SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission File #0-22699
COVENANT BANCORP, INC.
----------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2890624
---------- ----------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
18 Kings Highway West, Haddonfield, New Jersey 08033
----------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(609) 428-7300
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. (Note: Registrant is successor to Covenant
Bank, whose shares were previously registered with the Federal Deposit Insurance
Corporation).
Yes __X__ No_____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practical date.
<TABLE>
<CAPTION>
<S> <C>
Common Stock 3,057,193
------------ ---------
(Title of Class) (No. of Shares Outstanding as of 8/11/97)
Series A Non-Cumulative Convertible Preferred Stock 138,300
- --------------------------------------------------- -------
(Title of Class) (No. of Shares Outstanding as of 8/11/97)
Series B Non-Cumulative Convertible Preferred Stock 161,700
- --------------------------------------------------- -------
(Title of Class) (No. of Shares Outstanding as of 8/11/97)
</TABLE>
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
Table of Contents
FINANCIAL INFORMATION Page
- --------------------- ----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) 3
June 30, 1997 and December 31, 1996
Consolidated Statements of Income (Unaudited) 4-5
Three months ended June 30, 1997 and June 30, 1996 and
six months ended June 30, 1997 and June 30, 1996
Consolidated Statements of Cash Flows (Unaudited) 6
Six months ended June 30, 1997 and June 30, 1996
Consolidated Statements of Changes in Stockholders' Equity 7
Notes to Consolidated Financial Statements (Unaudited) 8-10
Item 2. Management's Discussion and Analysis of Financial 11-23
Condition and Results of Operations
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
<TABLE>
<CAPTION>
(in thousands) June 30, 1997 December 31, 1996
- -------------- ------------- -----------------
<S> <C> <C>
Assets:
Cash and due from banks $ 23,989 $ 12,446
Federal funds sold 8,500 3,100
--------- ---------
Cash and cash equivalents 32,489 15,546
--------- ---------
Investments available for sale (cost
1997-$132,572; 1996-$133,061) 131,706 132,578
Investment securities (fair value
1997-$11,425; 1996-$11,743) 11,353 11,687
Loans held for sale -- --
Loans receivable 262,848 241,201
Less allowance for loan losses 2,817 3,016
--------- ---------
Loans receivable, net 260,031 238,185
--------- ---------
Premises and equipment, net 9,495 9,135
Real estate owned 747 695
Accrued interest receivable 4,036 3,913
Other assets 4,114 2,895
--------- ---------
Total Assets $ 453,971 $ 414,634
========= =========
Liabilities:
Non-interest bearing deposits 57,137 41,868
Interest bearing deposits 96,480 96,169
Time deposits 148,166 139,428
--------- ---------
Total deposits 301,783 277,465
--------- ---------
Advances from The Federal Home Loan Bank 21,000 20,500
Securities sold under agreements to repurchase 96,242 84,037
Other liabilities 4,134 3,381
--------- ---------
Total Liabilities 423,159 385,383
--------- ---------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock authorized 300,000 shares;
Series "A", $25 par value:
issued and outstanding 138,300 and
138,300 shares, respectively 3,457 3,457
Series "B", $25 par value:
issued and outstanding 161,700 and
161,700 shares, respectively 4,043 4,043
Common stock, $5 par value:
authorized 5,000,000 shares;
issued and outstanding 2,936,480 and
2,906,262 shares, respectively 14,682 14,531
Additional paid-in capital 10,702 10,614
Net unrealized holding (loss) on
investments available for sale (572) (305)
Accumulated deficit (1,500) (3,089)
--------- ---------
Total Stockholders' Equity 30,812 29,251
--------- ---------
Total Liabilities and Stockholders' Equity $ 453,971 $ 414,634
========= =========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
COVENANT BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
(In thousands except per share data) Three Months Ended June 30,
- ------------------------------------ ---------------------------
1997 1996
---- ----
<S> <C> <C>
Interest Income
Interest and fees on loans $5,602 $5,005
Interest on investment securities 2,336 2,256
Other interest income 16 106
------ ------
Total interest income 7,954 7,367
Interest Expense
Interest on deposits 2,612 2,360
Interest on borrowings 1,507 1,296
------ ------
Total interest expense 4,119 3,656
------ ------
Net interest income 3,835 3,711
Provision for loan losses 5 23
------ ------
Net interest income after provision for loan losses 3,830 3,688
------ ------
Other Income
Service charges on deposit accounts 172 165
Loan servicing income 48 64
Other operating income 51 38
Gain on sale of assets 11 --
------ ------
Total other income 282 267
------ ------
Other Expenses
Salaries and employee benefits 1,600 1,584
Net occupancy 457 395
Data processing and other service costs 162 187
Professional services 76 137
Advertising and promotion 45 58
Federal insurance premiums 19 61
Other operating expenses 370 347
------ ------
Total other expenses 2,729 2,769
------ ------
Income before income taxes 1,383 1,186
Income taxes 473 432
------ ------
Net income 910 754
Less: preferred stock dividends 113 113
------ ------
Net income applicable to common shareholders $ 797 $ 641
====== ======
Income per common share and common stock equivalents $ 0.21 $ 0.18
====== ======
Weighted average common stock and common stock equivalents outstanding 4,314 4,238
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
COVENANT BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
(In thousands except per share data) Six Months Ended June 30,
- ------------------------------------ -------------------------
1997 1996
---- ----
<S> <C> <C>
Interest Income
Interest and fees on loans $10,899 $ 9,850
Interest on investment securities 4,663 4,220
Other interest income 47 197
------- -------
Total interest income 15,609 14,267
Interest Expense
Interest on deposits 5,166 4,708
Interest on borrowings 2,922 2,250
------- -------
Total interest expense 8,088 6,958
------- -------
Net interest income 7,521 7,309
Provision for loan losses 30 41
------- -------
Net interest income after provision for loan losses 7,491 7,268
------- -------
Other Income
Service charges on deposit accounts 311 290
Loan servicing income 91 124
Other operating income 90 84
Gain on sale of assets 11 --
------- -------
Total other income 503 498
------- -------
Other Expenses
Salaries and employee benefits 3,075 3,157
Net occupancy 918 788
Data processing and other service costs 264 374
Professional services 155 271
Advertising and promotion 75 93
Federal insurance premiums 39 120
Other operating expenses 711 706
------- -------
Total other expenses 5,237 5,509
------- -------
Income before income taxes 2,757 2,257
Income taxes 943 822
------- -------
Net income 1,814 1,435
Less: preferred stock dividends 225 225
------- -------
Net income applicable to common shareholders $ 1,589 $ 1,210
======= =======
Income per common share and common stock equivalents $ 0.42 $ 0.34
======= =======
Weighted average common stock and common stock equivalents outstanding 4,283 4,239
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
Covenant Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(in thousands) Six Months ended June 30,
- -------------- -------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,814 $ 1,435
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Provision for loan losses 30 41
Depreciation and amortization 317 346
Amortization of premiums and discounts, net 36 156
Loans originated for sale -- (951)
Proceeds from sales of loans held for sale -- 1,887
Decrease in unearned discounts and loan fees, net (247) (106)
Increase in accrued interest receivable
and other assets (1,342) (2,359)
Increase in other liabilities 753 991
-------- --------
Net cash provided by operating activities 1,361 1,440
Cash flows from investing activities:
Purchases of investments held to maturity -- (1,312)
Purchases of investments available for sale (6,970) (52,674)
Proceeds from maturities of investments available for sale 7,500 --
Proceeds from maturities of investments held to maturity -- 25,860
Principal collected on mortgage backed securities 309 498
Net increase in loans (21,958) (23,688)
Proceeds from sales of real estate owned 341 357
Purchases of premises and equipment (677) (629)
-------- --------
Net cash used in investing activities (21,455) (51,588)
Cash flows from financing activities:
Net increase in deposits 24,318 13,018
Net increase in securities sold
under agreements to repurchase 12,205 44,473
Net increase (decrease) in advances from the
Federal Home Loan Bank 500 (3,000)
Preferred stock dividends paid (225) (225)
Common stock issuance and other 239 41
-------- --------
Net cash provided by financing activities 37,037 54,307
Net increase in cash and cash equivalents 16,943 4,159
Cash and cash equivalents at the beginning of the year 15,546 22,777
-------- --------
Cash and cash equivalents at the end of the period $ 32,489 $ 26,936
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 8,107 $ 6,525
Cash paid during the period for income taxes 881 568
Noncash investing and financing activities:
Net transfers to real estate owned from loans receivable 393 559
Net change in gross unrealized (loss) on
investments available for sale ($ 383) ($ 1,082)
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(in thousands, including share data)
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in Net Unrealized Accumulated
Stock Stock Capital Gain (Loss) Deficit Total
----- ----- ------- ----------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1996 $ 7,500 $ 13,559 $ 9,212 $ 1,157 ($ 1,519) $ 29,909
Net income twelve months ended
December 31, 1996 -- -- -- -- 1,850 1,850
Preferred stock dividend -- -- -- -- (450) (450)
Adjustment to unrealized gain
(net of of tax) -- -- -- (1,462) -- (1,462)
Common stock dividends and other
(194 shares) -- 972 1,402 -- (2,970) (596)
-------- -------- -------- -------- -------- --------
Balance at
December 31, 1996 7,500 14,531 10,614 (305) (3,089) 29,251
Net income six months ended June 30, 1997 -- -- -- -- 1,814 1,814
Preferred stock dividend -- -- -- -- (225) (225)
Adjustment to unrealized gain (net of tax) -- -- -- (267) -- (267)
Common stock dividends and other
(30 shares) -- 151 88 -- -- 239
-------- -------- -------- -------- -------- --------
Balance at
June 30, 1997 $ 7,500 $ 14,682 $ 10,702 ($ 572) ($ 1,500) $ 30,812
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Consolidated Financial Statements
The financial statements included herein have been prepared without audit
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The accompanying condensed consolidated financial statements
reflect all adjustments which are, in the opinion of management, necessary to a
fair statement of the results for the interim periods presented. Such
adjustments are of a normal recurring nature.
On June 13, 1997, Covenant Bancorp, Inc. (the "Company") was formed and
registered with the SEC. Also on that date, Covenant Bank (the "Bank") was
acquired by the Company. These condensed consolidated financial statements
should be read in conjunction with the audited financial statements and the
notes thereto included in the Bank's Annual Report (Amendment No. 2 to Form F-2
dated April 28, 1997, filed with the Federal Deposit Insurance Corporation) for
the period ended December 31, 1996. The annual report is also included in the
Registrant's Registration Statement on Form S-4 dated April 28, 1997. The
results for the three and six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997.
The consolidated financial statements include the accounts of Covenant Bancorp,
Inc. and all of its subsidiaries, including Covenant Bank. All material
intercompany transactions have been eliminated.
B. Commitments
In the normal course of business, there are various outstanding commitments to
extend credit, such as letters of credit and unadvanced loan commitments, which
are not reflected in the accompanying consolidated financial statements.
Management does not anticipate any material losses as a result of these
transactions.
C. SFAS No. 128 - Earnings Per Share
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS.
8
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
It also requires dual presentation of basic and diluted EPS on the face of the
statement of operations for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
This Statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. This Statement requires restatement of all prior-period EPS data
presented.
Had the Company adopted this Statement as of June 30, 1997, the pro forma
earnings per share would have been:
<TABLE>
<CAPTION>
For the three months
ended June 30, 1997
-------------------
Weighted Pro forma
Income average shares earnings per
(Numerator) (Denominator) share
----------- ------------- -----
<S> <C> <C> <C>
Basic EPS
Net income available to
common shareholders $797 3,054 $0.26
Effect of dilutive securities
Convertible preferred stock $113 1,059
Stock options -- 201
----- ------
Dilutive EPS
Income available to
common shareholders
plus assumed conversions $910 4,314 $0.21
For the six months ended June 30, 1997
--------------------------------------
Weighted Pro forma
Income average shares earnings per
(Numerator) (Denominator) share
----------- ------------- -----
Basic EPS
Net income available to
common shareholders $1,589 3,044 $0.52
Effect of dilutive securities
Convertible preferred stock $225 1,059
Stock options -- 180
------ ------
Dilutive EPS
Income available to
common shareholders
plus assumed conversions $1,814 4,283 $0.42
</TABLE>
9
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
D. Issuance of Common Stock
On July 14, 1997, the Company issued a 4% stock dividend on its common stock to
shareholders of record on June 24, 1997, resulting in the issuance of 117,110
additional shares of common stock and cash paid in lieu of fractional shares of
$5,957. All share and per share data has been adjusted to reflect the
retroactive recognition of all stock dividends declared.
E. Subsequent Event
On August 5, 1997, the Company and First Union Corporation (First Union)
executed a definitive merger agreement in which First Union would acquire the
Company. The Company's shareholders will receive .3813 shares of First Union
common stock for each share of the Company's common stock. Each share of the two
issues of the Company's convertible preferred stock will be exchanged for a
number of shares of First Union common stock equal to the respective conversion
ratios of the preferred stock times the merger exchange ratio of .3813. The
acquisition, which will be accounted for under the purchase method of
accounting, is subject to various conditions including the approval of the
Company's shareholders and regulatory approvals. It is anticipated that the
transaction will close during the first quarter of 1998.
10
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Covenant Bancorp, Inc. and its subsidiaries, ("the Company"), recorded net
income of $1.8 million for the six months ended June 30, 1997, as compared to
$1.4 million for the six months ended June 30, 1996. The 26% increase in net
income between the two periods is the result of an increase in net interest
income coupled with meaningful expense reduction and control. Net interest
income was positively impacted by a 12% increase in average interest-earning
assets for the six month period ended June 30, 1997, compared to the six months
ended June 30, 1996. Return on average assets was 0.85% and return on average
common equity was 14.29% for the six month period ended June 30, 1997, compared
to 0.76% and 10.79%, respectively, for the six month period ended June 30, 1996.
All prior period amounts have been restated to reflect the September 1996
acquisition of 1st Southern State Bank ("1st Southern").
For the three months ended June 30, 1997, the Company reported net income of
$910,000, representing an increase of 21% in earnings compared to net income of
$754,000 for the second quarter of 1996. Net interest income increased 3% for
the second quarter of 1997 when compared to the second quarter of 1996 due to
the above-mentioned increase in average interest-earning assets. Return on
average assets and return on average common equity for the three months ended
June 30, 1997 were 0.84% and 14.40%, respectively, compared to 0.76% and 11.66%,
respectively, for the same period in 1996.
Total assets amounted to $454.0 million at June 30, 1997, compared to $414.6
million at December 31, 1996, representing an increase of $39.4 million or 10%
since year-end 1996. Net loans totaled $260.0 million, representing a 9%
increase, over the year-end 1996 balance. Total deposits increased $24.3 million
to reach $301.8 million at June 30, 1997, from the December 31, 1996 balance of
$277.5 million. Stockholders' equity was $30.8 million at June 30, 1997. The
Company's capital position meets the definition of a well-capitalized
institution, which is evident by its leverage ratio, which stood at 7.30% and
its Tier 1 and Total Capital ratios, which equaled 11.74% and 12.79%,
respectively.
On August 5, 1997, the Company and First Union Corporation (First Union)
executed a definitive merger agreement in which First Union would acquire the
Company. The Company's shareholders will receive .3813 shares of First Union
common stock for each share of the Company's common stock. Each share of the two
issues of the Company's convertible preferred stock will be exchanged for a
number of shares of First Union common stock equal to the respective conversion
ratios of the preferred stock times the merger exchange ratio of .3813. The
acquisition, which will be accounted for under the purchase method of
accounting, is subject to various conditions including the approval of the
Company's shareholders and regulatory approvals. It is anticipated that the
transaction will close during the first quarter of 1998.
11
<PAGE>
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the difference between interest earned on loans and
investments and interest incurred on deposits and other borrowed funds. Net
interest income is affected by changes in both interest rates and the amounts of
interest-earning assets and interest-bearing liabilities outstanding.
Net interest income for the six months ended June 30, 1997 increased $212,000 or
3% to $7.5 million, compared to $7.3 million for the same period in 1996
primarily due to an increase in average loans of $35.2 million and a $7.8
million or 6% increase in average investments (see page 12 for an average
balance sheet and average rate comparisons). The increase in average loans is
concentrated in the commercial and commercial mortgage portfolios of $21.9
million or 16% and a $8.6 million increase in 1-4 family mortgage loans. The
increase in net interest income associated with growth in the loan portfolio has
been largely offset by a compression in the net interest margin to 3.79% for the
six months ended June 30, 1997 from 4.14% for the same period in 1996. The
decrease in the net interest margin is due to the following factors: 1) a
decline in the yield on the total loan portfolio to 8.71% for the six month
period ended June 30, 1997 from 9.18% for the same period in 1997; caused by
overall market conditions and 2) the increase in the Company's loan portfolio
funded by higher-priced securities sold under agreements to repurchase and
certificates of deposit rather than the Company's core deposit base, causing the
Company's cost of funds to increase from 4.51% for the six months ended June 30,
1996 to 4.67% for the same period of 1997. Delays in the opening of the
Company's three new personal financial centers resulted in the need for these
types of short-term higher-costing funding sources.
Net interest income for the three months ended June 30, 1997 increased $124,000
or 3% to $3.8 million, compared to $3.7 million for the same period in 1996. As
discussed in the six month results, the improvement is directly related to the
increase in average interest-earning assets during the second quarter of 1997,
as compared to the same period in 1996, partially offset by a narrowing in the
net interest margin.
Other Income
Other income for the first six months of 1997 totaled $503,000, compared to
$498,000 for the same period of 1996. Service charges on deposit accounts
increased $21,000 or 7% to $311,000 for the six months ended June 30, 1997 when
compared to the same period in 1996, due to an increase in core deposit accounts
over the past twelve months. Loan servicing income decreased $33,000 to $91,000
for the six months ended June 30, 1997
12
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
(in thousands)
Six Months Ended June 30, 1997 Six Months Ended June 30, 1996
-------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans:(1)
Commercial $ 57,634 $ 2,575 8.98% $ 55,754 $ 2,626 9.50%
Commercial mortgage 105,211 4,685 8.96 85,224 4,042 9.56
Mortgage 53,630 2,155 8.00 45,070 1,842 8.18
Consumer 35,193 1,484 8.50 30,395 1,340 8.89
-------- ------- ------ -------- ------- -------
Total loans 251,668 10,899 8.71 216,443 9,850 9.18
Investments:
Federal funds sold 1,508 47 5.28 7,386 197 5.38
Investment securities 146,300 4,663 6.37 132,609 4,220 6.33
-------- ------- ------ -------- ------- -------
Total investments 147,808 4,710 6.37 139,995 4,417 6.27
-------- ------- ------ -------- ------- -------
Total interest-earning assets 399,476 $15,609 7.84% 356,438 $14,267 8.07%
-------- ------- ------ -------- ------- -------
Allowance for loan losses (2,994) (3,101)
Cash and due from banks 10,764 9,534
Fixed assets (net) 9,368 7,861
REO 679 1,372
Other assets 7,268 5,654
-------- ---------
Total Assets $424,561 $ 377,758
======== =========
Liabilities and Stockholders' Equity
Deposits:
Interest-bearing demand $ 34,154 $ 394 2.33% $ 25,527 $ 254 2.01%
Statement savings 38,940 467 2.42 44,494 539 2.44
Money market 20,895 330 3.18 20,808 295 2.86
Certificates of deposit 148,620 3,975 5.39 136,322 3,620 5.35
-------- ------- ------ -------- ------- -------
Total interest-bearing deposits 242,609 5,166 4.29 227,151 4,708 4.18
FHLB advances and securities sold
under agreements to repurchase 106,691 2,922 5.52 83,939 2,250 5.41
-------- ------- ------ -------- ------- -------
Total interest bearing liabilities 349,300 8,088 4.67 311,090 6,958 4.51
------- ------ ------- -------
Non-interest bearing deposits 42,204 34,181
Other liabilities 3,488 2,792
Stockholders' equity 29,569 29,695
-------- --------
Total Liabilities and
Stockholders' Equity $424,561 $377,758
======== ========
Net Interest Income/Spread $7,521 3.17% $ 7,309 3.56%
======== ===== ======== ======
Net Interest Margin (2) 3.79% 4.14%
===== ======
</TABLE>
- ----------
(1) Includes non-accruing loans. The effect of including such loans is to
reduce the average rate earned on Covenant's loans.
(2) Net interest income as a percentage of average interest-earning assets.
13
<PAGE>
when compared to the same period of 1996 and is attributable to volume decreases
in investor servicing fees, late fees, and credit card fees. Other operating
income increased $6,000 for the first half of 1997, compared to the same period
in 1996, due to an increase in MAC surcharge income and volume increases in safe
deposit box fees offset by the discontinuance of a fee-based residential loan
origination program. The one-time gain of $11,000 on sale of assets during the
second quarter of 1997 was due to a subdivision and subsequent sale of a small
parcel of land and building that had been previously purchased with the
Company's North Wildwood personal financial center.
Other income for the three month period ended June 30, 1997 totaled $282,000,
compared to $267,000 for the same period of 1996, representing a $15,000 or 6%
increase. The increase in service charges on deposit accounts of $7,000 was
associated with the above-mentioned increase in core deposit accounts. Loan
servicing income decreased $16,000 to $48,000 for the second quarter of 1997
when compared to the same period of 1996 and is also attributable to volume
decreases in investor servicing fees, late fees and credit card fees. Other
operating income increased $13,000 for the second quarter of 1997, primarily
related to an increase in MAC surcharge income and volume increases in safe
deposit box fees.
Other Expenses
Other expenses for the six months ended June 30, 1997 equaled $5.2 million,
compared to $5.5 million for the same period of 1996. This represents a decrease
of $272,000 or 5% between the two periods. The ratio of total other expenses to
average assets for the six months ended June 30, 1997 improved to 2.47% from
2.91% for the same period of 1996. Cost containment and operating efficiency are
continuing priorities of management. The Company's operating efficiency ratio
(non-interest expenses, less other real estate expenses, divided by net interest
income plus non-interest income excluding non-recurring gains) improved to 65%
for the first half of 1997, compared to 70% for the same period of 1996.
Salaries and employee benefits equaled $3.1 million for the first six months of
1997, compared to $3.2 million for the same period in 1996. The salaries and
benefits category is the largest component of other expenses, encompassing 59%
of total other expenses as of June 30, 1997. The decrease in salaries and
employee benefits expense is attributable to reductions in staff in connection
with the 1st Southern acquisition completed in September 1996, partially offset
by staffing increases associated with the new personal financial centers opened
since March of 1996.
Net occupancy increased $130,000 to $918,000 for the six months ended June 30,
1997 due to additional personal financial centers opened in Hammonton (3/96),
the relocated Linwood center (10/96), Mount Laurel (12/96) and Cherry Hill
(3/97), and the establishment of an operations center in Voorhees, NJ during the
second quarter of 1996. Data processing and other service costs declined
$110,000 to $264,000 for the six months ended June 30, 1997, compared to
$374,000 for the same period of 1996. The Company's acquisition of 1st Southern
and the operating efficiencies gained due to the system conversion in September
1996 are primarily attributable for the reduction in costs.
14
<PAGE>
Professional services expenses decreased $116,000 to $155,000 for the first six
months of 1997, compared to $271,000 for the same period of 1996. The reduction
is related to decreases of $48,000 in legal expenses related to the decrease in
problem credits; a $25,000 decrease in consulting expenses due to the
discontinuance of certain advertising and promotion programs and a $43,000
decrease in examinations expense due to the acquisition of 1st Southern. Federal
insurance premiums declined $81,000 to $39,000 for the first half of 1997 due to
a reduction in the Bank Insurance Fund premiums. Other operating expenses
increased $5,000 to $711,000 for the six months ended June 30, 1997, compared to
the same period of 1996.
Other expenses for the three months ended June 30, 1997 equaled $2.7 million,
compared to $2.8 million, representing a decrease of $40,000 or 1% over the
second quarter of 1996. Salaries and employee benefits increased $16,000 to $1.6
million for the second quarter of 1997 when compared to the same period in 1996.
The increase in salaries and employee benefits expense is directly associated
with the new staffing positions created for the new personal financial centers
noted above. Net occupancy increased $62,000 to $457,000 for the three months
ended June 30, 1997, compared to the same period of 1996 due to the
above-mentioned new personal financial centers.
Data processing and service costs decreased $25,000 for the three months ended
June 30, 1997, compared to the same period in 1996. The Company's acquisition of
1st Southern and operating efficiencies gained due to the system conversion in
September 1996 are primarily attributable to the reduction in costs offset by
new accounts added over the last twelve months.
Professional services expenses decreased $61,000 for the second quarter of 1997
to $76,000, compared to the same period in 1996. The reduction is related to a
decrease of $27,000 in legal expenses; a $6,000 decrease in consulting expenses
due to the discontinuance of certain advertising and promotion programs and a
$20,000 decrease in examination expense due to the acquisition of 1st Southern.
Federal insurance premiums declined $42,000 to $19,000 for the three months
ended June 30, 1997 as compared to the same period in 1996 due to a reduction in
the Bank Insurance Fund premium. Other operating expenses increased $23,000 to
$370,000 for the three months ended June 30, 1997, compared to the same period
in 1996 due to increases in postage, insurance and telephone expenses related to
the new branch facilities opened.
15
<PAGE>
FINANCIAL CONDITION
Loan Portfolio
The lending function is the Company's principal business activity and it
continues its policy to serve as a reliable source of credit to a diverse
customer base. The Company lends primarily to commercial borrowers in the
southern New Jersey marketplace. The loan portfolio is diversified, with 65% of
the portfolio comprised of commercial and commercial mortgage loans and 35%
comprised of residential mortgage loans and consumer loans at June 30, 1997.
At June 30, 1997, the Company's net loan portfolio totaled $260.0 million,
compared to $238.2 million as of December 31, 1996. The $21.8 million or 9% (18%
annualized) in growth in net loans has been concentrated within the commercial,
commercial mortgage and residential mortgage loan portfolios. The majority of
the Company's loan portfolio is primarily categorized as secured by commercial
and 1-4 family residential real estate properties (including home equity loans).
It is the Company's continuing policy to emphasize well-collaterized and
properly-structured loans and to promote long-term quality relationships with
financially strong borrowers.
Non-Performing Assets
Non-performing assets include those loans that are not accruing interest
(non-accruing loans), loans that have been restructured and real estate owned.
Generally, loans that are contractually past-due are placed on non-accrual
status when interest on principal becomes 90 days past-due, unless, in the
Company's assessment, the value of collateral securing the loan adequately
ensures the likelihood of the ultimate collection of all unpaid principal and
interest and the loan is in the process of collection.
The following table sets forth information regarding non-performing assets and
contractually past-due loans of June 30, 1997 and 1996 and December 31, 1996:
June 30, June 30, Dec. 31,
1997 1996 1996
---- ---- ----
Non-performing assets:
Non-accruing loans:
Commercial $ 993 $2,500 $1,734
Mortgage 1,111 1,180 931
Consumer 112 232 201
------ ------ ------
Total non-performing loans $2,216 $3,912 $2,866
Real estate owned 747 1,222 695
------ ------ ------
Total non-performing assets $2,963 $5,134 $3,561
====== ====== ======
Accruing loans 90 days past-due $1,324 $2,236 $1,753
====== ====== ======
Non-performing loans as a
percentage of loans 0.84% 1.71% 1.19%
====== ====== ======
Non-performing asset as a percentage
of loans and real estate owned 1.12% 2.23% 1.47%
====== ====== ======
Non-performing assets as a percentage
of total assets 0.65% 1.28% 0.86%
====== ====== ======
16
<PAGE>
Non-performing assets totaled $3.0 million or 1.12% of total loans and real
estate owned at June 30, 1997, showing marked improvement when compared to $3.6
million or 1.47% of total loans and real estate owned at December 31, 1996 and
$5.1 million or 2.23% of total loans and real estate owned at June 30, 1996.
Non-performing loans at June 30, 1997 decreased $650,000 from the December 31,
1996 balance of $2.9 million due to a $741,000 reduction in commercial
non-performing loans and a reduction in consumer non-performing loans of $89,000
offset by an increase in mortgage non-performing loans of $180,000. The balance
of non-performing loans at June 30, 1996 was $3.9 million or 1.71% of total
loans.
Real estate owned (net of reserves) was $747,000 at June 30, 1997, compared to
$695,000 at December 31, 1996 and $1.2 million at June 30, 1996. During the
first six months of 1997, additions to real estate owned of $393,000
(representing three foreclosed properties) were offset by the sale of five
properties for $341,000, which resulted in the $52,000 increase in real estate
owned.
The balance of accruing loans 90 days past-due was $1.3 million at June 30,
1997, $1.8 million at December 31, 1996 and $2.2 million at June 30, 1996. The
$429,000 decrease in accruing loans 90 days past-due during the six months ended
June 30, 1997 is related to a decrease of $366,000 in various residential
mortgage loans and a decrease in various home equity consumer loans of $107,000
offset by an increase in well-collateralized commercial loans of $44,000.
At June 30, 1997 and December 31, 1996, the Company had impaired loans totaling
approximately $993,000 and $1,734,000, respectively. The allowance for loan
losses on impaired loans has a valuation allowance of $101,000, and $199,000 at
June 30, 1997 and December 31, 1996, respectively. The average balance of
impaired loans totaled $1,532,000 and $1,684,000 for June 30, 1997 and December
31, 1996, respectively. Interest income not accrued for impaired loans for the
six months ended June 30, 1997 and for the twelve months ended December 31, 1996
was approximately $75,000 and $164,000, respectively.
Provision and Allowance for Loan Losses
The provision and allowance for loan losses is based on management's ongoing
evaluation of the loan portfolio and reflects an amount considered by management
to be adequate to absorb known and inherent losses in the portfolio. Management
considers a variety of factors when establishing the allowance, such as the
impact of current economic conditions, diversification of the loan portfolio,
delinquency statistics, results of loan review and related classifications, the
borrower's perceived financial and managerial strengths, the estimated adequacy
of underlying collateral and other relevant factors. Consideration is also given
to examinations performed by regulatory authorities.
17
<PAGE>
The following table sets forth information regarding the Company's allowance for
loan losses for the six month periods ended June 30, 1997 and 1996, and for the
year ended December 31, 1996.
Changes in Allowance for Loan Losses
<TABLE>
<CAPTION>
Six Months Ended Year Ended
---------------- ----------
6/30/97 6/30/96 12/31/96
------- ------- --------
<S> <C> <C> <C>
Balance at beginning of period $3,016 $3,195 $3,195
Provision charge to operating expenses 30 41 636
Charge-offs:
Commercial (171) (49) (449)
Mortgage (29) (119) (417)
Consumer (57) (101) (124)
------ ------ ------
Total Charge-offs (257) (269) (990)
Recoveries:
Commercial 24 85 124
Mortgage 3 4 --
Consumer 1 25 51
------ ------ ------
Total recoveries 28 114 175
------ ------ ------
Net charge-offs (229) (155) (815)
------ ------ ------
Balance at end of period $2,817 $3,081 $3,016
====== ====== ======
Net charge-offs as a percentage of
average loans 0.18% 0.14% 0.36%
Allowance as a percentage of
period-end loans 1.07% 1.34% 1.25%
Allowance as a percentage of
non-performing loans 127.12% 78.76% 105.20%
Allowance as a percentage of
non-performing assets 95.07% 60.01% 84.70%
</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 $30,000 in the first
six months of 1997, compared to $41,000 for the first six months of 1996.
Management believes that the allowance for loan losses at June 30, 1997 is
adequate to absorb known and inherent losses in the portfolio.
18
<PAGE>
Investment Securities
Investment securities were $143.1 million at June 30, 1997, compared to $144.3
million at December 31, 1996. The decrease in investment securities was the
result of purchases of $7.0 million of US Treasury Notes with maturities beyond
one year and classified as "Available for Sale," offset by maturities and
paydowns of $7.8 million and a decline of $400,000 in the gross unrealized
holding loss on investments available for sale.
At June 30, 1997, the fair value of investments available for sale was $131.7
million, and unrealized holding losses were $866,000. At December 31, 1996, the
fair value of investments available for sale was $132.6 million and unrealized
holding losses were $483,000. At June 30, 1997, securities held to maturity
totaled $11.4 million compared to $11.7 million at December 31, 1996. The fair
values of these investments were $11.4 million at June 30, 1997 and $11.7
million at December 31, 1996.
The Company's investment portfolio is comprised of US Government securities,
federal agency mortgage-backed securities and Federal Home Loan Bank ("FHLB")
stock. The portfolio generates substantial interest income, serves as a source
of liquidity and is used as a tool in managing interest rate sensitivity.
Portions of the portfolio are also used to secure public deposits and serve as
collateral for repurchase transactions. The investment portfolio also plays a
significant role in the asset/liability management process. Among other things,
the investment portfolio is utilized to balance the interest sensitivity of the
prime-based portion of the loan portfolio.
Deposits
The Company's predominant source of funds is depository accounts comprised of
demand deposits, savings and money market accounts, time deposits and individual
retirement accounts (IRA's). Deposits are provided by individuals and businesses
located within the southern New Jersey marketplace. The Company gathers deposits
from local municipalities within the guidelines of the Government Unit Deposit
Protection Act (GUDPA). The Bank has no brokered deposits.
The Company opened new personal financial centers in Linwood (relocation in
October 1996), Mount Laurel (December 1996) and Cherry Hill (March 1997). Total
deposits at June 30, 1997 equaled $301.8 million, compared to $277.5 million at
December 31, 1996, representing a $24.3 million or 9% increase between December
31, 1996 and June 30, 1997.
Borrowings
Sources of funds for the Company other than deposits include FHLB advances and
securities sold under agreements to repurchase. FHLB advances were $21.0 million
at June 30, 1997 and $20.5 million at December 31, 1996. Securities sold under
agreements to repurchase totaled $96.2 million at June 30, 1997, compared to
$84.0 million at December 31, 1996. The increase in securities sold under
agreements to repurchase was related to the increase in loans during the first
six months of 1997.
19
<PAGE>
Asset and Liability Management
The Company monitors its sensitivity to interest rate changes and its liquidity
and capital position through its asset and liability management process. The
Company's objectives include (i) controlling interest rate exposures, (ii)
ensuring adequate liquidity, (iii) maintaining a strong capital position and
(iv) maximizing net interest income opportunities. The Company manages these
objectives centrally through the Asset Liability Management Committee (ALCO).
Interest Rate Sensitivity
The Company seeks to manage its sensitivity position to maximize earnings and
minimize the risk associated with interest rate movements through the use of a
"gap analysis" on a monthly basis. The gap analysis assesses the interest rate
risk that arises from differences in the volumes of assets and liabilities that
mature or reprice within a given period. A "positive" gap position results when
the amount of interest-sensitive assets exceeds that of interest-sensitive
liabilities, signifying that the net interest margin will be positively affected
by rising rates and negatively affected by falling rates; a "negative" gap
position results when the amount of interest-sensitive liabilities exceeds that
of interest-sensitive assets, indicating that the net interest margin will be
negatively affected by rising rates and positively affected by falling rates.
However, the Company's gap position does not necessarily predict the impact of
changes in general levels of interest rates or net interest income due to
assumptions made as to repricing and maturities of certain products.
Decisions are also based on "dynamic shock analysis," a process that entails the
application of different prime rate increase or decrease scenarios to the
current maturity/repricing structure. This analysis measures the impact on net
interest income of each of the scenarios applied relative to the Company's
interest rate risk management policy guidelines, and seeks to identify
appropriate measures to maintain the interest sensitivity of net interest income
within such policy guidelines. At June 30, 1997, the Company's "dynamic shock
analysis" indicates an acceptable level of interest rate risk and is within
policy guidelines.
In the event that the Company's interest rate risk models indicate an
unacceptable level of risk, the Company could undertake a number of actions that
would reduce this risk, including the sale of a portion of its Available for
Sale portfolio or the extension of the maturities of its short-term borrowings,
or the use of other risk management strategies as determined by the Company's
ALCO Committee.
20
<PAGE>
The following table illustrates the gap position of the Company as of June 30,
1997.
<TABLE>
<CAPTION>
Non-Interest
Beyond Sensitive
Rate sensitive assets: 1-90 91-180 181-365 One - Five Five Assets/
Interest earning assets Days Days Days Years Years Liabilities Total
---- ---- ---- ----- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Loans $96,515 $6,859 $12,616 $82,980 $61,061 -- $260,031
Investment securities 21,015 8,050 26,174 57,890 38,430 -- 151,559
Other short-term
investments -- -- -- -- -- -- --
---------- ---------- --------- -------- ------- -------- --------
Total interest
earning assets 117,530 14,909 38,790 140,870 99,491 -- 412,368
Non-interest earning assets $42,381 42,381
---------- ---------- --------- -------- ------- -------- --------
Total assets $117,530 $14,909 $38,790 $140,870 $99,491 $42,381 $453,971
========== ========== ========= ======== ======= ======== ========
Rate sensitive liabilities:
Interest bearing demand $26,649 -- -- $4,442 $4,441 -- $35,532
Statement Savings 29,367 -- -- 4,895 $4,894 -- 39,156
Money Market 16,344 -- -- 2,724 $2,724 -- 21,792
Certificate of Deposit 56,797 27,672 32,751 30,946 -- -- 148,166
FHLB advances and
securities sold under
agreements to repurchase 109,242 -- 3,000 5,000 -- -- 117,242
---------- ---------- --------- -------- ------- -------- --------
Total interest bearing
liabilities $238,399 $27,672 $35,751 48,007 $12,059 -- $361,888
Non-interest bearing
liabilities -- -- -- -- -- $61,271 $61,271
Stockholders' equity -- -- -- -- -- 30,812 30,812
---------- ---------- --------- -------- ------- -------- --------
Total liabilities and
stockholders' equity $238,399 $27,672 $35,751 $48,007 $12,059 $92,083 $453,971
========== ========== ========= ======== ======= ======== ========
Interest rate
sensitivity GAP ($120,869) ($12,763) $3,039 $92,863 $87,432 ($49,702)
========== ========== ========= ======== ======= ========
Cumulative GAP ($120,869) ($133,632) ($130,593) ($37,730) $49,702
========== ========== ========= ======== =======
Cumulative GAP as a
percentage of total 49.30% 49.78% 56.73% 89.47% 113.73%
</TABLE>
The Gap Analysis table is intended to illustrate the maturity/repricing
characteristics of Company's interest-earning assets and interest-bearing
liabilities as of June 30, 1997. The analysis is based upon contractual
maturities and, where applicable, management's estimates of the repricing
characteristics of various assets and liabilities and on assumptions as to
customer behavior.
The Gap Analysis indicates a liability-sensitive position through the one-year
time period beginning June 30, 1997. The Company's investment in U. S. Treasury
Notes with maturities beyond one year funded by a growth in deposits and
short-term (three months or less) securities sold under agreements to repurchase
and is primarily responsible for the liability-sensitive position through the
one-year time period as of June 30, 1997.
Covenant's net interest income has not been subject to the degree of sensitivity
indicated by this traditional gap analysis. In monitoring interest sensitivity,
adjustments are made to the dynamic shock assumptions to reflect management's
recent experience regarding the impact of product pricing, interest rate spread
relationships and customer behavior.
These marginal adjustments are necessarily subjective and will vary over time
with loan and deposit changes and market conditions. The investment portfolio is
utilized to balance the Company's gap position, to manage the interest rate
spread and to mitigate overall maturity risk in the portfolio.
21
<PAGE>
Liquidity
Adequate liquidity is necessary to meet the borrowing needs and deposit
withdrawal requirements of customers as well as to satisfy liabilities, fund
operations and support asset growth. Maintaining an appropriate level of liquid
funds through the asset/liability management process ensures that the needs of
the Company are met at a reasonable cost. Therefore, the management of liquidity
is coordinated with the management of the Company's interest sensitivity and
capital position. Major sources of liquidity are core deposits, cash flow
generated by the Company's investment and loan portfolios, and short-term
borrowings. Earnings and funds provided by operations also serve as a source of
liquidity.
Cash and cash equivalents equaled $32.5 million at June 30, 1997, compared to
$15.6 million at December 31, 1996, resulting in a net increase of $16.9
million, as shown on the Consolidated Statements of Cash Flows for the six
months ended June 30, 1997. The net increase of $22.0 million in loans
contributed to a net cash used in investing activities equaling $21.5 million.
The Company funded the net cash used in investing activities and the net
increase in cash and cash equivalents principally through a $24.3 million
increase in deposits, and a $12.2 million increase in securities sold under
agreements to repurchase.
The Company places strong emphasis on the composition of the investments
available for sale portfolio. Additional sources of liquidity are available to
the Company through the purchase of federal funds and borrowings on approved
lines of credit. One measure of the Company's liquidity is the FDIC liquidity
ratio. This ratio measures net cash, short-term investments and marketable
assets divided by net deposits and short-term liabilities. The Company's
liquidity ratio at June 30, 1997 was 23%. Overall, based on the its core deposit
base, and its available sources of borrowed funds, management believes that the
Company's liquidity position is satisfactory.
Capital
The maintenance of appropriate levels of capital is a management priority and an
important objective of the Company's asset and liability management process. The
Company's principal capital planning goals are to provide an adequate return to
stockholders, to support its growth and expansion activities, to provide
stability to current operations, and to promote public confidence.
Bank regulatory authorities have issued risk-based capital standards and
leverage ratio requirements by which all bank holding companies and banks will
be evaluated in terms of capital adequacy. The "Prompt Corrective Action"
regulations issued pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991 established five categories of depository institutions:
(1) well-capitalized, (2) adequately capitalized, (3) undercapitalized, (4)
significantly undercapitalized, and (5) critically undercapitalized. Each
category relates to the level of capital for the depository institution. The
highest capital ratios equate to a "well-capitalized" depository institution
which is one that significantly exceeds the minimum level required by regulation
(i.e., total risk-based capital ratio of 10% or greater, a Tier 1 risk-based
capital ratio of 6% or greater and a leverage ratio of 5% or greater). At June
30, 1997, the Company and the Bank met the definition of a "well-capitalized"
institution.
22
<PAGE>
The following table sets forth the Company's and the Bank's regulatory capital
requirements and compliance therewith as of June 30, 1997:
Covenant Bancorp, Inc. and subsidiaries
Well- Capital Excess
Actual Capitalized (in thousands)
------ ----------- --------------
Tier 1 Risk-Based Capital Ratio (1) 11.74% 6.00% $15,342
Total Risk-Based Capital Ratio (2) 12.79% 10.00% $ 7,464
Tier 1 Leverage Ratio (3) 7.30% 5.00% $ 9,896
Covenant Bank
Well- Capital Excess
Actual Capitalized (in thousands)
------ ----------- -------------
Tier 1 Risk-Based Capital Ratio (1) 11.74% 6.00% $15,342
Total Risk-Based Capital Ratio (2) 12.79% 10.00% $ 7,464
Tier 1 Leverage Ratio (3) 7.30% 5.00% $ 9,896
- ----------
(1) Tier 1 Risk-Based Capital Ratio is defined as the ratio of Tier 1 Capital
to Total Risk- Weighted Assets.
(2) Total Risk-Based Capital Ratio is defined as the ratio of Tier 1 and Tier 2
Capital to Total Risk-Weighted Assets.
(3) Tier 1 Leverage Ratio is defined as the ratio of Tier 1 Capital to Total
Average Quarterly Assets.
Income Taxes
The Company's effective tax rate for the six months ended June 30, 1997 was
34.2%, compared to an effective rate of 36.4% for the same period in 1996. The
decreased percentage from 1996 to 1997 is attributable to a reduction in state
income taxes due to business strategies employed.
23
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
The Annual Meeting of the Registrant's Shareholders was held on June 10, 1997.
The items of business acted upon at the Annual Meeting were the formation of
Covenant Bancorp, Inc. (the Registrant) and the election of ten directors for
one year terms. The number of votes cast for, against and abstained as to each
proposal are as follows:
Proposal 1 - Formation of Covenant Bancorp, Inc.
For Against Abstain
--- ------- -------
2,026,595 118,123 791,762
Proposal 2 - Election of Directors
Name of Nominee For Against Abstain
- --------------- --- ------- -------
Richard A. Hocker 2,418,836 119,873 1,045
John J. Gallagher, Jr. 2,419,881 118,828 0
Charles E. Sessa, Jr. 2,419,881 118,828 0
Barry M. Abelson 2,418,518 120,191 1,363
Thomas V.G. Brown 2,419,881 118,828 0
William T. Carson, Jr. 2,419,881 118,828 0
Gary E. Greenblatt 2,419,509 119,200 372
James R. Iannone 2,419,364 119,345 517
Joseph A. Maressa, Jr. 2,415,220 123,489 4,661
Kyle W. Will 2,415,220 123,489 4,661
24
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
2. Agreement and Plan of Mergers dated August 4, 1997 by and among
Covenant Bancorp, Inc., Covenant Bank, First Union Corporation
and First Union National Bank, attached as Exhibit 1 to the
registrant's Current Report on Form 8-K dated August 8, 1997 and
incorporated herein by reference.
10.1 Amendment No. 1 to Agreement, dated June 10, 1997, amending the
Agreement dated November 22, 1995 between Covenant Bank and
Richard A. Hocker.
10.2 Amendment No. 1 to Agreement, dated June 10, 1997, amending the
Agreement dated November 22, 1995 between Covenant Bank and
Charles E. Sessa, Jr.
10.3 Amendment No. 1 to Agreement, dated June 10, 1997, amending the
Agreement dated November 22, 1995 between Covenant Bank and
Kenneth R. Mancini, Jr.
10.4 Amendment No. 1 to Agreement, dated June 10, 1997, amending the
Agreement dated November 22, 1995 between Covenant Bank and J.
William Parker, Jr.
10.5 Amendment No. 1 to Agreement, dated June 10, 1997, amending the
Agreement dated November 22, 1995 between Covenant Bank and
Eugene D. D'Orazio.
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the second quarter ended June 30,
1997.
25
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Bank has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
COVENANT BANCORP, INC.
August 11, 1997 /s/ Charles E. Sessa, Jr.
- --------------- -------------------------
(Date) CHARLES E. SESSA, JR.
PRESIDENT
August 11, 1997 /s/ J. William Parker, Jr.
- --------------- --------------------------
(Date) J. WILLIAM PARKER, JR.
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER &
TREASURER
26
Exhibit 10.1
AMENDMENT NO. 1 TO AGREEMENT
THIS AMENDMENT NO. 1 (this "Amendment") is made as of June 10, 1997, and
amends that certain Agreement dated as of November 22, 1995 (the "Agreement") by
and between Covenant Bank (formerly Covenant Bank for Savings) (the "Company")
and Richard A. Hocker (the "Employee").
For good and valuable consideration the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound, the parties hereby
amend the Agreement as follows:
1. Paragraph 4(a)(ii) of the Agreement is hereby amended and restated
to read in its entirety as follows:
(ii) the Company shall pay to Employee, at the time specified in
Subsection 4(b), a lump sum severance payment equal to three times
Employee's annual rate of base salary in effect at the time Notice of
Termination is given (without giving effect to any reduction in salary
which would constitute Good Reason pursuant to Section 3(c)(i)
hereof);
2. Paragraph 4(d) of the Agreement is hereby amended and restated to
read in its entirety as follows:
(d) If the total of all payments made to the Employee pursuant to
this Agreement, together with any other payments which the Employee
has a right to receive from the Company, or any successors, affiliates
or subsidiaries thereof, result in the imposition of an excise tax
under Internal Revenue Code Section 4999 (or any successor thereto),
the Company shall pay the Employee an additional excise tax adjustment
payment in an amount such that, after the payment of all federal and
state income and excise taxes, the Employee will be in the same
after-tax position as if no excise tax had been imposed. Any payment
or benefit which is required to be included under Internal Revenue
Code Sections 280G or 4999 (or any successor provisions thereto) for
purposes of determining whether an excise tax is payable shall be
deemed a payment "made to the Employee" or a payment "which the
Employee has a right to receive" for purposes of this provision. The
Company shall be responsible for the costs of calculation of the
excise tax by its independent certified accountant and tax counsel and
shall notify the Employee of the amount of excise tax due prior to the
time such excise tax is due. If at any time it is determined that the
additional excise tax adjustment payment previously made to the
Employee was insufficient to cover the effect of the excise tax, the
excise tax gross-up payment pursuant to this provision shall be
increased to make the Employee whole, including an amount to cover the
payment of any
- -1-
PHLEGAL: #329764 v1 (72G401!.WPD)
<PAGE>
penalties resulting from incorrect or late payment of the excise tax
resulting from the prior calculation.
3. Covenant Bancorp, Inc. (the "Parent") hereby joins in and agrees
that it shall be liable, jointly and severally with the Company, for all
obligations of the Company under the Agreement. The parties hereto hereby
agree that the events with respect to the Company which constitute a
"Change in Control" or a "Potential Change in Control" shall also
constitute a Change in Control or Potential Change in Control,
respectively, when they occur with respect to the Parent.
IN WITNESS WHEREOF, the undersigned have executed this Amendment effective
as of the day and year first above written.
EMPLOYEE: COVENANT BANK
/s/ Richard A. Hocker By: /s/ Charles E. Sessa, Jr.
- ------------------------- -----------------------------------
RICHARD A. HOCKER Name: Charles E. Sessa, Jr.
Title: President
COVENANT BANCORP, INC.
By: /s/ Charles E. Sessa, Jr.
-----------------------------------
Name: Charles E. Sessa, Jr.
Title: President
- -2-
PHLEGAL: #329764 v1 (72G401!.WPD)
Exhibit 10.2
AMENDMENT NO. 1 TO AGREEMENT
THIS AMENDMENT NO. 1 (this "Amendment") is made as of June 10, 1997, and
amends that certain Agreement dated as of November 22, 1995 (the "Agreement") by
and between Covenant Bank (formerly Covenant Bank for Savings) (the "Company")
and Charles E. Sessa, Jr. (the "Employee").
For good and valuable consideration the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound, the parties hereby
amend the Agreement as follows:
1. Paragraph 4(a)(ii) of the Agreement is hereby amended and restated
to read in its entirety as follows:
(ii) the Company shall pay to Employee, at the time specified in
Subsection 4(b), a lump sum severance payment equal to three times
Employee's annual rate of base salary in effect at the time Notice of
Termination is given (without giving effect to any reduction in salary
which would constitute Good Reason pursuant to Section 3(c)(i)
hereof);
2. Paragraph 4(d) of the Agreement is hereby amended and restated to
read in its entirety as follows:
(d) If the total of all payments made to the Employee pursuant to
this Agreement, together with any other payments which the Employee
has a right to receive from the Company, or any successors, affiliates
or subsidiaries thereof, result in the imposition of an excise tax
under Internal Revenue Code Section 4999 (or any successor thereto),
the Company shall pay the Employee an additional excise tax adjustment
payment in an amount such that, after the payment of all federal and
state income and excise taxes, the Employee will be in the same
after-tax position as if no excise tax had been imposed. Any payment
or benefit which is required to be included under Internal Revenue
Code Sections 280G or 4999 (or any successor provisions thereto) for
purposes of determining whether an excise tax is payable shall be
deemed a payment "made to the Employee" or a payment "which the
Employee has a right to receive" for purposes of this provision. The
Company shall be responsible for the costs of calculation of the
excise tax by its independent certified accountant and tax counsel and
shall notify the Employee of the amount of excise tax due prior to the
time such excise tax is due. If at any time it is determined that the
additional excise tax adjustment payment previously made to the
Employee was insufficient to cover the effect of the excise tax, the
excise tax gross-up payment pursuant to this provision shall be
increased to make the Employee whole, including an amount to cover the
payment of any
- -1-
PHLEGAL: #328804 v1 (71PG01!.WPD)
<PAGE>
penalties resulting from incorrect or late payment of the excise tax
resulting from the prior calculation.
3. Covenant Bancorp, Inc. (the "Parent") hereby joins in and agrees
that it shall be liable, jointly and severally with the Company, for all
obligations of the Company under the Agreement. The parties hereto hereby
agree that the events with respect to the Company which constitute a
"Change in Control" or a "Potential Change in Control" shall also
constitute a Change in Control or Potential Change in Control,
respectively, when they occur with respect to the Parent.
IN WITNESS WHEREOF, the undersigned have executed this Amendment effective
as of the day and year first above written.
EMPLOYEE: COVENANT BANK
/s/ Charles E. Sessa, Jr. By: /s/ Richard A. Hocker
- --------------------------- -------------------------------------
CHARLES E. SESSA, JR. Name: Richard A. Hocker
Title: Chairman and Chief Executive
Officer
COVENANT BANCORP, INC.
By: /s/ Richard A. Hocker
-------------------------------------
Name: Richard A. Hocker
Title: Chairman and Chief Executive
Officer
- -2-
PHLEGAL: #328804 v1 (71PG01!.WPD)
Exhibit 10.3
AMENDMENT NO. 1 TO AGREEMENT
THIS AMENDMENT NO. 1 (this "Amendment") is made as of June 10, 1997, and
amends that certain Agreement dated as of November 22, 1995 (the "Agreement") by
and between Covenant Bank (formerly Covenant Bank for Savings) (the "Company")
and Kenneth R. Mancini (the "Employee").
For good and valuable consideration the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound, the parties hereby
amend the Agreement as follows:
1. Covenant Bancorp, Inc. (the "Parent") hereby joins in and agrees
that it shall be liable, jointly and severally with the Company, for all
obligations of the Company under the Agreement. The parties hereto hereby
agree that the events with respect to the Company which constitute a
"Change in Control" or a "Potential Change in Control" shall also
constitute a Change in Control or Potential Change in Control,
respectively, when they occur with respect to the Parent.
IN WITNESS WHEREOF, the undersigned have executed this Amendment effective
as of the day and year first above written.
EMPLOYEE: COVENANT BANK
/s/ Kenneth R. Mancini By: /s/ Charles E. Sessa, Jr.
- ---------------------------- --------------------------------
KENNETH R. MANCINI Name: Charles E. Sessa, Jr.
Title: President
COVENANT BANCORP, INC.
By: /s/ Charles E. Sessa, Jr.
--------------------------------
Name: Charles E. Sessa, Jr.
Title: President
- -1-
PHLEGAL: #329774 v1 (72G#01!.WPD)
Exhibit 10.4
AMENDMENT NO. 1 TO AGREEMENT
THIS AMENDMENT NO. 1 (this "Amendment") is made as of June 10, 1997, and
amends that certain Agreement dated as of November 22, 1995 (the "Agreement") by
and between Covenant Bank (formerly Covenant Bank for Savings) (the "Company")
and J. William Parker, Jr. (the "Employee").
For good and valuable consideration the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound, the parties hereby
amend the Agreement as follows:
1. Covenant Bancorp, Inc. (the "Parent") hereby joins in and agrees
that it shall be liable, jointly and severally with the Company, for all
obligations of the Company under the Agreement. The parties hereto hereby
agree that the events with respect to the Company which constitute a
"Change in Control" or a "Potential Change in Control" shall also
constitute a Change in Control or Potential Change in Control,
respectively, when they occur with respect to the Parent.
IN WITNESS WHEREOF, the undersigned have executed this Amendment effective
as of the day and year first above written.
EMPLOYEE: COVENANT BANK
/s/ J. William Parker, Jr. By: /s/ Charles E. Sessa, Jr.
- ------------------------------- ------------------------------
J. WILLIAM PARKER, JR. Name: Charles E. Sessa, Jr.
Title: President
COVENANT BANCORP, INC.
By: /s/ Charles E. Sessa, Jr.
------------------------------
Name: Charles E. Sessa, Jr.
Title: President
- -1-
PHLEGAL: #329780 v1 (72GK01!.WPD)
Exhibit 10.5
AMENDMENT NO. 1 TO AGREEMENT
THIS AMENDMENT NO. 1 (this "Amendment") is made as of June 10, 1997, and
amends that certain Agreement dated as of November 22, 1995 (the "Agreement") by
and between Covenant Bank (formerly Covenant Bank for Savings) (the "Company")
and Eugene D. D'Orazio (the "Employee").
For good and valuable consideration the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound, the parties hereby
amend the Agreement as follows:
1. Covenant Bancorp, Inc. (the "Parent") hereby joins in and agrees
that it shall be liable, jointly and severally with the Company, for all
obligations of the Company under the Agreement. The parties hereto hereby
agree that the events with respect to the Company which constitute a
"Change in Control" or a "Potential Change in Control" shall also
constitute a Change in Control or Potential Change in Control,
respectively, when they occur with respect to the Parent.
IN WITNESS WHEREOF, the undersigned have executed this Amendment effective
as of the day and year first above written.
EMPLOYEE: COVENANT BANK
/s/ Eugene D. D'Orazio By: /s/ Charles E. Sessa, Jr.
- ---------------------------- ------------------------------------
EUGENE D. D'ORAZIO Name: Charles E. Sessa, Jr.
Title: President
COVENANT BANCORP, INC.
By: /s/ Charles E. Sessa, Jr.
----------------------------------
Name: Charles E. Sessa, Jr.
Title: President
- -1-
PHLEGAL: #329783 v1 (72GN01!.WPD)
Exhibit 11
COVENANT BANCORP, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 910 $ 754 $1,814 $1,435
====== ====== ====== ======
Average number of shares outstanding:
Average common shares outstanding 3,054 3,073 3,044 3,073
Common stock equivalents considered in
earnings per share computation:
Dilutive stock options 201 106 180 107
Conversion of preferred stock Series "A" 550 550 550 550
Conversion of preferred stock Series "B" 509 509 509 509
------ ------ ------ ------
Average number of shares outstanding 4,314 4,238 4,283 4,239
====== ====== ====== ======
Net income per share
of common stock and common stock equivalents $ 0.21 $ 0.18 $ 0.42 $ 0.34
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001035468
<NAME> COVENANT BANCORP, INC.
<MULTIPLIER> 1000
<CURRENCY> US DOL
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 23989
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 131706
<INVESTMENTS-CARRYING> 11353
<INVESTMENTS-MARKET> 11425
<LOANS> 262848
<ALLOWANCE> 2817
<TOTAL-ASSETS> 453971
<DEPOSITS> 301783
<SHORT-TERM> 117242
<LIABILITIES-OTHER> 4134
<LONG-TERM> 0
0
7500
<COMMON> 14682
<OTHER-SE> 10702
<TOTAL-LIABILITIES-AND-EQUITY> 453971
<INTEREST-LOAN> 10899
<INTEREST-INVEST> 4663
<INTEREST-OTHER> 47
<INTEREST-TOTAL> 15609
<INTEREST-DEPOSIT> 5166
<INTEREST-EXPENSE> 8088
<INTEREST-INCOME-NET> 7521
<LOAN-LOSSES> 30
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5237
<INCOME-PRETAX> 2757
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1814
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.84
<LOANS-NON> 2216
<LOANS-PAST> 1324
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3016
<CHARGE-OFFS> 257
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 2817
<ALLOWANCE-DOMESTIC> 2817
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
