SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO ________________
COMMISSION FILE #0-22699
COVENANT BANCORP, INC.
----------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2890624
---------- ----------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
18 KINGS HIGHWAY WEST, HADDONFIELD, NEW JERSEY 08033
----------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(609) 428-7300
--------------
(Registrant's telephone number, including area code)
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 report(s), and (2) has been subject to such filing
requirements for the past 90 days. (Note: Registrant is successor to Covenant
Bank, whose shares were previously registered with the Federal Deposit Insurance
Corporation).
Yes X No_____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practical date.
<TABLE>
<CAPTION>
<S> <C>
COMMON STOCK 3,057,332
- --------------------------------------------------- ------------------------------------------
(Title of Class) (No. of Shares Outstanding as of 11/07/97)
SERIES A NON-CUMULATIVE CONVERTIBLE PREFERRED STOCK 138,300
- --------------------------------------------------- ------------------------------------------
(Title of Class) (No. of Shares Outstanding as of 11/07/97)
SERIES B NON-CUMULATIVE CONVERTIBLE PREFERRED STOCK 161,700
- --------------------------------------------------- ------------------------------------------
(Title of Class) (No. of Shares Outstanding as of 11/07/97)
</TABLE>
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
Table of Contents
FINANCIAL INFORMATION PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Income (Unaudited)
Three months ended September 30, 1997 and September 30, 1996
and nine months ended September 30, 1997 and September 30, 1996 4-5
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1997 and
September 30, 1996 6
Consolidated Statements of Changes in Stockholders' Equity 7
Notes to Consolidated Financial Statements (Unaudited) 8-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-25
PART II. OTHER INFORMATION 26
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
<TABLE>
<CAPTION>
(in thousands) September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Assets:
Cash and due from banks $ 15,653 $ 12,446
Federal funds sold -- 3,100
--------- ---------
Cash and cash equivalents 15,653 15,546
--------- ---------
Investments available for sale (cost
1997-$120,091; 1996-$133,061) 119,944 132,578
Investment securities (fair value
1997-$11,236; 1996-$11,743) 11,144 11,687
Loans held for sale 338 --
Loans receivable 257,585 241,201
Less allowance for loan losses 2,714 3,016
--------- ---------
Loans receivable, net 254,871 238,185
--------- ---------
Premises and equipment, net 9,376 9,135
Real estate owned 1,049 695
Accrued interest receivable 3,222 3,913
Other assets 4,255 2,895
--------- ---------
Total Assets $ 419,852 $ 414,634
========= =========
Liabilities:
Non-interest bearing deposits 47,819 41,868
Interest bearing deposits 107,237 96,169
Time deposits 149,008 139,428
--------- ---------
Total deposits 304,064 277,465
--------- ---------
Advances from The Federal Home Loan Bank 14,700 20,500
Securities sold under agreements to repurchase 64,362 84,037
Other liabilities 4,590 3,381
--------- ---------
Total Liabilities 387,716 385,383
--------- ---------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock authorized 300,000 shares;
Series "A", $25 par value:
issued and outstanding 138,300 and
138,300 shares, respectively 3,457 3,457
Series "B", $25 par value:
issued and outstanding 161,700 and
161,700 shares, respectively 4,043 4,043
Common stock, $5 par value:
authorized 5,000,000 shares;
issued and outstanding 3,057,332 and
2,906,262 shares, respectively 15,287 14,531
Additional paid-in capital 12,137 10,614
Net unrealized holding (loss) on
investments available for sale (97) (305)
Accumulated deficit (2,691) (3,089)
--------- ---------
Total Stockholders' Equity 32,136 29,251
--------- ---------
Total Liabilities and Stockholders' Equity $ 419,852 $ 414,634
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVENANT BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
(In thousands except per share data) Three Months Ended September 30,
--------------------------------
1997 1996
---- ----
<S> <C> <C>
Interest Income
Interest and fees on loans $ 5,727 $ 5,144
Interest on investment securities 2,188 2,130
Other interest income 24 159
------- -------
Total interest income 7,939 7,433
Interest Expense
Interest on deposits 2,716 2,469
Interest on borrowings 1,278 1,126
------- -------
Total interest expense 3,994 3,595
------- -------
Net interest income 3,945 3,838
Provision for loan losses 3 483
------- -------
Net interest income after provision for loan losses 3,942 3,355
------- -------
Other Income
Service charges on deposit accounts 205 179
Loan servicing income 62 69
Other operating income 67 62
Gain on sale of assets -- --
------- -------
Total other income 334 310
------- -------
Other Expenses
Salaries and employee benefits 1,760 1,641
Net occupancy 470 398
Data processing and other service costs 258 283
Professional services 80 163
Advertising and promotion 50 53
SAIF recapitalization costs -- 504
Merger costs -- 666
Federal insurance premiums 18 59
Other operating expenses 379 397
------- -------
Total other expenses 3,015 4,164
------- -------
Income (loss) before income taxes 1,261 (499)
Income taxes (benefit) 336 (86)
------- -------
Net income (loss) 925 (413)
Less: preferred stock dividends 112 112
------- -------
Net income (loss) applicable to common shareholders $ 813 ($ 525)
======= =======
Income (loss) per common share and
common stock equivalents $ 0.21 ($ 0.17)
======= =======
Weighted average common stock and
common stock equivalents outstanding 4,358 3,175
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
COVENANT BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
(In thousands except per share data) Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Interest Income
Interest and fees on loans $16,627 $15,010
Interest on investment securities 6,851 6,350
Other interest income 71 356
------- -------
Total interest income 23,549 21,716
Interest Expense
Interest on deposits 7,881 7,177
Interest on borrowings 4,201 3,376
------- -------
Total interest expense 12,082 10,553
------- -------
Net interest income 11,467 11,163
Provision for loan losses 33 524
------- -------
Net interest income after provision for loan losses 11,434 10,639
------- -------
Other Income
Service charges on deposit accounts 516 519
Loan servicing income 153 193
Other operating income 157 146
Gain on sale of assets 11 --
------- -------
Total other income 837 858
------- -------
Other Expenses
Salaries and employee benefits 4,835 4,798
Net occupancy 1,388 1,186
Data processing and other service costs 522 707
Professional services 235 434
Advertising and promotion 125 146
SAIF recapitalization costs -- 504
Merger costs -- 666
Federal insurance premiums 57 179
Other operating expenses 1,091 1,118
------- -------
Total other expenses 8,253 9,738
------- -------
Income before income taxes 4,018 1,759
Income taxes 1,279 736
------- -------
Net income 2,739 1,023
Less: preferred stock dividends 337 337
------- -------
Net income applicable to common shareholders $ 2,402 $ 686
======= =======
Income per common share and
common stock equivalents $ 0.63 $ 0.22
======= =======
Weighted average common stock and
common stock equivalents outstanding 4,347 3,168
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) Nine Months ended September 30,
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996
---- ----
<S> <C> <C>
Net income $ 2,739 $ 1,023
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Provision for loan losses 33 524
Depreciation and amortization 478 392
Amortization of premiums and discounts, net 57 119
Loans originated for sale (641) (951)
Proceeds from sales of loans held for sale 303 1,887
Decrease in unearned discounts and loan fees, net (254) (206)
Increase in accrued interest receivable
and other assets (669) (1,222)
Increase in other liabilities 1,209 1,344
-------- --------
Net cash provided by operating activities 3,255 2,910
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments held to maturity -- (1,312)
Purchases of investments available for sale (6,970) (63,095)
Proceeds from maturities of investments available for sale 20,000 --
Proceeds from maturities of investments held to maturity -- 41,665
Principal collected on mortgage backed securities 518 621
Net increase in loans (17,459) (23,218)
Proceeds from sales of real estate owned 420 884
Purchases of premises and equipment (719) (977)
-------- --------
Net cash used in investing activities (4,210) (45,432)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 26,599 23,127
Net increase (decrease) in securities sold
under agreements to repurchase (19,675) 22,749
Net decrease in advances from the
Federal Home Loan Bank (5,800) (5,500)
Preferred stock dividends paid (337) (337)
Common stock issuance and other 275 (594)
-------- --------
Net cash provided by financing activities 1,062 39,445
Net increase (decrease) in cash and cash equivalents 107 (3,077)
Cash and cash equivalents at the beginning of the year 15,546 22,777
-------- --------
Cash and cash equivalents at the end of the period $ 15,653 $ 19,700
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 12,163 $ 10,575
Cash paid during the period for income taxes 1,031 768
Noncash investing and financing activities:
Net transfers to real estate owned from loans receivable 773 559
Net change in gross unrealized (loss) on
investments available for sale $ 336 ($ 1,015)
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(in thousands, including share data)
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in Net Unrealized Accumulated
Stock Stock Capital Gain (Loss) Deficit Total
----- ----- ------- ----------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1996 $ 7,500 $ 13,559 $ 9,212 $ 1,157 ($ 1,519) $ 29,909
Net income twelve months ended
December 31, 1996 -- -- -- -- 1,850 1,850
Preferred stock dividend -- -- -- -- (450) (450)
Adjustment to unrealized gain (net of tax) -- -- -- (1,462) -- (1,462)
Common stock dividends and other
(194 shares) -- 972 1,402 -- (2,970) (596)
-------- -------- -------- -------- -------- --------
Balance at
December 31, 1996 7,500 14,531 10,614 (305) (3,089) 29,251
Net income nine months ended
September 30, 1997 -- -- -- -- 2,739 2,739
Preferred stock dividend -- -- -- -- (337) (337)
Adjustment to unrealized loss (net of tax) -- -- -- 208 -- 208
Common stock dividends and other
(151 shares) -- 756 1,523 -- (2,004) 275
-------- -------- -------- -------- -------- --------
Balance at
September 30, 1997 $ 7,500 $ 15,287 $ 12,137 ($ 97) ($ 2,691) $ 32,136
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. CONSOLIDATED FINANCIAL STATEMENTS
The financial statements included herein have been prepared without audit
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The accompanying condensed consolidated financial statements
reflect all adjustments which are, in the opinion of management, necessary to a
fair statement of the results for the interim periods presented. Such
adjustments are of a normal recurring nature.
On June 13, 1997, Covenant Bancorp, Inc. (the "Company") was formed and
registered with the SEC. Also on that date, Covenant Bank (the "Bank") was
acquired by the Company. These condensed consolidated financial statements
should be read in conjunction with the audited financial statements and the
notes thereto included in the Bank's Annual Report (Amendment No. 2 to Form F-2
dated April 28, 1997, filed with the Federal Deposit Insurance Corporation) for
the period ended December 31, 1996. The annual report is also included in the
Registrant's Registration Statement on Form S-4 dated April 28, 1997. The
results for the three and nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997.
The consolidated financial statements include the accounts of Covenant Bancorp,
Inc. and all of its subsidiaries, including Covenant Bank. All material
intercompany transactions have been eliminated.
B. COMMITMENTS
In the normal course of business, there are various outstanding commitments to
extend credit, such as letters of credit and unadvanced loan commitments, which
are not reflected in the accompanying consolidated financial statements.
Management does not anticipate any material losses as a result of these
transactions.
C. SFAS NO. 128 - EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS.
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
It also requires dual presentation of basic and diluted EPS on the face of the
statement of operations for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
This Statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. This Statement requires restatement of all prior-period EPS data
presented.
Had the Company adopted this Statement as of September 30, 1997, the pro forma
earnings per share would have been:
<TABLE>
<CAPTION>
For the three months ended September 30, 1997
---------------------------------------------
Weighted Pro forma
Income average shares earnings per
(Numerator) (Denominator) share
----------- ------------- -----
<S> <C> <C> <C>
Basic EPS
Net income available to
common shareholders $813 3,057 $0.27
Effect of dilutive securities
Convertible preferred stock $112 1,059
Stock options --- 242
----- ------
Dilutive EPS
Income available to
common shareholders
plus assumed conversions $925 4,358 $0.21
For the nine months ended September 30, 1997
--------------------------------------------
Weighted Pro forma
Income average shares earnings per
(Numerator) (Denominator) share
----------- ------------- -----
Basic EPS
Net income available to
common shareholders $2,402 3,051 $0.79
Effect of dilutive securities
Convertible preferred stock $337 1,059
Stock options --- 237
----- ------
Dilutive EPS
Income available to
common shareholders
plus assumed conversions $2,739 4,347 $0.63
</TABLE>
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
D. ISSUANCE OF COMMON STOCK
On July 14, 1997, the Company issued a 4% stock dividend on its common stock to
shareholders of record on June 24, 1997, resulting in the issuance of 117,110
additional shares of common stock and cash paid in lieu of fractional shares of
$5,957. All share and per share data has been adjusted to reflect the
retroactive recognition of all stock dividends declared.
E. SUBSEQUENT EVENT
On August 5, 1997, the Company and First Union Corporation (First Union)
executed a definitive merger agreement in which First Union would acquire the
Company. The Company's shareholders will receive .3813 shares of First Union
common stock for each share of the Company's common stock. Each share of the two
issues of the Company's convertible preferred stock will be exchanged for a
number of shares of First Union common stock equal to the respective conversion
ratios of the preferred stock times the merger exchange ratio of .3813. The
acquisition, which will be accounted for under the purchase method of
accounting, is subject to various conditions including the approval of the
Company's shareholders and regulatory approvals. It is anticipated that the
transaction will close during the first quarter of 1998.
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Covenant Bancorp, Inc. and its subsidiaries, ("the Company"), recorded net
income of $2.7 million, or $0.63 per share for the nine months ended September
30, 1997, as compared to $1.0 million. or $0.22 for the nine months ended
September 30, 1996. The nine months ended September 30, 1996 results included
merger-related costs associated with the Company's acquisition in September 1996
of 1st Southern State Bank, and a one-time SAIF recapitalization assessment,
aggregating $1.2 million, after tax. Net interest income was positively impacted
by a 10% increase in average interest-earning assets for the nine month period
ended September 30, 1997, compared to the nine months ended September 30, 1996.
Return on average assets was 0.86% and return on average common equity was
13.96% for the nine month period ended September 30, 1997, compared to 0.35% and
4.08%, respectively, for the nine month period ended September 30, 1996. All
prior period amounts have been restated to reflect the September 1996
acquisition of 1st Southern State Bank ("1st Southern").
For the three months ended September 30, 1997, the Company reported net income
of $925,000, or $0.21 per share compared to a net loss of $413,000, or $0.17 per
share for the third quarter of 1996 which included the above-mentioned
non-recurring costs. Net interest income increased 3% for the third quarter of
1997 when compared to the third quarter of 1996 due to the above-mentioned
increase in average interest-earning assets. Return on average assets and return
on average common equity for the three months ended September 30, 1997 were
0.86% and 13.67%, respectively, compared to (0.41)% and (9.61)%, respectively,
for the same period in 1996.
Total assets amounted to $419.9 million at September 30, 1997, compared to
$414.6 million at December 31, 1996, representing an increase of $5.3 million
since year-end 1996. Net loans totaled $254.9 million, representing a 7%
increase, over the year-end 1996 balance. Total deposits increased $26.6 million
to reach $304.1 million at September 30, 1997, from the December 31, 1996
balance of $277.5 million. Stockholders' equity was $32.1 million at September
30, 1997. The Company's capital position meets the definition of a
well-capitalized institution, which is evident by its leverage ratio, which
stood at 7.50% and its Tier 1 and Total Capital ratios, which equaled 12.46% and
13.51%, respectively.
On August 5, 1997, the Company and First Union Corporation (First Union)
executed a definitive merger agreement in which First Union would acquire the
Company. The Company's shareholders will receive .3813 shares of First Union
common stock for each share of the Company's common stock. Each share of the two
issues of the Company's convertible preferred stock will be exchanged for a
number of shares of First Union
<PAGE>
common stock equal to the respective conversion ratios of the preferred stock
times the merger exchange ratio of .3813. The acquisition, which will be
accounted for under the purchase method of accounting, is subject to various
conditions including the approval of the Company's shareholders and regulatory
approvals. It is anticipated that the transaction will close during the first
quarter of 1998.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between interest earned on loans and
investments and interest incurred on deposits and other borrowed funds. Net
interest income is affected by changes in both interest rates and the amounts of
interest-earning assets and interest-bearing liabilities outstanding.
Net interest income for the nine months ended September 30, 1997 increased
$304,000 or 3% to $11.5 million, compared to $11.2 million for the same period
in 1996 primarily due to an increase in average loans of $34.9 million or 15%
and a $2.6 million increase in average investments (see page 12 for an average
balance sheet and average rate comparisons). The increase in average loans is
concentrated in the commercial and commercial mortgage portfolios of $22.1
million or 15% and a $8.7 million increase in 1-4 family mortgage loans. The
increase in net interest income associated with growth in the loan portfolio has
been largely offset by a compression in the net interest margin to 3.83% for the
nine months ended September 30, 1997 from 4.12% for the same period in 1996. The
decrease in the net interest margin is due to the following factors: 1) a
decline in the yield on the total loan portfolio to 8.71% for the nine month
period ended September 30, 1997 from 9.11% for the same period in 1996, caused
by overall market conditions; and 2) the increase in the Company's loan
portfolio funded by higher-priced securities sold under agreements to repurchase
and certificates of deposit rather than the Company's core deposit base, causing
the Company's cost of funds to increase from 4.50% for the nine months ended
September 30, 1996 to 4.65% for the same period of 1997. Delays in the opening
of the Company's three new personal financial centers resulted in the need for
these types of short-term higher-costing funding sources.
Net interest income for the three months ended September 30, 1997 increased
$107,000 or 3% to $3.9 million, compared to $3.8 million for the same period in
1996. As discussed in the nine month results, the improvement is directly
related to the increase in average interest-earning assets during the third
quarter of 1997, as compared to the same period in 1996, partially offset by a
narrowing in the net interest margin.
OTHER INCOME
Other income for the first nine months of 1997 totaled $837,000, compared to
$858,000 for the same period of 1996. Service charges on deposit accounts
equaled $516,000 for
<PAGE>
the nine months ended September 30, 1997. Loan servicing income decreased
$40,000 to $153,000 for the nine months ended September 30, 1997 when compared
to the same period of 1996 and is attributable to volume decreases in investor
servicing fees, late fees, and credit card fees. Other operating income
increased $11,000 or 7.5% to $157,000 for the nine months ended September 30,
1997, compared to the same period in 1996, due to an increase in MAC surcharge
income and volume increases in safe deposit box fees. The one-time gain of
$11,000 on sale of assets during the second quarter of 1997 was due to a
subdivision and subsequent sale of a small parcel of land and building that had
been previously purchased with the Company's North Wildwood personal financial
center.
Other income for the three month period ended September 30, 1997 totaled
$334,000, compared to $310,000 for the same period of 1996, representing a
$24,000 or 8% increase. The increase in service charges on deposit accounts of
$26,000 was associated with an increase in core deposit accounts over the past
twelve months. Loan servicing income decreased $7,000 to $62,000 for the third
quarter of 1997 when compared to the same period of 1996 and is also
attributable to volume decreases in investor servicing fees, late fees and
credit card fees. Other operating income increased $5,000 for the third quarter
of 1997, primarily related to an increase in MAC surcharge income and volume
increases in safe deposit box fees.
OTHER EXPENSES
Other expenses for the nine months ended September 30, 1997 equaled $8.3
million, compared to $9.7 million for the same period of 1996. Other expenses
for the first nine months of 1996 included the one-time merger costs of $666,000
and the non-recurring SAIF assessment of $504,000. Excluding these one time
charges, other expenses equaled $8.6 million for the nine months ended 1996,
resulting in a decrease in other expenses of $315,000 or 4% excluding the
one-time charges incurred in 1996. The ratio of total other expenses to average
assets for the nine months ended September 30, 1997 improved to 2.58% from 2.97%
for the same period of 1996. Cost containment and operating efficiency are
continuing priorities of management. The Company's operating efficiency ratio
(non-interest expenses, less other real estate expenses, divided by net interest
income plus non-interest income excluding non-recurring gains) improved to 67%
for the first nine months of 1997, compared to 71% for the same period of 1996.
Salaries and employee benefits increased $37,000 or 1% and equaled $4.84 million
for the first nine months of 1997, compared to $4.80 million for the same period
in 1996. The salaries and benefits category is the largest component of other
expenses, encompassing 59% of total other expenses as of September 30, 1997. The
slight increase in salaries and employee benefits expense is attributable to
reductions in staff in connection with the 1st Southern acquisition completed in
September 1996, partially offset by staffing increases associated with the new
personal financial centers opened since March of 1996.
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
(in thousands)
Nine Months Ended September 30, 1997 Nine Months Ended September 30, 1996
------------------------------------ ------------------------------------
Average Average Average Average
Assets Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Loans:(1)
Commercial $ 57,591 $ 3,885 9.01% $ 55,803 $ 3,918 9.39%
Commercial mortgage 107,736 7,200 8.93 87,425 6,400 9.79
Mortgage 54,795 3,285 7.98 46,064 2,641 7.64
Consumer 35,080 2,257 8.60 31,053 2,051 8.83
--------- --------- ---- --------- --------- ----
Total loans 255,202 16,627 8.71 220,345 15,010 9.11
Investments:
Federal funds sold 1,421 71 5.23 8,935 356 5.33
Investment securities 143,031 6,851 6.39 132,940 6,350 6.30
--------- --------- ---- --------- --------- ----
Total investments 144,452 6,922 6.39 141,875 6,706 6.23
--------- --------- ---- --------- --------- ----
Total interest-earning assets 399,654 $ 23,549 7.88% 362,220 $ 21,716 8.02%
--------- --------- ---- --------- --------- ----
Allowance for loan losses (2,930) (3,105)
Cash and due from banks 11,912 10,185
Fixed assets (net) 9,399 7,979
REO 709 1,244
Other assets 7,516 6,084
--------- ---------
Total Assets $ 426,260 $ 384,607
========= =========
Liabilities and Stockholders' Equity
Deposits:
Interest-bearing demand $ 36,029 $ 622 2.31% $ 26,127 $ 473 2.42%
Statement savings 39,090 704 2.41 43,955 796 2.42
Money market 21,242 515 3.24 21,858 410 2.51
Certificates of deposit 149,594 6,040 5.40 138,362 5,498 5.31
--------- --------- ---- --------- --------- ----
Total interest-bearing deposits 245,955 7,881 4.28 230,302 7,177 4.17
FHLB advances and securities sold
under agreements to repurchase 101,282 4,201 5.55 83,474 3,376 5.41
--------- --------- ---- --------- --------- ----
Total interest bearing liabilities 347,237 12,082 4.65 313,776 10,553 4.50
--------- ---- --------- ----
Non-interest bearing deposits 45,178 38,277
Other liabilities 3,743 2,986
Stockholders' equity 30,102 29,568
--------- ---------
Total Liabilities and
Stockholders' Equity $ 426,260 $ 384,607
========= =========
Net Interest Income/Spread $ 11,467 3.23% $ 11,163 3.52%
========= ==== ========= =====
Net Interest Margin (2) 3.83% 4.12%
===== =====
</TABLE>
(1) Includes non-accruing loans. The effect of including such loans is to
reduce the average rate earned on Covenant's loans.
(2) Net interest income as a percentage of average interest-earning assets.
<PAGE>
Net occupancy increased $202,000 to $1.4 million for the nine months ended
September 30, 1997 due to additional personal financial centers opened in
Hammonton (3/96), the relocated Linwood center (10/96), Mount Laurel (12/96) and
Cherry Hill (3/97), and the establishment of an operations center in Voorhees,
NJ during the second quarter of 1996. Data processing and other service costs
declined $185,000 to $522,000 for the nine months ended September 30, 1997,
compared to $707,000 for the same period of 1996. The Company's acquisition of
1st Southern and the operating efficiencies gained due to the system conversion
in September 1996 are primarily attributable for the reduction in costs.
Professional services expenses decreased $199,000 to $235,000 for the first nine
months of 1997, compared to $434,000 for the same period of 1996. The reduction
is related to decreases of $84,000 in legal expenses related to the decrease in
problem credits; a $20,000 decrease in consulting expenses due to the
discontinuance of certain advertising and promotion programs and a $95,000
decrease in audit and examinations expense due to the acquisition of 1st
Southern. Federal insurance premiums declined $122,000 to $57,000 for the first
nine months of 1997 due to a reduction in the Bank Insurance Fund premiums.
Other operating expenses decreased $27,000 to $1.1 million for the nine months
ended September 30, 1997, compared to the same period of 1996.
Other expenses for the three months ended September 30, 1997 equaled $3.0
million, compared to $4.2 million for the same period in 1996, excluding the
one-time charges incurred mentioned above other expenses equaled $3.0 million ,
representing an increase of $21,000 or 1% over the third quarter of 1996.
Salaries and employee benefits increased $119,000 to $1.8 million for the third
quarter of 1997 when compared to the same period in 1996. The increase in
salaries and employee benefits expense is directly associated with the new
staffing positions created for the new personal financial centers noted above.
Net occupancy increased $72,000 to $470,000 for the three months ended September
30, 1997, compared to the same period of 1996 due to the above-mentioned new
personal financial centers.
Data processing and service costs decreased $25,000 for the three months ended
September 30, 1997, compared to the same period in 1996. The Company's system
conversion in September 1996 along with the acquisition of 1st Southern created
operating efficiencies and are primarily attributable to the reduction in data
processing costs offset by increased costs related to new accounts added over
the last twelve months.
Professional services expenses decreased $83,000 for the third quarter of 1997
to $80,000, compared to the same period in 1996. The reduction is related to a
decrease in legal expenses related to a decrease in problem credits, a decrease
in consulting expenses due to the discontinuance of certain advertising and
promotion programs, and a decrease in audit and examination expense due to the
acquisition of 1st Southern. Federal insurance premiums declined $41,000 to
$18,000 for the three months ended September 30, 1997 as compared to the same
period in 1996 due to a reduction in the Bank Insurance Fund premium. Other
operating expenses increased $18,000 to $379,000 for the three months ended
September 30, 1997, compared to the same period in 1996 due to increases in
postage, insurance and telephone expenses related to the new branch facilities
opened.
<PAGE>
FINANCIAL CONDITION
LOAN PORTFOLIO
The lending function is the Company's principal business activity and it
continues its policy to serve as a reliable source of credit to a diverse
customer base. The Company lends primarily to commercial borrowers in the
southern New Jersey marketplace. The loan portfolio is diversified, with 64% of
the portfolio comprised of commercial and commercial mortgage loans and 36%
comprised of residential mortgage loans and consumer loans at September 30,
1997.
At September 30, 1997, the Company's net loan portfolio totaled $254.9 million,
compared to $238.2 million as of December 31, 1996. The $16.7 million or 7% in
growth in net loans has been concentrated within the commercial, commercial
mortgage and residential mortgage loan portfolios. The majority of the Company's
loan portfolio is primarily categorized as secured by commercial and 1-4 family
residential real estate properties (including home equity loans). It is the
Company's continuing policy to emphasize well-collaterized and
properly-structured loans and to promote long-term quality relationships with
financially strong borrowers.
NON-PERFORMING ASSETS
Non-performing assets include those loans that are not accruing interest
(non-accruing loans), loans that have been restructured and real estate owned.
Generally, loans that are contractually past-due are placed on non-accrual
status when interest on principal becomes 90 days past-due, unless, in the
Company's assessment, the value of collateral securing the loan adequately
ensures the likelihood of the ultimate collection of all unpaid principal and
interest and the loan is in the process of collection.
The following table sets forth information regarding non-performing assets and
contractually past-due loans of September 30, 1997 and 1996 and December 31,
1996:
Sept. 30, Sept. 30, Dec. 31,
1997 1996 1996
---- ---- ----
Non-performing assets:
Non-accruing loans:
Commercial $ 664 $2,199 $1,734
Mortgage 1,024 1,273 931
Consumer 121 220 201
------ ------ ------
Total non-performing loans $1,809 $3,692 $2,866
Real estate owned 1,049 846 695
------ ------ ------
Total non-performing assets $2,858 $4,538 $3,561
====== ====== ======
Accruing loans 90 days past-due $1,761 $1,743 $1,753
====== ====== ======
Non-performing loans as a
percentage of loans 0.70% 1.62% 1.19%
====== ====== ======
Non-performing asset as a percentage
of loans and real estate owned 1.10% 1.98% 1.47%
====== ====== ======
Non-performing assets as a percentage
of total assets 0.68% 1.17% 0.86%
====== ====== ======
Non-performing assets totaled $2.9 million or 1.10% of total loans and real
estate owned at September 30, 1997, showing marked improvement when compared to
$3.6 million or 1.47% of total loans and real estate owned at December 31, 1996
and $4.5 million or 1.98% of total loans and real estate owned at September 30,
1996. Non-performing loans at September 30, 1997 decreased $1.1 million from the
December 31, 1996 balance of $2.9 million due to a $1.1 million reduction in
commercial non-performing loans and a reduction in consumer non-performing loans
of $80,000 offset by an increase in mortgage non-performing loans of $93,000.
The balance of non-performing loans at September 30, 1996 was $3.7 million or
1.62% of total loans.
Real estate owned (net of reserves) was $1.1 millon at September 30, 1997,
compared to $695,000 at December 31, 1996 and $846,000 at September 30, 1996.
During the first nine months of 1997, additions to real estate owned of $773,000
(representing four foreclosed properties) were offset by the sale of six
properties for $419,000, which resulted in the $354,000 increase in real estate
owned.
The balance of accruing loans 90 days past-due was $1.7 million at September 30,
1997, $1.8 million at December 31, 1996 and $1.7 million at September 30, 1996.
The $8,000 increase in accruing loans 90 days past-due during the nine months
ended September 30, 1997 is related to an increase of $369,000 in
well-collateralized commercial loans, a $19,000 increase in various home equity
consumer loans, offset by a $380,000 decrease of various residential mortgage
loans.
<PAGE>
At September 30, 1997 and December 31, 1996, the Company had impaired loans
totaling approximately $724,000 and $1,734,000, respectively. The allowance for
loan losses on impaired loans has a valuation allowance of $124,000, and
$199,000 at September 30, 1997 and December 31, 1996, respectively. The average
balance of impaired loans totaled $1,315,000 and $1,684,000 for September 30,
1997 and December 31, 1996, respectively. Interest income not accrued for
impaired loans for the nine months ended September 30, 1997 and for the twelve
months ended December 31, 1996 was approximately $99,000 and $164,000,
respectively.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision and allowance for loan losses is based on management's ongoing
evaluation of the loan portfolio and reflects an amount considered by management
to be adequate to absorb known and inherent losses in the portfolio. Management
considers a variety of factors when establishing the allowance, such as the
impact of current economic conditions, diversification of the loan portfolio,
delinquency statistics, results of loan review and related classifications, the
borrower's perceived financial and managerial strengths, the estimated adequacy
of underlying collateral and other relevant factors. Consideration is also given
to examinations performed by regulatory authorities.
The following table sets forth information regarding the Company's allowance for
loan losses for the six month periods ended September 30, 1997 and 1996, and for
the year ended December 31, 1996.
Changes in Allowance for Loan Losses
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
----------------- ----------
9/30/97 9/30/96 12/31/96
------- ------- --------
<S> <C> <C> <C>
Balance at beginning of period $3,016 $3,195 $3,195
Provision charge to operating expenses 33 524 636
Charge-offs:
Commercial (259) (456) (449)
Mortgage (55) (198) (417)
Consumer (64) (116) (124)
------ ------ ------
Total Charge-offs (378) (770) (990)
Recoveries:
Commercial 30 91 124
Mortgage 4 11 --
Consumer 9 25 51
------ ------ ------
Total recoveries 43 127 175
------ ------ ------
Net charge-offs (335) (643) (815)
------ ------ ------
Balance at end of period $2,714 $3,076 $3,016
====== ====== ======
Net charge-offs as a percentage of
average loans 0.18% 0.39% 0.36%
Allowance as a percentage of
period-end loans 1.05% 1.35% 1.25%
Allowance as a percentage of
non-performing loans 150.03% 83.32% 105.20%
Allowance as a percentage of
non-performing assets 94.99% 67.78% 84.70%
</TABLE>
<PAGE>
Management is consistently informed of changes in economic indicators which may
have impact, either positive or adverse, on asset quality, the allowance for
loan losses, potential charge-offs and delinquencies.
The provision for loan losses charged against earnings was $33,000 in the nine
months of 1997, compared to $524,000 for the nine months of 1996 which included
a $481,000 provision for loan losses during the third quarter of 1996 to align
1st Southern State Bank's allowance for loan loss methodology with Covenant as
to the credit and non-performing processes at the time of the merger. Management
believes that the allowance for loan losses at September 30, 1997 is adequate to
absorb known and inherent losses in the portfolio.
INVESTMENT SECURITIES
Investment securities were $131.1 million at September 30, 1997, compared to
$144.3 million at December 31, 1996. The $13.2 million decrease in investment
securities was the result of purchases of $7.0 million of US Treasury Notes with
maturities beyond one year and classified as "Available for Sale," offset by
proceeds from maturities of investments available for sale of $20.0 million,
$0.5 million principal collected on mortgage backed securities and an decrease
of $336,000 in the gross unrealized loss on investments available for sale.
At September 30, 1997, the fair value of investments available for sale was
$119.9 million, and unrealized holding losses were $147,000. At December 31,
1996, the fair value of investments available for sale was $132.6 million and
unrealized holding losses were $483,000. At September 30, 1997, securities held
to maturity totaled $11.1 million compared to $11.7 million at December 31,
1996. The fair values of these investments were $11.2 million at September 30,
1997 and $11.7 million at December 31, 1996.
The Company's investment portfolio is comprised of US Government securities,
federal agency mortgage-backed securities and Federal Home Loan Bank ("FHLB")
stock. The portfolio generates substantial interest income, serves as a source
of liquidity and is used as a tool in managing interest rate sensitivity.
Portions of the portfolio are also used to secure public deposits and serve as
collateral for repurchase transactions. The investment portfolio also plays a
significant role in the asset/liability management process. Among other things,
the investment portfolio is utilized to balance the interest sensitivity of the
prime-based portion of the loan portfolio.
DEPOSITS
The Company's predominant source of funds is depository accounts comprised of
demand deposits, savings and money market accounts, time deposits and individual
retirement accounts (IRA's). Deposits are provided by individuals and businesses
located within the southern New Jersey marketplace. The Company gathers deposits
from local
<PAGE>
municipalities within the guidelines of the Government Unit Deposit Protection
Act (GUDPA). The Bank has no brokered deposits.
The Company opened new personal financial centers in Linwood (relocation in
October 1996), Mount Laurel (December 1996) and Cherry Hill (March 1997). Total
deposits at September 30, 1997 equaled $304.1 million, compared to $277.5
million at December 31, 1996, representing a $26.6 million or 10% increase
between December 31, 1996 and September 30, 1997.
BORROWINGS
Sources of funds for the Company other than deposits include FHLB advances and
securities sold under agreements to repurchase. FHLB advances were $14.7 million
at September 30, 1997 and $20.5 million at December 31, 1996. Securities sold
under agreements to repurchase totaled $64.4 million at September 30, 1997,
compared to $84.0 million at December 31, 1996. The decrease in securities sold
under agreements to repurchase was related to the maturities and paydowns
described above in the "INVESTMENT SECURITIES" section.
ASSET AND LIABILITY MANAGEMENT
The Company monitors its sensitivity to interest rate changes and its liquidity
and capital position through its asset and liability management process. The
Company's objectives include (i) controlling interest rate exposures, (ii)
ensuring adequate liquidity, (iii) maintaining a strong capital position and
(iv) maximizing net interest income opportunities. The Company manages these
objectives centrally through the Asset Liability Management Committee (ALCO).
INTEREST RATE SENSITIVITY
The Company seeks to manage its sensitivity position to maximize earnings and
minimize the risk associated with interest rate movements through the use of a
"gap analysis" on a monthly basis. The gap analysis assesses the interest rate
risk that arises from differences in the volumes of assets and liabilities that
mature or reprice within a given period. A "positive" gap position results when
the amount of interest-sensitive assets exceeds that of interest-sensitive
liabilities, signifying that the net interest margin will be positively affected
by rising rates and negatively affected by falling rates; a "negative" gap
position results when the amount of interest-sensitive liabilities exceeds that
of interest-sensitive assets, indicating that the net interest margin will be
negatively affected by rising rates and positively affected by falling rates.
However, the Company's gap position does not necessarily predict the impact of
changes in general levels of interest rates or net interest income due to
assumptions made as to repricing and maturities of certain products.
<PAGE>
Decisions are also based on "dynamic shock analysis," a process that entails the
application of different prime rate increase or decrease scenarios to the
current maturity/repricing structure. This analysis measures the impact on net
interest income of each of the scenarios applied relative to the Company's
interest rate risk management policy guidelines, and seeks to identify
appropriate measures to maintain the interest sensitivity of net interest income
within such policy guidelines. At September 30, 1997, the Company's "dynamic
shock analysis" indicates an acceptable level of interest rate risk and is
within policy guidelines.
In the event that the Company's interest rate risk models indicate an
unacceptable level of risk, the Company could undertake a number of actions that
would reduce this risk, including the sale of a portion of its Available for
Sale portfolio or the extension of the maturities of its short-term borrowings,
or the use of other risk management strategies as determined by the Company's
ALCO Committee.
The following table illustrates the gap position of the Company as of September
30, 1997.
<TABLE>
<CAPTION>
Non-Interest
Beyond Sensitive
1-90 91-180 181-365 One - Five Five Assets/
Days Days Days Years Years Liabilities Total
---- ---- ---- ----- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Interest earning assets
Loans $ 81,916 $ 6,442 $ 13,122 $ 93,468 $ 60,980 -- $ 255,921
Investment securities 8,018 18,108 19,064 47,110 38,788 -- 131,088
Loans held for sale 338 -- -- -- -- -- 338
--------- --------- --------- --------- --------- --------- ---------
Total interest
earning assets 90,272 24,550 32,186 140,578 99,768 -- 387,354
Non-interest earning assets $ 32,498 32,498
--------- ---------
Total assets $ 90,272 $ 24,550 $ 32,186 $ 140,578 $ 99,768 $ 32,498 $ 419,852
========= ========= ========= ========= ========= ========= =========
Rate sensitive liabilities:
Interest bearing demand $ 31,193 -- -- $ 5,199 $ 5,199 -- $ 41,591
Statement Savings 32,408 -- -- 5,401 $ 5,401 -- 43,211
Money Market 16,825 -- -- 2,804 $ 2,804 -- 22,433
Certificate of Deposit 53,657 33,772 33,397 28,183 -- -- 149,009
FHLB advances
and securities sold
under agreements to
repurchase 71,063 2,000 1,000 5,000 -- -- 79,063
--------- --------- --------- --------- --------- --------- ---------
Total interest
bearing liabilities $ 205,146 $ 35,772 $ 34,397 46,587 $ 13,404 -- $ 335,307
Non-interest
bearing liabilities -- -- -- -- -- $ 52,409 $ 52,409
Stockholders' equity -- -- -- -- -- 32,136 32,136
--------- --------- --------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity $ 205,146 $ 35,768 $ 34,397 $ 46,587 $ 13,404 $ 84,545 $ 419,852
========= ========= ========= ========= ========= ========= =========
Interest rate
sensitivity GAP ($114,874) ($ 11,222) ($2,211) $ 93,991 $ 86,364 ($52,047)
========= ========= ========= ========= ========= =========
Cumulative GAP ($114,874) ($126,096) ($128,307) ($ 34,317) $ 52,047
========= ========= ========= ========= =========
Cumulative GAP as a
percentage of total 44.00% 47.66% 53.40% 89.34% 115.52%
</TABLE>
<PAGE>
The Gap Analysis table is intended to illustrate the maturity/repricing
characteristics of Company's interest-earning assets and interest-bearing
liabilities as of September 30, 1997. The analysis is based upon contractual
maturities and, where applicable, management's estimates of the repricing
characteristics of various assets and liabilities and on assumptions as to
customer behavior.
The Gap Analysis indicates a liability-sensitive position through the one-year
time period beginning September 30, 1997. The Company's investment in U. S.
Treasury Notes with maturities beyond one year funded by a growth in deposits
and short-term (three months or less) securities sold under agreements to
repurchase and is primarily responsible for the liability-sensitive position
through the one-year time period as of September 30, 1997.
Covenant's net interest income has not been subject to the degree of sensitivity
indicated by this traditional gap analysis. In monitoring interest sensitivity,
adjustments are made to the dynamic shock assumptions to reflect management's
recent experience regarding the impact of product pricing, interest rate spread
relationships and customer behavior.
These marginal adjustments are necessarily subjective and will vary over time
with loan and deposit changes and market conditions. The investment portfolio is
utilized to balance the Company's gap position, to manage the interest rate
spread and to mitigate overall maturity risk in the portfolio.
LIQUIDITY
Adequate liquidity is necessary to meet the borrowing needs and deposit
withdrawal requirements of customers as well as to satisfy liabilities, fund
operations and support asset growth. Maintaining an appropriate level of liquid
funds through the asset/liability management process ensures that the needs of
the Company are met at a reasonable cost. Therefore, the management of liquidity
is coordinated with the management of the Company's interest sensitivity and
capital position. Major sources of liquidity are core deposits, cash flow
generated by the Company's investment and loan portfolios, and short-term
borrowings. Earnings and funds provided by operations also serve as a source of
liquidity.
Cash and cash equivalents equaled $15.7 million at September 30, 1997, compared
to $15.6 million at December 31, 1996, resulting in a net increase of $107,000,
as shown on the Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997. The net increase of $17.5 million in loans and the $7.0
million in purchases of investments available for sale, offset by the $20.0
million in proceeds from maturities of investments available for sale primarily
contributed to a net cash used in investing activities equaling $4.2 million.
The Company funded the net cash used in investing activities principally through
$3.3 million in net cash provided by operating activities and a $26.6 million
increase in deposits offset by a $20.0 million decrease in securities sold under
agreements to repurchase and a $5.8 million decrease in advances from the
Federal Home Loan Bank.
<PAGE>
The Company places strong emphasis on the composition of the investments
available for sale portfolio. Additional sources of liquidity are available to
the Company through the purchase of federal funds and borrowings on approved
lines of credit. One measure of the Company's liquidity is the FDIC liquidity
ratio. This ratio measures net cash, short-term investments and marketable
assets divided by net deposits and short-term liabilities. The Company's
liquidity ratio at September 30, 1997 was 23%. Overall, based on the its core
deposit base, and its available sources of borrowed funds, management believes
that the Company's liquidity position is satisfactory.
CAPITAL
The maintenance of appropriate levels of capital is a management priority and an
important objective of the Company's asset and liability management process. The
Company's principal capital planning goals are to provide an adequate return to
stockholders, to support its growth and expansion activities, to provide
stability to current operations, and to promote public confidence.
Bank regulatory authorities have issued risk-based capital standards and
leverage ratio requirements by which all bank holding companies and banks will
be evaluated in terms of capital adequacy. The "Prompt Corrective Action"
regulations issued pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991 established five categories of depository institutions:
(1) well-capitalized, (2) adequately capitalized, (3) undercapitalized, (4)
significantly undercapitalized, and (5) critically undercapitalized. Each
category relates to the level of capital for the depository institution. The
highest capital ratios equate to a "well-capitalized" depository institution
which is one that significantly exceeds the minimum level required by regulation
(i.e., total risk-based capital ratio of 10% or greater, a Tier 1 risk-based
capital ratio of 6% or greater and a leverage ratio of 5% or greater). At
September 30, 1997, the Company and the Bank met the definition of a
"well-capitalized" institution.
The following table sets forth the Company's and the Bank's regulatory capital
requirements and compliance therewith as of September 30, 1997:
COVENANT BANCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Well- Capital Excess
Actual Capitalized (in thousands)
------ ----------- --------------
<S> <C> <C> <C>
Tier 1 Risk-Based Capital Ratio (1) 12.46% 6.00% $16,710
Total Risk-Based Capital Ratio (2) 13.51% 10.00% $ 9,075
Tier 1 Leverage Ratio (3) 7.50% 5.00% $10,752
</TABLE>
<PAGE>
COVENANT BANK
<TABLE>
<CAPTION>
Well- Capital Excess
Actual Capitalized (in thousands)
------ ----------- --------------
<S> <C> <C> <C>
Tier 1 Risk-Based Capital Ratio(1) 12.32% 6.00% $16,339
Total Risk-Based Capital Ratio (2) 13.37% 10.00% $ 8,710
Tier 1 Leverage Ratio (3) 7.42% 5.00% $10,380
</TABLE>
- ----------
(1) Tier 1 Risk-Based Capital Ratio is defined as the ratio of Tier 1 Capital
to Total Risk-Weighted Assets.
(2) Total Risk-Based Capital Ratio is defined as the ratio of Tier 1 and Tier 2
Capital to Total Risk-Weighted Assets.
(3) Tier 1 Leverage Ratio is defined as the ratio of Tier 1 Capital to Total
Average Quarterly Assets.
INCOME TAXES
The Company's effective tax rate for the nine months ended September 30, 1997
was 31.8%, compared to an effective rate of 36.4% for the same period in 1996.
The decreased percentage from 1996 to 1997 is attributable to a reduction in
state income taxes due to business strategies employed.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
2. Agreement and Plan of Mergers dated August 4, 1997 by and
among Covenant Bancorp, Inc., Covenant Bank, First Union
Corporation and First Union National Bank, attached as
Exhibit 1 to the registrant's Current Report on Form 8-K
dated August 12, 1997 and incorporated
herein by reference.
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. On August 12, 1997, the Company filed an 8-K
report with the Commission regarding the Agreement and Plan of Mergers dated
August 4, 1997, between and among the Company, its subsidiary Covenant Bank,
First Union Corporation and its subsidiary First Union National Bank.
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Bank has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
COVENANT BANCORP, INC.
NOVEMBER 13, 1997 /s/ Charles E. Sessa, Jr.
- ----------------------------- -----------------------------
(DATE) CHARLES E. SESSA, JR.
PRESIDENT
NOVEMBER 13, 1997 /s/ J. William Parker, Jr.
- ----------------------------- -----------------------------
(DATE) J. WILLIAM PARKER, JR.
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER & TREASURER
Exhibit 11
COVENANT BANCORP, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 925 ($ 413) $ 2,739 $ 1,023
======= =======
Less: preferred dividends (112) (337)
------- -------
Net income applicable to common stock ($ 525) $ 686
======== =======
Average number of shares outstanding:
Average common shares outstanding 3,057 3,069 3,051 3,168
Common stock equivalents considered in
earnings per share computation:
Dilutive stock options 242 106 237 --
Conversion of preferred stock Series "A" 550 -- 550 --
Conversion of preferred stock Series "B" 509 -- 509 --
------- ------- ------- -------
Average number of shares outstanding 4,358 3,175 4,347 3,168
======= ======= ======= =======
Net income (loss) per share of common
stock and common stock equivalents $ 0.21 ($ 0.17) $ 0.63 $ 0.22
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001035468
<NAME> COVENANT BANCORP, INC.
<MULTIPLIER> 1000
<CURRENCY> US DOL
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 15653
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 119944
<INVESTMENTS-CARRYING> 11144
<INVESTMENTS-MARKET> 11236
<LOANS> 257585
<ALLOWANCE> 2714
<TOTAL-ASSETS> 419852
<DEPOSITS> 304064
<SHORT-TERM> 79062
<LIABILITIES-OTHER> 4590
<LONG-TERM> 0
0
7500
<COMMON> 15287
<OTHER-SE> 12137
<TOTAL-LIABILITIES-AND-EQUITY> 419852
<INTEREST-LOAN> 16627
<INTEREST-INVEST> 6851
<INTEREST-OTHER> 71
<INTEREST-TOTAL> 23549
<INTEREST-DEPOSIT> 7881
<INTEREST-EXPENSE> 12082
<INTEREST-INCOME-NET> 11467
<LOAN-LOSSES> 33
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8253
<INCOME-PRETAX> 4018
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2739
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.88
<LOANS-NON> 1809
<LOANS-PAST> 1761
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3016
<CHARGE-OFFS> 378
<RECOVERIES> 43
<ALLOWANCE-CLOSE> 2714
<ALLOWANCE-DOMESTIC> 2714
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
