<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 1997
REGISTRATION NO. 333-37709
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FIRST UNION CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
NORTH CAROLINA 6711 56-0898180
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation or organization) classification code number) identification number)
</TABLE>
ONE FIRST UNION CENTER
CHARLOTTE, NORTH CAROLINA 28288-0013
(704) 374-6565
(Address, including zip code and telephone number,
including area code, of registrant's principal executive offices)
MARION A. COWELL, JR., ESQ.
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
FIRST UNION CORPORATION
ONE FIRST UNION CENTER
CHARLOTTE, NORTH CAROLINA 28288-0013
(704) 374-6828
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPY TO:
L. GARRETT DUTTON, JR., ESQ.
PEPPER, HAMILTON & SCHEETZ, LLP
3000 TWO LOGAN SQUARE
PHILADELPHIA, PA 19103
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As promptly as practicable after the effective date of this Registration
Statement.
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. [ ]
------------------------
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<PAGE>
COVENANT BANCORP, INC.
18 KINGS HIGHWAY WEST
HADDONFIELD, NEW JERSEY 08033
(609) 428-7300
December 15, 1997
Dear Stockholder:
As previously announced, the Special Meeting of Stockholders of Covenant
Bancorp, Inc. ("Covenant"), which was adjourned on November 20, 1997, will
re-convene at 10:00 a.m., on January 8, 1998, at Tavistock Country Club,
Haddonfield, New Jersey (the "Special Meeting"). The purpose of the Special
Meeting is to vote on a proposal to approve the Agreement and Plan of Mergers,
dated as of August 4, 1997 (the "Merger Agreement"), by and among Covenant,
Covenant Bank, First Union Corporation ("FUNC") and First Union National Bank
("FUNB"), pursuant to which, among other things, Covenant will merge with and
into FUNC and Covenant Bank will merge with and into FUNB (collectively, the
"Mergers"), all on and subject to the terms and conditions contained therein,
and as described in the Prospectus/Proxy Statement, dated October 15, 1997 (the
"Prospectus/Proxy Statement"), previously delivered to you in connection with
the Special Meeting.
As you know, the Special Meeting was adjourned in order to provide you with
certain information relating to FUNC's agreement to acquire CoreStates Financial
Corp ("CoreStates"), which was announced by FUNC on November 18, 1997, and to
provide you with additional time to submit new proxies if you wish to do so.
Accordingly, attached hereto is a Supplement to the Prospectus/Proxy Statement
(the "Supplement") and a new proxy card. The Supplement includes, among other
things, information relating to the CoreStates acquisition and certain updated
information with respect to FUNC, Covenant and the Mergers, and I urge you to
review such information carefully. If you wish to receive another copy of the
Prospectus/Proxy Statement, please call Covenant at (609) 428-7300 or FUNC at
(704) 374-6782.
If you have not previously submitted a proxy or you desire to submit a new
proxy, please complete the enclosed proxy, sign and date it and mail it promptly
in the enclosed postage-paid return addressed envelope. IF YOU HAVE PREVIOUSLY
SUBMITTED A PROXY AND DO NOT WISH TO CHANGE YOUR VOTE, YOU DO NOT NEED TO SUBMIT
A NEW PROXY OR TAKE ANY OTHER ACTION.
THE BOARD OF DIRECTORS OF COVENANT HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT, BELIEVES THE MERGER AGREEMENT IS IN THE BEST INTERESTS OF COVENANT
AND ITS STOCKHOLDERS AND RECOMMENDS ITS APPROVAL BY COVENANT STOCKHOLDERS.
Yours very truly,
/s/ CHARLES E. SESSA, JR.
-------------------------
CHARLES E. SESSA, JR.
PRESIDENT
<PAGE>
FIRST UNION CORPORATION COVENANT BANCORP, INC.
SUPPLEMENT TO
PROSPECTUS/PROXY STATEMENT
The information set forth herein supplements the Prospectus/Proxy
Statement, dated October 15, 1997 (the "Prospectus/Proxy Statement"), previously
delivered to you in connection with the solicitation of proxies by the Board of
Directors of Covenant Bancorp, Inc. ("Covenant") for use at the Special Meeting
of Stockholders of Covenant, which was convened on November 20, 1997 and
adjourned to 10 a.m., on January 8, 1998, at Tavistock Country Club (the
"Special Meeting"). As set forth in the Prospectus/Proxy Statement, at the
Special Meeting stockholders will vote upon a proposal to approve the Agreement
and Plan of Mergers, dated as of August 4, 1997 (the "Merger Agreement"), by and
among Covenant, Covenant Bank, First Union Corporation ("FUNC") and First Union
National Bank ("FUNB"), pursuant to which, among other things, Covenant will
merge with and into FUNC (the "Corporate Merger") and Covenant Bank will merge
with and into FUNB (the "Bank Merger" and, together with the Corporate Merger,
the "Mergers"), all on and subject to the terms and conditions contained
therein.
As more fully described below, the Special Meeting was adjourned in order
to provide Covenant stockholders with certain information relating to FUNC's
agreement to acquire CoreStates Financial Corp ("CoreStates"), which was
announced by FUNC on November 18, 1997. This Supplement sets forth, among other
things, (i) certain information relating to the CoreStates acquisition,
including certain pro forma financial information with respect to the Mergers,
the CoreStates acquisition, FUNC's recently completed acquisition of Signet
Banking Corporation ("Signet") and its pending acquisition of Wheat First
Butcher Singer, Inc. ("Wheat"), and (ii) certain updated information with
respect to FUNC, Covenant and the Mergers. Certain additional financial
information, including certain historical financial information relating to
Covenant and CoreStates, is included in EXHIBITS A, B and C attached hereto,
respectively.
This Supplement should be read in conjunction with the Prospectus/Proxy
Statement. Unless otherwise indicated, all capitalized terms used herein shall
have the meanings assigned to them in the Prospectus/Proxy Statement. If you
wish to receive another copy of the Prospectus/Proxy Statement, please call
Covenant at (609) 428-7300 or FUNC at (704) 374-6782.
On December 12, 1997, the last reported sale price of FUNC Common Stock on
the NYSE Tape, the last reported sale price of Covenant Common Stock on the
Nasdaq National Market and the last reported sale prices of Covenant Series A
Preferred Stock and Covenant Series B Preferred Stock on the Nasdaq Small-Cap
Market were $50.00, $18.50, $66.50 and $55.00, respectively.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This Supplement and the Prospectus/Proxy Statement (including information
included or incorporated by reference herein or therein) contain, among other
things, certain forward-looking statements with respect to the financial
condition, results of operations, plans, objectives, future performance and
business of each of FUNC and Covenant, as well as certain information relating
to CoreStates, Signet and Wheat, including (i) statements relating to the cost
savings estimated to result from the CoreStates and Signet acquisitions (see
"CERTAIN RECENT DEVELOPMENTS", "PRO FORMA FINANCIAL INFORMATION" and "CERTAIN
UPDATED INFORMATION RELATING TO THE MERGERS -- Comparison of Certain Unaudited
Per Share Data" and " -- Selected Financial Data" in this Supplement and "RECENT
DEVELOPMENTS" in the Prospectus/Proxy Statement), (ii) statements relating to
revenues estimated to result from the CoreStates and Signet acquisitions (see
"CERTAIN RECENT DEVELOPMENTS", "PRO FORMA FINANCIAL INFORMATION" and "CERTAIN
UPDATED INFORMATION RELATING TO THE MERGERS -- Comparison of Certain Unaudited
Per Share Data" and " -- Selected Financial Data" in this Supplement and "RECENT
DEVELOPMENTS" in the Prospectus/Proxy Statement), (iii) statements relating to
the restructuring charges estimated to be incurred in connection with the
CoreStates and Signet acquisitions (see "CERTAIN RECENT DEVELOPMENTS", "PRO
FORMA FINANCIAL INFORMATION" and "CERTAIN UPDATED INFORMATION RELATING TO THE
MERGERS -- Comparison of Certain Unaudited Per Share Data" and " -- Selected
Financial Data" in this Supplement and "RECENT DEVELOPMENTS" in the
Prospectus/Proxy Statement), and (iv) statements preceded by, followed by or
that include the words "believes", "expects", "anticipates", "estimates" or
similar expressions (see, in particular, "CERTAIN RECENT DEVELOPMENTS", "PRO
FORMA FINANCIAL INFORMATION" and "CERTAIN UPDATED INFORMATION RELATING TO THE
MERGERS -- Comparison of Certain Unaudited Per Share Data" and " -- Selected
Financial Data" in this Supplement and "RECENT DEVELOPMENTS" and "THE MERGERS --
Background and Reasons" and " -- Opinion of Financial Advisor" in the
Prospectus/Proxy Statement). These forward-looking statements involve certain
risks and uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include,
among others, the following possibilities: (a) expected cost savings from the
Mergers and the CoreStates, Signet and Wheat acquisitions may not be fully
realized or realized within the expected time frame; (b) revenues following the
Mergers and the CoreStates, Signet and Wheat acquisitions may be lower than
expected, or deposit attrition, operating costs or customer loss and business
disruption following the Mergers and the CoreStates, Signet and Wheat
acquisitions may be greater than expected; (c) competitive pressures among
depository and other financial institutions may increase significantly; (d)
costs or difficulties related to the integration of the business of FUNC,
Covenant, CoreStates, Signet and/or Wheat may be greater than expected; (e)
changes in the interest rate environment may reduce margins; (f) general
economic or business conditions, either nationally or in the states or regions
in which FUNC is doing business, may be less favorable than expected, resulting
in, among other things, a deterioration in credit quality or a reduced demand
for credit; (g) legislative or regulatory changes may adversely affect the
businesses in which FUNC is engaged; and (h) changes may occur in the securities
markets.
THE DATE OF THIS SUPPLEMENT IS DECEMBER 15, 1997
<PAGE>
CERTAIN AVAILABLE INFORMATION
THE PROSPECTUS/PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH, INCLUDING, WITHOUT LIMITATION,
FUNC'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1997,
AND FUNC'S CURRENT REPORTS ON FORM 8-K DATED NOVEMBER 18, 1997, NOVEMBER 28,
1997, AND DECEMBER 2, 1997. A COPY OF SUCH DOCUMENTS IS AVAILABLE WITHOUT CHARGE
(OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS) TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS SUPPLEMENT AND THE PROSPECTUS/PROXY STATEMENT IS
DELIVERED, UPON WRITTEN OR ORAL REQUEST TO: FIRST UNION CORPORATION, CORPORATE
RELATIONS, ONE FIRST UNION CENTER, CHARLOTTE, NORTH CAROLINA 28288-0206
(TELEPHONE NUMBER (704) 374-6782). IN ORDER TO ENSURE TIMELY DELIVERY OF SUCH
DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY DECEMBER 31, 1997.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION.......................................................... Cover
CERTAIN AVAILABLE INFORMATION........................................................................................ 2
CERTAIN RECENT DEVELOPMENTS.......................................................................................... 3
CoreStates Acquisition............................................................................................. 3
Signet and Wheat Acquisitions...................................................................................... 4
CERTAIN UPDATED INFORMATION RELATING TO THE MERGERS.................................................................. 4
Record Date; Vote Required; Revocation of Proxies.................................................................. 4
General; Exchange Ratios........................................................................................... 5
Regulatory Approvals............................................................................................... 5
Comparison of Certain Unaudited Per Share Data..................................................................... 5
Selected Financial Data............................................................................................ 9
Accounting Treatment............................................................................................... 15
Experts............................................................................................................ 15
PRO FORMA FINANCIAL INFORMATION...................................................................................... 16
EXHIBIT A
Quarterly Report on Form 10-Q of Covenant Bancorp, Inc. for the Quarter Ended September 30, 1997................... A-1
EXHIBIT B
Certain Historical Financial Information Relating to CoreStates.................................................... B-1
EXHIBIT C
Independent Auditors' Report with respect to Meridian Bancorp, Inc. (which was acquired by CoreStates in 1996)..... C-1
Independent Auditors' Report with respect to United Counties Bancorporation (which was acquired by CoreStates in
1996)........................................................................................................... C-2
</TABLE>
2
<PAGE>
CERTAIN RECENT DEVELOPMENTS
CORESTATES ACQUISITION
On November 18, 1997, FUNC entered into an agreement to acquire CoreStates,
a bank holding company based in Philadelphia, Pennsylvania. CoreStates, through
its lead bank subsidiary, CoreStates Bank, N.A., provides financial services
through banking offices located in Pennsylvania, New Jersey and Delaware. As of
September 30, 1997, and for the nine months then ended, CoreStates reported
assets of $48 billion, net loans of $35 billion, deposits of $34 billion,
stockholders' equity of $3 billion and net income of $597 million. Under the
terms of the CoreStates acquisition agreement, FUNC will exchange 1.62 shares of
FUNC Common Stock (subject to possible adjustment under certain circumstances)
for each outstanding share of CoreStates common stock. The CoreStates
acquisition, which will be accounted for as a pooling of interests, is expected
to close in the second quarter of 1998, subject to certain conditions of
closing, including approval of the CoreStates acquisition agreement by
CoreStates and FUNC stockholders, approval by FUNC stockholders of an amendment
to the FUNC Articles to increase the number of authorized shares of FUNC Common
Stock from 750,000,000 to 2,000,000,000, and approval by various regulatory
agencies. Based on the 1.62 exchange ratio, a total of 323,642,000 shares of
FUNC Common Stock are expected to be issued upon consummation of the CoreStates
acquisition, excluding FUNC Common Stock to be exchanged for an estimated 3.5
million shares of CoreStates common stock that CoreStates expects to issue in
order to qualify the CoreStates acquisition as a pooling of interests. See
"CERTAIN UPDATED INFORMATION RELATING TO THE MERGERS -- Accounting Treatment" in
this Supplement and "THE MERGERS -- Accounting Treatment" in the
Prospectus/Proxy Statement.
In connection with the CoreStates acquisition, CoreStates granted FUNC an
option to purchase, under certain circumstances, up to 19.9 percent of the
outstanding shares of common stock of CoreStates at a price of $72.00 per share,
subject to certain adjustments, and FUNC granted CoreStates an option to
purchase, under certain circumstances, up to 9.9 percent of the outstanding
shares of FUNC Common Stock at a price of $52.00 per share, subject to certain
adjustments. Under certain circumstances, the respective issuers of such options
may be required to repurchase the options or the shares acquired pursuant to the
exercise thereof. In addition, Terrence A. Larsen, CoreStates' Chairman and
Chief Executive Officer, would become a Vice Chairman of FUNC and would become a
member of the Office of the Chairman of FUNC, which also would include Edward E.
Crutchfield, Chairman and Chief Executive Officer of FUNC, and John R. Georgius,
President of FUNC. Also, six directors of CoreStates would become directors of
FUNC.
On November 18, 1997, FUNC filed a Current Report on Form 8-K with the
Commission (the "CoreStates Form 8-K"), which contains, among other things,
certain financial and other information (the "CoreStates Form 8-K Materials")
about CoreStates and the CoreStates acquisition. The CoreStates Form 8-K
Materials contain certain forward-looking statements regarding FUNC, CoreStates
and the combined organization following the CoreStates acquisition, including
statements relating to estimated cost savings and enhanced revenues that may be
realized from the CoreStates acquisition, and certain restructuring charges
expected to be incurred in connection with the CoreStates acquisition. Such
forward-looking statements involve significant risks and uncertainties. Actual
results may differ materially from the results discussed in the CoreStates Form
8-K Materials and herein. Factors that might cause such a difference include,
but are not limited to, those discussed in the CoreStates Form 8-K and FUNC's
Quarterly Report on Form 10-Q for the period ended September 30, 1997. See
"CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION" and "CERTAIN
AVAILABLE INFORMATION" in this Supplement and "AVAILABLE INFORMATION" and
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" in the Prospectus/Proxy
Statement.
As indicated in the CoreStates Form 8-K:
(Bullet) FUNC expects to realize before-tax expense savings resulting from
the CoreStates acquisition of approximately $406 million and $723
million in 1998 and 1999, respectively, or approximately $258
million and $459 million after-tax, respectively. These estimates
assume that approximately 45 percent of CoreStates' 1997
annualized expenses are eliminated by the end of 1999.
(Bullet) FUNC expects to realize before-tax revenue enhancements relating
to the CoreStates acquisition of approximately $123 million and
$194 million in 1998 and 1999, respectively, or approximately $58
million and $89 million after-tax, respectively. These estimates
are primarily based on FUNC's broader array of income generating
products from its capital markets, capital management and other
fee producing businesses.
(Bullet) Assuming (i) the restructuring charges discussed below and the
expense savings and revenue enhancements discussed above are as
estimated, (ii) 985 million shares of FUNC Common Stock are
outstanding in 1998 and 999 million shares are outstanding in
1999, (iii) the CoreStates acquisition is consummated by mid-1998,
(iv) the conversion of
3
<PAGE>
CoreStates' operations and computer systems to FUNC's operations
and computer systems is completed by November 1998, (v) 1998
earnings per share of (a) FUNC Common Stock are $3.91, and (b)
CoreStates common stock are $4.23, each of which represents the
First Call consensus earnings estimates as of November 18, 1997
(before public announcement of the CoreStates acquisition but
after public announcement of the Signet acquisition and the filing
of the Signet Form 8-K, the "1998 Illustrative First Call
Consensus Estimates"), (vi) 1999 earnings per share of FUNC Common
Stock and CoreStates common stock are equal to the 1998
Illustrative First Call Consensus Estimates plus 11 percent for
FUNC and ten percent for CoreStates (the "1999 Illustrative
Estimates") (I.E., $4.34 for FUNC Common Stock and $4.65 for
CoreStates common stock), and (vii) certain other assumptions
contained in the CoreStates Form 8-K, the CoreStates acquisition
is estimated to dilute the 1998 Illustrative First Call Consensus
Estimate for FUNC Common Stock by $.09 and add $.12 to the 1999
Illustrative Estimate for FUNC Common Stock. The 1998 Illustrative
First Call Consensus Estimates and the 1999 Illustrative Estimates
are presented for illustrative purposes only, are subject to the
risks and uncertainties set forth in the CoreStates Form 8-K
Materials and under "CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION" in this Supplement, among others, and
do not constitute earnings projections or estimates by FUNC or
CoreStates.
(Bullet) FUNC expects to record after-tax restructuring and merger-related
charges associated with the CoreStates acquisition, currently
estimated at $795 million, or $0.81 per share of FUNC Common
Stock, in the second quarter of 1998. The estimated $795 million
restructuring charge is summarized below.
<TABLE>
<CAPTION>
(IN MILLIONS, AFTER TAX)
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<S> <C>
Severance and change in control related obligations............................... $214
Fixed asset write-downs and vacant space accruals................................. 289
Service contract terminations..................................................... 127
Charitable support................................................................ 63
Other............................................................................. 102
----
Total............................................................................. $795
----
----
</TABLE>
The estimated restructuring charge includes approximately $149 million in
non-cash charges. Cash payments included in the estimated restructuring charge
are expected to be completed within 18 months from the date of consummation. The
"Other" category includes CoreStates acquisition-related amounts, none of which
individually is estimated to exceed $50 million. The amounts included in the
$795 million estimated restructuring charge are subject to change prior to the
effective date of the CoreStates acquisition. The estimates include assumptions
about the timing of the consummation of the CoreStates acquisition and the
number of employees whose employment will terminate as a result of the
CoreStates acquisition. Changes in such assumptions could result in a change in
the estimated restructuring charge. In addition, FUNC estimates that another $75
million in CoreStates pre-tax, acquisition-related costs will be incurred over
the 12 months following the date the CoreStates acquisition is consummated.
These costs primarily relate to training and systems conversions.
See "PRO FORMA FINANCIAL INFORMATION", EXHIBITS B AND C and "CERTAIN
AVAILABLE INFORMATION" in this Supplement and "AVAILABLE INFORMATION" and
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" in the Prospectus/Proxy
Statement.
SIGNET AND WHEAT ACQUISITIONS
The Signet acquisition was consummated on November 28, 1997. The Wheat
acquisition is expected to be consummated in the first quarter of 1998. See
"RECENT DEVELOPMENTS -- Signet Banking Corporation Acquisition" and " -- Wheat
First Butcher Singer, Inc. Acquisition" in the Prospectus/Proxy Statement.
CERTAIN UPDATED INFORMATION RELATING TO THE MERGERS
THE FOLLOWING INFORMATION SUPPLEMENTS THE CORRESPONDING INFORMATION SET
FORTH IN THE PROSPECTUS/PROXY STATEMENT.
RECORD DATE; VOTE REQUIRED; REVOCATION OF PROXIES
The Special Meeting, which was adjourned on November 20, 1997 because of
the announcement of the CoreStates acquisition, will re-convene at 10:00 a.m.,
on January 8, 1998, at Tavistock Country Club, Haddonfield, New Jersey. Prior to
the adjournment of the Special Meeting on November 20, 1997, it was determined
that at least a majority of the votes entitled to be cast at the Special Meeting
by the holders of each of Covenant Common Stock, Covenant Series A Preferred
Stock and
4
<PAGE>
Covenant Series B Preferred Stock was present, in person or by proxy, and that a
quorum was present for purposes of conducting business at the Special Meeting on
November 20, 1997, and will be present for such purposes on January 8, 1998.
At the Special Meeting, holders of record on October 6, 1997 (the "Record
Date"), of Covenant Common Stock, Covenant Series A Preferred Stock and Covenant
Series B Preferred Stock, each voting as a separate class, will vote upon a
proposal to approve the Merger Agreement. As noted in the Prospectus/Proxy
Statement, the Covenant Series A Preferred Stock will automatically convert into
3.976 shares of Covenant Common Stock on December 31, 1997 (the "Automatic
Conversion"). Although the Automatic Conversion will occur prior to the date of
the continuation of the Special Meeting and the expected date of the
consummation of the Corporate Merger, holders of Covenant Series A Preferred
Stock on the Record Date may vote at the Special Meeting.
Covenant stockholders who have not previously submitted a proxy or who
desire to submit a new proxy, should complete the enclosed proxy, sign and date
it and mail it promptly in the enclosed postage-paid return addressed envelope.
IF YOU HAVE PREVIOUSLY SUBMITTED A PROXY AND DO NOT WISH TO CHANGE YOUR VOTE,
YOU DO NOT NEED TO SUBMIT A NEW PROXY OR TAKE ANY OTHER ACTION. As set forth in
the Prospectus/Proxy Statement, a previously submitted proxy also may be revoked
before it is exercised, by submitting a written notice of revocation of such
proxy to the Secretary of Covenant or by appearing in person at the Special
Meeting on January 8, 1998, and requesting a return of the proxy. See "GENERAL
INFORMATION -- Record Date; Vote Required; Revocation of Proxies" in the
Prospectus/Proxy Statement.
THE COVENANT BOARD HAS APPROVED THE MERGER AGREEMENT BY UNANIMOUS VOTE,
BELIEVES IT IS IN THE BEST INTERESTS OF COVENANT AND ITS STOCKHOLDERS AND
RECOMMENDS ITS APPROVAL BY COVENANT STOCKHOLDERS. SEE "THE MERGERS -- BACKGROUND
AND REASONS; COVENANT " IN THE PROSPECTUS/PROXY STATEMENT.
GENERAL; EXCHANGE RATIOS
As described in the Prospectus/Proxy Statement, subject to the terms and
conditions of the Merger Agreement and upon consummation of the Corporate
Merger, (i) each outstanding share of Covenant Common Stock will be converted
into the right to receive .3813 FUNC Common Shares (I.E., the Common Stock
Exchange Ratio); (ii) each outstanding share of Covenant Series A Preferred
Stock will be converted into the right to receive 1.516 FUNC Common Shares
(I.E., the Series A Exchange Ratio); and (iii) each outstanding share of
Covenant Series B Preferred Stock will be converted into the right to receive
1.2 FUNC Common Shares (I.E., the Series B Exchange Ratio). As noted above, the
Series A Preferred Stock will automatically convert into 3.976 shares of
Covenant Common Stock on December 31, 1997, which will be prior to the expected
consummation date of the Corporate Merger. As a result, at the time of
consummation of the Corporate Merger, each former holder of Covenant Series A
Preferred Stock on December 31, 1997, will hold shares of Covenant Common Stock
and, upon consummation of the Corporate Merger, will be entitled to receive
.3813 FUNC Common Shares for each such outstanding share of Covenant Common
Stock held by such holder (I.E., 1.516 FUNC Common Shares for each outstanding
share of Covenant Series A Preferred Stock formerly held by such holder).
REGULATORY APPROVALS
FUNC has received the approval of the OCC with respect to the Bank Merger
and has been notified by the Federal Reserve Board that prior approval of the
Corporate Merger will not be required. FUNC expects to receive the approval of
the NJ Banking Department with respect to the Bank Merger shortly, although
there can be no assurance that such approval will be obtained or as to the
timing or conditions of such approval. See "THE MERGERS -- Regulatory Approvals"
in the Prospectus/Proxy Statement.
COMPARISON OF CERTAIN UNAUDITED PER SHARE DATA
The following unaudited information, adjusted to reflect the FUNC Stock
Split, stock dividends on Covenant Common Stock and Covenant Bank common stock
and consummation of the Signet acquisition on November 28, 1997, reflects, where
applicable, certain comparative per share data related to book value, cash
dividends paid, income and market value: (i) on a historical basis for FUNC and
Covenant; (ii) on a pro forma combined basis per share of FUNC Common Stock,
reflecting consummation of (a) the Signet acquisition, (b) the Signet
acquisition and the Mergers, and (c) the Signet acquisition, the Mergers and the
Wheat and CoreStates acquisitions; and (iii) on an equivalent pro forma basis
per share of Covenant Common Stock and, with respect to cash dividends paid or
declared and market value, Covenant Preferred Stock, reflecting consummation of
(a) the Signet acquisition, (b) the Signet acquisition and the Mergers, and (c)
the Signet acquisition, the
5
<PAGE>
Mergers and the Wheat and CoreStates acquisitions. Such pro forma information
has been prepared assuming (a) consummation of the Mergers on a purchase
accounting basis only for the nine months ended September 30, 1997, and the year
ended December 31, 1996, and (b) consummation of the CoreStates, Signet and
Wheat acquisitions on a pooling of interests accounting basis as of the
beginning of each of the periods presented. All data relating to Covenant has
been restated to reflect the 1996 and 1994 pooling of interests mergers with 1st
Southern State Bank and Landis Savings Bank, S.L.A., respectively. See "CERTAIN
RECENT DEVELOPMENTS" and " -- Accounting Treatment" in this Supplement and
"RECENT DEVELOPMENTS" and "THE MERGERS -- Accounting Treatment" in the
Prospectus/Proxy Statement.
Since purchase accounting does not require restatement of results for prior
periods following consummation of the Mergers, consummation of the Mergers will
not affect FUNC's historical results for the periods indicated. Pro forma
financial information is intended to show how the Mergers, the Signet
acquisition and the Wheat and CoreStates acquisitions might have affected
historical financial statements if the Mergers, the Signet acquisition and the
Wheat and CoreStates acquisitions had been consummated at an earlier time. The
pro forma financial information does not purport to be indicative of the results
that actually would have been realized had the Mergers, the Signet acquisition
and the Wheat and CoreStates acquisitions taken place at the beginning of the
applicable periods indicated, nor is it indicative of the combined financial
position or results of operations for any future periods.
The information shown below should be read in conjunction with the
historical financial statements of FUNC, Covenant, CoreStates, Signet and Wheat,
including the respective notes thereto, and the documents included in EXHIBITS
A, B and C to this Supplement or incorporated by reference in the
Prospectus/Proxy Statement. See "PRO FORMA FINANCIAL INFORMATION", EXHIBITS A, B
and C and "CERTAIN AVAILABLE INFORMATION" in this Supplement and "AVAILABLE
INFORMATION", "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE", "RECENT
DEVELOPMENTS" and ANNEX A in the Prospectus/Proxy Statement.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
BOOK VALUE PER SHARE
Historical per share of
FUNC Common Stock................................................................. $18.86 17.41
Covenant Common Stock............................................................. 8.06 7.17
Pro forma combined per share of FUNC Common Stock (1)
FUNC and Signet................................................................... 18.43 17.06
FUNC, Signet and Covenant......................................................... 18.43 17.06
FUNC, Signet, Covenant, Wheat and CoreStates...................................... 15.52 14.85
Equivalent pro forma per share of Covenant Common Stock (2)
FUNC and Signet................................................................... 7.03 6.51
FUNC, Signet and Covenant......................................................... 7.03 6.51
FUNC, Signet, Covenant, Wheat and CoreStates...................................... $ 5.92 5.66
</TABLE>
- ---------------
(1) The pro forma combined book value per share of FUNC Common Stock amounts
represent the sum of the pro forma combined common stockholders' equity
amounts, divided by the pro forma combined period-end number of shares of
FUNC Common Stock outstanding.
(2) The equivalent pro forma book value per share of Covenant Common Stock
amounts represent the pro forma combined book value per share of FUNC Common
Stock amounts multiplied by the Common Stock Exchange Ratio.
------------------------
6
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- --------------------
1997 1996 1995 1994
----------------- ---- ---- ----
<S> <C> <C> <C> <C>
CASH DIVIDENDS PAID OR DECLARED PER SHARE
Historical per share of
FUNC Common Stock.............................................................. $ 0.90 1.10 0.98 0.86
Covenant Common Stock.......................................................... -- -- -- --
Covenant Series A Preferred Stock.............................................. 1.125 1.50 1.50 1.50
Covenant Series B Preferred Stock.............................................. 1.125 1.50 0.75 --
Pro forma combined per share of FUNC Common Stock (3)
FUNC and Signet................................................................ 0.87 1.06 0.61 0.57
FUNC, Signet and Covenant...................................................... 0.87 1.06 0.61 0.57
FUNC, Signet, Covenant, Wheat and CoreStates................................... 0.87 1.01 0.87 0.79
Equivalent pro forma per share of Covenant Common Stock (4)
FUNC and Signet................................................................ 0.33 0.40 0.23 0.22
FUNC, Signet and Covenant...................................................... 0.33 0.40 0.23 0.22
FUNC, Signet, Covenant, Wheat and CoreStates................................... 0.33 0.39 0.33 0.30
Equivalent pro forma per share of Covenant Series A Preferred Stock (5)
FUNC and Signet................................................................ 1.32 1.60 0.93 0.86
FUNC, Signet and Covenant...................................................... 1.32 1.60 0.93 0.86
FUNC, Signet, Covenant, Wheat and CoreStates................................... 1.32 1.53 1.32 1.20
Equivalent pro forma per share of Covenant Series B Preferred Stock (5)
FUNC and Signet................................................................ 1.04 1.27 0.74 0.68
FUNC, Signet and Covenant...................................................... 1.04 1.27 0.74 0.68
FUNC, Signet, Covenant, Wheat and CoreStates................................... $ 1.04 1.21 1.04 0.95
</TABLE>
- ---------------
(3) The pro forma combined cash dividends paid per share of FUNC Common Stock
amounts represent pro forma combined cash dividends paid on common stock
outstanding, divided by the pro forma combined average number of shares of
FUNC Common Stock outstanding, rounded to the nearest cent.
(4) The equivalent pro forma cash dividends paid per share of Covenant Common
Stock amounts represent pro forma combined per share of FUNC Common Stock
amounts multiplied by the Common Stock Exchange Ratio, rounded to the
nearest cent. The current annualized dividend rate per share for FUNC Common
Stock, based upon the most recently declared quarterly dividend rate of $.32
per share paid on December 15, 1997, is $1.28. On an equivalent pro forma
basis, such current annualized FUNC dividend per share of Covenant Common
Stock would be $.49, based on the Common Stock Exchange Ratio, rounded to
the nearest cent. Neither Covenant nor Covenant Bank paid any cash dividends
on Covenant Common Stock or Covenant Bank common stock during the periods
indicated above. Any future FUNC and Covenant dividends are dependent upon
their respective earnings and financial conditions, government regulations
and policies and other factors. See "THE MERGERS -- Exchange of Covenant
Certificates" and " -- Dividends" in the Prospectus/Proxy Statement.
(5) Holders of Covenant Series A Preferred Stock and Covenant Series B Preferred
Stock currently are entitled to receive, when and as declared by the
Covenant Board, preferred dividends at the annual rate of $1.50 per share.
The equivalent pro forma cash dividends paid per share of Covenant Series A
Preferred Stock and Covenant Series B Preferred Stock amounts represent pro
forma combined per share of FUNC Common Stock amounts multiplied by the
Series A Exchange Ratio, with respect to the Covenant Series A Preferred
Stock, and the Series B Exchange Ratio, with respect to the Covenant Series
B Preferred Stock, in each case rounded to the nearest cent. On an
equivalent pro forma basis, the current annualized FUNC dividend per share
of Covenant Series A Preferred Stock and Covenant Series B Preferred Stock
would be $1.94 and $1.54, respectively, which amounts represent pro forma
combined per share of FUNC Common Stock amounts multiplied by the Series A
Exchange Ratio, with respect to the Covenant Series A Preferred Stock, and
the Series B Exchange Ratio, with respect to the Covenant Series B Preferred
Stock, in each case rounded to the nearest cent. See "THE
MERGERS -- Exchange of Covenant Certificates", " -- Business Pending
Consummation" and " -- Dividends" in the Prospectus/Proxy Statement.
------------------------
7
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- --------------------
1997 1996 1995 1994
----------------- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS
Historical per share of
FUNC Common Stock (6).......................................................... $2.60 2.67 2.52 2.29
Covenant Common Stock.......................................................... 0.63 0.44 0.61 0.35
Pro forma combined per share of FUNC Common Stock (7)
FUNC and Signet................................................................ 2.43 2.59 2.43 2.29
FUNC, Signet and Covenant...................................................... 2.43 2.57 2.43 2.29
FUNC, Signet, Covenant, Wheat and CoreStates................................... 2.22 2.31 2.21 1.89
Equivalent pro forma per share of Covenant Common Stock (8)
FUNC and Signet................................................................ 0.93 0.99 0.93 0.88
FUNC, Signet and Covenant...................................................... 0.93 0.98 0.93 0.88
FUNC, Signet, Covenant, Wheat and CoreStates................................... $0.85 0.88 0.84 0.72
</TABLE>
- ---------------
(6) FUNC net income applicable to common stockholders amounts as of and for the
year ended December 31, 1996, includes (i) $181 million, or $0.32 per share
of FUNC Common Stock, in after-tax First Fidelity Bancorporation ("FFB")
merger-related restructuring charges, and (ii) $86 million, or $0.16 per
share of FUNC Common Stock, in after-tax charges relating to the
recapitalization of the SAIF. The acquisition of FFB by FUNC was consummated
on January 1, 1996. See "FUNC -- History and Business" and " -- Certain
Regulatory Considerations" in the Prospectus/Proxy Statement.
(7) The pro forma combined income per share of FUNC Common Stock amounts
represent pro forma combined net income applicable to holders of FUNC Common
Stock, divided by the pro forma combined average number of shares of FUNC
Common Stock outstanding.
(8) The equivalent pro forma income per share of Covenant Common Stock amounts
represent pro forma combined income per share of FUNC Common Stock amounts
multiplied by the Common Stock Exchange Ratio.
------------------------
<TABLE>
<CAPTION>
EQUIVALENT
HISTORICAL EQUIVALENT PRO FORMA
--------------------------------------------------- PRO FORMA PER SHARE
COVENANT COVENANT PER SHARE OF COVENANT
SERIES A SERIES B OF COVENANT SERIES A
FUNC COVENANT PREFERRED PREFERRED COMMON PREFERRED
COMMON STOCK COMMON STOCK STOCK STOCK STOCK (9) STOCK (9)
------------ ------------ --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
MARKET VALUE PER SHARE
August 4, 1997......................... $ 49.50 21.00 76.00 57.125 18.75 75.00
December 12, 1997...................... $ 50.00 18.50 66.50 55.000 19.00 75.75
<CAPTION>
EQUIVALENT
PRO FORMA
PER SHARE
OF COVENANT
SERIES B
PREFERRED
STOCK (9)
-----------
<S> <C>
MARKET VALUE PER SHARE
August 4, 1997......................... 59.375
December 12, 1997...................... 60.000
</TABLE>
- ---------------
(9) The equivalent pro forma market values per share of Covenant Common Stock
amounts represent the historical market values per share of FUNC Common
Stock multiplied by the Common Stock Exchange Ratio, rounded down to the
nearest one-eighth. The equivalent pro forma market values per share of
Covenant Series A Preferred Stock and Covenant Series B Preferred Stock
amounts represent the historical market values per share of FUNC Common
Stock multiplied by the Series A Exchange Ratio, with respect to the
Covenant Series A Preferred Stock, and the Series B Exchange Ratio, with
respect to the Covenant Series B Preferred Stock, in each case rounded down
to the nearest one-eighth. The FUNC and Covenant historical market values
per share represent the last reported sale prices per share of FUNC Common
Stock on the NYSE Tape and the Covenant Common Stock and Covenant Preferred
Stock on the Nasdaq National Market and the Nasdaq Small-Cap Market,
respectively: (i) on August 4, 1997, the last business day preceding public
announcement of the execution of the Merger Agreement; and (ii) on December
12, 1997. See "RECENT DEVELOPMENTS -- Wheat First Butcher Singer, Inc.
Acquisition" and "THE MERGERS -- Market Prices" in the Prospectus/Proxy
Statement.
The high and low last reported sale prices per share of FUNC Common Stock
on the NYSE Tape, with respect to the 1997 fourth quarter (through December 12,
1997), were $52.875 and $46.9375, respectively, and the high and low last
reported sale prices per share of Covenant Common Stock on the Nasdaq National
Market during such period were $19.625 and $17.00, respectively. The
corresponding equivalent pro forma market values per share of Covenant Common
Stock during such period were $20.125 and $17.875, respectively. The high and
low last reported sale prices per share of Covenant Series A Preferred Stock and
Covenant Series B Preferred Stock on the Nasdaq Small-Cap Market during such
period were $76.00 and
8
<PAGE>
$66.50, and $57.50 and $55.00, respectively. The corresponding equivalent pro
forma market values per share of Covenant Series A Preferred Stock and Covenant
Series B Preferred Stock during such period were $80.125 and $71.125, and
$63.375 and $56.25, respectively. See "THE MERGERS -- Market Prices" in the
Prospectus/Proxy Statement.
Because the market price of FUNC Common Stock is subject to fluctuation,
the market value of the FUNC Common Shares that holders of Covenant Common
Stock, Covenant Series A Preferred Stock and Covenant Series B Preferred Stock
will receive upon consummation of the Corporate Merger may increase or decrease
prior to and after the receipt of such shares. Covenant stockholders are urged
to obtain current market quotations for FUNC Common Stock.
SELECTED FINANCIAL DATA
The following tables set forth certain unaudited historical consolidated
selected financial information for FUNC and Covenant and certain unaudited pro
forma combined selected financial information, adjusted to reflect the FUNC
Stock Split, stock dividends on Covenant Common Stock and Covenant Bank common
stock and consummation of the Signet acquisition on November 28, 1997. Such pro
forma information has been prepared assuming (a) consummation of the Mergers on
a purchase accounting basis only for the nine months ended September 30, 1997,
and the year ended December 31, 1996, and (b) consummation of the Signet, Wheat
and CoreStates acquisitions on a pooling of interests accounting basis as of the
beginning of each of the periods presented. This information should be read in
conjunction with the historical financial statements of FUNC, Covenant,
CoreStates, Signet and Wheat, including the respective notes thereto, and the
documents included in EXHIBITS A, B and C to this Supplement or incorporated by
reference in the Prospectus/Proxy Statement. See "PRO FORMA FINANCIAL
INFORMATION", EXHIBITS A, B and C and "CERTAIN AVAILABLE INFORMATION" in this
Supplement, and "AVAILABLE INFORMATION", "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE", "RECENT DEVELOPMENTS" and ANNEX A in the Prospectus/Proxy Statement.
Interim unaudited historical data of FUNC and Covenant reflect, in the
respective opinions of management, all adjustments (consisting only of normal
recurring adjustments) necessary to a fair presentation of such data.
Since purchase accounting does not require restatement of results for prior
periods following consummation of the Mergers, consummation of the Mergers will
not affect FUNC's historical results for the periods indicated. Pro forma
financial information is intended to show how the Mergers, the Signet
acquisition and the Wheat and CoreStates acquisitions might have affected
historical financial statements if the Mergers, the Signet acquisition and the
Wheat and CoreStates acquisitions had been consummated at an earlier time. The
pro forma financial information does not purport to be indicative of the results
that actually would have been realized had the Mergers, the Signet acquisition
and the Wheat and CoreStates acquisitions taken place at the beginning of the
applicable periods indicated, nor is it indicative of the combined financial
position or results of operations for any future periods.
9
<PAGE>
FUNC (HISTORICAL)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- ----------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1997 1996 1996 1995 1994 1993
- ---------------------------------------------------------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income.......................................... $ 7,556 7,193 9,628 8,687 7,231 6,602
Interest expense........................................ 3,586 3,452 4,632 4,052 2,793 2,482
-------- -------- ------- ------- ------- -------
Net interest income..................................... 3,970 3,741 4,996 4,635 4,438 4,120
Provision for loan losses............................... 465 255 375 220 179 370
-------- -------- ------- ------- ------- -------
Net interest income after provision for loan losses..... 3,505 3,486 4,621 4,415 4,259 3,750
Securities available for sale transactions.............. 12 20 31 44 6 33
Investment security transactions........................ 3 3 4 5 4 7
Noninterest income...................................... 2,262 1,649 2,322 1,848 1,566 1,542
Merger-related restructuring charges.................... -- 281 281 94 -- --
SAIF special assessment................................. -- 133 133 -- -- --
Noninterest expense..................................... 3,529 3,141 4,254 3,999 3,747 3,536
-------- -------- ------- ------- ------- -------
Income before income taxes.............................. 2,253 1,603 2,310 2,219 2,088 1,796
Income taxes............................................ 792 564 811 789 712 579
-------- -------- ------- ------- ------- -------
Net income.............................................. 1,461 1,039 1,499 1,430 1,376 1,217
Dividends on preferred stock............................ -- 8 9 26 46 46
-------- -------- ------- ------- ------- -------
Net income applicable to common stockholders before
redemption premium.................................... 1,461 1,031 1,490 1,404 1,330 1,171
Redemption premium on preferred stock................... -- -- -- -- 41 --
-------- -------- ------- ------- ------- -------
Net income applicable to common stockholders after
redemption premium.................................... $ 1,461 1,031 1,490 1,404 1,289 1,171
-------- -------- ------- ------- ------- -------
-------- -------- ------- ------- ------- -------
PER COMMON SHARE DATA (a)
Net income before redemption premium.................... $ 2.60 1.85 2.67 2.52 2.36 2.15
Net income after redemption premium..................... 2.60 1.85 2.67 2.52 2.29 2.15
Cash dividends.......................................... 0.90 0.81 1.10 0.98 0.86 0.75
Book value.............................................. 18.86 15.97 17.41 15.94 14.10 13.36
CASH DIVIDENDS PAID ON COMMON STOCK....................... 508 449 611 336 298 244
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets.................................................. 143,904 133,882 140,127 131,880 113,529 104,550
Loans, net of unearned income........................... 94,904 92,520 95,858 90,563 77,831 68,263
Deposits................................................ 91,690 91,444 94,815 92,555 87,865 81,885
Long-term debt.......................................... 7,819 7,332 7,660 7,121 4,242 3,675
Guaranteed preferred beneficial interests............... 990 -- 495 -- -- --
Preferred stockholders' equity.......................... -- 48 -- 183 230 514
Common stockholders' equity............................. 10,720 8,641 10,008 8,860 8,044 7,432
Total stockholders' equity.............................. $ 10,720 8,689 10,008 9,043 8,274 7,946
Preferred shares outstanding (IN THOUSANDS)............. -- 1,911 -- 3,388 5,213 11,560
Common shares outstanding (IN THOUSANDS)................ 568,296 541,015 574,697 555,692 570,721 556,408
CONSOLIDATED AVERAGE BALANCE SHEET ITEMS
Assets.................................................. $138,301 133,541 134,127 118,142 106,413 99,610
Loans, net of unearned income........................... 94,636 89,864 90,660 83,265 70,726 62,996
Deposits................................................ 92,325 91,064 91,320 87,274 80,760 76,830
Long-term debt.......................................... 7,489 7,570 7,565 5,707 4,009 3,598
Guaranteed preferred beneficial interests............... 964 -- 47 -- -- --
Common stockholders' equity (b)......................... 9,889 9,000 9,079 8,412 7,870 6,782
Total stockholders' equity (b).......................... $ 9,889 9,138 9,187 8,623 8,372 7,302
Common shares outstanding (IN THOUSANDS)................ 562,534 557,968 557,624 557,354 563,325 544,876
CONSOLIDATED PERCENTAGES
Net income applicable to common stockholders before
redemption premium to average common stockholders'
equity (b)............................................. 19.75%(c) 15.30(c) 16.41 16.69 16.91 17.26
Net income applicable to common stockholders after
redemption premium to average common stockholders'
equity (b)............................................ 19.75(c) 15.30(c) 16.41 16.69 16.38 17.26
Net income to
Average total stockholders' equity (b)................ 19.75(c) 15.19(c) 16.32 16.59 16.44 16.66
Average assets........................................ 1.41(c) 1.04(c) 1.12 1.21 1.29 1.22
Average stockholders' equity to average assets (d)...... 7.14 6.81 6.82 7.23 7.52 7.11
Allowance for loan losses to
Net loans............................................. 1.44 1.49 1.42 1.66 2.03 2.38
Nonaccrual and restructured loans..................... 224 188 204 233 248 151
Nonperforming assets.................................. 194 167 179 182 178 115
Net charge-offs to average net loans.................... 0.65(c) 0.58(c) 0.63 0.41 0.40 0.78
Nonperforming assets to loans, net and foreclosed
properties............................................ 0.74 0.89 0.80 0.91 1.14 2.06
Capital ratios (d)
Tier 1 capital........................................ 8.18 6.38 7.33 6.70 7.76 9.14
Total capital......................................... 13.72 10.94 12.33 11.45 12.94 14.64
Leverage.............................................. 6.53 5.23 6.13 5.49 6.12 6.13
Net interest margin..................................... 4.36%(c) 4.21(c) 4.21 4.46 4.75 4.82
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE DATA) 1992
- ---------------------------------------------------------- -------
<S> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income.......................................... 6,609
Interest expense........................................ 2,942
-------
Net interest income..................................... 3,667
Provision for loan losses............................... 643
-------
Net interest income after provision for loan losses..... 3,024
Securities available for sale transactions.............. 39
Investment security transactions........................ (3)
Noninterest income...................................... 1,360
Merger-related restructuring charges.................... --
SAIF special assessment................................. --
Noninterest expense..................................... 3,443
-------
Income before income taxes.............................. 977
Income taxes............................................ 278
-------
Net income.............................................. 699
Dividends on preferred stock............................ 53
-------
Net income applicable to common stockholders before
redemption premium.................................... 646
Redemption premium on preferred stock................... --
-------
Net income applicable to common stockholders after
redemption premium.................................... 646
-------
-------
PER COMMON SHARE DATA (a)
Net income before redemption premium.................... 1.26
Net income after redemption premium..................... 1.26
Cash dividends.......................................... 0.64
Book value.............................................. 11.68
CASH DIVIDENDS PAID ON COMMON STOCK....................... 168
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets.................................................. 95,308
Loans, net of unearned income........................... 60,301
Deposits................................................ 76,156
Long-term debt.......................................... 3,733
Guaranteed preferred beneficial interests............... --
Preferred stockholders' equity.......................... 530
Common stockholders' equity............................. 6,187
Total stockholders' equity.............................. 6,717
Preferred shares outstanding (IN THOUSANDS)............. 12,158
Common shares outstanding (IN THOUSANDS)................ 529,790
CONSOLIDATED AVERAGE BALANCE SHEET ITEMS
Assets.................................................. 90,621
Loans, net of unearned income........................... 58,700
Deposits................................................ 71,947
Long-term debt.......................................... 3,528
Guaranteed preferred beneficial interests............... --
Common stockholders' equity (b)......................... 5,724
Total stockholders' equity (b).......................... 6,280
Common shares outstanding (IN THOUSANDS)................ 510,768
CONSOLIDATED PERCENTAGES
Net income applicable to common stockholders before
redemption premium to average common stockholders'
equity (b)............................................. 11.28
Net income applicable to common stockholders after
redemption premium to average common stockholders'
equity (b)............................................ 11.28
Net income to
Average total stockholders' equity (b)................ 11.13
Average assets........................................ 0.77
Average stockholders' equity to average assets (d)...... 6.89
Allowance for loan losses to
Net loans............................................. 2.57
Nonaccrual and restructured loans..................... 105
Nonperforming assets.................................. 76
Net charge-offs to average net loans.................... 1.03
Nonperforming assets to loans, net and foreclosed
properties............................................ 3.36
Capital ratios (d)
Tier 1 capital........................................ 9.22
Total capital......................................... 14.31
Leverage.............................................. 6.55
Net interest margin..................................... 4.73
</TABLE>
- ---------------
(a) Per common share data has been restated to reflect the FUNC Stock Split.
(b) Average common stockholders' equity and total stockholders' equity exclude
net unrealized gains and (losses) on debt and equity securities in 1994
through 1997.
(c) Annualized.
(d) The average stockholders' equity to average assets ratios and all capital
ratios for 1992-1994 are not restated for pooling of interests acquisitions.
Risk-based capital ratio guidelines require a minimum ratio of tier 1
capital to risk-weighted assets of four percent and total capital to
risk-weighted assets of eight percent. The minimum leverage ratio of tier 1
capital to adjusted average quarterly assets is from three to five percent.
10
<PAGE>
FUNC AND SIGNET
PRO FORMA COMBINED SELECTED FINANCIAL DATA (A)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- ----------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1997 1996 1996 1995 1994 1993
- ---------------------------------------------------------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income.......................................... $ 8,187 7,812 10,459 9,553 8,038 7,406
Interest expense........................................ 3,859 3,719 4,994 4,425 3,090 2,757
-------- -------- ------- ------- ------- -------
Net interest income..................................... 4,328 4,093 5,465 5,128 4,948 4,649
Provision for loan losses............................... 515 299 449 258 193 417
-------- -------- ------- ------- ------- -------
Net interest income after provision for loan losses..... 3,813 3,794 5,016 4,870 4,755 4,232
Securities available for sale transactions.............. 19 20 36 45 9 37
Investment security transactions........................ 3 3 4 6 4 7
Noninterest income...................................... 2,457 1,839 2,597 2,125 2,130 1,903
Merger-related restructuring charges.................... -- 281 281 94 -- --
SAIF special assessment................................. -- 133 133 -- -- --
Noninterest expense..................................... 3,930 3,501 4,740 4,563 4,593 4,134
-------- -------- ------- ------- ------- -------
Income before income taxes.............................. 2,362 1,741 2,499 2,389 2,305 2,045
Income taxes............................................ 828 611 875 848 779 654
-------- -------- ------- ------- ------- -------
Net income.............................................. 1,534 1,130 1,624 1,541 1,526 1,391
Dividends on preferred stock............................ -- 8 9 26 46 46
-------- -------- ------- ------- ------- -------
Net income applicable to common stockholders before
redemption premium.................................... 1,534 1,122 1,615 1,515 1,480 1,345
Redemption premium on preferred stock................... -- -- -- -- 41 --
-------- -------- ------- ------- ------- -------
Net income applicable to common stockholders after
redemption premium.................................... $ 1,534 1,122 1,615 1,515 1,439 1,345
-------- -------- ------- ------- ------- -------
-------- -------- ------- ------- ------- -------
PER COMMON SHARE DATA
Net income before redemption premium..................... $ 2.43 1.80 2.59 2.43 2.36 2.21
Net income after redemption premium..................... 2.43 1.80 2.59 2.43 2.29 2.21
Book value.............................................. 18.43 15.79 17.06 15.66 14.41 13.57
CASH DIVIDENDS PAID ON COMMON STOCK....................... 546 485 659 382 355 289
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets................................................... 155,175 145,375 151,847 142,858 126,460 116,399
Loans, net of unearned income........................... 101,426 98,692 102,213 95,979 85,755 74,573
Deposits................................................ 99,402 99,278 102,702 100,148 95,687 89,706
Long-term debt.......................................... 8,169 7,732 8,060 7,374 4,496 3,941
Guaranteed preferred beneficial interests............... 990 -- 495 -- -- --
Preferred stockholders' equity.......................... -- 48 -- 183 230 514
Common stockholders' equity............................. 11,710 9,530 10,932 9,724 9,155 8,397
Total stockholders' equity.............................. $ 11,710 9,578 10,932 9,907 9,385 8,911
Preferred shares outstanding (IN THOUSANDS)............. -- 1,911 -- 3,388 5,213 11,560
Common shares outstanding (IN THOUSANDS)................ 635,334 606,711 640,782 620,822 635,222 618,678
CONSOLIDATED PERCENTAGES
Allowance for loan losses to
Net loans............................................. 1.47% 1.53 1.47 1.71 2.10 2.52
Nonperforming assets.................................. 203 173 187 186 192 123
Net charge-offs to average net loans.................... 0.67(b) 0.61(b) 0.66 0.44 0.42 0.79
Nonperforming assets to loans, net and foreclosed
properties............................................ 0.73% 0.88 0.78 0.92 1.09 2.04
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE DATA) 1992
- ---------------------------------------------------------- -------
<S> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income.......................................... 7,376
Interest expense........................................ 3,273
-------
Net interest income..................................... 4,103
Provision for loan losses............................... 711
-------
Net interest income after provision for loan losses..... 3,392
Securities available for sale transactions.............. 49
Investment security transactions........................ (21)
Noninterest income...................................... 1,641
Merger-related restructuring charges.................... --
SAIF special assessment................................. --
Noninterest expense..................................... 3,942
-------
Income before income taxes.............................. 1,119
Income taxes............................................ 311
-------
Net income.............................................. 808
Dividends on preferred stock............................ 53
-------
Net income applicable to common stockholders before
redemption premium.................................... 755
Redemption premium on preferred stock................... --
-------
Net income applicable to common stockholders after
redemption premium.................................... 755
-------
-------
PER COMMON SHARE DATA
Net income before redemption premium..................... 1.32
Net income after redemption premium..................... 1.32
Book value.............................................. 11.86
CASH DIVIDENDS PAID ON COMMON STOCK....................... 193
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets................................................... 107,401
Loans, net of unearned income........................... 66,110
Deposits................................................ 83,979
Long-term debt.......................................... 4,031
Guaranteed preferred beneficial interests............... --
Preferred stockholders' equity.......................... 530
Common stockholders' equity............................. 7,014
Total stockholders' equity.............................. 7,544
Preferred shares outstanding (IN THOUSANDS)............. 12,158
Common shares outstanding (IN THOUSANDS)................ 591,348
CONSOLIDATED PERCENTAGES
Allowance for loan losses to
Net loans............................................. 2.75
Nonperforming assets.................................. 82
Net charge-offs to average net loans.................... 1.14
Nonperforming assets to loans, net and foreclosed
properties............................................ 3.34
</TABLE>
- ---------------
(a) See "PRO FORMA FINANCIAL INFORMATION".
(b) Annualized.
11
<PAGE>
COVENANT (HISTORICAL) (A)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------- -------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------- ---------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income...................................................... $ 23 29 26 20 17 16
Interest expense..................................................... 12 14 12 8 7 9
------- ----- ----- ----- ----- -----
Net interest income.................................................. 11 15 14 12 10 7
Provision for loan losses............................................ -- 1 1 1 1 1
------- ----- ----- ----- ----- -----
Net interest income after provision for loan losses.................. 11 14 13 11 9 6
Noninterest income................................................... 1 1 1 1 1 1
Merger-related restructuring charges................................. -- 1 -- 1 -- --
SAIF special assessment.............................................. -- 1 -- -- -- --
Noninterest expense.................................................. 8 10 11 10 9 6
------- ----- ----- ----- ----- -----
Income before income taxes........................................... 4 3 3 1 1 1
Income taxes......................................................... 1 1 1 -- -- --
------- ----- ----- ----- ----- -----
Net income........................................................... 3 2 2 1 1 1
Dividends on preferred stock......................................... -- 1 -- -- -- --
------- ----- ----- ----- ----- -----
Net income applicable to common stockholders......................... $ 3 1 2 1 1 1
------- ----- ----- ----- ----- -----
------- ----- ----- ----- ----- -----
PER COMMON SHARE DATA
Net income........................................................... $ 0.63 0.44 0.61 0.35 0.38 0.22
Book value........................................................... 8.06 7.17 7.25 6.19 6.01 5.63
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets............................................................... 420 415 347 317 274 210
Loans, net of unearned income........................................ 258 241 205 194 183 148
Deposits............................................................. 304 277 263 236 244 186
Long-term debt....................................................... 15 20 14 18 7 --
Preferred stockholders' equity....................................... 7 7 7 3 3 3
Common stockholders' equity.......................................... 25 22 23 19 19 17
Total stockholders' equity........................................... $ 32 29 30 22 22 20
Preferred shares outstanding (IN THOUSANDS).......................... 300 300 300 138 138 138
Common shares outstanding (IN THOUSANDS)............................. 3,057 3,023 3,068 3,064 3,054 3,054
CONSOLIDATED PERCENTAGES
Net income applicable to common stockholders to average common
stockholders' equity.............................................. 13.96%(b) 6.30 9.53 5.72 6.68 4.30
Net income to average assets......................................... 0.86(b) 0.48 0.72 0.45 0.56 0.35
Average stockholders' equity to average assets....................... 7.06 7.56 7.66 7.70 8.49 8.24
Allowance for loan losses to
Gross loans....................................................... 1.05 1.25 1.56 1.87 2.00 1.81
Nonaccrual and restructured loans................................. 150 105 87 78 86 137
Nonperforming assets.............................................. 95 85 64 66 70 70
Net charge-offs to average net loans................................. 0.18(b) 0.36 0.37 0.38 0.77 0.46
Nonperforming assets to gross loans and foreclosed properties........ 1.10 1.47 2.43 2.81 2.84 2.56
Capital ratios (c)
Tier 1 capital.................................................... 12.46 11.98 13.62 11.68 11.52 13.88
Total capital..................................................... 13.51 13.20 14.87 12.94 12.78 14.83
Leverage.......................................................... 7.50 7.51 8.49 7.42 7.87 9.88
Net interest margin.................................................. 3.83%(b) 4.10 4.37 4.50 4.24 3.86
</TABLE>
- ---------------
(a) All data has been restated to reflect the 1996 and 1994 pooling of interests
mergers with 1st Southern State Bank and Landis Savings Bank, S.L.A.,
respectively, and to reflect all common stock dividends issued by Covenant
and Covenant Bank through July 14, 1997. See "THE MERGERS -- Dividends",
"COVENANT -- History and Business" and ANNEX A in the Prospectus/Proxy
Statement.
(b) Annualized.
(c) Risk-based capital ratio guidelines require a minimum ratio of tier 1
capital to risk-weighted assets of four percent and total capital to
risk-weighted assets of eight percent. The minimum leverage ratio of tier 1
capital to adjusted average quarterly assets is from three to five percent.
12
<PAGE>
FUNC, SIGNET AND COVENANT
PRO FORMA COMBINED SELECTED FINANCIAL DATA (A)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- ----------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1997 1996 1996 1995 1994 1993
- ---------------------------------------------------------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income.......................................... $ 8,206 7,812 10,484 9,553 8,038 7,406
Interest expense........................................ 3,871 3,719 5,008 4,425 3,090 2,757
-------- -------- ------- ------- ------- -------
Net interest income..................................... 4,335 4,093 5,476 5,128 4,948 4,649
Provision for loan losses............................... 515 299 450 258 193 417
-------- -------- ------- ------- ------- -------
Net interest income after provision for loan losses..... 3,820 3,794 5,026 4,870 4,755 4,232
Securities available for sale transactions.............. 19 20 36 45 9 37
Investment security transactions........................ 3 3 4 6 4 7
Noninterest income...................................... 2,458 1,839 2,598 2,125 2,130 1,903
Merger-related restructuring charges.................... -- 281 282 94 -- --
SAIF special assessment................................. -- 133 134 -- -- --
Noninterest expense..................................... 3,940 3,501 4,760 4,563 4,593 4,134
-------- -------- ------- ------- ------- -------
Income before income taxes.............................. 2,360 1,741 2,488 2,389 2,305 2,045
Income taxes............................................ 828 611 871 848 779 654
-------- -------- ------- ------- ------- -------
Net income.............................................. 1,532 1,130 1,617 1,541 1,526 1,391
Dividends on preferred stock............................ -- 8 10 26 46 46
-------- -------- ------- ------- ------- -------
Net income applicable to common stockholders............ 1,532 1,122 1,607 1,515 1,480 1,345
Redemption premium on preferred stock................... -- -- -- -- 41 --
-------- -------- ------- ------- ------- -------
Net income applicable to common stockholders after
redemption premium.................................... $ 1,532 1,122 1,607 1,515 1,439 1,345
-------- -------- ------- ------- ------- -------
-------- -------- ------- ------- ------- -------
PER COMMON SHARE DATA
Net income before redemption premium..................... $ 2.43 1.80 2.57 2.43 2.36 2.21
Net income after redemption premium..................... 2.43 1.80 2.57 2.43 2.29 2.21
Book value.............................................. 18.43 15.79 17.06 15.66 14.41 13.57
CASH DIVIDENDS PAID ON COMMON STOCK....................... 546 485 659 382 355 289
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets................................................... 155,563 145,375 152,230 142,858 126,460 116,399
Loans, net of unearned income........................... 101,684 98,692 102,454 95,979 85,755 74,573
Deposits................................................ 99,706 99,278 102,979 100,148 95,687 89,706
Long-term debt.......................................... 8,184 7,732 8,080 7,374 4,496 3,941
Guaranteed preferred beneficial interests............... 990 -- 495 -- -- --
Preferred stockholders' equity.......................... -- 48 -- 183 230 514
Common stockholders' equity............................. 11,710 9,530 10,932 9,724 9,155 8,397
Total stockholders' equity.............................. $ 11,710 9,578 10,932 9,907 9,385 8,911
Preferred shares outstanding (IN THOUSANDS)............. -- 1,911 -- 3,388 5,213 11,560
Common shares outstanding (IN THOUSANDS)................ 635,334 606,711 640,782 620,822 635,222 618,678
CONSOLIDATED PERCENTAGES
Allowance for loan losses to
Net loans............................................. 1.47% 1.53 1.47 1.71 2.10 2.52
Nonperforming assets.................................. 202 173 187 186 192 123
Net charge-offs to average net loans.................... 0.66(b) 0.61(b) 0.66 0.44 0.42 0.79
Nonperforming assets to loans, net and foreclosed
properties............................................ 0.73% 0.88 0.79 0.92 1.09 2.04
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE DATA) 1992
- ---------------------------------------------------------- -------
<S> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income.......................................... 7,376
Interest expense........................................ 3,273
-------
Net interest income..................................... 4,103
Provision for loan losses............................... 711
-------
Net interest income after provision for loan losses..... 3,392
Securities available for sale transactions.............. 49
Investment security transactions........................ (21)
Noninterest income...................................... 1,641
Merger-related restructuring charges.................... --
SAIF special assessment................................. --
Noninterest expense..................................... 3,942
-------
Income before income taxes.............................. 1,119
Income taxes............................................ 311
-------
Net income.............................................. 808
Dividends on preferred stock............................ 53
-------
Net income applicable to common stockholders............ 755
Redemption premium on preferred stock................... --
-------
Net income applicable to common stockholders after
redemption premium.................................... 755
-------
-------
PER COMMON SHARE DATA
Net income before redemption premium..................... 1.32
Net income after redemption premium..................... 1.32
Book value.............................................. 11.86
CASH DIVIDENDS PAID ON COMMON STOCK....................... 193
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets................................................... 107,401
Loans, net of unearned income........................... 66,110
Deposits................................................ 83,979
Long-term debt.......................................... 4,031
Guaranteed preferred beneficial interests............... --
Preferred stockholders' equity.......................... 530
Common stockholders' equity............................. 7,014
Total stockholders' equity.............................. 7,544
Preferred shares outstanding (IN THOUSANDS)............. 12,158
Common shares outstanding (IN THOUSANDS)................ 591,348
CONSOLIDATED PERCENTAGES
Allowance for loan losses to
Net loans............................................. 2.75
Nonperforming assets.................................. 82
Net charge-offs to average net loans.................... 1.14
Nonperforming assets to loans, net and foreclosed
properties............................................ 3.34
</TABLE>
- ---------------
(a) See "PRO FORMA FINANCIAL INFORMATION".
(b) Annualized.
13
<PAGE>
FUNC, SIGNET, COVENANT, WHEAT AND CORESTATES
PRO FORMA COMBINED SELECTED FINANCIAL DATA (A)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, TWELVE MONTHS ENDED
-------------------- ------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1997 1996 1997/1996 1996/1995 1995/1994 1994/1993
- ------------------------------------------------ -------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income................................ $ 10,787 10,308 13,831 13,068 11,086 10,335
Interest expense.............................. 4,839 4,591 6,187 5,752 4,052 3,660
-------- -------- --------- --------- --------- ---------
Net interest income........................... 5,948 5,717 7,644 7,316 7,034 6,675
Provision for loan losses..................... 658 488 679 402 472 606
-------- -------- --------- --------- --------- ---------
Net interest income after provision for loan
losses...................................... 5,290 5,229 6,965 6,914 6,562 6,069
Securities available for sale transactions.... 101 142 184 156 97 154
Investment security transactions.............. 3 3 4 6 4 7
Noninterest income............................ 3,438 2,715 3,794 3,269 3,115 2,944
Restructuring and merger-related charges...... -- 411 422 233 107 --
SAIF special assessment....................... -- 147 148 -- -- --
Noninterest expense........................... 5,497 5,018 6,802 6,656 6,673 6,332
-------- -------- --------- --------- --------- ---------
Income before income taxes.................... 3,335 2,513 3,575 3,456 2,998 2,842
Income taxes.................................. 1,173 905 1,278 1,232 1,018 908
-------- -------- --------- --------- --------- ---------
Net income.................................... 2,162 1,608 2,297 2,224 1,980 1,934
Dividends on preferred stock.................. -- 8 10 26 46 46
-------- -------- --------- --------- --------- ---------
Net income applicable to common stockholders
before redemption premium................... 2,162 1,600 2,287 2,198 1,934 1,888
Redemption premium on preferred stock......... -- -- -- -- 41 --
-------- -------- --------- --------- --------- ---------
Net income applicable to common stockholders
after redemption premium.................... $ 2,162 1,600 2,287 2,198 1,893 1,888
-------- -------- --------- --------- --------- ---------
-------- -------- --------- --------- --------- ---------
PER COMMON SHARE DATA
Net income before redemption premium........... $ 2.22 1.61 2.31 2.21 1.93 1.91
Net income after redemption premium........... $ 2.22 1.61 2.31 2.21 1.89 1.91
Average common shares outstanding (IN
THOUSANDS).................................. 973,263 990,901 989,106 993,504 1,003,740 988,055
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets......................................... $204,327 191,531 198,668 189,592 173,116 161,194
Loans, net of unearned income................. 136,769 131,526 135,231 127,693 116,510 104,411
Deposits...................................... 133,447 131,581 136,706 134,112 130,461 123,570
Long-term debt................................ 12,054 10,291 11,193 9,620 6,695 5,983
Guaranteed preferred beneficial interests..... 990 -- 495 -- -- --
Preferred stockholders' equity................ -- 48 -- 183 230 514
Common stockholders' equity................... 14,988 13,696 14,775 13,722 12,982 12,186
Total stockholders' equity.................... $ 14,988 13,744 14,775 13,905 13,212 12,700
Preferred shares outstanding (IN THOUSANDS)... -- 1,911 -- 3,388 5,213 11,560
Common shares outstanding (IN THOUSANDS)...... 965,709 974,937 995,189 987,596 1,013,603 1,001,056
CONSOLIDATED PERCENTAGES
Allowance for loan losses to
Net loans................................... 1.59% 1.68 1.64 1.81 2.13 2.41
Nonperforming assets........................ 217 195 211 201 180 117
Net charge-offs to average net loans.......... 0.67(b) 0.62(b) 0.64 0.45 0.55 0.74
Nonperforming assets to loans, net and
foreclosed properties....................... 0.73% 0.86 0.78 0.90 1.18 2.05
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE DATA) 1993/1992
- ------------------------------------------------ ---------
<S> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income................................ 10,480
Interest expense.............................. 4,477
---------
Net interest income........................... 6,003
Provision for loan losses..................... 972
---------
Net interest income after provision for loan
losses...................................... 5,031
Securities available for sale transactions.... 146
Investment security transactions.............. (21)
Noninterest income............................ 2,691
Restructuring and merger-related charges...... --
SAIF special assessment....................... --
Noninterest expense........................... 6,246
---------
Income before income taxes.................... 1,601
Income taxes.................................. 455
---------
Net income.................................... 1,146
Dividends on preferred stock.................. 53
---------
Net income applicable to common stockholders
before redemption premium................... 1,093
Redemption premium on preferred stock......... --
---------
Net income applicable to common stockholders
after redemption premium.................... 1,093
---------
---------
PER COMMON SHARE DATA
Net income before redemption premium........... 1.17
Net income after redemption premium........... 1.17
Average common shares outstanding (IN
THOUSANDS).................................. 933,400
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets......................................... 152,535
Loans, net of unearned income................. 94,635
Deposits...................................... 118,799
Long-term debt................................ 5,724
Guaranteed preferred beneficial interests..... --
Preferred stockholders' equity................ 530
Common stockholders' equity................... 10,367
Total stockholders' equity.................... 10,897
Preferred shares outstanding (IN THOUSANDS)... 12,158
Common shares outstanding (IN THOUSANDS)...... 969,491
CONSOLIDATED PERCENTAGES
Allowance for loan losses to
Net loans................................... 2.57
Nonperforming assets........................ 78
Net charge-offs to average net loans.......... 1.10
Nonperforming assets to loans, net and
foreclosed properties....................... 3.28
</TABLE>
- ---------------
(a) See "PRO FORMA FINANCIAL INFORMATION".
(b) Annualized.
14
<PAGE>
ACCOUNTING TREATMENT
Financial statements of FUNC for periods before consummation of the Mergers
will not be restated to reflect the historical financial position or results of
operations of Covenant or Wheat. Such financial statements will be restated for
the Signet acquisition only for periods beginning on and after January 1, 1995,
and will be restated upon consummation of the CoreStates acquisition for all
periods presented. See "THE MERGERS -- Accounting Treatment" in the
Prospectus/Proxy Statement.
EXPERTS
The consolidated financial statements of CoreStates at December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996,
appearing in Exhibit B herein have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The consolidated balance sheet of Meridian Bancorp, Inc. and subsidiaries
as of December 31, 1995 and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the years in the
two-year period ended December 31, 1995, included in EXHIBIT B herein, have been
included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, included in EXHIBIT C, and upon the
authority of said firm as experts in accounting and auditing. Such financial
statements were combined with those of CoreStates for such periods.
The consolidated balance sheet of United Counties Bancorporation and
subsidiaries as of December 31, 1995, and the related consolidated statements
of income, changes in stockholders' equity and cash flows for each of the years
in the two-year period ended December 31, 1995, included in EXHIBIT B herein,
have been included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, included in EXHIBIT C, and upon the
authority of said firm as experts in accounting and auditing. Such financial
statements were combined with those of CoreStates for such periods.
See "EXPERTS" in the Prospectus/Proxy Statement.
15
<PAGE>
PRO FORMA FINANCIAL INFORMATION
PRO FORMA COMBINED CONDENSED BALANCE SHEET
FUNC, SIGNET, COVENANT, WHEAT AND CORESTATES
SEPTEMBER 30, 1997
(UNAUDITED)
The following unaudited pro forma combined condensed balance sheet combines
the consolidated historical balance sheets of FUNC, Signet, Covenant, Wheat and
CoreStates, assuming the companies had been combined as of September 30, 1997,
on a pooling of interests accounting basis with respect to the Signet, Wheat and
CoreStates acquisitions, and on a purchase accounting basis with respect to the
Mergers. The Signet acquisition was consummated on November 28, 1997.
<TABLE>
<CAPTION>
FUNC,
FUNC SIGNET AND
(IN MILLIONS) FUNC SIGNET AND SIGNET COVENANT COVENANT WHEAT CORESTATES
- ---------------------------------------------- -------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks....................... $ 6,200 462 6,662 16 6,591 34 3,166
Interest-bearing bank balances................ 200 4 204 -- 204 -- 3,044
Federal funds sold and securities purchased
under resale agreements..................... 6,011 887 6,898 -- 6,898 77 139
-------- -------- ---------- -------- ---------- -------- ----------
Total cash and cash equivalents......... 12,411 1,353 13,764 16 13,693 111 6,349
-------- -------- ---------- -------- ---------- -------- ----------
Trading account assets........................ 7,548 277 7,825 -- 7,825 180 327
Securities available for sale................. 16,690 2,233 18,923 120 19,043 -- 2,211
Investment securities......................... 2,268 -- 2,268 11 2,279 6 1,413
Loans, net of unearned income................. 94,904 6,522 101,426 258 101,684 -- 35,085
Allowance for loan losses................... (1,370) (126) (1,496) (3 ) (1,499) -- (679)
-------- -------- ---------- -------- ---------- -------- ----------
Loans, net.............................. 93,534 6,396 99,930 255 100,185 -- 34,406
-------- -------- ---------- -------- ---------- -------- ----------
Premises and equipment........................ 4,056 172 4,228 9 4,237 66 627
Due from customers on acceptances............. 837 -- 837 -- 837 -- 791
Other intangible assets....................... 2,701 31 2,732 -- 2,787 -- 287
Other assets.................................. 3,859 809 4,668 9 4,677 810 1,180
-------- -------- ---------- -------- ---------- -------- ----------
Total................................... $143,904 11,271 155,175 420 155,563 1,173 47,591
-------- -------- ---------- -------- ---------- -------- ----------
-------- -------- ---------- -------- ---------- -------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits................ 18,963 1,771 20,734 48 20,782 -- 8,942
Interest-bearing deposits................... 72,727 5,941 78,668 256 78,924 -- 24,799
-------- -------- ---------- -------- ---------- -------- ----------
Total deposits.......................... 91,690 7,712 99,402 304 99,706 -- 33,741
Short-term borrowings......................... 27,623 1,922 29,545 64 29,609 271 4,239
Bank acceptances outstanding.................. 837 -- 837 -- 837 -- 789
Other liabilities............................. 4,225 297 4,522 5 4,527 651 1,925
Long-term debt................................ 7,819 350 8,169 15 8,184 86 3,784
-------- -------- ---------- -------- ---------- -------- ----------
Total liabilities....................... 132,194 10,281 142,475 388 142,863 1,008 44,478
-------- -------- ---------- -------- ---------- -------- ----------
Guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable
interest debentures......................... 990 -- 990 -- 990 -- --
-------- -------- ---------- -------- ---------- -------- ----------
STOCKHOLDERS' EQUITY
Preferred stock............................... -- -- -- 8 -- 3 --
Common stock.................................. 1,894 305 2,118 15 2,118 17 224
Paid-in capital............................... 999 216 1,296 12 1,296 21 1,253
Retained earnings............................. 7,681 435 8,116 (3 ) 8,116 124 2,955
Unrealized gain on debt and equity securities,
net......................................... 146 34 180 -- 180 -- 35
Treasury stock................................ -- -- -- -- -- -- (1,302)
Unallocated shares held by ESOP............... -- -- -- -- -- -- (52)
-------- -------- ---------- -------- ---------- -------- ----------
Total stockholders' equity.............. 10,720 990 11,710 32 11,710 165 3,113
-------- -------- ---------- -------- ---------- -------- ----------
Total................................... $143,904 11,271 155,175 420 155,563 1,173 47,591
-------- -------- ---------- -------- ---------- -------- ----------
-------- -------- ---------- -------- ---------- -------- ----------
<CAPTION>
FUNC,
SIGNET,
WHEAT AND
(IN MILLIONS) CORESTATES
- ---------------------------------------------- ---------
<S> <C>
ASSETS
Cash and due from banks....................... 9,791
Interest-bearing bank balances................ 3,248
Federal funds sold and securities purchased
under resale agreements..................... 7,114
---------
Total cash and cash equivalents......... 20,153
---------
Trading account assets........................ 8,332
Securities available for sale................. 21,254
Investment securities......................... 3,698
Loans, net of unearned income................. 136,769
Allowance for loan losses................... (2,178 )
---------
Loans, net.............................. 134,591
---------
Premises and equipment........................ 4,930
Due from customers on acceptances............. 1,628
Other intangible assets....................... 3,074
Other assets.................................. 6,667
---------
Total................................... 204,327
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits................ 29,724
Interest-bearing deposits................... 103,723
---------
Total deposits.......................... 133,447
Short-term borrowings......................... 34,119
Bank acceptances outstanding.................. 1,626
Other liabilities............................. 7,103
Long-term debt................................ 12,054
---------
Total liabilities....................... 188,349
---------
Guaranteed preferred beneficial interests in
Corporation's junior subordinated deferrable
interest debentures......................... 990
---------
STOCKHOLDERS' EQUITY
Preferred stock............................... --
Common stock.................................. 3,226
Paid-in capital............................... 1,497
Retained earnings............................. 10,050
Unrealized gain on debt and equity securities,
net......................................... 215
Treasury stock................................ --
Unallocated shares held by ESOP............... --
---------
Total stockholders' equity.............. 14,988
---------
Total................................... 204,327
---------
---------
</TABLE>
See accompanying notes to pro forma financial information.
16
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
FUNC AND SIGNET
(UNAUDITED)
The following unaudited pro forma combined condensed statements of income
present the combined statements of income of FUNC and Signet assuming the
companies had been combined for each period presented on a pooling of interests
accounting basis. The Signet acquisition was consummated on November 28, 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- --------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1997 1996 1996 1995 1994 1993 1992
- ---------------------------------------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income............................... $ 8,187 7,812 10,459 9,553 8,038 7,406 7,376
Interest expense.............................. 3,859 3,719 4,994 4,425 3,090 2,757 3,273
-------- -------- -------- -------- -------- -------- --------
Net interest income........................... 4,328 4,093 5,465 5,128 4,948 4,649 4,103
Provision for loan losses..................... 515 299 449 258 193 417 711
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision for loan
losses...................................... 3,813 3,794 5,016 4,870 4,755 4,232 3,392
Securities available for sale transactions.... 19 20 36 45 9 37 49
Investment security transactions.............. 3 3 4 6 4 7 (21)
Noninterest income............................ 2,457 1,839 2,597 2,125 2,130 1,903 1,641
Merger-related restructuring charges.......... -- 281 281 94 -- -- --
SAIF special assessment....................... -- 133 133 -- -- -- --
Noninterest expense........................... 3,930 3,501 4,740 4,563 4,593 4,134 3,942
-------- -------- -------- -------- -------- -------- --------
Income before income taxes.................... 2,362 1,741 2,499 2,389 2,305 2,045 1,119
Income taxes.................................. 828 611 875 848 779 654 311
-------- -------- -------- -------- -------- -------- --------
Net income.................................... 1,534 1,130 1,624 1,541 1,526 1,391 808
Dividends on preferred stock.................. -- 8 9 26 46 46 53
-------- -------- -------- -------- -------- -------- --------
Net income applicable to common stockholders
before redemption premium................... 1,534 1,122 1,615 1,515 1,480 1,345 755
Redemption premium on preferred stock......... -- -- -- -- 41 -- --
-------- -------- -------- -------- -------- -------- --------
Net income applicable to common stockholders
after redemption premium.................... $ 1,534 1,122 1,615 1,515 1,439 1,345 755
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
PER COMMON SHARE DATA
Net income before redemption premium.......... $ 2.43 1.80 2.59 2.43 2.36 2.21 1.32
Net income after redemption premium........... $ 2.43 1.80 2.59 2.43 2.29 2.21 1.32
Average common shares outstanding (IN
THOUSANDS).................................. 630,384 624,554 624,363 623,163 626,974 607,488 572,068
FUNC HISTORICAL PER COMMON SHARE DATA
Net income before redemption premium.......... $ 2.60 1.85 2.67 2.52 2.36 2.15 1.26
Net income after redemption premium........... $ 2.60 1.85 2.67 2.52 2.29 2.15 1.26
Average common shares outstanding (IN
THOUSANDS).................................. 562,534 557,968 557,624 557,354 563,325 544,876 510,768
</TABLE>
See accompanying notes to pro forma financial information.
17
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
FUNC, SIGNET AND COVENANT
(UNAUDITED)
The following unaudited pro forma combined condensed statements of income
present the combined statements of income of FUNC, Signet and Covenant assuming
the companies had been combined for each period presented on a pooling of
interests accounting basis with respect to the Signet acquisition, and on a
purchase accounting basis with respect to the Mergers (only for the nine months
ended September 30, 1997, and the year ended December 31, 1996). The Signet
acquisition was consummated on November 28, 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1997 1996 1996 1995 1994 1993 1992
- ---------------------------------------------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income..................................... $ 8,206 7,812 10,484 9,553 8,038 7,406 7,376
Interest expense.................................... 3,871 3,719 5,008 4,425 3,090 2,757 3,273
-------- -------- -------- -------- -------- -------- --------
Net interest income................................. 4,335 4,093 5,476 5,128 4,948 4,649 4,103
Provision for loan losses........................... 515 299 450 258 193 417 711
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision for loan
losses............................................ 3,820 3,794 5,026 4,870 4,755 4,232 3,392
Securities available for sale transactions.......... 19 20 36 45 9 37 49
Investment security transactions.................... 3 3 4 6 4 7 (21)
Noninterest income.................................. 2,458 1,839 2,598 2,125 2,130 1,903 1,641
Merger-related restructuring charges................ -- 281 282 94 -- -- --
SAIF special assessment............................. -- 133 134 -- -- -- --
Noninterest expense................................. 3,940 3,501 4,760 4,563 4,593 4,134 3,942
-------- -------- -------- -------- -------- -------- --------
Income before income taxes.......................... 2,360 1,741 2,488 2,389 2,305 2,045 1,119
Income taxes........................................ 828 611 871 848 779 654 311
-------- -------- -------- -------- -------- -------- --------
Net income.......................................... 1,532 1,130 1,617 1,541 1,526 1,391 808
Dividends on preferred stock........................ -- 8 10 26 46 46 53
-------- -------- -------- -------- -------- -------- --------
Net income applicable to common stockholders........ 1,532 1,122 1,607 1,515 1,480 1,345 755
Redemption premium on preferred stock............... -- -- -- -- 41 -- --
-------- -------- -------- -------- -------- -------- --------
Net income applicable to common stockholders after
redemption premium................................ $ 1,532 1,122 1,607 1,515 1,439 1,345 755
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
PER COMMON SHARE DATA
Net income before redemption premium................ $ 2.43 1.80 2.57 2.43 2.36 2.21 1.32
Net income after redemption premium................. $ 2.43 1.80 2.57 2.43 2.29 2.21 1.32
Average common shares outstanding (IN THOUSANDS).... 630,384 624,554 624,363 623,163 626,974 607,488 572,068
FUNC HISTORICAL PER COMMON SHARE DATA
Net income before redemption premium................ $ 2.60 1.85 2.67 2.52 2.36 2.15 1.26
Net income after redemption premium................. $ 2.60 1.85 2.67 2.52 2.29 2.15 1.26
Average common shares outstanding (IN THOUSANDS).... 562,534 557,968 557,624 557,354 563,325 544,876 510,768
</TABLE>
See accompanying notes to pro forma financial information.
18
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
FUNC, SIGNET, COVENANT, WHEAT AND CORESTATES
(UNAUDITED)
The following unaudited pro forma combined condensed statements of income
present the combined statements of income of FUNC, Signet, Covenant, Wheat and
CoreStates assuming the companies had been combined for each period presented on
a pooling of interests accounting basis with respect to the Signet acquisition,
the Wheat acquisition and the CoreStates acquisition, and on a purchase
accounting basis with respect to the Mergers (only for the nine months ended
September 30, 1997, and the year ended December 31, 1996). Such information for
Wheat for the 12-month periods ended March 31 has been added to comparable
information related to FUNC, Signet, CoreStates and Covenant for the preceding
12-month periods ended December 31, to reflect the combined results of
operations. The Signet acquisition was consummated on November 28, 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, TWELVE MONTHS ENDED
-------------------- -------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1997 1996 1997/1996 1996/1995 1995/1994 1994/1993
- -------------------------------------------- -------- -------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income............................. $ 10,787 10,308 13,831 13,068 11,086 10,335
Interest expense............................ 4,839 4,591 6,187 5,752 4,052 3,660
-------- -------- --------- --------- ---------- ---------
Net interest income......................... 5,948 5,717 7,644 7,316 7,034 6,675
Provision for loan losses................... 658 488 679 402 472 606
-------- -------- --------- --------- ---------- ---------
Net interest income after provision for loan
losses.................................... 5,290 5,229 6,965 6,914 6,562 6,069
Securities available for sale
transactions.............................. 101 142 184 156 97 154
Investment security transactions............ 3 3 4 6 4 7
Noninterest income.......................... 3,438 2,715 3,794 3,269 3,115 2,944
Restructuring and merger-related charges.... -- 411 422 233 107 --
SAIF special assessment..................... -- 147 148 -- -- --
Noninterest expense......................... 5,497 5,018 6,802 6,656 6,673 6,332
-------- -------- --------- --------- ---------- ---------
Income before income taxes.................. 3,335 2,513 3,575 3,456 2,998 2,842
Income taxes................................ 1,173 905 1,278 1,232 1,018 908
-------- -------- --------- --------- ---------- ---------
Net income.................................. 2,162 1,608 2,297 2,224 1,980 1,934
Dividends on preferred stock................ -- 8 10 26 46 46
-------- -------- --------- --------- ---------- ---------
Net income applicable to common stockholders
before redemption premium................. 2,162 1,600 2,287 2,198 1,934 1,888
Redemption premium on preferred stock....... -- -- -- -- 41 --
-------- -------- --------- --------- ---------- ---------
Net income applicable to common stockholders
after redemption premium.................. $ 2,162 1,600 2,287 2,198 1,893 1,888
-------- -------- --------- --------- ---------- ---------
-------- -------- --------- --------- ---------- ---------
PER COMMON SHARE DATA
Net income before redemption premium........ $ 2.22 1.61 2.31 2.21 1.93 1.91
Net income after redemption premium......... $ 2.22 1.61 2.31 2.21 1.89 1.91
Average common shares outstanding (IN
THOUSANDS)................................ 973,263 990,901 989,106 993,504 1,003,740 988,055
FUNC HISTORICAL PER COMMON SHARE DATA
Net income before redemption premium........ $ 2.60 1.85 2.67 2.52 2.36 2.15
Net income after redemption premium......... $ 2.60 1.85 2.67 2.52 2.29 2.15
Average common shares outstanding (IN
THOUSANDS)................................ 562,534 557,968 557,624 557,354 563,325 544,876
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE DATA) 1993/1992
- -------------------------------------------- ---------
<S> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income............................. 10,480
Interest expense............................ 4,477
---------
Net interest income......................... 6,003
Provision for loan losses................... 972
---------
Net interest income after provision for loan
losses.................................... 5,031
Securities available for sale
transactions.............................. 146
Investment security transactions............ (21 )
Noninterest income.......................... 2,691
Restructuring and merger-related charges.... --
SAIF special assessment..................... --
Noninterest expense......................... 6,246
---------
Income before income taxes.................. 1,601
Income taxes................................ 455
---------
Net income.................................. 1,146
Dividends on preferred stock................ 53
---------
Net income applicable to common stockholders
before redemption premium................. 1,093
Redemption premium on preferred stock....... --
---------
Net income applicable to common stockholders
after redemption premium.................. 1,093
---------
---------
PER COMMON SHARE DATA
Net income before redemption premium........ 1.17
Net income after redemption premium......... 1.17
Average common shares outstanding (IN
THOUSANDS)................................ 933,400
FUNC HISTORICAL PER COMMON SHARE DATA
Net income before redemption premium........ 1.26
Net income after redemption premium......... 1.26
Average common shares outstanding (IN
THOUSANDS)................................ 510,768
</TABLE>
See accompanying notes to pro forma financial information.
19
<PAGE>
NOTES TO PRO FORMA FINANCIAL INFORMATION
(1) The unaudited pro forma information presented herein is not necessarily
indicative of the results of operations or the combined financial position
that would have resulted had the Mergers, the Signet acquisition or either
of the Wheat or CoreStates acquisitions been consummated at the beginning
of the applicable periods indicated, nor is it necessarily indicative of
the results of operations in future periods or the future financial
position of the combined entities. Consummation of the Mergers, the Signet
acquisition or either of the Wheat or CoreStates acquisitions is not
contingent upon consummation of any other of such acquisitions. Pro forma
financial information with respect to the Mergers and the Signet and
CoreStates acquisitions assumes such acquisitions were consummated as of
the beginning of each period presented. Such information for Wheat for the
12-month periods ended March 31 has been added to comparable information
related to FUNC, Signet and CoreStates for the preceding 12-month periods
ended December 31, as appropriate. Pro forma financial information for the
Mergers is included only for the nine months ended September 30, 1997, and
December 31, 1996. See "CERTAIN RECENT DEVELOPMENTS" and "CERTAIN UPDATED
INFORMATION RELATING TO THE MERGERS -- Accounting Treatment" in this
Supplement and "RECENT DEVELOPMENTS" and "THE MERGER -- Accounting
Treatment" in the Prospectus/Proxy Statement.
(2) The Mergers will be accounted for on a purchase accounting basis, and
accordingly, the related pro forma adjustments herein reflect, where
applicable, (i) an exchange ratio of (a) 1.516 shares of FUNC Common Stock
for each of the 138,000 shares of Covenant Series A Preferred Stock which
were outstanding at September 30, 1997, (b) an exchange ratio of 1.2 shares
of FUNC Common Stock for each of the 162,000 shares of Covenant Series B
Preferred Stock which were outstanding at September 30, 1997, (c) an
exchange ratio of .3813 shares of FUNC Common Stock for each of the
3,057,000 shares of Covenant Common Stock which were outstanding at
September 30, 1997, and (d) the resulting issuance of 1,743,000 shares of
FUNC Common Stock; (ii) the repurchase of such shares in the open market at
a cost of $87 million; and (iii) an increase in goodwill and deposit base
premium of $49 million and $6 million, respectively.
Additionally, the pro forma adjustments related to the unaudited pro forma
combined condensed statements of income with respect to the Mergers reflect
a (i) 5.51 percent and 5.27 percent cost of funds for the nine months ended
September 30, 1997, and for the year ended December 31, 1996, respectively;
(ii) ten-year sum-of-the-years' digits method related to deposit base
premium; and (iii) 25-year straight-line life related to goodwill.
As a result, for the nine months ended September 30, 1997, and the year
ended December 31, 1996, these adjustments amounted to (i) an increase in
noninterest expense of $2 million and $10 million, respectively; and (ii)
reductions in (a) interest income of $2 million and $4 million,
respectively; (b) income taxes of $1 million and $5 million, respectively,
and (c) net income applicable to common stockholders of $5 million and $9
million, respectively.
(3) The Signet acquisition, which was consummated on November 28, 1997, will be
accounted for on a pooling of interests accounting basis, and accordingly,
the related pro forma adjustments herein reflect, where applicable, an
exchange ratio of 1.10 shares of FUNC Common Stock for each of the
60,944,000 shares of Signet common stock which were outstanding at
September 30, 1997.
As a result, information was adjusted for the Signet acquisition by the (i)
addition of 67,038,000 shares of FUNC Common Stock amounting to $224
million; (ii) elimination of 60,944,000 shares of Signet common stock
amounting to $305 million; and (iii) recordation of the remaining amount of
$81 million as an increase to paid-in capital at September 30, 1997.
As of September 30, 1997, FUNC and Signet had 50,530,000 and 3,501,000
shares of common stock reserved for issuance primarily for stock option
plans, respectively, (excluding, as to FUNC, shares reserved for issuance
in connection with the Mergers, the Signet acquisition and the Wheat and
CoreStates acquisitions, or upon exercise of the rights attached to shares
of FUNC Common Stock and, as to Signet, shares reserved for issuance upon
exercise of the rights attached to shares of Signet common stock), which
are not included in the unaudited pro forma financial information presented
herein.
For the nine months ended September 30, 1997, Signet had net income
applicable to common stockholders of $73 million.
(4) It is assumed that the Wheat acquisition will be accounted for on a pooling
of interests accounting basis, and accordingly, the related pro forma
adjustments herein reflect, where applicable, an exchange ratio of 1.1621
shares of FUNC Common Stock for each of the 209,000 shares of Wheat
preferred stock and 8,599,000 shares of Wheat common stock which were
outstanding at September 30, 1997. The 1.1621 exchange ratio is subject to
possible adjustment under certain circumstances.
20
<PAGE>
As a result, information was adjusted for the Wheat acquisition by the (i)
addition of 10,267,000 shares of FUNC Common Stock amounting to $34
million; (ii) elimination of 209,000 shares of Wheat preferred stock
amounting to $3 million; (iii) elimination of 8,599,000 shares of Wheat
common stock amounting to $17 million; and (iv) recordation of the
remaining amount of $14 million as a reduction of paid-in capital at
September 30, 1997.
As of September 30, 1997, FUNC had 50,530,000 shares, and Wheat had no
shares of common stock reserved for issuance primarily for stock option
plans (excluding, as to FUNC, shares reserved for issuance in connection
with the Mergers, the Signet acquisition and the Wheat and CoreStates
acquisitions, or upon exercise of the rights attached to shares of FUNC
Common Stock), which are not included in the unaudited pro forma financial
information presented herein.
For the nine months ended September 30, 1997, Wheat had net income
applicable to common stockholders of $33 million, which includes $9 million
related to Wheat's results of operations in the fourth quarter ended March
31, 1997.
(5) It is assumed that the CoreStates acqusition will be accounted for on a
pooling of interests accounting basis, and accordingly, the related pro
forma adjustments herein reflect, where applicable, an exchange ratio of
1.62 shares of FUNC Common Stock for each of the 199,779,000 shares of
CoreStates common stock which were outstanding at September 30, 1997. The
1.62 exchange ratio is subject to possible adjustment under certain
circumstances.
As a result, information was adjusted for the CoreStates acquisition by the
(i) addition of 323,642,000 shares of FUNC Common Stock amounting to $1.1
billion (excluding an estimated 3.5 million shares of CoreStates common
stock that CoreStates expects to issue in order to qualify the CoreStates
Acquisition as a pooling of interests and including 2,182,000 shares of
CoreStates common stock allocated to the CoreStates ESOP); (ii) elimination
of 199,779,000 shares of outstanding CoreStates common stock amounting to
$200 million; (iii) elimination of the cost of CoreStates treasury stock of
$1.3 billion of which $1.1 billion reduced retained earnings; (iv)
reclassification of the cost of unallocated shares held by the CoreStates
ESOP of $52 million; and (v) recordation of the remaining amount of $1.0
billion as a reduction of paid-in capital at September 30, 1997.
As of September 30, 1997, FUNC and CoreStates had 50,530,000 and 16,915,000
shares of common stock reserved for issuance primarily for stock option
plans, respectively, (excluding, as to FUNC, shares reserved for issuance
in connection with the Mergers, the Signet acquisition and the Wheat and
CoreStates acquisitions, or upon exercise of the rights attached to shares
of FUNC Common Stock), which are not included in the unaudited pro forma
financial information presented herein.
For the nine months ended September 30, 1997, CoreStates had net income
applicable to common stockholders of $597 million.
In 1993, CoreStates changed its method of accounting for postemployment
benefits, and in 1993 CoreStates reported additional expense as a
cumulative effect of a change in accounting principle, net of tax of $16
million in 1993 and $108 million in 1992. Such amounts have been
appropriately reclassified to noninterest expense and income taxes in 1993
and 1992, respectively, in the pro forma financial information presented
herein.
(6) In the second quarter of 1997, FUNC acquired the Bank of Boca Raton with
assets of $29 million, net loans of $15 million and deposits of $27 million
for $2 million in cash. This purchase accounting acquisition has been
reflected in the pro forma financial information only from the date of
consummation.
From January 1, 1997, through September 30, 1997, FUNC has purchased 24
million shares of FUNC Common Stock in the open market at a cost of $1.0
billion, of which 1.65 million shares relate to the Mergers as noted above.
The historical financial statements of FUNC will be restated for the
CoreStates acquisition for all periods presented and for the Signet
acquisition only for periods beginning on and after January 1, 1995. Such
financial statements will not be restated as a result of the Mergers or the
Wheat acquisition.
(7) Income per share data has been computed based on the combined historical
net income applicable to common stockholders of FUNC, Signet, Covenant,
Wheat and CoreStates using the historical weighted average shares
outstanding of FUNC Common Stock and the weighted average outstanding
shares, adjusted to equivalent shares of FUNC Common Stock, as of the
earliest applicable period presented, as appropriate.
(8) Certain insignificant reclassifications have been included herein to
conform to statement presentations. Transactions conducted in the ordinary
course of business between FUNC, Signet, Covenant, Wheat and CoreStates are
immaterial, and accordingly, have not been eliminated.
21
<PAGE>
(9) The unaudited pro forma financial information does not include any material
merger-related expenses or any material expenses related to the Mergers,
the Signet acquisition and the Wheat and CoreStates acquisitions. FUNC
currently estimates after-tax restructuring and merger-related charges of
approximately (i) $135 million related to the Signet acquisition, or $0.42
per share of FUNC Common Stock, expected to be taken in the fourth quarter
of 1997, and (ii) $795 million related to the CoreStates acquisition, or
$0.81 per share of FUNC Common Stock, expected to be taken in the second
quarter of 1998. In addition, FUNC expects to incur an estimated $75
million in pre-tax restructuring and merger-related expenses in the
12-month period following the CoreStates acquisition. See "CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING INFORMATION" in this Supplement.
(10) FUNC expects to realize significant revenue enhancements and cost savings
from the Signet acquisition and the CoreStates acquisition. The pro forma
financial information, which does not reflect any revenue enhancements,
direct costs or potential savings from the consolidation of operations of
FUNC, Signet, Covenant, Wheat and CoreStates, is not indicative of the
results of future operations. No assurance can be given with respect to the
ultimate level of such revenue enhancements or cost savings. As indicated
by the foregoing unaudited pro forma financial information and based solely
on the foregoing assumptions, consummation of the Mergers, the Signet
acquisition and the Wheat and CoreStates acquisitions would have diluted
FUNC's historical net income per common share for the nine months ended
September 30, 1997, and the year ended December 31, 1996, by 15 percent and
13 percent, respectively. See "CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION" in this Supplement.
22
<PAGE>
EXHIBIT A
QUARTERLY REPORT ON FORM 10-Q
OF COVENANT BANCORP, INC.
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission file #0-22699
COVENANT BANCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEW JERSEY 22-2890624
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
</TABLE>
18 KINGS HIGHWAY WEST,
HADDONFIELD, NEW JERSEY 08033
(Address of Principal Executive Offices)
(Zip Code)
(609) 428-7300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. (Note: Registrant is successor to
Covenant Bank, whose shares were previously registered with the Federal Deposit
Insurance Corporation). Yes _X_ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practical date.
<TABLE>
<S> <C>
COMMON STOCK 3,057,332
- --------------------------------------------- ---------------------------------------------
(TITLE OF CLASS) (NO. OF SHARES OUTSTANDING AS OF 11/07/97)
SERIES A NON-CUMULATIVE CONVERTIBLE PREFERRED
STOCK 138,300
- --------------------------------------------- ---------------------------------------------
(TITLE OF CLASS) (NO. OF SHARES OUTSTANDING AS OF 11/07/97)
SERIES B NON-CUMULATIVE CONVERTIBLE PREFERRED
STOCK 161,700
- --------------------------------------------- ---------------------------------------------
(TITLE OF CLASS) (NO. OF SHARES OUTSTANDING AS OF 11/07/97)
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
FINANCIAL INFORMATION PAGE
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) September 30, 1997
and December 31, 1996.................................................................................... A-2
Consolidated Statements of Income (Unaudited) Three months ended
September 30, 1997 and September 30, 1996................................................................ A-3
Consolidated Statements of Income (Unaudited) Nine months ended
September 30, 1997 and September 30, 1996................................................................ A-4
Consolidated Statements of Cash Flows (Unaudited) Nine months ended
September 30, 1997 and September 30, 1996................................................................ A-5
Consolidated Statements of Changes in Stockholders' Equity............................................... A-6
Notes to Consolidated Financial Statements (Unaudited)................................................... A-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................................... A-9
PART II. OTHER INFORMATION........................................................................................ A-19
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
A-1
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
(IN THOUSANDS)
Assets:
Cash and due from banks......................................................... $ 15,653 $ 12,446
Federal funds sold.............................................................. -- 3,100
------------------ -----------------
Cash and cash equivalents.................................................. 15,653 15,546
------------------ -----------------
Investments available for sale (cost 1997 -- $120,091;
1996 -- $133,061)............................................................. 119,944 132,578
------------------ -----------------
Investment securities (fair value 1997 -- $11,236;
1996 -- $11,743).............................................................. 11,144 11,687
Loans held for sale............................................................. 338 --
Loans receivable........................................................... 257,585 241,201
Less allowance for loan losses.................................................. 2,714 3,016
------------------ -----------------
Loans receivable, net........................................................... 254,871 238,185
------------------ -----------------
Premises and equipment, net..................................................... 9,376 9,135
Real estate owned............................................................... 1,049 695
Accrued interest receivable..................................................... 3,222 3,913
Other assets.................................................................... 4,255 2,895
------------------ -----------------
Total Assets............................................................... $419,852 $ 414,634
------------------ -----------------
------------------ -----------------
Liabilities:
Non-interest bearing deposits................................................... 47,819 41,868
Interest bearing deposits....................................................... 107,237 96,169
Time deposits................................................................... 149,008 139,428
------------------ -----------------
Total deposits............................................................. 304,064 277,465
------------------ -----------------
Advances from The Federal Home Loan Bank........................................ 14,700 20,500
Securities sold under agreements to repurchase.................................. 64,362 84,037
Other liabilities............................................................... 4,590 3,381
------------------ -----------------
Total Liabilities.......................................................... 387,716 385,383
------------------ -----------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock authorized 300,000 shares;
Series "A", $25 par value: issued and outstanding 138,300 and 138,300 shares,
respectively............................................................... 3,457 3,457
Series "B", $25 par value: issued and outstanding 161,700 and 161,700 shares,
respectively............................................................... 4,043 4,043
Common stock, $5 par value: authorized 5,000,000 shares; issued and outstanding
3,057,332 and 2,906,262 shares, respectively.................................. 15,287 14,531
Additional paid-in capital...................................................... 12,137 10,614
Net unrealized holding (loss) on investments available for sale................. (97) (305)
Accumulated deficit............................................................. (2,691) (3,089)
------------------ -----------------
Total Stockholders' Equity................................................. 32,136 29,251
------------------ -----------------
Total Liabilities and Stockholders' Equity................................. $419,852 $ 414,634
------------------ -----------------
------------------ -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
A-2
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30,
----------------
1997 1996
------ ------
<S> <C> <C>
(IN THOUSANDS)
Interest Income
Interest and fees on loans............................................................................... $5,727 $5,144
Interest on investment securities........................................................................ 2,188 2,130
Other interest income.................................................................................... 24 159
------ ------
Total interest income................................................................................. 7,939 7,433
Interest Expense
Interest on deposits..................................................................................... 2,716 2,469
Interest on borrowings................................................................................... 1,278 1,126
------ ------
Total interest expense................................................................................ 3,994 3,595
------ ------
Net interest income........................................................................................ 3,945 3,838
Provision for loan losses.................................................................................. 3 483
------ ------
Net interest income after provision for loan losses........................................................ 3,942 3,355
------ ------
Other Income
Service charges on deposit accounts...................................................................... 205 179
Loan servicing income.................................................................................... 62 69
Other operating income................................................................................... 67 62
Gain on sale of assets................................................................................... -- --
------ ------
Total other income.................................................................................... 334 310
------ ------
Other Expenses
Salaries and employee benefits........................................................................... 1,760 1,641
Net occupancy............................................................................................ 470 398
Data processing and other service costs.................................................................. 258 283
Professional services.................................................................................... 80 163
Advertising and promotion................................................................................ 50 53
SAIF recapitalization costs.............................................................................. -- 504
Merger costs............................................................................................. -- 666
Federal insurance premiums............................................................................... 18 59
Other operating expenses................................................................................. 379 397
------ ------
Total other expenses.................................................................................. 3,015 4,164
------ ------
Income (loss) before income taxes.......................................................................... 1,261 (499)
Income taxes (benefit)..................................................................................... 336 (86)
------ ------
Net income (loss).......................................................................................... 925 (413)
Less: preferred stock dividends............................................................................ 112 112
------ ------
Net income (loss) applicable to common shareholders........................................................ $ 813 $ (525)
------ ------
------ ------
Income (loss) per common share and common stock equivalents................................................ $ 0.21 $(0.17)
------ ------
------ ------
Weighted average common stock and common stock equivalents outstanding..................................... 4,358 3,175
</TABLE>
See accompanying notes to consolidated financial statements
A-3
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
------- -------
<S> <C> <C>
(IN THOUSANDS
EXCEPT PER SHARE
DATA)
Interest Income
Interest and fees on loans............................................................................ $16,627 $15,010
Interest on investment securities..................................................................... 6,851 6,350
Other interest income................................................................................. 71 356
------- -------
Total interest income.............................................................................. 23,549 21,716
Interest Expense
Interest on deposits.................................................................................. 7,881 7,177
Interest on borrowings................................................................................ 4,201 3,376
------- -------
Total interest expense............................................................................. 12,082 10,553
------- -------
Net interest income..................................................................................... 11,467 11,163
Provision for loan losses............................................................................... 33 524
------- -------
Net interest income after provision for loan losses..................................................... 11,434 10,639
------- -------
Other Income
Service charges on deposit accounts................................................................... 516 519
Loan servicing income................................................................................. 153 193
Other operating income................................................................................ 157 146
Gain on sale of assets................................................................................ 11 --
------- -------
Total other income................................................................................. 837 858
------- -------
Other Expenses
Salaries and employee benefits........................................................................ 4,835 4,798
Net occupancy......................................................................................... 1,388 1,186
Data processing and other service costs............................................................... 522 707
Professional services................................................................................. 235 434
Advertising and promotion............................................................................. 125 146
SAIF recapitalization costs........................................................................... -- 504
Merger costs.......................................................................................... -- 666
Federal insurance premiums............................................................................ 57 179
Other operating expenses.............................................................................. 1,091 1,118
------- -------
Total other expenses............................................................................... 8,253 9,738
------- -------
Income before income taxes.............................................................................. 4,018 1,759
Income taxes............................................................................................ 1,279 736
------- -------
Net income.............................................................................................. 2,739 1,023
Less: preferred stock dividends......................................................................... 337 337
------- -------
Net income applicable to common shareholders............................................................ $ 2,402 $ 686
------- -------
------- -------
Income per common share and common stock equivalents.................................................... $ 0.63 $ 0.22
------- -------
------- -------
Weighted average common stock and common stock equivalents outstanding.................................. 4,347 3,168
</TABLE>
See accompanying notes to consolidated financial statements.
A-4
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................................ $ 2,739 $ 1,023
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Provision for loan losses............................................................................. 33 524
Depreciation and amortization......................................................................... 478 392
Amortization of premiums and discounts, net........................................................... 57 119
Loans originated for sale............................................................................. (641) (951)
Proceeds from sales of loans held for sale............................................................ 303 1,887
Decrease in unearned discounts and loan fees, net..................................................... (254) (206)
Increase in accrued interest receivable and other assets.............................................. (669) (1,222)
Increase in other liabilities......................................................................... 1,209 1,344
------- -------
Net cash provided by operating activities.......................................................... 3,255 2,910
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments held to maturity............................................................. -- (1,312)
Purchases of investments available for sale........................................................... (6,970) (63,095)
Proceeds from maturities of investments available for sale............................................ 20,000 --
Proceeds from maturities of investments held to maturity.............................................. -- 41,665
Principal collected on mortgage backed securities..................................................... 518 621
Net increase in loans................................................................................. (17,459) (23,218)
Proceeds from sales of real estate owned.............................................................. 420 884
Purchases of premises and equipment................................................................... (719) (977)
------- -------
Net cash used in investing activities.............................................................. (4,210) (45,432)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits.............................................................................. 26,599 23,127
Net increase (decrease) in securities sold under agreements to repurchase............................. (19,675) 22,749
Net decrease in advances from the Federal Home Loan Bank.............................................. (5,800) (5,500)
Preferred stock dividends paid........................................................................ (337) (337)
Common stock issuance and other....................................................................... 275 (594)
------- -------
Net cash provided by financing activities.......................................................... 1,062 39,445
Net increase (decrease) in cash and cash equivalents.................................................. 107 (3,077)
Cash and cash equivalents at the beginning of the year.................................................. 15,546 22,777
------- -------
Cash and cash equivalents at the end of the period...................................................... $15,653 $19,700
------- -------
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................................... $12,163 $10,575
Cash paid during the period for income taxes....................................................... 1,031 768
Noncash investing and financing activities:
Net transfers to real estate owned from loans receivable........................................... 773 559
Net change in gross unrealized (loss) on investments available for sale............................ $ 336 $(1,015)
</TABLE>
See accompanying notes to consolidated financial statements.
A-5
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, INCLUDING SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN NET UNREALIZED ACCUMULATED
STOCK STOCK CAPITAL GAIN (LOSS) DEFICIT TOTAL
--------- ------- ---------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996........................ $ 7,500 $13,559 $ 9,212 $ 1,157 $(1,519) $29,909
Net income twelve months ended December 31, 1996.. -- -- -- -- 1,850 1,850
Preferred stock dividend.......................... -- -- -- -- (450) (450)
Adjustment to unrealized gain (net of tax)........ -- -- -- (1,462) -- (1,462)
Common stock dividends and other (194 shares)..... -- 972 1,402 -- (2,970) (596)
--------- ------- ---------- -------------- ----------- -------
Balance at December 31, 1996...................... 7,500 14,531 10,614 (305) (3,089) 29,251
Net income nine months ended September 30, 1997... -- -- -- -- 2,739 2,739
Preferred stock dividend.......................... -- -- -- -- (337) (337)
Adjustment to unrealized loss (net of tax)........ -- -- -- 208 -- 208
Common stock dividends and other (151 shares)..... -- 756 1,523 -- (2,004) 275
--------- ------- ---------- -------------- ----------- -------
Balance at September 30, 1997..................... $ 7,500 $15,287 $ 12,137 $ (97) $(2,691) $32,136
--------- ------- ---------- -------------- ----------- -------
-------- ------- ---------- -------------- ----------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
A-6
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. CONSOLIDATED FINANCIAL STATEMENTS
The financial statements included herein have been prepared without audit
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The accompanying condensed consolidated financial statements
reflect all adjustments which are, in the opinion of management, necessary to a
fair statement of the results for the interim periods presented. Such
adjustments are of a normal recurring nature.
On June 13, 1997, Covenant Bancorp, Inc. (the "Company") was formed and
registered with the SEC. Also on that date, Covenant Bank (the "Bank") was
acquired by the Company. These condensed consolidated financial statements
should be read in conjunction with the audited financial statements and the
notes thereto included in the Bank's Annual Report (Amendment No. 2 to Form F-2
dated April 28, 1997, filed with the Federal Deposit Insurance Corporation) for
the period ended December 31, 1996. The annual report is also included in the
Registrant's Registration Statement on Form S-4 dated April 28, 1997. The
results for the three and nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. The consolidated financial statements include the accounts of
Covenant Bancorp, Inc. and all of its subsidiaries, including Covenant Bank. All
material intercompany transactions have been eliminated.
B. COMMITMENTS
In the normal course of business, there are various outstanding commitments
to extend credit, such as letters of credit and unadvanced loan commitments,
which are not reflected in the accompanying consolidated financial statements.
Management does not anticipate any material losses as a result of these
transactions.
C. SFAS NO. 128 -- EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS on the face of
the statement of operations for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
This Statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. This Statement requires restatement of all prior-period EPS data
presented.
Had the Company adopted this Statement as of September 30, 1997, the pro
forma earnings per share would have been:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
---------------------------------------------
WEIGHTED PRO FORMA
INCOME AVERAGE SHARES EARNINGS PER
(NUMERATOR) (DENOMINATOR) SHARE
----------- -------------- ------------
<S> <C> <C> <C>
Basic EPS
Net income available to common shareholders...................................... $ 813 3,057 $ 0.27
Effect of dilutive securities
Convertible preferred stock...................................................... 112 1,059
Stock options.................................................................... -- 242
----------- --------------
Dilutive EPS
Income available to common shareholders plus assumed conversions................. $ 925 4,358 $ 0.21
</TABLE>
A-7
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
C. SFAS NO. 128 -- EARNINGS PER SHARE -- Continued
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
---------------------------------------------
WEIGHTED PRO FORMA
INCOME AVERAGE SHARES EARNINGS PER
(NUMERATOR) (DENOMINATOR) SHARE
----------- -------------- ------------
<S> <C> <C> <C>
Basic EPS
Net income available to common shareholders...................................... $ 2,402 3,051 $ 0.79
Effect of dilutive securities
Convertible preferred stock...................................................... 337 1,059
Stock options.................................................................... -- 237
----------- --------------
Dilutive EPS
Income available to common shareholders plus assumed conversions................. $ 2,739 4,347 $ 0.63
</TABLE>
D. ISSUANCE OF COMMON STOCK
On July 14, 1997, the Company issued a 4% stock dividend on its common
stock to shareholders of record on June 24, 1997, resulting in the issuance of
117,110 additional shares of common stock and cash paid in lieu of fractional
shares of $5,957. All share and per share data has been adjusted to reflect the
retroactive recognition of all stock dividends declared.
E. SUBSEQUENT EVENT
On August 5, 1997, the Company and First Union Corporation (First Union)
executed a definitive merger agreement in which First Union would acquire the
Company. The Company's shareholders will receive .3813 shares of First Union
common stock for each share of the Company's common stock. Each share of the two
issues of the Company's convertible preferred stock will be exchanged for a
number of shares of First Union common stock equal to the respective conversion
ratios of the preferred stock times the merger exchange ratio of .3813. The
acquisition, which will be accounted for under the purchase method of
accounting, is subject to various conditions including the approval of the
Company's shareholders and regulatory approvals. It is anticipated that the
transaction will close during the first quarter of 1998.
A-8
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Covenant Bancorp, Inc. and its subsidiaries, ("the Company"), recorded net
income of $2.7 million, or $0.63 per share for the nine months ended September
30, 1997, as compared to $1.0 million, or $0.22 for the nine months ended
September 30, 1996. The nine months ended September 30, 1996 results included
merger-related costs associated with the Company's acquisition in September 1996
of 1st Southern State Bank, and a one-time SAIF recapitalization assessment,
aggregating $1.2 million, after tax. Net interest income was positively impacted
by a 10% increase in average interest-earning assets for the nine month period
ended September 30, 1997, compared to the nine months ended September 30, 1996.
Return on average assets was 0.86% and return on average common equity was
13.96% for the nine month period ended September 30, 1997, compared to 0.35% and
4.08%, respectively, for the nine month period ended September 30, 1996. All
prior period amounts have been restated to reflect the September 1996
acquisition of 1st Southern State Bank ("1st Southern").
For the three months ended September 30, 1997, the Company reported net
income of $925,000, or $0.21 per share compared to a net loss of $413,000, or
$0.17 per share for the third quarter of 1996 which included the above-mentioned
non-recurring costs. Net interest income increased 3% for the third quarter of
1997 when compared to the third quarter of 1996 due to the above-mentioned
increase in average interest-earning assets. Return on average assets and return
on average common equity for the three months ended September 30, 1997 were
0.86% and 13.67%, respectively, compared to (0.41)% and (9.61)%, respectively,
for the same period in 1996.
Total assets amounted to $419.9 million at September 30, 1997, compared to
$414.6 million at December 31, 1996, representing an increase of $5.3 million
since year-end 1996. Net loans totaled $254.9 million, representing a 7%
increase, over the year-end 1996 balance. Total deposits increased $26.6 million
to reach $304.1 million at September 30, 1997, from the December 31, 1996
balance of $277.5 million. Stockholders' equity was $32.1 million at September
30, 1997. The Company's capital position meets the definition of a
well-capitalized institution, which is evident by its leverage ratio, which
stood at 7.50% and its Tier 1 and Total Capital ratios, which equaled 12.46% and
13.51%, respectively.
On August 5, 1997, the Company and First Union Corporation (First Union)
executed a definitive merger agreement in which First Union would acquire the
Company. The Company's shareholders will receive .3813 shares of First Union
common stock for each share of the Company's common stock. Each share of the two
issues of the Company's convertible preferred stock will be exchanged for a
number of shares of First Union common stock equal to the respective conversion
ratios of the preferred stock times the merger exchange ratio of .3813. The
acquisition, which will be accounted for under the purchase method of
accounting, is subject to various conditions including the approval of the
Company's shareholders and regulatory approvals. It is anticipated that the
transaction will close during the first quarter of 1998.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between interest earned on loans and
investments and interest incurred on deposits and other borrowed funds. Net
interest income is affected by changes in both interest rates and the amounts of
interest-earning assets and interest-bearing liabilities outstanding.
Net interest income for the nine months ended September 30, 1997 increased
$304,000 or 3% to $11.5 million, compared to $11.2 million for the same period
in 1996 primarily due to an increase in average loans of $34.9 million or 15%
and a $2.6 million increase in average investments (see page A-11 for an average
balance sheet and average rate comparisons). The increase in average loans is
concentrated in the commercial and commercial mortgage portfolios of $22.1
million or 15% and a $8.7 million increase in 1-4 family mortgage loans. The
increase in net interest income associated with growth in the loan portfolio has
been largely offset by a compression in the net interest margin to 3.83% for the
nine months ended September 30, 1997 from 4.12% for the same period in 1996. The
decrease in the net interest margin is due to the following factors: 1) a
decline in the yield on the total loan portfolio to 8.71% for the nine month
period ended September 30, 1997 from 9.11% for the same period in 1996, caused
by overall market conditions; and 2) the increase in the Company's loan
portfolio funded by higher-priced securities sold under agreements to repurchase
and certificates of deposit rather than the Company's core deposit base, causing
the Company's cost of funds to increase from 4.50% for the nine months ended
September 30, 1996 to
A-9
<PAGE>
4.65% for the same period of 1997. Delays in the opening of the Company's three
new personal financial centers resulted in the need for these types of
short-term higher-costing funding sources.
Net interest income for the three months ended September 30, 1997 increased
$107,000 or 3% to $3.9 million, compared to $3.8 million for the same period in
1996. As discussed in the nine month results, the improvement is directly
related to the increase in average interest-earning assets during the third
quarter of 1997, as compared to the same period in 1996, partially offset by a
narrowing in the net interest margin.
OTHER INCOME
Other income for the first nine months of 1997 totaled $837,000, compared
to $858,000 for the same period of 1996. Service charges on deposit accounts
equaled $516,000 for the nine months ended September 30, 1997. Loan servicing
income decreased $40,000 to $153,000 for the nine months ended September 30,
1997 when compared to the same period of 1996 and is attributable to volume
decreases in investor servicing fees, late fees, and credit card fees. Other
operating income increased $11,000 or 7.5% to $157,000 for the nine months ended
September 30, 1997, compared to the same period in 1996, due to an increase in
MAC surcharge income and volume increases in safe deposit box fees. The one-time
gain of $11,000 on sale of assets during the second quarter of 1997 was due to a
subdivision and subsequent sale of a small parcel of land and building that had
been previously purchased with the Company's North Wildwood personal financial
center.
Other income for the three month period ended September 30, 1997 totaled
$334,000, compared to $310,000 for the same period of 1996, representing a
$24,000 or 8% increase. The increase in service charges on deposit accounts of
$26,000 was associated with an increase in core deposit accounts over the past
twelve months. Loan servicing income decreased $7,000 to $62,000 for the third
quarter of 1997 when compared to the same period of 1996 and is also
attributable to volume decreases in investor servicing fees, late fees and
credit card fees. Other operating income increased $5,000 for the third quarter
of 1997, primarily related to an increase in MAC surcharge income and volume
increases in safe deposit box fees.
OTHER EXPENSES
Other expenses for the nine months ended September 30, 1997 equaled $8.3
million, compared to $9.7 million for the same period of 1996. Other expenses
for the first nine months of 1996 included the one-time merger costs of $666,000
and the non-recurring SAIF assessment of $504,000. Excluding these one time
charges, other expenses equaled $8.6 million for the nine months ended 1996,
resulting in a decrease in other expenses of $315,000 or 4% excluding the
one-time charges incurred in 1996. The ratio of total other expenses to average
assets for the nine months ended September 30, 1997 improved to 2.58% from 2.97%
for the same period of 1996. Cost containment and operating efficiency are
continuing priorities of management. The Company's operating efficiency ratio
(non-interest expenses, less other real estate expenses, divided by net interest
income plus non-interest income excluding non-recurring gains) improved to 67%
for the first nine months of 1997, compared to 71% for the same period of 1996.
Salaries and employee benefits increased $37,000 or 1% and equaled $4.84
million for the first nine months of 1997, compared to $4.80 million for the
same period in 1996. The salaries and benefits category is the largest component
of other expenses, encompassing 59% of total other expenses as of September 30,
1997. The slight increase in salaries and employee benefits expense is
attributable to reductions in staff in connection with the 1st Southern
acquisition completed in September 1996, partially offset by staffing increases
associated with the new personal financial centers opened since March of 1996.
A-10
<PAGE>
CONSOLIDATED AVERAGE BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
----------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Assets
Loans:(1)
Commercial.............................. $ 57,591 $ 3,885 9.01% $ 55,803 $ 3,918 9.39%
Commercial mortgage..................... 107,736 7,200 8.93 87,425 6,400 9.79
Mortgage................................ 54,795 3,285 7.98 46,064 2,641 7.64
Consumer................................ 35,080 2,257 8.60 31,053 2,051 8.83
-------- -------- ------- -------- -------- -------
Total loans.......................... 255,202 16,627 8.71 220,345 15,010 9.11
Investments:
Federal funds sold...................... 1,421 71 5.23 8,935 356 5.33
Investment securities................... 143,031 6,851 6.39 132,940 6,350 6.30
-------- -------- ------- -------- -------- -------
Total investments.................... 144,452 6,922 6.39 141,875 6,706 6.23
-------- -------- ------- -------- -------- -------
Total interest-earning assets........ 399,654 $ 23,549 7.88% 362,220 $ 21,716 8.02%
-------- -------- ------- -------- -------- -------
Allowance for loan losses................. (2,930) (3,105)
Cash and due from banks................... 11,912 10,185
Fixed assets (net)........................ 9,399 7,979
REO....................................... 709 1,244
Other assets.............................. 7,516 6,084
-------- --------
Total Assets......................... $426,260 $384,607
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Deposits:
Interest-bearing demand................. $ 36,029 $ 622 2.31% $ 26,127 $ 473 2.42%
Statement savings....................... 39,090 704 2.41 43,955 796 2.42
Money market............................ 21,242 515 3.24 21,858 410 2.51
Certificates of deposit................. 149,594 6,040 5.40 138,362 5,498 5.31
-------- -------- ------- -------- -------- -------
Total interest-bearing deposits...... 245,955 7,881 4.28 230,302 7,177 4.17
FHLB advances and securities sold under
agreements to repurchase................ 101,282 4,201 5.55 83,474 3,376 5.41
-------- -------- ------- -------- -------- -------
Total interest bearing liabilities... 347,237 12,082 4.65 313,776 10,553 4.50
-------- -------- ------- -------- -------- -------
Non-interest bearing deposits............. 45,178 38,277
Other liabilities......................... 3,743 2,986
Stockholders' equity...................... 30,102 29,568
-------- --------
Total Liabilities and Stockholders'
Equity............................... $426,260 $384,607
-------- --------
-------- --------
Net Interest Income/Spread................ $ 11,467 3.23% $ 11,163 3.52%
-------- ------- -------- -------
-------- ------- -------- -------
Net Interest Margin (2)................... 3.83% 4.12%
------- -------
------- -------
</TABLE>
- ---------------
(1) Includes non-accruing loans. The effect of including such loans is to reduce
the average rate earned on Covenant's loans.
(2) Net interest income as a percentage of average interest-earning assets.
A-11
<PAGE>
Net occupancy increased $202,000 to $1.4 million for the nine months ended
September 30, 1997 due to additional personal financial centers opened in
Hammonton (3/96), the relocated Linwood center (10/96), Mount Laurel (12/96) and
Cherry Hill (3/97), and the establishment of an operations center in Voorhees,
NJ during the second quarter of 1996. Data processing and other service costs
declined $185,000 to $522,000 for the nine months ended September 30, 1997,
compared to $707,000 for the same period of 1996. The Company's acquisition of
1st Southern and the operating efficiencies gained due to the system conversion
in September 1996 are primarily attributable for the reduction in costs.
Professional services expenses decreased $199,000 to $235,000 for the first
nine months of 1997, compared to $434,000 for the same period of 1996. The
reduction is related to decreases of $84,000 in legal expenses related to the
decrease in problem credits; a $20,000 decrease in consulting expenses due to
the discontinuance of certain advertising and promotion programs and a $95,000
decrease in audit and examinations expense due to the acquisition of 1st
Southern. Federal insurance premiums declined $122,000 to $57,000 for the first
nine months of 1997 due to a reduction in the Bank Insurance Fund premiums.
Other operating expenses decreased $27,000 to $1.1 million for the nine months
ended September 30, 1997, compared to the same period of 1996.
Other expenses for the three months ended September 30, 1997 equaled $3.0
million, compared to $4.2 million for the same period in 1996, excluding the
one-time charges incurred mentioned above other expenses equaled $3.0 million,
representing an increase of $21,000 or 1% over the third quarter of 1996.
Salaries and employee benefits increased $119,000 to $1.8 million for the third
quarter of 1997 when compared to the same period in 1996. The increase in
salaries and employee benefits expense is directly associated with the new
staffing positions created for the new personal financial centers noted above.
Net occupancy increased $72,000 to $470,000 for the three months ended September
30, 1997, compared to the same period of 1996 due to the above-mentioned new
personal financial centers.
Data processing and service costs decreased $25,000 for the three months
ended September 30, 1997, compared to the same period in 1996. The Company's
system conversion in September 1996 along with the acquisition of 1st Southern
created operating efficiencies and are primarily attributable to the reduction
in data processing costs offset by increased costs related to new accounts added
over the last twelve months.
Professional services expenses decreased $83,000 for the third quarter of
1997 to $80,000, compared to the same period in 1996. The reduction is related
to a decrease in legal expenses related to a decrease in problem credits, a
decrease in consulting expenses due to the discontinuance of certain advertising
and promotion programs, and a decrease in audit and examination expense due to
the acquisition of 1st Southern. Federal insurance premiums declined $41,000 to
$18,000 for the three months ended September 30, 1997 as compared to the same
period in 1996 due to a reduction in the Bank Insurance Fund premium. Other
operating expenses increased $18,000 to $379,000 for the three months ended
September 30, 1997, compared to the same period in 1996 due to increases in
postage, insurance and telephone expenses related to the new branch facilities
opened.
FINANCIAL CONDITION
LOAN PORTFOLIO
The lending function is the Company's principal business activity and it
continues its policy to serve as a reliable source of credit to a diverse
customer base. The Company lends primarily to commercial borrowers in the
southern New Jersey marketplace. The loan portfolio is diversified, with 64% of
the portfolio comprised of commercial and commercial mortgage loans and 36%
comprised of residential mortgage loans and consumer loans at September 30,
1997.
At September 30, 1997, the Company's net loan portfolio totaled $254.9
million, compared to $238.2 million as of December 31, 1996. The $16.7 million
or 7% in growth in net loans has been concentrated within the commercial,
commercial mortgage and residential mortgage loan portfolios. The majority of
the Company's loan portfolio is primarily categorized as secured by commercial
and 1-4 family residential real estate properties (including home equity loans).
It is the Company's continuing policy to emphasize well-collaterized and
properly-structured loans and to promote long-term quality relationships with
financially strong borrowers.
NON-PERFORMING ASSETS
Non-performing assets include those loans that are not accruing interest
(non-accruing loans), loans that have been restructured and real estate owned.
A-12
<PAGE>
Generally, loans that are contractually past-due are placed on non-accrual
status when interest on principal becomes 90 days past-due, unless, in the
Company's assessment, the value of collateral securing the loan adequately
ensures the likelihood of the ultimate collection of all unpaid principal and
interest and the loan is in the process of collection.
The following table sets forth information regarding non-performing assets
and contractually past-due loans of September 30, 1997 and 1996 and December 31,
1996:
<TABLE>
<CAPTION>
SEPT. 30, SEPT. 30, DEC. 31,
1997 1996 1996
--------- --------- --------
<S> <C> <C> <C>
Non-performing assets:
Non-accruing loans:
Commercial.............................................................................. $ 664 $ 2,199 $1,734
Mortgage................................................................................ 1,024 1,273 931
Consumer................................................................................ 121 220 201
--------- --------- --------
Total non-performing loans................................................................ $ 1,809 $ 3,692 $2,866
Real estate owned......................................................................... 1,049 846 695
--------- --------- --------
Total non-performing assets............................................................... $ 2,858 $ 4,538 $3,561
--------- --------- --------
--------- --------- --------
Accruing loans 90 days past-due........................................................... $ 1,761 $ 1,743 $1,753
--------- --------- --------
--------- --------- --------
Non-performing loans as a percentage of loans............................................. 0.70% 1.62% 1.19%
--------- --------- --------
--------- --------- --------
Non-performing asset as a percentage of loans and real estate owned....................... 1.10% 1.98% 1.47%
--------- --------- --------
--------- --------- --------
Non-performing assets as a percentage of total assets..................................... 0.68% 1.17% 0.86%
--------- --------- --------
--------- --------- --------
</TABLE>
Non-performing assets totaled $2.9 million or 1.10% of total loans and real
estate owned at September 30, 1997, showing marked improvement when compared to
$3.6 million or 1.47% of total loans and real estate owned at December 31, 1996
and $4.5 million or 1.98% of total loans and real estate owned at September 30,
1996. Non-performing loans at September 30, 1997 decreased $1.1 million from the
December 31, 1996 balance of $2.9 million due to a $1.1 million reduction in
commercial non-performing loans and a reduction in consumer non-performing loans
of $80,000 offset by an increase in mortgage non-performing loans of $93,000.
The balance of non-performing loans at September 30, 1996 was $3.7 million or
1.62% of total loans.
Real estate owned (net of reserves) was $1.1 millon at September 30, 1997,
compared to $695,000 at December 31, 1996 and $846,000 at September 30, 1996.
During the first nine months of 1997, additions to real estate owned of $773,000
(representing four foreclosed properties) were offset by the sale of six
properties for $419,000, which resulted in the $354,000 increase in real estate
owned.
The balance of accruing loans 90 days past-due was $1.7 million at
September 30, 1997, $1.8 million at December 31, 1996 and $1.7 million at
September 30, 1996. The $8,000 increase in accruing loans 90 days past-due
during the nine months ended September 30, 1997 is related to an increase of
$369,000 in well-collateralized commercial loans, a $19,000 increase in various
home equity consumer loans, offset by a $380,000 decrease of various residential
mortgage loans.
At September 30, 1997 and December 31, 1996, the Company had impaired loans
totaling approximately $724,000 and $1,734,000, respectively. The allowance for
loan losses on impaired loans has a valuation allowance of $124,000, and
$199,000 at September 30, 1997 and December 31, 1996, respectively. The average
balance of impaired loans totaled $1,315,000 and $1,684,000 for September 30,
1997 and December 31, 1996, respectively. Interest income not accrued for
impaired loans for the nine months ended September 30, 1997 and for the twelve
months ended December 31, 1996 was approximately $99,000 and $164,000,
respectively.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision and allowance for loan losses is based on management's
ongoing evaluation of the loan portfolio and reflects an amount considered by
management to be adequate to absorb known and inherent losses in the portfolio.
Management considers a variety of factors when establishing the allowance, such
as the impact of current economic conditions, diversification of the loan
portfolio, delinquency statistics, results of loan review and related
classifications, the borrower's perceived financial and managerial strengths,
the estimated adequacy of underlying collateral and other relevant factors.
Consideration is also given to examinations performed by regulatory authorities.
A-13
<PAGE>
The following table sets forth information regarding the Company's
allowance for loan losses for the six month periods ended September 30, 1997 and
1996, and for the year ended December 31, 1996.
CHANGES IN ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
YEAR
NINE MONTHS ENDED ENDED
------------------- --------
9/30/97 9/30/96 12/31/96
------- ------- --------
<S> <C> <C> <C>
Balance at beginning of period.............................................................. $ 3,016 $ 3,195 $3,195
Provision charge to operating expenses...................................................... 33 524 636
Charge-offs:
Commercial................................................................................ (259) (456) (449)
Mortgage.................................................................................. (55) (198) (417)
Consumer.................................................................................. (64) (116) (124)
------- ------- --------
Total Charge-offs........................................................................... (378) (770) (990)
Recoveries:
Commercial................................................................................ 30 91 124
Mortgage.................................................................................. 4 11 --
Consumer.................................................................................. 9 25 51
------- ------- --------
Total recoveries............................................................................ 43 127 175
------- ------- --------
Net charge-offs............................................................................. (335) (643) (815)
------- ------- --------
Balance at end of period.................................................................... $ 2,714 $ 3,076 $3,016
------- ------- --------
------- ------- --------
Net charge-offs as a percentage of average loans............................................ 0.18% 0.39% 0.36%
Allowance as a percentage of period-end loans............................................... 1.05 1.35 1.25
Allowance as a percentage of non-performing loans........................................... 150.03 83.32 105.20
Allowance as a percentage of non-performing assets.......................................... 94.99 67.78 84.70
</TABLE>
Management is consistently informed of changes in economic indicators which
may have impact, either positive or adverse, on asset quality, the allowance for
loan losses, potential charge-offs and delinquencies.
The provision for loan losses charged against earnings was $33,000 in the
nine months of 1997, compared to $524,000 for the nine months of 1996 which
included a $481,000 provision for loan losses during the third quarter of 1996
to align 1st Southern State Bank's allowance for loan loss methodology with
Covenant as to the credit and non-performing processes at the time of the
merger. Management believes that the allowance for loan losses at September 30,
1997 is adequate to absorb known and inherent losses in the portfolio.
INVESTMENT SECURITIES
Investment securities were $131.1 million at September 30, 1997, compared
to $144.3 million at December 31, 1996. The $13.2 million decrease in investment
securities was the result of purchases of $7.0 million of US Treasury Notes with
maturities beyond one year and classified as "Available for Sale," offset by
proceeds from maturities of investments available for sale of $20.0 million,
$0.5 million principal collected on mortgage backed securities and an decrease
of $336,000 in the gross unrealized loss on investments available for sale.
At September 30, 1997, the fair value of investments available for sale was
$119.9 million, and unrealized holding losses were $147,000. At December 31,
1996, the fair value of investments available for sale was $132.6 million and
unrealized holding losses were $483,000. At September 30, 1997, securities held
to maturity totaled $11.1 million compared to $11.7 million at December 31,
1996. The fair values of these investments were $11.2 million at September 30,
1997 and $11.7 million at December 31, 1996.
The Company's investment portfolio is comprised of US Government
securities, federal agency mortgage-backed securities and Federal Home Loan Bank
("FHLB") stock. The portfolio generates substantial interest income, serves as a
source of liquidity and is used as a tool in managing interest rate sensitivity.
Portions of the portfolio are also used to secure public deposits and serve as
collateral for repurchase transactions. The investment portfolio also plays a
significant role in the asset/liability management process. Among other things,
the investment portfolio is utilized to balance the interest sensitivity of the
prime-based portion of the loan portfolio.
A-14
<PAGE>
DEPOSITS
The Company's predominant source of funds is depository accounts comprised
of demand deposits, savings and money market accounts, time deposits and
individual retirement accounts (IRA's). Deposits are provided by individuals and
businesses located within the southern New Jersey marketplace. The Company
gathers deposits from local municipalities within the guidelines of the
Government Unit Deposit Protection Act (GUDPA). The Bank has no brokered
deposits.
The Company opened new personal financial centers in Linwood (relocation in
October 1996), Mount Laurel (December 1996) and Cherry Hill (March 1997). Total
deposits at September 30, 1997 equaled $304.1 million, compared to $277.5
million at December 31, 1996, representing a $26.6 million or 10% increase
between December 31, 1996 and September 30, 1997.
BORROWINGS
Sources of funds for the Company other than deposits include FHLB advances
and securities sold under agreements to repurchase. FHLB advances were $14.7
million at September 30, 1997 and $20.5 million at December 31, 1996. Securities
sold under agreements to repurchase totaled $64.4 million at September 30, 1997,
compared to $84.0 million at December 31, 1996. The decrease in securities sold
under agreements to repurchase was related to the maturities and paydowns
described above in the "INVESTMENT SECURITIES" section.
ASSET AND LIABILITY MANAGEMENT
The Company monitors its sensitivity to interest rate changes and its
liquidity and capital position through its asset and liability management
process. The Company's objectives include (i) controlling interest rate
exposures, (ii) ensuring adequate liquidity, (iii) maintaining a strong capital
position and (iv) maximizing net interest income opportunities. The Company
manages these objectives centrally through the Asset Liability Management
Committee (ALCO).
INTEREST RATE SENSITIVITY
The Company seeks to manage its sensitivity position to maximize earnings
and minimize the risk associated with interest rate movements through the use of
a "gap analysis" on a monthly basis. The gap analysis assesses the interest rate
risk that arises from differences in the volumes of assets and liabilities that
mature or reprice within a given period. A "positive" gap position results when
the amount of interest-sensitive assets exceeds that of interest-sensitive
liabilities, signifying that the net interest margin will be positively affected
by rising rates and negatively affected by falling rates; a "negative" gap
position results when the amount of interest-sensitive liabilities exceeds that
of interest-sensitive assets, indicating that the net interest margin will be
negatively affected by rising rates and positively affected by falling rates.
However, the Company's gap position does not necessarily predict the impact of
changes in general levels of interest rates or net interest income due to
assumptions made as to repricing and maturities of certain products.
Decisions are also based on "dynamic shock analysis," a process that
entails the application of different prime rate increase or decrease scenarios
to the current maturity/repricing structure. This analysis measures the impact
on net interest income of each of the scenarios applied relative to the
Company's interest rate risk management policy guidelines, and seeks to identify
appropriate measures to maintain the interest sensitivity of net interest income
within such policy guidelines. At September 30, 1997, the Company's "dynamic
shock analysis" indicates an acceptable level of interest rate risk and is
within policy guidelines.
In the event that the Company's interest rate risk models indicate an
unacceptable level of risk, the Company could undertake a number of actions that
would reduce this risk, including the sale of a portion of its Available for
Sale portfolio or the extension of the maturities of its short-term borrowings,
or the use of other risk management strategies as determined by the Company's
ALCO Committee.
A-15
<PAGE>
The following table illustrates the gap position of the Company as of
September 30, 1997.
<TABLE>
<CAPTION>
NON-INTEREST
BEYOND SENSITIVE
1-90 91-180 181-365 ONE-FIVE FIVE ASSETS/
DAYS DAYS DAYS DAYS YEARS LIABILITIES TOTAL
--------- --------- --------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Interest earning assets
Loans.......................... $ 81,916 $ 6,442 $ 13,122 $ 93,468 $ 60,980 -- $ 255,921
Investment securities.......... 8,018 18,108 19,064 47,110 38,788 -- 131,088
Loans held for sale............ 338 -- -- -- -- -- 338
--------- --------- --------- --------- --------- ------------ ---------
Total interest earning
assets.................... 90,272 24,550 32,186 140,578 99,768 -- 387,354
Non-interest earning assets...... $ 32,498 32,498
------------ ---------
Total assets................ $ 90,272 $ 24,550 $ 32,186 $ 140,578 $ 99,768 $ 32,498 $ 419,852
--------- --------- --------- --------- --------- ------------ ---------
--------- --------- --------- --------- --------- ------------ ---------
Rate sensitive liabilities:
Interest bearing demand........ $ 31,193 -- -- $ 5,199 $ 5,199 -- $ 41,591
Statement Savings.............. 32,408 -- -- 5,401 5,401 -- 43,211
Money Market................... 16,825 -- -- 2,804 2,804 -- 22,433
Certificate of Deposit......... 53,657 33,772 33,397 28,183 -- -- 149,009
FHLB advances and securities
sold under agreements to
repurchase.................. 71,063 2,000 1,000 5,000 -- -- 79,063
--------- --------- --------- --------- --------- ------------ ---------
Total interest bearing
liabilities............... $ 205,146 $ 35,772 $ 34,397 $ 46,587 $ 13,404 -- $ 335,307
Non-interest bearing
liabilities.................... -- -- -- -- -- $ 52,409 52,409
Stockholders' equity............. -- -- -- -- -- 32,136 32,136
--------- --------- --------- --------- --------- ------------ ---------
Total liabilities and
stockholders' equity...... $ 205,146 $ 35,768 $ 34,397 $ 46,587 $ 13,404 $ 84,545 $ 419,852
--------- --------- --------- --------- --------- ------------ ---------
--------- --------- --------- --------- --------- ------------ ---------
Interest rate sensitivity GAP.... $(114,874) $ (11,222) $ (2,211) $ 93,991 $ 86,364 $ (52,047)
--------- --------- --------- --------- --------- ------------
--------- --------- --------- --------- --------- ------------
Cumulative GAP................... $(114,874) $(126,096) $(128,307) $ (34,317) $ 52,047
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cumulative GAP as a percentage of
total.......................... 44.00% 47.66% 53.40% 89.34% 115.52%
</TABLE>
The Gap Analysis table is intended to illustrate the maturity/repricing
characteristics of Company's interest-earning assets and interest-bearing
liabilities as of September 30, 1997. The analysis is based upon contractual
maturities and, where applicable, management's estimates of the repricing
characteristics of various assets and liabilities and on assumptions as to
customer behavior.
The Gap Analysis indicates a liability-sensitive position through the
one-year time period beginning September 30, 1997. The Company's investment in
U. S. Treasury Notes with maturities beyond one year funded by a growth in
deposits and short-term (three months or less) securities sold under agreements
to repurchase and is primarily responsible for the liability-sensitive position
through the one-year time period as of September 30, 1997.
Covenant's net interest income has not been subject to the degree of
sensitivity indicated by this traditional gap analysis. In monitoring interest
sensitivity, adjustments are made to the dynamic shock assumptions to reflect
management's recent experience regarding the impact of product pricing, interest
rate spread relationships and customer behavior.
These marginal adjustments are necessarily subjective and will vary over
time with loan and deposit changes and market conditions. The investment
portfolio is utilized to balance the Company's gap position, to manage the
interest rate spread and to mitigate overall maturity risk in the portfolio.
LIQUIDITY
Adequate liquidity is necessary to meet the borrowing needs and deposit
withdrawal requirements of customers as well as to satisfy liabilities, fund
operations and support asset growth. Maintaining an appropriate level of liquid
funds through the
A-16
<PAGE>
asset/liability management process ensures that the needs of the Company are met
at a reasonable cost. Therefore, the management of liquidity is coordinated with
the management of the Company's interest sensitivity and capital position. Major
sources of liquidity are core deposits, cash flow generated by the Company's
investment and loan portfolios, and short-term borrowings. Earnings and funds
provided by operations also serve as a source of liquidity.
Cash and cash equivalents equaled $15.7 million at September 30, 1997,
compared to $15.6 million at December 31, 1996, resulting in a net increase of
$107,000, as shown on the Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997. The net increase of $17.5 million in loans and
the $7.0 million in purchases of investments available for sale, offset by the
$20.0 million in proceeds from maturities of investments available for sale
primarily contributed to a net cash used in investing activities equaling $4.2
million. The Company funded the net cash used in investing activities
principally through $3.3 million in net cash provided by operating activities
and a $26.6 million increase in deposits offset by a $20.0 million decrease in
securities sold under agreements to repurchase and a $5.8 million decrease in
advances from the Federal Home Loan Bank.
The Company places strong emphasis on the composition of the investments
available for sale portfolio. Additional sources of liquidity are available to
the Company through the purchase of federal funds and borrowings on approved
lines of credit. One measure of the Company's liquidity is the FDIC liquidity
ratio. This ratio measures net cash, short-term investments and marketable
assets divided by net deposits and short-term liabilities. The Company's
liquidity ratio at September 30, 1997 was 23%. Overall, based on the its core
deposit base, and its available sources of borrowed funds, management believes
that the Company's liquidity position is satisfactory.
CAPITAL
The maintenance of appropriate levels of capital is a management priority
and an important objective of the Company's asset and liability management
process. The Company's principal capital planning goals are to provide an
adequate return to stockholders, to support its growth and expansion activities,
to provide stability to current operations, and to promote public confidence.
Bank regulatory authorities have issued risk-based capital standards and
leverage ratio requirements by which all bank holding companies and banks will
be evaluated in terms of capital adequacy. The "Prompt Corrective Action"
regulations issued pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991 established five categories of depository institutions:
(1) well-capitalized, (2) adequately capitalized, (3) undercapitalized, (4)
significantly undercapitalized, and (5) critically undercapitalized. Each
category relates to the level of capital for the depository institution. The
highest capital ratios equate to a "well-capitalized" depository institution
which is one that significantly exceeds the minimum level required by regulation
(i.e., total risk-based capital ratio of 10% or greater, a Tier 1 risk-based
capital ratio of 6% or greater and a leverage ratio of 5% or greater). At
September 30, 1997, the Company and the Bank met the definition of a
"well-capitalized" institution.
The following table sets forth the Company's and the Bank's regulatory
capital requirements and compliance therewith as of September 30, 1997:
COVENANT BANCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
EXCESS
WELL- CAPITAL
ACTUAL CAPITALIZED (IN THOUSANDS)
------ ----------- --------------
<S> <C> <C> <C>
Tier 1 Risk-Based Capital Ratio (1)............................... 12.46 % 6.00% $ 16,710
Total Risk-Based Capital Ratio (2)................................ 13.51 % 10.00% $ 9,075
Tier 1 Leverage Ratio (3)......................................... 7.50 % 5.00% $ 10,752
</TABLE>
A-17
<PAGE>
COVENANT BANK
<TABLE>
<CAPTION>
EXCESS
WELL- CAPITAL
ACTUAL CAPITALIZED (IN THOUSANDS)
------ ----------- --------------
<S> <C> <C> <C>
Tier 1 Risk-Based Capital Ratio (1)............................... 12.32 % 6.00% $ 16,339
Total Risk-Based Capital Ratio (2)................................ 13.37 % 10.00% $ 8,710
Tier 1 Leverage Ratio (3)......................................... 7.42 % 5.00% $ 10,380
</TABLE>
- ---------------
(1) Tier 1 Risk-Based Capital Ratio is defined as the ratio of Tier 1 Capital to
Total Risk-Weighted Assets.
(2) Total Risk-Based Capital Ratio is defined as the ratio of Tier 1 and Tier 2
Capital to Total Risk-Weighted Assets.
(3) Tier 1 Leverage Ratio is defined as the ratio of Tier 1 Capital to Total
Average Quarterly Assets.
INCOME TAXES
The Company's effective tax rate for the nine months ended September 30,
1997 was 31.8%, compared to an effective rate of 36.4% for the same period in
1996. The decreased percentage from 1996 to 1997 is attributable to a reduction
in state income taxes due to business strategies employed.
A-18
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
2. Agreement and Plan of Mergers dated August 4, 1997 by and among
Covenant Bancorp, Inc., Covenant Bank, First Union Corporation
and First Union National Bank, attached as Exhibit 1 to the
registrant's Current Report on Form 8-K dated August 12, 1997
and incorporated herein by reference.
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. On August 12, 1997, the Company filed an 8-K
report with the Commission regarding the Agreement and Plan of Mergers dated
August 4, 1997, between and among the Company, its subsidiary Covenant Bank,
First Union Corporation and its subsidiary First Union National Bank.
A-19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Bank has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
COVENANT BANCORP, INC.
<TABLE>
<S> <C>
November 13, 1997 /S/CHARLES E. SESSA, JR.
(DATE) CHARLES E. SESSA, JR.
PRESIDENT
November 13, 1997 /S/J. WILLIAM PARKER, JR.
(DATE) J. WILLIAM PARKER, JR.
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER & TREASURER
</TABLE>
A-20
<PAGE>
EXHIBIT 11
COVENANT BANCORP, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss)................................................ $ 925 $ (413) $ 2,739 $ 1,023
------------- -------------
------------- -------------
Less: preferred dividends........................................ (112) (337)
------------- -------------
Net income applicable to common stock............................ (525) 686
------------- -------------
------------- -------------
Average number of shares outstanding:
Average common shares outstanding.............................. 3,057 3,069 3,051 3,168
Common stock equivalents considered in
earnings per share computation:
Dilutive stock options...................................... 242 106 237 --
Conversion of preferred stock Series "A".................... 550 -- 550 --
Conversion of preferred stock Series "B".................... 509 -- 509 --
------------- ------------- ------------- -------------
Average number of shares outstanding............................. 4,358 3,175 4,347 3,168
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income (loss) per share of common
stock and common stock equivalents............................. $ 0.21 $ (0.17) $ 0.63 $ 0.22
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
A-21
<PAGE>
EXHIBIT B
CERTAIN HISTORICAL FINANCIAL
INFORMATION RELATING
TO CORESTATES
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
(UNAUDITED) (NOTE)
ASSETS
Cash and due from banks........................................................................ $ 3,166,454 $ 3,462,287
Time deposits, principally Eurodollars......................................................... 3,043,723 2,443,154
Federal funds sold and securities purchased under agreements to resell......................... 138,699 509,694
Trading account assets......................................................................... 326,717 122,317
Investments available-for-sale, at fair value.................................................. 2,211,382 2,394,166
Investments held-to-maturity (fair value: 1997 -- $1,417,351; 1996 -- $1,692,243).............. 1,413,351 1,689,058
Loans, net of unearned discounts of $220,485 in 1997 and $234,607 in 1996...................... 35,085,285 32,777,032
Less: Allowance for loan losses.............................................................. (679,415) (710,327)
------------- ------------
Net loans............................................................................... 34,405,870 32,066,705
------------- ------------
Due from customers on acceptances.............................................................. 790,548 738,077
Premises and equipment......................................................................... 626,760 625,876
Other assets................................................................................... 1,467,105 1,442,860
------------- ------------
Total assets............................................................................ $ 47,590,609 $ 45,494,194
------------- ------------
------------- ------------
LIABILITIES
Deposits:
Domestic:
Non-interest bearing...................................................................... $ 8,942,224 $ 9,330,445
Interest bearing.......................................................................... 23,401,727 22,986,955
Overseas branches and subsidiaries........................................................... 1,396,731 1,409,756
------------- ------------
Total deposits.......................................................................... 33,740,682 33,727,156
------------- ------------
Funds borrowed................................................................................. 4,239,227 2,633,157
Bank acceptances outstanding................................................................... 789,169 727,728
Other liabilities.............................................................................. 1,924,257 1,661,162
Long-term debt................................................................................. 3,784,179 3,049,297
------------- ------------
Total liabilities....................................................................... 44,477,514 41,798,500
------------- ------------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Preferred stock: authorized 10.0 million shares; no shares issued.............................. -- --
Common stock: $1 par value; authorized 350.0 million shares; issued 223.599 million shares in
1997 and 1996 (including treasury shares of 23.820 million in 1997 and 8.900 million in 1996,
and unallocated shares held by the Employee Stock Ownership Plan ("ESOP") of 2.182 million in
1997 and 2.267 million in 1996).............................................................. 223,599 223,599
Other common shareholders' equity, net......................................................... 2,889,496 3,472,095
------------- ------------
Total shareholders' equity.............................................................. 3,113,095 3,695,694
------------- ------------
Total liabilities and shareholders' equity.............................................. $ 47,590,609 $ 45,494,194
------------- ------------
------------- ------------
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date.
See accompanying notes to the consolidated financial statements.
B-1
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable income......................................................... $760,590 $716,075 $2,221,554 $2,118,771
Tax exempt income...................................................... 5,201 6,009 15,759 19,409
Interest on investment securities:
Taxable income......................................................... 51,890 58,363 157,064 198,952
Tax exempt income...................................................... 3,950 5,855 13,006 17,952
Interest on time deposits in banks....................................... 43,234 33,277 112,619 85,969
Interest on Federal funds sold, securities purchased under agreements to
resell and other....................................................... 8,169 3,504 20,719 21,503
-------- -------- ---------- ----------
Total interest income............................................... 873,034 823,083 2,540,721 2,462,556
-------- -------- ---------- ----------
INTEREST EXPENSE
Interest on deposits..................................................... 229,291 207,391 646,273 629,811
Interest on short-term funds borrowed.................................... 53,586 35,780 132,035 111,379
Interest on long-term debt............................................... 59,663 39,564 171,463 116,969
-------- -------- ---------- ----------
Total interest expense.............................................. 342,540 282,735 949,771 858,159
-------- -------- ---------- ----------
NET INTEREST INCOME................................................. 530,494 540,348 1,590,950 1,604,397
Provision for losses on loans............................................ 50,000 40,000 143,000 188,767
-------- -------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOSSES ON LOANS............. 480,494 500,348 1,447,950 1,415,630
-------- -------- ---------- ----------
NON-INTEREST INCOME
Service charges on deposit accounts...................................... 63,039 57,863 180,958 172,779
Trust income............................................................. 47,453 42,102 137,620 124,877
Fees for international services.......................................... 31,445 27,130 84,194 74,805
Debit and credit card fees............................................... 25,261 22,417 70,729 65,041
Third party processing................................................... 19,389 14,075 58,136 42,543
Income from investment in EPS, Inc....................................... 7,499 7,469 22,109 22,192
Income from trading activities........................................... 9,591 2,763 25,377 15,880
Securities gains......................................................... 5,023 31,135 14,857 55,476
Other operating income................................................... 26,777 31,677 82,872 101,105
-------- -------- ---------- ----------
Total non-interest income........................................... 235,477 236,631 676,852 674,698
-------- -------- ---------- ----------
NON-FINANCIAL EXPENSES
Salaries, wages and benefits............................................. 206,467 204,945 614,201 619,725
Net occupancy............................................................ 36,286 39,856 110,876 120,201
Equipment expenses....................................................... 30,320 29,427 92,717 90,360
Restructuring and merger-related charges................................. -- 12,298 -- 130,100
Other operating expenses................................................. 136,749 145,327 386,906 399,154
-------- -------- ---------- ----------
Total non-financial expenses........................................ 409,822 431,853 1,204,700 1,359,540
-------- -------- ---------- ----------
INCOME BEFORE INCOME TAXES............................................... 306,149 305,126 920,102 730,788
Provision for income taxes............................................... 107,335 108,269 323,449 277,190
-------- -------- ---------- ----------
NET INCOME............................................................... $198,814 $196,857 $ 596,653 $ 453,598
-------- -------- ---------- ----------
-------- -------- ---------- ----------
Average common shares outstanding........................................ 199,817 220,409 205,316 219,802
-------- -------- ---------- ----------
-------- -------- ---------- ----------
PER COMMON SHARE DATA
Net income............................................................... $ 1.00 $ 0.89 $ 2.91 $ 2.06
-------- -------- ---------- ----------
-------- -------- ---------- ----------
Cash dividends declared.................................................. $ 0.47 $ 0.42 $ 1.41 $ 1.26
-------- -------- ---------- ----------
-------- -------- ---------- ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
B-2
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON CAPITAL RETAINED
NINE MONTHS ENDED SEPTEMBER 30, 1996 STOCK SURPLUS EARNINGS
- -------------------------------------------------------------------------------------- -------- ---------- ----------
<S> <C> <C> <C>
Balances at beginning of year......................................................... $230,231 $1,225,167 $2,724,298
Net income............................................................................ 453,598
Net change in unrealized gain on investments available-for-sale, net of tax........... (33,264)
Treasury shares acquired (741 shares).................................................
Treasury shares issued in merger (7,300 shares)....................................... (7,300) (33,288) (192,042)
Repurchase and retirement of common stock (1,340 shares).............................. (1,340) (43,559) (12,804)
Common stock issued under employee benefit plans (1,575 new shares;
928 treasury shares)................................................................ 1,575 55,521 (14,668)
Common stock issued under dividend reinvestment plan (31 new shares)
(347 treasury shares)............................................................... 31 1,727 (68)
ESOP shares committed for release (92 shares)......................................... 1,454
Cash paid for fractional shares issued................................................ (341)
Foreign currency translation adjustments.............................................. 1,037
Common dividends declared............................................................. (272,658)
-------- ---------- ----------
Balances at end of period............................................................. $223,197 $1,207,022 $2,653,088
-------- ---------- ----------
-------- ---------- ----------
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances at beginning of year......................................................... $223,599 $1,234,522 $2,729,310
Net income............................................................................ 596,653
Net change in unrealized gain on investments available-for-sale, net of tax........... 8,406
Treasury shares acquired (17,098 shares)..............................................
Common stock issued under employee benefit plans (1,734 treasury shares).............. 15,510 (49,740)
Common stock issued under dividend reinvestment plan (444 treasury shares)............ 330 (1,058)
ESOP shares committed for release (85 shares)......................................... 2,587
Foreign currency translation adjustments.............................................. (1,194)
Common dividends declared............................................................. (291,802)
-------- ---------- ----------
Balances at end of period............................................................. $223,599 $1,252,949 $2,990,575
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
(continued)
B-3
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED) -- CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNALLOCATED
TREASURY ESOP
NINE MONTHS ENDED SEPTEMBER 30, 1996 STOCK SHARES TOTAL
- ------------------------------------------------------------------------------------ ----------- ---------- ----------
<S> <C> <C> <C>
Balances at beginning of year....................................................... $ (250,465) $(53,666) $3,875,565
Net income.......................................................................... 453,598
Net change in unrealized gain on investments available-for-sale, net of tax......... (33,264)
Treasury shares acquired (741 shares)............................................... (28,294) (28,294)
Treasury shares issued in merger (7,300 shares)..................................... 232,630 --
Repurchase and retirement of common stock (1,340 shares)............................ (57,703)
Common stock issued under employee benefit plans (1,575 new shares;
928 treasury shares).............................................................. 33,079 75,507
Common stock issued under dividend reinvestment plan (31 new shares)
(347 treasury shares)............................................................. 13,050 14,740
ESOP shares committed for release (92 shares)....................................... 2,250 3,704
Cash paid for fractional shares issued.............................................. (341)
Foreign currency translation adjustments............................................ 1,037
Common dividends declared........................................................... (272,658)
----------- ---------- ----------
Balances at end of period........................................................... $ -- $(51,416) $4,031,891
----------- ---------- ----------
----------- ---------- ----------
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances at beginning of year....................................................... $ (437,580) $(54,157) $3,695,694
Net income.......................................................................... 596,653
Net change in unrealized gain on investments available-for-sale, net of tax......... 8,406
Treasury shares acquired (17,098 shares)............................................ (986,575) (986,575)
Common stock issued under employee benefit plans (1,734 treasury shares)............ 98,986 64,756
Common stock issued under dividend reinvestment plan (444 treasury shares).......... 23,277 22,549
ESOP shares committed for release (85 shares)....................................... 2,021 4,608
Foreign currency translation adjustments............................................ (1,194)
Common dividends declared........................................................... (291,802)
----------- ---------- ----------
Balances at end of period........................................................... $(1,301,892) $(52,136) $3,113,095
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See accompanying notes to the consolidated financial statements.
B-4
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................................................... $ 596,653 $ 453,598
Adjustments to reconcile net income to net cash provided by operating activities:
Restructuring and merger-related charges.................................................... -- 130,100
Provision for losses on loans............................................................... 143,000 188,767
Provision for losses and writedowns on OREO................................................. 2,012 2,753
Depreciation and amortization............................................................... 93,459 88,448
Deferred income tax expense (benefit)....................................................... 32,250 (10,525)
Securities gains............................................................................ (14,857) (55,476)
(Increase) decrease in trading account assets............................................... (204,400) 90,418
Increase (decrease) in due to factored clients.............................................. 77,028 (16,292)
(Increase) decrease in interest receivable.................................................. (13,895) 44,813
Increase (decrease) in interest payable..................................................... 8,776 (5,519)
Other, net.................................................................................. 80,356 181,460
------------ ------------
Net Cash Provided by Operating Activities................................................ 800,382 1,092,545
------------ ------------
INVESTING ACTIVITIES
Net increase in loans......................................................................... (2,462,447) (1,895,346)
Proceeds from sales of loans.................................................................. 491,506 843,260
Loans originated or acquired -- non-bank subsidiaries......................................... (27,289,355) (28,572,504)
Principal collected on loans -- non-bank subsidiaries......................................... 26,758,059 28,274,066
Net increase in time deposits, principally Eurodollars........................................ (600,569) (685,213)
Purchases of investments held-to-maturity..................................................... (445,244) (372,596)
Purchases of investments available-for-sale................................................... (549,954) (1,430,753)
Proceeds from maturities of investments held-to-maturity...................................... 739,006 1,164,746
Proceeds from maturities of investments available-for-sale.................................... 678,077 767,581
Proceeds from sales of investments available-for-sale......................................... 89,092 856,474
Net decrease in Federal funds sold and securities purchased under agreements to resell........ 370,995 551,235
Purchases of premises and equipment........................................................... (63,050) (77,435)
Proceeds from sales and paydowns on OREO...................................................... 12,398 26,536
Other, net.................................................................................... 32,187 27,475
------------ ------------
Net Cash Used in Investing Activities.................................................... (2,239,299) (522,474)
------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits........................................................... 13,312 (1,251,670)
Payment for sale of deposits.................................................................. -- (368,110)
Proceeds from issuance of long-term debt...................................................... 1,138,145 533,070
Retirement of long-term debt.................................................................. (402,154) (225,973)
Net increase in short-term funds borrowed..................................................... 1,606,070 325,374
Cash dividends paid........................................................................... (297,510) (236,987)
Purchases of treasury stock................................................................... (986,575) (28,294)
Repurchase and retirement of common stock..................................................... -- (57,703)
Common stock issued under employee benefit plans.............................................. 49,247 48,448
Other, net.................................................................................... 22,549 14,399
------------ ------------
Net Cash Provided by (Used in) Financing Activities...................................... 1,143,084 (1,247,446)
------------ ------------
DECREASE IN CASH AND DUE FROM BANKS...................................................... (295,833) (677,375)
Cash and due from banks at January 1,.................................................... 3,462,287 3,662,143
------------ ------------
Cash and due from banks at September 30,................................................. $ 3,166,454 $ 2,984,768
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest................................................................................. $ 940,995 $ 863,678
------------ ------------
------------ ------------
Income taxes............................................................................. $ 191,007 $ 248,505
------------ ------------
------------ ------------
Net cash received on interest rate swaps...................................................... $ 44,983 $ 46,253
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to the consolidated financial statements.
B-5
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of CoreStates
Financial Corp ("CoreStates") have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (comprising only normal recurring accruals)
necessary for a fair presentation have been included. Certain amounts in prior
periods have been reclassified for comparative purposes. Operating results for
the nine-month period ended September 30, 1997 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1997.
NOTE B -- CHANGE IN ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("FAS 128") was issued in February 1997. FAS 128, which must be adopted on
December 31, 1997, requires entities to change the method currently used to
compute earnings per share and to restate earnings per share for all prior
periods presented. Under FAS 128, primary earnings per share will exclude the
dilutive effect of stock options and fully diluted earnings per share must
include the dilutive effect of stock options even if the dilutive effect is
immaterial. The impact of FAS 128 on the calculation of primary earnings per
share and fully diluted earnings per share is not expected to be material.
NOTE C -- LOAN PORTFOLIO
Loans, net of unearned discounts, consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Domestic:
Commercial, industrial and other............................................................. $ 15,800,229 $ 13,906,646
Real estate:
Construction and development.............................................................. 625,910 554,924
Residential............................................................................... 4,312,171 4,226,980
Other..................................................................................... 4,284,944 4,541,697
------------- -------------
Total real estate....................................................................... 9,223,025 9,323,601
------------- -------------
Consumer:
Installment............................................................................... 3,260,034 3,319,970
Credit card............................................................................... 1,686,941 1,674,921
------------- -------------
Total consumer.......................................................................... 4,946,975 4,994,891
------------- -------------
Financial institutions....................................................................... 1,362,525 1,153,715
Factoring receivables........................................................................ 564,877 411,280
Lease financing.............................................................................. 1,217,578 1,232,213
------------- -------------
Total domestic.......................................................................... 33,115,209 31,022,346
------------- -------------
Foreign........................................................................................ 1,970,076 1,754,686
------------- -------------
Total loans............................................................................. $ 35,085,285 $ 32,777,032
------------- -------------
------------- -------------
</TABLE>
B-6
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
NOTE D -- OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS
In the normal course of business, there are outstanding commitments and
contingent liabilities which are not reflected in the financial statements.
These include various financial instruments with off-balance sheet risk used in
connection with CoreStates' asset and liability management and to provide for
the needs of customers. These involve varying degrees of credit, interest rate
and liquidity risk, but do not represent unusual risks for the Corporation and
management does not anticipate any significant losses as a result of these
transactions.
The following is a summary of contractual or notional amounts of
off-balance sheet commitments and derivative financial instruments (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Standby letters of credit, net of participations............................................... $ 1,889,145 $ 1,630,621
Commercial letters of credit................................................................... 1,503,337 1,262,593
Commitments to extend credit................................................................... 17,250,051 15,396,553
Unused commitments under credit card lines..................................................... 4,493,830 4,173,013
When-issued securities:
Commitments to purchase...................................................................... 15,990 1,770
Commitments to sell.......................................................................... 110,000 75,120
Whole mortgage loans and securities:
Commitments to purchase...................................................................... 17,048 17,280
Commitments to sell.......................................................................... 41,195 7,965
Loans sold with recourse and loan servicing acquired with recourse............................. 316,038 361,410
Interest rate futures contracts:
Commitments to purchase...................................................................... 1,825,900 4,489,800
Commitments to purchase foreign and U. S. currencies........................................... 2,728,984 1,766,122
Interest rate swaps, notional principal amounts................................................ 11,068,963 9,850,708
Interest rate caps and floors:
Written...................................................................................... 1,728,073 908,799
Purchased.................................................................................... 2,802,353 2,039,331
Tender option bonds............................................................................ 471,395 148,711
Treasury float contracts....................................................................... 256,546 270,358
Other derivative financial instruments......................................................... 864,199 597,261
</TABLE>
B-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
CORESTATES FINANCIAL CORP
We have audited the accompanying consolidated balance sheets of CoreStates
Financial Corp as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. 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 did not audit the 1995 or 1994 financial statements of Meridian
Bancorp, Inc. and United Counties Bancorporation, which statements reflect
combined total assets of 35.6% as of December 31, 1995 and combined net interest
income constituting 31.3% and 32.8% of the related consolidated totals for the
years ended December 31, 1995 and 1994, respectively. Those statements were
audited by other auditors whose reports thereon have been furnished to us, and
our opinion, insofar as it relates to data included for Meridian Bancorp, Inc.
and United Counties Bancorporation, is based solely on the reports of 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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of CoreStates Financial Corp at December 31,
1996 and 1995, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
January 22, 1997
B-8
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable income.................................................................... $2,845,898 $2,902,265 $2,484,660
Tax exempt income................................................................. 25,335 30,390 34,023
Interest on investment securities:
Taxable income.................................................................... 254,576 349,138 365,298
Tax exempt income................................................................. 23,190 31,018 38,180
Interest on time deposits in banks.................................................. 122,752 121,993 70,996
Interest on Federal funds sold, securities purchased under agreements to resell and
other............................................................................. 26,453 40,276 21,402
---------- ---------- ----------
Total interest income.......................................................... 3,298,204 3,475,080 3,014,559
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits:
Domestic savings.................................................................. 295,650 396,176 280,532
Domestic time..................................................................... 497,956 492,610 370,373
Overseas branches and subsidiaries................................................ 48,174 52,261 29,602
---------- ---------- ----------
Total interest on deposits..................................................... 841,780 941,047 680,507
Interest on short-term funds borrowed............................................... 153,129 214,119 149,618
Interest on long-term debt.......................................................... 161,811 152,989 116,419
---------- ---------- ----------
Total interest expense......................................................... 1,156,720 1,308,155 946,544
---------- ---------- ----------
Net interest income............................................................... 2,141,484 2,166,925 2,068,015
Provision for losses on loans....................................................... 228,767 144,002 279,195
---------- ---------- ----------
Net interest income after provision for losses on loans........................... 1,912,717 2,022,923 1,788,820
---------- ---------- ----------
NON-INTEREST INCOME
Service charges on deposit accounts................................................. 243,696 244,439 239,811
Trust income........................................................................ 167,138 162,776 153,214
Fees for international services..................................................... 101,761 94,396 87,364
Debit and credit card fees.......................................................... 74,707 83,812 80,482
Income from investment in EPS, Inc.................................................. 29,902 30,114 31,800
Income from trading activities...................................................... 25,216 35,403 23,360
Securities gains.................................................................... 59,512 31,475 18,283
Other gains......................................................................... 8,200 26,400 --
Other operating income.............................................................. 188,943 173,407 154,173
---------- ---------- ----------
Total non-interest income...................................................... 899,075 882,222 788,487
---------- ---------- ----------
NON-FINANCIAL EXPENSES
Salaries, wages and benefits........................................................ 826,442 904,377 947,903
Net occupancy....................................................................... 157,358 159,530 162,003
Equipment expenses.................................................................. 120,602 118,532 117,659
Restructuring and merger-related charges............................................ 139,702 138,600 107,119
Other operating expenses............................................................ 532,724 564,489 583,558
---------- ---------- ----------
Total non-financial expenses................................................... 1,776,828 1,885,528 1,918,242
---------- ---------- ----------
INCOME BEFORE INCOME TAXES.......................................................... 1,034,964 1,019,617 659,065
Provision for income taxes.......................................................... 385,820 364,441 225,859
---------- ---------- ----------
NET INCOME.......................................................................... $ 649,144 $ 655,176 $ 433,206
---------- ---------- ----------
---------- ---------- ----------
PER COMMON SHARE DATA (Based on weighted average shares outstanding
of 218.812 million in 1996, 222.268 million in 1995 and 226.234 million
in 1994)
Net income.......................................................................... $ 2.97 $ 2.95 $ 1.91
---------- ---------- ----------
---------- ---------- ----------
Cash dividends declared............................................................. $ 1.73 $ 1.44 $ 1.24
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(continued)
B-9
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks........................................................................ $ 3,462,287 $ 3,662,143
Time deposits, principally Eurodollars......................................................... 2,443,154 1,909,260
Federal funds sold and securities purchased under agreements to resell......................... 509,694 719,937
Trading account assets......................................................................... 122,317 147,218
Investment securities available-for-sale....................................................... 2,394,166 2,572,315
Investment securities held-to-maturity (market value: 1996 -- $1,692,243; 1995 --
$3,075,964).................................................................................. 1,689,058 3,059,917
Total loans, net of unearned discounts of $204,521 in 1996 and $232,077 in 1995................ 32,777,032 31,714,152
Less: Allowance for loan losses.............................................................. (710,327) (670,265)
----------- -----------
Net loans................................................................................. 32,066,705 31,043,887
----------- -----------
Due from customers on acceptances.............................................................. 738,077 560,707
Premises and equipment......................................................................... 625,876 664,279
Other assets................................................................................... 1,442,860 1,657,579
----------- -----------
Total assets.............................................................................. $45,494,194 $45,997,242
----------- -----------
----------- -----------
LIABILITIES
Deposits:
Domestic:
Non-interest bearing.................................................................... $ 9,330,445 $ 8,937,147
Interest bearing........................................................................ 22,986,955 23,883,726
Overseas branches and subsidiaries........................................................ 1,409,756 1,142,947
----------- -----------
Total deposits............................................................................ 33,727,156 33,963,820
----------- -----------
Short-term funds borrowed...................................................................... 2,633,157 3,677,013
Bank acceptances outstanding................................................................... 727,728 549,048
Other liabilities.............................................................................. 1,661,162 1,719,697
Long-term debt................................................................................. 3,049,297 2,212,099
----------- -----------
Total liabilities......................................................................... 41,798,500 42,121,677
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Preferred stock: authorized 10.0 million shares; no shares issued.............................. -- --
Common stock: $1 par value; authorized 350.0 million shares; issued 223.6 million shares in
1996 and 230.2 million shares in 1995 (including treasury shares of 8.9 million in 1996 and
7.8 million in 1995, and unallocated shares held by Employee Stock Ownership Plan ("ESOP") of
2.3 million in 1996 and 2.3 million in 1995)................................................. 223,599 230,231
Other common shareholders' equity, net......................................................... 3,472,095 3,645,334
----------- -----------
Total shareholders' equity................................................................ 3,695,694 3,875,565
----------- -----------
Total liabilities and shareholders' equity................................................ $45,494,194 $45,997,242
----------- -----------
----------- -----------
</TABLE>
(continued)
B-10
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARES AMOUNT)
<TABLE>
<CAPTION>
COMMON CAPITAL RETAINED TREASURY UNALLOCATED
STOCK SURPLUS EARNINGS STOCK ESOP SHARES TOTAL
-------- ---------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993............... $230,050 $1,194,872 $2,287,406 $ (7,819) $3,704,509
Net income.................................. 433,206 433,206
Net change in unrealized gain on investments
available-for-sale,
net of tax................................ (66,095) (66,095)
Acquisition of Germantown Savings Bank
(5,880 treasury shares)................... (8,605) 156,361 147,756
Stock issued in other acquisitions (190 new
shares)................................... 190 6,782 6,972
Treasury shares acquired (8,598 shares)..... (228,963) (228,963)
Repurchase and retirement of common stock
(1,016 shares)............................ (1,016) (6,646) (17,226) (24,888)
Common stock issued under employee benefit
plans (567 new shares; 688 treasury
shares)................................... 567 6,097 (6,410) 18,456 18,710
Common stock issued under dividend
reinvestment plan (450 treasury shares)... (447) (483) 12,306 11,376
Purchase of shares for Employee Stock
Ownership Plan (1,574 shares)............. $ (35,568) (35,568)
Conversion of subordinated debt (36 new
shares; 909 treasury shares).............. 36 (2,001) 25,362 23,397
Cash paid for fractional shares............. (83) (83)
Foreign currency translation adjustments.... 52 52
Common dividends declared................... (259,449) (259,449)
-------- ---------- ---------- --------- ----------- ----------
Balances at December 31, 1994............... 229,827 1,200,658 2,360,312 (24,297) (35,568) 3,730,932
Net income.................................. 655,176 655,176
Net change in unrealized gain on investments
available-for-sale, net of tax............ 41,187 41,187
Treasury shares acquired (10,307 shares).... (335,528) (335,528)
Repurchase and retirement of common stock
(595 shares).............................. (595) (4,093) (12,446) (17,134)
Common stock issued under employee benefit
plans (1,002 new shares; 3,089 treasury
shares)................................... 999 26,825 (25,483) 96,670 99,011
Common stock issued under dividend
reinvestment plan (417 treasury shares)... (9) (2) 12,690 12,679
Purchase of shares for Employee Stock
Ownership Plan (876 shares)............... (20,922) (20,922)
Employee Stock Ownership Plan shares
committed for release (123 shares)........ 1,786 2,824 4,610
Cash paid for fractional shares............. (24) (24)
Foreign currency translation adjustments.... (29) (29)
Common dividends declared................... (294,393) (294,393)
-------- ---------- ---------- --------- ----------- ----------
Balances at December 31, 1995............... 230,231 1,225,167 2,724,298 (250,465) (53,666) 3,875,565
</TABLE>
(continued)
B-11
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY -- CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON CAPITAL RETAINED TREASURY UNALLOCATED
STOCK SURPLUS EARNINGS STOCK ESOP SHARES TOTAL
-------- ---------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income.................................. $ 649,144 $ 649,144
Net change in unrealized gain on investments
available-for-sale,
net of tax................................ (25,070) (25,070)
Treasury shares acquired (11,055 shares).... $(533,932) (533,932)
Treasury shares issued in merger
(7,300 shares)............................ $ (7,300) $ (33,288) (192,042) 232,630 --
Repurchase and retirement of common stock
(1,340 shares)............................ (1,340) (43,559) (12,804) (57,703)
Common stock issued under employee benefit
plans (1,824 new shares; 2,330 treasury
shares)................................... 1,824 75,618 (48,119) 100,826 130,149
Common stock issued under dividend
reinvestment plan (184 new shares; 353
treasury shares).......................... 184 8,225 (68) 13,361 21,702
Purchase of shares for Employee Stock
Ownership Plan (65 shares)................ (38) $ (3,509) (3,547)
Employee stock ownership plan shares
committed for release (126 shares)........ 2,397 3,018 5,415
Cash paid for fractional shares............. (342) (342)
Foreign currency translation adjustments.... 5,448 5,448
Common dividends declared................... (371,135) (371,135)
-------- ---------- ---------- --------- ----------- ----------
Balances at December 31, 1996............... $223,599 $1,234,522 $2,729,310 $(437,580) $ (54,157) $3,695,694
-------- ---------- ---------- --------- ----------- ----------
-------- ---------- ---------- --------- ----------- ----------
</TABLE>
See accompanying notes to the financial statements.
B-12
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................................... $ 649,144 $ 655,176 $ 433,206
Adjustments to reconcile net income to net cash provided by operating
activities:
Restructuring and merger-related charges.................................... 139,702 138,600 107,119
Provision for losses on loans............................................... 228,767 144,002 279,195
Provision for losses and writedowns on other real estate owned.............. 3,387 15,971 14,596
Depreciation and amortization............................................... 110,512 122,996 139,305
Deferred income tax expense................................................. 9,156 28,420 41,847
Securities gains............................................................ (59,512) (31,475) (18,283)
Gains on sale of mortgage servicing......................................... -- (2,387) (867)
Other gains................................................................. (8,200) (26,400) --
(Increase) decrease in trading account assets............................... 24,901 200,833 (18,392)
Increase (decrease) in due to factored clients.............................. 1,805 (86,921) 41,262
(Increase) decrease in interest receivable.................................. 45,046 2,009 (33,548)
Increase in interest payable................................................ 10,163 45,044 26,026
Other, net.................................................................. 115,877 (117,411) (102,895)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................................... 1,270,748 1,088,457 908,571
------------ ------------ ------------
INVESTING ACTIVITIES
Net increase in loans......................................................... (2,896,402) (1,832,179) (1,310,777)
Proceeds from sales of loans.................................................. 1,577,270 1,087,732 1,130,918
Loans originated or acquired -- non-bank subsidiaries......................... (39,054,032) (35,767,440) (33,760,035)
Principal collected on loans -- non-bank subsidiaries......................... 39,039,627 35,407,667 33,399,764
Net increase in time deposits, principally Eurodollars........................ (533,894) (33,172) (452,747)
Purchases of investments held-to-maturity..................................... (490,995) (686,652) (2,386,505)
Purchases of investments available-for-sale................................... (2,062,012) (589,327) (711,227)
Proceeds from maturities of investments held-to-maturity...................... 1,524,670 2,175,780 2,911,632
Proceeds from maturities of investments available-for-sale.................... 854,898 161,477 386,142
Proceeds from sales of investments available-for-sale......................... 1,500,504 546,728 767,453
Net (increase) decrease in Federal funds sold and securities purchased under
agreements to resell........................................................ 210,243 203,693 (646,409)
Purchases of premises and equipment........................................... (101,469) (125,216) (147,308)
Proceeds from sales and paydowns on other real estate owned................... 31,465 66,834 78,057
Purchase of Germantown Savings Bank, net of cash acquired..................... -- -- (74,053)
Net cash provided by other acquisitions....................................... -- -- 379,318
Other, net.................................................................... 141,063 11,303 39,357
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES........................... (259,064) 627,228 (396,420)
------------ ------------ ------------
</TABLE>
(continued)
B-13
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS -- CONTINUED
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in deposits........................................... $ 172,155 $ (660,745) $ (1,013,622)
Payment for sales of deposits................................................. (368,110) (154,360) --
Proceeds from issuance of long-term debt...................................... 1,340,099 582,251 480,433
Retirement of long-term debt.................................................. (501,165) (533,480) (306,452)
Net increase (decrease) in short-term funds borrowed.......................... (1,043,856) 215,764 694,499
Cash dividends paid........................................................... (328,114) (286,565) (245,962)
Purchases of treasury stock................................................... (533,932) (335,528) (228,963)
Purchases of ESOP shares...................................................... -- -- (35,568)
Funds transferred to Trust for future ESOP purchases.......................... -- -- (24,432)
Repurchase and retirement of common stock..................................... (57,703) (17,134) (24,888)
Common stock issued under employee benefit plans.............................. 87,726 99,011 18,710
Other, net.................................................................... 21,360 12,655 11,293
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES......................................... (1,211,540) (1,078,131) (674,952)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS................................ (199,856) 637,554 (162,801)
Cash and due from banks at January 1,......................................... 3,662,143 3,024,589 3,187,390
------------ ------------ ------------
CASH AND DUE FROM BANKS AT DECEMBER 31,....................................... $ 3,462,287 $ 3,662,143 $ 3,024,589
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.................................................................... $ 1,146,557 $ 1,263,681 $ 918,503
------------ ------------ ------------
------------ ------------ ------------
Income taxes................................................................ $ 331,940 $ 284,987 $ 189,918
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to the financial statements.
B-14
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of CoreStates
Financial Corp ("the Corporation") and all of its subsidiaries, including:
CoreStates Bank, N.A. ("CBNA"); CoreStates Bank of Delaware, N.A. ("CBD");
Congress Financial Corporation; and CoreStates Capital Corp ("CSCC"). All
material intercompany transactions have been eliminated. The financial
statements include the consolidated accounts of Meridian Bancorp, Inc.
("Meridian") which was acquired on April 9, 1996 in a transaction accounted for
under the pooling of interests method of accounting. On February 23, 1996,
Meridian acquired United Counties Bancorporation ("United Counties") in a
transaction accounted for as a pooling of interests. The consolidated accounts
of Meridian include United Counties for all periods presented. Certain amounts
in prior years have been reclassified for comparative purposes.
The Corporation is a bank holding company incorporated under the laws of
the Commonwealth of Pennsylvania, primarily operating in the eastern
Pennsylvania, northern Delaware and the central and southern New Jersey markets.
Through its subsidiaries, the Corporation is engaged in the business of
providing global and specialized banking (including international banking
services), regional banking, retail credit services, trust and asset management
and third party processing services to a diversified customer base.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CHANGES IN ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123") was issued in October 1995 to establish
accounting and reporting standards for stock-based employee compensation plans
such as stock option and restricted stock plans ("stock-based plans"). FAS 123
defines a fair value method of accounting for measuring compensation expense for
stock-based plans and encourages all entities to adopt that method of
accounting. However, FAS 123 also permits entities to continue to measure
compensation expense for stock-based plans using the intrinsic value method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the fair value method, compensation expense would be measured as the
value of an award under a stock-based plan on the date the award is granted, and
would be recognized over the vesting period of the award. Under the intrinsic
value method, compensation expense is measured as the excess, if any, of the
market price of the stock underlying the award on the date the award is granted,
over the exercise price. Under the Corporation's stock-based long-term incentive
plan, awards have no intrinsic value on the date of grant as the exercise price
equals the market price on that date. The Corporation did not adopt the fair
value method of accounting for stock-based plans, and will continue to use the
intrinsic value method to measure compensation expense.
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("FAS 114") and Statement No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures" ("FAS 118"). FAS 114 addresses
accounting for impairment of certain loans and requires that impaired loans
within the scope of FAS 114 be measured based on the present value of expected
cash flows discounted at the loan's effective interest rate, or be measured at
the loan's observable market price or the fair value of its collateral. FAS 118
amended the income recognition policies and clarified disclosure requirements of
FAS 114. The adoption of these standards did not have an impact on CoreStates'
provision for loan losses or allowance for loan losses, nor change CoreStates'
methodology for recognizing income on impaired loans.
INCOME TAXES
Under the asset and liability method used by the Corporation to provide for
income taxes, deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
B-15
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
The Corporation and its subsidiaries file a consolidated Federal income tax
return.
INVESTMENTS
Held-to-maturity securities, consisting primarily of debt securities, are
carried at cost adjusted for amortization of premiums and accretion of
discounts, both computed on the interest method. The Corporation has both the
ability and positive intent to hold these securities until maturity. Trading
account assets are carried at market value. Gains on trading account assets
include both realized and unrealized gains and losses on the portfolio. All
other securities are classified as available-for-sale and are carried at fair
value, with unrealized gains and losses, net of tax, reported as a component of
shareholders' equity. The net unrealized gain on available-for-sale securities
included in retained earnings was $26,555 at December 31, 1996 and $51,625 at
December 31, 1995. Realized securities gains and losses are determined using the
adjusted cost of a specific security sold.
Interest and dividends on investment securities are recognized as income
when earned.
LOANS
Interest on commercial loans is recognized on the daily principal amounts
outstanding. Loan fees are generally considered adjustments of interest rate
yields and are amortized into interest income on loans over the terms of the
related loans. Interest on installment loans is principally recognized on the
interest method.
Commercial loans are placed on a non-accrual status, generally recognizing
interest as income when received, when, in the opinion of management, the
collectability of principal or interest payments becomes doubtful or when such
payments are 90 days or more past due, unless the loan is well secured and in
the process of collection. The deferral or non-recognition of interest does not
constitute forgiveness of the borrower's obligation.
Consumer loans, excluding residential mortgage loans and credit card loans,
are charged off after reaching 90 days past due. Residential mortgage loans are
placed on non-accrual status after reaching 120 days past due and are written
down to the fair value of underlying collateral at that time. Credit card loans
are charged off after reaching 150 days past due. Prior to the second quarter of
1996, credit card loans were charged off after reaching 180 days past due.
OTHER REAL ESTATE OWNED
When a property is acquired through foreclosure of a loan secured by real
estate, that property is recorded at the lower of the cost basis in the loan or
the estimated fair value of the property less estimated disposal costs.
Writedowns at the time of foreclosure are charged against the allowance for loan
losses. Subsequent writedowns for changes in the fair value of the property are
charged to other non-financial expense.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Factors included in
management's determination of an adequate level of allowance for loan losses are
a statistical analysis of historical loss levels throughout an economic cycle
and one year of projected charge-offs, establishing a minimum level below which
the allowance for loan losses is considered inadequate and a maximum level above
which is considered inappropriate. A quarterly evaluation of loss potential on
specific credits, products, industries, portfolios and markets, as well as
indicators for loan growth, the economic environment and concentrations assist
in validating the position of the allowance for loan losses within those
boundaries. This evaluation is inherently subjective as it requires material
estimates that may be susceptible to significant change.
The Corporation adopted FAS 114 effective January 1, 1995. Under FAS 114,
the allowance for loan losses related to "impaired loans" is based on discounted
cash flows using the impaired loan's initial effective interest rate as the
discount rate, or the fair value of the collateral for collateral dependent
loans. A loan is impaired when it meets the criteria to be placed on non-accrual
status or is a renegotiated loan. Loans which are evaluated for impairment
pursuant to FAS 114 are assessed on a loan-by-loan basis, and include only
commercial non-accrual and renegotiated loans. Large groups of smaller balance
B-16
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
homogeneous loans, such as credit cards, lease financing receivables, loans
secured by first and second liens on residential properties, and other consumer
loans are evaluated collectively for impairment.
Additions to the allowance arise from the provision for loan losses charged
to operations or from the recovery of amounts previously charged off. Loan
charge-offs reduce the allowance. Loans are charged off when there has been
permanent impairment of the related carrying values.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. The provision for depreciation and amortization is computed,
generally, on the straight-line method at rates based on the following range of
lives: buildings -- 10 to 45 years; equipment -- 3 to 12 years; and leasehold
improvements -- 3 to 15 years.
RETIREMENT PLANS
The Corporation maintains non-contributory defined benefit pension plans
for substantially all employees. Benefits are primarily based on the employee's
years of credited service, average annual salary and primary social security
benefit, as defined in the plans. It is the Corporation's policy to fund the
plans on a current basis to the extent deductible under existing tax
regulations.
The Corporation provides postretirement health care and life insurance
benefits for substantially all retired employees. In order to participate in the
health care plan, an employee must retire with at least 10 years of service. The
postretirement health care plan is contributory, with retiree contributions
based on years of service. It is the Corporation's policy to fund these plans on
a current basis to the extent deductible under existing tax regulations.
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
Compensation expense was recognized based on the average fair value of
shares committed to be released to employees. Effective January 1, 1997, the
ESOP was combined with the Corporation's 401(k) Savings Plan. The remaining
shares in the ESOP will be released to substantially all employees and will be
recorded as a portion of the Corporation's match of employee contributions to
the 401(k) Savings Plan.
FOREIGN EXCHANGE/CURRENCY
Forward exchange contracts are valued at current rates of exchange. Gains
or losses on forward exchange contracts intended to hedge an identifiable
foreign currency commitment, if any, are deferred and included in the
measurement of the related foreign currency transaction. All other gains or
losses on forward exchange contracts are included in fees for international
services.
Currency gains and losses in connection with non-dollar denominated loans
and deposits, which are included in interest income and expenses, are recognized
pro rata over the contract terms. Foreign currency translation adjustments are
recorded directly to retained earnings. The cumulative foreign currency
translation gain (loss) was $3,848, $(1,600) and $(1,571) at December 31, 1996,
1995 and 1994, respectively.
DERIVATIVE INTEREST RATE CONTRACTS
The Corporation uses various interest rate contracts such as, interest rate
swaps, futures, forward rate agreements, caps and floors, tender option bonds,
Treasury float agreements, and forward commitments to purchase and sell loans
and securities, primarily to manage the interest rate risk of specific assets,
liabilities or anticipated transactions, to manage interest rate risk in
securities trading positions and to provide for the needs of its customers. For
contracts held for purposes other than trading, gains or losses are deferred and
recognized as adjustments to interest income or expense of the underlying assets
or liabilities and the interest differentials are recognized as adjustments of
the related interest income or expense. Gains or losses resulting from early
terminations of these contracts are deferred and amortized over the remaining
term of the underlying assets or liabilities. Any fees received or disbursed
which represent adjustments to the yield on interest rate contracts are
B-17
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
capitalized and amortized over the term of the interest rate contracts. If the
underlying assets or liabilities related to a derivative matures, is sold,
extinguished, or terminates, the amount of the previously unrecognized gain or
loss is recognized at that time in the consolidated income statement.
The Corporation's trading and customer-related derivative positions mostly
include tender option bonds, Treasury float agreements, and forward commitments
to purchase and sell loans and securities, and interest rate caps, floors, and
swaps. Tender option bonds represent a contingent liability to purchase
securities. Gains and losses and net interest spread earned on these products
are included in non-interest income. Treasury float agreements represent
purchased option contracts. Forward commitments to purchase and sell loans and
securities consist primarily of forward commitments to sell mortgage-backed
securities, which are used to hedge mortgage loans held in the trading account.
These commitments are marked to fair value with unrealized gains and losses
recorded in income from trading activities. Contracts held or issued for
customers are valued at market with gains or losses included in income from
trading activities.
EARNINGS PER COMMON SHARE
Earnings per common share for all periods presented are based on weighted
average common shares outstanding as dilution from potentially dilutive common
stock equivalents (primarily stock options) does not have a materially dilutive
effect on earnings per share. For purposes of computing earnings per share,
shares committed to be released and shares allocated in the ESOP are considered
outstanding.
TREASURY STOCK
The purchase of the Corporation's common stock is recorded at cost. At the
date of subsequent reissuance, the treasury stock account is reduced by the cost
of shares reissued on a last-in-first-out basis.
CASH DIVIDENDS DECLARED PER SHARE
Cash dividends declared per share for the periods prior to the acquisitions
of Meridian on April 9, 1996, Independence Bancorp, Inc. on June 27, 1994 and
Constellation Bancorp on March 16, 1994 assume that the Corporation would have
declared cash dividends equal to the cash dividends per share actually declared
by the Corporation.
2. ACQUISITIONS
PURCHASE ACQUISITION
On December 2, 1994, the Corporation purchased Germantown Savings Bank
("Germantown"), a Pennsylvania chartered stock savings bank with $1.6 billion in
assets and $1.4 billion in deposits at the time of the acquisition. Under the
terms of the transaction, each of Germantown's 4.15 million shares of common
stock was exchanged for a combination of the Corporation's common stock, equal
to approximately 55% of the $62 per Germantown share purchase price, and cash,
equal to approximately 45% of the purchase price. As a result of this
acquisition, 5.9 million shares of the Corporation's common stock were issued
out of treasury stock. The transaction had a total value of approximately $260
million and was accounted for under the purchase method of accounting.
Accordingly, the results of operations of Germantown have been included since
the date of acquisition. Under this method of accounting, the purchase price is
allocated to the respective assets acquired and liabilities assumed based on
their estimated fair values, net of applicable income tax effects. Intangible
assets of $183 million, including $140 million of goodwill, were created in this
transaction. Goodwill is being amortized to other operating expense on a
straight-line basis over 15 years.
A summary of unaudited pro forma combined financial information for the
year ended December 31, 1994 for the Corporation and Germantown as if the
transaction had occurred on January 1, 1994 is as follows:
<TABLE>
<S> <C>
Net interest income............................................. $2,135,969
Non-interest income............................................. 797,961
Net income...................................................... 451,063
Per common share................................................ $1.94
Average common shares outstanding............................... 232,180
</TABLE>
B-18
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
2. ACQUISITIONS -- Continued
POOLING ACQUISITION
On April 9, 1996, the Corporation acquired Meridian, a Pennsylvania bank
holding company with $15.2 billion in assets and $12.1 billion in deposits. The
Corporation issued approximately 81.1 million shares of common stock to
shareholders of Meridian based on an exchange ratio of 1.225 shares of the
Corporation's common stock for each share of Meridian common stock. At a
February 6, 1996 shareholders' meeting, the Corporation's shareholders approved
an increase in the number of authorized shares from 200 million to 350 million.
On February 23, 1996, Meridian acquired United Counties, a New Jersey bank
holding company with $1.6 billion in assets in a transaction accounted for as a
pooling of interests. Accordingly, the consolidated accounts of Meridian include
United Counties for all periods presented.
The Meridian acquisition was accounted for under the pooling of interests
method of accounting; accordingly, the consolidated financial statements include
the consolidated accounts of Meridian for all periods presented. Financial
information on a separate company basis for the two years ended December 31,
1995 for the Corporation and Meridian (including United Counties) was as
follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------- --------------------------
THE (UNAUDITED) THE (UNAUDITED)
CORPORATION MERIDIAN CORPORATION MERIDIAN
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net interest income..................................................$ 1,488,534 $ 678,391 $ 1,389,369 $ 678,646
Provision for losses on loans........................................ 105,000 38,877 246,900 27,261
Non-interest income.................................................. 605,666 276,556 562,264 226,223
Non-financial expenses............................................... 1,274,398 612,695 1,317,561 608,736
Provision for income taxes........................................... 262,565 101,372 141,810 82,992
Income before cumulative effect of a change in accounting principle.. 452,237 202,003 245,362 185,880
Cumulative effect of a change in accounting principle................ -- -- (2,730)(a)
Net income........................................................... 452,237 202,003 245,362 183,150
Income per share before cumulative effect of a change in accounting
principle..........................................................$ 3.22 $ 3.03 $ 1.73 $ 2.72
Net income per share................................................. 3.22 3.03 1.73 2.68
Cash dividends declared.............................................. 1.44 1.45 1.24 1.34
</TABLE>
- ---------------
(a) Meridian adopted FAS 112 on January 1, 1994, the date required under that
statement, and recognized a charge of $4,200, $2,730 after-tax, as the
cumulative effect of a change in accounting principle. CoreStates adopted
FAS 112 on January 1, 1993. As permitted under pooling of interests
accounting, the restated consolidated financial statements are prepared as
if Meridian also adopted FAS 112 effective January 1, 1993.
The restated consolidated statements of income for 1995 and 1994 reflect a
conforming accounting adjustment for Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions"
("FAS 106"). The Corporation elected to recognize immediately the January 1,
1992 transitional liability of $128,706 pre-tax, $84,946 after-tax, as the
cumulative effect of a change in accounting principle in the first quarter of
1992. Meridian adopted FAS 106 on January 1, 1993, the date required under that
statement. As permitted by FAS 106, Meridian elected to amortize its liability
over 20 years. As permitted under pooling of interests accounting, the restated
financial information is prepared as if Meridian adopted FAS 106 effective
January 1, 1992 and immediately recognized the $28,827, $18,738 after-tax,
transitional liability. Restated salaries, wages and benefits have been adjusted
accordingly.
3. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" ("FAS 107"), requires disclosure of fair
value information about financial instruments, whether or not required to be
recognized in the balance sheet, for which it is practicable to estimate that
value. FAS 107 defines a financial instrument as cash, evidence of ownership
interest in an entity, or a contractual obligation or right that will be settled
with another financial instrument.
B-19
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
3. FAIR VALUES OF FINANCIAL INSTRUMENTS -- Continued
In cases where quoted market prices are not available, fair values are
based on estimates using discounted cash flow or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Fair value estimates
derived through those techniques cannot 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 nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Corporation.
The following table summarizes the carrying amount and fair value estimates
of financial instruments at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
CARRYING CARRYING
OR NOTIONAL FAIR OR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Cash and short-term assets...................................... $ 6,415,135 $ 6,415,135 $ 6,291,340 $ 6,291,340
Investment securities........................................... 4,083,224 4,086,409 5,632,232 5,648,279
Trading account assets.......................................... 122,317 122,317 147,218 147,218
Net loans, excluding leases..................................... 30,834,492 30,837,703 29,876,531 30,293,254
Liabilities:
Demand and savings deposits..................................... 22,629,513 22,629,513 23,063,053 23,063,053
Time deposits, including overseas branches and subsidiaries..... 11,097,643 11,321,471 10,900,767 11,065,260
Short-term borrowings........................................... 2,633,157 2,633,157 3,677,013 3,677,013
Long-term debt.................................................. 3,049,297 3,059,173 2,212,099 2,266,725
Off-balance sheet asset (liability):
Letters of credit............................................... 2,893,214 (28,931) 2,873,265 (27,659)
Commitments to extend credit.................................... 19,569,566 (21,204) 18,438,277 (16,135)
Mortgage loans sold and loan servicing acquired with recourse... 361,410 (9,637) 434,628 (12,260)
Derivative financial instruments................................ 20,173,225 96,629 16,091,322 237,649
</TABLE>
Fair value estimates, methods, and assumptions for the Corporation's
financial instruments are set forth below:
CASH AND DUE FROM BANKS AND SHORT-TERM INSTRUMENTS -- The carrying amounts
reported in the balance sheet for cash and due from banks and short-term
instruments approximate their fair values. Short-term instruments include: time
deposits; Federal funds sold; and securities purchased under agreements to
resell, all of which generally have original maturities of less than 90 days.
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.
TRADING ACCOUNT ASSETS -- Fair values for the Corporation's trading account
assets, which also are the amounts recognized in the balance sheet, 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 or are
derived from pricing models or formulas using discounted cash flows.
LOANS -- Fair values are estimated for loans in groups with similar
financial and risk characteristics. Loans are segregated by type including:
commercial and industrial; commercial real estate; residential real estate;
credit card and other consumer; financial institutions; factoring receivables;
and foreign. Each loan type is further segmented into fixed and variable rate
interest terms and by performing and non-performing categories in order to
estimate fair values.
The fair value of fixed-rate performing loans is calculated by discounting
scheduled principal and interest cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate risk
inherent in the loan type at December 31, 1996 and 1995. The estimate of
maturity is based on the Corporation's historical experience
B-20
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
3. FAIR VALUES OF FINANCIAL INSTRUMENTS -- Continued
with repayments for each loan type, modified by an estimate of the effect of
current economic and lending conditions. For performing residential mortgage
loans, fair value is estimated by referring to secondary market source pricing.
For credit card loans, cash flows and maturities are estimated based on
contractual interest rates and historical experience and are discounted using
secondary market rates adjusted for differences in servicing and credit costs.
This estimate does not include the benefit that relates to cash flows which
could generate from new loans to existing cardholders over the remaining life of
the portfolio.
For variable rate loans that reprice frequently and which have experienced
no significant change in credit risk, fair values are based on carrying amounts.
Fair value for non-performing loans is based on discounting estimated cash
flows using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding cash flows and discount rates are determined using
available market information and specific borrower information.
DEPOSIT LIABILITIES -- The fair values disclosed for demand deposits
(non-interest bearing checking accounts, NOW accounts, savings accounts, and
money market accounts) are, by FAS 107 definition, equal to the amount payable
on demand at the reporting date (i.e., their carrying amounts). The carrying
amounts for variable-rate, fixed-term certificates of deposit approximate their
fair values. Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates offered on
certificates at December 31, 1996 and 1995, respectively, to an estimate of
aggregate expected maturities for those certificates of deposit.
The estimated fair values do not include the benefit that results from
funding provided by core deposit liabilities as compared to the cost of
borrowing funds in the financial markets.
SHORT-TERM FUNDS BORROWED -- The carrying amounts of Federal funds
purchased, securities sold under agreements to repurchase, commercial paper and
other short-term borrowings approximate their fair values.
LONG-TERM DEBT -- The fair values for long-term debt are based on quoted
market prices where available. If quoted market prices are not available, fair
values are estimated using discounted cash flow analyses based on the
Corporation's borrowing rates at December 31, 1996 and 1995 for comparable types
of borrowing arrangements.
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS AND COMMITMENTS -- Fair
values for the Corporation's futures, forwards, interest rate swaps, options,
interest rate caps and floors, foreign exchange contracts, tender option bonds
and Treasury float contracts are based on quoted market prices (futures);
current settlement values (forwards); quoted market prices of comparable
instruments (foreign currency exchange contracts); or, if there are no directly
comparable instruments, on pricing models or formulas using current assumptions
(interest rate swaps, interest rate caps and floors, tender option bonds,
Treasury float contracts and options). The fair value of commitments to extend
credit, other than credit card lines, is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present credit worthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The value of
commitments to extend credit under credit card lines is embodied in the benefit
that relates to estimated cash flows from new loans expected to be generated
from existing cardholders over the remaining life of the portfolio.
The fair value of standby and commercial letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
the agreements or otherwise settle the obligations with the counterparties.
B-21
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
4. LOAN PORTFOLIO
The following are summaries of certain loan categories, net of unearned
discounts, for the two years ended December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Domestic loans:
Commercial, industrial and other......................... $13,906,646 $12,597,470
Real estate loans:
Construction and development.......................... 554,924 607,845
Residential........................................... 4,676,016 5,648,661
Other, primarily commercial mortgages and commercial
loans secured by owner-occupied real estate......... 4,541,697 4,712,473
----------- -----------
Total real estate loans............................. 9,772,637 10,968,979
----------- -----------
Consumer loans:
Installment.............................................. 2,870,934 2,912,670
Credit card.............................................. 1,674,921 1,527,447
----------- -----------
Total consumer loans................................ 4,545,855 4,440,117
----------- -----------
Financial institutions..................................... 1,153,715 961,289
Factoring receivables...................................... 411,280 557,272
Lease financing............................................ 1,232,213 1,167,356
----------- -----------
Total domestic loans................................ 31,022,346 30,692,483
----------- -----------
----------- -----------
Foreign loans:
Loans to or guaranteed by foreign banks:
Government owned and central banks.................... -- --
Other foreign banks................................... 1,369,015 615,166
Commercial and industrial................................ 385,426 406,503
Loans to other financial institutions.................... 245 --
----------- -----------
Total foreign loans................................. 1,754,686 1,021,669
----------- -----------
Total loans......................................... $32,777,032 $31,714,152
----------- -----------
----------- -----------
</TABLE>
The following represents the Corporation's non-accrual loans, renegotiated
loans and other real estate owned for the years ended December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Non-accrual loans
Domestic........................................................ $220,770 $223,602
Foreign......................................................... -- --
Total non-accrual loans...................................... 220,770 223,602
Renegotiated loans (a)............................................ 18 7,202
-------- --------
Total non-performing loans................................... 220,788 230,804
-------- --------
Other real estate owned (OREO).................................... 24,175 37,502
-------- --------
Total non-performing assets....................................... $244,963 $268,306
-------- --------
-------- --------
</TABLE>
- ---------------
(a) There were no foreign renegotiated loans in any periods presented.
B-22
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
4. LOAN PORTFOLIO -- Continued
The following reflects the effect of non-accrual and renegotiated loans on
both interest income and net interest income for the three years ended December
31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Interest income which would have been recorded in
accordance with original terms:
Domestic............................................... $20,244 $27,452 $35,554
Foreign................................................ -- 8 9
------- ------- -------
Total............................................... 20,244 27,460 35,563
------- ------- -------
Interest income reflected in total operating income:
Domestic............................................... 8,977 14,354 12,599
------- ------- -------
Total............................................... 8,977 14,354 12,599
------- ------- -------
Net reduction in interest income and net interest
income................................................. $11,267 $13,106 $22,964
------- ------- -------
------- ------- -------
</TABLE>
The Corporation has traditionally maintained limits on industry, market and
borrower concentrations as a way to diversify and manage credit risk. The
Corporation's current policy is to limit industry concentrations to 50% of total
equity and to limit market segment concentrations to 10% of total assets. The
Corporation manages industry concentrations by applying these dollar limits to
industries that have common risk characteristics.
At December 31, 1996 and 1995, the Corporation had loans totaling $110,948
and $152,436, respectively, to its officers, directors and companies in which
the directors had a 10% or more voting interest. These loans were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and do
not involve more than normal risk of collectibility. The 1996 additions and
reductions were $376,984 and $418,472, respectively.
Included in loans at December 31, 1996 and 1995 were $446,000 and $514,000,
respectively, of loans held for sale and carried at lower of cost or market.
The book value of real estate loans transferred to other real estate owned
during 1996, 1995 and 1994 was $19,536, $29,337 and $79,539, respectively.
The following presents information on derivative financial instruments used
to manage interest rate risk associated with loans:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
At December 31,
Notional value.............................................. $9,118,000 $4,251,000
Unrealized gains............................................ 64,000 104,000
Unrealized losses........................................... 19,000 5,000
Effect on loan yield for the years ended December 31,
From........................................................ 8.92% 9.37%
To.......................................................... 9.03% 9.43%
</TABLE>
B-23
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
5. INVESTMENT SECURITIES
The carrying and fair values of investment securities at December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1996
Held-to-Maturity
U.S. Treasury and Government agencies.................................... $ 362,736 $ 3,501 $ 815 $ 365,422
State and municipal...................................................... 366,012 8,548 95 374,465
Mortgage-backed.......................................................... 463,796 52 1,023 462,825
Other:
Domestic............................................................... 442,082 340 7,529 434,893
Foreign................................................................ 54,432 224 18 54,638
---------- ---------- ---------- ----------
Total held-to-maturity.............................................. $1,689,058 $ 12,665 $ 9,480 $1,692,243
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Available-for-Sale
U.S. Treasury and Government agencies.................................... $1,512,966 $ 9,207 $ 1,061 $1,521,112
State and municipal...................................................... 59,864 468 335 59,997
Mortgage-backed.......................................................... 505,527 4,494 4,854 505,167
Other:
Domestic............................................................... 186,029 14,096 939 199,186
Foreign................................................................ 87,741 20,974 11 108,704
---------- ---------- ---------- ----------
Total available-for-sale............................................ $2,352,127 $ 49,239 $ 7,200 $2,394,166
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
1995
Held-to-Maturity
U.S. Treasury and Government agencies.................................... $ 978,603 $ 12,198 $ 1,310 $ 989,491
State and municipal...................................................... 469,330 13,276 552 482,054
Mortgage-backed.......................................................... 1,136,486 5,587 4,950 1,137,123
Other:
Domestic............................................................... 444,090 4,107 12,323 435,874
Foreign................................................................ 31,408 16 2 31,422
---------- ---------- ---------- ----------
Total held-to-maturity.............................................. $3,059,917 $ 35,184 $ 19,137 $3,075,964
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Available-for-Sale
U.S. Treasury and Government agencies.................................... $1,570,689 $ 17,098 $ 1,744 $1,586,043
State and municipal...................................................... 78,625 1,174 94 79,705
Mortgage-backed.......................................................... 620,727 6,508 4,838 622,397
Other:
Domestic............................................................... 186,409 45,555 955 231,009
Foreign................................................................ 31,844 21,317 -- 53,161
---------- ---------- ---------- ----------
Total available-for-sale............................................ $2,488,294 $ 91,652 $ 7,631 $2,572,315
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
On November 15, 1995, the FASB issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities", which permitted an enterprise to reassess the
appropriateness of the classification of all investment securities held between
November 15, 1995 and December 31, 1995. Based on its reassessment, the
Corporation reclassified $1,726,739 in investment securities previously
classified as held-to-maturity to the available-for-sale category. Unrealized
gains on transferred investments were $12,160, unrealized losses were $8,340,
and the fair value was $1,730,559.
Marketable equity securities are carried in the available-for-sale
portfolio and have been written up by $34,808 at December 31, 1996 and $66,061
at December 31, 1995, the aggregate of their excess fair values over cost,
through after-tax
B-24
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
5. INVESTMENT SECURITIES -- Continued
credits to retained earnings. The Corporation recorded pre-tax gains of $13,210
in 1996, $7,654 in 1995 and $14,167 in 1994 on sales of certain domestic equity
securities. During 1996 and 1995, the Corporation recorded pre-tax gains of
$28,656 and $13,596, on the exchange of certain domestic equity securities.
During 1996, 1995 and 1994, the Corporation recorded pre-tax gains of $18,924,
$939 and $2,567 on sales of foreign equity securities.
Included in mortgage-backed securities available-for-sale at December 31,
1996 were mortgage residual securities with an amortized cost and fair value of
$5,989 and $7,569, respectively. Pre-tax write-downs of $5,276 were recognized
in 1994 on these investments and were included in securities gains and losses.
At December 31, 1996 and 1995, there were no investments in securities of
any single, non-Federal issuer in excess of 10% of shareholders' equity.
Securities with a carrying value of $1,734,355 were pledged at December 31,
1996 to secure public deposits, trust deposits, and for certain other purposes
as required by law.
The amortized cost and estimated fair value of debt securities at December
31, 1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Held-to-Maturity
Due in one year or less....................................... $ 220,553 $ 221,808
Due after one year through five years......................... 595,215 599,835
Due after five years through ten years........................ 94,845 97,802
Due after ten years........................................... 46,533 49,385
Mortgage-backed securities.................................... 463,796 462,825
---------- ----------
$1,420,942 $1,431,655
---------- ----------
---------- ----------
Available-for-Sale
Due in one year or less....................................... $ 562,884 $ 564,608
Due after one year through five years......................... 1,100,626 1,106,603
Due after five years through ten years........................ 11,591 11,627
Due after ten years........................................... 26,130 26,161
Mortgage-backed securities.................................... 505,527 505,167
---------- ----------
$2,206,758 $2,214,166
---------- ----------
---------- ----------
</TABLE>
Proceeds from sales of investments in debt securities during 1996, 1995,
and 1994 were $1,411,398, $560,022, and $739,457, respectively. Gross gains of
$4,100 in 1996, $11,180 in 1995, and $14,646 in 1994, and gross losses of $5,378
in 1996, $1,894 in 1995, and $5,005 in 1994 were realized on those sales.
6. REGULATORY AND CAPITAL MATTERS
The Corporation and its subsidiaries are subject to the regulations of
certain Federal and state agencies including minimum risk-based and leverage
capital guidelines issued by the Federal Reserve Board and Comptroller of the
Currency.
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 Corporation's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines that
involve quantitative measures of the Corporation's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Corporation's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
B-25
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
6. REGULATORY AND CAPITAL MATTERS -- Continued
At December 31, 1996, management believes that the Corporation and its
principal bank subsidiary, CBNA, meet all capital adequacy requirements to which
they are subject. The following table illustrates the Corporation's and CBNA's
risk-based and leverage capital ratios at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
PER REGULATORY GUIDELINES
----------------------------------------
ACTUAL MINIMUM "WELL-CAPITALIZED"
------------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------ ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
Tier 1 capital (a):
Consolidated............................................. $3,725,318 9.45% $1,576,914 4% $2,365,372 6%
CBNA..................................................... 3,270,045 8.90 1,471,992 4 2,207,987 6
Total capital (b):
Consolidated............................................. 5,215,789 13.23 3,153,829 8 3,942,286 10
CBNA..................................................... 4,206,434 11.43 2,943,983 8 3,679,979 10
Tier 1 leverage ratio:
Consolidated............................................. 3,725,318 8.46 1,321,090 3 2,201,817 5
CBNA..................................................... 3,270,045 7.80 1,257,745 3 2,096,241 5
December 31, 1995
Tier 1 capital (a):
Consolidated............................................. 3,534,144 9.20 1,537,225 4 2,305,838 6
CBNA..................................................... 1,404,622 7.57 742,217 4 1,113,326 6
Total capital (b):
Consolidated............................................. 4,890,929 12.71 3,074,450 8 3,843,063 10
CBNA..................................................... 1,966,829 10.60 1,484,434 8 1,855,543 10
Tier 1 leverage ratio:
Consolidated............................................. 3,534,144 7.99 1,327,425 3 2,212,374 5
CBNA..................................................... 1,404,622 6.83 616,934 3 1,028,223 5
</TABLE>
- ---------------
(a) Consists primarily of common shareholders' equity and Trust Capital
Securities, less goodwill and certain intangible assets.
(b) Consists of Tier 1 capital plus qualifying subordinated debt and the
allowance for loan losses, within permitted limits.
The primary source of funds for cash dividend payments by the Corporation
to its shareholders is dividends received from its banking subsidiaries. The
approval of the Comptroller of the Currency is required for a nationally
chartered bank to pay dividends if the total of all dividends declared in any
calendar year exceeds the bank's net profits (as defined by national banking
regulations) for that year combined with its retained net profits for the
preceding two calendar years. Under this formula, CBNA and CBD can declare
dividends without approval of the Comptroller of the Currency of approximately
$112,000 and $18,000, respectively, plus an additional amount equal to CBNA's
and CBD's retained net profits for 1997 up to the date of any such dividend
declaration. The Federal Reserve Act requires that extensions of credit by CBNA
to certain affiliates, including the Corporation, be secured by specified
amounts and types of collateral, that extensions of credit to any such affiliate
generally be limited to 10% of capital and surplus (as defined in that Act) and
that extensions of credit to all such affiliates be limited to 20% of capital
and surplus.
The Corporation's banking subsidiaries are required to maintain reserve
balances with the Federal Reserve Bank. The average amount of those reserve
balances for the years ended December 31, 1996 and 1995 were approximately
$257,000 and $429,000, respectively.
B-26
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
7. ALLOWANCE FOR LOAN LOSSES
The following represents an analysis of changes in the allowance for loan
losses for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period......................................................... $ 670,265 $ 681,124 $ 636,915
Provision charged to operating expense................................................. 228,767 144,002 279,195
Recoveries of loans previously charged off............................................. 92,985 85,226 83,914
Loan charge-offs....................................................................... (281,690) (240,087) (341,454)
Allowance for loans sold at date of sale............................................... -- -- (2,377)
Allowance for loans purchased at date of purchase...................................... -- -- 1,192
Allowance for loans of bank acquired under purchase method of accounting............... -- -- 23,739
--------- --------- ---------
Balance at end of period............................................................... $ 710,327 $ 670,265 $ 681,124
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following presents information on loans that are considered impaired
under FAS 114:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
At December 31,
Recorded investment in impaired loans............................. $183,330 $203,399
Impaired loans against which a portion of the allowance for loan
losses is specifically allocated................................ 74,609 88,973
Amount of allowance for loan losses specifically allocated to
impaired loans.................................................. 15,105 24,445
For the years ended December 31,
Average recorded investment in impaired loans..................... 197,854 257,746
Interest income recognized on impaired loans...................... 8,977 14,354
</TABLE>
8. PREMISES AND EQUIPMENT
Premises and equipment on the consolidated balance sheet is presented net
of accumulated depreciation and amortization of $667,412 and $711,830 at
December 31, 1996 and 1995, respectively. Depreciation and amortization of
premises and equipment for the years ended December 31, 1996, 1995, and 1994,
was $95,897, $98,033 and $95,240, respectively.
9. OPERATING LEASES
Rental expense, reduced by sublease rental income, charged to operations
was $90,982, $85,419 and $85,554 for 1996, 1995 and 1994, respectively.
10. DEPOSITS
The following presents a breakdown of deposits at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Domestic:
Non-interest bearing checking............................ $ 9,330,445 $ 8,937,147
Savings, NOW and money market accounts................... 13,299,068 14,125,906
Time deposits............................................ 9,687,887 9,757,820
----------- -----------
Total domestic deposits............................... 32,317,400 32,820,873
Overseas branches and subsidiaries......................... 1,409,756 1,142,947
----------- -----------
Total deposits........................................ $33,727,156 $33,963,820
----------- -----------
----------- -----------
</TABLE>
B-27
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
10. DEPOSITS -- Continued
Domestic time deposits in denominations of $100 or more at December 31,
1996, 1995, and 1994 were:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Commercial certificates of deposit.............. $ 754,437 $ 695,970 $ 611,206
Other domestic time deposits, principally
savings certificates.......................... 613,126 501,058 533,336
---------- ---------- ----------
Total...................................... $1,367,563 $1,197,028 $1,144,542
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Interest expense on domestic time deposits in denominations of $100 or more
for the years ended December 31, 1996, 1995, and 1994 was:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Interest expense:
Commercial certificates of deposit..................... $30,857 $36,520 $22,499
Other domestic time deposits, principally savings
certificates........................................ 25,451 30,057 24,138
------- ------- -------
Total............................................... $56,308 $66,577 $46,637
------- ------- -------
------- ------- -------
</TABLE>
Substantially all of the deposits of overseas branches and subsidiaries
were time deposits in denominations of $100 or more for each of the three years
presented.
The following presents information on derivative financial instruments used
to manage interest rate risk associated with deposits:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
At December 31,
Notional value.............................................. $5,314,000 $6,962,000
Unrealized gains............................................ 50,000 106,000
Unrealized losses........................................... 16,000 8,000
Effect on deposit cost for the year ended December 31,
From........................................................ 3.62% 3.75%
To.......................................................... 3.49% 3.76%
</TABLE>
B-28
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
11. SHORT-TERM FUNDS BORROWED
Short-term funds borrowed at December 31, 1996 and 1995 include the
following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Federal funds purchased (a)................................... $ 532,334 $1,129,432
Securities sold under agreements to repurchase (b)............ 656,397 812,281
Commercial paper (c).......................................... 675,181 1,255,656
Other short-term funds borrowed (d)........................... 769,245 479,644
---------- ----------
Total short-term funds borrowed (e)...................... $2,633,157 $3,677,013
---------- ----------
---------- ----------
</TABLE>
- ---------------
(a) Federal funds purchased generally represent the overnight Federal funds
transactions of banking subsidiaries with correspondent banks. The weighted
average interest rate paid was 5.54% in 1996, 6.02% in 1995 and 4.58% in
1994. The maximum amount outstanding at any month-end was $1,977,950 during
1996, $2,060,375 during 1995, and $1,646,440 during 1994.
(b) Securities sold under agreements to repurchase usually mature within one to
thirty days or are due on demand. The weighted average interest rate paid
was 4.52% in 1996, 5.03% in 1995 and 3.44% in 1994. The maximum amount
outstanding at any month-end was $836,722 during 1996, $863,937 during 1995,
and $1,025,217 during 1994.
(c) Commercial paper issued by CSCC is used to finance the short-term borrowing
requirements of certain banking-related activities. Commercial paper is
issued with maturities of not more than nine months and there are no
provisions for extension, renewal or automatic rollover. The weighted
average interest rate on commercial paper borrowings was 5.44% in 1996,
5.94% in 1995, and 4.24% in 1994. The maximum amount outstanding at any
month-end was $1,106,078 during 1996, $1,388,927 during 1995, and $919,292
during 1994.
At December 31, 1996, the Corporation had a $700,000 revolving credit
facility from unaffiliated banks. The facility was established in support
of commercial paper borrowings, Medium Term Note (see Note 12) issuance and
general corporate purposes. Unless extended by the Corporation in
accordance with the terms of the facility agreement, the facility expires
February 2000. There were no borrowings under this facility at December 31,
1996. The interest rate charged for usage of these lines varies with money
market conditions.
(d) Other short-term funds borrowed include term Federal funds purchased,
short-term Bank Notes and demand notes payable to the U.S. Treasury.
(e) The aggregate average short-term funds borrowed were $2,958,655 in 1996,
$3,751,518 in 1995, and $3,435,972 in 1994. The weighted average interest
rate was 5.18% in 1996, 5.71% in 1995 and 4.35% in 1994. The average
interest rate is calculated primarily on a daily average of short-term
funds borrowed.
B-29
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
12. LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 includes the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
CoreStates Financial Corp:
6 5/8% Notes due 2000 (a)..................................... $ 150,000 $ 150,000
7 7/8% Subordinated Notes due 2002 (b)........................ 100,000 100,000
7 7/8% Subordinated Notes due 1996............................ -- 75,000
8 5/8% Mortgages due 2001..................................... 6,603 8,823
Unamortized Discounts......................................... (271) (325)
---------- ----------
256,332 333,498
---------- ----------
CSCC:
6 3/4% Guaranteed Subordinated Notes due 2006 (c)............. 200,000 --
5 7/8% Guaranteed Subordinated Notes due 2003 (c)............. 200,000 200,000
6 5/8% Guaranteed Subordinated Notes due 2005 (c)............. 175,000 175,000
9 5/8% Guaranteed Subordinated Notes due 2001 (c)............. 150,000 150,000
9 3/8% Guaranteed Subordinated Notes due 2003 (c)............. 100,000 100,000
Medium Term Notes (d)......................................... 1,509,000 1,036,035
Unamortized Discounts......................................... (4,990) (3,631)
---------- ----------
2,329,010 1,657,404
---------- ----------
CoreStates Capital I:
8% Trust Capital Securities due 2026(e)....................... 300,000
Unamortized Discounts......................................... (6,491)
----------
293,509
----------
Other subsidiaries:
6 5/8% Subordinated Notes due 2003 (f)........................ 150,000 150,000
Federal Home Loan Bank Borrowings (g)......................... 2,888 42,888
Various other................................................. 18,175 29,022
Unamortized Discounts......................................... (617) (713)
---------- ----------
170,446 221,197
---------- ----------
Total long-term debt (h)................................. $3,049,297 $2,212,099
---------- ----------
---------- ----------
</TABLE>
- ---------------
(a) The Notes are unsecured and senior in right of payment to all subordinated
indebtedness of the Corporation. The Notes are not redeemable by the
Corporation or the holders prior to the maturity date and are not entitled
to the benefit of any sinking fund.
(b) The Notes are unsecured and subordinate in right of payment to all present
and future senior indebtedness of the Corporation. The Notes are not
redeemable by the Corporation or the holders prior to the maturity date and
are not entitled to the benefit of any sinking fund.
(c) The Notes are not subject to redemption prior to maturity and are
unconditionally guaranteed, on a subordinated basis, as to payment of
principal and interest by the Corporation. The Notes are subordinated to
all existing and future senior CSCC indebtedness and the guarantee is
subordinated to all outstanding senior Corporation indebtedness.
(d) CSCC can issue Medium Term Notes (Senior and Subordinated) with maturities
of nine months or greater from date of issue. The interest rate or interest
rate formula on each Note is established by CSCC at the time of issuance.
The Senior Notes are unconditionally guaranteed as to payment of principal
and interest by the Corporation. The Subordinated Notes are unconditionally
guaranteed, on a subordinated basis, as to payment of principal and interest
by the Corporation. The
B-30
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
12. LONG-TERM DEBT -- Continued
Subordinated Notes are subordinated to all existing and future senior CSCC
indebtedness and the guarantee is subordinated to all existing and future
senior Corporation indebtedness. At December 31, 1996, $1,509,000 of debt is
outstanding with maturities up to five years. Interest rates are
predominately variable.
Under an existing shelf registration statement filed with the Securities and
Exchange Commission, the Corporation had debt and capital securities that
were registered but unissued of approximately $1,085,000 at December 31,
1996.
(e) The Trust Capital Securities evidence a preferred ownership interest in a
trust, of which 100% of the common equity is owned by CBNA. The Trust
Capital Securities are unconditionally guaranteed by CBNA. The proceeds
from issuance of the Trust Capital Securities are invested in 8% Junior
Subordinated Deferrable Interest Debentures of CBNA due 2026. These
Subordinated Debt Securities have provisions enabling certain actions such
as redemption or the deferment of the semiannual payments of interest,
which will impact the Trust Capital Securities. CBNA may redeem the
Subordinated Debt Securities in whole or in part, on or after December 15,
2006. In addition, Subordinated Debt Securities may be redeemed by CBNA at
any time upon the occurrence of certain events. In the event of such a
redemption of the Subordinated Debt Securities, the proceeds of such
payment or repayment shall concurrently be applied to redeem the Trust
Capital Securities.
(f) The Notes were issued by CBNA and are unsecured and subordinate to the
claims of depositors and other creditors. The Notes are not redeemable by
CBNA or the holders prior to the maturity date and are not entitled to the
benefit of any sinking fund.
(g) The borrowing matures in July 2016 and carries a fixed interest rate of
6.66%. These borrowings require membership in the Federal Home Loan Bank of
Pittsburgh and the maintenance of available collateral with a fair value
which approximates the total amount of the outstanding debt.
(h) The consolidated aggregate maturities for long-term debt for the years
ending December 31, 1997 through 2001 are: $376,637; $528,562; $395,740;
$216,672; and $298,203, respectively.
The following presents information on derivative financial instruments used
to manage interest rate risk associated with long-term debt:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
At December 31,
Notional value................................................ $1,019,000 $614,000
Unrealized gains.............................................. 16,000 24,000
Unrealized losses............................................. 13,000 8,000
Effect on long-term debt cost for the years ended
December 31,
From.......................................................... 6.53% 6.78%
To............................................................ 6.38% 6.76%
</TABLE>
B-31
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
13. RETIREMENT AND BENEFIT PLANS
The fair value of the assets in the Corporation's defined benefit pension
plans exceeded the projected benefit obligation by $57,158 at December 31, 1996,
based on current and estimated future salary levels. The excess of the fair
value of plan assets is reconciled to the accrued pension cost included in other
liabilities as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Plan assets at fair value(a)...................................... $902,947 $815,621
-------- --------
Present value of benefit obligation:
Accumulated benefits based on salaries to date, including
vested benefits of $667,536 in 1996 and $611,077 in 1995... 688,102 647,743
Additional benefits based on estimated future salary
levels..................................................... 157,687 175,454
-------- --------
Projected benefit obligation...................................... 845,789 823,197
-------- --------
Amount the fair value of plan assets exceeds (is less than) the
projected benefit obligation at December 31,.................... 57,158 (7,576)
Reconciliation:
Unrecognized prior service cost................................. 30,770 11,676
Unrecognized net asset from date of initial application......... (20,016) (25,357)
Net deferred actuarial loss (gain).............................. (91,835) 22,151
-------- --------
Prepaid (accrued) pension expense included in other liabilities... $(23,923) $ 894
-------- --------
-------- --------
</TABLE>
- ---------------
(a) Primarily U.S. Government securities, U.S. agency securities, fixed income
securities, common stock, and commingled funds managed by subsidiary banks.
Net pension cost for the years ended December 31, 1996, 1995 and 1994
included the following expense (income) components:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
Service cost benefits earned during the period...... $ 29,020 $ 24,492 $ 30,411
Interest cost on projected benefit obligation....... 60,793 54,497 51,881
Actual (return) loss on plan assets................. (121,868) (162,143) 22,038
Net amortization and deferral....................... 53,887 96,484 (80,394)
--------- --------- --------
Net pension cost............................... $ 21,832 $ 13,330 $ 23,936
--------- --------- --------
--------- --------- --------
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation for the Corporation was 7.5%
and 7.0%-7.5%; respectively, at December 31, 1996 and 1995. The rate of increase
on future compensation levels was 5.0% to 6.0% in both 1996 and 1995. The
expected long-term rate of return on plan assets was 7.5%-9.5% in both 1996 and
1995.
The Corporation sponsors a 401(k) savings plan for substantially all its
employees. Contributions to the savings plan for the employer's match were
$18,955 in 1996, $18,192 in 1995, and $23,140 in 1994.
The ESOP is a leveraged plan funded through a direct loan from the
Corporation. The ESOP has acquired a total of 2,450,000 shares of common stock
for distribution to eligible employees ratably over a 20 year period.
Compensation cost has been recognized based on the fair market value of the
shares committed to be released to employees. Total compensation cost recognized
was $5,378 in 1996 and $3,600 in 1995. Dividends on allocated shares are paid to
participants and are charged to retained earnings. Dividends on unallocated
shares are used by the ESOP to reduce its loan. Effective January 1, 1997 the
ESOP was combined with the Corporation's 401(k) savings plan.
B-32
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
13. RETIREMENT AND BENEFIT PLANS -- Continued
The Corporation and its subsidiaries provide postretirement health care and
life insurance benefits for substantially all retired employees. Postretirement
benefits are provided through an insurance company whose premiums are based on
the benefits paid during the year. The postretirement health care plan is
contributory, with retiree contributions based on years of service.
The liability for postretirement benefits included in other liabilities at
December 31, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees...................................................... $ (68,702) $(125,502)
Fully eligible active plan participants....................... (1,827) (3,864)
Other active plan participants................................ (29,748) (39,709)
--------- ---------
Accumulated postretirement benefit obligation................... (100,277) (169,075)
Plan assets at fair value (a)................................... 52,591 46,974
--------- ---------
Unfunded obligation at December 31,............................. (47,686) (122,101)
Unrecognized prior service cost................................. (45,239) 115
Unrecognized net gain........................................... (51,157) (22,638)
--------- ---------
Accrued postretirement benefit obligation included in other
liabilities................................................... $(144,082) $(144,624)
--------- ---------
--------- ---------
</TABLE>
- ---------------
(a) Primarily municipal bonds and short-term investments.
Net periodic postretirement benefit cost for the years ended December 31,
1996, 1995 and 1994 included the following expense (income) components:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost benefits earned during the period............ $ 2,769 $ 3,044 $ 3,602
Interest cost on accumulated postretirement benefit
obligation.............................................. 7,947 11,932 11,931
Actual return on plan assets.............................. (1,527) (1,107) (461)
Net amortization and deferral............................. (6,069) (1,436) (730)
------- ------- -------
Net periodic postretirement benefit cost.................. $ 3,120 $12,433 $14,342
------- ------- -------
------- ------- -------
</TABLE>
For measurement purposes, the rate of increase in the per capita cost of
covered health care benefits was assumed to be 5.5% per year and remains at that
level until a predetermined benefit cap is reached. This fixed dollar cap was
established as the per capita projected cost level in 1997 associated with the
Corporation's indemnity medical plan. The health care cost trend rate assumption
has an effect on the amounts reported. To illustrate, increasing the assumed
health care cost trend rates by 1 percentage point in each year would increase
the accumulated postretirement benefit obligation as of December 31, 1996 by
$4,479 and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year then ended by $745.
The expected long-term rate of return on plan assets was 6.0%. The
weighted-average discount rate used in determining the Corporation's accumulated
postretirement benefit obligation was 7.5% and 7.0%, respectively, at December
31, 1996 and 1995.
14. LONG-TERM INCENTIVE PLAN
The Corporation has outstanding options granted under the Corporation's
long-term incentive plan (the "Plan"). As provided in the Plan, a variety of
incentives can be issued to eligible participants including restricted stock
awards, incentive stock options, non-qualified stock options, stock appreciation
rights, performance units and cash awards. Meridian, Constellation,
Independence, United Counties and Germantown had maintained similar plans.
Options granted under those plans
B-33
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
14. LONG-TERM INCENTIVE PLAN -- Continued
were assumed by the Corporation upon consummation of their respective
acquisitions. The Plan provides for a maximum number of options available to be
granted each year equal to 2% of outstanding common shares as of January 1 of
that year. Options under the Plan are granted to purchase the Corporation's
common shares at market value on the date of grant and are exercisable one year
from the date of grant for a period not exceeding ten years from the date of
grant. Stock appreciation rights may be granted in conjunction with the granting
of an option.
Information on option activity for 1996 follows:
<TABLE>
<CAPTION>
SHARES UNDER WEIGHTED-AVERAGE
OPTION EXERCISE PRICE
------------ ----------------
<S> <C> <C>
Balance at January 1, 1996............................... 8,581,554 $23.86
Options granted.......................................... 1,968,001(a) 41.49
Options exercised........................................ (4,519,411) 23.27
Options canceled......................................... (241,080) 31.84
------------
Balance at December 31, 1996............................. 5,789,064 29.98
------------
------------
</TABLE>
- ---------------
(a) The fair value of options granted during 1996 was $12.6 million.
The following table summarizes information about options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE --------------------------------
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- ----------- ---------------- ---------------- ----------- ----------------
<C> <C> <S> <C> <C> <C>
$ 3.99 to $15.67 293,947 2.69 years $13.34 293,947 $13.34
$16.12 to $23.27 912,288 6.20 21.51 912,288 21.51
$25.41 to $29.95 2,977,462 7.94 27.74 2,977,462 27.74
$37.96 to $42.63 1,605,367 9.13 41.98 221,843 37.96
----------- -----------
$ 3.99 to $42.63 5,789,064 7.73 29.98 4,405,540 25.37
----------- -----------
----------- -----------
</TABLE>
The Corporation uses the intrinsic value method of accounting to measure
compensation expense. If the fair value method had been used to measure
compensation expense, net income would have been reduced by $7.4 million, or
$0.04 per share and $7.2 million, or $0.03 per share, to $641.8 million, or
$2.93 per share, and $647.9 million, or $2.92 per share, for the years ended
December 31, 1996 and 1995, respectively.
The fair value of options granted in 1996 and 1995 was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions, respectively: risk-free interest rates of 5.49% to
7.80%, dividend yield of 4.0%, volatility factors of the expected market price
of the Corporation's common stock of .148 to .223, and a weighted-average
expected life of the options of 6 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Corporation's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND
CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments and
contingent liabilities which are not reflected in the financial statements.
These include various financial instruments with off-balance sheet risk used in
connection with the Corporation's asset and liability management, the management
of interest rate risk in securities trading positions and to provide for the
needs of customers. These involve varying degrees of credit, interest rate and
liquidity risk, but do not
B-34
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND
CONTINGENT LIABILITIES -- Continued
represent unusual risks for the Corporation and management does not anticipate
any significant losses as a result of these transactions.
DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN
TRADING
The Corporation uses off-balance sheet derivative financial instruments,
such as interest rate swaps, futures and caps, to manage interest rate risk. The
Corporation's exposure to interest rate risk stems from the mismatch between the
sensitivity to movements in interest rates of the Corporation's assets and
liabilities and from the spread risk between the rates on those assets and
liabilities and financial market rates. The use of derivatives to manage
interest rate risk falls into three categories: interest sensitivity
adjustments, interest rate spread protection and hedging anticipated asset
sales.
Interest rate swaps and futures are generally used to lengthen the interest
rate sensitivity of short-term assets and to shorten the repricing
characteristics of longer term liabilities. Interest rate caps are used to
manage spread risk. Interest rate caps are also used to offset the risk of
upward interest rate movement on adjustable rate mortgages and other products
with imbedded caps as well as to reduce the risk that interest rate spreads
narrow on prime based products. Gains or losses are used to adjust the basis of
the related asset or liability and interest differentials are adjustments of the
related interest income or expense.
In connection with anticipated sales of longer term assets acquired through
merger or generated in the loan origination process, the Corporation uses
interest rate swaps, rate locks and option agreements to reduce interest rate
sensitivity as the assets are readied for sale. Hedge gains or losses are used
to adjust the basis of the assets held for sale.
B-35
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND
CONTINGENT LIABILITIES -- Continued
Derivative financial instruments used in the management of interest rate
risk at December 31, 1996 are summarized below (in millions):
<TABLE>
<CAPTION>
INTEREST INTEREST INTEREST
RATE RATE RATE CAPS OTHER
SWAPS FUTURES AND FLOORS DERIVATIVES
-------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Interest Sensitivity Adjustment:
Assets (primarily loans):
Notional amount................................................... $ 4,092 $ 4,451 $ 8 $ 80
Unrealized gains.................................................. 64 2 -- --
Unrealized losses................................................. (19) -- -- --
Deposits and other borrowings:
Notional amount................................................... 4,132 925 150
Unrealized gains.................................................. 35 13 2
Unrealized losses................................................. (16) -- --
Long-term debt:
Notional amount................................................... 869 150
Unrealized gains.................................................. 13 3
Unrealized losses................................................. (13) --
Spread Protection:
Assets (primarily loans):
Notional amount................................................... 50 500
Unrealized gains.................................................. 3 2
Unrealized losses................................................. -- --
Deposits and other borrowings:
Notional amount................................................... 107
Unrealized gains.................................................. --
Unrealized losses................................................. --
Anticipated Asset Sales:
Notional amount................................................... 37
Unrealized gains.................................................. --
Unrealized losses................................................. --
Total
Notional amount...................................................... $ 9,143 $ 4,451 $1,540 $ 417
-------- -------- ---------- -----------
Unrealized gains..................................................... $ 115 $ 2 $ 15 $ 5
-------- -------- ---------- -----------
Unrealized losses.................................................... $ (48) $ -- $ -- $ --
-------- -------- ---------- -----------
Net unrealized gains................................................. $ 67 $ 2 $ 15 $ 5
-------- -------- ---------- -----------
<CAPTION>
TOTAL
-------
<S> <C>
Interest Sensitivity Adjustment:
Assets (primarily loans):
Notional amount................................................... $ 8,631
Unrealized gains.................................................. 66
Unrealized losses................................................. (19)
Deposits and other borrowings:
Notional amount................................................... 5,207
Unrealized gains.................................................. 50
Unrealized losses................................................. (16)
Long-term debt:
Notional amount................................................... 1,019
Unrealized gains.................................................. 16
Unrealized losses................................................. (13)
Spread Protection:
Assets (primarily loans):
Notional amount................................................... 550
Unrealized gains.................................................. 5
Unrealized losses................................................. --
Deposits and other borrowings:
Notional amount................................................... 107
Unrealized gains.................................................. --
Unrealized losses................................................. --
Anticipated Asset Sales:
Notional amount................................................... 37
Unrealized gains.................................................. --
Unrealized losses................................................. --
Total
Notional amount...................................................... $15,551
-------
Unrealized gains..................................................... $ 137
-------
Unrealized losses.................................................... $ (48)
-------
Net unrealized gains................................................. $ 89
-------
</TABLE>
B-36
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND
CONTINGENT LIABILITIES -- Continued
A summary of interest rate swap contracts categorized by whether the
Corporation receives or pays fixed rates and stratified by repricing or maturity
date is below (in millions):
<TABLE>
<CAPTION>
YEARS
------------------------------------------------------------------
0-1 1-2 2-3 3-4 4-5 OVER 5 TOTAL
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Receive Fixed/Pay Floating:
Receive Notional................................... $1,775 $1,271 $1,346 $1,402 $1,538 $1,050 $8,382
Rate....................................... 6.32% 6.30% 6.79% 6.41% 6.50% 6.74% 6.50%
Pay Notional................................... $8,382 $8,382
Rate....................................... 5.68% 5.68%
Pay Fixed/Receive Floating:
Pay Notional................................... $ 15 $ 9 $ 25 $ 49
Rate....................................... 8.60% 8.09% 9.26% 8.84%
Receive Notional................................... $ 49 $ 49
Rate....................................... 5.60% 5.60%
Receive Floating/Pay Floating:
(Basis Swaps)
Notional................................... $ 230 $ 230
Receive Rate....................................... 5.54% 5.54%
Pay Rate....................................... 5.58% 5.58%
Receive Fixed/Pay Floating(a):
(Forward Start)
Receive Notional................................... $ 160 $ 275 $ 47 $ 482
Rate....................................... 7.07% 6.48% 7.05% 6.73%
Start Date Notional................................... $ 115 $ 132 $ 235 $ 482
</TABLE>
- ---------------
(a) Pay rate will be determined on forward start date.
Foreign currency derivatives used for hedging activities have not had a
material impact on income or liquidity of the Corporation for any of the years
presented.
DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES
In its business of providing risk management services for its customers,
the Corporation purchases and sells certain derivatives including interest rate
swaps, caps and floors. In addition, as part of its international business, the
Corporation enters into foreign exchange contracts on behalf of customers. These
contracts are matched against forward sale or purchase contracts. Customer
related derivative financial instrument transactions are generally marked to
market and any gains or losses are recorded in the income statement. The
Corporation also holds derivatives in connection with its securities trading
activities and, at times, as a position taken in the expectation of profiting
from favorable movements in interest rates. These products include tender option
bonds and Treasury float contracts. Included in the income statement are trading
revenues from derivatives of $29,242 of which $22,557 represents net foreign
exchange gains included in fees for international services.
B-37
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND
CONTINGENT LIABILITIES -- Continued
Outstanding notional amounts and related fair values of trading and
customer related derivative financial instruments at December 31, 1996 and 1995
are summarized by type of instrument below (in millions):
<TABLE>
<CAPTION>
1996 1995
-------------------------------------- --------------------
POSITIVE NEGATIVE
NOTIONAL NET ASSETS MARKET MARKET NOTIONAL
AMOUNT (LIABILITY)(A) VALUE VALUE AMOUNT
-------- -------------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest Rate Swaps:
CoreStates receives fixed................................ $ 355 $ 1.5 $ 2.7 $ (1.2) $ 115
CoreStates pays fixed.................................... 353 (1.0) 1.3 (2.3) 115
Futures.................................................... 39 0.4 0.4 -- 2
Rate Locks:
CoreStates receives fixed................................ 30 (0.1) -- (0.1) 15
CoreStates pays fixed.................................... 30 0.1 0.1 -- 15
Interest Rate Caps/Floors:
Sold..................................................... 705 (2.7) -- (2.7) 517
Purchased................................................ 704 2.7 2.7 -- 517
Commitments to purchase/sell whole mortgage loans and
securities (including when-issued securities):
Sold..................................................... 83 (0.2) 0.1 (0.3) 117
Purchased................................................ 19 -- -- -- 106
Other Options:
Sold..................................................... 206 6.5 7.1 (0.6) 247
Purchased................................................ 334 0.8 0.8 -- 624
Foreign exchange contracts (b)............................. 1,766 (0.5) 28.0 (28.5) 1,695
-------- -------------- -------- -------- --------
Total Trading and Customer Related Derivatives............. $4,624 $ 7.5 $ 43.2 $(35.7) $4,085
-------- -------------- -------- -------- --------
<CAPTION>
NET ASSETS
(LIABILITY)(A)
--------------
<S> <C>
Interest Rate Swaps:
CoreStates receives fixed................................ $ 2
CoreStates pays fixed.................................... (2)
Futures.................................................... --
Rate Locks:
CoreStates receives fixed................................ --
CoreStates pays fixed.................................... --
Interest Rate Caps/Floors:
Sold..................................................... (1)
Purchased................................................ 1
Commitments to purchase/sell whole mortgage loans and
securities (including when-issued securities):
Sold..................................................... (2)
Purchased................................................ 2
Other Options:
Sold..................................................... 6
Purchased................................................ 1
Foreign exchange contracts (b)............................. 2(c)
---
Total Trading and Customer Related Derivatives............. $ 9
---
</TABLE>
- ---------------
(a) Average net assets (liabilities) during 1996 and 1995 were substantially
the same as the net assets (liabilities) at December 31, 1996 and 1995,
respectively.
(b) Foreign exchange contracts purchased and sold at December 31, 1996 were $836
million and $930 million, respectively, and at December 31, 1995 were $853
million and $842 million, respectively.
(c) Gross assets and (liabilities) on foreign exchange contracts at December
31, 1995 were $16 million and $14 million, respectively.
B-38
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND
CONTINGENT LIABILITIES -- Continued
The following is a summary of off-balance sheet commitments and derivative
financial instruments as of December 31, 1996 and 1995, including fair values.
See Note 3 for a discussion of fair value.
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
NOTIONAL FAIR NOTIONAL FAIR
OR VALUE OR VALUE
CONTRACTUAL OF ASSET CONTRACTUAL OF ASSET
AMOUNT (LIABILITY) AMOUNT (LIABILITY)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Standby letters of credit, net of participations (a).................... $ 1,630,621 $ (16,306) $ 1,548,551 $ (14,502)
Commercial letters of credit............................................ 1,262,593 (12,625) 1,324,714 (13,157)
Commitments to extend credit (b)........................................ 15,396,553 (21,204) 14,565,636 (16,135)
Unused commitments under credit card lines.............................. 4,173,013 -- 3,872,641 --
When-issued securities (c):
Commitments to purchase............................................... 1,770 -- 500 --
Commitments to sell................................................... 75,120 (140) 145,000 (1,411)
Commitments to purchase/sell whole mortgage loans and
securities (c):
Commitments to purchase............................................... 17,280 30 109,714 2,071
Commitments to sell................................................... 7,965 (70) 47,259 (1,738)
Mortgage loans sold and loan servicing acquired with recourse (d)....... 361,410 (9,637) 434,628 (12,260)
Interest rate futures contracts (e):
Commitments to purchase............................................... 4,489,800 2,781 621,000 658
Commitments to purchase foreign and U.S. currencies (f)................. 1,766,122 (488) 1,695,148 1,567
Interest rate swaps, notional principal amounts (g)..................... 9,850,708 67,673 9,945,840 206,186
Interest rate caps and floors (h):
Written............................................................... 908,799 (2,842) 847,323 (1,229)
Purchased............................................................. 2,039,331 17,383 1,673,023 25,021
Tender option bonds (i)................................................. 148,711 5,976 208,103 4,995
Treasury float contracts (j)............................................ 270,358 682 623,738 884
Other derivatives....................................................... 597,261 5,644 174,674 645
</TABLE>
- ---------------
(a) Standby letters of credit ("SBLC") are used in various transactions to
enhance the credit standing of the Corporation's customers and are
subjected to the same risk, credit review and approval process as loans.
SBLC's are irrevocable assurances that the Corporation will make payment in
the event that a customer cannot perform its contractual obligations to
third parties.
(b) Commitments to extend credit represent the Corporation's obligation to fund
various types of loans, including home equity lines, lines of credit,
revolving lines of credit and other types of commitments.
(c) The Corporation has commitments to purchase/sell mortgage-backed securities
or loans with delivery at a future date but typically within 120 days. The
fair value of these instruments is affected by interest rates. In a
declining interest rate environment, commitments to sell mortgage-backed
securities or loans will decline in value. In a rising interest rate
environment, commitments to buy mortgage-backed securities or loans will
increase in value.
Forward agreements to sell securities are used in transactions with
municipalities that generally have a debt payment due in the future. Under
these agreements, the Corporation agrees to deliver primarily United States
Treasury securities that will mature on or before the required payment
date. The type and associated interest rate of these securities is
established when the agreement is entered. The primary risk associated with
forward agreements is interest rate risk to the extent the required
securities have not been purchased. If interest rates fall, securities
yielding the higher agreed upon fixed rate will be more expensive for the
Corporation to purchase.
Included in when-issued securities and commitments to purchase/sell whole
mortgage loans and securities are customer and trading-related products
with a notional value of $102,135 and $223,873 at December 31, 1996 and
1995, respectively.
B-39
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND
CONTINGENT LIABILITIES -- Continued
(d) The Corporation originates and sells residential mortgage loans as part of
various mortgage-backed security programs sponsored by the United States
government agencies or government-sponsored agencies, such as the Government
National Mortgage Association, Federal Home Loan Mortgage Corporation and
the Federal National Mortgage Association. Certain sales and other servicing
acquired are subject to recourse provisions in the event of default by the
borrower. The Corporation provides for potential losses under these recourse
provisions by establishing reserves at the time of sale and evaluates the
adequacy of these reserves on an ongoing basis.
(e) Exchange traded futures contracts represent agreements to exchange dollar
amounts at a specified future date for interest rate differentials between
an agreed interest rate and a reference rate, computed on a notional
amount. Credit and market risk exist with respect to these instruments.
Exchange traded futures contracts entail daily cash settlement; therefore,
the credit risk amount represents a one-day receivable.
(f) Commitments to purchase foreign and U.S. currencies are primarily executed
for the needs of customers. These foreign exchange contracts are structured
similar to interest rate futures and forward contracts. The risk associated
with a foreign exchange contract arises from the counterparty's ability to
make payment at settlement and that the value of a foreign currency might
change in relation to the U.S. dollar. The Corporation's exposure, if any,
to counterparty failure equals the current market value of the contract,
which at December 31, 1996 and 1995 was $27,962 and $16,434, respectively.
Included in fees for international services are net foreign exchange gains
of $22,557, $22,943, and $19,783 for the years ended December 31, 1996,
1995 and 1994, respectively.
(g) Interest rate swaps generally represent the contractual exchange of fixed
and variable rate interest payments based on a notional principal amount and
an interest reference rate. Credit risk exists with respect to these
instruments arising from the possible failure of the counterparty to make
required payments on those contracts which are favorable to the Corporation.
The Corporation's exposure to counterparty failure equals the current
replacement cost of the contract. At December 31, 1996 and 1995, the
replacement cost of the Corporation's interest rate swap contracts was
$118,929 and $225,140, respectively. The risk of counterparty failure is
controlled by limiting transactions to an approved list of counterparties
and requiring collateral in certain instances. Net cash received on interest
rate swaps during 1996 and 1995 totaled $68,103 and $7,493, respectively.
(h) Interest rate caps and floors are written by the Corporation to enable
customers to transfer, modify or reduce their interest rate risk. Interest
rate caps and floors are similar to interest rate swaps except that payments
are made only if current interest rates move above or below a predetermined
rate. The risk associated with interest rate caps and floors is an
unfavorable change in interest rates. As a writer of interest rate caps and
floors, the Corporation receives a premium in exchange for bearing the risk
of an unfavorable change in interest rates. The Corporation generally
reduces risk by entering into offsetting cap and floor positions that
essentially counterbalance each other. The Corporation also enters interest
rate caps to offset the risk of upward interest rate movement on assets with
embedded caps as well as to limit spread risk. As a purchaser of interest
rate caps, the Corporation pays a premium in exchange for the right to
receive payments if interest rates rise above predetermined levels. The
Corporation has also purchased interest rate floors in which the Corporation
has paid a fee for the right to receive payments if rates fall below a
predetermined level. Similar to interest rate swaps, credit risk exists with
respect to the possible failure of the counterparty to make required
payments on those contracts which are favorable to the Corporation. Exposure
to counterparty failure equals the current replacement cost of the contract
which totaled $17,383 and $26,384, respectively, at December 31, 1996 and
1995.
(i) Tender option bonds are instruments associated with municipalities. A
municipality generally issues a tax-free, fixed rate, long-term security in
order to finance the origination of single family residential mortgages.
The municipality enters into a tender option bond program with the
Corporation, which converts the fixed rate long-term instrument into a
variable rate short-term product.
(j) A Treasury float contract is created because a municipality, which has
defeased a bond issue with government securities, has a mismatch in the
timing of the maturity of the securities and the date the funds are needed
to pay the debt service. The Corporation will pay an up-front fee for the
right to sell government securities to the municipality, generally at par.
The Corporation retains any profit between the sales price and the price at
which the Corporation acquired the securities.
B-40
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND
CONTINGENT LIABILITIES -- Continued
CONTINGENT LIABILITIES
In the normal course of business, the Corporation and its subsidiaries are
subject to numerous pending and threatened legal actions and proceedings, some
for which the relief or damages sought are substantial. Management does not
believe the outcome of these actions and proceedings will have a materially
adverse effect on the consolidated financial position of the Corporation.
16. PROVISION FOR INCOME TAXES
The provision for income taxes for the years ended December 31, 1996, 1995,
and 1994 consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal............................................ $344,142 $303,647 $158,771
State.............................................. 20,401 24,134 19,683
-------- -------- --------
Total domestic.................................. 364,543 327,781 178,454
Foreign............................................ 12,121 8,240 5,558
-------- -------- --------
Total current................................... 376,664 336,021 184,012
Deferred Federal and state expense................... 9,156 28,420 41,847
-------- -------- --------
Total provision for income taxes................ $385,820 $364,441 $225,859
-------- -------- --------
-------- -------- --------
</TABLE>
The significant components of the Corporation's deferred tax assets and
liabilities at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses....................................... $261,180 $241,487
Postretirement and postemployment benefits...................... 57,191 54,127
Reserves........................................................ 56,489 54,779
Other........................................................... 77,181 70,928
-------- --------
Total deferred tax assets.................................... 452,041 421,321
-------- --------
Deferred tax liabilities:
Auto leasing portfolio.......................................... 142,196 119,894
FAS 115 fair value accounting................................... 14,298 15,596
Partnership investments......................................... 3,781 3,980
Tax over book depreciation...................................... 38,446 30,626
Affiliate income................................................ 32,873 30,404
Other........................................................... 71,802 59,405
-------- --------
Total deferred tax liabilities............................... 303,396 259,905
-------- --------
Net deferred tax assets........................................... $148,645 $161,416
-------- --------
-------- --------
</TABLE>
At December 31, 1996, cumulative deductible temporary differences related
to the deferred tax asset are approximately $1,292,000. Cumulative taxable
temporary differences related to deferred tax liabilities at December 31, 1996
are estimated at $867,000.
At December 31, 1996, the Corporation has determined that it is not
required to establish a valuation allowance for the deferred tax asset since it
is more likely than not that the deferred tax asset of $452,041 will be realized
principally through carryback to taxable income in prior years, future reversals
of existing taxable temporary differences, future taxable income and to a lesser
extent, tax planning strategies. The Corporation's conclusion that it is "more
likely than not" that the deferred tax asset will be realized is based on a
history of growth in earnings and the prospects for continued growth, including
an
B-41
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
16. PROVISION FOR INCOME TAXES -- Continued
analysis of potential uncertainties that may affect future operating results.
The Corporation will continue to review the tax criteria of "more likely than
not" for the recognition of deferred tax assets on a quarterly basis.
The consolidated effective tax rates are reconciled to the statutory rate
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory rate................................................... 35.0% 35.0% 35.0%
Difference resulting from:
Tax-exempt income.............................................. (1.6) (2.0) (3.6)
State, local and foreign income tax............................ 1.6 1.5 1.9
Other, net..................................................... 2.3 1.2 1.0
----- ----- -----
Effective tax rate............................................... 37.3% 35.7% 34.3%
----- ----- -----
----- ----- -----
</TABLE>
Foreign earnings of certain subsidiaries would be taxed only upon their
transfer to the United States. No transfers or dividends are contemplated at
this time. Taxes payable upon remittance of such accumulated earnings of $21,323
at December 31, 1996 would approximate $7,065.
Taxes, other than income taxes, included in other operating expenses for
the years ended December 31, 1996, 1995 and 1994 are $101,109, $105,913 and
$104,805, respectively.
B-42
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the
Corporation, which, in the opinion of management, reflects all adjustments
(comprising only normal recurring accruals) necessary for a fair presentation:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1996
Interest income................................. $835,649 $823,082 $815,755 $823,718
-------- -------- -------- --------
-------- -------- -------- --------
Interest expense................................ $298,561 $282,735 $282,360 $293,064
-------- -------- -------- --------
-------- -------- -------- --------
Net interest income............................. $537,088 $540,347 $533,395 $530,654
-------- -------- -------- --------
-------- -------- -------- --------
Provision for losses on loans................... $ 40,000 $ 40,000 $110,000(a) $ 38,767
-------- -------- -------- --------
-------- -------- -------- --------
Securities gains................................ $ 4,036 $ 31,135 $ 17,393 $ 6,948
-------- -------- -------- --------
-------- -------- -------- --------
Net income...................................... $195,546 $196,857 $ 79,597(a)(b) $177,144
-------- -------- -------- --------
-------- -------- -------- --------
Net income per common share..................... $ 0.91 $ 0.89 $ 0.36(a)(b) $ 0.81
-------- -------- -------- --------
-------- -------- -------- --------
Average common shares outstanding............... 215,866 220,409 219,478 219,512
-------- -------- -------- --------
-------- -------- -------- --------
Common Stock Price Information:
High.......................................... $ 55 3/8 $ 44 $ 43 1/8 $ 44
Low........................................... 42 3/4 35 1/2 35 3/4 36 1/8
Quarter-end................................... 51 7/8 43 1/4 38 1/2 42 3/8
1995
Interest income................................. $868,521 $871,164 $884,807 $850,588
-------- -------- -------- --------
-------- -------- -------- --------
Interest expense................................ $322,095 $329,592 $337,203 $319,265
-------- -------- -------- --------
-------- -------- -------- --------
Net interest income............................. $546,426 $541,572 $547,604 $531,323
-------- -------- -------- --------
-------- -------- -------- --------
Provision for losses on loans................... $ 38,225 $ 38,050 $ 34,661 $ 33,066
-------- -------- -------- --------
-------- -------- -------- --------
Securities gains................................ $ 5,729 $ 2,230 $ 5,512 $ 18,004
-------- -------- -------- --------
-------- -------- -------- --------
Net income...................................... $192,145 $194,712 $158,150(c) $110,169(c)
-------- -------- -------- --------
-------- -------- -------- --------
Net income per common share..................... $ 0.87 $ 0.88 $ 0.71(c) $ 0.49(c)
-------- -------- -------- --------
-------- -------- -------- --------
Average common shares outstanding............... 219,915 220,718 222,440 226,091
-------- -------- -------- --------
-------- -------- -------- --------
Common Stock Price Information:
High.......................................... $ 40 1/8 $ 38 7/8 $ 36 $ 33
Low........................................... 34 5/8 34 1/4 30 1/2 25 5/8
Quarter-end................................... 37 7/8 36 5/8 34 5/8 32
</TABLE>
- ---------------
(a) Includes a provision for loan losses of $70.0 million, $45.5 million
after-tax or $0.20 per share, related to the Meridian acquisition.
(b) Includes net restructuring and merger-related charges of $139.7 million,
$105.3 million after-tax or $0.48 per share, primarily recorded in the
second quarter and related to costs associated with the Meridian
acquisition.
(c) Includes restructuring charges of $110.0 million pre-tax, $70.0 million
after-tax or $0.31 per share, recorded by CoreStates, and $32.0 million
pre-tax, $20.8 million after-tax or $0.09 per share, recorded by Meridian
related to corporate-wide process redesigns in the first and second
quarters, respectively.
B-43
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
18. JOINT VENTURE
In December 1992, the Corporation entered into a joint venture with three
other banking companies creating Electronic Payment Services, Inc. ("EPS"). The
joint venture combines the partners' separate consumer electronic transaction
processing businesses and provides automated teller machine ("ATM") and
electronic point-of-sale ("POS") processing services. The Corporation
contributed to EPS its wholly-owned subsidiaries of Money Access Service Inc.
("MAC"), a regional ATM network, and BUYPASS Corporation, a third-party
processor of electronic POS transactions.
At the formation of EPS, the Corporation had equal ownership with two
partners in the joint venture, each with 31%. The fourth partner owned 7%. As
part of the 1992 transaction, the Corporation received a cash payment of $79,350
and $245,400 of EPS 5% cumulative redeemable preferred stock. The exchange of
assets involved in the transaction resulted in a 1992 pre-tax gain to the
Corporation of $41,072, $25,670 after-tax. The exchange also generated a
deferred gain of approximately $138,000.
In December 1993, the Corporation and EPS mutually agreed to enter into a
recapitalization of EPS involving the EPS preferred stock held by the
Corporation. In exchange for substantially all of the preferred stock, the
Corporation received from EPS a ten-year 6.45% note providing for equal
principal payments over the life of the note. The recapitalization did not
affect the amount of deferred gain, but changed the timing of deferred gain
income recognition from a five-year period beginning in 1996 to a ten-year
period which began in 1994.
On March 27, 1995, EPS added a new partner and increased the ownership
interests of an existing partner to that of a full partner, resulting in a
decrease in the Corporation's share of ownership from 31% to 20%. As a direct
result of this change in ownership interests, the Corporation recognized a
pre-tax gain of $19,000, $11,800 after-tax or $0.05 per share, in 1995. Included
in the pre-tax gain amount was $4,000 related to the acceleration of deferred
gain recognition.
The Corporation's investment in EPS at December 31, 1996, net of $104,000
deferred gain, is $65,304 and is included in other assets. "Income from
investment in EPS, Inc.", which is included in non-interest income, reflects the
Corporation's share in EPS net income, interest income on the 6.45% note and
amortization of the deferred gain.
19. RESTRUCTURING AND MERGER-RELATED CHARGES
A summary of restructuring and merger-related charges for the years ended
December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Meridian and United Counties merger-related restructuring
charges......................................................... $161,598 $ 10,000
Meridian merger-related implementation costs...................... 29,019 --
Process redesign restructuring charges............................ -- 142,000
Gains on sales of branches........................................ (43,064) (3,988)
Pension curtailment gains......................................... (7,851) (9,412)
-------- --------
Total........................................................ $139,702 $138,600
-------- --------
-------- --------
</TABLE>
B-44
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
19. RESTRUCTURING AND MERGER-RELATED CHARGES -- Continued
In 1996, the Corporation recorded merger-related restructuring charges of
$161,598, $120,150 after-tax or $0.55 per share, in connection with the
acquisitions of Meridian and United Counties. The charges included direct and
incremental costs associated with these acquisitions. The components of the
merger-related restructuring charges were as follows:
<TABLE>
<CAPTION>
REQUIRING 1996
CASH CASH
PROVISION OUTFLOW OUTFLOW
--------- --------- -------
<S> <C> <C> <C>
Severance costs........................................ $ 70,469 $ 70,469 $33,939
Branch closing costs................................... 33,469 15,102 3,815
Office reconfiguration costs........................... 19,059 2,792 21
Merger transaction costs............................... 14,624 14,624 13,328
System consolidation writedowns........................ 6,391 -- --
Miscellaneous.......................................... 17,586 17,593 9,634
--------- --------- -------
Total............................................. $ 161,598 $ 120,580 $60,737
--------- --------- -------
--------- --------- -------
</TABLE>
Restructuring and merger-related charges in 1996 also included $29,019,
$18,263 after-tax or $0.07 per share, of implementation costs that were incurred
in the process of consolidating Meridian and United Counties businesses and
operations.
The Corporation recorded restructuring credits of $50,915, $33,096
after-tax or $0.14 per share and $13,400, $8,549 after-tax or $0.03 per share in
1996 and 1995, respectively, related to gains on the curtailment of pension
benefits associated with employees displaced during 1996 and 1995 and gains on
the sale of branches which were sold as a result of consolidating the Meridian
and United Counties branches and the process redesigns.
Upon consummation of the merger, the Corporation recorded a $70 million
provision for loan losses in connection with a change in strategic direction
related to Meridian's problem assets and to conform its consumer lending
charge-off policies to those of the Corporation.
In 1995, the Corporation recorded restructuring charges of $142,000,
$90,800 after-tax or $0.40 per share, in connection with process redesigns
commenced during that year. The objectives of the process redesigns were: (i) to
enhance customer focus; (ii) to accelerate "cultural changes" which were already
in progress; and (iii) to improve productivity. The charges included direct and
incremental costs associated with the process redesigns. The components of the
process redesign restructuring charges were as follows:
<TABLE>
<CAPTION>
REQUIRING CASH
CASH OUTFLOW
PROVISION OUTFLOW TO DATE
--------- --------- -------
<S> <C> <C> <C>
Severance costs........................................ $ 87,900 $ 87,900 $74,944
Office reconfiguration and branch closing costs........ 44,300 16,600 3,881
Outplacement costs..................................... 2,500 2,500 2,002
Miscellaneous.......................................... 7,300 5,300 4,464
--------- --------- -------
Total............................................. $ 142,000 $ 112,300 $85,291
--------- --------- -------
--------- --------- -------
</TABLE>
The following table summarizes the activity in the restructuring and
merger-related accrual for the year ended December 31, 1996:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Balance at beginning of year.................................................. $ 82,772
Provision charged against income.............................................. 161,598
Cash outflow.................................................................. (100,258)
Writedowns of assets.......................................................... (35,907)
--------
Balance at December 31,....................................................... $108,205
--------
--------
</TABLE>
B-45
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
20. FINANCIAL STATEMENTS OF THE PARENT COMPANY
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Dividends from subsidiaries:
Banks.............................................. $657,744 $373,023 $389,733
Other subsidiaries................................. 27,217 91,917 27,575
-------- -------- --------
Total dividends from subsidiaries............... 684,961 464,940 417,308
Management fees and other income from subsidiaries... 178,179 190,027 186,092
Securities gains (losses)............................ (22) 16,343 259
Other income......................................... 3,054 3,241 1,483
-------- -------- --------
Total revenues.................................. 866,172 674,551 605,142
-------- -------- --------
EXPENSES
Interest on:
Funds borrowed..................................... 5,606 19,685 11,613
Long-term debt..................................... 22,843 21,578 13,137
-------- -------- --------
Total interest expense.......................... 28,449 41,263 24,750
Other operating expenses............................. 245,836 219,463 210,629
-------- -------- --------
Total expenses.................................. 274,285 260,726 235,379
-------- -------- --------
Income before income tax benefit and equity in
undistributed income of subsidiaries............... 591,887 413,825 369,763
-------- -------- --------
Income tax benefit................................... (14,911) (11,977) (15,357)
-------- -------- --------
Income before equity in undistributed income of
subsidiaries....................................... 606,798 425,802 385,120
-------- -------- --------
Equity in undistributed income (excess dividends) of
subsidiaries:
Banks.............................................. (52,497) 203,909 (9,827)
Other subsidiaries................................. 94,843 25,465 57,913
-------- -------- --------
Total equity in undistributed income of
subsidiaries.................................. 42,346 229,374 48,086
-------- -------- --------
Net Income........................................... $649,144 $655,176 $433,206
-------- -------- --------
-------- -------- --------
</TABLE>
B-46
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
20. FINANCIAL STATEMENTS OF THE PARENT COMPANY -- Continued
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Cash.......................................................... $ 1,374 $ 1,340
Time deposits................................................. 887 --
Investment-securities available-for-sale...................... 97,786 148,009
Investments and receivables -- subsidiaries:
Investments in subsidiaries at equity in underlying net
assets:
Banks.................................................... 3,389,148 3,769,779
Other subsidiaries....................................... 558,062 427,451
---------- ----------
Total investments in subsidiaries...................... 3,947,210 4,197,230
Receivables -- subsidiaries................................. 40,814 108,827
---------- ----------
Total investments and receivables -- subsidiaries...... 3,988,024 4,306,057
Other assets.................................................. 80,039 76,453
---------- ----------
Total assets........................................... $4,168,110 $4,531,859
---------- ----------
---------- ----------
LIABILITIES
Funds borrowed -- subsidiaries................................ $ -- $ 177,827
Dividends payable and other liabilities....................... 214,925 143,575
Long-term debt................................................ 257,491 334,892
---------- ----------
Total liabilities...................................... 472,416 656,294
---------- ----------
SHAREHOLDERS' EQUITY
Total shareholders' equity............................. 3,695,694 3,875,565
---------- ----------
Total liabilities and shareholders' equity............. $4,168,110 $4,531,859
---------- ----------
---------- ----------
</TABLE>
The Corporation has guaranteed certain borrowings of its subsidiaries at
December 31, 1996 in the amount of $3,259,181, which includes $675,181 for
commercial paper.
The maturities for parent company long-term debt for the years ending
December 31, 1997 through 2001 are: $1,475; $1,607; $1,751; $1,908; and $697,
respectively.
B-47
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
20. FINANCIAL STATEMENTS OF THE PARENT COMPANY -- Continued
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................................................... $ 649,144 $ 655,176 $ 433,206
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed income of subsidiaries............................................ (42,346) (229,374) (48,086)
Securities (gains) losses....................................................... 22 (16,343) (259)
Deferred income tax expense (benefit)........................................... 180 (785) (3,895)
Net (increase) decrease in other assets......................................... (6,969) 24,265 6,360
Net increase (decrease) in other liabilities.................................... 8,454 (22,761) 13,921
Other, net...................................................................... 7,288 7,840 (8,865)
----------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................................... 615,773 418,018 392,382
----------- --------- ---------
INVESTING ACTIVITIES
Net capital returned from (contributed to) subsidiaries............................ 270,226 190,900 (99,903)
(Increase) decrease in receivables from subsidiaries............................... 107,069 (3,593) 53,862
Purchases of investment securities................................................. (707,008) (170,988) (202,424)
Proceeds from maturities and sales of investment securities........................ 717,536 118,483 188,028
Purchase of Germantown Savings Bank................................................ -- -- (108,061)
Other, net......................................................................... -- (1,380) (1,428)
----------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............................. 387,823 133,422 (169,926)
----------- --------- ---------
FINANCING ACTIVITIES
Issuance (repayment) of funds borrowed............................................. -- (75,000) 75,000
Retirement of long-term debt....................................................... (77,401) (1,471) (45,568)
Proceeds from issuance of long-term debt........................................... -- 149,877 --
Net increase (decrease) in financing from and due to subsidiaries.................. (115,498) (94,054) 270,587
Cash dividends paid................................................................ (328,114) (286,565) (245,962)
Purchases of treasury stock........................................................ (533,932) (335,528) (228,963)
Purchases of ESOP shares........................................................... -- -- (35,568)
Repurchase and retirement of common stock.......................................... (57,703) (17,134) (24,888)
Common stock issued under employee benefit plans................................... 87,726 99,011 18,710
Funds transferred to Trust for future ESOP purchases............................... -- -- (24,432)
Other, net......................................................................... 21,360 6,777 11,294
----------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES........................................... (1,003,562) (554,087) (229,790)
----------- --------- ---------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS..................................... 34 (2,647) (7,334)
Cash and due from banks at January 1,.............................................. 1,340 3,987 11,321
----------- --------- ---------
CASH AND DUE FROM BANKS AT DECEMBER 31,............................................ $ 1,374 $ 1,340 $ 3,987
----------- --------- ---------
----------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest........................................................................ $ 25,267 $ 40,745 $ 24,500
----------- --------- ---------
----------- --------- ---------
Income taxes.................................................................... $ -- $ 43 $ (626)
----------- --------- ---------
----------- --------- ---------
</TABLE>
B-48
<PAGE>
EXHIBIT C
CERTAIN INDEPENDENT
AUDITORS' REPORTS
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Meridian Bancorp, Inc.:
We have audited the accompanying consolidated balance sheet of Meridian
Bancorp, Inc. and subsidiaries as of December 31, 1995, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the two year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the accounts and disclosures in the financial statements. An audit also includes
asserting 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Meridian
Bancorp, Inc. and subsidiaries 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
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As described in Notes 1 and 8, respectively, to the consolidated financial
statements, the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities and Statement
of Financial Accounting Standards No. 112, Employers' Accounting for
Postemployment Benefits, in 1994.
Philadelphia, Pa.
January 17, 1996,
Except as to note 2, which is as of February 23, 1996
/s/ KPMG Peat Marwick LLP
C-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
United Counties Bancorporation:
We have audited the accompanying consolidated balance sheet of United
Counties Bancorporation and subsidiaries as of December 31, 1995, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flow for each of the years in the two-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the
Bancorporation's management. Our responsibility is to express an opinion on
these consolidated finanical 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
Counties Bancorporation and subsidiaries at December 31, 1995, and the results
of their operations and their cash flow for each of the years in the two-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in notes 1 and 3 to the consolidated financial statements, the
Bancorporation adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," in 1994.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
January 16, 1996, except for note 20,
which is as of February 23, 1996
C-2
<PAGE>
COVENANT BANCORP, INC.
18 KINGS HIGHWAY WEST
HADDONFIELD, NEW JERSEY 08033
(609) 428-7300
October 15, 1997
Dear Stockholder:
On behalf of the Board of Directors, I want to extend to you a cordial
invitation to attend a Special Meeting of Stockholders of Covenant Bancorp, Inc.
("Covenant"). The meeting will be held at 2:00 p.m., on November 20, 1997, at
Tavistock Country Club, Haddonfield, New Jersey (the "Special Meeting").
The purpose of the Special Meeting is to vote on a proposal to approve the
Agreement and Plan of Mergers, dated as of August 4, 1997 (the "Merger
Agreement"), by and among Covenant, Covenant Bank, First Union Corporation
("FUNC") and First Union National Bank ("FUNB"), pursuant to which, among other
things, Covenant will merge with and into FUNC (the "Corporate Merger") and
Covenant Bank will merge with and into FUNB (the "Bank Merger" and, together
with the Corporate Merger, the "Mergers"), all on and subject to the terms and
conditions contained therein.
YOU WILL RECEIVE A SEPARATE PROSPECTUS/PROXY STATEMENT AND PROXY CARD WITH
RESPECT TO EACH CLASS OF STOCK THAT YOU HOLD. EVEN IF YOU PLAN TO ATTEND THE
SPECIAL MEETING IN PERSON, PLEASE BE SURE TO VOTE ALL OF YOUR SHARES BY
RETURNING THE SEPARATE PROXY CARD FOR EACH CLASS OF STOCK THAT YOU HOLD.
Upon consummation of the Corporate Merger, each outstanding share of
Covenant common stock (excluding certain shares held by Covenant or FUNC
("Excluded Shares")) will be converted into the right to receive .3813 shares of
FUNC common stock (the "Exchange Ratio"). In addition, (i) each outstanding
share of Covenant Series A preferred stock (other than Excluded Shares) will be
converted into the right to receive 1.516 shares of FUNC common stock (I.E., the
result obtained by multiplying the Exchange Ratio by 3.976, which is the number
of shares of Covenant common stock into which a share of such series of
preferred stock would be convertible as of its conversion date); and (ii) each
outstanding share of Covenant Series B preferred stock (other than Excluded
Shares) will be converted into the right to receive 1.2 shares of FUNC common
stock (I.E., the result obtained by multiplying the Exchange Ratio by 3.147,
which is the number of shares of Covenant common stock into which a share of
such series of preferred stock would be convertible as of its conversion date).
The Covenant Series A preferred stock will automatically convert into shares of
Covenant common stock on December 31, 1997, if the Corporate Merger has not been
consummated by such date. The common stock of FUNC is actively traded and is
listed on the New York Stock Exchange. The last reported sale price of FUNC
common stock on the New York Stock Exchange Composite Transactions Tape on
October 14, 1997, was $51.375 per share. It is expected that the transaction
generally will be tax free to Covenant stockholders for federal income tax
purposes.
Consummation of the Mergers is subject to certain conditions, including
approval of the Merger Agreement by Covenant stockholders and approval of the
Mergers by various regulatory agencies. Approval of the Merger Agreement
requires the affirmative vote of a majority of the votes cast at the Special
Meeting by the holders of Covenant common stock, Covenant Series A preferred
stock and Covenant Series B preferred stock, each voting as a separate class.
The accompanying Notice of Special Meeting and Prospectus/Proxy Statement
contain information about the Mergers. I urge you to review carefully such
information and the information in FUNC's 1996 Annual Report on Form 10-K, 1997
First and Second Quarter Reports on Form 10-Q, 1997 Annual Meeting Proxy
Statement and 1997 Current Reports on Form 8-K, copies of which are available as
indicated in the accompanying Prospectus/Proxy Statement under "AVAILABLE
INFORMATION".
THE BOARD OF DIRECTORS OF COVENANT HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT, BELIEVES THE MERGER AGREEMENT IS IN THE BEST INTERESTS OF COVENANT
AND ITS STOCKHOLDERS AND RECOMMENDS ITS APPROVAL BY COVENANT STOCKHOLDERS. EVEN
IF YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE COMPLETE THE
ENCLOSED PROXY, SIGN AND DATE IT AND MAIL IT PROMPTLY IN THE ENCLOSED
POSTAGE-PAID, RETURN ADDRESSED ENVELOPE.
Yours very truly,
/s/ Charles E. Sessa, Jr.
CHARLES E. SESSA, JR.
PRESIDENT
<PAGE>
COVENANT BANCORP, INC.
18 KINGS HIGHWAY WEST
HADDONFIELD, NEW JERSEY 08033
(609) 428-7300
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 20, 1997
October 15, 1997
Dear Stockholder:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Covenant
Bancorp, Inc. ("Covenant") will be held at 2:00 p.m., on November 20, 1997, at
Tavistock Country Club, Haddonfield, New Jersey (the "Special Meeting"), for the
following purpose:
To consider and vote upon a proposal to approve the Agreement and Plan of
Mergers, dated as of August 4, 1997 (the "Merger Agreement"), by and among
Covenant, Covenant Bank, First Union Corporation ("FUNC") and First Union
National Bank ("FUNB"), pursuant to which, among other things, (i) Covenant
will merge with and into FUNC (the "Corporate Merger") and Covenant Bank
will merge with and into FUNB (the "Bank Merger" and, together with the
Corporate Merger, the "Mergers"); (ii) each outstanding share of Covenant
common stock (excluding certain shares held by Covenant or FUNC ("Excluded
Shares")) will be converted into the right to receive .3813 shares of FUNC
common stock (the "Exchange Ratio"); (iii) each outstanding share of
Covenant Series A preferred stock (other than Excluded Shares) will be
converted into the right to receive 1.516 shares of FUNC common stock (I.E.,
the result obtained by multiplying the Exchange Ratio by 3.976, which is the
number of shares of Covenant common stock into which a share of such series
of preferred stock would be convertible as of its conversion date); and (iv)
each outstanding share of Covenant Series B preferred stock (other than
Excluded Shares) will be converted into the right to receive 1.2 shares of
FUNC common stock (I.E., the result obtained by multiplying the Exchange
Ratio by 3.147, which is the number of shares of Covenant common stock into
which a share of such series of preferred stock would be convertible as of
its conversion date), all on and subject to the terms and conditions
contained in the Merger Agreement.
A copy of the Merger Agreement is set forth in ANNEX B to the accompanying
Prospectus/Proxy Statement.
The Board of Directors of Covenant has fixed October 6, 1997, as the record
date for the determination of stockholders entitled to notice of and to vote at
the Special Meeting, and accordingly, only holders of record of Covenant common
stock, Covenant Series A preferred stock and Covenant Series B preferred stock
at the close of business on that date will be entitled to notice of and to vote
at the Special Meeting.
Approval of the Merger Agreement requires the affirmative vote of a
majority of the votes cast at the Special Meeting by the holders of Covenant
common stock, Covenant Series A preferred stock and Covenant Series B preferred
stock, each voting as a separate class.
Pursuant to the New Jersey Business Corporation Act, holders of Covenant
common stock, Covenant Series A preferred stock and Covenant Series B preferred
stock do not have dissenters' or appraisal rights in connection with the
proposal to approve the Merger Agreement.
THE BOARD OF DIRECTORS OF COVENANT UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS
VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
By Order of the Board of Directors of
COVENANT BANCORP, INC.,
/s/ William T. Carson, Jr.
WILLIAM T. CARSON, JR.
CORPORATE SECRETARY
COVENANT STOCKHOLDERS ARE URGED TO COMPLETE, DATE, SIGN AND RETURN PROMPTLY THE
ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED
IN THE UNITED STATES.
<PAGE>
<TABLE>
<S> <C>
PROSPECTUS PROXY STATEMENT
1,825,000 SHARES
FIRST UNION CORPORATION COVENANT BANCORP, INC.
COMMON STOCK SPECIAL MEETING OF STOCKHOLDERS
$3.33 1/3 PAR VALUE PER SHARE TO BE HELD ON NOVEMBER 20, 1997
</TABLE>
This Prospectus/Proxy Statement is being furnished by Covenant Bancorp,
Inc., a New Jersey corporation ("Covenant"), to the holders of Covenant common
stock, par value $5.00 per share ("Covenant Common Stock"), Covenant Series A
preferred stock, par value $25.00 per share ("Covenant Series A Preferred
Stock"), and Covenant Series B preferred stock, par value $25.00 per share
("Covenant Series B Preferred Stock" and, together with Covenant Series A
Preferred Stock, "Covenant Preferred Stock"), as a Proxy Statement in connection
with the solicitation of proxies by the Board of Directors of Covenant (the
"Covenant Board") for use at a Special Meeting of Stockholders of Covenant to be
held at 2:00 p.m., on November 20, 1997, at Tavistock Country Club, Haddonfield,
New Jersey, and at any adjournments or postponements thereof (the "Special
Meeting"). This Prospectus/Proxy Statement is also being furnished by First
Union Corporation, a North Carolina corporation ("FUNC"), as a Prospectus with
respect to the shares (the "FUNC Common Shares") of FUNC common stock, $3.33 1/3
par value per share (together with the FUNC Rights (as hereinafter defined)
attached thereto, "FUNC Common Stock"), that are issuable upon consummation of
the Corporate Merger (as hereinafter defined).
This Prospectus/Proxy Statement, the accompanying Notice of Special Meeting
and forms of proxy are first being mailed to the stockholders of Covenant on or
about October 20, 1997.
The purpose of the Special Meeting is to consider and vote upon a proposal
to approve the Agreement and Plan of Mergers, dated as of August 4, 1997 (the
"Merger Agreement"), by and among Covenant, Covenant Bank, a New Jersey bank,
FUNC and First Union National Bank, a national banking association headquartered
in Avondale, Pennsylvania ("FUNB"), pursuant to which, among other things,
Covenant will merge with and into FUNC (the "Corporate Merger") and Covenant
Bank will merge with and into FUNB (the "Bank Merger" and, together with the
Corporate Merger, the "Mergers"), all on and subject to the terms and conditions
contained therein.
Upon consummation of the Corporate Merger, (i) each outstanding share of
Covenant Common Stock (excluding any shares of stock held by Covenant or FUNC,
other than in a fiduciary capacity or in satisfaction of a debt previously
contracted ("Excluded Shares")) will be converted into the right to receive
.3813 FUNC Common Shares (the "Common Stock Exchange Ratio"); (ii) each
outstanding share of Covenant Series A Preferred Stock (other than Excluded
Shares) will be converted into the right to receive 1.516 FUNC Common Shares
(I.E., the result obtained by multiplying the Common Stock Exchange Ratio by
3.976, which is the number of shares of Covenant Common Stock into which a share
of such series of preferred stock would be convertible as of its conversion
date) (the "Series A Exchange Ratio"); and (iii) each outstanding share of
Covenant Series B Preferred Stock (other than Excluded Shares) will be converted
into the right to receive 1.2 FUNC Common Shares (I.E., the result obtained by
multiplying the Common Stock Exchange Ratio by 3.147, which is the number of
shares of Covenant Common Stock into which a share of such series of preferred
stock would be convertible as of its conversion date) (the "Series B Exchange
Ratio"). The Covenant Series A Preferred Stock will automatically convert into
shares of Covenant Common Stock on December 31, 1997, if the Corporate Merger
has not been consummated by such date. See "THE MERGERS -- Exchange of Covenant
Certificates". Upon consummation of the Corporate Merger, the Excluded Shares
will be canceled.
Based on (i) 3,057,332 shares of Covenant Common Stock outstanding on the
Record Date (as hereinafter defined); (ii) 138,300 shares of Covenant Series A
Preferred Stock outstanding on the Record Date; (iii) 161,700 shares of Covenant
Series B Preferred Stock outstanding on the Record Date; (iv) 451,350 shares of
Covenant Common Stock issuable upon the exercise of all options outstanding on
the Record Date to purchase shares of Covenant Common Stock granted to employees
and directors of Covenant; (v) an estimated 5,000 shares of Covenant Common
Stock issuable pursuant to Covenant's employee stock purchase plan prior to
consummation of the Corporate Merger; and (vi) the Common Stock Exchange Ratio,
Series A Exchange Ratio and Series B Exchange Ratio, a total of 1,743,470 FUNC
Common Shares will be issuable upon consummation of the Corporate Merger, which
represents less than one percent of the total number of FUNC Common Shares
outstanding on September 30, 1997. See "RECENT DEVELOPMENTS -- FUNC Common Stock
Buybacks".
FUNC Common Stock is listed and traded on the New York Stock Exchange
("NYSE"), Covenant Common Stock is listed and traded on the Nasdaq Stock Market
National Market (the "Nasdaq National Market") and Covenant Preferred Stock is
listed and traded on the Nasdaq Stock Market Small-Cap Market (the "Nasdaq
Small-Cap Market"). On August 4, 1997, the last business day prior to public
announcement of the execution of the Merger Agreement, the last reported sale
price per share of FUNC Common Stock on the NYSE Composite Transactions Tape
(the "NYSE Tape"), the last reported sale price of Covenant Common Stock on the
Nasdaq National Market and the last reported sale prices of Covenant Series A
Preferred Stock and Covenant Series B Preferred Stock on the Nasdaq Small-Cap
Market were $49.50, $21.00, $76.00 and $57.125, respectively. On October 14,
1997, such prices were $51.375, $19.00, $76.00 and $55.00, respectively. See
"RECENT DEVELOPMENTS -- Wheat First Butcher Singer, Inc. Acquisition" and "THE
MERGERS -- Market Prices".
Covenant stockholders do not have dissenters' or appraisal rights in
connection with the proposal to approve the Merger Agreement. See "THE
MERGERS -- No Dissenters' Rights".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS/PROXY STATEMENT IS OCTOBER 15, 1997.
<PAGE>
AVAILABLE INFORMATION
FUNC and Covenant (since Covenant's reorganization as a holding company for
Covenant Bank on June 13, 1997) are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (the "Exchange Act"), and, in accordance therewith, file reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by FUNC and Covenant can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's Regional Offices in New York (7 World Trade
Center, 13th Floor, New York, New York 10048) and Chicago (Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60621) and copies of such
materials can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Certain of
such reports, proxy statements and other information is also available from the
Commission over the Internet at http://www.sec.gov. In addition, prior to June
13, 1997, Covenant Bank was subject to the informational requirements of the
rules and regulations of the Federal Deposit Insurance Corporation (the "FDIC")
promulgated under the Exchange Act, and, in accordance therewith, filed reports,
proxy statements and other information with the FDIC. Such reports, proxy
statements and other information can be inspected at the office of the FDIC,
Registration and Disclosure Section, 550 17th Street, N.W., Washington, D.C.
20429, and copies may be obtained from the FDIC at prescribed rates. Since FUNC
Common Stock is listed on the NYSE, reports, proxy statements and other
information relating to FUNC can also be inspected at the offices of the NYSE,
20 Broad Street, New York, New York 10005.
This Prospectus/Proxy Statement does not contain all of the information set
forth in the Registration Statement on Form S-4 (No. 333-37709), of which this
Prospectus/Proxy Statement is a part, and the exhibits thereto (together with
any amendments or supplements thereto, the "Registration Statement"), which has
been filed by FUNC with the Commission under the Securities Act of 1933, as
amended, and the rules and regulations thereunder (the "Securities Act"),
certain portions of which have been omitted pursuant to the rules and
regulations of the Commission and to which portions reference is hereby made for
further information.
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. A COPY OF SUCH DOCUMENTS IS
AVAILABLE WITHOUT CHARGE (OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS) TO ANY
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROSPECTUS/PROXY STATEMENT
IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO: FIRST UNION CORPORATION, INVESTOR
RELATIONS, TWO FIRST UNION CENTER, CHARLOTTE, NORTH CAROLINA 28288-0206
(TELEPHONE NUMBER (704) 374-6782). IN ORDER TO ENSURE TIMELY DELIVERY OF SUCH
DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY NOVEMBER 13, 1997.
All information contained or incorporated by reference in this
Prospectus/Proxy Statement with respect to FUNC was supplied by FUNC, and all
information contained in this Prospectus/Proxy Statement with respect to
Covenant was supplied by Covenant.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY FUNC OR COVENANT. NEITHER THE DELIVERY OF THIS
PROSPECTUS/PROXY STATEMENT NOR ANY DISTRIBUTION OF THE FUNC COMMON SHARES SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF FUNC OR COVENANT SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS
PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE FUNC COMMON SHARES
OR AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT LAWFUL.
The Commissioner of Insurance of the State of North Carolina (the
"Commissioner") has not approved or disapproved this offering nor has the
Commissioner passed upon the accuracy or adequacy of this Prospectus/Proxy
Statement.
THE FUNC COMMON SHARES 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 GOVERNMENT
AGENCY.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by FUNC (File No.
1-10000) under Section 13(a) or 15(d) of the Exchange Act are hereby
incorporated by reference in this Prospectus/Proxy Statement:
(i) FUNC's Annual Report on Form 10-K for the year ended December 31,
1996;
(ii) FUNC's Quarterly Reports on Form 10-Q for the periods ended
March 31, 1997 and June 30, 1997; and
(iii) FUNC's Current Reports on Form 8-K dated January 13, 1997, July
21, 1997 and August 20, 1997.
All documents filed by FUNC pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date hereof and prior to the date of the
Special Meeting are hereby incorporated by reference into this Prospectus/Proxy
Statement and shall be deemed to be a part hereof from the date of filing of
such documents.
Certain financial and other information relating to Covenant is contained
in this Prospectus/Proxy Statement, including ANNEX A attached hereto.
Any statement contained herein, in any supplement hereto or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of the Registration Statement and this
Prospectus/Proxy Statement to the extent that a statement contained herein, in
any supplement hereto or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of the Registration
Statement, this Prospectus/Proxy Statement or any supplement hereto.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This Prospectus/Proxy Statement (including information included or
incorporated by reference herein) contains certain forward-looking statements
with respect to the financial condition, results of operations, plans,
objectives, future performance and business of each of FUNC and Covenant, as
well as certain information relating to FUNC's pending acquisitions of Signet
Banking Corporation ("Signet") (the "Signet Acquisition") and Wheat First
Butcher Singer, Inc. ("WFBS") (the "WFBS Acquisition" and, together with the
Signet Acquisition, the "Other Pending Acquisitions"), including (i) statements
relating to the cost savings estimated to result from the Signet Acquisition
(see "RECENT DEVELOPMENTS -- Signet Banking Corporation Acquisition"), (ii)
statements relating to revenues estimated to result from the Signet Acquisition
(see "RECENT DEVELOPMENTS -- Signet Banking Corporation Acquisition"), (iii)
statements relating to the restructuring charges estimated to be incurred in
connection with the Signet Acquisition (see "RECENT DEVELOPMENTS -- Signet
Banking Corporation Acquisition"), and (iv) statements preceded by, followed by
or that include the words "believes", "expects", "anticipates", "estimates" or
similar expressions (see "THE MERGERS -- Background and Reasons" and
" -- Opinion of Financial Advisor"). These forward-looking statements involve
certain risks and uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements include,
among others, the following possibilities: (a) expected cost savings from the
Mergers and the Other Pending Acquisitions may not be fully realized or realized
within the expected time frame; (b) revenues following the Mergers and the Other
Pending Acquisitions may be lower than expected, or deposit attrition, operating
costs or customer loss and business disruption following the Mergers and the
Other Pending Acquisitions may be greater than expected; (c) competitive
pressures among depository and other financial institutions may increase
significantly; (d) costs or difficulties related to the integration of the
business of FUNC, Covenant, Signet and/or WFBS may be greater than expected; (e)
changes in the interest rate environment may reduce margins; (f) general
economic or business conditions, either nationally or in the states in which
FUNC is doing business, may be less favorable than expected resulting in, among
other things, a deterioration in credit quality or a reduced demand for credit;
(g) legislative or regulatory changes may adversely affect the business in which
FUNC is engaged; and (h) changes may occur in the securities markets.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
AVAILABLE INFORMATION................................................................................................. 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................................................... 3
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION........................................................... 3
SUMMARY............................................................................................................... 6
RECENT DEVELOPMENTS................................................................................................... 17
Certain Financial Information for the Period Ended September 30, 1997............................................... 17
Signet Banking Corporation Acquisition.............................................................................. 18
Wheat First Butcher Singer, Inc. Acquisition........................................................................ 19
FUNC Common Stock Buybacks.......................................................................................... 19
FUNC Common Stock Offering.......................................................................................... 19
Future Acquisitions................................................................................................. 20
GENERAL INFORMATION................................................................................................... 20
General............................................................................................................. 20
Record Date; Vote Required; Revocation of Proxies................................................................... 20
THE MERGERS........................................................................................................... 21
General; Exchange Ratios............................................................................................ 21
Effective Date...................................................................................................... 22
Exchange of Covenant Certificates................................................................................... 22
Background and Reasons.............................................................................................. 23
Opinion of Financial Advisor........................................................................................ 26
Interests of Certain Persons........................................................................................ 28
Certain Federal Income Tax Consequences............................................................................. 30
Business Pending Consummation....................................................................................... 31
Regulatory Approvals................................................................................................ 31
Conditions to Consummation; Termination............................................................................. 32
Waiver; Amendment................................................................................................... 33
Accounting Treatment................................................................................................ 33
Expenses; Termination Fee........................................................................................... 33
No Dissenters' Rights............................................................................................... 34
Market Prices....................................................................................................... 35
Dividends........................................................................................................... 37
COVENANT.............................................................................................................. 38
General............................................................................................................. 38
History and Business................................................................................................ 38
FUNC.................................................................................................................. 39
General............................................................................................................. 39
History and Business................................................................................................ 39
Certain Regulatory Considerations................................................................................... 40
DESCRIPTION OF FUNC CAPITAL STOCK..................................................................................... 43
Authorized Capital.................................................................................................. 43
FUNC Common Stock................................................................................................... 43
FUNC Preferred Stock................................................................................................ 44
FUNC Class A Preferred Stock........................................................................................ 44
FUNC Rights Plan.................................................................................................... 44
Other Provisions.................................................................................................... 45
CERTAIN DIFFERENCES IN THE RIGHTS OF COVENANT AND FUNC STOCKHOLDERS................................................... 46
General............................................................................................................. 46
Authorized Capital.................................................................................................. 46
Amendment to Articles of Incorporation or Bylaws.................................................................... 46
Size and Classification of Board of Directors....................................................................... 47
</TABLE>
4
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<TABLE>
<CAPTION>
PAGE
<S> <C>
Removal of Directors................................................................................................ 47
Director Exculpation................................................................................................ 47
Director Conflict of Interest Transactions.......................................................................... 47
Stockholder Meetings................................................................................................ 48
Director Nominations................................................................................................ 48
Stockholder Proposals............................................................................................... 49
Stockholder Protection Rights Plans................................................................................. 49
Stockholder Inspection Rights; Stockholder Lists.................................................................... 49
Required Stockholder Vote for Certain Actions....................................................................... 49
Anti-Takeover Provisions............................................................................................ 50
Dissenters' Rights.................................................................................................. 51
Dividends and Other Distributions................................................................................... 51
Voluntary Dissolution............................................................................................... 52
RESALE OF FUNC COMMON SHARES.......................................................................................... 52
VALIDITY OF FUNC COMMON SHARES........................................................................................ 52
EXPERTS............................................................................................................... 52
ANNEX A -- CERTAIN COVENANT INFORMATION
Annual Report on Form F-2, as amended, of Covenant Bank for the Year
Ended December 31, 1996................................................................................ A-1
Quarterly Report on Form 10-Q/A of Covenant Bancorp, Inc., for the Quarter Ended
June 30, 1997.......................................................................................... A-52
ANNEX B -- AGREEMENT AND PLAN OF MERGERS (including the form of Voting Agreement)..................................... B-1
ANNEX C -- OPINION OF BERWIND FINANCIAL, L.P. ........................................................................ C-1
</TABLE>
5
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY OF CERTAIN INFORMATION RELATING TO THE MERGERS IS NOT
INTENDED TO BE A SUMMARY OF ALL MATERIAL INFORMATION RELATING TO THE MERGERS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION
CONTAINED ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT, INCLUDING THE ANNEXES
HERETO, AND IN THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS PROSPECTUS/PROXY
STATEMENT. A COPY OF THE MERGER AGREEMENT IS SET FORTH IN ANNEX B TO THIS
PROSPECTUS/PROXY STATEMENT AND REFERENCE IS MADE THERETO FOR A COMPLETE
DESCRIPTION OF THE TERMS OF THE MERGERS. STOCKHOLDERS ARE URGED TO READ
CAREFULLY THIS ENTIRE PROSPECTUS/PROXY STATEMENT, INCLUDING THE ANNEXES HERETO
AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. AS USED IN THIS
PROSPECTUS/PROXY STATEMENT, THE TERMS "FUNC", "FUNB", "COVENANT" AND "COVENANT
BANK" REFER TO SUCH ORGANIZATIONS, RESPECTIVELY, AND UNLESS THE CONTEXT
OTHERWISE REQUIRES, TO THEIR RESPECTIVE CONSOLIDATED SUBSIDIARIES AND, WITH
RESPECT TO COVENANT FOR PERIODS PRIOR TO ITS FORMATION ON JUNE 13, 1997 AS A
HOLDING COMPANY FOR COVENANT BANK, REFERENCES TO COVENANT SHALL MEAN COVENANT
BANK.
PARTIES TO THE MERGERS
FUNC AND FUNB
FUNC is a North Carolina-based, multi-bank holding company registered under
the Bank Holding Company Act of 1956, as amended, and the rules and regulations
promulgated thereunder (the "BHCA"). Through its full-service banking
subsidiaries, FUNC provides a wide range of commercial and retail banking
services and trust services in North Carolina, Florida, South Carolina, Georgia,
Tennessee, Virginia, Maryland, Delaware, Pennsylvania, New Jersey, New York,
Connecticut and Washington, D.C. FUNC also provides various other financial
services, including mortgage banking, home equity lending, credit cards,
leasing, investment banking, insurance and securities brokerage services,
through other subsidiaries. As of June 30, 1997, and for the six months then
ended, FUNC reported assets of $142.9 billion, net loans of $96.4 billion,
deposits of $92.9 billion, stockholders' equity of $10.0 billion and net income
applicable to common stockholders of $956 million, and as of such date FUNC
operated in 38 states, Washington, D.C. and six foreign countries. FUNC is the
sixth largest bank holding company in the United States, based on assets at June
30, 1997. The principal executive offices of FUNC are located at One First Union
Center, Charlotte, North Carolina 28288-0013, and its telephone number is (704)
374-6565.
FUNB, a national banking association with its headquarters in Avondale,
Pennsylvania, provides a wide range of commercial and retail banking services
and trust services in New Jersey, New York and Pennsylvania, and is an indirect
subsidiary of FUNC. As of June 30, 1997, and for the six months then ended, FUNB
reported assets of $27.6 billion, net loans of $19.6 billion, deposits of $21.6
billion, stockholder's equity of $2.3 billion and net income of $228 million.
See "FUNC -- Certain Regulatory Considerations; INTERSTATE BANKING AND BRANCHING
LEGISLATION".
FUNC is continually evaluating acquisition opportunities and frequently
conducts due diligence activities in connection with possible acquisitions. As a
result, acquisition discussions and, in some cases, negotiations frequently take
place and future acquisitions involving cash, debt or equity securities can be
expected. Acquisitions typically involve the payment of a premium over book and
market values, and therefore, some dilution of FUNC's book value and net income
per common share may occur in connection with any future transactions.
See " -- Comparison of Certain Unaudited Per Share Data", " -- Selected
Financial Data", "RECENT DEVELOPMENTS" and "FUNC".
COVENANT AND COVENANT BANK
Covenant is a bank holding company registered under the BHCA. Covenant is
the parent corporation of Covenant Bank, a New Jersey commercial bank that
provides commercial and retail banking services in southern New Jersey. As of
June 30, 1997, and for the six months then ended, Covenant reported assets of
$454 million, loans, net of unearned income of $263 million, deposits of $302
million, stockholders' equity of $31 million and net income of $2 million, and
as of such date Covenant operated through 17 offices in southern New Jersey. The
principal executive offices of Covenant are located at 18 Kings Highway West,
Haddonfield, New Jersey 08033 and its telephone number is (609) 428-7300. See
" -- Comparison of Certain Unaudited Per Share Data", " -- Selected Financial
Data", "RECENT DEVELOPMENTS" and "COVENANT".
SPECIAL MEETING; RECORD DATE
The Special Meeting is scheduled to be held on November 20, 1997, at 2:00
p.m., at Tavistock Country Club, Haddonfield, New Jersey. At the Special
Meeting, holders of Covenant Common Stock, Covenant Series A Preferred Stock and
6
<PAGE>
Covenant Series B Preferred Stock, each voting as a separate class, will
consider and vote upon a proposal to approve the Merger Agreement.
The Covenant Board has fixed October 6, 1997, as the record date for
determining stockholders entitled to notice of and to vote at the Special
Meeting (the "Record Date"). As of such date, there were 3,057,332 shares of
Covenant Common Stock, 138,300 shares of Covenant Series A Preferred Stock and
161,700 shares of Covenant Series B Preferred Stock outstanding and entitled to
be voted at the Special Meeting.
See "GENERAL INFORMATION".
THE MERGERS; EXCHANGE RATIOS
Subject to the terms and conditions of the Merger Agreement, Covenant will
merge with and into FUNC and Covenant Bank will merge with and into FUNB. Upon
consummation of the Corporate Merger, (i) each outstanding share of Covenant
Common Stock (other than Excluded Shares) will be converted into the right to
receive .3813 FUNC Common Shares (I.E., the Common Stock Exchange Ratio); (ii)
each outstanding share of Covenant Series A Preferred Stock (other than Excluded
Shares) will be converted into the right to receive 1.516 FUNC Common Shares
(I.E., the Series A Exchange Ratio); and (iii) each outstanding share of
Covenant Series B Preferred Stock (other than Excluded Shares) will be converted
into the right to receive 1.2 FUNC Common Shares (I.E., the Series B Exchange
Ratio). The Covenant Series A Preferred Stock will automatically convert into
shares of Covenant Common Stock on December 31, 1997, if the Corporate Merger
has not been consummated by such date.
See "RECENT DEVELOPMENTS -- FUNC Common Stock Buybacks", "THE
MERGERS -- General; Exchange Ratios" and " -- Exchange of Covenant
Certificates", "DESCRIPTION OF FUNC CAPITAL STOCK" and "CERTAIN DIFFERENCES IN
THE RIGHTS OF COVENANT AND FUNC STOCKHOLDERS".
VOTE REQUIRED
Approval of the Merger Agreement at the Special Meeting requires the
affirmative vote of a majority of the votes cast by the holders of Covenant
Common Stock, Covenant Series A Preferred Stock and Covenant Series B Preferred
Stock, each voting as a separate class.
The directors and executive officers of Covenant (including certain of
their related interests) beneficially owned, as of the Record Date, and are
entitled to vote at the Special Meeting, 276,210 shares of Covenant Common
Stock, 21,000 shares of Covenant Series A Preferred Stock and 53,326 shares of
Covenant Series B Preferred Stock, which represent approximately nine percent,
15 percent and 33 percent of the outstanding shares of Covenant Common Stock,
Covenant Series A Preferred Stock and Covenant Series B Preferred Stock,
respectively, entitled to be voted at the Special Meeting. As an inducement to
and a condition of FUNC's willingness to enter into the Merger Agreement, each
of the directors of Covenant, beneficially owning and entitled to vote in the
aggregate approximately nine percent, 14 percent and 32 percent of the shares of
Covenant Common Stock, Covenant Series A Preferred Stock and Covenant Series B
Preferred Stock outstanding on the Record Date, respectively, agreed to vote
such shares in favor of approval of the Merger Agreement at the Special Meeting
(the "Voting Agreement"). It is currently expected that the directors and
executive officers of Covenant will vote the shares of Covenant Common Stock and
Covenant Preferred Stock that such directors and executive officers of Covenant
are entitled to vote at the Special Meeting in favor of approval of the Merger
Agreement. To the best of FUNC's knowledge, no shares of Covenant Common Stock
or Covenant Preferred Stock are beneficially owned and entitled to be voted at
the Special Meeting by any of the directors, executive officers or affiliates of
FUNC. FUNB holds 6,000 shares of Covenant Series B Preferred Stock in a
custodial capacity on behalf of a client of an investment advisory firm which is
majority owned by Richard A. Hocker, Chairman and Chief Executive Officer of
Covenant, but FUNB is not entitled to vote such shares. Such shares are not
included in the shares of Covenant Series B Preferred Stock beneficially owned
by the directors and executive officers of Covenant indicated above. It is
currently expected that such shares will be voted in favor of approval of the
Merger Agreement at the Special Meeting.
See "GENERAL INFORMATION -- Record Date; Vote Required; Revocation of
Proxies".
EFFECTIVE DATE
Subject to the conditions to the obligations of the parties to effect the
Mergers set forth in the Merger Agreement, the Corporate Merger will become
effective on such date (the "Effective Date") as FUNC and Covenant mutually
agree upon,
7
<PAGE>
and if not so agreed upon, such date will be the fifth business day to occur
after the last of certain conditions to consummation of the Mergers relating to,
among other things, approval of the Merger Agreement by Covenant stockholders,
receipt of the requisite regulatory approvals to the Mergers and the listing on
the NYSE of the FUNC Common Shares, have been satisfied or waived (or, at the
election of FUNC, on the last business day of the month in which such day
occurs); provided that such date will be after December 31, 1997, unless FUNC
and Covenant mutually agree otherwise. Subject to the foregoing, it is currently
anticipated that the Mergers will be consummated in the first quarter of 1998.
If the Corporate Merger is consummated in such quarter, or in any other quarter,
Covenant stockholders should not assume or expect that the Effective Date will
precede the record date for the dividend on FUNC Common Stock for that quarter,
so as to enable such stockholders to receive such dividend.
Assuming the Corporate Merger is consummated after December 31, 1997, which
is currently anticipated, it is currently expected that a dividend on Covenant
Series A Preferred Stock and Covenant Series B Preferred Stock in the amount of
$.375 per share will be paid on January 14, 1998, to holders of record on
December 31, 1997. Such dividend would be paid to holders of shares of Covenant
Series A Preferred Stock notwithstanding the conversion of such shares into
shares of Covenant Common Stock on December 31, 1997.
See "THE MERGERS -- Effective Date", " -- Exchange of Covenant
Certificates", " -- Conditions to Consummation; Termination" and
" -- Dividends".
RECOMMENDATION OF THE COVENANT BOARD
THE COVENANT BOARD HAS APPROVED THE MERGER AGREEMENT BY UNANIMOUS VOTE,
BELIEVES IT IS IN THE BEST INTERESTS OF COVENANT AND ITS STOCKHOLDERS AND
RECOMMENDS ITS APPROVAL BY COVENANT STOCKHOLDERS. SEE "THE MERGERS -- BACKGROUND
AND REASONS; COVENANT".
OPINION OF FINANCIAL ADVISOR
Berwind Financial, L.P. ("Berwind Financial") has advised the Covenant
Board that, in its opinion, the consideration to be received by Covenant
stockholders in the Corporate Merger is fair, from a financial point of view, to
Covenant stockholders. The full text of Berwind Financial's opinion, which
describes the procedures followed, assumptions made, limitations on the review
undertaken and other matters in connection with rendering such opinion, is set
forth in ANNEX C to this Prospectus/Proxy Statement and should be read in its
entirety by Covenant stockholders. See "THE MERGERS -- Opinion of Financial
Advisor".
INTERESTS OF CERTAIN PERSONS IN THE MERGERS
Certain members of Covenant's management and the Covenant Board may be
deemed to have interests in the Mergers in addition to their interests as
stockholders of Covenant generally. These include, among other things,
provisions in the Merger Agreement relating to indemnification, directors' and
officers' liability insurance, and certain other benefits as summarized below.
Pursuant to the Merger Agreement, FUNC has agreed to assume Covenant's
obligations under certain agreements (the "Termination Agreements") with Messrs.
Richard A. Hocker, Charles E. Sessa, Jr., William Parker, Jr., Eugene D'Orazio
and Kenneth R. Mancini (the "Covenant Officers"). Messrs. Hocker and Sessa also
are directors of Covenant. Pursuant to the terms of the Termination Agreements
with respect to Messrs. Hocker and Sessa, if termination of employment occurs
within two years following a "Change in Control" (as such term is defined in the
Termination Agreements, and which would include consummation of the Corporate
Merger), such officers will be entitled to receive certain payments and
benefits, unless such termination of employment is because of such officer's
death. In addition, even if a Change in Control has not occurred within two
years prior to the date of termination of employment, Messrs. Hocker and Sessa
will be entitled to such payments and benefits unless such termination of
employment is (i) because of such officer's death, (ii) by the employer for
"Cause", or (iii) by such officer for other than "Good Reason" (as each of such
terms is defined in the Termination Agreements). Pursuant to the Termination
Agreements with respect to the Covenant Officers other than Messrs. Hocker and
Sessa, such officers will be entitled to such payments and benefits if
termination of employment occurs within two years following a Change in Control,
unless such termination is because of any of the reasons set forth in clauses
(i), (ii) or (iii) above.
In addition, pursuant to the Termination Agreements, the terms of
Covenant's option plans and the individual stock option agreements thereunder,
options granted to the Covenant Officers will become fully vested and
exercisable upon consummation of the Corporate Merger.
See "THE MERGERS -- Interests of Certain Persons".
8
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Among other things, consummation of the Mergers is conditioned upon receipt
by FUNC and Covenant of an opinion of Sullivan & Cromwell, special counsel for
FUNC, dated as of the Effective Date, that (a) the Corporate Merger constitutes
a reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code"), and (b) no gain or loss will be recognized for federal
income tax purposes by stockholders of Covenant who receive FUNC Common Shares
solely in exchange for their shares of Covenant Common Stock or Covenant
Preferred Stock, except that gain or loss may be recognized as to cash received
in lieu of fractional share interests. See "THE MERGERS -- Certain Federal
Income Tax Consequences".
BECAUSE CERTAIN TAX CONSEQUENCES MAY VARY DEPENDING UPON THE PARTICULAR
CIRCUMSTANCES OF EACH COVENANT STOCKHOLDER, IT IS RECOMMENDED THAT COVENANT
STOCKHOLDERS CONSULT THEIR TAX ADVISORS CONCERNING THE FEDERAL (AND ANY STATE
AND LOCAL) TAX CONSEQUENCES OF THE CORPORATE MERGER IN THEIR PARTICULAR
CIRCUMSTANCES.
RESALE OF FUNC COMMON SHARES
The FUNC Common Shares will be freely transferable by the holders of such
shares under applicable federal securities laws, except for those shares held by
those holders who may be deemed to be "affiliates" (generally including
directors, certain executive officers and ten percent or more stockholders) of
Covenant or FUNC. See "RESALE OF FUNC COMMON SHARES".
BUSINESS PENDING CONSUMMATION
Covenant agreed in the Merger Agreement to conduct its business in the
ordinary and usual course consistent with past practice and to refrain from
taking certain actions relating to its operation pending consummation of the
Mergers, without the prior written consent of FUNC, except as otherwise
permitted by the Merger Agreement. These actions include, without limitation:
(i) paying any dividends, other than dividends payable on Covenant Preferred
Stock at a quarterly rate not to exceed the rate provided for in the terms
thereof, or redeeming or otherwise acquiring any shares of its capital stock, or
issuing any additional shares of its capital stock, or giving any person the
right to acquire any such shares; (ii) incurring any indebtedness for borrowed
money or becoming liable for the obligations of any other entity (other than in
the ordinary course of business consistent with past practice); (iii) entering
into any employment, consulting, severance or similar agreements or arrangements
with any director, officer or employee of Covenant, or granting any salary or
wage increase or increasing any employee benefits (including incentive or bonus
payments), except for normal individual increases in regular compensation in the
ordinary course of business consistent with past practice; (iv) disposing of any
material portion of its assets or acquiring any portion of the business or
property of any other entity which is material to it; (v) changing its lending,
investment, liability management or other material banking policies in any
material respect; (vi) settling any claim, action or proceeding involving money
damages in an amount greater than $25,000 or any restrictions upon the
operations of Covenant; or (vii) entering into, terminating or materially
changing any material agreements, except for those agreements entered into in
the ordinary course of business consistent with past practice that are
terminable by Covenant without penalty on not more than 60 days' prior written
notice.
Covenant also has agreed to make such modifications or changes to its
accounting, loan, litigation and other reserve and real estate valuation
policies and practices prior to the Effective Date, as may be mutually agreed
upon between FUNC and Covenant.
See "THE MERGERS -- Interests of Certain Persons" and " -- Business Pending
Consummation".
REGULATORY APPROVALS
The Mergers are subject to the prior approval of the Comptroller of the
Currency (the "OCC") and the State of New Jersey Department of Banking (the "NJ
Banking Department") and to the prior approval, or a waiver of the requirement
to receive such approval, from the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). Applications have been filed with such
regulatory authorities for such approvals or waiver. There can be no assurance
that the necessary regulatory approvals or waiver will be obtained or as to the
timing or conditions of such approvals or waiver. See "THE MERGERS -- Regulatory
Approvals".
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CONDITIONS TO CONSUMMATION; TERMINATION
Consummation of the Mergers is subject, among other things, to: (i)
approval of the Merger Agreement by the requisite vote of the stockholders of
Covenant; (ii) receipt of the regulatory approvals referred to above without any
restrictions or conditions which, in the reasonable opinion of FUNC, would so
materially adversely impact the economic or business benefits to FUNC of the
transactions contemplated by the Merger Agreement so as to render inadvisable
the consummation of the Mergers; (iii) no court or governmental or regulatory
authority having taken any action which prohibits the Mergers; (iv) receipt by
FUNC and Covenant of the opinion of Sullivan & Cromwell dated as of the
Effective Date, as to certain federal income tax consequences of the Corporate
Merger, as discussed above; (v) receipt by FUNC of a letter from Covenant's
independent auditors, dated as of or shortly prior to the Effective Date, with
respect to Covenant's consolidated financial position and results of operations;
and (vi) the FUNC Common Shares having been approved for listing on the NYSE,
subject to official notice of issuance.
The Merger Agreement may be terminated by mutual consent of FUNC and
Covenant. The Merger Agreement may also be terminated by the Board of Directors
of either FUNC or Covenant if the Corporate Merger does not occur on or before
June 30, 1998, or if certain conditions set forth in the Merger Agreement are
not met.
See "THE MERGERS -- Conditions to Consummation; Termination".
EXPENSES; TERMINATION FEE
All expenses incurred by or on behalf of the parties in connection with the
Merger Agreement and the transactions contemplated thereby shall be borne by the
party incurring the same, except that printing expenses will be shared equally
by FUNC and Covenant.
FUNC shall be entitled to a fee of $3.5 million (the "Termination Fee")
following the occurrence of a Payment Event (as hereinafter defined), provided
FUNC shall have sent written notice of such entitlement within 90 days after its
awareness of such occurrence. FUNC's right to receive the Termination Fee shall
terminate if any of the following occurs prior to a Payment Event; (i) the
Effective Date; (ii) termination of the Merger Agreement in accordance with its
terms if such termination occurs prior to the occurrence of a Preliminary
Payment Event (as hereinafter defined), except for termination by FUNC due to a
breach by Covenant; (iii) termination of the Merger Agreement following the
occurrence of a Preliminary Payment Event and the passage of 18 months after
such termination; or (iv) termination of the Merger Agreement by FUNC due to a
breach by Covenant and the passage of 18 months after such termination.
See "THE MERGERS -- Expenses; Termination Fee".
ACCOUNTING TREATMENT
It is intended that the Mergers will be accounted for as a purchase under
generally accepted accounting principles. See "RECENT DEVELOPMENTS -- FUNC
Common Stock Buybacks" and "THE MERGERS -- Accounting Treatment".
NO DISSENTERS' RIGHTS
Holders of Covenant Common Stock, Covenant Series A Preferred Stock and
Covenant Series B Preferred Stock do not have dissenters' or appraisal rights in
connection with the proposal to approve the Merger Agreement. See "THE
MERGERS -- No Dissenters' Rights".
CERTAIN DIFFERENCES IN THE RIGHTS OF COVENANT AND FUNC STOCKHOLDERS
The rights of stockholders of Covenant are currently determined by
reference to the New Jersey Business Corporation Act (the "NJBCA") and by
Covenant's Certificate of Incorporation (the "Covenant Certificate") and
Covenant's bylaws (the "Covenant Bylaws"). On the Effective Date, stockholders
of Covenant will become stockholders of FUNC, and their rights as stockholders
of FUNC will be determined by reference to the North Carolina Business
Corporation Act (the "NCBCA") and by FUNC's Articles of Incorporation (the "FUNC
Articles") and bylaws (the "FUNC Bylaws"). See "DESCRIPTION OF FUNC CAPITAL
STOCK" and "CERTAIN DIFFERENCES IN THE RIGHTS OF COVENANT AND FUNC
STOCKHOLDERS".
COMPARISON OF CERTAIN UNAUDITED PER SHARE DATA
The following unaudited information, adjusted to reflect the two-for-one
FUNC Common Stock split paid on July 31, 1997, to holders of record July 1, 1997
(the "FUNC Stock Split") and stock dividends on Covenant Common Stock and
Covenant Bank common stock, reflects, where applicable, certain comparative per
share data related to book value, cash
10
<PAGE>
dividends paid, income and market value: (i) on a historical basis for FUNC and
Covenant; (ii) on a pro forma combined basis per share of FUNC Common Stock; and
(iii) on an equivalent pro forma basis per share of Covenant Common Stock and,
with respect to cash dividends paid or declared and market value, Covenant
Preferred Stock. Such pro forma information has been prepared assuming
consummation of the Mergers on a purchase accounting basis as of the beginning
of each of the periods presented, and does not reflect the Other Pending
Acquisitions or the restatement of FUNC's financial statements in connection
with the Signet Acquisition. All data relating to Covenant has been restated to
reflect the 1996 and 1994 pooling of interests mergers with 1st Southern State
Bank and Landis Savings Bank, S.L.A., respectively. See "RECENT DEVELOPMENTS",
"THE MERGERS -- Accounting Treatment" and " -- Dividends" and
"COVENANT -- History and Business".
Since purchase accounting does not require restatement of results for prior
periods following consummation of the Mergers, consummation of the Mergers will
not affect FUNC's historical results for the periods indicated. Pro forma
financial information is intended to show how the Mergers might have affected
historical financial statements if the Mergers had been consummated at an
earlier time. The pro forma financial information does not purport to be
indicative of the results that actually would have been realized had the Mergers
taken place at the beginning of the applicable periods indicated, nor is it
indicative of the combined financial position or results of operations for any
future periods.
The information shown below should be read in conjunction with the
historical financial statements of FUNC and Covenant, including the respective
notes thereto, and the documents incorporated herein by reference. See
"AVAILABLE INFORMATION", "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and
ANNEX A. See also the footnotes to the table "FUNC and Covenant Pro Forma
Combined Selected Financial Data" under " -- Selected Financial Data".
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
<S> <C> <C>
BOOK VALUE PER SHARE:
Historical per share of:
FUNC Common Stock...................................................................... $ 17.79 17.41
Covenant Common Stock.................................................................. 7.49 7.17
Pro forma combined per share of FUNC Common Stock (1)..................................... 17.79 17.41
Equivalent pro forma per share of Covenant Common Stock (2)............................... $ 6.78 6.64
</TABLE>
(1) The pro forma combined book value per share of FUNC Common Stock amounts
represent the sum of the pro forma combined common stockholders' equity
amounts, divided by pro forma combined period-end number of shares of FUNC
Common Stock outstanding.
(2) The equivalent pro forma book value per share of Covenant Common Stock
amounts represent the pro forma combined book value per share of FUNC Common
Stock amounts multiplied by the Common Stock Exchange Ratio.
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996 1995 1994
<S> <C> <C> <C> <C>
CASH DIVIDENDS PAID OR DECLARED PER SHARE:
Historical per share of:
FUNC Common Stock............................................................... $.58 1.10 .98 .86
Covenant Common Stock........................................................... -- -- -- --
Covenant Series A Preferred Stock............................................... .75 1.50 1.50 1.50
Covenant Series B Preferred Stock............................................... .75 1.50 .75 --
Pro forma combined per share of FUNC Common Stock (3).............................. .58 1.10 .98 .86
Equivalent pro forma per share of Covenant Common Stock (4)........................ .22 .42 .37 .33
Equivalent pro forma per share of Covenant Series A Preferred Stock (5)............ .88 1.67 1.49 1.30
Equivalent pro forma per share of Covenant Series B Preferred Stock (5)............ $.70 1.32 .62 --
</TABLE>
(3) The pro forma combined cash dividends paid per share of FUNC Common Stock
amounts represent pro forma combined cash dividends paid on common stock
outstanding, divided by pro forma combined average number of shares of FUNC
Common Stock outstanding, rounded to the nearest cent.
(4) The equivalent pro forma cash dividends paid per share of Covenant Common
Stock amounts represent pro forma combined per share of FUNC Common Stock
amounts multiplied by the Common Stock Exchange Ratio, rounded to the
nearest cent. The current annualized dividend rate per share for FUNC Common
Stock, based upon the most recently
11
<PAGE>
declared quarterly dividend rate of $.32 per share paid on September 15,
1997, is $1.28. On an equivalent pro forma basis, such current annualized
FUNC dividend per share of Covenant Common Stock would be $.49, based on the
Common Stock Exchange Ratio, rounded to the nearest cent. Neither Covenant
nor Covenant Bank paid any cash dividends on Covenant Common Stock or
Covenant Bank common stock during the periods indicated above. Any future
FUNC and Covenant dividends are dependent upon their respective earnings and
financial conditions, government regulations and policies and other factors.
See "THE MERGERS -- Exchange of Covenant Certificates" and " -- Dividends".
(5) Holders of Covenant Series A Preferred Stock and Covenant Series B Preferred
Stock currently are entitled to receive, when and as declared by the
Covenant Board, preferred dividends at the annual rate of $1.50 per share.
The equivalent pro forma cash dividends paid per share of Covenant Series A
Preferred Stock and Covenant Series B Preferred Stock amounts represent pro
forma combined per share of FUNC Common Stock amounts multiplied by the
Series A Exchange Ratio, with respect to the Covenant Series A Preferred
Stock, and the Series B Exchange Ratio, with respect to the Covenant Series
B Preferred Stock, in each case rounded to the nearest cent. On an
equivalent pro forma basis, the current annualized FUNC dividend per share
of Covenant Series A Preferred Stock and Covenant Series B Preferred Stock
would be $1.94 and $1.54, respectively, which amounts represent pro forma
combined per share of FUNC Common Stock amounts multiplied by the Series A
Exchange Ratio, with respect to the Covenant Series A Preferred Stock, and
the Series B Exchange Ratio, with respect to the Covenant Series B Preferred
Stock, in each case rounded to the nearest cent. See "THE
MERGERS -- Exchange of Covenant Certificates", " -- Business Pending
Consummation" and " -- Dividends".
<TABLE>
<CAPTION>
YEARS ENDED
SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1997 1996 1995 1994
<S> <C> <C> <C> <C>
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS:
Historical per share of:
FUNC Common Stock (6)........................................................... $ 1.70 2.67 2.52 2.29
Covenant Common Stock........................................................... .42 .44 .61 .35
Pro forma combined per share of FUNC Common Stock (7).............................. 1.70 2.66 -- --
Equivalent pro forma per share of Covenant Common Stock (8)........................ $ .65 1.01 -- --
</TABLE>
(6) FUNC net income applicable to common stockholders amounts as of and for the
year ended December 31, 1996, includes (i) $181 million, or $0.32 per share
of FUNC Common Stock, in after-tax First Fidelity Bancorporation ("FFB")
merger-related restructuring charges, and (ii) $86 million, or $0.16 per
share of FUNC Common Stock, in after-tax charges relating to the
recapitalization of the Savings Association Insurance Fund ("SAIF"). The
acquisition of FFB by FUNC was consummated on January 1, 1996. See
"FUNC -- History and Business" and " -- Certain Regulatory Considerations".
(7) The pro forma combined income per share of FUNC Common Stock amounts
represent pro forma combined net income applicable to holders of FUNC Common
Stock, divided by pro forma combined average number of shares of FUNC Common
Stock outstanding.
(8) The equivalent pro forma income per share of Covenant Common Stock amounts
represent pro forma combined income per share of FUNC Common Stock amounts
multiplied by the Common Stock Exchange Ratio.
12
<PAGE>
<TABLE>
<CAPTION>
EQUIVALENT
EQUIVALENT PRO FORMA
HISTORICAL PRO FORMA PER SHARE
COVENANT COVENANT PER SHARE OF COVENANT
SERIES A SERIES B OF COVENANT SERIES A
FUNC COVENANT PREFERRED PREFERRED COMMON PREFERRED
COMMON STOCK COMMON STOCK STOCK STOCK STOCK (9) STOCK (9)
<S> <C> <C> <C> <C> <C> <C>
MARKET VALUE PER SHARE:
August 4, 1997......................... $ 49.500 21.00 76.00 57.125 18.75 75.000
October 14, 1997....................... $ 51.375 19.00 76.00 55.000 19.50 77.875
<CAPTION>
EQUIVALENT
PRO FORMA
PER SHARE
OF COVENANT
SERIES B
PREFERRED
STOCK (9)
<S> <C>
MARKET VALUE PER SHARE:
August 4, 1997......................... 59.375
October 14, 1997....................... 61.625
</TABLE>
(9) The equivalent pro forma market values per share of Covenant Common Stock
amounts represent the historical market values per share of FUNC Common
Stock multiplied by the Common Stock Exchange Ratio, rounded down to the
nearest one-eighth. The equivalent pro forma market values per share of
Covenant Series A Preferred Stock and Covenant Series B Preferred Stock
amounts represent the historical market values per share of FUNC Common
Stock multiplied by the Series A Exchange Ratio, with respect to the
Covenant Series A Preferred Stock, and the Series B Exchange Ratio, with
respect to the Covenant Series B Preferred Stock, in each case rounded down
to the nearest one-eighth. The FUNC and Covenant historical market values
per share represent the last reported sale prices per share of FUNC Common
Stock on the NYSE Tape and the Covenant Common Stock and Covenant Preferred
Stock on the Nasdaq National Market and the Nasdaq Small-Cap Market,
respectively: (i) on August 4, 1997, the last business day preceding public
announcement of the execution of the Merger Agreement; and (ii) on October
14, 1997. See "RECENT DEVELOPMENTS -- Wheat First Butcher Singer, Inc.
Acquisition" and "THE MERGERS -- Market Prices".
Because the market price of FUNC Common Stock is subject to fluctuation,
the market value of the FUNC Common Shares that holders of Covenant Common
Stock, Covenant Series A Preferred Stock and Covenant Series B Preferred Stock
will receive upon consummation of the Corporate Merger may increase or decrease
prior to and after the receipt of such shares. Covenant stockholders are urged
to obtain current market quotations for FUNC Common Stock.
SELECTED FINANCIAL DATA
The following tables set forth certain unaudited historical consolidated
selected financial information for FUNC and Covenant and certain unaudited pro
forma combined selected financial information. Such pro forma information has
been prepared assuming consummation of the Mergers on a purchase accounting
basis as of the beginning of each of the periods presented, and does not reflect
the Other Pending Acquisitions or the restatement of FUNC's financial statements
in connection with the Signet Acquisition. See "RECENT DEVELOPMENTS" and "THE
MERGERS -- Accounting Treatment". This information should be read in conjunction
with the historical financial statements of FUNC and Covenant, including the
respective notes thereto, and the other documents incorporated herein by
reference. See "AVAILABLE INFORMATION", "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE" and ANNEX A. Interim unaudited historical data of FUNC and Covenant
reflect, in the respective opinions of management, all adjustments (consisting
only of normal recurring adjustments) necessary to a fair presentation of such
data.
Since purchase accounting does not require restatement of results for prior
periods following consummation of the Mergers, consummation of the Mergers will
not affect FUNC's historical results for the periods indicated. Pro forma
financial information is intended to show how the Mergers might have affected
historical financial statements if the Mergers had been consummated at an
earlier time. The pro forma combined selected financial information does not
purport to be indicative of the results that actually would have been realized
had the Mergers taken place at the beginning of the applicable periods
indicated, nor is it indicative of the combined financial position or results of
operations for any future periods.
13
<PAGE>
FUNC (HISTORICAL)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 1997 1996 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income.......................................... $ 4,977 4,770 9,628 8,687 7,231 6,602
Interest expense........................................ 2,350 2,294 4,632 4,052 2,793 2,482
Net interest income..................................... 2,627 2,476 4,996 4,635 4,438 4,120
Provision for loan losses............................... 310 150 375 220 179 370
Net interest income after provision for loan losses..... 2,317 2,326 4,621 4,415 4,259 3,750
Securities available for sale transactions.............. 9 18 31 44 6 33
Investment security transactions........................ 1 3 4 5 4 7
Noninterest income...................................... 1,498 1,051 2,322 1,848 1,566 1,542
Merger-related restructuring charges.................... -- 281 281 -- -- --
SAIF special assessment................................. -- -- 133 -- -- --
Noninterest expense..................................... 2,351 2,063 4,254 4,093 3,747 3,536
Income before income taxes.............................. 1,474 1,054 2,310 2,219 2,088 1,796
Income taxes............................................ 518 372 811 789 712 579
Net income.............................................. 956 682 1,499 1,430 1,376 1,217
Dividends on preferred stock............................ -- 7 9 26 46 46
Net income applicable to common stockholders before
redemption premium.................................... 956 675 1,490 1,404 1,330 1,171
Redemption premium on preferred stock................... -- -- -- -- 41 --
Net income applicable to common stockholders after
redemption premium.................................... $ 956 675 1,490 1,404 1,289 1,171
PER COMMON SHARE DATA (a)
Net income before redemption premium.................... $ 1.70 1.20 2.67 2.52 2.36 2.15
Net income after redemption premium..................... 1.70 1.20 2.67 2.52 2.29 2.15
Cash dividends.......................................... 0.58 0.52 1.10 0.98 0.86 0.75
Book value.............................................. 17.79 16.23 17.41 15.94 14.10 13.36
CASH DIVIDENDS PAID ON COMMON STOCK....................... 329 291 611 336 298 244
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets.................................................. 142,942 139,886 140,127 131,880 113,529 104,550
Loans, net of unearned income........................... 96,411 91,339 95,858 90,563 77,831 68,263
Deposits................................................ 92,934 91,453 94,815 92,555 87,865 81,885
Long-term debt.......................................... 7,258 7,807 7,660 7,121 4,242 3,675
Guaranteed preferred beneficial interests............... 990 -- 495 -- -- --
Preferred stockholders' equity.......................... -- 163 -- 183 230 262
Common stockholders' equity............................. 9,980 9,153 10,008 8,860 8,044 7,432
Total stockholders' equity.............................. $ 9,980 9,316 10,008 9,043 8,274 7,946
Preferred shares outstanding (IN THOUSANDS)............. -- 2,599 -- 3,388 5,213 11,560
Common shares outstanding (IN THOUSANDS)................ 560,977 563,895 574,697 555,692 570,721 556,408
CONSOLIDATED AVERAGE BALANCE SHEET ITEMS
Assets.................................................. $137,390 133,597 134,127 118,142 106,413 99,610
Loans, net of unearned income........................... 94,959 89,546 90,660 83,265 70,726 62,996
Deposits................................................ 92,837 91,367 91,320 87,274 80,760 76,830
Long-term debt.......................................... 7,482 7,429 7,565 5,707 4,009 3,598
Guaranteed preferred beneficial interests............... 951 -- 47 -- -- --
Common stockholders' equity (b)......................... 9,767 9,049 9,079 8,412 7,870 6,782
Total stockholders' equity (b).......................... $ 9,767 9,221 9,187 8,623 8,372 7,302
Common shares outstanding (IN THOUSANDS)................ 563,003 562,950 557,624 557,354 563,325 544,876
CONSOLIDATED PERCENTAGES
Net income applicable to common stockholders before
redemption premium to average common stockholders'
equity (b)............................................. 19.74%(c) 14.99(c) 16.41 16.69 16.91 17.26
Net income applicable to common stockholders after
redemption premium to average common stockholders'
equity (b)............................................ 19.74(c) 14.99(c) 16.41 16.69 16.38 17.26
Net income to
Average total stockholders' equity (b)................ 19.74(c) 14.88(c) 16.32 16.59 16.44 16.66
Average assets........................................ 1.40(c) 1.03(c) 1.12 1.21 1.29 1.22
Average stockholders' equity to average assets (d)...... 7.06 6.90 6.82 7.23 7.52 7.11
Allowance for loan losses to
Net loans............................................. 1.42 1.55 1.42 1.66 2.03 2.38
Nonaccrual and restructured loans..................... 223 195 204 233 248 151
Nonperforming assets.................................. 194 169 179 182 178 115
Net charge-offs to average net loans.................... 0.64(c) 0.56(c) 0.63 0.41 0.40 0.78
Nonperforming assets to loans, net and foreclosed
properties............................................ 0.73 0.91 0.80 0.91 1.14 2.06
Capital ratios (d)
Tier 1 capital........................................ 7.55 7.11 7.33 6.70 7.76 9.14
Total capital......................................... 12.64 11.94 12.33 11.45 12.94 14.64
Leverage.............................................. 6.23 5.60 6.13 5.49 6.12 6.13
Net interest margin..................................... 4.36%(c) 4.18(c) 4.21 4.46 4.75 4.82
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE DATA) 1992
<S> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income.......................................... 6,609
Interest expense........................................ 2,942
Net interest income..................................... 3,667
Provision for loan losses............................... 643
Net interest income after provision for loan losses..... 3,024
Securities available for sale transactions.............. 39
Investment security transactions........................ (3)
Noninterest income...................................... 1,360
Merger-related restructuring charges.................... --
SAIF special assessment................................. --
Noninterest expense..................................... 3,443
Income before income taxes.............................. 977
Income taxes............................................ 278
Net income.............................................. 699
Dividends on preferred stock............................ 53
Net income applicable to common stockholders before
redemption premium.................................... 646
Redemption premium on preferred stock................... --
Net income applicable to common stockholders after
redemption premium.................................... 646
PER COMMON SHARE DATA (a)
Net income before redemption premium.................... 1.26
Net income after redemption premium..................... 1.26
Cash dividends.......................................... 0.64
Book value.............................................. 11.68
CASH DIVIDENDS PAID ON COMMON STOCK....................... 168
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets.................................................. 95,308
Loans, net of unearned income........................... 60,301
Deposits................................................ 76,156
Long-term debt.......................................... 3,733
Guaranteed preferred beneficial interests............... --
Preferred stockholders' equity.......................... 277
Common stockholders' equity............................. 6,187
Total stockholders' equity.............................. 6,717
Preferred shares outstanding (IN THOUSANDS)............. 12,158
Common shares outstanding (IN THOUSANDS)................ 529,790
CONSOLIDATED AVERAGE BALANCE SHEET ITEMS
Assets.................................................. 90,621
Loans, net of unearned income........................... 58,700
Deposits................................................ 71,947
Long-term debt.......................................... 3,528
Guaranteed preferred beneficial interests............... --
Common stockholders' equity (b)......................... 5,724
Total stockholders' equity (b).......................... 6,280
Common shares outstanding (IN THOUSANDS)................ 510,768
CONSOLIDATED PERCENTAGES
Net income applicable to common stockholders before
redemption premium to average common stockholders'
equity (b)............................................. 11.28
Net income applicable to common stockholders after
redemption premium to average common stockholders'
equity (b)............................................ 11.28
Net income to
Average total stockholders' equity (b)................ 11.13
Average assets........................................ 0.77
Average stockholders' equity to average assets (d)...... 6.89
Allowance for loan losses to
Net loans............................................. 2.57
Nonaccrual and restructured loans..................... 105
Nonperforming assets.................................. 76
Net charge-offs to average net loans.................... 1.03
Nonperforming assets to loans, net and foreclosed
properties............................................ 3.36
Capital ratios (d)
Tier 1 capital........................................ 9.22
Total capital......................................... 14.31
Leverage.............................................. 6.55
Net interest margin..................................... 4.73
</TABLE>
(a) Per common share data has been restated to reflect the FUNC Stock Split.
(b) Average common stockholders' equity and total stockholders' equity exclude
net unrealized gains and (losses) on debt and equity securities in 1994
through 1997.
(c) Annualized.
(d) The average stockholders' equity to average assets ratios and all capital
ratios for 1992-1994 are not restated for pooling of interests acquisitions.
Risk-based capital ratio guidelines require a minimum ratio of tier 1
capital to risk-weighted assets of four percent and total capital to
risk-weighted assets of eight percent. The minimum leverage ratio of tier 1
capital to adjusted average quarterly assets is from three to five percent.
14
<PAGE>
COVENANT (HISTORICAL) (A)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income...................................................... $ 16 29 26 20 17 16
Interest expense..................................................... 8 14 12 8 7 9
Net interest income.................................................. 8 15 14 12 10 7
Provision for loan losses............................................ -- 1 1 1 1 1
Net interest income after provision for loan losses.................. 8 14 13 11 9 6
Noninterest income................................................... 1 1 1 1 1 1
Merger-related restructuring charges................................. -- 1 -- 1 -- --
SAIF special assessment.............................................. -- 1 -- -- -- --
Noninterest expense.................................................. 6 10 11 10 9 6
Income before income taxes........................................... 3 3 3 1 1 1
Income taxes......................................................... 1 1 1 -- -- --
Net income........................................................... 2 2 2 1 1 1
Dividends on preferred stock......................................... -- 1 -- -- -- --
Net income applicable to common stockholders......................... $ 2 1 2 1 1 1
PER COMMON SHARE DATA
Net income........................................................... $ 0.42 0.44 0.61 0.35 0.38 0.22
Book value........................................................... 7.49 7.17 7.25 6.19 6.01 5.63
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets............................................................... 454 415 347 317 274 210
Loans, net of unearned income........................................ 263 241 205 194 183 148
Deposits............................................................. 302 277 263 236 244 186
Long-term debt....................................................... 21 20 14 18 7 --
Preferred stockholders' equity....................................... 7 7 7 3 3 3
Common stockholders' equity.......................................... 24 22 23 19 19 17
Total stockholders' equity........................................... $ 31 29 30 22 22 20
Preferred shares outstanding (IN THOUSANDS).......................... 300 300 300 138 138 138
Common shares outstanding (IN THOUSANDS)............................. 3,053 3,023 3,068 3,064 3,054 3,054
CONSOLIDATED PERCENTAGES
Net income applicable to common stockholders to average common
stockholders' equity.............................................. 14.29%(b) 6.30 9.53 5.72 6.68 4.30
Net income to average assets......................................... 0.85(b) 0.48 0.72 0.45 0.56 0.35
Average stockholders' equity to average assets....................... 6.96 7.56 7.66 7.70 8.49 8.24
Allowance for loan losses to
Gross loans....................................................... 1.07 1.25 1.56 1.87 2.00 1.81
Nonaccrual and restructured loans................................. 127 105 87 78 86 137
Nonperforming assets.............................................. 95 85 64 66 70 70
Net charge-offs to average net loans................................. 0.18(b) 0.36 0.37 0.38 0.77 0.46
Nonperforming assets to gross loans and foreclosed properties........ 1.12 1.47 2.43 2.81 2.84 2.56
Capital ratios (c)
Tier 1 capital.................................................... 11.74 11.98 13.62 11.68 11.52 13.88
Total capital..................................................... 12.79 13.20 14.87 12.94 12.78 14.83
Leverage.......................................................... 7.30 7.51 8.49 7.42 7.87 9.88
Net interest margin.................................................. 3.79%(b) 4.10 4.37 4.50 4.24 3.86
</TABLE>
(a) All data has been restated to reflect the 1996 and 1994 pooling of interests
mergers with 1st Southern State Bank and Landis Savings Bank, S.L.A.,
respectively, and to reflect all common stock dividends issued by Covenant
and Covenant Bank through July 14, 1997. See "THE MERGERS -- Dividends",
"COVENANT -- History and Business" and ANNEX A.
(b) Annualized.
(c) Risk-based capital ratio guidelines require a minimum ratio of tier 1
capital to risk-weighted assets of four percent and total capital to
risk-weighted assets of eight percent. The minimum leverage ratio of tier 1
capital to adjusted average quarterly assets is from three to five percent.
15
<PAGE>
FUNC AND COVENANT
PRO FORMA COMBINED SELECTED FINANCIAL DATA (A)
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 1997 1996
<S> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income......................................................................... $ 4,990 9,653
Interest expense........................................................................ 2,358 4,646
Net interest income..................................................................... 2,632 5,007
Provision for loan losses............................................................... 310 376
Net interest income after provision for loan losses..................................... 2,322 4,631
Securities available for sale transactions.............................................. 9 31
Investment security transactions........................................................ 1 4
Noninterest income...................................................................... 1,499 2,323
Merger-related restructuring charges.................................................... -- 282
SAIF special assessment................................................................. -- 134
Noninterest expense..................................................................... 2,358 4,274
Income before income taxes.............................................................. 1,473 2,299
Income taxes............................................................................ 518 807
Net income.............................................................................. 955 1,492
Dividends on preferred stock............................................................ -- 10
Net income applicable to common stockholders............................................ $ 955 1,482
Net income per common share............................................................. $ 1.70 2.66
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets.................................................................................. $ 143,446 140,592
Loans, net of unearned income........................................................... 96,674 96,099
Deposits................................................................................ 93,236 95,092
Long-term debt.......................................................................... 7,279 7,680
Guaranteed preferred beneficial interests............................................... 990 495
Common stockholders' equity............................................................. 9,980 10,008
Total stockholders' equity.............................................................. $ 9,980 10,008
Common shares outstanding (IN THOUSANDS)................................................ 560,977 574,697
CONSOLIDATED PERCENTAGES
Allowance for loan losses to
Net loans............................................................................ 1.42% 1.42
Nonperforming assets................................................................. 193 178
Net charge-offs to average net loans.................................................... 0.64(b) 0.63
Nonperforming assets to loans, net and foreclosed properties............................ 0.73% 0.80
</TABLE>
(a) Pro forma assumptions related to the Corporate Merger include (i) the .3813
Common Stock Exchange Ratio, the 1.516 Series A Exchange Ratio and the 1.2
Series B Exchange Ratio; (ii) the issuance of 1.7 million shares of FUNC
Common Stock; (iii) the repurchase by FUNC of such shares in the open market
at a cost of approximately $81 million; (iv) a cost of funds rate of 5.56
percent for the six months period ended June 30, 1997, and 5.27 percent for
the year ended December 31, 1996; and (v) an increase in goodwill and
deposit base premium of $44 million and $6 million, respectively, which is
being amortized over 25-year straight-line and 10-year accelerated bases,
respectively. See "RECENT DEVELOPMENTS -- FUNC Common Stock Buybacks".
(b) Annualized.
16
<PAGE>
RECENT DEVELOPMENTS
CERTAIN FINANCIAL INFORMATION FOR THE PERIOD ENDED SEPTEMBER 30, 1997
FUNC
FUNC's earnings applicable to common stockholders were $505 million in the
third quarter of 1997, compared with $485 million in the second quarter of 1997
and $356 million in the third quarter a year ago. On a per common share basis,
earnings were $0.90, compared with $0.87 in the second quarter of 1997 and $0.65
in the third quarter a year ago. Earnings applicable to common stockholders for
the third quarter of 1996 include a one-time assessment related to DIFA (as
hereinafter defined) of $86 million after-tax. Excluding such assessment, FUNC's
operating earnings in the third quarter of 1996 were $442 million, or $0.81 per
share of FUNC Common Stock. All per share data have been restated to reflect the
FUNC Stock Split.
In the nine months ended September 30, 1997, net income applicable to
common stockholders was $1.5 billion, or $2.60 per share, compared with $1.0
billion, or $1.85 per share, in the first nine months of 1996. Excluding
after-tax restructuring charges relating to the FFB acquisition of $181 million
incurred in the first quarter of 1996, and the one-time assessment related to
DIFA in the third quarter of 1996, operating earnings in the nine months ended
September 30, 1996, were $1.3 billion, or $2.33 per share.
Tax-equivalent net interest income was $1.4 billion in the third quarter of
1997, compared with $1.4 billion in the second quarter of 1997 and $1.3 billion
in the third quarter of 1996.
Nonperforming assets were $704 million, or 0.74 percent of net loans and
foreclosed properties, at September 30, 1997, compared with $708 million, or
0.73 percent at June 30, 1997, and $825 million, or 0.89 percent, at September
30, 1996. Annualized net charge-offs as a percentage of average net loans were
0.66 percent in the third quarter of 1997, compared with 0.68 percent in the
second quarter of 1997 and 0.64 percent in the third quarter of 1996. The loan
loss provision was $155 million in the third quarter of 1997, compared with $165
million in the second quarter of 1997 and $105 million in the third quarter of
1996.
Net loans at September 30, 1997, were $94.9 billion, compared with $92.5
billion a year ago. Deposits were $91.7 billion at September 30, 1997, compared
with $91.4 billion a year ago. Total stockholders' equity was $10.7 billion at
September 30, 1997, compared with $8.7 billion a year ago. At September 30,
1997, FUNC had assets of $143.9 billion.
See "FUNC".
COVENANT
Covenant's earnings for the third quarter of 1997 were $925,000, or $0.21
per share, compared to a loss of $413,000, or $0.17 per share, for the third
quarter of 1996. Third quarter 1996 results include merger-related costs
associated with Covenant's acquisition in September 1996 of 1st Southern State
Bank and a one-time assessment related to DIFA amounting to $1.2 million,
after-tax. Return on average assets and return on average common equity were
0.86 percent and 13.67 percent, respectively, for the third quarter of 1997.
For the nine months ended September 30, 1997, Covenant's earnings were $2.7
million, or $0.63 per share, compared to $1.0 million, or $0.22 per share, for
the same period in 1996, which included the above-mentioned non-recurring costs.
Return on average assets and return on average common equity for the nine months
ended September 30, 1997, were 0.86 percent and 13.96 percent, respectively.
Total assets were $419.9 million at September 30, 1997, compared to total
assets of $387.2 million at September 30, 1996. Net loans were $254.9 million,
compared to net loans of $224.9 million at September 30, 1996. Total deposits
were $304.1 million, compared to deposits of $285.9 million at September 30,
1996.
Covenant's allowance for loan losses amounted to $2.7 million, or 1.05
percent of gross loans, at September 30, 1997. The loan loss allowance covered
150 percent of nonperforming loans at September 30, 1997, compared to 83 percent
coverage at September 30, 1996. Nonperforming assets as a percentage of total
loans and other real estate owned were 1.11 percent at September 30, 1997,
compared to 1.98 percent at September 30, 1996.
See "COVENANT" and ANNEX A.
17
<PAGE>
SIGNET BANKING CORPORATION ACQUISITION
On July 18, 1997, FUNC entered into an agreement (the "Signet Merger
Agreement") to acquire Signet, a Virginia-based, bank holding company. Signet,
through its principal bank subsidiary, Signet Bank, provides financial services
through banking offices located throughout Virginia, Maryland and Washington,
D.C. As of June 30, 1997, and for the six months then ended, Signet reported
assets of $11.9 billion, net loans of $6.3 billion, deposits of $8.1 billion,
stockholders' equity of $936 million and net income of $31 million. Under the
terms of the Signet Merger Agreement, FUNC will exchange 1.10 shares of FUNC
Common Stock for each share of Signet common stock. As of June 30, 1997, Signet
had 60.4 million shares of common stock outstanding. The Signet Acquisition,
which will be accounted for as a pooling of interests, is expected to close in
the fourth quarter of 1997, subject to certain conditions of closing. See
" -- FUNC Common Stock Offering" and "THE MERGERS -- Accounting Treatment".
On July 21, 1997, FUNC filed a Current Report on Form 8-K with the
Commission (the "Signet Form 8-K") which contained, among other items, certain
financial and other information (the "Signet Form 8-K Materials") about the
Signet Acquisition. The Signet Form 8-K Materials contained certain
forward-looking statements regarding FUNC, Signet and the combined organization
following the Signet Acquisition, including statements relating to estimated
cost savings and enhanced revenues that may be realized from the Signet
Acquisition, and certain restructuring charges expected to be incurred in
connection with the Signet Acquisition. Such forward-looking statements involve
significant risks and uncertainties. Actual results may differ materially from
the results discussed in the Signet Form 8-K Materials and herein. Factors that
might cause such a difference include, but are not limited to, those discussed
in the Signet Form 8-K and FUNC's Quarterly Report on Form 10-Q for the period
ended June 30, 1997. See "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
INFORMATION" and "AVAILABLE INFORMATION".
As indicated in the Signet Form 8-K:
(Bullet) FUNC expects to realize before-tax expense savings resulting
from the Signet Acquisition of approximately $169 million in
1998 and $242 million in 1999, or approximately $108 million
and $155 million after-tax, respectively. These estimates
assume that approximately 50 percent of Signet's 1996 annual
expenses are eliminated by the end of 1999.
(Bullet) FUNC expects to realize before-tax revenue enhancements
relating to the Signet Acquisition of approximately $30
million in 1998 and $37 million in 1999, or approximately
$15 million and $19 million after-tax, respectively. These
estimates are primarily based on an analysis of fee income
generating products currently offered by FUNC which either
are not offered by Signet or are offered by Signet on a more
limited basis.
(Bullet) Assuming (i) the restructuring charges discussed below and
the expense savings and revenue enhancements discussed above
are as indicated, (ii) 641 million shares of FUNC Common
Stock are outstanding in 1998 and 646 million shares of FUNC
Common Stock are outstanding in 1999, (iii) the Signet
Acquisition is consummated in 1997, (iv) the conversion of
Signet's operations and computer systems to FUNC's
operations and computer systems are completed by April 1998,
(v) 1998 earnings per share of (a) FUNC Common Stock are
$3.905 and (b) Signet common stock are $2.62, which
represent the First Call Consensus estimates (before public
announcement of the Signet Merger Agreement and before
Signet's June 3, 1997 corporate redesign announcement, the
"1998 Illustrative First Call Consensus Estimates"), (vi)
1999 earnings per share of FUNC Common Stock and Signet
common stock are equal to the 1998 Illustrative First Call
Consensus Estimates plus ten percent (the "1999 Illustrative
Estimates") (i.e., $4.295 for FUNC Common Stock and $2.88
for Signet common stock), and (vii) certain other
assumptions contained in the Signet Form 8-K, the Signet
Acquisition is estimated to add $0.005 per share to the 1998
Illustrative First Call Consensus Estimates for FUNC Common
Stock and $0.065 per share to the 1999 Illustrative
Estimates for FUNC Common Stock. The 1998 Illustrative First
Call Consensus Estimates and the 1999 Illustrative Estimates
are presented for illustrative purposes only, are subject to
the risks and uncertainties set forth in the Signet Form 8-K
Materials and under "CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION", and do not constitute earnings
projections or estimates by FUNC or Signet.
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<PAGE>
(Bullet) FUNC expects to take an after-tax restructuring charge
relating to the Signet Acquisition currently estimated at
$135 million, or $0.42 per share of FUNC Common Stock, in
1997. The estimated $135 million restructuring charge is
summarized below.
<TABLE>
<CAPTION>
(IN MILLIONS, AFTER TAX)
<S> <C>
Severance and change in control related obligations............................... $ 58
Fixed asset write-downs and vacant space accrual.................................. 38
Service contract terminations..................................................... 18
Other............................................................................. 21
Total............................................................................. $135
</TABLE>
The estimated restructuring charge includes approximately $18 million in
non-cash charges. Cash payments included in the estimated restructuring charge
are expected to be completed by the end of the second quarter of 1998. The
"Other" category includes Signet Acquisition-related amounts, none of which is
estimated to exceed $13 million. The amounts included in the $135 million
estimated restructuring charge are subject to change prior to the effective date
of the Signet Acquisition. The estimates include assumptions about the timing of
the consummation of the Signet Acquisition and number of employees whose
employment will terminate as a result of the Signet Acquisition. Changes in such
assumptions could result in a change in the estimated restructuring charge.
Certain additional financial and other information relating to Signet and the
proposed acquisition are set forth in the Signet Form 8-K, which is incorporated
by reference herein and a copy of which may be obtained from FUNC as indicated
under "AVAILABLE INFORMATION".
WHEAT FIRST BUTCHER SINGER, INC. ACQUISITION
On August 20, 1997, FUNC entered into an agreement to acquire WFBS, a full
service investment banking, brokerage and asset management company based in
Richmond, Virginia. WFBS is employee-owned and operates 126 offices in 19 states
and Washington, D.C. Under the terms of the agreement, First Union will issue
10,267,029 shares of FUNC Common Stock (as may be adjusted in certain
circumstances) in exchange for the outstanding shares of capital stock of WFBS.
In addition, FUNC agreed to establish an employee retention pool of $75 million
in restricted FUNC Common Stock to be paid over a three-year period to certain
key employees of WFBS. The acquisition, which will be accounted for as a pooling
of interests, is expected to close in the fourth quarter of 1997, subject to
certain conditions of closing. See " -- FUNC Common Stock Offering" and "THE
MERGERS -- Accounting Treatment". Certain additional financial and other
information relating to WFBS and the proposed acquisition are set forth in
FUNC's Current Report on Form 8-K dated August 20, 1997, which is incorporated
by reference herein and a copy of which may be obtained from FUNC as indicated
under "AVAILABLE INFORMATION". A subsidiary of WFBS is a market maker in
Covenant Common Stock and Covenant Preferred Stock. See "THE MERGERS -- Market
Prices".
FUNC COMMON STOCK BUYBACKS
In 1995, as adjusted to reflect the FUNC Stock Split, FUNC repurchased in
the open market 51 million shares of FUNC Common Stock at a cost of $1.2
billion; in 1996, 31 million shares at a cost of $968 million; and from January
1, 1997 to the most recent practicable date prior to the mailing of this
Prospectus/Proxy Statement, 24 million shares at a cost of $1.0 billion
(including 1.65 million shares of FUNC Common Stock expected to be issued in
connection with the Corporate Merger at a cost of $79 million). The repurchase
of such 1.65 million shares of FUNC Common Stock requires that the Mergers be
accounted for as a purchase. See "THE MERGERS -- Accounting Treatment".
FUNC COMMON STOCK OFFERING
On September 23, 1997, FUNC sold 7.5 million shares of FUNC Common Stock in
a public offering (the "Offering"), in order for the Signet Acquisition and the
WFBS Acquisition to qualify for pooling of interests accounting treatment. See
"THE MERGERS -- Accounting Treatment". The Offering also included the sale by
Banco Santander, S.A. ("Santander") of all of the remaining 44.7 million shares
of FUNC Common Stock (approximately 7.98 percent of the outstanding shares of
FUNC Common Stock as of August 31, 1997) beneficially owned by Santander.
Santander had acquired its shares of FUNC Common Stock in connection with FUNC's
acquisition of FFB on January 1, 1996. FUNC received $358 million in net
proceeds from its sale of the 7.5 million shares in the Offering. FUNC did not
receive any proceeds from the sale of Santander's shares in the Offering.
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<PAGE>
FUTURE ACQUISITIONS
FUNC is continually evaluating acquisition opportunities and frequently
conducts due diligence activities in connection with possible acquisitions. As a
result, acquisition discussions and, in some cases, negotiations, frequently
take place and future acquisitions involving cash, debt and equity securities
can be expected. Acquisitions typically involve the payment of a premium over
book and market values, and therefore, some dilution of FUNC's book value and
net income may occur in connection with future acquisitions. See
"FUNC -- History and Business".
GENERAL INFORMATION
GENERAL
This Prospectus/Proxy Statement is being furnished by Covenant to its
stockholders as a Proxy Statement in connection with the solicitation of proxies
by the Covenant Board for use at the Special Meeting to be held on November 20,
1997, and any adjournments or postponements thereof, to consider and vote upon a
proposal to approve the Merger Agreement. This Prospectus/Proxy Statement is
also being furnished by FUNC to the holders of Covenant Common Stock and
Covenant Preferred Stock as a Prospectus in connection with the issuance by FUNC
of the FUNC Common Shares upon consummation of the Corporate Merger.
Directors, officers and employees of Covenant and FUNC may solicit proxies
from Covenant stockholders, either personally or by telephone, telegraph or
other forms of communication. Such persons will receive no additional
compensation for such services. Covenant has retained Corporate Investor
Communications, Inc. to assist in soliciting proxies and to send proxy materials
to brokerage houses and other custodians, nominees and fiduciaries for
transmittal to their principals, at a cost not expected to exceed $5,000, plus
out-of-pocket expenses. All expenses associated with the solicitation of proxies
in the form enclosed will be borne by the party incurring the same, except for
printing expenses, which will be shared equally between FUNC and Covenant.
THE COVENANT BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, BELIEVES
THE MERGER AGREEMENT IS IN THE BEST INTERESTS OF COVENANT AND ITS STOCKHOLDERS,
AND RECOMMENDS ITS APPROVAL BY COVENANT STOCKHOLDERS. SEE "THE
MERGERS -- BACKGROUND AND REASONS; COVENANT".
RECORD DATE; VOTE REQUIRED; REVOCATION OF PROXIES
The Covenant Board has fixed October 6, 1997, as the Record Date for
determining stockholders entitled to notice of and to vote at the Special
Meeting, and accordingly, only holders of Covenant Common Stock, Covenant Series
A Preferred Stock and Covenant Series B Preferred Stock of record at the close
of business on that day are entitled to notice of and to vote at the Special
Meeting. The number of shares of Covenant Common Stock, Covenant Series A
Preferred Stock and Covenant Series B Preferred Stock outstanding on the Record
Date was 3,057,332, 138,300 and 161,700, respectively, each of such shares being
entitled to one vote. The presence, in person or by proxy, of at least a
majority of the votes entitled to be cast at the Special Meeting by the holders
of each of Covenant Common Stock, Covenant Series A Preferred Stock and Covenant
Series B Preferred Stock will constitute a quorum for purposes of conducting
business at the Special Meeting. Abstentions and broker non-votes (I.E., proxies
from brokers or nominees indicating that such persons have not received
instructions from the beneficial owners or other persons as to the proposal to
approve the Merger Agreement) will be treated as shares present at the Special
Meeting for purposes of determining the presence of a quorum. Approval of the
Merger Agreement at the Special Meeting requires the affirmative vote of a
majority of the votes cast by the holders of Covenant Common Stock, Covenant
Series A Preferred Stock and Covenant Series B Preferred Stock, each voting as a
separate class. For purposes of determining the votes cast with respect to any
matter presented for consideration at the Special Meeting, only those votes cast
"FOR" or "AGAINST" are included.
The directors and executive officers of Covenant (including certain of
their related interests) beneficially owned, as of the Record Date, and are
entitled to vote at the Special Meeting 276,210 shares of Covenant Common Stock,
21,000 shares of Covenant Series A Preferred Stock and 53,326 shares of Covenant
Series B Preferred Stock, which represent approximately nine percent, 15 percent
and 33 percent of the outstanding shares of Covenant Common Stock, Covenant
Series A Preferred Stock and Covenant Series B Preferred Stock, respectively,
entitled to be voted at the Special Meeting. As an inducement to and a condition
of FUNC's willingness to enter into the Merger Agreement, each of the directors
of Covenant, beneficially owning and entitled to vote in the aggregate
approximately nine percent, 14 percent and 32 percent of the shares of Covenant
Common Stock, Covenant Series A Preferred Stock and Covenant Series B Preferred
Stock outstanding on the Record Date, respectively, agreed to vote such shares
in favor of approval of the Merger Agreement at the Special Meeting pursuant to
the terms of the Voting Agreement. It is currently expected that the directors
and executive officers of Covenant will vote the
20
<PAGE>
shares of Covenant Common Stock and Covenant Preferred Stock that such directors
and executive officers of Covenant are entitled to vote at the Special Meeting
in favor of approval of the Merger Agreement. To the best of FUNC's knowledge,
no shares of Covenant Common Stock or Covenant Preferred Stock are beneficially
owned and entitled to be voted at the Special Meeting by any of the directors,
executive officers or affiliates of FUNC. FUNB holds 6,000 shares of Covenant
Series B Preferred Stock in a custodial capacity on behalf of a client of an
investment advisory firm which is majority owned by Richard A. Hocker, Chairman
and Chief Executive Officer of Covenant, but FUNB is not entitled to vote such
shares. Such shares are not included in the shares of Covenant Series B
Preferred Stock beneficially owned by the directors and executive officers of
Covenant indicated above. It is currently expected that such shares will be
voted in favor of approval of the Merger Agreement at the Special Meeting.
COVENANT STOCKHOLDERS ARE URGED TO PROMPTLY SIGN, DATE AND RETURN THE
ACCOMPANYING PROXY CARD IN THE ENCLOSED POSTAGE-PAID, ADDRESSED ENVELOPE.
STOCKHOLDERS WILL RECEIVE A SEPARATE PROXY CARD WITH RESPECT TO EACH CLASS OF
STOCK HELD BY SUCH STOCKHOLDER. STOCKHOLDERS SHOULD BE SURE TO VOTE ALL OF THEIR
SHARES BY RETURNING THE SEPARATE PROXY CARD FOR EACH CLASS OF STOCK THAT THEY
HOLD.
After having been submitted, the enclosed proxy may be revoked by the
person giving it, at any time before it is exercised, by: (i) submitting written
notice of revocation of such proxy to the Secretary of Covenant; (ii) submitting
a proxy having a later date; or (iii) appearing at the Special Meeting and
requesting a return of the proxy. All shares represented by valid proxies will
be exercised in the manner specified thereon. If no specification is made, such
shares will be voted in favor of approval of the Merger Agreement and otherwise
in the discretion of the proxyholders named thereon in accordance with their
best judgment as to any other matters which may be voted on at the Special
Meeting, including among other things, a motion to adjourn or postpone the
Special Meeting to another time and/or place for the purpose of soliciting
additional proxies or otherwise; provided, however, that no proxy which is voted
against the proposal to adopt the Merger Agreement will be voted in favor of any
adjournment or postponement proposed for the purpose of soliciting additional
votes in favor of the Merger Agreement.
THE MERGERS
THE FOLLOWING INFORMATION RELATING TO THE MERGERS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS/PROXY STATEMENT, INCLUDING THE ANNEXES HERETO, AND IN THE
DOCUMENTS INCORPORATED HEREIN BY REFERENCE. A COPY OF THE MERGER AGREEMENT IS
SET FORTH IN ANNEX B TO THIS PROSPECTUS/PROXY STATEMENT AND IS INCORPORATED
HEREIN BY REFERENCE, AND REFERENCE IS MADE THERETO FOR A COMPLETE DESCRIPTION OF
THE TERMS OF THE MERGERS. STOCKHOLDERS OF COVENANT ARE URGED TO READ THE MERGER
AGREEMENT CAREFULLY.
GENERAL; EXCHANGE RATIOS
Subject to the terms and conditions of the Merger Agreement, Covenant will
merge with and into FUNC and Covenant Bank will merge with and into FUNB. Upon
consummation of the Corporate Merger, (i) each outstanding share of Covenant
Common Stock (other than Excluded Shares) will be converted into the right to
receive .3813 FUNC Common Shares (I.E., the Common Stock Exchange Ratio); (ii)
each outstanding share of Covenant Series A Preferred Stock (other than Excluded
Shares) will be converted into the right to receive 1.516 FUNC Common Shares
(I.E., the Series A Exchange Ratio); and (iii) each outstanding share of
Covenant Series B Preferred Stock (other than Excluded Shares) will be converted
into the right to receive 1.2 FUNC Common Shares (I.E., the Series B Exchange
Ratio). Each holder of Covenant Common Stock, Covenant Series A Preferred Stock
and Covenant Series B Preferred Stock who would otherwise be entitled to a
fractional share of FUNC Common Stock will receive cash in lieu thereof in an
amount determined by multiplying the last reported sale price per share of FUNC
Common Stock on the NYSE Tape on the last trading day prior to the Effective
Date by the fraction of a share of FUNC Common Stock to which such holder would
otherwise be entitled.
The Merger Agreement provides that FUNC may at any time change the method
of acquiring Covenant and Covenant Bank; provided, however, no such change may
(i) alter the amount or kind of consideration to be issued to the holders of
Covenant Common Stock and Covenant Preferred Stock pursuant to the Merger
Agreement, (ii) adversely affect the intended tax-free treatment to such holders
as a result of receiving such consideration, or (iii) materially impede or delay
receipt of any required regulatory approvals of the Mergers or the consummation
of the transactions contemplated by the Merger Agreement.
21
<PAGE>
EFFECTIVE DATE
Subject to the conditions to the obligations of the parties to effect the
Mergers, the Effective Date will occur on such date as FUNC and Covenant
mutually agree upon, and if not so agreed upon, such date will be the fifth
business day to occur after the last of certain conditions to consummation of
the Mergers, relating to, among other things, approval of the Merger Agreement
by Covenant stockholders, receipt of the requisite regulatory approvals to the
Mergers and the listing on the NYSE of the FUNC Common Shares to be issued in
the Corporate Merger, have been satisfied or waived (or, at the election of
FUNC, on the last business day of the month in which such day occurs); provided
that such date will be after December 31, 1997, unless FUNC and Covenant
mutually agree otherwise. Subject to the foregoing, it is currently anticipated
that the Mergers will be consummated in the first quarter of 1998. If the
Corporate Merger is consummated in such quarter, or in any other quarter,
Covenant stockholders should not assume or expect that the Effective Date will
precede the record date for the dividend on FUNC Common Stock for that quarter,
so as to enable such stockholders to receive such dividend. The Board of
Directors of either FUNC or Covenant may terminate the Merger Agreement if the
Effective Date does not occur on or before June 30, 1998.
Assuming the Corporate Merger is consummated after December 31, 1997, which
is currently anticipated, it is currently expected that a dividend on Covenant
Series A Preferred Stock and Covenant Series B Preferred Stock in the amount of
$.375 per share will be paid on January 14, 1998, to holders of record on
December 31, 1997. Such dividend would be paid to holders of shares of Covenant
Series A Preferred Stock notwithstanding the conversion of such shares into
shares of Covenant Common Stock on December 31, 1997.
See " -- Exchange of Covenant Certificates", " -- Conditions to
Consummation; Termination" and " -- Dividends".
EXCHANGE OF COVENANT CERTIFICATES
As promptly as practicable after the Effective Date, FUNC will send or
cause to be sent to each holder of record of Covenant Common Stock and Covenant
Preferred Stock as of the Effective Date, transmittal materials for use in
exchanging all of such holder's certificates representing Covenant Common Stock
and Covenant Preferred Stock for a certificate or certificates representing the
FUNC Common Shares to which such holder is entitled and a check for such
holder's fractional share interest and any dividends to which such holder is
entitled, as appropriate. The transmittal materials will contain information and
instructions with respect to the surrender and exchange of such certificates.
COVENANT STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY
RECEIVE THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS.
Upon surrender of all of the certificates for Covenant Common Stock and
Covenant Preferred Stock registered in the name of a holder of such certificates
(or indemnity satisfactory to FUNC and the exchange agent selected by FUNC if
any of such certificates are lost, stolen or destroyed), together with a
properly completed letter of transmittal, such exchange agent will mail to such
holder a certificate or certificates representing the number of FUNC Common
Shares to which such holder is entitled, together with all undelivered dividends
or distributions in respect of such shares and, where applicable, a check for
any fractional share interest (in each case, without interest).
All FUNC Common Shares issued to the holders of Covenant Common Stock and
Covenant Preferred Stock pursuant to the Corporate Merger will be deemed issued
as of the Effective Date. After the Effective Date, former holders of record of
Covenant Common Stock and Covenant Preferred Stock will be entitled to vote at
any meeting of holders of FUNC Common Stock the number of FUNC Common Shares
into which their shares of Covenant Common Stock and Covenant Preferred Stock
have been converted, regardless of whether they have surrendered their Covenant
Common Stock and Covenant Preferred Stock certificates. FUNC dividends having a
record date on or after the Effective Date will include dividends on all FUNC
Common Shares issued in the Corporate Merger, but no dividend or other
distribution payable to the holders of record of FUNC Common Shares at or as of
any time after the Effective Date will be distributed to the holder of any
Covenant Common Stock and Covenant Preferred Stock certificates until such
holder physically surrenders all such certificates as described above. Promptly
after such surrender, all undelivered dividends and other distributions and,
where applicable, a check for any fractional share interest, will be delivered
to such holder, in each case, without interest. FUNC dividends having a record
date before the Effective Date (which record date may, in FUNC's sole
discretion, be the day immediately preceding the Effective Date or any other day
prior to the Effective Date) will not include dividends on the FUNC Common
Shares issued in the Corporate Merger. After the Effective Date, the stock
transfer books of Covenant will be closed, and there will be no transfers on the
transfer books of Covenant of the shares of Covenant Common Stock and Covenant
Preferred Stock that were outstanding immediately prior to the Effective Date.
22
<PAGE>
In accordance with the terms of the Covenant Series A Preferred Stock and
assuming the Corporate Merger has not been consummated, each outstanding share
of Covenant Series A Preferred Stock will automatically be converted into 3.976
shares of Covenant Common Stock on December 31, 1997 (the "Automatic
Conversion"), after which holders thereof will not be entitled to any further
dividends on such Covenant Series A Preferred Stock, except for any such
dividends declared but unpaid prior to such date. As indicated above, holders of
record on December 31, 1997 of Covenant Series A Preferred Stock are expected to
be paid a dividend on January 14, 1998 notwithstanding the Automatic Conversion.
See " -- Effective Date" and " -- Dividends". Pursuant to the terms of the
Covenant Series A Preferred Stock, Covenant is to deliver to the holders of
Covenant Series A Preferred Stock certificates representing the applicable
number of full shares of Covenant Common Stock entitled to be received by such
holders as a result of the Automatic Conversion within 30 business days after
such Automatic Conversion. As a result of the pending Mergers, however, it is
not expected that Covenant will deliver such certificates to such holders.
Instead, following the Effective Date and upon surrender of all of their
certificates for Covenant Series A Preferred Stock, holders of Covenant Series A
Preferred Stock will be entitled to receive 1.516 FUNC Common Shares (I.E., the
Series A Exchange Ratio), and a check for any fractional share interest as
discussed above.
The Merger Agreement provides that Covenant will cause each person who may
be deemed to be an "affiliate" (as defined in the Securities Act) to execute an
agreement restricting the disposition of such affiliate's shares of Covenant
Common Stock and Covenant Preferred Stock. The Merger Agreement further provides
that although shares of Covenant Common Stock and Covenant Preferred Stock held
by an affiliate of Covenant will automatically be converted into FUNC Common
Shares upon consummation, such shares will not be physically exchanged for FUNC
Common Shares until FUNC receives such an agreement.
BACKGROUND AND REASONS
COVENANT
BACKGROUND OF THE MERGERS. From time to time, Covenant received from
representatives of other bank holding companies preliminary expressions of
interest in the possibility of engaging in a business combination with Covenant
should Covenant be willing to consider such a transaction. Through 1996,
Covenant responded to such expressions of interest by affirming its strategy of
seeking to create value as an independent institution.
Covenant continued to receive expressions of interest from various bank
holding companies in 1997. In early April 1997, Mr. Charles E. Sessa, Jr., the
President and a director of Covenant, met with representatives of Berwind
Financial to discuss an expression of interest that had been presented to
Covenant through Berwind Financial and to establish a process with Berwind
Financial for evaluating such expression of interest, exploring other possible
transactions, and assessing whether it might be in the best interests of
Covenant to engage in a combination with another institution. Mr. Sessa reported
on these meetings with Berwind Financial to the Covenant Board at its April
meeting, and the Covenant Board authorized Mr. Sessa and Mr. Richard A. Hocker,
the Chairman and Chief Executive Officer of Covenant, to continue to work with
Berwind Financial, which was retained by Covenant as its financial advisor (such
engagement was subsequently confirmed in writing on July 14, 1997), to explore
and evaluate possible transactions.
Working with Berwind Financial, Messrs. Hocker and Sessa identified
institutions (including FUNC) that might be interested in a combination with
Covenant, and through Berwind Financial such institutions were contacted in
April, May and June 1997, regarding their possible interest in such a
transaction. The institutions which were interested in considering a possible
combination with Covenant and which signed confidentiality agreements were given
general information about Covenant. Mr. Sessa advised the Covenant Board of the
continuing process to evaluate the possibility of a combination at the May
meeting of the Covenant Board, and the Covenant Board approved the continuation
of such process.
In response to the solicitation of interest by Covenant through Berwind
Financial, five institutions (including FUNC) provided preliminary indications
of interest in a possible combination with Covenant, including preliminary
indications of possible pricing and transaction structure. Messrs. Hocker and
Sessa met with Berwind Financial and Covenant's legal counsel on July 11, 1997,
to review and evaluate the indications of interest. At a July 14, 1997 special
meeting of the Covenant Board, Messrs. Hocker and Sessa and Berwind Financial
reported to the Covenant Board on the five interested parties and the
expressions of interest that had been received. Legal counsel discussed
fiduciary duty matters, and Berwind Financial presented information relating to
the five interested parties and the financial terms of the proposed
transactions, as well as financial information regarding comparable transactions
in the Mid-Atlantic region and nationally. The Covenant Board and Berwind
Financial discussed generally the subject of remaining independent versus being
acquired by another institution. The Covenant Board authorized Messrs. Hocker
and Sessa, working with Berwind Financial and legal counsel, to continue with
the process of assessing the possibility of a combination.
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<PAGE>
Arrangements were then made for the institutions that had presented
indications of interest in a range potentially acceptable to Covenant, and that
remained interested in pursuing a possible combination, to conduct further due
diligence, and revised expressions of interest were requested. Three parties,
including FUNC, conducted additional due diligence during the week of July 21,
1997, and delivered revised expressions of interest.
On July 30, 1997, Messrs. Hocker and Sessa met with Berwind Financial and
legal counsel to review the most recent expressions of interest.
A special meeting of the Covenant Board was held on July 31, 1997, at which
meeting the events since the prior meeting, and the most recent expressions of
interest, were reviewed. Counsel to Covenant, as well as Covenant's financial
advisor, Berwind Financial, were present. Berwind Financial presented its review
of the three possible transactions, and the Covenant Board and Berwind Financial
discussed the alternatives of being acquired or continuing as an independent
institution. The Covenant Board determined at this meeting that it was in the
best interests of Covenant, its stockholders and other constituencies to enter
into a combination, and that the proposal presented by FUNC, which had the
highest value on such date, was the most favorable of the three proposals that
had been received. The Covenant Board directed Messrs. Sessa and Hocker, with
the advice and counsel of Covenant's attorneys and financial advisor, to seek to
negotiate a definitive agreement with FUNC for review and consideration by the
Covenant Board.
Following the July 31, 1997 meeting, discussions were held with FUNC's
management and legal advisors and a definitive merger agreement was negotiated.
At a special meeting of the Covenant Board held on August 4, 1997, with legal
counsel and Berwind Financial present, the Merger Agreement and the transactions
contemplated thereby were reviewed by the Covenant Board. Berwind Financial
reviewed the financial terms of the transaction and presented its opinion that
the transaction was fair to Covenant's stockholders from a financial point of
view. See " -- Opinion of Financial Advisor". Legal counsel reviewed the terms
of the Merger Agreement with the Covenant Board, and after discussion, the
Merger Agreement and the transactions contemplated thereby were approved by the
Covenant Board. The Merger Agreement was entered into on August 4, 1997, after
completion of the Covenant Board meeting.
RECOMMENDATION OF THE COVENANT BOARD AND REASONS FOR THE MERGERS. The
Covenant Board believes that a combination with FUNC will enable holders of
Covenant Common Stock, Covenant Series A Preferred Stock and Covenant Series B
Preferred Stock to realize significant value for their shares, and will also
enable Covenant's stockholders to acquire shares on a tax-free basis in a larger
institution which the Covenant Board believes is better positioned to compete in
a consolidating financial services industry. For these reasons, and as further
discussed below, the Covenant Board believes that the Mergers are in the best
interests of Covenant's stockholders.
In reaching its determination to approve the Merger Agreement and the
transactions contemplated thereby, the Covenant Board considered the advice and
counsel of management and Covenant's outside legal and financial advisors, and
based its decision on a number of factors, including, without limitation, the
following:
(i) The Covenant Board considered the terms of the Merger Agreement and the
transactions contemplated thereby, and took into account the historical trading
ranges of Covenant Common Stock, Covenant Series A Preferred Stock, Covenant
Series B Preferred Stock and FUNC Common Stock, and the consideration to be
received by Covenant's stockholders in the Corporate Merger. The Covenant Board
also considered the expected increase in dividends to Covenant's stockholders
following the Corporate Merger.
(ii) The Covenant Board considered that the Mergers are expected to be
tax-free to stockholders of Covenant (other than with respect to cash paid in
lieu of fractional shares).
(iii) The Covenant Board reviewed the detailed financial analysis, pro
forma results and other information presented by its financial advisor, Berwind
Financial, and considered the opinion of Berwind Financial (including the
assumptions and financial information and projections relied upon by it in
arriving at such opinion) that the consideration to be received by Covenant's
stockholders in the Corporate Merger was fair to such stockholders. For a
discussion of the opinion of Berwind Financial, including a summary of the
procedures followed, the matters considered, the scope of the review undertaken
and the assumptions made with respect thereto, see " -- Opinion of Financial
Advisor" and ANNEX C attached hereto.
(iv) In considering the terms of the Merger Agreement, the Covenant Board
considered that FUNC would be entitled to the Termination Fee if the Merger
Agreement were terminated in certain circumstances, and that the existence of
such Termination Fee and certain other provisions in the Merger Agreement might
discourage third parties from seeking to acquire
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<PAGE>
Covenant. The Covenant Board considered, with respect thereto, that FUNC was
unwilling to enter into the Merger Agreement with Covenant absent such
provisions and the fact that such Termination Fee was being provided in order to
increase the likelihood that the transactions would be completed.
(v) The Covenant Board took into account the current and prospective
economic environment facing the financial services industry generally, and
Covenant in particular, and considered the ability of larger institutions to
invest in technology, leverage fixed costs over larger markets, and provide a
greater variety of products and services. The Covenant Board perceived that
there were limited opportunities for Covenant to grow through acquisition of
other institutions. The Covenant Board considered opportunities for its
employees that would likely arise from a combination with a larger institution
such as FUNC, as well as the possible negative impact the Mergers would have on
Covenant employees, including possible job loss. The Covenant Board perceived
that the combined institution would be more likely than Covenant alone to
possess the financial resources to compete in the areas of business in which
Covenant was engaged, and therefore the combination would have long-term
benefits for Covenant's stockholders, employees, customers and communities.
(vi) The Covenant Board perceived that FUNC had a customer-oriented culture
that was consistent with the vision and goals of Covenant and provided a strong
basis for integration of Covenant's operations and future performance in a
highly-competitive environment.
(vii) The Covenant Board considered that Mr. Sessa and, subject to FUNC
approval, Mr. Hocker and Mr. John J. Gallagher, Jr., the Vice Chairman of
Covenant, would be appointed to an advisory board of FUNB, and perceived that
this would facilitate a successful combination. See " -- Interests of Certain
Persons".
(viii) The Covenant Board considered that consummation of the Mergers would
constitute a "Change in Control" under the Termination Agreements that Covenant
had previously entered into with the Covenant Officers with the approval of the
Covenant Board, such that such officers would be entitled to certain severance
payments in the event that their employment were terminated within two years
following the Mergers. See " -- Interests of Certain Persons".
(ix) In considering all of the foregoing factors, the Covenant Board
considered the alternatives of Covenant continuing as an independent institution
or combining with other potential merger partners, compared to the effect of
Covenant combining with FUNC pursuant to the Merger Agreement, and determined
that the combination with FUNC presented the best opportunity for maximizing
stockholder value and achieving Covenant's other strategic goals.
In reaching their determination to approve the Merger Agreement and the
transactions contemplated thereby, individual directors may have given differing
weights to different factors and may have viewed certain factors more positively
or negatively than others. In addition, there can be no assurances that the
benefits of the Mergers perceived by the Covenant Board and described above will
be realized.
FOR THE REASONS DESCRIBED ABOVE, THE COVENANT BOARD UNANIMOUSLY APPROVED
THE MERGER AGREEMENT AND BELIEVES THAT THE MERGERS ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE HOLDERS OF COVENANT COMMON STOCK, COVENANT SERIES A PREFERRED
STOCK AND COVENANT SERIES B PREFERRED STOCK. ACCORDINGLY, THE COVENANT BOARD
UNANIMOUSLY RECOMMENDS THAT HOLDERS OF COVENANT COMMON STOCK, COVENANT SERIES A
PREFERRED STOCK AND COVENANT SERIES B PREFERRED STOCK VOTE "FOR" APPROVAL OF THE
MERGER AGREEMENT.
FUNC
FUNC believes that it is advantageous to build a multi-state banking
organization. The economies of banking favor such an organization as a way of
gaining efficiency and spreading costs over a large base, as well as providing
diversification. To further its objective to build a multi-state banking
organization, FUNC has concentrated its efforts on what it perceives to be some
of the better banking markets in the eastern region of the United States and on
advantageous ways of entering or expanding its presence in those markets. FUNC
believes that joining with Covenant is an excellent way to expand FUNC's
presence in the southern portion of New Jersey.
FUNC is continually evaluating acquisition opportunities and frequently
conducts due diligence activities in connection with possible acquisitions. As a
result, acquisition discussions and, in some cases, negotiations frequently take
place and future acquisitions involving cash, debt or equity securities can be
expected. Acquisitions typically involve the payment of a premium over book and
market values, and therefore, some dilution of FUNC's book value and net income
per common share may occur in connection with any future transactions. See
"FUNC -- History and Business".
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<PAGE>
OPINION OF FINANCIAL ADVISOR
Covenant retained Berwind Financial to act as its financial advisor and to
render a fairness opinion in connection with the Corporate Merger. Berwind
Financial rendered its opinion (the "Covenant Fairness Opinion") to the Covenant
Board that, based upon and subject to the various considerations set forth
therein, as of August 4, 1997, the consideration to be received in the Corporate
Merger is fair, from a financial point of view, to Covenant stockholders.
The full text of the Covenant Fairness Opinion, which sets forth the
assumptions made, matters considered and limitations of the review undertaken,
is attached as ANNEX C to this Prospectus/Proxy Statement, is incorporated
herein by reference, and should be read in its entirety in connection with this
Prospectus/Proxy Statement. The summary of the Covenant Fairness Opinion set
forth herein is qualified in its entirety by reference to the full text of the
Covenant Fairness Opinion.
Berwind Financial has knowledge of, and experience with, New Jersey and
surrounding banking markets as well as banking organizations operating in those
markets and was selected by Covenant because of its knowledge of, experience
with, and reputation in the financial services industry. Berwind Financial, as
part of its investment banking business, is engaged regularly in the valuation
of assets, securities and companies in connection with various types of asset
and securities transactions, including mergers, acquisitions, private
placements, and valuations for various other purposes and in the determination
of adequate consideration in such transactions.
In rendering the Covenant Fairness Opinion, Berwind Financial (i) reviewed
the historical financial performances, current financial positions and general
prospects of Covenant and FUNC; (ii) reviewed the Merger Agreement; (iii)
reviewed and analyzed the stock market performance of Covenant and FUNC; (iv)
studied and analyzed the consolidated financial and operating data of Covenant
and FUNC; (v) considered the terms and conditions of the Merger Agreeement as
compared with the terms and conditions of comparable bank and bank holding
company mergers and acquisitions; (vi) met and/or communicated with certain
members of Covenant's and FUNC's senior management to discuss their respective
operations, historical financial statements and future prospects; and (vii)
conducted such other financial analyses, studies and investigations as Berwind
Financial deemed appropriate. No limitations were imposed by the Covenant Board
upon Berwind Financial with respect to the investigations made or procedures
followed by Berwind Financial in rendering the Covenant Fairness Opinion.
In delivering the Covenant Fairness Opinion, Berwind Financial assumed that
in the course of obtaining the necessary regulatory and governmental approvals
for the Mergers, no restriction will be imposed on FUNC or Covenant that would
have a material adverse effect on the contemplated benefits of the Mergers.
Berwind Financial also assumed that there will not occur any change in
applicable law or regulation that would cause a material adverse change in the
future prospects or operations of FUNC.
Berwind Financial relied without independent verification upon the accuracy
and completeness of all of the financial and other information reviewed by and
discussed with it for purposes of the Covenant Fairness Opinion. With respect to
Covenant's financial forecasts reviewed by Berwind Financial in rendering the
Covenant Fairness Opinion, Berwind Financial assumed that such financial
forecasts were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of Covenant as to the future
financial performance of Covenant. Berwind Financial did not make an independent
evaluation or appraisal of the assets (including loans) or liabilities of
Covenant or FUNC nor was it furnished with any such appraisal. Berwind Financial
also did not independently verify and has relied on and assumed that all
allowances for loan and lease losses set forth in the balance sheets of Covenant
and FUNC were adequate and complied fully with applicable law, regulatory policy
and sound banking practice as of the dates of such financial statements.
The following is a summary of selected analyses prepared and analyzed by
Berwind Financial and presented to the Covenant Board in connection with the
Covenant Fairness Opinion.
COMPARABLE COMPANIES AND COMPARABLE ACQUISITION TRANSACTION ANALYSES.
Berwind Financial compared selected financial and operating data for Covenant
with those of a peer group of selected banks and bank holding companies,
headquartered in New Jersey, with assets between $250 million and $750 million,
as of the most recent period publicly available. Such companies included: Broad
National Bancorp, Carnegie Bancorp, Center Bancorp, Inc., Greater Community
Bancorp, High Point Financial Corp., Interchange Financial Services, Prestige
Financial Corp., Ramapo Financial Corp., Sun Bancorp Inc., Vista Bancorp, Inc.,
and Yardville National Bancorp. Financial data and operating ratios compared in
the analysis of the Covenant peer group included but were not limited to: return
on average assets, return on average stockholders' equity, stockholders' equity
to assets ratios, and certain asset quality ratios. The analysis showed
Covenant's return on average assets was .85 percent compared to the peer group
median of 1.02 percent, its return on average stockholders' equity was 14.29
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<PAGE>
percent compared to the peer group median of 12.65 percent, its stockholders'
equity to assets ratio was 6.80 percent compared to the peer group median of
7.20 percent, and its nonperforming assets to total assets ratio was .49 percent
compared to the peer group median of .83 percent.
Berwind Financial also compared selected financial, operating and stock
market data for FUNC with those of a peer group of selected bank holding
companies with assets between $75 billion and $275 billion, as of the most
recent period publicly available. Such companies included: BankAmerica
Corporation, Wells Fargo & Company, First Chicago NBD Corporation, Fleet
Financial Group, Inc. Norwest Corporation, NationsBank Corporation, J.P. Morgan
& Co., Bankers Trust New York Corporation, and Banc One Corporation. Financial,
operating and stock market data, ratios and multiples compared in the analysis
of the FUNC peer group included but were not limited to: return on average
assets, return on average stockholders' equity, stockholders' equity to assets
ratios, certain asset quality ratios, price to book value, price to tangible
book value, price to earnings (latest 12 months) and dividend yield. The
analysis showed FUNC's return on average assets was 1.39 percent compared to the
peer group median of 1.25 percent, its return on average stockholders' equity
was 19.85 percent compared to the peer group median of 15.20 percent, its
stockholders' equity to assets ratio was 7.00 percent compared to the peer group
median of 7.90 percent, and its nonperforming assets to total assets ratio was
.50 percent compared to the peer group median of .42 percent. The analysis also
indicated that the per share price of FUNC Common Stock of $49.5625 as of August
1, 1997, as a percentage of book value and tangible book value per share was
278.6 percent and 385.4 percent, respectively, compared to the peer group
medians of 275.0 percent and 385.5 percent, respectively, and such per share
price of FUNC Common Stock as a multiple of latest 12 months' earnings was 15.6x
compared to a peer group median of 17.2x, and its dividend yield was 2.58
percent compared to a peer group median of 2.12 percent.
Berwind Financial also compared the multiples of book value, and latest 12
months' earnings inherent in the Corporate Merger with the multiples paid in
recent acquisitions of banks and bank holding companies that Berwind Financial
deemed comparable. The transactions deemed comparable by Berwind Financial
included both interstate and intrastate acquisitions announced from January 1,
1996 to the date of the Covenant Fairness Opinion, in which the selling
institution's assets were between $200 million and $600 million as of the most
recent period publicly available. Berwind Financial compared transactions
located throughout the country and analyzed the transactions in four groups: a
national group (60 transactions), a regional group (seven transactions), a
performance group (14 transactions) and a 1997 national group (16 transactions).
The median values calculated for the purchase price as a percentage of book
value for the national, regional, performance and 1997 national groups were
207.6 percent, 222.5 percent, 220.1 percent and 215.9 percent, respectively. The
median values calculated for the purchase price as a multiple of the latest 12
months' earnings per share for the national, regional, performance and 1997
national groups were 16.9x, 17.7x, 15.9x and 16.6x, respectively. These medians
compare to the FUNC/Covenant purchase price as a percentage of book value of
251.9 percent and purchase price as a multiple of latest 12 months' earnings per
share of 41.0x (23.6x excluding SAIF assessment charges and certain one-time
merger-related expenses).
No company or transaction, however, used in this analysis is identical to
Covenant, FUNC or the Corporate Merger. Accordingly, an analysis of the results
of the foregoing is not mathematical; rather, it involves complex considerations
and judgments concerning differences in financial and operating characteristics
of the companies and other factors that would affect the public trading values
of the companies or company to which they are being compared.
DISCOUNTED DIVIDEND ANALYSES. Using discounted dividend analyses, Berwind
Financial estimated the present value of Covenant Common Stock after a five-year
period by applying a range of earnings multiples to Covenant's terminal year
earnings under various growth assumptions. The range of multiples used reflected
a variety of scenarios regarding the growth and profitability prospects of
Covenant. The terminal values were then discounted to present value using
discount rates, reflecting different assumptions regarding the rates of return
required by holders or prospective buyers of Covenant Common Stock. The
discounted dividend analysis indicated a range of values of $8.12 to $18.81 per
share.
PRO FORMA CONTRIBUTION ANALYSIS. Berwind Financial analyzed the changes in
the amount of earnings, book value and dividends represented by one share of
Covenant Common Stock and Covenant Preferred Stock as of June 30, 1997, and the
number of FUNC Common Shares to be received in the Corporate Merger resulting
from the Common Stock Exchange Ratio and, with respect to the Covenant Preferred
Stock, the Series A Exchange Ratio and the Series B Exchange Ratio. The analysis
considered, among other things, the changes that the Corporate Merger would
cause to Covenant's 1997 estimated earnings per share (based on management
estimates, with respect to Covenant earnings, and consensus estimates, with
respect to FUNC earnings), book value per share and indicated dividends. On a
Covenant Common Stock per share basis, Covenant's 1997 estimated earnings per
share would increase from $.85 to $1.33, pro forma book value per share would
decrease from $7.49 to $6.78, and indicated dividends per share would increase
from zero to $.49.
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In connection with rendering the Covenant Fairness Opinion, Berwind
Financial performed a variety of financial analyses. Although the evaluation of
the fairness, from a financial point of view, of the consideration to be paid in
the Corporate Merger was to some extent a subjective one based on the experience
and judgment of Berwind Financial and not merely the result of mathematical
analysis of financial data, Berwind Financial principally relied on the
previously discussed financial valuation methodologies in its determinations.
Berwind Financial believes its analyses must be considered as a whole and that
selecting portions of such analyses and factors considered by Berwind Financial
without considering all such analyses and factors could create an incomplete
view of the process underlying the Covenant Fairness Opinion. In its analysis,
Berwind Financial made numerous assumptions with respect to business, market,
monetary and economic conditions, industry performance and other matters, many
of which are beyond Covenant's and FUNC's control. Any estimates contained in
Berwind Financial's analyses are not necessarily indicative of future results or
values, which may be significantly more or less favorable than such estimates.
In reaching its opinion as to fairness, none of the analyses performed by
Berwind Financial was assigned a greater or lesser weighting by Berwind
Financial than any other analysis. As a result of its consideration of the
aggregate of all factors present and analyses performed, Berwind Financial
reached the conclusion, and opined, that the consideration to be received in the
Corporate Merger as set forth in the Merger Agreement, is fair, from a financial
point of view, to Covenant stockholders.
The Covenant Fairness Opinion was based solely upon the information
available to Berwind Financial and the economic, market and other circumstances
as they existed as of the date the Covenant Fairness Opinion was delivered;
events occurring after the date of the Covenant Fairness Opinion could
materially affect the assumptions used in preparing the Covenant Fairness
Opinion. Berwind Financial has not undertaken to reaffirm and revise the
Covenant Fairness Opinion or otherwise comment upon any events occurring after
the date thereof.
Pursuant to the terms of the engagement letter dated July 14, 1997,
Covenant has paid Berwind Financial $75,000 for acting as financial advisor in
connection with the Mergers, including delivering the Covenant Fairness Opinion.
In addition, Covenant has also agreed to pay Berwind Financial a fee based on a
formula relating to the transaction value of the Corporate Merger as of August
5, 1997, which fee is approximately $782,500 and is payable upon consummation of
the Corporate Merger. Whether or not the Corporate Merger is consummated,
Covenant has also agreed to reimburse Berwind Financial for its reasonable
out-of-pocket expenses incurred in connection with its advisory work, and to
indemnify Berwind Financial and certain related persons against certain
liabilities relating to or arising out of its engagement.
The full text of the Covenant Fairness Opinion, which sets forth
assumptions made and matters considered, is attached hereto as ANNEX C. Covenant
stockholders are urged to read the Covenant Fairness Opinion in its entirety.
The Covenant Fairness Opinion is directed only to the consideration to be
received by Covenant's stockholders in the Corporate Merger and does not
constitute a recommendation to any Covenant stockholder as to how such holder
should vote at the Special Meeting.
THE FOREGOING PROVIDES ONLY A SUMMARY OF THE COVENANT FAIRNESS OPINION OF
BERWIND FINANCIAL AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION, WHICH IS SET FORTH IN ANNEX C TO THIS PROSPECTUS/PROXY
STATEMENT.
INTERESTS OF CERTAIN PERSONS
GENERAL
Certain members of Covenant's management and the Covenant Board have
interests in the Mergers that are in addition to any interests they have as
stockholders of Covenant generally. The material interests include provisions in
the Merger Agreement relating to the indemnification of Covenant's directors and
officers, directors' and officers' liability insurance, and certain other
benefits, as described below.
TERMINATION AGREEMENTS AND OPTION PLANS
On November 22, 1995, Covenant Bank entered into the Termination Agreements
with its senior executive officers -- Messrs. Hocker, Sessa, Parker, D'Orazio
and Mancini (I.E., the "Covenant Officers"), and amended such Termination
Agreements on June 10, 1997. Such Termination Agreements were assumed by
Covenant, as amended, in connection with its formation as a holding company for
Covenant Bank on June 13, 1997. Pursuant to the Merger Agreement, FUNC has
agreed to assume Covenant's obligations under the Termination Agreements.
Pursuant to the Termination Agreements with respect to Messrs. Hocker and Sessa,
(i) if termination of employment occurs within two years following a "Change in
Control" (which term includes consummation of the Corporate Merger), such
officers will be entitled to the payments and benefits set
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<PAGE>
forth below (the "Termination Payments"), unless such termination of employment
is because of such officer's death, and (ii) even if a Change in Control has not
occurred within two years prior to the date of termination of employment, such
officers will be entitled to the Termination Payments unless such termination of
employment is (a) because of such officer's death, (b) by the employer for
"Cause", or (c) by such officer for other than "Good Reason". Messrs. Hocker and
Sessa also are directors of Covenant. Pursuant to the Termination Agreements
with respect to the Covenant Officers other than Messrs. Hocker and Sessa, such
officers will be entitled to the Termination Payments if termination of
employment occurs within two years following a Change in Control, unless such
termination is because of any of the reasons set forth in clauses (a), (b) or
(c) above.
The Termination Payments that the Covenant Officers would be entitled to
receive pursuant to the Termination Agreements would generally be as follows:
(i) such officer's full base salary, as in effect at the time notice of
termination is provided, through the date of termination, plus all other amounts
to which such officer is entitled under any of Covenant's compensation plans at
the time such payments are due; (ii) a lump sum severance payment equal to three
times (in the case of Messrs. Hocker and Sessa) or one times (in the case of
Messrs. Parker, D'Orazio and Mancini) the annual rate of base salary; and (iii)
continued uninterrupted health care coverage to the Covenant Officers
substantially comparable to, and no less beneficial than, that in effect at the
time notice of termination is provided, for a period of two years (in the case
of Messrs. Hocker and Sessa) or one year (in the case of Messrs. Parker,
D'Orazio and Mancini) following the date of termination. In addition, the
Termination Agreements with respect to Messrs. Hocker and Sessa provide for
gross-up payments to be made to such officers, if necessary, to eliminate the
effects of the imposition of the excise tax under Section 4999 of the Code on
payments made to such officers and the imposition of income and excise taxes on
such gross-up payments. Assuming the Corporate Merger were to occur on January
1, 1998, and the Covenant Officers were terminated immediately thereafter, based
on the Covenant Officers' current base salaries and the estimated cost of health
care coverage required under the Termination Agreements, the Termination
Payments payable to the Covenant Officers are currently estimated to be
approximately equal to the following: Mr. Hocker $696,445; Mr. Sessa $854,798;
Mr. Parker $98,637; Mr. D'Orazio $96,637; and Mr. Mancini $129,137. Pursuant to
the Merger Agreement, it is expected that regular annual salary increases (not
exceeding an aggregate of $100,000 for the Covenant Officers) will be given
effect prior to consummation of the Corporate Merger, which would result in an
increase in the foregoing payments.
In addition, pursuant to the Termination Agreements, the terms of
Covenant's Incentive Stock Option Plan and 1996 Stock Option Plan for Employees
and Non-Employee Directors (the "Covenant Option Plans"), and the individual
stock option agreements thereunder, upon consummation of the Corporate Merger,
all outstanding options to purchase shares of Covenant Common Stock (the
"Covenant Options") will become immediately exercisable. Pursuant to the Merger
Agreement, upon consummation of the Corporate Merger, FUNC has agreed to assume
all outstanding Covenant Options granted pursuant to the Covenant Option Plans.
The number of shares covered by each Covenant Option would be equal to the
number of shares of Covenant Common Stock covered thereby multiplied by the
Common Stock Exchange Ratio and rounded down to the nearest whole share, and the
Covenant Option exercise price would be adjusted by dividing such price by the
Common Stock Exchange Ratio and rounding to the nearest cent.
The following table sets forth the following information with respect to
each of the Covenant Officers, the Covenant Officers as a group and the
non-employee directors of Covenant as a group (the "Non-Employee Directors"):
(i) the number of shares of Covenant Common Stock covered by Covenant Options
held by such persons as of the Record Date; (ii) the number of shares of
Covenant Common Stock covered by such Covenant Options that are exercisable as
of the Record Date; (iii) the number of shares of Covenant Common Stock covered
by such Covenant Options that will be exercisable upon consummation of the
Corporate Merger; (iv) the weighted average exercise price for such exercisable
Covenant Options; and (v) the aggregate value of such exercisable Covenant
Options based upon the Common Stock Exchange Ratio and $52.875 (the closing sale
price of FUNC Common Stock on the Record Date), less the applicable Covenant
Option exercise price.
<TABLE>
<CAPTION>
COVENANT OPTIONS WEIGHTED AVERAGE
COVENANT OPTIONS EXERCISABLE UPON EXERCISE PRICE PER AGGREGATE VALUE
COVENANT OPTIONS CURRENTLY CONSUMMATION OF THE EXERCISABLE COVENANT OF EXERCISABLE
HELD EXERCISABLE CORPORATE MERGER OPTION COVENANT OPTIONS
<S> <C> <C> <C> <C> <C>
Mr. Hocker...................... 158,612 147,588 158,612 $ 8.20 $1,897,172
Mr. Sessa....................... 73,775 64,387 73,775 9.13 813,818
Mr. Parker...................... 19,768 17,012 19,768 9.39 212,911
Mr D'Orazio..................... 12,833 10,627 12,833 9.83 132,575
Mr. Mancini..................... 36,222 32,732 36,222 8.78 412,238
Covenant Officers............... 301,210 272,546 301,210 8.65 3,468,714
Non-Employee Directors.......... 41,340 24,798 41,340 $12.63 $ 311,343
</TABLE>
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CERTAIN CASH-BASED INCENTIVE
As permitted by the Merger Agreement, Covenant has established a $530,000
retention bonus pool for employees of Covenant (other than Messrs. Hocker and
Sessa) to be administered as mutually agreed upon by Covenant and FUNC. In
addition, the Merger Agreement provides that regular performance-based bonuses
for 1997 may be paid prior to consummation of the Corporate Merger.
INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE
The Merger Agreement provides that for the six-year period following the
Effective Date, FUNC will indemnify the directors, officers and employees of
Covenant holding such positions on or prior to the date of the Merger Agreement,
against certain liabilities to the extent such persons were indemnified under
the NJBCA, the Covenant Certificate and the Covenant Bylaws, as in effect on the
date of the Merger Agreement.
In addition, FUNC agreed in the Merger Agreement to use its reasonable best
efforts to maintain Covenant's existing directors' and officers' liability
insurance policy for persons who were covered by such insurance maintained by
Covenant on the date of the Merger Agreement for a period of three years after
the Effective Date at an annual cost not to exceed 150 percent of Covenant's
annual premium payment on Covenant's current policy.
CERTAIN OTHER MATTERS RELATING TO THE MERGERS
In connection with the execution of the Merger Agreement, FUNC has agreed
to cause Mr. Sessa and, subject to FUNC approval, Messrs. Hocker and Gallagher,
to be appointed to an advisory board following consummation of the Mergers,
which advises FUNB on its activities in the south New Jersey area. The directors
of Covenant who serve on the advisory board will receive $500 for each meeting
they attend. Currently, Messrs. Hocker, Sessa and Gallagher receive no
additional compensation for their services as directors of Covenant. All other
employee-directors receive an annual retainer of $5,400, and all non-employee
directors receive an annual retainer of $8,400 for their services as directors
of Covenant. Barry M. Abelson, a director of Covenant, is a partner in the law
firm of Pepper, Hamilton & Scheetz LLP, which has acted as counsel to Covenant
in connection with the Mergers.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING IS A DISCUSSION OF ALL MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE CORPORATE MERGER. THE DISCUSSION IS INCLUDED FOR GENERAL
INFORMATION PURPOSES ONLY AND MAY NOT APPLY TO SPECIAL SITUATIONS, SUCH AS
COVENANT STOCKHOLDERS, IF ANY, WHO RECEIVED THEIR COVENANT COMMON STOCK UPON THE
EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION, THAT HOLD THEIR
COVENANT COMMON STOCK AND/OR COVENANT PREFERRED STOCK AS PART OF A "STRADDLE" OR
"CONVERSION TRANSACTION", OR THAT ARE INSURANCE COMPANIES, SECURITIES DEALERS,
FINANCIAL INSTITUTIONS OR FOREIGN PERSONS.
Sullivan & Cromwell, special counsel for FUNC, has advised FUNC and
Covenant, that, in its opinion the Corporate Merger will constitute a
reorganization under Section 368 of the Code and:
(i) No gain or loss will be recognized for federal income tax
purposes by Covenant stockholders upon the exchange in the Corporate Merger
of shares of Covenant Common Stock and/or Covenant Preferred Stock solely
for FUNC Common Shares (except with respect to cash received in lieu of a
fractional share interest in FUNC Common Stock).
(ii) The basis of FUNC Common Shares received in the Corporate Merger
by Covenant stockholders (including the basis of any fractional share
interest in FUNC Common Stock) will be the same as the basis of the shares
of Covenant Common Stock and/or Covenant Preferred Stock surrendered in
exchange therefor.
(iii) The holding period of the FUNC Common Shares received in the
Corporate Merger by a Covenant stockholder (including the holding period of
any fractional share interest in FUNC Common Stock) will include the
holding period during which the shares of Covenant Common Stock and/or
Covenant Preferred Stock surrendered in exchange therefor were held by the
Covenant stockholder, provided such shares of Covenant Common Stock and/or
Covenant Preferred Stock were held as capital assets.
(iv) Cash received by a holder of Covenant Common Stock and/or
Covenant Preferred Stock in lieu of a fractional share interest in FUNC
Common Stock will be treated as received for such fractional share interest
and, provided the fractional share would have constituted a capital asset
in the hands of such holder, the holder should in general recognize capital
gain or loss in an amount equal to the difference between the amount of
cash received and the portion of the
30
<PAGE>
adjusted tax basis in the Covenant Common Stock and/or Covenant Preferred
Stock allocable to the fractional share interest.
In addition, consummation of the Mergers is conditioned, among other
things, upon receipt by FUNC and Covenant of an opinion of Sullivan & Cromwell
dated as of the Effective Date, that (i) the Corporate Merger constitutes a
reorganization under Section 368 of the Code, and (ii) no gain or loss will be
recognized by Covenant stockholders who receive FUNC Common Shares solely in
exchange for their shares of Covenant Common Stock and/or Covenant Preferred
Stock, except that gain or loss may be recognized as to cash received in lieu of
fractional share interests. FUNC and Covenant do not currently intend to waive
the receipt of such tax opinion; however, if such tax opinion were waived and
the material federal income tax consequences of the Corporate Merger were
materially different from those summarized above, Covenant would resolicit its
stockholders prior to consummating the Corporate Merger. The tax opinion of
Sullivan & Cromwell summarized above is or will be based, among other things, on
representations relating to certain facts and circumstances of, and the
intentions of the parties to, the Corporate Merger.
BECAUSE CERTAIN TAX CONSEQUENCES OF THE CORPORATE MERGER MAY VARY DEPENDING
UPON THE PARTICULAR CIRCUMSTANCES OF EACH COVENANT STOCKHOLDER AND OTHER
FACTORS, EACH COVENANT STOCKHOLDER IS URGED TO CONSULT SUCH HOLDER'S OWN TAX
ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE
CORPORATE MERGER (INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME
AND OTHER TAX LAWS).
BUSINESS PENDING CONSUMMATION
Covenant agreed in the Merger Agreement to conduct its business in the
ordinary and usual course consistent with past practice and to refrain from
taking certain actions relating to its operation pending consummation of the
Mergers, without the prior written consent of FUNC, except as otherwise
permitted in the Merger Agreement. These actions include, without limitation:
(i) paying any dividends, other than dividends on Covenant Preferred Stock at a
quarterly rate not to exceed the rate provided for in the terms thereof, or
redeeming or otherwise acquiring any shares of its capital stock, or issuing any
additional shares of its capital stock, or giving any person the right to
acquire any such shares; (ii) incurring any indebtedness for borrowed money or
becoming liable for the obligations of any other entity other than in the
ordinary course of business consistent with past practice; (iii) entering into
any employment, consulting, severance or similar agreements or arrangements with
any director, officer or employee of Covenant, or granting any salary or wage
increase or increasing any employee benefits (including incentive or bonus
payments) except for normal individual increases in regular compensation in the
ordinary course of business consistent with past practice; (iv) disposing of any
material portion of its assets or acquiring any portion of the business or
property of any other entity which is material to it; (v) changing its lending,
investment, liability management or other material banking policies in any
material respect; (vi) settling any claims involving any liability for money
damages in an amount greater than $25,000 or restrictions on the operations of
Covenant; (vii) entering into, terminating or changing any material agreements,
except for those agreements entered into in the ordinary course of business
consistent with past practices that are terminable by Covenant without penalty
on not more than 60 days' prior written notice.
Covenant also agreed in the Merger Agreement to make such modifications or
changes to its accounting, loan, litigation and other reserve and real estate
valuation policies and practices prior to the Effective Date, as may be mutually
agreed upon between FUNC and Covenant.
From time to time Covenant and its affiliates engage in transactions with
FUNC and its affiliates in the ordinary course of business. It is anticipated
that such transactions may increase as a result of the execution of the Merger
Agreement.
REGULATORY APPROVALS
Consummation of the Bank Merger is subject to receipt of the prior approval
of the OCC under the Bank Merger Act, 12 U.S.C. (section mark)1828(c) (the
"BMA") and the prior approval of the NJ Banking Department under New Jersey law.
The BMA requires that the relevant regulatory agency take into consideration,
among other factors, the financial and managerial resources and future prospects
of the institutions and the convenience and needs of the communities to be
served. The BMA prohibits the OCC from approving the Bank Merger (i) if such
transaction would result in a monopoly or be in furtherance of any combination
or conspiracy to monopolize or to attempt to monopolize the business of banking
in any part of the United States, or (ii) if the effect of such transaction in
any section of the country may be substantially to lessen competition or to tend
to create a monopoly, or if it would in any other manner be a restraint of
trade, unless the relevant regulatory agency finds that the anti-competitive
effects of such merger are clearly outweighed by the public interest and by the
probable effect of the transaction in meeting the convenience and needs of the
communities to be served.
31
<PAGE>
In addition to receipt of the approvals necessary for consummation of the
Bank Merger, consummation of the Corporate Merger also is subject to receipt of
the prior approval of the Federal Reserve Board under the BHCA, or a waiver of
such requirement in accordance with regulations adopted by the Federal Reserve
Board under the BHCA, 12 C.F.R. (section mark)225.12(d). If an application is
required under the BHCA, the Federal Reserve Board would consider whether the
proposed transaction can reasonably be expected to produce benefits to the
public, such as greater convenience, increased competition, or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interests, or
unsound banking practices. In addition, the Federal Reserve Board would be
prohibited from approving an application if it finds that the proposed
transaction (i) would result in a monopoly or which would be in furtherance of
any combination or conspiracy to monopolize or to attempt to monopolize the
business of banking in any part of the United States; or (ii) may have the
effect in any section of the United States of substantially lessening
competition, or tending to create a monopoly, or resulting in a restraint of
trade, unless the Federal Reserve Board finds that the anti-competitive effects
of the transaction are clearly outweighed by the public interest and by the
probable effect of the transaction in meeting the convenience and needs of the
communities to be served.
Under both statutes, the relevant federal regulatory agency has the
authority to deny an application if it concludes that the combined organization
would have an inadequate capital position or if the acquiring organization does
not meet the requirements of the Community Reinvestment Act of 1977.
The Mergers may not be consummated until the 15th day following the dates
of each of the requisite approvals, during which period the United States
Department of Justice may comment adversely on the transaction (which has the
effect of extending the waiting period to the 30th day following approval) or
challenge such merger on antitrust grounds. The commencement of an antitrust
action would stay the effectiveness of such an approval unless a court
specifically orders otherwise.
Applications have been filed pursuant to the BMA with the OCC and pursuant
to state law with the NJ Banking Department. A request for a waiver pursuant to
the BHCA has been filed with the Federal Reserve Board.
THE MERGERS WILL NOT PROCEED IN THE ABSENCE OF THE REQUISITE REGULATORY
APPROVALS FOR BOTH THE CORPORATE MERGER AND THE BANK MERGER. THERE CAN BE NO
ASSURANCE THAT SUCH REGULATORY APPROVALS WILL BE OBTAINED, AND IF THE MERGERS
ARE APPROVED, THERE CAN BE NO ASSURANCE AS TO THE DATE OF ANY SUCH APPROVAL.
THERE CAN ALSO BE NO ASSURANCE THAT SUCH APPROVALS WILL NOT CONTAIN A CONDITION
OR REQUIREMENT WHICH CAUSES SUCH APPROVALS TO FAIL TO SATISFY THE CONDITIONS SET
FORTH IN THE MERGER AGREEMENT AND DESCRIBED BELOW UNDER " -- CONDITIONS TO
CONSUMMATION; TERMINATION". THERE CAN LIKEWISE BE NO ASSURANCE THAT THE UNITED
STATES DEPARTMENT OF JUSTICE OR A STATE ATTORNEY GENERAL WILL NOT CHALLENGE THE
CORPORATE MERGER OR THE BANK MERGER, OR IF SUCH A CHALLENGE IS MADE, AS TO THE
OUTCOME THEREOF.
CONDITIONS TO CONSUMMATION; TERMINATION
Consummation of the Mergers is subject, among other things, to: (i)
approval of the Merger Agreement by the requisite vote of the stockholders of
Covenant; (ii) receipt of the regulatory approvals referred to above without any
restrictions or conditions which, in the reasonable opinion of FUNC, would so
materially adversely impact the economic or business benefits to FUNC of the
transactions contemplated by the Merger Agreement so as to render inadvisable
the consummation of the Mergers; (iii) no court or governmental or regulatory
authority having taken any action which enjoins or prohibits the Mergers; (iv)
receipt by FUNC and Covenant of the opinion of Sullivan & Cromwell dated as of
the Effective Date, as to certain federal income tax consequences of the
Corporate Merger; and (v) the FUNC Common Shares having been approved for
listing on the NYSE, subject to official notice of issuance.
Consummation of the Mergers is also subject to the satisfaction or waiver
of various other conditions specified in the Merger Agreement, including, among
others: (i) the delivery by Covenant and FUNC, each to the other, of (a)
opinions of their respective counsel, and (b) certificates executed by certain
of their respective executive officers as to compliance with the Merger
Agreement; (ii) the receipt by FUNC of a letter from Covenant's independent
certified public accountants, dated as of or shortly prior to the Effective
Date, with respect to Covenant's financial position and results of operations;
and (iii) the receipt by FUNC of an agreement from each "affiliate" of Covenant
restricting the sale of FUNC Common Shares received by such affiliate in the
Corporate Merger. See "RESALE OF FUNC COMMON SHARES".
The Merger Agreement provides that, whether before or after the Special
Meeting and notwithstanding the approval of the Merger Agreement by the
stockholders of Covenant, the Merger Agreement may be terminated and the Mergers
abandoned at any time prior to the Effective Date: (i) by mutual consent of FUNC
and Covenant; or (ii) by either the Board of Directors of FUNC (the "FUNC
Board") or the Covenant Board (a) if the stockholders of Covenant fail to
approve the
32
<PAGE>
Merger Agreement or any required regulatory approval is denied, (b) in the event
of a breach by the other party of any representation, warranty or covenant
contained in the Merger Agreement, which breach is not cured after 30 days'
written notice thereof is given to the party committing such breach, or (c) if
the Corporate Merger is not consummated on or before June 30, 1998.
WAIVER; AMENDMENT
Prior to the Effective Date, any provision of the Merger Agreement may be:
(i) waived by the party benefitted by the provision; or (ii) amended or modified
at any time (including the structure of the transaction) by an agreement in
writing among the parties thereto approved by their respective Boards of
Directors and executed in the same manner as the Merger Agreement, provided that
after approval by the stockholders of Covenant, the consideration to be received
by the stockholders of Covenant may not thereby be decreased.
ACCOUNTING TREATMENT
It is expected that the purchase method of accounting will be used to
reflect the Mergers upon consummation. As required by generally accepted
accounting principles, under purchase accounting the assets and liabilities of
Covenant as of the Effective Date will be recorded at their respective fair
market values and added to those of FUNC. Financial statements of FUNC issued
after consummation of the Mergers would reflect such values. Financial
statements of FUNC for periods before consummation of the Mergers would not be
restated to reflect Covenant's historical financial position or results of
operations.
It is expected that the pooling of interests method of accounting will be
used to reflect the Signet Acquisition and the WFBS Acquisition. Under pooling
of interests accounting, as of the effective date of an acquisition, the assets
and liabilities of the acquired company are added to those of the acquiring
company at their recorded book values, and the stockholders' equity accounts of
the acquired company and the acquiring company are combined on the acquiring
company's consolidated balance sheet. Depending on the relative significance of
the acquisition, together with any other pending acquisitions, to the acquiring
company, income and other financial statements of the acquiring company for
periods ended prior to the effective date of the acquisition may be restated to
reflect the consolidated combined financial position and results of operations
as if such acquisition had taken place prior to the periods covered by such
financial statements. Due to the relative significance of the Signet Acquisition
to FUNC, it is currently expected that FUNC's financial statements will be
restated as a result of the Signet Acquisition, but will not be restated as a
result of the WFBS Acquisition.
The unaudited pro forma financial information contained in this
Prospectus/Proxy Statement has been prepared using purchase accounting to
account for the Mergers and does not reflect the Other Pending Acquisitions or
the restatement of FUNC's financial statements in connection with the Signet
Acquisition. See "RECENT DEVELOPMENTS -- FUNC Common Stock Buybacks".
See "RECENT DEVELOPMENTS -- Signet Banking Corporation Acquisition",
" -- Wheat First Butcher Singer, Inc. Acquisition" and " -- FUNC Common Stock
Offering".
EXPENSES; TERMINATION FEE
All expenses incurred by or on behalf of the parties in connection with the
Merger Agreement and the transactions contemplated thereby shall be borne by the
party incurring the same, except that printing expenses will be shared equally
by FUNC and Covenant.
FUNC shall be entitled to the Termination Fee of $3.5 million from Covenant
following the occurrence of a Payment Event, provided FUNC shall have sent
written notice of such entitlement within 90 days after its awareness of such
occurrence. FUNC's right to receive the Termination Fee shall terminate if any
of the following occurs prior to a Payment Event: (i) the Effective Date; (ii)
termination of the Merger Agreement in accordance with its terms if such
termination occurs prior to the occurrence of a Preliminary Payment Event,
except termination by FUNC due to a breach by Covenant; (iii) termination of the
Merger Agreement following the occurrence of a Preliminary Payment Event and the
passage of 18 months after such termination; or (iv) termination of the Merger
Agreement by FUNC due to a breach by Covenant and the passage of 18 months after
such termination.
A Preliminary Payment Event refers to any of the following events or
transactions occurring after the date of the Merger Agreement:
(i) Covenant or Covenant Bank, without having received FUNC's prior
written consent, shall have entered into an agreement to engage in any
Acquisition Transaction (as hereinafter defined) with any person other than
FUNC, or the
33
<PAGE>
Covenant Board shall have recommended that the stockholders of Covenant
approve or accept any Acquisition Transaction with any person other than
FUNC. "Acquisition Transaction" means (a) a merger or consolidation, or any
similar transaction, involving Covenant or Covenant Bank, (b) a purchase,
lease or other acquisition of all or substantially all of the assets or
deposits of Covenant or Covenant Bank, (c) a purchase or other acquisition
(including by way of merger, consolidation, share exchange or otherwise) of
securities representing 20 percent or more of the voting power of Covenant
or Covenant Bank; provided that the term "Acquisition Transaction" does not
include any internal merger or consolidation involving only Covenant or
Covenant Bank;
(ii)(a) any person (other than FUNC) shall have acquired beneficial
ownership or the right to acquire beneficial ownership of 20 percent or
more of the outstanding shares of Covenant Common Stock, or (b) any group,
other than a group of which FUNC is a member, shall have been formed that
beneficially owns 20 percent or more of the shares of Covenant Common Stock
then outstanding;
(iii) any person other than FUNC shall have made a bona fide proposal
to Covenant or its stockholders, by public announcement or written
communication that is or becomes the subject of public disclosure, to
engage in an Acquisition Transaction (including, without limitation, any
situation in which any person other than FUNC shall have commenced (as such
term is defined in Rule 14d-2 under the Exchange Act) or shall have filed a
registration statement under the Securities Act, with respect to a tender
offer or exchange offer to purchase any shares of Covenant Common Stock
such that, upon consummation of such offer, such person would own or
control 20 percent or more of the then outstanding shares of Covenant
Common Stock (such an offering referred to herein as a "Tender Offer" or an
"Exchange Offer", respectively));
(iv) after a proposal is made by a third party to Covenant or its
stockholders to engage in an Acquisition Transaction, or such third party
states its intentions to Covenant to make such a proposal if the Merger
Agreement terminates, Covenant shall have knowingly breached any
representation, covenant or obligation contained in the Merger Agreement
and such breach would entitle FUNC to terminate the Merger Agreement
(without regard to the cure period provided for in the Merger Agreement
unless such cure is promptly effected without jeopardizing consummation of
the Corporate Merger); or
(v) the holders of shares of Covenant Common Stock and Covenant
Preferred Stock shall not have approved the Merger Agreement at the Special
Meeting or the Special Meeting shall not have been held or shall have been
canceled prior to termination of the Merger Agreement, in each case after
any person (other than FUNC) shall have (a) made, or disclosed an intention
to make, a bona fide proposal to engage in an Acquisition Transaction, or
(b) commenced a Tender Offer or filed a registration statement under the
Securities Act, with respect to an Exchange Offer.
The term "Payment Event" shall mean either of the following events or
transactions occurring after the date of the Merger Agreement:
(a) the acquisition by any person, other than FUNC, alone or together
with such person's affiliates and associates, or any group, of beneficial
ownership of 25 percent or more of the outstanding shares of Covenant
Common Stock; or
(b) the occurrence of a Preliminary Payment Event described in (x)
clause (i) above, except that the percentage referred therein shall be 25
percent, or (y) clause (v) above.
The foregoing discussion is qualified in its entirety by reference to the
applicable provisions in the Merger Agreement relating to the Termination Fee.
NO DISSENTERS' RIGHTS
Pursuant to the NJBCA, holders of Covenant Common Stock, Covenant Series A
Preferred Stock and Covenant Series B Preferred Stock do not have dissenters' or
appraisal rights in connection with the proposal to approve the Merger Agreement
because the FUNC Common Shares to be issued to Covenant stockholders upon
consummation of the Corporate Merger will be listed on the NYSE and FUNC has at
least 1,000 record stockholders. See " -- Conditions to Consummation;
Termination" and "CERTAIN DIFFERENCES IN THE RIGHTS OF COVENANT AND FUNC
STOCKHOLDERS -- Dissenters' Rights".
34
<PAGE>
MARKET PRICES
The following table sets forth (i) the high and low last reported sale
prices per share of FUNC Common Stock on the NYSE Tape (trading symbol, FTU),
with respect to each quarterly period since January 1, 1995; (ii) the high and
low last reported sale prices per share of Covenant Common Stock on the Nasdaq
National Market (trading symbol, CNSK) with respect to the period from June 13,
1997; (iii) the high and low last reported sale prices per share of Covenant
Bank common stock on the Nasdaq National Market (trading symbol, CNSK) prior to
June 13, 1997; (iv) the high and low last reported sale prices per share of
Covenant Series A Preferred Stock (Covenant Bank Series A 6% convertible
non-cumulative preferred stock ("Covenant Bank Series A Preferred Stock") prior
to June 13, 1997) on the Nasdaq Small-Cap Market (trading symbol, CNSKP) since
January 1, 1995; (v) the high and low last reported sales prices per share of
Covenant Series B Preferred Stock (Covenant Bank Series B 6% convertible
non-cumulative preferred stock ("Covenant Bank Series B Preferred Stock") prior
to June 13, 1997) on the Nasdaq Small-Cap Market (trading symbol, CNSKO) since
June 30, 1995; (vi) the equivalent pro forma market values per share of Covenant
Common Stock, based on the Common Stock Exchange Ratio; (vii) the equivalent pro
forma market values per share of Covenant Series A Preferred Stock, based on the
Series A Exchange Ratio; and (viii) the equivalent pro forma market values per
share of Covenant Series B Preferred Stock, based on the Series B Exchange
Ratio. The following Covenant Common Stock and Covenant Bank common stock prices
have been adjusted to reflect all stock dividends issued by Covenant and
Covenant Bank on such stock. See " -- Dividends". A subsidiary of WFBS is a
market maker in Covenant Common Stock, Covenant Series A Preferred Stock and
Covenant Series B Preferred Stock, and acted as a market maker in Covenant Bank
common stock, Covenant Bank Series A Preferred Stock and Covenant Bank Series B
Preferred Stock. See "RECENT DEVELOPMENTS -- Wheat First Butcher Singer, Inc.
Acquisition".
<TABLE>
<CAPTION>
FUNC COVENANT
COMMON STOCK COMMON STOCK
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
1995
First quarter................................... $ 22 1/2 20 5/8 9 7 1/2
Second quarter.................................. 24 7/8 21 3/8 8 3/4 7 1/2
Third quarter................................... 25 5/8 22 5/8 9 3/8 8 1/4
Fourth quarter.................................. 29 3/8 24 3/4 12 3/8 8 3/4
1996
First quarter................................... 31 3/8 25 3/4 11 1/2 10 7/8
Second quarter.................................. 32 1/4 28 3/4 11 3/4 11 1/4
Third quarter................................... 33 7/8 30 1/2 12 7/8 11 1/4
Fourth quarter.................................. 38 1/2 33 1/2 14 3/4 12
1997
First quarter................................... 47 3/4 36 5/8 13 7/8 12 3/8
Second quarter.................................. 47 7/8 39 1/8 18 1/4 13 3/8
Third quarter................................... 50 11/16 45 7/8 21 17
Fourth quarter (through October 14, 1997)....... $ 52 7/8 50 3/8 19 1/2 18 1/2
<CAPTION>
EQUIVALENT PRO FORMA
PER SHARE OF COVENANT
COMMON STOCK (1)
HIGH LOW
<S> <C> <C>
1995
First quarter................................... 8 1/2 7 3/4
Second quarter.................................. 9 3/8 8 1/8
Third quarter................................... 9 3/4 8 5/8
Fourth quarter.................................. 11 1/8 9 3/8
1996
First quarter................................... 11 7/8 9 3/4
Second quarter.................................. 12 1/4 10 7/8
Third quarter................................... 12 7/8 11 5/8
Fourth quarter.................................. 14 5/8 12 3/4
1997
First quarter................................... 18 1/8 13 7/8
Second quarter.................................. 18 1/4 14 7/8
Third quarter................................... 19 1/4 17 3/8
Fourth quarter (through October 14, 1997)....... 20 1/8 19 1/8
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
EQUIVALENT PRO FORMA
PER SHARE OF COVENANT
COVENANT COVENANT
SERIES A SERIES A PREFERRED SERIES B
PREFERRED STOCK STOCK (1) PREFERRED STOCK
HIGH LOW HIGH LOW HIGH LOW
<S> <C> <C> <C> <C> <C> <C>
1995
First quarter......... $39 1/8 35 3/8 34 31 1/4 -- --
Second quarter........ 37 5/8 34 37 5/8 32 3/8 -- --
Third quarter......... 38 1/4 35 1/8 38 3/4 34 1/4 37 5/8 31 1/2
Fourth quarter........ 40 1/8 42 3/8 44 1/2 37 1/2 38 7/8 34 3/8
1996
First quarter......... 48 1/8 48 1/8 47 1/2 39 43 1/2 38 7/8
Second quarter........ 46 1/4 46 1/4 48 7/8 43 1/2 41 7/8 37 3/8
Third quarter......... 49 47 3/8 51 1/4 46 1/8 40 3/4 38 1/2
Fourth quarter........ 49 7/8 49 7/8 58 1/4 50 3/4 43 5/8 39 1/2
1997
First quarter......... 49 7/8 49 7/8 72 3/8 55 1/2 43 5/8 39 1/2
Second quarter........ 48 48 72 1/2 59 1/4 42 38
Third quarter......... 76 70 76 3/4 69 1/2 57 1/2 55
Fourth quarter
(through
October 14, 1997)... $76 70 80 1/8 76 1/4 57 1/2 55
<CAPTION>
EQUIVALENT PRO FORMA
PER SHARE OF COVENANT
SERIES B PREFERRED
STOCK (1)
HIGH LOW
<S> <C> <C>
1995
First quarter......... -- --
Second quarter........ -- --
Third quarter......... 30 5/8 27 1/8
Fourth quarter........ 35 1/8 29 5/8
1996
First quarter......... 37 5/8 30 7/8
Second quarter........ 38 5/8 34 3/8
Third quarter......... 40 5/8 36 1/2
Fourth quarter........ 46 1/8 40 1/8
1997
First quarter......... 57 1/4 43 7/8
Second quarter........ 57 3/8 46 7/8
Third quarter......... 60 3/4 55
Fourth quarter
(through
October 14, 1997)... 63 3/8 60 3/8
</TABLE>
(1) Equivalent pro forma market values per share of Covenant Common Stock
amounts represent the high and low last reported sales prices per share of
FUNC Common Stock multiplied by the Common Stock Exchange Ratio, rounded
down to the nearest one-eighth. Equivalent pro forma market values per share
of Covenant Series A Preferred Stock and Covenant Series B Preferred Stock
amounts represent the high and low last reported sales prices per share of
FUNC Common Stock multiplied by the Series A Exchange Ratio, with respect to
the Covenant Series A Preferred Stock, and the Series B Exchange Ratio, with
respect to the Covenant Series B Preferred Stock, in each case rounded down
to the nearest one-eighth.
On August 4, 1997, the last business day prior to public announcement of
the execution of the Merger Agreement, the last reported sale prices per share
of FUNC Common Stock on the NYSE Tape, Covenant Common Stock on the Nasdaq
National Market, and Covenant Series A Preferred Stock and Covenant Series B
Preferred Stock on the Nasdaq Small-Cap Market were $49.50, $21.00, $76.00 and
$57.125, respectively. On October 14, 1997, such prices were $51.375, $19.00,
$76.00 and $55.00, respectively. Covenant stockholders are urged to obtain
current quotations of the market price of FUNC Common Stock.
The Merger Agreement provides for the filing of a listing application with
the NYSE covering the FUNC Common Shares. It is a condition to consummation of
the Corporate Merger that the FUNC Common Shares be authorized for listing on
the NYSE effective upon official notice of issuance. See " -- Conditions to
Consummation; Termination".
See "RECENT DEVELOPMENTS -- FUNC Common Stock Buybacks".
36
<PAGE>
DIVIDENDS
The following table sets forth the cash dividends paid or declared on FUNC
Common Stock with respect to each quarterly period since January 1, 1995,
Covenant Series A Preferred Stock (Covenant Bank Series A Preferred Stock prior
to June 13, 1997) with respect to each quarterly period since January 1, 1995,
and Covenant Series B Preferred Stock (Covenant Bank Series B Preferred Stock
prior to June 13, 1997) with respect to the period from June 30, 1995, and the
equivalent pro forma cash dividends paid per share of Covenant Common Stock,
Covenant Series A Preferred Stock and Covenant Series B Preferred Stock, based
on the Common Stock Exchange Ratio, the Series A Exchange Ratio and the Series B
Exchange Ratio, respectively. Neither Covenant nor Covenant Bank paid any cash
dividends on Covenant Common Stock or Covenant Bank common stock during such
periods. Covenant issued a four percent stock dividend on Covenant Common Stock
on July 14, 1997, and Covenant Bank issued (i) a four percent stock dividend on
Covenant Bank common stock on each of June 15, 1996 and June 15, 1995, and (ii)
a six percent stock dividend on Covenant Bank common stock on each of December
16, 1996 and December 15, 1995.
<TABLE>
<CAPTION>
EQUIVALENT
PRO
FORMA EQUIVALENT
PER PRO FORMA
SHARE PER SHARE
OF OF
COVENANT COVENANT COVENANT COVENANT
FUNC COVENANT COMMON SERIES A SERIES A SERIES B
COMMON COMMON STOCK PREFERRED PREFERRED PREFERRED
STOCK STOCK (1) STOCK (2) STOCK (1) STOCK (2)
<S> <C> <C> <C> <C> <C> <C>
1995
First quarter... $0.23 -- 0.085 0.375 0.350 --
Second
quarter......... 0.23 -- 0.085 0.375 0.350 --
Third quarter... 0.26 -- 0.100 0.375 0.395 0.375
Fourth
quarter......... 0.26 -- 0.100 0.375 0.395 0.375
1996
First quarter... 0.26 -- 0.100 0.375 0.395 0.375
Second
quarter......... 0.26 -- 0.100 0.375 0.395 0.375
Third quarter... 0.29 -- 0.110 0.375 0.440 0.375
Fourth
quarter......... 0.29 -- 0.110 0.375 0.440 0.375
1997
First quarter... 0.29 -- 0.110 0.375 0.440 0.375
Second
quarter......... 0.29 -- 0.110 0.375 0.440 0.375
Third quarter... $0.32 -- 0.120 0.375 0.485 0.375
<CAPTION>
EQUIVALENT
PRO FORMA
PER SHARE
OF
COVENANT
SERIES B
PREFERRED
STOCK (1)
<S> <C>
1995
First quarter... --
Second
quarter......... --
Third quarter... 0.310
Fourth
quarter......... 0.310
1996
First quarter... 0.310
Second
quarter......... 0.310
Third quarter... 0.350
Fourth
quarter......... 0.350
1997
First quarter... 0.350
Second
quarter......... 0.350
Third quarter... 0.385
</TABLE>
(1) Equivalent pro forma cash dividends paid per share of Covenant Common Stock
amounts represent FUNC historical dividend rates per share multiplied by the
Common Stock Exchange Ratio, rounded to the nearest one-half cent. The
current annualized dividend rate per share for FUNC Common Stock, based upon
the most recently declared quarterly dividend of $.32 per share paid on
September 15, 1997, is $1.28. On an equivalent pro forma basis, such current
annualized FUNC dividend per share of Covenant Common Stock would be $.49,
based on the Common Stock Exchange Ratio, rounded to the nearest cent. Any
future FUNC and Covenant dividends are dependent upon their respective
earnings and financial condition, government regulations and policies and
other factors. Holders of Covenant Series A Preferred Stock and Covenant
Series B Preferred Stock currently are entitled to receive, when and as
declared by the Covenant Board, preferred dividends at the annual rate of
$1.50 per share. The equivalent pro forma cash dividends paid per share of
Covenant Series A Preferred Stock and Covenant Series B Preferred Stock
amounts represent pro forma combined per share of FUNC Common Stock amounts
multiplied by the Series A Exchange Ratio, with respect to the Covenant
Series A Preferred Stock, and the Series B Exchange Ratio, with respect to
the Covenant Series B Preferred Stock, in each case rounded to the nearest
cent. On an equivalent pro forma basis, the current annualized FUNC dividend
per share of Covenant Series A Preferred Stock and Covenant Series B
Preferred Stock would be $1.94 and $1.54, respectively, which amounts
represent pro forma combined per share of FUNC Common Stock amounts
multiplied by the Series A Exchange Ratio, with respect to the Covenant
Series A Preferred Stock, and the Series B Exchange Ratio, with respect to
the Covenant Series B Preferred Stock, in each case rounded to the nearest
cent.
(2) Assuming the Corporate Merger is consummated after December 31, 1997, which
is currently anticipated, it is currently expected that a dividend on
Covenant Series A Preferred Stock and Covenant Series B Preferred Stock in
the amount of $.375 per share will be paid on January 14, 1998, to holders
of record on December 31, 1997. Such dividend would be paid to holders of
shares of Covenant Series A Preferred Stock notwithstanding the conversion
of such shares into shares of Covenant Common Stock on December 31, 1997.
See " -- Effective Date" and " -- Business Pending Consummation",
"FUNC -- Certain Regulatory Considerations; PAYMENTS OF DIVIDENDS" and
"DESCRIPTION OF FUNC CAPITAL STOCK".
37
<PAGE>
COVENANT
GENERAL
Financial and other information relating to Covenant, including certain
information about Covenant's directors and executive officers, is set forth in
Covenant Bank's 1996 Annual Report on Form F-2, as amended, and Covenant's
Second Quarter Report on Form 10-Q/A, copies of which are included in ANNEX A to
this Prospectus/Proxy Statement. See also "RECENT DEVELOPMENTS".
HISTORY AND BUSINESS
Covenant is a bank holding company registered under the BHCA. It was
organized under the laws of the State of New Jersey on February 13, 1997, and
became a bank holding company on June 13, 1997, through the consummation of a
plan of acquisition between Covenant and Covenant Bank, pursuant to which
Covenant Bank became a wholly-owned subsidiary of Covenant. In connection with
such acquisition, each outstanding share of common stock and preferred stock of
Covenant Bank was exchanged for a share of Covenant Common Stock and Covenant
Preferred Stock.
Covenant Bank commenced operations in September 1988 as a savings bank
chartered under the laws of the State of New Jersey. Effective January 1, 1997,
Covenant Bank converted its charter to a commercial bank under the laws of the
State of New Jersey. Covenant's market focus is southern New Jersey, where it
offers, through its 17 personal financial centers, a broad range of lending,
depository and related financial services to individual consumers, businesses
and governmental units.
The lending function is Covenant's principal business activity, and it is
its 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. For commercial clients, Covenant also offers
cash management accounts with an automatic investment feature, and escrow
management and lockbox payment processing services.
In June 1993, Covenant acquired New Jersey Savings & Loan Association, with
three offices in Waterford Township, Sicklerville and Voorhees, New Jersey, and
in September 1994, Covenant acquired Landis Savings Bank, S.L.A., with an office
in Vineland, New Jersey. In addition, in September 1996, Covenant acquired 1st
Southern State Bank, adding three personal financial centers in Avalon, Cape May
and Sea Isle City, New Jersey.
38
<PAGE>
FUNC
GENERAL
Financial and other information relating to FUNC, including information
relating to FUNC's directors and executive officers, is set forth in FUNC's 1996
Annual Report on Form 10-K, 1997 First and Second Quarter Reports on Form 10-Q,
1997 Annual Meeting Proxy Statement and 1997 Current Reports on Form 8-K, copies
of which may be obtained from FUNC as indicated under "AVAILABLE INFORMATION".
HISTORY AND BUSINESS
FUNC was incorporated under the laws of North Carolina in 1967 and is
registered as a bank holding company under the BHCA. Pursuant to a corporate
reorganization in 1968, First Union National Bank, headquartered in Charlotte,
North Carolina and formerly named First Union National Bank of North Carolina
("FUNB-NC"), and First Union Mortgage Corporation, a mortgage banking firm
acquired by FUNB-NC in 1964, became subsidiaries of FUNC.
In addition to FUNB's operations in New Jersey, New York, and Pennsylvania,
FUNC also owns banks conducting operations in Connecticut, Delaware, Florida,
Georgia, Maryland, North Carolina, South Carolina, Tennessee, Virginia and
Washington, D.C. In addition to providing a wide range of commercial and retail
banking and trust services through its banking subsidiaries, FUNC also provides
various other financial services, including mortgage banking, home equity
lending, credit cards, leasing, investment banking, insurance and securities'
brokerage services, through other subsidiaries. See " -- Certain Regulatory
Considerations; INTERSTATE BANKING AND BRANCHING LEGISLATION".
Since the 1985 Supreme Court decision upholding regional interstate banking
legislation, FUNC has concentrated its efforts on building a large, regional
banking organization in what it perceives to be some of the better banking
markets in the eastern region of the United States. Since November 1985, FUNC
has completed 72 banking-related acquisitions, and currently has pending three
banking-related acquisitions (including Covenant), including the more
significant acquisitions (I.E., involving the acquisition of $3.0 billion or
more of assets or deposits) set forth in the following table. See "RECENT
DEVELOPMENTS -- Signet Banking Corporation Acquisition" and " -- Wheat First
Butcher Singer, Inc. Acquisition".
<TABLE>
<CAPTION>
ASSETS/ CONSIDERATION/
NAME HEADQUARTERS DEPOSITS(1)(2) ACCOUNTING TREATMENT COMPLETION DATE
<S> <C> <C> <C> <C>
Atlantic Bancorporation...................... Florida $ 3.8 billion common stock/pooling November 1985
Northwestern Financial Corporation........... North Carolina 3.0 billion common stock/pooling December 1985
First Railroad & Banking Company of
Georgia.................................... Georgia 3.7 billion common stock/pooling November 1986
Florida National Banks of Florida, Inc....... Florida 7.9 billion cash and preferred January 1990
stock/purchase
Southeast banks.............................. Florida 9.9 billion cash, notes and preferred September 1991
stock/
purchase
Resolution Trust Company ("RTC") 5.3 billion cash/purchase 1991-1994
acquisitions............................... Florida,
Georgia,
Virginia
Dominion Bankshares Corporation.............. Virginia 8.9 billion common stock and March 1993
preferred stock/pooling
Georgia Federal Bank, FSB.................... Georgia 4.0 billion cash/purchase June 1993
First American Metro Corp.................... Virginia 4.6 billion cash/purchase June 1993
American Savings of Florida, F.S.B........... Florida 3.6 billion common stock/purchase July 1995
FFB.......................................... New Jersey,
Pennsylvania 35.3 billion common stock and January 1996
preferred stock/pooling
Center Financial Corporation................. Connecticut $ 4.0 billion common stock/purchase November 1996
Signet....................................... Virginia $ 11.9 billion common stock/pooling pending
</TABLE>
(1) The dollar amounts indicated represent the assets of the related
organization as of the last reporting period prior to acquisition, except
for (i) the dollar amount relating to RTC acquisitions, which represents
savings and loan deposits
39
<PAGE>
acquired from the RTC, and (ii) the dollar amount relating to Southeast
banks, which represent assets of the two banking subsidiaries of Southeast
Banking Corporation acquired from the FDIC.
(2) In addition, FUNC acquired (i) Lieber & Company ("Lieber"), a mutual fund
advisory company with approximately $3.4 billion in assets under management,
in June 1994, and (ii) Keystone Investments, Inc., a mutual fund advisory
company with approximately $11.6 billion in assets under management, in
December 1996. Since such assets are not owned by these mutual advisory
companies, they are not reflected on FUNC's balance sheet.
FUNC is continually evaluating acquisition opportunities and frequently
conducts due diligence activities in connection with possible acquisitions. As a
result, acquisition discussions and, in some cases, negotiations frequently take
place and future acquisitions involving cash, debt or equity securities can be
expected. Acquisitions typically involve the payment of a premium over book and
market values, and therefore, some dilution of FUNC's book value and net income
per common share may occur in connection with any future transactions.
See "RECENT DEVELOPMENTS".
CERTAIN REGULATORY CONSIDERATIONS
AS A BANK HOLDING COMPANY, FUNC IS SUBJECT TO REGULATION UNDER THE BHCA AND
TO ITS EXAMINATION AND REPORTING REQUIREMENTS. THE FOLLOWING DISCUSSION SETS
FORTH CERTAIN OF THE MATERIAL ELEMENTS OF THE REGULATORY FRAMEWORK APPLICABLE TO
BANK HOLDING COMPANIES AND THEIR SUBSIDIARIES AND PROVIDES CERTAIN SPECIFIC
INFORMATION RELEVANT TO FUNC. TO THE EXTENT THAT THE FOLLOWING INFORMATION
DESCRIBES STATUTORY AND REGULATORY PROVISIONS, IT IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE APPLICABLE STATUTORY AND REGULATORY PROVISIONS. A CHANGE IN
APPLICABLE STATUTES, REGULATIONS OR REGULATORY POLICY MAY HAVE A MATERIAL EFFECT
ON THE BUSINESS OF FUNC.
GENERAL
As a bank holding company, FUNC is subject to regulation under the BHCA and
to its examination and reporting requirements. Under the BHCA, bank holding
companies may not directly or indirectly acquire the ownership or control of
more than five percent of the voting shares or substantially all of the assets
of any company, including a bank, without the prior approval of, or a waiver of
the requirement for such approval by, the Federal Reserve Board. In addition,
bank holding companies are generally prohibited under the BHCA from engaging in
nonbanking activities, subject to certain exceptions.
The earnings of FUNC are affected by the legislative and governmental
actions of various regulatory authorities, including the Federal Reserve Board,
the OCC and the FDIC. In addition, there are numerous governmental requirements
and regulations which affect the activities of FUNC.
PAYMENT OF DIVIDENDS
FUNC is a legal entity separate and distinct from its banking and other
subsidiaries. A major portion of FUNC's revenues result from amounts paid as
dividends to FUNC by its national bank subsidiaries. The prior approval of the
OCC is required for the payment of any dividend by a national bank if the total
of all dividends declared by the board of directors of such bank in any calendar
year will exceed the sum of such bank's net profits for that year and its
retained net profits for the preceding two calendar years, less any required
transfers to surplus. Federal law also prohibits any national bank from paying
dividends which would be greater than such bank's undivided profits after
deducting statutory bad debt in excess of such bank's allowance for loan losses.
In addition to its national bank subsidiaries, FUNC has one state-chartered
bank subsidiary which is subject to dividend limitations under applicable state
laws.
Under the foregoing dividend restrictions and certain restrictions
applicable to certain of FUNC's nonbanking subsidiaries, as of June 30, 1997,
FUNC's subsidiaries, without obtaining affirmative governmental approvals, could
pay aggregate dividends of $717 million to FUNC. In the first six months of
1997, FUNC's subsidiaries paid $603 million in cash dividends to FUNC. In
addition, the corporate reorganization of FUNC's subsidiary banks in Georgia and
Florida into FUNB-NC on June 5, 1997, resulted in a reduction of capital in the
amount of $400 million, which was paid to FUNC.
In addition, FUNC and its bank subsidiaries are subject to various general
regulatory policies and requirements relating to the payment of dividends,
including requirements to maintain adequate capital above regulatory minimums.
The appropriate federal regulatory authority is authorized to determine, under
certain circumstances relating to the financial condition of a national bank or
bank holding company, that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment thereof. The OCC (the appropriate
agency with respect to FUNC's national bank subsidiaries) and the
40
<PAGE>
FDIC (the appropriate agency with respect to FUNC's state-chartered bank
subsidiary) have indicated that paying dividends that deplete a bank's capital
base to an inadequate level would be an unsound and unsafe banking practice. The
OCC, the FDIC and the Federal Reserve Board have each indicated that banking
organizations should generally pay dividends only out of current operating
earnings.
BORROWINGS; ETC.
There are also various legal restrictions on the extent to which each of
FUNC and certain of its nonbank subsidiaries can borrow or otherwise obtain
credit from its bank subsidiaries. In general, these restrictions require that
any such extensions of credit must be secured by designated amounts of specified
collateral and are limited, as to any one of FUNC or such nonbank subsidiaries,
to ten percent of the lending bank's capital stock and surplus, and as to FUNC
and all such nonbank subsidiaries in the aggregate, to 20 percent of such
lending bank's capital stock and surplus.
The Federal Deposit Insurance Act, as amended (the "FDIA") imposes
liability on an institution the deposits of which are insured by the FDIC, such
as FUNC's subsidiary banks, for certain potential losses of the FDIC incurred in
connection with other FDIC-insured institutions under common control with such
institution.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of the
deficiency by assessment upon the bank's stockholders, pro rata and, to the
extent necessary, if any such assessment is not paid by any stockholder after
three months notice, to sell the stock of such stockholder to make good the
deficiency.
Under Federal Reserve Board policy, FUNC is expected to act as a source of
financial strength to each of its subsidiary banks and to commit resources to
support each of such subsidiaries. This support may be required at times when,
absent such Federal Reserve Board policy, FUNC may not find itself willing or
able to provide it.
Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary banks. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
CAPITAL ADEQUACY
The Federal Reserve Board, the FDIC and the OCC have adopted substantially
similar risk-based and leverage capital guidelines for United States banking
organizations. Under these risked-based capital standards, the minimum
consolidated ratio of total capital to risk-weighted assets (including certain
off-balance sheet activities, such as standby letters of credit) is eight
percent. At least half of the total capital is to be composed of common
stockholder's equity, retained earnings, a limited amount of qualifying
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill and certain intangibles ("tier 1
capital" and, together with tier 2 capital, "total capital"). The remainder of
total capital may consist of mandatory convertible debt securities and a limited
amount of subordinated debt, qualifying preferred stock and loan loss allowance
("tier 2 capital"). At June 30, 1997, FUNC's tier 1 and total capital ratios
were 7.55 percent and 12.64 percent, respectively. On an FUNC and Covenant
combined basis, such ratios at June 30, 1997, would have been 7.48 percent and
12.56 percent, respectively.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. These guidelines provide for a
minimum leverage ratio of tier 1 capital to adjusted average quarterly assets
less certain amounts ("leverage ratio") equal to three percent for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies will generally be required
to maintain a leverage ratio of from at least four to five percent. FUNC's
leverage ratio at June 30, 1997, was 6.23 percent. On an FUNC and Covenant
combined basis, such ratio at June 30, 1997, would have been 6.17 percent. The
guidelines also provide that bank holding companies experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. Furthermore, the guidelines indicate that the Federal
Reserve Board will continue to consider a "tangible tier 1 leverage ratio"
(deducting all intangibles) in evaluating proposals for expansion or new
activity. The Federal Reserve Board has not advised FUNC of any specific minimum
leverage ratio or tangible tier 1 leverage ratio applicable to it.
Each of FUNC's subsidiary banks is subject to similar capital requirements
adopted by the OCC or the FDIC. Each of FUNC's subsidiary banks had a leverage
ratio in excess of 5.47 percent as of June 30, 1997. The federal banking
agencies have not advised any of the subsidiary banks of any specific minimum
leverage ratio applicable to it.
41
<PAGE>
PROMPT CORRECTIVE ACTION
The FDIA, among other things, requires the federal banking agencies to take
"prompt corrective action" in respect of depository institutions that do not
meet minimum capital requirements. The FDIA establishes five capital tiers:
"well capitalized"; "adequately capitalized"; "undercapitalized"; "significantly
undercapitalized"; and "critically undercapitalized". A depository institution's
capital tier will depend upon how its capital levels compare to various relevant
capital measures and certain other factors, as established by regulation.
The federal bank regulatory agencies have adopted regulations establishing
relevant capital measures and relevant capital levels applicable to FDIC-insured
banks. The relevant capital measures are the total capital ratio, tier 1 capital
ratio and the leverage ratio. Under the regulations, a FDIC-insured bank will be
(i) "well capitalized" if it has a total capital ratio of ten percent or
greater, a tier 1 capital ratio of six percent or greater and a leverage ratio
of five percent or greater and is not subject to any order or written directive
by the OCC to meet and maintain a specific capital level for any capital
measure; (ii) "adequately capitalized" if it has a total capital ratio of eight
percent or greater, a tier 1 capital ratio of four percent or greater and a
leverage ratio of four percent or greater (three percent in certain
circumstances) and is not "well capitalized"; (iii) "undercapitalized" if it has
a total capital ratio of less than eight percent, a tier 1 capital ratio of less
than four percent or a leverage ratio of less than four percent (three percent
in certain circumstances); (iv) "significantly undercapitalized" if it has a
total capital ratio of less than six percent, a tier 1 capital ratio of less
than three percent or a leverage ratio of less than three percent; and (v)
"critically undercapitalized" if its tangible equity is equal to or less than
two percent of average quarterly tangible assets. An institution may be
downgraded to, or deemed to be in, a capital category that is lower than is
indicated by its capital ratios if it is determined to be in an unsafe or
unsound condition or if it receives an unsatisfactory examination rating with
respect to certain matters. As of June 30, 1997, all of FUNC's deposit-taking
subsidiary banks had capital levels that qualify them as being "well
capitalized" under such regulations.
The FDIA generally prohibits a FDIC-insured depository institution from
making any capital distribution (including payment of a dividend) or paying any
management fee to its holding company if the depository institution would
thereafter be "undercapitalized". "Undercapitalized" depository institutions are
subject to growth limitations and are required to submit a capital restoration
plan. The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic assumptions
and is likely to succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution will
comply with such capital restoration plan. The aggregate liability of the parent
holding company is limited to the lesser of: (i) an amount equal to five percent
of the depository institution's total assets at the time it became
"undercapitalized"; and (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all capital standards
applicable with respect to such institution as of the time it fails to comply
with the plan. If a depository institution fails to submit an acceptable plan,
it is treated as if it is "significantly undercapitalized".
"Significantly undercapitalized" insured depository institutions may be
subject to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become "adequately capitalized", requirements to
reduce total assets, and cessation of receipt of deposits from correspondent
banks. "Critically undercapitalized" institutions are subject to the appointment
of a receiver or conservator. A bank that is not "well capitalized" is subject
to certain limitations relating to so-called "brokered" deposits.
DEPOSITOR PREFERENCE STATUTE
Under federal law, deposits and certain claims for administrative expenses
and employee compensation against an insured depository institution would be
afforded a priority over other general unsecured claims against such an
institution, including federal funds and letters of credit, in the "liquidation
or other resolution" of such an institution by any receiver.
INTERSTATE BANKING AND BRANCHING LEGISLATION
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "IBBEA") authorized interstate acquisitions of banks and bank holding
companies without geographic limitation beginning one year after enactment. In
addition, it authorized, beginning June 1, 1997, a bank to merge with a bank in
another state as long as neither of the states has opted out of interstate
branching between the date of enactment of the IBBEA and May 31, 1997. In
addition, a bank may establish and operate a DE NOVO branch in a state in which
the bank does not maintain a branch if that state expressly permits DE NOVO
interstate branching. It was pursuant to authority from IBBEA that FUNB-NC
completed corporate reorganizations in June and July 1997 (I.E., FUNC's
commercial banking subsidiaries operating in Florida, Georgia, South Carolina,
Tennessee, Virginia, Maryland, Connecticut and Washington, D.C. were merged into
FUNB-NC). In addition, FUNB, which conducts
42
<PAGE>
banking operations in New Jersey, New York and Pennsylvania, is to be merged
with FUNB-NC in February 1998, pending regulatory approval.
FDIC INSURANCE ASSESSMENTS; DIFA
Effective January 1, 1996, the FDIC reduced the insurance premiums it
currently charges on bank deposits insured by the Bank Insurance Fund ("BIF") to
the statutory minimum of $2,000 for "well capitalized" banks. The Deposit
Insurance Funds Act of 1996, which was enacted on September 30, 1996 ("DIFA"),
reduced the amount of semi-annual FDIC insurance premiums for savings
association deposits acquired by banks and insured by SAIF to the same levels
assessed for deposits insured by BIF. DIFA also provided for a special one-time
assessment imposed on deposits insured by SAIF, including such deposits held by
banks, to bring the SAIF up to statutorily required levels. FUNC accrued for the
one-time assessment in the third quarter of 1996 in the amount of $86 million
after tax in connection with the SAIF recapitalization.
DIFA further provides for assessments to be imposed on insured depository
institutions with respect to deposits insured by the BIF, and continues the
assessments currently imposed on depository institutions with respect to
SAIF-insured deposits, to pay for the cost of Financing Corporation funding.
DESCRIPTION OF FUNC CAPITAL STOCK
THE DESCRIPTIVE INFORMATION SUPPLIED HEREIN OUTLINES CERTAIN PROVISIONS OF
THE FUNC ARTICLES, THE FUNC BYLAWS AND THE NCBCA. THE INFORMATION DOES NOT
PURPORT TO BE COMPLETE AND IS QUALIFIED IN ALL RESPECTS BY REFERENCE TO THE
PROVISIONS OF THE FUNC ARTICLES, THE FUNC BYLAWS AND THE NCBCA.
AUTHORIZED CAPITAL
The authorized capital stock of FUNC consists of 750,000,000 shares of FUNC
Common Stock, 10,000,000 shares of Preferred Stock, no-par value per share
("FUNC Preferred Stock"), and 40,000,000 shares of FUNC Class A Preferred Stock,
no-par value per share ("FUNC Class A Preferred Stock"). As of September 30,
1997, there were 568,296,416 shares of FUNC Common Stock, no shares of FUNC
Preferred Stock and no shares of FUNC Class A Preferred Stock issued and
outstanding. The FUNC Preferred Stock and FUNC Class A Preferred Stock are each
issuable in one or more series, and with respect to any series, the FUNC Board,
subject to certain limitations, is authorized to fix the numbers of shares,
dividend rates, liquidation prices, liquidation rights of holders, redemption,
conversion and voting rights and other terms of the series. Shares of FUNC Class
A Preferred Stock and FUNC Preferred Stock that are redeemed, repurchased or
otherwise acquired by FUNC have the status of authorized, unissued and
undesignated shares of FUNC Class A Preferred Stock and FUNC Preferred Stock,
respectively, and may be reissued.
FUNC COMMON STOCK
Subject to the prior rights of the holders of any FUNC Preferred Stock and
any FUNC Class A Preferred Stock then outstanding, holders of FUNC Common Stock
are entitled to receive such dividends as may be declared by the FUNC Board out
of funds legally available therefor, and in the event of liquidation or
dissolution, to receive the net assets of FUNC remaining after payment of all
liabilities and after payment to holders of all shares of FUNC Preferred Stock
and FUNC Class A Preferred Stock of the full preferential amounts to which such
holders are respectively entitled, in proportion to their respective holdings.
See "FUNC -- Certain Regulatory Considerations; PAYMENT OF DIVIDENDS".
Pursuant to an indenture dated as of November 27, 1996, between FUNC and
Wilmington Trust Company, as trustee, under which certain of FUNC's outstanding
junior subordinated debt securities have been issued, FUNC has covenanted that
it generally will not declare or pay any dividends or distributions on, or
redeem, repurchase, acquire or make a liquidation payment with respect to, any
of FUNC's capital stock, including FUNC Common Stock, FUNC Preferred Stock and
FUNC Class A Preferred Stock if, at such time, certain defaults have occurred
under such indenture or a related guarantee of FUNC or FUNC shall have exercised
its rights under such indenture to defer interest payments on the securities
issued thereunder.
Subject to the rights of the holders of any FUNC Preferred Stock and any
FUNC Class A Preferred Stock then outstanding, all voting rights are vested in
the holders of the shares of FUNC Common Stock, each share being entitled to one
vote on all matters requiring stockholder action and in the election of
directors. Holders of FUNC Common Stock have no preemptive, subscription or
conversion rights. All of the outstanding shares of FUNC Common Stock are fully
paid and nonassessable, and the FUNC Common Shares issuable to the stockholders
of Covenant upon consummation of the Corporate Merger will, upon issuance, be
fully paid and nonassessable.
43
<PAGE>
FUNC PREFERRED STOCK
All shares of each series of FUNC Preferred Stock must be of equal rank and
have the same powers, preferences and rights and are subject to the same
qualifications, limitations and restrictions, except with respect to dividend
rates, redemption prices, liquidation amounts, terms of conversion or exchange
and voting rights.
FUNC CLASS A PREFERRED STOCK
Shares of FUNC Class A Preferred Stock rank prior or superior to FUNC
Common Stock and on a parity with or junior to (but not prior or superior to)
FUNC Preferred Stock or any series thereof, in respect of the right to receive
dividends and/or the right to receive payments out of the net assets of FUNC
upon any involuntary or voluntary liquidation, dissolution or winding up of
FUNC. Subject to the foregoing and to the terms of any particular series of FUNC
Class A Preferred Stock, each series of FUNC Class A Preferred Stock may vary as
to priority.
FUNC RIGHTS PLAN
Each outstanding share of FUNC Common Stock currently has attached to it
one right (an "FUNC Right") issued pursuant to an Amended and Restated
Shareholder Protection Rights Agreement (as amended, the "FUNC Rights
Agreement"). Accordingly, in the Corporate Merger, holders of Covenant Common
Stock and Covenant Preferred Stock would receive one FUNC Right with respect to
each share of FUNC Common Stock they receive, which FUNC Right will be attached
to the related shares of FUNC Common Stock, unless the Separation Time (as
defined below) has occurred, in which case holders of Covenant Common Stock and
Covenant Preferred Stock would receive separate certificates with respect to
such FUNC Rights. Each FUNC Right entitles its registered holder to purchase
one-hundredth of a share of a junior participating series of FUNC Class A
Preferred Stock designed to have economic and voting terms similar to those of
one share of FUNC Common Stock, for $105.00 (as adjusted to reflect the FUNC
Stock Split), subject to adjustment (the "Rights Exercise Price"), but only
after the earlier to occur (the "Separation Time") of: (i) the tenth business
day (subject to extension) after any person (an "Acquiring Person") (x)
commences a tender or exchange offer, which, if consummated, would result in
such person becoming the beneficial owner of 15 percent or more of the
outstanding shares of FUNC Common Stock, or (y) is determined by the Federal
Reserve Board to "control" FUNC within the meaning of the BHCA (see " -- Other
Provisions" below), subject to certain exceptions; and (ii) the tenth business
day after the first date (the "Flip-in Date") of a public announcement by FUNC
that a person has become an Acquiring Person. The FUNC Rights will not trade
separately from the shares of FUNC Common Stock unless and until the Separation
Time occurs.
The FUNC Rights Agreement provides that a person will not become an
Acquiring Person under the BHCA control-based test described above if either (i)
the Federal Reserve Board's control determination would not have been made but
for such person's failure to make certain customary passivity commitments, or
such person's violation of such commitments made, to the Federal Reserve Board,
so long as the Federal Reserve Board determines that such person no longer
controls FUNC within 30 days (or 60 days in certain circumstances), or (ii) the
Federal Reserve Board's control determination was not based on such a failure or
violation and such person (x) obtains a noncontrol determination within three
years, and (y) is using its best efforts to allow FUNC to make any acquisition
or engage in any legally permissible activity notwithstanding such person's
being deemed to control FUNC for purposes of the BHCA.
The FUNC Rights will not be exercisable until the business day following
the Separation Time. The FUNC Rights will expire on the earliest of: (i) the
Exchange Time (as defined below); (ii) the close of business on December 28,
2000; and (iii) the date on which the FUNC Rights are redeemed or terminated as
described below (in any such case, the "Expiration Time"). The Rights Exercise
Price and the number of FUNC Rights outstanding, or in certain circumstances the
securities purchasable upon exercise of the FUNC Rights, are subject to
adjustment upon the occurrence of certain events.
In the event that prior to the Expiration Time a Flip-in Date occurs, FUNC
has agreed to take such action as shall be necessary to ensure and provide that
each FUNC Right (other than FUNC Rights beneficially owned by an Acquiring
Person or any affiliate, associate or transferee thereof, which FUNC Rights
shall become void) shall constitute the right to purchase, from FUNC, shares of
FUNC Common Stock having an aggregate market price equal to twice the Rights
Exercise Price for an amount in cash equal to the then current Rights Exercise
Price. In addition, the FUNC Board may, at its option, at any time after a
Flip-in Date, elect to exchange all of the then outstanding FUNC Rights for
shares of FUNC Common Stock, at an exchange ratio of two shares of FUNC Common
Stock per FUNC Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the Separation Time (the "Rights
Exchange Rate"). Immediately upon such action by the FUNC Board (the "Exchange
Time"), the right to exercise the FUNC Rights will terminate and each FUNC Right
will thereafter represent only the right to receive a number of shares of FUNC
Common Stock equal to the
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Rights Exchange Rate. If FUNC becomes obligated to issue shares of FUNC Common
Stock upon exercise of or in exchange for FUNC Rights, FUNC, at its option, may
substitute for each such share of FUNC Common Stock one one-hundredth of a share
of junior participating FUNC Class A Preferred Stock.
The FUNC Rights may be canceled and terminated without any payment to
holders thereof at any time prior to the date that they become exercisable and
are redeemable by FUNC at $.01 per FUNC Right, subject to adjustment upon the
occurrence of certain events, at any date between the date on which they become
exercisable and the Flip-In Date. The FUNC Rights have no voting rights and are
not entitled to dividends.
The FUNC Rights will not prevent a takeover of FUNC. The FUNC Rights,
however, may cause substantial dilution to a person or group that acquires 15
percent or more of FUNC Common Stock (or that acquires "control" of FUNC within
the meaning of the BHCA) unless the FUNC Rights are first redeemed or terminated
by the FUNC Board. Nevertheless, the FUNC Rights should not interfere with a
transaction that is in the best interests of FUNC and its stockholders because
the FUNC Rights can be redeemed or terminated, as hereinabove described, before
the consummation of such transaction.
The complete terms of the FUNC Rights are set forth in the FUNC Rights
Agreement. The foregoing description of the FUNC Rights and the FUNC Rights
Agreement is qualified in its entirety by reference to such document. The FUNC
Rights Agreement is incorporated by reference as an exhibit to the Registration
Statement. A copy of the FUNC Rights Agreement can be obtained upon written
request to the Rights Agent, First Union National Bank, Two First Union Center,
Charlotte, North Carolina 28288-1154.
OTHER PROVISIONS
The FUNC Articles and the FUNC Bylaws contain a number of provisions which
may be deemed to have the effect of discouraging or delaying attempts to gain
control of FUNC. These include provisions in the FUNC Articles: (i) classifying
the FUNC Board into three classes with each class to serve for three years with
one class being elected annually; (ii) authorizing the FUNC Board to fix the
size of the FUNC Board between nine and 30 directors; (iii) authorizing
directors to fill vacancies on the FUNC Board that occur between annual
meetings, except that vacancies resulting from a removal of a director by a
stockholder vote may only be filled by a stockholder vote; (iv) providing that
directors may be removed only for cause and only by affirmative vote of the
majority of shares entitled to be voted in the election of directors, voting as
a single class; (v) authorizing only the FUNC Board, the Chairman of the FUNC
Board or the President to call a special meeting of stockholders (except for
special meetings called under specified circumstances for holders of classes or
series of stock ranking superior to the FUNC Common Stock); and (vi) requiring
an 80 percent vote of stockholders entitled to vote in the election of
directors, voting as a single class, to alter any of the foregoing provisions.
The FUNC Bylaws include provisions setting forth specific conditions under
which: (i) business may be transacted at an annual meeting of stockholders; and
(ii) persons may be nominated for election as directors of FUNC at an annual
meeting of stockholders.
The Change in Bank Control Act prohibits a person or group of persons from
acquiring "control" of a bank holding company unless the Federal Reserve Board
has been given 60 days' prior written notice of such proposed acquisition and
within that time period the Federal Reserve Board has not issued a notice
disapproving the proposed acquisition or extending for up to another 30 days the
period during which such a disapproval may be issued, or unless the acquisition
is subject to Federal Reserve Board approval under the BHCA. An acquisition may
be made prior to the expiration of the disapproval period if the Federal Reserve
Board issues written notice of its intent not to disapprove the action. Under a
rebuttable presumption established by the Federal Reserve Board, the acquisition
of more than ten percent of a class of voting stock of a bank holding company
with a class of securities registered under Section 12 of the Exchange Act, such
as FUNC, would, under the circumstances set forth in the presumption, constitute
the acquisition of control.
In addition, any "company" would be required to obtain the approval of the
Federal Reserve Board under the BHCA before acquiring 25 percent (five percent
in the case of an acquiror that is a bank holding company) or more of the
outstanding shares of FUNC Common Stock, or otherwise obtaining "control" over
FUNC. Under the BHCA, "control" generally means (i) the ownership or control of
25 percent or more of any class of voting securities of the bank holding
company, (ii) the ability to elect a majority of the bank holding company's
directors, or (iii) the ability otherwise to exercise a controlling influence
over the management and policies of the bank holding company.
Two North Carolina "anti-takeover" statutes adopted in 1987, The North
Carolina Shareholder Protection Act and The North Carolina Control Share
Acquisition Act, allowed North Carolina corporations to elect to either be
covered or not be covered by such statutes. FUNC elected not to be covered by
such statutes.
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In addition to the foregoing, in certain instances the ability of the FUNC
Board to issue authorized but theretofore unissued shares of FUNC Common Stock,
FUNC Class A Preferred Stock or FUNC Preferred Stock may have an anti-takeover
effect.
The existence of the foregoing provisions could (i) result in FUNC being
less attractive to a potential acquiror, or (ii) result in FUNC stockholders
receiving less for their shares of FUNC Common Stock than otherwise might be
available in the event of a takeover attempt.
CERTAIN DIFFERENCES IN THE RIGHTS OF COVENANT AND FUNC STOCKHOLDERS
GENERAL
FUNC is a North Carolina corporation subject to the provisions of the
NCBCA, and Covenant is a New Jersey corporation subject to the provisions of the
NJBCA. Stockholders of Covenant will, upon consummation of the Corporate Merger,
become stockholders of FUNC. The rights of such stockholders as stockholders of
FUNC will then be governed by the FUNC Articles and the FUNC Bylaws, in addition
to the NCBCA.
Set forth below are the material differences between the rights of a
Covenant stockholder under the NJBCA, the Covenant Certificate and the Covenant
Bylaws, on the one hand, and the rights of an FUNC stockholder under the NCBCA,
the FUNC Articles and the FUNC Bylaws, on the other hand. This summary does not
purport to be a complete discussion of, and is qualified in its entirety by
reference to, the governing law and the charter and bylaws of each corporation.
AUTHORIZED CAPITAL
COVENANT. Covenant has authority to issue 25,000,000 shares of Covenant
Common Stock and 1,000,000 shares of Covenant Preferred Stock. Such shares of
Covenant Preferred Stock are issuable from time to time in one or more series
and, with respect to any such series, the Covenant Board is authorized to
establish such voting rights, designations, preferences, qualifications,
privileges, limitations, options, conversion rights, dividend rate and other
special rights as the Covenant Board may determine. Pursuant to such authority,
138,300 shares have been designated as Covenant Series A Preferred Stock and
161,700 shares have been designated as Covenant Series B Preferred Stock. Each
share of Covenant Series A Preferred Stock and Covenant Series B Preferred Stock
is entitled to receive, when and as declared by the Covenant Board,
non-cumulative dividends at the annual rate of $1.50 per share. Covenant Series
A Preferred Stock and Covenant Series B Preferred Stock rank prior to Covenant
Common Stock and on a parity basis with each other with respect to the right to
receive dividends and/or the right to receive payments out of the net assets of
Covenant upon any involuntary or voluntary liquidation, dissolution or winding
up of Covenant, and have no voting rights, except as may be otherwise required
by law. Each outstanding share of Covenant Series A Preferred Stock will
automatically be converted into 3.976 shares of Covenant Common Stock on
December 31, 1997, if the Corporate Merger is not consummated by such date, and
each outstanding share of Covenant Series B Preferred Stock would, absent the
Corporate Merger, automatically be converted into 3.147 shares of Covenant
Common Stock on June 30, 2000. See "THE MERGERS -- General; Exchange Ratios" and
" -- Exchange of Covenant Certificates".
As of the Record Date, Covenant had outstanding 3,057,332 shares of
Covenant Common Stock, 138,300 shares of Covenant Series A Preferred Stock and
161,700 shares of Covenant Series B Preferred Stock.
FUNC. FUNC's authorized capital is set forth under "DESCRIPTION OF FUNC
CAPITAL STOCK -- Authorized Capital".
AMENDMENT TO ARTICLES OF INCORPORATION OR BYLAWS
COVENANT. Pursuant to the NJBCA, an amendment of the provisions of the
Covenant Certificate requires the approval of the Covenant Board and the
affirmative vote of a majority of the votes cast by the stockholders entitled to
vote thereon, if a quorum exists. Pursuant to the NJBCA, under certain
circumstances, the approval of the holders of a majority of the outstanding
shares of a series of Covenant Preferred Stock may also be required to amend the
Covenant Certificate. In accordance with the NJBCA and the Covenant Bylaws, the
provisions of the Covenant Bylaws generally may be amended, added to or repealed
in whole or in part (i) by the vote of the stockholders at a meeting, or (ii) by
vote of a majority of the entire Covenant Board.
FUNC. Under North Carolina law, an amendment to the FUNC Articles generally
requires the recommendation of the FUNC Board and the approval of either a
majority of all shares entitled to vote thereon or a majority of the votes cast
thereon, depending on the nature of the amendment. In accordance with North
Carolina law, the FUNC Board may condition
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its submission of the proposed amendment on any basis. An amendment to the
bylaws of FUNC generally requires the approval of either the stockholders or the
FUNC Board. The FUNC Board generally may not amend any bylaw approved by the
stockholders. Under certain circumstances, the approval of the holders of at
least two-thirds, or in some cases a majority, of the outstanding shares of any
series of FUNC Preferred Stock or FUNC Class A Preferred Stock may be required
to amend the FUNC Articles. In addition, certain amendments to the FUNC Articles
or the FUNC Bylaws require the approval of not less than 80 percent of the
outstanding shares of FUNC entitled to vote in the election of directors, voting
together as a single class. See "DESCRIPTION OF FUNC CAPITAL STOCK".
SIZE AND CLASSIFICATION OF BOARD OF DIRECTORS
COVENANT. Under the NJBCA, subject to any provisions contained in a New
Jersey corporation's certificate of incorporation, the corporation's bylaws must
specify the number of directors or provide that the number of directors not be
less than a stated minimum or more than a stated maximum. The Covenant Bylaws
provides that the total number of directors will be established by the Covenant
Board and shall be not less than one or more than 25. Covenant currently has ten
directors. As permitted by the NJBCA, the Covenant Board is divided into three
classes, each as nearly as possible equal in number, with one class being
elected annually for staggered three-year terms.
FUNC. The size of the FUNC Board is determined by the affirmative vote of a
majority of the FUNC Board, provided that the FUNC Board may not set the number
of directors at less than nine nor more than 30, and provided further that no
decrease in the number of directors may shorten the term of any director then in
office. The number of directors of FUNC is currently set at 29. The FUNC Board
is divided into three classes, each as nearly as possible equal in number as the
others, with one class being elected annually. See "DESCRIPTION OF FUNC CAPITAL
STOCK".
REMOVAL OF DIRECTORS
COVENANT. In accordance with the NJBCA, the Covenant Certificate and the
Covenant Bylaws, directors of Covenant may be removed by the stockholders of
Covenant for cause by the affirmative vote of the majority of the votes cast by
the holders of shares entitled to vote for the election of directors. The
Covenant Board also may remove any director for cause.
FUNC. Except for directors elected under specified circumstances by holders
of any class or series of stock having a preference over FUNC Common Stock as to
dividends or upon liquidation, directors of FUNC may be removed only for cause
and only by a vote of the holders of a majority of the shares then entitled to
vote in the election of directors, voting together as a single class.
DIRECTOR EXCULPATION
COVENANT. The Covenant Certificate provides for the elimination of personal
liability of each director and officer of Covenant for a breach of fiduciary
duty as a director or officer, as the case may be. The NJBCA does not presently
permit the elimination of such liability with respect to an act or omission (i)
in breach of such person's duty of loyalty to the corporation or its
stockholders, (ii) not in good faith or involving a knowing violation of law, or
(iii) resulting in receipt of an improper personal benefit.
FUNC. The FUNC Articles provide for the elimination of personal liability
of each director of FUNC to the fullest extent permitted by the provisions of
the NCBCA, as the same may be in effect from time to time. The NCBCA does not
permit the elimination of such liability with respect to (i) acts or omissions
the director knew or believed were clearly in conflict with the best interests
of FUNC, (ii) any liability under the NCBCA for unlawful distributions by FUNC,
or (iii) any transaction from which the director derived an improper personal
benefit.
DIRECTOR CONFLICT OF INTEREST TRANSACTIONS
COVENANT. The NJBCA generally permits transactions between a New Jersey
corporation and one of its directors or a corporation in which one of its
directors is interested if: (i) the contract or other transaction is fair and
reasonable as to the corporation at the time it is authorized, approved or
ratified; (ii) the common directorship or interest is disclosed or known to the
board or committee and the board or committee approves, authorizes or ratifies
the contract or transaction by unanimous written consent, provided at least one
director consenting is disinterested, or by the affirmative vote of a majority
of the disinterested directors even though less than a quorum; or (iii) the
common directorship or interest is disclosed or known to the stockholders, and
they authorize, approve or ratify the contract or transaction. Under the NJBCA,
a New Jersey corporation may loan money to, or guarantee the obligation of, a
director if, in the judgment of the board, such action may reasonably be
expected to benefit the corporation.
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FUNC. North Carolina law generally permits transactions involving a North
Carolina corporation and an interested director of that corporation if: (i) the
material facts of the transaction and the director's interest are disclosed and
a majority of disinterested shares entitled to vote thereon authorizes, approves
or ratifies the transaction; (ii) the material facts are disclosed and a
majority of disinterested directors or a committee of the board of directors
authorizes, approves or ratifies the transaction; or (iii) the transaction is
fair to the corporation. North Carolina law prohibits loans to directors or the
guaranteeing of their obligations by a North Carolina corporation unless
approved by a majority vote of disinterested stockholders or unless the
corporation's board of directors determines that the loan or guarantee benefits
the corporation and either approves the specific loan or guarantee or a general
plan of loans and guarantees by the corporation.
STOCKHOLDER MEETINGS
COVENANT. Special meetings of stockholders may be called by the chief
executive officer, the president or the Covenant Board, and must be called by
Covenant upon the written application by the holder or holders of a majority of
all stock entitled to vote on the matter or matters to be considered at the
meeting. In addition, a court may order a special meeting upon the application
of the holders of not less than ten percent of all shares entitled to vote at a
meeting.
Holders of shares of Covenant Common Stock vote on all matters submitted to
a vote of stockholders, with each share of Covenant Common Stock being entitled
to one vote. In addition, in certain circumstances, holders of Covenant Common
Stock and each of the series of Covenant Preferred Stock are entitled to vote as
a class with respect to certain matters. Except as provided in the NJBCA, a
majority of the votes cast is generally required for action by the stockholders
of Covenant, provided that a quorum is present. In general, the holders of
shares entitled to cast a majority of the votes at a Covenant stockholder
meeting will constitute a quorum.
Pursuant to the NJBCA and the Covenant Certificate, Covenant stockholders
may take any action by written consent or without a meeting only upon the
unanimous written consent of all stockholders.
FUNC. A special meeting of stockholders may be called for any purpose only
by the FUNC Board, by the Chairman of the FUNC Board or the President (except
for special meetings called under specified circumstances for holders of any
class or series of stock having a preference over FUNC Common Stock as to
dividends or upon liquidation). A quorum for a meeting of the stockholders of
FUNC is a majority of the outstanding shares of FUNC entitled to vote. Except as
provided in the FUNC Articles or the NCBCA, a majority of the votes cast is
generally required for any action by the stockholders of FUNC. North Carolina
law provides that such quorum and voting requirements may be increased only with
the approval of the stockholders of FUNC.
DIRECTOR NOMINATIONS
COVENANT. Covenant does not have a provision in the Covenant Certificate or
Covenant Bylaws relating to director nominations.
FUNC. The FUNC Bylaws establish procedures that must be followed for
stockholders to nominate persons for election to the FUNC Board. Such
nominations must be made by delivering written notice to the Secretary of FUNC
not less than 60 or more than 90 days prior to the annual meeting at which
directors will be elected; provided, however, that if less than 70 days' notice
of the date of the meeting is given, such written notice by the stockholder must
be so delivered not later than the tenth day after the day on which such notice
of the date of the meeting was given. Notice will be deemed to have been given
more than 70 days prior to the meeting if the meeting is called on the third
Tuesday of April regardless as to when public disclosure is made. The nomination
notice must set forth certain information about the person to be nominated
similar to that required to be disclosed in the solicitation of proxies for
election of directors pursuant to Items 7(a) and 7(b) of Regulation 14A under
the Exchange Act, and such person's written consent to being nominated and to
serving as a director if elected. The nomination notice must also set forth
certain information about the person submitting the notice, including the name
and address of the stockholder and the class and number of shares of FUNC Common
Stock owned of record or beneficially by such stockholder. The Chairman of the
meeting will, if the facts warrant, determine that a nomination was not made in
accordance with the provisions prescribed by the FUNC Bylaws, and the defective
nomination will be disregarded. The foregoing procedures do not apply to any
director who is nominated under specified circumstances by holders of any class
or series of stock having a preference over FUNC Common Stock as to dividends or
upon liquidation.
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STOCKHOLDER PROPOSALS
COVENANT. Covenant does not have a provision in the Covenant Certificate or
Covenant Bylaws relating to stockholder proposals at annual meetings of
stockholders. However, pursuant to the NJBCA, only those matters specified in
the notice of meeting to stockholders may be submitted to a vote of the
stockholders at an annual or special meeting of stockholders.
FUNC. The FUNC Bylaws establish procedures that must be followed for a
stockholder to submit a proposal to a vote of the stockholders of FUNC at an
annual meeting of stockholders. Such proposal must be made by the stockholder
delivering written notice to the Secretary of FUNC not less than 60 days nor
more than 90 days prior to the meeting; provided, however, that if less than 70
days' notice of the date of the meeting is given, such written notice by the
stockholder must be so delivered not later than the tenth day after the day on
which such notice of the date of the meeting was given. Notice will be deemed to
have been given more than 70 days prior to the meeting if the meeting is called
on the third Tuesday of April. The stockholder proposal notice must set forth:
(i) a brief description of the proposal and the reasons for its submission; (ii)
the name and address of the stockholder, as they appear on FUNC's books; (iii)
the classes and number of shares of FUNC stock owned by the stockholder; and
(iv) any material interest of the stockholder in such proposal other than such
holder's interest as a stockholder of FUNC. The chairman of the meeting will, if
the facts warrant, determine that any proposal was not properly submitted in
accordance with the provisions prescribed by the FUNC Bylaws, and the defective
proposal will not be submitted to the meeting for a vote of the stockholders.
STOCKHOLDER PROTECTION RIGHTS PLANS
COVENANT. Covenant does not have a stockholder rights plan.
FUNC. FUNC has adopted the FUNC Rights Agreement. See "DESCRIPTION OF FUNC
CAPITAL STOCK -- FUNC Rights Plan".
STOCKHOLDER INSPECTION RIGHTS; STOCKHOLDER LISTS
COVENANT. Under the NJBCA, any stockholder who has been a stockholder for
at least six months or who holds, or is authorized by persons who hold, at least
five percent of the outstanding shares of any class or series of stock of
Covenant has the right, for any proper purpose, to inspect the minutes of the
proceedings of Covenant stockholders and record of stockholders. Upon
establishing a proper purpose and receiving a court order, a stockholder may
examine the books and records of account, minutes and record of stockholders of
Covenant.
FUNC. Under the NCBCA, qualified stockholders have the right to inspect and
copy certain records of FUNC if their demand is made in good faith and for a
proper purpose. Such right of inspection requires that the stockholder give FUNC
at least five business days' written notice of the demand, describing with
reasonable particularity his purpose and the requested records. The records must
be directly connected with the stockholder's purpose. The rights of inspection
and copying extend not only to stockholders of record but also to beneficial
owners whose beneficial ownership is certified to FUNC by the stockholder of
record. However, FUNC is under no duty to provide any accounting records or any
records with respect to any matter that FUNC determines in good faith may, if
disclosed, adversely affect FUNC in the conduct of its business or may
constitute material non-public information, and the rights of inspection and
copying are limited to stockholders who either have been stockholders for at
least six months or who hold at least five percent of the outstanding shares of
any class of stock of FUNC. A stockholder's agent or attorney has the same
inspection and copying rights as the stockholder he represents.
In addition, after fixing a record date for a stockholders' meeting, FUNC
is required to prepare a stockholder list with respect to such stockholders'
meeting and to make such list available at FUNC's principal office or at a place
identified in the meeting notice to any stockholder beginning two business days
after notice of such meeting is given and continuing through such meeting and
any adjournment thereof. Subject to the applicable provisions of the NCBCA, a
stockholder or his agent or attorney upon written demand at his own expense
during regular business hours is entitled to copy such list. Such list must be
available at the stockholders' meeting, and any stockholder, his agent or
attorney, may inspect such list at any time during the meeting or any
adjournment thereof.
REQUIRED STOCKHOLDER VOTE FOR CERTAIN ACTIONS
COVENANT. Under the Covenant Certificate and the NJBCA, absent
circumstances described below under " -- Anti-Takeover Provisions", consummation
of a merger or consolidation involving Covenant requires the approval of the
Covenant Board and the affirmative vote of at least 80 percent of the
outstanding shares of Covenant Common Stock, unless such transaction has been
approved by a majority of the independent members of the Covenant Board. If so
approved by such
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independent members, such a transaction would require the affirmative vote of a
majority of the votes cast by the holders of Covenant Common Stock entitled to
vote thereon. Under certain circumstances under the NJBCA, certain actions will
require a class vote of the holders of each series of Covenant Preferred Stock.
FUNC. Under North Carolina law, except as otherwise provided below or in
the NCBCA, any plan of merger or share exchange to which FUNC is a party, would
require adoption by the FUNC Board, who would generally be required to recommend
its approval to the stockholders, who in turn would be required to approve the
plan by a vote of a majority of the outstanding shares. Except as otherwise
provided below or in the NCBCA, any sale, lease, exchange or other disposition
of all or substantially all of FUNC's assets not made in the usual and regular
course of business would generally require that the FUNC Board recommend the
proposed transaction to the stockholders who would be required to approve the
transaction by a vote of a majority of the outstanding shares. In accordance
with North Carolina law, the submission by the FUNC Board of any such action may
be conditioned on any basis, including, without limitation, conditions regarding
a supermajority voting requirement or that no more than a certain number of
shares indicate that they will seek dissenters' rights.
With respect to a plan of merger to which FUNC is a party, no vote of the
stockholders of FUNC is required if FUNC is the surviving corporation and: (i)
the FUNC Articles would remain unchanged after the merger, subject to certain
exceptions; (ii) each stockholder of FUNC immediately before the merger would
hold an identical number of shares, with identical designations, limitations,
preferences and relative rights, after the merger; (iii) the number of shares of
FUNC stock entitled to vote unconditionally in the election of directors to be
issued in the merger (either by the conversion of securities issued in the
merger or by the exercise of rights and warrants issued in the merger) would not
exceed 20 percent of the shares of FUNC stock entitled to vote unconditionally
in the election of directors outstanding immediately before the merger; and (iv)
the number of shares of FUNC stock entitling holders to participate without
limitation in distributions to be issued in the merger (either by the conversion
of securities issued in the merger or by the exercise of rights and warrants
issued in the merger) would not exceed 20 percent of the shares of FUNC stock
entitling holders to participate without limitation in distributions outstanding
immediately before the merger.
In addition, no vote of the stockholders of FUNC would be required to merge
a subsidiary of which FUNC owns at least 90 percent of the outstanding shares of
each class of subsidiary shares, into FUNC, as long as no amendment is made to
the FUNC Articles that could not be made without approval of FUNC's
stockholders.
With respect to a sale, lease, exchange or other disposition of all or
substantially all the assets of FUNC made upon the authority of the FUNC Board,
no vote of the stockholders of FUNC would be required if such disposition is
made in the usual and regular course of business or if such disposition is made
to a wholly-owned subsidiary of FUNC.
ANTI-TAKEOVER PROVISIONS
COVENANT. The NJBCA provides that no publicly held corporation organized
under the laws of New Jersey with its principal executive offices or significant
operations located in New Jersey (a "resident domestic corporation") may engage
in any "business combination" (as defined in the NJBCA) with any "interested
stockholder" (generally, a ten percent or greater stockholder) of such
corporation for a period of five years following such interested stockholder's
stock acquisition unless such business combination is approved by the board of
directors of such corporation prior to the stock acquisition. A resident
domestic corporation, such as Covenant, cannot opt out of the foregoing
provisions of the NJBCA.
In addition to the foregoing, no resident domestic corporation may engage,
at any time, in any business combination with any interested stockholder of such
corporation other than: (i) a business combination approved by the board of
directors of such corporation prior to the stock acquisition; (ii) a business
combination approved by the affirmative vote of the holders of two-thirds of the
voting stock not beneficially owned by that interested stockholder at a meeting
called for such purpose; or (iii) a business combination in which the interested
stockholder pays a formula price designed to ensure that all other stockholders
receive at least the highest price per share paid by that interested
stockholder.
Under the NJBCA, the director of a New Jersey corporation may consider, in
discharging his or her duties to the corporation and in determining what he or
she reasonably believes to be in the best interest of the corporation, any of
the following (in addition to the effects of any action on stockholders): (i)
the effects of the action on the corporation's employees, suppliers, creditors
and customers; (ii) the effects of the action on the community in which the
corporation operates; and (iii) the long-term as well as the short-term
interests of the corporation and its stockholders, including the possibility
that these interests may best be served by the continued independence of the
corporation. If, on the basis of the foregoing factors, the board of directors
determines that any proposal or offer to acquire the corporation is not in the
best interest of the corporation,
50
<PAGE>
it may reject such proposal or offer, in which event the board of directors will
have no duty to facilitate, remove any obstacles to, or refrain from impeding,
such proposal or offer.
The existence of the foregoing provisions could (i) result in Covenant
being less attractive to a potential acquiror, and (ii) result in Covenant
stockholders receiving less for their shares of Covenant Common Stock and
Covenant Preferred Stock than otherwise might be available in the event of a
takeover attempt.
FUNC. North Carolina has two anti-takeover statutes in force, The North
Carolina Shareholder Protection Act and The North Carolina Control Share
Acquisition Act. These statutes restrict business combinations with, and the
accumulation of shares of voting stock of, certain North Carolina corporations.
In accordance with the provisions of these statutes, FUNC elected not to be
covered by the restrictions imposed by these statutes. As a result, such
statutes do not apply to FUNC. In addition, North Carolina has a Tender Offer
Disclosure Act, which contains certain prohibitions against deceptive practices
in connection with making a tender offer and also contains a filing requirement
with the North Carolina Secretary of State that has been held unenforceable as
to its 30-day waiting period.
DISSENTERS' RIGHTS
COVENANT. The NJBCA generally provides for dissenters' rights in connection
with any merger or consolidation or any sale, lease, exchange or other
disposition of all or substantially all of the assets of the corporation not in
the usual or ordinary course of business. A stockholder of a corporation may
also dissent from any acquisition of shares owned by such stockholder in
connection with the acquisition by another New Jersey corporation, in exchange
for its shares, of all the shares of a class or series of securities of such
corporation. However, no such rights exist with respect to (i) any class or
series of shares that is listed on a national securities exchange or is held of
record by not less than 1,000 holders on the record date fixed to determine the
stockholders entitled to vote on the transaction, or generally, (ii) any
transaction in connection with which the stockholders of the corporation will
receive only (a) cash, (b) securities that, upon consummation of the
transaction, will be listed on a national securities exchange or held of record
by not less than 1,000 holders, or (c) cash and such securities. Any stockholder
that perfects dissenters' rights under the NJBCA is entitled to receive the
"fair value" of such shares as determined either by agreement between such
stockholder and the corporation or by a court of competent jurisdiction.
As described under "THE MERGER -- No Dissenters' Rights", holders of
Covenant Common Stock and Covenant Preferred Stock do not have dissenters' or
appraisal rights in connection with the proposal to approve the Merger Agreement
because the FUNC Common Shares to be issued to Covenant stockholders upon
consummation of the Corporate Merger will be listed on the NYSE and FUNC has at
least 1,000 record stockholders.
FUNC. North Carolina law generally provides dissenters' rights for mergers
and certain share exchanges that would require stockholder approval, sales of
all or substantially all of the assets (other than sales that are in the usual
and regular course of business and certain liquidations and court-ordered
sales), certain amendments to the articles of incorporation and any corporate
action taken pursuant to a stockholder vote to the extent the articles of
incorporation, bylaws or a resolution of the board of directors entitles
stockholders to dissent.
DIVIDENDS AND OTHER DISTRIBUTIONS
COVENANT. Under the NJBCA, a corporation may pay dividends or purchase,
redeem or otherwise acquire its own shares unless, after giving effect thereto,
(i) the corporation would be unable to pay its debts as they become due in the
usual course of its business, or (ii) the corporation's total assets would be
less than its total liabilities.
FUNC. Under North Carolina law, FUNC generally may make dividends or other
distributions to its stockholders unless after the distribution either: (i) FUNC
would not be able to pay its debts as they become due in the usual course of
business; or (ii) FUNC's assets would be less than the sum of its liabilities
plus the amount that would be needed to satisfy the preferential dissolution
rights of stockholders whose preferential rights are superior to those receiving
the distribution. See "FUNC -- Certain Regulatory Considerations; PAYMENT OF
DIVIDENDS" and "DESCRIPTION OF FUNC CAPITAL STOCK".
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<PAGE>
VOLUNTARY DISSOLUTION
COVENANT. Under the NJBCA, Covenant may be dissolved upon the consent of
all of its stockholders entitled to vote thereon or, alternatively, if the
Covenant Board recommends that Covenant be dissolved and directs that the
question be submitted to a vote at a meeting of stockholders, Covenant may be
dissolved upon the affirmative vote of a majority of the votes cast by the
stockholders entitled to vote thereon and, if any class or series of securities
of Covenant is entitled to vote as a class, upon the affirmative vote of a
majority of the votes cast by each such class.
FUNC. North Carolina law provides that FUNC may be dissolved if the FUNC
Board proposes dissolution and a majority of the shares of FUNC entitled to vote
thereon approves. In accordance with North Carolina law, the FUNC Board may
condition its submission of a proposal for dissolution on any basis.
RESALE OF FUNC COMMON SHARES
The FUNC Common Shares have been registered under the Securities Act,
thereby allowing such shares to be traded freely and without restriction by
those holders of Covenant Common Stock and Covenant Preferred Stock who receive
such shares following consummation of the Corporate Merger and who are not
deemed to be "affiliates" (as defined under the Securities Act, but generally
including directors, certain executive officers and ten percent or more
stockholders) of Covenant or FUNC. It is a condition to consummation of the
Mergers that each holder of Covenant Common Stock and Covenant Preferred Stock
who is deemed by Covenant to be an affiliate has entered into an agreement with
FUNC providing, among other things, that such affiliate will not transfer any
FUNC Common Shares received by such affiliate in the Corporate Merger except in
compliance with the Securities Act. This Prospectus/Proxy Statement does not
cover any resales of FUNC Common Shares received by affiliates of Covenant.
VALIDITY OF FUNC COMMON SHARES
The validity of the FUNC Common Shares being offered hereby is being passed
upon for FUNC by Marion A. Cowell, Jr., Esq., Executive Vice President,
Secretary and General Counsel of FUNC. Mr. Cowell is also a stockholder of FUNC
and holds options to purchase additional shares of FUNC Common Stock.
EXPERTS
The 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 have been audited by KPMG Peat Marwick
LLP. KPMG Peat Marwick LLP has also audited Covenant Bank's statement of
financial condition 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 merger with
1st Southern State Bank. Coopers & Lybrand L.L.P. audited Covenant Bank's
statements of operations, changes in stockholders' equity and cash flows for the
year ended December 31, 1994, prior to their restatement for the 1996 pooling of
interests merger with 1st Southern State Bank. Moore, Costello & Co. (formerly
Moore & Fitzpatrick, LLC) audited 1st Southern State Bank's statements of
income, changes in stockholders' equity and cash flows for each of the years in
the two-year period ended December 31, 1995, such statements of which have been
included in the 1995 and 1994 restated financial statements of Covenant Bank.
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
aforementioned financial statements of Covenant Bank have been included herein
in reliance upon the separate reports of KPMG Peat Marwick LLP, Coopers &
Lybrand L.L.P and Moore & Fitzpatrick, LLC, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firms as
experts in accounting and auditing.
The consolidated balance sheets of FUNC as of December 31, 1996 and 1995,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996, included in FUNC's 1996 Annual Report to Stockholders, which
is incorporated by reference in FUNC's 1996 Annual Report on Form 10-K and
incorporated by reference herein, have been incorporated by reference herein in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
52
<PAGE>
ANNEX A
AMENDMENT NO. 2 TO
FORM F-2
ANNUAL REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
FDIC CERTIFICATE NO. 27339
COVENANT BANK
(Exact name of bank as specified in charter)
NEW JERSEY
(State or other jurisdiction of
incorporation or organization)
22-2890624
(IRS Employer Identification No.)
18 KINGS HIGHWAY WEST
HADDONFIELD, NJ 08033
(Address of principal office)
(609) 428-7300
(Bank's telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
Title of Class: Common Stock, par value $5.00 per share; Series A 6%
Convertible Non-Cumulative Preferred Stock, par value $25.00
per share; and Series B 6% Convertible Non-Cumulative
Preferred Stock, par value $25.00 per share
Indicate by check mark if disclosure of delinquent filers pursuant to item
10 is not contained herein, and will not be contained, to the best of bank's
knowledge, in definitive proxy or information statements incorporated by
reference in part III of this Form F-2 or any amendment of this Form F-2. H
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.
A-1
<PAGE>
PART I
ITEM 1 -- BUSINESS
GENERAL.
Covenant Bank ("Covenant" or "the Bank") is a bank organized under the laws
of the State of New Jersey. Covenant's market focus is southern New Jersey.
Covenant offers a broad range of lending, depository and related financial
services to individual consumers, businesses and governmental units. Covenant is
a member of the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC"). As a state-chartered bank, Covenant is subject to
extensive regulation and supervision by the New Jersey Department of Banking
(the "Department of Banking") under New Jersey law and by the FDIC under federal
law. See "Supervision and Regulation."
Since commencing operations in September, 1988 with a single office in
Haddonfield, New Jersey, Covenant has grown through acquisitions and internal
growth to approximately $415 million in assets and 15 personal financial centers
throughout the southern New Jersey market place as of December 31, 1996. In
March 1997, Covenant opened an additional personal financial center in Cherry
Hill, New Jersey. Covenant acquired New Jersey Savings & Loan Association, with
three offices in Waterford Township, Sicklerville and Voorhees, New Jersey, in
June, 1993, and in September, 1994, Covenant acquired Landis Savings Bank,
S.L.A., with an office in Vineland, New Jersey. In addition to expanding
Covenant's network of personal financial centers, these acquisitions expanded
and diversified Covenant's loan portfolio and loan product offerings into
residential mortgage lending and consumer lending. In September, 1996 Covenant
acquired 1st Southern State Bank, adding three personal financial centers in
Avalon, Cape May and Sea Isle City, New Jersey. As of December 31, 1996,
Covenant had 166.5 full-time equivalent employees.
The lending function is Covenant's principal business activity and it is
Covenant's continuing policy to serve as a reliable source of credit for a
diverse customer base. Commercial credit services offered by Covenant include
short- and medium-term loans, lines of credit, certain types of asset-based
lending, real estate construction loans and commercial mortgage loans. Consumer
credit services include secured and unsecured loans, installment loans, mortgage
loans and home equity loans.
Covenant offers the customary range of retail and commercial deposit
services. Personal accounts include checking accounts, NOW accounts, money
market accounts, savings accounts, IRAs, and both retail and wholesale
certificates of deposit. Covenant is a member of the MAC(R) automated teller
machine network. Deposits into and withdrawals from transaction accounts can be
made by MAC cards which are provided with an annual fee and no transaction
charges. In addition, Covenant offers a Covenant Visa(R) credit card, travelers
checks and direct deposit facilities.
For commercial clients, Covenant offers checking and savings accounts,
money market accounts, certificates of deposit and cash management accounts with
an automatic investment feature. Businesses can make deposits at branches of
other financial institutions which can be transferred to Covenant by a
Depository Transfer Check initiated by a toll-free telephone call or by use of a
corporate MAC card with respect to deposits made at a MAC terminal. In addition,
Covenant offers escrow management and lockbox payment processing services.
While Covenant's deposit base is somewhat seasonal as a result of its
personal financial centers in the New Jersey shore communities, its earnings and
total assets are not seasonal in any material respect.
MARKET AREA AND COMPETITION.
Covenant's market focus is southern New Jersey. Covenant has established
"hub" personal financial centers in Atlantic, Burlington, Camden, Cape May and
Cumberland counties, and has a total of fifteen personal financial centers 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.
A-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.
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:
A-3
<PAGE>
<TABLE>
<CAPTION>
ADEQUATELY WELL COVENANT AT
CAPITALIZED CAPITALIZED DECEMBER 31, 1996
<S> <C> <C> <C>
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%
</TABLE>
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.
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
A-4
<PAGE>
without geographic limitations. Beginning June 1, 1997, the legislation will
eliminate certain restrictions on interstate branching under federal law in
states that have not passed legislation prohibiting interstate branching, except
that de novo branching or acquisition of a branch in another state without
acquisition of the entire bank will only be permitted if expressly permitted by
the law of the state in which such branch would be located. Interstate branching
prior to June 1, 1997 will be possible in states that pass laws affirmatively
authorizing such interstate branching. Prior to this legislation, interstate
acquisitions of banks have required affirmative authorization in state law, and
interstate branching has been possible only to a very limited degree. The effect
of this legislation on Covenant cannot be predicted at this time.
ITEM 2 -- PROPERTIES
Covenant has sixteen personal banking centers in southern New Jersey, in
the communities of Haddonfield, Moorestown, Waterford Township, Sicklerville,
Voorhees, Linwood, Cape May Court House, the Greater Wildwoods, Vineland,
Hammonton, Avalon, Sea Isle City, Cape May, Mt. Laurel and Cherry Hill. Covenant
also has administrative offices adjacent to its main office in Haddonfield, New
Jersey, and an operating center in Voorhees, New Jersey.
Covenant leases its main office pursuant to a lease with an initial term of
ten years ending October 31, 1997. The lease also contains two separate
five-year renewal options and a right of first refusal in the event of sale by
the landlord during the term of the lease. Covenant also leases its Linwood,
Cape May Court House, Sea Isle City, Cape May, Hammonton, Mt. Laurel and Cherry
Hill (land lease only) personal financial centers, and its administrative
offices adjacent to its main office.
Covenant owns all of its other personal financial centers and its Voorhees
operations center free and clear of any mortgages or other material liens.
ITEM 3 -- LEGAL PROCEEDINGS
There are no material legal proceedings to which Covenant is a party or to
which any of its property is subject. From time to time, Covenant is a party to
various legal proceedings incident to its business.
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:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF PERCENT
OWNER BENEFICIAL OWNERSHIP (1) OF CLASS
<S> <C> <C>
Richard A. Hocker 199,209 shares (2) 6.50%
107 E. Cottage Avenue
Haddonfield, NJ 08033
</TABLE>
(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.
A-5
<PAGE>
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%
(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.
A-6
<PAGE>
(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.
A-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.
<TABLE>
<CAPTION>
1995 LOW HIGH
<S> <C> <C>
1st Quarter............................................................ $7.60 $9.05
2nd Quarter............................................................ 7.60 8.76
3rd Quarter............................................................ 8.34 9.42
4th Quarter............................................................ 8.76 12.47
<CAPTION>
1996
<S> <C> <C>
1st Quarter............................................................ $10.89 $11.57
2nd Quarter............................................................ 11.32 11.79
3rd Quarter............................................................ 11.32 12.97
4th Quarter............................................................ 12.00 14.75
</TABLE>
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.
A-8
<PAGE>
ITEM 6 -- SELECTED FINANCIAL DATA
COVENANT BANK
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Balance Sheet Data
Total assets $414,634 $347,161 $316,722 $274,351 $210,129
Loans receivable, net...................................... 238,185 201,666 190,037 179,825 145,371
Investments available for sale............................. 132,578 57,178 16,823 20,604 17,034
Investments held to maturity............................... 11,687 50,343 79,518 24,923 12,422
Deposits................................................... 277,465 262,752 235,821 244,015 186,187
Stockholders' equity....................................... 29,251 29,909 22,376 21,645 20,288
Book value per share (5)................................... $7.45 $7.54 $6.44 $6.24 $5.85
Income Statement Data
Net interest income........................................ 14,934 13,668 12,140 9,697 7,344
Provision for loan losses.................................. 636 314 682 1,043 947
Non-interest income........................................ 1,090 844 779 799 811
Non-interest expense....................................... 12,337 (1) 11,121 11,296 8,769 6,310
Income before income tax................................... 3,051 (1) 3,077 941 684 898
Net income................................................. $1,850 (4) $2,379 $1,281 $1,373 $ 712
Operating earnings -- pre-tax.............................. $4,701 (2) $3,077 $2,077 (3) $ 684 $ 898
Average common shares outstanding.......................... 4,069 3,761 3,535 3,454 3,018
Earnings per share......................................... $0.45 (4) $0.63 $0.36 $0.40 $0.24
Net interest margin........................................ 4.10% 4.37% 4.50% 4.24% 3.86%
Profitability Statistics
Pre-tax operating return on average assets................. 1.21% 0.93% 0.73% 0.28% 0.45%
Return on average assets................................... 0.48 (4) 0.72 0.45 0.56 0.35
Return on average common equity............................ 6.30 (4) 9.53 5.72 6.68 4.30
Book value per share excluding FAS 115 valuation
adjustment............................................... $7.53 $7.24 $6.51 $6.20 $5.85
Non-performing assets/total period end assets.............. 0.86 1.44 1.73 1.91 1.83
Allowance/non-performing loans............................. 105.23 86.84 77.95 86.33 137.42
Allowance/total loans...................................... 1.25 1.56 1.87 2.00 1.81
Net charge-offs/average loans outstanding.................. 0.36 0.37 0.38 0.77 0.46
Capital Measures
Average stockholders' equity/average assets................ 7.56% 7.66% 7.70% 8.49% 8.24%
Leverage ratio............................................. 7.51 8.49 7.42 7.87 9.88
Tier 1 capital ratio....................................... 11.98 13.62 11.68 11.52 13.88
Total capital ratio........................................ 13.20 14.87 12.94 12.78 14.83
Number of full-service offices............................. 15 14 13 11 6
</TABLE>
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:
<TABLE>
<CAPTION>
1996
<S> <C>
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 %
</TABLE>
(5) Book value per share calculation includes SFAS 115 valuation adjustment.
A-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.
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.
(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.
A-10
<PAGE>
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).
A-11
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE P 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.
A-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>
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.
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 ended 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
A-13
<PAGE>
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).
A-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>
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>
Loans By Type
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>
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
A-15
<PAGE>
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.
<TABLE>
<CAPTION>
ONE TO OVER
WITHIN FIVE FIVE
ONE YEAR YEARS YEARS TOTAL
<S> <C> <C> <C> <C>
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
</TABLE>
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.
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.
A-16
<PAGE>
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>
<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>
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.
A-17
<PAGE>
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.
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.
A-18
<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
GROSS GROSS GROSS GROSS
LOANS LOANS LOANS LOANS
AMOUNT (1) AMOUNT (1) AMOUNT (1) AMOUNT (1) AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial......................... $1,088 27% $1,484 31% $1,817 31% $1,609 32% $1,375
Mortgage........................... 1,619 59 1,390 54 1,427 55 1,302 55 827
Consumer........................... 309 14 321 15 379 14 759 13 497
Total............................ $3,016 100% $3,195 100% $3,623 100% $3,670 100% $2,699
<CAPTION>
% OF
GROSS
LOANS
(1)
<S> <C>
Commercial......................... 31%
Mortgage........................... 55
Consumer........................... 14
Total............................ 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.
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
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
</TABLE>
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.
A-19
<PAGE>
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.
Table 9 sets forth Covenant's securities portfolio by contractual maturity
distribution and weighted average yield as of December 31, 1996.
<TABLE>
<CAPTION>
ONE TO FIVE FIVE TO TEN NO STATED
ONE YEAR OR LESS YEARS YEARS OVER TEN YEARS MATURITY
AMORTIZED AMORTIZED AMORTIZED AMORTIZED AMORTIZED
COST YIELD COST YIELD COST YIELD COST YIELD COST YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments Held to Maturity:
U.S. Treasury.................... $ -- -- % $ -- -- % $ -- -- % $ -- -- % $ -- -- %
Obligations of U.S. Government
Agencies....................... -- -- -- -- -- -- 7,209 6.70 % -- -- %
Federal Home Loan Bank stock..... -- -- -- -- -- -- -- -- 4,478 6.48 %
Total.............................. $ -- -- % $ -- -- % $ -- -- % $7,209 6.70 % $4,478 6.48 %
<CAPTION>
TOTAL
AMORTIZED
COST YIELD
<S> <C> <C>
Investments Held to Maturity:
U.S. Treasury.................... $ -- -- %
Obligations of U.S. Government
Agencies....................... 7,209 6.70 %
Federal Home Loan Bank stock..... 4,478 6.48 %
Total.............................. $11,687 6.64 %
</TABLE>
<TABLE>
<CAPTION>
ONE TO FIVE FIVE TO TEN NO STATED
ONE YEAR OR LESS YEARS YEARS OVER TEN YEARS MATURITY
FAIR FAIR FAIR FAIR FAIR
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD 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 % $ -- -- % $ -- -- %
<CAPTION>
TOTAL
FAIR
VALUE YIELD
<S> <C> <C>
Securities Available for
Sale:
U.S. Treasury......... $132,578 6.30 %
</TABLE>
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
<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-20
<PAGE>
A summary of certificates of deposit of $100,000 or more by maturity is
shown in Table 11.
<TABLE>
<CAPTION>
1996
AMOUNT PERCENT
<S> <C> <C>
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%
</TABLE>
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.
A-21
<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
ONE TO OVER SENSITIVE
1-90 91-180 181-365 THREE THREE ASSETS/
DAYS DAYS DAYS YEARS YEARS LIABILITIES
<S> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Interest earning assets
Loans............................... $92,473 $6,162 $12,338 $36,582 $90,879 $ --
Investment securities............... -- 7,023 21,149 64,257 51,836 --
Federal funds sold.................. 3,100 -- -- -- -- --
Total interest earning assets..... 95,573 13,185 33,487 100,839 142,715 --
Non-interest earning assets........... -- -- -- -- -- 28,835
Total assets...................... $95,573 $13,185 $33,487 $100,839 $142,715 $28,835
Rate sensitive liabilities:
Interest bearing demand............. $26,068 $ -- $ -- $4,345 $4,344 $ --
Statement savings................... 30,150 -- -- 5,058 5,049 --
Money market........................ 15,866 -- -- 2,645 2,644 --
Time deposits....................... 59,660 26,830 26,824 13,305 12,809 --
Borrowings.......................... 95,537 1,000 -- 3,000 5,000 --
Total interest bearing
liabilities..................... 227,281 27,830 26,824 28,353 29,846 --
Non-interest bearing liabilities...... -- -- -- -- -- 45,249
Stockholders' equity.................. -- -- -- -- -- 29,251
Total liabilities and
stockholders' equity............ $227,281 $27,830 $26,824 $28,353 $29,846 $74,500
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%
<CAPTION>
TOTAL
<S> <C>
Rate sensitive assets:
Interest earning assets
Loans............................... $238,434
Investment securities............... 144,265
Federal funds sold.................. 3,100
Total interest earning assets..... 385,799
Non-interest earning assets........... 28,835
Total assets...................... $414,634
Rate sensitive liabilities:
Interest bearing demand............. $34,757
Statement savings................... 40,257
Money market........................ 21,155
Time deposits....................... 139,428
Borrowings.......................... 104,537
Total interest bearing
liabilities..................... 340,134
Non-interest bearing liabilities...... 45,249
Stockholders' equity.................. 29,251
Total liabilities and
stockholders' equity............ $414,634
Interest rate sensitivity GAP.........
Cumulative GAP........................
Cumulative GAP as a percentage of
total interest earning assets.......
</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.
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.
A-22
<PAGE>
LIQUIDITY
Adequate liquidity is necessary to meet the borrowing needs and deposit
withdrawal requirements of customers as well as to satisfy liabilities, fund
operations and support asset growth. Maintaining an appropriate level of liquid
funds through the asset/liability management process ensures that the needs of
the 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.
Table 14 sets forth Covenant's minimum regulatory capital requirements and
compliance therewith as of December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
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%
</TABLE>
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.
A-23
<PAGE>
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.
A-24
<PAGE>
(KPMG Peat Marwick LLP logo)
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
January 27, 1997
Philadelphia, Pennsylvania
A-25
<PAGE>
(Moore & Fitzpatrick LLC logo)
Kenneth W. Moore, CPA, RMA, PFS Members of American Institute
Thomas J. Fitzpatrick, CPA, PFS of Certified Public Accountants
Leon P. Costello, CPA, RMA
New Jersey Society of 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
January 16, 1996
200 S. Shore Road P.O. Box 523 Marmora, New Jersey 08223 Phone (609)
390-3600 Fax (609) 390-0056
Bank Street Commons Suite 150 510 Bank Street, Cape May, New Jersey
08204 Phone (609) 898-9600 Fax (609) 898-9568
207 Locust Street Turnersville, New Jersey 08012 Phone (609) 232-1520
Fax (609) 232-1521
A-26
<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
A-27
<PAGE>
COVENANT BANK
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
(IN THOUSANDS,
EXCEPT SHARE DATA)
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.
A-28
<PAGE>
COVENANT BANK
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
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.
A-29
<PAGE>
COVENANT BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN(LOSS),
ADDITIONAL NET OF
PREFERRED COMMON PAID-IN DEFERRED ACCUMULATED
STOCK STOCK CAPITAL INCOME TAXES DEFICIT
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, INCLUDING SHARE DATA)
Balance at January 1, 1994................................. $ 3,457 $12,138 $ 7,553 $ 140 $(1,643)
Net income................................................. -- -- -- -- 1,281
Preferred stock dividend................................... -- -- -- -- (208)
Adjustment to unrealized gain (net of tax)................. -- -- -- (394) --
Common stock dividends and other (106 shares).............. -- 531 654 -- (1,133)
Balance at December 31, 1994............................... $ 3,457 $12,669 $ 8,207 $ (254) $(1,703)
Net income................................................. -- -- -- -- 2,379
Issuance of preferred stock series "B"..................... 4,043 -- (60) --
Preferred stock dividend................................... -- -- -- -- (268)
Adjustment to unrealized gain (net of tax)................. -- -- -- 1,411 --
Common stock dividends and other (178 shares).............. -- 890 1,065 -- (1,927)
Balance at December 31, 1995............................... $ 7,500 $13,559 $ 9,212 $1,157 $(1,519)
Net income................................................. -- -- -- -- 1,850
Preferred stock dividend................................... -- -- -- -- (450)
Adjustment to unrealized gain (net of tax)................. -- -- -- (1,462) --
Common stock dividends and other (194 shares).............. -- 972 1,402 -- (2,970)
Balance at December 31, 1996............................... $ 7,500 $14,531 $ 10,614 $ (305) $(3,089)
<CAPTION>
TOTAL
<S> <C>
Balance at January 1, 1994................................. $21,645
Net income................................................. 1,281
Preferred stock dividend................................... (208)
Adjustment to unrealized gain (net of tax)................. (394)
Common stock dividends and other (106 shares).............. 52
Balance at December 31, 1994............................... $22,376
Net income................................................. 2,379
Issuance of preferred stock series "B"..................... 3,983
Preferred stock dividend................................... (268)
Adjustment to unrealized gain (net of tax)................. 1,411
Common stock dividends and other (178 shares).............. 28
Balance at December 31, 1995............................... $29,909
Net income................................................. 1,850
Preferred stock dividend................................... (450)
Adjustment to unrealized gain (net of tax)................. (1,462)
Common stock dividends and other (194 shares).............. (596)
Balance at December 31, 1996............................... $29,251
</TABLE>
See accompanying notes to financial statements.
A-30
<PAGE>
COVENANT BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
(IN THOUSANDS)
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.
A-31
<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.
A-32
<PAGE>
COVENANT BANK
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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 judgments 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.
A-33
<PAGE>
COVENANT BANK
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
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.
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COVENANT
BANK 1ST COVENANT
AS SOUTHERN BANK
PREVIOUSLY STATE AS
STATED BANK 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>
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
COVENANT
BANK 1ST COVENANT
AS SOUTHERN BANK
PREVIOUSLY STATE AS
STATED BANK 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>
A-34
<PAGE>
COVENANT BANK
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. MERGER -- Continued
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.
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.
Obligations of US Government Agencies are shown separately due to the
amortization and prepayment of principal occurring throughout the life of these
instruments.
A-35
<PAGE>
COVENANT BANK
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. INVESTMENT SECURITIES -- Continued
<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:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
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
</TABLE>
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 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.
A-36
<PAGE>
COVENANT BANK
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
5. LOANS -- Continued
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:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
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
</TABLE>
A-37
<PAGE>
COVENANT BANK
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Investment securities.................................................. $2,356 $1,969
Loans receivable....................................................... 1,486 1,523
Obligations of U.S. Government Agencies................................ 71 31
$3,913 $3,523
</TABLE>
8. DEPOSITS
Interest expense on deposits for the years ended December 31, 1996, 1995
and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
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
</TABLE>
The major classifications of deposits at December 31, 1996, 1995 and 1994
consisted of the following:
<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-38
<PAGE>
COVENANT BANK
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
8. DEPOSITS -- Continued
A summary of certificates of deposit of $100,000 or more by maturity is as
follows:
<TABLE>
<CAPTION>
1996
AMOUNT PERCENT
<S> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
AMOUNT MATURITY
<S> <C>
$12,500..................................... 1997
3,000..................................... 1998
5,000..................................... 2000
$20,500
</TABLE>
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.
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>
A-39
<PAGE>
COVENANT BANK
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
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:
<TABLE>
<CAPTION>
CONTRACT AMOUNT
1996 1995
<S> <C> <C>
Amounts representing credit risk:
Commitments to extend credit.......................... $36,732 $29,094
Standby letters of credit............................. 1,313 2,163
</TABLE>
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.
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:
<TABLE>
<S> <C>
1997................................................................. $ 400
1998................................................................. 305
1999................................................................. 305
2000................................................................. 105
2001................................................................. 59
Total........................................................... $1,174
</TABLE>
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.
A-40
<PAGE>
COVENANT BANK
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
13. REGULATORY MATTERS -- Continued
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.
The Bank's actual capital amounts and ratios are presented in the table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSE 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.
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.
A-41
<PAGE>
COVENANT BANK
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
15. INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1996, 1995
and 1994 is comprised as shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
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)
</TABLE>
The Bank's provision (benefit) for income taxes differs from that computed
by applying the federal income tax rate to income before income taxes as shown
below:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
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)
</TABLE>
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.
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.
A-42
<PAGE>
COVENANT BANK
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
15. INCOME TAXES -- Continued
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
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 available 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
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
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
</TABLE>
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.
A-43
<PAGE>
COVENANT BANK
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
16. EMPLOYEE BENEFIT PLANS -- Continued
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:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
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
</TABLE>
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.
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.
A-44
<PAGE>
COVENANT BANK
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
16. EMPLOYEE BENEFIT PLANS -- Continued
An analysis of the activity under the Plan during the year 1996 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C>
Balance, December 31, 1995..................................... -- $ --
Granted...................................................... 140,450 12.13
Exercised.................................................... -- --
Terminated................................................... -- --
Balance, December 31, 1996..................................... 140,450 $12.13
</TABLE>
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.
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.
A-45
<PAGE>
COVENANT BANK
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
17. FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
The following represents the carrying value and fair value of Covenant's
financial instruments at December 31, 1996 and 1995:
<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' or liabilities 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.
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.
A-46
<PAGE>
COVENANT BANK
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
17. FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
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>
THREE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
<S> <C> <C> <C> <C>
1996
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.
A-47
<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.
<TABLE>
<CAPTION>
LOW HIGH
<S> <C> <C>
1995
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
</TABLE>
The above prices have been adjusted to reflect all stock dividends issued
on the common stock.
A-48
<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.
A-49
<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
<TABLE>
<S> <C>
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.
</TABLE>
* Previously filed
A-50
<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
<TABLE>
<S> <C>
Date: April 28, 1997 By: /s/ CHARLES E. SESSA, JR.
Name: Charles E. Sessa, Jr.
Title: President
Date: April 28, 1997 By: /s/ J. WILLIAM PARKER, JR.
Name: J. William Parker, Jr.
Title: Chief Financial Officer
</TABLE>
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.
<TABLE>
<S> <C>
Date: By: Barry M. Abelson, Director
Date: April 28, 1997 By: /s/ WILLIAM T. CARSON
William T. Carson, Director
Date: By:
John J. Gallagher, Director
Date: April 28, 1997 By: /s/ GARY E. GREENBLATT
Gary E. Greenblatt, Director
Date: April 28, 1997 By: /s/ RICHARD A. HOCKER
Richard A. Hocker, Director
Date: April 28, 1997 By: /s/ JAMES R. IANNONE
James R. Iannone, Director
Date: By:
Joseph A. Maressa, Sr., Director
Date: April 28, 1997 By: /s/ CHARLES E. SESSA, JR.
Charles E. Sessa, Jr., Director
Date: April 28, 1997 By: /s/ KYLE W. WILL
Kyle W. Will, Director
</TABLE>
A-51
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE #0-22699
COVENANT BANCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEW JERSEY 22-2890624
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
</TABLE>
18 KINGS HIGHWAY WEST, HADDONFIELD, NEW JERSEY 08033
(Address of Principal Executive Offices) (Zip Code)
(609) 428-7300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. (Note: Registrant is successor to
Covenant Bank, whose shares were previously registered with the Federal Deposit
Insurance Corporation).
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practical date.
<TABLE>
<S> <C>
COMMON STOCK 3,057,193
(Title of Class) (No. of Shares Outstanding as of 8/11/97)
SERIES A NON-CUMULATIVE CONVERTIBLE PREFERRED STOCK 138,300
(Title of Class) (No. of Shares Outstanding as of 8/11/97)
SERIES B NON-CUMULATIVE CONVERTIBLE PREFERRED STOCK 161,700
(Title of Class) (No. of Shares Outstanding as of 8/11/97)
</TABLE>
A-52
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited) June 30, 1997 and
December 31, 1996.................................................................................... A-54
Consolidated Statements of Operations (Unaudited) Three months ended June 30, 1997 and
June 30, 1996 and six months ended June 30, 1997 and June 30, 1996................................... A-55-A-56
Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, 1997 and June 30, 1996... A-57
Consolidated Statements of Changes in Stockholders' Equity........................................... A-58
Notes to Consolidated Financial Statements (Unaudited)............................................... A-59
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ A-61
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.................................................. A-70
Item 6. Exhibits and Reports on Form 8-K..................................................................... A-70
</TABLE>
A-53
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
<S> <C> <C>
(IN THOUSANDS)
Assets:
Cash and due from banks..................................................................... $ 23,989 $ 12,446
Federal funds sold.......................................................................... 8,500 3,100
Cash and cash equivalents................................................................. 32,489 15,546
Investments available for sale (cost 1997-$132,572; 1996-$133,061).......................... 131,706 132,578
Investment securities (fair value 1997-$11,425; 1996-$11,743)............................... 11,353 11,687
Loans held for sale......................................................................... -- --
Loans receivable............................................................................ 262,848 241,201
Less allowance for loan losses............................................................ 2,817 3,016
Loans receivable, net.................................................................. 260,031 238,185
Premises and equipment, net................................................................. 9,495 9,135
Real estate owned........................................................................... 747 695
Accrued interest receivable................................................................. 4,036 3,913
Other assets................................................................................ 4,114 2,895
Total Assets.............................................................................. $ 453,971 $ 414,634
Liabilities:
Non-interest bearing deposits............................................................... 57,137 41,868
Interest bearing deposits................................................................... 96,480 96,169
Time deposits............................................................................... 148,166 139,428
Total deposits............................................................................ 301,783 277,465
Advances from The Federal Home Loan Bank.................................................... 21,000 20,500
Securities sold under agreements to repurchase.............................................. 96,242 84,037
Other liabilities........................................................................... 4,134 3,381
Total Liabilities......................................................................... 423,159 385,383
Commitments and Contingencies
Stockholders' Equity:
Preferred stock authorized 300,000 shares;
Series "A", $25 par value:
issued and outstanding 138,300 and 138,300 shares, respectively........................... 3,457 3,457
Series "B", $25 par value:
issued and outstanding 161,700 and 161,700 shares, respectively........................... 4,043 4,043
Common stock, $5 par value:
authorized 5,000,000 shares;
issued and outstanding 2,936,480 and 2,906,262 shares, respectively....................... 14,682 14,531
Additional paid-in capital.................................................................. 10,702 10,614
Net unrealized holding (loss) on investments available for sale............................. (572) (305)
Accumulated deficit......................................................................... (1,500) (3,089)
Total Stockholders' Equity................................................................ 30,812 29,251
Total Liabilities and Stockholders' Equity................................................ $ 453,971 $ 414,634
</TABLE>
See accompanying notes to financial statements.
A-54
<PAGE>
COVENANT BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1997 1996
<S> <C> <C>
(IN THOUSANDS
EXCEPT PER SHARE
DATA)
Interest Income
Interest and fees on loans............................................................................ $5,602 $5,005
Interest on investment securities..................................................................... 2,336 2,256
Other interest income................................................................................. 16 106
Total interest income.............................................................................. 7,954 7,367
Interest Expense
Interest on deposits.................................................................................. 2,612 2,360
Interest on borrowings................................................................................ 1,507 1,296
Total interest expense............................................................................. 4,119 3,656
Net interest income..................................................................................... 3,835 3,711
Provision for loan losses............................................................................... 5 23
Net interest income after provision for loan losses..................................................... 3,830 3,688
Other Income
Service charges on deposit accounts................................................................... 172 165
Loan servicing income................................................................................. 48 64
Other operating income................................................................................ 51 38
Gain on sale of assets................................................................................ 11 --
Total other income................................................................................. 282 267
Other Expenses
Salaries and employee benefits........................................................................ 1,600 1,584
Net occupancy......................................................................................... 457 395
Data processing and other service costs............................................................... 162 187
Professional services................................................................................. 76 137
Advertising and promotion............................................................................. 45 58
Federal insurance premiums............................................................................ 19 61
Other operating expenses.............................................................................. 370 347
Total other expenses............................................................................... 2,729 2,769
Income before income taxes.............................................................................. 1,383 1,186
Income taxes............................................................................................ 473 432
Net income.............................................................................................. 910 754
Less: preferred stock dividends......................................................................... 113 113
Net income applicable to common shareholders............................................................ $ 797 $ 641
Income per common share and common stock equivalents.................................................... $ 0.21 $ 0.18
Weighted average common stock and common stock equivalents outstanding.................................. 4,314 4,238
</TABLE>
See accompanying notes to financial statements.
A-55
<PAGE>
COVENANT BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1996
<S> <C> <C>
(IN THOUSANDS
EXCEPT PER SHARE
DATA)
Interest Income
Interest and fees on loans............................................................................ $10,899 $ 9,850
Interest on investment securities..................................................................... 4,663 4,220
Other interest income................................................................................. 47 197
Total interest income.............................................................................. 15,609 14,267
Interest Expense
Interest on deposits.................................................................................. 5,166 4,708
Interest on borrowings................................................................................ 2,922 2,250
Total interest expense............................................................................. 8,088 6,958
Net interest income..................................................................................... 7,521 7,309
Provision for loan losses............................................................................... 30 41
Net interest income after provision for loan losses..................................................... 7,491 7,268
Other Income
Service charges on deposit accounts................................................................... 311 290
Loan servicing income................................................................................. 91 124
Other operating income................................................................................ 90 84
Gain on sale of assets................................................................................ 11 --
Total other income................................................................................. 503 498
Other Expenses
Salaries and employee benefits........................................................................ 3,075 3,157
Net occupancy......................................................................................... 918 788
Data processing and other service costs............................................................... 264 374
Professional services................................................................................. 155 271
Advertising and promotion............................................................................. 75 93
Federal insurance premiums............................................................................ 39 120
Other operating expenses.............................................................................. 711 706
Total other expenses............................................................................... 5,237 5,509
Income before income taxes.............................................................................. 2,757 2,257
Income taxes............................................................................................ 943 822
Net income.............................................................................................. 1,814 1,435
Less: preferred stock dividends......................................................................... 225 225
Net income applicable to common shareholders............................................................ $ 1,589 $ 1,210
Income per common share and common stock equivalents.................................................... $ 0.42 $ 0.34
Weighted average common stock and common stock equivalents outstanding.................................. 4,283 4,239
</TABLE>
See accompanying notes to financial statements.
A-56
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1996
<S> <C> <C>
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................................ $ 1,814 $ 1,435
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Provision for loan losses............................................................................. 30 41
Depreciation and amortization......................................................................... 317 346
Amortization of premiums and discounts, net........................................................... 36 156
Loans originated for sale............................................................................. -- (951)
Proceeds from sales of loans held for sale............................................................ -- 1,887
Decrease in unearned discounts and loan fees, net..................................................... (247) (106)
Increase in accrued interest receivable and other assets.............................................. (1,342) (2,359)
Increase in other liabilities......................................................................... 753 991
Net cash provided by operating activities.......................................................... 1,361 1,440
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments held to maturity............................................................. -- (1,312)
Purchases of investments available for sale........................................................... (6,970) (52,674)
Proceeds from maturities of investments available for sale............................................ 7,500 --
Proceeds from maturities of investments held to maturity.............................................. -- 25,860
Principal collected on mortgage backed securities..................................................... 309 498
Net increase in loans................................................................................. (21,958) (23,688)
Proceeds from sales of real estate owned.............................................................. 341 357
Purchases of premises and equipment................................................................... (677) (629)
Net cash used in investing activities.............................................................. (21,455) (51,588)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits.............................................................................. 24,318 13,018
Net increase in securities sold under agreements to repurchase........................................ 12,205 44,473
Net increase (decrease) in advances from the Federal Home Loan Bank................................... 500 (3,000)
Preferred stock dividends paid........................................................................ (225) (225)
Common stock issuance and other....................................................................... 239 41
Net cash provided by financing activities.......................................................... 37,037 54,307
Net increase in cash and cash equivalents............................................................. 16,943 4,159
Cash and cash equivalents at the beginning of the year.................................................. 15,546 22,777
Cash and cash equivalents at the end of the period...................................................... $32,489 $26,936
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................................... $ 8,107 $ 6,525
Cash paid during the period for income taxes....................................................... 881 568
Noncash investing and financing activities:
Net transfers to real estate owned from loans receivable........................................... 393 559
Net change in gross unrealized (loss) on investments available for sale............................ $ (383) $(1,082)
</TABLE>
See accompanying notes to financial statements.
A-57
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN NET UNREALIZED ACCUMULATED
STOCK STOCK CAPITAL GAIN (LOSS) DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, INCLUDING SHARE DATA)
Balance at
January 1, 1996.................................. $ 7,500 $13,559 $ 9,212 $ 1,157 $(1,519) $29,909
Net income twelve months ended December 31, 1996... -- -- -- -- 1,850 1,850
Preferred stock dividend........................... -- -- -- -- (450) (450)
Adjustment to unrealized gain (net of of tax)...... -- -- -- (1,462) -- (1,462)
Common stock dividends and other (194 shares)...... -- 972 1,402 -- (2,970) (596)
Balance at
December 31, 1996................................ 7,500 14,531 10,614 (305) (3,089) 29,251
Net income six months ended June 30, 1997.......... -- -- -- -- 1,814 1,814
Preferred stock dividend........................... -- -- -- -- (225) (225)
Adjustment to unrealized gain (net of tax)......... -- -- -- (267) -- (267)
Common stock dividends and other (30 shares)....... -- 151 88 -- -- 239
Balance at
June 30, 1997.................................... $ 7,500 $14,682 $ 10,702 $ (572) $(1,500) $30,812
</TABLE>
See accompanying notes to financial statements.
A-58
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. CONSOLIDATED FINANCIAL STATEMENTS
The financial statements included herein have been prepared without audit
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The accompanying condensed consolidated financial statements
reflect all adjustments which are, in the opinion of management, necessary to a
fair statement of the results for the interim periods presented. Such
adjustments are of a normal recurring nature.
On June 13, 1997, Covenant Bancorp, Inc. (the "Company") was formed and
registered with the SEC. Also on that date, Covenant Bank (the "Bank") was
acquired by the Company. These condensed consolidated financial statements
should be read in conjunction with the audited financial statements and the
notes thereto included in the Bank's Annual Report (Amendment No. 2 to Form F-2
dated April 28, 1997, filed with the Federal Deposit Insurance Corporation) for
the period ended December 31, 1996. The annual report is also included in the
Registrant's Registration Statement on Form S-4 dated April 28, 1997. The
results for the three and six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997.
The consolidated financial statements include the accounts of Covenant
Bancorp, Inc. and all of its subsidiaries, including Covenant Bank. All material
intercompany transactions have been eliminated.
B. COMMITMENTS
In the normal course of business, there are various outstanding commitments
to extend credit, such as letters of credit and unadvanced loan commitments,
which are not reflected in the accompanying consolidated financial statements.
Management does not anticipate any material losses as a result of these
transactions.
C. SFAS NO. 128 -- EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, EARNINGS PER SHARE. This
statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS on the face of
the statement of operations for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
This Statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. This Statement requires restatement of all prior-period EPS data
presented.
Had the Company adopted this Statement as of June 30, 1997, the pro forma
earnings per share would have been:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30, 1997
WEIGHTED PRO FORMA
INCOME AVERAGE SHARES EARNINGS
(NUMERATOR) (DENOMINATOR) PER SHARE
<S> <C> <C> <C>
Basic EPS
Net income available to common shareholders........................................ $ 797 3,054 $0.26
Effect of dilutive securities
Convertible preferred stock........................................................ $ 113 1,059
Stock options...................................................................... -- 201
Dilutive EPS
Income available to common shareholders plus assumed conversions................... $ 910 4,314 $0.21
</TABLE>
A-59
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(UNAUDITED)
C. SFAS NO. 128 -- EARNINGS PER SHARE -- Continued
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30, 1997
WEIGHTED PRO FORMA
INCOME AVERAGE SHARES EARNINGS
(NUMERATOR) (DENOMINATOR) PER SHARE
<S> <C> <C> <C>
Basic EPS
Net income available to common shareholders........................................ $ 1,589 3,044 $0.52
Effect of dilutive securities
Convertible preferred stock........................................................ $ 225 1,059
Stock options...................................................................... -- 180
Dilutive EPS
Income available to common shareholders plus assumed conversions................... $ 1,814 4,283 $0.42
</TABLE>
D. ISSUANCE OF COMMON STOCK
On July 14, 1997, the Company issued a 4% stock dividend on its common
stock to shareholders of record on June 24, 1997, resulting in the issuance of
117,110 additional shares of common stock and cash paid in lieu of fractional
shares of $5,957. All share and per share data has been adjusted to reflect the
retroactive recognition of all stock dividends declared.
E. SUBSEQUENT EVENT
On August 5, 1997, the Company and First Union Corporation (First Union)
executed a definitive merger agreement in which First Union would acquire the
Company. The Company's shareholders will receive .3813 shares of First Union
common stock for each share of the Company's common stock. Each share of the two
issues of the Company's convertible preferred stock will be exchanged for a
number of shares of First Union common stock equal to the respective conversion
ratios of the preferred stock times the merger exchange ratio of .3813. The
acquisition, which will be accounted for under the purchase method of
accounting, is subject to various conditions including the approval of the
Company's shareholders and regulatory approvals. It is anticipated that the
transaction will close during the first quarter of 1998.
A-60
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Covenant Bancorp, Inc. and its subsidiaries, ("the Company"), recorded net
income of $1.8 million for the six months ended June 30, 1997, as compared to
$1.4 million for the six months ended June 30, 1996. The 26% increase in net
income between the two periods is the result of an increase in net interest
income coupled with meaningful expense reduction and control. Net interest
income was positively impacted by a 12% increase in average interest-earning
assets for the six month period ended June 30, 1997, compared to the six months
ended June 30, 1996. Return on average assets was 0.85% and return on average
common equity was 14.29% for the six month period ended June 30, 1997, compared
to 0.76% and 10.79%, respectively, for the six month period ended June 30, 1996.
All prior period amounts have been restated to reflect the September 1996
acquisition of 1st Southern State Bank ("1st Southern").
For the three months ended June 30, 1997, the Company reported net income
of $910,000, representing an increase of 21% in earnings compared to net income
of $754,000 for the second quarter of 1996. Net interest income increased 3% for
the second quarter of 1997 when compared to the second quarter of 1996 due to
the above-mentioned increase in average interest-earning assets. Return on
average assets and return on average common equity for the three months ended
June 30, 1997 were 0.84% and 14.40%, respectively, compared to 0.76% and 11.66%,
respectively, for the same period in 1996.
Total assets amounted to $454.0 million at June 30, 1997, compared to
$414.6 million at December 31, 1996, representing an increase of $39.4 million
or 10% since year-end 1996. Net loans totaled $260.0 million, representing a 9%
increase, over the year-end 1996 balance. Total deposits increased $24.3 million
to reach $301.8 million at June 30, 1997, from the December 31, 1996 balance of
$277.5 million. Stockholders' equity was $30.8 million at June 30, 1997. The
Company's capital position meets the definition of a well-capitalized
institution, which is evident by its leverage ratio, which stood at 7.30% and
its Tier 1 and Total Capital ratios, which equaled 11.74% and 12.79%,
respectively.
On August 5, 1997, the Company and First Union Corporation (First Union)
executed a definitive merger agreement in which First Union would acquire the
Company. The Company's shareholders will receive .3813 shares of First Union
common stock for each share of the Company's common stock. Each share of the two
issues of the Company's convertible preferred stock will be exchanged for a
number of shares of First Union common stock equal to the respective conversion
ratios of the preferred stock times the merger exchange ratio of .3813. The
acquisition, which will be accounted for under the purchase method of
accounting, is subject to various conditions including the approval of the
Company's shareholders and regulatory approvals. It is anticipated that the
transaction will close during the first quarter of 1998.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between interest earned on loans and
investments and interest incurred on deposits and other borrowed funds. Net
interest income is affected by changes in both interest rates and the amounts of
interest-earning assets and interest-bearing liabilities outstanding.
Net interest income for the six months ended June 30, 1997 increased
$212,000 or 3% to $7.5 million, compared to $7.3 million for the same period in
1996 primarily due to an increase in average loans of $35.2 million and a $7.8
million or 6% increase in average investments (see page A-63 for an average
balance sheet and average rate comparisons). The increase in average loans is
concentrated in the commercial and commercial mortgage portfolios of $21.9
million or 16% and a $8.6 million increase in 1-4 family mortgage loans. The
increase in net interest income associated with growth in the loan portfolio has
been largely offset by a compression in the net interest margin to 3.79% for the
six months ended June 30, 1997 from 4.14% for the same period in 1996. The
decrease in the net interest margin is due to the following factors: 1) a
decline in the yield on the total loan portfolio to 8.71% for the six month
period ended June 30, 1997 from 9.18% for the same period in 1997, caused by
overall market conditions and 2) the increase in the Company's loan portfolio
funded by higher-priced securities sold under agreements to repurchase and
certificates of deposit rather than the Company's core deposit base, causing the
Company's cost of funds to increase from 4.51% for the six months ended June 30,
1996 to 4.67% for the same period of 1997. Delays in the opening of the
Company's three new personal financial centers resulted in the need for these
types of short-term higher-costing funding sources.
A-61
<PAGE>
Net interest income for the three months ended June 30, 1997 increased
$124,000 or 3% to $3.8 million, compared to $3.7 million for the same period in
1996. As discussed in the six month results, the improvement is directly related
to the increase in average interest-earning assets during the second quarter of
1997, as compared to the same period in 1996, partially offset by a narrowing in
the net interest margin.
OTHER INCOME
Other income for the first six months of 1997 totaled $503,000, compared to
$498,000 for the same period of 1996. Service charges on deposit accounts
increased $21,000 or 7% to $311,000 for the six months ended June 30, 1997 when
compared to the same period in 1996, due to an increase in core deposit accounts
over the past twelve months. Loan servicing income decreased $33,000 to $91,000
for the six months ended June 30, 1997 when compared to the same period of 1996
and is attributable to volume decreases in investor servicing fees, late fees,
and credit card fees. Other operating income increased $6,000 for the first half
of 1997, compared to the same period in 1996, due to an increase in MAC
surcharge income and volume increases in safe deposit box fees offset by the
discontinuance of a fee-based residential loan origination program. The one-time
gain of $11,000 on the sale of assets during the second quarter of 1997 was due
to a subdivision and subsequent sale of a small parcel of land and building that
had been previously purchased with the Company's North Wildwood personal
financial center.
Other income for the three month period ended June 30, 1997 totaled
$282,000, compared to $267,000 for the same period of 1996, representing a
$15,000 or 6% increase. The increase in service charges on deposit accounts of
$7,000 was associated with the above-mentioned increase in core deposit
accounts. Loan servicing income decreased $16,000 to $48,000 for the second
quarter of 1997 when compared to the same period of 1996 and is also
attributable to volume decreases in investor servicing fees, late fees and
credit card fees. Other operating income increased $13,000 for the second
quarter of 1997, primarily related to an increase in MAC surcharge income and
volume increases in safe deposit box fees.
OTHER EXPENSES
Other expenses for the six months ended June 30, 1997 equaled $5.2 million,
compared to $5.5 million for the same period of 1996. This represents a decrease
of $272,000 or 5% between the two periods. The ratio of total other expenses to
average assets for the six months ended June 30, 1997 improved to 2.47% from
2.91% for the same period of 1996. Cost containment and operating efficiency are
continuing priorities of management. The Company's operating efficiency ratio
(non-interest expenses, less other real estate expenses, divided by net interest
income plus non-interest income excluding non-recurring gains) improved to 65%
for the first half of 1997, compared to 70% for the same period of 1996.
Salaries and employee benefits equaled $3.1 million for the first six
months of 1997, compared to $3.2 million for the same period in 1996. The
salaries and benefits category is the largest component of other expenses,
encompassing 59% of total other expenses as of June 30, 1997. The decrease in
salaries and employee benefits expense is attributable to reductions in staff in
connection with the 1st Southern acquisition completed in September 1996,
partially offset by staffing increases associated with the new personal
financial centers opened since March of 1996.
Net occupancy increased $130,000 to $918,000 for the six months ended June
30, 1997 due to additional personal financial centers opened in Hammonton
(3/96), the relocated Linwood center (10/96), Mount Laurel (12/96) and Cherry
Hill (3/97), and the establishment of an operations center in Voorhees, NJ
during the second quarter of 1996. Data processing and other service costs
declined $110,000 to $264,000 for the six months ended June 30, 1997, compared
to $374,000 for the same period of 1996. The Company's acquisition of 1st
Southern and the operating efficiencies gained due to the system conversion in
September 1996 are primarily attributable for the reduction in costs.
Professional services expenses decreased $116,000 to $155,000 for the first
six months of 1997, compared to $271,000 for the same period of 1996. The
reduction is related to decreases of $48,000 in legal expenses related to the
decrease in problem credits; a $25,000 decrease in consulting expenses due to
the discontinuance of certain advertising and promotion programs and a $43,000
decrease in examinations expense due to the acquisition of 1st Southern. Federal
insurance premiums declined $81,000 to $39,000 for the first half of 1997 due to
a reduction in the Bank Insurance Fund premiums. Other operating expenses
increased $5,000 to $711,000 for the six months ended June 30, 1997, compared to
the same period of 1996.
A-62
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 SIX MONTHS ENDED JUNE 30, 1996
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Assets
Loans:(1)
Commercial................................................ $ 57,634 $ 2,575 8.98% $ 55,754 $ 2,626 9.50%
Commercial mortgage....................................... 105,211 4,685 8.96 85,224 4,042 9.56
Mortgage.................................................. 53,630 2,155 8.00 45,070 1,842 8.18
Consumer.................................................. 35,193 1,484 8.50 30,395 1,340 8.89
Total loans............................................ 251,668 10,899 8.71 216,443 9,850 9.18
Investments:
Federal funds sold........................................ 1,508 47 5.28 7,386 197 5.38
Investment securities..................................... 146,300 4,663 6.37 132,609 4,220 6.33
Total investments...................................... 147,808 4,710 6.37 139,995 4,417 6.27
Total interest-earning assets........................ 399,476 $ 15,609 7.84% 356,438 $ 14,267 8.07%
Allowance for loan losses................................... (2,994) (3,101)
Cash and due from banks..................................... 10,764 9,534
Fixed assets (net).......................................... 9,368 7,861
REO......................................................... 679 1,372
Other assets................................................ 7,268 5,654
Total Assets.............................................. $424,561 $377,758
Liabilities and Stockholders' Equity
Deposits:
Interest-bearing demand................................... $ 34,154 $ 394 2.33% $ 25,527 $ 254 2.01%
Statement savings......................................... 38,940 467 2.42 44,494 539 2.44
Money market.............................................. 20,895 330 3.18 20,808 295 2.86
Certificates of deposit................................... 148,620 3,975 5.39 136,322 3,620 5.35
Total interest-bearing deposits........................ 242,609 5,166 4.29 227,151 4,708 4.18
FHLB advances and securities sold under agreements to
repurchase................................................ 106,691 2,922 5.52 83,939 2,250 5.41
Total interest bearing liabilities..................... 349,300 8,088 4.67 311,090 6,958 4.51
Non-interest bearing deposits............................... 42,204 34,181
Other liabilities........................................... 3,488 2,792
Stockholders' equity........................................ 29,569 29,695
Total Liabilities and Stockholders' Equity............. $424,561 $377,758
Net Interest Income/Spread.................................. $ 7,521 3.17% $ 7,309 3.56%
Net Interest Margin (2)..................................... 3.79% 4.14%
</TABLE>
(1) Includes non-accruing loans. The effect of including such loans is to reduce
the average rate earned on Covenant's loans.
(2) Net interest income as a percentage of average interest-earning assets.
A-63
<PAGE>
Other expenses for the three months ended June 30, 1997 equaled $2.7
million, compared to $2.8 million, representing a decrease of $40,000 or 1% over
the second quarter of 1996. Salaries and employee benefits increased $16,000 to
$1.6 million for the second quarter of 1997 when compared to the same period in
1996. The increase in salaries and employee benefits expense is directly
associated with the new staffing positions created for the new personal
financial centers noted above. Net occupancy increased $62,000 to $457,000 for
the three months ended June 30, 1997, compared to the same period of 1996 due to
the above-mentioned new personal financial centers.
Data processing and service costs decreased $25,000 for the three months
ended June 30, 1997, compared to the same period in 1996. The Company's
acquisition of 1st Southern and operating efficiencies gained due to the system
conversion in September 1996 are primarily attributable to the reduction in
costs offset by new accounts added over the last twelve months.
Professional services expenses decreased $61,000 for the second quarter of
1997 to $76,000, compared to the same period in 1996. The reduction is related
to a decrease of $27,000 in legal expenses; a $6,000 decrease in consulting
expenses due to the discontinuance of certain advertising and promotion programs
and a $20,000 decrease in examination expense due to the acquisition of 1st
Southern. Federal insurance premiums declined $42,000 to $19,000 for the three
months ended June 30, 1997 as compared to the same period in 1996 due to a
reduction in the Bank Insurance Fund premium. Other operating expenses increased
$23,000 to $370,000 for the three months ended June 30, 1997, compared to the
same period in 1996 due to increases in postage, insurance and telephone
expenses related to the new branch facilities opened.
FINANCIAL CONDITION
LOAN PORTFOLIO
The lending function is the Company's principal business activity and it
continues its policy to serve as a reliable source of credit to a diverse
customer base. The Company lends primarily to commercial borrowers in the
southern New Jersey marketplace. The loan portfolio is diversified, with 65% of
the portfolio comprised of commercial and commercial mortgage loans and 35%
comprised of residential mortgage loans and consumer loans at June 30, 1997.
At June 30, 1997, the Company's net loan portfolio totaled $260.0 million,
compared to $238.2 million as of December 31, 1996. The $21.8 million or 9% (18%
annualized) in growth in net loans has been concentrated within the commercial,
commercial mortgage and residential mortgage loan portfolios. The majority of
the Company's loan portfolio is primarily categorized as secured by commercial
and 1-4 family residential real estate properties (including home equity loans).
It is the Company's continuing policy to emphasize well-collaterized and
properly-structured loans and to promote long-term quality relationships with
financially strong borrowers.
NON-PERFORMING ASSETS
Non-performing assets include those loans that are not accruing interest
(non-accruing loans), loans that have been restructured and real estate owned.
Generally, loans that are contractually past-due are placed on non-accrual
status when interest on principal becomes 90 days past-due, unless, in the
Company's assessment, the value of collateral securing the loan adequately
ensures the likelihood of the ultimate collection of all unpaid principal and
interest and the loan is in the process of collection.
A-64
<PAGE>
The following table sets forth information regarding non-performing assets
and contractually past-due loans of June 30, 1997 and 1996 and December 31,
1996:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DEC. 31,
1997 1996 1996
<S> <C> <C> <C>
Non-performing assets:
Non-accruing loans:
Commercial................................................................................. $ 993 $2,500 $1,734
Mortgage................................................................................... 1,111 1,180 931
Consumer................................................................................... 112 232 201
Total non-performing loans................................................................... $2,216 $3,912 $2,866
Real estate owned............................................................................ 747 1,222 695
Total non-performing assets.................................................................. $2,963 $5,134 $3,561
Accruing loans 90 days past-due.............................................................. $1,324 $2,236 $1,753
Non-performing loans as a percentage of loans................................................ 0.84% 1.71% 1.19%
Non-performing assets as a percentage of loans and real estate owned......................... 1.12% 2.23% 1.47%
Non-performing assets as a percentage of total assets........................................ 0.65% 1.28% 0.86%
</TABLE>
Non-performing assets totaled $3.0 million or 1.12% of total loans and real
estate owned at June 30, 1997, showing marked improvement when compared to $3.6
million or 1.47% of total loans and real estate owned at December 31, 1996 and
$5.1 million or 2.23% of total loans and real estate owned at June 30, 1996.
Non-performing loans at June 30, 1997 decreased $650,000 from the December 31,
1996 balance of $2.9 million due to a $741,000 reduction in commercial non-
performing loans and a reduction in consumer non-performing loans of $89,000
offset by an increase in mortgage non-performing loans of $180,000. The balance
of non-performing loans at June 30, 1996 was $3.9 million or 1.71% of total
loans.
Real estate owned (net of reserves) was $747,000 at June 30, 1997, compared
to $695,000 at December 31, 1996 and $1.2 million at June 30, 1996. During the
first six months of 1997, additions to real estate owned of $393,000
(representing three foreclosed properties) were offset by the sale of five
properties for $341,000, which resulted in the $52,000 increase in real estate
owned.
The balance of accruing loans 90 days past-due was $1.3 million at June 30,
1997, $1.8 million at December 31, 1996 and $2.2 million at June 30, 1996. The
$429,000 decrease in accruing loans 90 days past-due during the six months ended
June 30, 1997 is related to a decrease of $366,000 in various residential
mortgage loans and a decrease in various home equity consumer loans of $107,000
offset by an increase in well-collateralized commercial loans of $44,000.
At June 30, 1997 and December 31, 1996, the Company had impaired loans
totaling approximately $993,000 and $1,734,000, respectively. The allowance for
loan losses on impaired loans has a valuation allowance of $101,000, and
$199,000 at June 30, 1997 and December 31, 1996, respectively. The average
balance of impaired loans totaled $1,532,000 and $1,684,000 for June 30, 1997
and December 31, 1996, respectively. Interest income not accrued for impaired
loans for the six months ended June 30, 1997 and for the twelve months ended
December 31, 1996 was approximately $75,000 and $164,000, respectively.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision and allowance for loan losses is based on management's
ongoing evaluation of the loan portfolio and reflects an amount considered by
management to be adequate to absorb known and inherent losses in the portfolio.
Management considers a variety of factors when establishing the allowance, such
as the impact of current economic conditions, diversification of the loan
portfolio, delinquency statistics, results of loan review and related
classifications, the borrower's perceived financial and managerial strengths,
the estimated adequacy of underlying collateral and other relevant factors.
Consideration is also given to examinations performed by regulatory authorities.
A-65
<PAGE>
The following table sets forth information regarding the Company's
allowance for loan losses for the six month periods ended June 30, 1997 and
1996, and for the year ended December 31, 1996.
CHANGES IN ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
YEAR
SIX MONTHS ENDED ENDED
6/30/97 6/30/96 12/31/96
<S> <C> <C> <C>
Balance at beginning of period............................................................... $ 3,016 $ 3,195 $ 3,195
Provision charged to operating expenses...................................................... 30 41 636
Charge-offs:
Commercial................................................................................. (171) (49) (449)
Mortgage................................................................................... (29) (119) (417)
Consumer................................................................................... (57) (101) (124)
Total Charge-offs............................................................................ (257) (269) (990)
Recoveries:
Commercial 24 85 124
Mortgage................................................................................... 3 4 --
Consumer................................................................................... 1 25 51
Total recoveries............................................................................. 28 114 175
Net charge-offs.............................................................................. (229) (155) (815)
Balance at end of period..................................................................... $ 2,817 $ 3,081 $ 3,016
Net charge-offs as a percentage of average loans............................................. 0.18% 0.14% 0.36%
Allowance as a percentage of
period-end loans........................................................................... 1.07% 1.34% 1.25%
Allowance as a percentage of
non-performing loans....................................................................... 127.12% 78.76% 105.20%
Allowance as a percentage of
non-performing assets...................................................................... 95.07% 60.01% 84.70%
</TABLE>
Management is consistently informed of changes in economic indicators which
may have impact, either positive or adverse, on asset quality, the allowance for
loan losses, potential charge-offs and delinquencies.
The provision for loan losses charged against earnings was $30,000 in the
first six months of 1997, compared to $41,000 for the first six months of 1996.
Management believes that the allowance for loan losses at June 30, 1997 is
adequate to absorb known and inherent losses in the portfolio.
INVESTMENT SECURITIES
Investment securities were $143.1 million at June 30, 1997, compared to
$144.3 million at December 31, 1996. The decrease in investment securities was
the result of purchases of $7.0 million of US Treasury Notes with maturities
beyond one year and classified as "Available for Sale," offset by maturities and
paydowns of $7.8 million and a decline of $400,000 in the gross unrealized
holding loss on investments available for sale.
At June 30, 1997, the fair value of investments available for sale was
$131.7 million, and unrealized holding losses were $866,000. At December 31,
1996, the fair value of investments available for sale was $132.6 million and
unrealized holding losses were $483,000. At June 30, 1997, securities held to
maturity totaled $11.4 million compared to $11.7 million at December 31, 1996.
The fair values of these investments were $11.4 million at June 30, 1997 and
$11.7 million at December 31, 1996.
The Company's investment portfolio is comprised of US Government
securities, federal agency mortgage-backed securities and Federal Home Loan Bank
("FHLB") stock. The portfolio generates substantial interest income, serves as a
source of liquidity and is used as a tool in managing interest rate sensitivity.
Portions of the portfolio are also used to secure public deposits and serve as
collateral for repurchase transactions. The investment portfolio also plays a
significant role in the asset/liability management process. Among other things,
the investment portfolio is utilized to balance the interest sensitivity of the
prime-based portion of the loan portfolio.
A-66
<PAGE>
DEPOSITS
The Company's predominant source of funds is depository accounts comprised
of demand deposits, savings and money market accounts, time deposits and
individual retirement accounts (IRA's). Deposits are provided by individuals and
businesses located within the southern New Jersey marketplace. The Company
gathers deposits from local municipalities within the guidelines of the
Government Unit Deposit Protection Act (GUDPA). The Bank has no brokered
deposits.
The Company opened new personal financial centers in Linwood (relocation in
October 1996), Mount Laurel (December 1996) and Cherry Hill (March 1997). Total
deposits at June 30, 1997 equaled $301.8 million, compared to $277.5 million at
December 31, 1996, representing a $24.3 million or 9% increase between December
31, 1996 and June 30, 1997.
BORROWINGS
Sources of funds for the Company other than deposits include FHLB advances
and securities sold under agreements to repurchase. FHLB advances were $21.0
million at June 30, 1997 and $20.5 million at December 31, 1996. Securities sold
under agreements to repurchase totaled $96.2 million at June 30, 1997, compared
to $84.0 million at December 31, 1996. The increase in securities sold under
agreements to repurchase was related to the increase in loans during the first
six months of 1997.
ASSET AND LIABILITY MANAGEMENT
The Company monitors its sensitivity to interest rate changes and its
liquidity and capital position through its asset and liability management
process. The Company's objectives include (i) controlling interest rate
exposures, (ii) ensuring adequate liquidity, (iii) maintaining a strong capital
position and (iv) maximizing net interest income opportunities. The Company
manages these objectives centrally through the Asset Liability Management
Committee (ALCO).
INTEREST RATE SENSITIVITY
The Company seeks to manage its sensitivity position to maximize earnings
and minimize the risk associated with interest rate movements through the use of
a "gap analysis" on a monthly basis. The gap analysis assesses the interest rate
risk that arises from differences in the volumes of assets and liabilities that
mature or reprice within a given period. A "positive" gap position results when
the amount of interest-sensitive assets exceeds that of interest-sensitive
liabilities, signifying that the net interest margin will be positively affected
by rising rates and negatively affected by falling rates; a "negative" gap
position results when the amount of interest-sensitive liabilities exceeds that
of interest-sensitive assets, indicating that the net interest margin will be
negatively affected by rising rates and positively affected by falling rates.
However, the Company's gap position does not necessarily predict the impact of
changes in general levels of interest rates or net interest income due to
assumptions made as to repricing and maturities of certain products.
Decisions are also based on "dynamic shock analysis," a process that
entails the application of different prime rate increase or decrease scenarios
to the current maturity/repricing structure. This analysis measures the impact
on net interest income of each of the scenarios applied relative to the
Company's interest rate risk management policy guidelines, and seeks to identify
appropriate measures to maintain the interest sensitivity of net interest income
within such policy guidelines. At June 30, 1997, the Company's "dynamic shock
analysis" indicates an acceptable level of interest rate risk and is within
policy guidelines.
In the event that the Company's interest rate risk models indicate an
unacceptable level of risk, the Company could undertake a number of actions that
would reduce this risk, including the sale of a portion of its Available for
Sale portfolio or the extension of the maturities of its short-term borrowings,
or the use of other risk management strategies as determined by the Company's
ALCO Committee.
A-67
<PAGE>
The following table illustrates the gap position of the Company as of June
30, 1997.
<TABLE>
<CAPTION>
NON-INTEREST
BEYOND SENSITIVE
1-90 91-180 181-365 ONE-FIVE FIVE ASSETS/
DAYS DAYS DAYS YEARS YEARS LIABILITIES TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Interest earning assets
Loans............................ $ 96,515 $ 6,859 $ 12,616 $ 82,980 $ 61,061 -- $ 260,031
Investment securities............ 21,015 8,050 26,174 57,890 38,430 -- 151,559
Other short-term investments..... -- -- -- -- -- -- --
Total interest earning
assets...................... 117,530 14,909 38,790 140,870 99,491 -- 412,368
Non-interest earning assets........ 42,381 42,381
Total assets..................... $ 117,530 $ 14,909 $ 38,790 $140,870 $ 99,491 $ 42,381 $ 453,971
Rate sensitive liabilities:
Interest bearing demand.......... $ 26,649 -- -- $ 4,442 $ 4,441 -- $ 35,532
Statement Savings................ 29,367 -- -- 4,895 4,894 -- 39,156
Money Market..................... 16,344 -- -- 2,724 2,724 -- 21,792
Certificates of Deposit.......... 56,797 27,672 32,751 30,946 -- -- 148,166
FHLB advances and securities sold
under agreements to
repurchase.................... 109,242 -- 3,000 5,000 -- -- 117,242
Total interest bearing
liabilities................... $ 238,399 $ 27,672 $ 35,751 $ 48,007 $ 12,059 -- $ 361,888
Non-interest bearing liabilities... -- -- -- -- -- 61,271 61,271
Stockholders' equity............... -- -- -- -- -- 30,812 30,812
Total liabilities and
stockholders' equity.......... $ 238,399 $ 27,672 $ 35,751 $ 48,007 $ 12,059 $ 92,083 $ 453,971
Interest rate sensitivity GAP...... $(120,869) $ (12,763) $ 3,039 $ 92,863 $ 87,432 $(49,702)
Cumulative GAP..................... $(120,869) $(133,632) $(130,593) $(37,730) $ 49,702
Cumulative GAP as a percentage of
total............................ 49.30% 49.78% 56.73% 89.47% 113.73%
</TABLE>
The Gap Analysis table is intended to illustrate the maturity/repricing
characteristics of the Company's interest-earning assets and interest-bearing
liabilities as of June 30, 1997. The analysis is based upon contractual
maturities and, where applicable, management's estimates of the repricing
characteristics of various assets and liabilities and on assumptions as to
customer behavior.
The Gap Analysis indicates a liability-sensitive position through the
one-year time period beginning June 30, 1997. The Company's investment in U. S.
Treasury Notes with maturities beyond one year is funded by a growth in deposits
and short-term (three months or less) securities sold under agreements to
repurchase and is primarily responsible for the liability-sensitive position
through the one-year time period as of June 30, 1997.
Covenant's net interest income has not been subject to the degree of
sensitivity indicated by this traditional gap analysis. In monitoring interest
sensitivity, adjustments are made to the dynamic shock assumptions to reflect
management's recent experience regarding the impact of product pricing, interest
rate spread relationships and customer behavior.
These marginal adjustments are necessarily subjective and will vary over
time with loan and deposit changes and market conditions. The investment
portfolio is utilized to balance the Company's gap position, to manage the
interest rate spread and to mitigate overall maturity risk in the portfolio.
LIQUIDITY
Adequate liquidity is necessary to meet the borrowing needs and deposit
withdrawal requirements of customers as well as to satisfy liabilities, fund
operations and support asset growth. Maintaining an appropriate level of liquid
funds through the asset/liability management process ensures that the needs of
the Company are met at a reasonable cost. Therefore, the management of liquidity
is coordinated with the management of the Company's interest sensitivity and
capital position. Major
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<PAGE>
sources of liquidity are core deposits, cash flow generated by the Company's
investment and loan portfolios, and short-term borrowings. Earnings and funds
provided by operations also serve as a source of liquidity.
Cash and cash equivalents equaled $32.5 million at June 30, 1997, compared
to $15.6 million at December 31, 1996, resulting in a net increase of $16.9
million, as shown on the Consolidated Statements of Cash Flows for the six
months ended June 30, 1997. The net increase of $22.0 million in loans
contributed to a net cash used in investing activities equaling $21.5 million.
The Company funded the net cash used in investing activities and the net
increase in cash and cash equivalents principally through a $24.3 million
increase in deposits, and a $12.2 million increase in securities sold under
agreements to repurchase.
The Company places strong emphasis on the composition of the investments
available for sale portfolio. Additional sources of liquidity are available to
the Company through the purchase of federal funds and borrowings on approved
lines of credit. One measure of the Company's liquidity is the FDIC liquidity
ratio. This ratio measures net cash, short-term investments and marketable
assets divided by net deposits and short-term liabilities. The Company's
liquidity ratio at June 30, 1997 was 23%. Overall, based on the its core deposit
base, and its available sources of borrowed funds, management believes that the
Company's liquidity position is satisfactory.
CAPITAL
The maintenance of appropriate levels of capital is a management priority
and an important objective of the Company's asset and liability management
process. The Company's principal capital planning goals are to provide an
adequate return to stockholders, to support its growth and expansion activities,
to provide stability to current operations, and to promote public confidence.
Bank regulatory authorities have issued risk-based capital standards and
leverage ratio requirements by which all bank holding companies and banks will
be evaluated in terms of capital adequacy. The "Prompt Corrective Action"
regulations issued pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991 established five categories of depository institutions:
(1) well-capitalized, (2) adequately capitalized, (3) undercapitalized, (4)
significantly undercapitalized, and (5) critically undercapitalized. Each
category relates to the level of capital for the depository institution. The
highest capital ratios equate to a "well-capitalized" depository institution
which is one that significantly exceeds the minimum level required by regulation
(i.e., total risk-based capital ratio of 10% or greater, a Tier 1 risk-based
capital ratio of 6% or greater and a leverage ratio of 5% or greater). At June
30, 1997, the Company and the Bank met the definition of a "well-capitalized"
institution.
The following table sets forth the Company's and the Bank's regulatory
capital requirements and compliance therewith as of June 30, 1997:
COVENANT BANCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
WELL- CAPITAL EXCESS
ACTUAL CAPITALIZED (IN THOUSANDS)
<S> <C> <C> <C>
Tier 1 Risk-Based Capital Ratio (1)..................................................... 11.74% 6.00% $ 15,342
Total Risk-Based Capital Ratio (2)...................................................... 12.79% 10.00% $ 7,464
Tier 1 Leverage Ratio (3)............................................................... 7.30% 5.00% $ 9,896
</TABLE>
COVENANT BANK
<TABLE>
<CAPTION>
WELL- CAPITAL EXCESS
ACTUAL CAPITALIZED (IN THOUSANDS)
<S> <C> <C> <C>
Tier 1 Risk-Based Capital Ratio (1)..................................................... 11.74% 6.00% $ 15,342
Total Risk-Based Capital Ratio (2)...................................................... 12.79% 10.00% $ 7,464
Tier 1 Leverage Ratio (3)............................................................... 7.30% 5.00% $ 9,896
</TABLE>
(1) Tier 1 Risk-Based Capital Ratio is defined as the ratio of Tier 1 Capital to
Total Risk-Weighted Assets.
(2) Total Risk-Based Capital Ratio is defined as the ratio of Tier 1 and Tier 2
Capital to Total Risk-Weighted Assets.
(3) Tier 1 Leverage Ratio is defined as the ratio of Tier 1 Capital to Total
Average Quarterly Assets.
A-69
<PAGE>
INCOME TAXES
The Company's effective tax rate for the six months ended June 30, 1997 was
34.2%, compared to an effective rate of 36.4% for the same period in 1996. The
decreased percentage from 1996 to 1997 is attributable to a reduction in state
income taxes due to business strategies employed.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Annual Meeting of the Registrant's Shareholders was held on June 10,
1997. The items of business acted upon at the Annual Meeting were the formation
of Covenant Bancorp, Inc. (the Registrant) and the election of ten directors for
one year terms. The number of votes cast for, against and abstained as to each
proposal are as follows:
Proposal 1 -- Formation of Covenant Bancorp,
Inc.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
2,026,595 118,123 791,762
</TABLE>
Proposal 2 -- Election of Directors
<TABLE>
<CAPTION>
NAME OF NOMINEE FOR AGAINST ABSTAIN
<S> <C> <C> <C>
Richard A. Hocker 2,418,836 119,873 1,045
John J. Gallagher, Jr. 2,419,881 118,828 0
Charles E. Sessa, Jr. 2,419,881 118,828 0
Barry M. Abelson 2,418,518 120,191 1,363
Thomas V.G. Brown 2,419,881 118,828 0
William T. Carson, Jr. 2,419,881 118,828 0
Gary E. Greenblatt 2,419,509 119,200 372
James R. Iannone 2,419,364 119,345 517
Joseph A. Maressa, Jr. 2,415,220 123,489 4,661
Kyle W. Will 2,415,220 123,489 4,661
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<C> <S>
2. Agreement and Plan of Mergers dated August 4, 1997 by and among Covenant Bancorp, Inc., Covenant Bank, First
Union Corporation and First Union National Bank, attached as Exhibit 1 to the registrant's Current Report on
Form 8-K dated August 8, 1997 and incorporated herein by reference.
10.1 Amendment No. 1 to Agreement, dated June 10, 1997, amending the Agreement dated November 22, 1995 between
Covenant Bank and Richard A. Hocker.
10.2 Amendment No. 1 to Agreement, dated June 10, 1997, amending the Agreement dated November 22, 1995 between
Covenant Bank and Charles E. Sessa, Jr.
10.3 Amendment No. 1 to Agreement, dated June 10, 1997, amending the Agreement dated November 22, 1995 between
Covenant Bank and Kenneth R. Mancini, Jr.
10.4 Amendment No. 1 to Agreement, dated June 10, 1997, amending the Agreement dated November 22, 1995 between
Covenant Bank and J. William Parker, Jr.
10.5 Amendment No. 1 to Agreement, dated June 10, 1997, amending the Agreement dated November 22, 1995 between
Covenant Bank and Eugene D. D'Orazio.
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the second quarter ended June 30,
1997.
A-70
<PAGE>
COVENANT BANCORP, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Bank has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
COVENANT BANCORP, INC.
/S/ CHARLES E. SESSA, JR.
CHARLES E. SESSA, JR.
PRESIDENT
August 12, 1997
/S/ J. WILLIAM PARKER, JR.
J. WILLIAM PARKER, JR.
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER & TREASURER
August 12, 1997
A-71
<PAGE>
EXHIBIT 11
COVENANT BANCORP, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net income.................................................................. $ 910 $ 754 $1,814 $1,435
Average number of shares outstanding:
Average common shares outstanding......................................... 3,054 3,073 3,044 3,073
Common stock equivalents considered in earnings per share computation:
Dilutive stock options................................................. 201 106 180 107
Conversion of preferred stock Series "A"............................... 550 550 550 550
Conversion of preferred stock Series "B"............................... 509 509 509 509
Average number of shares outstanding........................................ 4,314 4,238 4,283 4,239
Net income per share of common stock and common stock equivalents........... $ 0.21 $ 0.18 $ 0.42 $ 0.34
</TABLE>
A-72
<PAGE>
ANNEX B
AGREEMENT AND PLAN OF MERGERS
AGREEMENT AND PLAN OF MERGERS, dated as of the 4th day of August, 1997
(this "Plan"), by and among COVENANT BANCORP, INC. (the "Company"), COVENANT
BANK (the "Bank"), FIRST UNION CORPORATION ("First Union"), and FIRST UNION
NATIONAL BANK ("FUNB").
RECITALS:
(A) THE COMPANY. The Company is a corporation duly organized and existing
in good standing under the laws of the State of New Jersey, with its principal
executive offices located in Haddonfield, New Jersey. The Company is a
registered bank holding company under the Bank Holding Company Act of 1956, as
amended ("BHCA"). As of the date hereof, the Company has 25,000,000 authorized
shares of common stock, each of $5.00 par value ("Company Common Stock"), and
1,000,000 authorized shares of preferred stock, each of $25.00 par value
("Company Preferred Stock" and, together with the Company Common Stock, "Company
Stock"), of which 138,300 shares have been authorized and designated as Series A
Preferred Stock ("Series A Preferred Stock") and 161,700 shares have been
authorized and designated as Series B Preferred Stock ("Series B Preferred
Stock") (no other class of capital stock being authorized), of which 3,057,193
shares of Company Common Stock, 138,300 shares of Series A Preferred Stock and
161,700 shares of Series B Preferred Stock are issued and outstanding.
(B) THE BANK. The Bank is a commercial bank duly organized and existing in
good standing under the laws of the State of New Jersey, with its principal
executive offices located in Haddonfield, New Jersey. As of June 30, 1997, the
Bank had capital of $30,812,000, divided into common stock of $14,682,000,
preferred stock of $7,500,000, surplus of $10,702,000, undivided profits (loss),
including retained earnings, of $(1,500,000), and net unrealized gain (loss) on
investment securities of $(572,000). All of the issued and outstanding shares of
capital stock of the Bank ("Bank Capital Stock") are owned by the Company.
(C) FIRST UNION. First Union is a corporation duly organized and existing
in good standing under the laws of the State of North Carolina, with its
principal executive offices located in Charlotte, North Carolina. First Union is
a registered bank holding company under the BHCA. As of the date hereof, First
Union has 750,000,000 authorized shares of common stock, each of $3.33 1/3 par
value ("First Union Common Stock"), 40,000,000 authorized shares of Class A
Preferred Stock, no-par value ("First Union Class A Preferred Stock"), and
10,000,000 authorized shares of Preferred Stock, no-par value ("First Union
Preferred Stock") (no other class of capital stock being authorized), of which
280,488,704 shares of First Union Common Stock (without giving effect to the
two-for-one First Union Common Stock split paid on July 31, 1997 to holders of
record of First Union Common Stock on July 1, 1997), no shares of First Union
Class A Preferred Stock, and no shares of First Union Preferred Stock, were
issued and outstanding as of June 30, 1997.
(D) FUNB. FUNB is a national banking association duly organized and
existing under the laws of the United States, with its principal executive
offices located in Avondale, Pennsylvania. As of June 30, 1997, FUNB had capital
of $2,267,270,516, divided into common stock of $452,155,620, preferred stock of
$160,540,000, surplus of $1,300,079,773, undivided profits, including capital
reserves, of $353,444,727, and net unrealized holding gains on available for
sale securities of $1,050,396. All of FUNB's issued and outstanding shares of
capital stock are owned by First Fidelity Incorporated ("FFI"), a wholly-owned
subsidiary of First Union Corporation of New Jersey ("FUNC-NJ"), a wholly-owned
subsidiary of First Union.
(E) RIGHTS, ETC. Except as Previously Disclosed (as hereinafter defined) in
SCHEDULE 4.01(C), there are no shares of capital stock of the Company or the
Bank authorized and reserved for issuance, neither the Company nor the Bank has
any Rights (as defined below) issued or outstanding and neither the Company nor
the Bank has any commitment to authorize, issue or sell any such shares or any
Rights, except pursuant to this Plan. The term "Rights" means securities or
obligations convertible into or exchangeable for, or giving any person any right
to subscribe for or acquire, or any options, calls or commitments relating to,
shares of capital stock (and shall include stock appreciation rights). There are
no preemptive rights in respect of the Company Stock.
(F) APPROVALS. The Board of Directors of each of the Company, the Bank,
First Union and FUNB has approved, at meetings of each of such Boards of
Directors, this Plan and has authorized the execution hereof in counterparts.
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In consideration of their mutual promises and obligations, the parties
hereto adopt and make this Plan and prescribe the terms and conditions thereof
and the manner and basis of carrying it into effect, which shall be as follows:
I. THE MERGERS.
1.01. THE CORPORATE MERGER. On the Effective Date (as hereinafter defined):
(A) THE CONTINUING CORPORATION. The Company shall merge with and into
First Union (the "Corporate Merger"), the separate existence of the Company
shall cease and First Union (the "Continuing Corporation") shall survive
and the name of the Continuing Corporation shall be "First Union
Corporation".
(B) EFFECT OF THE CORPORATE MERGER. Subject to the satisfaction or
waiver of the conditions set forth in ARTICLE VI in accordance with the
terms of this Plan, the Corporate Merger shall become effective upon the
filing in the offices of the Secretary of State of the States of North
Carolina and New Jersey of Articles of Merger and a Certificate of Merger,
as applicable, or such later date and time as may be set forth in such
Articles of Merger and Certificate of Merger, in accordance with applicable
law.
(C) RIGHTS, ETC. The Continuing Corporation shall thereupon and
thereafter possess all of the rights, privileges, immunities and
franchises, of a public as well as of a private nature, of each of the
merging corporations; and all property, real, personal and mixed, and all
debts due on whatever account, and all other choses in action, and all and
every other interest, of or belonging to or due to each of the corporations
so merged, shall be deemed to be vested in the Continuing Corporation
without further act or deed; and the title to any real estate or any
interest therein, vested in each of such corporations, shall not revert or
be in any way impaired by reason of the Corporate Merger.
(D) LIABILITIES. The Continuing Corporation shall thenceforth be
responsible and liable for all the liabilities, obligations and penalties
of each of the corporations so merged, in accordance with applicable law.
(E) ARTICLES OF INCORPORATION; BYLAWS; DIRECTORS; OFFICERS. The
Articles of Incorporation and Bylaws of the Continuing Corporation shall be
those of First Union, as in effect immediately prior to the Corporate
Merger becoming effective. The directors and officers of First Union in
office immediately prior to the Corporate Merger becoming effective shall
be the directors and officers of the Continuing Corporation, together with
such additional directors and officers as may thereafter be elected, who
shall hold office until such time as their successors are elected and
qualified.
1.02. THE BANK MERGER. Following the Corporate Merger on the Effective Date
or as soon thereafter as First Union may deem appropriate:
(A) CONTRIBUTION OF BANK CAPITAL STOCK. First Union shall contribute
the Bank Capital Stock to FUNC-NJ and shall cause FUNC-NJ to contribute the
Bank Capital Stock to FFI.
(B) THE CONTINUING BANK. Following the contribution of the Bank
Capital Stock to FUNC-NJ and from FUNC-NJ to FFI and at least one day
following the Effective Date, the Bank shall be merged with and into FUNB
(the "Bank Merger" and together with the Corporate Merger, the "Mergers"),
the separate existence of the Bank shall cease and FUNB (the "Continuing
Bank") shall survive; the name of the Continuing Bank shall be "First Union
National Bank"; and the Continuing Bank shall continue to conduct the
business of a national banking association at FUNB's main office in
Avondale, Pennsylvania and at the legally established branches of the Bank
and FUNB.
(C) RIGHTS, ETC. The Continuing Bank shall thereupon and thereafter
possess all the rights, privileges, immunities and franchises, of a public
as well as of a private nature, of each of the banks so merged; and all
property, real, personal and mixed, and all debts due on whatever account,
and all other choses in action, and all and every other interest, of or
belonging to or due to each of the banks so merged, shall be taken and
deemed to be transferred to and vested in the Continuing Bank without
further act or deed, including appointments, designations and nominations
and all other rights and interests in any fiduciary capacity; and the title
to any real estate or any interest therein, vested in each of such banks,
shall not revert or be in any way impaired by reason of the Bank Merger.
(D) LIABILITIES, ETC. The Continuing Bank shall thenceforth be
responsible and liable for all the liabilities, obligations and penalties
of the banks so merged (including liabilities arising out of the operation
of any trust departments). All rights of creditors and obligors and all
liens on the property of each of the Bank and FUNB shall be preserved
unimpaired.
(E) CHARTER; BYLAWS; DIRECTORS; OFFICERS. The Charter and Bylaws of
the Continuing Bank shall be those of FUNB, as in effect immediately prior
to the Bank Merger becoming effective. The directors and officers of FUNB
in
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office immediately prior to the Bank Merger becoming effective shall be the
directors and officers of the Continuing Bank, together with such
additional directors and officers as may thereafter be elected, who shall
hold office until such time as their successors are elected and qualified.
(F) OUTSTANDING STOCK OF THE CONTINUING BANK. The amount of the
capital stock of the Continuing Bank shall be not less than $612,695,620
and shall consist of not less than 22,727,147 issued and outstanding shares
of common stock, each of $20.00 par value, and 160,540 issued and
outstanding shares of preferred stock, each of $1.00 par value, and such
issued and outstanding shares shall remain issued and outstanding as shares
of FUNB, each of $20.00 par value and $1.00 par value, as applicable, and
the holders thereof shall retain their rights therein.
(G) OUTSTANDING STOCK OF THE BANK. Promptly after the Bank Merger
becomes effective, FFI shall deliver all of the issued and outstanding
shares of the capital stock of the Bank to the Continuing Bank for
cancellation.
1.03. EFFECTIVE DATE AND EFFECTIVE TIME. Subject to the conditions to the
obligations of the parties to effect the Corporate Merger as set forth in
ARTICLE VI, the parties shall cause the effective date of the Corporate Merger
(the "Effective Date") to occur on such date as the Company and First Union
mutually agree upon, or if such parties cannot agree on such date, such date
shall be the fifth business day to occur after the last of the conditions set
forth in SECTIONS 6.01, 6.02, 6.03, 6.10, 6.11 and 6.13 shall have been
satisfied or waived in accordance with the terms of this Plan (or, at the
election of First Union, on the last business day of the month in which such day
occurs); PROVIDED, HOWEVER, that such date shall be after December 31, 1997,
unless the parties mutually agree otherwise. The time on the Effective Date when
the Corporate Merger shall become effective is referred to as the "Effective
Time".
II. CONSIDERATION.
2.01. CORPORATE MERGER CONSIDERATION. Subject to the provisions of this
Plan, on the Effective Date:
(A) OUTSTANDING FIRST UNION COMMON STOCK. The shares of First Union
Common Stock (together with the rights ("First Union Rights") issued
pursuant to an Amended and Restated Shareholder Protection Rights
Agreement, dated December 18, 1990, and as amended and restated as of
October 15, 1996, attached thereto), issued and outstanding immediately
prior to the Effective Time shall, on and after the Effective Time, remain
as issued and outstanding shares of First Union Common Stock.
(B) OUTSTANDING COMPANY COMMON STOCK. Each share (excluding shares
held by the Company or any of the Company Subsidiaries (as hereinafter
defined) or by First Union or any of its subsidiaries, in each case other
than in a fiduciary capacity or as a result of debts previously contracted
("Excluded Shares")) of Company Common Stock issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Corporate
Merger, automatically and without any action on the part of the holder
thereof, become and be converted into the right to receive .3813 shares of
First Union Common Stock (the "Exchange Ratio") (together with the attached
First Union Rights), subject to possible adjustment as set forth in SECTION
2.08 (upon any such adjustment any reference in this Plan to "Exchange
Ratio" shall thereafter be deemed to refer to the Exchange Ratio as
adjusted).
(C) OUTSTANDING SERIES A PREFERRED STOCK. If, immediately prior to the
Effective Time, there shall be issued and outstanding any shares of Series
A Preferred Stock, then each such share (excluding Excluded Shares) of
Series A Preferred Stock shall become and be converted into the right to
receive the number of shares of First Union Common Stock equal to the
result of the product of the Exchange Ratio and 3.976, the conversion
number for the Series A Preferred Stock provided for in the Company's
Certificate of Incorporation, as amended (the "Company Certificate").
(D) OUTSTANDING SERIES B PREFERRED STOCK. If, immediately prior to the
Effective Time, there shall be issued and outstanding any shares of Series
B Preferred Stock, then each such share (excluding Excluded Shares) of
Series B Preferred Stock shall become and be converted into the right to
receive the number of shares of First Union Common Stock equal to the
result of the product of the Exchange Ratio and 3.147, the conversion
number for the Series B Preferred Stock provided for in the Company
Certificate.
2.02. STOCKHOLDER RIGHTS; STOCK TRANSFERS. At the Effective Time, holders
of Company Common Stock and Company Preferred Stock shall cease to be, and shall
have no rights as, stockholders of the Company, other than to receive the
consideration provided under this ARTICLE II, without interest. After the
Effective Time, there shall be no transfers on the stock transfer books of the
Company or the Continuing Corporation of the shares of Company Stock which were
issued and outstanding immediately prior to the Effective Time.
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2.03. FRACTIONAL SHARES. Notwithstanding any other provision hereof, no
fractional shares of First Union Common Stock and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in the
Corporate Merger; instead, First Union shall pay to each holder of Company Stock
who would otherwise be entitled to a fractional share an amount in cash (without
interest) determined by multiplying such fraction by the last sale price of
First Union Common Stock on the last trading day prior to the Effective Date, as
reported by the New York Stock Exchange, Inc. (the "NYSE") Composite
Transactions tape (as reported in THE WALL STREET JOURNAL).
2.04. EXCHANGE PROCEDURES. As promptly as practicable after the Effective
Date, First Union will send or cause to be sent to each former stockholder of
the Company of record immediately prior to the Effective Time, transmittal
materials for use in exchanging such stockholder's certificates for Company
Stock for the consideration set forth in this ARTICLE II. The certificates
representing the shares of First Union Common Stock into which shares of such
stockholder's Company Stock are converted on the Effective Date, any fractional
share check which such stockholder shall be entitled to receive, and any
dividends paid on such shares of First Union Common Stock for which the record
date for determination of stockholders entitled to such dividends is on or after
the Effective Date, will be delivered to such stockholder only upon delivery to
First Union National Bank (the "Exchange Agent") of the certificates
representing all of such shares of Company Stock (or indemnity satisfactory to
First Union and the Exchange Agent, in their judgment, if any of such
certificates are lost, stolen or destroyed). No interest will be paid on any
such fractional share check or dividends which the holder of such shares shall
be entitled to receive upon such delivery. Certificates surrendered for exchange
by any person constituting an Affiliate (as hereinafter defined) of the Company
shall not be exchanged for certificates representing First Union Common Stock
until First Union has received a written agreement from such person as specified
in SECTION 5.10.
2.05. EXCLUDED SHARES. Each of the Excluded Shares of Company Stock shall
be canceled and retired at the Effective Time, and no consideration shall be
issued in exchange therefor.
2.06. RESERVATION OF RIGHT TO REVISE TRANSACTION. First Union may at any
time change the method of effecting the acquisition of the Company and the Bank
(including without limitation the provisions of this ARTICLE II) if and to the
extent it deems such change to be desirable; PROVIDED, HOWEVER, that no such
change shall (A) alter or change the amount or kind of consideration to be
issued to holders of Company Stock as provided for in this Plan, (B) adversely
affect the intended tax-free treatment to the Company's stockholders as a result
of receiving such consideration, or (C) materially impede or delay receipt of
any approval referred to in SECTION 6.02 or the consummation of the transactions
contemplated by this Plan.
2.07. STOCK OPTIONS. From and after the Effective Time, all employee and
director stock options to purchase shares of Company Common Stock ("Stock
Options"), which are then outstanding and unexercised (whether vested or
unvested), shall be converted into and become options with respect to First
Union Common Stock, and First Union shall assume each such Stock Option in
accordance with the terms of the plan and agreement by which it is evidenced;
PROVIDED, HOWEVER, that from and after the Effective Time, (A) each such Stock
Option assumed by First Union may be exercised solely for shares of First Union
Common Stock, (B) the number of shares of First Union Common Stock subject to
such Stock Option shall be equal to the number of shares of Company Common Stock
subject to such Stock Option immediately prior to the Effective Time, multiplied
by the Exchange Ratio and rounded down to the nearest whole share, and (C) the
per share exercise price under each such Stock Option shall be adjusted by
dividing such price by the Exchange Ratio and rounding to the nearest cent. The
Company represents and warrants that the number of shares of Company Common
Stock which are issuable upon exercise of Stock Options as of the date hereof
are Previously Disclosed in SCHEDULE 4.01(C).
2.08. ANTI-DILUTION PROVISIONS. In the event First Union changes the number
of shares of First Union Common Stock issued and outstanding prior to the
Effective Date as a result of a stock split, stock dividend, recapitalization or
similar transaction with respect to the outstanding First Union Common Stock and
the record date therefor shall be prior to the Effective Time, the Exchange
Ratio shall be proportionately adjusted.
III. ACTIONS PENDING CONSUMMATION.
From the date hereof until the Effective Time, except as expressly
contemplated by this Plan, without the prior written consent of First Union,
each of the Company and the Bank will not, and will cause each of the Company
Subsidiaries not to, agree to:
3.01. ORDINARY COURSE. Conduct its and each of the Company Subsidiaries'
business other than in the ordinary and usual course consistent with past
practice or fail to use its best efforts to maintain and preserve intact its and
each of the Company Subsidiaries' business organization and assets and maintain
its rights, franchises and existing relations with customers, suppliers,
employees and business associates.
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3.02. CAPITAL STOCK. Except as Previously Disclosed in SCHEDULE 4.01(C),
(A) issue, sell or otherwise permit to become outstanding any additional shares
of capital stock of the Company or the Company Subsidiaries, or any Rights with
respect thereto, (B) enter into any agreement with respect to the foregoing, or
(C) permit any additional shares of Company Common Stock to become subject to
new grants of employee stock options, stock appreciation rights or similar stock
based employee compensation rights or take any action that permits the
acceleration of Stock Options.
3.03. DIVIDENDS, ETC. Make, declare, pay or set aside for payment any
dividend, cash or stock (other than dividends payable on Company Preferred Stock
at a rate not exceeding the rate provided for in the terms thereof, and
dividends from Company Subsidiaries to the Company or the Bank, as applicable),
on or in respect of or declare or make any distribution on, or directly or
indirectly combine, split, redeem, reclassify (except as Previously Disclosed in
SCHEDULE 3.03), purchase or otherwise acquire, any shares of the capital stock
of the Company or the Company Subsidiaries or, other than as permitted in or
contemplated by this Plan, authorize the creation or issuance of, or issue, any
additional shares of such capital stock or any Rights with respect thereto.
3.04. INDEBTEDNESS; LIABILITIES; ETC. Other than in the ordinary course of
business consistent with past practice, incur any indebtedness for borrowed
money or assume, guarantee, endorse or otherwise as an accommodation become
liable for the obligations of any other individual or corporation, bank,
partnership, limited liability company, joint venture, business trust,
association or other organization (each, a "Business Entity").
3.05. OPERATING PROCEDURES; CAPITAL EXPENDITURES; ETC. Except as may be
directed by applicable law or regulation, (A) change its or any of the Company
Subisidiaries' lending, investment, liability management or other material
banking or other policies in any material respect, except such changes as are in
accordance and in an effort to comply with SECTION 5.11, (B) incur or commit to
incur any capital expenditures beyond those Previously Disclosed in SCHEDULE
3.05, other than in the ordinary course of business and not exceeding the
Company's current budget for such expenditures as set forth in SCHEDULE 3.05, or
(C) implement or adopt any change in accounting principles, practices or
methods, other than as may be required by generally accepted accounting
principles.
3.06. LIENS. Impose, or permit or suffer the imposition, on any shares of
capital stock of any of the Company Subsidiaries, or on any of its or the
Company Subsidiaries' other assets, any Liens (as hereinafter defined), other
than Liens on such other assets that, individually or in the aggregate, are not
reasonably likely to have a Material Adverse Effect (as hereinafter defined) on
the Company.
3.07. COMPENSATION; EMPLOYMENT AGREEMENTS; ETC. Except as Previously
Disclosed in SCHEDULE 3.07, enter into or amend any employment, consulting,
severance or similar agreement or arrangement with any of its directors,
officers, employees or consultants, or grant any salary or wage increase, amend
the terms of any Stock Option or increase any employee benefit (including
incentive or bonus payments), except normal individual increases in regular
compensation to employees in the ordinary course of business consistent with
past practice.
3.08. BENEFIT PLANS. Except as Previously Disclosed in SCHEDULE 3.08, enter
into, establish, adopt or modify (except as may be required by applicable law)
any pension, retirement, stock option, stock purchase, savings, profit sharing,
deferred compensation, consulting, bonus, group insurance or other employee
benefit, incentive or welfare contract, plan or arrangement, or any trust
agreement related thereto, in respect of any of its directors, officers or other
employees, including without limitation taking any action that accelerates the
vesting or exercise of any benefits payable thereunder (other than any such
acceleration or vesting that results from this Plan or the transactions
contemplated herein).
3.09. ACQUISITIONS AND DISPOSITIONS. (A) sell, transfer or otherwise
dispose of any portion of its assets, deposits, business or properties, except
for any such dispositions which taken together are not material to the Company
and the Company Subsidiaries taken as a whole, or discontinue or terminate any
existing line of business, (B) merge or consolidate with, or acquire all or any
portion of the business or property of, any other entity except for any such
transaction that is in the ordinary course of business and which is not material
to the Company and the Company Subsidiaries taken as a whole (except
foreclosures or acquisitions by the Bank in a fiduciary capacity, in each case
in the ordinary course of business consistent with past practice) or (C) make
any material investment either by purchase of stock or securities, contributions
to capital, property transfers, or purchase of any property or assets of any
person or Business Entity other than from wholly-owned Company Subsidiaries and
other than the purchase or sale of loans or marketable securities in the
ordinary course of business consistent with past practices.
3.10. GOVERNING DOCUMENTS. Amend its Certificate of Incorporation, Charter
or Bylaws.
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3.11. CLAIMS. Settle any claim, action or proceeding involving liability
for any material money damages in an amount greater than $25,000 or any
restrictions upon the operations of the Company or any of the Company
Subsidiaries, or forgive or compromise any material amount of debt of any person
or Business Entity, other than from wholly-owned Company Subsidiaries.
3.12. CONTRACTS. Enter into, terminate or make any change in any material
contract, agreement or lease, except in the ordinary course of business
consistent with past practice with respect to such contracts, agreements and
leases that are terminable by it without penalty on not more than 60 days prior
written notice.
3.13. OTHER ACTIONS. Take any actions that would (A) impede or delay the
receipt of any approval referred to in SECTION 6.02 without the imposition of a
condition or restriction of the type referred to in the proviso to such Section
or (B) adversely affect the ability of any party to perform its obligations
under this Plan.
3.14. AGREEMENTS. Authorize, commit or enter into any agreement to take any
of the actions referred to in SECTIONS 3.01 through 3.13.
IV. REPRESENTATIONS AND WARRANTIES.
4.01. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE BANK. Each of
the Company and the Bank hereby represents and warrants to First Union and FUNB
as follows:
(A) RECITALS. The facts set forth in the Recitals of this Plan with respect
to it are true and correct.
(B) ORGANIZATION, STANDING AND AUTHORITY. It is duly qualified to do
business and is in good standing in the States of the United States and foreign
jurisdictions where its ownership or leasing of property or the conduct of its
business requires it to be so qualified and in which the failure to be duly
qualified, individually or in the aggregate, is reasonably likely to have a
Material Adverse Effect on the Company. Each of the Company and the Company
Subsidiaries has in effect all federal, state, local, and foreign governmental
authorizations necessary for it to own or lease its properties and assets and to
carry on its business as it is now conducted, the absence of which, individually
or in the aggregate, is reasonably likely to have a Material Adverse Effect on
the Company.
(C) SHARES. The outstanding shares of it are duly authorized, validly
issued and outstanding, fully paid and nonassessable, and are subject to no, and
have not been issued in violation of any, preemptive rights. Except as
Previously Disclosed in SCHEDULE 4.01(C), there are no shares of capital stock
or other equity securities of the Company or the Bank outstanding and no
outstanding Rights with respect thereto.
(D) COMPANY SUBSIDIARIES. The Company has Previously Disclosed in SCHEDULE
4.01(D) a list of all the Company Subsidiaries, including the state of
organization and principal business activities of each such Company Subsidiary.
Each of the Company Subsidiaries that is a bank is an "insured depository
institution" as defined in the Federal Deposit Insurance Act and applicable
regulations thereunder. No equity securities of any of the Company Subsidiaries
are or may become required to be issued (other than to the Company or a
wholly-owned Company Subsidiary) by reason of any Rights with respect thereto.
There are no contracts, commitments, understandings or arrangements by which any
of the Company Subsidiaries is or may be bound to sell or otherwise issue any
shares of its capital stock, and there are no contracts, commitments,
understandings or arrangements relating to the rights of the Company or the
Bank, as applicable, to vote or to dispose of such shares. All of the shares of
capital stock of each Company Subsidiary held by the Company or a Company
Subsidiary are fully paid and nonassessable and subject to no preemptive rights
and are owned by the Company or a Company Subsidiary free and clear of any
Liens. Each Company Subsidiary is in good standing under the laws of the
jurisdiction in which it is incorporated or organized, and is duly qualified to
do business and in good standing in each jurisdiction where its ownership or
leasing of property or the conduct of its business requires it to be so
qualified and in which the failure to be duly qualified is reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on the
Company. Except as Previously Disclosed in SCHEDULE 4.01(D), the Company does
not own beneficially, directly or indirectly, any equity securities or similar
interests of any Business Entity. The Bank is a member of the Bank Insurance
Fund (the "BIF") of the Federal Deposit Insurance Corporation (the "FDIC"). The
Bank is a member in good standing of the Federal Home Loan Bank of New York (the
"FHL Bank"). The term "Company Subsidiary" means any Business Entity (including
the Bank), five percent or more of the equity interests of which are owned
directly or indirectly by the Company.
(E) CORPORATE POWER. It and each of the Company Subsidiaries has the
corporate power and authority to carry on its business as it is now being
conducted and to own or lease all its material properties and assets and it has
the corporate power
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and authority to execute, deliver and perform its obligations under this Plan,
and to consummate the transactions contemplated hereby.
(F) CORPORATE AUTHORITY. Each of this Plan and the transactions
contemplated hereby and, subject to any necessary receipt of approval by its
stockholders referred to in SECTION 4.01(Y), consummation of the Corporate
Merger, has been authorized by all necessary corporate action of it and is a
valid and binding agreement of it enforceable against it in accordance with its
terms, subject as to enforcement to bankruptcy, insolvency and other similar
laws of general applicability relating to or affecting creditors' rights and to
general equity principles.
(G) NO DEFAULTS. Subject to the approval by its stockholders referred to in
SECTION 6.01, the required regulatory approvals referred to in SECTION 6.02, and
the required filings under federal and state securities laws, and except as
Previously Disclosed in SCHEDULE 4.01(G), the execution, delivery and
performance of this Plan and the consummation of the transactions contemplated
hereby, do not and will not (1) constitute a breach or violation of, or a
default under, or cause or allow the acceleration or creation of a Lien (with or
without the giving of notice, passage of time or both) pursuant to, any law,
rule or regulation or any judgment, decree, order, governmental or
non-governmental permit or license, or agreement, indenture or instrument of it
or of any of the Company Subsidiaries or to which it or any of the Company
Subsidiaries or its or their properties is subject or bound, which breach,
violation, default or Lien is reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on the Company, (2) constitute a
breach or violation of, or a default under, its Certificate of Incorporation,
Charter or Bylaws, or (3) require any consent or approval under any such law,
rule, regulation, judgment, decree, order, governmental or non-governmental
permit or license or the consent or approval of any other party to any such
agreement, indenture or instrument, other than any such consent or approval,
which if not obtained, would not be reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on the Company.
(H) FINANCIAL REPORTS. As to (1) the Company, its Registration Statement on
Form S-4, dated March 13, 1997, as amended, filed under the Securities Act of
1933, as amended (together with the rules and regulations thereunder, the
"Securities Act"), and all other documents filed or to be filed subsequent to
the date hereof, under Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended (together with the rules and regulations
thereunder, the "Exchange Act"), in the form filed with the Securities and
Exchange Commission (the "SEC") (in each such case, the "Company Financial
Reports"), and (2) the Bank, (i) its Call Reports for the fiscal year ended
December 31, 1996, and all other Call Reports filed or to be filed subsequent to
December 31, 1996, in the form filed with the FDIC and (ii) its Annual Report on
Form F-2 for the fiscal year ended December 31, 1996, as amended, and all other
documents filed subsequent to December 31, 1996 under Section 13, 14 or 15(d) of
the Exchange Act, in the form filed with the FDIC (in each case, the "Bank
Financial Reports" and together with the Company Financial Reports, the
"Company/Bank Financial Reports"), did not and will not as of their respective
dates contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances under which they were made, not
misleading; and each of the balance sheets in or incorporated by reference into
the Company/Bank Financial Reports (including the related notes and schedules
thereto) fairly presents and will fairly present the financial position of the
entity or entities to which it relates as of its date and each of the statements
of income and changes in stockholders' equity and cash flows or equivalent
statements in the Company/Bank Financial Reports (including any related notes
and schedules thereto) fairly presents and will fairly present the results of
operations, changes in stockholders' equity and cash flows, as the case may be,
of the entity or entities to which it relates for the periods set forth therein,
in each case in accordance with generally accepted accounting principles
consistently applied during the periods involved, except in each case as may be
noted therein, subject to normal and recurring year-end audit adjustments in the
case of unaudited statements.
(I) ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed in the
Company/Bank Financial Reports prior to the date hereof, none of the Company or
the Company Subsidiaries has any obligation or liability (contingent or
otherwise) that, individually or in the aggregate, is reasonably likely to have
a Material Adverse Effect on the Company.
(J) NO EVENTS. No events have occurred, or circumstances have arisen, since
March 31, 1997, which, individually or in the aggregate, have had or are
reasonably likely to have a Material Adverse Effect on the Company.
(K) PROPERTIES. Except as specifically reserved against or otherwise
disclosed in the Company/Bank Financial Reports (including the related notes and
schedules thereto) and except for those properties and assets that have been
sold or otherwise disposed of in the ordinary course of business, and except as
Previously Disclosed in SCHEDULE 4.01(K), the Company and the Company
Subsidiaries have good and marketable title, free and clear of all liens,
encumbrances, charges, security interests, restrictions (including restrictions
on voting rights or rights of disposition), defaults or equities of any
character or claims or third party rights of whatever nature (collectively
"Liens"), to all of the properties and assets, tangible and intangible,
reflected in the Company/Bank Financial Reports as being owned by the Company or
the Company Subsidiaries as of the
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dates thereof, other than those Liens that, individually or in the aggregate,
are not reasonably likely to have a Material Adverse Effect on the Company. All
buildings and all fixtures, equipment, and other property and assets which are
held under leases or subleases by any of the Company or the Company Subsidiaries
are held under valid leases or subleases enforceable in accordance with their
respective terms.
(L) LITIGATION; REGULATORY ACTION. Except as Previously Disclosed in
SCHEDULE 4.01(L), no litigation, proceeding or controversy before any court or
governmental agency is pending which, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect on the Company or which
alleges claims under any fair lending law or other law relating to
discrimination, including, without limitation, the Truth in Lending Act, the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Housing
Act, the Community Reinvestment Act and the Home Mortgage Disclosure Act, and,
to the best of its knowledge, no such litigation, proceeding or controversy has
been threatened; and except as Previously Disclosed in SCHEDULE 4.01(L), neither
it nor any of the Company Subsidiaries or any of its or their material
properties or their officers, directors or controlling persons is a party to or
is subject to any order, decree, agreement, memorandum of understanding or
similar arrangement with, or a commitment or supervisory letter or similar
submission to or from, any federal or state governmental agency or authority
charged with the supervision or regulation of depository institutions or engaged
in the insurance of deposits (together with any and all agencies or departments
of federal, state or local government (including, without limitation, the FHL
Bank, the Federal Reserve Board, the FDIC and any other federal or state bank,
thrift or other financial institution, insurance or securities regulatory
authorities (including the SEC, the "Regulatory Authorities")) and neither it
nor any of the Company Subsidiaries has been advised by any of the Regulatory
Authorities that any such authority is contemplating issuing or requesting (or
is considering the appropriateness of issuing or requesting) any such order,
decree, agreement, memorandum of understanding, commitment or supervisory letter
or similar submission.
(M) COMPLIANCE WITH LAWS. Except as Previously Disclosed in SCHEDULE
4.01(M), each of the Company and the Company Subsidiaries:
(1) has all permits, licenses, authorizations, orders and approvals
of, and has made all filings, applications and registrations with, all
Regulatory Authorities that are required in order to permit it to conduct
its business as presently conducted and that are material to the business
of the Company and the Company Subsidiaries taken as a whole; all such
permits, licenses, certificates of authority, orders and approvals are in
full force and effect and, to the best of its knowledge, no suspension or
cancellation of any of them is threatened; and all such filings,
applications and registrations are current;
(2) has received no notification or communication from any Regulatory
Authority or the staff thereof (a) asserting that any of the Company or the
Company Subsidiaries is not in compliance with any of the statutes,
regulations or ordinances which such Regulatory Authority enforces, which,
as a result of such noncompliance in any such instance, individually or in
the aggregate, is reasonably likely to have a Material Adverse Effect on
the Company, (b) threatening to revoke any license, franchise, permit or
governmental authorization, which revocation, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on the
Company, or (c) requiring any of the Company or the Company Subsidiaries
(or any of their officers, directors or controlling persons) to enter into
a cease and desist order, agreement or memorandum of understanding (or
requiring the board of directors thereof to adopt any material resolution
or policy);
(3) is in compliance in all material respects with all fair lending
laws or other laws relating to discrimination, including, without
limitation, the Truth in Lending Act, the Equal Credit Opportunity Act, the
Fair Credit Reporting Act, the Fair Housing Act, the Community Reinvestment
Act and the Home Mortgage Disclosure Act and similar federal and state laws
and regulations.
(N) MATERIAL CONTRACTS. Except as Previously Disclosed in SCHEDULE 4.01(N),
none of the Company or the Company Subsidiaries, nor any of its respective
assets, businesses or operations, is a party to, or is bound or affected by, or
receives benefits under, any contract or agreement or amendment thereto that in
each case (1) is required to be filed as an exhibit to an Exchange Act or
Securities Act report filed by the Company or as an exhibit to an Annual Report
on Form F-2 filed by the Bank that has not been filed as an exhibit to the
Company's Exchange Act or Securities Act reports or the Bank's Annual Report on
Form F-2 filed for the fiscal year ended December 31, 1996, or (2) which
provides for annual payments by the Company or a Company Subsidiary of $100,000
or more. True and correct copies of such contracts, and any agreements or
amendments thereto, have been supplied to First Union. Except as Previously
Disclosed in SCHEDULE 4.01(N), none of the Company or the Company Subsidiaries
is in default under any contract, agreement, commitment, arrangement, lease,
insurance policy or other instrument to which it is a party, by which its
respective assets, businesses or operations may be bound
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or affected, or under which it or any of its respective assets, business or
operations receives benefits, which default, individually or in the aggregate,
is reasonably likely to have a Material Adverse Effect on the Company, and there
has not occurred any event that, with lapse of time or giving of notice or both,
would constitute such a default. Except as Previously Disclosed in SCHEDULE
4.01(N), neither the Company nor any Company Subsidiary is subject to, or bound
by, any contract containing covenants which (i) limit the ability of the Company
or any Company Subsidiary to compete in any line of business or with any person,
or (ii) involve any restriction of geographical area in which, or method by
which, the Company or any Company Subsidiary may carry on its business (other
than as may be required by law or any applicable Regulatory Authority).
(O) REPORTS. Since January 1, 1994, each of the Company and the Company
Subsidiaries has filed all reports and statements, together with any amendments
required to be made with respect thereto, that it was required to file with (1)
the SEC, (2) the FDIC, the New Jersey Department of Banking, the FHL Bank and
(3) any other applicable Regulatory Authorities. As of their respective dates
(and without giving effect to any amendments or modifications filed after the
date of this Plan with respect to reports and documents filed before the date of
this Plan), each of such reports and documents, including the financial
statements, exhibits and schedules thereto, complied in all material respects
with all of the statutes, rules and regulations enforced or promulgated by the
Regulatory Authority with which they were filed and did not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
(P) NO BROKERS. All negotiations relative to this Plan and the transactions
contemplated hereby have been carried on by it directly with the other parties
hereto and no action has been taken by it that would give rise to any valid
claim against any party hereto for a brokerage commission, finder's fee or other
like payment, excluding a fee previously disclosed to First Union to be paid to
Berwind Financial, L.P.
(Q) EMPLOYEE BENEFIT PLANS.
(1) SCHEDULE 4.01(Q) contains a complete list of all bonus, deferred
compensation, pension, retirement, profit-sharing, thrift, savings,
employee stock ownership, stock bonus, stock purchase, restricted stock and
stock option plans, all employment or severance contracts, all medical,
dental, health and life insurance plans, all other employee benefit plans,
contracts or arrangements and any applicable "change of control" or similar
provisions in any plan, contract or arrangement maintained or contributed
to by it or any of the Company Subsidiaries for the benefit of employees,
former employees, directors, former directors or their beneficiaries (the
"Compensation and Benefit Plans"). True and complete copies of all
Compensation and Benefit Plans, including, but not limited to, any trust
instruments and/or insurance contracts, if any, forming a part thereof, and
all amendments thereto have been supplied to First Union. Neither it nor
any of the Company Subsidiaries has any commitment to create any additional
Compensation and Benefit Plan or to modify or change any existing
Compensation and Benefit Plan.
(2) All "employee benefit plans" within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
other than "multiemployer plans" within the meaning of Section 3(37) of
ERISA ("Multiemployer Plans"), covering employees or former employees of it
and the Company Subsidiaries (the "ERISA Plans"), to the extent subject to
ERISA, are in substantial compliance with ERISA. Except as Previously
Disclosed in SCHEDULE 4.01(Q) each ERISA Plan which is an "employee pension
benefit plan" within the meaning of Section 3(2) of ERISA ("Pension Plan")
and which is intended to be qualified, under Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), has received a favorable
determination letter from the Internal Revenue Service, and it is not aware
of any circumstances reasonably likely to result in the revocation or
denial of any such favorable determination letter or the inability to
receive such a favorable determination letter. There is no material pending
or, to its knowledge, threatened litigation relating to the ERISA Plans.
Neither it nor any of the Company Subsidiaries has engaged in a transaction
with respect to any ERISA Plan that would subject it or any of the Company
Subsidiaries to a tax or penalty imposed by either Section 4975 of the Code
or Section 502 (i) of ERISA in an amount which would be material.
(3) No liability under Subtitle C or D of Title IV of ERISA has been
or is expected to be incurred by it or any of the Company Subsidiaries with
respect to any ongoing, frozen or terminated "single-employer plan", within
the meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by any of them, or the single-employer plan of any entity which
is considered one employer with it under Section 4001(a)(15) of ERISA or
Section 414 of the Code (an "ERISA Affiliate"). Neither it nor any of the
Company Subsidiaries presently contributes to a Multiemployer Plan, nor
have they contributed to such a plan within the past five calendar years.
No notice of a "reportable event", within the meaning of Section 4043 of
ERISA for which the 30-day reporting requirement has not been waived, has
been required to be filed for any Pension Plan or by any ERISA Affiliate
within the past 12-month period.
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(4) All contributions required to be made under the terms of any ERISA
Plan have been timely made. Neither any Pension Plan nor any
single-employer plan of an ERISA Affiliate has an "accumulated funding
deficiency" (whether or not waived) within the meaning of Section 412 of
the Code or Section 302 of ERISA. Neither it nor any of the Company
Subsidiaries has provided, or is required to provide, security to any
Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant
to Section 401(a)(29) of the Code.
(5) Under each Pension Plan which is a single-employer plan, as of the
last day of the most recent plan year, the actuarially determined present
value of all "benefit liabilities", within the meaning of Section
4001(a)(16) of ERISA (as determined on the basis of the actuarial
assumptions contained in the plan's most recent actuarial valuation) did
not exceed the then current value of the assets of such plan, and there has
been no material change in the financial condition of such plan since the
last day of the most recent plan year.
(6) Neither it nor any of the Company Subsidiaries has any obligations
for retiree health and life benefits under any plan, except as set forth in
SCHEDULE 4.01(Q). There are no restrictions on the rights of it or any of
the Company Subsidiaries to amend or terminate any such plan without
incurring any liability thereunder.
(7) Except as Previously Disclosed in SCHEDULE 4.01(Q), neither the
execution and delivery of this Plan nor the consummation of the
transactions contemplated hereby will (a) result in any payment (including,
without limitation, severance, unemployment compensation, golden parachute
or otherwise) becoming due to any director or any employee of it or any of
the Company Subsidiaries under any Compensation and Benefit Plan or
otherwise from it or any of the Company Subsidiaries, (b) increase any
benefits otherwise payable under any Compensation and Benefit Plan, (c)
result in any acceleration of the time of payment or vesting of any such
benefit, or (d) result in the imposition to the recipient of any excise tax
pursuant to Section 4999 of the Code.
(8) Neither the Company nor any of the Company Subsidiaries maintains
any compensation plans, programs or arrangements the payments under which
would not reasonably be expected to be deductible as a result of the
limitations under Section 162(m) of the Code and the regulations issued
thereunder. Except as Previously Disclosed in SCHEDULE 4.01(Q), as a
result, directly or indirectly, of the transactions contemplated by this
Plan (including, without limitation, as a result of any termination of
employment prior to or following the Effective Time), none of First Union,
the Company or the Continuing Corporation, or any of their respective
subsidiaries will be obligated to make a payment that would be
characterized as an "excess parachute payment" to an individual who is a
"disqualified individual" (as such terms are defined in Section 280G of the
Code), without regard to whether such payment is reasonable compensation
for personal services performed or to be performed in the future.
(R) NO KNOWLEDGE. It knows of no reason why the regulatory approvals
referred to in SECTION 6.02 should not be obtained without the imposition of any
condition of the type referred to in the proviso following such SECTION 6.02.
(S) LABOR AGREEMENTS. Neither it nor any of the Company Subsidiaries is a
party to, or is bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization, nor is it
or any of the Company Subsidiaries the subject of a proceeding asserting that it
or any such Company Subsidiary has committed an unfair labor practice (within
the meaning of the National Labor Relations Act) or seeking to compel it or such
subsidiary to bargain with any labor organization as to wages and conditions of
employment, nor is there any strike or other labor dispute involving it or any
of the Company Subsidiaries, pending or, to the best of its knowledge,
threatened, nor is it aware of any activity involving its or any of the Company
Subsidiaries' employees seeking to certify a collective bargaining unit or
engaging in any other organization activity.
(T) ASSET CLASSIFICATION. It has Previously Disclosed in SCHEDULE 4.01(T) a
list, accurate and complete in all material respects, of the aggregate amounts
of loans, extensions of credit or other assets of the Company and the Company
Subsidiaries that have been classified by it as of June 30, 1997 (the "Asset
Classification"); and no amounts of loans, extensions of credit or other assets
that have been classified as of June 30, 1997 by any Regulatory Authority as
"Other Loans Specially Mentioned", "Substandard", "Doubtful", "Loss", or words
of similar import are excluded from the amounts disclosed in the Asset
Classification, other than amounts of loans, extensions of credit or other
assets that were charged off by the Company or a Company Subsidiary prior to
June 30, 1997.
(U) ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible loan
losses shown on the consolidated balance sheets of the Bank included in the
March 31, 1997 Bank Financial Reports was, and the allowance for possible loan
losses to be shown on subsequent Company/Bank Financial Reports, will be,
adequate, in the opinion of the Board of Directors and
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management of the Company, determined in accordance with generally accepted
accounting principles, to provide for possible losses, net of recoveries
relating to loans previously charged off, on loans outstanding (including
accrued interest receivable) as of the date thereof.
(V) INSURANCE. Each of Company and the Company Subsidiaries has taken all
requisite action (including without limitation the making of claims and the
giving of notices) pursuant to its directors' and officers' liability insurance
policy or policies in order to preserve all rights thereunder with respect to
all matters that are known to it, except for such matters which, individually or
in the aggregate, are not reasonably likely to have a Material Adverse Effect on
the Company. Set forth in SCHEDULE 4.01(V) is a list of all insurance policies
maintained by or for the benefit of the Company or the Company Subsidiaries or
their directors, officers, employees or agents.
(W) AFFILIATES. Except as Previously Disclosed in SCHEDULE 4.01(W), there
is no person who, as of the date of this Plan, may be deemed to be an
"affiliate" of the Company (each, an "Affiliate") as that term is used in Rule
145 under the Securities Act.
(X) STATE TAKEOVER LAWS; ARTICLES OF INCORPORATION. It has taken all
necessary action to exempt this Plan and the transactions contemplated hereby
from, and this Plan, and the transactions contemplated hereby are exempt from,
(a) any applicable state takeover laws, including, without limitation, the
provisions of Article 14A:10A of the New Jersey Business Corporation Act
("NJBCA"), (b) any applicable takeover provisions in the Company Certificate,
and (c) any takeover provisions set forth in any agreement to which the Company
is a party or may be bound and which provides for the issuance of any Rights in
connection with a takeover.
(Y) NO FURTHER ACTION. It has taken all action so that the entering into of
this Plan and the consummation of the transactions contemplated hereby
(including without limitation the Mergers) or any other action or combination of
actions, or any other transactions, contemplated hereby do not and will not (1)
require a vote of stockholders (other than the affirmative vote of the holders
of a majority of the votes cast by the holders of shares of Company Common
Stock, Series A Preferred Stock and Series B Preferred Stock, each voting as a
separate class, on this Plan, and the approval of the Company in its capacity as
sole stockholder of the Bank, which approval has been given), or (2) result in
the grant of any rights to any person under the Company Certificate, Charter or
Bylaws of the Company or any Company Subsidiary or under any agreement to which
the Company or any of the Company Subsidiaries is a party, or (3) restrict or
impair in any way the ability of First Union or FUNB to exercise the rights
granted hereunder.
(Z) ENVIRONMENTAL MATTERS.
(1) To its knowledge, it and each of the Company Subsidiaries, the
Participation Facilities and the Loan/Fiduciary Properties (each as defined
below) are, and have been, in compliance with all Environmental Laws (as
defined below), except for instances of noncompliance which are not
reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect on the Company or have been Previously Disclosed in SCHEDULE
4.01(Z).
(2) There is no proceeding pending or, to its knowledge, threatened
before any court, governmental agency or board or other forum in which it
or any of the Company Subsidiaries or any Participation Facility has been,
or with respect to threatened proceedings, reasonably would be expected to
be, named as a defendant or potentially responsible party (a) for alleged
noncompliance (including by any predecessor) with any Environmental Law, or
(b) relating to the release or threatened release into the environment of
any Hazardous Material (as defined below), whether or not occurring at or
on a site owned, leased or operated by it or any of the Company
Subsidiaries or any Participation Facility, except for such proceedings
pending or threatened that are not reasonably likely, individually or in
the aggregate, to have a Material Adverse Effect on the Company or have
been Previously Disclosed in SCHEDULE 4.01(Z).
(3) There is no proceeding pending or, to its knowledge, threatened
before any court, governmental agency or board or other forum in which any
Loan/Fiduciary Property (or it or any of the Company Subsidiaries in
respect of any Loan/Fiduciary Property) has been, or with respect to
threatened proceedings, reasonably would be expected to be, named as a
defendant or potentially responsible party (a) for alleged noncompliance
(including by any predecessor) with any Environmental Law, or (b) relating
to the release or threatened release into the environment of any Hazardous
Material, whether or not occurring at or on a Loan/Fiduciary Property,
except for such proceedings pending or threatened that are not reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect
on the Company or have been Previously Disclosed in SCHEDULE 4.01(Z).
(4) To its knowledge, there is no reasonable basis for any proceeding
of a type described in SUBSECTIONS (2) OR (3) above, except as has been
Previously Disclosed in SCHEDULE 4.01(Z).
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(5) To its knowledge, during the period of (a) its or any of the
Company Subsidiaries' ownership or operation of any of their respective
current properties, (b) its or any of the Company Subsidiaries'
participation in the management of any Participation Facility, or (c) its
or any of the Company Subsidiaries' holding of a security or other interest
in a Loan/Fiduciary Property, there have been no releases of Hazardous
Material in, on, under or affecting any such property, Participation
Facility or Loan/Fiduciary Property, except for such releases that are not
reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect on the Company or have been Previously Disclosed in SCHEDULE
4.01(Z).
(6) To its knowledge, prior to the period of (a) its or any of the
Company Subsidiaries' ownership or operation of any of their respective
current properties, (b) its or any of the Company Subsidiaries'
participation in the management of any Participation Facility, or (c) its
or any of the Company Subsidiaries' holding of a security or other interest
in a Loan/Fiduciary Property, there were no releases of Hazardous Material
in, on, under or affecting any such property, Participation Facility or
Loan/Fiduciary Property, except for such releases that are not reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect
on the Company or have been Previously Disclosed in SCHEDULE 4.01(Z).
(7) The following definitions apply for purposes of this SECTION
4.01(Z): "Loan/Fiduciary Property" means any property owned or controlled
by it or any of the Company Subsidiaries or in which it or any of the
Company Subsidiaries holds a security or other interest, and, where
required by the context, includes any such property where the Company or
any of the Company Subsidiaries constitutes the owner or operator of such
property, but only with respect to such property; "Participation Facility"
means any facility in which it or any of the Company Subsidiaries
participates in the management and, where required by the context, includes
the owner or operator of such property, but only with respect to such
property; "Environmental Law" means (a) any federal, state and local law,
statute, ordinance, rule, regulation, code, license, permit, approval,
order, judgment, decree, injunction, or agreement with any governmental
entity, relating to (i) the protection, preservation or restoration of the
environment, (including, without limitation, air, water vapor, surface
water, groundwater, drinking water supply, surface land, subsurface land,
plant and animal life or any other natural resource), or to human health or
safety, or (ii) the exposure to, or the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production,
release or disposal of Hazardous Material, in each case as amended and as
now in effect and includes, without limitation, the federal Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, the
Superfund Amendments and Reauthorization Act, the Federal Water Pollution
Control Act of 1972, the federal Clean Air Act, the federal Clean Water
Act, the federal Resource Conservation and Recovery Act of 1976 (including
the Hazardous and Solid Waste Amendments thereto), the federal Solid Waste
Disposal and the federal Toxic Substances Control Act, and the Federal
Insecticide, Fungicide and Rodenticide Act, the Federal Occupational Safety
and Health Act of 1970, each as amended and as now in effect, and (b) any
common law or equitable doctrine (including, without limitation, injunctive
relief and tort doctrines such as negligence, nuisance, trespass and strict
liability) that may impose liability or obligations for injuries or damages
due to, or threatened as a result of, the presence of or exposure to any
Hazardous Material; "Hazardous Material" means any substance presently
listed, defined, designated or classified as hazardous, toxic, radioactive
or dangerous, or otherwise regulated, under any Environmental Law, whether
by type or quantity, and includes, without limitation, any oil or other
petroleum product, toxic waste, pollutant, contaminant, hazardous
substance, toxic substance, hazardous waste, special waste or petroleum or
any derivative or by-product thereof, radon, radioactive material,
asbestos, asbestos containing material, urea formaldehyde foam insulation,
lead and polychlorinated biphenyl.
(8) For purposes of this SECTION 4.01(Z), the term "knowledge" means
the actual knowledge of the directors and officers of the Company and the
Company Subsidiaries.
(AA) TAXES. Except as Previously Disclosed in SCHEDULE 4.01(AA), (1) all
reports and returns with respect to Taxes (as defined below) and tax related
information reporting requirements that are required to be filed by or with
respect to it or the Company Subsidiaries, including without limitation
consolidated federal income tax returns of it and the Company Subsidiaries
(collectively, the "Company Tax Returns"), have been duly filed, or requests for
extensions have been timely filed and have not expired, and such Company Tax
Returns were true, complete and accurate in all material respects, (2) all taxes
(which shall mean federal, state, local or foreign income, gross receipts,
windfall profits, severance, property, production, sales, use, license, excise,
franchise, employment, premium, recording, documentary, documentary stamps, real
estate transfer, transfer, back-up withholding or similar taxes, together with
any interest, additions, or penalties with respect thereto, imposed on the
income, properties or operations of it or the Company Subsidiaries, together
with any interest in respect of such additions or penalties, collectively the
"Taxes") shown to be due on the Company Tax Returns or otherwise imposed on the
income, properties or operations of the Company or Company Subsidiaries have
been paid in full, (3) the Company Tax
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Returns have been examined by the Internal Revenue Service or the appropriate
state, local or foreign taxing authority or the period for assessment of the
Taxes in respect of which such Company Tax Returns were required to be filed has
expired, (4) all Taxes due with respect to completed and settled examinations
have been paid in full, (5) no issues have been raised by the relevant taxing
authority in connection with the examination of any of the Company Tax Returns
which are reasonably likely, individually or in the aggregate, to result in a
determination that would have a Material Adverse Effect on the Company, except
as reserved against in the Company/Bank Financial Reports filed prior to the
date of this Plan, (6) no waivers of statutes of limitations (excluding such
statutes that relate to years under examination by the Internal Revenue Service)
have been given by or requested with respect to any Taxes of it or the Company
Subsidiaries, and (7) the bank holding company formation completed on June 13,
1997 (the "Transaction") constituted a tax-free transaction under the Code;
neither the Company, the Bank, the Company's stockholders nor any other holders
of beneficial ownership interest in any party to the Transaction were required
to recognize any gain or loss for purposes of the Code by virtue of the
Transaction.
(BB) ACCURACY OF INFORMATION. The statements with respect to the Company
and the Company Subsidiaries contained in this Plan, the Schedules and any other
written documents executed and delivered by or on behalf of it pursuant to the
terms of this Plan are true and correct in all material respects, and such
statements and documents do not omit any material fact necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading.
(CC) DERIVATIVES CONTRACTS; STRUCTURED NOTES; ETC. None of the Company or
the Company Subsidiaries is a party to or has agreed to enter into an
exchange-traded or over-the-counter swap, forward, future, option, cap, floor or
collar financial contract or any other contract not included on the balance
sheet which is a derivative contract (including various combinations thereof)
(each a "Derivatives Contract") or owns securities that (1) are referred to as
"structured notes", "high risk mortgage derivatives", "capped floating rate
notes", or "capped floating rate mortgage derivatives," or (2) are likely to
have changes in value as a result of interest rate changes that significantly
exceed normal changes in value attributable to interest rate changes, except for
those Derivatives Contracts and other instruments legally purchased or entered
into in the ordinary course of business and Previously Disclosed in SCHEDULE
4.01(CC), including a list, as applicable, of any Company or Company Subsidiary
assets pledged as security for each such instrument.
(DD) ACCOUNTING CONTROLS. Each of the Company and the Company Subsidiaries
has devised and maintained systems of internal accounting controls sufficient to
provide reasonable assurances, in the judgment of the Board of Directors of the
Company, that (1) all material transactions are executed in accordance with
management's general or specific authorization; (2) all material transactions
are recorded as necessary to permit the preparation of financial statements in
conformity with generally accepted accounting principles consistently applied
with respect to banks or any other criteria applicable to such statements, (3)
access to the material property and assets of the Company and the Company
Subsidiaries is permitted only in accordance with management's general or
specific authorization; (4) the recorded accountability for items is compared
with the actual levels at reasonable intervals and appropriate action is taken
with respect to any differences; and (5) there are no violations of the Bank
Secrecy Act.
(EE) NO DISSENTERS' RIGHTS. The holders of Company Stock have no
dissenters' or appraisal rights in connection with the execution of this Plan or
the consummation of any of the transactions contemplated hereby.
4.02. FIRST UNION AND FUNB REPRESENTATIONS AND WARRANTIES. Each of First
Union and FUNB hereby represents and warrants to the Company and the Bank, as
follows:
(A) RECITALS. The facts set forth in the Recitals of this Plan with respect
to it are true and correct.
(B) CORPORATE AUTHORITY. Subject to the required regulatory approvals
referred to in SECTION 6.02, this Plan has been authorized by all necessary
corporate action of it and is a valid and binding agreement of it enforceable
against it in accordance with its terms, subject as to enforcement to
bankruptcy, insolvency and other similar laws of general applicability relating
to or affecting creditors' rights and to general equity principles.
(C) NO DEFAULTS. Subject to the required regulatory approvals referred to
in SECTION 6.02, and the required filings under federal and state securities'
laws, the execution, delivery and performance of this Plan, and the consummation
of the transactions contemplated hereby by it, does not and will not (1)
constitute a breach or violation of, or a default under, any law, rule or
regulation or any judgment, decree, order, governmental permit or license, or
agreement, indenture or instrument of it or of any of its subsidiaries or to
which it or any of its subsidiaries or properties is subject or bound, which
breach, violation or default is reasonably likely to have a Material Adverse
Effect on First Union, (2) constitute a breach or violation of, or a default
under, its Articles of Incorporation, Charter or Bylaws, or (3) require any
consent or approval under any such law, rule, regulation, judgment, decree,
order, governmental permit or license, or the consent or approval of any other
party to any
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such agreement, indenture or instrument other than such consent or approval,
which if not obtained, would not be reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect.
(D) FINANCIAL REPORTS. In the case of First Union, its Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, and all other documents
filed or to be filed subsequent to December 31, 1996 under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act, in the form filed with the SEC (in each
such case, the "First Union Financial Reports"), did not and will not as of
their respective dates contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading; and each of the balance sheets in or incorporated by
reference into the First Union Financial Reports (including the related notes
and schedules thereto) fairly presents and will fairly present the financial
position of the entity or entities to which it relates as of its date and each
of the statements of income and changes in stockholders' equity and cash flows
or equivalent statements in the First Union Financial Reports (including any
related notes and schedules thereto) fairly presents and will fairly present the
results of operations, changes in stockholders' equity and changes in cash
flows, as the case may be, of the entity or entities to which it relates for the
periods set forth therein, in each case in accordance with generally accepted
accounting principles consistently applied to banks and bank holding companies
during the periods involved, except as may be noted therein, subject to normal
and recurring year-end audit adjustments in the case of unaudited statements.
(E) NO EVENTS. No events have occurred, or circumstances have arisen, since
March 31, 1997, which, individually or in the aggregate, have had or are
reasonably likely to have a Material Adverse Effect on First Union.
(F) NO BROKERS. All negotiations relative to this Plan and the transactions
contemplated hereby have been carried on by it directly with the other parties
hereto and no action has been taken by it that would give rise to any valid
claim against any party hereto for a brokerage commission, finder's fee or other
like payment.
(G) NO KNOWLEDGE. It knows of no reason why the regulatory approvals
referred to in SECTION 6.02 should not be obtained without the imposition of any
condition of the type referred to in the proviso following such SECTION 6.02.
(H) SHARES AUTHORIZED. In the case of First Union, the shares of First
Union Common Stock to be issued (1) in exchange for shares of Company Stock upon
consummation of the Corporate Merger in accordance with ARTICLE II of this Plan,
and (2) upon exercise of outstanding Stock Options pursuant to SECTION 2.07,
have been duly authorized and, when issued in accordance with the terms of this
Plan, will be validly issued, fully paid and nonassessable and subject to no
preemptive rights.
(I) ORGANIZATION, STANDING AND AUTHORITY. It is duly qualified to do
business and is in good standing in the States of the United States and foreign
jurisdictions where the failure to be duly qualified, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on First
Union. Each of First Union and its subsidiaries has in effect all federal,
state, local and foreign governmental authorizations necessary for it to own or
lease its properties and assets and to carry on its business as it is now
conducted, the absence of which, individually or in the aggregate, is reasonably
likely to have a Material Adverse Effect on First Union.
(J) CORPORATE POWER. First Union and FUNB each has the corporate power and
authority to carry on its business as it is now being conducted and to own or
lease all its material properties and assets.
(K) ACCURACY OF INFORMATION. The statements with respect to First Union and
FUNB contained in this Plan, the Schedules and any other written documents
executed and delivered by or on behalf of First Union or FUNB pursuant to the
terms of this Plan, are true and correct in all material respects, and such
statements and documents do not omit any material fact necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading.
(L) LITIGATION; REGULATORY ACTION. Neither First Union nor any of its
subsidiaries is a party to any litigation, proceeding or controversy before any
court or governmental agency which, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect on First Union and, to the
best of its knowledge, no such litigation, proceeding or controversy has been
threatened; and neither it nor any of its subsidiaries or any of its or their
material properties or their officers, directors or controlling persons is a
party to or is the subject of any order, decree, agreement, memorandum of
understanding or similar arrangement with, or a commitment letter or similar
submission to, any Regulatory Authorities, which is reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on First
Union and neither it nor any of its subsidiaries has been advised by any
Regulatory Authorities that any such authority is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such order, decree, agreement, memorandum or understanding, commitment letter or
similar submission.
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(M) ABSENCE OF UNDISCLOSED LIABILITIES. None of First Union or its
subsidiaries has any obligation or liability (contingent or otherwise) that,
individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect on it, except as reflected in the First Union Financial Reports
prior to the date of this Plan.
V. COVENANTS.
Each of the Company and the Bank hereby covenants to First Union and FUNB,
and each of First Union and FUNB hereby covenants to the Company and the Bank,
that:
5.01. EFFORTS. Subject to the terms and conditions of this Plan, it shall
use its reasonable best efforts in good faith to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper or
desirable, or advisable under applicable laws, so as to permit consummation of
the Corporate Merger on the Effective Date and to otherwise enable consummation
of the transactions contemplated hereby and shall cooperate fully with the other
parties hereto to that end (it being understood that any amendments to the
Registration Statement (as hereinafter defined) or a resolicitation of proxies
as a consequence of an acquisition agreement by First Union or any of its
subsidiaries shall not violate this covenant), including, without limitation,
cooperating in developing and implementing a plan relating to data processing
and any other systems conversions, and the sending of notices and other
communications to employees, customers or others.
5.02. COMPANY PROXY/REGISTRATION STATEMENT. The Company and First Union
shall prepare a proxy statement/prospectus (the "Proxy Statement") to be mailed
to the holders of Company Stock in connection with the transactions contemplated
hereby and to be filed by First Union (after providing drafts in advance to the
Company and its counsel for review and comment) in a registration statement (the
"Registration Statement") with the SEC as provided in SECTION 5.08, which shall
conform to all applicable legal requirements. The Company shall call a special
meeting (the "Meeting") of the holders of Company Stock to be held as soon as
practicable for purposes of voting upon the approval of this Plan and the
Company shall use its best efforts to solicit and obtain votes of the holders of
Company Stock in favor of the approval of this Plan, and, subject to the
exercise of its fiduciary duties under applicable law (based upon the advice of
outside counsel), the Board of Directors of the Company shall recommend approval
of this Plan by such holders.
5.03. REGISTRATION STATEMENT COMPLIANCE WITH SECURITIES LAWS. When the
Registration Statement or any post-effective amendment or supplement thereto
shall become effective, and at all times subsequent to such effectiveness, up to
and including the date of the Meeting, such Registration Statement and all
amendments or supplements thereto, with respect to all information set forth
therein furnished or to be furnished by or on behalf of the Company relating to
the Company or the Company Subsidiaries and by or on behalf of First Union
relating to First Union or its subsidiaries, (A) will comply in all material
respects with the provisions of the Securities Act and the Exchange Act and any
other applicable statutory or regulatory requirements, and (B) will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements contained
therein not misleading; PROVIDED, HOWEVER, in no event shall any party hereto be
liable for any untrue statement of a material fact or omission to state a
material fact in the Registration Statement made in reliance upon, and in
conformity with, written information concerning another party furnished by or on
behalf of such other party specifically for use in the Registration Statement.
5.04. REGISTRATION STATEMENT EFFECTIVENESS. First Union will advise the
Company, promptly after First Union receives notice thereof, of the time when
the Registration Statement has become effective or any supplement or amendment
has been filed (after providing drafts in advance to the Company and its counsel
for review and comment), of the issuance of any stop order or the suspension of
the qualification of the First Union Common Stock for offering or sale in any
jurisdiction, of the initiation or threat of any proceeding for any such
purpose, or of any request by the SEC for the amendment or supplement of the
Registration Statement or for additional information.
5.05. PRESS RELEASES. Neither the Company nor the Bank will, without the
prior approval of First Union (which approval shall not be unreasonably withheld
or delayed), and neither First Union nor FUNB will, without the prior approval
of the Company (which approval shall not be unreasonably withheld or delayed),
issue any press release or written statement for general circulation relating to
the transactions contemplated hereby, except as otherwise required by law.
5.06. ACCESS; INFORMATION. (A) Upon reasonable notice, the Company and the
Bank shall afford First Union and its officers, employees, counsel, accountants
and other authorized representatives, access, during normal business hours
throughout the period prior to the Effective Date, to all of its and the Company
Subsidiaries' properties, books, contracts, data processing system files,
commitments and records and, during such period, the Company and the Bank shall
furnish promptly to First Union (1) a copy of each material report, schedule and
other document filed by the Company and the Company Subsidiaries with any
Regulatory Authority, and (2) all other information concerning the business,
properties and personnel
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of the Company and the Company Subsidiaries as First Union may reasonably
request, PROVIDED that no investigation pursuant to this SECTION 5.06 shall
affect or be deemed to modify or waive any representation or warranty made by
the Company or the Bank or the conditions to the obligations of the Company and
the Bank to consummate the transactions contemplated by this Plan; and (B) First
Union will not use any information obtained pursuant to this SECTION 5.06 for
any purpose unrelated to the consummation of the transactions contemplated by
this Plan and, if this Plan is terminated, will hold all information and
documents obtained pursuant to this paragraph in confidence (as provided in
SECTION 8.06) unless and until such time as such information or documents become
publicly available other than by reason of any action or failure to act by First
Union or as it is advised by counsel in writing that any such information or
document is required by law or applicable published stock exchange rule to be
disclosed, and in the event of the termination of this Plan, First Union will,
upon request by the Company, deliver to the Company all documents so obtained by
First Union or destroy such documents and, in the case of destruction, will
certify such fact to the Company.
5.07. ACQUISITION PROPOSALS. In the case of the Company, without the prior
written consent of First Union, it shall not, and it shall cause the Company
Subsidiaries not to, initiate, solicit or encourage inquiries or proposals with
respect to, or, except as required by the fiduciary duties of the Board of
Directors of the Company under applicable law (as advised by its outside
counsel), furnish any nonpublic information relating to or participate in any
negotiations or discussions concerning, any acquisition or purchase of all or a
substantial portion of the assets or deposits of, or a substantial equity
interest in, the Company or any of the Company Subsidiaries or any merger or
other business combination with the Company or any of the Company Subsidiaries
other than as contemplated by this Plan; it shall instruct its and the Company
Subsidiaries' officers, directors, agents, advisors and affiliates to refrain
from taking any action that would violate or conflict with any of the foregoing;
and it shall notify First Union immediately if any such inquiries or proposals
are received by, or any such negotiations or discussions are sought to be
initiated with, the Company or any of the Company Subsidiaries.
5.08. REGISTRATION STATEMENT PREPARATION. In the case of First Union, it
shall, as promptly as practicable following the date of this Plan, and subject
to the cooperation of the Company, prepare and file the Registration Statement
with the SEC, and shall use its best efforts to cause the Registration Statement
to be declared effective as soon as practicable after the filing thereof.
5.09. BLUE-SKY FILINGS. In the case of First Union, it shall use its
reasonable best efforts to obtain all necessary state securities laws or "blue
sky" permits and approvals, PROVIDED that First Union shall not be required by
virtue thereof to submit to general jurisdiction in any state.
5.10. AFFILIATE AGREEMENTS. In the case of the Company, it will cause each
person who may be deemed to be an Affiliate of the Company to execute and
deliver to First Union on or before the mailing of the Proxy Statement for the
Meeting an agreement in the form attached hereto as EXHIBIT A restricting the
disposition of the shares of First Union Common Stock to be received by such
Affiliate in exchange for such Affiliate's shares of Company Stock.
5.11. CERTAIN MODIFICATIONS. The Company and First Union shall consult with
respect to their accounting, loan, litigation and real estate valuation policies
and practices (including loan classifications and levels of reserves) and the
Company shall make such modifications or changes to its policies and practices,
if any, and at such date prior to the Effective Time, as may be mutually agreed
upon. No party's representations, warranties and covenants contained in this
Plan shall be deemed to be untrue or breached in any respect for any purpose as
a consequence of any modifications or changes to such policies and practices
which may be undertaken on account of this SECTION 5.11.
5.12. STATE TAKEOVER LAWS; CERTIFICATE OF INCORPORATION. In the case of the
Company, it shall not take any action that would cause the transactions
contemplated by this Plan to be subject to any applicable state takeover statute
and the Company shall take all necessary steps to exempt (or ensure the
continued exemption of) the transactions contemplated by this Plan from (A) any
applicable state takeover law, as now or hereafter in effect, including, without
limitation, Article 14A:10A of the NJBCA, (B) any applicable takeover provisions
in the Company Certificate, and (C) any takeover provisions set forth in any
agreement to which the Company is a party or may be bound and which provides for
the issuance of any Rights in connection with a takeover.
5.13. NO RIGHTS TRIGGERED. In the case of the Company, it shall take all
necessary steps to ensure that the entering into of this Plan and the
consummation of the transactions contemplated hereby (including without
limitation the Mergers) and any other action or combination of actions, or any
other transactions contemplated hereby or thereby do not and will not, (A)
result in the grant of any Rights to any person (including directors, officers
and employees of the Company or any Company Subsidiary) (1) under the Company
Certificate or Bylaws of the Company or (2) under any agreement to which the
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Company or any of the Company Subsidiaries is a party or (B) restrict or impair
in any way the ability of First Union or FUNB to exercise the rights granted
hereunder.
5.14. SHARES LISTED. In the case of First Union, it shall use its
reasonable best efforts to list, prior to the Effective Date, on the NYSE, upon
official notice of issuance, the shares of First Union Common Stock to be issued
to the holders of Company Stock and the outstanding Stock Options referred to in
SECTION 2.07, pursuant to this Plan.
5.15. REGULATORY APPLICATIONS. In the case of First Union and FUNB, subject
to the cooperation of the Company and the Bank, (A) it shall promptly prepare
and submit applications to the appropriate Regulatory Authorities for approval
of the Mergers, and (B) promptly make all other appropriate filings to secure
all other approvals, consents and rulings which are necessary for the
consummation of the Mergers by First Union and FUNB. First Union will provide
copies of such applications and responses to the Company and its counsel prior
to submitting such applications and responses to the applicable Regulatory
Authorities. In the case of the Company, it agrees, upon request, to furnish
First Union with information concerning itself, the Company Subsidiaries, its
and their directors, officers and stockholders and such other matters as may be
necessary or advisable in connection with any filing, notice or application made
by or on behalf of First Union or any of its subsidiaries in connection with the
Mergers and the other transactions contemplated in this Plan.
5.16. REGULATORY DIVESTITURES. In the case of the Company, effective on or
before the Effective Date (to the extent required by any Regulatory Authority),
the Company and the Company Subsidiaries shall cease engaging in such activities
as First Union shall advise the Company in writing are not permitted to be
engaged in by First Union under applicable law following the Effective Date, and
to the extent required by any Regulatory Authority as a conditional approval of
the transactions contemplated by this Plan, the Company shall divest any Company
Subsidiary engaged in activities or holding assets that are impermissible for a
bank holding company, on terms and conditions agreed to by First Union.
5.17. INDEMNIFICATION/LIABILITY COVERAGE.
(A) For six years after the Effective Date, First Union shall, and shall
cause the Continuing Corporation to, indemnify, defend and hold harmless the
present and former directors, officers and employees of the Company and the
Company Subsidiaries (each, an "Indemnified Party") against all liabilities
arising out of actions or omissions occurring at or prior to the Effective Date
(including, without limitation, the transactions contemplated by this Plan) to
the extent such persons are indemnified under the NJBCA and the Company
Certificate and Bylaws of the Company as in effect on the date hereof, including
provisions relating to advances of expenses incurred in the defense of any
litigation.
(B) First Union shall use its reasonable best efforts to maintain the
Company's existing directors' and officers' liability insurance policy (or a
policy, including First Union's existing policy, providing comparable coverage
amount on terms no less favorable) covering persons who are currently covered by
such insurance for a period of three years after the Effective Date; PROVIDED,
that First Union shall not be obligated to make an annual premium payment in
respect of such policy (or replacement policy) which exceeds, for the portion
related to the Company's directors and officers, 150% of the annual premium
payment on the Company's current policy in effect as of the date of this Plan;
PROVIDED, FURTHER, that if such coverage can only be obtained upon the payment
of an annual premium in excess of 150% of the annual premium payment of the
Company's current policy, First Union shall obtain such coverage as can
reasonably be obtained by paying a premium of 150% of the annual premium payment
of the Company's current policy in effect as of the date of this Plan.
(C) Any Indemnified Party wishing to claim indemnification under SECTION
5.17(A), upon learning of such claim, action, suit, proceeding or investigation,
shall promptly notify First Union thereof; PROVIDED, that the failure so to
notify shall not affect the obligations of First Union and the Continuing
Corporation under SECTION 5.17(A) (unless such failure materially increases
First Union's liability under such Section). In the event of any such claim,
action, suit, proceeding or investigation (whether arising before or after the
Effective Date), (1) First Union or the Continuing Corporation shall have the
right to assume the defense thereof, if it so elects, and First Union or the
Continuing Corporation shall pay all reasonable fees and expenses of counsel for
the Indemnified Parties promptly as statements therefor are received; PROVIDED,
HOWEVER, that First Union shall be obligated pursuant to this subsection (C) to
pay for only one firm of counsel for all Indemnified Parties in any jurisdiction
for any single action, suit or proceeding or any group of actions, suits or
proceedings arising out of or related to a common body of facts, (2) the
Indemnified Parties will cooperate in the defense of any such matter, and (3)
First Union shall not be liable for any settlement effected without its prior
written consent.
(D) If First Union or the Continuing Corporation or any of its successors
or assigns shall consolidate with or merge into any other entity and shall not
be the continuing or surviving entity of such consolidation or merger or shall
transfer all or substantially all of its assets to any entity, then and in each
case, proper provision shall be made so that the successors and assigns of First
Union or the Continuing Corporation shall assume the obligations set forth in
this SECTION 5.17.
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(E) First Union shall pay, or cause the Continuing Corporation to pay, all
reasonable expenses, including attorneys' fees, promptly as statements therefor
are received, that may be incurred by any Indemnified Party in enforcing the
indemnity and other obligations provided for in this SECTION 5.17. The rights of
each Indemnified Party hereunder shall be in addition to any other rights such
Indemnified Party may have under the Company Certificate or Bylaws of the
Company, under the NJBCA or otherwise.
5.18. CURRENT INFORMATION.
(A) During the period from the date of this Plan to the Effective Date,
each of the Company and First Union shall, and shall cause its representatives
to, confer on a regular and frequent basis with representatives of the other.
(B) The Company and the Bank shall promptly notify First Union of (1) any
material change in the business or operations of the Company or any Company
Subsidiary, (2) any material complaints, investigations or hearings (or
communications indicating that the same may be contemplated) of any Regulatory
Authority relating to the Company or any Company Subsidiary, (3) the institution
or the threat of material litigation involving or relating to the Company or any
Company Subsidiary, or (4) any event or condition that might be reasonably
expected to cause any of the Company's and the Bank's representations or
warranties set forth herein not to be true and correct as of the Effective Time
(except to the extent contemplated by SECTION 6.09) or prevent the Company or
the Bank from fulfilling its or their obligations hereunder; and in each case
shall keep First Union informed with respect thereto.
(C) First Union shall (1) promptly notify the Company of any event or
condition that might reasonably be expected to cause any of First Union's and
FUNB's representations or warranties set forth herein not to be true and correct
as of the Effective Date (except to the extent contemplated by SECTION 6.08),
and (2) notify the Company immediately of any denial of any application filed by
First Union or FUNB with any Regulatory Authority with respect to this Plan, and
in each case shall keep the Company and the Bank informed with respect thereto.
5.19. COORDINATION OF DIVIDENDS. Until the Effective Time, the Company and
First Union shall coordinate with the other the declaration of any dividends or
other distributions with respect to the Company Preferred Stock and First Union
Common Stock and the record dates and payment dates relating thereto, it being
the intention of the parties that holders of shares of Company Preferred Stock
or First Union Common Stock shall not receive more than one dividend, or fail to
receive one dividend, for any single calendar quarter on their shares of Company
Preferred Stock (including any shares of First Union Common Stock received in
exchange therefor in the Corporate Merger) or First Union Common Stock, as the
case may be.
VI. CONDITIONS TO CONSUMMATION OF THE MERGERS.
Consummation of the Mergers is conditioned upon:
6.01. SHAREHOLDER VOTE. Approval of this Plan by the requisite vote of the
stockholders of the Company.
6.02. REGULATORY APPROVALS. Procurement by First Union and FUNB, as
applicable, of all required regulatory consents and approvals by the appropriate
Regulatory Authorities and the expiration of the statutory waiting period
relating thereto; PROVIDED, HOWEVER, that no such approval or consent shall have
imposed any condition or requirement which, in the reasonable opinion of First
Union, would so materially and adversely impact the economic or business
benefits to First Union of the transactions contemplated by this Plan so as to
render inadvisable the consummation of the Mergers.
6.03. THIRD PARTY CONSENTS. All consents or approvals of all persons (other
than Regulatory Authorities) required for the consummation of the Mergers shall
have been obtained and shall be in full force and effect, unless the failure to
obtain any such consent or approval is not reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on the Company or
First Union.
6.04. NO INJUNCTION. There shall not be in effect any order, decree or
injunction of any court or agency of competent jurisdiction that enjoins or
prohibits consummation of any of the transactions contemplated hereby.
6.05. ACCOUNTANTS' LETTERS. The Company shall cause KPMG Peat Marwick LLP
to deliver to First Union letters, dated the date of or shortly prior to (A) the
mailing of the Proxy Statement, and (B) the Effective Date, in form and
substance reasonably satisfactory to First Union, with respect to the Company's
consolidated financial position and results of operations, which letters shall
be based upon "agreed upon procedures" undertaken by such firm in accordance
with the Statement on Auditing Standards No. 72.
6.06. LEGAL OPINION. The Company and the Bank shall have received an
opinion, dated the Effective Date, of Marion A. Cowell, Jr., counsel for First
Union and FUNB in form reasonably satisfactory to the Company and the Bank,
which shall
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cover the matters contained in the first sentence in RECITAL (C), the first
sentence in RECITAL (D), SECTION 4.02(B), (C), (H) and (I), the first clause of
the first sentence in SECTION 4.02(L), and SECTION 5.03.
6.07. LEGAL OPINION. First Union and FUNB shall have received an opinion,
dated the Effective Date, of Pepper, Hamilton & Scheetz LLP, counsel for the
Company and the Bank, in form reasonably satisfactory to First Union and FUNB
which together shall cover the matters contained in the first sentence in
RECITAL (A), the first sentence in RECITAL (B), SECTION 4.01 (B) and (C), the
fifth and sixth sentences in SECTION 4.01(D), SECTION 4.01(F) and (G), the first
clause of the first sentence in SECTION 4.01(L), SECTION 4.01(X), (Y) and (EE)
and SECTION 5.03.
6.08. OFFICERS' CERTIFICATE. (A) Each of the representations and warranties
contained herein of First Union and FUNB shall be true and correct (in the case
of each representation and warranty that contains a materiality qualification)
or true and correct in all material respects (in the case of each representation
and warranty that contains no materiality qualification) as of the date of this
Plan and upon the Effective Date with the same effect as though all such
representations and warranties had been made on the Effective Date, except for
any such representations and warranties made as of a specified date, which shall
be true and correct as of such date, and (B) each and all of the agreements and
covenants of First Union and FUNB to be performed and complied with pursuant to
this Plan on or prior to the Effective Date shall have been duly performed and
complied with in all material respects, and the Company and the Bank shall have
received a certificate signed by an executive officer of each of First Union and
FUNB, dated the Effective Date, to such effect.
6.09. OFFICERS' CERTIFICATE. (A) Each of the representations and warranties
contained herein of the Company and the Bank shall be true and correct (in the
case of each representation and warranty that contains a materiality
qualification) or true and correct in all material respects (in the case of each
representation and warranty that contains no materiality qualification) as of
the date of this Plan and upon the Effective Date with the same effect as though
all such representations and warranties had been made on the Effective Date,
except for any such representations and warranties made as of a specified date,
which shall be true and correct as of such date, and (B) each and all of the
agreements and covenants of the Company and the Bank to be performed and
complied with pursuant to this Plan on or prior to the Effective Date shall have
been duly performed and complied with in all material respects, and First Union
and FUNB shall have received a certificate signed by the Chief Executive
Officers and the Chief Financial Officers of the Company and the Bank, dated the
Effective Date, to such effect.
6.10. EFFECTIVE REGISTRATION STATEMENT. The Registration Statement shall
have become effective and no stop or other order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC or any other
Regulatory Authority.
6.11. BLUE-SKY PERMITS. First Union shall have received all state
securities laws and "blue sky" permits necessary to consummate the Corporate
Merger.
6.12. TAX OPINION. First Union and the Company shall have received an
opinion from Sullivan & Cromwell to the effect that (A) the Corporate Merger
constitutes a reorganization under Section 368 of the Code, and (B) no gain or
loss will be recognized by stockholders of the Company who receive shares of
First Union Common Stock solely in exchange for their shares of Company Stock,
except that gain or loss may be recognized as to cash received in lieu of
fractional share interests. In rendering its opinion, Sullivan & Cromwell may
require and rely upon representations and agreements contained in documents
executed by officers of First Union, the Company and others.
6.13. NYSE LISTING. The shares of First Union Common Stock issuable
pursuant to this Plan shall have been approved for listing on the NYSE, subject
to official notice of issuance.
6.14. RECEIPT OF AFFILIATE AGREEMENTS. First Union shall have received from
each Affiliate of the Company the agreement referred to in SECTION 5.10.
PROVIDED, HOWEVER, that a failure to satisfy any of the conditions set forth in
the proviso following SECTION 6.02 or in SECTIONS 6.05, 6.07, 6.09, or 6.14
shall only constitute conditions if asserted by First Union, and a failure to
satisfy any of the conditions set forth in SECTION 6.06 or 6.08 shall only
constitute conditions if asserted by the Company.
VII. TERMINATION.
This Plan may be terminated prior to the Effective Date, either before or
after receipt of required stockholder approvals:
7.01. MUTUAL CONSENT. By the mutual consent of First Union and the Company.
B-19
<PAGE>
7.02. BREACH. By First Union or the Company, if its Board of Directors so
determines by vote of a majority of the members of its entire Board, in the
event of (A) a breach by the other party of any representation or warranty
contained herein, which breach cannot be or has not been cured within thirty
(30) days after the giving of written notice to the breaching party of such
breach, or (B) a breach by the other party of any of the covenants or agreements
contained herein, which breach cannot be or has not been cured within thirty
(30) days after the giving of written notice to the breaching party of such
breach.
7.03. DELAY. By First Union or the Company, if its Board of Directors so
determines by vote of a majority of the members of its entire Board, in the
event that the Corporate Merger is not consummated by June 30, 1998.
7.04. NO STOCKHOLDER OR REGULATORY APPROVAL. By the Company or First Union,
if its Board of Directors so determines by a vote of a majority of the members
of its entire Board, in the event that any stockholder approval contemplated by
SECTION 6.01 is not obtained at the Meeting, including any adjournment or
adjournments thereof, or in the event that written notice is received which
states that any required regulatory approval contemplated by SECTION 6.02 will
not be approved or has been denied.
7.05. VOTING AGREEMENT. By First Union, if a Voting Agreement between First
Union and certain of the stockholders of the Company, holding an aggregate
beneficial ownership interest of not less than 30% and 12% of the outstanding
shares of Series B Preferred Stock and Series A Preferred Stock, respectively,
in substantially the form of EXHIBIT B hereto, shall not have been executed and
delivered by such stockholders by the close of business on the day following the
date of execution of this Plan.
7.06. FAILURE TO RECOMMEND, ETC. At any time prior to the Meeting, by First
Union if the Board of Directors of the Company shall have failed to make its
recommendation referred to in SECTION 5.02, withdrawn such recommendation or
modified or changed such recommendation in a manner adverse to the interests of
First Union.
7.07. TERMINATION FEE. (A) The Company hereby agrees to pay First Union and
First Union shall be entitled to payment of, a nonperformance fee (the
"Termination Fee") of $3.5 million following the occurrence of a Payment Event
(as defined below, PROVIDED that First Union shall have sent written notice of
such entitlement within 90 days after First Union actually becomes aware of such
occurrence. Such payment shall be made in immediately available funds within
five business days after delivery of a notice from First Union requesting such
payment. The right to receive the Termination Fee shall terminate if any of the
following (a "Fee Termination Event") occurs prior to a Payment Event: (i) the
Effective Date, (ii) termination of this Plan in accordance with the provisions
hereof if such termination occurs prior to the occurrence of a Preliminary
Payment Event (as defined below), except a termination by First Union pursuant
to SECTION 7.02, (iii) termination of this Plan following the occurrence of a
Preliminary Payment Event and the passage of eighteen (18) months after such
termination, or (iv) termination of this Plan by First Union pursuant to SECTION
7.02, and the passage of eighteen (18) months after such termination.
(B) The term "Preliminary Payment Event" shall mean any of the following
events or transactions occurring after the date hereof:
(1) The Company or the Bank without having received First Union's prior
written consent, shall have entered into an agreement to engage in any
Acquisition Transaction (as defined below) with any person (the term "person"
for purposes of this SECTION 7.07 having the meaning assigned thereto in Section
3(a)(9) and 13(d)(3) of the Exchange Act) other than First Union or any of its
subsidiaries or affiliates, or the Board of Directors of the Company shall have
recommended that the stockholders of the Company approve or accept any
Acquisition Transaction with any person other than First Union or any of its
subsidiaries or affiliates. For purposes of this Plan, "Acquisition Transaction"
shall mean (a) a merger or consolidation, or any similar transaction, involving
the Company or the Bank, (b) a purchase, lease or other acquisition of all or
substantially all of the assets or deposits of the Company or the Bank, (c) a
purchase or other acquisition (including by way of merger, consolidation, share
exchange or otherwise) of securities representing 20% or more of the voting
power of the Company or of the Bank; PROVIDED that the term "Acquisition
Transaction" does not include any internal merger or consolidation involving
only the Company and/or any of the Company Subsidiaries;
(2) (a) any person other than First Union or any of its subsidiaries or
affiliates shall have acquired beneficial ownership or the right to acquire
beneficial ownership of 20% or more of the outstanding shares of Company Common
Stock (the term "beneficial ownership" for purposes of this SECTION 7.07 having
the meaning assigned thereto in Section 13(d) of the Exchange Act, or (b) any
group (as such term is defined in Section 13(d)(3) of the Exchange Act), other
than a group of which any of First Union or any of its subsidiaries or
affiliates is a member, shall have been formed that beneficially owns 20% or
more of the Company Common Stock then outstanding;
B-20
<PAGE>
(3) any person other than First Union or any of its subsidiaries or
affiliates shall have made a proposal to the Company or its stockholders, by
public announcement or written communication that is or becomes the subject of
public disclosure, to engage in an Acquisition Transaction (including, without
limitation, any situation in which any person other than First Union or any of
its subsidiaries or affiliates shall have commenced (as such term is defined in
Rule 14d-2 under the Exchange Act) or shall have filed a registration statement
under the Securities Act, with respect to, a tender offer or exchange offer to
purchase any shares of Company Common Stock such that, upon consummation of such
offer, such person would own or control 20% or more of the then outstanding
shares of Company Common Stock (such offering referred to herein as a "Tender
Offer" or an "Exchange Offer", respectively));
(4) after a proposal is made by a third party to the Company or its
stockholders to engage in an Acquisition Transaction, or such third party states
its intention to the Company to make such a proposal, the Company shall have
breached any representation, covenant or obligation contained in this Plan and
such breach would entitle First Union to terminate this Plan under SECTION 7.02
(without regard to the cure period provided for therein unless such cure is
promptly effected without jeopardizing consummation of the Corporate Merger); or
(5) the holders of shares of Company Stock shall not have approved this
Plan at the Meeting or the Meeting shall not have been held or shall have been
canceled prior to termination of this Plan, in each case after any person other
than First Union or any of its subsidiaries or affiliates shall have (a) made,
or disclosed an intention to make, a proposal to engage in an Acquisition
Transaction or (b) commenced a Tender Offer or filed a registration statement
under the Securities Act, with respect to an Exchange Offer.
(C) The term "Payment Event" shall mean either of the following events or
transactions occurring after the date hereof:
(1) the acquisition by any person other than First Union or any of its
subsidiaries or affiliates, alone or together with such person's affiliates and
associates, or any group (as defined in Section 13(d)(3) of the Exchange Act),
of beneficial ownership of 25% or more of the outstanding shares of Company
Common Stock; or
(2) the occurrence of a Preliminary Payment Event described in (x) clause
(B)(1) above, except that the percentage referred to in clause (c) thereof shall
be 25%, or (y) clause (B)(5) above.
(D) The Company shall notify First Union promptly in writing of its
knowledge of the occurrence of any Preliminary Payment Event or Payment Event;
PROVIDED, HOWEVER, that the giving of such notice by the Company shall not be a
condition to the right of First Union to the Termination Fee.
VIII. OTHER MATTERS.
8.01. SURVIVAL. If the Effective Date occurs, all representations,
warranties, agreements and covenants contained in this Plan, except for SECTIONS
5.17, 8.04 and 8.09, shall not survive the Effective Date. If this Plan is
terminated prior to the Effective Date, the agreements and representations of
the parties in SECTIONS 4.01(P) and 4.02(F), SECTIONS 5.03, 5.06(B), 5.12 and
5.13, and SECTIONS 8.01, 8.03, 8.04, 8.05, 8.06, 8.07, 8.09 and 8.11 shall
survive such termination.
8.02. WAIVER; AMENDMENT. Prior to the Effective Date, any provision of this
Plan may be (A) waived in writing by the party benefitting by the provision, or
(B) amended or modified at any time (including the structure of the transactions
contemplated hereby) by an agreement in writing among the parties hereto
approved by their respective Boards of Directors and executed in the same manner
as this Plan, except that, after the vote by the stockholders of the Company,
the consideration to be received by the stockholders of the Company for each
share of Company Stock shall not thereby be decreased.
8.03. COUNTERPARTS. This Plan may be executed in one or more counterparts,
each of which shall be deemed to constitute an original. This Plan shall become
effective when one counterpart has been signed by each party hereto.
8.04. GOVERNING LAW. This Plan shall be governed by, and interpreted in
accordance with, the laws of the State of North Carolina.
8.05. EXPENSES. Each party hereto will bear all expenses incurred by it in
connection with this Plan and the transactions contemplated hereby, except
printing expenses which shall be shared equally between the Company and First
Union.
8.06. CONFIDENTIALITY. Except as otherwise provided in SECTION 5.06(B),
each of the parties hereto and their respective agents, attorneys and
accountants will maintain the confidentiality of all information provided in
connection herewith which has not been publicly disclosed.
B-21
<PAGE>
8.07. NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
If to First Union
or FUNB, to: First Union Corporation
One First Union Center
Charlotte, North Carolina 28288-0013
Telecopy Number: (704) 374-3425
Attention: Marion A. Cowell, Jr.
General Counsel
If to the Company
or the Bank, to: Covenant Bancorp, Inc.
18 Kings Highway West
Haddonfield, New Jersey 08033
Telecopy Number: (609) 428-8820
Attention: Charles E. Sessa, Jr.
President
Copy to: Pepper, Hamilton & Scheetz, LLP
3000 Two Logan Square
Eighteenth and Arch Streets
Philadelphia, PA 19103
Telecopy Number: (215) 981-4750
Attention: L. Garrett Dutton, Jr.
8.08. DEFINITIONS. Any term defined anywhere in this Plan shall have the
meaning ascribed to it for all purposes of this Plan (unless expressly noted to
the contrary). In addition:
(A) the term "Material Adverse Effect", when applied to a party, shall
mean an event, occurrence or circumstance (including without limitation,
any breach of a representation or warranty contained herein by such party)
which (1) has a material adverse effect on the financial condition, results
of operations, business or prospects of such party and its subsidiaries,
taken as a whole, or (2) would materially impair such party's, or any
affiliated party's (which includes, as to the Company, the Bank and as to
First Union, FUNB), ability to timely perform its obligations under this
Plan or the consummation of any of the transactions contemplated hereby;
PROVIDED, that a Material Adverse Effect with respect to a party shall not
include effects resulting from general economic conditions (including
changes in interest rates), changes in accounting practices or changes to
statutes, regulations or regulatory policies, that do not have a materially
more adverse effect on such party than that experienced by similarly
situated financial institutions;
(B) the term "individually or in the aggregate" as used in ARTICLE IV
of this Plan includes all events, occurrences and circumstances described
in any paragraph of ARTICLE IV, and is not linked to, or limited by, any
specific paragraph; and
(C) the term "Previously Disclosed" by a party shall mean information
set forth in a Schedule that is delivered by such party to the other party
contemporaneously with the execution of this Plan and specifically
designated as information "Previously Disclosed" pursuant to this Plan.
8.09. ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES. This Plan and all
schedules hereto represent the entire understanding of the parties hereto with
reference to the transactions contemplated hereby and supersede any and all
other oral or written agreements heretofore made. Except for SECTION 5.17,
nothing in this Plan, expressed or implied, is intended to confer upon any
person, other than the parties hereto or their respective successors, any
rights, remedies, obligations or liabilities under or by reason of this Plan.
8.10. BENEFIT PLANS. As soon as administratively practicable after the
Effective Time, employees of the Company and the Company Subsidiaries shall be
generally entitled to participate in the pension, benefit, severance and similar
plans of First Union on substantially the same terms and conditions as employees
of First Union and its subsidiaries; without duplication with respect to
pension, benefit, severance and similar plans provided by the Company that
survive the Effective Time. For the purpose of determining eligibility to
participate in such plans and the vesting of benefits under such plans (but not
for the accrual of benefits under such plans), First Union shall give effect to
years of service with the Company or the Company
B-22
<PAGE>
Subsidiaries, as the case may be, as if such service had been with First Union
or its subsidiaries. Following the Effective Time, First Union shall assume and
honor in accordance with their terms the change of control agreements between
the Company and any director, officer or employee that are set forth in SCHEDULE
8.10.
8.11. HEADINGS. The headings contained in this Plan are for reference
purposes only and are not part of this Plan.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
FIRST UNION CORPORATION
By: /s/ KENNETH R. STANCLIFF
-----------------------
Name: Kenneth R. Stancliff
Title: Senior Vice President
FIRST UNION NATIONAL BANK
By: /s/ KENNETH R. STANCLIFF
----------------------------
Name: Kenneth R. Stancliff
Title: Senior Vice President
COVENANT BANCORP, INC.
By: /s/ CHARLES E. SESSA, JR.
-------------------------
Name: Charles E. Sessa, Jr.
Title: President
COVENANT BANK
By: /s/ CHARLES E. SESSA, JR.
--------------------------
Name: Charles E. Sessa, Jr.
Title: President
B-23
<PAGE>
EXHIBIT B
FORM OF VOTING AGREEMENT
AGREEMENT, dated as of August 4, 1997, by and between the individual
stockholder of Covenant Bancorp, Inc. (the "Stockholder") and First Union
Corporation ("First Union").
WHEREAS, the Stockholder is the beneficial owner of and has the right to
vote shares of Common Stock,
shares of Series A Preferred Stock and/or shares of Series B Preferred
Stock of Covenant Bancorp, Inc. ("Covenant") (collectively, the "Shares");
WHEREAS, First Union and Covenant have entered into an Agreement and Plan
of Mergers (the "Plan"), pursuant to which First Union will acquire Covenant,
subject to the terms and conditions of the Plan;
WHEREAS, as a condition and inducement to First Union's willingness to
enter into the Plan, the Stockholder has agreed to enter into this Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the parties hereto agree as follows:
1. The Stockholder shall vote all the Shares, and any other shares of stock
of Covenant owned or controlled by him or her entitled to be voted, in favor of
the Plan and the transactions contemplated thereby at the meeting of
stockholders of Covenant called for that purpose.
2. The Stockholder agrees that he/she will not sell or transfer any Shares
to any other party unless such party enters into an agreement, satisfactory to
First Union, to abide by all the terms of this Agreement.
3. The parties hereto agree that this Agreement shall terminate and be of
no further force and effect if the Plan is terminated in accordance with its
terms or if the Board of Directors of Covenant withdraws its recommendation of
the transactions contemplated by the Plan.
4. The Stockholder represents and warrants to First Union as follows:
(i) the Stockholder has good title to the Shares and owns the Shares free
and clear of any rights, claims, encumbrances, liens, interests or restrictions
of any nature whatsoever, including, without limitation, any restrictions on the
voting of the Shares or any rights of others to vote, or to participate
(including by consultation) in the voting of, the Shares;
(ii) this Agreement is a valid and legally binding agreement enforceable
against the Stockholder in accordance with its terms, subject to bankruptcy,
insolvency and other laws of general applicability relating to or affecting
creditors' rights and to general equity principles; and
(iii) the execution, delivery and performance of this Agreement, and the
consummation of the transactions contemplated hereby by the Stockholder, do not
and will not constitute a breach or violation of, or a default under, any law,
rule or regulation or any judgment, decree, order, governmental permit or
license, or agreement, indenture or instrument of the Stockholder or to which
the Stockholder is subject or bound, or require any consent or approval under
such law, rule, regulation, judgment, decree, order, governmental permit or
license or the consent or approval of any other party to any such agreement,
indenture or instrument.
5. The Stockholder hereby agrees that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed by the
Stockholder in accordance with its specific terms or were otherwise breached.
Accordingly, the Stockholder agrees that First Union shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement by the
Stockholder and to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which First Union may be entitled at law or in
equity.
6. This Agreement shall be governed and construed in accordance with the
laws of the State of North Carolina without regard to any applicable conflicts
of law rules.
7. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to constitute an original. This Agreement shall become
effective when one counterpart has been signed by each party hereto.
B-24
<PAGE>
IN WITNESS WHEREOF, the parties have caused this instrument to be executed
as of the day and year first above written.
FIRST UNION CORPORATION
By:
Name:
Title:
(the Stockholder)
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<PAGE>
ANNEX C
BERWIND FINANCIAL, L.P.
August 4, 1997
BOARD OF DIRECTORS
COVENANT BANCORP, INC.
18 Kings Highway West
Haddonfield, New Jersey 08033
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the shareholders of Covenant Bancorp, Inc. ("Covenant") of the
financial terms of the proposed merger by and between Covenant and First Union
Corporation ("First Union"). The terms of the proposed merger (the "Proposed
Merger") by and between Covenant and First Union are set forth in the Agreement
and Plan of Mergers dated August 4, 1997 (the "Merger Agreement") and provide
that each outstanding share of Covenant common stock (including the common stock
into which the preferred stock of Covenant is convertible) will be converted
into the right to receive .3813 shares of First Union Common Stock as defined in
the Merger Agreement.
Berwind Financial, L.P., as part of its investment banking business,
regularly is engaged in the valuation of assets, securities and companies in
connection with various types of asset and security transactions, including
mergers, acquisitions, private placements and valuations for various other
purposes, and in the determination of adequate consideration in such
transactions.
In arriving at our opinion, we have, among other things: (i) reviewed the
historical financial performances, current financial positions and general
prospects of Covenant and First Union, (ii) reviewed the Merger Agreement, (iii)
reviewed and analyzed the stock market performance of Covenant and First Union,
(iv) studied and analyzed the consolidated financial and operating data of
Covenant and First Union, (v) considered the terms and conditions of the
Proposed Merger between Covenant and First Union as compared with the terms and
conditions of comparable bank and bank holding company mergers and acquisitions,
(vi) met and/or communicated with certain members of Covenant's and First
Union's senior management to discuss their respective operations, historical
financial statements and future prospects, and (vii) conducted such other
financial analyses, studies and investigations as we deemed appropriate.
Our opinion is given in reliance on information and representations made or
given by Covenant and First Union, and their respective officers, directors,
auditors, counsel and other agents, and on filings, releases and other
information issued by Covenant and First Union including financial statements,
financial projections, and stock price data as well as certain information from
recognized independent sources. We have not independently verified the
information concerning Covenant and First Union nor other data which we have
considered in our review and, for purposes of the opinion set forth below, we
have assumed and relied upon the accuracy and completeness of all such
information and data. Additionally, we assume that the Proposed Merger is, in
all respects, lawful under applicable law.
With regard to financial and other information relating to the general
prospects of Covenant, we have assumed that such information has been reasonably
prepared and reflects the best currently available estimates and judgment of the
management of Covenant as to its most likely future performance. In rendering
our opinion, we have assumed that in the course of obtaining the necessary
regulatory approvals for the Proposed Merger no conditions will be imposed that
will have a material adverse effect on the contemplated benefits of the Proposed
Merger to Covenant.
Our opinion is based upon information provided to us by the management of
Covenant, as well as market, economic, financial and other conditions as they
exist and can be evaluated only as of the date hereof and speaks to no other
period. Our opinion pertains only to the financial consideration of the Proposed
Merger and does not constitute a recommendation to the Board of Covenant and
does not constitute a recommendation to Covenant shareholders as to how such
shareholders should vote on the Proposed Merger.
Based on the foregoing, it is our opinion that, as of the date hereof, the
financial terms of the Proposed Merger by and between Covenant and First Union
are fair, from a financial point of view, to the shareholders of Covenant.
Sincerely,
/s/ BERWIND FINANCIAL
---------------------
BERWIND FINANCIAL, L.P.
3000 CENTRE SQUARE WEST, 1500 MARKET STREET, PHILADELPHIA, PENNSYLVANIA 19102,
PHONE (215) 575-2400, FAX: (215) 564-5402
MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS
C-1
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 55-8-50 through 55-8-58 of the NCBCA contain specific provisions
relating to indemnification of directors and officers of North Carolina
corporations. In general, the statute provides that (i) a corporation must
indemnify a director or officer who is wholly successful in his defense of a
proceeding to which he is a party because of his status as such, unless limited
by the articles of incorporation, and (ii) a corporation may indemnify a
director or officer if he is not wholly successful in such defense, if it is
determined as provided in the statute that the director or officer meets a
certain standard of conduct, provided when a director or officer is liable to
the corporation, the corporation may not indemnify him. The statute also permits
a director or officer of a corporation who is a party to a proceeding to apply
to the courts for indemnification, unless the articles of incorporation provide
otherwise, and the court may order indemnification under certain circumstances
set forth in the statute. The statute further provides that a corporation may in
its articles of incorporation or bylaws or by contract or resolution provide
indemnification in addition to that provided by the statute, subject to certain
conditions set forth in the statute.
FUNC's bylaws provide for the indemnification of FUNC's directors and
executive officers by FUNC against liabilities arising out of his status as
such, excluding any liability relating to activities which were at the time
taken known or believed by such person to be clearly in conflict with the best
interests of FUNC.
The FUNC Articles provide for the elimination of the personal liability of
each director of FUNC to the fullest extent permitted by the provisions of the
NCBCA, as the same may from time to time be in effect.
FUNC maintains directors and officers liability insurance, which provides
coverage of up to $80,000,000, subject to certain deductible amounts. In
general, the policy insures (i) FUNC's directors and officers against loss by
reason of any of their wrongful acts, and/or (ii) FUNC against loss arising from
claims against the directors and officers by reason of their wrongful acts, all
subject to the terms and conditions contained in the policy.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ----------------------------------------------------------------------------------------------------------------
<S> <C>
(2)(a) The Merger Agreement, including the form of Voting Agreement as Exhibit B thereto. (Incorporated by reference to
ANNEX B to the Prospectus/Proxy Statement included in this Registration Statement.)*
(2)(b) The CoreStates acquisition agreement. (Incorporated by reference to Exhibit (2) to FUNC's Current Report on Form
8-K dated November 28, 1997.)*
(3)(a) Articles of Incorporation of FUNC, as amended. (Incorporated by reference to Exhibit (4) to FUNC's 1990 First
Quarter Report on Form 10-Q, to Exhibit (99)(a) to FUNC's 1993 First Quarter Report on Form 10-Q and to Exhibit
(4)(a) to FUNC's Current Report on Form 8-K dated January 10, 1996.)
(3)(b) Bylaws of FUNC, as amended. (Incorporated by reference to Exhibit (3)(b) to FUNC's 1995 Annual Report on Form
10-K.)
(4)(a) Shareholder Protection Rights Agreement, as amended. (Incorporated by reference to Exhibits (4)(b) to FUNC's
Forms 8-K dated December 18, 1990 and October 20, 1992, and to Exhibit (99) to FUNC's Current Reports on Form
8-K dated June 20, 1995 and June 21, 1995 and to Exhibit (4) to FUNC's Current Report on Form 8-K dated October
16, 1996.)
(4)(b) All instruments defining the rights of holders of long-term debt of FUNC and its subsidiaries. (Not filed
pursuant to (4)(iii) of Item 601(b) of Regulation S-K; to be furnished upon request of the Commission.)
(5) Opinion of Marion A. Cowell, Jr., Esq.**
(8) Tax opinion of Sullivan & Cromwell.**
(12) Computations of Consolidated Ratios of Earnings to Fixed Charges. (Incorporated by reference to Exhibit (12) to
FUNC's 1997 Third Quarter Report on Form 10-Q.)
(23)(a) Consent of KPMG Peat Marwick LLP.
(23)(b) Consent of Coopers & Lybrand L.L.P.
(23)(c) Consent of Moore & Costello LLC.
(23)(d) Consent of KPMG Peat Marwick LLP.
(23)(e) Consent of Ernst & Young LLP.
(23)(f) Consent of KPMG Peat Marwick LLP.
(23)(g) Consent of KPMG Peat Marwick LLP.
(23)(h) Consent of Marion A. Cowell, Jr., Esq. (Included in Exhibit (5).)
(23)(i) Consent of Sullivan & Cromwell. (Included in Exhibit (8).)
(23)(j) Consent of Berwind Financial, L.P.
(24) Power of Attorney.**
(27) FUNC's Financial Data Schedule. (Incorporated by reference to Exhibit (27) to FUNC's 1997 Third Quarter Report
on Form 10-Q.)
(99) Form of proxies for the Special Meeting of Stockholders of Covenant.**
</TABLE>
- ---------------
* Omitted exhibits to be furnished upon request of the Commission.
** Previously filed.
II-1
<PAGE>
ITEM 22. UNDERTAKINGS.
(a)(1) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933 (as amended and the
rules and regulations thereunder, the "Securities Act"), each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (as amended and the rules and regulations
thereunder, the "Exchange Act") (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the registration statement 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.
(2) 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)
promulgated pursuant to the Securities Act, the issuer undertakes that such
reoffering prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items of
the applicable form.
(3) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (2) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415 promulgated
pursuant to the Securities Act, will be filed as a 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,
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.
(4) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions of this Item 22, or otherwise
(other than insurance), the registrant 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 registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant 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 registrant 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
Items 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 a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) 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;
(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. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective 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.
(2) That, for the purpose of determining any liability under the
Securities Act, 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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Post-Effective Amendment No. 1 to Registration
Statement No. 333-37709 on Form S-4 to be signed on its behalf by the
undersigned, thereunto, duly authorized, in the City of Charlotte, State of
North Carolina, on December 15, 1997.
FIRST UNION CORPORATION
By: /s/ MARION A. COWELL, JR.
-------------------------
MARION A. COWELL, JR.
EXECUTIVE VICE PRESIDENT,
SECRETARY AND GENERAL COUNSEL
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 1 to Registration Statement No. 333-37709 on
Form S-4 has been signed by the following persons in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- ------------------------------------------------------ ------------------------------------------------------------------
<S> <C>
*EDWARD E. CRUTCHFIELD Chairman and Chief Executive Officer and Director
- ------------------------------------------------------
EDWARD E. CRUTCHFIELD
*ROBERT T. ATWOOD Executive Vice President and Chief Financial Officer
- ------------------------------------------------------
ROBERT T. ATWOOD
*JAMES H. HATCH Senior Vice President and Corporate Controller (Principal
- ------------------------------------------------------ Accounting Officer)
JAMES H. HATCH
*EDWARD E. BARR Director
- ------------------------------------------------------
EDWARD E. BARR
*G. ALEX BERNHARDT Director
- ------------------------------------------------------
G. ALEX BERNHARDT
*W. WALDO BRADLEY Director
- ------------------------------------------------------
W. WALDO BRADLEY
*ROBERT J. BROWN Director
- ------------------------------------------------------
ROBERT J. BROWN
*A. DANO DAVIS Director
- ------------------------------------------------------
A. DANO DAVIS
*R. STUART DICKSON Director
- ------------------------------------------------------
R. STUART DICKSON
*B.F. DOLAN Director
- ------------------------------------------------------
B.F. DOLAN
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- ------------------------------------------------------ ------------------------------------------------------------------
<S> <C>
*RODDEY DOWD, SR. Director
- ------------------------------------------------------
RODDEY DOWD, SR.
*JOHN R. GEORGIUS Director
- ------------------------------------------------------
JOHN R. GEORGIUS
Director
- ------------------------------------------------------
ARTHUR M. GOLDBERG
*WILLIAM N. GOODWIN, JR. Director
- ------------------------------------------------------
WILLIAM N. GOODWIN, JR.
*HOWARD H. HAWORTH Director
- ------------------------------------------------------
HOWARD H. HAWORTH
*FRANK M. HENRY Director
- ------------------------------------------------------
FRANK M. HENRY
*LEONARD G. HERRING Director
- ------------------------------------------------------
LEONARD G. HERRING
Director
- ------------------------------------------------------
JACK A. LAUGHERY
*MAX LENNON Director
- ------------------------------------------------------
MAX LENNON
*RADFORD D. LOVETT Director
- ------------------------------------------------------
RADFORD D. LOVETT
*MACKEY J. MCDONALD Director
- ------------------------------------------------------
MACKEY J. MCDONALD
*JOSEPH NEUBAUER Director
- ------------------------------------------------------
JOSEPH NEUBAUER
*RANDOLPH N. REYNOLDS Director
- ------------------------------------------------------
RANDOLPH N. REYNOLDS
*RUTH G. SHAW Director
- ------------------------------------------------------
RUTH G. SHAW
*CHARLES M. SHELTON, SR. Director
- ------------------------------------------------------
CHARLES M. SHELTON, SR.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- ------------------------------------------------------ ------------------------------------------------------------------
<S> <C>
*LANTY L. SMITH Director
- ------------------------------------------------------
LANTY L. SMITH
*ANTHONY P. TERRACCIANO Director
- ------------------------------------------------------
ANTHONY P. TERRACCIANO
*DEWEY L. TROGDON Director
- ------------------------------------------------------
DEWEY L. TROGDON
Director
- ------------------------------------------------------
JOHN D. UIBLE
*B. J. WALKER Director
- ------------------------------------------------------
B. J. WALKER
*By Marion A. Cowell, Jr., Attorney-in-Fact
MARION A. COWELL, JR.
- ------------------------------------------------------
MARION A. COWELL, JR.
</TABLE>
Date: December 15, 1997
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ------------------------------------------------------ ------------------------------------------------------
<S> <C> <C>
(2)(a) The Merger Agreement, including the form of Voting Incorporated by reference to ANNEX B to the
Agreement as Exhibit B thereto. Prospectus/Proxy Statement included in this
Registration Statement.*
(2)(b) The CoreStates acquisition agreement. Incorporated by reference to Exhibit (2) to FUNC's
Current Report on Form 8-K dated November 28, 1997.*
(3)(a) Articles of Incorporation of FUNC, as amended. Incorporated by reference to Exhibit (4) to FUNC's
1990 First Quarter Report on Form 10-Q, to Exhibit
(99)(a) to FUNC's 1993 First Quarter Report on Form
10-Q and to Exhibit (4)(a) to FUNC's Current Report on
Form 8-K dated January 10, 1996.
(3)(b) Bylaws of FUNC, as amended. Incorporated by reference to Exhibit (3)(b) to FUNC's
1995 Annual Report on Form 10-K.
(4)(a) Shareholder Protection Rights Agreement, as amended. Incorporated by reference to Exhibits (4)(b) to FUNC's
Forms 8-K dated December 18, 1990 and October 20,
1992, and to Exhibit (99) to FUNC's Current Reports on
Form 8-K dated June 20, 1995 and June 21, 1995 and to
Exhibit (4) to FUNC's Current Report on Form 8-K dated
October 16, 1996.
(4)(b) All instruments defining the rights of holders of Not filed pursuant to (4)(iii) of Item 601(b) of
long-term debt of FUNC and its subsidiaries. Regulation S-K; to be furnished upon request of the
Commission.
(5) Opinion of Marion A. Cowell, Jr., Esq. **
(8) Tax opinion of Sullivan & Cromwell. **
(12) Computations of Consolidated Ratios of Earnings to Incorporated by reference to Exhibit (12) to FUNC's
Fixed Charges. 1997 Third Quarter on Form 10-Q.
(23)(a) Consent of KPMG Peat Marwick LLP. Filed herewith.
(23)(b) Consent of Coopers & Lybrand L.L.P. Filed herewith.
(23)(c) Consent of Moore & Costello LLC. Filed herewith.
(23)(d) Consent of KPMG Peat Marwick LLP. Filed herewith.
(23)(e) Consent of Ernst & Young LLP. Filed herewith.
(23)(f) Consent of KPMG Peat Marwick LLP. Filed herewith.
(23)(g) Consent of KPMG Peat Marwick LLP. Filed herewith.
(23)(h) Consent of Marion A. Cowell, Jr., Esq. Included in Exhibit (5).
(23)(i) Consent of Sullivan & Cromwell. Included in Exhibit (8).
(23)(j) Consent of Berwind Financial, L.P. Filed herewith.
(24) Power of Attorney. **
(27) FUNC's Financial Data Schedule. Incorporated by reference to Exhibit (27) to FUNC's
1997 Third Quarter Report on
Form 10-Q.
(99) Form of proxies for the Special Meeting of **
Stockholders of Covenant.
</TABLE>
- ---------------
* Omitted exhibits to be furnished upon request of the Commission.
** Previously filed.
<PAGE>
EXHIBIT (23)(A)
CONSENT OF KPMG PEAT MARWICK LLP
BOARD OF DIRECTORS
COVENANT BANK
We consent to the incorporation by reference in this Post-Effective
Amendment No. 1 to the Registration Statement on Form S-4 of First Union
Corporation of our report dated January 27, 1997, relating to (i) the 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, (ii) the statement of financial condition of Covenant bank
as of December 31, 1995, and the related statements of operations, changes in
stockholder's equity, and cash flows for the year then ended, prior to their
restatement for the 1966 pooling-of-interests transaction with 1st Southern
State Bank and (iii) the combination of the 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. We also
consent to the reference to our firm under the caption "Experts."
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
December 12, 1997
<PAGE>
EXHIBIT (23)(B)
CONSENT OF COOPERS & LYBRAND L.L.P.
We consent to the incorporation by reference in this Post-Effective
Amendment No. 1 to the Registration Statement on Form S-4 of First Union
Corporation of our report dated January 19, 1995, on our audit of the 1994
statement of operations, and changes in stockholders' equity and cash flows of
Covenant Bank as included in ANNEX A of the Registration Statement. We also
consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
December 10, 1997
<PAGE>
EXHIBIT (23)(C)
CONSENT OF MOORE & COSTELLO LLC
We consent to the incorporation by reference in this Post-Effective
Amendment No. 1 to the Registration Statement on Form S-4 of First Union
Corporation of our report dated January 16, 1996, relating to the statements of
financial condition of 1st Southern State Bank as of December 31, 1995 and 1994,
and the related statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1995,
which report appears in ANNEX A of the Registration Statement.
MOORE & COSTELLO LLC
(formerly Moore & Fitzpatrick LLC)
Marmora, New Jersey
December 12, 1997
<PAGE>
<PAGE>
EXHIBIT (23)(D)
CONSENT OF KPMG PEAT MARWICK LLP
BOARD OF DIRECTORS
FIRST UNION CORPORATION
We consent to the incorporation by reference in this Post-Effective
Amendment No. 1 to the Registration Statement on Form S-4 of First Union
Corporation of our report dated January 16, 1997, relating to the consolidated
balance sheets of First Union Corporation and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996, which report appears in the 1996 Annual Report
to Stockholders which is incorporated by reference in the 1996 Form 10-K of
First Union Corporation. We also consent to the reference to our firm under the
caption "Experts."
KPMG PEAT MARWICK LLP
Charlotte, North Carolina
December 12, 1997
<PAGE>
<PAGE>
EXHIBIT (23)(E)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 22, 1997, with respect to the consolidated
financial statements of CoreStates Financial Corp included in the
Prospectus/Proxy Statement of Covenant Bancorp, Inc. that is made a part of the
Post-Effective Amendment No. 1 to the Registration Statement (Form S-4 No.
333-37709) and related prospectus of First Union Corporation for the
registration of 1,825,000 shares of its common stock.
/S/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
December 12, 1997
<PAGE>
<PAGE>
EXHIBIT (23)(F)
CONSENT OF KPMG PEAT MARWICK LLP
BOARD OF DIRECTORS
CORESTATES FINANCIAL CORP
We consent to the incorporation by reference in this Post-Effective
Amendment No. 1 to the Registration Statement on Form S-4 (333-37709) of First
Union Corporation of our report dated January 17, 1996, except as to Note 2,
which is as of February 23, 1996, relating to the consolidated balance sheet of
Meridian Bancorp, Inc. and subsidiaries as of December 31, 1995, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the years in the two-year period ended December 31,
1995, which report appears on page C-1 of Exhibit C herein. The report includes
an explanatory paragraph indicating that Meridian Bancorp, Inc. adopted the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities, and No. 112, Employers' Accounting for Postemployment
Benefits, in 1994. We also consent to the reference to our firm under the
caption "Experts."
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
December 12, 1997
<PAGE>
<PAGE>
EXHIBIT (23)(G)
CONSENT OF KPMG PEAT MARWICK LLP
BOARD OF DIRECTORS
CORESTATES FINANCIAL CORP
We consent to the incorporation by reference in this Post-Effective
Amendment No. 1 to the Registration Statement on Form S-4 (333-37709) of First
Union Corporation of our report dated January 16, 1996, except as to Note 20,
which is as of February 23, 1996, relating to the consolidated balance sheet of
United Counties Bancorporation and subsidiaries as of December 31, 1995, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the two-year period ended December 31, 1995,
which report on page C-2 of Exhibit C herein. The report includes an explanatory
paragraph indicating that United Counties Bancorporation adopted the provisions
of the Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, in 1994. We also consent to the reference to our firm under the
caption "Experts."
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
December 12, 1997
<PAGE>
<PAGE>
EXHIBIT (23)(J)
CONSENT OF BERWIND FINANCIAL, L.P.
We hereby consent to (i) the use of our opinion letter dated August 4, 1997
to the Board of Directors of Covenant Bancorp, Inc. (the "Company") included as
Annex C to the Prospectus/Proxy Statement which forms a part of the Registration
Statement on Form S-4, as amended by Post-Effective Amendment No. 1, relating to
the proposed merger of the Company and First Union Corporation, and (ii) the
references to such opinion in such Prospectus/Proxy Statement. In giving such
consent, we do not admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder, nor do we hereby admit that we are experts with respect to any part
of such Registration Statement within the meaning of the term "experts" as used
in the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
BERWIND FINANCIAL, L.P.
December 12, 1997
<PAGE>
