As filed with the Securities and Exchange Commission on April 17, 1997.
Registration No. 333-23257
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
COVENANT BANCORP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
New Jersey 6021 22-3505405
- --------------------------------- ---------------------------- ------------------
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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18 Kings Highway West
Haddonfield, NJ 08033
(609) 428-7300
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
J. William Parker, Jr.
Chief Financial Officer
Covenant Bancorp, Inc.
18 Kings Highway West
Haddonfield, NJ 08033
(609) 428-7318
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With a copy to:
J. Bradley Boericke, Esquire
Pepper, Hamilton & Scheetz LLP
3000 Two Logan Square
Philadelphia, PA 19103-2799
(215)-981-4790
Approximate Date of Commencement of Proposed Sale to the Public:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum
Title Of Each Class Offering Price Aggregate Amount of
Of Securities To Be Registered Amount to be Registered Per Share Offering Price Registration Fee
- ------------------------------ ----------------------- --------- -------------- ----------------
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Common Stock, par value $5 12,950 shares $16.38 $212,121.00 (1) $64.28
</TABLE>
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- ----------
(1) This Registration Statement registers (i) 3,376,505 shares of Common Stock
of Covenant Bancorp, Inc. (the "Company"), including 12,950 shares of
Common Stock of the Company being registered with this Amendment No. 1 (the
"Additional Shares") and 3,363,555 shares of Common Stock of the Company
previously registered hereunder, (ii) 138,300 shares of Series A Preferred
Stock of the Company, previously registered hereunder, and (iii) 161,700
shares of Series B Preferred Stock of the Company, previously registered
hereunder, which shares represent the maximum number of shares of Common
Stock, Series A Preferred Stock and Series B Preferred Stock of the Company
that could be issued in connection with the acquisition by the Company (the
"Reorganization") of all of the outstanding capital stock of Covenant Bank
(the "Bank"), including shares issuable pursuant to options and other
rights to acquire rights of Company Common Stock which will be exchanged in
the Reorganization for comparable rights to acquire shares of Bank Common
Stock. Pursuant to Rule 457(f)(1) and 457(c) promulgated under the
Securities Act of 1933, as amended, and estimated solely for purposes of
calculating the registration fee, the proposed maximum aggregate offering
price of the Additional Shares is $212,121 which equals (x) the average of
the high and low prices of the common stock, par value $5.00 per share (the
"Bank Common Stock") of the Bank, of $16.38, as reported on the Nasdaq
Stock Market National Market on April 14, 1997, multiplied by (y) the total
number of Additional Shares. The proposed maximum aggregate offering price
per share is equal to the proposed maximum aggregate offering price
determined in the manner described in the preceding sentence divided by the
number of Additional Shares.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
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
April ___, 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
----------
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 April ___, 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 ___, 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>
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Page
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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
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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
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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
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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
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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. 1 filed with the FDIC on April 18,
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 theExchange 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.
(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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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").
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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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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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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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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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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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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.
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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 March 12, 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
[signature]
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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. 1 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.
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.
C-2
<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.
C-3
<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 fifteen 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 and Mt. Laurel. 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 and Mt. Laurel 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) $7.53 $7.24 $6.51 $6.20 $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
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 excludes 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 16, 1997 By: /s/ Charles E. Sessa, Jr.
-----------------------------------
Name: Charles E. Sessa, Jr.
Title: President
Date: April 16, 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 16, 1997 By: /s/ William T. Carson
-----------------------------------
William T. Carson, Director
Date: By:
-----------------------------------
John J. Gallagher, Director
Date: April 16, 1997 By: /s/ Gary E. Greenblatt
-----------------------------------
Gary E. Greenblatt, Director
Date: April 16, 1997 By: /s/ Richard A. Hocker
-----------------------------------
Richard A. Hocker, Director
Date: April 16, 1997 By: /s/ James R. Iannone
-----------------------------------
James R. Iannone, Director
Date: By:
-----------------------------------
Joseph A. Maressa, Sr., Director
Date: April 16, 1997 By: /s/ Charles E. Sessa, Jr.
-----------------------------------
Charles E. Sessa, Jr., Director
Date: April 16, 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
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 5 of the Holding Company's Bylaws provides that the Holding
Company, to the full extent permitted by Section 14A:3-5 of the Corporation Law
of the State of New Jersey (the "NJCL"), shall indemnify all past and present
directors, officer, employee or agent of the Holding Company against all
expenses and liabilities reasonably incurred by or imposed upon such person in
connection with any proceeding to which such person may be made, or threatened
to be made, a party, or in which he or she may become involved by reason of
being or having been a director or executive officer of the Holding Company.
Section 14A:3-5 of the NJCL permits each New Jersey business corporation to
indemnify its directors, officers, employees and agents against expenses and
liability for each such person's acts taken in his or her capacity as a
director, officer, employee or agent of the corporation if such actions were
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal proceeding, he or she had no reasonable cause to
believe his or her conduct was unlawful. In the case of an action or proceeding
by or in the right of the Holding Company, no indemnification may be provided in
respect of any claim, issue or matter as to which such corporate agent shall
have been adjudged to be liable to the Holding Company, unless the Superior
Court or the court in which the proceeding was brought shall determine upon
application that in light of all circumstances such person is fairly and
reasonably entitled to indemnity. Expenses may be paid by the Holding Company in
advance of the final disposition of the action, suit or proceeding as authorized
by the Board of Directors upon receipt of an undertaking to repay the advance if
it is ultimately determined that such person is not entitled to indemnification.
As permitted under the NJCL, Article 10 of the Holding Company's
Certificate of Incorporation provides that no director or officer of the Holding
Company shall be liable to the Holding Company or its shareholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Holding Company or its
shareholders as defined in Section 14A:2-7(3) of the NJCL, (ii) for acts or
omissions not in good faith or which involve a knowing violation of law, or
(iii) for any act or omission which resulted in receipt by the director of an
improper personal benefit.
The Holding Company also has a policy insuring it and its directors and
officers against certain liabilities, including liabilities under the Securities
Act.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibit Index
No. Description
--- -----------
2.1 -- Plan of Reorganization dated February 28, 1997, attached as
Annex A to the Proxy Statement--Prospectus included in Part I,
is incorporated herein by reference.
*3.1 -- Certificate of Incorporation of Covenant Bancorp, Inc.
*3.2 -- Bylaws of Covenant Bancorp, Inc.
4.1 -- Form of Stock Certificate (Common Stock)
4.2 -- Form of Stock Certificate (Series A Preferred Stock)
4.3 -- Form of Stock Certificate (Series B Preferred Stock)
5.1 -- Opinion of Pepper, Hamilton & Scheetz LLP
II-1
<PAGE>
8.1 -- Tax Opinion
10.1 -- Incentive Stock Option Plan
10.2 -- Employee Stock Purchase Plan
10.3 -- 1996 Stock Option Plan for Officers and
Non-Employee Directors
10.4 -- Agreement dated November 22, 1995 between
Covenant Bank and Richard A. Hocker
10.5 -- Agreement dated November 22, 1995 between
Covenant Bank and Charles E. Sessa, Jr.
10.6 -- Agreement dated November 22, 1995 between
Covenant Bank and Kenneth R. Mancini, Jr.
10.7 -- Agreement dated November 22, 1995 between
Covenant Bank and J. William Parker, Jr.
10.8 -- Agreement dated November 22, 1995 between
Covenant Bank and Eugene D. D'Orazio, Jr.
11.1 -- Computation of Earnings Per Share, attached as part of
Annex C to the Proxy Statement -- Prospectus
included in Part I, is incorporated herein by reference.
23.1 -- Consent of KPMG Peat Marwick, LLP
23.2 -- Consent of Moore & Fitzpatrick LLC
23.3 -- Consent of Coopers & Lybrand LLP
*27.1 -- Financial Data Schedules
99.1 -- Form of Proxy of Covenant Bank
99.2 -- Letter from the Chairman and President of Covenant Bank
- ----------
* Previously filed
(b) Financial Statement Schedules:
All schedules have been omitted because they are not applicable, not
required, or the required information is included in the Financial
Statements or the notes thereto.
(c) Report, Opinion or Appraisal
Not applicable.
Item 22. Undertakings.
(a) (a) The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
II-2
<PAGE>
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement,
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(g) (1) The undersigned registrant hereby undertakes as follows:
that prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c), the issuer undertakes that such
offering prospectus will contain the information called for by the
applicable registration form with respect to offerings by persons who may
be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Act and
is used in connection with an offering of securities subject to Rule
415, will be filed as part of an amendment to the registration
statement and will not be used until such amendment is effective, and
that, for purposes of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to securities offered therein,
and the offering of such securities at the time shall be deemed to be
the initial bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Holding Company pursuant to the foregoing provisions, or
otherwise, the Holding Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Holding Company of expenses
incurred or paid by a director, officer or controlling person of the
Holding Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Holding Company will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning the transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Haddonfield, state of New
Jersey, on April 17, 1997.
COVENANT BANCORP, INC.
By: /s/ CHARLES E. SESSA, JR.
-------------------------------
Charles E. Sessa, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated. Each person in so signing also makes,
constitutes and appoints Richard A. Hocker, Chairman of the Board and Chief
Executive Officer, and Charles E. Sessa, Jr., President, and each of them, his
or her true and lawful attorney-in-fact, in his or her name, place and stead to
execute and cause to be filed with the Securities and Exchange Commission any
and all further amendments (including post-effective amendments) to this
registration statement.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
*
______________________________ Director, Chairman of the Board April 17, 1997
Richard A. Hocker and Chief Executive Officer
(principal executive officer)
/s/ CHARLES E. SESSA, JR.
_______________________________ Director, President April 17, 1997
Charles E. Sessa, Jr. (principal executive officer)
/s/ J. WILLIAM PARKER, JR.
______________________________ Executive Vice President, April 17, 1997
J. William Parker, Jr. Chief Financial Officer and
Treasurer (principal financial officer
and principal accounting officer)
*
______________________________ Director April 17, 1997
Barry M. Abelson
*
______________________________ Director April 17, 1997
Thomas V.G. Brown
*
______________________________ Director April 17, 1997
William T. Carson, Jr.
*
______________________________ Director April 17, 1997
John J. Gallagher, Jr.
______________________________ Director
Gary E. Greenblatt
*
______________________________ Director April 17, 1997
James R. Iannone
*
______________________________ Director April 17, 1997
Joseph A. Maressa, Sr.
*
______________________________ Director April 17, 1997
Kyle W. Will
*By: __________________________
Charles E. Sessa, Jr.,
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
No. Description
--- -----------
2.1 -- Plan of Reorganization dated February 28, 1997,
attached as Annex A to the Proxy Statement -- Prospectus
included in Part I, is incorporated herein by reference.
*3.1 -- Certificate of Incorporation of Covenant Bancorp, Inc.
*3.2 -- Bylaws of Covenant Bancorp, Inc.
4.1 -- Form of Stock Certificate (Common Stock)
4.2 -- Form of Stock Certificate (Series A Preferred Stock)
4.3 -- Form of Stock Certificate (Series B Preferred Stock)
5.1 -- Opinion of Pepper, Hamilton & Scheetz LLP
8.1 -- Tax Opinion
10.1 -- Incentive Stock Option Plan
10.2 -- Employee Stock Purchase Plan
10.3 -- 1996 Stock Option Plan for Officers and
Non-Employee Directors
10.4 -- Agreement dated November 22, 1995 between
Covenant Bank and Richard A. Hocker
10.5 -- Agreement dated November 22, 1995 between
Covenant Bank and Charles E. Sessa, Jr.
10.6 -- Agreement dated November 22, 1995 between
Covenant Bank and Kenneth R. Mancini, Jr.
10.7 -- Agreement dated November 22, 1995 between
Covenant Bank and J. William Parker, Jr.
10.8 -- Agreement dated November 22, 1995 between
Covenant Bank and Eugene D. D'Orazio, Jr.
11.1 -- Computation of Earnings Per Share, attached as part of
Annex C to the Proxy Statement -- Prospectus included in
Part I, is incorporated herein by reference.
23.1 -- Consent of KPMG Peat Marwick, LLP
23.2 -- Consent of Moore & Fitzpatrick LLC
23.3 -- Consent of Coopers & Lybrand LLP
*27.1 -- Financial Data Schedules
99.1 -- Form of Proxy of Covenant Bank
99.2 -- Letter from the Chairman and President of Covenant Bank
- ----------
* Previously filed
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, CORPORATE /s/ Charles E. Sessa, Jr.,
------------------------ SEAL ------------------------
Secretary 1988 President
Exhibit 4.2
COVENANT BANK
Preferred Stock, Series A Certificate
COVENANT BANK
Number - CBP________
COVENANT BANK
INCORPORATED UNDER THE LAWS OF THE STATE OF NEW JERSEY
300,000 SHARES PREFERRED STOCK
Par Value $25.00 Per Share
CUSIP 222837 20 5
SEE REVERSE FOR CERTAIN DEFINITIONS
PREFERRED STOCK
THIS CERTIFIES THAT
IS THE OWNER OF
Shares
of the PREFERRED STOCK 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.
The Corporation will furnish to any shareholder, upon request and without
charge, a full statement of the designations, relative rights, preferences and
limitations of the shares of each class and series authorized to be issued. 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, CORPORATE /s/ Charles E. Sessa, Jr.,
------------------------ SEAL ------------------------
Secretary 1988 President
Exhibit 4.3
COVENANT BANK
Preferred Stock, Series B Certificate
COVENANT BANK
Number - CBPB________
COVENANT BANK
INCORPORATED UNDER THE LAWS OF THE STATE OF NEW JERSEY
300,000 SHARES PREFERRED STOCK
Par Value $25.00 Per Share
CUSIP 222837 30 4
SEE REVERSE FOR CERTAIN DEFINITIONS
SERIES B PREFERRED STOCK
THIS CERTIFIES THAT
IS THE OWNER OF
Shares
of the SERIES B PREFERRED STOCK 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.
The Corporation will furnish to any shareholder, upon request and without
charge, a full statement of the designations, relative rights, preferences and
limitations of the shares of each class and series authorized to be issued. 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, CORPORATE /s/ Charles E. Sessa, Jr.,
------------------------ SEAL ------------------------
Secretary 1988 President
Exhibit 5.1
April 15, 1997
Covenant Bancorp, Inc.
18 Kings Highway West
Haddonfield, NJ 08033
Dear Gentlemen and Ladies:
We have acted as counsel to Covenant Bancorp, Inc., a New Jersey
corporation (the "Company") in connection with the preparation and filing with
the Securities and Exchange Commission (the "Commission") of a registration
statement (the "Registration Statement") of the Company on Form S-4 under the
Securities Act of 1933, as amended (the "Act"), to register the public offering
and issuance of up to 3,376,505 shares of common stock, par value $5.00 per
share, of the Company (the "Common Stock"), 138,300 shares of Series A Preferred
Stock, par value $25.00 per share, of the Company (the "Series A Preferred
Stock") and 161,700 shares of Series B Preferred Stock, par value $25.00 per
share, of the Company (the "Series B Preferred Stock") to be issued in
connection with the acquisition by the Company of all of the outstanding capital
stock of Covenant Bank (the "Bank") pursuant to the Plan of Acquisition dated as
of February 28, 1997, as amended (the "Plan") between the Company and the Bank.
In this connection, we have examined the originals or copies, certified or
otherwise identified to our satisfaction, of the Plan, the Certificate of
Incorporation and Bylaws of the Company, resolutions of the Company's Board of
Directors, and such other documents and corporate records relating to the
Company and the proposed issuance of securities as we have deemed appropriate.
The opinion expressed herein is based exclusively on the applicable provisions
of the New Jersey Business Corporation Act as in effect on the date hereof.
We have assumed (i) the genuineness of all signatures and the authenticity
and completeness of all records, certificates, instruments and documents
submitted to us as originals, and (ii) the conformity to authentic originals of
all records, certificates, instruments and documents submitted to us as
certified, conformed, photostatic or facsimile copies thereof. We have also
assumed that the consideration to be received by the Company in connection with
the
<PAGE>
Covenant Bancorp, Inc.
April 15, 1997
Page 2
issuance of the Common Stock, Series A Preferred Stock and Series B Preferred
Stock pursuant to the Plan is in fact received by the Company.
On the basis of the foregoing, we are of the opinion that the Common Stock,
Series A Preferred Stock and Series B Preferred Stock, when issued in accordance
with the Plan, will be legally issued, fully paid and non-assessable.
We hereby consent to the reference to our firm under the caption "Legal
Matters" in the Proxy Statement/Prospectus included in the Registration
Statement and to the filing of this opinion as an exhibit to the Registration
Statement. Such consent does not constitute a consent under Section 7 of the
Act, since we have not certified any part of such Registration Statement and do
not otherwise come within the categories of persons whose consent is required
under Section 7 of the Act or the rules and regulations of the Commission
promulgated thereunder.
Very truly yours,
PEPPER, HAMILTON & SCHEETZ LLP
Exhibit 8.1
April 15, 1997
Covenant Bank
18 Kings Highway West
Haddonfield, NJ 08033
Ladies and Gentlemen:
You have requested our opinion regarding certain federal income tax
consequences of the reorganization (the "Reorganization") of Covenant Bank, a
New Jersey chartered capital stock commercial bank ("Covenant"), through the
formation of Covenant Bancorp, a New Jersey corporation ("Holding Company"),
which will serve as a holding company for Covenant, under the circumstances and
on the terms and conditions more fully described herein.
The terms of the Reorganization are contained in the Plan of Acquisition,
dated as of February 28, 1997 (the "Plan"). Terms not otherwise defined in this
letter shall have the meanings assigned to them in the Plan.
With your permission, we have assumed that: (1) the Reorganization will be
consummated in accordance with the terms, conditions and other provisions of the
Plan, and (2) all of the factual information, descriptions, representations and
assumptions set forth in this letter (an advance copy of which has been provided
to you), in the Plan, your letter to us dated April 15, 1997 (the "Certification
Letter", a copy of which is attached hereto), and in the preliminary Proxy
Statement pertaining to the Reorganization (the "Proxy Statement") as filed with
the Securities and Exchange Commission (the "SEC") on March 13, 1997, are
accurate and complete and will be accurate and complete at the time the
Reorganization becomes effective (the "Effective Time"). We have not
independently verified any factual matters relating to the Reorganization in
connection with our preparation of this opinion and, accordingly, our opinion
does not take into account any other matters not set forth herein which might
have been disclosed by independent verification.
<PAGE>
Page 2
April 15, 1997
PARTIES TO THE REORGANIZATION
Covenant
Covenant is a capital stock commercial bank organized under the laws of the
State of New Jersey with its principal office at 18 Kings Highway West,
Haddonfield, New Jersey 08033. Covenant offers a broad range of lending,
depository and related financial services to individuals, businesses and
governmental units, with a market focus on southern New Jersey.
As of the Record Date set forth in the Proxy Statement, the authorized
capital stock of Covenant consisted of 5,000,000 shares of common stock, par
value $5.00 per share ("Bank Common Stock"), of which 2,936,480 shares were
issued and outstanding, and 300,000 shares of 6% Convertible Non-Cumulative
Preferred Stock, par value $25.00 per share, of which 138,300 shares were
designated, issued and outstanding as Series A Preferred Stock (the "Bank Series
A Preferred Stock") and 161,700 were designated, issued and outstanding as
Series B Preferred Stock (the "Bank Series B Preferred Stock").
Holding Company
Holding Company was formed in February 1997 to serve as the Holding Company
of Covenant following the acquisition by Holding Company of the outstanding
capital stock of Covenant pursuant to the terms of the Reorganization.
The authorized capital stock of Holding Company consists of up to
25,000,000 shares of common stock, par value $5.00 per share ("Holding Company
Common Stock"), of which 2,936,481 shares will be issued and outstanding
immediately following the Reorganization, and up to 1,000,000 shares of 6%
Convertible Non-Cumulative Preferred Stock, par value $25.00 per share, of which
138,300 shares have been designated as Holding Company Series A Preferred Stock
(the "Holding Company Series A Preferred Stock") and 161,700 shares have been
designated as Holding Company Series B Preferred Stock (the "Holding Company
Series B Preferred Stock").
The Reorganization
The Reorganization will be consummated in accordance with The Banking Act
of 1948, as amended, N.J.S.A. sections 17:9A-355 through 17:9A-369 (the "Act"),
on the terms summarized below and more fully detailed in the Plan and Proxy
Statement.
Acquisition of Outstanding Shares. At the Effective Time (as defined
below), Holding Company shall acquire all of the issued and outstanding shares
of Bank Common Stock, Bank
<PAGE>
Page 3
April 15, 1997
Series A Preferred Stock, and Bank Series B Preferred Stock (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 Holding Company, as set forth
below:
(1) in exchange for each share of Bank Common Stock, one share of Holding
Company Common Stock;
(2) in exchange for each share of Bank Series A Preferred Stock, one share
of Holding Company Series A Preferred Stock; and
(3) in exchange for each share of Bank Series B Preferred Stock, one share
of Holding Company Series B Preferred Stock.
Options and Other Rights. Effective as of the Effective Time, Holding
Company 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 Covenant. At the Effective Time all references in
such Plans to Covenant shall be deemed to be references to Holding Company, and
all rights under the Plans to acquire shares of Bank Common Stock shall be
converted into and become rights to acquire shares of Holding Company Common
Stock.
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 Holding Company Common Stock, Holding Company
Series A Preferred Stock and Holding Company Series B Preferred Stock,
respectively.
Dissenters' Shares. Dissenters' Shares shall be paid for by Covenant in
accordance with the applicable provisions of the Act, and shall thereafter be
distributed by Covenant as a stock dividend to Holding Company as provided in
the Act.
Effective Time. Upon approval of the Plan by the Commissioner of the New
Jersey Department of Banking and Insurance (the "Department") and the
shareholders of Covenant as provided in the Act, the Plan shall be filed with
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.
<PAGE>
Page 4
April 15, 1997
Representations and Assumptions
We also have relied with your permission on the following additional
representations and/or assumptions:
1. No stock or securities will be issued by Holding Company in
exchange for services rendered to or for the benefit of Holding Company or
Covenant in connection with the Reorganization.
2. No stock or securities will be issued by Holding Company in
exchange for indebtedness of Holding Company or Covenant in connection with
the Reorganization.
3. To the best of the knowledge of the management of Holding Company
and Covenant, none of the stock of Covenant prior to the Reorganization is
"Section 306 Stock" within the meaning of Section 306(c) of the Code.
4. The Reorganization is not the result of a solicitation by a
promoter, broker or investment house.
5. Shareholders of Covenant will not retain any rights to their shares
of Covenant following the Reorganization.
6. None of the shares of Covenant exchanged in the Reorganization are
subject to acquisition indebtedness which is being assumed by Holding
Company or Covenant, and none of the shares of Covenant exchanged in the
Reorganization will be exchanged for "property" within the meaning of
Sections 304(a) and 317(a) of the Code.
7. Holding Company will be a "bank holding company" within the meaning
of Section 2(a) of the Bank Holding Company Act of 1956.
8. An application to form a bank holding company was not filed by
Covenant or any predecessor entity before August 16, 1982.
9. Neither Holding Company nor Covenant is assuming any liabilities of
the shareholders of Covenant in connection with the Reorganization.
10. There is no indebtedness outstanding between Holding Company and
the shareholders of Covenant, and no such indebtedness will be created
pursuant to the Reorganization.
<PAGE>
Page 5
April 15, 1997
11. The Reorganization is not part of a larger transaction that fits a
pattern common to acquisitive reorganizations as described in Revenue
Procedure 83-22, 1983-1 C.B. 680.
12. No stock of Covenant or Holding Company will be placed in escrow
in connection with the Reorganization, and no stock of Covenant or Holding
Company will be issued at a later date under a contingent stock arrangement
relating to the Reorganization.
13. The Reorganization will be conducted in its entirety pursuant to
the Plan as adopted by the shareholders of Covenant; the Plan defines all
of the rights of the shareholders of Covenant and Holding Company,
respectively, and there are no other plans, arrangements or agreements
outstanding which will affect the terms of the Reorganization pursuant to
the Plan.
14. All exchanges under the Plan will occur simultaneously at the
Effective Time as defined therein.
15. To the best of the knowledge of the management of Covenant, there
is no plan or intention on the part of Holding Company to redeem or
reacquire any of its stock issued pursuant to the Reorganization.
16. Taking into account (a) any issuance of Holding Company stock (i)
in exchange for services, (ii) pursuant the exercise of outstanding stock
options, warrants or other rights to acquire the stock of Holding Company,
and (iii) pursuant to a public offering of Holding Company stock, and (b)
the sale, transfer by gift or other disposition of stock of Holding Company
to be received by the shareholders of Covenant in the Reorganization, the
former shareholders of Covenant will be in "control" of Holding Company
within the meaning of Section 368(c) of the Code immediately following the
Reorganization.
17. Each shareholder of Covenant will receive stock of Holding Company
approximately equal in worth to the fair market value of the stock of
Covenant transferred to Holding Company in the Reorganization.
18. Holding Company and Covenant will each remain in existence
following the Reorganization, Covenant will continue to pursue its trade
and business, and Holding Company will retain the stock of Covenant as part
of its trade and business.
19. To the best of the knowledge of the management of Covenant, as of
the date hereof there is no plan or intention by Holding Company to dispose
of any of the stock of Covenant following the Reorganization other than in
the ordinary course of business.
<PAGE>
Page 6
April 15, 1997
20. As of the date hereof, there is no plan or intention on the part
of Covenant or Holding Company to issue additional shares of any class of
stock except pursuant to the Reorganization or the Plans.
21. The business purposes for the Reorganization are: (i) the
facilitation of possible acquisitions of other financial institutions and
flexibility with respect to possible acquisitions of different types of
financial institutions, (ii) the elimination of adverse tax consequences
with respect to stock repurchases, (iii) the permissibility of a staggered
board of directors, and (iv) the application of the modern corporations
code as the principal corporate law governing Holding Company, and the
reduction of the applicable burdens under the Act regarding Covenant's
charter, capital stock and governance.
22. The shareholders of Covenant and Holding Company will each pay
their respective expenses, if any, in connection with the consummation of
the Reorganization.
23. Holding Company will not be an "investment company" within the
meaning of Section 351(e)(1) of the Code or Section 1.351-1(c)(1)(ii) of
the Treasury Regulations.
24. To the best of the knowledge of the management of Covenant, none
of the shareholders of Covenant is under the jurisdiction of a court in a
Title 11 or similar case (within the meaning of Section 368(a)(3)(A) of the
Code), and the stock of Holding Company received in the Reorganization will
not be used to satisfy the indebtedness any shareholder under the
jurisdiction of a court in a Title 11 or similar case.
25. Holding Company will not be a "personal services corporation"
within the meaning of Section 269A of the Code.
OPINION
Assuming that the Reorganization is consummated in accordance with the
terms and conditions set forth in the Plan and based on the facts, assumptions
and representations set forth in the Certification Letter and this letter and
subject to the qualifications and other matters set forth herein, we are of the
opinion that:
A. The Reorganization will qualify as a tax-free exchange under
Section 351 of the Code.
B. No gain or loss will be recognized to Covenant or Holding Company
as a result of the Reorganization. Section 1032 of the Code.
<PAGE>
Page 7
April 15, 1997
C. Except to the extent of any cash received, no gain or loss, if any,
will be recognized by the shareholders of Covenant whose shares of Bank
Common Stock, Bank Series A Preferred Stock and Bank Series B Preferred
Stock are converted solely into Holding Company Common Stock, Holding
Company Series A Preferred Stock and Holding Company Series B Preferred
Stock, respectively. Sections 351 and 357 of the Code.
D. The basis of the Holding Company Common Stock, Holding Company
Series A Preferred Stock and Holding Company Series B Preferred Stock
received by the Covenant shareholders will be the same, respectively, as
the adjusted basis of their Bank Common Stock, Bank Series A Preferred
Stock and Bank Series B Preferred Stock that was exchanged upon the
consummation of the Reorganization, less any cash received, plus any gain
recognized, allocated between the Holding Company Common Stock, Holding
Company Series A Preferred Stock and Holding Company Series B Preferred
Stock that they receive in proportion to the fair market value of each
security at the Effective Time. Section 358 of the Code.
E. The holding period of the Holding Company Common Stock, Holding
Company Series A Preferred Stock and Holding Company Series B Preferred
Stock to be received by each shareholder pursuant to the Reorganization
will include the period during which such shareholder held, respectively,
the Bank Common Stock, Bank Series A Preferred Stock and Bank Series B
Preferred Stock which was converted upon consummation of the
Reorganization, provided that such shareholder held such Bank Common Stock,
Bank Series A Preferred Stock and Bank Series B Preferred Stock as a
capital asset at the Effective Time. Section 1223(1) of the Code.
F. Any shareholder who perfects dissenters' rights under the laws of
the State of New Jersey and who receives a cash payment of the fair market
value of such shareholder's shares of Bank Common Stock, Bank Series A
Preferred Stock or Bank Series B Preferred Stock will be treated as having
received such payment in redemption of such shares. Such redemption will be
subject to the conditions and limitations of Code Section 302, including
the attribution rules of Code Section 318. In general, if, at the Effective
Time, all of the Bank Common Stock, Bank Series A Preferred Stock and Bank
Series B Preferred Stock owned (actually or constructively) by a dissenting
shareholder is surrendered for cash in connection with the Reorganization
and such stock is owned as a capital asset, the dissenting shareholder will
recognize capital gain or loss measured by the difference between the
amount of cash received by such holder and the basis for such shares. If,
however, such dissenting holder owns, either actually or constructively,
any additional Covenant or Holding Company shares, or if such holder should
only dissent with respect to one class or two classes of Covenant stock,
the payment made to such holder could be treated as a dividend. In general,
under the constructive ownership rules of the Code, a holder may be
considered to own stock that is owned, and in some cases constructively
owned, by certain related individuals or entities, as well as stock that
such holder (or related individuals or entities) has the right to acquire
by exercising an option or converting a convertible security.
<PAGE>
Page 8
April 15, 1997
Our opinion is limited to the foregoing federal income tax consequences of
the Reorganization, which are the only matters as to which you have requested
our opinion. We have not addressed any other federal income tax consequences of
the Reorganization other than those specifically set forth herein and we have
not considered any matters (including state or local tax consequences) arising
under the laws of any jurisdiction other than matters of federal law arising
under the laws of the United States as expressly set forth herein.
Our opinion is based on the understanding that the relevant facts are, and
will be at the Effective Time, as set forth or referred to in this letter. If
this understanding is incorrect or incomplete in any respect, our opinion could
be affected. Our opinion is based on the facts and representations as expressed
herein.
Our opinion is based upon existing law, including the provisions of the
Code, Treasury Regulations promulgated thereunder, current administrative
rulings and practices of the Internal Revenue Service, case law, and judicial
decisions interpreting the same.
In addition, the authorities upon which we have relied are all subject to
change and such change may be made with retroactive effect. No assurances can be
provided as to future judicial interpretations of these laws or their affect on
this opinion. We are not hereby undertaking to advise you as to any changes in
the law, facts, or circumstances which may hereafter occur or come to our
attention. No assurance can be provided that after any such change our opinion
would not be different. Further, we undertake no responsibility and are under no
obligation to update or supplement our opinion at any future time nor render any
further opinion to you.
We hereby consent to the reference to our firm under the caption "Federal
Income Tax Consequences" in the Proxy Statement included in the Registration
Statement of Holding Company on Form S-4 under the Securities Act of 1933, as
amended, and to the filing of this opinion as an exhibit to such Registration
Statement. Only Covenant and Holding Company may rely on this opinion, and only
with respect to the Reorganization.
Very truly yours,
PEPPER, HAMILTON & SCHEETZ LLP
---------------------------------
Lisa Petkun, a Partner
Exhibit 10.1
COVENANT BANK FOR SAVINGS
INCENTIVE STOCK OPTION PLAN
1. Purpose. This Incentive Stock Option Plan (the "Plan") is intended to
encourage stock ownership by selected employees and officers of Covenant Bank
for Savings (the "Bank") and its subsidiaries (if any) who are important to the
success and growth of the Bank's business and to help the Bank and its
subsidiaries obtain and retain the services of such employees. It is further
intended that options issued pursuant to this Plan shall constitute incentive
stock options within the meaning of Section 422A of the Internal Revenue Code of
1986, as amended (the "Code").
2. Administration. The Plan shall be administered by a Committee of not
less than three Directors, each of whom shall be ineligible to participate, or
shall have waived the right to participate, in the Plan.
The Committee shall have, subject to, and within the limits of, the express
provisions of the Plan, the following powers:
(a) To determine from time to time which of the eligible employees
shall be granted options under the Plan, and the time or times when, and
the number of shares for which, an option or options shall be granted to
each of them.
(b) To construe and interpret the Plan and options granted under it,
and to establish, amend, and revoke rules and regulations for its
administration. The Committee, in the exercise of its power, may correct
any defect, or supply any omission, in the Plan or in any option agreement,
in a manner and to the extent it shall be necessary or expedient to make
the Plan fully effective. The interpretation and construction by the
Committee of any provision of the Plan or of any option granted under it
shall be final. No member of the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any option
granted under it.
(c) To prescribe the terms and provisions of each option granted,
which terms and provisions need not be identical.
3. Eligibility. The persons who shall be eligible to receive options shall
be such key employees and senior officers, whether or not they are directors, of
the Bank or its subsidiary corporations" (as such term is defined in Section 425
of the Code), as the Committee shall select from time to time. An optionee may
hold more than one option, but only on the terms and subject to the restrictions
hereafter set forth. No optionee shall be granted incentive stock options (under
this and all other stock option plans of the Bank and its subsidiaries) for
which the shares exercisable for the first time in any calendar year shall have
an aggregate fair market value (determined as of the time of grant) in excess of
$100,000.
4. Stock. The stock subject to the options shall be the shares of the
Bank's authorized but unissued Common Stock (the "Stock"), shares of Stock held
in the Bank's treasury, or both. The aggregate number of shares of Stock which
may be issued under options shall not exceed 120,000 shares of Stock; except
that such number shall be subject to adjustment as provided in Article 5(i) of
the Plan.
<PAGE>
In the event any outstanding option under the Plan for any reason expires
or is terminated, the shares of Stock allocable to the unexercised portion of
such option may again be subjected to an option under the Plan.
5. Terms and Conditions of Options. Stock options granted pursuant to the
Plan shall be authorized by the Committee and shall be evidenced by agreements
in such form as the Committee shall from time to time approve, which agreements
shall comply with and be subject to the following terms and conditions:
(a) Employment. Nothing in this Plan shall impose upon the Bank or its
subsidiaries any obligation to retain the optionee in their employ for any
period.
(b) Number of Shares of Stock. Each option shall state the number of
shares of Stock to which it pertains.
(c) Option Price. Each option shall state the option price which shall
be not less than 100% of the fair market value of the shares of Stock on
the date of the granting of the option; except, in the case of the grant of
an option to an employee who owns capital stock of the Bank possessing more
than 10% of the total combined voting power of all classes of stock of the
Bank or of its subsidiaries, the option price of such stock shall be at
least 110% of the fair market value of Stock subject to such option. Such
fair market value shall be determined by the Committee in accordance with
applicable U.S. Treasury Regulations.
(d) Medium and Time of Payment. The option price shall be payable in
cash, by check or by tendering to the Bank shares of its Stock having an
aggregate fair market value, determined as of the date of payment, equal to
the option price. The option price shall be payable upon exercise of the
option.
(e) Term and Exercise of Options. Each option shall expire ten years
from the date it is granted or at the end of such shorter period as may be
designated by the committee on the date of grant; except, in the case of
the grant of an option to an employee who owns capital stock of the Bank
possessing more than 10% of the total combined voting power of all classes
of stock of the Bank or of its subsidiaries, such option shall not be
exercisable after the expiration of five years from the date it is granted.
The option shall be exercisable only by the optionee and shall not be
assignable or transferable by him and no other person shall acquire any
rights therein.
(f) Termination of Employment Except by Death or Disability. If an
optionee shall cease to be employed by the Bank or one of its subsidiaries
for any reason other than his death or disability, his option shall
terminate three months following such cessation of employment. Whether
authorized leave of absence or absence for military or governmental service
shall constitute termination of employment for the purpose of the Plan,
shall be determined by the Committee, which determination shall be final
and conclusive.
(g) Disability of Optionee. In the event that an optionee shall cease
to be employed by the Bank or one of its subsidiaries because he is
disabled (within the meaning of Section 105(d)(4) of the Code), such
optionee shall have the right to exercise his option (to the extent
otherwise exercisable) at any time within one year after his employment
ceases by reason of such disability.
2
<PAGE>
(h) Death of Optionee and Transfer of Option. If the optionee shall
die while in the employ of the Bank or one of its subsidiaries, the option
may be exercised (to the extent the option is otherwise exercisable) at any
time within one year after the optionee's death, by the executors or
administrators of the optionee or by any person or persons who shall have
acquired the option directly from the optionee by bequest or inheritance.
(i) Recapitalization. Notwithstanding any other provision of the Plan,
the option agreement may contain such provisions as the Committee shall
determine to be appropriate for the adjustment of the number and class of
shares subject to each outstanding option and the option prices in the
event of changes in the outstanding capital stock of the Bank by reason of
stock dividends, stock splits, recapitalizations, mergers, consolidations,
splitups, spinoffs, liquidations, or other similar changes in
capitalization, or any distribution to common stockholders other than cash
dividends, and in the event of any such change in the outstanding capital
stock of the Bank, the aggregate number and class of shares available under
the Plan and the maximum number of shares as to which options may be
granted to any employee shall be appropriately adjusted by the Committee,
whose determination shall be conclusive.
(j) Rights as a Stockholder. An optionee shall have no rights as a
stockholder with respect to any shares covered by his option until the date
of the issuance of a stock certificate to him for such shares. No
adjustment shall be made for dividends (ordinary or extraordinary-, whether
in cash, securities or other property) or distributions or other rights for
which the record date is prior to the date such stock certificate is
issued, except as provided in Article 5(i) hereof.
(k) Modification, Extension and Renewal of Options. Subject to the
terms and conditions and within the limitations of the Plan, the Committee
may modify, extend or renew outstanding options (to the extent not
theretofore exercised). Notwithstanding the foregoing, however, no
modification of an option shall, without the consent of the optionee, alter
or impair any rights or obligations under any option theretofore granted
under the Plan.
(l) Investment Purpose. If the Committee in its discretion determines
that as a matter of law such procedure is or may be desirable in order to
assure compliance with any applicable securities or Blue Sky law, it may
condition any exercise of an option granted hereunder or any portion
thereof and the delivery of certificates representing the shares subject to
exercise, upon such procedures as it deems appropriate, including the
requirement that the optionee execute and deliver to the Bank a written
statement, in form satisfactory to the Bank, representing and warranting
that his purchase of shares of Stock on exercise thereof is for his own
account for investment and not with a view to resale or distribution
thereof.
(m) Disqualifying Disposition. Any optionee who disposes of shares of
Stock acquired in the exercise of an option by sale or exchange either (i)
within two years after the date of the grant of the option under which the
Stock was acquired or (ii) within one year after the acquisition of such
shares shall notify the Bank of such disposition and of the amount realized
and of his adjusted basis in such shares.
(n) Other Provisions. The option agreements authorized under the Plan,
which need not be identical, shall contain such other provisions,
including, without limitation, restrictions
3
<PAGE>
upon the exercise of the option, as the Committee shall deem advisable. Any
such option agreement shall contain such limitations and restrictions upon
the exercise of the option as shall be necessary in order that such option
will be an "incentive stock option" as defined in Section 422A of the Code
or to conform to any change in the law.
6. Term of the Plan. The Plan shall be effective upon its approval by the
Bank's stockholders, and unless the Plan shall theretofore have been terminated
as herein provided, the Plan shall terminate on, and no option shall be granted,
after the tenth anniversary of the date of such approval.
7. Amendment of the Plan. The Board of Directors of the Bank may, insofar
as permitted by law, from time to time, with respect to any shares at the time
not subject to options, suspend or discontinue the Plan or revise or amend it in
any respect whatsoever except that, without approval of the stockholders, no
such revision or amendment shall increase the number of shares subject to the
Plan, change the designation of the class of employees eligible to receive
options, decrease the price at which options may be granted, or extend beyond
ten years the period in which options may be exercised.
4
Exhibit 10.2
COVENANT BANK FOR SAVINGS
EMPLOYEE STOCK PURCHASE PLAN
COVENANT BANK FOR SAVINGS (the "Bank") hereby adopts the following Employee
Stock Purchase Plan for the benefit of its eligible employees, in accordance
with the following terms and conditions.
1. Purpose. The purpose of this Plan is to provide an opportunity for
eligible employees of the Bank and its subsidiaries, if any, to share in the
growth and prosperity of the Bank by acquiring a proprietary interest in the
Bank through acquisition of shares of the Bank's common stock, and to provide an
employee stock purchase plan which qualifies under Section 423 of the Internal
Revenue Code and which qualifies for exemption from Section 16(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") pursuant to
Rule 16b-3 promulgated thereunder.
2. Title. This Plan shall be known as the COVENANT BANK FOR SAVINGS
Employee Stock Purchase Plan (hereinafter referred to as the to "plan")
3. Definitions. The following definitions shall be applicable to the terms
used in the Plan:
(a) "Board of Directors" means the Board of Directors of the Bank.
(b) "Closing Price" means the average of the closing bid and ask
prices of the Common Stock as reported on the National Association of
Securities Dealers Automated Quotation System or, if not so reported, as
furnished by any member of the National Association of Securities Dealers,
Inc. selected by the Board of Directors. In the event that the price of a
share of Common Stock shall not be so reported, the Closing Price shall be
determined by such a method as shall be authorized by the Board of
Directors.
(c) "Code" means the Internal Revenue Code of 1986, as currently in
effect or as hereafter amended.
(d) "Common Stock" means those shares of the Bank's Common Stock which
pursuant to Paragraph 5(a) are reserved for issuance upon the exercise of
the purchase rights granted under this Plan.
(e) "Contribution Account" means the account established on behalf of
a Member to which shall be credited the amount of the Member's
contribution, pursuant to Article V.
(f) "Effective Date" means the first day after adoption of the Plan by
the Board of Directors, approval by the shareholders of the Bank, and
receipt of any required regulatory approval.
1
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(g) "Employee" means each current or future employee of the Bank or
its subsidiaries, if any. However, the term "Employee,, shall exclude
employees who customarily work twenty (20) hours or less per week or who
customarily work not more than five (5) months during the calendar year.
(h) "Exercise Date" means the last Trading Date of the applicable
Participation Period.
(i) "Grant Date" means the last Trading Date preceding the first day
of the applicable Participation Period.
(j) "Issue Price" means 85% of the lower of the Closing Price of the
stock on either the Grant Date or the Exercise Date.
(k) "Member" means any Employee who has met the conditions and
provisions for becoming a Member as provided in Article III hereof.
(l) "Member's Contribution Rate" means the amount elected by the
Member to contribute by regular payroll deductions to his Contribution
Account as outlined in Paragraph 5(b).
(m) "Participation Period" means a six month period beginning on the
first day of July and January of each year.
(n) "Trading Date" means a date on which stocks in the United States
are traded on the over-the-counter markets, whether any share of the Bank's
Common Stock is actually traded on such date.
4. Membership in the Plan.
(a) Eligibility. Each present and future Employee shall be eligible to
become a Member of the Plan as of the first day of any Participation Period
which is at least six (6) months after he was first employed by the Bank.
(b) Participation. Any Employee electing to participate hereunder
shall complete and file with the Bank such form as may be prescribed by the
Bank. The completed form shall indicate the Member's Contribution Rate and,
unless waived by the Bank, must be received at least fifteen days prior to
the commencement of the applicable Participation Period. Upon becoming a
Member, said Member shall be bound by the terms of this Plan, including any
amendments hereto.
2
<PAGE>
5. Issuance of Stock Purchase Plan Rights.
(a) Shares Subject to Plan. - The Bank shall reserve 100,000 shares of
its Common Stock for issuance upon the exercise of the purchase rights
granted hereunder. These shares may be either authorized and unissued
shares, issued shares held in or acquired for the treasury of the Bank, or
shares of stock acquired by the Bank upon purchase in the open market or
otherwise. Such number of shares shall be appropriately adjusted in the
event of any one or more stock splits, reverse stock splits, stock
dividends paid or declared with respect to such stock in the future, or
merger of the Bank.
(b) Contributions to Plan. In order to participate in this Plan, an
Employee must authorize the Bank to deduct through a payroll deduction
either an exact number of dollars per pay period or a percentage of
Compensation, as from time to time specified by the Bank. In any event, the
amount so specified shall not be less than one percent (1%) and not more
than ten percent (10%) of the Employee's Compensation for that pay period.
For purposes of this Section 5, Compensation means the base salary paid to
the Member for such Participation Period, but excluding overtime pay,
commissions, bonuses, and incentive pay. Such authorization shall be in
writing and on such forms as provided by the Bank. No interest shall accrue
on any amounts withheld under this Plan.
(c) Withdrawal or Change in Contributions. The Member's contribution
rate, once established pursuant to subparagraph (b) above, shall remain in
effect for each Participation Period. A Member may choose to withdraw from
participation or may change his contribution rate, effective for the next
Participation Period following the receipt of written notice by the Bank on
such forms as are provided by the Bank; provided, however, no Member who is
an officer (as defined in Rule 16a-l(f) under the Exchange Act) or director
shall be permitted to change his Contribution Rate or his status as a
participating Member except in accordance with the provisions of Rule
16b-3(d)(2) under the Exchange Act.
(d) Total Number of Shares Exceeded. If the total number of shares to
be purchased hereunder by all Members in a Participation Period exceeds the
number of shares authorized under this Plan, a pro rata allocation of the
available shares will be made among all Members based on the amount in
their respective Contribution Accounts on the Exercise Date.
(e) Number of Shares Purchased. On each Exercise Date, the Member's
Contribution Account shall be used to purchase the number of whole shares
of the Bank Stock determined by dividing the Issue Price into the Member's
Contribution Account. Any money remaining in a Member's Contribution
Account will remain in the Contribution Account to be used in the next
Participation Period along with new contributions in the new Participation
Period. All rights or options under this Plan shall be subject to such
amendment or modification as the Bank shall deem necessary to comply
3
<PAGE>
with any applicable law or regulation, and shall contain such other
provisions as the Bank shall from time to time approve and deem necessary.
(f) Limitation on Stock purchase. In no event may a Member:
(1) Have rights to purchase stock in any one calendar year
pursuant to this Plan and any other stock plan of the Bank which
accrue at a rate which exceeds $25,000 of fair market value of the
Common Stock (determined at the time such rights are granted);
(2) Receive an option hereunder if he beneficially owns,
immediately after the option is granted, 5% or more of the total
combined voting power or value of all classes of stock of the Bank; or
(3) Transfer or otherwise alienate any rights granted to him
under this Plan.
A Member's stock ownership shall be determined by taking into account the
rules of constructive ownership set forth in Section 425(d) of the code. Any
unused portion of the $25,000 per calendar year limitation shall not be carried
over to a succeeding year.
(g) Time of Issuance. The Bank stock certificates purchased through
the exercise of the option granted hereunder shall be issued as soon as
practicable after the date of such exercise. Any transfer or issue tax
shall be paid by the Bank. A Member shall have no rights as a shareholder
with respect to any shares covered by the Plan until the date of issuance
of a certificate to him f or shares purchased. No adjustment shall be made
for dividends or other rights for which the record date is prior to the
date such certificate is issued.
(h) Termination of Employment. Any Member whose employment is
terminated for any reason except death during a Participation Period shall
make no further contributions to the Plan, shall no longer be deemed a
Member in the Plan and shall be returned the balance in his Contribution
Account.
(i) Death. If a Member shall die during a Participation Period, no
further contributions on behalf of the deceased Member shall be made, and
the balance in the Contribution Account shall be paid to the deceased
Member's Personal Representative.
(j) One Year Restriction on Sale. A Member may not sell or otherwise
dispose of any Common Stock obtained by reason of the exercise of the
purchase rights granted hereunder for a period of one (1) year after the
date of purchase of such Stock; provided, however, that the Board of
Directors may waive this provision on a case by case basis.
4
<PAGE>
6. Miscellaneous.
(a) Plan Administration. The Board of Directors or any Committee
delegated such authority by the Board of Directors shall administer the
Plan and keep records of individual Member benefits. The Board of Directors
or such Committee shall interpret the Plan and shall determine all
questions arising in the administration, interpretation and application of
the Plan, and all such determinations shall be conclusive and binding on
all persons. The Bank's Board of Directors may at any time or from time to
time amend the Plan in any respect or terminate same. The Bank will pay all
expenses of administering this Plan that may arise in connection with the
Plan. Any rules, regulations, or procedures that may be necessary for the
proper administration or functioning of this Plan that are not covered in
this Plan shall be promulgated and adopted by the Bank's Board of Directors
or such Committee.
(b) Construction. Any heading or subheadings in this Plan are inserted
for convenience of reference only and are to be ignored in the construction
of any provisions hereof. This Plan shall be construed in accordance with
the laws of the State of New Jersey.
(c) No Assignment or Alienation. The option rights hereunder are not
subject to assignment or alienation. Such rights may not be sold,
exchanged, assigned, pledged, discounted, hypothecated or otherwise
transferred except by will or by the laws of descent and distribution. No
option rights shall be subject to execution, attachment or similar process.
If a Member attempts such assignment, transfer or alienation, the Bank
shall disregard that action and treat it as an automatic withdrawal from
the Plan.
(d) Not a Contract of Employment. This Plan will not be deemed to
constitute a contract between the Bank and any Member or to be
consideration or an inducement for the employment of any Member. Nothing
contained in this Plan shall be deemed to give any Member the right to be
retained in the service of the Bank or to interfere with the right of the
Bank to discharge any Member at any time, regardless of the effect which
such discharge shall have upon him as a Member of the Plan.
(e) Liability. No liability whatever shall attach to or be incurred by
any past, present or future shareholders, officers or directors, as such,
of the Bank, under or by reason of any of the terms, conditions or
agreements contained in this Plan or implied therefrom, and any and all
liabilities of, and any and all rights and claims against the Bank, or any
shareholder, officer or director as such, whether arising at common law or
in equity or created by statute or constitution or otherwise, pertaining to
this Plan, are hereby expressly waived and released by every Member, as a
part of the consideration for any benefits provided by the Bank under this
Plan.
5
<PAGE>
(f) Governmental Approval. The Bank's obligation to sell and deliver
stock under the Plan is at all times subject to all approvals of any
governmental authorities required in connection with the authorization,
issuance, sale or delivery of such stock.
(g) Shareholder Approval. This Plan shall be approved by the
shareholders of the Bank in any manner which is provided for in the New
Jersey Banking Act to constitute valid shareholder action, and in
accordance with Rule 16b-3 under the Exchange Act.
(h) Use of Proceeds. The proceeds from the sale of shares pursuant to
purchase rights granted under this Plan shall constitute general funds of
the Bank.
(i) Termination. This Plan shall terminate on January 1, 2004, or such
earlier date as may be determined by the Board of Directors. The
termination of this Plan, however, shall not affect any restrictions
previously imposed on shares issued pursuant to this Plan or rights of the
Bank granted pursuant to this Plan.
6
Exhibit 10.3
COVENANT BANK FOR SAVINGS
1996 STOCK OPTION PLAN FOR EMPLOYEES AND NON-EMPLOYEE DIRECTORS
Section 1. Purposes.
The purposes of this Plan are (a) to maintain the competitive position of
the Company and its Subsidiaries by attracting and retaining directors and
employees; and (b) to provide incentive compensation to such directors and
employees based upon the Company's performance as measured by the appreciation
in the value of the Company's Common Stock. The Discretionary Options granted to
Employees pursuant to this Plan are intended to constitute either Incentive
Stock Options or non-qualified stock options, as determined by the Committee at
the time of grant. The Non-Discretionary Options granted to Non-Employee
Directors pursuant to this Plan are intended to constitute non-qualified stock
options; as to such grantees, this Plan is intended to constitute a "formula"
plan satisfying the conditions of Rule 16b-3(c)(2)(ii) promulgated under Section
16 of the Exchange Act. Options granted hereunder shall be subject to the terms
and conditions of this Plan, which shall be deemed incorporated in this Option
Agreement.
Section 2. Definitions.
"Adjusted Fair Market Value" shall have the meaning set forth in Section 8
hereof.
"Annual Grant" shall have the meaning set forth in Section 3(a)(ii) hereof.
"Board" shall mean the Board of Directors of the Company, as constituted
from time to time.
"Change of Control" shall mean the occurrence of any of the following
events: (i) approval by the shareholders of the Company (or the Board, if
shareholder action is not required) of a plan or other arrangement pursuant to
which the Company will be dissolved or liquidated; or (ii) the acquisition by
any entity, person or group (within the meaning of Section 13(d)(3) or Section
14(d)(2) of the Exchange Act), other than (A) the Company, (B) any of its
Subsidiaries, (C) a holder of the capital stock of the Company on the date that
this Plan is adopted by the Board, as determined by the Committee, or a group
consisting solely of such holders, or (D) any employee benefit plan (or related
trust) sponsored or maintained by the Company or any of its Subsidiaries, of
beneficial ownership of, or voting control over more than fifty percent (50%) of
the outstanding shares of the Company's voting capital stock (computed on a
fully diluted basis), unless the transaction pursuant to which such entity,
person entity or group acquired such beneficial ownership or voting control
resulted from
<PAGE>
the issuance by the Company of shares of its voting capital stock and was
approved by at least a majority of directors who shall have been members of the
Board for at least twelve (12) months.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Committee described in Section 4(a) of this
Plan.
"Company" shall mean Covenant Bank for Savings, a New Jersey capital stock
savings bank, and its successors and assigns.
"Common Stock" shall mean the common stock of the Company.
"Director" shall mean a member of the Board of Directors of the Company.
"Disability" or "Disabled" shall mean the inability of an Optionee to
perform his or her normal duties as an Employee or Director, as applicable, for
the Company resulting from a mental or physical illness, impairment or any other
similar occurrence which has lasted or can be expected to last for a period of
twelve (12) consecutive months, as determined by the Committee.
"Discretionary Option" shall mean an Option awarded to an Employee pursuant
to Section 3(b) hereof.
"Disinterested Person" shall have the meaning set forth in Rule
16b-3(c)(2)(i) promulgated by the Securities and Exchange Commission under the
Exchange Act, or any successor definition adopted by the Securities and Exchange
Commission.
"Employee" shall mean any person (including officers) employed by the
Company or any Subsidiary.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as in effect
from time to time.
"Fair Market Value" shall mean the fair market value of a share of Common
Stock, as determined pursuant to Section 8 hereof.
"Incentive Stock Option" shall mean an Option that meets the requirements
of Section 422 of the Code and which is designated as an Incentive Stock Option.
"Initial Grant" shall have the meaning set forth in Section 3(a)(ii)
hereof.
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<PAGE>
"Non-Discretionary Option" shall mean an Option awarded to a Non-Employee
Director pursuant to Section 3(a) hereof.
"Non-Employee Director" shall mean a Director who on the date of the
granting of an Option hereunder is not an Employee.
"Option" shall mean an option to purchase Common Stock that is granted
pursuant to this Plan.
"Option Agreement" shall mean a written agreement in such form or forms as
the Committee (subject to the terms and conditions of this Plan) may from time
to time approve evidencing and reflecting the terms of an Option.
"Optionee" shall mean a Participant to whom an Option is granted.
"Participant" shall mean each Director of the Company and each Employee.
"Plan" shall mean this 1996 Stock Option Plan for Employees and
Non-Employee Directors, as amended from time to time.
"Proprietary Information" shall mean any and all confidential, proprietary,
business and technical information or trade secrets of the Company or of any
Subsidiary or affiliate of the Company revealed, obtained or developed in the
course of an Optionee's employment with the Company or in the course of an
Optionee's performance of services for the Company in any other capacity.
Proprietary Information shall include but shall not be limited to marketing and
development plans, methods and efforts, cost information, pricing information,
identities of customers and suppliers, the Company's relationship with actual or
potential customers and the needs and requirements of any such actual or
potential customers, and any other confidential information relating to the
business of the Company. Proprietary Information shall not include (i) such
information as may be necessary or appropriate for an Optionee to disclose in
the course of his employment for the effective and efficient discharge of his
duties as an employee of the Company or as may be required by law to be
disclosed; or (ii) such information as is readily available to the general
public so long as such information did not become readily available to the
general public as a direct or indirect result of an Optionee's breach of his
obligation to maintain confidentiality.
"Sale of the Company" shall mean the earliest of: (i) the closing of a
sale, transfer or other disposition of all or substantially all of the shares of
capital stock then outstanding of the Company; (ii) the closing of a sale,
transfer or other disposition of all or substantially all of the assets of the
Company; or (iii) the merger or consolidation of the Company with
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<PAGE>
or into another corporation or share exchange with respect to the outstanding
shares of the Company; other than, in each case, a transaction in which (x)
shares of the Company's voting capital stock outstanding immediately before such
transaction are exchanged or converted into shares that represent greater than
fifty percent (50%) of the acquiring, resulting or surviving entity's voting
capital stock (or comparable equity interests) after such transaction and (y)
this Plan is assumed by the acquiring, resulting or surviving entity.
"Securities Act" shall mean the Securities Act of 1933, as in effect from
time to time.
"Shares" shall mean shares of Common Stock.
"Stock Purchase Agreement" shall mean an agreement in such form as the
Committee may from time to time approve (subject to the terms and conditions of
this Plan), which an Optionee may be required to execute as a condition of
purchasing Shares upon exercise of an Option.
"Subsidiary" shall mean a subsidiary corporation of the Company, whether
now or hereafter existing, as defined in Sections 424(f) and (g) of the Code.
Section 3. Participation.
Non-Discretionary Options.
Each Non-Employee Director (other than a Non-Employee Director that was
previously an Employee) shall receive an initial award of a Non-Discretionary
Option to purchase 10,000 shares (subject to adjustment as provided in Section
9) of Common Stock (the "Initial Grant"), on the date that such Non-Employee
Director first becomes a Non-Employee Director or on the date this Plan becomes
effective in accordance with Section 27 hereof, in the case of those who are
Non-Employee Directors at such time.
Upon the conclusion of the Company's Annual Meeting of Stockholders in each
year following the effectiveness of this Plan, each person who is then serving
as a Non-Employee Director of the Company and has served as a Non-Employee
Director since the previous Annual Meeting of Stockholders shall receive a
Non-Discretionary Option for the purchase of 2,500 shares (subject to adjustment
as provided in Section 9) of Common Stock (each, an "Annual Grant").
Discretionary Options. The Committee may grant Discretionary Options at any
time and from time to time to Employees who shall be selected by the Committee.
Discretionary Options may be granted only to Employees, and may not be granted
to
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<PAGE>
Non-Employee Directors. Any grant of Discretionary Options may include or
exclude any Employees, as the Committee shall determine in its sole discretion.
An Employee who has been granted an Option, if he or she is otherwise eligible,
may be granted additional Options.
Section 4. Administration.
Procedure. This Plan shall be administered by a Committee consisting of not
less than two persons appointed by the Board who are each Disinterested Persons
and who shall be appointed by, and serve at the pleasure of, the Board. No
member of the Committee may be an employee, officer or consultant of the
Corporation and no member of the Committee may be a former employee or officer
of the Company.
Powers of Administration. Subject to the provisions of this Plan, the
Committee shall have the authority, in its discretion: (i) to grant
Discretionary Options; (ii) to determine the Fair Market Value per Share in
accordance with Section 8 of this Plan; (iii) to determine the exercise price of
the Options to be granted in accordance with Sections 6 and 7 of this Plan; (iv)
to determine the Participants to whom, and the time or times at which,
Discretionary Options shall be granted, and the number of Shares to be subject
to each Discretionary Option; (v) to prescribe, amend and rescind rules and
regulations relating to this Plan; (vi) to determine the terms and provisions of
each Option granted under this Plan, each Option Agreement and each Stock
Purchase Agreement (which need not be identical with the terms of other Options,
Option Agreements and Stock Purchase Agreements) and, subject to Section 14
hereof, to modify or amend an outstanding Option, Option Agreement or Stock
Purchase Agreement; (vii) to accelerate the exercise date of any Discretionary
Option; (viii) to determine whether any Participant will be required to execute
a Stock Purchase Agreement or other agreement as a condition to the exercise of
an Option, and to determine the terms and provisions of any such agreement
(which need not be identical with the terms of any other such agreement); (ix)
to interpret this Plan or any agreement entered into with respect to the grant
or exercise of Options; (x) to authorize any person to execute on behalf of the
Company any instrument required to effectuate the grant of an Option previously
granted under this Plan or to take such other actions as may be necessary or
appropriate with respect to the Company's rights pursuant to Options or
agreements relating to the grant or exercise thereof; and (xi) to make such
other determinations and establish such other procedures as it deems necessary
or advisable for the administration of this Plan.
Effect of the Committee's Decisions. All decisions, determinations and
interpretations of the Committee shall be final
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<PAGE>
and binding on all Optionees and any other holders of any Options granted under
this Plan.
Limitation of Liability. Notwithstanding anything herein to the contrary,
no member of the Committee shall be liable for any good faith determination, act
or failure to act in connection with this Plan or any Option granted hereunder.
Section 5. Stock Subject to the Plan.
Subject to this Section 5 and to the provisions of Section 9 of this Plan,
the maximum aggregate number of Shares which may be issued upon the exercise of
Options under this Plan is One Hundred Forty Thousand (140,000). If an Option
expires or becomes unexercisable for any reason without having been exercised in
full, the Shares subject to such Option shall, unless this Plan shall have been
terminated, return to this Plan and become available for future grant under this
Plan.
Section 6. Terms and Conditions of Discretionary Options.
Option Agreement. Each Discretionary Option granted pursuant to this Plan
shall be authorized by the Committee and shall be evidenced by an Option
Agreement in such form as the Committee may from time to time determine. Each
Option Agreement shall be deemed to incorporate by reference all other terms and
conditions of this Plan.
Option Price. The price per share payable on the exercise of any
Discretionary Option shall be stated in the Option Agreement and shall be no
less than the greater of (i) the par value of the Common Stock of the Company or
(ii) the Fair Market Value per share of the Common Stock on the date such Option
is granted. Notwithstanding the foregoing, if a Discretionary Option which is an
Incentive Stock Option shall be granted under this Plan to any person who, at
the time of the grant of such Option, owns capital stock possessing more than
10% of the total combined voting power of all classes of the Company's capital
stock, the price per share payable upon exercise of such Incentive Stock Option
shall be no less than 110 percent (110%) of the Fair Market Value per share of
the Common Stock on the date such Option is granted.
Form of Option. The Option Agreement with respect to any Discretionary
Option will state whether the Option granted is an Incentive Stock Option or a
non-qualified stock option, and will constitute a binding determination as to
the form of Option granted. In the event that the Option Agreement fails to so
state, the Option shall be a non-qualified stock option.
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<PAGE>
Term and Vesting of Options.
Unless sooner terminated as provided in this Plan, each Discretionary
Option shall be exercisable for a period of ten (10) years after the date of
grant or such shorter period of time as shall be determined by the Committee and
set forth in the Option Agreement, and shall be void and unexercisable
thereafter. Notwithstanding any other provision of this Plan or the Option
Agreement, if an Incentive Stock Option shall be granted under this Plan to any
person who, at the time of the grant of such Option, owns stock possessing more
than 10% of the total combined voting power of all classes of the Company's
stock, then such Option shall not be exercisable more than five (5) years after
the date of grant.
Any Discretionary Option granted hereunder shall be vested and exercisable
at such times and under such conditions as shall be set forth in the Option
Agreement (as may be determined by the Committee and as shall be permissible
under the terms of this Plan), which may include performance criteria with
respect to the Company and/or the Optionee, and as shall be permissible under
the terms of this Plan. No Option granted to any Optionee shall be treated as an
Incentive Stock Option, to the extent such Option would cause the aggregate Fair
Market Value (determined as of the date of grant of each such Option) of the
Shares with respect to which Incentive Stock Options are exercisable by such
Optionee for the first time during any calendar year to exceed $100,000. For
purposes of determining whether an Incentive Stock Option would cause the
aggregate Fair Market Value of the Shares to exceed the $100,000 limitation,
such Incentive Stock Options shall be taken into account in the order granted.
For purposes of this subsection, Incentive Stock Options include all incentive
stock options under all plans of the Company that are incentive stock option
plans within the meaning of Section 422 of the Code.
Termination of Options.
Except as otherwise provided herein (including without limitation Section
11 hereof) or in the applicable Option Agreement, upon the termination of the
Optionee's employment with the Company and its Subsidiaries for any reason,
except as provided in subparagraph (ii) below with respect to death or
Disability, (A) Discretionary Options vested and exercisable on the date of
termination of employment shall be exercisable by the Optionee (or in the case
of the Optionee's death subsequent to termination of employment, by the
Optionee's executor(s) or administrator(s)) for a period of three months, in the
case of an Incentive Stock Option, or twelve months, in the case of a
non-qualified stock option, from the date of the Optionee's termination of
employment, but in no
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<PAGE>
event later than the date such Option would have been exercisable had the
Optionee continued to be employed by the Company and (B) Discretionary Options
which are not vested and exercisable on the date of termination of employment
shall terminate on such date.
Except as otherwise provided herein (including without limitation Section
11 hereof) or in the applicable Option Agreement, upon the Disability or death
of an Optionee while an Employee of the Company or a Subsidiary, Options held by
such Optionee which are vested and exercisable on the date of Disability or
death shall be exercisable for a period of twelve months commencing on the date
of the Optionee's Disability or death, by the Optionee or his legal guardian or,
in the case of death, by his executor(s) or administrator(s); provided, however,
that if such disabled Optionee shall commence any employment during such twelve
month period with a competitor of the Company (including, but not limited to,
full or part-time employment or independent consulting work), as determined
solely in the judgment of the Committee, all Discretionary Options held by such
Optionee which have not yet been exercised shall terminate in accordance with
clause (i) above.
Disqualifying Disposition. Any Optionee who disposes of Shares acquired
upon the exercise of an Incentive Stock Option by sale or exchange either (i)
within two years after the date of the grant of the Incentive Stock Option under
which the Shares were acquired or (ii) within one year after the acquisition of
such Shares, shall notify the Company of such disposition, the amount realized
and his adjusted basis in such Shares.
Section 7. Terms and Conditions of Non-Discretionary Options.
Option Agreement. Each Non-Discretionary Option granted pursuant to this
Plan shall be evidenced by an Option Agreement in such form as the Committee may
from time to time determine. Each Option Agreement shall be deemed to
incorporate by reference all other terms and conditions of this Plan.
Option Price. The exercise price of all Non-Discretionary Options shall be
the greater of (i) the par value of the Common Stock or (ii) the Fair Market
Value of the Common Stock on the Grant Date of such Non-Discretionary Options.
Term and Vesting of Non-Discretionary Options. Non-Discretionary Options
issued pursuant to an Initial Grant shall vest and become exercisable as to
3,333 shares immediately on their respective grant dates, as to 3,333 shares on
the first anniversary of the grant date, and as to the remaining 3,334 shares on
the second anniversary of the grant date, provided, in each case, that the
holder of the Non-Discretionary Option is a Director at such time.
Non-Discretionary Options issued pursuant to an Annual Grant
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<PAGE>
shall be fully vested and exercisable from and after their respective grant
dates. Non-Discretionary Options shall expire 10 years after their respective
grant dates.
Termination of Non-Discretionary Options. Except as otherwise provided
herein (including without limitation Section 11 hereof) or in the Option
Agreement, if an Optionee under a Non-Discretionary Option ceases to be a
Director for any reason (including death or Disability), (i) any
Non-Discretionary Options vested and exercisable on the date of such event shall
be exercisable by the Optionee (or in the case of death or Disability, by his
executor(s), administrator(s) or legal guardian as the case may be) for a period
of twelve months from the date on which he ceases to be a Director, but in no
event later than the date such option would have expired had the Optionee
continued to be a Director and (ii) any Non-Discretionary Options which are not
vested and exercisable on the date of such event shall terminate as of such
date.
Section 8. Determination of Fair Market Value.
Except to the extent otherwise provided in this Section 8, the Fair Market
Value or Adjusted Fair Market Value of a share of Common Stock or other
securities shall be determined by the Committee in its sole discretion.
In the event shares are listed on a national or regional securities
exchange or traded in the Nasdaq National Market ("NNM"), the Fair Market Value
of a share of stock shall be the average of the closing prices of such shares on
the exchange or on the NNM, as applicable, for the five (5) trading days
preceding the relevant valuation date, as reported in The Wall Street Journal.
In the event that shares are traded in the over-the-counter market, the "Fair
Market Value" of a share of stock shall be the average for the five (5) trading
days preceding the relevant valuation date of the mean of the bid and asked
prices for such shares, as reported in The Wall Street Journal (or, if not so
reported, as otherwise reported by the National Association of Securities
Dealers Automated Quotation System).
"Adjusted Fair Market Value" shall mean, in the event of a Sale of the
Company, the greater of (A) the highest price (determined at the Fair Market
Value thereof if such consideration is payable in shares of stock) per share of
Common Stock paid or payable to holders of the Common Stock in any transaction
(or series of transactions) constituting or resulting (or as to which approval
by shareholders of the Company constitutes or results) in the Sale of the
Company or (B) the highest Fair Market Value of a share of Common Stock on any
business day during the 90 day period ending on the date of the Sale of the
Company.
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<PAGE>
Section 9. Adjustments.
Subject to required action by the shareholders, if any, the number of
shares of Common Stock as to which Options may be granted under this Plan, the
number of Non-Discretionary Options to be issued pursuant to each Initial Grant
and each Annual Grant, and the number of shares subject to outstanding Options
and the option prices thereof, shall be adjusted proportionately for any
increase or decrease in the number of outstanding shares of Common Stock of the
Company resulting from stock splits, reverse stock splits, stock dividends,
reclassifications and recapitalizations.
No fractional shares of Common Stock shall be issuable on account of any
action referenced in paragraph 9(a) above, and the aggregate number of Shares
into which Shares then covered by the Option, when changed as the result of such
action, shall be reduced to the number of whole Shares resulting from such
action, unless the Committee, in its sole discretion, shall determine to issue
scrip certificates with respect to any fractional shares, which scrip
certificates, in such event, shall be in a form and have such terms and
conditions as the Committee in its discretion shall prescribe.
Section Exercise of Options. An Option may be exercised in accordance with
the provisions of this Plan as to all or any portion of the Shares then
exercisable under the Option from time to time during the term of the Option. An
Option may not be exercised for a fraction of a Share.
The consideration to be paid for the Shares to be issued upon the exercise
of an Option may be paid to the Company (i) in cash or certified funds, (ii)
with the approval of the Committee, by delivery to the Company of Shares having
a Fair Market Value on the date of surrender (as determined by the Committee in
its sole discretion) equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised, (iii) by means of a cashless exercise
procedure in a manner prescribed by the Committee, or (iv) by any combination of
such methods of payment. If the consideration for the exercise of an Option is
the surrender of previously acquired and owned Shares, the Optionee will be
required to make representations and warranties satisfactory to the Company
regarding his title to the Shares used to effect the purchase. Where payment of
the option price is to be made with Shares acquired under any compensation plan
of the Company, such Shares will not be accepted as payment unless the Optionee
has acquired the Shares at least six months prior to such payment. If such
payment Shares were acquired upon previous exercise of Incentive Stock Options
granted within two years prior to the exercise of the Option or acquired by the
Optionee within one year prior to the exercise of the Option, such Optionee
shall be
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<PAGE>
required, as a condition to using the payment Shares in payment of the exercise
price of the Option, to acknowledge the tax consequences of doing so, in that
such previously exercised Incentive Stock Options may, by such action, lose
their status as Incentive Stock Options, and the Optionee may have to recognize
ordinary income for tax purposes as a result.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company at its principal executive office in
accordance with the terms of the Option Agreement by the person entitled to
exercise the Option and full payment for the Shares with respect to which the
Option is exercised, as provided above, has been received by the Company,
accompanied by any agreements required by the terms of this Plan and/or Option
Agreement, including an executed Stock Purchase Agreement, if required. No
adjustment shall be made for a dividend or other right for which the record date
is prior to the date the Option is exercised, except as provided in Section 9 of
this Plan.
As soon as practicable after any proper exercise of an Option in accordance
with the provisions of this Plan, the Company shall, without transfer or issue
tax to the Optionee, deliver to the Optionee at the principal executive office
of the Company or such other place as shall be mutually agreed upon between the
Company and the Optionee, a certificate or certificates representing the Shares
for which the Option shall have been exercised. The time of issuance and
delivery of the certificate(s) representing the Shares for which the Option
shall have been exercised may be postponed by the Company for such period as may
be required by the Company, with reasonable diligence, to comply with any
applicable listing requirements of any national or regional securities exchange
or any law or regulation applicable to the issuance or delivery of such Shares.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of this
Plan and the Option, by the number of Shares as to which the Option is
exercised.
Options may be exercised in any order elected by the Optionee whether or
not the Optionee holds any unexercised Options under this Plan or any other plan
of the Company.
Section Forfeiture of Options. Notwithstanding any other provision of this
Plan, in the event the Committee makes a determination that the Optionee (i) has
engaged in any type of fraud, embezzlement, theft, or dishonesty in the course
of his employment or service as a director, or (ii) has been convicted of a
felony or (iii) has disclosed any Proprietary Information without the consent of
the Company or (iv) has breached the terms of any written confidentiality
agreement or any non-competition agreement
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<PAGE>
with the Company in any material respect, all unexercised Options held by such
Optionee shall terminate upon the earlier of (x) the date of termination of
employment or removal from the Board for "cause" or (y) the date of such a
finding.
Section 10. Rights as a Shareholder.
The Optionee shall have no rights as a shareholder of the Company and shall
have neither the right to vote nor receive dividends with respect to any Shares
subject to an Option until such Option has been exercised.
Section 11. Time of Granting Options.
The date of grant of an Option shall, for all purposes, be the date on
which the Committee authorizes the granting of such Option or such other date as
may be designated by the Committee at the time of such authorization. Notice of
the grant shall be given to each Participant to whom an Option is so granted
within a reasonable time after the date of such grant.
Section 12. Modification, Extension and Renewal of Option.
Subject to the terms and conditions of this Plan, the Committee may modify,
extend or renew an Option, or accept the surrender of an Option (to the extent
not theretofore exercised). Notwithstanding the foregoing, (a) no modification
of an Option which in the determination of the Committee adversely affects an
Optionee shall be made without the consent of such Optionee, (b) no Incentive
Stock Option may be modified, extended or renewed if such action would cause it
to cease to be an "incentive stock option" under the Code, unless the Optionee
specifically acknowledges and consents to the tax consequences of such action
and (c) the Committee shall have no authority to modify, extend or renew
outstanding Non-Discretionary Options.
Section 13. Conditions to Issuance of Shares Upon Exercise.
The obligation of the Company to issue and sell Shares to an Optionee upon
the exercise of an Option granted under this Plan is conditioned upon (i) the
Company obtaining any required permit or order from appropriate governmental
agencies, authorizing the Company to issue and sell such Shares, and (ii) such
issuance and sale complying with all relevant provisions of law, including,
without limitation, the Securities Act, the Exchange Act, the rules and
regulations promulgated thereunder, state Blue Sky laws, and the requirements of
any stock exchange upon which the Shares may then be listed.
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<PAGE>
At the option of the Committee, the obligation of the Company to issue and
sell Shares to an Optionee upon the exercise of an Option granted under this
Plan may be conditioned upon obtaining appropriate representations, warranties
and agreements of the Optionee set forth in a Stock Purchase Agreement. If at
any time the Company's securities shall be subject to the registration
requirements of the Securities Act, the Optionee shall acknowledge, unless the
issuance of such Shares is registered under the Securities Act, that the Shares
purchased on exercise of the Option have not been registered under the
Securities Act and may not be sold or otherwise transferred unless such Shares
have been registered under the Securities Act in connection with the sale or
other transfer, or counsel satisfactory to the Company has issued an opinion
satisfactory to the Company that the sale or other transfer is exempt from
registration under the Securities Act, and unless said sale or other transfer is
in compliance with any other applicable laws, rules and regulations including
all applicable federal and state securities laws, rules and regulations. If at
any time the Company's securities shall be subject to the registration
requirements of the Securities Act, the certificates representing all Shares
issued upon exercise of such Option shall contain the following legend, unless
issuance of the Shares subject to an Option have been registered under the
Securities Act:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES
LAWS. THESE SHARES HAVE NOT BEEN ACQUIRED WITH A VIEW TO DISTRIBUTION OR
RESALE, AND MAY NOT BE SOLD, ASSIGNED, EXCHANGED, MORTGAGED, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED OR DISPOSED OF, BY GIFT OR OTHERWISE,
OR IN ANY WAY ENCUMBERED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR
SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS.
Section 14. Transferability.
No Option shall be assignable or transferable otherwise than by will or by
the laws of descent and distribution. During the lifetime of the Optionee, the
Optionee's Options shall be exercisable only by such Optionee, or in the event
of his or her legal incapacity, then by the Optionee's legal representative.
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<PAGE>
Section 15. Other Provisions.
The Option Agreement and Stock Purchase Agreement may contain such other
provisions as the Committee in its sole discretion deems advisable and which are
not inconsistent with the provisions of this Plan.
Section 16. Change of Control or Sale of the Company.
Discretionary Options. Notwithstanding anything to the contrary set forth
in this Plan or the applicable Option Agreement, in the event of a Change of
Control or a Sale of the Company, all outstanding Discretionary Options shall be
vested and exercisable, effective immediately prior to the Change of Control or
Sale of the Company. In addition, in the event of a Sale of the Company, the
Committee shall have the right, in its sole discretion, either to (1) arrange
for the successor company (or other entity) to assume all of the rights and
obligations of the Company under this Plan and outstanding Option Agreements
with respect to Discretionary Options; or (2) terminate this Plan and the
applicable Option Agreements as to Discretionary Options and either (a) pay or
arrange for payment to the Optionees under such terminated Discretionary Options
cash in an amount, or other property having a value equal to, the difference
between the exercise price of the Discretionary Option and the Adjusted Fair
Market Value of a Share of Common Stock (determined as of the date of the Sale
of the Company) multiplied by the number of terminated Discretionary Options
held by the Optionee, or (b) arrange for the exchange of all Discretionary
Options for options to purchase common stock in the successor corporation, on
terms substantially comparable as to duration, number of shares, and exercise
price, appropriately adjusted to reflect the Sale of the Company, all as
determined by the Committee in its sole discretion. The form of payment or
distribution to Optionees under Discretionary Options and the terms thereof
pursuant to this Section 18(a) shall be determined by the Committee in its sole
discretion.
Non-Discretionary Options. Notwithstanding anything to the contrary set
forth in this Plan or the applicable Option Agreement, in the event of a Change
of Control or a Sale of the Company, all outstanding Non-Discretionary Options
shall be vested and exercisable, effective immediately prior to the Change of
Control or Sale of the Company. In addition, in the event of a Sale of the
Company, this Plan and the applicable Option Agreements shall terminate as to
all Non-Discretionary Options and all Optionees shall be paid in exchange
therefor cash in an amount equal to the difference (the "Spread") between the
exercise price of the terminated Non-Discretionary Option and the Adjusted Fair
Market Value of a Share of Common Stock (determined as of the date of the Sale
of the Company) multiplied by the number of Non-
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<PAGE>
Discretionary Options which are held by the Optionee as of the date of the Sale
of the Company; provided, however, that in the event that the Sale of the
Company would otherwise be accounted for under the "pooling of interests" method
of accounting, and if such cash payment to all holders of Non-Discretionary
Options would prevent such pooling treatment, then in lieu of such cash payment
the Optionee shall receive consideration in the same form as holders of Common
Stock receive in such Sale of the Company, which consideration shall have a Fair
Market Value equal to the Spread.
No Consent. The terms and provisions of this Section 18 are part of the
terms and conditions of an Option granted under this Plan, and any acceleration,
termination or other treatment of any such Option in accordance with the terms
hereof, including any exercise of the Committee's discretion with respect to the
treatment of Discretionary Options, shall not constitute an amendment of such
Option and shall not require any consent of the Optionee.
Section 17. Amendment of the Plan.
Insofar as permitted by law and this Plan, the Board may from time to time
suspend, terminate or discontinue this Plan or revise or amend it in any respect
whatsoever with respect to any Shares at the time not subject to an Option;
provided, however, that (a) without approval of the shareholders, no such
revision or amendment may change the aggregate number of Shares for which
Options may be granted hereunder, change the designation of the class of persons
eligible to receive Options or decrease the price at which Options may be
granted and (b) the provisions of this Plan that govern Non-Discretionary
Options may not be amended more than once every six months, other than to
comport with changes in the Code, the Employee Retirement Income Security Act,
or the rules thereunder.
Any other provision of this Section 19 notwithstanding, the Board
specifically is authorized to adopt any amendment to this Plan deemed by the
Board to be necessary or advisable to assure that the Incentive Stock Options or
the non-qualified stock Options available under this Plan continue to be treated
as such, respectively, under the law.
Section 18. Application of Funds.
The proceeds received by the Company from the sale of Shares pursuant to
the exercise of Options shall be used for general corporate purposes or such
other purposes as may be determined by the Company.
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<PAGE>
Section 19. Reservation of Shares.
The Company, during the term of this Plan, shall at all times reserve and
keep available such number of Shares as shall be sufficient to satisfy the
requirements of this Plan.
The Company, during the term of this Plan, shall use its best efforts to
seek to obtain from appropriate regulatory agencies any requisite authorization
in order to issue and sell such number of Shares as shall be sufficient to
satisfy the requirements of this Plan. The inability of the Company to obtain
from any such regulatory agency having jurisdiction the requisite
authorization(s) deemed by the Company's counsel to be necessary for the lawful
issuance and sale of any Shares hereunder, or the inability of the Company to
confirm to its satisfaction that any issuance and sale of any Shares hereunder
will meet applicable legal requirements, shall relieve the Company of any
liability in respect to the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
Section 20. Taxes, Fees, Expenses and Withholding of Taxes.
The Company shall pay all original issue and transfer taxes (but not income
taxes, if any) with respect to the grant of Options and/or the issue and
transfer of Shares pursuant to the exercise thereof, and all other fees and
expenses necessarily incurred by the Company in connection therewith, and will
from time to time use its best efforts to comply with all laws and regulations
which, in the opinion of counsel for the Company, shall be applicable thereto.
The grant of Options hereunder and the issuance of Shares pursuant to the
exercise thereof is conditioned upon the Company's reservation of the right to
withhold in accordance with any applicable law, from any compensation or other
amounts payable to the Optionee, any taxes required to be withheld under
federal, state or local law as a result of the grant or exercise of such Option
or the sale of the Shares issued upon exercise thereof. To the extent that
compensation or other amounts, if any, payable to the Optionee are insufficient
to pay any taxes required to be so withheld, the Company may, in its sole
discretion, require the Optionee, as a condition of the exercise of an Option,
to pay in cash to the Company an amount sufficient to cover such tax liability
or otherwise to make adequate provision for the Company's satisfaction of its
withholding obligations under federal, state and local law.
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<PAGE>
Section 21. Notices.
Any notice to be given to the Company pursuant to the provisions of this
Plan shall be addressed to the Company in care of its Secretary (or such other
person as the Company may designate from time to time) at its principal
executive office, and any notice to be given to an Optionee shall be delivered
personally or addressed to him or her at the address given beneath his or her
signature on his or her Option Agreement, or at such other address as such
Optionee or his or her transferee (upon the transfer of the Shares purchased
upon exercise) may hereafter designate in writing to the Company. Any such
notice shall be deemed duly given when enclosed in a properly sealed envelope or
wrapper addressed as aforesaid, registered or certified, and deposited, postage
and registry or certification fee prepaid, in a post office or branch post
office regularly maintained by the United States Postal Service. It shall be the
obligation of each Optionee and each transferee holding Shares purchased upon
exercise of an Option to provide the Secretary of the Company, by letter mailed
as provided herein, with written notice of his or her direct mailing address.
Section 22. No Enlargement of Optionee Rights.
This Plan is purely voluntary on the part of the Company, and the
continuance of this Plan shall not be deemed to constitute a contract between
the Company and any Optionee, or to be consideration for or a condition of the
employment or service of any Optionee. Nothing contained in this Plan shall be
deemed to give any Optionee the right to be retained in the employ or service of
the Company or any Subsidiary, or to interfere with the right of the Company or
any such corporation to discharge or retire any Optionee thereof at any time,
subject to applicable law. No Optionee shall have any right to or interest in
Options authorized hereunder prior to the grant thereof to such Optionee, and
upon such grant he shall have only such rights and interests as are expressly
provided herein and in the Option Agreement, subject, however, to all applicable
provisions of the Company's Certificate of Incorporation, as the same may be
amended from time to time.
Section 23. Invalid Provisions.
In the event that any provision of this Plan is found to be invalid or
otherwise unenforceable under any applicable law, such invalidity or
unenforceability shall not be construed as rendering any other provisions
contained herein as invalid or unenforceable, and all such other provisions
shall be given full force and effect to the same extent as though the invalid or
unenforceable provision was not contained herein.
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<PAGE>
Section 24. Applicable Law.
This Plan shall be governed by and construed in accordance with the laws of
the State of New Jersey.
Section 25. Effectiveness and Duration of Plan.
This Plan shall become effective upon approval by the stockholders of the
Company and filing with the Department of Banking in accordance with the
requirements of applicable law. Unless earlier terminated by the Board, this
Plan shall continue in effect until all Options have either expired, been
exercised or have otherwise terminated and no further Options may be granted
within the limit established pursuant to Section 5 hereof.
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Exhibit 10.4
AGREEMENT
THIS AGREEMENT, dated as of November 22, 1995 (the "Agreement"), is by and
between Covenant Bank for Savings, a New Jersey savings bank (the "Company"),
and Richard A. Hocker (the "Employee").
BACKGROUND
The Company considers it essential to the best interests of its
stockholders to foster the continuous employment of the Employee. In this
connection, the Board of Directors of the Company (the "Board") recognizes that,
in the future, the possibility of a termination of the employment of the
Employee may exist and that such possibility, and the uncertainty and questions
which it might raise, may result in the departure or distraction of the Employee
to the detriment of the Company and its stockholders.
The Board has determined that appropriate steps should be taken to enforce
and encourage the continued attention and dedication of the Employee to his
assigned duties without distraction in the face of potentially disturbing
circumstances arising from the possibility in the future of an employment
termination.
In order to induce Employee to remain in the employ of the Company, the
Company agrees that Employee shall receive the severance benefits set forth in
this Agreement in the event Employee's employment with the Company is terminated
under the circumstances described below.
NOW THEREFORE, in consideration of the premises and the mutual agreements,
covenants and promises hereafter set forth, the parties hereby agree as follows:
I. Term of Agreement. This Agreement shall commence on the date hereof (the
"Effective Date"), and shall continue in effect until such time as the
Employee's employment shall have terminated and all obligations hereunder shall
have been satisfied.
1. Change in Control.
(a) For purposes of this Agreement, a "Change in Control" shall have
occurred if any of the following events shall occur:
(i) the Company 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 Company 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
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<PAGE>
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 Company immediately prior to such transaction;
(ii) the Company 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 Company and
one or more of its subsidiaries are parties); or
(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 Company or its subsidiaries, or any
employee benefit plan of the Company or its subsidiaries, becomes a
direct or indirect beneficial owner of shares of stock of the Company
(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 Company.
(b) For purposes of this Agreement, a "Potential Change in Control of
the Company" shall be deemed to have occurred if:
(i) the Company enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control of the
Company;
(ii) any person (including the Company) publicly announces an
intention to take or to consider taking actions which if consummated
would constitute a Change in Control of the Company;
(iii) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control of the
Company has occurred.
2. Termination Events.
(a) General. Employee shall be entitled to the benefits provided in
Section 4 hereof upon termination of employment in the following
circumstances:
(i) if none of the events described in Section 2 constituting a
Change in Control of the Company shall have occurred within two years
prior to the Date of Termination (as defined below), Employee shall be
entitled to the benefits provided in Section 4 unless such termination
is (A) because of Employee's death, (B) by the Company for Cause (as
defined below), or (C) by Employee other than for Good Reason (as
defined below)
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<PAGE>
(ii) if any of the events described in Section 2 constituting a
Change in Control of the Company shall have occurred and the Date of
Termination is prior to the second anniversary of the date such Change
in Control of the Company occurred, Employee shall be entitled to the
benefits provided in Section 4 unless such termination is because of
Employee's death.
(b) Cause. Termination by the Company of Employee's employment for
"Cause" shall mean termination: (a) upon the commission by Employee of a
willful unlawful act, such as embezzlement, against the Company which is
intended to enrich the Employee at the expense of the Company or upon
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 Company. For purposes of this Subsection, no act, or failure to
act, on Employee's part shall be deemed "willful" unless done, or omitted
to be done, by Employee not in good faith and without reasonable belief
that his action or omission was in the best interest of the Company.
(c) Good Reason. For purposes of this Agreement, "Good Reason" shall
mean, without 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 (as defined below) specified in the Notice
of Termination (as defined below) given in respect thereof:
(i) a reduction by the Company in Employee's annual base salary
or employee benefits as in effect immediately prior to such reduction;
(ii) the Company's requiring Employee to be based at a Company
office more than twenty (20) miles from the Company's offices at which
Employee is principally employed immediately prior to the date hereof
except for required travel on the Company's business to an extent
substantially consistent with Employee's present business travel
obligations;
(iii) a material reduction in Employee's position, duties or
responsibilities as in effect immediately prior to such reduction;
(iv) the failure of the Company to obtain the agreement to assume
and to perform this Agreement by any successor as contemplated in
Section 5 hereof; or
(v) any purported termination of Employee's employment that is
not effected pursuant to a Notice of Termination satisfying the
requirements of Subsection 3(d) hereof, which purported termination
shall not be effective for purposes of this Agreement.
Employee's continued employment shall not constitute consent to, or a
waiver of rights with respect to, any circumstance constituting Good Reason
hereunder.
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<PAGE>
(d) Notice of Termination. Any purported termination of Employee's
employment by the Company or by Employee shall be communicated by written
Notice of Termination to the other party hereto in accordance with Section
6. "Notice of Termination" shall mean a notice that shall indicate the
specific termination provision in this Agreement relied upon and, if
applicable, shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Employee's
employment under the provision so indicated.
(e) Date of Termination, Etc. "Date of Termination" shall mean the
date specified in the Notice of Termination (which in the case of a
termination by the Company, other than termination based on death, shall
not be less than thirty (30) days from the date such Notice of Termination
is given, and in the case of a termination by Employee, shall not be less
than thirty (30) nor more than sixty (60) days from the date such Notice of
Termination is given); provided, however, that if within fifteen (15) days
after any Notice of Termination is given, or, if the Notice of Termination
is not properly given, prior to the Date of Termination (as determined
without regard to an extension of such Date of Termination as described in
this proviso), the party receiving such Notice of Termination notifies the
other party that a dispute exists concerning the termination, then the Date
of Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties, by a final
and binding arbitration award or by a court of competent jurisdiction; and
provided, further, that the Date of Termination shall be extended by a
notice of dispute only if such notice is given in good faith and the party
giving such notice pursues the resolution of such dispute with reasonable
diligence. Notwithstanding the pendency of any dispute, the Company will
continue to pay Employee his full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to, base
salary) and continue to allow Employee to participate in all compensation,
benefit and insurance plans in which Employee was participating when the
notice giving rise to the dispute was given, until the dispute is finally
resolved in accordance with this Subsection. Amounts paid under this
Subsection are in addition to all other amounts due under this Agreement,
and shall not be offset against or reduce any other amounts due under this
Agreement and shall not be reduced by any compensation earned by Employee
as the result of employment by another employer.
3. Compensation Upon Termination.
(a) In the event that Employee is entitled to benefits hereunder upon
termination pursuant to Section 3(a) hereof, Employee shall be entitled to
the benefits provided below:
(i) the Company shall pay to Employee his full base salary
through the Date of Termination at the rate in effect at the time
Notice of Termination is given, plus all other amounts to which
Employee is entitled under any compensation plan
- -4-
<PAGE>
of the Company, in each case without giving effect to any reduction in
salary or benefits which would constitute Good Reason pursuant to
Section 3(c)(i) hereof, at the time such payments are due;
(ii) the Company shall pay to Employee, at the time specified in
Subsection 4(b), a lump sum severance payment equal to two 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);
(iii) the Company shall provide continued uninterrupted health
care coverage to 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 pursuant to Section
3(c)(i) hereof), for a period of two years following such Date of
Termination; and
(iv) vesting and exercisability of all options granted to
Employee under the Company's Incentive Stock Option Plan prior to the
date hereof, 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 Company shall pay to Employee, at the time
specified in Subsection 4(b), 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 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 Company's Common
Stock shall be not less than the amount paid to holders of such Common
Stock in such Change in Control.
(b) The payments provided for in Subsection 4(a) shall be made not
later than the fifth day following the Date of Termination; provided,
however, that if the amounts of such payments cannot be finally determined
on or before such day, the Company shall pay to Employee on such day an
estimate, as determined in good faith by the Company, of the minimum amount
of
- -5-
<PAGE>
such payments and shall pay the remainder of such payments (together with
interest at the rate provided in Section 1274(b)(2)(B) of the Internal
Revenue Code (the "Code")) as soon as the amount thereof can be determined
but in no event later than the thirtieth day after the Date of Termination.
In the event that the amount of the estimated payments exceeds the amount
subsequently determined to have been due, such excess shall constitute a
loan by the Company to Employee payable on the fifth day after demand
therefor by the Company (together with interest at the rate provided in
Section 1274(b)(2)(B) of the Code).
(c) Employee shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in
this Section 4 be reduced by any compensation earned by Employee as the
result of employment by another employer, by retirement benefits, by offset
against any amount claimed to be owed by Employee to the Company, or
otherwise.
(d) Notwithstanding any provision of this Agreement to the contrary,
the aggregate present value of all "payments in the nature of compensation"
(within the meaning of Section 280G of the Code) provided to Employee in
connection with a Change in Control of the Company or the termination of
Employee's employment shall be one dollar less than the amount that is
fully deductible by the Company under Section 280G of the Code and, to the
extent necessary, payments and benefits under this Agreement shall be
reduced in order that this limitation not be exceeded. It is the intention
of this Subsection 4(d) to avoid excise taxes on Employee under Section
4999 of the Code or the disallowance of a deduction in the Company pursuant
to Section 280G of the Code. Notwithstanding the foregoing, this Section
shall not apply in the event of termination of employment within two years
following a Change in Control if such termination is by the Company without
Cause or by Employee for Good Reason.
4. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company could be required to perform this Agreement if
no such succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession
shall be a breach of this Agreement and shall entitle Employee to
compensation from the Company in the same amount and on the same terms to
which Employee would be entitled hereunder if Employee terminated his
employment for Good Reason following a Change in Control of the Company,
except that for purposes of implementing the foregoing, the date on which
any such succession becomes effective shall be deemed the Date of
- -6-
<PAGE>
Termination. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation
of law, or otherwise.
(b) This Agreement shall inure to the benefit of and be enforceable by
Employee and his personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
(c) All benefits to be paid hereunder shall be in addition to any
disability, workers' compensation, or other Company benefit plan
distribution, unpaid vacation or other unpaid benefits that Employee has at
the Date of Termination.
5. Notice. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified or registered mail, return receipt requested, postage prepaid,
addressed to the following addresses:
- -7-
<PAGE>
To the Company:
Covenant Bank for Savings
18 Kings Highway West
Haddonfield, NJ 08033
Attn: President
To the Employee:
Richard A. Hocker
107 East Cottage Avenue
Haddonfield, NJ 08033
All notices to the Company shall also be directed to the attention of the
Board with a copy to the Secretary of the Company, or to such other address as
either party may have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon receipt.
6. Governing Law. The validity, interpretation, construction and
performance of this agreement shall be governed by the laws of the State of New
Jersey, without giving effect to the principles of conflict of laws of such
state.
7. No Right to Continued Employment. This Agreement does not give to
Employee any right to continued employment, and does not give to Employee any
rights or remedies based on termination of employment except as expressly set
forth herein.
8. Miscellaneous. No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Employee and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other
party, shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, expressed or implied with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. All references to sections of the Exchange Act and
the Code shall be deemed also to refer to any successor provisions to such
sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law.
9. Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity of enforceability of any other
provision of this Agreement which shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
- -8-
<PAGE>
11. Prior Agreements. Any and all agreements relating to the subject matter
hereof previously entered into between the Company and Employee are hereby
mutually terminated and canceled, and each of the parties mutually releases and
discharges the other from any and all obligations and liabilities whatsoever
existing under it by reason of any such agreements, it being the intention of
the Company and Employee that this Agreement shall supersede and be in place of
any and all prior agreements or understandings between them.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
EMPLOYEE: COVENANT BANK FOR SAVINGS
/s/ Richard A. Hocker /s/ Charles E. Sessa, Jr.
- ------------------------ ------------------------------
RICHARD A. HOCKER By: Charles E. Sessa, Jr.
Title: President
Exhibit 10.5
AGREEMENT
THIS AGREEMENT, dated as of November 22, 1995 (the "Agreement"), is by and
between Covenant Bank for Savings, a New Jersey savings bank (the "Company"),
and Charles E. Sessa, Jr. (the "Employee").
BACKGROUND
The Company considers it essential to the best interests of its
stockholders to foster the continuous employment of the Employee. In this
connection, the Board of Directors of the Company (the "Board") recognizes that,
in the future, the possibility of a termination of employment of the Employee
may exist and that such possibility, and the uncertainty and questions which it
might raise, may result in the departure or distraction of the Employee to the
detriment of the Company and its stockholders.
The Board has determined that appropriate steps should be taken to enforce
and encourage the continued attention and dedication of the Employee to his
assigned duties without distraction in the face of potentially disturbing
circumstances arising from the possibility in the future of an employment
termination.
In order to induce Employee to remain in the employ of the Company, the
Company agrees that Employee shall receive the severance benefits set forth in
this Agreement in the event Employee's employment with the Company is terminated
under the circumstances described below.
NOW THEREFORE, in consideration of the premises and the mutual agreements,
covenants and promises hereafter set forth, the parties hereby agree as follows:
I. Term of Agreement. This Agreement shall commence on the date hereof (the
"Effective Date"), and shall continue in effect until such time as the
Employee's employment shall have terminated and all obligations hereunder shall
have been satisfied.
1. Change in Control.
(a) For purposes of this Agreement, a "Change in Control" shall have
occurred if any of the following events shall occur:
(i) the Company 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 Company 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
- -1-
<PAGE>
such transaction or series of related transactions are held in the
aggregate by persons or entities who were holders of voting securities
of the Company immediately prior to such transaction;
(ii) the Company 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 Company and
one or more of its subsidiaries are parties); or
(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 Company or its subsidiaries, or any
employee benefit plan of the Company or its subsidiaries, becomes a
direct or indirect beneficial owner of shares of stock of the Company
(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 Company.
(b) For purposes of this Agreement, a "Potential Change in Control of
the Company" shall be deemed to have occurred if:
(i) the Company enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control of the
Company;
(ii) any person (including the Company) publicly announces an
intention to take or to consider taking actions which if consummated
would constitute a Change in Control of the Company;
(iii) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control of the
Company has occurred.
2. Termination Events.
(a) General. Employee shall be entitled to the benefits provided in
Section 4 hereof upon termination of employment in the following
circumstances:
(i) if none of the events described in Section 2 constituting a
Change in Control of the Company shall have occurred within two years
prior to the Date of Termination (as defined below), Employee shall be
entitled to the benefits provided in Section 4 unless such termination
is (A) because of Employee's death, (B) by the Company for Cause (as
defined below), or (C) by Employee other than for Good Reason (as
defined below)
(ii) if any of the events described in Section 2 constituting a
Change in Control of the Company shall
- -2-
<PAGE>
have occurred and the Date of Termination is prior to the second
anniversary of the date such Change in Control of the Company
occurred, Employee shall be entitled to the benefits provided in
Section 4 unless such termination is (A) because of Employee's death.
(b) Cause. Termination by the Company of Employee's employment for
"Cause" shall mean termination: (a) upon the commission by Employee of a
willful unlawful act, such as embezzlement, against the Company which is
intended to enrich the Employee at the expense of the Company or upon
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 Company. For purposes of this Subsection, no act, or failure to
act, on Employee's part shall be deemed "willful" unless done, or omitted
to be done, by Employee not in good faith and without reasonable belief
that his action or omission was in the best interest of the Company.
(c) Good Reason. For purposes of this Agreement, "Good Reason" shall
mean, without 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 (as defined below) specified in the Notice
of Termination (as defined below) given in respect thereof:
(i) a reduction by the Company in Employee's annual base salary
or employee benefits as in effect immediately prior to such reduction;
(ii) the Company's requiring Employee to be based at a Company
office more than twenty (20) miles from the Company's offices at which
Employee is principally employed on the date hereof except for
required travel on the Company's business to an extent substantially
consistent with Employee's present business travel obligations;
(iii) a material reduction in Employee's position, duties or
responsibilities as in effect immediately prior to such reduction;
(iv) the failure of the Company to obtain the agreement to assume
and to perform this Agreement by any successor as contemplated in
Section 5 hereof; or
(v) any purported termination of Employee's employment that is
not effected pursuant to a Notice of Termination satisfying the
requirements of Subsection 3(d) hereof, which purported termination
shall not be effective for purposes of this Agreement.
Employee's continued employment shall not constitute consent to, or a
waiver of rights with respect to, any circumstance constituting Good Reason
hereunder.
- -3-
<PAGE>
(d) Notice of Termination. Any purported termination of Employee's
employment by the Company or by Employee shall be communicated by written
Notice of Termination to the other party hereto in accordance with Section
6. "Notice of Termination" shall mean a notice that shall indicate the
specific termination provision in this Agreement relied upon and, if
applicable, shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Employee's
employment under the provision so indicated.
(e) Date of Termination, Etc. "Date of Termination" shall mean the
date specified in the Notice of Termination (which in the case of a
termination by the Company, other than termination based on death, shall
not be less than thirty (30) days from the date such Notice of Termination
is given, and in the case of a termination by Employee, shall not be less
than thirty (30) nor more than sixty (60) days from the date such Notice of
Termination is given); provided, however, that if within fifteen (15) days
after any Notice of Termination is given, or, if the Notice of Termination
is not properly given, prior to the Date of Termination (as determined
without regard to an extension of such Date of Termination as described in
this proviso), the party receiving such Notice of Termination notifies the
other party that a dispute exists concerning the termination, then the Date
of Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties, by a final
and binding arbitration award or by a court of competent jurisdiction; and
provided, further, that the Date of Termination shall be extended by a
notice of dispute only if such notice is given in good faith and the party
giving such notice pursues the resolution of such dispute with reasonable
diligence. Notwithstanding the pendency of any dispute, the Company will
continue to pay Employee his full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to, base
salary) and continue to allow Employee to participate in all compensation,
benefit and insurance plans in which Employee was participating when the
notice giving rise to the dispute was given, until the dispute is finally
resolved in accordance with this Subsection. Amounts paid under this
Subsection are in addition to all other amounts due under this Agreement,
and shall not be offset against or reduce any other amounts due under this
Agreement and shall not be reduced by any compensation earned by Employee
as the result of employment by another employer.
3. Compensation Upon Termination.
(a) In the event that Employee is entitled to benefits hereunder upon
termination pursuant to Section 3(a) hereof, Employee shall be entitled to
the benefits provided below:
(i) the Company shall pay to Employee his full base salary
through the Date of Termination at the rate in effect at the time
Notice of Termination is given, plus all other amounts to which
Employee is entitled under any compensation plan
- -4-
<PAGE>
of the Company, in each case without giving effect to any reduction in
salary or benefits which would constitute Good Reason pursuant to
Section 3(c)(i) hereof, at the time such payments are due;
(ii) the Company shall pay to Employee, at the time specified in
Subsection 4(b), a lump sum severance payment equal to two 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);
(iii) the Company shall provide continued uninterrupted health
care coverage to 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 pursuant to Section
3(c)(i) hereof), for a period of two years following such Date of
Termination; and
(iv) vesting and exercisability of all options granted to
Employee under the Company's Incentive Stock Option Plan prior to the
date hereof, 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 Company shall pay to Employee, at the time
specified in Subsection 4(b), 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 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 Company's Common
Stock shall be not less than the amount paid to holders of such Common
Stock in such Change in Control.
(b) The payments provided for in Subsection 4(a) shall be made not
later than the fifth day following the Date of Termination; provided,
however, that if the amounts of such payments cannot be finally determined
on or before such day, the Company shall pay to Employee on such day an
estimate, as determined in good faith by the Company, of the minimum amount
of
- -5-
<PAGE>
such payments and shall pay the remainder of such payments (together with
interest at the rate provided in Section 1274(b)(2)(B) of the Internal
Revenue Code (the "Code")) as soon as the amount thereof can be determined
but in no event later than the thirtieth day after the Date of Termination.
In the event that the amount of the estimated payments exceeds the amount
subsequently determined to have been due, such excess shall constitute a
loan by the Company to Employee payable on the fifth day after demand
therefor by the Company (together with interest at the rate provided in
Section 1274(b)(2)(B) of the Code).
(c) Employee shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in
this Section 4 be reduced by any compensation earned by Employee as the
result of employment by another employer, by retirement benefits, by offset
against any amount claimed to be owed by Employee to the Company, or
otherwise.
(d) Notwithstanding any provision of this Agreement to the contrary,
the aggregate present value of all "payments in the nature of compensation"
(within the meaning of Section 280G of the Code) provided to Employee in
connection with a Change in Control of the Company or the termination of
Employee's employment shall be one dollar less than the amount that is
fully deductible by the Company under Section 280G of the Code and, to the
extent necessary, payments and benefits under this Agreement shall be
reduced in order that this limitation not be exceeded. It is the intention
of this Subsection 4(d) to avoid excise taxes on Employee under Section
4999 of the Code or the disallowance of a deduction in the Company pursuant
to Section 280G of the Code. Notwithstanding the foregoing, this Section
shall not apply in the event of termination of employment within two years
following a Change in Control if such termination is by the Company without
Cause or by Employee for Good Reason.
4. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company could be required to perform this Agreement if
no such succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession
shall be a breach of this Agreement and shall entitle Employee to
compensation from the Company in the same amount and on the same terms to
which Employee would be entitled hereunder if Employee terminated his
employment for Good Reason following a Change in Control of the Company,
except that for purposes of implementing the foregoing, the date on which
any such succession becomes effective shall be deemed the Date of
- -6-
<PAGE>
Termination. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation
of law, or otherwise.
(b) This Agreement shall inure to the benefit of and be enforceable by
Employee and his personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
(c) All benefits to be paid hereunder shall be in addition to any
disability, workers' compensation, or other Company benefit plan
distribution, unpaid vacation or other unpaid benefits that Employee has at
the Date of Termination.
5. Notice. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified or registered mail, return receipt requested, postage prepaid,
addressed to the following addresses:
- -7-
<PAGE>
To the Company:
Covenant Bank for Savings
18 Kings Highway West
Haddonfield, NJ 08033
Attn: Chief Executive Officer
To the Employee:
Charles E. Sessa, Jr.
29 Rickland Drive
Sewell, NJ 08080
All notices to the Company shall also be directed to the attention of the
Board with a copy to the Secretary of the Company, or to such other address as
either party may have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon receipt.
6. Governing Law. The validity, interpretation, construction and
performance of this agreement shall be governed by the laws of the State of New
Jersey, without giving effect to the principles of conflict of laws of such
state.
7. No Right to Continued Employment. This Agreement does not give to
Employee any right to continued employment, and does not give to Employee any
rights or remedies based on termination of employment except as expressly set
forth herein.
8. Miscellaneous. No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Employee and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other
party, shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, expressed or implied with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. All references to sections of the Exchange Act and
the Code shall be deemed also to refer to any successor provisions to such
sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law.
9. Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity of enforceability of any other
provision of this Agreement which shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
- -8-
<PAGE>
11. Prior Agreements. Any and all agreements relating to the subject matter
hereof previously entered into between the Company and Employee are hereby
mutually terminated and canceled, and each of the parties mutually releases and
discharges the other from any and all obligations and liabilities whatsoever
existing under it by reason of any such agreements, it being the intention of
the Company and Employee that this Agreement shall supersede and be in place of
any and all prior agreements or understandings between them. This Agreement
shall not affect Employee's rights under that certain letter dated March 1, 1994
between Covenant and Employee, except as to the paragraph thereof headed
"Severance", which is superseded hereby so long as this Agreement is not held to
be invalid or unenforceable in any respect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
EMPLOYEE: COVENANT BANK FOR SAVINGS
/s/ Charles E. Sessa, Jr. /s/ Richard A. Hocker
- -------------------------- ------------------------------
CHARLES E. SESSA, JR. By: Richard A. Hocker
Title: Chief Executive Officer
Exhibit 10.6
AGREEMENT
THIS AGREEMENT, dated as of November 20, 1995 (the "Agreement"), is by and
between Covenant Bank for Savings, a New Jersey savings bank (the "Company"),
and Kenneth R. Mancini, Jr. (the "Employee").
BACKGROUND
The Company considers it essential to the best interests of its
stockholders to foster the continuous employment of key management personnel. In
this connection, the Board of Directors of the Company (the "Board") recognizes
that, in the future, the possibility of a Change in Control of the Company (as
defined below) may exist and that such possibility, and the uncertainty and
questions which it might raise among management, may result in the departure or
distraction of management personnel to the detriment of the Company and its
stockholders.
The Board has determined that appropriate steps should be taken to enforce
and encourage the continued attention and dedication of members of the Company's
management, including Employee, to their assigned duties without distraction in
the face of potentially disturbing circumstances arising from the possibility in
the future of a Change in Control of the Company.
In order to induce Employee to remain in the employ of the Company, the
Company agrees that Employee shall receive the severance benefits set forth in
this Agreement in the event Employee's employment with the Company is terminated
under the circumstances described below subsequent to a Change in Control of the
Company.
NOW THEREFORE, in consideration of the premises and the mutual agreements,
covenants and promises hereafter set forth, the parties hereby agree as follows:
I. Term of Agreement. This Agreement shall commence on the date hereof (the
"Effective Date"), and shall continue in effect until such time as the
Employee's employment shall have terminated and all obligations hereunder shall
have been satisfied.
1. Change in Control.
(a) For purposes of this Agreement, a "Change in Control" shall have
occurred if any of the following events shall occur:
(i) the Company 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 Company and one or more of its subsidiaries are parties) and as a
result of such merger, consolidation or reorganization less than a
majority of
- -1-
<PAGE>
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 Company
immediately prior to such transaction;
(ii) any person (including the Company) publicly announces an
intention to take or to consider taking actions which if consummated
would constitute a Change in Control of the Company;
(iii) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control of the
Company has occurred.
2. Termination Following Change in Control.
(a) General. If any of the events described in Section 2 constituting
a Change in Control of the Company shall have occurred, Employee shall be
entitled to the benefits provided in Section 4 hereof upon termination of
employment before the second anniversary of the date such a Change in
Control of the Company occurred unless such termination is (i) because of
Employee's death, (ii) by the Company for Cause (as defined below), or
(iii) by Employee other than for Good Reason (as defined below). In the
event Employee's employment with the Company is terminated for any reason
prior to a Change in Control (provided that such termination did not occur
during the pendency of a Potential Change in Control) and subsequently a
Change in
- -2-
<PAGE>
Control of the Company occurs, Employee shall not be entitled to any
benefits hereunder.
(b) Cause. Termination by the Company of Employee's employment for
"Cause" shall mean termination: (a) upon the commission by Employee of a
willful unlawful act, such as embezzlement, against the Company which is
intended to enrich the Employee at the expense of the Company or upon
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 Company. For purposes of this Subsection, no act, or failure to
act, on Employee's part shall be deemed "willful" unless done, or omitted
to be done, by Employee not in good faith and without reasonable belief
that his action or omission was in the best interest of the Company.
(c) Good Reason. For purposes of this Agreement, "Good Reason" shall
mean, without Employee's express written consent, the occurrence after a
Change in Control of the Company of any of the following circumstances
unless such circumstances are fully corrected prior to the Date of
Termination (as defined below) specified in the Notice of Termination (as
defined below) given in respect thereof:
(i) a reduction by the Company in Employee's annual base salary
or employee benefits as in effect immediately prior to such reduction;
(ii) the Company's requiring Employee to be based at a Company
office more than twenty (20) miles from the Company's offices at which
Employee is principally employed immediately prior to the date of the
Change in Control of the Company except for required travel on the
Company's business to an extent substantially consistent with
Employee's present business travel obligations immediately prior to
the Change in Control;
(iii) a material reduction in Employee's position, duties or
responsibilities as in effect immediately prior to such reduction;
(iv) the failure of the Company to obtain the agreement to assume
and to perform this Agreement by any successor as contemplated in
Section 5 hereof; or
(v) any purported termination of Employee's employment that is
not effected pursuant to a Notice of Termination satisfying the
requirements of Subsection 3(d) hereof, which purported termination
shall not be effective for purposes of this Agreement.
Employee's continued employment shall not constitute consent to, or a
waiver of rights with respect to, any circumstance constituting Good Reason
hereunder.
- -3-
<PAGE>
(d) Notice of Termination. Any purported termination of Employee's
employment by the Company or by Employee shall be communicated by written
Notice of Termination to the other party hereto in accordance with Section
6. "Notice of Termination" shall mean a notice that shall indicate the
specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Employee's employment under the provision so
indicated.
(e) Date of Termination, Etc. "Date of Termination" shall mean the
date specified in the Notice of Termination (which in the case of a
termination by the Company, other than termination based on death, shall
not be less than thirty (30) days from the date such Notice of Termination
is given, and in the case of a termination by Employee, shall not be less
than thirty (30) nor more than sixty (60) days from the date such Notice of
Termination is given); provided, however, that if within fifteen (15) days
after any Notice of Termination is given, or, if the Notice of Termination
is not properly given, prior to the Date of Termination (as determined
without regard to an extension of such Date of Termination as described in
this proviso), the party receiving such Notice of Termination notifies the
other party that a dispute exists concerning the termination, then the Date
of Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties, by a final
and binding arbitration award or by a court of competent jurisdiction; and
provided, further, that the Date of Termination shall be extended by a
notice of dispute only if such notice is given in good faith and the party
giving such notice pursues the resolution of such dispute with reasonable
diligence. Notwithstanding the pendency of any dispute, the Company will
continue to pay Employee his full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to, base
salary) and continue to allow Employee to participate in all compensation,
benefit and insurance plans in which Employee was participating when the
notice giving rise to the dispute was given, until the dispute is finally
resolved in accordance with this Subsection. Amounts paid under this
Subsection are in addition to all other amounts due under this Agreement,
and shall not be offset against or reduce any other amounts due under this
Agreement and shall not be reduced by any compensation earned by Employee
as the result of employment by another employer.
3. Compensation Upon Termination.
(a) Following a Change in Control of the Company, if Employee's
employment by the Company should be terminated by the Company other than
for Cause or if Employee should terminate his employment for Good Reason,
before the second anniversary of the date such Change in Control occurred,
Employee shall be entitled to the benefits provided below:
(i) the Company shall pay to Employee his full base salary
through the Date of Termination at the rate in
<PAGE>
effect at the time Notice of Termination is given, plus all other
amounts to which Employee is entitled under any compensation plan of
the Company, in each case without giving effect to any reduction in
salary or benefits which would constitute Good Reason pursuant to
Section 3(c)(i) hereof, at the time such payments are due;
(ii) the Company shall pay to Employee, at the time specified in
Subsection 4(b), a lump sum severance payment equal to 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);
(iii) the Company shall provide continued uninterrupted health
care coverage to 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 pursuant to Section
3(c)(i) hereof), for a period of one year following the Date of
Termination; and
(iv) vesting and exercisability of all options granted to
Employee under the Company's Incentive Stock Option Plan prior to the
date hereof, 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 Company shall pay to Employee, at the time
specified in Subsection 4(b), 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 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 Company's Common
Stock shall be not less than the amount paid to holders of such Common
Stock in such Change in Control.
<PAGE>
(b) The payment provided for in Subsection 4(a)(ii) shall be made not
later than the fifth day following the Date of Termination; provided,
however, that if the amounts of such payments cannot be finally determined
on or before such day, the Company shall pay to Employee on such day an
estimate, as determined in good faith by the Company, of the minimum amount
of such payments and shall pay the remainder of such payments (together
with interest at the rate provided in Section 1274(b)(2)(B) of the Internal
Revenue Code (the "Code")) as soon as the amount thereof can be determined
but in no event later than the thirtieth day after the Date of Termination.
In the event that the amount of the estimated payments exceeds the amount
subsequently determined to have been due, such excess shall constitute a
loan by the Company to Employee payable on the fifth day after demand
therefor by the Company (together with interest at the rate provided in
Section 1274(b)(2)(B) of the Code).
(c) Employee shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in
this Section 4 be reduced by any compensation earned by Employee as the
result of employment by another employer, by retirement benefits, by offset
against any amount claimed to be owed by Employee to the Company, or
otherwise.
4. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company could be required to perform this Agreement if
no such succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession
shall be a breach of this Agreement and shall entitle Employee to
compensation from the Company in the same amount and on the same terms to
which Employee would be entitled hereunder if Employee terminated his
employment for Good Reason following a Change in Control of the Company,
except that for purposes of implementing the foregoing, the date on which
any such succession becomes effective shall be deemed the Date of
Termination. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation
of law, or otherwise.
(b) This Agreement shall inure to the benefit of and be enforceable by
Employee and his personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
<PAGE>
(c) All benefits to be paid hereunder shall be in addition to any
disability, workers' compensation, or other Company benefit plan
distribution, unpaid vacation or other unpaid benefits that Employee has at
the Date of Termination.
5. Notice. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified or registered mail, return receipt requested, postage prepaid,
addressed to the following addresses:
To the Company:
Covenant Bank for Savings
18 Kings Highway West
Haddonfield, NJ 08033
Attn: President
To the Employee:
Kenneth R. Mancini, Jr.
17 Farmingham Road
Edgewater Park, NJ 08010
All notices to the Company shall also be directed to the attention of the
Board with a copy to the Secretary of the Company, or to such other address as
either party may have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon receipt.
6. Governing Law. The validity, interpretation, construction and
performance of this agreement shall be governed by the laws of the State of New
Jersey, without giving effect to the principles of conflict of laws of such
state.
7. No Right to Continued Employment. This Agreement does not give to
Employee any right to continued employment, and does not give to Employee any
rights or remedies based on termination of employment except as expressly set
forth herein.
8. Miscellaneous. No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Employee and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other
party, shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, expressed or implied with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. All references to sections of the Exchange Act and
the Code shall be deemed also to refer to any successor provisions to such
sections. Any payments provided
- -7-
<PAGE>
for hereunder shall be paid net of any applicable withholding required under
federal, state or local law.
9. Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity of enforceability of any other
provision of this Agreement which shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
11. Prior Agreements. Any and all agreements relating to the subject matter
hereof previously entered into between the Company and Employee are hereby
mutually terminated and canceled, and each of the parties mutually releases and
discharges the other from any and all obligations and liabilities whatsoever
existing under it by reason of any such agreements, it being the intention of
the Company and Employee that this Agreement shall supersede and be in place of
any and all prior agreements or understandings between them.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
EMPLOYEE: COVENANT BANK FOR SAVINGS
/s/ Kenneth R. Mancini, Jr. /s/ Charles E. Sessa, Jr.
- --------------------------- ------------------------------
KENNETH R. MANCINI, JR. By: Charles E. Sessa, Jr.
Title: President
Exhibit 10.7
AGREEMENT
THIS AGREEMENT, dated as of November 22, 1995 (the "Agreement"), is by and
between Covenant Bank for Savings, a New Jersey savings bank (the "Company"),
and J. William Parker, Jr. (the "Employee").
BACKGROUND
The Company considers it essential to the best interests of its
stockholders to foster the continuous employment of key management personnel. In
this connection, the Board of Directors of the Company (the "Board") recognizes
that, in the future, the possibility of a Change in Control of the Company (as
defined below) may exist and that such possibility, and the uncertainty and
questions which it might raise among management, may result in the departure or
distraction of management personnel to the detriment of the Company and its
stockholders.
The Board has determined that appropriate steps should be taken to enforce
and encourage the continued attention and dedication of members of the Company's
management, including Employee, to their assigned duties without distraction in
the face of potentially disturbing circumstances arising from the possibility in
the future of a Change in Control of the Company.
In order to induce Employee to remain in the employ of the Company, the
Company agrees that Employee shall receive the severance benefits set forth in
this Agreement in the event Employee's employment with the Company is terminated
under the circumstances described below subsequent to a Change in Control of the
Company.
NOW THEREFORE, in consideration of the premises and the mutual agreements,
covenants and promises hereafter set forth, the parties hereby agree as follows:
I. Term of Agreement. This Agreement shall commence on the date hereof (the
"Effective Date"), and shall continue in effect until such time as the
Employee's employment shall have terminated and all obligations hereunder shall
have been satisfied.
1. Change in Control.
(a) For purposes of this Agreement, a "Change in Control" shall have
occurred if any of the following events shall occur:
(i) the Company 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 Company and one or more of its subsidiaries are parties) and as a
result of such merger, consolidation or reorganization less than a
majority of
- -1-
<PAGE>
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 Company
immediately prior to such transaction;
(ii) the Company 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 Company and
one or more of its subsidiaries are parties); or
(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 Company or its subsidiaries, or any
employee benefit plan of the Company or its subsidiaries, becomes a
direct or indirect beneficial owner of shares of stock of the Company
(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 Company.
(b) For purposes of this Agreement, a "Potential Change in Control of
the Company" shall be deemed to have occurred if:
(i) the Company enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control of the
Company;
(ii) any person (including the Company) publicly announces an
intention to take or to consider taking actions which if consummated
would constitute a Change in Control of the Company;
(iii) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control of the
Company has occurred.
2. Termination Following Change in Control.
(a) General. If any of the events described in Section 2 constituting
a Change in Control of the Company shall have occurred, Employee shall be
entitled to the benefits provided in Section 4 hereof upon termination of
employment before the second anniversary of the date such a Change in
Control of the Company occurred unless such termination is (i) because of
Employee's death, (ii) by the Company for Cause (as defined below), or
(iii) by Employee other than for Good Reason (as defined below). In the
event Employee's employment with the Company is terminated for any reason
prior to a Change in Control (provided that such termination did not occur
during the pendency of a Potential Change in Control) and subsequently a
Change in Control of the Company occurs, Employee shall not be entitled to
any benefits hereunder.
- -2-
<PAGE>
(b) Cause. Termination by the Company of Employee's employment for
"Cause" shall mean termination: (a) upon the commission by Employee of a
willful unlawful act, such as embezzlement, against the Company which is
intended to enrich the Employee at the expense of the Company or upon
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 Company. For purposes of this Subsection, no act, or failure to
act, on Employee's part shall be deemed "willful" unless done, or omitted
to be done, by Employee not in good faith and without reasonable belief
that his action or omission was in the best interest of the Company.
(c) Good Reason. For purposes of this Agreement, "Good Reason" shall
mean, without Employee's express written consent, the occurrence after a
Change in Control of the Company of any of the following circumstances
unless such circumstances are fully corrected prior to the Date of
Termination (as defined below) specified in the Notice of Termination (as
defined below) given in respect thereof:
(i) a reduction by the Company in Employee's annual base salary
or employee benefits as in effect immediately prior to such reduction;
(ii) the Company's requiring Employee to be based at a Company
office more than twenty (20) miles from the Company's offices at which
Employee is principally employed immediately prior to the date of the
Change in Control of the Company except for required travel on the
Company's business to an extent substantially consistent with
Employee's present business travel obligations immediately prior to
the Change in Control;
(iii) a material reduction in Employee's position, duties or
responsibilities as in effect immediately prior to such reduction;
(iv) the failure of the Company to obtain the agreement to assume
and to perform this Agreement by any successor as contemplated in
Section 5 hereof; or
(v) any purported termination of Employee's employment that is
not effected pursuant to a Notice of Termination satisfying the
requirements of Subsection 3(d) hereof, which purported termination
shall not be effective for purposes of this Agreement.
Employee's continued employment shall not constitute consent to, or a
waiver of rights with respect to, any circumstance constituting Good Reason
hereunder.
- -3-
<PAGE>
(d) Notice of Termination. Any purported termination of Employee's
employment by the Company or by Employee shall be communicated by written
Notice of Termination to the other party hereto in accordance with Section
6. "Notice of Termination" shall mean a notice that shall indicate the
specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Employee's employment under the provision so
indicated.
(e) Date of Termination, Etc. "Date of Termination" shall mean the
date specified in the Notice of Termination (which in the case of a
termination by the Company, other than termination based on death, shall
not be less than thirty (30) days from the date such Notice of Termination
is given, and in the case of a termination by Employee, shall not be less
than thirty (30) nor more than sixty (60) days from the date such Notice of
Termination is given); provided, however, that if within fifteen (15) days
after any Notice of Termination is given, or, if the Notice of Termination
is not properly given, prior to the Date of Termination (as determined
without regard to an extension of such Date of Termination as described in
this proviso), the party receiving such Notice of Termination notifies the
other party that a dispute exists concerning the termination, then the Date
of Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties, by a final
and binding arbitration award or by a court of competent jurisdiction; and
provided, further, that the Date of Termination shall be extended by a
notice of dispute only if such notice is given in good faith and the party
giving such notice pursues the resolution of such dispute with reasonable
diligence. Notwithstanding the pendency of any dispute, the Company will
continue to pay Employee his full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to, base
salary) and continue to allow Employee to participate in all compensation,
benefit and insurance plans in which Employee was participating when the
notice giving rise to the dispute was given, until the dispute is finally
resolved in accordance with this Subsection. Amounts paid under this
Subsection are in addition to all other amounts due under this Agreement,
and shall not be offset against or reduce any other amounts due under this
Agreement and shall not be reduced by any compensation earned by Employee
as the result of employment by another employer.
3. Compensation Upon Termination.
(a) Following a Change in Control of the Company, if Employee's
employment by the Company should be terminated by the Company other than
for Cause or if Employee should terminate his employment for Good Reason,
before the second anniversary of the date such Change in Control occurred,
Employee shall be entitled to the benefits provided below:
(i) the Company shall pay to Employee his full base salary
through the Date of Termination at the rate in
<PAGE>
effect at the time Notice of Termination is given, plus all other
amounts to which Employee is entitled under any compensation plan of
the Company, in each case without giving effect to any reduction in
salary or benefits which would constitute Good Reason pursuant to
Section 3(c)(i) hereof, at the time such payments are due;
(ii) the Company shall pay to Employee, at the time specified in
Subsection 4(b), a lump sum severance payment equal to 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);
(iii) the Company shall provide continued uninterrupted health
care coverage to 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 pursuant to Section
3(c)(i) hereof), for a period of one year following the Date of
Termination; and
(iv) vesting and exercisability of all options granted to
Employee under the Company's Incentive Stock Option Plan prior to the
date hereof, 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 Company shall pay to Employee, at the time
specified in Subsection 4(b), an amount equal to the difference (the
"Spread") between the exercise price for such Covered Options and the
Fair Market Value of such Covered Options 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
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 Company's Common
Stock shall be not less than the amount paid to holders of such Common
Stock in such Change in Control.
- -5-
<PAGE>
(b) The payment provided for in Subsection 4(a)(ii) shall be made not
later than the fifth day following the Date of Termination; provided,
however, that if the amounts of such payments cannot be finally determined
on or before such day, the Company shall pay to Employee on such day an
estimate, as determined in good faith by the Company, of the minimum amount
of such payments and shall pay the remainder of such payments (together
with interest at the rate provided in Section 1274(b)(2)(B) of the Internal
Revenue Code (the "Code")) as soon as the amount thereof can be determined
but in no event later than the thirtieth day after the Date of Termination.
In the event that the amount of the estimated payments exceeds the amount
subsequently determined to have been due, such excess shall constitute a
loan by the Company to Employee payable on the fifth day after demand
therefor by the Company (together with interest at the rate provided in
Section 1274(b)(2)(B) of the Code).
(c) Employee shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in
this Section 4 be reduced by any compensation earned by Employee as the
result of employment by another employer, by retirement benefits, by offset
against any amount claimed to be owed by Employee to the Company, or
otherwise.
4. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company could be required to perform this Agreement if
no such succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession
shall be a breach of this Agreement and shall entitle Employee to
compensation from the Company in the same amount and on the same terms to
which Employee would be entitled hereunder if Employee terminated his
employment for Good Reason following a Change in Control of the Company,
except that for purposes of implementing the foregoing, the date on which
any such succession becomes effective shall be deemed the Date of
Termination. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation
of law, or otherwise.
(b) This Agreement shall inure to the benefit of and be enforceable by
Employee and his personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
(c) All benefits to be paid hereunder shall be in addition to any
disability, workers' compensation, or other
- -6-
<PAGE>
Company benefit plan distribution, unpaid vacation or other unpaid benefits
that Employee has at the Date of Termination.
5. Notice. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified or registered mail, return receipt requested, postage prepaid,
addressed to the following addresses:
To the Company:
Covenant Bank for Savings
18 Kings Highway West
Haddonfield, NJ 08033
Attn: President
To the Employee:
J. William Parker, Jr.
110 Ashford Road
Cherry Hill, NJ 08003
All notices to the Company shall also be directed to the attention of the
Board with a copy to the Secretary of the Company, or to such other address as
either party may have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon receipt.
6. Governing Law. The validity, interpretation, construction and
performance of this agreement shall be governed by the laws of the State of New
Jersey, without giving effect to the principles of conflict of laws of such
state.
7. No Right to Continued Employment. This Agreement does not give to
Employee any right to continued employment, and does not give to Employee any
rights or remedies based on termination of employment except as expressly set
forth herein.
8. Miscellaneous. No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Employee and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other
party, shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, expressed or implied with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. All references to sections of the Exchange Act and
the Code shall be deemed also to refer to any successor provisions to such
sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law.
- -7-
<PAGE>
9. Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity of enforceability of any other
provision of this Agreement which shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
11. Prior Agreements. Any and all agreements relating to the subject matter
hereof previously entered into between the Company and Employee are hereby
mutually terminated and canceled, and each of the parties mutually releases and
discharges the other from any and all obligations and liabilities whatsoever
existing under it by reason of any such agreements, it being the intention of
the Company and Employee that this Agreement shall supersede and be in place of
any and all prior agreements or understandings between them.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
EMPLOYEE: COVENANT BANK FOR SAVINGS
/s/ J. William Parker, Jr. /s/ Charles E. Sessa, Jr.
- --------------------------- ------------------------------
J. WILLIAM PARKER, JR. By: Charles E. Sessa, Jr.
Title: President
Exhibit 10.8
AGREEMENT
THIS AGREEMENT, dated as of November 22, 1995 (the "Agreement"), is by and
between Covenant Bank for Savings, a New Jersey savings bank (the "Company"),
and Eugene D. D'Orazio, Jr. (the "Employee").
BACKGROUND
The Company considers it essential to the best interests of its
stockholders to foster the continuous employment of key management personnel. In
this connection, the Board of Directors of the Company (the "Board") recognizes
that, in the future, the possibility of a Change in Control of the Company (as
defined below) may exist and that such possibility, and the uncertainty and
questions which it might raise among management, may result in the departure or
distraction of management personnel to the detriment of the Company and its
stockholders.
The Board has determined that appropriate steps should be taken to enforce
and encourage the continued attention and dedication of members of the Company's
management, including Employee, to their assigned duties without distraction in
the face of potentially disturbing circumstances arising from the possibility in
the future of a Change in Control of the Company.
In order to induce Employee to remain in the employ of the Company, the
Company agrees that Employee shall receive the severance benefits set forth in
this Agreement in the event Employee's employment with the Company is terminated
under the circumstances described below subsequent to a Change in Control of the
Company.
NOW THEREFORE, in consideration of the premises and the mutual agreements,
covenants and promises hereafter set forth, the parties hereby agree as follows:
I. Term of Agreement. This Agreement shall commence on the date hereof (the
"Effective Date"), and shall continue in effect until such time as the
Employee's employment shall have terminated and all obligations hereunder shall
have been satisfied.
1. Change in Control.
(a) For purposes of this Agreement, a "Change in Control" shall have
occurred if any of the following events shall occur:
(i) the Company 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 Company and one or more of its subsidiaries are parties) and as a
result of such merger, consolidation or reorganization less than a
majority of
- -1-
<PAGE>
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 Company
immediately prior to such transaction;
(ii) the Company 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 Company and
one or more of its subsidiaries are parties); or
(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 Company or its subsidiaries, or any
employee benefit plan of the Company or its subsidiaries, becomes a
direct or indirect beneficial owner of shares of stock of the Company
(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 Company.
(b) For purposes of this Agreement, a "Potential Change in Control of
the Company" shall be deemed to have occurred if:
(i) the Company enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control of the
Company;
(ii) any person (including the Company) publicly announces an
intention to take or to consider taking actions which if consummated
would constitute a Change in Control of the Company;
(iii) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control of the
Company has occurred.
2. Termination Following Change in Control.
(a) General. If any of the events described in Section 2
constituting a Change in Control of the Company shall have occurred,
Employee shall be entitled to the benefits provided in Section 4
hereof upon termination of employment before the second anniversary of
the date such a Change in Control of the Company occurred unless such
termination is (i) because of Employee's death, (ii) by the Company
for Cause (as defined below), or (iii) by Employee other than for Good
Reason (as defined below). In the event Employee's employment with the
Company is terminated for any reason prior to a Change in Control
(provided that such termination did not occur during the pendency of a
Potential Change in Control) and subsequently a Change in
- -2-
<PAGE>
Control of the Company occurs, Employee shall not be entitled to any
benefits hereunder.
(b) Cause. Termination by the Company of Employee's employment
for "Cause" shall mean termination: (a) upon the commission by
Employee of a willful unlawful act, such as embezzlement, against the
Company which is intended to enrich the Employee at the expense of the
Company or upon 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 Company. For purposes of this
Subsection, no act, or failure to act, on Employee's part shall be
deemed "willful" unless done, or omitted to be done, by Employee not
in good faith and without reasonable belief that his action or
omission was in the best interest of the Company.
(c) Good Reason. For purposes of this Agreement, "Good Reason"
shall mean, without Employee's express written consent, the occurrence
after a Change in Control of the Company of any of the following
circumstances unless such circumstances are fully corrected prior to
the Date of Termination (as defined below) specified in the Notice of
Termination (as defined below) given in respect thereof:
(i) a reduction by the Company in Employee's annual base
salary or employee benefits as in effect immediately prior to
such reduction;
(ii) the Company's requiring Employee to be based at a
Company office more than twenty (20) miles from the Company's
offices at which Employee is principally employed immediately
prior to the date of the Change in Control of the Company except
for required travel on the Company's business to an extent
substantially consistent with Employee's present business travel
obligations immediately prior to the Change in Control;
(iii) a material reduction in Employee's position, duties or
responsibilities as in effect immediately prior to such
reduction;
(iv) the failure of the Company to obtain the agreement to
assume and to perform this Agreement by any successor as
contemplated in Section 5 hereof; or
(v) any purported termination of Employee's employment that
is not effected pursuant to a Notice of Termination satisfying
the requirements of Subsection 3(d) hereof, which purported
termination shall not be effective for purposes of this
Agreement.
Employee's continued employment shall not constitute consent to, or a
waiver of rights with respect to, any circumstance constituting Good Reason
hereunder.
- -3-
<PAGE>
(d) Notice of Termination. Any purported termination of Employee's
employment by the Company or by Employee shall be communicated by written
Notice of Termination to the other party hereto in accordance with Section
6. "Notice of Termination" shall mean a notice that shall indicate the
specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Employee's employment under the provision so
indicated.
(e) Date of Termination, Etc. "Date of Termination" shall mean the
date specified in the Notice of Termination (which in the case of a
termination by the Company, other than termination based on death, shall
not be less than thirty (30) days from the date such Notice of Termination
is given, and in the case of a termination by Employee, shall not be less
than thirty (30) nor more than sixty (60) days from the date such Notice of
Termination is given); provided, however, that if within fifteen (15) days
after any Notice of Termination is given, or, if the Notice of Termination
is not properly given, prior to the Date of Termination (as determined
without regard to an extension of such Date of Termination as described in
this proviso), the party receiving such Notice of Termination notifies the
other party that a dispute exists concerning the termination, then the Date
of Termination shall be the date on which the dispute is finally
determined, either by mutual written agreement of the parties, by a final
and binding arbitration award or by a court of competent jurisdiction; and
provided, further, that the Date of Termination shall be extended by a
notice of dispute only if such notice is given in good faith and the party
giving such notice pursues the resolution of such dispute with reasonable
diligence. Notwithstanding the pendency of any dispute, the Company will
continue to pay Employee his full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to, base
salary) and continue to allow Employee to participate in all compensation,
benefit and insurance plans in which Employee was participating when the
notice giving rise to the dispute was given, until the dispute is finally
resolved in accordance with this Subsection. Amounts paid under this
Subsection are in addition to all other amounts due under this Agreement,
and shall not be offset against or reduce any other amounts due under this
Agreement and shall not be reduced by any compensation earned by Employee
as the result of employment by another employer.
3. Compensation Upon Termination.
(a) Following a Change in Control of the Company, if Employee's
employment by the Company should be terminated by the Company other than
for Cause or if Employee should terminate his employment for Good Reason,
before the second anniversary of the date such Change in Control occurred,
Employee shall be entitled to the benefits provided below:
(i) the Company shall pay to Employee his full base salary
through the Date of Termination at the rate in
- -4-
<PAGE>
effect at the time Notice of Termination is given, plus all other
amounts to which Employee is entitled under any compensation plan of
the Company, in each case without giving effect to any reduction in
salary or benefits which would constitute Good Reason pursuant to
Section 3(c)(i) hereof, at the time such payments are due;
(ii) the Company shall pay to Employee, at the time specified in
Subsection 4(b), a lump sum severance payment equal to 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);
(iii) the Company shall provide continued uninterrupted health
care coverage to 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 pursuant to Section
3(c)(i) hereof), for a period of one year following the Date of
Termination; and
(iv) vesting and exercisability of all options granted to
Employee under the Company's Incentive Stock Option Plan prior to the
date hereof, and all such options granted hereafter which shall
specifically indicate in such grant that they are subject to this
provision (collectively, the "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 Company shall pay to Employee, at the time
specified in Subsection 4(b), 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 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 Company's Common
Stock shall be not less than the amount paid to holders of such Common
Stock in such Change in Control.
- -5-
<PAGE>
(b) The payment provided for in Subsection 4(a)(ii) shall be made not
later than the fifth day following the Date of Termination; provided,
however, that if the amounts of such payments cannot be finally determined
on or before such day, the Company shall pay to Employee on such day an
estimate, as determined in good faith by the Company, of the minimum amount
of such payments and shall pay the remainder of such payments (together
with interest at the rate provided in Section 1274(b)(2)(B) of the Internal
Revenue Code (the "Code")) as soon as the amount thereof can be determined
but in no event later than the thirtieth day after the Date of Termination.
In the event that the amount of the estimated payments exceeds the amount
subsequently determined to have been due, such excess shall constitute a
loan by the Company to Employee payable on the fifth day after demand
therefor by the Company (together with interest at the rate provided in
Section 1274(b)(2)(B) of the Code).
(c) Employee shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for in
this Section 4 be reduced by any compensation earned by Employee as the
result of employment by another employer, by retirement benefits, by offset
against any amount claimed to be owed by Employee to the Company, or
otherwise.
4. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the
same extent that the Company could be required to perform this Agreement if
no such succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession
shall be a breach of this Agreement and shall entitle Employee to
compensation from the Company in the same amount and on the same terms to
which Employee would be entitled hereunder if Employee terminated his
employment for Good Reason following a Change in Control of the Company,
except that for purposes of implementing the foregoing, the date on which
any such succession becomes effective shall be deemed the Date of
Termination. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation
of law, or otherwise.
(b) This Agreement shall inure to the benefit of and be enforceable by
Employee and his personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
(c) All benefits to be paid hereunder shall be in addition to any
disability, workers' compensation, or other
- -6-
<PAGE>
Company benefit plan distribution, unpaid vacation or other unpaid benefits
that Employee has at the Date of Termination.
5. Notice. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified or registered mail, return receipt requested, postage prepaid,
addressed to the following addresses:
To the Company:
Covenant Bank for Savings
18 Kings Highway West
Haddonfield, NJ 08033
Attn: President
To the Employee:
Eugene D. D'Orazio, Jr.
RD #2, Box 347C
Williamstown, NJ 08094
All notices to the Company shall also be directed to the attention of the
Board with a copy to the Secretary of the Company, or to such other address as
either party may have furnished to the other in writing in accordance herewith,
except that notice of change of address shall be effective only upon receipt.
6. Governing Law. The validity, interpretation, construction and
performance of this agreement shall be governed by the laws of the State of New
Jersey, without giving effect to the principles of conflict of laws of such
state.
7. No Right to Continued Employment. This Agreement does not give to
Employee any right to continued employment, and does not give to Employee any
rights or remedies based on termination of employment except as expressly set
forth herein.
8. Miscellaneous. No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Employee and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other
party, shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, expressed or implied with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. All references to sections of the Exchange Act and
the Code shall be deemed also to refer to any successor provisions to such
sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law.
- -7-
<PAGE>
9. Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity of enforceability of any other
provision of this Agreement which shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
11. Prior Agreements. Any and all agreements relating to the subject matter
hereof previously entered into between the Company and Employee are hereby
mutually terminated and canceled, and each of the parties mutually releases and
discharges the other from any and all obligations and liabilities whatsoever
existing under it by reason of any such agreements, it being the intention of
the Company and Employee that this Agreement shall supersede and be in place of
any and all prior agreements or understandings between them.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
EMPLOYEE: COVENANT BANK FOR SAVINGS
/s/ Eugene D. D'Orazio, Jr. /s/ Charles E. Sessa, Jr.
- --------------------------- ------------------------------
EUGENE D. D'ORAZIO, JR. By: Charles E. Sessa, Jr.
Title: President
- -8-
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Covenant Bank:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the registration statement.
KPMG Peat Marwick, LLP
1600 Market Street
Philadelphia, PA 19103
April 15, 1997
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
1st Southern State Bank
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the registration statements.
Moore & Fitzpatrick, LLC
Certified Public Accountants
200 South Shore Road
Marmora, NJ 08223
April 15, 1997
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We agree to the inclusion in this registration statement of Covenant
Bancorp on Form S-4 of our report, dated January 19, 1995, on our audit of the
financial statements of Covenant Bank, which report is included in the Annual
Report on Form F-2.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 15, 1997
Exhibit 99.1
Annual Meeting of Stockholders, June 10, 1997
Solicited on Behalf of the Board of Directors
The undersigned stockholder of COVENANT BANK (the "Bank") does hereby
appoint L. Garrett Dutton, Jr., Gary L. Green and Joseph A. Maressa, Sr. and
each of them his true and lawful attorney, with power of substitution, for him
and in his name, place and stead, to vote as proxy for the undersigned all of
the shares of common stock of the Bank standing in the undersigned's name on the
Bank's books, at the Annual Meeting of Stockholders to be held on June 10, 1997,
or any adjournment or postponement thereof, as indicated on the reverse side
hereof with respect to all items and in the discretion of the proxy holder with
respect to any other business which may properly come before the meeting.
Please indicate on the reverse side of this card how your stock is to be
voted. If no choice is specified, this proxy will be voted FOR proposal 1 and
FOR management's nominees for election as directors. This proxy may be revoked
at any time it is voted.
PLEASE SIGN, DATE AND RETURN THIS PROXY IN THE ENVELOPE PROVIDED.
<PAGE>
Solicited on Behalf of the Board of Directors
The Board of Directors Recommends a Vote "FOR" Proposal 1 and
"FOR" each of the Nominees for Election to the Board
1. Approve the Plan of Acquisition dated as of February 28, 1997, pursuant to
which the Bank will reorganize into a holding company structure.
[___] FOR [___] AGAINST [___] ABSTAIN
2. [___] FOR all nominees listed [___] WITHHOLD AUTHORITY
(except as marked to the to vote for all nominees listed
contrary)
Barry M. Abelson, Thomas V.G. Brown, William T. Carson, Jr., John J.
Gallagher, Jr., Gary E. Greenblatt, Richard A. Hocker, James R. Iannone,
Joseph A. Maressa, Sr., Charles E. Sessa, Jr. and Kyle W. Will.
(INSTRUCTIONS: To withhold authority to vote for any individual, strike a
line through the nominees name in the list above.)
- -2-
EXHIBIT 99.2
April ___, 1997
Dear Shareholder:
Enclosed are Covenant Bank's 1996 Annual Report to Shareholders, a Proxy
Statement/Prospectus and a proxy card with an invitation to our annual meeting
of shareholders. The Board of Directors and management encourage you to take a
few moments to read the enclosed material and cast your vote on the enclosed
proxy card. Your Board of Directors and management recommend a vote FOR each of
the proposals. We urge you to return your vote as soon as possible.
YOUR VOTE IS IMPORTANT!
Under applicable New Jersey law, Proposal 2 requires approval by two-thirds
of all outstanding shares of Covenant common stock. If your shares are held
through a broker or other nominee, your shares cannot be voted without specific
voting instructions from you.
Failure to return your signed proxy card will have the same effect as a
vote against Proposal 2. Accordingly, we are urgently requesting that you
complete, sign and return the enclosed proxy card whether or not you plan to
attend the annual meeting of shareholders.
If you have any questions, please contact J. William Parker, Jr., Senior
Vice President and Chief Financial Officer, at (609)-428-7318.
Very truly yours,
- ----------------------------- ----------------------------
Richard A. Hocker Charles E. Sessa, Jr.
Chairman & CEO President
