SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-B
FOR REGISTRATION OF SECURITIES OF
CERTAIN SUCCESSOR ISSUERS
FILED PURSUANT TO SECTION 12(b) OR 12(g)
OF THE SECURITIES EXCHANGE ACT OF 1934
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COVENANT BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-3493913
(State or Other Jurisdiction of
Incorporation or Organization) (IRS Identification Number)
18 Kings Highway West, Haddonfield, NJ 08033
(Address of Principal Executive Offices) (Zip Code)
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $5.00 per share
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(Title of Class)
Series A Preferred Stock, par value $25.00 per share
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(Title of Class)
Series B Preferred Stock, par value $25.00 per share
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(Title of Class)
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<PAGE>
Item 1. General Information
(a) The Registrant was organized on February 13, 1997 as a corporation
under the laws of Pennsylvania.
(b) The Registrant's fiscal year ends on December 31.
Item 2. Transaction of Succession
(a) Covenant Bank (the "Bank") is the predecessor issuer which had
securities registered pursuant to Section 12(g) of the Securities Exchange Act
of 1934.
(b) On June 13, 1997, the Registrant completed the acquisition of all of
the issued and outstanding capital stock of the Bank. Under the terms of the
Plan of Acquisition by and between the Registrant and the Bank, holders of
shares of common stock, par value $5.00 per share, Series A Preferred Stock, par
value $25.00 per share, and Series B Preferred Stock, par value $25.00 per
share, of the Bank received in exchange for each such share one share of common
stock, par value $5.00 per share ('Registrant Common Stock"), Series A Preferred
Stock, par value $25.00 per share ("Registrant Series A Preferred Stock"), and
Series B Preferred Stock, par value $25.00 share ("Registrant Series B Preferred
Stock"), of the Registrant, respectively. Thus, the Bank became a wholly-owned
subsidiary of the Registrant and the shareholders of the Bank became the
shareholders of the Registrant. The Registrant has thereby become the successor
issuer to the Bank.
Item 3. Securities to be Registered
The Certificate of Incorporation of the Registrant authorizes the issuance
of up to 25,000,000 shares of Registrant Common Stock and up to 1,000,000 shares
of series preferred stock of which 138,300 shares have been designated as
Registrant Series A Preferred Stock and 161,700 shares have been designated as
Registrant Series B Preferred Stock. As of the date hereof, there are
outstanding 2,936,480 shares of Registrant Common Stock, 138,300 shares of
Registrant Series A Preferred Stock and 161,700 shares of Registrant Series B
Preferred Stock. None of such outstanding shares are held as of the date hereof
by or for the account of the Registrant.
Item 4. Description of Registrant's Securities to be Registered.
The description of the Registrant Common Stock, Registrant Series A
Preferred Stock and Registrant Series B Preferred Stock is incorporated herein
by reference to the Registrant's Registration Statement on Form S-4 (Commission
File No. 333-23257).
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<PAGE>
Item 5. Financial Statements and Exhibits.
(a) Financial Statements.
None.
(b) Exhibits.
2. Plan of Acquisition dated February 28, 1997, included as Annex A
to the Proxy Statement-Prospectus set forth as Exhibit 99.1
hereto
3.1. Certificate of Incorporation of the Registrant, incorporated by
reference to the Registrant's Registration Statement on Form S-4
(File No. 333-23257)
3.2 Bylaws of the Registrant, incorporated by reference to the
Registrant's Registration Statement on Form S-4 (File No.
333-23257)
4.1 Forms of Common Stock Certificate
4.2 Form of Series A Preferred Stock Certificate, incorporated by
reference to the Registrant's Registration Statement on Form S-4
(File No. 333-23257)
4.3 Form of Series B Preferred Stock Certificate, incorporated by
reference to the Registrant's Registration Statement on Form S-4
(File No. 333-23257)
10.1 Incentive Stock Option Plan, incorporated by reference to the
Registrant's Registration Statement on Form S-4 (File No.
333-23257)
10.2 1996 Stock Option Plan for Employees and Non-Employee Directors,
incorporated by reference to the Registrant's Registration
Statement on Form S-4 (File No. 333-23257)
10.3 Employee Stock Purchase Plan, incorporated by reference to the
Registrant's Registration Statement on Form S-4 (File No.
333-23257)
21 Subsidiaries of the Registrant
99.1 Proxy Statement-Prospectus of Covenant Bank and the Registrant
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<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereto duly authorized.
COVENANT BANCORP, INC.
Date: June 13, 1997 By: /s/ Charles E. Sessa, Jr.
----------------------------
Charles E. Sessa, Jr.
President
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Exhibit 4.1
COVENANT BANK
Common stock certificate
COVENANT BANK
Number - CBC________
COVENANT BANK
INCORPORATED UNDER THE LAWS OF THE STATE OF NEW JERSEY
Authorized Shares 5,000,000 -- Par Value $5.00 Per Share
CUSIP 222837 10 6
SEE REVERSE FOR CERTAIN DEFINITIONS
COMMON STOCK
THIS CERTIFIES THAT
IS THE OWNER OF
Shares of
COVENANT BANK
fully paid and non-assessable, transferable only on the books of the Corporation
in person or by Attorney upon surrender of this Certificate properly endorsed.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed.
/s/ William T. Carson, Jr. CORPORATE /s/ Charles E. Sessa, Jr.,
------------------------ SEAL ------------------------
Secretary 1988 President
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship
and not as tenants in common
UNIF GIFT MIN ACT -- ___________________ Custodian ________________ under
(Cust) (Minor)
Uniform Gifts to Minors Act ________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, __________________ hereby sell, assign and transfer unto
PLEASE IDENTIFY SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE.
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Shares represented by the within Certificate, and do hereby irrevocably
constitute and appoint _____________________________________________ Attorney to
transfer the said Shares on the books of the within named Corporation with full
power of substitution in the premises.
Dated ________________ 19_____
In the presence of
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NOTICE: THE SIGNATURE OF THE ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE. IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
COVENANT BANCORP, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF NEW JERSEY
Authorized Shares 25,000,000 -- Par Value $5.00 Per Share
Number - CBCH________
Shares - _____________
COMMON STOCK
THIS CERTIFICATE IS TRANSFERABLE IN NEW YORK, N.Y. AND RIDGEFIELD PARK, N.J.
CUSIP 222906 10 9
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
IS THE OWNER OF
Shares of
COVENANT BANCORP, INC.
fully paid and non-assessable, transferable only on the books of the Corporation
in person or by Attorney upon surrender of this Certificate properly endorsed.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed.
/s/ William T. Carson, Jr. CORPORATE /s/ Charles E. Sessa, Jr.,
------------------------ SEAL -------------------------
Secretary 1988 President
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship
and not as tenants in common
UNIF GIFT MIN ACT -- ___________________ Custodian ________________ under
(Cust) (Minor)
Uniform Gifts to Minors Act ________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, __________________ hereby sell, assign and transfer unto
PLEASE IDENTIFY SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares represented by the within Certificate, and do hereby irrevocably
constitute and appoint _____________________________________________ Attorney to
transfer the said Shares on the books of the within named Corporation with full
power of substitution in the premises.
Dated ________________ 19_____
In the presence of
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NOTICE: THE SIGNATURE OF THE ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE. IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT, OR ANY CHANGE WHATEVER.
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SIGNATURE(S) GUARANTEED: THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BONDS, STOCK BROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 14Ad-15.
Exhibit 21
SUBSIDIARIES
Jurisdiction of
Parent Incorporation
- ------ -------------
Covenant Bancorp, Inc. New Jersey
Subsidiary of Parent
- --------------------
Covenant Bank New Jersey
Subsidiaries of Covenant Bank
- -----------------------------
Covenant Investment Corp. Delaware
Dole Realty Group, Inc. New Jersey
COVENANT BANK
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held on June 10, 1997
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "Annual
Meeting") of Covenant Bank (the "Bank") will be held on June 10, 1997, at 6:00
p.m., local time, at the Bank's Cherry Hill personal financial center located at
488 Evesham Road, Cherry Hill, New Jersey, to consider the following matters:
1. The approval and adoption of the Plan of Acquisition dated February
28, 1997, as amended, pursuant to which Covenant will reorganize into a
holding company structure (the "Reorganization"). In the Reorganization,
Covenant Bancorp, Inc., a New Jersey corporation formed for this purpose
(the "Holding Company"), will acquire all of the issued and outstanding
shares of common stock and preferred stock of the Bank, and the holders
thereof will receive in exchange therefor shares of common and preferred
stock, respectively, of the Holding Company.
2. The election of the directors of the Bank for a one year term and
until their successors are elected and qualify.
3. Such other matters as may properly be brought before the Annual
Meeting or any adjournments thereof.
The Board of Directors of the Bank has fixed the close of business on April
11, 1997, as the record date for determining stockholders entitled to notice of,
and to vote at, the Annual Meeting and any adjournments thereof.
A Proxy Statement is set forth on the following pages and a proxy card is
enclosed herewith. To ensure that your vote is counted, please complete, sign,
date and return the proxy card in the enclosed, postage-paid return envelope,
whether or not you plan to attend the Annual Meeting in person. If you attend
the Annual Meeting, you may revoke your proxy and vote your shares in person.
However, attendance at the meeting will not of itself constitute revocation of a
proxy.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ William T. Carson
April 28, 1997
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN PROMPTLY THE
ENCLOSED PROXY CARD, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. ANY
PROXY GIVEN MAY BE REVOKED BY YOU IN WRITING OR IN PERSON AT ANY TIME PRIOR TO
THE EXERCISE THEREOF.
<PAGE>
COVENANT BANK
18 Kings Highway West
Haddonfield, New Jersey 08033
PROXY STATEMENT
For the Annual Meeting of Shareholders
To Be Held on June 10, 1997
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COVENANT BANCORP, INC.
PROSPECTUS
For up to 3,376,505 shares of Common Stock, par value $5.00 per share,
138,300 shares of Series A Preferred Stock, par value $25.00 per share, and
161,700 shares of Series B Preferred Stock, par value $25.00 per share
----------
This Proxy Statement ("Proxy Statement") is being furnished to
stockholders of Covenant Bank (the "Bank") in connection with the solicitation
of proxies by the Board of Directors of the Bank for use at the Annual Meeting
of Stockholders (the "Annual Meeting") to be held on June 10, 1997.
The following matters will be considered at the Annual Meeting:
1. The approval and adoption of the Plan of Acquisition dated
February 28, 1997, as amended, a copy of which is attached hereto as Annex
A (the "Plan") pursuant to which the Bank will reorganize into a holding
company structure (the "Reorganization"). In the Reorganization, Covenant
Bancorp, Inc., a New Jersey corporation formed for this purpose (the
"Holding Company"), will acquire all of the issued and outstanding shares
of common stock, par value $5.00 per share (the "Bank Common Stock"),
Series A Preferred Stock, par value $25.00 per share (the "Bank Series A
Preferred Stock") and Series B Preferred Stock, par value $25.00 per share
(the "Bank Series B Preferred Stock") of the Bank, and the holders thereof
will receive in exchange therefor shares of common stock, par value $5.00
per share (the "Holding Company Common Stock"), Series A Preferred Stock,
par value $25.00 per share (the "Holding Company Series A Preferred
Stock") and Series B Preferred Stock, par value $25.00 per share (the
"Holding Company Series B Preferred Stock"), respectively, of the Holding
Company.
2. The election of the directors of the Bank for a one year term and
until their successors are elected and qualify.
3. Such other matters as may properly be brought before the Annual
Meeting or any adjournments thereof.
This Proxy Statement and the accompanying forms of proxy are first being
mailed to stockholders of the Bank on or about May 6, 1997.
This Proxy Statement also serves as the prospectus for the Holding Company
as it relates to the shares of Holding Company Common Stock (and options and
other rights to acquire Holding Company Common Stock), the shares of Holding
Company Series A Preferred Stock, and the shares of Holding Company Series B
Preferred Stock (the Holding Company Series A Preferred Stock and the Holding
Company Series B Preferred Stock, the "Holding Company Preferred Stock"; and the
Holding Company Common Stock and the Holding Company Preferred Stock, the
"Holding Company Stock"), to be issued to the stockholders of the Bank in
exchange for their shares of Bank Common Stock (and options and other rights to
acquire Bank Common Stock), Bank Series A Preferred Stock and Bank Series B
Preferred Stock, respectively (the Bank Series A Preferred Stock and Bank Series
B Preferred Stock, the "Bank Preferred Stock"; and the Bank Common Stock and
Bank Preferred Stock, the "Bank Stock"). See "DESCRIPTION OF HOLDING COMPANY
SECURITIES." The Holding Company has filed a Registration Statement under the
Securities Act of 1933, as amended, with the Securities and Exchange Commission
with respect to the shares of Holding Company Stock to be issued in connection
with the Reorganization.
The Bank's Common Stock is traded on the Nasdaq National Market under the
sumbol "CNSK." The high and low sales price for the Bank's Common Stock on
December 17, 1996, the date preceding public announcement of the Bank's intent
to enter into the Reorganization, were $12.63 and $12.00, respectively.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF HOLDING COMPANY STOCK OFFERED HEREBY ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS
ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER FUND OR AGENCY. THE
SHARES OF HOLDING COMPANY STOCK ARE SUBJECT TO
INVESTMENT RISK, INCLUDING LOSS OF PRINCIPAL OR INVESTMENT.
The date of this Proxy Statement is April 28, 1997.
<PAGE>
AVAILABLE INFORMATION
Covenant Bank is subject to the informational and reporting requirements
of the rules and regulations of the Federal Deposit Insurance Corporation (the
"FDIC") promulgated under the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith files reports, proxy
statements and other information with the FDIC. Such reports, proxy statements
and other information can be inspected at the offices of the FDIC, Registration
and Disclosure Section, 550 17th Street, N.W., Washington, D.C. 20429, telephone
(202) 898-8913, and copies may be obtained from the FDIC at prescribed rates.
The Bank Common Stock is included for quotation on the Nasdaq Stock Market
National Market ("Nasdaq National Market"), and the Bank Preferred Stock is
included for quotation on the Nasdaq Stock Market Small-Cap Market ("Nasdaq
Small-Cap Market"), and such reports, proxy statements and other information
concerning the Bank should also be available for inspection and copying at the
offices of the Nasdaq Stock Market, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
Covenant Bancorp, Inc., the proposed one-bank holding company that will
become the parent corporation of Covenant Bank, has filed with the Securities
and Exchange Commission ("SEC") on March 13, 1997 a Registration Statement (as
amended, the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act") relating to the shares of Holding Company Stock
issuable in the Reorganization. As permitted by the rules of the SEC, this Proxy
Statement omits certain information contained in the Registration Statement. For
further information and reference, the Registration Statement and exhibits
thereto may be inspected without charge at the public reference facilities of
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies may be
obtained from the SEC at prescribed rates. The SEC maintains an Internet web
site that contains reports, proxy and information statements and other
information regarding issuers who file electronically with the SEC. The address
of that site is http://www.sec.gov.
Pursuant to the Reorganization, the Holding Company will assume the
Exchange Act reporting responsibilities under rules and regulations of the SEC,
similar to the responsibilities previously performed by Covenant under rules and
regulations of the FDIC. Following the Reorganization, the Holding Company will
file such reports with the SEC rather than the FDIC.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AVAILABLE INFORMATION..................................................................................... 2
SUMMARY................................................................................................... 4
GENERAL INFORMATION....................................................................................... 6
Time and Place of the Annual Meeting................................................................ 6
Votes Required...................................................................................... 6
Solicitation, Voting and Revocability of Proxies.................................................... 6
ELECTION OF DIRECTORS..................................................................................... 7
Directors........................................................................................... 7
Committees of the Board............................................................................. 8
Compensation of Directors........................................................................... 9
THE REORGANIZATION........................................................................................ 10
General............................................................................................. 10
Reasons for the Reorganization; Recommendations of the Boards of Directors.......................... 10
Structure of the Reorganization..................................................................... 10
Treatment of Outstanding Options and Other Rights................................................... 11
Share Certificates.................................................................................. 11
Required Regulatory Approvals....................................................................... 11
Termination or Amendment............................................................................ 11
Accounting Treatment................................................................................ 11
Federal Income Tax Consequences..................................................................... 12
Rights of Dissenting Stockholders................................................................... 12
CERTAIN INFORMATION REGARDING THE BANK.................................................................... 14
General............................................................................................. 14
Management of the Bank.............................................................................. 14
Executive Compensation.............................................................................. 15
Certain Transactions................................................................................ 21
Principal Holders of Covenant Common Stock and Holdings of Management............................... 21
CERTAIN INFORMATION REGARDING THE HOLDING COMPANY......................................................... 24
General............................................................................................. 24
Dividend Policy..................................................................................... 24
Management and Operations After the Reorganization.................................................. 24
SUPERVISION AND REGULATION................................................................................ 25
DESCRIPTION OF HOLDING COMPANY SECURITIES
AND COMPARISON OF STOCKHOLDERS' RIGHTS.................................................................. 29
Description of Securities........................................................................... 29
Comparison of Stockholders Rights................................................................... 30
EXPERTS................................................................................................... 33
LEGAL MATTERS............................................................................................. 34
SHAREHOLDER PROPOSALS..................................................................................... 34
ANNEX A -- PLAN OF ACQUISITION
ANNEX B -- PROVISIONS OF THE NEW JERSEY BANKING ACT REGARDING DISSENTERS' RIGHTS
ANNEX C -- ANNUAL REPORT OF THE BANK ON FORM F-2
</TABLE>
No person has been authorized to give any information or to make any
representations not contained herein and, if given or made, such information or
representation must not be relied upon as having been authorized. This Proxy
Statement does not constitute an offer to sell any securities other than the
securities to which it relates or an offer to sell any securities covered by
this Proxy Statement in any jurisdiction where, or to any person whom, it is
unlawful to make such an offer. Neither the delivery hereof nor any distribution
of securities of Covenant Bancorp made hereunder shall, under any circumstances,
create an implication that there has been no change in the facts herein set
forth since the date hereof.
3
<PAGE>
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Proxy Statement. The summary is not intended to be complete
and is qualified in its entirety by reference to detailed information contained
elsewhere in this document and in the accompanying annexes.
The Annual Meeting
Date, Time and Place. Tuesday, June 10, 1997, at 6:00 p.m. local time, at
the Bank's Cherry Hill personal financial center, located at 488 Evesham Road,
Cherry Hill, New Jersey.
Purpose and Voting. Stockholders will be asked to vote on the
Reorganization by which the Bank will reorganize into a holding company
structure. The affirmative vote of holders of two-thirds of the issued and
outstanding shares of Bank Common Stock will be required to approve the
Reorganization. In addition, stockholders will be asked to vote on the election
of the directors of the Bank for a one year term and until their successors are
elected and qualify. The election of the directors of the Bank will be by
plurality, with the directors receiving the most votes being elected to office.
As of April 11, 1997 (the "Record Date"), there were 2,936,480 shares of Bank
Common Stock issued and outstanding, held of record by approximately 1200
stockholders. At the Record Date, directors and executive officers of the Bank
held beneficially approximately 561,876 shares of Bank Common Stock, or
approximately 17.37% of the outstanding shares of Bank Common Stock. The Bank's
Board of Directors recommends that stockholders vote for the Reorganization and
in favor of the nominees set forth herein for election as directors.
The Holding Company
At the direction of the Board of Directors of the Bank, the Holding Company
was formed as a New Jersey corporation on February 13, 1997. Its purpose is to
serve as the holding company for the Bank following the Reorganization. The
Holding Company has not yet engaged in business activity. The Holding Company
has no current plans to engage in any activities other than acting as a holding
company for the Bank Stock. In connection with the Reorganization, the Holding
Company will be required to register with the Board of Governors of the Federal
Reserve System (the "FRB") as a bank holding company under the federal Bank
Holding Company Act (the "BHC Act"), and will become subject to supervision and
regulation by the FRB. The Holding Company's offices are located in the Bank's
executive offices at 18 Kings Highway West, Haddonfield, New Jersey 08033. The
Holding Company's telephone number is (609) 428-7300.
The Bank
The Bank is a bank organized under the laws of the State of New Jersey,
with headquarters at 18 Kings Highway West, Haddonfield, New Jersey 08033,
telephone (609) 428-7300.
The Bank's market focus is southern New Jersey. The Bank offers a broad
range of lending, depository and related financial services to individual
consumers, businesses and governmental units. The Bank is a member of the Bank
Insurance Fund ("BIF") of the FDIC. Since commencing operations in September
1988 with a single office in Haddonfield, New Jersey, the Bank has grown to
approximately $415 million in assets and fifteen offices throughout southern New
Jersey. As a state-chartered bank, the Bank is subject to extensive regulation
and supervision by the New Jersey Department of Banking (the "Department of
Banking") under New Jersey law and by the FDIC under federal law.
The Reorganization
Pursuant to the Plan, the Holding Company will acquire all of the issued
and outstanding shares of Bank Common Stock, Bank Series A Preferred Stock and
Bank Series B Preferred Stock, and will issue in exchange therefor an equal
number of shares of Holding Company Common Stock, Holding Company Series A
Preferred Stock and Holding Company Series B Preferred Stock, respectively. As a
result, the Bank will become a wholly-owned subsidiary of the Holding Company,
and the stockholders of the Bank will become stockholders of the Holding
Company. Following the Reorganization, the Bank will conduct its business in the
same manner as it conducted business prior to the Reorganization. See "THE
REORGANIZATION."
4
<PAGE>
Required Regulatory Approvals
The Reorganization is subject to the approval of the FRB under the BHC Act
and the approval of the Department of Banking. Applications requesting the
approvals of the FRB and the Department of Banking, respectively, have been
submitted and the Bank knows of no reason that such approvals will not be
forthcoming. All regulatory approvals are expected to be received by the end of
the second calendar quarter of 1997.
Rights of Dissenting Stockholders
Under the provisions of the New Jersey Banking Act ("NJBA"), holders of the
Bank's Common Stock may exercise dissenters' rights of appraisal with respect to
the Reorganization. Such rights, if properly exercised, will entitle such
holders to receive a cash payment equal to the value of their shares instead of
receiving shares of Holding Company Stock in the Reorganization. See "THE
REORGANIZATION -- Rights of Dissenting Stockholders."
Tax Consequences of the Transaction
It is intended that the Reorganization will be treated for federal income
tax purposes as a tax free exchange under Section 351 of the Internal Revenue
Code of 1986, as amended (the "Code"), and that, accordingly, for federal income
tax purposes: (i) no gain or loss will be recognized by the Bank or the Holding
Company as a result of the Reorganization; (ii) no gain or loss will be
recognized by stockholders of the Bank who exchange their shares of Bank Stock
solely for shares of Holding Company Stock pursuant to the Reorganization; (iii)
the tax basis of the shares of Bank Stock received by stockholders who exchange
all of their shares of Bank Stock solely for shares of Holding Company Stock in
the Reorganization will be the same as the tax basis of the shares of Bank Stock
surrendered in exchange therefor; and (iv) the holding period of the shares of
Bank Stock received in the Reorganization will include the period during which
the shares of Bank Stock surrendered in exchange therefor were held, provided
such shares of Bank Stock were held as capital assets at the effective time of
the Reorganization. See "THE REORGANIZATION -- Federal Income Tax Consequences."
Listing of Shares
The Bank Common Stock is included for quotation on the Nasdaq National
Market, and the Bank Preferred Stock is included for quotation on the Nasdaq
Small-Cap Market. It is expected that the Holding Company Common Stock and
Holding Company Preferred Stock will be similarly included for quotation on the
Nasdaq National Market and Nasdaq Small-Cap Market, respectively, following the
Reorganization.
5
<PAGE>
GENERAL INFORMATION
Time and Place of the Annual Meeting
The Annual Meeting will be held at the Bank's Cherry Hill personal financial
center, 488 Evesham Road, Cherry Hill, New Jersey, at 6:00 p.m. local time on
Tuesday, June 10, 1997.
Votes Required
The approval and adoption of the Plan will require the affirmative vote of
holders of two-thirds of the issued and outstanding shares of Bank Common Stock.
The election of the directors of the Bank will be by plurality, with the
directors receiving the most votes being elected to office.
Holders of Bank Common Stock on the Record Date are each entitled to one
vote per share on each matter to be voted on at the Annual Meeting. As of the
Record Date, there were 2,936,480 shares of Covenant Common Stock issued and
outstanding, held of record by approximately 1200 stockholders. Shares of Bank
Preferred Stock have no voting rights with respect to the matters to be
considered at the Annual Meeting.
At the Record Date, directors and executive officers of the Bank held
beneficially approximately 561,876 shares of Bank Common Stock, or approximately
17.37% of the outstanding shares of Bank Common Stock.
Abstentions (including failure to submit a proxy or appear in person at the
meeting to vote) with respect to shares of Bank Common Stock will have the same
effect as a vote against the approval and adoption of the Plan.
Solicitation, Voting and Revocability of Proxies
Shares represented by all properly executed proxies received in time for
the Annual Meeting will be voted at the Annual Meeting in the manner specified
therein. Properly executed proxies which do not contain voting instructions will
be voted in favor of the Plan and in favor of election of management's nominees
for election to the Board of Directors.
It is not expected that any matter other than those referred to herein will
be brought before the Annual Meeting. If, however, other matters are properly
presented for a vote, the persons named as proxies will vote in accordance with
their judgment with respect to such matters, provided that no proxy that is
voted against approval and adoption of the Plan will be voted in favor of any
adjournment or postponement of the Annual Meeting for the purpose of soliciting
additional proxies.
The grant of a proxy on the enclosed form does not preclude a stockholder
from voting in person at the Annual Meeting. A stockholder may revoke a proxy at
any time prior to its exercise by filing with the Secretary of the Bank a duly
executed revocation of proxy, by submitting a duly executed proxy bearing a
later date, or by appearing at the Annual Meeting and voting in person at Annual
Meeting. Attendance at the Annual Meeting will not, by itself, constitute
revocation of a proxy.
YOUR VOTE IS IMPORTANT. FAILURE TO VOTE WITH RESPECT TO THE PLAN WILL HAVE
THE SAME EFFECT AS A VOTE AGAINST THE APPROVAL AND ADOPTION OF THE PLAN. PLEASE
COMPLETE, SIGN, DATE AND RETURN PROMPTLY THE ENCLOSED PROXY CARD, WHETHER OR NOT
YOU PLAN TO ATTEND THE ANNUAL MEETING. ANY PROXY GIVEN MAY BE REVOKED BY YOU IN
WRITING OR IN PERSON AT ANY TIME PRIOR TO THE EXERCISE THEREOF, IN THE MANNER
DESCRIBED ABOVE.
The Bank will bear the cost of the solicitation of proxies in connection
with the Annual Meeting. In addition to solicitation by mail, the directors,
officers and employees of the Bank may solicit proxies by telephone,
telefacsimile or in person. Arrangements will be made with brokerage houses and
other custodians, nominees and fiduciaries for the forwarding of solicitation
materials to the beneficial owners of stock held of record by such persons, and
the Bank will reimburse such custodians, nominees and fiduciaries for their
reasonable out-of-pocket expenses in connection therewith. The Bank may retain a
professional proxy solicitor to assist in the solicitation of proxies for the
Annual Meeting. If such a solicitor is engaged, the Bank expects that it will
pay a fee of approximately $3,000, plus expenses, for such services.
6
<PAGE>
ELECTION OF DIRECTORS
Directors
The Bank's Bylaws authorize the Board of Directors to fix the number of
directors to be elected each year, provided that such number may not be less
than 5 nor more than 25. In accordance with the Bylaws, the Board of Directors
has fixed the number of directors to be elected at 10. In accordance with
applicable provisions of the NJBA, all of the Directors of the Bank are elected
annually for one (1) year terms. Cumulative voting is not permitted in the
election of Directors.
The Board of Directors of the Bank held thirteen meetings of the full Board
during 1996. Barry M. Abelson was the only Director who attended fewer than
seventy-five (75%) of the aggregate of all Board meetings and all meetings of
committees of the Board on which said director served during 1996.
Set forth below is certain information regarding the management's nominees to
serve as directors of the Bank until the election and qualification of directors
at the next Annual Meeting of the Bank. Each of the nominees to the Board have
served on the Board since the dates indicated below, except for Mr. Brown who is
a new candidate for election to the Board.
Name Age Director Since
- ---- --- --------------
Barry M. Abelson........................... 50 1994
Thomas V.G. Brown.......................... 49 --
William T. Carson, Jr...................... 64 1987
John J. Gallagher, Jr...................... 52 1987
Gary E. Greenblatt......................... 47 1994
Richard A. Hocker.......................... 50 1987
James R. Iannone........................... 49 1996
Joseph A. Maressa, Sr...................... 73 1993
Charles E. Sessa, Jr....................... 38 1994
Kyle W. Will............................... 72 1992
Richard A. Hocker is a co-founder of the Bank, has served as Chairman of
the Board since its inception and was appointed Chief Executive Officer in
February 1994. He is currently a Senior Partner and a substantial owner of Penn
Capital Management, Inc., an investment advisory firm located in Cherry Hill,
NJ. This firm provides certain services to Covenant. See "CERTAIN INFORMATION
REGARDING THE BANK -- Certain Transactions." Prior to founding Penn Capital
Management, Inc. in 1987, Mr. Hocker was Senior Portfolio Manager and part owner
of Delaware Management Company, a Philadelphia based mutual fund group and
investment advisory firm. Mr. Hocker also serves as a Director of Bedminster
Bioconversion Corporation, a company which designs, develops and operates
commercial waste processing facilities. Mr. Hocker is also a member of the Board
of Trustees of the Valley Forge Military Academy and College, and a member of
the Board of Trustees of the West Jersey Health and Hospital Foundation.
John J. Gallagher, Jr. is a co-founder of the Bank and has served as Vice
Chairman of the Board since its inception. Mr. Gallagher serves as the Chairman
of the Board of the Gallagher Group. The Gallagher Group consists of several
companies, all involved in various business activities relating to insurance and
financial services, including Gallagher Associates, Inc., which provides certain
services to the Bank. See "CERTAIN INFORMATION REGARDING THE BANK -- Certain
Transactions." Mr. Gallagher is Chairman of the Board of the Valley Forge
Military Academy and College and also Chairman of the Maria Foundation and the
Camden County Workforce Investment Board.
Charles E. Sessa, Jr. was appointed President of the Bank in February,
1994. He has played a pivotal role in expanding the Bank from a $50 million
institution with one personal banking center to a $415 million institution with
fifteen personal banking centers and a five-star rating by Bauer Financial
Reports. He joined the Bank in 1991 as Senior Vice President, Chief Financial
Officer and Treasurer, and was responsible for financial reporting, treasury,
financial planning and mergers and acquisitions activity. Prior to joining
Covenant, Mr. Sessa was Senior Vice President and Chief Financial Officer for
Empire Savings Bank, Hammonton, NJ, where he had worked since 1987. Mr. Sessa
began his career with Peat Marwick as a CPA. Mr. Sessa serves as a member of the
Board of Trustees of Cooper Health System, where he serves as Chairman of the
Finance Committee, and is a member and secretary of the Rowan College Foundation
Board of Directors.
7
<PAGE>
Barry M. Abelson, Esquire, has been a partner in the law firm of Pepper,
Hamilton & Scheetz LLP, Philadelphia, Pennsylvania since May, 1992. Pepper,
Hamilton & Scheetz LLP, acts as counsel to the Bank in connection with certain
matters. See "CERTAIN INFORMATION REGARDING THE BANK -- Certain Transactions."
Prior to joining Pepper, Hamilton & Scheetz LLP, Mr. Abelson had been a partner
in the law firm of Braemer Abelson & Hitchner, Philadelphia, Pennsylvania (and
its predecessor firms). Mr. Abelson has been a director of Intelligent
Electronics, Inc., a reseller of microcomputers and related products and
services, since 1989, and of XLConnect Solutions, Inc., an information
technology services provider, since 1996.
Thomas V.G. Brown is currently a private investor with interests in banks,
railroads and manufacturing. He was the head of High Yield Sales, Trading and
Research at Nomura Securities, from 1994 to 1996, and prior thereto he was a
Senior Vice President with Donaldson, Lufkin & Jenrette for seventeen years. Mr.
Brown serves as director of the Naugatuck Railroad Company and Bedminster
Bioconversion Corporation where he also serves on the Audit Committee. Mr. Brown
also serves as a volunteer financial advisor to several non-profit
organizations.
William T. Carson, Jr., Secretary of the Bank, is the retired President of
Sullivan-Carson, Inc., a textile business he co-founded. Mr. Carson is presently
the President of William Carson Company, a consulting firm. Mr. Carson is also a
Vice President of Covenant. In addition, Mr. Carson's business affiliations
include positions as a director and owner of a retail beverage and liquor
company, a director of MedQuist, Inc. (a provider of healthcare information
services), a member of the Board of Trustees of the Coriell Institute for
Medical Research and a member of the Executive Advisory Council of Rutgers
University School of Business.
Gary E. Greenblatt, Esquire, is an attorney with the law firm of Greenblatt
and Greenblatt, with offices in Vineland, New Jersey, and is an adjunct
professor of communications law at Rowan University of New Jersey. He is also
Chairman of RE/MAX Realty Group. Mr. Greenblatt was Co-Chairman of Landis
Savings Bank, S.L.A. prior to its acquisition by the Bank in September, 1994.
Mr. Greenblatt is also a Vice President of the Bank.
James R. Iannone is a realtor with Freda Real Estate, and was Chairman of 1st
Southern State Bank prior to its acquisition by the Bank in September, 1996. In
addition, Mr. Iannone is City Commissioner and heads the Department of Public
Safety of Sea Isle City, New Jersey. He is also Commissioner of the South Jersey
Transportation Authority.
Joseph A. Maressa, Sr., Esquire, is the senior partner of the law firm
Maressa, Goldstein, Birsner, Patterson, Drinkwater & Oddo, which acts as counsel
for the Bank. See "CERTAIN INFORMATION REGARDING THE BANK -- Certain
Transactions." Mr. Maressa was Chairman of New Jersey Savings and Loan
Association prior to its acquisition by the Bank in June, 1993. In addition, Mr.
Maressa's business affiliations include partnership interests in Harbor Builders
and Senior Citizens Apartments. He is also Chairman of the Board of Trustees for
Kennedy Memorial Hospitals -- University Medical Center, as well as a Trustee of
the University of Medicine and Dentistry of New Jersey.
Kyle W. Will has served as President and Chief Executive Officer of
Delaware Valley Liebert, Inc., since 1985. Delaware Valley Liebert, Inc.
designs, assembles and services computer room, environmental and power systems.
Mr. Will is a member of the Executive Committee of the Board of Directors of
West Jersey Health System.
Committees of the Board
The standing committees of the Board of Directors of the Bank during 1996
were the Executive Committee, the Board Loan Committee, the Audit Committee, the
Nominating Committee, the Compensation Committee and the Stock Option Committee.
The Audit Committee serves as the principal liaison among the Board of
Directors, the Bank's independent certified public accountants and the Bank's
internal auditors, in connection with the audit function. In addition, the Audit
Committee makes recommendations to the Board of Directors concerning the
designation of the Bank's independent certified public accountants and certain
other auditing matters. The present members of the Audit Committee are Kyle W.
Will (Chairman), Gary E. Greenblatt and James R. Iannone. The Audit Committee
met six times during 1996. The Outsourcing Partnership, LLC, a firm engaged in
the business of outsourcing the internal audit function for banks and insurance
companies, provides internal audit services to the Bank.
8
<PAGE>
The Nominating Committee makes recommendations to the Board of Directors
with respect to qualifications and nominations of directors. The present members
of the Nominating Committee are William T. Carson, Jr. (Chairman), Richard A.
Hocker, Gary E. Greenblatt and Kyle W. Will. The Nominating Committee met three
times during 1996. The Nominating Committee will consider nominees recommended
by stockholders for future recommendations to the Board of Directors of the Bank
(or the Board of Directors of the Holding Company, following the
Reorganization). Such stockholders' recommendations with respect to the Annual
Meeting of Stockholders in 1998 should be made in writing no later than January
1, 1998 addressed to the Nominating Committee, Covenant Bank, 18 Kings Highway
West, Haddonfield, New Jersey 08033, Attention: William T. Carson, Jr.
The Compensation Committee makes recommendations to the Board of Directors
with respect to compensation of members of the Bank's officer group. The members
of the Compensation Committee are Joseph A. Maressa, Sr. (Chairman), Richard A.
Hocker, John J. Gallagher, Jr., Barry M. Abelson and Kyle W. Will. The
Compensation Committee met five times during 1996.
The Stock Option Committee administers the Bank's Incentive Stock Option
Plan and 1996 Stock Option Plan. The members of the Stock Option Committee are
Joseph Maressa, Sr. (Chairman), Barry M. Abelson and Kyle W. Will. The Stock
Option Committee met four times during 1996.
Compensation of Directors
Mr. Hocker, Mr. Gallagher and Mr. Sessa received no additional compensation
for their services as director of the Bank in 1996. All other employee-directors
received an annual retainer of $5,400, and all non-employee directors received
an annual retainer of $8,400, for services on the Board of Directors of the Bank
in 1996.
John J. Gallagher, Jr., Vice Chairman of the Board, received $48,400 for
serving as a Vice President of the Bank in 1996. William T. Carson, Jr. and Gary
E. Greenblatt also served as Vice Presidents of the Bank, for which they
received salaries in 1996 of $30,000 and $20,000, respectively. James Iannone
began service as a Vice President of the Bank in September, 1996, and received
compensation of $4,462 for such service in 1996.
9
<PAGE>
THE REORGANIZATION
General
The Board of Directors of the Bank has unanimously approved the Plan, which
provides for the Reorganization of Covenant into a holding company structure.
The following description of the material aspects of the proposed
Reorganization, including the principal terms of the Plan, is qualified in its
entirety by reference to the full text of the Plan, attached to this Proxy
Statement as Annex A and incorporated herein by reference. Stockholders of the
Bank are encouraged to read the Plan in its entirety.
The Holding Company was formed as a New Jersey corporation in February of
this year to serve as the holding company for the Bank following the
Reorganization. Pursuant to the Plan, the Holding Company will acquire all of
the issued and outstanding shares of Bank Common Stock, Bank Series A Preferred
Stock and Bank Series B Preferred Stock, and will issue in exchange therefor an
equal number of shares of Holding Company Common Stock, Holding Company Series A
Preferred Stock and Holding Company Series B Preferred Stock, respectively. As a
result, the Bank will become a wholly-owned subsidiary of the Holding Company,
and the stockholders of the Bank will become stockholders of the Holding
Company. Following the Reorganization, the Bank will conduct its business in the
same manner as it conducted business prior to the Reorganization.
Reasons for the Reorganization; Recommendations of the Boards of Directors
The Board of Directors of the Bank has determined that the reorganization of
the Bank into a holding company structure is in the best interest of the Bank
and its shareholders. In making this determination, the Board considered, among
other factors, the following benefits that a holding company structure would be
expected to yield:
o facilitation of possible acquisitions of other financial institutions,
and flexibility with respect to possible acquisitions of different
types of financial institutions;
o elimination of adverse tax consequences with respect to stock
repurchases, relating to recapture of bad debt reserve deductions of
the Bank under Section 593 of the Internal Revenue Code of 1986, as
amended (the "Code"). The Board of Directors has not approved any
specific stock repurchases at this time. Stock repurchases by the
Holding Company will be subject to restriction under New Jersey and
federal law (see "SUPERVISION AND REGULATION -- Limits on Dividends
and Other Payments");
o permissibility of a staggered board of directors;
o modern corporations code as principal corporate law governing the
Holding Company, reducing the burden of provisions under the New
Jersey Banking Act regarding the Bank's charter, capital stock and
governance.
FOR THE FOREGOING REASONS, THE BOARD OF DIRECTORS OF THE BANK BY THE
UNANIMOUS VOTE OF ALL DIRECTORS PRESENT, APPROVED THE PLAN AND THE
REORGANIZATION CONTEMPLATED THEREBY, AND RECOMMENDED THAT SHAREHOLDERS VOTE
"FOR" APPROVAL OF THE PLAN.
Structure of the Reorganization
Subject to the terms and conditions of the Plan, and in accordance with the
New Jersey Banking Act, at the Effective Time (as defined below) the Holding
Company will acquire all of the issued and outstanding shares of stock of the
Bank. Holders of Bank Common Stock, Bank Series A Preferred Stock and Bank
Series B Preferred Stock will receive in exchange therefor an equal number of
shares of Holding Company Common Stock, Holding Company Series A Preferred Stock
and Holding Company Series B Preferred Stock, respectively. The terms of such
Holding Company Stock will be substantially identical to the terms of the
corresponding shares of Bank Stock. See "DESCRIPTION OF HOLDING COMPANY
SECURITIES AND COMPARISON OF SHAREHOLDER RIGHTS."
The Reorganization will become effective at the date and time that the New
Jersey Department of Banking (the "Department of Banking") endorses its approval
on the Plan or the date specified in such endorsement as the effective time of
the Reorganization (the date and time of such endorsement or such later
effective date and time, the "Effective Time").
10
<PAGE>
Treatment of Outstanding Options and Other Rights
Effective as of the Effective Time, the Holding Company will assume the
Bank's Incentive Stock Option Plan, the Bank's 1996 Stock Option Plan for
Officers and Non-Employee Directors and the Bank's Employee Stock Purchase Plan
(collectively, the "Plans"), and all rights under such Plans to acquire shares
of Bank Common Stock will be converted into and become rights to acquire Holding
Company Common Stock.
Share Certificates
As of the Effective Time, all certificates representing shares of Bank
Common Stock, Bank Series A Preferred Stock or Bank Series B Preferred Stock,
other than Dissenters' Shares, shall automatically and without any action on the
part of the holder thereof be converted into and be deemed to represent shares
of Holding Company Common Stock, Holding Company Series A Preferred Stock and
Holding Company Series B Preferred Stock, respectively. There will be no need
for stockholders to surrender their certificates representing shares of Bank
Stock for exchange.
Required Regulatory Approvals
The Reorganization is subject to the approval of the FRB under the BHC Act.
In determining whether to grant its approval for the Reorganization, the BHC Act
requires the FRB to take into consideration the financial and managerial
resources (including the competence, experience and integrity of the officers,
directors and principal stockholders) and future prospects of the existing and
proposed institutions and the convenience and needs of the communities to be
served. In addition, under the Community Reinvestment Act of 1977, as amended
("CRA"), the FRB must take into account the record of performance of the
existing institutions in meeting the credit needs of the entire community,
including low- and moderate-income neighborhoods, served by such institutions.
Applicable Federal law provides for the publication of notice and public comment
on applications filed with the FRB and authorizes such agency to permit
interested parties to intervene in the proceedings. Following receipt of FRB
approval, a waiting period of at least 15 days will be required prior to
consummation of the Reorganization, during which time applicable law provides
that the Reorganization may be challenged on antitrust grounds by the United
States Justice Department.
The Reorganization is also subject to the approval of the New Jersey
Department of Banking under the NJBA, which will evaluate whether the
transaction is in the public interest.
Applications requesting the approvals of the FRB and the Department of
Banking, respectively, have been submitted, and the Bank knows of no reason that
such approvals will not be forthcoming. All regulatory approvals are expected to
be received by the end of the second calendar quarter of 1997.
Termination or Amendment
The Plan may be terminated at any time by the Bank, and may be amended at
any time by agreement of the Bank and the Holding Company either before or after
the stockholders' vote on the Plan. No amendment to the Plan will be made which
changes the consideration receivable by stockholders in the Reorganization
without the further approval of the stockholders.
Accounting Treatment
The Reorganization will be accounted for as a combination of entities under
common control ("as-if pooling of interests"). Accordingly, there will be no
change in the historical basis of the assets, liabilities and stockholders'
equity of the Bank, which will be carried forward at their previously recorded
amounts, and no goodwill or intangible assets will be created.
11
<PAGE>
Federal Income Tax Consequences
The federal income tax discussion set forth below is included for general
information only. It may not be applicable to certain classes of taxpayers,
including insurance companies, securities dealers, financial institutions,
foreign persons and persons who acquired Bank Common Stock pursuant to the
exercise of employee stock options or rights or otherwise as compensation.
Stockholders are urged to consult their own tax advisor as to the specific tax
consequences to them of the Reorganization, including the applicability and
effect of federal, state, local and other tax laws.
Pepper, Hamilton & Scheetz LLP has delivered its opinion that the
Reorganization will be treated for federal income tax purposes as a tax free
exchange under Section 351 of the Code, and that, accordingly, for federal
income tax purposes: (i) no gain or loss will be recognized by the Bank or the
Holding Company as a result of the Reorganization; (ii) no gain or loss will be
recognized by the stockholders of the Bank who exchange their shares of Bank
Stock solely for shares of Holding Stock pursuant to the Reorganization; (iii)
the tax basis of the shares of Bank Stock received by stockholders who exchange
all of their shares of Bank Stock solely for shares of Holding Company Stock in
the Reorganization will be the same as the tax basis of the shares of Bank Stock
surrendered in exchange therefor; and (iv) the holding period of the shares of
Bank Stock received in the Reorganization will include the period during which
the shares of Bank Stock surrendered in exchange therefor were held, provided
such shares of Bank Stock were held as capital assets at the Effective Time.
Rights of Dissenting Stockholders
Under the provisions of the NJBA, holders of Bank Stock may exercise
dissenters' rights of appraisal with respect to the Reorganization. Such rights,
if properly exercised, will entitle such holders to receive a cash payment equal
to the value of their shares instead of receiving shares of Holding Company
Common Stock in the Reorganization. Attached as Annex B to this Proxy Statement
is a copy of the text of the applicable provisions of the NJBA that prescribe
the procedures for the exercise of dissenters' rights and for determining the
value of their shares. Stockholders of the Bank who seek to exercise dissenters'
rights must carefully follow the procedure described in such provisions of the
NJBA. The following summary of such provisions is qualified in its entirety by
reference to such statutory provisions.
The Reorganization may be terminated at the sole option of the Bank if
dissenters' rights are exercised with respect to more than 5% of the issued and
outstanding shares of Bank Stock.
A stockholder electing to dissent from the Plan and demand payment for his
shares must file with the Bank prior to the Annual Meeting a written notice of
such dissent, stating that such stockholder intends to demand payment for his
shares if the Plan becomes effective, and must not vote in favor of the Plan at
the Annual Meeting. Submission of a proxy indicating a vote against the Plan
does not constitute the required notice of dissent, which must be separately
given prior to the Annual Meeting.
Within 10 days after the date on which the Plan is approved by the
stockholders of the Bank, the Bank will give notice of such approval by
certified mail to each stockholder who has filed a written notice of dissent as
provided above, except any who voted for or consented in writing to the Plan.
Within 20 days after the mailing of such notice, a dissenting stockholder must
make written demand on the Bank for the payment of the fair value of his shares.
Upon making such demand, the dissenting stockholder shall cease to have any
rights of a stockholder except the right to be paid the fair value of his shares
and other rights of a dissenting stockholder under the NJBA. A stockholder may
not dissent as to less than all of the shares owned beneficially by him. The
fair value of the shares held by a dissenting stockholder shall be determined as
of the day before the Annual Meeting. In determining such fair value, there
shall be excluded any appreciation or depreciation in value resulting from the
consummation of the Plan.
Not later than 20 days after demanding payment for his shares as provided
in the immediately preceding paragraph, the dissenting stockholder must submit
the certificates representing his or her shares to the Bank for notation thereon
that such demand has been made, whereupon such certificates shall be returned to
such stockholder. If shares represented by such certificates shall be
transferred, each new certificate shall bear similar notation and a transferee
of such shares shall acquire no rights other than those which the original
dissenting stockholder had.
12
<PAGE>
Within 10 days after expiration of the period within which stockholders may
make written demand as provided above or 10 days after the Plan becomes
effective, whichever is later, the Bank will be required to mail to each
dissenting stockholder the balance sheet and the surplus statement of the Bank
as of the latest available date, and a profit and loss statement for not less
than a 12-month period ended on the date of such balance sheet. The Bank may
accompany such mailing with a written offer to pay each dissenting stockholder a
specified price deemed by the Bank to be the fair value for the shares.
If, not later than 30 days after the expiration of the 10-day period
provided above, the fair value of the shares is agreed upon between the
dissenting stockholder and the Bank, payment therefore shall be made upon
surrender of the certificates representing such shares. If the fair value of
such shares is not agreed upon within such 30-day period, the dissenting
stockholder may serve upon the participation bank a written demand that it
commence an action in the Superior Court for the determination of such fair
value. Such demand must be served not later than 30 days after the expiration of
the above 30-day period and such action shall be commenced by the Bank not later
than 30 days after receipt of such demand. If the Bank fails to commence such
action within such time period, the dissenting stockholder may do so in the name
of such Bank but not later than 60 days after the expiration of the time in
which the Bank may commence such action. A judgment for the payment of the fair
value of shares shall be payable upon surrender to the Bank of the certificates
representing such shares.
The right of a dissenting stockholder to be paid the fair value of his shares
shall cease if: (a) such stockholder shall fail to present his certificates for
notation as provided above, unless a court shall otherwise direct; (b) such
stockholder's demand for payment is withdrawn with the written consent of the
Bank; (c) the fair value of the shares is not agreed upon as provided in the Act
and no action for the determination of fair value by the Superior Court is
commenced within the time provided in the Act; (d) the Superior Court determines
that the stockholder is not entitled to payment for his or her shares; (e) the
Plan is abandoned, rescinded, or otherwise terminated; or (f) a court having
jurisdiction permanently enjoins or sets aside the Reorganization. In any such
event, the rights of the dissenting stockholder as a stockholder shall be
reinstated.
13
<PAGE>
CERTAIN INFORMATION REGARDING THE BANK
General
Financial statements of the Bank and information regarding the Bank's
business and operations and certain other matters is included in the Bank's
Annual Report on Form F-2 (Amendment No. 2 filed with the FDIC on April 29,
1997), a copy of which is attached hereto as Annex C and incorporated herein by
reference.
Management of the Bank
Set forth below are the names, ages, current positions and brief
descriptions of business experience over the past five years of the executive
officers of the Bank.
<TABLE>
<CAPTION>
Name [Age] Current Position Business Experience
- ---------- ---------------- -------------------
<S> <C> <C>
Richard A. Hocker Chairman and Chief Executive Officer See "ELECTION OF DIRECTORS -- Directors."
[50]
Charles E. Sessa, Jr. President See "ELECTION OF DIRECTORS -- Directors."
[38]
Kenneth R. Mancini, Jr. Executive Vice President and Joined the Bank in June, 1993;
[50] Senior Credit Officer prior thereto, Vice President of
Meritor Savings Bank,
managing the Business
Development Division and the
Commercial Lending Department.
J. William Parker, Jr. Senior Vice President, Chief Joined the Bank in April, 1994;
[38] Financial Officer and Treasurer prior thereto, Vice President/
Comptroller of Commerce
Bank, N.A., Cherry Hill,
managing the accounting
division for Commerce
Bancorp, Inc. and subsidiaries.
Eugene D. D'Orazio, Jr. Senior Vice President and Joined the Bank in January, 1995;
[34] Chief Operating Officer prior thereto, Group Manager
(1987-1992), District Operations
Officer (1992-1993), Senior Credit
Administrator (1993-1994) and
District Manager (September, 1994 -
January, 1995) for Midlantic Bank, N.A.
</TABLE>
14
<PAGE>
Executive Compensation
Executive Compensation Summary.
The following table sets forth the compensation paid by the Bank for the
years ended December 31, 1996, 1995 and 1994 to its Chief Executive Officer and
each of the other executive officers of the Bank whose annual salary and bonus
totaled in excess of $100,000 in 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------- ----------------------
Name and Other Annual Number of All Other
Principal Position Year Salary Bonus Compensation(1) Options(2) Compensations(3)
- ------------------ ---- ------ ----- --------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Hocker 1996 $127,029 $60,000 $ * 31,800 $1,479
Chief Executive Officer 1995 100,961 50,000 * 31,961(4) 381
1994 50,000 52,500 * 16,398 0
Charles E. Sessa, Jr. 1996 $163,134 $50,000 $ * 26,500 $2,373
President 1995 133,227 37,500 * 34,886(4) 467
1994 117,715 35,000 * 19,322 0
Kenneth A. Mancini, Jr. 1996 $119,318 $21,000 $ * 10,070 $ 911
Executive Vice 1995 115,001 15,000 * 19,300(4) 203
President and Senior 1994 106,680 22,000 * 10,304 0
Credit Officer
J. William Parker, Jr. 1996 $ 89,351 $15,000 $ * 7,950 $1,204
Senior Vice President, Chief 1995 84,482 8,500 * 11,059(4) 303
Financial Officer and Treasurer 1994 56,163 14,125 * 3,863 0
Eugene D. D'Orazio, Jr. 1996 $ 90,654 $11,000 $ * 6,360 $1,528
Senior Vice President and 1995 77,385 11,000 * 5,981 303
Chief Operating Officer 1994 N/A N/A * N/A N/A
</TABLE>
- ----------
* Amounts do not exceed 10% of total annual salary and bonus or $50,000.
(1) Represents perquisites and other personal benefits paid for by the Bank
including car allowances or leased vehicles, group term life insurance,
special life insurance, and value of the difference between the market
value at the time of purchase under the Bank Employee Stock Purchase Plan
and the amount paid by the employee.
(2) Numbers of option shares have been adjusted to reflect stock dividends on
Bank Common Stock through December 31, 1996.
(3) Represents allocations to accounts of executive officers under the Bank's
401(k) Plan ("401(k)"). On October 1, 1995, the Bank established the 401(k)
for all eligible employees. The Bank matches 25% of each employee's pre-tax
contributions, up to 6% of the employee's pre-tax salary. The Bank's
contribution vests to the employee ratably over a five-year period.
(4) Includes with respect to Messrs. Hocker, Sessa, Mancini and Parker options
to acquire 16,398 shares, 19,322 shares, 10,304 shares and 3,863 shares,
respectively, originally issued in 1994 and repriced in February, 1995, as
adjusted for stock dividends on Bank Common Stock through December 31,
1996.
15
<PAGE>
The following table presents certain additional information with respect to
grants of stock options pursuant to Covenant's Incentive Stock Option Plan and
1996 Stock Option Plan, during the year ended December 31, 1996, to the named
executive officers reflected in the Summary Compensation Table:
<TABLE>
<CAPTION>
Option/SAR Grants in 1996
Individual Grants
-----------------
% of Total
Options
Granted to Exercise or
Options Employees in Base Price Expiration Grant Date
Name Granted(1) Fiscal Year Per Share (1) Date Present Value(2)
- ---- ---------- ----------- ------------- ---- ----------------
<S> <C> <C> <C> <C> <C>
Richard A. Hocker 31,800 22% $12.12 11/21/2006 $186,348
Charles E. Sessa, Jr. 26,500 19% $12.12 11/21/2006 $155,290
Kenneth R. Mancini, Jr. 10,070 7% $12.12 11/21/2006 $ 59,010
J. William Parker, Jr. 7,950 6% $12.12 11/21/2006 $ 46,587
Eugene D. D'Orazio, Jr. 6,360 4% $12.12 11/21/2006 $ 37,270
</TABLE>
- ----------
(1) The number of shares subject to options granted in 1996 and the exercise
prices with respect thereto have been adjusted in accordance with the terms
of such options to reflect a 6% stock dividend issued by the Bank on its
Common Stock in December, 1996.
(2) The Black-Scholes pricing model was utilized to value the options at grant
date. The assumptions used are: Expected Volatility of .1534 -- an average
of the prior two and one-half years from the end of 1996 of weekly
volatility of the Standard and Poor's Banks Composite Index; Risk-Free Rate
of Return -- 6.31%; Dividend Yield -- annualized dividend yield of 0; and
Time of Exercise -- ten years.
Option Exercises and Year-End Option Values.
The following table presents information concerning the aggregate stock
option exercises during the fiscal year ended December 31, 1996 and stock option
values as of the end of 1996 for unexercised stock options held by each of the
named executive officers.
<TABLE>
<CAPTION>
Aggregated Option Exercises in 1996
and Year End Option Values
Number of Value of Unexercised
Unexercised Options In-the-Money Options/
Number of at Fiscal Year End SARs at Fiscal Year End
Shares ------------------ -----------------------
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Hocker -- -- 129,365 23,150 $817,321 $56,037
Charles E. Sessa, Jr. -- -- 51,328 19,613 $288,893 $48,495
Kenneth R. Mancini, Jr. -- -- 27,143 7,688 $158,550 $19,739
J. William Parker, Jr. -- -- 12,931 6,078 $69,555 $15,630
Eugene D. D'Orazio, Jr. -- -- 7,323 5,018 $43,596 $28,000
</TABLE>
16
<PAGE>
Compensation and Stock Option Committee's Report on Executive Compensation.
Executive compensation consists principally of annual salary, annual bonus
and stock option awards. Salaries and bonuses for executive officers other than
Mr. Hocker, Chairman of the Board and Chief Executive Officer, are set by the
Compensation Committee, the current members of which are Messrs. Maressa
(Chairman), Hocker, Gallagher, Abelson and Will. Salary and bonus for Mr. Hocker
are set by the Compensation Committee acting without Mr. Hocker present. Stock
option awards are determined by the Stock Option Committee, the current members
of which are Messrs. Maressa (Chairman), Abelson and Will.
In setting each component of executive compensation, the other elements of
executive compensation are taken into consideration.
Salaries. In setting the salaries for executive officers for 1996, the
Compensation Committee reviewed a number of criteria relating to the performance
of the Bank generally and of each executive officer specifically during the
prior fiscal year and evaluated its expectation as to each such individual's
future contributions to the Bank. The salaries of the Chief Executive Officer
and the other executive officers for 1996 were based on an evaluation of
individual job performance and the performance of the Bank as a whole, and of
the experience and responsibilities of the individual executive officer, as well
as consideration of compensation programs applicable generally at financial
institutions comparable to the Bank. In making its decision on salary levels,
the Compensation Committee did not use any predetermined formula or assign any
particular weight to any individual criteria.
Bonuses. As an element of its compensation package for its employees
(including executive officers of the Bank), the Bank has a Bonus Plan which
provides that performance bonuses may be made out of a bonus pool calculated
based on the Bank's income before taxes, as compared to the Bank's targeted
budget for the year. Each position within the Bank is assigned a salary grade
which determines the maximum bonus which could be received by an employee
holding that position, as a percentage of salary. Bonus awards, within the
constraints set by the amount of the bonus pool and the salary grade for a given
position, are made annually after the end of each calendar year by an employee's
supervisor based on the employee's performance relative to goals set for the
employee for that year.
For executive officers, bonus awards were determined in accordance with the
Bonus Plan by the Compensation Committee or, in the case of bonus awards for the
Chief Executive Officer, by the Compensation Committee acting without the Chief
Executive Officer present. In determining the specific bonus awards for
executive officers with respect to 1996, within the limits established by the
Bonus Plan as described above, the Compensation Committee took into
consideration executive compensation at financial institutions comparable to the
Bank, the salary levels and other compensation for the individual officer, the
experience and responsibilities of the individual executive officer, and
individual job performance. The Compensation Committee did not use any
predetermined formula or assign any particular weight to any individual
criteria.
Option Awards. The Bank's 1996 Stock Option Plan provides for the issuance
of options for the purchase of the Bank's Common Stock. The purposes of the 1996
Stock Option Plan are to provide a continuing long-term incentive to those
employees eligible under the Plan as a means of rewarding outstanding
performance and to enable the Bank to attract and retain key personnel necessary
for continued long-term growth and profitability. The 1996 Stock Option Plan is
administered by the Stock Option Committee. The 1996 Stock Option Plan permits
the Stock Option Committee to grant options to qualified participants. Qualified
participants under the 1996 Stock Option Plan include senior officers as well as
any person determined by the stock option committee to be a key employee of the
Bank.
Awards under the 1996 Stock Option Plan, including awards to executive
officers, are determined by the Stock Option Committee based on a variety of
factors, including the position and responsibility of the potential option
recipient and the total number of options available for grant, as well as
consideration of compensation programs applicable at comparable financial
institutions. The Stock Option Committee seeks to use option awards to provide
an incentive for continued performance, and options generally vest in three
annual installments.
17
<PAGE>
A principal consideration in determining option awards is to provide the
greatest incentives to those with the best opportunity to impact the success of
the Bank.
Compensation Committee Stock Option Committee
---------------------- ----------------------
Joseph A. Maressa, Sr. Joseph A. Maressa, Sr.
Richard A. Hocker Barry M. Abelson
Barry M. Abelson Kyle W. Will
John J. Gallagher, Jr.
Kyle W. Will
The Report of the Compensation and Stock Option Committees on Executive
Compensation shall not be deemed incorporated by reference by any general
statement incorporating by reference this Proxy Statement into any filing under
the Securities Act of 1933 or under the Securities and Exchange Act of 1934, and
shall not otherwise be deemed filed under such Acts.
Compensation Committee Interlocks and Insider Participation.
The members of the Compensation Committee during 1996 were Messrs. Maressa,
Hocker, Abelson, Gallagher and Will. Mr. Hocker is Chairman and Chief Executive
Officer of the Bank, and he is majority owner of Penn Capital Management, Inc.,
which provides various investment advisory services to the Bank. Mr. Gallagher
is Vice Chairman and a Vice President of the Bank, and Gallagher Associates,
Inc., of which Mr. Gallagher is the majority stockholder, acts as insurance
agent and consultant for the Bank. Mr. Abelson is a partner in the law firm of
Pepper, Hamilton & Scheetz LLP which acts as counsel to the Bank with respect to
mergers and acquisitions, securities laws and certain other matters.
Stock Performance Comparison.
<TABLE>
<CAPTION>
Period Ending
---------------------------------------------------------------
Index 11/28/94 12/31/94 6/30/95 12/31/95 6/30/96 12/31/96
- ----- -------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Covenant Bank 100.00 94.24 95.56 142.86 129.66 163.21
Nasdaq - Total US 100.00 100.89 125.81 142.68 161.53 175.51
Banks (under $500M) 100.00 99.85 114.01 136.60 151.22 175.82
Thrifts (Mid-Atlantic) 100.00 101.43 126.75 149.56 158.82 204.56
</TABLE>
18
<PAGE>
Certain Agreements.
The Bank has entered into Agreements with Messrs. Hocker and Sessa which
provide for certain benefits upon termination of employment. If termination of
employment occurs within two years following a "Change in Control" (as defined
below), the employee is entitled under these Agreements to the benefits
described below unless such termination of employment is because of the
employee's death. If a Change of Control has not occurred within two years prior
to the date of termination of employment, the employee is entitled to the
benefits described below unless such termination of employment is (i) because of
the employee's death, (ii) by the Bank for "Cause" (as defined below) or (iii)
by the employee other than for "Good Reason" (as defined below).
In addition, the Bank has entered into Agreements with Messrs. Mancini,
Parker and D'Orazio which provide for certain benefits upon termination of
employment within two years following a Change in Control, unless such
termination is (i) because of the employee's death, (ii) by the Bank for Cause,
or (iii) by the employee other than for Good Reason.
The benefits provided under the Agreements, if applicable as set forth
above, are as follows: (i) the Bank shall pay to the employee his full base
salary through the date of termination at the rate in effect at the time notice
of termination is given in accordance with the Agreement, plus all other amounts
to which the employee is entitled under any compensation plan of the Bank, in
each case without giving effect to any reduction in salary or benefits which
would constitute Good Reason pursuant to the Agreement, at the time such
payments are due; (ii) the Bank shall pay to the employee a lump sum severance
payment equal to the employee's annual rate of base salary (in the case of
Messrs. Mancini, Parker and D'Orazio) or two times the employee's annual rate of
base salary (in the case of Messrs. Hocker and Sessa) in effect at the time
notice of termination is given (without giving effect to any reduction in salary
which would constitute Good Reason); (iii) the Bank shall provide continued
uninterrupted health care coverage to the employee substantially comparable to
(and no less beneficial to employee than) that in effect at the time notice of
termination is given (without giving effect to any reduction in benefits which
would constitute Good Reason), for a period of one year (in the case of Messrs.
Mancini, Parker and D'Orazio) or two years (in the case of Messrs. Hocker and
Sessa) following the date of termination; and (iv) vesting and exercisability of
all options granted to the employee under the Bank's Incentive Stock Option Plan
prior to the date of the Agreement, and all such options granted hereafter which
shall specifically indicate in such grant that they are subject to this
provision (collectively, "Covered Options") shall be accelerated to the fullest
extent possible; provided, however, that in the event that any such Covered
Options do not become immediately fully vested and exercisable then such Covered
Options shall be canceled and in exchange therefor the Bank shall pay to the
employee an amount equal to the difference (the "Spread") between the exercise
price for such Covered Options and the Fair Market Value of the underlying
shares of Common Stock as of the date of termination; provided, further,
however, that in the event that a Change in Control or Potential Change in
Control has occurred and such Change in Control would otherwise be accounted for
under the "pooling of interests" method of accounting, and if such cash payment
would prevent such pooling treatment, then in lieu of such cash payment the
employee shall receive consideration in the same form as holders of Common Stock
receive in such Change in Control, which consideration shall have a Fair Market
Value equal to the Spread. For purposes hereof, "Fair Market Value" of any
security shall mean the closing price of such security on the trading day
immediately prior to the date of determination; provided, however, that in the
event that a Change in Control or Potential Change in Control has occurred as of
the date of termination, the Fair Market Value of the Bank's Common Stock shall
be not less than the amount paid to holders of such Common Stock in such Change
in Control.
For purposes of these Agreements, a "Change in Control" shall have occurred
if any of the following events shall occur:
(i) the Bank is merged, consolidated or reorganized into or with
another corporation or other legal person in any transaction or series of
related transactions (other than a transaction to which only the Bank and
one or more of its subsidiaries are parties) and as a result of such
merger, consolidation or reorganization less than a majority of the
combined voting power of the then-outstanding voting securities of the
surviving entity or person immediately after such transaction or series of
related transactions are held in the aggregate by persons or entities who
were holders of voting securities of the Bank immediately prior to such
transaction;
(ii) the Bank sells all or substantially all of its assets to any
other corporation or other legal person in any sale or series of related
sales (other than a transaction to which only the Bank and one or more of
its subsidiaries are parties); or
19
<PAGE>
(iii) any person, corporation or group of associated persons acting in
concert within the meaning of Section 13(d)(3) or 4(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), excluding, for this
purpose, the Bank or its subsidiaries, or any employee benefit plan of the
Bank or its subsidiaries, becomes a direct or indirect beneficial owner of
shares of stock of the Bank (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) representing an aggregate of more than 50% of the
votes then entitled to be cast at an election of directors of the Bank.
For purposes of these Agreements, a "Potential Change in Control" shall be
deemed to have occurred if: (i) the Bank enters into an agreement, the
consummation of which would result in the occurrence of a Change in Control;
(ii) any person (including the Bank) publicly announces an intention to take or
to consider taking actions which if consummated would constitute a Change in
Control; (iii) the Board of Directors of the Bank adopts a resolution to the
effect that, for purposes of the Agreement, a Potential Change in Control has
occurred.
Pursuant to these Agreements termination by the Bank of an employee's
employment for "Cause" means termination: (a) upon the commission by the
employee of a willful unlawful act, such as embezzlement, against the Bank which
is intended to enrich the employee at the expense of the Bank or upon the
employee's conviction of a felony; or (b) in the event of willful, gross neglect
or willful, gross misconduct, resulting in either case in material harm to the
Bank. No act, or failure to act, on an employee's part shall be deemed "willful"
unless done, or omitted to be done, by the employee not in good faith and
without reasonable belief that his action or omission was in the best interest
of the Bank.
For purposes of these Agreements, "Good Reason" means, without the
employee's express written consent, the occurrence of any of the following
circumstances unless such circumstances are fully corrected prior to the date of
termination specified in the notice of termination given in respect thereof: (i)
a reduction by the Bank in the employee's annual base salary or employee
benefits as in effect immediately prior to such reduction; (ii) the Bank's
requiring the employee to be based at a Bank office more than twenty (20) miles
from the offices at which the employee is principally employed immediately prior
to the date of the Agreement except for required travel on the Bank's business
to an extent substantially consistent with the employee's present business
travel obligations; (iii) a material reduction in the employee's position,
duties or responsibilities as in effect immediately prior to such reduction;
(iv) the failure of the Bank to obtain the agreement to assume and to perform
the Agreement by any successor; or (v) any purported termination of the
employee's employment that is not effected pursuant to a notice of termination
satisfying the requirements of the Agreement, which purported termination shall
not be effective for purposes of the Agreement.
No "Change in Control" or "Potential Change in Control" will occur under
these Agreements as a result of the Reorganization. If a Change in Control had
occurred within two years prior to the date hereof and the employees covered by
such Agreements were terminated as of the date hereof without Cause, the
severance and health insurance benefits to such employees, as outlined above,
would be as follows:
Severance Payment Health Care Coverage (1)
----------------- ------------------------
Richard A. Hocker............. $300,000 $13,264
Charles E. Sessa, Jr.......... 380,000 11,828
Kenneth R. Mancini, Jr........ 125,000 3,637
J. William Parker, Jr......... 95,000 3,637
Eugene D. D'Orazio, Jr........ 93,000 3,637
- ----------
(1) Calculated based on the current annual cost to the Bank of health insurance
coverage for such employee.
20
<PAGE>
Certain Transactions
Set forth below are brief descriptions of certain transactions and
relationships during the preceding fiscal year between the Bank, on the one
hand, and the directors, executive officers and significant stockholders of the
Bank (and their respective affiliates), on the other hand. The Bank believes
that each of the following transactions was on terms no less favorable than
could have been obtained by Covenant from non-affiliated parties.
Richard A. Hocker, Chairman of the Board of the Bank, is Senior Partner and
majority owner of Penn Capital Management, Inc., which has provided various
investment advisory services to the Bank since inception, and Gallagher
Associates, Inc., of which John J. Gallagher, Jr., Vice Chairman of the Board of
the Bank, is the majority stockholder, has acted as insurance agent and
consultant for the Bank since inception. Amounts paid by the Bank to Penn
Capital Management, Inc. and Gallagher Associates, Inc., were $124,500 and
$108,500, respectively, in 1996.
Barry M. Abelson, Esquire, a member of the Board of Directors of the Bank,
is a partner in the law firm of Pepper, Hamilton & Scheetz LLP, which has acted
as special counsel to the Bank since 1992 with respect to mergers and
acquisitions, securities laws and certain other matters. Fees paid by the Bank
to Pepper, Hamilton & Scheetz LLP in 1996 did not exceed five percent of such
firm's gross revenues for 1996.
Joseph A. Maressa, Sr. is a senior partner of the law firm Maressa,
Goldstein, Birsner, Patterson, Drinkwater & Oddo, which has acted as counsel to
the Bank with respect to certain loan collection and work-out matters since
1993. Fees paid by the Bank to Maressa, Goldstein, Birsner, Patterson,
Drinkwater & Oddo in 1996 did not exceed five percent of such firm's gross
revenues in 1996.
Any extensions of credit by the Bank to any officers, directors, five
percent security holders or affiliates thereof were made in the ordinary course
of business on terms substantially the same as for comparable arms-length
transactions, and do not involve more than a normal risk of collectibility or
other unfavorable features. The aggregate amount of such extensions of credit to
any individual (and such individual's associates) has not at any time exceeded
the lesser of 10% of the Bank's equity capital or $5 million, and the aggregate
amount of all such extensions of credit has at no time exceeded 20% of the
Bank's equity capital.
Principal Holders of Covenant Common Stock and Holdings of Management
To the knowledge of the Bank, based solely upon a review of Forms F-7,
Forms F-8 and Forms F-8A, and amendments thereto, furnished to the Bank, and
representations of such persons to the Bank, no director, officer or beneficial
owner of more than 10% of any class of the Bank's capital stock has failed to
file on a timely basis any report required by Section 16(a) of the Securities
Exchange Act of 1934, as amended.
Security Ownership of Certain Beneficial Owners.
The following table describes, to the Bank's knowledge, the security
ownership of those persons who own beneficially more than five percent (5%) of
the Bank's Common Stock as of April 11, 1997:
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership (1) of Class
- ------------------- ------------------------ --------
Richard A. Hocker 199,209 shares (2) 6.50%
107 E. Cottage Avenue
Haddonfield, NJ 08033
- ----------
(1) The information in this table is based on information furnished by the
respective stockholders. Shares are deemed to be beneficially owned by a
person if he or she directly or indirectly has or shares the power to vote
or dispose of the shares, whether or not he or she has any economic
interest in such shares. Unless otherwise indicated, the named beneficial
owner has sole voting and dispositive power with respect to the shares.
(2) Includes (i) 3,995 shares owned by Mr. Hocker's wife and 1,363 shares owned
in custodial and trust accounts for the benefit of Mr. Hocker's daughter,
and (ii) 129,365 shares issuable under stock options exercisable currently
or within 60 days by Mr. Hocker.
21
<PAGE>
Security Ownership of Directors and Directors and Officers as a Group.
The following table describes the security ownership of each director, each
executive officer named in the Summary Compensation Table, and all directors and
executive officers as a group as of April 11, 1997:
<TABLE>
<CAPTION>
Series A Series B
Common Stock Preferred Stock Preferred Stock
------------ --------------- ---------------
Amount(1) Percent Amount(1) Percent Amount(1) Percent
--------- ------- --------- ------- --------- -------
Directors:
<S> <C> <C> <C> <C> <C> <C>
Barry M. Abelson .......... 4,213(2) * % -- -- % 800 * %
Thomas V.G. Brown ......... 2,729 * 7,000 5.06 -- --
William T. Carson, Jr ..... 49,824(3) 1.68 3,000 2.17 2,000 1.24
John J. Gallagher, Jr ..... 66,600(4) 2.25 4,000(5) 2.89 6,046(6) 3.74
Gary E. Greenblatt ........ 29,482(7) 1.00 -- -- 272(8) *
Richard A. Hocker ......... 199,209(9) 6.50 5,000(10) 3.62 37,000(11) 22.88
James R. Iannone .......... 58,862(12) 2.00 -- -- -- --
Joseph Maressa, Sr ........ 41,131(13) 1.40 -- -- 4,000 2.47
Charles E. Sessa, Jr ...... 55,727(14) 1.87 -- -- 440 *
Kyle W. Will .............. 4,897(15) * 2,000 1.45% 2,000 1.24
Named Executive Officers
Kenneth R. Mancini, Jr .... 27,873(16) * -- -- 300 0.19
J. William Parker, Jr ..... 13,569(17) * -- -- 320(18) *
Eugene D. D'Orazio, Jr .... 7,760(19) * -- -- 148 *
All directors and executive
officers as a group
(13 Persons) ............ 561,876(20) 17.37% 21,000 15.18% 53,326 32.98%
</TABLE>
- ----------
* indicates less than 1%
(1) The information in this table is based on information furnished by the
respective stockholders. Shares are deemed to be beneficially owned by a
person if he or she directly or indirectly has or shares the power to vote
or dispose of the shares, whether or not he or she has any economic
interest in such shares. Unless otherwise indicated, the named beneficial
owner has sole voting and dispositive power with respect to the shares.
(2) Includes 3,534 shares issuable under stock options exercisable currently or
within 60 days by Mr. Abelson.
(3) Includes 28,276 shares issuable under stock options exercisable currently
or within 60 days by Mr. Carson.
<PAGE>
(4) Includes (i) 3,320 shares owned by Mr. Gallagher's wife, with respect to
which beneficial ownership is disclaimed, 25,928 shares owned jointly with
Mr. Gallagher's wife, 678 shares owned by his son and 320 shares owned in a
custodial account for the benefit of Mr. Gallagher's daughter; (ii) 6,825
shares owned by Gallagher Associates Pension Trust Fund, in which Mr.
Gallagher is a participant and as to which beneficial ownership is
disclaimed; and (iii) 29,529 shares issuable under stock options
exercisable currently or within 60 days by Mr. Gallagher.
(5) Includes 2,000 shares owned by Gallagher Associates Pension Trust Fund, in
which Mr. Gallagher is a participant and as to which beneficial ownership
is disclaimed and 2,000 shares owned jointly with Mr. Gallagher's wife.
(6) Includes (i) 2,660 shares owned by Gallagher Associates Pension Trust Fund,
in which Mr. Gallagher is a participant and as to which beneficial
ownership is disclaimed, (ii) 25 shares owned by Mr. Gallagher's wife, as
to which beneficial ownership is disclaimed and (iii) 3,361 shares owned
jointly with Mr. Gallagher's wife.
(7) Includes (i) 3,149 shares owned by Mr. Greenblatt's wife, as to which
beneficial ownership is disclaimed, and 531 shares in a custodial account
for the benefit of Mr. Greenblatt's daughter; and (ii) 1,097 shares
issuable under stock options exercisable currently or within 60 days by Mr.
Greenblatt.
(8) Shares owned by Mr. Greenblatt in a custodial account for the benefit of
Mr. Greenblatt's daughter.
(9) Includes (i) 3,995 shares owned by Mr. Hocker's wife, as to which
beneficial ownership is disclaimed, and 1,363 shares owned in a custodial
account for the benefit of Mr. Hocker's daughter; and (ii) 129,365 shares
issuable under stock options exercisable currently or within 60 days by Mr.
Hocker.
22
<PAGE>
(10) Includes 1,725 shares owned by Mr. Hocker's wife, as to which beneficial
ownership is disclaimed.
(11) Includes 800 shares owned by Mr. Hocker's wife, as to which beneficial
ownership is disclaimed.
(12) Includes (i) 25,138 shares as to which Mr. Iannone holds the power to vote
pursuant to a power of attorney; and (ii) 1,724 shares owned in a custodial
account for the benefit of Mr. Iannone's daughters.
(13) Includes 3,534 shares issuable under stock options exercisable currently or
within 60 days by Mr. Maressa.
(14) Includes (i) 22 shares held by Mr. Sessa's wife in a custodial account for
the benefit of Mr. Sessa's son; and (ii) 51,328 shares issuable under stock
options exercisable currently or within 60 days by Mr. Sessa.
(15) Includes 3,534 shares issuable under stock options exercisable currently or
within 60 days by Mr. Will.
(16) Includes 27,143 shares issuable under stock options exercisable currently
or within 60 days by Mr. Mancini.
(17) Includes 12,931 shares issuable under stock options exercisable currently
or within 60 days by Mr. Parker.
(18) Shares owned by Mr. Parker in a custodial account for the benefit of Mr.
Parker's daughters.
(19) Includes 7,323 shares issuable under stock options exercisable currently or
within 60 days by Mr. D'Orazio.
(20) Includes 297,594 shares issuable under stock options which are currently
exercisable or become exercisable within 60 days.
23
<PAGE>
CERTAIN INFORMATION REGARDING THE HOLDING COMPANY
General
The Holding Company was incorporated under the laws of New Jersey on
February 13, 1997 at the direction of the Board of Directors of the Bank for the
purpose of acquiring all of the outstanding shares of Bank Stock. The Holding
Company has not yet engaged in business activity. The Holding Company has no
current plans to engage in any activities other than acting as a holding company
for the Bank Stock.
The Holding Company owns no properties and therefore, as necessary, will
use the Bank's existing premises, facilities and personnel. The Holding
Company's needs in this regard are expected to be minimal[, and the Holding
Company will reimburse the Bank for such expenses, determined in accordance with
generally accepted accounting principles]. The Holding Company's offices will be
located in the Bank's offices at 18 Kings Highway West, Haddonfield, New Jersey.
Accordingly, the Holding Company does not contemplate any substantial
expenditures for equipment, plant or personnel in the foreseeable future.
Dividend Policy
As noted above, the Bank has never paid a cash dividend on its outstanding
shares of Bank Common Stock, and no change in this policy is contemplated by the
Holding Company with respect to the Holding Company Common Stock following the
Reorganization for the foreseeable future. Following the Reorganization, the
ability of the Holding Company to pay cash dividends with respect to the Holding
Company Common Stock and Holding Company Preferred Stock will be dependent on
the payment of dividends to the Holding Company by the Bank. The ability of the
Bank to pay such dividends to the Holding Company is restricted under applicable
law. See "DESCRIPTION OF HOLDING COMPANY SECURITIES AND COMPARISON OF
STOCKHOLDERS' RIGHTS -- Comparison of Stockholders' Rights -- Dividends."
Management and Operations After the Reorganization
The Board of Directors of the Holding Company upon the effectiveness of the
Reorganization initially will be comprised of ten (10) members, divided into
three classes serving for three-year staggered terms, as follows:
Director Term to Expire
-------- --------------
Barry M. Abelson......................................... 1998
Thomas V.G. Brown........................................ 1998
Charles E. Sessa, Jr..................................... 1998
Kyle W. Will............................................. 1998
William T. Carson, Jr.................................... 1999
Gary E. Greenblatt....................................... 1999
Richard A. Hocker........................................ 1999
John J. Gallagher, Jr.................................... 2000
James R. Iannone......................................... 2000
Joseph A. Maressa, Sr.................................... 2000
Approval of the Reorganization by the shareholders of the Bank at the
Annual Meeting will be deemed to constitute the election of the above directors
as the directors of the Holding Company at the Effective Time. Each of the above
designees to the Holding Company Board of Directors currently serves as a member
of the Board of Directors of the Bank. See "ELECTION OF DIRECTORS -- Directors"
for additional information regarding such Directors.
24
<PAGE>
The officers of the Holding Company upon consummation of the Reorganization
will be as follows:
<TABLE>
<CAPTION>
Name Position
---- --------
<S> <C>
Richard A. Hocker.................. Chairman of the Board and Chief Executive Officer
Charles E. Sessa, Jr............... President
J. William Parker, Jr.............. Senior Vice President, Chief Financial Officer and Treasurer
William T. Carson, Jr.............. Secretary
</TABLE>
For additional information regarding these officers, see "CERTAIN
INFORMATION REGARDING THE BANK -- Management."
The Board of Directors, officers and employees of the Bank will not change
as a result of the Reorganization. Following the Reorganization, the Bank will
keep its existing name and office locations, and will continue to carry on its
business in the same manner as before the Reorganization.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under federal
and state law. These requirements and restrictions affect or will affect
virtually all aspects of the operation of the Bank and, upon consummation of the
Reorganization, the Holding Company. With few exceptions, state and federal
banking laws have as their principal objective either the maintenance of the
safety and soundness of financial institutions, protection of the federal
deposit insurance system or protection of consumers or classes of consumers,
rather than the specific protection of stockholders of banks or bank holding
companies. To the extent that the following discussion describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the
particular statute or regulation. Any change in applicable laws, regulations or
policies of various regulatory authorities may have a material effect on the
business, operations and prospects of the Holding Company or the Bank.
Holding Companies -- Generally
The Holding Company, upon becoming a bank holding company, will be subject
to regulation under the NJBA and the BHC Act. The FRB has jurisdiction under the
BHC Act to approve any bank or nonbank acquisition, merger or consolidation
proposed by a bank holding company. The BHC Act generally limits the activities
of a bank holding company and its subsidiaries to that of banking, managing or
controlling banks, or other activities which are so closely related to banking,
or to managing or controlling banks, as to be a proper incident thereto. The
Holding Company also will be required to register in New Jersey with the
Department of Banking under the NJBA, and will be subject to regulation and
supervision by the Department of Banking.
Source of Strength Doctrine
Under a policy of the FRB with respect to bank holding company operations,
a bank holding company is required to serve as a source of financial strength to
its subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so absent such policy.
The Bank -- Generally
As a bank organized under the banking laws of the State of New Jersey and
insured by the FDIC, the Bank is subject to regulation by the Department of
Banking and the FDIC. Various regulations, requirements and restrictions under
the laws of New Jersey and the United States affect the operations of the Bank,
including the requirement to maintain reserves against deposits and to maintain
certain capital ratios, restrictions on the nature and amount of loans which may
be made and the interest which may be charged thereon, regulations relating to
investments, and restrictions on other activities of the Bank. The Bank is a
member of and owns stock in the Federal Home Loan Bank ("FHLB") of New York, one
of 12 regional banks in the Federal Home Loan Bank System, and is subject to
certain requirements in connection therewith.
The FDIC, in connection with its provision of deposit insurance, has
primary responsibility for regulation of the Bank at the federal level and in
that capacity undertakes periodic reviews of the operations of the Bank to
assess whether the Bank is engaging in unsafe or unsound banking practices, is
in an unsafe or unsound condition
25
<PAGE>
to continue operations, or has violated any applicable law, regulations, rule or
order of, or condition imposed by, the FDIC. The Department of Banking likewise
oversees the operations of the Bank to monitor compliance with all applicable
state law requirements.
The regulation and supervision of the Bank by the FDIC and the Department
of Banking are designed primarily for the protection of depositors and the FDIC,
and not the Bank or its stockholders. Legislative and regulatory proposals
regarding changes in banking, and the regulation of banks, thrifts and other
financial institutions could significantly change the regulation of banks and
the financial services industry. It cannot be predicted whether any of these
proposals will be adopted or, if adopted, how these proposals will affect the
Bank.
Regulatory Capital Requirements
The Bank is required, and the Holding Company (on a consolidated basis)
will be required, to maintain a minimum ratio of qualified total capital to
risk-weighted assets (including certain off-balance sheet items, such as standby
letters of credit) of 8.00%. At least half of the total capital must be
comprised of common equity, retained earnings and a limited amount of permanent
preferred stock, less goodwill ("Tier 1 capital"). The remainder ("Tier 2
capital") may consist of a limited amount of subordinated debt, other preferred
stock, certain other instruments and a limited amount of loan and lease loss
reserves. The sum of Tier 1 capital and Tier 2 capital is "total risk-based
capital." The Bank is also required, and the Holding Company (on a consolidated
basis) will be required, to maintain a minimum ratio of Tier 1 capital to
risk-weighted assets of 4.00%. The Bank's Tier 1 risk-based capital and total
risk-based capital ratios as of December 31, 1996 were 11.98% and 13.22%,
respectively.
In addition, the applicable regulations establish a minimum leverage ratio
(Tier 1 capital to quarterly average assets less goodwill) of 3.00% for banking
institutions that meet certain specified criteria, including that they must have
the highest regulatory rating. All other banking institutions are required to
maintain a leverage ratio of 3.00% plus an additional cushion of at least 100 to
200 basis points. The Department of Banking has established a minimum leverage
ratio of not less than 4.00%, and may set a minimum leverage ratio of more than
4.00% for an institution based on certain factors. Pursuant to the foregoing,
the Bank is required, and the Holding Company (on a consolidated basis) will be
required, to maintain a leverage ratio of not less than 4.00%. As of December
31, 1996, the Bank's leverage ratio was 7.51%.
The ability of the Bank and the Holding Company to maintain the required
levels of capital is substantially dependent upon the success of their capital
and business plans, the impact of future economic events on their loan
customers, and their ability to manage its interest rate risk and control its
growth and other operating expenses.
A banking institution that is not in compliance with applicable federal or
state capital requirements may be subject to certain growth restrictions,
issuance of a capital directive by the appropriate regulator, and various other
possible enforcement actions by the appropriate regulators, including a cease
and desist order, civil money penalties, and the establishment of restrictions
on operations. In addition, the institution could be subject to appointment of a
receiver or conservator or a forced merger into another institution.
Prompt Corrective Action
In addition to the foregoing capital requirements, the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") established a system of
"prompt corrective action" with respect to banks that do not meet minimum
capital requirements. FDICIA establishes five capital tiers: "well capitalized,"
"adequately capitalized," "under capitalized," "significantly under capitalized"
and "critically under capitalized." At December 31, 1996, the Bank was "well
capitalized." The following table sets forth the minimum capital ratios that a
bank must satisfy in order to be considered well capitalized or adequately
capitalized under FDIC regulations and the Bank's ratios at December 31, 1996:
Adequately Well The Bank at
Capitalized Capitalized December 31, 1996
----------- ----------- -----------------
Total Risk-Based Capital Ratio.... 8% 10% 13.22%
Tier 1 Risk-Based Capital Ratio... 4% 6% 11.98%
Leverage Ratio.................... 4% 5% 7.51%
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<PAGE>
If a bank does not meet all of the minimum capital ratios necessary to be
considered adequately capitalized, it will be considered undercapitalized,
significantly undercapitalized or critically undercapitalized, depending on the
amount of the shortfall in its capital.
If its principal federal regulator determines that an adequately
capitalized institution is in an unsafe or unsound condition or is engaging in
an unsafe or unsound practice, it may require the institution to submit a
corrective action plan, restrict its asset growth and prohibit branching, new
acquisitions and new lines of business. An institution's principal federal
regulator may deem it to be engaging in an unsafe or unsound practice if it
receives a less than satisfactory rating for asset quality, management, earnings
or liquidity in its most recent examination.
Among other possible sanctions, an undercapitalized depository institution
may not pay dividends and is required to submit a capital restoration plan to
its principal federal regulator. If an undercapitalized depository institution
fails to submit or implement an acceptable capital restoration plan, it can be
subjected to more severe sanctions, including an order to sell sufficient voting
stock to become adequately capitalized. Generally, FDICIA requires the
appropriate federal regulator to appoint a receiver conservator for an
institution that is critically undercapitalized. Under FDICIA, a holding company
can be required to guaranty a subsidiary bank's capital restoration plan.
Limits on Dividends and Other Payments
The ability of the Holding Company to pay dividends and make other
distributions to shareholders is limited by applicable corporate law, and in
addition, in the case of cash distributions, will be dependent on the receipt of
dividends from the Bank, which are limited under applicable provisions of the
NJBA. See "DESCRIPTION OF HOLDING COMPANY SECURITIES AND COMPARISON OF
STOCKHOLDERS' RIGHTS -- Comparison of Stockholders' Rights Dividends." In
addition, dividends and other distributions to shareholders, as well as share
repurchases, are subject to the capital requirements and other prudential limits
imposed under Federal law. Applicable provisions of Federal law also will
severely restrict certain other transactions between the Bank and the Holding
Company or other companies controlled by the Holding Company, including loans or
other extensions of credit by the Bank to the Holding Company or such other
affiliates.
Deposit Insurance
The FDIC has adopted deposit insurance regulations under which insured
institutions are assigned to one of the following three capital groups based on
their capital levels: "well-capitalized," "adequately capitalized" and
"undercapitalized." Banks in each of these three groups are further classified
into three subgroups based upon the level of supervisory concern with respect to
each bank. The resulting matrix creates nine assessment risk classifications to
which are assigned deposit insurance premiums ranging from 0.00% for the best
capitalized, healthiest institutions, to 0.27% for undercapitalized institutions
with substantial supervisory concerns. In addition, Covenant is subject to
semi-annual assessments by the FDIC relating to interest payments on Financing
Corporation (FICO) Bonds issued in connection with the resolution of the thrift
industry crisis.
Federal Home Loan Bank System.
The Bank is a member of the FHLB of New York, which is one of 12 regional
FHLBs. As a member of the FHLB, Covenant is required to purchase and maintain
stock in the FHLB of New York in an amount equal to the greater of 1% of its
aggregate unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year, 5% (or such greater fraction as
established by FHLB) of outstanding FHLB advances, or 0.3% of total assets. At
December 31, 1996, Covenant had $4.5 million in FHLB of New York stock which was
in compliance with this requirement. The Bank has received dividends on its FHLB
stock.
Each FHLB serves as a reserve or central bank for its members within its
assigned region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB. These policies and procedures are subject to the
regulation and oversight of the Federal Housing Finance Board (the "FHFB").
27
<PAGE>
Activities and Investments.
Pursuant to FDICIA, the activities and equity investments of FDIC-insured
state-chartered banks are generally limited to those that are permissible for
national banks, notwithstanding powers which may be granted under state law.
Interstate Banking and Branching Legislation.
Federal legislation enacted in 1994, and implementing state legislation
passed since that time, is eliminating many restrictions on interstate banking.
Prior to this legislation, interstate acquisitions of banks have required
affirmative authorization in state law, and interstate branching has been
possible only to a very limited degree. Effective September 29, 1995, the
federal legislation authorized interstate acquisitions of banks by bank holding
companies without geographic limitations. Beginning June 1, 1997, the
legislation will eliminate certain restrictions on interstate branching under
federal law in states that have not passed legislation prohibiting interstate
branching, except that de novo branching or acquisition of a branch in another
state without acquisition of the entire bank will only be permitted if expressly
permitted by the law of the state in which such branch would be located.
Interstate branching prior to June 1, 1997 will be possible in states that pass
laws affirmatively authorizing such interstate branching. Pursuant to the
federal legislation, New Jersey has passed legislation which authorizes
interstate branching into New Jersey by out-of-state banks, and branching
outside of New Jersey by New Jersey institutions, in connection with interstate
merger transactions or branch acquisitions. The New Jersey legislation does not
authorize establishment of interstate branches other than by means of acquiring
such branches from another institution. The effect of this federal and state
legislation on the Bank or the Holding Company cannot be predicted at this time.
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<PAGE>
DESCRIPTION OF HOLDING COMPANY SECURITIES
AND COMPARISON OF STOCKHOLDERS' RIGHTS
The Holding Company is authorized to issue up to 25,000,000 shares of
Holding Company Common Stock and up to 1,000,000 shares of series preferred
stock, of which 138,300 shares have been designated as Holding Company Series A
Preferred Stock and 161,700 shares have been designated as Holding Company
Series B Preferred Stock. As of the Record Date, the Bank had 2,936,480 shares
of Bank Common Stock, 138,300 shares of Bank Series A Preferred Stock and
161,700 shares of Bank Series B Preferred Stock outstanding.
Description of Securities
Holding Company Common Stock
Each share of Holding Company Common Stock has the same rights, privileges
and preferences as every other share, and is entitled to vote at any meeting of
stockholders. Generally, election of directors and other actions by the
stockholders is by majority vote of the shares voting at the meeting. Dividends,
which are payable when and as declared by the Board of Directors out of funds
legally available therefore and after payment of the dividend preference of the
Holding Company Preferred Stock, are payable ratably to the holders of the
Holding Company Common Stock. The Holding Company Common Stock has no conversion
or redemption rights or sinking fund provisions applicable thereto. Holders of
shares of the Holding Company Common Stock do not have preemptive rights with
respect to issuance of Holding Company Common Stock out of authorized but
unissued shares.
Holding Company Preferred Stock
The authorized capital of the Holding Company includes 1,000,000 shares of
preferred stock, with respect to which the Board of Directors has authority by
resolution from time to time to establish one or more series and issue shares
thereof, with such voting rights, designations, preferences, qualifications,
privileges, limitations, options, conversion rights, dividend rate and manner of
payment and other special rights as the Board of Directors shall determine.
Pursuant to this authority, 138,300 shares have been designated as Holding
Company Series B Preferred Stock and 161,700 shares have been designated as
Holding Company Series B Preferred Stock. The Holding Company Series A Preferred
Stock and Holding Company Series B Preferred Stock are collectively referred to
herein as the Holding Company Preferred Stock.
The Holding Company Preferred Stock is senior to the Holding Company Common
Stock as to dividends and other distributions and upon liquidation. Each share
is entitled to receive, when and as declared by the Board of Directors,
non-cumulative preferred dividends at the annual rate of 6% of par value (or
$1.50 per share per annum), before any dividend can be declared or paid upon or
set apart for the Holding Company Common Stock. Such dividends are
non-cumulative, which means that should the Board of Directors choose not to
declare all or any portion of such preferred dividend in any year, such
arrearage will not accumulate and be payable in future years. Upon liquidation
of the Holding Company, holders of Holding Company Preferred Stock will receive,
after payment of the debts and liabilities of Holding Company and before any
liquidating distributions are made to the holders of Holding Company Common
Stock, liquidating distributions equal to the par value per share of the Holding
Company Preferred Stock plus a sum equal to declared but unpaid dividends. The
Series A and Series B Preferred Stock are treated on a parity basis with respect
to dividends and upon liquidation of the Holding Company.
The shares of Holding Company Preferred Stock have no voting rights, except
as may be otherwise required by law. There are no sinking fund or redemption
provisions or preemptive rights applicable to the Holding Company Preferred
Stock.
Each outstanding share of Holding Company Series A Preferred Stock will be
converted into Holding Company Common Stock on December 31, 1997, and the
Holding Company Series B Preferred Stock will be converted into Holding Company
Common Stock on June 30, 2000. The conversion rate is 3.823 shares of Holding
Company Common Stock for each share of Holding Company Series A Preferred Stock
and 3.026 shares of Holding Company Common Stock for each share of Holding
Company Series B Preferred Stock, in each case subject to adjustment in the
event of stock splits, stock dividends or subdivisions or combinations with
respect to the Holding Company Common Stock.
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<PAGE>
Comparison of Stockholders' Rights
The rights of holders of Bank Stock are governed by the Certificate of
Incorporation of the Bank (the "Bank Certificate"), the Bylaws of the Bank (the
"Bank Bylaws") and the NJBA. Following the Reorganization, the rights of
stockholders will be governed by the Certificate of Incorporation of the Holding
Company (the "Holding Company Certificate"), the Bylaws of the Holding Company
(the "Holding Company Bylaws") and the New Jersey Business Corporation Act (the
"NJBCA"). The following is a summary of certain principal differences between
the rights of stockholders of the Bank under the NJBA, Bank Certificate and Bank
Bylaws and the rights of stockholders of the Holding Company under the NJBCA,
Holding Company Certificate and Holding Company Bylaws.
This summary does not purport to be a complete statement of the rights of
Bank stockholders and Holding Company stockholders, and the identification of
specific differences is not meant to indicate that other differences do not
exist. This summary is qualified in its entirety by reference to the NJBCA, the
NJBA, other applicable banking laws and regulations, and the respective
organizational documents of the Holding Company and the Bank.
Authorized Capital
The Bank Certificate authorizes the issuance of up to 5,000,000 shares of
Bank Common Stock and up to 300,000 shares of Bank Preferred Stock. As of the
Record Date, the Bank had 2,936,480 shares of Bank Common Stock, 138,000 shares
of Bank Series A Preferred Stock and 161,700 shares of Bank Series B Preferred
Stock outstanding.
The Holding Company Certificate authorizes the issuance of up to 25,000,000
shares of Holding Company Common Stock and up to 1,000,000 shares of series
preferred stock. Thus, additional shares have been authorized for issuance under
the Holding Company Certificate of Incorporation compared to the Bank
Certificate of Incorporation and will be available for issuance without further
approval of the stockholders. The issuance of additional shares could result in
the dilution of existing stockholders' interests.
Board of Directors
The NJBA requires that every bank shall be managed by a board of not less
than five and not more than twenty-five directors. Provisions of the NJBA
applicable to the Bank do not allow for classification of the Board into classes
of directors with staggered terms. As authorized by the NJBA, the Bank
Certificate provides that the Board of Directors may increase the number of
directors between annual meetings by not more than two, and the Board of
Directors has authority to fill any vacancies created by such increase. Election
of directors of the Bank is by plurality with the candidate receiving the most
votes being elected to office. Under the NJBA and the Bank Certificate,
stockholders of the Bank are not entitled to cumulative voting in the election
of directors.
The NJBCA requires that a corporation shall be managed by a board of
directors consisting of not less than three persons, unless there are less than
three shareholders in which case the board of directors may consist of one or
more directors. The directors of the Holding Company have authority to increase
the size of the board and to fill any vacancies created thereby until the next
Annual Meeting of stockholders. The NJBCA allows a corporation to provide for
classification of directors in respect to the time for which they hold office
and the Holding Company Certificate defines three classes of directors, with the
directors of each class serving for three years (after initial term of one, two
or three years, respectively) and the term of one class expiring in each year,
and specifies that the first board of directors shall consist of ten (10)
members. Election of directors is by plurality, and stockholders of the Holding
Company are not entitled to cumulative voting in the election of directors.
Removal of Directors
No provisions exist in the NJBA regarding removal of directors by
stockholders. The NJBA does specify that a director who ceases to be the owner
of bank shares or who fails to subscribe the oath within a requiredtime period
shall cease to become a director. The NJBA also allows the New Jersey
Commissioner of Banking to remove a director under certain conditions. The Bank
Certificate and Bylaws are silent on the issue of director removal.
Under the NJBCA, directors may be removed for cause by the affirmative vote
of the majority of the votes cast by the holders of shares entitled to vote for
election of directors. Any director elected by a class vote may be removed only
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<PAGE>
by a class vote of the holders of shares entitled to vote for his election. The
Holding Company Bylaws specify that the Board of Directors may remove any
director for cause and may suspend any director from acting as director pending
a final determination that cause exists for removal.
Voting Rights
The NJBA generally requires an affirmative vote by the holders of at least
two-thirds of the capital stock entitled to vote in order to amend the Bank's
Certificate of Incorporation, to consummate a merger or to effect certain other
transactions. As permitted by the NJBA, the Bank Certificate of Incorporation
requires the approval of 80% of the outstanding shares of Bank Common Stock for
certain combinations or asset dispositions. See "Anti-Takeover Provisions."
Under the NJBCA, amendments to the Certificate of Incorporation, mergers
and similar transactions generally require approval of a majority of the votes
cast at a meeting of stockholders by the holders of shares entitled to vote
thereon, unless a greater vote is required by the certificate of incorporation.
The Holding Company Certificate contains the same 80% voting restrictions
regarding certain transactions as exist in the Bank Certificate.
Dividends
The Bank is subject to regulatory limitations on the payment of dividends.
As a New Jersey capital stock bank, the Bank may not declare a cash dividend or
a stock dividend unless, following payment of the dividend, the capital stock of
the Bank will be unimpaired and the Bank will have a surplus of at least 50% of
its capital stock or, if not, the payment of the dividend will not reduce the
surplus of the Bank. In addition, the Department of Banking or the FDIC may
restrict the ability of the Bank to pay dividends in certain circumstances,
including if such payment would constitute an unsafe or unsound banking
practice, if the Bank is not meeting certain capital requirements, or if the
Bank is in default of any assessment to the FDIC.
Under the NJBCA, the Holding Company may issue dividends or other
distributions unless, after giving effect thereto, the corporation would be
unable to pay its debts as they become due in the usual course of its business
or the corporation's total assets would be less than its total liabilities.
However, the ability of the Holding Company to make any cash distribution would
be substantially dependent on the receipt of dividends from the Bank. The
ability of the Holding Company to issue dividends or other distributions will
also be subject to limitations under federal bank regulatory law. See
"SUPERVISION AND REGULATION -- Limits on Dividends and Other Payments."
Special Meetings of Stockholders
Under the NJBA and the Bank Bylaws, special meetings of the stockholders
of the Bank may be called at any time by the holders of not less than one-tenth
of all shares outstanding with voting rights. Notice of the time, place, and
purpose must be given to each stockholder not less than ten nor more than sixty
days prior to the date of such a meeting.
The NJBCA allows a corporation to specify in its bylaws under what
conditions stockholders may call a special meeting. The Holding Company Bylaws
permit the calling of a special meeting upon the written request of the holders
of a majority of any class of shares issued and outstanding and entitled to vote
at the meeting. Notice must be given to each stockholder entitled to vote at
least ten days and not more than sixty days prior to the date of the meeting.
Stockholder Action by Written Consent
The NJBA specifies that any action required or permitted to be taken at a
meeting of stockholders may be taken without a meeting if all stockholders
consent in writing.
The NJBCA permits any action required or permitted to be taken at a meeting
of the stockholders to be taken without a meeting provided all of the
stockholders entitled to vote on the matter note their consent in writing.
The NJBCA also allows such action to be taken upon the written consent of
holders of that number of shares required to approve the matter at a meeting of
the stockholders, unless otherwise provided in the Certificate of Incorporation.
The Holding Company Certificate removes the authority for stockholder action
without a meeting by less than unanimous written consent.
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<PAGE>
Dissenters' Rights
The NJBA grants dissenters' rights of appraisal to stockholders, entitled
to vote on a merger agreement and with respect to certain other transactions,
who do not approve of the agreement and who follow a prescribed series of
procedures.
The NJBCA makes certain exceptions to dissenters' rights of appraisal,
including precluding them in a merger or consolidation to stockholders whose
sole consideration received consists of shares listed on a national security
exchange, or who would receive only shares of the corporation itself, or whose
vote was not required for approval of the merger.
Anti-Takeover Provisions
The Bank Certificate, the Holding Company Certificate and the NJBCA contain
provisions which could make changes in control more difficult, even if such
changes were desired by a majority of the stockholders.
In some circumstances, certain stockholders may consider such anti-takeover
provisions to have disadvantageous effects. Tender offers or other non-open
market acquisitions of stock are frequently made at prices above the prevailing
market price of a company's stock. In addition, acquisitions of stock by persons
attempting to acquire control through market purchases may cause the market
price of the stock to reach levels that are higher than would otherwise be the
case. The anti-takeover provisions may discourage any or all of such
acquisitions, particularly those of less than all of the Holding Company's
shares, and may thereby deprive certain holders of the Holding Company's stock
of an opportunity to sell their stock at a temporarily higher market price.
Certificate of Incorporation. The Holding Company Certificate provides for
the division of its Board of Directors into three classes of approximately equal
size. Directors are generally to be elected for three year terms and the terms
of office of approximately one-third of the members of the Board of Directors
will expire in any given year. Therefore, unless one or more directors resigned
or "cause" existed for the removal of one or more directors, the maximum number
of positions on the Board which would be subject to election in any given year
would be approximately one-third of the Board's total number.
The Holding Company Certificate provides further that approval of the
holders of at least eighty percent of the outstanding shares of Holding Company
Common Stock is required for the Holding Company to enter into: (i) any merger
or consolidation of the Holding Company; or (ii) any sale or exchange of all or
substantially all of the assets of the Holding Company, unless, in either case,
such transaction has been approved by a majority of the Directors who are not
affiliated with the other party to the transaction, or the holders of the
Holding Company Common Stock immediately prior to the merger or transfer of
assets will become stockholders of the surviving corporation and will own at
least fifty percent of the outstanding Holding Company Common Stock of the
surviving corporation. The Bank Certificate has an identical provision.
In addition, the Certificate of Incorporation of the Holding Company
authorizes the issuance of up to 1,000,000 shares of preferred stock, of which
300,000 will be issued in the Reorganization to holders of the Bank Preferred
Stock. The authorized shares of preferred stock, including shares which return
to authorized and unissued preferred stock upon the conversion, repurchase or
other retirement of the Holding Company Series A Preferred Stock or Holding
Company Series B Preferred Stock, may be issued by the Board of Directors of the
Holding Company with such preferences and rights as the Board may determine. The
existence of authorized but unissued shares of Preferred Stock could make more
difficult a change in control of the Holding Company without the approval of the
Board of Directors. The creation of a series of preferred stock could be used to
create voting impediments with respect to changes in control of the Holding
Company by diluting the stock ownership of holders of Holding Company Common
Stock seeking to obtain control of the Company. In addition, the creation and
issuance of a series of Preferred Stock could generally discourage a merger or
tender offer involving the Holding Company's securities by increasing the cost
of effecting any transaction and, accordingly, could have an adverse impact on
stockholders who might want to vote in favor of such merger or participate in
such tender offer. The Holding Company is not aware of any person or entity
currently seeking control of the Bank or the Holding Company, and the Board of
Directors has no present intention to cause shares of preferred stock to be
issued for any anti-takeover purpose.
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<PAGE>
New Jersey Law. The New Jersey Shareholders' Protection Act prohibits
certain "Business Combinations," as defined under the Act, between a New Jersey
corporation and an interested stockholder. The term "Business Combination"
refers to a wide variety of transactions including mergers, consolidations,
sales, leases, or transfers of all, or substantially all, of the assets of the
corporation, certain issuances of securities having an aggregate fair market
value of $2,000,000 or more and certain recapitalization or reorganizations, as
well as any plans for the liquidation or dissolution of the corporation. An
"interested stockholder" is any person or entity that beneficially owns,
directly or indirectly, 10% of more of the voting stock of the Holding Company,
or is an affiliate or associate of the Holding Company and at any time within
the five-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of 10% or more of the voting power of
the then outstanding stock of the Holding Company.
The Shareholders' Protection Act contains an outright prohibition on any
Business Combination with an interested stockholder for five years following the
interested stockholder's acquisition date unless the Business Combination was
approved by the Board of Directors prior to the interested stockholder becoming
an interested stockholder. In addition, the Act prohibits any Business
Combination with an interested stockholder at any time unless (i) it is approved
by the Board of Directors prior to the interested stockholder becoming an
interested stockholder; (ii) it is approved by the affirmative vote of the
holders of two-thirds of the voting stock not beneficially owned by the
interested stockholder; or (iii) the cash and/or market value of securities to
be received per share by the stockholders of the company is at least equal to or
greater than the greater of the highest per share price paid by the interested
stockholder and the market value per share on the announcement date with respect
to the Business Combination. The type of consideration paid by the interested
stockholder must be in cash or the same form as the interested stockholder used
to acquire the largest number of shares of the corporation. In addition, with
certain limited exceptions, the interested stockholder may not acquire
additional shares between the time he or she became an interested stockholder
and the consummation date with respect to a Business Combination under the
Shareholders' Protection Act.
Limitation on Director Liability
Under the NJBA and the Bank Certificate, and under the NJBCA and the
Holding Company Certificate, respectively, a director of the Bank or the Holding
Company cannot be held personally liable for damages for breach of any duty owed
to the Bank or the Holding Company or its stockholders, except where the
director breaches his duty of loyalty to the Bank or the Holding Company, or
acts not in good faith or in knowing violation of the law, or receives an
improper personal benefit.
EXPERTS
The financial statements of the Bank as of December 31, 1996 and for the
year then ended and as of December 31, 1995 and for the year then ended, prior
to their restatement for the 1996 pooling of interests transaction with 1st
Southern State Bank, have been audited by KPMG Peat Marwick LLP. The financial
statements of the Bank for the year ended December 31, 1994, prior to their
restatement for the 1996 pooling of interests with 1st Southern State Bank, were
audited by Coopers & Lybrand LLP. The financial statements of 1st Southern State
Bank as of December 31, 1995 and for the years ended December 31, 1995 and 1994,
were audited by Moore & Fitzpatrick LLC. The combination of the statement of
financial condition as of December 31, 1995 and the related statements of
operations, changes in stockholders' equity and cash flows for the years ended
December 31, 1995 and 1994, after restatement for the 1996 pooling of interests,
have been audited by KPMG Peat Marwick LLP.
The financial statements of the Bank have been included herein and in the
registration statement in reliance upon the separate reports of KPMG Peat
Marwick LLP, Moore & Fitzpatrick LLC, and Coopers & Lybrand, LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firms as experts in accounting and auditing. It is anticipated that
representatives from KPMG Peat Marwick LLP will be present at the Annual Meeting
to respond to appropriate questions and, if they desire, to make a statement.
33
<PAGE>
LEGAL MATTERS
The legality of the Holding Company Stock to be issued in the
Reorganization will be passed upon for the Holding Company by the law firm of
Pepper, Hamilton & Scheetz LLP, Philadelphia, Pennsylvania, which has acted as
counsel to the Bank and the Holding Company in connection with the
Reorganization. Barry M. Abelson, a partner with Pepper, Hamilton & Scheetz LLP,
is a director of the Bank and the Holding Company and owns 800 shares of Bank
Series B Preferred Stock, 679 shares of Bank Common Stock, and options to
acquire 10,600 shares of Bank Common Stock, (of which 3,534 shares are currently
exercisable).
STOCKHOLDER PROPOSALS
The Reorganization is expected to be consummated prior to the 1998 Annual
Meeting of Stockholders of the Bank, and the Holding Company will be conducting
such annual meeting of stockholders. Stockholder proposals intended to be
presented at the 1998 Annual Meeting of Stockholders must be presented to the
Holding Company (if the Reorganization has been consummated) or to the Bank (if
the Reorganization has not been consummated) by January 28, 1998 in order to be
considered for inclusion in the proxy materials for such meeting.
Following the Reorganization, the Nominating Committee of the Holding
Company will consider nominees recommended by stockholders for future
recommendations to the Holding Company's Board. Such stockholders'
recommendations with respect to the Annual Meeting of the Stockholders in 1998
should be made in writing no later than January 1, 1998 addressed to the
Nominating Committee, Covenant Bancorp, Inc., 18 Kings Highway West,
Haddonfield, New Jersey 08033, Attention: William T. Carson, Jr.
By Order of the Directors
/s/ William T. Carson
34
<PAGE>
ANNEX A
PLAN OF ACQUISITION
(as amended)
This Plan of Acquisition (this "Plan") is made this 28th day of February,
1997.
1. PARTIES:
Participating Bank: Acquiring Corporation:
COVENANT BANK COVENANT BANCORP, INC.
18 Kings Highway West 18 Kings Highway West
Haddonfield, NJ 08033 Haddonfield, NJ 08033
2. BACKGROUND:
a. The Board of Directors of the Participating Bank has determined that it
is desirable to reorganize the Participating Bank into a holding company
structure (the "Reorganization").
b. In order to effect such Reorganization, the Acquiring Corporation has
been formed to acquire all of the outstanding capital stock of the Participating
Bank in accordance with the applicable provisions of The Banking Act of 1948, as
amended, N.J.S.A. Sections 17:9A-355 through 17:9A-369 (the "Act"), on the terms
and conditions set forth herein.
c. This Plan constitutes the "plan of acquisition" required by the Act in
order to effect the Reorganization.
3. CERTAIN INFORMATION REGARDING THE ACQUIRING CORPORATION:
a. Board of Directors. A list of the names and addresses of the members of
the Board of Directors of the Acquiring Corporation as of the date of this Plan
is set forth as Exhibit A attached hereto.
b. Ownership of Other Bank Shares. The Acquiring Corporation does not own
shares of capital stock of any bank as of the date hereof.
4. TERMS AND CONDITIONS OF THE ACQUISITION:
a. Acquisition of Outstanding Shares. At the Effective Time (as defined
below), the Acquiring Corporation shall acquire all of the issued and
outstanding shares of common stock, par value $5.00 per share (the "Bank Common
Stock"), Series A Preferred Stock, par value $25.00 per shares (the "Bank Series
A Preferred Stock") and Series B Preferred Stock, par value $25.00 per share
(the "Bank Series B Preferred Stock") of the Participating Bank (other than
shares which have not been voted in favor of the Reorganization and as to which
dissenters' rights shall have been perfected in accordance with the applicable
provisions of the Act ("Dissenters' Shares")), and the holders thereof shall
receive in exchange therefor shares of stock of the Acquiring Corporation, as
set forth below:
(i) in exchange for each share of Bank Common Stock, one share of
common stock, par value $5.00 per share, of the Acquiring Corporation (the
"Acquiring Corporation Common Stock");
(ii) in exchange for each share of Bank Series A Preferred Stock,
one share of Series A Preferred Stock, par value $25.00 per share, of the
Acquiring Corporation (the "Acquiring Corporation Series A Preferred
Stock"); and
(iii) in exchange for each share of Bank Series B Preferred Stock,
one share of Series B Preferred Stock, par value $25.00 per share, of the
Acquiring Corporation (the "Acquiring Corporation Series B Preferred
Stock").
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b. Options and Other Rights. Effective as of the Effective Time, the
Acquiring Corporation hereby expressly assumes the Incentive Stock Option Plan,
the 1996 Stock Option Plan for Officers and Non-Employee Directors and the
Employee Stock Purchase Plan (collectively, the "Plans") of the Participating
Bank. At the Effective Time, all references in such Plans to the Participating
Bank shall be deemed to be references to the Acquiring Corporation, and all
rights under the Plans to acquire shares of Bank Common Stock shall be converted
into and constitute rights to acquire shares of Acquiring Corporation Common
Stock and shall no longer constitute rights to acquire shares of stock of the
Participating Bank.
c. Certificates for Shares. As of the Effective Time, all certificates
representing shares of Bank Common Stock, Bank Series A Preferred Stock and Bank
Series B Preferred Stock, other than Dissenters' Shares, shall, automatically
and without any action on the part of the holder thereof, be converted into and
be deemed to represent shares of Acquiring Corporation Common Stock, Acquiring
Corporation Series A Preferred Stock and Acquiring Corporation Series B
Preferred Stock, respectively.
d. Dissenters' Shares. Dissenters' Shares shall be paid for by the
Participating Bank in accordance with the applicable provisions of the Act, and
shall thereafter be distributed by the Participating Bank as a stock dividend to
the Acquiring Corporation as provided in the Act.
5. CONDITIONS; TERMINATION:
This Plan may be terminated by the Participating Bank at any time,
including, without limitation, in the following circumstances:
a. dissenters' rights shall be exercised with respect to more than 5%
of the issued and outstanding shares of stock of the Participating Bank;
b. the shareholders of the Participating Bank shall fail to approve
this Plan at the meeting of shareholders called for that purpose;
c. any required regulatory approval is denied or has not been granted
within a reasonable period of time, or adverse conditions are imposed in
connection with any such regulatory approval; or
d. the Reorganization would not qualify as a tax free exchange under
Section 351 of the Internal Revenue Code of 1986, as amended.
6. EFFECTIVE TIME:
Upon approval of this Plan by the Commissioner of the New Jersey
Department of Banking and Insurance (the "Department") and the shareholders of
the Participating Bank as provided in the Act, this Plan shall be filed in the
Department as provided in N.J.S.A. Section 17:9A-359, and the "Effective Time"
shall be the date and time of such filing or such other date and time as shall
be specified with respect thereto.
7. AMENDMENT:
This Plan may be amended at any time by the parties hereto.
IN WITNESS WHEREOF, the undersigned have executed this Plan as of the day
and year first above written.
COVENANT BANK COVENANT BANCORP, INC.
By: /s/ Charles E. Sessa, Jr. By: /s/ Charles E. Sessa, Jr.
----------------------------- -------------------------------
Name: Charles E. Sessa, Jr. Name: Charles E. Sessa, Jr.
Title: President Title: President
A-2
<PAGE>
ANNEX B
RIGHTS OF DISSENTING STOCKHOLDERS
NEW JERSEY BANKING ACT OF 1948
17:9A-360. Notice of dissent; "dissenting stockholder" defined
(1) Any stockholder of a participating bank electing to dissent from the
plan of acquisition may do so by filing with the participating bank of which he
is a stockholder, a written notice of such dissent, stating that he intends to
demand payment for his shares if the plan of acquisition becomes effective. Such
dissent shall be filed before the taking of the vote of the stockholders on the
plan of acquisition pursuant to [NJSA Section 17:9A-359].
(2) Within 10 days after the date on which the plan of acquisition is
approved by stockholders of a participating bank as provided in [NJSA Section
17:9A-359] hereof, such bank shall give notice of such approval by certified
mail to each stockholder who has filed written notice of dissent pursuant to
subsection (1) of this section, except any who voted for or consented in writing
to such plan of acquisition.
(3) Within 20 days after the mailing of such notice, any stockholder to
whom the participating bank was required to give such notice, may make written
demand on the participating bank for the payment of the fair value of his
shares. A stockholder who makes a demand pursuant to this subsection (3) is
hereafter in this act referred to as a "dissenting stockholder." Upon making
such demand, the dissenting stockholder shall cease to have any rights of a
stockholder except the right to be paid the fair value of his shares and any
other rights of a dissenting stockholder under this act.
(4) Not later than 20 days after demanding payment for his shares pursuant
to this section, the stockholder shall submit the certificate or certificates
representing such shares to the participating bank of which he is a stockholder
for notation thereon that such demand has been made, whereupon such certificate
or certificates shall be returned to him. If shares represented by a certificate
on which such notation has been made shall be transferred, each new certificate
issued therefor shall bear similar notation, together with the name of the
original dissenting holder of such shares, and a transferee of such shares shall
acquire by such transfer no rights other than those which the original
dissenting stockholder had after making a demand for payment of the fair value
thereof.
(5) A stockholder may not dissent as to less than all of the shares owned
beneficially by him. A nominee or fiduciary may not dissent on behalf of any
beneficial owner as to less than all of the shares of such owner.
17:9A-361. Valuation date of fair value
For the purposes of this act, the fair value of the shares of a
participating bank shall be determined as of the day before the day on which the
vote of stockholders of such bank was taken as provided in [NJSA Section
17:9A-359]. In determining fair value, there shall be excluded any appreciation
or depreciation in value resulting from the consummation of the plan of
acquisition.
17:9A-362. Termination of right of stockholder to be paid the fair value of his
shares
(1) The right of a dissenting stockholder to be paid the fair value of his
shares shall cease if
(a) He has failed to present his certificates for notation as provided
by subsection (4) of [NJSA Section 17:9A-360] unless a court having
jurisdiction, for good and sufficient cause shown, shall otherwise direct;
(b) His demand for payment is withdrawn with the written consent of
the participating bank;
(c) The fair value of the shares is not agreed upon as provided in
this act, and no action for the determination of fair value by the Superior
Court is commenced within the time provided in this act;
B-1
<PAGE>
(d) The Superior Court determines that the stockholder is not entitled
to payment for his shares;
(e) The plan of acquisition of shares is abandoned, rescinded, or
otherwise terminated in respect to the participating bank of which he is a
stockholder; or
(f) A court having jurisdiction permanently enjoins or sets aside the
acquisition of shares.
(2) In any case provided for in subsection (1) of this section the rights
of the dissenting stockholder as a stockholder shall be reinstated as of the
date of the making of a demand for payment pursuant to [NJSA Section 17:9A-360]
without prejudice to any corporate action which has taken place during the
interim period. In such event, he shall be entitled to any intervening
pre-emptive rights and the right to payment of any intervening dividend or other
distribution, or if any such rights have expired or any such dividend or
distribution other than in cash has been completed, in lieu thereof, at the
election of the participating bank, the fair value thereof in cash as of the
time of such expiration or completion.
17:9A-363. Rights of dissenting stockholder
(1) A dissenting stockholder may not withdraw his demand for payment of
the fair value of his shares without the written consent of the participating
bank.
(2) The enforcement by a dissenting stockholder of his right to receive
payment for his shares shall exclude the enforcement by such dissenting
stockholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in subsection (2) of [NJSA Section
17:9A-362] and except that this subsection shall not exclude the right of such
dissenting stockholder to bring or maintain an appropriate action to obtain
relief on the ground that consummation of the plan of acquisition will be or is
ultra vires, unlawful or fraudulent as to such dissenting stockholder.
17:9A-364. Determination of fair value by agreement
(1) Within 10 days after the expiration of the period within which
stockholders may make written demand to be paid the fair value of their shares,
or within 10 days after the plan of acquisition becomes effective, whichever is
later, the participating bank shall mail to each dissenting stockholder the
balance sheet and the surplus statement of the participating bank as of the
latest available date, which shall not be earlier than 12 months prior to the
making of the offer of payment hereinafter referred to in this subsection and a
profit and loss statement or statements for not less than a 12-month period
ended on the date of such balance sheet or, if the participating bank was not in
existence for such 12-month period, for the portion thereof during which it was
in existence. The participating bank may accompany such mailing with a written
offer to pay each dissenting stockholder for his shares at a specified price
deemed by such bank to be the fair value thereof. Such offer shall be made at
the same price per share to all dissenting stockholders of the same class, or,
if divided into series, of the same series.
(2) If, not later than 30 days after the expiration of the 10-day period
limited by subsection (1) of this section, the fair value of the shares is
agreed upon between any dissenting stockholder and the participating bank,
payment therefor shall be made upon surrender of the certificate or certificates
representing such shares.
17:9A-365. Procedure on failure to agree upon fair value; commencement of action
to determine fair value
(1) If the fair value of the shares is not agreed upon within the 30-day
period limited by subsection (2) of [NJSA Section 17:9A-364]the dissenting
stockholder may serve upon the participating bank a written demand that it
commence an action in the Superior Court for the determination of such fair
value. Such demand shall be served not later than 30 days after the expiration
of the 30-day period so limited and such action shall be commenced by the
participating bank not later than 30 days after receipt by such bank of such
demand, but nothing herein shall prevent such bank from commencing such action
at any earlier time.
B-2
<PAGE>
(2) If a participating bank fails to commence the action as provided in
subsection (1) of this section a dissenting stockholder may do so in the name of
such bank, not later than 60 days after the expiration of the time limited by
subsection (1) of this section in which such bank may commence such an action.
17:9A-366. Action to determine fair value; jurisdiction of court;
appointment of appraiser
In any action to determine the fair value of shares pursuant to this act:
(a) The Superior Court shall have jurisdiction and may proceed in the
action in a summary manner or otherwise;
(b) All dissenting stockholders, wherever residing, except those who
have agreed with the participating bank upon the price to be paid for their
shares, shall be made parties thereto as an action against their shares
quasi in rem;
(c) The court in its discretion may appoint an appraiser to receive
evidence and report to the court on the question of fair value, who shall
have such power and authority as shall be specified in the order of his
appointment; and
(d) The court shall render judgment against the participating bank and
in favor of each stockholder who is a party to the action for the amount of
the fair value of his shares.
17:9A-367. Judgment in action to determine fair value
(1) A judgment for the payment of the fair value of shares shall be
payable upon surrender to the participating bank of the certificate or
certificates representing such shares.
(2) The judgment shall include an allowance for interest at such rate as
the court finds to be equitable, from the day of the meeting of stockholders of
the participating bank at which the plan of acquisition was approved to the day
of payment. If the court finds that the refusal of any dissenting stockholder to
accept any offer of payment made by the participating bank under [NJSA Section
17:9A-364] was arbitrary, vexatious or otherwise not in good faith, no interest
shall be allowed to him.
17:9A-368. Costs and expenses of action
The costs and expenses of bringing an action pursuant to [NJSA Section
17:9A-365] shall be determined by the court and shall be apportioned and
assessed as the court may find equitable upon the parties or any of them. Such
expenses shall include reasonable compensation for and reasonable expenses of
the appraiser, if any, but shall exclude the fees and expenses of counsel for
and experts employed by any party; but if the court finds that the offer of
payment made by the participating bank under [NJSA Section 17:9A-364] was not
made in good faith, or if no such offer was made, the court in its discretion
may award to any dissenting stockholder who is a party to the action reasonable
fees and expenses of his counsel and of any experts employed by the dissenting
stockholder.
17:9A-369. Disposition of shares
Upon payment for shares pursuant to subsection (2) of [NJSA Section
17:9A-367], or upon payment of a judgment pursuant to subsection (1) of [NJSA
Section 17:9A-367], the participating bank making such payment shall acquire all
the right, title and interest in and to such shares, notwithstanding any other
provision of law. Shares so acquired by the participating bank shall be disposed
of as a stock dividend as provided by section 212 of the Banking Act of 1948,
P.L. 1948, chapter 67.
B-3
<PAGE>
ANNEX C
AMENDMENT NO. 2 TO
FORM F-2
ANNUAL REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
FDIC Certificate No. 27339
COVENANT BANK
(Exact name of bank as specified in charter)
New Jersey
(State or other jurisdiction of
incorporation or organization)
22-2890624
(IRS Employer Identification No.)
18 Kings Highway West
Haddonfield, NJ 08033
(Address of principal office)
(609) 428-7300
(Bank's telephone number, including area code)
Securities registered under Section 12(b) of the Act:
Securities registered under Section 12(g) of the Act:
Title of Class: Common Stock, par value $5.00 per
share; Series A 6% Convertible Non-
Cumulative Preferred Stock, par
value $25.00 per share; and Series
B 6% Convertible Non-Cumulative
Preferred Stock, par value $25.00
per share
Indicate by check mark if disclosure of delinquent filers pursuant to item 10 is
not contained herein, and will not be contained, to the best of bank's
knowledge, in definitive proxy or information statements incorporated by
reference in part III of this Form F-2 or any amendment of this Form F-2. [X]
Indicate by check mark whether the bank (1) has filed all reports required to be
filed by Section 13 of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the bank was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes _X_ No ___
The aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing sales price on March 10, 1997 was approximately
$36,074,673.
The number of shares of Common Stock outstanding on March 10, 1997 was
2,936,480.
DOCUMENTS INCORPORATED BY REFERENCE
1. Definitive Proxy Statement for the 1997 Annual Shareholders'
Meeting, portions of which are incorporated by reference in
this Report.
C-1
<PAGE>
Part I
Item 1 - Business
General.
Covenant Bank ("Covenant" or "the Bank") is a bank organized under the laws
of the State of New Jersey. Covenant's market focus is southern New Jersey.
Covenant offers a broad range of lending, depository and related financial
services to individual consumers, businesses and governmental units. Covenant is
a member of the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC"). As a state-chartered bank, Covenant is subject to
extensive regulation and supervision by the New Jersey Department of Banking
(the "Department of Banking") under New Jersey law and by the FDIC under federal
law. See "Supervision and Regulation."
Since commencing operations in September, 1988 with a single office in
Haddonfield, New Jersey, Covenant has grown through acquisitions and internal
growth to approximately $415 million in assets and 15 personal financial centers
throughout the southern New Jersey market place as of December 31, 1996. In
March 1997, Covenant opened an additional personal financial center in Cherry
Hill, New Jersey. Covenant acquired New Jersey Savings & Loan Association, with
three offices in Waterford Township, Sicklerville and Voorhees, New Jersey, in
June, 1993, and in September, 1994, Covenant acquired Landis Savings Bank,
S.L.A., with an office in Vineland, New Jersey. In addition to expanding
Covenant's network of personal financial centers, these acquisitions expanded
and diversified Covenant's loan portfolio and loan product offerings into
residential mortgage lending and consumer lending. In September, 1996 Covenant
acquired 1st Southern State Bank, adding three personal financial centers in
Avalon, Cape May and Sea Isle City, New Jersey. As of December 31, 1996,
Covenant had 166.5 full-time equivalent employees.
The lending function is Covenant's principal business activity and it is
Covenant's continuing policy to serve as a reliable source of credit for a
diverse customer base. Commercial credit services offered by Covenant include
short- and medium-term loans, lines of credit, certain types of asset-based
lending, real estate construction loans and commercial mortgage loans. Consumer
credit services include secured and unsecured loans, installment loans, mortgage
loans and home equity loans.
Covenant offers the customary range of retail and commercial deposit
services. Personal accounts include checking accounts, NOW accounts, money
market accounts, savings accounts, IRAs, and both retail and wholesale
certificates of deposit. Covenant is a member of the MAC(R) automated teller
machine network. Deposits into and withdrawals from transaction accounts can be
made by MAC cards which are provided with an annual fee and no transaction
charges. In addition, Covenant offers a Covenant Visa(R) credit card, travelers
checks and direct deposit facilities.
For commercial clients, Covenant offers checking and savings accounts,
money market accounts, certificates of deposit and cash management accounts with
an automatic investment feature. Businesses can make deposits at branches of
other financial institutions which can be transferred to Covenant by a
Depository Transfer Check initiated by a toll-free telephone call or by use of a
corporate MAC card with respect to deposits made at a MAC terminal. In addition,
Covenant offers escrow management and lockbox payment processing services.
While Covenant's deposit base is somewhat seasonal as a result of its
personal financial centers in the New Jersey shore communities, its earnings and
total assets are not seasonal in any material respect.
Market Area and Competition.
Covenant's market focus is southern New Jersey. Covenant has established
"hub" personal financial centers in Atlantic, Burlington, Camden, Cape May and
Cumberland counties, and has a total of fifteen personal financial in the
southern New Jersey market represented by those counties. Covenant intends to
continue to explore opportunities for additional locations in its southern New
Jersey marketplace.
Covenant faces significant competition, both in making loans and in
attracting deposits. Covenant's competition for loans comes principally from
other banks and thrift institutions. Covenant encounters competition in
attracting deposits not only from area financial institutions, but also from
alternative investment opportunities such as mutual funds and other corporate
and government securities funds. Most of Covenant's competitors have greater
financial and marketing resources than those of Covenant. Covenant has placed a
major emphasis on providing its customers with superior service, and believes
that this emphasis has contributed to its growth both in deposits and loans
outstanding.
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<PAGE>
Supervision and Regulation.
General. As a bank organized under the banking laws of the State of New
Jersey and insured by the FDIC, Covenant is subject to regulation by the
Department of Banking and the FDIC. Various regulations, requirements and
restrictions under the laws of New Jersey and the United States affect the
operations of Covenant, including the requirement to maintain reserves against
deposits and to maintain certain capital ratios, restrictions on the nature and
amount of loans which may be made and the interest which may be charged thereon,
regulations relating to investments, and restrictions on other activities of
Covenant. Covenant is a member of and owns stock in the Federal Home Loan Bank
("FHLB") of New York, one of 12 regional banks in the Federal Home Loan Bank
System, and is subject to certain requirements in connection therewith.
The FDIC, in connection with its provision of deposit insurance, has
primary responsibility for regulation of Covenant at the federal level and in
that capacity undertakes periodic reviews of the operations of Covenant to
assess whether Covenant is engaging in unsafe or unsound banking practices, is
in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulations, rule or order of, or condition imposed by, the
FDIC. The Department of Banking likewise oversees the operations of Covenant to
monitor compliance with all applicable state law requirements.
The regulation and supervision of Covenant by the FDIC and the Department
of Banking are designed primarily for the protection of depositors and the FDIC,
and not Covenant or its stockholders. Legislative and regulatory proposals
regarding changes in banking, and the regulation of banks, thrifts and other
financial institutions could significantly change the regulation of banks and
the financial services industry. It cannot be predicted whether any of these
proposals will be adopted or, if adopted, how these proposals will affect
Covenant.
Capital Requirements. Under regulations of the FDIC and the Department of
Banking, Covenant must maintain a minimum ratio of qualified total capital to
risk-weighted assets (including certain off-balance sheet items, such as standby
letters of credit) of 8.00%. At least half of the total capital must be
comprised of common equity, retained earnings and a limited amount of permanent
preferred stock, less goodwill ("Tier 1 capital"). The remainder ("Tier 2
capital") may consist of a limited amount of subordinated debt, other preferred
stock, certain other instruments and a limited amount of loan and lease loss
reserves. The sum of Tier 1 capital and Tier 2 capital is "total risk-based
capital." FDIC and Department of Banking regulations also require a minimum
ratio of Tier 1 capital to risk-weighted assets of 4.00%. Covenant's Tier 1
risk-based capital and total risk-based capital ratios as of December 31, 1996
were 11.98% and 13.20%, respectively.
In addition, the FDIC has established a minimum leverage ratio (Tier 1
capital to quarterly average assets less goodwill) of 3.00% for banking
institutions that meet certain specified criteria, including that they must have
the highest regulatory rating. All other banking institutions are required to
maintain a leverage ratio of 3.00% plus an additional cushion of at least 100 to
200 basis points. The Department of Banking has established a minimum leverage
ratio of not less than 4.00%, and may set a minimum leverage ratio of more than
4.00% for an institution based on certain factors. Pursuant to the foregoing,
Covenant is required to maintain a leverage ratio of not less than 4.00%. As of
December 31, 1996, Covenant's leverage ratio was 7.51%.
Covenant's ability to maintain the required levels of capital is
substantially dependent upon the success of Covenant's capital and business
plans, the impact of future economic events on Covenant's loan customers, and
Covenant's ability to manage its interest rate risk and control its growth and
other operating expenses.
A bank that is not in compliance with applicable federal or state capital
requirements may be subject to certain growth restrictions, issuance of a
capital directive by the appropriate regulator, and various other possible
enforcement actions by the appropriate regulators, including a cease and desist
order, civil money penalties, and the establishment of restrictions on
operations. In addition, the institution could be subject to appointment of a
receiver or conservator or a forced merger into another institution.
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<PAGE>
Prompt Corrective Action. In addition to the foregoing capital
requirements, the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") established a system of "prompt corrective action" with respect to
banks that do not meet minimum capital requirements. FDICIA establishes five
capital tiers: "well capitalized," "adequately capitalized," "under
capitalized," "significantly under capitalized" and "critically under
capitalized." At December 31, 1996, Covenant was "well capitalized." The
following table sets forth the minimum capital ratios that a bank must satisfy
in order to be considered well capitalized or adequately capitalized under FDIC
regulations and Covenant's ratios at December 31, 1996:
Adequately Well Covenant at
Capitalized Capitalized December 31, 1996
----------- ----------- -----------------
Total Risk-Based Capital Ratio 8% 10% 13.20%
Tier 1 Risk-Based Capital Ratio 4% 6% 11.98%
Leverage Ratio 4% 5% 7.51%
If a bank does not meet all of the minimum capital ratios necessary to be
considered adequately capitalized, it will be considered undercapitalized,
significantly undercapitalized or critically undercapitalized, depending on the
amount of the shortfall in its capital.
If its principal federal regulator determines that an adequately
capitalized institution is in an unsafe or unsound condition or is engaging in
an unsafe or unsound practice, it may require the institution to submit a
corrective action plan, restrict its asset growth and prohibit branching, new
acquisitions and new lines of business. An institution's principal federal
regulator may deem it to be engaging in an unsafe or unsound practice if it
receives a less than satisfactory rating for asset quality, management, earnings
or liquidity in its most recent examination.
Among other possible sanctions, an undercapitalized depository institution
may not pay dividends and is required to submit a capital restoration plan to
its principal federal regulator. If an undercapitalized depository institution
fails to submit or implement an acceptable capital restoration plan, it can be
subjected to more severe sanctions, including an order to sell sufficient voting
stock to become adequately capitalized. Generally, FDICIA requires the
appropriate federal regulator to appoint or receive a conservator for an
institution that is critically undercapitalized.
Deposit Insurance. The FDIC has adopted deposit insurance regulations under
which insured institutions are assigned to one of the following three capital
groups based on their capital levels: "well-capitalized," "adequately
capitalized" and "undercapitalized." Banks in each of these three groups are
further classified into three subgroups based upon the level of supervisory
concern with respect to each bank. The resulting matrix creates nine assessment
risk classifications to which are assigned deposit insurance premiums ranging
from 0.00% for the best capitalized, healthiest institutions to 0.27% for
undercapitalized institutions with substantial supervisory concerns. In
addition, Covenant is subject to semi-annual assessments by the FDIC relating to
interest payments on Financing Corporation (FICO) Bonds issued in connection
with the resolution of the thrift industry crisis.
Limits on Dividends and Other Payments. As a bank chartered under the laws
of the State of New Jersey, Covenant may not declare a cash dividend or a stock
dividend unless, following payment of the dividend, the capital stock of
Covenant will be unimpaired and Covenant will have surplus of at least 50% of
its capital stock or, if not, the payment of the dividend will not reduce
surplus.
In addition, the FDIC and the Department of Banking are authorized to
determine under certain circumstances relating to the financial condition of
Covenant that the payment of dividends would be an unsafe or unsound practice
and to prohibit payment thereof. The payment of dividends that deplete a bank's
capital base could be deemed to constitute such an unsafe or unsound practice.
Federal Home Loan Bank System. Covenant is a member of the FHLB of New
York, which is one of 12 regional FHLBs. As a member of the FHLB, Covenant is
required to purchase and maintain stock in the FHLB of New York in an amount
equal to the greater of 1% of its aggregate unpaid residential mortgage loans,
home purchase contracts or similar obligations at the beginning of each year, 5%
(or such greater fraction as established by FHLB) of outstanding FHLB advances,
or 0.3% of total assets. At December 31, 1996, Covenant had $4.5 million in FHLB
of New York stock which was in compliance with this requirement. Covenant has
received dividends on its FHLB stock.
C-4
<PAGE>
Each FHLB serves as a reserve or central bank for its members within its
assigned region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB. These policies and procedures are subject to the
regulation and oversight of the Federal Housing Finance Board (the "FHFB").
Activities and Investments. Pursuant to FDICIA, the activities and equity
investments of FDIC-insured state-chartered banks are generally limited to those
that are permissible for national banks, notwithstanding powers which may be
granted under state law.
Interstate Banking and Branching Legislation. Legislation enacted in 1994
is eliminating many restrictions on interstate banking. Effective September 29,
1995, this legislation authorized interstate acquisitions of banks by bank
holding companies without geographic limitations. Beginning June 1, 1997, the
legislation will eliminate certain restrictions on interstate branching under
federal law in states that have not passed legislation prohibiting interstate
branching, except that de novo branching or acquisition of a branch in another
state without acquisition of the entire bank will only be permitted if expressly
permitted by the law of the state in which such branch would be located.
Interstate branching prior to June 1, 1997 will be possible in states that pass
laws affirmatively authorizing such interstate branching. Prior to this
legislation, interstate acquisitions of banks have required affirmative
authorization in state law, and interstate branching has been possible only to a
very limited degree. The effect of this legislation on Covenant cannot be
predicted at this time.
Item 2 - Properties
Covenant has sixteen personal banking centers in southern New Jersey, in
the communities of Haddonfield, Moorestown, Waterford Township, Sicklerville,
Voorhees, Linwood, Cape May Court House, the Greater Wildwoods, Vineland,
Hammonton, Avalon, Sea Isle City, Cape May, Mt. Laurel and Cherry Hill. Covenant
also has administrative offices adjacent to its main office in Haddonfield, New
Jersey, and an operating center in Voorhees, New Jersey.
Covenant leases its main office pursuant to a lease with an initial term
of ten years ending October 31, 1997. The lease also contains two separate
five-year renewal options and a right of first refusal in the event of sale by
the landlord during the term of the lease. Covenant also leases its Linwood,
Cape May Court House, Sea Isle City, Cape May, Hammonton, Mt. Laurel and Cherry
Hill (land lease only) personal financial centers, and its administrative
offices adjacent to its main office.
Covenant owns all of its other personal financial centers and its Voorhees
operations center free and clear of any mortgages or other material liens.
Item 3 - Legal Proceedings
There are no material legal proceedings to which Covenant is a party or to
which any of its property is subject. From time to time, Covenant is a party to
various legal proceedings incident to its business.
C-5
<PAGE>
Item 4 - Security Ownership of Certain Beneficial Owners and Management
To the knowledge of the Bank, based solely upon a review of Forms F-7,
Forms F-8 and Forms F-8A, and amendments thereto, furnished to the Bank, and
representations of such persons to the Bank, no director, officer or beneficial
owner of more than 10% of any class of the Bank's capital stock has failed to
file on a timely basis any report required by Section 16(a) of the Securities
Exchange Act of 1934, as amended.
Security Ownership of Certain Beneficial Owners.
The following table describes, to the Bank's knowledge, the security
ownership of those persons who own beneficially more than five percent (5%) of
the Bank's Common Stock as of April 11, 1997:
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership (1) of Class
- ------------------- ------------------------ --------
Richard A. Hocker 199,209 shares (2) 6.50%
107 E. Cottage Avenue
Haddonfield, NJ 08033
- ----------
(1) The information in this table is based on information furnished by the
respective stockholders. Shares are deemed to be beneficially owned by a
person if he or she directly or indirectly has or shares the power to vote
or dispose of the shares, whether or not he or she has any economic
interest in such shares. Unless otherwise indicated, the named beneficial
owner has sole voting and dispositive power with respect to the shares.
(2) Includes (i) 3,995 shares owned by Mr. Hocker's wife and 1,363 shares owned
in custodial and trust accounts for the benefit of Mr. Hocker's daughter,
and (ii) 129,365 shares issuable under stock options exercisable currently
or within 60 days by Mr. Hocker.
Security Ownership of Directors and Directors and Officers as a Group.
The following table describes the security ownership of each director, each
named executive officer and all directors and executive officers as a group as
of April 11, 1997:
<TABLE>
<CAPTION>
Series A Series B
Common Stock Preferred Stock Preferred Stock
------------ --------------- ---------------
Amount(1) Percent Amount(1) Percent Amount(1) Percent
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Directors:
Barry M. Abelson .......... 4,213(2) * % -- -- % 800 * %
Thomas V.G. Brown ......... 2,729 * 7,000 5.06 -- --
William T. Carson, Jr ..... 49,824(3) 1.68 3,000 2.17 2,000 1.24
John J. Gallagher, Jr ..... 66,600(4) 2.25 4,000(5) 2.89 6,046(6) 3.74
Gary E. Greenblatt ........ 29,482(7) 1.00 -- -- 272(8) *
Richard A. Hocker ......... 199,209(9) 6.50 5,000(10) 3.62 37,000(11) 22.88
James R. Iannone .......... 58,862(12) 2.00 -- -- -- --
Joseph Maressa, Sr ........ 41,131(13) 1.40 -- -- 4,000 2.47
Charles E. Sessa, Jr ...... 55,727(14) 1.87 -- -- 440 *
Kyle W. Will .............. 4,897(15) * 2,000 1.45% 2,000 1.24
Named Executive Officers
Kenneth R. Mancini, Jr .... 27,873(16) * -- -- 300 0.19
J. William Parker, Jr ..... 13,569(17) * -- -- 320(18) *
Eugene D. D'Orazio, Jr .... 7,760(19) * -- -- 148 *
All directors and executive
officers as a group
(13 Persons) ............ 561,876(20) 17.37% 21,000 15.18% 53,326 32.98%
</TABLE>
- ----------
* indicates less than 1%
C-6
<PAGE>
(1) The information in this table is based on information furnished by the
respective stockholders. Shares are deemed to be beneficially owned by a
person if he or she directly or indirectly has or shares the power to vote
or dispose of the shares, whether or not he or she has any economic
interest in such shares. Unless otherwise indicated, the named beneficial
owner has sole voting and dispositive power with respect to the shares.
(2) Includes 3,534 shares issuable under stock options exercisable currently or
within 60 days by Mr. Abelson.
(3) Includes 28,276 shares issuable under stock options exercisable currently
or within 60 days by Mr. Carson.
(4) Includes (i) 3,320 shares owned by Mr. Gallagher's wife, with respect to
which beneficial ownership is disclaimed, 25,928 shares owned jointly with
Mr. Gallagher's wife, 678 shares owned by his son and 320 shares owned in a
custodial account for the benefit of Mr. Gallagher's daughter; (ii) 6,825
shares owned by Gallagher Associates Pension Trust Fund, in which Mr.
Gallagher is a participant and as to which beneficial ownership is
disclaimed; and (iii) 29,529 shares issuable under stock options
exercisable currently or within 60 days by Mr. Gallagher.
(5) Includes 2,000 shares owned by Gallagher Associates Pension Trust Fund, in
which Mr. Gallagher is a participant and as to which beneficial ownership
is disclaimed and 2,000 shares owned jointly with Mr. Gallagher's wife.
(6) Includes (i) 2,660 shares owned by Gallagher Associates Pension Trust
Fund, in which Mr. Gallagher is a participant and as to which beneficial
ownership is disclaimed, (ii) 25 shares owned by Mr. Gallagher's wife, as
to which beneficial ownership is disclaimed and (iii) 3,361 shares owned
jointly with Mr. Gallagher's wife.
(7) Includes (i) 3,149 shares owned by Mr. Greenblatt's wife, as to which
beneficial ownership is disclaimed, and 531 shares in a custodial account
for the benefit of Mr. Greenblatt's daughter; and (ii) 1,097 shares
issuable under stock options exercisable currently or within 60 days by Mr.
Greenblatt.
(8) Shares owned by Mr. Greenblatt in a custodial account for the benefit of
Mr. Greenblatt's daughter.
(9) Includes (i) 3,995 shares owned by Mr. Hocker's wife, as to which
beneficial ownership is disclaimed, and 1,363 shares owned in a custodial
account for the benefit of Mr. Hocker's daughter; and (ii) 129,365 shares
issuable under stock options exercisable currently or within 60 days by Mr.
Hocker.
(10) Includes 1,725 shares owned by Mr. Hocker's wife, as to which beneficial
ownership is disclaimed.
(11) Includes 800 shares owned by Mr. Hocker's wife, as to which beneficial
ownership is disclaimed.
(12) Includes (i) 25,138 shares as to which Mr. Iannone holds the power to vote
pursuant to a power of attorney; and (ii) 1,724 shares owned in a custodial
account for the benefit of Mr. Iannone's daughters.
(13) Includes 3,534 shares issuable under stock options exercisable currently or
within 60 days by Mr. Maressa.
(14) Includes (i) 22 shares held by Mr. Sessa's wife in a custodial account for
the benefit of Mr. Sessa's son; and (ii) 51,328 shares issuable under stock
options exercisable currently or within 60 days by Mr. Sessa.
(15) Includes 3,534 shares issuable under stock options exercisable currently or
within 60 days by Mr. Will.
(16) Includes 27,143 shares issuable under stock options exercisable currently
or within 60 days by Mr. Mancini.
(17) Includes 12,931 shares issuable under stock options exercisable currently
or within 60 days by Mr. Parker.
(18) Shares owned by Mr. Parker in a custodial account for the benefit of Mr.
Parker's daughters.
(19) Includes 7,323 shares issuable under stock options exercisable currently or
within 60 days by Mr. D'Orazio.
(20) Includes 297,594 shares issuable under stock options which are currently
exercisable or become exercisable within 60 days.
C-7
<PAGE>
Part II
Item 5 - Market for the Bank's Common Stock and Related
Security Holder Matters
The Bank's Common Stock is traded on the NNM under the symbol "CNSK." There
are currently five market makers in Covenant Stock including: Janney Montgomery
Scott Inc., Wheat First Butcher Singer, and Ryan, Beck & Co., Inc.
Set forth below for each quarter of 1995 and 1996 are the low and high
prices of the Bank's Common Stock during the fiscal quarter as reported by the
NASDAQ National Market, Inc.
1995 Low High
---- --- ----
1st Quarter........................ $ 7.60 $ 9.05
2nd Quarter........................ 7.60 8.76
3rd Quarter........................ 8.34 9.42
4th Quarter........................ 8.76 12.47
1996
----
1st Quarter........................ $10.89 $11.57
2nd Quarter........................ 11.32 11.79
3rd Quarter........................ 11.32 12.97
4th Quarter........................ 12.00 14.75
- ----------
Note: The above prices have been adjusted to reflect all stock dividends issued
on the Common Stock.
The Bank has never paid a cash dividend on its Common Stock. The Bank has
paid quarterly dividends of $.375 per share with respect to the Bank Preferred
Stock, in accordance with the terms of the Bank Preferred Stock. Holders of the
Preferred Stock are entitled to receive non-cumulative dividends at the rate of
6% of par value per annum before dividends are declared with respect to Bank
Common Stock for such year. The declaration of such dividends, however, is
discretionary with the Board of Directors. In the event the Board of Directors
chooses not to declare a dividend in any year, such arrearage will not
accumulate or be payable in future years, even though the Bank has earnings in
such year. See "DESCRIPTION OF HOLDING COMPANY SECURITIES AND COMPARISON OF
STOCKHOLDERS' RIGHTS."
The Bank is subject to regulatory limitations on the payment of dividends.
As a New Jersey bank, the Bank may not declare a cash dividend or a stock
dividend unless, following payment of the dividend, the capital stock of the
Bank will be unimpaired and the Bank will have a surplus of at least 50% of its
capital stock or, if not, the payment of the dividend will not reduce the
surplus of the Bank. In addition, the Department of Banking or the FDIC may
restrict the ability of the Bank to pay dividends in certain circumstances,
including if such payment would constitute an unsafe or unsound banking
practice, if the Bank is not meeting certain capital requirements, or if the
Bank is in default of any assessment to the FDIC.
C-8
<PAGE>
Item 6 - Selected Financial Data
COVENANT BANK
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
in thousands, except per share amounts Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets $414,634 $347,161 $316,722 $274,351 $210,129
Loans receivable, net 238,185 201,666 190,037 179,825 145,371
Investments available for sale 132,578 57,178 16,823 20,604 17,034
Investments held to maturity 11,687 50,343 79,518 24,923 12,422
Deposits 277,465 262,752 235,821 244,015 186,187
Stockholders' equity 29,251 29,909 22,376 21,645 20,288
Book value per share (5) $7.45 $7.54 $6.44 $6.24 $5.85
Income Statement Data
Net interest income 14,934 13,668 12,140 9,697 7,344
Provision for loan losses 636 314 682 1,043 947
Non-interest income 1,090 844 779 799 811
Non-interest expense 12,337 (1) 11,121 11,296 8,769 6,310
Income before income tax 3,051 (1) 3,077 941 684 898
Net income $ 1,850 (4) $ 2,379 $ 1,281 $ 1,373 $ 712
======== ======== ======== ======== ========
Operating earnings - pre-tax $ 4,701 (2) $ 3,077 $ 2,077 (3) $ 684 $ 898
======== ======== ======== ======== ========
Average common shares outstanding 4,069 3,761 3,535 3,454 3,018
Earnings per share $0.45 (4) $0.63 $0.36 $0.40 $0.24
Net interest margin 4.10% 4.37% 4.50% 4.24% 3.86%
Profitability Statistics
Pre-tax operating return on average assets 1.21% 0.93% 0.73% 0.28% 0.45%
Return on average assets 0.48 (4) 0.72 0.45 0.56 0.35
Return on average common equity 6.30 (4) 9.53 5.72 6.68 4.30
Book value per share excluding
FAS 115 valuation adjustment $7.53 $7.24 $6.51 $6.20 $5.85
Non-performing assets/total period end assets 0.86 1.44 1.73 1.91 1.83
Allowance/non-performing loans 105.23 86.84 77.95 86.33 137.42
Allowance/total loans 1.25 1.56 1.87 2.00 1.81
Net charge-offs/average loans outstanding 0.36 0.37 0.38 0.77 0.46
Capital Measures
Average stockholders' equity/average assets 7.56% 7.66% 7.70% 8.49% 8.24%
Leverage ratio 7.51 8.49 7.42 7.87 9.88
Tier 1 capital ratio 11.98 13.62 11.68 11.52 13.88
Total capital ratio 13.20 14.87 12.94 12.78 14.83
Number of full-service offices 15 14 13 11 6
</TABLE>
<PAGE>
- ----------
Note: All data has been restated to reflect the 1996 merger with 1st Southern
State Bank.
All share data has been restated for all stock dividends issued on common
stock to date.
Covenant has not paid cash dividends on common stock to date; therefore,
dividend payout ratio is not applicable.
(1) Includes pre-tax merger-related costs of $1,147,000 and pre-tax one-time
SAIF recapitalization assessment of $503,000.
(2) Excludes pre-tax merger-related costs of $1,147,000 and pre-tax one-time
SAIF recapitalization assessment of $503,000.
(3) Excludes pre-tax merger-related costs of $1,136,000 recorded for the Landis
Savings Bank, S.L.A. acquisition.
(4) Excluding after-tax merger-related costs of $860,000 and after-tax one-time
SAIF assessment of $323,000, operating earnings data is as follows:
1996
----
Operating earnings $3,033
Operating earnings per share $0.75
Operating return on average assets 0.78%
Operating return on average common equity 11.63%
(5) Book value per share calculation includes SFAS 115 valuation adjustment.
C-9
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion is presented in conjunction with and should be read with
the audited financial statements and the accompanying notes contained herein of
Covenant Bank ("Covenant" or "the Bank") for the years 1996, 1995 and 1994.
Tabular information is presented throughout this report in thousands of dollars,
except for share and per share data.
Summary
On September 27, 1996, Covenant consummated its acquisition of 1st Southern
State Bank ("1st Southern"), thus adding three personal financial centers and
$47.2 million to Covenant's assets. The pooling of interests method of
accounting was used for this transaction and accordingly the financial
statements contained herein have been restated to include 1st Southern for all
periods presented. The acquisition resulted in the conversion of 1st Southern
common stock outstanding as of September 27, 1996 to Covenant common stock at a
rate of 1.55 shares of Covenant common stock for each share of 1st Southern
common stock.
Covenant recorded net income of $1.9 million, or $0.45 per share, for the
year ended December 31, 1996. Net income includes one-time merger-related costs
of $1,147,000 ($860,000, after-tax) (A) recorded in 1996 associated with the 1st
Southern transaction. Net income for the year ended December 31, 1996 also
includes a non-recurring Savings Association Insurance Fund ("SAIF") assessment
of $503,000 ($322,700, after-tax). Excluding the merger-related costs and the
SAIF assessment, Covenant reported for the year ended December 31, 1996
operating earnings of $3.0 million, or $0.75 per share, compared to $2.4
million, or $0.63 per share, for the year ended December 31, 1995. Covenant
recorded net income of $1.3 million, or $0.36 per share, for the year ended
December 31, 1994. Net income in 1994 included merger-related costs ($917,000,
after-tax) as a result of Covenant's acquisition of Landis Savings Bank, S.L.A.
Pre-tax operating earnings increased to $4.7 million or 52% (excluding the
one-time merger related costs and non-recurring SAIF assessment) for the year
ended December 31, 1996, compared to $3.1 million for 1995 and $2.1 million for
1994 (adjusted for pre-tax merger-related costs of $1.1 million). Covenant's
enhanced pre-tax operating earnings performance in 1996 reflects higher net
interest income primarily due to increased loan and investment balances, a
reduction in the provision for loan losses (exclusive of $481,000, as described
in Note A below), and increases in non-interest income coupled with a
stabilization of non-interest expenses.
Return on average assets was 0.48% and return on average common equity was
6.30% for the year ended December 31, 1996. Excluding the one-time
merger-related costs and SAIF assessment, return on average assets was 0.78% and
return on average common equity was 11.63% for the year ended December 31, 1996,
compared to 0.72% and 9.53%, respectively, for the year ended December 31, 1995,
and 0.45% and 5.72%, respectively, for the year ended December 31, 1994.
- ----------
(A) One-time merger-related charges consist of $666,000 of merger costs and a
$481,000 provision for loan losses recorded during 1996 to align the two
Banks' allowance for loan loss methodologies as to the credit and
non-performing process. The total one-time merger-related charges of
$1,147,000 are equal to $860,000 on an after-tax basis.
C-10
<PAGE>
In 1996, Covenant reached record levels of total assets, loans, investments
and deposits. Total assets at December 31, 1996 equaled $414.6 million;
representing an increase of $67.5 million or 19% over December 31, 1995
balances. Net loans increased 18% during 1996 to reach $238.2 million, compared
to $201.7 million at December 31, 1995. Total investments grew to $144.3 million
or 34% at December 31, 1996 from December 31, 1995's balance of $107.5 million.
Total deposits reached $277.5 million at December 31, 1996, compared to $262.8
million at December 31, 1995. Total stockholders' equity stood at $29.3 million
at December 31, 1996 compared to $29.9 million as of December 31, 1995.
Non-performing assets at December 31, 1996 decreased $1.4 million or 28% to
$3.6 million from $5.0 million at year-end 1995. Non-performing loans at
December 31, 1996 amounted to $2.9 million, representing a 25% decrease from
1995's balance of $3.8 million. Non-performing loans as a percentage of total
loans decreased to 1.19% at December 31, 1996, from 1.87% at December 31, 1995
as Covenant continued to identify and aggressively pursue problem credits. The
allowance for loan loss as a percentage of non-performing loans increased to
105.23% at December 31, 1996, from 86.84% at December 31, 1995.
RESULTS OF OPERATIONS
Net Interest Income and Net Interest Margin
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 represents the principal source of income for Covenant
Bank. Net interest income for the year 1996 was $14.9 million, compared to $13.7
million for 1995. The improvement in net interest income is directly related to
the increase in average interest-earning assets for the year 1996 by $51.6
million or 16%, as compared to the average interest-earning asset balance in
1995. The increase in average interest-earning assets during 1996 as compared to
1995 was attributable to a $25.8 million or 13% growth in average loans and a
$25.8 million or 22% growth in average investments.
The yield on average interest-earning assets decreased by 32 basis points
to 7.99% for 1996, compared to 8.31% for 1995, and was directly responsible for
the 27 basis point decrease in the Bank's net interest margin between 1995 and
1996. The net interest margin for 1996 was 4.10%, compared to 4.37% for 1995.
Competition in the southern New Jersey marketplace with respect to loan pricing
has compelled Covenant to price loans and deposits to remain competitive and to
draw and maintain market share.
Net interest income for 1995 totaled $13.7 million compared to $12.1
million for 1994, representing an increase of $1.6 million. In 1995, average
interest-earning assets increased by $42.8 million or 16% over 1994's balances.
The increase in average interest-earning assets during 1995 as compared to 1994
was primarily attributable to a $34.8 million increase in the average investment
portfolio balance, as well as a $8.1 million increase in the average loan
portfolio. The yield on average interest-earning assets increased by 83 basis
points to 8.31% for 1995, compared to 7.48% for 1994, but offsetting this
increase was an increase in the cost of funds for interest-bearing liabilities
of 111 basis points between 1994 and 1995, which contributed to the 13 basis
point decrease in the net interest margin.
Table 1 provides for each of the years 1996, 1995 and 1994 an analysis of
the following: (i) average assets, liabilities and stockholders' equity, (ii)
net interest income and the interest income earned and interest expense incurred
for each major component of interest-earning assets and interest-bearing
liabilities, as well as average rates earned and incurred, (iii) the net
interest spread (the difference between the average yield earned on assets and
the average rate incurred on liabilities) and (iv) the net yield on average
interest-earning assets (the net interest margin).
C-11
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans:(1)
Commercial $ 65,244 $ 6,127 9.39% $ 58,821 $ 5,885 10.00% $ 59,333 $ 5,013 8.45%
Mortgage 126,888 11,338 8.94 111,079 10,234 9.21 105,317 9,083 8.62
Consumer 31,584 2,774 8.78 28,012 2,635 9.41 25,201 2,207 8.76
-------- ------- ---- -------- ------- ----- -------- ------- ----
Total loans 223,716 20,239 9.05 197,912 18,754 9.48 189,851 16,303 8.59
-------- ------- ---- -------- ------- ----- -------- ------- ----
Investments:
Federal funds sold 6,867 366 5.33 9,715 572 5.89 15,573 569 3.65
Other short-term
investments -- -- -- -- -- -- 1,395 49 3.51
Investment securities 133,755 8,493 6.35 105,140 6,673 6.35 63,105 3,267 5.18
-------- ------- ---- -------- ------- ----- -------- ------- ----
Total investments 140,622 8,859 6.30 114,855 7,245 6.31 80,073 3,885 4.85
-------- ------- ---- -------- ------- ----- -------- ------- ----
Total interest-earning
assets 364,338 29,098 7.99% 312,767 25,999 8.31% 269,924 20,188 7.48%
------- ---- ------- ----- ------- ----
Allowance for loan losses (3,087) (3,486) (4,026)
Cash and due from banks 10,021 9,292 9,801
Other assets 15,644 12,428 10,652
-------- -------- --------
Total Assets $386,916 $331,001 $286,351
======== ======== ========
Liabilities and
Stockholders' Equity
Deposits:
Interest-bearing demand $ 27,644 $ 592 2.14% $ 24,730 $ 518 2.09% $ 23,641 $ 416 1.76%
Statement savings 43,221 1,038 2.40 42,849 1,132 2.64 51,927 1,269 2.44
Money market 21,906 639 2.92 22,494 630 2.80 28,041 681 2.43
Time deposits 138,833 7,374 5.31 129,107 6,852 5.31 112,166 4,585 4.09
-------- ------- ---- -------- ------- ----- -------- ------- ----
Total interest-bearing
deposits 231,604 9,643 4.16 219,180 9,132 4.17 215,775 6,951 3.22
FHLB advances and reverse
repurchase agreements 83,443 4,521 5.42 54,667 3,199 5.85 21,570 1,097 5.09
-------- ------- ---- -------- ------- ----- -------- ------- ----
Total interest-bearing
liabilities 315,047 14,164 4.50 273,847 12,331 4.50 237,345 8,048 3.39
------- ---- ------- ----- ------- ----
Non-interest bearing deposits 39,331 29,562 24,414
Other liabilities 3,278 2,224 2,532
Stockholders' equity 29,260 25,368 22,060
-------- -------- --------
Total Liabilities and
Stockholders' Equity $386,916 $331,001 $286,351
======== ======== ========
Net Interest Income/Spread $14,934 3.49% $13,668 3.81% $ 12,140 4.09%
======= ==== ======= ==== ======== ====
Net Interest Margin 4.10% 4.37% 4.50%
==== ==== ====
</TABLE>
- ----------
(1) Includes non-accruing loans. The effect of including such loans is to
reduce the average rate earned on Covenant's loans.
C-12
<PAGE>
Table 2 presents the major factors that contributed to the changes in net
interest income for the years ended December 31, 1996 and 1995 as compared to
the respective previous periods. Amounts in brackets represent a decrease in
interest income or expense.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
----------------------------------------------------------------------------------------
Total Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
------ ---- ------ ---------- ------ ---- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Commercial $ 642 ($ 361) ($ 39) $ 242 ($ 43) $ 923 ($ 8) $ 872
Mortgage 1,456 (309) (43) 1,104 496 620 35 1,151
Consumer 336 (174) (23) 139 246 164 18 428
Federal funds sold (168) (54) 16 (206) (214) 348 (131) 3
Other short-term investments -- -- -- -- (49) (49) 49 (49)
Investment securities 1,816 3 1 1,820 2,177 738 491 3,406
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets 4,082 (895) (88) 3,099 2,613 2,744 454 5,811
------- ------- ------- ------- ------- ------- ------- -------
Interest expense
Interest-bearing demand 61 12 1 74 20 79 3 102
Statement savings 10 (103) (1) (94) (222) 103 (18) (137)
Money market (16) 27 (2) 9 (135) 104 (20) (51)
Time deposits 516 5 1 522 692 1,368 207 2,267
Borrowed funds 1,684 (237) (125) 1,322 1,684 165 253 2,102
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities 2,255 (296) (126) 1,833 2,039 1,819 425 4,283
------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest income $ 1,827 ($ 599) $ 38 $ 1,266 $ 574 $ 925 $ 29 $ 1,528
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
Non-Interest Income
Non-interest income for the year ended December 31, 1996 totaled
$1,090,000, compared to $844,000 for the same period of 1995, representing an
increase of $246,000 or 29%. As Covenant continues to grow, management continues
to focus on its core business to generate a greater base of non-interest income.
Service charges on deposit accounts equaled $631,000 for 1996, an increase of
$257,000 or 69% over 1995's level. The level of these fees have been enhanced by
additional transaction volume and a significant increase in core deposit
accounts. Loan servicing-related income amounted to $274,000 for 1996, compared
to $248,000 in 1995. The increases in service charges on deposit accounts and
loan servicing income was slightly offset by a $36,000 decrease in other income
to $185,000 for 1996 from $221,000 for 1995 due to the discontinuance of a
fee-based residential loan origination program during the latter part of 1995,
offset by the implementation of ATM surcharging beginning in the second quarter
of 1996.
Non-interest income for the year ended December 31, 1995 totaled $844,000,
compared to 1994's level of $779,000, representing an increase of $65,000 or 8%.
Service charges on deposit accounts amounted to $374,000, representing a $74,000
or 25% increase over 1994's service charges. Loan servicing-related income for
1995 was $248,000, compared to $227,000 for the year ended December 31, 1994.
Other income increased $17,000 between 1994 and 1995. The Bank reported gains on
the sale of loans totaling $46,000 for the year ended December 31, 1994, which
represented gains on the sale of mortgage loans which were recognized by Landis
Savings Bank, S.L.A. ("Landis") prior to its acquisition by Covenant in
September 1994.
C-13
<PAGE>
Non-Interest Expense
For 1996, non-interest expenses were $12.3 million, compared to $11.1
million for 1995. Expenses for 1996 included $666,000 of pre-tax merger costs
associated with the 1st Southern acquisition and the pre-tax SAIF assessment of
$503,000. Excluding these one-time charges, total non-interest expenses equaled
$11.2 million for the twelve months ended December 31, 1996, compared to $11.1
million for the twelve month period ending December 31, 1995, representing a
less than 1% increase. Total salaries and employee benefits were $6.4 million
for 1996, compared to $6.0 million for 1995. The increase of $331,000 between
1995 and 1996 is primarily attributable to additional personnel to staff
Covenant's new personal financial centers in Cape May Court House, Hammonton,
Linwood and Mount Laurel, New Jersey coupled with staff additions to the
commercial lending group during the latter part of 1995 to better position
Covenant to take advantage of current and future opportunities in the commercial
lending market.
Occupancy costs equaled $1.6 million for 1996, compared to $1.4 million for
1995. The $207,000 increase in occupancy costs in 1996 over 1995 is attributable
to expenses associated with the above-mentioned new personal financial centers
and the establishment of an operations center in Voorhees, NJ during the second
quarter of 1996. In 1996, a decrease of $145,000 occurred in data processing and
other service costs due to Covenant's conversion to a more cost-efficient,
state-of-the-art data processing system in September of 1996. Federal insurance
premiums include the above-mentioned pre-tax SAIF recapitalization assessment of
$503,000. Excluding the non-recurring assessment, federal insurance premiums
decreased $206,000 in 1996 compared to 1995 due to a reduction in the Bank
Insurance Fund premium rates. Advertising and promotion expenses decreased
$35,000 to equal $173,000 for the year 1996, compared to $208,000 for 1995.
Other expenses for 1996 were $1.6 million, compared to $1.7 million for 1995,
representing a decrease of 6%. This decrease was attributable to the
implementation of cost-containment strategies, which contributed to an
improvement in Covenant's efficiency ratio to 69.25% for 1996, (excluding the
one-time merger costs and non-recurring SAIF assessment), compared to 76.19% for
1995.
For 1995, non-interest expenses were $11.1 million, compared to $11.3
million for 1994, which included pre-tax merger-costs of $809,000 related to the
Bank's acquisition of Landis in September 1994. Salaries and employee benefits
expenses were $6.0 million in 1995, compared to $5.3 million for 1994. The
increase of $721,000 between 1994 and 1995 was primarily attributable to
additions to the commercial lending group to ensure adequate staffing to enable
Covenant to take advantage of current and future market opportunities. Occupancy
costs totaled $1.4 million in 1995, compared to $1.3 million in 1994.
Professional services decreased $151,000 between 1994 and 1995. Due to a
reduction in Bank Insurance Fund premium rates in 1995, federal insurance
premium rates were $387,000, which is $234,000 lower than 1994's expense of
$621,000. Other expenses were $1.7 million in 1995, compared to $1.5 million in
1994. This increase was due to increased credit report volume, and increased
fees related to the growth in the investment portfolio.
The ratio of non-interest expenses to average assets for the year ended
December 31, 1996 improved to 2.89% (excluding pre-tax merger costs associated
with the 1st Southern acquisition and the pre-tax one-time SAIF assessment) from
3.36% for 1995 and 3.66% for 1994 (excluding merger costs associated with the
Landis acquisition).
C-14
<PAGE>
FINANCIAL CONDITION
Loan Portfolio
The lending function is Covenant's principal business activity, and
Covenant continues its mission to serve as a reliable source of credit to a
diverse customer base. Covenant lends primarily to commercial borrowers in the
southern New Jersey marketplace. Covenant's loan portfolio is diversified among
commercial, residential and consumer loans, with 35% of the total loan portfolio
comprised of residential mortgage loans and consumer loans at December 31, 1996.
Table 3 sets forth information regarding Covenant's loan portfolio as of
December 31, for each of the years 1992 through 1996.
<TABLE>
<CAPTION>
Loans By Type 1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ----------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial
Collateralized by:
1-4 family dwelling $ 5,435 2% $ 9,070 4% $ 7,635 4% $ 8,617 5% $ 7,032 5%
multi-family, office
building, retail center 15,500 6 13,739 7 11,840 6 11,127 6 10,969 7
accounts receivable,
inventory, fixed assets 9,744 4 9,240 4 9,449 5 6,639 4 7,233 5
hotel, motel 1,900 1 3,118 2 4,170 2 4,496 2 3,348 2
fishing /agricultural 4,563 2 3,938 2 4,127 2 3,442 2 3,706 2
land 3,955 2 3,392 2 3,789 2 3,492 2 2,976 2
CD's, stock, bonds 9,076 4 8,123 4 6,781 3 10,216 6 2,732 2
other 8,747 4 7,474 4 7,182 4 6,035 3 2,346 2
Unsecured 6,431 3 4,423 2 5,551 3 5,161 3 5,651 4
-------- --- -------- --- -------- --- -------- --- -------- ---
Total Commercial $ 65,351 27% $ 62,517 31% $ 60,524 31% $ 59,225 32% $ 45,993 31%
Mortgage
Construction 7,075 3% 3,346 2% 6,002 3% 4,872 3% 1,817 1%
Collateralized by:
1-4 family 52,563 22 43,193 21 43,912 23 45,615 25 35,985 24
multi-family 5,058 2 3,919 2 6,116 3 5,920 3 6,605 4
office building 21,989 9 20,315 10 15,417 8 14,027 8 10,209 7
retail center 19,843 8 24,141 12 19,586 10 17,388 9 16,873 11
hotel, motel 13,183 5 9,823 5 7,587 4 5,643 3 2,644 2
other 22,628 9 9,007 4 8,369 4 7,348 4 7,194 5
-------- --- -------- --- -------- --- -------- --- -------- ---
Total Mortgage $142,339 59% $113,744 54% $106,989 55% $100,813 55% $ 81,327 55%
Consumer
Installment 3,364 1% 3,730 2% 3,899 2% 2,527 1% 2,151 1%
Home equity 30,262 13 25,372 13 22,902 12 21,307 12 19,345 13
Other 134 0 55 0 28 0 12 0 5 0
-------- --- -------- --- -------- --- -------- --- -------- ---
Total Consumer $ 33,760 14% $ 29,157 15% $ 26,829 14% $ 23,846 13% $ 21,501 14%
-------- --- -------- --- -------- --- -------- --- -------- ---
Total Loans $241,450 100% $205,418 100% $194,342 100% $183,884 100% $148,821 100%
-------- === -------- === -------- === -------- === -------- ===
Unearned discounts and
deferred loan fees (249) (557) (682) (389) (751)
-------- -------- -------- -------- --------
Loans receivable $241,201 $204,861 $193,660 $183,495 $148,070
======== ======== ======== ======== ========
</TABLE>
C-15
<PAGE>
The majority of Covenant's loans are located within the southern New Jersey
marketplace, which is its only significant geographic concentration. During
1996, total loans increased $36.0 million or 18% from $205.4 million to $241.4
million. The increase in total loans has been concentrated within the
commercial, commercial mortgage and residential loan portfolios. The increase in
commercial and commercial mortgage loans outstanding during 1996 is directly
related to a localized lending approach, coupled with personalized service and
products that compete with larger institutions that enable Covenant to take
advantage of current opportunities in the commercial lending market. The Bank's
loan-to-deposit ratio was 87% at December 31, 1996 and 78% at December 31,1995.
The majority of Covenant's loan portfolio is categorized as secured by
commercial and real estate properties (including home equity loans). Unsecured
loans at December 31, 1996 amounted to $6.4 million or 2.66% of total loans,
compared to $4.4 million or 2.15% and $5.6 million or 2.86% of total loans at
December 31, 1995 and 1994, respectively. Covenant's policy continues to
emphasize well-collateralized and properly structured loans and the promotion of
long-term quality relationships with financially strong borrowers.
At December 31, 1996, commercial and commercial mortgage loans totaled
$155.1 million, representing 64% of Covenant's total loan portfolio. Covenant
directs its lending efforts toward small- and medium-sized businesses that
operate within its marketplace.
Residential mortgage and consumer lending are segments of the lending
market in which Covenant has developed a presence. Residential mortgages are the
second largest component of Covenant's loan portfolio, encompassing 22%. At
December 31, 1996, residential mortgages totaled $52.6 million; the majority of
these loans are collateralized by 1-4 family dwellings. In 1996, Covenant
discontinued a program of origination and sale of residential mortgage loans
(without recourse) to the secondary market. There were no loans held for sale at
December 31, 1996, as compared to $936,000 and $494,000 as of December 31, 1995
and 1994, respectively. Consumer loans amounted to $33.8 million at December 31,
1996. The largest segment of the consumer loan portfolio is home equity loans,
which are fixed borrowings or variable rate lines of credit, and totaled $30.3
million at December 31, 1996.
Covenant services loans for the Federal Home Loan Mortgage Corporation
(FHLMC) and the Federal National Mortgage Association (FNMA). This service
includes processing payments, maintaining escrow accounts, disbursing funds to
FHLMC and FNMA, and engaging in collection activities, if necessary. The total
amount of loans serviced for these parties was $14.4 million in 1996 and $16.0
million in 1995. Covenant received servicing fees of $75,000, $94,000, and
$115,000 for 1996, 1995 and 1994, respectively.
The maturity ranges of the loan portfolio and the amount of loans with
predetermined interest rates and floating rates in each maturity range at
December 31, 1996 are summarized in Table 4.
Within One to Over
One Year Five Years Five Years Total
-------- ---------- ---------- -----
Commercial $28,102 $31,870 $ 5,379 $ 65,351
Mortgage 7,856 39,812 94,671 142,339
------- ------- -------- --------
Total $35,958 $71,682 $100,050 $207,690
======= ======= ======== ========
Fixed Rate $ 9,085 $41,754 $ 63,611 $114,450
Variable Rate 26,873 29,928 36,439 93,240
------- ------- -------- --------
Total $35,958 $71,682 $100,050 $207,690
======= ======= ======== ========
Asset Quality
Covenant manages asset quality and controls credit risk through
diversification of its loan portfolio and the application of policies designed
to foster sound underwriting and loan monitoring practices. Covenant's senior
credit officer is charged with monitoring asset quality, establishing credit
policies and procedures as approved by the Board of Directors, seeking the
consistent application of these policies and procedures across the Bank, and
adjusting policies as appropriate for changes in market conditions.
C-16
<PAGE>
The loan review process entails three levels of review, each made in
accordance with the Bank's loan classification system. In general, the loan
classification system makes use of the guidelines employed by federal and state
regulators. At the first level, the Bank's loan officer reviews and assigns a
rating to all new commercial and commercial real estate mortgage loans at the
time of origination. At the second level, each loan officer's portfolio is
independently reviewed by the loan review officer on a twelve-month schedule
utilizing a threshold of $100,000 or more. The loan review officer reports
directly to the Board of Directors and all findings are reported on a quarterly
basis to the Loan Committee of the Board of Directors. The Bank, as part of its
asset-monitoring procedures, requires officers to perform self-grading loan
reviews, whereby each loan officer is responsible for self-grading his/her
individual credits on a periodic basis, but not less than once a year. In
addition, a monthly and quarterly reporting and review process is in place for
monitoring those credits that have been identified as problematic or vulnerable
in order to assess the Bank's progress in working toward a solution and to
assist in determining an appropriate allowance for loan losses. These reports
are reviewed with the Loan Committee of the Board and are reported to the full
Board of Directors.
Non-Performing Assets
Non-performing assets include loans that are not accruing interest
(non-accruing loans), loans that have been restructured (a loan is categorized
as restructured if the original interest rate on the loan, repayment terms, or
both were restructured on a below-market basis, due to deterioration in the
financial condition of the borrower), and real estate owned.
Generally, loans are placed on non-accrual status when interest or
principal becomes contractually 90 days past-due, unless, in Covenant'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.
Table 5 sets forth information regarding non-performing assets and
contractually past-due loans as of December 31, for each of the years 1992
through 1996.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-performing assets:
Non-accruing loans:
Commercial $1,734 $2,045 $2,376 $1,981 $1,197
Mortgage 931 1,536 1,526 1,943 556
Consumer 201 263 262 328 211
------ ------ ------ ------ ------
Total 2,866 3,844 4,164 4,252 1,964
Restructured loans --- --- 595 - -
------ ------ ------ ------ ------
Total non-performing loans 2,866 3,844 4,759 4,252 1,964
Real estate owned 695 1,171 715 998 1,889
------ ------ ------ ------ ------
Total non-performing assets $3,561 $5,015 $5,474 $5,250 $3,853
====== ====== ====== ====== ======
Accruing loans 90 days past due $1,753 $ 993 $2,124 $2,058 $ 351
====== ====== ====== ====== ======
Non-performing loans as a
percentage of loans 1.19% 1.87% 2.45% 2.31% 1.32%
====== ====== ====== ====== ======
Non-performing assets as a
percentage of loans
and real estate owned 1.47% 2.43% 2.81% 2.84% 2.56%
====== ====== ====== ====== ======
Non-performing assets as a
percentage of total assets 0.86% 1.44% 1.73% 1.91% 1.83%
====== ====== ====== ====== ======
Allowance as a percentage of
non-performing loans 105.23% 86.84% 77.95% 86.33% 137.42%
====== ====== ====== ====== ======
</TABLE>
C-17
<PAGE>
Non-accruing loans at December 31, 1996 and 1995 totaled $2.9 million and
$3.8 million, respectively. Interest income recognized on non-accruing loans
totaled $89,000 in 1996, $28,000 in 1995, and $195,000 in 1994. Had interest
income on year-end non-accrual loans been paid at the contracted rates and due
dates, Covenant would have recorded additional interest income in 1996, 1995 and
1994 of $273,000, $508,000, and $464,000, respectively. Restructured loans at
December 31, 1994 totaled $595,000. Had interest income on restructured loans
been paid in accordance with contracted rates, Covenant would have recorded
additional interest income of $4,000 in 1994. There were no restructured loans
at December 31, 1996, consequently, no interest income on restructured loans was
recognized.
Non-performing assets totaled $3.6 million or 1.47% of total loans and real
estate owned at December 31, 1996, compared to $5.0 million or 2.43% of total
loans and real estate owned at December 31, 1995. Non-performing loans at
December 31, 1996 of $2.9 million represent a decrease of $978,000 when compared
to December 31, 1995's balance of $3.8 million. At December 31, 1996,
non-performing loans as a percentage of total loans were 1.19%, compared to
1.87% for 1995. These favorable variances show the significant progress Covenant
has made in reducing problem loans primarily in the mortgage and commercial
categories.
The balance of real estate owned was $695,000 (six properties totaling
$493,000 are residential) at December 31, 1996, compared to $1,171,000 at
December 31, 1995. The decrease from 1995 to 1996 was due to the sale of
fourteen properties for $1,319,000 offset by the addition of eight properties
for $843,000, during 1996. The balance of real estate owned was $715,000 at
December 31, 1994. All properties are reported at the lower of cost or fair
value less estimated selling costs.
The $760,000 increase in accruing loans 90 days past-due between December
31, 1995 and December 31, 1996 is related to the following: (1) two matured,
well-collateralized commercial loans totaling $116,000 that are in the process
of collection; (2) a $61,000 increase in commercial share loans that are 100%
secured by certificates of deposit and are in the process of collection; (3) two
commercial loans totaling $39,000 that are in the process of collection; (4) an
increase of $544,000 in various residential and consumer loans that are
well-collateralized and are in the process of collection.
Provision and Allowance for Loan Losses
The 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 agencies.
At December 31, 1996, the recorded investment in loans for which impairment
has been recognized in accordance with FAS 114 and FAS 118 totaled $1.7 million,
which have a valuation allowance of $199,000. Such valuation allowance is
included in the allowance for loan losses.
C-18
<PAGE>
Table 6 sets forth information regarding Covenant's allowance for loan
losses as of December 31, for each of the years 1992 through 1996.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $3,195 $3,623 $3,670 $2,699 $2,404
Acquired allowance for
loan losses from NJS&L --- --- --- 1,039 ---
Provision charged to
operating expense 636 314 682 1,043 947
Charge-offs:
Commercial (449) (865) (877) (1,208) (366)
Mortgage (417) (68) (125) (20) (283)
Consumer (124) (70) (59) (57) (24)
------ ------ ------ ------ ------
Total Charge-offs (990) (1,003) (1,061) (1,284) (673)
Recoveries 175 261 332 173 21
------ ------ ------ ------ ------
Net charge-offs (815) (742) (729) (1,111) (652)
------ ------ ------ ------ ------
Balance at end of period $3,016 $3,195 $3,623 $3,670 $2,699
Net charge-offs as a percentage of
average loans 0.36% 0.37% 0.38% 0.77% 0.46%
Allowance as a percentage of
period-end loans 1.25% 1.56% 1.87% 2.00% 1.81%
Allowance as a percentage of
non-performing loans 105.23% 86.84% 77.95% 86.33% 137.42%
Allowance as a percentage of
non-performing assets 84.70% 63.71% 66.19% 69.92% 70.05%
</TABLE>
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 $636,000 in
1996, compared to $314,000 in 1995, an increase of 103%. A substantial portion
($481,000) of the provision in 1996 was taken in connection with the acquisition
of 1st Southern, and reflects the conformance of 1st Southern reserves for loan
losses to the Bank's policies with respect thereto. Asset quality in the Bank's
loan portfolio continues to be at reasonable levels. Net charge-offs as a
percentage of average loans was 0.36% for 1996, compared to 0.37% for 1995. The
Bank's allowance for loan losses as a percentage of non-performing loans and as
a percentage of non-performing assets increased to 105.23% and 84.70%,
respectively, at December 31, 1996, compared to 86.84% and 63.71%, respectively,
at December 31, 1995.
C-19
<PAGE>
Table 7 sets forth Covenant's allocation of the allowance for loan losses
as of December 31, for each of the years 1992 through 1996. The allocation of
the allowance for loan losses in Table 7 is based upon historical experience and
the Bank's review of each specific loan category in which future losses may
ultimately occur. However, the entire allowance for loan losses is available to
absorb further loan losses in any category. Covenant is unable to determine in
which category future charge-offs and recoveries may occur.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
% Of % Of % Of % Of % Of
Gross Gross Gross Gross Gross
Amount Loans (1) Amount Loans (1) Amount Loans (1) Amount Loans (1) Amount Loans (1)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $1,088 27% $1,484 31% $1,817 31% $1,609 32% $1,375 31%
Mortgage 1,619 59 1,390 54 1,427 55 1,302 55 827 55
Consumer 309 14 321 15 379 14 759 13 497 14
------ --- ------ --- ------ --- ------ --- ------ ---
Total $3,016 100% $3,195 100% $3,623 100% $3,670 100% $2,699 100%
====== === ====== === ====== === ====== === ====== ===
</TABLE>
- ----------
(1) Represents the amount of loans in each category as a percentage of gross
loans.
Note: Unallocated reserves have been allocated proportionately to each category.
Investment Securities
Table 8 summarizes the fair value of investments available for sale and the
amortized cost of investments held to maturity at December 31, 1996, 1995 and
1994, respectively. See Note 4 of "COVENANT BANK NOTES TO FINANCIAL STATEMENTS"
for information relating to fair values.
December 31,
--------------------------------
1996 1995 1994
---- ---- ----
Investments Available For Sale
U.S. Treasury $132,578 $57,178 $16,823
======== ======= =======
Investments Held to Maturity
U.S. Treasury --- 38,091 72,795
Obligations of U.S. Government Agencies 7,209 10,596 6,745
Federal Home Loan Bank Stock 4,478 1,656 900
-------- ------- -------
Total Investments Held to Maturity $ 11,687 $50,343 $80,440
======== ======= =======
C-20
<PAGE>
Investment securities were $144.3 million at December 31, 1996, compared to
$107.5 million at December 31, 1995. The increase in investment securities
during 1996 was the result of additional purchases of US Treasury Notes
classified as "Available for Sale" which were funded with securities sold under
agreements to repurchase, FHLB advances and deposits.
In December, 1995, the Bank responded to a Special Report issued by the
Financial Accounting Standards Board by reclassifying a portion of its
investment securities from the "Held to Maturity" category to the "Available for
Sale" category. Covenant reclassified US Treasury Notes with a book value of
$45.4 million and a fair value of $46.8 million, resulting in a $0.9 million
unrealized holding gain, after related income taxes, that was credited to
stockholders' equity on the Statement of Financial Condition contained herein.
Management reclassified only those securities with scheduled maturities beyond
March 31, 1997 due to interest rate sensitivity issues.
At December 31, 1996, the fair value of investments available for sale was
$132.6 million, resulting in unrealized holding losses of $0.5 million. At
December 31, 1995, the fair value of investments available for sale was $57.2
million, resulting in unrealized holding gains of $1.8 million.
At December 31, 1996, investments held to maturity totaled $11.7 million,
compared to $50.3 million at December 31, 1995 the decline is primarily due to
maturities of $41.7 million during 1996. The fair values of these investments
were $11.8 million at December 31, 1996 and $50.6 million at December 31, 1995,
respectively.
Investments held to maturity are classified as such and are carried at
amortized cost. Securities to be held for indefinite periods of time and not
intended to be held to maturity are classified as investments available for sale
and carried at fair value.
Covenant'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 utilized 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.
C-21
<PAGE>
Table 9 sets forth Covenant's securities portfolio by contractual maturity
distribution and weighted average yield as of December 31, 1996.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years Over Ten Years No Stated Maturity Total
---------------- ----------------- ----------------- -------------- ------------------ -----
Amortized Amortized Amortized Amortized Amortized Amortized
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
--------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments Held
to Maturity:
US Treasury $ -- -- % $ -- -- % $ -- -- % $ -- -- % $ -- -- % $ -- -- %
Obligations of US
Government Agencies -- -- -- -- -- -- 7,209 6.70% $ -- -- % 7,209 6.70%
Federal Home Loan
Bank stock -- -- -- -- -- -- -- -- 4,478 6.48% 4,478 6.48%
------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------- ----
Total $ -- -- % $ -- -- % $ -- -- % $7,209 6.70% $4,478 6.48% $11,687 6.64%
====== ==== ====== ==== ====== ==== ====== ==== ====== ==== ======= ====
</TABLE>
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years Over Ten Years No Stated Maturity Total
---------------- ----------------- ----------------- ----------------- ------------------ --------------
Fair Value Yield Fair Value Yield Fair Value Yield Fair Value Yield Fair Value Yield Fair Value Yield
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities
Available
for Sale:
U.S.
Treasury $28,171 6.94% $77,198 6.30% $27,208 6.10% $ -- --% $ -- --% $132,578 6.30%
======= ==== ======= ==== ======= ==== ===== === ====== ==== ======== ====
</TABLE>
C-22
<PAGE>
Deposits
Covenant's predominant source of funds is depository accounts. Covenant's
deposit base is comprised of demand deposits, savings and money market accounts,
time deposits and individual retirement accounts (IRA's). Deposits are held by
individuals and businesses located within the southern New Jersey marketplace.
Covenant gathers deposits from a diverse customer base and accepts deposits from
local municipalities within the guidelines of the New Jersey Government Unit
Deposit Protection Act (GUDPA). Covenant has no brokered deposits.
Deposits totaled $277.5 million at December 31, 1996, compared to $262.8
million at December 31, 1995, representing a $14.7 million or 6% increase. Of
the increase in deposits, $7.5 million is attributable to increases in
non-interest demand accounts. The remainder is due to increases in
interest-bearing demand, savings and money market balances ($4.7 million) and
time deposits ($2.5 million).
Table 10 sets forth the major classifications of deposits at December 31,
1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- ------------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Rate Amount Percent Rate Amount Percent Rate Amount Percent
---- ------ ------- ---- ------ ------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits 0.00% $ 41,868 15% 0.00% $ 34,347 13% 0.00% $ 25,625 11%
Interest-bearing deposits:
Demand 2.15% 34,757 13% 2.09% 26,517 10% 1.76% 25,009 11%
Statement savings 2.40% 40,257 15% 2.64% 44,756 17% 2.44% 45,563 19%
Money market 2.92% 21,155 8% 2.80% 20,215 8% 2.43% 24,350 10%
Time deposits 5.31% 139,428 50% 5.31% 136,917 52% 4.09% 115,274 49%
---- -------- --- ---- -------- --- ---- -------- ---
Total deposits 3.56% $277,465 100% 3.67% $262,752 100% 2.89% $235,821 100%
==== ======== === ==== ======== === ==== ======== ===
</TABLE>
The aggregate amounts of certificates of deposit of $100,000 or more at
December 31, 1996, 1995 and 1994 were $37,035,000, $42,976,000 and $30,046,000,
respectively.
A summary of certificates of deposit of $100,000 or more by maturity is
shown in Table 11.
1996
----------------------
Amount Percent
------ -------
Within one year $35,798 97%
One to two years 837 2%
Two to three years 400 1%
Three to four years -- --
Four to five years -- --
Over five years -- --
------- ----
$37,035 100%
======= ====
C-23
<PAGE>
Borrowings
Sources of funds for Covenant other than deposits include FHLB advances and
securities sold under agreements to repurchase. FHLB advances were $20.5 million
at December 31, 1996 and $14.5 million at December 31, 1995. Securities sold
under agreements to repurchase totaled $84.0 million at December 31, 1996 and
$37.6 million at December 31, 1995. The increase in securities sold under
agreements to repurchase was directly related to purchases of investments
available for sale as noted in the investment section and the net increase in
loans. Table 12 summarizes information regarding securities sold under
agreements to repurchase.
<TABLE>
<CAPTION>
December 31,
------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance $84,037 $37,582 $38,795
Weighted average interest rate at December 31 5.72% 5.74% 6.29%
Maximum amount outstanding during the period 96,088 62,715 49,737
Average amount outstanding during the period 72,358 46,774 13,657
Weighted average interest rate during the period 5.30% 5.93% 5.04%
</TABLE>
Asset and Liability Management
Covenant monitors its sensitivity to interest rate changes and its
liquidity and capital position through its asset and liability management
process. Covenant's objectives include (i) controlling interest rate exposure,
(ii) ensuring adequate liquidity, (iii) maintaining a strong capital position
and (iv) maximizing net interest income opportunities. Covenant manages these
objectives centrally through its Asset Liability Management Committee (ALCO).
Interest Rate Sensitivity
Covenant seeks to manage its interest 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
(i.e., liability-sensitive position); conversely, 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 Bank'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.
C-24
<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 Covenant'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. Table 13 illustrates the gap position of Covenant
Bank as of December 31, 1996.
<TABLE>
<CAPTION>
Non-interest
Sensitive
1-90 91-180 181-365 One to Over Assets/
Days Days Days Three Years Three Years Liabilities Total
---- ---- ---- ----------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Interest earning assets
Loans $ 92,473 $ 6,162 $ 12,338 $ 36,582 $ 90,879 $ --- $238,434
Investment securities --- 7,023 21,149 64,257 51,836 --- 144,265
Federal funds sold 3,100 --- --- --- --- --- 3,100
-------- -------- --------- -------- -------- ------- --------
Total interest
earning assets 95,573 13,185 33,487 100,839 142,715 --- 385,799
Non-interest earning assets --- --- --- --- --- 28,835 28,835
-------- -------- --------- -------- -------- ------- --------
Total assets $ 95,573 $ 13,185 $ 33,487 $100,839 $142,715 $28,835 $414,634
======== ======== ======== ======== ======== ======= ========
Rate sensitive liabilities:
Interest bearing demand $ 26,068 $ --- $ --- $ 4,345 $ 4,344 $ --- $ 34,757
Statement savings 30,150 --- --- 5,058 5,049 --- 40,257
Money market 15,866 --- --- 2,645 2,644 --- 21,155
Time deposits 59,660 26,830 26,824 13,305 12,809 --- 139,428
Borrowings 95,537 1,000 --- 3,000 5,000 --- 104,537
-------- -------- -------- -------- -------- ------- --------
Total interest
bearing liabilities 227,281 27,830 26,824 28,353 29,846 --- 340,134
Non-interest bearing liabilities --- --- --- --- --- 45,249 45,249
Stockholders' equity --- --- --- --- --- 29,251 29,251
-------- -------- -------- -------- -------- ------- --------
Total liabilities and
stockholders' equity $227,281 $ 27,830 $ 26,824 $ 28,353 $ 29,846 $74,500 $414,634
======== ======== ======= ======== ======== ======= ========
Interest rate sensitivity GAP ($131,708) ($ 14,645) $ 6,663 $ 72,486 $112,869 ($45,665)
======== ======== ======= ======== ======== =======
Cumulative GAP ($131,708) ($146,353) ($139,690) ($ 67,204) $ 45,665
======== ======== ======= ======== ========
Cumulative GAP as a percentage of
total interest earning assets -34.14% -37.94% -36.21% -17.42% 11.84%
</TABLE>
The gap analysis table is intended to illustrate the maturity/repricing
characteristics of Covenant's interest-earning assets and interest-bearing
liabilities as of December 31, 1996. The analysis is based on 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 presented in Table 13 indicates a liability-sensitive
position through the one-year time period beginning December 31, 1996. During
1995 and 1996, Covenant increased its investment in US Treasury Notes with
maturities beyond one year that have been funded by growth in deposits and
short-term (three months or less) securities sold under agreements to repurchase
and FHLB advances. This transaction is primarily responsible for the
liability-sensitive position as of December 31, 1996.
C-25
<PAGE>
Covenant's net interest income has not been subject to the degree of
sensitivity indicated by this traditional gap analysis. Interest-bearing core
deposits (interest-bearing demand, statement savings and money market deposits)
have no contractual maturity; therefore, management has assigned a repricing
interval of 1-90 days for 75% of the balance outstanding of each category, with
the remaining 25% of the total core deposit balance included in the one- to
three-year category. This allocation is based on management's recent experience
regarding deposit changes and market conditions. 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 manage the Bank's gap
position, 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 Bank are met at a reasonable cost. Therefore, the management of liquidity is
coordinated with the management of Covenant's interest sensitivity and capital
position. Major sources of liquidity are core deposits, cash flow generated by
the Bank'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 $15.5 million at December 31, 1996,
representing a decrease of $7.3 million from the $22.8 million balance at
December 31, 1995. During 1996, the Bank purchased $77.9 million of US Treasury
Notes with various maturities beyond one year and classified as "Available for
Sale," and the Bank purchased $3.8 million of FHLB stock and U.S. government
agency securities classified as "Held to Maturity," offset by proceeds from
maturities of investments held to maturity of $41.6 million. In addition, a net
increase of $36.8 million in loans contributed to a net cash used in investing
activities totaling $76.6 million as shown on the Statement of Cash Flows for
1996. Covenant funded the net cash used in investing activities by a $46.5
million increase in securities sold under agreements to repurchase, a $6.0
million increase in FHLB advances and a $14.7 million increase in deposits.
Covenant places a strong emphasis on the composition of the investment
portfolio as a source of liquidity. Additional sources of liquidity are
available to Covenant through the purchase of federal funds and borrowings on
approved lines of credit. On measure of Covenant'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. Covenant's
liquidity ratio at December 31, 1996 was 23%. Overall, based on the Bank's core
deposit base, and its available sources of borrowed funds, management believes
that Covenant's liquidity position remains at an adequate level.
Capital
The maintenance of appropriate levels of capital is a management priority
and an important objective of Covenant's asset and liability management process.
Covenant's principle capital planning goals are to provide an adequate return to
stockholders, to support Covenant's growth and expansion activities, to provide
stability to current operations and to promote public confidence. At December
31, 1996, Covenant met the definition of a "well-capitalized" institution. See
Note 13 of "COVENANT BANK NOTES TO FINANCIAL STATEMENTS" (Regulatory Matters)
for additional information regarding various regulatory capital requirements.
C-26
<PAGE>
Table 14 sets forth Covenant's minimum regulatory capital requirements and
compliance therewith as of December 31, 1996 and 1995.
1996 1995
---- ----
Stockholders' equity
to total assets 7.05% 8.62%
Leverage ratio 7.51% 8.49%
Risk-based capital ratios:
Tier 1 11.98% 13.62%
Total capital 13.20% 14.87%
Income Taxes
The provision for income taxes for 1996 was $1.2 million compared to $0.7
million for 1995. The effective tax rate, which is the ratio of income tax
expense to income before income taxes, was 39% in 1996, up from 23% in 1995, due
to the non-deductible merger expenses incurred during 1996 and a smaller
reduction in the valuation allowance for deferred tax assets recorded during
1996 vs. 1995. References should be made to Note 15 of the "COVENANT BANK NOTES
TO FINANCIAL STATEMENTS" for an additional analysis of the provision for income
taxes.
At December 31, 1996, deferred tax assets amounted to $1.4 million and
deferred tax liabilities amounted to $0.3 million. Under SFAS NO. 109, a
valuation allowance is required to be provided for the deferred tax assets to
the extent it is more likely than not that they will not be realized. At
December 31, 1996 the net change in the valuation allowance for the year ended
December 31, 1996 was a decrease of $74,000. This change resulted from a
reassessment of the realizability of the existing net deductible temporary
differences which give rise to the net deferred income tax asset. Based upon the
Bank's tax history and anticipated level of future taxable income, management
believes the existing net deductible temporary differences will,
more-likely-than-not, reverse in future periods in which the Bank generates net
taxable income.
New Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Principally,
SFAS 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities based on the consistent
application of a financial components approach (for example, focus on assets and
liabilities that remain after the transfer takes place) that focuses on control.
It distinguishes transfers of financial assets that are sales from transfers
that are secured borrowings.
In addition, SFAS 125 extends the "available for sale" or "trading"
approach of SFAS 115 to all financial assets that contractually can be prepaid
or otherwise settled in such a way that the holder of the asset would not
recover substantially all of its recorded investment. Such financial assets can
no longer be classified as held to maturity.
SFAS 125 is effective for transfers of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. The
extension of SFAS 125 to all financial assets subject to prepayment risk is
effective for financial assets held on or after January 1, 1997. Management does
not believe that this statement will have a material effect on the Bank's
financial position or results of operations.
C-27
<PAGE>
Item 8 - Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Covenant Bank
We have audited the accompanying statement of financial condition of
Covenant Bank as of December 31, 1996, and the related statements of operations,
changes in stockholders' equity, and cash flows for the year then ended. We have
also audited the accompanying statement of financial condition of Covenant Bank
as of December 31, 1995, and the related statements of operations, changes in
stockholders' equity, and cash flows for the year then ended, prior to their
restatement for the 1996 pooling-of-interests transaction described in Note 2 to
the financial statements. 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. The financial statements of Covenant
Bank for the year ended December 31, 1994, prior to their restatement for the
1996 pooling-of-interests transaction described in Note 2 to the financial
statements, were audited by other auditors whose report dated January 19, 1995,
expressed an unqualified opinion on those statements. Separate financial
statements of 1st Southern State Bank also included in the 1995 and 1994
restated financial statements were audited by other auditors whose report dated
January 16, 1996, expressed an unqualified opinion on those statements. The
report of the other auditors has been furnished to us, and our opinion, insofar
as it relates to the amounts included for 1st Southern State Bank, is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Covenant Bank as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
We also audited the combination of the accompanying statement of financial
condition as of December 31, 1995 and the statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 1995 and
1994, after restatement for the 1996 pooling-of-interests; in our opinion, such
statements have been properly combined on the basis described in Note 2 of the
notes to the financial statements.
KPMG Peat Marwick, LLP
1600 Market Street
Philadelphia, PA 19103
January 27, 1997
C-28
<PAGE>
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
1st Southern State Bank:
We have audited the statement of financial condition of 1st Southern State
Bank as of December 31, 1995, and the related statements of income, changes in
stockholders' equity, and cash flows for each of the years in the two-year
period then 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.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide 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 1st Southern State Bank as
of December 31, 1995, and the results of their operations and their cash flows
for each of the years in the two-year period then ended in conformity with
generally accepted accounting principles.
Moore & Fitzpatrick, LLC
Certified Public Accountants
200 South Shore Road
Marmora, NJ 08223
January 16, 1996
C-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Covenant Bank:
We have audited the statements of operations, changes in stockholders'
equity and cash flows for the year ended December 31, 1994. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of operations, changes in
stockholders' equity and cash flows are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statements of operations, changes in stockholders' equity and
cash flows. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the statements of operations, changes in stockholders' equity
and cash flows. 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 results of its operations and its cash flows for
the year ended December 31, 1994, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 19, 1995
C-30
<PAGE>
COVENANT BANK
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
(in thousands, except share data) December 31,
- ----------------------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
Assets:
Cash and due from banks $ 12,446 $ 10,788
Federal funds sold 3,100 11,989
-------- --------
Cash and cash equivalents 15,546 22,777
-------- --------
Investments available for sale 132,578 57,178
Investments held to maturity (fair value
1996-$11,743; 1995-$50,635) 11,687 50,343
Loans held for sale -- 936
Loans receivable 241,201 204,861
Less allowance for loan losses 3,016 3,195
-------- --------
Loans receivable, net 238,185 201,666
-------- --------
Premises and equipment, net 9,135 7,749
Real estate owned 695 1,171
Accrued interest receivable 3,913 3,523
Deferred income taxes, net 1,076 427
Other assets 1,819 1,391
-------- --------
Total Assets $414,634 $347,161
======== ========
Liabilities:
Non-interest bearing deposits $ 41,868 $ 34,347
Interest bearing deposits 96,169 91,488
Time deposits 139,428 136,917
-------- --------
Total deposits 277,465 262,752
-------- --------
Advances from The Federal Home Loan Bank 20,500 14,500
Securities sold under agreements to repurchase 84,037 37,582
Other liabilities 3,381 2,418
-------- --------
Total Liabilities 385,383 317,252
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Convertible preferred stock, authorized 300,000 shares;
Series "A", $25 par value:
138,300 shares issued and outstanding 3,457 3,457
Series "B", $25 par value:
161,700 shares issued and outstanding 4,043 4,043
Common stock, $5 par value:
authorized 5,000,000 shares;
issued and outstanding 2,906,262 and
2,711,800 shares, respectively 14,531 13,559
Additional paid-in capital 10,614 9,212
Net unrealized gain (loss) on
investments available for sale,
net of deferred income taxes (305) 1,157
Accumulated deficit (3,089) (1,519)
-------- --------
Total Stockholders' Equity 29,251 29,909
-------- --------
Total Liabilities and Stockholders' Equity $414,634 $347,161
======== ========
</TABLE>
- ----------
See accompanying notes to financial statements.
C-31
<PAGE>
COVENANT BANK
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except share and per share data) Years Ended December 31,
- ----------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest Income
Interest and fees on loans $ 20,239 $ 18,754 $ 16,303
Interest on investment securities 8,493 6,673 3,267
Other interest income 366 572 618
-------- -------- --------
Total interest income 29,098 25,999 20,188
Interest Expense
Interest on deposits 9,643 9,132 6,951
Interest on borrowings 4,521 3,199 1,097
-------- -------- --------
Total interest expense 14,164 12,331 8,048
-------- -------- --------
Net interest income 14,934 13,668 12,140
Provision for loan losses 636 314 682
-------- -------- --------
Net interest income after provision for loan losses 14,298 13,354 11,458
-------- -------- --------
Non-interest Income
Service charges on deposit accounts 631 374 300
Gain on sale of investment securities -- 1 2
Gain on sale of loans -- -- 46
Loan servicing-related income 274 248 227
Other income 185 221 204
-------- -------- --------
Total other income 1,090 844 779
-------- -------- --------
Non-interest Expense
Salaries and employee benefits 6,367 6,036 5,315
Occupancy 1,610 1,403 1,323
Data processing and other service costs 681 826 847
Professional services 524 491 642
Advertising and promotion 173 208 227
Federal insurance premiums 684 387 621
Amortization of organizational costs -- 40 49
Merger costs 666 -- 809
Other expenses 1,632 1,730 1,463
-------- -------- --------
Total other expenses 12,337 11,121 11,296
-------- -------- --------
Income before income taxes 3,051 3,077 941
Income taxes (benefit) 1,201 698 (340)
-------- -------- --------
Net income 1,850 2,379 1,281
Less dividends on preferred stock 450 268 208
-------- -------- --------
Net income applicable to common stock $ 1,400 $ 2,111 $ 1,073
======== ======== ========
Earnings per share: (1) $0.45 $0.63 $0.36
======== ======= ========
Weighted average common shares outstanding,
including common stock equivalents 4,068,680 3,760,524 3,534,979
</TABLE>
- ----------
(1) Earnings per share data has been restated to reflect the common stock
dividends declared in 1996 and 1995.
See accompanying notes to financial statements.
C-32
<PAGE>
COVENANT BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(in thousands, including share data) Net Unrealized
Additional Gain (Loss),
Preferred Common Paid-in Net of Deferred Accumulated
Stock Stock Capital Income Taxes Deficit Total
----- ----- ------- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $ 3,457 $ 12,138 $ 7,553 $ 140 ($ 1,643) $ 21,645
Net income -- -- -- -- 1,281 1,281
Preferred stock dividend -- -- -- -- (208) (208)
Adjustment to unrealized gain (net of tax) -- -- -- (394) -- (394)
Common stock dividends and other (106 shares) -- 531 654 -- (1,133) 52
-------- -------- -------- -------- -------- --------
Balance at December 31, 1994 $ 3,457 $ 12,669 $ 8,207 ($ 254) ($ 1,703) $ 22,376
Net income -- -- -- -- 2,379 2,379
Issuance of preferred stock series "B" 4,043 -- (60) -- -- 3,983
Preferred stock dividend -- -- -- -- (268) (268)
Adjustment to unrealized gain (net of tax) -- -- -- 1,411 -- 1,411
Common stock dividends and other (178 shares) -- 890 1,065 -- (1,927) 28
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 $ 7,500 $ 13,559 $ 9,212 $ 1,157 ($ 1,519) $ 29,909
Net income -- -- -- -- 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
======== ======== ======== ======== ======== ========
</TABLE>
- ----------
See accompanying notes to financial statements.
C-33
<PAGE>
COVENANT BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31,
----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,850 $ 2,379 $ 1,281
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Provision for loan losses 636 314 682
Depreciation and amortization 535 575 565
Amortization of premiums and discounts, net 84 77 302
Gain on sale of investments -- (1) (2)
Loans originated for sale (951) (12,292) (2,854)
Proceeds from sales of loans held for sale 1,887 11,850 2,360
Increase (decrease) in unearned discounts and loan fees, net (308) (123) 129
Increase in accrued interest receivable
and other assets (1,467) (835) (1,921)
Increase in other liabilities 963 688 35
-------- -------- --------
Net cash provided by operating activities 3,229 2,632 577
Cash flows from investing activities:
(Increase) decrease in other short-term investments -- -- 6,990
Purchases of investments held to maturity (3,822) (8,297) (65,654)
Purchases of investments available for sale (77,304) (27,926) --
Proceeds from maturities of investments held to maturity 39,894 9,399 10,245
Proceeds from maturities of investments available for sale 1,250 14,100 1,000
Proceeds from sales of investments available for sale -- 2,843 2,010
Principal collected on mortgage backed securities 834 714 1,017
Net increase in loans (36,832) (13,261) (11,123)
Proceeds from sales of real estate owned 1,319 333 303
Purchases of premises and equipment (1,921) (1,636) (1,213)
-------- -------- --------
Net cash used in investing activities (76,582) (23,731) (56,425)
Cash flows from financing activities:
Net increase (decrease) in deposits 14,713 26,931 (8,195)
Net increase (decrease) in securities sold
under agreements to repurchase 46,455 (1,213) 38,795
Net increase (decrease) in advances from the
Federal Home Loan Bank 6,000 (3,500) 11,000
Preferred stock dividends paid (450) (268) (208)
Net proceeds from issuance of preferred stock -- 3,983
Common stock dividends and other (596) 52
-------- -------- --------
Net cash provided by financing activities 66,122 25,933 41,444
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (7,231) 4,834 (14,404)
Cash and cash equivalents at the beginning of the year 22,777 17,943 32,347
-------- -------- --------
Cash and cash equivalents at the end of the year $ 15,546 $ 22,777 $ 17,943
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 14,062 $ 12,220 $ 7,733
Cash paid during the period for income taxes 768 917 250
Noncash investing and financing activities:
Fair value of investments transferred from
Held To Maturity to Available For Sale 1,750(1) 46,881 --
Net transfers to real estate owned from loans receivable 843 789 141
Preferred stock dividends declared not paid -- 113 52
Net change in unrealized gain (loss) on
investments available for sale ($ 2,320) $ 2,091 ($ 467)
</TABLE>
- ----------
(1) Transfer of securities at September 27, 1996 in conjunction with the merger
of 1st Southern State Bank into Covenant Bank.
See accompanying notes to financial statements
C-34
<PAGE>
COVENANT BANK
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Covenant Bank ("Covenant" or "the Bank") is a bank organized under the laws
of the state of New Jersey. Covenant's market focus is southern New Jersey.
Covenant offers a broad range of lending, depository and related financial
services to individual customers, businesses and governmental units. Covenant is
a member of the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC"). Since commencing operations in 1988, Covenant has grown to
$415 million in assets and operates fifteen personal financial centers
throughout the southern New Jersey marketplace as of December 31, 1996. Through
December 31, 1996, Covenant Bank ("Covenant" or "the Bank") was a
state-chartered savings bank incorporated under the laws of the State of New
Jersey. Effective January 1, 1997, Covenant Bank converted its charter to a
state-chartered commercial bank.
The following is a description of the significant accounting policies of
Covenant. Such accounting policies are in accordance with generally accepted
accounting principles and have been applied on a consistent basis. Tabular
information is presented in thousands of dollars, except for share and per share
data.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and certain
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and amounts due from banks, interest-bearing deposits with an original
maturity of 90 days or less, and federal funds sold. Generally, federal funds
sold are repurchased the following day.
Investment Securities
Investments held to maturity are carried at cost, adjusted for amortization
of premiums and accretion of discounts, since management intends to hold these
securities until maturity. Investment securities to be held for indefinite
periods of time and not intended to be held to maturity are classified as
investments available for sale and carried at fair value, with a corresponding
adjustment for the related unrealized appreciation/(depreciation), net of taxes,
to stockholders' equity. Gains or losses on the sale of investments available
for sale are recognized using the specific identification method.
Loans Held for Sale
In 1996, Covenant discontinued a program of origination and sale of
residential mortgage loans (without recourse) to the secondary market. Prior to
the discontinuance of the program, loans held for sale were reported at the
lower of their aggregate cost or fair value.
Loans
Loan origination fees and certain direct loan origination costs are
deferred and amortized as adjustments of the loans' yields on a level yield
basis. Net loan fees are amortized over the contractual lives of the related
loans.
Interest income is recorded on the accrual basis. Loans are reported as
non-accrual if they are past due as to principal or interest payments for a
period of ninety days or more. Exceptions may be made if a loan is deemed by
management to be adequately collateralized and in the process of collection.
Loans that are on a current payment status may also be classified as non-accrual
if there is serious doubt as to the borrower's ability to continue interest or
principal payments. When a loan is placed in the non-accrual category, interest
accruals cease and uncollected accrued interest receivable is reversed and
charged against current interest income. Non-accrual loans are generally not
returned to accruing status until principal and interest payments have been
brought current and full collectibility is reasonably assured.
C-35
<PAGE>
Servicing loans for others generally consists of collecting mortgage
payments of principal and interest, the maintenance of escrow accounts for
payment of taxes and insurance, disbursing payments to investors and the
collection of delinquent payments. Mortgage loans serviced for others are not
included in the accompanying Statements of Financial Condition. Fees earned by
servicing loans for others are reported as income when the related loan payments
are collected. Loan servicing costs are charged to expense as incurred.
Allowance for Loan Losses
The allowance for loan losses is based on periodic evaluations of the loan
portfolio and reflects an amount that in management's opinion is adequate to
absorb known and inherent losses in the portfolio. Management considers a
variety of factors when establishing the allowance, including the impact of
current economic conditions, diversification of the loan portfolio, historical
loss experience, delinquency statistics, results of loan reviews, borrowers'
perceived financial and managerial strengths, the estimated adequacy of
underlying collateral and other relevant factors.
Actual loan losses are charged directly against the allowance and
recoveries on previously charged-off loans are added to the allowance. The
provision for loan losses is charged to operating expense. While management uses
available information to recognize losses on loans, future modifications to the
allowance for loan losses may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance for
loan losses based on their judgements of information which is available to them
at the time of their examinations. Recovery of the carrying value of such loans
and real estate is dependent, to a great extent, on general economic and other
conditions that may be beyond the Bank's control.
The measurement of impaired loans is generally based on the present value
of expected future cash flows discounted at the historical effective interest
rate, except that all collateral-dependent loans are measured for impairment
based on the fair value of the collateral. Covenant considers a loan impaired,
based on current information and events, if it is probable that the Bank will be
unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Generally all
non-accrual loans are considered to be impaired. Large groups of
smaller-balance, homogeneous loans such as residential mortgage and consumer
loans that are collectively evaluated for impairment are not included in the
impaired loans category. All cash received on both impaired loans and
non-accrual loans are applied against principal.
Premises and Equipment
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight line method over
the estimated useful lives of the assets, which range from 3 to 40 years.
Leasehold improvements are amortized over the shorter of the lease term or the
life of the improvement. Expenditures for maintenance and repairs are expensed
as incurred.
Real Estate Owned
Real estate owned (REO) consists of real estate acquired in partial or full
satisfaction of loans. Prior to transferring a real estate loan to REO, it is
written down to the lower of cost or fair value through a charge to the
allowance for loan losses. Subsequently, REO is carried at the lower of fair
value less estimated costs to sell or carrying value.
Income Taxes
Deferred tax assets and liabilities are recognized for the future
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as well as operating loss and tax credit carryforwards. Deferred tax
assets are recognized for future deductible temporary differences and tax loss
and credit carryforwards if their realization is "more likely than not."
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
C-36
<PAGE>
Income Per Common Share and Common Stock Equivalents
Both series of preferred stock and all stock options are considered to be
common stock equivalents. The number of common stock equivalents is based upon
the if-converted method for both series of preferred stock and the treasury
stock method for stock options. Primary earnings per share is the lower of (i)
net income less preferred stock dividends, divided by the weighted average
number of common shares outstanding plus dilutive stock options or (ii) net
income divided by the weighted average number of common shares outstanding plus
the effect of convertible non-cumulative preferred stock and dilutive stock
options. Fully diluted net income per common share and common stock equivalents
is not materially different from primary net income per share for any of the
periods presented. Earnings per share has been restated to reflect all stock
dividends.
Reclassification
Prior period amounts are reclassified when necessary to conform with the
current year's presentation.
2. Merger
On September 27, 1996, 1st Southern State Bank ("1st Southern")
headquartered in Avalon, NJ, was merged with and into Covenant Bank. Covenant
issued 778,061 shares of common stock and $1,363 cash in lieu of fractional
shares for all the outstanding shares of 1st Southern common stock. In
conjunction with the merger, Covenant recorded one-time merger costs of
$666,000. The merger qualified as a tax-free reorganization and was accounted
for as a pooling of interests. Accordingly, Covenant's financial statements have
been restated to include the results of 1st Southern for all periods presented.
The following is a reconciliation of amounts previously reported with amounts
reflected herein.
<TABLE>
<CAPTION>
For The Year Ended December 31, 1995
Covenant Bank
as previously 1st Southern Covenant Bank
stated State Bank as restated
------ ---------- -----------
<S> <C> <C> <C>
Net Interest Income $ 11,848 $ 1,820 $ 13,668
Provision for Possible Loan Losses 225 89 314
Other Income 764 80 844
Other Expenses 9,645 1,476 11,121
-------- -------- --------
Income Before Income Taxes 2,742 335 3,077
Provision for Income Taxes 654 44 698
-------- -------- --------
Net Income $ 2,088 $ 291 $ 2,379
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
For The Year Ended December 31, 1994
Covenant Bank
as previously 1st Southern Covenant Bank
stated State Bank as restated
------ ---------- -----------
<S> <C> <C> <C>
Net Interest Income $ 10,617 $ 1,523 $ 12,140
Provision for Possible Loan Losses 670 12 682
Other Income 720 59 779
Other Expenses 9,943 1,353 11,296
-------- -------- --------
Income Before Income Taxes 724 217 941
Provision for Income Tax Expense (Benefit) (390) 50 (340)
-------- -------- --------
Net Income $ 1,114 $ 167 $ 1,281
======== ======== ========
</TABLE>
In September 1994, Covenant acquired all of the outstanding common shares
of Landis Savings Bank, S.L.A. of Vineland, New Jersey. The acquisition was
accounted for by a pooling of interests and resulted in the issuance of 429,747
shares of common stock and $2,071 cash in lieu of fractional shares.
Accordingly, Covenant's financial statements have been restated to include the
results of the Landis merger for all prior periods.
C-37
<PAGE>
3. Cash and Due from Banks
Covenant is required to maintain certain average reserve balances as
established by the Federal Reserve Board. The amounts of those balances for the
reserve computation periods which included December 31, 1996 and 1995 were $1.9
million and $1.4 million, respectively. These requirements were satisfied
through the restriction of vault cash and a balance at the Federal Reserve Bank
of Philadelphia.
4. Investment Securities
The amortized cost and estimated fair value of investments held to maturity
and investments available for sale as of December 31, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
Investments Held to Maturity:
U.S. Treasury $ --- $ --- $ --- $ ---
Obligations of U.S. Government Agencies 7,209 56 --- 7,265
Federal Home Loan Bank Stock 4,478 --- --- 4,478
-------- ------- ------ --------
Total $ 11,687 $ 56 $ --- $ 11,743
======== ======= ====== ========
Investments Available for Sale:
U.S. Treasury $133,061 $ --- $ 483 $132,578
======== ======= ====== ========
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
Investments Held to Maturity:
U.S. Treasury $38,091 $ 204 $ --- $38,295
Obligations of U.S. Government Agencies 10,596 98 10 10,684
Federal Home Loan Bank Stock 1,656 --- --- 1,656
------- ------ ------- -------
Total $50,343 $ 302 $ 10 $50,635
======= ====== ======= =======
Investments Available for Sale:
U.S. Treasury $55,341 $1,837 $ --- $57,178
======= ====== ======= =======
</TABLE>
The amortized cost and estimated fair value of investments held to maturity
and investments available for sale at December 31, 1996, by contractual maturity
are shown in the following table. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
C-38
<PAGE>
Obligations of US Government Agencies are shown separately due to the
amortization and prepayment of principal occurring throughout the life of these
instruments.
<TABLE>
<CAPTION>
Investments Investments
Held to Maturity Available for Sale
------------------ --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ --- $ --- $ 27,969 $ 28,172
Due after one year through five years --- --- 76,889 77,198
Due after five years through ten years --- --- 28,203 27,208
No stated maturity 4,478 4,478 --- ---
Obligations of U.S. Government Agencies 7,209 7,265 --- ---
------- ------- -------- --------
$11,687 $11,743 $133,061 $132,578
======= ======= ======== ========
</TABLE>
There were no sales of investments available for sale during 1996.
Proceeds from sales of investments available for sale during 1995 were $2.8
million, and gross realized gains of $1,000 were realized on these sales.
Proceeds from sales of investments available for sale during 1994 were $2.0
million, and gross realized gains of $2,000 were realized on these sales.
There were no sales of investments held to maturity during 1996, 1995 and
1994.
Investments held to maturity and investments available for sale with
amortized costs aggregating $69.8 million and $50.8 million at December 31, 1996
and 1995, respectively, are pledged as collateral for securities sold under
agreements to repurchase and public deposits.
The FASB issued a Special Report stating that effective November 15, 1995
until December 31, 1995, banks could redesignate some or all of current "Held to
Maturity" portfolios to an "Available for Sale" classification without the
intent to hold other securities to maturity being questioned. On December 22,
1995, Covenant reclassified US Treasury Notes categorized as "Held to Maturity"
to "Available for Sale" with an amortized cost of $45.4 million. This
reclassification resulted in the recording of an unrealized gain of $1.4 million
on those US Treasury Notes. Management reclassified only those securities in the
"Held to Maturity" portfolio with scheduled maturities beyond March 31, 1997.
5. Loans
Loans at December 31, 1996 and 1995 consist of the following:
1996 1995
---- ----
Commercial and financial $ 65,351 $ 62,517
Real estate - construction 7,075 3,346
Mortgage - residential 50,744 42,415
Mortgage - commercial 84,520 67,983
Consumer (including home equity
lines of credit) 33,760 29,157
--------- ---------
Subtotal 241,450 205,418
Unearned discounts and deferred loan fees (249) (557)
Allowance for loan losses (3,016) (3,195)
--------- ---------
Loans receivable, net $ 238,185 $ 201,666
========= =========
Non-accruing loans at December 31, 1996 and 1995 totaled $2,866,000 and
$3,844,000, respectively. Interest income recognized on non-accruing loans
totaled $89,000 in 1996, $28,000 in 1995, and $195,000 in 1994. Had interest
income on year-end non-accrual loans been paid at the contracted rates and due
dates, Covenant would have
C-39
<PAGE>
recorded additional interest income in 1996, 1995 and 1994 of $273,000,
$508,000, and $464,000, respectively. Restructured loans at December 31, 1994
totaled $595,000. Had interest income on restructured loans been paid in
accordance with contracted rates, Covenant would have recorded additional
interest income of $4,000 in 1994. There were no restructured loans at December
31, 1996, consequently, no interest income on restructured loans was recognized.
Under New Jersey Banking statutes, Covenant is subject to a
loans-to-one-borrower limitation of 15% of capital funds. At December 31, 1996,
Covenant's loans-to-one-borrower limitation was $4,885,800; this excludes an
additional 10% of adjusted capital funds or $3,257,200, which may be loaned if
collateralized by readily marketable securities, as defined in the regulations.
At December 31, 1996, there are no loans to any borrower which individually or
in the aggregate exceed that limit. The majority of Covenant's loans are located
within the southern New Jersey marketplace, which is its only significant
geographic concentration. Credit exposure to customers with credit extensions
(on and off-balance sheet) collateralized at least in part by commercial real
estate was $81.2 million or 29.1% and $80.3 million or 34.0% of total credit
extensions at December 31, 1996 and 1995, respectively. No other concentration
of credit risk exceeds 10% of total credit extensions at year-end.
The total amount of loans serviced for the benefit of others was $14.4
million and $16.0 million at December 31, 1995 and 1994, respectively. The total
amount of loan servicing fees received from investors was approximately $75,000,
$94,000, and $115,000 during 1996, 1995, and 1994 respectively.
Loans to directors and executive officers including loans to related
parties and entities were $7,194,000 and 5,868,000 December 31, 1996 and 1995,
respectively. These loans were made in the ordinary course of business at
substantially the same terms and conditions as those with other borrowers.
During 1996, there were increases of approximately $1,493,000 and loan
repayments of approximately $167,000 on such loans.
Covenant engaged in certain legal, rental and consulting services with
other entities which are affiliated with Directors of the Bank. Such aggregate
services amounted to $369,000, $469,000, and $628,000, in 1996, 1995, and 1994,
respectively. In management's opinion, the terms of such services were
substantially equivalent to those which would have been obtained from
unaffiliated parties.
As of December 31, 1996 and December 31, 1995, the Bank had impaired loans
totaling approximately $1,734,000 and $2,947,000, respectively. The allowance
for loan losses on impaired loans had a valuation allowance of $199,000 and
$440,000 at December 31, 1996 and 1995, respectively. The average balance of
impaired loans totaled $1,684,000 for 1996 and $2,655,000 for 1995. Interest
income not accrued for impaired loans for the years ended December 31, 1996 and
1995 was approximately $164,000 and $275,000, respectively.
An analysis of the changes in the allowance for loan losses for the years
ended December 31, 1996, 1995 and 1994 is as follows:
December 31,
------------
1996 1995 1994
---- ---- ----
Balance at January 1 $ 3,195 $ 3,623 $ 3,670
Provision for loan losses 636 314 682
Charge-offs: (990) (1,003) (1,061)
Recoveries 175 261 332
------- ------- -------
Net charge-offs (815) (742) (729)
------- ------- -------
Balance at end of period $ 3,016 $ 3,195 $ 3,623
======= ======= =======
C-40
<PAGE>
6. Premises and Equipment
Premises and equipment at December 31, 1996 and 1995 consisted of the
following:
1996 1995
---- ----
Land $ 1,886 $ 1,574
Buildings 6,860 5,896
Leasehold improvements 713 646
Equipment and furniture 3,683 3,153
-------- --------
13,142 11,269
Accumulated depreciation
and amortization (4,007) (3,520)
-------- --------
$ 9,135 $ 7,749
======== ========
Depreciation and amortization expenses for 1996, 1995 and 1994 were
$535,000, $536,000 and $517,000, respectively.
7. Accrued Interest Receivable
Accrued interest receivable at December 31, 1996 and 1995 consisted of the
following:
1996 1995
---- ----
Investment securities $2,356 $1,969
Loans receivable 1,486 1,523
Obligations of U.S. Government Agencies 71 31
------ ------
$3,913 $3,523
====== ======
8. Deposits
Interest expense on deposits for the years ended December 31, 1996, 1995
and 1994 is summarized as follows:
1996 1995 1994
---- ---- ----
Interest-bearing demand $ 592 $ 518 $ 416
Statement savings 1,038 1,132 1,269
Money market 639 630 681
Time deposits 7,374 6,852 4,585
------ ------ ------
$9,643 $9,132 $6,951
====== ====== ======
C-41
<PAGE>
Table 23 sets forth the major classifications of deposits at December 31,
1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------- ------------------------------ ------------------------------
Weighted Weighted Weighted
Average Average Average
Rate Amount Percent Rate Amount Percent Rate Amount Percent
---- ------ ------- ---- ------ ------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits 0.00% $ 41,868 15% 0.00% $ 34,347 13% 0.00% $ 25,625 11%
Interest-bearing deposits:
Demand 2.15% 34,757 13% 2.09% 26,517 10% 1.76% 25,009 11%
Statement savings 2.40% 40,257 15% 2.64% 44,756 17% 2.44% 45,563 19%
Money market 2.92% 21,155 8% 2.80% 20,215 8% 2.43% 24,350 10%
Time deposits 5.31% 139,428 50% 5.31% 136,917 52% 4.09% 115,274 49%
-------- --- -------- --- -------- ---
Total deposits 3.56% $277,465 100% 3.67% $262,752 100% 2.89% $235,821 100%
==== ======== === ==== ======== === ==== ======== ===
</TABLE>
The aggregate amounts of certificates of deposit of $100,000 or more at
December 31, 1996, 1995 and 1994 were $37,035,000, $42,976,000 and $30,046,000,
respectively.
A summary of certificates of deposit of $100,000 or more by maturity is
shown in Table 24.
1996
---------------------
Amount Percent
------ -------
Within one year $35,798 97%
One to two years 837 2%
Two to three years 400 1%
Three to four years -- --
Four to five years -- --
Over five years -- --
------- -----
$37,035 100%
======= =====
9. Advances from the Federal Home Loan Bank
At December 31, 1996, Covenant had advances from the Federal Home Loan Bank
of New York (FHLB) in the amount of $20.5 million with a weighted average
interest rate of 6.50%. The advances are scheduled to mature as follows:
Amount Maturity
------ --------
$12,500 1997
3,000 1998
5,000 2000
-------
$20,500
=======
At December 31, 1996, Covenant had an unused credit line with the FHLB of
$6.2 million. At December 31, 1995, Covenant had $14.5 million in advances from
the FHLB with a weighted average interest rate of 5.38%. Advances are
collateralized by FHLB stock and residential mortgage loans. Interest expense
incurred on Federal Home Loan Bank advances for 1996, 1995 and 1994 was
$623,000, $421,000, and $404,000, respectively.
C-42
<PAGE>
10. Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase range in maturity from one
day to three months. Securities underlying these repurchase agreements consisted
of US Treasury securities which had a carrying value of $84.6 million and $36.9
million at December 31, 1996 and 1995, respectively, and a market value of $84.0
million, $37.6 million and $38.8 million at December 31, 1996, 1995, and 1994,
respectively.
The securities collateralizing the securities sold under agreements to
repurchase have one- to three-year maturities and are held by three
broker/dealers. In certain instances, the broker may sell, loan, or dispose of
the securities to other parties in the normal course of their operations, and
have agreed to sell to Covenant substantially similar securities at the maturity
of the existing agreements. The following table summarizes information regarding
securities sold under repurchase agreements.
<TABLE>
<CAPTION>
December 31,
------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance $84,037 $37,582 $38,795
Weighted average interest rate at December 31 5.72% 5.74% 6.29%
Maximum amount outstanding during the period 96,088 62,715 49,737
Average amount outstanding during the period 72,358 46,774 13,657
Weighted average interest rate during the period 5.30% 5.93% 5.04%
</TABLE>
11. Commitments and Contingencies
Covenant is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financial needs of its customers. The
contract amounts of these instruments reflect the extent of involvement Covenant
has in particular classes of financial instruments and are not included in the
financial statements as of December 31, 1996. Covenant's involvement in such
financial instruments at December 31, 1996 and 1995 is summarized as follows:
Contract Amount
----------------
1996 1995
---- ----
Amounts representing credit risk:
Commitments to extend credit $36,732 $29,094
Standby letters of credit 1,313 2,163
Covenant uses the same credit policies in extending commitments and standby
letters of credit as it does for financial instruments recorded in the statement
of financial condition. Covenant controls its exposure to loss from these
agreements through credit approval processes and monitoring procedures.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The total commitment amounts do not
necessarily represent future cash disbursements, as many of the commitments
expire without being drawn upon. Covenant may require collateral in extending
commitments, which may include cash, accounts receivable, investment securities,
real or personal property, or other assets.
Covenant is subject to certain legal actions and proceedings arising in the
normal course of business. Management, after consultation with legal counsel,
does not anticipate any liability will have a material adverse effect on
Covenant's financial statements.
C-43
<PAGE>
12. Operating Leases
At December 31, 1996, Covenant was obligated under non-cancelable operating
leases, which generally include options to renew, for certain premises and
equipment. Future minimum rental payments under these leases for the years 1997
through 2001 are as follows:
1997 $ 400
1998 305
1999 305
2000 105
2001 59
------
Total $1,174
======
Total rent expense for all leases for the years ended December 31, 1996,
1995, and 1994 were $372,000, $310,000, and $225,000, respectively.
13. Regulatory Matters
Covenant Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios set forth in the
following table. As of December 31, 1996, the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Bank as well-capitalized under the regulatory framework for
prompt corrective action. To be categorized as well-capitalized under the
regulatory framework for prompt corrective action, the Bank must maintain
minimum ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
C-44
<PAGE>
The Bank's actual capital amounts and ratios are presented in the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purpose Action Provisions
------ ---------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted Assets) $32,572 13.20% $19,739 8.00% $24,674 10.00%
Tier I Captial (to Risk Weighted Assets) $29,556 11.98% $ 9,870 4.00% $14,804 6.00%
Tier I Capital (to Average Assets) $29,556 7.51% $15,752 4.00% $19,690 5.00%
As of December 31, 1995:
Total Capital (to Risk Weighted Assets) $31,398 14.87% $16,892 8.00% $21,115 10.00%
Tier I Capital (to Risk Weighted Assets) $28,752 13.62% $ 8,446 4.00% $12,669 6.00%
Tier I Capital (to Average Assets) $28,752 8.49% $13,549 4.00% $16,936 5.00%
</TABLE>
Under New Jersey Banking Statutes, Covenant may not declare a cash dividend
or a stock dividend unless, following the payment of the dividend, the capital
stock of the Bank will be unimpaired and the Bank will have a surplus amounting
to at least 50% of its capital stock or, if not, the payment of the dividend
will not reduce the surplus of the Bank. To date, Covenant has not paid a cash
dividend on its common stock.
14. Capital Stock
On June 30, 1995, Covenant issued 161,700 shares of Series B 6% convertible
non-cumulative preferred stock ("Series B"). At that time, the 138,300 shares of
6% convertible non-cumulative preferred stock issued on December 31, 1992, were
renamed to Series A 6% convertible non-cumulative preferred stock ("Series A").
Holders of both series of Covenant's 6% convertible non-cumulative
preferred stock (par value $25 per share) are senior to Covenant's common stock
and are entitled to receive, when and as declared by the Board of Directors,
preferred dividends at the annual rate of 6% of par value, or $1.50 per share
annually. Such dividends are not cumulative. In 1996, the Board of Directors
declared preferred stock dividends amounting to $450,000, $268,000 in 1995, and
$207,450 in 1994. The Series A preferred stock will be automatically converted
into common stock on December 31, 1997 at the rate of 3.823 shares of common
stock for each share of Series A preferred stock. The Series B preferred stock
will be automatically converted into common stock on June 30, 2000 at the rate
of 3.026 shares of common stock for each share of Series B preferred stock. The
preferred stock has no voting rights, except as may be otherwise required by
law.
On June 15, 1996, Covenant issued a 4% stock dividend on its common stock
to shareholders of record on May 31, 1996, resulting in the issuance of 75,171
additional common shares and cash paid in lieu of fractional shares of $3,881.
On December 16, 1996, Covenant issued a 6% stock dividend on its common stock to
shareholders of record on December 2, 1996, resulting in the issuance of 164,113
additional common shares and cash paid in lieu of fractional shares of $5,174.
C-45
<PAGE>
On June 15, 1995, Covenant issued a 4% stock dividend on its common stock
to shareholders of record on May 31, 1995, resulting in the issuance of 67,813
additional common shares and cash paid in lieu of fractional shares of $2,959.
On December 15, 1995, Covenant issued a 6% stock dividend on its common stock to
shareholders of record on November 30, 1995, resulting in the issuance of
106,111 additional common shares and cash paid in lieu of fractional shares of
$3,639.
15. Income Taxes
Income tax expense (benefit) for the years ended December 31, 1996, 1995
and 1994 is comprised as shown in Table 30:
December 31,
------------
1996 1995 1994
---- ---- ----
Current:
Federal $ 914 $ 556 $ 227
State 77 103 55
------ ------ ------
$ 991 $ 659 $ 282
------ ------ ------
Deferred:
Federal 188 6 (514)
State 22 33 (108)
------ ------ ------
210 39 (622)
------ ------ ------
Total tax expense (benefit) $1,201 $ 698 ($ 340)
====== ====== ======
The Bank's provision (benefit) for income taxes differs from that computed
by applying federal income tax rate to income before income taxes as shown in
Table 31:
1996 1995 1994
---- ---- ----
Computed "expected" tax expense $ 1,037 $ 1,047 $ 320
State tax expense, net of
federal benefit 72 90 11
Decrease in valuation allowance
for deferred tax assets (74) (333) (918)
Non-deductible merger expenses 155 -- 208
Alternative minimum tax credits -- (75) --
Other, net 11 (31) 39
------- ------- -------
Income tax expense (benefit) $ 1,201 $ 698 ($ 340)
======= ======= =======
Under SFAS No. 109, a valuation allowance is required to be provided for
the deferred tax assets to the extent it is more likely than not that they will
not be realized. The net change in the valuation allowance for the year ended
December 31, 1996 was a decrease of $74,000. This change resulted from a
reassessment of the realizability of the existing net deductible temporary
differences which give rise to the net deferred income tax asset. Based upon the
Bank's tax history and anticipated level of future taxable income, management
believes the existing net deductible temporary differences will,
more-likely-than-not, reverse in future periods in which the Bank generates net
taxable income.
The Small Business Job Protection Act of 1996, enacted on August 20, 1996,
provides for the repeal of the tax bad debt deduction computed under the
percentage of taxable income method. The repeal of the use of this method is
effective for tax years beginning after December 31, 1995. Prior to the change
in law, Covenant had qualified under the provisions of the Internal Revenue Code
which permitted it to deduct from taxable income an allowance for bad debts
based on 8% of taxable income.
C-46
<PAGE>
Upon repeal, Covenant is required to recapture into income, over a six-year
period, the portion of its tax bad debt reserves that exceed its base year
reserves (i.e., tax reserves for tax years beginning before 1988). The base year
tax reserves, which may be subject to recapture if Covenant ceases to qualify as
a bank for federal income tax purposes, are restricted with respect to certain
distributions. Covenant's total tax bad debt reserves at December 31, 1996, are
approximately $2.5 million, of which $2.0 million represents the base year
amount and $500,000 is subject to recapture. Covenant has previously recorded a
deferred tax liability for the amount to be recaptured; therefore, this
recapture will not impact the statement of operations.
December 31,
------------
1996 1995
---- ----
Deferred Income Tax Assets:
Allowance for loan losses $ 944 $ 1,054
Deferred loan fees, net 67 213
Real estate owned allowance 181 249
Amortization of organization costs -- 70
Net operating loss carryovers -- 23
Unrealized loss on investments avaliable for sale 179 --
Other 11 5
------- -------
Gross deferred tax assets 1,382 1,614
Valuation allowance -- (74)
------- -------
Deferred tax assets $ 1,382 $ 1,540
------- -------
Deferred Income Tax Liabilities:
Premium on acquired assets $ 60 $ 217
Unrealized gain on investments available for sale -- 680
Depreciation 221 165
Prepaid expenses 14 41
Other 11 10
------- -------
Gross deferred tax liabilities 306 1,113
------- -------
Net deferred tax assets $ 1,076 $ 427
======= =======
16. Employee Benefit Plans
At December 31, 1996, Covenant had three stock-based compensation plans and
a 401(k) retirement plan, which are described below. Covenant applies APB
Opinion No. 25 and related interpretations in accounting for its plans.
Accordingly, no compensation expense has been recognized for the stock option
plans or the employee stock purchase plan. Had compensation cost for Covenant's
stock-based compensation plans been determined in accordance with the fair value
method of Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation," Covenant's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:
(In thousands, except per share data)
1996 1995
---- ----
Net income:
As reported $1,850 $2,379
Pro forma $1,019 $2,155
Primary earnings per share:
As reported $0.45 $0.63
Pro forma $0.19 $0.57
C-47
<PAGE>
Incentive Stock Option Plan.
Covenant maintains an incentive stock option plan pursuant to which an
aggregate of 313,281 shares of common stock has been authorized for issuance to
certain officers and key employees of Covenant upon exercise of stock options.
During 1996, there were 1,590 options granted under the plan which are
exercisable at a price equal to the fair market value of the common stock on the
date of grant and expire not more than ten years after the date of grant. Rights
to exercise options become vested according to schedules set forth in individual
agreements with participants.
Under Covenant's stock option plan, the exercisable option prices range
from $7.32 to $12.12 per share at December 31, 1996, which have been adjusted
for all stock dividends issued on common stock to date.
The fair value of each option granted under the Incentive Stock Option Plan
was estimated using the Black-Scholes option-pricing model with the following
assumptions for 1996 and 1995: assuming no cash dividends; an expected life of
ten years; expected volatility of 15.3%; and risk free interest rates of 6.3%
for 1996 grants, 7.59% and 6.63% for the two 1995 grants. The fair value of
those options granted in 1996 and 1995 were $5.85 and $4.21 per share,
respectively.
An analysis of the activity under the plan during the years 1996, 1995 and
1994 is as follows:
Weighted
Average
Shares Exercise Price
------ --------------
Balance, December 31, 1993 298,703 $ 7.46
-------
Granted 82,973 $ 9.32
Exercised (6,367) $ 9.12
Terminated (55,422) $ 9.65
-------
Balance, December 31, 1994 319,887 $ 7.53
-------
Granted 180,551 $ 7.80
Exercised (138) $ 9.47
Terminated (88,222) $ 9.27
-------
Balance, December 31, 1995 412,078 $ 7.74
-------
Granted 1,590 $12.12
Exercised (797) $ 8.72
Terminated (665) $ 8.77
-------
Balance, December 31, 1996 412,206 $ 7.76
=======
Two exercises of stock options totalling 797 shares of Covenant common
stock were executed as follows: 570 shares for an average price of $8.79 per
share on May 30, 1996, and, 227 shares for an average price of $8.53 per share
on July 31, 1996.
C-48
<PAGE>
Stock Option Plan for Employees and Non-Employee Directors.
An aggregate of 148,400 shares have been authorized for issuance to
employees and non-employee directors of Covenant Bank. As provided in the Stock
Option Plan for Employees and Non-Employee Directors (the "Plan"), a
non-discretionary option to purchase 10,600 shares of Covenant common stock was
granted to each non-employee director during 1996. In addition, the Plan
outlines that each non-employee director is also eligible to receive a
non-discretionary option to purchase 2,650 shares each year following Covenant's
annual meeting for as long as such individual is a non-employee director of the
Bank, provided such shares are available. During 1996, there were 140,450
options granted under the Plan which are exercisable at a price equal to the
fair market value of the common stock on the date of grant and expire not more
than ten years after the date of grant. Rights to exercise options become vested
on a one-third per year basis, with one-third being immediately vested.
Under the Plan, the exercisable option prices range from $12.12 to $12.15
per share at December 31, 1996, which have been adjusted for all stock dividends
issued on Covenant common stock to date.
The fair value of each option granted under the Plan was estimated using
the Black-Scholes option-pricing model with the following assumptions for 1996:
assuming no cash dividends; an expected life of ten years; expected volatility
of 15.3%; and a risk free interest rate of 6.3%. The fair value of those options
granted in 1996 was $5.85 per share.
An analysis of the activity under the Plan during the year 1996 is as
follows:
Weighted
Average
Shares Exercise Price
------ --------------
Balance, December 31, 1995 -- $ --
Granted 140,450 12.13
Exercised -- --
Terminated -- --
------- ------
Balance, December 31, 1996 140,450 $12.13
======= ======
401(k) Retirement Plan.
Covenant maintains a qualified 401(k) plan which allows employees to
participate after satisfaction of service requirements. This contributory
savings plan provides for an employee salary reduction feature pursuant to
Section 401(k) of the Internal Revenue Code. Employee contributions are
voluntary, and the employee can elect to defer up to 10% of his/her
compensation. Covenant provides a 25% matching contribution on up to 6% of the
employee's compensation, for a total matching contribution of 1.5%. The total of
Covenant's contribution to the 401(k) plan, which is subject to a vesting
schedule pursuant to the Plan, amounted to approximately $40,700 for the year
ended December 31, 1996.
Employee Stock Purchase Plan.
Covenant maintains an Employee Stock Purchase Plan, whereby eligible
employees may purchase Covenant common stock directly from the Bank. Purchases
of common stock are limited to 10% of a participant's compensation. Since 1994,
participants have purchased Covenant common stock at a price equal to 85% of the
fair value of Covenant's common stock at the lower of either the market price on
the first day of the six-month participation period or the last day of that
participation period.
C-49
<PAGE>
17. Fair Value of Financial Instruments
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments" (FAS 107), requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates may not be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. FAS 107 excludes certain financial
instruments and all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Bank.
Table 36 represents the carrying value and fair value of Covenant's
financial instruments at December 31, 1996:
<TABLE>
<CAPTION>
1996 1995
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 15,546 $ 15,546 $ 22,777 $ 22,777
Mortgages held for sale -- -- 936 936
Investment securities 144,265 144,321 107,521 107,813
Loans:
Commercial 156,946 158,380 133,846 135,057
Residential mortgage 50,744 51,582 42,415 45,941
Consumer 33,760 33,817 29,157 29,309
Unearned discounts and
deferred loan fees (249) -- (557) --
Allowance for loan losses (3,016) -- (3,195) --
--------- --------- --------- ---------
Loans receivable, net 238,185 243,779 201,666 210,307
Accrued interest receivable 3,931 -- 3,523 --
Financial liabilities:
Deposits $ 277,465 $ 277,472 $ 262,752 $ 262,815
Federal Home Loan Bank advances 20,500 20,329 14,500 14,457
Securities sold under agreements to repurchase 84,037 84,037 37,582 37,582
Accrued interest payable 861 -- 759 --
- -------------------------------------------------------------------------------------------------------------------------
Off-balance sheet instruments:
Letters of credit $ 13 $ 22
Unfunded lines of credit -- 5
</TABLE>
The following methods and assumptions were used by the Bank in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents, mortgages held for sale, and accrued interest
receivable and accrued interest payable: The carrying amounts reported
approximate those assets' fair value.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair values for other loans receivable were estimated using discounted cash flow
analysis, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loans with significant
collectibility concerns were fair valued on a loan-by-loan basis using a
discounted cash flow method. The carrying amount of accrued interest
approximates its fair value.
C-50
<PAGE>
Off-balance sheet instruments: Off-balance sheet instruments of the Bank
consist of letters of credit, loan commitments and unfunded lines of credit.
Fair values for the Bank's off- balance sheet instruments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest-bearing and non-interest-bearing checking, passbook savings, and
certain types of money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates of deposit to a schedule of aggregated expected monthly maturities
on time deposits.
Federal Home Loan Bank Advances: Current quoted market prices were used to
estimate fair value.
Securities Sold Under Agreements to Repurchase: The carrying amounts
reported approximate fair value.
18. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
(in thousands, except per share data): Three Months Ended
- --------------------------------------------------------------------------------------------------------------
1996 December 31, September 30, June 30, March 31,
- ---- ------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Interest income $ 7,398 $ 7,433 $ 7,367 $ 6,900
Interest expense 3,611 3,595 3,656 3,302
------- ------- ------- -------
Net interest income 3,787 3,838 3,711 3,598
Provision for loan losses 112 483 23 18
Merger costs -- 666 -- --
Income (loss) before taxes 1,292 (499) 1,186 1,072
Provision for federal and state
income taxes (benefit) 465 (86) 432 390
------- ------- ------- -------
Net income (loss) 827 (413) 754 682
Earnings per share (1) $ 0.20 ($ 0.17) $ 0.18 $ 0.17
1995
- ----
Interest income $ 6,623 $ 6,640 $ 6,598 $ 6,138
Interest expense 3,077 3,098 3,272 2,884
------- ------- ------- -------
Net interest income 3,546 3,542 3,326 3,254
Provision for loan losses 77 81 63 93
Net investment securities gains -- -- 1 --
Income before taxes 847 836 737 657
Provision for federal and state
income taxes 150 207 175 166
------- ------- ------- -------
Net income 697 629 562 491
Earnings per share (1) $ 0.17 $ 0.16 $ 0.16 $ 0.14
</TABLE>
- ----------
(1) Earnings per share has been restated to reflect all stock dividends issued
on common stock to date.
C-51
<PAGE>
MARKET INFORMATION
Covenant's common stock is traded on the NASDAQ National Market
("NASDAQ") under the symbol "CNSK". There are currently five market makers in
Covenant stock including: Janney Montgomery Scott Inc., Wheat First Butcher
Singer, and Ryan, Beck & Co.
The following table sets forth the low and high prices of the common stock
on the-over-counter market, as reported by the NASDAQ National Market, Inc. for
the each of the quarters outlined below.
1995 Low High
---- --- ----
1st Quarter........................ $ 7.60 $ 9.05
2nd Quarter........................ 7.60 8.76
3rd Quarter........................ 8.34 9.42
4th Quarter........................ 8.76 12.47
1996
----
1st Quarter........................ $10.89 $11.57
2nd Quarter........................ 11.32 11.79
3rd Quarter........................ 11.32 12.97
4th Quarter........................ 12.00 14.75
The above prices have been adjusted to reflect all stock dividends
issued on the common stock.
C-52
<PAGE>
Part III
Item 9 - Directors and Principal Officers of the Bank
Information required by this Item is incorporated by reference from
"Directors" and "Management of the Bank" in Covenant's Proxy Statement for its
1997 Annual Meeting.
Item 10 - Management Compensation and Transactions
Information required by this Item is incorporated by reference from
"Executive Compensation", "Certain Transactions" and "Principal Holders of
Covenant Common Stock and Holdings of Management" in Covenant's Proxy Statement
for its 1997 Annual Meeting.
C-53
<PAGE>
Part IV
Item 11 - Exhibits, Financial Statement Schedules, and Reports on Form F-3
(a)(1) Financial Statements. The consolidated financial statements listed
on the index to Item 8 of this Annual Report on Form F-2 are filed as part of
this report.
(a)(2) Financial Statement Schedules. All schedules applicable to Covenant
are shown in the respective financial statements or in the notes thereto
included in this Annual Report.
(b) Reports on Form F-3: The following reports on Form F-3 were filed
during the fourth quarter of 1996:
-- Current report dated October 8, 1996 and filed on or about October 10,
1996.
-- Current report dated December 9, 1996 and filed on or about December
10, 1996.
(c) Exhibits
1.1 Charter, filed as Exhibit 1.1 to the Bank's Annual Report on Form
F-2 dated March 29, 1995 and incorporated herein by reference.
1.2 By-laws (as amended), filed as Exhibit 1.2 to the Bank's Annual
Report on Form F-2 dated March 27, 1996 and incorporated herein
by reference.
2.1 Form of Stock Certificate (Common Stock), filed as Exhibit 2.1 to
the Bank's Annual Report on Form F-2 dated March 29, 1995 and
incorporated herein by reference.
2.2 Form of Stock Certificate (Series A Preferred Stock), filed as
Exhibit 2.2 to the Bank's Annual Report on Form F-2 dated March
29, 1995 and incorporated herein by reference.
2.3 Form of Stock Certificate (Series B Preferred Stock) filed as
Exhibit 3 to the Bank's Registration Statement for Additional
Classes of Securities on Form F-10 dated May 31, 1995, and
incorporated herein by reference.
3.1 Incentive Stock Option Plan, filed as Exhibit 5.1 to the Bank's
Registration Statement on Form F-1 dated November 7, 1994 and
incorporated herein by reference.
3.2 Employee Stock Purchase Plan, filed as Exhibit 5.2 to the Bank's
Registration Statement on Form F-1 dated November 7, 1994 and
incorporated herein by reference.
*3.3 1996 Stock Option Plan for Officers and Non-Employee Directors.
4.1 Statement re: computation of per share earnings.
- ----------
* Previously filed
C-54
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 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 BANK
Date: April 28, 1997 By: /s/ Charles E. Sessa, Jr.
-----------------------------------
Name: Charles E. Sessa, Jr.
Title: President
Date: April 28, 1997 By: /s/ J. William Parker, Jr.
-----------------------------------
Name: J. William Parker, Jr.
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: By:
-----------------------------------
Barry M. Abelson, Director
Date: April 28, 1997 By: /s/ William T. Carson
-----------------------------------
William T. Carson, Director
Date: By:
-----------------------------------
John J. Gallagher, Director
Date: April 28, 1997 By: /s/ Gary E. Greenblatt
-----------------------------------
Gary E. Greenblatt, Director
Date: April 28, 1997 By: /s/ Richard A. Hocker
-----------------------------------
Richard A. Hocker, Director
Date: April 28, 1997 By: /s/ James R. Iannone
-----------------------------------
James R. Iannone, Director
Date: By:
-----------------------------------
Joseph A. Maressa, Sr., Director
Date: April 28, 1997 By: /s/ Charles E. Sessa, Jr.
-----------------------------------
Charles E. Sessa, Jr., Director
Date: April 28, 1997 By: /s/ Kyle W. Will
-----------------------------------
Kyle W. Will, Director
C-55
<PAGE>
Exhibit 4.1
COVENANT BANK
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
Year Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
Earnings Per Share
Net income applicable to common stock: $1,850 $2,379 $1,281
====== ====== ======
Average number of shares outstanding:
Average common shares outstanding 2,942 2,949 2,970
Common stock equivalents considered
in computation:
Dilutive stock options 109 37 36
Conversion of preferred stock Series "A" 529 529 529
Conversion of preferred stock Series "B" 489 246 --
------ ------ ------
Average number of shares outstanding 4,069 3,761 3,535
====== ====== ======
Earnings per share $ 0.45 $ 0.63 $ 0.36
====== ====== ======
- ----------
Earnings per share data has been restated to reflect the common stock dividends
declared in 1996 and 1995.
C-56
