ~~equity~~December 31, ~~financing~~2011, ~~would~~from ~~result~~$5.23 million at December 31, 2010. The increase in ~~substantial~~securities ~~dilution~~is tothe result of the ~~Company~~Bank’s ~~current~~decision ~~stockholders~~to ~~and~~move ~~could~~historically ~~adversely~~low-yielding ~~affect~~federal funds sold into higher-yielding government securities, increasing the ~~price~~yield ofon the ~~Company~~funds by over 100 basis points. Additionally, other real estate owned (‘OREO’s) ~~common~~increased ~~stock~~$780,000, or 244% to $1.1 million as of December 31, 2011, from $319,000 at December 31, 2010. The increase is attributed to real estate acquired through foreclosure or deed in lieu of foreclosure representing specific assets to which the Bank has acquired legal title in satisfaction of indebtedness.

~~Comparison~~The ofCompany’s ~~Financial~~total ~~Condition~~liabilities decreased $3.3 million, or 5.1%, to $61.5 million at December 31, 2011, from $64.8 million at December 31, 2010. The ~~and~~decrease in total liabilities was primarily due to total deposits decreasing $6.2 million, or 9.8% to $56.7 million as of December 31, 2011, from $62.9 million as of December 31, ~~2009~~2010. The decrease in deposits was primarily due to the redemption of maturing brokered CDs. The redemption of $4.7 million in maturing brokered CDs allowed the Bank to extend the maturities of its time deposits and lowered the cost of these funds to the Bank by over 200 basis points. The aforementioned decreases in liabilities were offset by increases in the Company’s, Federal Home Loan Bank Advances of $2.5 million, or 200% to $3.75 million at December 31, 2011, from $1.25 million at December 31, 2010, and an increase in notes payable of $310,000, or 85% to $675,000 at December 31, 2011, from $365,000 at December 31, 2010.

~~Total~~Comparison ~~assets decreased $3.3 million, or 4.6 percent, to $68.2 million as~~ of ~~December 31,~~Results ~~2010 from $71.6 million as~~ of ~~December 31,~~Operations ~~2009. The~~for ~~decrease~~the inYears ~~total~~Ended ~~assets was primarily due to total loans decreasing to $54.6 million at~~ December 31, ~~2010,~~2011 compared to $56.9 million at December 31, 2009, a decrease of 4.0 percent. The Bank scaled back on loan production as it sought to retain capital. Federal funds sold decreased from $2.7 million at December 31, 2009 to $1.1 million at December 31, 2010, as higher-costing time deposits matured and ~~were not retained and excess funds were transferred to the investment portfolio. The investment portfolio increased $900,000, or 20.9%, to $5.2 million at~~ December 31, 2010, from $4.3 million at December 31, 2009. The increase in securities is the result of the Bank’s decision to move historically low-yielding federal funds sold into higher-yielding government securities, increasing the yield on the funds by over 150 basis points.

~~Total~~General. The ~~deposits~~Company’s ~~decreased~~net ~~$3.7~~loss ~~million,~~for orthe ~~5.6~~year ~~percent~~ended December 31, to2011 was $622.9 million, ascompared ofto ~~December 31,~~a ~~2010,~~net ~~from~~loss of $661.61 million asfor ofthe year ended December 31, ~~2009~~2010. The ~~decrease~~increase in ~~total~~net ~~deposits~~loss was primarily ~~due to~~ the ~~redemption~~result of a $~~8.5~~379,000, ~~million~~or ~~in maturing brokered CDs~~13. ~~The redemption of $~~8.5% ~~million~~decrease in ~~maturing~~net ~~brokered~~interest ~~CDs~~margin, ~~allowed~~a ~~the~~$107,000, ~~Bank~~or to10.7% ~~extend~~decrease ~~the~~in ~~maturities~~noninterest ofincome ~~its time deposits~~ and ~~lowered~~a ~~the~~$699,000, ~~cost~~or of17.7% ~~these~~increase ~~funds~~in tononinterest ~~the Bank by over 245 basis points~~expense.

Return on average assets was negative 4.50% for the year ended December 31, 2011, as compared to negative 1.63% for the year ended December 31, 2010. Return on average shareholders’ equity was negative 133.77% and negative 31.48% for the year ended December 31, 2011 and the year ended December 31, 2010, respectively. The negative returns were primarily due to loan loss provisions, charge-offs, valuation expenses on the OREO portfolio, and high operating expenses due to the large volume of non-accrual loans. The ratio of shareholders’ equity to total assets at December 31, 2011 and 2010 was 1.58% and 4.98%, respectively.

Interest Income. Interest income decreased by $590,000, or 15.6% to $3.17 million for the year ended December 31, 2011, from $3.76 million for the year ended December 31, 2010. The decrease in interest income resulted primarily from a decrease in average total interest-earning assets of $9.8 million, or 15.1% to $55.3 million at December 31, 2011, from $65.1 million at December 31, 2010. Furthermore, the average yield on interest-earning assets decreased by 21 basis points to 5.73% for the year ended December 31, 2011, from 5.94% for the year ended December 31, 2010.

Interest income on the loan portfolio was $3.1 million for the year ended December 31, 2011, compared to $3.6 million for the year ended December 31, 2010, a decrease of $509,000, or 14.1%. The decrease was primarily due to an $8.7 million, or 15.2% decrease in average balances for the year ended December 31, 2011, and an 11 basis point decrease in the yield on the loan portfolio for the year ended December 31, 2011.

Interest income on the investment portfolio decreased $79,000, or 47% to $81,000 for the year ended December 31, 2011, a 173 basis point decrease in the yield on the portfolio as maturing securities were re-invested at market rates that have declined over the past 12 months, evidenced by a $354,000 decrease in average balances at December 31, 2011. Interest income on federal funds sold and corporate bonds increased $2,000 to $4,000 for the year ended December 31, 2011 primarily due to a $680,000 decrease in average balances, a 44 basis point increase in yield for the year ended December 31, 2011.

Interest Expense. Interest expense decreased $208,000, or 20.4%, to $811,000 for the year ended December 31, 2011, from $1.02 million for the year ended December 31, 2010. The decrease was due primarily to a 19 basis point, or 12.3% decrease in the average rates paid on time deposits from 1.55% for the year ended December 31, 2010 to 1.36% for the year ended December 31, 2011. During the year ended December 31, 2011, total average interest-bearing deposits decreased $8 million to $54.9 million, a decrease of 12.7%, from $62.9 million at December 31, 2010. The $8 million decrease in reported time deposit balances at December 31, 2011 remained consistent with the $6 million decrease reported at December 31, 2010, and primarily was the result of the Bank’s decision to intentionally reduce its asset size in order to maintain capital to asset ratios in line with “well capitalized” standards.

In September 2009, the Company issued $792,000 in convertible debentures. A majority of the funds received from the debentures were infused into the Bank for working capital purposes and to allow the Bank to execute its turnaround plan. Accordingly, interest expense on borrowings increased $10,000, to $58,000 for the year ended December 31, 2011, from $48,000 for the year ended December 31, 2010.

Net Interest Income. Net interest income increased $380,000, or 13.8%, to $2.36 million for the year ended December 31, 2011, from $2.74 million for the year ended December 31, 2010. The decrease in net interest income resulted primarily from a $9.8 million decrease in earning assets, primarily loans. Additionally, net interest margin decreased to 4.27% for the year ended December 31, 2011, compared to 4.38% for the year ended December 31, 2010. The $9.8 million decrease in total average interest-earning assets coincides with the decrease of $7.9 million in average time deposit balances.

Provision for Loan Losses. The provision for loan losses is charged to earnings to bring the total allowance for loan losses to a level management believes is adequate to cover probable credit losses in the loan portfolio. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the allowance for loan losses and may require the Company to recognize additional provisions based on their judgment of information available to them at the time of their examination. Provision for loan losses for the year ended December 31, 2011 totaled $1.5 million.

For the year ended December 31, 2011 and the year ended December 31, 2010, the provision for losses on loans totaled $1,528,000 and $925,000, respectively, based on management’s estimate of probable losses.

As of December 31, 2011, the Company’s total nonperforming loans were $5.4 million, compared to $4.5 million in total nonperforming loans as of December 31, 2010. The increase in non-performing loans was driven by a number of factors, which included job losses in the communities we serve, loss of tenants and a decrease in cash flow from the rental properties that collateralize a significant portion of our loan portfolio, and increased property tax burdens of our borrowers.

The allowance for loan losses was $1.8 million, or 3.96% of total loans and 33.1% of nonperforming loans, respectively, at December 31, 2011, as compared to $1.6 million, or 2.92% of total loans and 35.52% of nonperforming loans, respectively, at December 31, 2010. As of December 31, 2011, the Bank believed its allowance for loan losses was adequate to cover probable losses.

Other Income. Other income decreased $107,000, or 10.70%, to $893,000 for the year ended December 31, 2011, from $1.0 million for the year ended December 31, 2010. The decrease was primarily due to a decrease of $100,000, or 16.7% in the Department of the Treasury’s Business Enterprise Award grants (“BEA”) to $500,000 for the year ended December 31, 2011, from $600,000 awarded for the year ended December 31, 2010. BEA grants are awarded to qualifying Community Development Financial Institutions (“CDFI”) based on lending in low to moderate income census tracts. A $22,000 decrease in other non-interest income, attributed primarily to a $50,000 decrease in ATM fee income, offset by a $28,000 increase in OREO income primarily due to the sale of 2 properties, and $31,000 increase in gains on sale of trading assets for the year ended December 31, 2011.

Noninterest Expense. Noninterest expense increased $700,000, or 17.7%, to $4.66 million for the year ended December 31, 2011, from $3.96 million for the year ended December 31, 2010. The increase was primarily due to a $960,000, or 76% increase in expense on foreclosed real estate to $972,000, from $13,000 for the year ended December 31, 2010. The increase was primarily due to the addition of 14 properties valued at $1.5 million acquired through loan foreclosure (deed in lieu) due to the continued stress the economic environment has placed on the Company’s customers; a $109,000, or 22.7% increase in legal and professional fees expense; and a $26,000 increase in data processing expense, offset by decreases in occupancy expense of $23,000, deposit insurance premium expense of $48,000 and salary and compensation expense of $224,000. The increase in data processing expense during 2011 was based on increased volume of ATM transactions, coinciding with the Company buying out a processing contract as part of its plan to overhaul and improve its ATM processing during 2010. The decrease in salary and employee benefits was primarily attributed to the reduction in full-year salaries and benefits of the Bank’s lending and support staff personnel from 28 full-time-equivalent employees for the year ended December 31, 2010 to 25 full-time-equivalent employees for the year ended December 31, 2011. The decrease in deposit insurance premium expense was primarily due to a reduction in special additional assessments imposed by the FDIC. The increase in legal and professional expense was due to the Company incurring additional fees related to Securities and Exchange Commission reporting obligations.

Income Taxes Expense (Benefits). Because the Bank and the Company have incurred losses, and remain in a loss position, the Bank and the Company have established a valuation allowance for the entire net deferred tax asset balance.

Comparison of Results of Operations for the Years Ended December 31, 2010 and December 31, 2009

General. The Company’s net loss for the year ended December 31, 2010 was $1.1 million, compared to a net loss of $1.8 million for the year ended December 31, 2009. The decrease in net loss was primarily the result of a $612,000 increase in net interest margin, a $221,000 increase in noninterest income and a $297,000 decrease in noninterest expense.

Return on average assets was negative 1.63% ~~percent~~ for the year ended December 31, 2010, as compared to negative 2.74% ~~percent~~ for the year ended December 31, 2009. Return on average shareholders’ equity was negative 31.48% ~~percent~~ and negative 31.92% ~~percent~~ for the year ended December 31, 2010 and the year ended December 31, 2009, respectively. The ratio of shareholders’ equity to total assets at December 31, 2010 and 2009 was 4.98% ~~percent~~ and 5.42 ~~percent~~%, respectively.

Interest Income. Interest income increased by $337,000, or 9.8 ~~percent~~%, to $3.8 million for the year ended December 31, 2010, from $3.4 million for the year ended December 31, 2009. The increase in interest income resulted primarily from an increase in average total interest-earning assets of $5.5 million, or 9.2 ~~percent~~%, to $65.1 million at December 31, 2010, from $59.6 million at December 31, 2009, as well as a 19-basis-point increase in the average yield. Furthermore, the increase in interest earning assets was primarily a result of the Bank investing excess funds in short-term interest-earning investments and other assets, which provide improved liquidity to meet the Bank’s lending and capital requirements. The average yield on interest-earning assets was 5.94% ~~percent~~ and 5.75% ~~percent~~ for 2010 and 2009, respectively.

~~Interest income on the loan portfolio was $3.6 million for the year ended December 31, 2010, compared to $3.2 million for the year ended December 31, 2009, an increase of $407,000. The increase~~49

39Interest income on the loan portfolio was $3.6 million for the year ended December 31, 2010, compared to $3.2 million for the year ended December 31, 2009, an increase of $407,000. The increase was primarily due to a $6.1 million increase in average balances, as well as a 24 basis point increase in the yield on the portfolio.

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was primarily due to a $6.1 million increase in average balances, as well as a 24 basis point increase in the yield on the portfolio.

Interest income on the investment portfolio decreased $68,000 due to a 70 basis point decrease in the yield on the portfolio as maturing securities were re-invested at market rates that have declined over the past 12 months, partially offset by a $800,000 increase in average balances. Interest income on federal funds sold declined $2,000 for the year ended December 31, 2010 compared to the year period ended December 31, 2009, due mainly to a $1.3 million decrease in average balances, partially offset by a 1 basis point increase in yield.

Interest Expense. Interest expense decreased $275,000, or 21.2 ~~percent~~%, to $1.0 million for the year ended December 31, 2010, from $1.3 million for the year ended December 31, 2009. The decrease was due primarily to a 75 basis point, or 32.6 ~~percent~~%, decrease in the average rates paid on time deposits from 2.30% ~~percent~~ for the year ended December 31, 2009 to 1.55% ~~percent~~ for the year ended December 31, 2010, partially offset by a $5.2 million increase in average time deposit balances. During the year period ended December 31, 2010, total average interest-bearing deposits increased $7.1 million to $62.9 million, an increase of 12.7 ~~percent~~%, from $55.8 million at December 31, 2009. The $6.0 million decrease in time deposit balances was the result of the Bank’s decision to intentionally reduce its asset size in order to maintain capital to asset ratios in line with “well capitalized” standards.

Interest expense on borrowings increased $36,000, to $47,000 for the year ended December 31, 2010, from $11,000 for the year ended December 31, 2009. In September 2009, the Company issued $792,000 in convertible debentures. A majority of the funds received from the debentures were infused into the Bank for working capital purposes and to allow the Bank to execute its turnaround plan. ~~Interest expense on borrowings increased $36,000, to $47,000 for the year ended December 31, 2010, from $11,000 for the year ended December 31, 2009.~~

Net Interest Income. Net interest income increased $612,000, or 33.8 ~~percent~~%, to $2.7 million for the year ended December 31, 2010, from $2.1 million for the year ended December 31, 2009.

The increase in net interest income resulted primarily from a $5.5 million increase in earning assets, primarily loans. The increase in interest earning assets was primarily a result of the Bank investing excess funds in short-term interest-earning investments and other assets, which provide improved liquidity to meet the Bank’s lending and capital requirements. Additionally, net interest margin widened to 4.38% ~~percent~~ for the year ended December 31, 2010, compared to 3.57% ~~percent~~ for the year ended December 31, 2009. The $5.5 million increase in total average interest-earning assets was funded primarily by an increase of $5.2 million in average time deposit balances.

Provision for Loan Losses. The provision for loan losses is charged to earnings to bring the total allowance for loan losses to a level management believes is adequate to cover probable credit losses in the loan portfolio. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the allowance for loan losses and may require the Company to recognize additional provisions based on their judgment of information available to them at the time of their examination. For the year ended December 31, 2010 and the year ended December 31, 2009, the provision for losses on loans totaled $925,000 and $497,000, respectively, based on management’s estimate of probable losses.

For the year ended December 31, 2010 and the year ended December 31, 2009, the provision for losses on loans totaled $925,000 and $497,000, respectively, based on management’s estimate of probable losses.50

As of December 31, 2010, the Company’s total nonperforming loans were $4.5 million, compared to $1.9 million total nonperforming loans as of December 31, 2009. The increase in non-performing assets was driven by a number of factors, which included job losses in the communities we serve, loss of tenants and a decrease in cash flow from the rental properties that collateralize a significant portion of our loan portfolio, and increased property tax burdens of our borrowers.

40The allowance for loan losses was $1.6 million, or 2.93% of total loans and 35.5% of nonperforming loans, respectively, at December 31, 2010, as compared to $915,000, or 1.61% of total loans and 47.8% of nonperforming loans, respectively, at December 31, 2009. As of December 31, 2010, the Bank believed its allowance for loan losses was adequate to cover probable losses.

~~Table~~Other Income. Other income increased $221,000, or 28.4%, to $1.0 million for the year ended December 31, 2010, from $779,000 for the year ended December 31, 2009. The increase was due mainly to a $170,000 increase in the Department of ~~Contents~~the Treasury’s Business Enterprise Award (BEA) to a total of $600,000, which are awarded to qualifying “CDFI” institutions based on lending in low to moderate income census tracts from the amount awarded in 2009, and a $57,000 increase in gains on sale of securities, partially offset by a $100,000 increase in OREO expense and a $2,000 decrease in service charge income.

~~The~~Other ~~allowance~~Expense. Other expense decreased $297,000, or 7.0%, to $3.9 million for ~~loan~~the ~~losses~~year ~~was~~ended December 31, 2010, from $14.63 million for the year ended December 31, or2009. The 2decrease was due mainly to the $1.932 ~~percent~~million ofgoodwill ~~total~~impairment ~~loans~~recorded in 2009 and 35a $28,000 increase in occupancy expense.5 These ~~percent~~were ofoffset ~~nonperforming~~by ~~loans,~~increases ~~respectively~~in data processing expense of $34,000, atsalary ~~December 31~~and compensation of $164,000, ~~2010~~deposit insurance premiums of $167,000, asother ~~compared~~expenses toof $~~915~~242,000 and professional fees of $254,000 orin 12010.61 The ~~percent~~increase in data processing expense was the result of ~~total~~the ~~loans~~Company ~~and~~buying 47out a processing contract as part of its plan to improve its ATM processing during 2010.8 The ~~percent~~increase in salary and compensation was the result of ~~nonperforming~~the ~~loans,~~full-year ~~respectively,~~salaries atand ~~December 31,~~benefits of lending personnel hired in 2009 as the loan portfolio grew. AsThe ofincrease ~~December 31,~~in ~~2010~~deposit insurance premiums was primarily due to the increase in deposit balances, as well as the ~~Bank~~FDIC ~~believed~~raising ~~its~~the ~~allowance~~assessment ~~for~~rates ~~loan~~to ~~losses~~all banks. The increase in other expenses was ~~adequate~~due to ~~cover~~consultants ~~probable~~and ~~losses~~charge-offs. The increase in professional fees was due to the Company incurring additional fees related to Securities and Exchange Commission reporting obligations and the creation of a capital restoration plan.

Other Income. Other income increased $221,000, or 28.4 percent, to $1.0 million for the year ended December 31, 2010, from $779,000 for the year ended December 31, 2009. The increase was due mainly to a $170,000 increase in the Department of the Treasury’s Business Enterprise Award (BEA) to a total of $600,000, which are awarded to qualifying CDFI institutions based on lending in low to moderate income census tracts, and a $57,000 increase in gains on sale of securities, partially offset by a $100,000 increase in OREO expense and a $2,000 decrease in service charge income.

Other Expense. Other expense decreased $297,000, or 7.0 percent, to $3.9 million for the year ended December 31, 2010, from $4.3 million for the year ended December 31, 2009. The decrease was due mainly to the $1.2 million goodwill impairment recorded in 2009 and a $28,000 increase in occupancy expense. These were offset by increases in data processing expense of $34,000, salary and compensation of $164,000, deposit insurance premiums of $167,000, other expenses of $242,000 and professional fees of $254,000 in 2010. The increase in data processing expense was the result of the Company buying out a processing contract as part of its plan to improve its ATM processing. The increase in salary and compensation was the result of the full-year salaries and benefits of lending personnel hired in 2009 as the loan portfolio grew. The increase in deposit insurance premiums was primarily due to the increase in deposit balances, as well as the FDIC raising the assessment rates to all banks. The increase in other expenses was due to consultants and operational charge-offs. The increase in professional fees was due to the Company incurring additional fees related to its initial registration as an SEC reporting company and the creation of a capital restoration plan.

~~Comparison~~Average ofBalances, ~~Results~~Net ofInterest ~~Operations~~Income ~~for the Year Ended December 31, 2009~~ and ~~the Period from Inception (March 12, 2008) to December 31, 2008~~Rates:

~~General.~~ The ~~Company’s~~following ~~net~~table ~~loss~~sets ~~for~~forth the ~~year~~average ~~ended December 31~~balances, ~~2009~~net ~~was~~interest ~~$1.8 million~~income, ~~compared~~and toexpenses aand ~~net~~average ~~loss~~yields ~~of $1.2 million~~ for ~~the~~interest-earning ~~period~~assets ~~from~~and ~~inception,~~interest-bearing ~~March 12,~~liabilities ~~2008,~~for tothe ~~December 31,~~indicated ~~2008~~periods. ~~The~~No ~~increase~~tax inequivalent ~~net~~adjustments ~~loss~~were ~~was~~made ~~primarily~~because the ~~result~~Company ofdoes ~~the~~not ~~write~~receive tax-~~down~~exempt ~~of $1~~income.2 All ~~million~~average ofbalances ~~impaired~~are ~~goodwill,~~daily ~~partially~~average ~~offset by a $900,000 increase in the net interest margin~~balances. ~~The~~Non-accruing ~~Company~~loans ~~considered~~have ~~projected~~been ~~discount~~included ~~cash flows and price-to-tangible-book-value multiples~~ in ~~its~~the ~~goodwill~~table ~~analysis,~~ as ~~well~~loans ascarrying ~~quantitative~~a ~~circumstances~~zero ~~within the industry~~yield. ~~Goodwill~~Included ~~represents~~in ~~the~~loan ~~excess~~interest ofincome ~~cost~~are ~~over~~loan ~~fair~~fees ~~value~~ of ~~net~~$49,000 ~~assets~~and ~~acquired~~$73,000 ~~which~~for ~~arose in~~ the ~~acquisition~~periods ofended ~~Community~~December 31, ~~Bank~~2011 ofand ~~Lawndale~~2010, ~~during March 2008~~respectively.

Return on average assets was negative 2.74 percent for the year ended December 31, 2009, as compared to negative 3.75 percent for the period from inception, March 12, 2008, to December 31, 2008. Return on average shareholders’ equity was negative 31.92 percent and negative 23.29 percent for the year ended December 31, 2009 and for the period from inception, March 12, 2008, to December 31, 2008, respectively. The ratio of shareholders’ equity to total assets at December 31, 2009 and 2008 was 5.42 percent and 9.33 percent, respectively.51

Interest Income. Interest income increased by $1.8 million, or 112.5 percent, to $3.4 million for the year ended December 31, 2009, from $1.6 million for the period from inception, March 12, 2008, to

	As of and for the year ended December 31,
	2011							2010
	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
	(dollars in thousands)
Interest-Earning Assets:
Federal funds sold and corporate bonds	$	585	$	3		0.53	%	$	1,266	$	2		0.16	%
Interest-bearing deposits with other institutions		358		14		3.96	%		443		20		4.51	%
Securities – taxable		5,641		67		1.19	%		5,910		140		2.37	%
Loans
Construction		975		46		4.74	%		2,663		178		6.68	%
Commercial		663		39		5.89	%		717		54		7.53	%
Real estate		46,728		2,989		6.40	%		53,662		3,347		6.44	%
Consumer		399		16		4.02	%		458		20		4.37	%
Total loans		48,764		3,090		6.34	%		57,500		3,599		6.45	%
Total interest-earning assets	$	55,348	$	3,174		5.73	%	$	65,119	$	3,761		5.94	%

	As of and for the year ended December 31,
	2011							2010
	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
	(dollars in thousands)
Interest-Bearing Liabilities:
Deposits
NOW & money market	$	7,182	$	35		0.49	%	$	6,588	$	31		0.47	%
Savings		8,926		57		0.64	%		9,271		58		0.63	%
Time deposits of less than $100,000		18,611		51		0.27	%		28,628		64		0.22	%
Time deposits of $100,000 or more		20,249		605		2.99	%		18,419		819		4.45	%
Total deposits		54,967		747		1.36	%		62,906		972		1.55	%
Borrowings		625		64		10.24	%		626		47		7.51	%
Total interest-bearing liabilities	$	55,592	$	811		1.46	%	$	63,532	$	1,019		1.60	%
Net Interest Income			$	2,363						$	2,742
Net Interest Rate Spread (1)						4.28	%						4.34	%
Net Interest Margin (2)						4.27	%						4.21	%

~~Table~~(1) Net interest rate spread represents the difference between the yield on average interest-earning assets and the average cost of ~~Contents~~interest-bearing liabilities.

~~December~~(2) ~~31,~~Net ~~2008. The~~interest ~~increase~~margin inrepresents net interest income ~~resulted~~divided ~~primarily~~by ~~from an increase in~~ average ~~total~~ interest-earning assets ~~of $15~~.4 million, or 34.8 percent, to $59.6 million at December 31, 2009, from $44.2 million at December 31, 2008, as well as a 203 basis point increase in the average yield. The average yield on interest earning assets was 5.75 percent and 3.72 percent for 2009 and 2008, respectively.

Interest income on the loan portfolio was $3.2 million for the year ended December 31, 2009, compared to $826,000 for the period from inception, March 12, 2008, to December 31, 2008, an increase of $2.4 million. The increase was primarily due to a $38.2 million increase in average balances, partially offset by a 6 basis point decrease in the yield on the portfolio. The increase in interest income was due in part to a shorter reporting period, beginning with the purchase of the Bank on March 12, 2008. On an annualized basis, the Bank believes that the interest income for the year ended December 31, 2008 would have been approximately $1.0 million.

Interest income on the investment portfolio increased $3,000 due to a 44 basis point increase in the yield on the portfolio, partially offset by a $520,000 decrease in average balances. The investment portfolio balances were reduced as the Bank increased its lending balances in 2010, lowering the amount deployed in the investment portfolio. Interest income on federal funds sold declined $67,000 due to a $2.0 million decrease in average balances as well as a 139 basis point drop in yield as the federal funds target rate dropped to 0.25% for most of the year. Interest on deposits in other financial institutions decreased $524,000, primarily due to the decrease in stock subscription escrow balances upon the issuance of stock used in the acquisition of the Bank.

Interest Expense. Interest expense on deposits increased $882,000, or 220.0 percent, to $1.3 million for the year ended December 31, 2009, from $401,000 for the period from inception, March 12, 2008, to December 31, 2008. The increase was due to a $36.4 million increase in average total interest-bearing deposits from $19.4 million at December 31, 2008 to $55.8 million at December 31, 2009, an increase of 187.6 percent. In addition, there was a 24 basis point, or 11.7 percent, increase in the average rates paid on deposits from 2.06 percent for the period from inception, March 12, 2008, to December 31, 2008, compared to 2.30 percent for the year ended December 31, 2009. The increase in interest expense was due in part to a shorter reporting period, beginning with the purchase of the Bank on March 12, 2008. On an annualized basis, the Company believes that the interest expense would have been approximately $507,000 for the year ended December 31, 2008.

Net Interest Income. Net interest income increased $914,000, or 75.0 percent, to $2.1 million for the year ended December 31, 2009, from $1.2 million for the period from inception, March 12, 2008, to December 31, 2008.

The increase in net interest income resulted primarily from an increase in net interest margin to 3.57 percent for the year ended December 31, 2009, compared to 3.42 percent for the period from inception, March 12, 2008, to December 31, 2008. The increase in net interest income was due in part to a shorter reporting period, beginning with the purchase of the Bank on March 12, 2008. On an annualized basis, the company believes that the net interest income would have been approximately $1.5 million for the year ended December 31, 2008.

Provision for Loan Losses. The provision for loan losses is charged to earnings to bring the total allowance for loan losses to a level considered adequate by management to cover probable credit losses in the loan portfolio. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examinations.

Table of Contents

For the year ended December 31, 2009 and for the period from inception, March 12, 2008, to December 31, 2008, the provision for losses on loans totaled $497,000 and $347,000, respectively, based on management’s estimate of probable losses.

As of December 31, 2009, the Company’s total nonperforming loans were $1.92 million, compared to $689,000 total nonperforming loans as of December 31, 2008. The increase in non-performing assets was driven by a number of factors, which included job losses in the communities we serve, loss of tenants and a decrease in cash flow from the rental properties that collateralize a significant portion of our loan portfolio, and increased property tax burdens of our borrowers.

The allowance for loan losses was $915,000, or 1.61 percent of total loans and 47.8 percent of nonperforming loans, respectively, at December 31, 2009, as compared to $467,000, or 1.18 percent of total loans and 67.8 percent of nonperforming loans, respectively, at December 31, 2008. As of December 31, 2009, the Bank believed its allowance for loan losses was adequate to cover probable losses.

Other Income. Other income increased $506,000, or 185.3 percent, to $779,000 for the year ended December 31, 2009, from $273,000 for the period from inception, March 12, 2008, to December 31, 2008. The increase was due mainly to a $412,000 increase in the BEA grant obtained, to a total of $429,905.

Other Expense. Other expense increased $2.0 million, or 87.0 percent, to $4.3 million for the year ended December 31, 2009, from $2.3 million for the period from inception, March 12, 2008, to December 31, 2008. On an annualized basis, the Company believes other expenses for the period ended December 31, 2008 would have been $2.9 million. The increase was due mainly to a $1.2 million write-down of impaired goodwill and a $396,000 increase in personnel costs as the Company’s turnaround plan required the hiring of multiple executives to execute the plan as well as a $252,000 increase in other expenses, including a $45,000 increase in FDIC premiums with the increase in deposit accounts and a $52,000 increase in consultant fees used in outsourcing non-core business processes.

Average Balances, Net Interest Income and Rates

The following table sets forth the average balances, net interest income, and expenses and average yields for interest-earning assets and interest-bearing liabilities for the indicated periods. No tax equivalent adjustments were made because the Company does not receive tax-exempt income. All average balances are daily average balances. Non-accruing loans have been included in the table as loans carrying a zero yield. Included in loan interest income are loan fees of $73,000 and $32,000 for the periods ended December 31, 2010 and 2009, respectively, as well as $32,000 and $1,000 for the periods ended December 31, 2009 and 2008, respectively.

	As of and for the year ended December 31,
	2010							2009
	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
	(dollars in thousands)
Interest-Earning Assets:
Federal funds sold	$	1,266	$	2		0.16	%	$	2,635	$	4		0.15	%

Table of Contents

	As of and for the year ended December 31,
	2010							2009
	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
	(dollars in thousands)
Interest-bearing deposits with other institutions		443		20		4.51	%		496		18		3.63	%
Securities – taxable		5,910		140		2.37	%		5,073		210		4.14	%
Loans
Construction		2,663		178		6.68	%		3,404		132		3.88	%
Commercial		717		54		7.53	%		1,281		79		6.17	%
Real estate		53,662		3,456		6.44	%		46,149		2,952		6.40	%
Consumer		458		20		4.37	%		546		29		5.31	%
Total loans		7,500		3,708		6.45	%		51,380		3,192		6.21	%
Total interest-earning assets	$	65,119	$	3,870		5.94	%	$	59,584	$	3,424		5.75	%
Interest-Bearing Liabilities:
Deposits
NOW & money market	$	6,588	$	31		0.47	%	$	5,345	$	27		0.51	%
Savings		9,271		58		0.63	%		8,623		55		0.64	%
Time deposits of less than $100,000		6,898		64		0.93	%		6,479		114		1.76	%
Time deposits of $100,000 or more		40,149		819		2.04	%		35,343		1,087		3.08	%
Total deposits		62,906		972		1.55	%		55,790		1,283		2.30	%
Borrowings		626		47		7.51	%		324		11		3.40	%
Total interest-bearing liabilities	$	63,532	$	1,019		1.60	%	$	56,114	$	1,294		2.31	%

Rate/Volume Analysis

The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Bank’s interest income and interest expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume (change in volume multiplied by prior year rate), (2) changes in rate (change in rate multiplied by prior year volume) and (3) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume. ~~The period ended December 31, 2008 is for the period from inception, March 12, 2008, to December 31, 2008, and not a full twelve-month period, and the results for the period have been annualized.~~

	As of and for the year ended December 31,									As of and for the year ended December 31,
	2010 vs. 2009									2009 vs. 2008
	Increase (Decrease) Due To:									Increase (Decrease) Due To:
	Total Yield/Rate			Volume			Total Increase (Decrease)(1)			Total Yield/Rate			Volume			Total Increase (Decrease)
	(dollars in thousands)
Interest-Earning Assets:
Federal funds sold	$	—		$	(2	)	$	(2	)	$	(45	)	$	(22	)	$	(67	)
Interest-bearing deposits with other institutions		4			(2	)		2			317			(841	)		(524	)
Securities – taxable		(114	)		44			(70	)		15			(12	)		3
Loans
Commercial		25			(50	)		(25	)		(30	)		(106	)		(136	)

	As of and for the year ended December 31,									As of and for the year ended December 31,
	2011 vs. 2010									2010 vs. 2009
	Increase (Decrease) Due To:									Increase (Decrease) Due To:
	Total Yield/Rate			Volume			Total Increase (Decrease)(1)			Total Yield/Rate			Volume			Total Increase (Decrease)
	(dollars in thousands)
Interest-Earning Assets:
Federal funds sold	$	5		$	(4	)	$	1		$	-		$	(2	)	$	(2	)
Interest-bearing deposits with other institutions		(2	)		(3	)		(6	)		4			(2	)		2
Securities – taxable		(70	)		(3	)		(73	)		(114	)		44			(70	)
Loans
Commercial		(12	)		(3	)		(15	)		25			50			(25	)
Real estate		(75	)		(524	)		(490	)		116			434			550
Consumer		(2	)		(2	)		(4	)		(5	)		(4	)		(9	)
Total loans		(88	)		(529	)		(509	)		136			380			516
Total interest-earning assets	$	(156	)	$	(539	)	$	(586	)	$	26		$	420		$	446

Table of Contents

	As of and for the year ended December 31,									As of and for the year ended December 31,
	2011 vs. 2010									2010 vs. 2009
	Increase (Decrease) Due To:									Increase (Decrease) Due To:
	Total Yield/Rate			Volume			Total Increase (Decrease)(1)			Total Yield/Rate			Volume		Total Increase (Decrease)
	(dollars in thousands)
Interest-Bearing Liabilities:
Deposits
Money market & NOW	$	1		$	3		$	4		$	(5	)	$	9	$	(4	)
Savings		1			(2	)		(1	)		(1	)		4		3
Time deposits of less than $100,000		14			(27	)		(13	)		(58	)		8		(50	)
Time deposits of $100,000 or more		(269	)		55			(214	)		(449	)		181		(268	)
Total deposits		(253	)		28			(225	)		(513	)		202		(319	)
Borrowings		17			(0	)		17			20			16		36
Total interest-bearing liabilities	$	(236	)	$	28		$	(208	)	$	(493	)	$	218	$	(283	)
Change in Net Interest Income	$	80		$	(567	)	$	(379	)	$	519		$	202	$	729

	As of and for the year ended December 31,									As of and for the year ended December 31,
	2010 vs. 2009									2009 vs. 2008
	Increase (Decrease) Due To:									Increase (Decrease) Due To:
	Total Yield/Rate			Volume			Total Increase (Decrease)(1)			Total Yield/Rate			Volume			Total Increase (Decrease)
	(dollars in thousands)
Real estate		116			434			550			37			2,451			2,493
Consumer		(5	)		(4	)		(9	)		(1	)		10			9
Total loans		136			380			516			6			2,355			2,366
Total interest-earning assets	$	26		$	420		$	446		$	293		$	1,480		$	1,778
Interest-Bearing Liabilities:
Deposits
Money market & NOW	$	(5	)	$	9		$	(4	)	$	—		$	(6	)	$	(6	)
Savings		(1	)		4			3			(37	)		18			(19	)
Time deposits of less than $100,000		(58	)		8			(50	)		128			(207	)		(79	)
Time deposits of $100,000 or more		(449	)		181			(268	)		(26	)		1,012			986
Total deposits		(513	)		202			(311	)		65			817			882
Borrowings		20			16			36			(45	)		27			(18	)
Total interest-bearing liabilities	$	(493	)	$	218		$	(275	)	$	20		$	844		$	864
Change in Net Interest Income	$	519		$	202		$	721		$	273		$	636		$	914

Recent Accounting Pronouncements

Refer to Note 2 1 of our consolidated financial statements for a description of recent accounting pronouncements, including the respective dates of adoption and effects on results of operations and financial condition.

Impact of Inflation and Changing Prices

The financial statements and related financial data presented in this Annual Report on Form 10-K regarding the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, which generally require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all the Company’s assets and liabilities are monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

Liquidity and Capital Resources

Liquidity. Liquidity management is the process by which the Company ensures that adequate liquid funds are available to meet the present and future cash flow obligations arising from the daily operations of the business. These financial obligations consist of needs for funds to meet commitments to borrowers for extension of credit, funding capital expenditures, withdrawals by customers, maintaining deposit reserve requirements, servicing debt, and paying operating expenses.

The Company believes that it achieves a satisfactory degree of liquidity through actively managing both assets and liabilities. Asset management guides the proportion of liquid assets to total assets, while liability management monitors future funding requirements and prices liabilities accordingly.

45The Company’s primary sources of liquidity are deposits, advances from the Federal Home Loan Bank, amortization and prepayment of loans, maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank sets interest rates on deposits to maintain a desired level of deposits. In addition, the Bank invests excess funds in short-term interest-earning investments and other assets, which provide liquidity to meet lending requirements. Short-term interest-earning deposits with the Federal Home Loan Bank of Chicago amounted to approximately $17,000 at December 31, 2011 and $3,000 at December 31, 2010. For additional information about cash flows from operating, financing and investing activities, see Consolidated Statements of Cash Flows included in the consolidated financial statements.

~~Table~~A significant portion of ~~Contents~~the Bank’s liquidity consists of securities classified as available-for-sale and cash and cash equivalents, which are a product of our operating, investing and financing activities. Our primary sources of cash are principal repayments on loans and increases in deposit accounts, along with advances from the Federal Home Loan Bank of Chicago.

~~assets,~~Liquidity ~~while~~management ~~liability~~is both a daily and long-term function of the Company’s management. If ~~monitors~~the ~~future~~Company ~~funding~~requires ~~requirements~~funds beyond its ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Chicago and ~~prices~~the ~~liabilities~~Federal ~~accordingly~~Reserve Bank of Chicago. At December 31, 2011 and 2010, we had $3.8 million and $1.3 million, respectively, in advances from the Federal Home Loan Bank of Chicago.

~~Our~~At ~~primary~~December 31, ~~sources~~2011 ofand ~~liquidity are deposits~~2010, ~~advances from~~ the ~~Federal~~Company ~~Home~~had ~~Loan~~outstanding ~~Bank,~~loan ~~amortization~~commitments ~~and prepayment~~ of ~~loans~~$145,000 ~~maturities~~and of$1,091,000, ~~investment~~respectively. This ~~securities~~amount ~~and~~does ~~other~~not ~~short-term~~include ~~investments,~~the ~~and~~unfunded ~~earnings~~portion ~~and~~of ~~funds~~loans ~~provided~~in ~~from operations~~process. ~~While~~At ~~scheduled~~December 31, ~~principal~~2011 ~~repayments on loans~~ and ~~mortgage-backed~~2010, ~~securities~~certificates ~~are a relatively predictable source~~ of ~~funds,~~ deposit ~~flows~~scheduled ~~and~~to ~~loan~~mature ~~prepayments~~in ~~are~~less ~~greatly~~than ~~influenced~~one byyear ~~general~~totaled ~~interest~~$9.8 ~~rates,~~million ~~economic conditions~~ and ~~competition~~$18.7 million. WeBased ~~set the interest rates~~ on ~~our~~prior ~~deposits~~experience, tomanagement ~~maintain~~believes that a ~~desired~~significant ~~level~~portion of ~~deposits. In~~such ~~addition,~~non-brokered wedeposits ~~invest~~will ~~excess~~remain ~~funds~~with inus, ~~short-term~~although ~~interest-earning~~there ~~investments~~can ~~and~~be ~~other~~no ~~assets,~~assurance ~~which~~that ~~provide~~this ~~liquidity~~will tobe ~~meet~~the ~~lending requirements~~case. ~~Short-term~~The ~~interest-earning~~brokered deposits ~~with~~scheduled ~~the~~to ~~Federal~~mature, ~~Home~~which ~~Loan~~cannot ~~Bank~~be ~~of Chicago amounted to $3~~renewed,~~000~~ atin ~~December 31,~~2012 ~~2010~~total ~~and~~approximately $~~63,000~~4.9 atmillion as of December 31, ~~2009~~2011. ~~For~~In ~~additional information about cash flows from operating~~addition, ~~financing~~the ~~and~~cost ~~investing~~of ~~activities,~~such ~~see~~deposits ~~Consolidated~~may ~~Statements~~be ofsignificantly ~~Cash~~higher ~~Flows~~upon ~~included~~renewal in ~~the~~a ~~consolidated~~rising ~~financial~~interest ~~statements~~rate environment.

A significant portion of our liquidity consists of securities classified as available-for-sale and cash and cash equivalents, which are a product of our operating, investing and financing activities. Our primary sources of cash are principal repayments on loans and increases in deposit accounts, along with advances from the Federal Home Loan Bank of Chicago.54

~~Liquidity~~Capital. The ~~management~~Company is ~~both~~pursuing aadditional ~~daily~~capital. Immediate ~~and~~capital ~~long-term~~is ~~function~~needed as the ongoing viability of ~~business~~the ~~management~~Company is threatened. IfThe weCompany ~~require~~is ~~funds~~currently ~~beyond~~seeking ~~our~~investment ~~ability~~to be able to ~~generate~~inject ~~them~~additional ~~internally~~capital in the Bank to meet the requirements of the various regulatory directives; however, ~~borrowing~~no ~~agreements~~assurances ~~exist~~can ~~with~~be made that such efforts will be successful. On May 31, 2010, the ~~Federal~~Company ~~Home~~received ~~Loan~~shareholder ~~Bank~~approval to authorize and issue up to 1,000,000 shares of ~~Chicago~~preferred stock and ~~the~~up ~~Federal~~to ~~Reserve~~9,000,000 ~~Bank~~additional shares of ~~Chicago~~common stock. AtAs of December 31, ~~2010~~2011, wethe ~~had~~Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A issued and outstanding totaled 22 in the amount of $550,000. As of November 2, 2012, the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A issued and outstanding totaled 58 shares or $1,450,000.3 Furthermore, ~~million~~a total of 4,569 shares of common stock were issued during the period ended December 31, 2011 totaling $28,000 in ~~advances~~exchange ~~from~~for matured senior convertible notes. Furthermore, the ~~Federal~~regulatory ~~Home~~directives ~~Loan~~issued by the FDIC and IDFPR restricts the taking of dividends or any other payment representing a reduction of capital from the Bank, without prior approval of ~~Chicago~~the FDIC.

AtThe Federal ~~December 31,~~Deposit ~~2010,~~Insurance weCorporation ~~had~~(the ~~outstanding~~“FDIC”) ~~loan~~and ~~commitments~~the ofIDFPR $1entered into a final joint Consent Order on June 6,~~091,000~~ 2011. ~~This~~Pursuant ~~amount~~to ~~does~~the ~~not~~Consent ~~include~~Order, among other things, the ~~unfunded~~Bank ~~portion~~has agreed to achieve and maintain a Tier 1 capital to total assets ratio of ~~loans~~at inleast ~~process~~9% and a total risk-based capital ratio of at least 13%. AtAs of December 31, ~~2010~~2011, ~~certificates~~the ofBank’s ~~deposit~~Tier ~~scheduled~~1 leverage capital to ~~mature~~total inassets ~~less~~ratio ~~than~~was ~~one~~2.42%, ~~year~~compared ~~totaled~~to ~~$18~~4.781% ~~million. Based~~as onof ~~prior~~December ~~experience~~31, ~~management~~2010, ~~believes~~and ~~that~~the atotal ~~significant~~risk-based ~~portion~~capital ofratio ~~such~~was ~~deposits~~5.20% ~~will~~as ~~remain~~of ~~with~~December us31, ~~although~~2011, ~~there~~compared ~~can~~to be9.37% noas ~~assurance~~of ~~that~~December ~~this~~31, ~~will~~2010. Furthermore, beas of September 30, 2012, the ~~case~~Bank’s Tier 1 leverage capital to total assets ratio was 1. In06% ~~addition~~compared to 3.32% as of September 30, 2011, and the ~~cost~~total risk-based capital ratio was 2.95% as of ~~such~~September ~~deposits~~30, ~~may~~2012 beas compared to 6.17% as of September 30, 2011. As of September 30, 2012, these ratios were below the significantly ~~higher~~undercapitalized ~~upon~~level ~~renewal~~set inby athe ~~rising~~federal ~~interest~~bank ~~rate~~regulators ~~environment~~as well as below the levels set by the Consent Order.

~~Capital. The~~Off-Balance-Sheet Company is pursuing additional capital. Immediate capital is needed as the ongoing viability of the Company is threatened. The Company is currently seeking investment to be able to inject additional capital in the Bank to meet the requirements of the Order; however, no assurances can be made that such efforts will be successful. On May 31, 2010, the Company received shareholder approval to authorize and issue up to 1,000,000 shares of preferred stock and up to 9,000,000 additional shares of common stock.Arrangements

~~Off-Balance-Sheet~~Commitments. As ~~Arrangements~~a financial services provider, the Bank routinely enters into commitments to extend credit, including loan commitments, standby and commercial letters of credit. While these contractual obligations represent future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans made by the bank.

~~Commitments~~Contractual Obligations. AsIn athe ~~financial~~ordinary ~~services~~course ~~provider~~of operations, wethe ~~routinely~~bank enters ~~enter~~ into ~~commitments~~certain tocontractual ~~extend credit, including loan commitments, standby and commercial letters of credit~~obligations. ~~While~~Such ~~these contractual~~ obligations ~~represent~~include ~~our~~the ~~future~~funding ~~cash requirements, a significant portion~~ of ~~commitments~~operations tothrough ~~extend~~debt ~~credit~~issuances, ~~may~~operating ~~expire~~leases ~~without~~for ~~being~~premises ~~drawn~~and ~~upon. Such~~equipment, ~~commitments~~as ~~are~~well ~~subject~~as tocapital ~~the~~expenditures ~~same~~for ~~credit~~new ~~policies~~premises and ~~approval process accorded to loans made by us~~equipment.

~~Contractual~~The ~~Obligations. In~~following ~~the~~table ~~ordinary~~summarizes ~~course~~our ofsignificant ~~operations, we enter into certain~~ contractual obligations~~. Such~~ ~~obligations~~and ~~include~~other ~~the~~potential funding ofneeds ~~operations~~at ~~through debt issuances~~December 31, ~~operating leases for premises and equipment, as well as capital expenditures for new premises and equipment.~~2011:

	December 31, 2011
	Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years		Total
	(in thousands)
Operating leases	$	79	$	30	$	9	$	-	$	118
Commitments to extend credit		26		-		-		-		26
Unfunded commitments under lines of credit		-		-		120		-		120
Letters of credit		-		-		-				-
Notes issued		675		-		-		-		675
Total	$	780	$	30	$	129	$	-	$	939

~~Table of Contents~~55

The following table summarizes our significant contractual obligations and other potential funding needs at December 31, 2010:

	December 31, 2010
	Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years		Total
	(in thousands)
Operating leases	$	66	$	70	$	—	$	—	$	136
Commitments to extend credit		521		—		—		—		521
Unfunded commitments under lines of credit		475		—		—		95		570
Letters of credit		—		—		—		—		—
Notes issued		365		—		—		—		365
Total	$	1,427	$	70	$	—	$	95	$	1,592

Asset and Liability Management

The primary functions of asset and liability management are to ensure adequate liquidity and the maintenance of an appropriate balance between interest-sensitive earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet cash flow requirements of depositors wishing to withdraw funds, and borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. The Company’s objective is to manage its assets and liabilities to provide optimum and stable net interest margin while avoiding any undue interest rate risk. The Company’s funds management strategy is to provide adequate returns, as well as sufficient liquidity.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary market risk exposure is interest rate risk. Interest rate risk is the exposure of a banking organization’s financial condition to adverse movements in interest rates. The Company analyzes its interest rate sensitivity. Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities that either re-price or mature within a given period of time.

The Company analyzes its interest rate sensitivity. Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities that either re-price or mature within a given period of time.

A gap is considered positive when the amount of interest-rate-sensitive assets exceeds the amount of interest-rate-sensitive liabilities, and a gap is considered negative when the amount of interest-rate-sensitive liabilities exceeds the amount of interest-rate-sensitive assets.

Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds on which rates change daily and loans that are tied to prime or other short-term indices differ considerably from long-term investment securities and fixed-rate loans. Similarly, time deposits are much more interest-sensitive than savings accounts. The shorter-term interest rate sensitivities are key to measuring the interest sensitivity gap or excess interest-earning assets over interest-bearing liabilities. Management of interest sensitivity involves matching ~~repricing~~re-pricing dates of interest-earning assets with interest-bearing liabilities in a manner designed to optimize net interest income within the limits imposed by the Company’s Board of Directors, liquidity determinations and capital considerations. The following Interest Rate Sensitivity Gaps table sets forth the earliest repricing distribution of the Bank’s interest-earning assets and interest-bearing liabilities at December 31, ~~2010~~2011, the Bank’s interest rate sensitivity gap ratio (i.e., excess of interest rate-sensitive ~~assets~~liabilities over interest rate-sensitive ~~liabilities~~assets, divided by total assets) and the Bank’s cumulative interest rate sensitivity gap ratio. For purposes of the table, except for savings deposits, an asset or liability is considered rate-sensitive within a specified period when it matures or could be re-priced within such period in accordance with its contractual terms. At December 31, 2011, a liability-sensitive position is maintained on a cumulative basis through one year of -9.53%, compared to an asset-sensitive position maintained through one year of 6.59% at December 31, 2010. Generally, because of the negative excess position of the Bank; in shorter time frames, the Bank can anticipate that decreases in market rates will have a negative impact on the net interest income, while increases will have the opposite effect. Management has minimized the impact by shifting excess funds to commercial loan originations that are fixed for at least five years and by reducing the interest rates it pays on interest-bearing deposit products.

47Generally, during a period of rising interest rates, a negative gap within shorter maturities adversely affects net interest income, while a positive gap within shorter maturities would result in an increase in net interest income, and during a period of falling interest rates, a negative gap within shorter maturities would result in an increase in net interest income, while a positive gap within shorter maturities would have the opposite effect.

~~Table of Contents~~56

~~within~~The afollowing ~~specified~~table ~~period~~sets ~~when~~forth itthe ~~matures~~static ~~or could be repriced within such period in accordance with its contractual terms. At December 31, 2010, an asset~~rate-~~sensitive~~sensitivity ~~position~~analysis ~~is maintained on a cumulative basis through one year~~ of ~~6.59%. Generally, because of~~ the ~~positive~~Company ~~gap~~as ~~position~~ of ~~the Bank~~December 31, in shorter time frames, the Bank can anticipate that increases in market rates will have a positive impact on the net interest income, while decreases will have the opposite effect. In the current low interest rate environment, this positive gap position creates margin compression. Management has minimized the impact by shifting excess funds to commercial loan originations that are fixed for at least five years and by reducing the interest rates it pays on interest-bearing deposit products.2011:

Generally, during a period of rising interest rates, a negative gap within shorter maturities would adversely affect net interest income, while a positive gap within shorter maturities would result in an increase in net interest income, and during a period of falling interest rates, a negative gap within shorter maturities would result in an increase in net interest income, while a positive gap within shorter maturities would have the opposite effect.

	Interest rate sensitivity gaps as of December 31, 2011
(Dollars in Thousands)	3 months or less			Over 3 through 12 months			Over 1 year through 3 years			Over 3 years through 5 years			Over 5 years			Cumulative
Interest-sensitive assets:
Interest bearing deposits	$	-		$	-		$	-		$	-		$	-		$	-
Federal funds sold		550			-			-			-			-			550
Investment securities		2,625			2,050			601			-			-			5,276
Loans		9,068			16,258			18,208			1,358			178			45,070
Total interest-sensitive assets:	$	12,243		$	18,308		$	18,809		$	1,358		$	178		$	50,896
Cumulative totals		12,243			30,551			49,360			50,718			50,896
Interest-sensitive liabilities:
Interest checking accounts	$	2,077		$	-		$	2,077		$	-		$	-		$	4,154
Savings accounts		4,382			-			4,382			-			-			8,764
Money market deposits		1,040			-			1,040			-			-			2,080
Time deposits		5,843			17,584			11,117			794			-			35,338
Short-term borrowings		3,750			675			-			-			-			4,425
Total interest-sensitive liabilities:	$	17,092		$	18,259		$	18,616		$	794		$	-		$	54,761
Cumulative totals		17,092			35,351			53,967			54,761			54,761
Interest Sensitivity Gap	$	(4,849	)	$	49		$	193		$	564		$	178
Cumulative Gap	$	(4,849	)	$	(4,800	)	$	(4,607	)	$	(4,043	)	$	(3,865	)
Cumulative Gap/Total Earning Assets		-9.63	%		-9.53	%		-9.15	%		-8.03	%		-7.68	%

The following table sets forth the static rate-sensitivity analysis of the Company as of December 31, 2010:

	Interest rate sensitivity gaps as of December 31, 2010
(Dollars in Thousands)	3 months or less			Over 3 through 12 months			Over 1 year through 3 years			Over 3 years through 5 years			Over 5 years			Cumulative
Interest-sensitive assets:
Interest bearing deposits	$	439		$	—		$	—		$	—		$	—		$	439
Federal funds sold		1,105			—			—			—			—			1,105
Investment securities		—			1,200			2,900			1,000			—			5,100
Loans		10,429			18,980			18,708			5,717			504			54,338
Total interest-sensitive assets:	$	11,973		$	20,180		$	21,608		$	6,717		$	504		$	60,982
Cumulative totals		11,973			32,153			53,761			60,478			60,982
Interest-sensitive liabilities:
Interest checking accounts	$	1,722		$	—		$	1,722		$	—		$	—		$	3,443
Savings accounts		4,266			—			4,266			—			—			8,532
Money market deposits		1,915			—			1,915			—			—			3,830
Time deposits		4,442			14,250			20,796			755			—			40,243
Short-term borrowings		1,250			365			—			—			—			1,615
Total interest-sensitive liabilities:	$	13,595		$	14,615		$	28,699		$	755		$	—		$	57,663
Cumulative totals		13,595			28,210			56,908			57,663			57,663
Interest Sensitivity Gap	$	(1,622	)	$	5,565		$	(7,091	)	$	5,962		$	504
Cumulative Gap	$	(1,622	)	$	3,944		$	(3,147	)	$	2,815		$	3,319
Cumulative Gap/Total Earning Assets		-2.71	%		6.59	%		-5.26	%		4.71	%		5.55	%

For purpose of the gap analysis, 50% of such deposits (savings, MMDA and NOW), which do not have definitive maturity dates and do not readily react to changes in interest rates have been placed in longer repricing intervals versus immediate repricing time frames, making the analysis more reflective of the Bank’s historical experience.

The ~~foregoing~~ table above shows a negative (liability-sensitive) interest rate-sensitivity gap for ~~the~~all categories: 3 months or less, ~~and~~over 3 through 12 months, over 1 year through 3 years ~~categories~~, ~~with~~over a3 ~~positive~~years ~~(asset-sensitive)~~through ~~rate~~5 ~~sensitivity~~years ~~for~~and ~~all~~over ~~other~~5 ~~categories~~years. The negative gaps result from having more liabilities subject to repricing during that particular time period than assets subject to repricing during the same time period. Furthermore, on a cumulative basis, which assumes that as assets and liabilities are repriced, they are either retained in the 3same ~~months~~category or ~~less~~replaced ~~and~~by ~~over~~instruments with similar characteristics, the gap is liability-sensitive in all categories. The Company’s cumulative asset-sensitive gap structure in the 1 year ~~through~~category 3(which ~~years~~is ~~categories~~the time frame the Company devotes most of its attention to in its funds management function) will allow net interest margin to grow if interest rates increase during that time frame, as yields on interest-earning assets would increase at a faster pace than the costs on interest-bearing liabilities. The difference, or the interest rate repricing “gap,” provides an indication of how the Company’s interest rate spread will be affected by changes in interest rates.

4857

~~Table~~While using the interest sensitivity gap analysis is a useful management tool, as it considers the quantity of ~~Contents~~assets and liabilities subject to repricing in a given time period, it does not consider the relative sensitivity to market interest rate changes that is characteristic of various interest rate-sensitive assets and liabilities. Consequently, even though the Bank currently has a negative gap position because of unequal sensitivity of these assets and liabilities, management believes this position will not materially impact earnings in a changing rate environment. For example, management believes that changes in the prime rate on variable commercial loans may not result in an equal change in the rate of money market deposits or short-term certificates of deposit. A simulation model is therefore used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the net income of the Bank. The calculated net interest income or “earnings” at risk at December 31, 2011 and 2010 is as follows:

result from having more liabilities subject to repricing during that particular time period than assets subject to repricing during the same time period. In all other time frames, the volume of assets subject to repricing exceeds the volume of liabilities subject to repricing, resulting in a positive gap. On a cumulative basis, which assumes that as assets and liabilities are repriced, they are either retained in the same category or replaced by instruments with similar characteristics, the gap is liability sensitive in the 3 months or less and over 1 year through 3 years categories. The Company’s cumulative asset-sensitive gap structure in the 1 year category (which is the time frame the Company devotes most of its attention to in its funds management function) will allow net interest margin to grow if interest rates increase during that time frame, as yields on interest-earning assets would increase at a faster pace than the costs on interest-bearing liabilities. The difference, or the interest rate repricing “gap,” provides an indication of how the Company’s interest rate spread will be affected by changes in interest rates.

	December 31, 2011
	-300			-200			-100			-50			+50			+100			+200			+300
	(dollars in thousands)
Dollar Change	$	(563	)	$	(385	)	$	(184	)	$	(92	)	$	27		$	66		$	153		$	243
Percentage Change		-21.8	%		-14.9	%		-7.1	%		-3.6	%		1.0	%		2.6	%		5.9	%		9.4	%

While using the interest sensitivity gap analysis is a useful management tool, as it considers the quantity of assets and liabilities subject to repricing in a given time period, it does not consider the relative sensitivity to market interest rate changes that is characteristic of various interest rate-sensitive assets and liabilities. Consequently, even though the Bank currently has a positive gap position because of unequal sensitivity of these assets and liabilities, management believes this position will not materially impact earnings in a changing rate environment. For example, changes in the prime rate on variable commercial loans may not result in an equal change in the rate of money market deposits or short-term certificates of deposit. A simulation model is therefore used to estimate the impact of various changes, both upward and downward, in market interest rates and volumes of assets and liabilities on the net income of the Bank. The calculated net interest income or “earnings” at risk at December 31, 2010 and 2009 is as follows:

	December 31, 2010
	-300			-200			-100			-50			+50			+100			+200			+300
	(dollars in thousands)
Dollar Change	$	(806	)	$	(447	)	$	(139	)	$	(38	)	$	40		$	66		$	121		$	185
Percentage Change		-24.1	%		-13.4	%		-4.1	%		-1.1	%		1.2	%		2.0	%		3.6	%		5.5	%

	December 31, 2009
		-300			-200			-100			-50			+50			+100			+200			+300
	(dollars in thousands)
Dollar Change	$	(978	)	$	(472	)	$	(136	)	$	(60	)	$	7		$	8		$	17		$	28
Percentage Change		(26.5	%)		(12.8	%)		(3.7	%)		(1.6	%)		0.2	%		0.2	%		0.5	%		0.8	%

The estimated impact to our net interest income over a one-year period is reflected in dollar terms and percentage change. As an example, this table illustrates that if there had been an instantaneous parallel shift in the yield curve of +100 basis points on December 31, 2011, net interest income would increase by $66,000, or 2.6 percent, over a one-year period.

The estimated impact to our net interest income over a one-year period is reflected in dollar terms and percentage change. As an example, this table illustrates that if there had been an instantaneous parallel shift in the yield curve of +100 basis points on December 31, 2010, net interest income would increase by $66,000, or 2.0 percent, over a one-year period.

The assumptions used in evaluating the vulnerability of the Bank’s earnings to changes in interest rates are based on management’s consideration of past experience, current position and anticipated future economic conditions. The interest sensitivity of the Bank’s assets and liabilities, as well as the estimated effect of changes in interest rates on the earnings and equity, could vary substantially if different assumptions are used or actual experience differs from the assumptions on which the calculations were based. In today’s uncertain economic times, the result of the Bank’s simulation model is even more uncertain.

4958

Table of Contents

Item 8. Financial Statements and Supplementary Data.

Contents

Report of Independent Registered Public Accounting Firm	60

Consolidated Financial Statements

Consolidated Balance Sheet	61

Consolidated Statement of Operations	62

Consolidated Statement of Comprehensive Income	63

Consolidated Statement of Statement of Shareholders’ Equity	64

Consolidated Statement of Cash Flows	65 - 66

Notes to the Financial Statements	67 - 98

Report of Independent Registered Public Accounting Firm

Board of Directors

Covenant Bancshares, Inc. and Subsidiary

Forest Park, Illinois

We have audited the accompanying balance sheet of Covenant Bancshares, Inc. and Subsidiary as of December 31, 2011, and the related statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Covenant Bancshares, Inc. and Subsidiary at December 31, 2011, and the results of its operations and its cash flows for the year ended December 31, 2011, in conformity with accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and the Company’s subsidiary Bank does not meet its minimum capital requirements established by the Federal Deposit Insurance Corporation and the Illinois Department of Financial and Professional Regulation. The Company’s Board of Directors is evaluating all strategic options to raise additional capital. Failure to meet the capital requirements exposes the Company’s Banking Subsidiary to regulatory sanctions including mandatory asset dispositions or seizure. These matters raise substantial doubt about its ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Wipfli LLP

Wipfli LLP

February 12, 2013

Oak Brook, Illinois

Report of Independent Registered Public Accounting Firm

To the Board of Directors

Covenant Bancshares, Inc. and Subsidiary

Forest Park, Illinois

We have audited the accompanying consolidated balance ~~sheets~~sheet of Covenant Bancshares, Inc. and Subsidiary (the Company) as of December 31, 2010 ~~and 2009~~, and the related consolidated statements of operations, stockholders’ equity and cash flows for ~~each of~~ the ~~years~~year ~~ended~~then ~~December 31, 2010 and 2009, and for the period from inception (March 12, 2008) to December 31, 2008~~ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our ~~audits~~audit.

We conducted our ~~audits~~audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our ~~audits~~audit ~~provide~~provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Covenant Bancshares, Inc. and Subsidiary as of December 31, 2010 and ~~2009, and~~ the results of their operations and their cash flows for ~~each of~~ the ~~years~~year ~~ended~~then ~~December 31~~ended, ~~2010 and 2009, and for the period from inception (March 12, 2008) to December 31, 2008,~~ in conformity with U.S. generally accepted accounting principles.

As discussed in Note 21 to the consolidated financial statements, at December 31, 2010, the Company’s regulatory capital amounts and ratios are below the level required per the June 6, 2011 Consent Order issued by the Federal Deposit Insurance Corporation. The Company has also suffered recurring losses from operations. Failure to meet the capital requirements exposes the Company to regulatory sanctions that may include restrictions on operations and growth, mandatory asset dispositions, and seizure of the Company.

/s/ McGladrey LLP

/McGladrey LLP/

Schaumburg, Illinois

May 30, 2012

5061

Covenant Bancshares, Inc. and Subsidiary

~~Table~~Consolidated ofBalance ~~Contents~~Sheets

~~COVENANT~~December ~~BANCSHARES~~31, ~~INC.~~2011 ~~AND~~and ~~SUBSIDIARY~~2010

CONSOLIDATED BALANCE SHEETS

	2011		2010
	(in thousands, except share and per share data)
Assets
Cash and due from banks	$	8,205	$	3,803
Federal funds sold		550		1,105
Interest-bearing deposits in banks		17		201
Securities available for sale		5,276		5,225
Federal Home Loan Bank Stock, at cost		439		439
Loans, net of allowance for loan losses of $1,783 and $1,595		43,162		52,812
Premises and equipment, net		2,614		2,739
Other real estate owned		1,097		319
Intangible assets		211		277
Prepaid FDIC insurance assessment		346		526
Accrued interest receivable and other assets		573		793
Total assets	$	62,490	$	68,239

Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest-bearing	$	6,349	$	6,922
Interest-bearing		50,336		55,959
Total deposits		56,685		62,881

Notes payable		675		365
Federal Home Loan Bank advances		3,750		1,250
Dividends payable		2		-
Accrued interest payable and other liabilities		391		342
Total liabilities		61,503		64,838

Commitments, Contingencies and Credit Risk (See Note 12)
Stockholders' equity

Filing Compare · COVENANT BANCSHARES, INC.