<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 13, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
U.S.B. HOLDING CO., INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6712 36-3197969
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Code No.) Identification No.)
</TABLE>
--------------------------
100 DUTCH HILL ROAD
ORANGEBURG, NEW YORK 10962
(914) 365-4600
(Address, including zip code and telephone number, including area code,
of Registrant's principal executive offices)
THOMAS E. HALES
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
100 DUTCH HILL ROAD
ORANGEBURG, NEW YORK 10962
(914) 365-4600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
WITH A COPY TO:
<TABLE>
<S> <C> <C>
Daniel P. Weitzel, Esq. Stephen C. Byelick Omer S. J. Williams, Esq.
Fiorello J. Vicencio, Jr., Esq. President and Chief Executive Robert C. Azarow, Esq.
Elias, Matz, Tiernan & Herrick Officer Thacher Proffitt & Wood
L.L.P. Tappan Zee Financial, Inc. Two World Trade Center
734 15th Street, N.W. 75 North Broadway 38th Floor
Washington, D.C. 20005 Tarrytown, New York 10591 New York, New York 10048
(202) 347-0300 (914) 631-0344 (212) 912-7400
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / _________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _________
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER UNIT(2) OFFERING PRICE(2) FEE(2)(3)
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per share........... 1,832,797 $19.938 36,542,306 $10,800
</TABLE>
(1) This Registration Statement covers the maximum number of common stock of the
Registrant issuable upon consummation of the acquisition of Tappan Zee
Financial, Inc. by the Registrant.
(2) Estimated solely for the purpose of calculation of the registration fee.
Pursuant to Rules 457(f)(1) and 457(c) under the Securities Act of 1933, the
registration fee is based on the average of the high and low prices of
U.S.B. Holding Co., Inc. common stock as reported on the American Stock
Exchange on July 6, 1998.
(3) A registration fee of $5,950.00 was previously paid with the preliminary
proxy statement filed by Tappan Zee Financial, Inc. on June 16, 1998.
Pursuant to Rule 0-11 under the Securities Exchange Act of 1934, the fee
paid under Section 6(b) of the Securities Act of 1933 has been reduced by
such previously paid fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TAPPAN ZEE FINANCIAL, INC.
75 NORTH BROADWAY
TARRYTOWN, NEW YORK 10591
(914) 631-0344
July 15, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of Tappan Zee Financial, Inc. ("Tappan Zee"), the holding
company for Tarrytowns Bank, FSB, Tarrytown, New York, which will be held on
August 19, 1998 at 5:00 p.m., Eastern Time, at the office of Tarrytowns Bank,
FSB, 75 North Broadway, Tarrytown, New York 10591.
At the Special Meeting, you will be asked to consider and vote upon an
Agreement and Plan of Merger, dated as of March 6, 1998 (the "Merger
Agreement"), whereby Tappan Zee will be merged with and into U.S.B. Holding Co.,
Inc. ("USB"), with USB as the surviving corporation operating under the name
"U.S.B. Holding Co., Inc" (the "Merger"). Upon consummation of the Merger, each
share of Tappan Zee common stock, par value $0.01 per share ("Tappan Zee Common
Stock"), outstanding immediately prior to consummation of the Merger shall be
converted into and represent the right to receive a number of shares of USB
common stock, par value $0.01 per share ("USB Common Stock"), based upon an
exchange ratio, and subject to the terms, conditions, limitations and
procedures, set forth in the Merger Agreement. The minimum exchange ratio will
be 0.88 shares of USB Common Stock for each share of Tappan Zee Common Stock if
the USB Common Stock has an average closing price (as defined in the Merger
Agreement) of greater than $25.00 per share, and subject to certain provisions
of the Merger Agreement, the maximum exchange ratio will be 1.24 shares of USB
Common Stock for each share of Tappan Zee Common Stock if the USB Common Stock
has an average closing price of less than $17.75 per share. If the USB Common
Stock has an average closing price greater than or equal to $17.75 and less than
or equal to $25.00 per share, the exchange ratio will be established to provide
a value to Tappan Zee's shareholders of $22.00 per share.
As a result of the Merger, the separate corporate existence of Tappan Zee
will cease and its wholly-owned financial institution subsidiary, Tarrytowns
Bank, FSB, will become a wholly-owned subsidiary of USB. Approval by Tappan
Zee's shareholders of the Merger Agreement is a condition to consummation of the
Merger. Consummation of the Merger also is subject to certain other conditions,
including the approval of the Merger Agreement by various regulatory agencies.
The terms of the proposed Merger are explained in detail in the accompanying
Notice of Special Meeting of Shareholders and Proxy Statement/ Prospectus, which
we urge you to read carefully.
THE MERGER AGREEMENT HAS BEEN UNANIMOUSLY APPROVED BY THE BOARD OF DIRECTORS
OF TAPPAN ZEE. YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS IN THE
BEST INTERESTS OF TAPPAN ZEE AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
The affirmative vote of a majority of the issued and outstanding shares of
Tappan Zee common stock is required for approval of the Merger Agreement.
Accordingly, a failure to return a properly executed proxy card or to vote in
person will have the same effect as a vote against the Merger Agreement. Your
vote is important, regardless of the number of shares you own. Please complete,
sign and date the enclosed proxy card and return it as soon as possible in the
envelope provided. If you decide to attend the Special Meeting, you may vote
your shares in person whether or not you have previously submitted a proxy. On
behalf of the Board, I thank you for your support and urge you to vote FOR
approval and adoption of the Merger Agreement.
Very truly yours,
Stephen C. Byelick
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
TAPPAN ZEE FINANCIAL, INC.
75 NORTH BROADWAY
TARRYTOWN, NEW YORK 10591
(914) 631-0344
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 19, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "Special
Meeting") of Tappan Zee Financial, Inc. ("Tappan Zee") will be held at the
office of Tarrytowns Bank, FSB, located at 75 North Broadway, Tarrytown, New
York 10591, on August 19, 1998 at 5:00 p.m., Eastern Time, to consider and vote
upon:
1. The approval and adoption of the Agreement and Plan of Merger between U.S.B.
Holding Co., Inc. ("USB") and Tappan Zee, dated as of March 6, 1998 (the
"Merger Agreement") which provides, among other things, for (i) the merger
of Tappan Zee with and into USB (the "Merger") and (ii) the conversion of
each share of common stock of Tappan Zee outstanding immediately prior to
the Merger into the right to receive a number of shares of USB common stock,
plus cash in lieu of any fractional share interest, determined pursuant to
the terms, conditions, limitations and procedures set forth in the Merger
Agreement;
2. The authorization of the Tappan Zee Board of Directors, in its discretion,
to direct the vote of the proxies upon such other business as may properly
be presented incident to the conduct of the Special Meeting, and any
adjournment or postponement thereof, including, without limitation, a motion
to adjourn the Special Meeting to another time or place for the purpose of
soliciting additional proxies in order to approve and adopt the transactions
contemplated by the Merger Agreement or otherwise.
The Board of Directors has fixed July 2, 1998 as the record date for the
determination of Tappan Zee shareholders entitled to notice of and to vote at
the Special Meeting and any adjournment or postponement thereof. Only
shareholders of record at the close of business on that date will be entitled to
notice of and to vote at the Special Meeting and any adjournment or postponement
thereof. A list of shareholders entitled to vote at the Special Meeting will be
available at Tappan Zee Financial, Inc., 75 North Broadway, Tarrytown, New York
10591 for a period of at least ten days prior to the Special Meeting and also
will be available at the Special Meeting itself.
BY ORDER OF THE BOARD OF DIRECTORS
Harry G. Murphy
VICE PRESIDENT AND SECRETARY
Tarrytown, New York
July 15, 1998
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. IT IS IMPORTANT
THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU OWN. EVEN IF YOU
PLAN TO BE PRESENT, YOU ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD PROMPTLY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE SPECIAL
MEETING, YOU MAY VOTE EITHER IN PERSON OR BY YOUR PROXY. ANY PROXY GIVEN MAY BE
REVOKED BY YOU IN WRITING AT ANY TIME PRIOR TO THE EXERCISE THEREOF.
<PAGE>
TAPPAN ZEE FINANCIAL, INC.
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 19, 1998
-------------------------------------------------------------------
U.S.B. HOLDING CO., INC.
PROSPECTUS
FOR
UP TO 1,832,797 SHARES OF COMMON STOCK OF
U.S.B. HOLDING CO., INC. TO BE ISSUED IN CONNECTION WITH THE
ACQUISITION OF TAPPAN ZEE FINANCIAL, INC. BY U.S.B. HOLDING CO., INC.
-------------------------------------------------------------------
This Proxy Statement/Prospectus is being furnished in connection with the
solicitation of proxies by the Board of Directors of Tappan Zee Financial, Inc.
("Tappan Zee") to be used at a special meeting of its shareholders to be held on
August 19, 1998 (the "Special Meeting"). The purpose of the Special Meeting is
to consider and vote upon the Agreement and Plan of Merger between U.S.B.
Holding Co., Inc. ("USB") and Tappan Zee, dated as of March 6, 1998 (the "Merger
Agreement"), a copy of which is attached as Appendix A to this Proxy
Statement/Prospectus. See "The Merger."
In accordance with the terms of the Merger Agreement, upon approval of the
Merger Agreement by the shareholders of Tappan Zee and the satisfaction or
waiver of all conditions, Tappan Zee shall be merged with and into USB (the
"Merger"), with USB as the surviving corporation of the Merger operating under
the name "U.S.B. Holding Co., Inc." As a result of the Merger, the separate
corporate existence of Tappan Zee will cease and its wholly-owned financial
institution subsidiary, Tarrytowns Bank, FSB (the "Savings Bank"), will become a
direct, wholly-owned subsidiary of USB. In connection with the Merger, each
share of common stock of Tappan Zee, par value $0.01 per share (the "Tappan Zee
Common Stock"), outstanding immediately prior to consummation of the Merger
(excluding shares held, otherwise than in a fiduciary capacity for the benefit
of third parties or as a result of debts previously contracted, by USB or any of
its subsidiaries) shall be converted into and represent the right to receive a
number of shares of USB common stock, par value $0.01 per share (the "USB Common
Stock"), based on an exchange ratio (the "Exchange Ratio") which will be
determined based on the average of the last reported sale prices for a share of
USB Common Stock for the 20 consecutive full trading days on the American Stock
Exchange ending on the date on which the last of the regulatory approvals
required for consummation of the Merger is obtained (the "Average Closing
Price"). The Merger Agreement provides that the Exchange Ratio will be equal to
(i) if the Average Closing Price is greater than or equal to $17.75 and less
than or equal to $25.00, the quotient (rounded to the nearest hundredth)
determined by dividing (A) $22.00 by (B) the Average Closing Price, (ii) if the
Average Closing Price is less than $17.75, 1.24 shares or (iii) if the Average
Closing Price is greater than $25.00, 0.88 shares. If, however, the Average
Closing Price is less than $15.00, Tappan Zee shall have the right to terminate
the Merger Agreement by giving written notice of such termination to USB,
subject to USB's option to increase the Exchange Ratio, within a specified
period, to a number (rounded to the nearest hundredth) obtained by dividing
$18.60 by the Average Closing Price, thereby eliminating Tappan Zee's right to
terminate the Merger Agreement. If the last
<PAGE>
regulatory approval had been obtained on July 7, 1998, the Average Closing Price
would have been $20.45 and the Exchange Ratio would have been 1.08.
Each of the shareholders of Tappan Zee entitled to vote at the Special
Meeting will also consider and vote upon a proposal to authorize the Board of
Directors to vote upon such other business as may properly be presented incident
to the conduct of the Special Meeting, including, without limitation, a motion
to adjourn the Special Meeting to another time or place for the purpose of
soliciting additional proxies in order to approve and adopt the transactions
contemplated by the Merger Agreement or otherwise (the "Additional Proposal").
See "Additional Proposal."
The outstanding USB Common Stock is, and the USB Common Stock offered hereby
will be, included for quotation on the American Stock Exchange. The outstanding
Tappan Zee Common Stock is currently included for quotation on the Nasdaq
National Market System of the Nasdaq Stock Market. The closing sales prices of
USB Common Stock and Tappan Zee Common Stock on March 5, 1998, were $22.25 per
share and $19.00 per share, respectively, the closing sales price of USB common
stock on July 9, 1998, was $20.875 per share and the closing sales price of
Tappan Zee Common Stock on July 7, 1998 (there were no trades in such stock on
July 8th or 9th) was $19.875 per share.
USB has filed a Registration Statement on Form S-4 pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), covering up to
1,832,797 shares of USB Common Stock. In addition to being the Proxy Statement
for the Special Meeting, this document constitutes a prospectus of USB with
respect to the USB Common Stock to be issued in connection with the Merger.
TAPPAN ZEE STOCK CERTIFICATES SHOULD NOT BE RETURNED TO TAPPAN ZEE WITH THE
ENCLOSED PROXY AND SHOULD NOT BE FORWARDED UNTIL AFTER RECEIPT OF A LETTER OF
TRANSMITTAL, WHICH WILL BE PROVIDED TO TAPPAN ZEE SHAREHOLDERS PROMPTLY
FOLLOWING CONSUMMATION OF THE MERGER.
This Proxy Statement/Prospectus does not cover resales of USB Common Stock
following consummation of the Merger, and no person may make use of this Proxy
Statement/Prospectus in connection with any such resale.
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being mailed to shareholders of Tappan Zee on or about July 16, 1998.
THE SHARES OF USB COMMON STOCK TO BE ISSUED IN THE MERGER 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 PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF USB COMMON STOCK OFFERED HEREBY ARE NOT DEPOSITS, SAVINGS
ACCOUNTS OR OTHER OBLIGATIONS OF ANY DEPOSITORY INSTITUTION AND ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
-------------------------------------------
The date of this Proxy Statement/Prospectus is July 15, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
AVAILABLE INFORMATION...................................................................................... iv
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................ iv
FORWARD-LOOKING STATEMENTS................................................................................. v
SUMMARY.................................................................................................... 1
Parties to the Merger.................................................................................... 1
Special Meeting of Tappan Zee Shareholders............................................................... 2
Merger Consideration and Exchange Procedures............................................................. 2
Opinion of Tappan Zee's Financial Advisor................................................................ 4
Recommendation of the Board of Directors of Tappan Zee................................................... 4
Affiliate Agreements..................................................................................... 4
Effective Time of the Merger............................................................................. 4
Termination of the Merger Agreement...................................................................... 5
Termination Fees......................................................................................... 5
Conditions to the Merger................................................................................. 5
Regulatory Approvals..................................................................................... 5
Certain Federal Income Tax Consequences.................................................................. 6
Accounting Treatment of the Merger....................................................................... 6
Absence of Dissenters' Rights of Appraisal............................................................... 6
Interests of Certain Persons in the Merger............................................................... 6
Directors of USB after the Merger........................................................................ 7
Stock Option Agreement................................................................................... 7
COMPARATIVE PER SHARE DATA................................................................................. 8
COMPARATIVE MARKET VALUES.................................................................................. 10
USB SELECTED CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)................................................ 11
TAPPAN ZEE SELECTED CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED).............................................................................................. 13
SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (UNAUDITED).................................... 15
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED).............................................. 18
SHAREHOLDER MEETING........................................................................................ 28
Special Meeting of Tappan Zee Shareholders............................................................... 28
Costs.................................................................................................... 30
THE MERGER................................................................................................. 30
General.................................................................................................. 30
Merger Consideration..................................................................................... 30
Background of and Reasons for the Merger................................................................. 31
Opinion of Tappan Zee's Financial Advisor................................................................ 34
Shareholders' Rights..................................................................................... 39
Cash in Lieu of Fractional Shares........................................................................ 39
Treatment of Tappan Zee Stock Options.................................................................... 39
Conditions to the Merger................................................................................. 40
Procedures for Exchange of Tappan Zee Stock Certificates................................................. 41
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Regulatory Approvals..................................................................................... 42
Business Pending the Merger.............................................................................. 43
No Solicitation.......................................................................................... 46
Representations and Warranties........................................................................... 47
Effective Time of the Merger; Termination and Amendment.................................................. 47
Termination Fees......................................................................................... 49
Interests of Certain Persons in the Merger............................................................... 49
Resale Considerations With Respect to the USB Common Stock............................................... 54
Certain Federal Income Tax Consequences.................................................................. 54
Accounting Treatment of the Merger....................................................................... 55
Absence of Dissenters' Rights of Appraisal............................................................... 56
Expenses of the Merger................................................................................... 56
Stock Option Agreement................................................................................... 56
Affiliate Agreements..................................................................................... 58
MANAGEMENT AND OPERATIONS AFTER THE MERGER................................................................. 59
Directors and Executive Officers......................................................................... 59
Consolidation of Operations.............................................................................. 59
Information Regarding Director to be Added to USB's Board of Directors................................... 59
ADDITIONAL PROPOSAL........................................................................................ 61
OWNERSHIP OF TAPPAN ZEE COMMON STOCK BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF TAPPAN ZEE............. 62
MARKET PRICE AND DIVIDEND INFORMATION FOR USB AND TAPPAN ZEE............................................... 66
TAPPAN ZEE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 67
General.................................................................................................. 67
Liquidity and Capital Resources.......................................................................... 67
Analysis of Net Interest Income.......................................................................... 69
Comparison of Financial Condition at March 31, 1998 and 1997............................................. 70
Comparison of Operating Results for the Fiscal Years Ended March 31, 1998 and 1997....................... 71
Comparison of Operating Results for the Fiscal Years Ended March 31, 1997 and 1996....................... 72
Impact of Inflation and Changing Prices.................................................................. 73
Year 2000 Compliance..................................................................................... 74
Quantitative and Qualitative Disclosures About Market Risk............................................... 74
BUSINESS OF TAPPAN ZEE..................................................................................... 76
Market Area and Competition.............................................................................. 76
Lending Activities....................................................................................... 77
Asset Quality............................................................................................ 83
Investment Activities.................................................................................... 88
Sources of Funds......................................................................................... 91
Subsidiary Activities.................................................................................... 93
Personnel................................................................................................ 93
REGULATION AND SUPERVISION OF TAPPAN ZEE AND THE SAVINGS BANK.............................................. 93
General.................................................................................................. 93
Regulation of Federal Savings Association................................................................ 93
Holding Company Regulation............................................................................... 101
Federal Taxation......................................................................................... 102
State Taxation........................................................................................... 103
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
DESCRIPTION OF USB COMMON STOCK....................................................... 104
General............................................................................. 104
Voting Rights....................................................................... 104
Nomination Procedures; Number of Directors; Classified Board of Directors; Removal
of Directors...................................................................... 105
Pre-Emptive Rights.................................................................. 106
Dividend Rights..................................................................... 106
Liquidation Rights.................................................................. 106
Antitakeover Provisions in USB Certificate, USB Bylaws and State Law................ 106
COMPARISON OF RIGHTS OF HOLDERS OF USB COMMON STOCK AND HOLDERS OF TAPPAN ZEE COMMON
STOCK............................................................................... 107
General............................................................................. 107
Authorized Capital Stock............................................................ 108
Board of Directors.................................................................. 108
Voting Rights....................................................................... 110
Payment of Dividends................................................................ 110
Special Meetings of Shareholders.................................................... 110
Shareholder Action Without a Meeting................................................ 110
Pre-Emptive Rights.................................................................. 110
Amendment of Certificate of Incorporation........................................... 111
Liquidation Rights.................................................................. 111
Antitakeover Provisions and Statutes................................................ 112
Director and Officer Liability and Indemnification.................................. 114
CERTAIN REGULATORY CONSIDERATIONS..................................................... 115
SHAREHOLDER PROPOSALS................................................................. 116
LEGAL MATTERS......................................................................... 116
EXPERTS............................................................................... 116
INDEX TO TAPPAN ZEE CONSOLIDATED FINANCIAL STATEMENTS................................. 117
</TABLE>
<TABLE>
<S> <C> <C>
APPENDIX A:... Agreement and Plan of Merger, dated as of March 6, 1998, between
U.S.B Holding Co., Inc. and Tappan Zee Financial, Inc................. A-1
APPENDIX B:... Stock Option Agreement, dated as of March 6, 1998, between
Tappan Zee Financial, Inc. and U.S.B. Holding Co., Inc................ B-1
APPENDIX C:... Opinion of Sandler O'Neill & Partners L.P............................. C-1
</TABLE>
iii
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN CONNECTION
WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE HEREBY, AND,
IF GIVEN OR MADE, ANY SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY USB OR TAPPAN ZEE OR ANY OTHER PERSON. THIS
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS PROXY
STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER, SOLICITATION OF AN OFFER OR PROXY
SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES OFFERED PURSUANT TO THIS PROXY
STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS
OF USB OR TAPPAN ZEE OR ANY OF THEIR RESPECTIVE SUBSIDIARIES SINCE THE DATE OF
THIS PROXY STATEMENT/PROSPECTUS.
AVAILABLE INFORMATION
USB and Tappan Zee are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by USB and Tappan Zee with the Commission
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549, and at the Commission's Regional Office at 7 World Trade Center,
Suite 1300, New York, New York 10048, or from the Web Site maintained by the
Commission at "http://www.sec.gov." Copies of such material also may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of prescribed rates. Copies of such
reports, proxy statements and other information with respect to Tappan Zee, also
may be inspected, at the National Association of Securities Dealers, Inc. (the
"NASD"), located at 1735 K Street, N.W., Washington, D.C. 20006, and, with
respect to USB, at the American Stock Exchange ("AMEX"), located at 86 Trinity
Place, New York, New York 10006.
USB has filed with the Commission a Registration Statement on Form S-4
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the USB Common Stock to be
issued pursuant to the Merger. As permitted by the rules and regulations of the
Commission, this Proxy Statement/Prospectus does not contain all the information
set forth in the Registration Statement and the exhibits thereto. Such
additional information may be obtained from the Commission's principal office in
Washington, D.C. by the means described above for obtaining reports, proxy
statements and other information filed pursuant to the Exchange Act. Statements
contained in this Proxy Statement/Prospectus or in any document incorporated in
this Proxy Statement/Prospectus by reference or supplied herewith as to the
contents of any contract or other document referred to herein or therein are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document, each such statement being qualified in all
respects by such reference.
All information contained in this Proxy Statement/Prospectus relating to USB
and its subsidiaries has been supplied by USB, and all information contained in
this Proxy Statement/Prospectus relating to Tappan Zee and its subsidiaries has
been supplied by Tappan Zee.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by USB (File No. 1-12811)
pursuant to the Exchange Act are incorporated by reference in this Proxy
Statement/Prospectus:
1. USB's Annual Report on Form 10-K for the fiscal year ended December 31,
1997;
2. USB's Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 1998;
3. USB's Current Report on Form 8-K dated as of March 6, 1998 and filed on
March 12, 1998; and
iv
<PAGE>
4. The description of USB Common Stock contained in the Registration
Statement on Form 8-A filed by USB on March 17, 1997.
All documents subsequently filed by USB pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act prior to the termination of the offering made
hereby shall be deemed to be incorporated by reference into this Proxy
Statement/Prospectus and to be a part hereof.
The Merger Agreement is included herewith as Appendix A and is incorporated
by reference herein. Discussion of the terms and conditions of the Merger
Agreement is summary in nature, and reference is made to the Merger Agreement
for a more complete discussion of the terms and conditions of the Merger, the
Merger Agreement and related transactions.
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 this Proxy Statement/Prospectus 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 this Proxy Statement/Prospectus or any supplement
hereto.
Also incorporated herein by reference are the documents attached hereto as
Appendix B and Appendix C to this Proxy Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS FILED BY
USB WITH THE COMMISSION WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH.
ALL OF SUCH DOCUMENTS WITH RESPECT TO USB ARE AVAILABLE, UPON WRITTEN OR ORAL
REQUEST, FROM STEVEN T. SABATINI, SENIOR EXECUTIVE VICE PRESIDENT, CHIEF
FINANCIAL OFFICER AND ASSISTANT SECRETARY, U.S.B. HOLDING CO., INC., 100 DUTCH
HILL ROAD, ORANGEBURG, NEW YORK 10962; TELEPHONE NUMBER (914) 365-4600. COPIES
WILL BE FURNISHED (WITHOUT EXHIBITS UNLESS THE EXHIBITS HAVE BEEN SPECIFICALLY
INCORPORATED BY REFERENCE) FREE OF CHARGE. IN ORDER TO ENSURE TIMELY DELIVERY OF
SUCH DOCUMENTS, ANY REQUEST SHOULD BE MADE BY AUGUST 9, 1998.
FORWARD-LOOKING STATEMENTS
THIS PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITH
RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF USB
UPON CONSUMMATION OF THE MERGER, INCLUDING STATEMENTS RELATING TO (A) THE
ESTIMATED EXPENSE SAVINGS AND ACCRETION TO REPORTED EARNINGS THAT WILL BE
REALIZED FROM THE MERGER, (B) THE ESTIMATED IMPACT ON REVENUES OF THE MERGER,
AND (C) THE RESTRUCTURING CHARGES EXPECTED TO BE INCURRED IN CONNECTION WITH THE
MERGER. THESE FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES. SEE "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE," "SELECTED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (UNAUDITED)," "PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)" AND "MANAGEMENT AND
OPERATIONS AFTER THE MERGER." FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE,
AMONG OTHERS, THE FOLLOWING POSSIBILITIES: (1) ESTIMATED EXPENSE SAVINGS FROM
THE MERGER CANNOT BE FULLY REALIZED WITHIN THE EXPECTED TIME FRAME; (2) REVENUES
FOLLOWING THE MERGER ARE LOWER THAN EXPECTED; (3) COMPETITIVE PRESSURE AMONG
DEPOSITORY INSTITUTIONS INCREASES SIGNIFICANTLY; (4) COSTS OR DIFFICULTIES
RELATED TO THE INTEGRATION OF THE BUSINESSES OF USB AND TAPPAN ZEE ARE GREATER
THAN EXPECTED; (5) CHANGES IN THE INTEREST RATE ENVIRONMENT REDUCE INTEREST
MARGINS; (6) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR IN THE MARKETS IN
WHICH USB WILL BE DOING BUSINESS, ARE LESS FAVORABLE THAN EXPECTED; OR (7)
LEGISLATION OR CHANGES IN REGULATORY REQUIREMENTS ADVERSELY AFFECT THE
BUSINESSES IN WHICH USB WOULD BE ENGAGED. USB'S FORWARD-LOOKING STATEMENTS SPEAK
ONLY AS TO THE DATE ON WHICH SUCH STATEMENTS ARE MADE, AND BY MAKING
FORWARD-LOOKING STATEMENTS USB ASSUMES NO DUTY TO UPDATE THEM TO REFLECT NEW,
CHANGING OR UNANTICIPATED EVENTS OR CIRCUMSTANCES. NEITHER DELOITTE & TOUCHE LLP
NOR KPMG PEAT MARWICK LLP HAS COMPILED, EXAMINED OR PERFORMED ANY PROCEDURES
WITH RESPECT TO ANY FORWARD-LOOKING STATEMENTS, NOR HAVE THEY EXPRESSED ANY
OPINION OR ANY FORM OF ASSURANCE ON SUCH INFORMATION OR ITS ACHIEVABILITY, AND
THEY ASSUME NO RESPONSIBILITY FOR, AND DISCLAIM ANY ASSOCIATION WITH, THE
FORWARD-LOOKING STATEMENTS.
v
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS AND IN THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE AND IS NOT INTENDED TO BE A COMPLETE STATEMENT OF THE MATTERS
DESCRIBED HEREIN. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED, OR INCORPORATED BY
REFERENCE, IN THIS PROXY STATEMENT/PROSPECTUS AND IN THE APPENDICES ATTACHED
HERETO. SHAREHOLDERS ARE URGED TO READ THIS PROXY STATEMENT/PROSPECTUS AND THE
APPENDICES HERETO IN THEIR ENTIRETY.
EXCEPT AS OTHERWISE SPECIFICALLY INDICATED, ALL RATIOS AND SHARE DATA
RELATING TO USB AND ALL SHARE PRICE INFORMATION RELATING TO THE MERGER AGREEMENT
HAVE BEEN ADJUSTED TO REFLECT USB'S STOCK SPLITS AND DIVIDENDS. SEE "MARKET
PRICE AND DIVIDEND INFORMATION FOR USB AND TAPPAN ZEE."
PARTIES TO THE MERGER
USB. USB, a Delaware corporation and registered bank holding company, is the
holding company for Union State Bank, a New York-chartered commercial bank (the
"Bank"). Currently, the business of USB consists of the business of the Bank. As
of or for the fiscal year ended December 31, 1997 and the three months ended
March 31, 1998, respectively, USB had net income of $10.4 million and $3.0
million, total assets of $1.0 billion and $1.0 billion, total deposits of $797.8
million and $852.9 million, and stockholders' equity of $62.6 million and $64.6
million, and was in compliance with all regulatory capital requirements
applicable to bank holding companies.
The Bank offers banking services through its 20 retail banking facilities
(as well as a limited purpose branch office) in Rockland and Westchester
Counties in the State of New York. The Bank attracts retail deposits from the
general public and the business community through a variety of deposit products.
Deposits are insured by the Bank Insurance Fund ("BIF") which is administered by
the Federal Deposit Insurance Corporation ("FDIC"), within applicable limits.
The Bank has a wholly-owned subsidiary, U.S.B. Realty Corp., which was formed in
November 1996 for the purpose of acquiring and managing a portfolio of loans
secured by real estate and other investment securities previously owned by the
Bank. USB has recently announced that U.S.B. Realty Corp. will be dissolved and
liquidated, with any remaining assets to be transferred to the Bank. Dissolution
of U.S.B. Realty Corp., subject to a number of conditions and factors, will have
a significant positive effect on USB's 1998 tax provision, but may increase its
effective tax rate slightly in future years. The Bank also has two other
wholly-owned subsidiaries, U.S.B. Financial Services, Inc., a New York
corporation formed in November 1997, which will provide customers with access to
insurance agency and brokerage services, as well as mutual funds and other
securities transactions, and Dutch Hill Realty Corp., formed in October 1997,
which owns real estate foreclosed by the Bank.
USB and the Bank are subject to examination and supervision by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), the
Superintendent of Banks and the Banking Board of the State of New York, and the
FDIC.
The principal executive offices of USB are located at 100 Dutch Hill Road,
Orangeburg, New York 10962, and the telephone number is (914) 365-4600. For
additional information concerning USB, its business, financial condition and
results of operations, see "Available Information," "Incorporation of Certain
Documents By Reference" and "USB Selected Consolidated Financial Information
(Unaudited)."
TAPPAN ZEE. Tappan Zee is the unitary savings bank holding company for the
Savings Bank, a federally chartered savings bank. The Savings Bank converted
from a mutual savings bank to a stock savings bank and became a wholly-owned
subsidiary of Tappan Zee on October 5, 1995. Concurrent with the Savings Bank's
conversion to the stock form and reorganization into a holding company
structure, Tappan Zee sold shares of its common stock in a subscription and
community offering.
The Savings Bank's primary market area consists of the Village of Tarrytown
and its neighboring communities in Westchester County, New York, with business
conducted from one office located in Tarrytown, New York. The Savings Bank is a
community-oriented savings institution whose business
1
<PAGE>
primarily consists of accepting deposits from customers within its market area
and investing those funds in mortgage loans secured by one-to four-family
residences. To a significantly lesser extent, funds are invested in
multi-family, commercial real estate, construction, commercial business and
consumer loans. The Savings Bank also invests in mortgage-backed and other
securities. The Savings Bank's deposits are insured by the Savings Association
Insurance Fund ("SAIF") which is administered by the FDIC, within applicable
limits. Tappan Zee has no significant business activities other than its
ownership of the Savings Bank. At or for the year ended March 31, 1998, Tappan
Zee had net income of $1.1 million, total assets of $129.3 million, total
deposits of $105.0 million and shareholders' equity of $21.8 million.
Tappan Zee and the Savings Bank are subject to supervision and examination
by the Office of Thrift Supervision ("OTS"). The Savings Bank also is subject to
the jurisdiction of the FDIC in its capacity as administrator of the SAIF.
The principal executive offices of Tappan Zee are located at 75 North
Broadway, Tarrytown, New York 10591, and the telephone number is (914) 631-0344.
For additional information concerning Tappan Zee, see "Available Information,"
"Tappan Zee Selected Consolidated Financial Information (Unaudited)," "Tappan
Zee Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business of Tappan Zee," "Regulation and Supervision of Tappan Zee
and the Savings Bank," and the Tappan Zee Consolidated Financial Statements
contained elsewhere herein.
SPECIAL MEETING OF TAPPAN ZEE SHAREHOLDERS
The Special Meeting will be held at the office of the Savings Bank located
at 75 North Broadway, Tarrytown, New York 10591, on August 19, 1998 at 5:00
p.m., Eastern Time. The purpose of the Special Meeting is to consider and vote
upon the proposal to approve and adopt the Merger Agreement and to authorize the
Tappan Zee Board of Directors to vote upon the Additional Proposal. Only holders
of shares of Tappan Zee Common Stock outstanding at the close of business on
July 2, 1998 (the "Record Date"), will be entitled to notice of and to vote at
the Special Meeting and at any adjournment or postponement thereof. At the
Record Date, 1,478,062 shares of Tappan Zee Common Stock were outstanding and
entitled to vote. The presence, in person or by proxy, of the holders of at
least a majority of the total number of outstanding shares of Tappan Zee Common
Stock entitled to vote at the Special Meeting is necessary to constitute a
quorum. Each share of Tappan Zee Common Stock held of record entitles the holder
thereof to one vote on each matter properly submitted at the Special Meeting and
at any adjournment or postponement thereof.
The affirmative vote of the holders of a majority of the outstanding shares
of Tappan Zee Common Stock entitled to vote at the meeting is required in order
to approve and adopt the Merger Agreement. The Additional Proposal requires the
affirmative vote of a majority of the outstanding shares of Tappan Zee Common
Stock represented, in person or by proxy, and entitled to vote thereon at the
Special Meeting.
The directors and certain officers of Tappan Zee have agreed and intend to
vote or cause to be voted all shares of Tappan Zee Common Stock in which they
have the right to vote for approval and adoption of the Merger Agreement. At May
31, 1998, directors and those certain officers of Tappan Zee and their
affiliates in the aggregate beneficially owned 200,458 shares, or 13.6%, of the
outstanding Tappan Zee Common Stock, excluding shares subject to stock options
under Tappan Zee's stock option plans. See "Ownership of Tappan Zee Common Stock
by Certain Beneficial Owners and Management of Tappan Zee."
MERGER CONSIDERATION AND EXCHANGE PROCEDURES
GENERAL. In accordance with the terms of the Merger Agreement, Tappan Zee
will be merged with and into USB, with USB as the surviving corporation
operating under the name "U.S.B. Holding Co., Inc." As a result of the Merger,
the separate corporate existence of Tappan Zee will cease and its subsidiaries,
2
<PAGE>
including its only significant wholly-owned subsidiary, the Savings Bank, will
become direct, wholly-owned subsidiaries of USB.
MERGER CONSIDERATION. The Merger Agreement provides that at the Effective
Time (as defined in "--Effective Time of the Merger") of the Merger, each share
of Tappan Zee Common Stock outstanding immediately prior to consummation of the
Merger (excluding shares held, otherwise than in a fiduciary capacity for the
benefit of third parties or as a result of debts previously contracted, by USB
or any of its subsidiaries, which shares will be cancelled and retired) will be
converted into and represent the right to receive a number of shares of USB
Common Stock (the "Merger Consideration") based on an exchange ratio which will
be determined based on the average of the last reported sale prices for a share
of USB Common Stock for the 20 consecutive full trading days on the American
Stock Exchange ending on the date on which the last of the regulatory approvals
required for consummation of the Merger is obtained. The Merger Agreement
provides that the Exchange Ratio will be equal to (i) if the Average Closing
Price is greater than or equal to $17.75 and less than or equal to $25.00, the
quotient (rounded to the nearest hundredth) determined by dividing (A) $22.00 by
(B) the Average Closing Price, (ii) if the Average Closing Price is less than
$17.75, 1.24 shares or (iii) if the Average Closing Price is greater than
$25.00, 0.88 shares. If, however, the Average Closing Price is less than $15.00,
Tappan Zee shall have the right to terminate the Merger Agreement by giving
written notice of such termination to USB, subject to USB's option to increase
the Exchange Ratio, within a specified period, to a number (rounded to the
nearest hundredth) obtained by dividing $18.60 by the Average Closing Price,
thereby eliminating Tappan Zee's right to terminate the Merger Agreement. The
number of shares of USB Common Stock issuable in exchange for shares of Tappan
Zee Common Stock are subject to further adjustment to prevent dilution in the
event of stock splits, reclassifications or other similar events. See "The
Merger--Merger Consideration." The last reported sale price of USB Common Stock
on July 9, 1998 was $20.875 per share.
No fractional USB Common Stock will be issued in the Merger to holders of
Tappan Zee Common Stock. Each holder of Tappan Zee Common Stock who otherwise
would have been entitled to a fraction of a share of USB Common Stock will
receive in lieu thereof, at the time of surrender of the certificate or
certificates representing such holder's shares of Tappan Zee Common Stock, an
amount of cash (without interest) determined by multiplying the fractional share
interest to which such holder would otherwise be entitled by $22.00.
The Merger Agreement also provides that each option to purchase shares of
Tappan Zee Common Stock under Tappan Zee's stock option plans which is
outstanding at the Effective Time, whether or not exercisable, shall be
converted into and become a right to purchase shares of USB Common Stock in
accordance with the terms of the Tappan Zee stock option plan and the Tappan Zee
option agreement by which it is evidenced, except that from and after the
Effective Time, among other things, (i) the number of shares of USB Common Stock
subject to each Tappan Zee option shall be equal to the number of shares of
Tappan Zee Common Stock subject to such option prior to the Effective Time
multiplied by the Exchange Ratio (with fractional shares rounded down to the
nearest share) and (ii) the exercise price per share of USB Common Stock
purchasable thereunder shall be that specified in the Tappan Zee option divided
by the Exchange Ratio (rounded up to the nearest cent).
EXCHANGE PROCEDURES. The conversion of Tappan Zee Common Stock into USB
Common Stock will occur automatically at the Effective Time. Within ten days
after the Effective Time, an agent of USB (the "Exchange Agent") will send a
letter of transmittal ("Letter of Transmittal") to each holder of record of
certificates representing shares of Tappan Zee Common Stock, advising such
holder of the terms of the exchange effected by the Merger and of the procedure
for surrendering such certificates in exchange for certificates representing
shares of USB Common Stock (plus cash in lieu of any fractional share interest).
The Exchange Agent shall accept certificates representing shares of Tappan Zee
Common Stock upon compliance with such reasonable terms and conditions as the
Exchange Agent may impose to effect an orderly exchange thereof in accordance
with customary exchange practices.
3
<PAGE>
TAPPAN ZEE SHAREHOLDERS SHOULD NOT FORWARD TAPPAN ZEE COMMON STOCK
CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED THEIR LETTERS OF
TRANSMITTAL. TAPPAN ZEE SHAREHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH
THE ENCLOSED PROXY CARD.
OPINION OF TAPPAN ZEE'S FINANCIAL ADVISOR
Sandler O'Neill & Partners L.P. ("Sandler O'Neill") has served as the
financial advisor to Tappan Zee in connection with the Merger and has rendered a
written opinion to the Board of Directors of Tappan Zee, dated as of the date of
the Merger Agreement and updated as of the date of this Proxy Statement/
Prospectus, to the effect that, based on the factors stated therein, the
consideration to be received by Tappan Zee's shareholders pursuant to the Merger
Agreement is fair from a financial point of view to the shareholders of Tappan
Zee. A copy of the fairness opinion of Sandler O'Neill is attached hereto as
Appendix C and should be read in its entirety for a description of the
procedures followed, assumptions made, matters considered and qualifications of
the review undertaken by Sandler O'Neill in connection therewith. See "The
Merger--Opinion of Tappan Zee's Financial Advisor."
RECOMMENDATION OF THE BOARD OF DIRECTORS OF TAPPAN ZEE
The Board of Directors of Tappan Zee has determined that the Merger is in
the best interests of the shareholders and, accordingly, has unanimously
approved the Merger. THE BOARD OF DIRECTORS OF TAPPAN ZEE UNANIMOUSLY RECOMMENDS
THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT. SEE "THE
MERGER--BACKGROUND OF AND REASONS FOR THE MERGER."
AFFILIATE AGREEMENTS
In conjunction with the Merger Agreement, USB has entered into an agreement,
dated as of March 6, 1998, with the directors and executive officers of Tappan
Zee (the "Tappan Zee Affiliate Agreement"). Pursuant to the Tappan Zee Affiliate
Agreement, each such director and executive officer of Tappan Zee has agreed in
his personal capacity, among other things, (i) to vote the shares of Tappan Zee
Common Stock beneficially owned by him in favor of the Merger Agreement and (ii)
to not transfer such shares of Tappan Zee Common Stock or shares of USB Common
Stock acquired upon consummation of the Merger or otherwise during specified
periods and to not enter into any transactions with respect to any shares of USB
Common Stock during specified periods.
Also in conjunction with the Merger Agreement, the directors and executive
officers of USB have entered into an agreement with Tappan Zee, dated as of
March 6, 1998 (the "USB Affiliate Agreement"). Pursuant to the USB Affiliate
Agreement, each such director and executive officer of USB has agreed in his
personal capacity to not transfer any shares of USB Common Stock during
specified periods. (The Tappan Zee Affiliate Agreement and the USB Affiliate
Agreement are collectively referred to as the "Affiliate Agreements").
EFFECTIVE TIME OF THE MERGER
The Merger shall become effective upon the occurrence of the filing of a
certificate of merger (the "Certificate of Merger") with the Secretary of State
of the State of Delaware pursuant to the Delaware General Corporation Law
("DGCL"), unless a later date and time is specified as the effective time in
such Certificate of Merger (the "Effective Time"). Such filings will occur on
the fifth business day following the receipt of all requisite regulatory
approvals, approval of the Merger Agreement by the requisite vote of Tappan
Zee's shareholders, the expiration of all applicable regulatory waiting periods
and the satisfaction or waiver of all other conditions to the Merger, or on such
other date as USB and Tappan Zee may mutually agree. See "The Merger--Effective
Time of the Merger; Termination and Amendment."
4
<PAGE>
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated, either before or after its approval
by the shareholders of Tappan Zee, (i) at any time on or prior to the Effective
Time by (a) mutual written consent of the parties or (b) by either party if the
other party materially breaches certain terms of the Merger Agreement and such
breach is not cured within a specified time period; (ii) at any time by either
party in writing if (a) the required regulatory approvals are denied or
withdrawn at the request or recommendation of the governmental entity which must
grant such approval and a petition for rehearing or the filing of an amended
application, if permitted, with the applicable governmental entity has not
occurred, provided that a party may not terminate the Merger Agreement pursuant
to this provision if such denial or request or recommendation for withdrawal is
due to the failure of such party to perform or observe certain terms of the
Merger Agreement, or (b) the Tappan Zee shareholders do not approve the Merger
Agreement, provided that a party may not terminate if the failure of such
approval is due to such party's failure to perform or observe certain terms of
the Merger Agreement at or before the Effective Time; (iii) by either party if
the Effective Time has not occurred by close of business on December 31, 1998,
provided that a party may not terminate if the failure of such occurrence was
caused by the failure of such party to perform its obligations under the Merger
Agreement; and (iv) by Tappan Zee if the Average Closing Price is less than
$15.00, subject to USB's right to adjust the Exchange Ratio to equal a number
obtained by dividing (A) $18.60 by (B) the Average Closing Price. See "The
Merger--Effective Time of the Merger; Termination and Amendment."
Prior to making any decision to terminate (or allow the termination of) the
Merger Agreement, each of the Tappan Zee Board and the USB Board would consult
with its respective financial and other advisors and would consider all
financial and other information it deemed relevant to its decision. Approval and
adoption of the Merger Agreement by the shareholders of Tappan Zee at the
Special Meeting will confer on the Tappan Zee Board the power, consistent with
its fiduciary duties, to elect to consummate the Merger in the event a
termination right is triggered, whether or not there is any increase in the
Exchange Ratio and without any further action by, or resolicitation of, the
shareholders of Tappan Zee.
TERMINATION FEES
In order to increase the likelihood that the transactions contemplated by
the Merger Agreement will be consummated, the Merger Agreement provides that
certain fees will be payable by USB or Tappan Zee to the other party if the
Merger Agreement is terminated under certain specified circumstances. See "The
Merger--Termination Fees."
CONDITIONS TO THE MERGER
Consummation of the Merger is subject to various conditions, including,
without limitation, obtaining the requisite approval of the Merger Agreement by
the shareholders of Tappan Zee solicited hereby, receipt of all necessary
regulatory approvals pertaining to the Merger and certain other closing
conditions. See "The Merger--Conditions to the Merger" and "The
Merger--Regulatory Approvals." Substantially all of the conditions to
consummation of the Merger (except for required shareholder and regulatory
approvals) may be waived at any time by the party for whose benefit they were
created, and the Merger Agreement may be amended at any time by written
agreement of the parties, except that no waiver or amendment occurring after
approval of the Merger Agreement by Tappan Zee's shareholders shall modify
either the amount or the form of the Merger Consideration.
REGULATORY APPROVALS
The regulatory approvals and consents necessary to consummate the Merger
include the approval of the OTS and the Federal Reserve Board. Applications for
approval of the transactions contemplated by the Merger Agreement were filed
with the Federal Reserve Board and the OTS on June 30, 1998 and April 18, 1998,
respectively. Such applications are currently under review. There can be no
assurance that
5
<PAGE>
such regulatory approvals will be obtained, and, if the Merger is approved,
there can be no assurance as to the date of any such approval. THERE ALSO CAN BE
NO ASSURANCE THAT ANY 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 UNDER "THE MERGER--REGULATORY APPROVALS" AND "THE
MERGER--CONDITIONS TO THE MERGER."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Merger will be treated as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"). Consummation of the Merger is conditioned upon receipt by both USB
and Tappan Zee of an opinion issued by either USB's independent accountants or
by Elias, Matz, Tiernan & Herrick L.L.P. to the effect that the Merger will
constitute such a reorganization for federal income tax purposes, and that no
gain or loss will be recognized by (i) USB, the Bank, Tappan Zee and the Savings
Bank, and (ii) the shareholders of Tappan Zee upon the exchange of their shares
of Tappan Zee Common Stock for shares of USB Common Stock, except for cash
received in lieu of fractional shares. The opinion is summarized under "The
Merger--Certain Federal Income Tax Consequences" and is filed as an exhibit to
the Registration Statement of which this Proxy Statement/ Prospectus is a part.
ACCOUNTING TREATMENT OF THE MERGER
It is anticipated that the Merger will be accounted for as a
pooling-of-interests. In this regard, consummation of the Merger is conditioned
upon USB's receipt from its independent auditors and Tappan Zee's receipt from
its independent certified public accountants of letters dated as of the
Effective Time, to the effect that, based on a review of the Merger Agreement
and related agreements and the facts and circumstances then known to the
respective independent auditors or accountants, the Merger shall be accounted
for as a pooling-of-interests under Generally Accepted Accounting Principles
("GAAP"). See "The Merger--Accounting Treatment of the Merger."
ABSENCE OF DISSENTERS' RIGHTS OF APPRAISAL
Under the DGCL, holders of shares of Tappan Zee Common Stock are not
entitled to dissenters' rights of appraisal in connection with the Merger. See
"The Merger--Absence of Dissenters' Rights of Appraisal."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Tappan Zee's management and Board of Directors may be
deemed to have certain interests in the Merger that are in addition to their
interests, if any, as shareholders of Tappan Zee generally, including the
interests described below. The Tappan Zee Board of Directors was aware of these
interests and considered them, among other things, in approving the Merger
Agreement and the transactions described below.
The directors and executive officers of Tappan Zee hold stock options to
acquire Tappan Zee Common Stock, which will be converted into options to acquire
USB Common Stock as a result of the Merger. As of the Record Date, the directors
and executive officers of Tappan Zee beneficially owned stock options issued
under Tappan Zee's stock option plans to purchase in the aggregate 121,500
shares of Tappan Zee Common Stock. Based on an Exchange Ratio of 1.08 assuming
an Average Closing Price of $20.45 such Tappan Zee stock options will be
converted into options to purchase approximately 131,220 shares of USB Common
Stock. See "The Merger--Treatment of Tappan Zee Stock Options" and "The
Merger--Interests of Certain Persons in the Merger--Tappan Zee Stock Options."
The Savings Bank will enter into, as of the Effective Time, a consulting
agreement ("Consulting Agreement") with Stephen C. Byelick, Tappan Zee's current
President and Chief Executive Officer and a director of Tappan Zee, and an
employment agreement ("Employment Agreement") with Harry G.
6
<PAGE>
Murphy, Tappan Zee's current Vice President and Secretary and a director of
Tappan Zee. The Consulting Agreement and the Employment Agreement will supersede
the respective current employment agreements of Messrs. Byelick and Murphy with
Tappan Zee and the Savings Bank. USB also has agreed to appoint Kevin J.
Plunkett, who currently serves as a director of Tappan Zee and the Savings Bank,
to the Board of Directors of USB effective as of the Effective Time. In
addition, USB will appoint those directors of Tappan Zee who so desire, other
than Mr. Plunkett and Mr. Murphy, to serve on USB's Chairman's Council. USB's
Chairman's Council advises the Bank of community needs and opportunities and
membership thereon is voluntary and without remuneration. Following consummation
of the Merger, the Board of Directors of the Savings Bank will consist of John
T. Cooney, Gerald L. Logan, Harry G. Murphy and Kevin J. Plunkett, each of whom
is a member of the Savings Bank's current Board of Directors, and the remaining
vacancies will be filled by USB, as the sole shareholder of the Savings Bank.
Stephen C. Byelick will be Director Emeritus of the Savings Bank. See "The
Merger--Interests of Certain Persons in the Merger--Consulting Agreement and
Employment Agreement."
USB has agreed in the Merger Agreement to indemnify each present and former
director, officer and employee of Tappan Zee or its subsidiaries and each
officer or employee of Tappan Zee or its subsidiaries that is serving or has
served as a director or trustee of another entity expressly at Tappan Zee's
request or direction, from and after the Effective Time through the sixth
anniversary thereof. Also, USB has agreed to maintain Tappan Zee's existing
directors' and officers' liability insurance policy (or purchase an insurance
policy providing coverage on substantially the same terms and conditions) for
acts or omissions occurring prior to the Effective Time by persons who are
currently covered by such insurance policy maintained by Tappan Zee, for a
period of six years therefrom, subject to certain conditions and restrictions.
See "The Merger--Interests of Certain Persons in the Merger--Indemnification and
Insurance."
DIRECTORS OF USB AFTER THE MERGER
The Merger Agreement provides that, at the Effective Time, the directors of
USB will consist of (i) the directors of USB immediately prior to the Effective
Time and (ii) Mr. Kevin J. Plunkett who is currently a member of the Tappan Zee
Board and who is willing to so serve. The directors of USB will appoint Mr.
Plunkett to the Board of Directors of USB effective as of the Effective Time.
See "The Merger--Interests of Certain Persons in the Merger" and "Management and
Operations after the Merger."
STOCK OPTION AGREEMENT
As a condition to USB entering into the Merger Agreement, Tappan Zee and USB
entered into a stock option agreement, dated as of March 6, 1998 (the "Stock
Option Agreement), a copy of which is attached hereto as Appendix B, pursuant to
which Tappan Zee granted to USB an option to purchase, under certain
circumstances (none of which has occurred, to the best of USB's and Tappan Zee's
knowledge, as of the date hereof), up to 294,134 shares of Tappan Zee Common
Stock (representing 19.9% of the shares of Tappan Zee Common Stock outstanding
on March 6, 1998) at a price of $18.50 per share (the "Option"). Under certain
circumstances, Tappan Zee may be required to repurchase the Option or the shares
acquired pursuant to the exercise thereof. See "The Merger--Stock Option
Agreement."
The Stock Option Agreement is intended to increase the likelihood that the
Merger will be consummated in accordance with the terms of the Merger Agreement.
Certain aspects of the Stock Option Agreement may have the effect of
discouraging persons other than USB who might now or prior to the consummation
of the Merger be interested in acquiring all of or a significant interest in
Tappan Zee from considering or proposing such an acquisition, even if such
persons were prepared to pay a higher price per share for Tappan Zee Common
Stock than the value per share contemplated by the Merger Agreement.
7
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share, pro forma
combined per share and pro forma equivalent per share information with respect
to USB Common Stock and Tappan Zee Common Stock at the dates and for the periods
presented, giving effect to the Merger using the pooling-of-interests method of
accounting, based on an Exchange Ratio of 1.08 and assuming that 1,596,199
shares of USB Common Stock are issued in the Merger based upon the assumptions
described in the Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited) included elsewhere herein. See "The Merger - Accounting Treatment of
the Merger" and "Pro Forma Condensed Combined Financial Statements (Unaudited)."
The selected per share data set forth below should be read in conjunction
with, and is qualified in its entirety by, the historical consolidated financial
statements of USB, including the related notes, incorporated herein by
reference, and the historical consolidated financial statements of Tappan Zee,
including the related notes, and the Pro Forma Condensed Combined Financial
Statements (Unaudited) included elsewhere herein. See "Available Information,"
"Incorporation of Certain Documents by Reference," the historical consolidated
financial statements of Tappan Zee, and "Pro Forma Condensed Combined Financial
Statements (Unaudited)" included elsewhere herein. The data set forth below is
not necessarily indicative of the results of the future operations of USB upon
consummation of the Merger or the actual results that would have been achieved
had the Merger been consummated prior to the periods presented.
<TABLE>
<CAPTION>
TAPPAN ZEE COMMON STOCK
USB COMMON STOCK
--------------------------------
PRO FORMA (2)
COMBINED --------------------------
CONTINUING PRO FORMA
CORPORATION EQUIVALENT
HISTORICAL (1)(2)(3) HISTORICAL (3)
----------- ------------------- ----------- -------------
<S> <C> <C> <C> <C>
Basic earnings per share (4)(5):
Three months ended March 31, 1998................... $ 0.24 $ 0.24 $ 0.24 $ 0.26
Year ended December 31, 1997........................ 0.84 0.83 0.80 0.90
Year ended December 31, 1996........................ 0.74 0.72 0.60 0.78
Year ended December 31, 1995........................ 0.74 0.72 0.31 0.78
Diluted earnings per share (4)(5):
Three months ended March 31, 1998................... 0.22 0.22 0.23 0.24
Year ended December 31, 1997........................ 0.77 0.76 0.77 0.82
Year ended December 31, 1996........................ 0.70 0.68 0.59 0.73
Year ended December 31, 1995........................ 0.71 0.69 0.31 0.75
Cash dividends declared per common share(5)(6):
Three months ended March 31, 1998................... 0.06 0.06 0.07 0.06
Year ended December 31, 1997........................ 0.19 0.19 0.28 0.21
Year ended December 31, 1996........................ 0.15 0.15 0.20 0.16
Year ended December 31, 1995........................ 0.14 0.14 0.05 0.15
Book value per common share at:
March 31, 1998...................................... 5.19 6.15 14.75 6.64
December 31, 1997................................... 5.04 6.02 14.56 6.50
</TABLE>
- ------------------------
(1) Reflects the assumed issuance of 1,596,199 shares of USB Common Stock in the
Merger based upon an Exchange Ratio of 1.08 assuming the Average Closing
Price is $20.45. See "Notes to Pro Forma Condensed Combined Financial
Statements (Unaudited)."
(NOTES CONTINUED ON NEXT PAGE)
8
<PAGE>
(2) The information above reflects Tappan Zee's historical financial data at and
for the three months ended March 31, 1998, and at and for the years ended
March 31, 1998, 1997 and 1996.
(3) Pro forma book value per share of USB Common Stock was calculated by
dividing total pro forma combined stockholders' equity amounts as of the
applicable date by the sum of (i) the total shares of USB Common Stock
outstanding as of the applicable date and (ii) the total shares of Tappan
Zee Common Stock outstanding as of the applicable date, 1,478,062 at March
31, 1998 and December 31, 1997, less shares previously acquired by USB,
multiplied by the Exchange Ratio of 1.08 shares of USB Common Stock for each
share of Tappan Zee Common Stock. Equivalent pro forma combined book value
per share of Tappan Zee Common Stock represents the pro forma combined book
value per share of USB Common Stock multiplied by the Exchange Ratio of
1.08. Assuming that the actual Average Closing Price was the $20.875 closing
per share price of USB Common Stock on July 9, 1998, the Exchange Ratio
would be 1.05 and the pro forma equivalent data set forth above would be
reduced accordingly. The Exchange Ratio is subject to adjustment based on
the actual Average Closing Price.
(4) USB pro forma combined basic and diluted earnings per share represents
historical net income available to common stockholders for USB and Tappan
Zee combined on the assumption that USB and Tappan Zee had been combined for
the periods presented on a pooling-of-interests basis, divided by the number
of weighted average shares (for basic earnings per share) and adjusted
weighted average shares, which includes the effect of potentially dilutive
securities such as stock options (for diluted earnings per share), as
applicable, of USB Common Stock which would have been issued and outstanding
assuming the Merger had been completed at the beginning of the period based
on an Exchange Ratio of 1.08 shares of USB Common Stock for each share of
Tappan Zee Common Stock, less shares previously acquired by USB. Per common
share amounts assuming dilution were computed assuming the exercise of stock
options and repurchase of common stock with the proceeds resulting from such
exercise using the average market price per share of USB Common Stock or
Tappan Zee Common Stock, as appropriate, for the applicable period. The pro
forma combined income information does not reflect Merger costs, expense
savings or revenue enhancements that may occur as a result of the Merger.
See "Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited)." Tappan Zee equivalent pro forma earnings per common share
amounts represent "Pro Forma Combined Continuing Corporation" amounts
multiplied by an Exchange Ratio of 1.08 shares of USB Common Stock for each
share of Tappan Zee Common Stock, less shares previously acquired by USB.
Assuming that the actual Average Closing Price was the $20.875 closing per
share price of USB Common Stock on July 9, 1998, the Exchange Ratio would be
1.05 and the pro forma equivalent data set forth above would be reduced
accordingly. The Exchange Ratio is subject to adjustment based on the actual
Average Closing Price.
(5) Earnings per share and cash dividends declared per common share information
reflects USB and Tappan Zee for their years ended December 31 and March 31,
respectively, and for the three months ended March 31, 1998.
(6) USB pro forma combined dividends declared per common share represent
historical dividends paid by USB. USB, as the resulting corporation from the
Merger (the "Continuing Corporation"), will pay dividends at a rate to be
determined by USB's Board of Directors; it is anticipated that the initial
dividend will be at the most recent rate paid by USB. Tappan Zee pro forma
equivalent dividends declared per common share represent USB pro forma
dividends declared per common share multiplied by an Exchange Ratio of 1.08.
Assuming that the actual Average Closing Price was the $20.875 closing per
share price of USB Common Stock on July 9, 1998, the Exchange Ratio would be
1.05 and the pro forma equivalent data set forth above would be reduced
accordingly. The Exchange Ratio is subject to adjustment based on the actual
Average Closing Price.
9
<PAGE>
COMPARATIVE MARKET VALUES
The following table sets forth the market value per share of USB Common
Stock, and the market value per share and the equivalent market value per share
of Tappan Zee Common Stock, on March 5, 1998 (the last business day preceding
public announcement of the Merger) and July 9, 1998 (the latest practicable
trading day before the printing of this Proxy Statement/Prospectus). The
equivalent market value per share of Tappan Zee Common Stock indicated in the
table (i) at March 5, 1998 is based on an Exchange Ratio of 0.99 (the applicable
Exchange Ratio assuming the Average Closing Price equaled the market value per
share of USB Common Stock on March 5, 1998) and (ii) at July 9, 1998 is based on
an Exchange Ratio of 1.05, (the applicable Exchange Ratio assuming the Average
Closing Price equaled the market value per share of USB Common Stock on July 9,
1998). See "Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited)."
The historical market values per share of USB Common Stock and Tappan Zee
Common Stock and the historical market value per share of USB Common Stock used
to determine the equivalent market value per share of Tappan Zee Common Stock
are the per share last sale prices on March 5, 1998 and July 9, 1998,
respectively, as reported on the American Stock Exchange with respect to USB
Common Stock and on The Nasdaq National Market with respect to Tappan Zee Common
Stock. See "Market Price and Dividend Information for USB and Tappan Zee."
<TABLE>
<CAPTION>
TAPPAN ZEE
USB ------------------------------
----------- EQUIVALENT MARKET
HISTORICAL HISTORICAL VALUE PER SHARE
----------- ----------- -----------------
<S> <C> <C> <C>
March 5, 1998....................................... $ 22.250 $ 19.000 $ 22.000
July 9, 1998........................................ $ 20.875 $ 19.875* $ 21.919
</TABLE>
- ------------------------
* Tappan Zee's historical per share closing sales price reflects the closing
sales price on July 7, 1998. There were no trades of Tappan Zee Common Stock
reported on The Nasdaq National Market on July 8, 1998 and July 9, 1998.
10
<PAGE>
USB SELECTED CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The following table sets forth certain consolidated financial and other data
of USB at the dates and for the periods indicated. For additional financial
information about USB, reference is made to the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of USB and related notes incorporated by reference herein.
<TABLE>
<CAPTION>
AS OF OR FOR THE THREE
MONTHS ENDED AS OF OR FOR THE FISCAL YEAR ENDED
MARCH 31, DECEMBER 31,
---------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets......................... $1,031,280 $891,360 $1,023,400 $803,451 $678,783 $602,603 $508,638
Securities........................... 369,803 306,103 380,900 249,775 231,155 225,524 200,006
Loans, net........................... 580,507 522,310 556,109 497,769 387,437 330,250 272,971
Deposits............................. 852,890 742,056 797,795 682,280 610,635 543,862 469,016
Borrowings........................... 83,653 68,471 133,803 59,692 10,000 15,900 --
Long-term debt qualifying as
regulatory capital................. -- -- -- -- -- 1,800 1,800
Corporation-Obligated mandatory
redeemable capital securities of
subsidiary trust................... 20,000 20,000 20,000 -- -- -- --
Preferred stock...................... -- -- -- 3,250 3,750 3,750 3,750
Common stockholders' equity.......... 64,606 54,259 62,639 53,616 47,583 34,569 30,685
Stockholders' equity................. 64,606 54,259 62,639 56,866 51,333 38,319 34,435
SELECTED OPERATING DATA (1):
Interest income...................... $19,337 $15,953 $70,912 $57,216 $49,692 $39,601 $34,544
Interest expense..................... 10,310 7,950 37,106 27,601 24,318 15,933 13,138
Net interest income.................. 9,027 8,003 33,806 29,615 25,374 23,668 21,406
Provision for loan losses............ 300 630 2,320 2,275 1,200 993 763
Non-interest income.................. 1,192 871 4,535 5,027 7,315 3,155 3,903
Non-interest expenses................ 5,709 4,899 21,388 18,179 17,851 15,704 14,741
Income before income tax expense..... 4,210 3,345 14,633 14,188 13,638 10,126 9,805
Net income........................... 2,951 2,332 10,402 9,414 9,327 7,000 6,200
Preferred dividends.................. -- 34 45 294 315 315 328
Income available to common
stockholders....................... 2,951 2,298 10,357 9,120 9,012 6,685 5,872
SELECTED FINANCIAL RATIOS(1)(2):
Return on average total assets(3).... 1.16% 1.11% 1.12% 1.25% 1.42% 1.23% 1.25%
Return on average total common
stockholders' equity(3)............ 18.50 16.93 17.95 18.60 22.17 19.66 21.08
Net interest margin(3)(4)............ 3.89 4.23 4.10 4.40 4.50 4.80 5.10
Average interest rate spread(3)(5)... 3.16 3.51 3.40 3.80 3.80 4.30 4.70
Equity to total assets at end of
period............................. 6.26 6.09 6.12 7.08 7.56 6.36 6.77
Average total equity to average total
assets............................. 6.25 6.65 6.27 6.99 6.78 6.65 6.42
Efficiency ratio (6)................. 55.21 52.71 54.64 50.94 57.61 54.12 56.19
Non-interest expenses to average
assets(3).......................... 2.24 2.33 2.30 2.42 2.72 2.76 2.98
Non-performing loans to total
loans.............................. .92 1.46 1.03 1.61 1.03 1.77 1.44
Allowance for loan losses to non-
performing loans................... 145.06 81.36 130.00 70.98 96.73 56.23 71.91
Allowance for loan losses to total
loans.............................. 1.33 1.19 1.34 1.14 1.00 1.00 1.03
Non-performing assets to total
assets............................. .70 .94 .77 1.09 .73 1.07 .96
Net charge-offs to average net
loans(3)........................... .02 .09 .10 .10 .17 .17 .17
Leverage capital ratio............... 8.22 9.03 8.26 7.06 7.43 7.21 6.90
Tier I risk-based capital ratio...... 13.03 12.86 12.63 10.45 11.37 10.58 10.33
Total risk-based capital ratio....... 14.24 13.93 13.80 11.50 12.26 11.82 11.74
Dividend payout ratio (7)............ 23.18 24.19 22.76 20.15 18.41 19.54 15.36
PER COMMON SHARE(1)(8):
Basic earnings(9).................... $ .24 $ .19 $ .84 $ .74 $ .74 $ .57 $ .52
Diluted earnings(9).................. .22 .17 .77 .70 .71 .55 .51
Book value at end of period(10)...... 5.19 4.38 5.04 4.34 3.87 2.92 2.65
Cash dividends declared.............. .06 .05 .19 .15 .14 .11 .08
Weighted average shares.............. 12,438,109 12,374,610 12,401,562 12,330,222 12,117,283 11,709,900 11,374,224
Adjusted weighted average shares..... 13,722,487 13,265,184 13,523,182 13,025,994 12,609,516 12,161,784 11,571,057
</TABLE>
(NOTES ON FOLLOWING PAGE)
11
<PAGE>
- ------------------------
(1) Net income for the years ended December 31, 1996 and 1995, excluding net
income from the sale of a branch, which was previously part of the Royal Oak
Savings Bank, F.S.B. ("Royal") branch system, in 1996 of $300,000, and the
nonrecurring gain on the sale of Royal in 1995 of $2.1 million, as well as
Royal's 1995 net income, would have been approximately $9.1 million, or
$0.68 per diluted common share, and $7.0 million or $0.53 per diluted common
share, respectively. Return on average total assets and return on average
total common stockholders' equity, excluding the effect of the Royal
transactions discussed above, was 1.21% and 1.07%, and 17.99% and 16.48% for
the years ended December 31, 1996 and 1995, respectively.
(2) With the exception of end-of-period ratios, all ratios are based on average
daily balances.
(3) Selected financial ratios for the three month periods ended March 31, 1998
and 1997, are presented on an annualized basis.
(4) Net interest income on a tax equivalent basis divided by average
interest-earning assets. Net interest income on a tax equivalent basis is
based on the federal statutory rate of 35% and applicable state tax rates.
(5) The difference between the weighted average yield on interest-earning assets
on a tax equivalent basis and the weighted average cost of interest-bearing
liabilities.
(6) Non-interest expense, divided by net interest income on a tax equivalent
basis plus non-interest income, excluding gains/losses on securities and
loans held for sale and gains from the sale of Royal and a branch facility.
(7) Dividends paid on common shares as a percentage of income available to
common stockholders.
(8) Adjusted for the two-for-one stock splits distributed in December 1997 and
1996, and the 10% stock dividends distributed in June 1996, June 1995 and
June 1993.
(9) Reflects the adoption in 1998 of SFAS No. 128, "Earnings Per Share." Prior
periods have been restated.
(10) Common stockholders' equity divided by total shares of common stock
outstanding.
12
<PAGE>
TAPPAN ZEE SELECTED CONSOLIDATED
FINANCIAL INFORMATION (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The following table sets forth certain consolidated financial and other data
of Tappan Zee at the dates and for the periods indicated. The table has been
derived from, and should be read in conjunction with the historical financial
statements of Tappan Zee, including the notes related thereto. For additional
financial information about Tappan Zee, reference is made to "Index to Tappan
Zee Consolidated Financial Statements" and the more detailed financial
information contained elsewhere herein.
<TABLE>
<CAPTION>
AS OF OR FOR THE FISCAL YEAR ENDED MARCH 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets............................................... $129,345 $121,841 $114,790 $91,149 $86,388
Securities................................................. 58,399 54,507 50,980 30,381 30,794
Loans, net................................................. 57,623 55,110 51,174 50,233 45,026
Deposits................................................... 104,993 98,327 89,908 81,813 77,510
Shareholders' equity (1)................................... 21,800 21,228 22,360 7,818 7,201
SELECTED OPERATING DATA:
Interest income............................................ $9,393 $8,591 $7,624 $6,547 $6,346
Interest expense........................................... 4,721 4,106 4,002 2,912 2,766
Net interest income........................................ 4,672 4,485 3,622 3,635 3,580
Provision for loan losses.................................. 42 69 90 171 151
Non-interest income........................................ 268 152 211 67 158
Non-interest expense (excluding SAIF special assessment)... 3,010 2,849 2,297 2,087 1,832
SAIF special assessment(2)................................. -- 538 -- -- --
Income before income taxes(4).............................. 1,888 1,181 1,446 1,444 1,755
Net income(3)(4)(5)........................................ 1,097 855 837 834 1,014
SELECTED FINANCIAL RATIOS: (6)
Return on average total assets (5)......................... 0.88% 0.74% 0.81% 0.93% 1.18%
Return on average total common stockholders' equity (5).... 5.12 3.97 6.04 10.81 15.25
Net interest margin (7).................................... 3.79 3.98 3.59 4.16 4.26
Average interest rate spread (8)........................... 2.90 3.07 2.91 3.80 3.94
Equity to total assets at end of period.................... 16.85 17.42 19.48 8.58 8.34
Average total equity to average total assets............... 17.10 18.57 13.34 8.65 7.74
Efficiency ratio (9)....................................... 62.16 72.11 60.75 50.80 47.51
Non-interest expenses to average total assets (5).......... 2.40 2.92 2.21 2.34 2.13
Non-performing loans to total loans........................ 2.67 2.97 3.15 5.20 4.18
Allowance for loan losses to non-performing loans.......... 45.03 39.81 40.07 24.58 28.38
Allowance for loan losses to total loans................... 1.20 1.18 1.26 1.28 1.19
Non-performing assets to total assets...................... 1.21 1.46 1.77 3.40 2.63
Net charge-offs to average net loans....................... -- .11 .17 .13 .20
Leverage capital ratio..................................... 16.77 17.63 19.49 8.80 8.32
Tier 1 risk-based capital ratio............................ 53.69 49.56 50.76 20.80 18.70
Total risk-based capital ratio............................. 54.94 50.81 52.01 22.00 20.10
Dividend payout ratio (10)(11)............................. 35.73 34.04 17.23 -- --
PER COMMON SHARE (11):
Basic earnings(12)......................................... $ 0.80 $ 0.60 $ 0.31 -- --
Diluted earnings(12)....................................... 0.77 0.59 0.31 -- --
Book value at end of period(13)............................ 14.75 13.84 13.80 -- --
Cash dividends declared.................................... 0.28 0.20 0.05 -- --
Weighted average shares.................................... 1,372,051 1,426,735 1,495,086 -- --
Adjusted weighted average shares........................... 1,423,299 1,449,400 1,495,086 -- --
</TABLE>
(NOTES ON FOLLOWING PAGE)
13
<PAGE>
- ------------------------
(1) For 1998, 1997 and 1996, includes net proceeds of $14.9 million from the
sale of Tappan Zee's common stock in connection with the Savings Bank's
conversion from the mutual to stock form.
(2) Represents the Savings Bank's share of a special assessment imposed on all
financial institutions with deposits insured by SAIF.
(3) The cumulative effect of changes in accounting principles for the year ended
March 31, 1994, resulted in an increase to net income of $100,000 from the
adoption of Financial Accounting Standard No. 109, "Accounting for Income
Taxes," and a decrease to net income of $100,000 for the adoption of
Financial Accounting Standards No. 106, "Employers Accounting for Post
Retirement Benefits Other than Pensions."
(4) Income tax expense for fiscal 1997 has been reduced by a tax benefit of
$166,000 resulting from a change in New York State tax law.
(5) If the after-tax SAIF charge and the state tax benefit described in notes
(2) and (4) above were excluded, the net income for fiscal 1997 would have
been $1,018,000, resulting in a return on average total assets of 0.88% and
a return on average equity of 4.72%. The ratio of non-interest expense to
average total assets would have been 2.45% without the SAIF charge.
(6) With the exception of end-of-period ratios, all ratios are based on
month-end balances which produce results which approximate average daily
balances.
(7) Net interest income divided by average interest-earning assets.
(8) The difference between the weighted average yield on interest-earning assets
and the weighted average cost of interest-bearing liabilities.
(9) Non-interest expense, excluding real estate owned gains and expenses,
divided by net interest income plus non-interest income, excluding
securities gains/losses. Excluding the SAIF special assessment the
efficiency ratio for fiscal 1997 would have been 60.45%.
(10) Dividends paid as a percentage of net income. Ratio for fiscal 1996 is
based on dividends paid in the fourth quarter ended March 31, 1996 as a
percentage of net income for the six-month period following the Savings
Bank's conversion from the mutual to stock form. If based on net income for
the fourth quarter, the ratio would have been 32.93%.
(11) No information is applicable to Tappan Zee for the periods prior to Tappan
Zee's initial public offering on October 5, 1995.
(12) Reflects the adoption in 1998 of SFAS No. 128, "Earnings Per Share." Prior
periods have been restated. Earnings per share amounts for fiscal 1996 are
stated from the date of the Savings Bank's conversion from mutual to stock
form. There were no potentially dilutive securities in fiscal 1996.
(13) Shareholders' equity divided by total shares of common stock outstanding at
March 31 (1,478,062 in 1998, 1,534,062 in 1997 and 1,620,062 in 1996).
14
<PAGE>
SELECTED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The unaudited selected pro forma condensed combined financial information
set forth below gives effect to the Merger under the pooling-of-interests
accounting method. The selected pro forma condensed combined operating data
treats the Merger as if it had been consummated at the beginning of the
respective periods indicated, and the selected pro forma condensed combined
balance sheet data treats the Merger as if it had been consummated on the dates
indicated. The pro forma condensed combined per common share data gives effect
to the assumed issuance of 1,596,199 shares of USB Common Stock based on an
Exchange Ratio of 1.08. The unaudited pro forma historical condensed combined
year-end statement of financial condition information reflects USB and Tappan
Zee at their year-end reporting periods of December 31 and March 31,
respectively, and for the annual periods then ended for the statement of
operations information. Financial information for the three months ended March
31, 1998 and 1997 combine USB and Tappan Zee with interim results presented to
coincide with the reporting periods for USB. Following the Merger, the
Continuing Corporation's fiscal year, like that of USB, will end on December 31.
See "Pro Forma Condensed Combined Financial Statements (Unaudited)."
The selected pro forma condensed combined financial information set forth
below is presented for illustrative purposes only and is not necessarily
indicative of the operating results or financial position that would have
occurred if the Merger had been consummated at the dates assumed herein, nor is
it necessarily indicative of future operating results or financial position. The
selected pro forma condensed combined financial information does not give effect
to the anticipated merger costs, expense savings and revenue enhancement
opportunities that could result from the Merger or any other items of income or
expense which may result from the Merger. See "Pro Forma Condensed Combined
Financial Statements (Unaudited)." As a result, the pro forma combined financial
information of the continuing corporation at the Effective Time and thereafter
may be significantly different from the pro forma financial information
presented herein.
15
<PAGE>
SELECTED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF OR FOR THE THREE AS OF OR FOR THE FISCAL YEAR
MONTHS ENDED MARCH 31, ENDED DECEMBER 31,
------------------------ -------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA(1):
Total assets..................................................... $ 1,160,623 $ 1,013,199 $ 1,152,743 $ 925,290 $ 793,573
Securities....................................................... 428,200 360,608 439,297 304,280 282,135
Loans, net....................................................... 638,130 577,420 613,732 552,879 438,611
Total deposits................................................... 957,883 840,383 902,788 780,607 700,543
Borrowings....................................................... 83,653 68,471 133,803 59,692 10,000
Corporation-Obligated mandatory redeemable capital securities of
subsidiary trust............................................... 20,000 20,000 20,000 -- --
Preferred stock.................................................. -- -- -- 3,250 3,750
Common stockholders' equity...................................... 86,404 75,485 84,437 74,842 69,943
Stockholders' equity............................................. 86,404 75,485 84,437 78,092 73,693
SELECTED OPERATING DATA (1)(2):
Interest income.................................................. $ 21,790 $ 18,149 $ 80,305 $ 65,807 $ 57,316
Interest expense................................................. 11,519 9,012 41,827 31,707 28,320
Net interest income.............................................. 10,271 9,137 38,478 34,100 28,996
Provision for loan losses........................................ 310 653 2,362 2,344 1,290
Non-interest income.............................................. 1,283 918 4,803 5,179 7,526
Non-interest expenses(3)......................................... 6,461 5,595 24,398 21,566 20,148
Income before income taxes....................................... 4,783 3,807 16,521 15,369 15,084
Net income(4).................................................... 3,285 2,601 11,499 10,269 10,164
Preferred dividends.............................................. -- 34 45 294 315
Income available to common stockholders.......................... 3,285 2,567 11,454 9,975 9,849
SELECTED FINANCIAL RATIOS(1)(2)(5):
Return on average total assets(6)................................ 1.14% 1.08% 1.09% 1.18% 1.34%
Return on average total common stockholders' equity(6)........... 15.38 13.59 14.47 14.13 18.07
Net interest margin(6)(7)........................................ 3.89 4.19 4.03 4.35 4.11
Average interest rate spread(6)(8)............................... 3.16 3.45 3.38 3.86 3.72
Equity to total assets at end of period.......................... 7.44 7.45 7.33 8.44 9.29
Average total equity to average total assets..................... 7.44 8.04 7.56 8.54 7.68
Efficiency ratio(9).............................................. 56.94 53.40 55.46 53.35 55.55
Non-interest expenses to average total assets.................... 2.25 2.33 2.31 2.49 2.65
Non-performing loans to total loans.............................. 1.34 1.71 1.49 1.85 1.43
Allowance for loan losses to non-performing loans................ 124.78 74.46 113.87 66.91 90.65
Allowance for loan losses to total loans......................... 1.32 1.30 1.33 1.14 1.03
Non-performing assets to total assets .75 .93 .80 1.12 .80
Net charge-offs to average net loans(6).......................... .02 .08 .09 .10 .17
Leverage capital ratio........................................... 9.18 10.11 9.24 8.45 9.60
Tier I risk-based capital ratio.................................. 15.42 15.38 15.05 13.32 15.20
Total risk-based capital ratio................................... 16.64 16.45 16.23 14.38 15.89
Dividend payout ratio(10)........................................ 22.98 25.44 24.00 21.34 17.67
PER COMMON SHARE(1)(2):
Basic earnings(11)(12)........................................... $ .24 $ .18 $ .83 $ .72 $ .71
Diluted earnings(11)(12)......................................... .22 .17 .76 .68 .69
Book value at end of period(13).................................. 6.15 5.37 6.02 5.34 4.98
Cash dividends declared(14)...................................... .06 .05 .19 .15 .14
Weighted average shares(15)...................................... 13,911,653 13,883,374 13,883,269 13,870,988 13,866,950
Adjusted weighted average shares(15)............................. 15,263,362 14,810,953 15,060,237 14,591,238 14,359,183
</TABLE>
(NOTES ON FOLLOWING PAGE)
16
<PAGE>
- ------------------------
(1) The information above reflects Tappan Zee's historical financial data at and
for the three months ended March 31, 1998 and 1997, and at and for the years
ended March 31, 1998, 1997 and 1996.
(2) Net income for the years ended December 31, 1996 and 1995, excluding net
income from the sale of a branch, which was previously part of the Royal
branch system, in 1996 of $300,000, and the nonrecurring gain on the sale of
Royal in 1995 of $2.1 million, as well as Royal's 1995 net income, would
have been approximately $10.0 million, or $.67 per diluted share, and $7.9
million, or $.53 per diluted share, respectively. Excluding the effect of
the Royal transactions discussed above, return on average total assets was
1.15% and 1.03%, and return on average total common stockholders' equity was
13.71% and 13.83% for the years ended December 31, 1996 and 1995,
respectively.
(3) Includes the Savings Bank's share of a special assessment imposed on all
financial institutions with deposits insured by SAIF of $538,000 in 1996.
(4) Income tax expense for fiscal 1997 has been reduced by a tax benefit of
$166,000 resulting from a change in New York State tax law for savings
institutions.
(5) With the exception of end-of-period ratios, all ratios are based on average
daily balances.
(6) Selected financial ratios for the three month periods ended March 31, 1998
and 1997, are presented on an annualized basis.
(7) Net interest income, on a tax equivalent basis, divided by average interest
earning assets. Net interest income on a tax equivalent basis is based on
the federal statutory rate of 35% and applicable state tax rates.
(8) The difference between the weighted average yield on interest-earning assets
on a tax equivalent basis and the weighted average cost of interest-bearing
liabilities.
(9) Non-interest expense, divided by net interest income on a tax equivalent
basis plus non-interest income, excluding gains/losses on securities and
loans held for sale and gains from the sale of Royal and a branch facility.
(10) Dividends paid on common shares as a percentage of net income available to
common stockholders.
(11) USB pro forma combined basic and diluted earnings per share represents
historical net income available to common stockholders for USB and Tappan
Zee combined on the assumption that USB and Tappan Zee had been combined for
the periods presented on a pooling-of-interests basis, divided by the number
of weighted average shares (for basic earnings per share) and adjusted
weighted average shares, which includes the effect of potentially dilutive
securities such as stock options (for diluted earnings per share), as
applicable, of USB Common Stock which would have been issued and outstanding
assuming the Merger had been completed at the beginning of the period based
on an Exchange Ratio of 1.08 shares of USB Common Stock for each share of
Tappan Zee Common Stock, less shares previously acquired by USB.
(12) Reflects the adoption in 1998 of SFAS No. 128, "Earnings Per Share." Prior
periods have been restated.
(13) Common stockholders' equity divided by total shares of common stock
outstanding.
(14) USB pro forma combined dividends per share represent historical dividends
paid by USB. The Continuing Corporation will pay dividends at a rate to be
determined by USB's Board of Directors; it is anticipated that the initial
dividend will be at the current rate paid by USB.
(15) Weighted average shares and adjusted weighted average shares for the year
ended December 31, 1995 assume issuance of Tappan Zee shares at the
beginning of the period.
17
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS (UNAUDITED)
The pro forma condensed combined balance sheet as of March 31, 1998, and the
related pro forma condensed combined statements of income for the three months
ended March 31, 1998 and 1997, and for the years ended December 31, 1997, 1996
and 1995 give effect to the acquisition of 100% of the outstanding Tappan Zee
Common Stock by USB. The pro forma information is based on the historical
consolidated financial statements, including the notes thereto, of USB that are
incorporated by reference into this Proxy Statement/Prospectus (see
"Incorporation of Certain Documents by Reference" and "USB Selected Consolidated
Financial Information") and the historical consolidated financial statements of
Tappan Zee, including the notes thereto, included elsewhere herein (see "Index
to Tappan Zee Consolidated Financial Statements" and "Tappan Zee Selected
Consolidated Financial Information"). The unaudited pro forma historical
combined income statement information for the periods presented reflects USB for
its year ended December 31, combined with Tappan Zee income statement
information for its fiscal year ended March 31, immediately succeeding the
applicable USB year end. Financial information for the three months ended March
31, 1998 and 1997 combine USB and Tappan Zee interim results for the quarter
then ended. Unaudited pro forma combined basic and diluted earnings per share
for the period ended December 31, 1995 is based upon the weighted average and
adjusted weighted average shares outstanding, respectively, for Tappan Zee as if
common shares were outstanding for the entire fiscal year ended March 31, 1996.
This assumption has been made to facilitate the presentation of pro forma
combined earnings and earnings per share amounts because Tappan Zee operated as
a mutual savings bank prior to October 1995 and in fact had no equity shares
outstanding prior to that time.
The pro forma information set forth below gives effect to the Merger under
the pooling-of-interests method of accounting. See "The Merger--Accounting
Treatment of the Merger." The pro forma condensed combined statements of income
give effect to the Merger as if it had occurred at the beginning of each period
presented. The pro forma combined per share data gives effect to the assumed
issuance of 1,596,199 shares of USB Common Stock, based on an Exchange Ratio of
1.08, which would result in 14,046,288 shares of USB Common Stock outstanding as
of March 31, 1998 following the Merger. See "Notes to Pro Forma Condensed
Combined Financial Statements (Unaudited)."
This pro forma information may not necessarily be indicative of the
operating results or financial position that would have actually occurred if the
Merger had been consummated at the beginning of each period presented, nor is it
necessarily indicative of future operating results or financial position. The
pro forma information does not give effect to the anticipated merger costs or to
the anticipated expense savings and revenue enhancements that could result from
the Merger or any other items of income or expense which may result from the
Merger. See "Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited)."
18
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
AS OF MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
USB AND
PRO FORMA TAPPAN
ADJUSTMENTS ZEE
USB TAPPAN ZEE DEBIT/(CREDIT) COMBINED
---------- ---------- ---------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and amounts due from
banks....................... $ 21,114 $ 783 $ -- $ 21,897
Federal funds sold............ 18,300 6,200 -- 24,500
---------- ---------- ------ -----------
Cash and cash equivalents... 39,414 6,983 -- 46,397
Interest bearing deposits in
other banks................. -- 2,401 -- 2,401
Securities:
Available for sale, at fair
value....................... 299,043 22,868 (2)(4(A)) 321,909
Held to maturity, at
amortized cost.............. 70,760 35,531 -- 106,291
Loans, net of deferred fees... 588,340 58,325 -- 646,665
Allowance for loan losses..... (7,833) (702) -- (8,535)
---------- ---------- ------ -----------
Net loans................... 580,507 57,623 -- 638,130
Other real estate owned....... 1,816 -- -- 1,816
Federal Home Loan Bank of New
York stock.................. 13,723 943 -- 14,666
Other assets.................. 26,017 2,996 -- 29,013
---------- ---------- ------ -----------
TOTAL ASSETS.............. $1,031,280 $129,345 $ (2) $1,160,623
---------- ---------- ------ -----------
---------- ---------- ------ -----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Total deposits................ $ 852,890 $104,993 $ -- $ 957,883
Securities sold under
agreements to repurchase.... 59,780 -- -- 59,780
Federal Home Loan Bank
advances.................... 23,873 -- -- 23,873
Other Liabilities............. 9,994 2,552 -- 12,546
---------- ---------- ------ -----------
TOTAL LIABILITIES......... 946,537 107,545 -- 1,054,082
---------- ---------- ------ -----------
Corporation-Obligated
mandatory redeemable capital
securities of subsidiary
trust....................... 20,000 -- -- 20,000
Minority interest-junior
preferred stock of
consolidated subsidiary..... 137 -- -- 137
Stockholders' equity(5)(6):
Common stock.................. 62,896 16 (7,965)(4(C)) 70,877
Additional paid-in capital.... 186 15,086 10,027(4(A)(B)(C)) 5,245
Retained earnings............. 2,912 9,974 -- 12,886
Treasury stock................ (885) (2,060) (2,060)(4(B)) (885)
Common stock held by employee
benefit plans(7)............ (1,152) (1,305) -- (2,457)
Net unrealized gain on
available for sale
securities, net of tax...... 649 89 -- 738
---------- ---------- ------ -----------
TOTAL STOCKHOLDERS'
EQUITY.................. 64,606 21,800 2 86,404
---------- ---------- ------ -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY.... $1,031,280 $129,345 $ 2 $1,160,623
---------- ---------- ------ -----------
---------- ---------- ------ -----------
Leverage capital ratio........ 8.22% 16.77% 9.18%
Tier 1 risk-based capital
ratio....................... 13.03 53.69 15.42
Total risk-based capital
ratio....................... 14.24 54.94 16.64
</TABLE>
See accompanying Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited).
19
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
------------------------------------------------------------
<S> <C> <C> <C>
USB AND TAPPAN ZEE
USB TAPPAN ZEE COMBINED
------------------ ------------------ ------------------
INTEREST INCOME:
Interest and fees on loans......................................... $12,768 $1,305 $14,073
Interest on federal funds sold..................................... 280 82 362
Interest and dividends on securities............................... 6,039 1,038 7,077
Interest on deposits in other banks................................ -- 13 13
Dividends on Federal Home Loan
Bank of New York stock........................................... 250 15 265
-------- -------- --------
TOTAL INTEREST INCOME............................................ 19,337 2,453 21,790
INTEREST EXPENSE:
Interest on deposits............................................... 8,338 1,209 9,547
Interest on borrowings............................................. 1,484 -- 1,484
Interest on Corporation-Obligated mandatory redeemable capital
securities of subsidiary trust................................... 488 -- 488
-------- -------- --------
TOTAL INTEREST EXPENSE........................................... 10,310 1,209 11,519
-------- -------- --------
NET INTEREST INCOME............................................ 9,027 1,244 10,271
Provision for loan losses.......................................... 300 10 310
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............ 8,727 1,234 9,961
NON-INTEREST INCOME:
Gain on securities transactions-net................................ 318 55 373
Service charges and fees........................................... 622 32 654
Other income....................................................... 252 4 256
-------- -------- --------
TOTAL NON-INTEREST INCOME........................................ 1,192 91 1,283
NON-INTEREST EXPENSES:
Salaries and employee benefits..................................... 3,122 451 3,573
Occupancy and equipment expense.................................... 1,115 88 1,203
Advertising and business development............................... 277 9 286
Professional fees.................................................. 282 87 369
Communications..................................................... 202 6 208
Stationery and printing............................................ 161 8 169
FDIC insurance..................................................... 26 16 42
Other expenses..................................................... 524 87 611
-------- -------- --------
TOTAL NON-INTEREST EXPENSES...................................... 5,709 752 6,461
-------- -------- --------
Income before income taxes......................................... 4,210 573 4,783
Provision for income taxes......................................... 1,259 239 1,498
-------- -------- --------
NET INCOME(3)(8)............................................... 2,951 334 3,285
Preferred dividends.................................................. -- -- --
-------- -------- --------
Income available to common stockholders.............................. $ 2,951 $ 334 $ 3,285
-------- -------- --------
-------- -------- --------
Basic earnings per share(2).......................................... $0.24 $0.24 $0.24
Diluted earnings per share(2)........................................ 0.22 0.23 0.22
</TABLE>
<TABLE>
<S> <C> <C> <C>
Weighted average shares(2)........................................... 12,438,109 1,364,493 13,911,653
Adjusted weighted average shares(2).................................. 13,722,487 1,426,836 15,263,361
</TABLE>
See accompanying Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited).
20
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
------------------------------------------------------------
<S> <C> <C> <C>
USB AND TAPPAN ZEE
USB TAPPAN ZEE COMBINED
------------------ ------------------ ------------------
INTEREST INCOME:
Interest and fees on loans......................................... $11,317 $1,206 $12,523
Interest on federal funds sold..................................... 179 114 293
Interest and dividends on securities............................... 4,388 853 5,241
Interest on deposits in other banks................................ -- 13 13
Dividends on Federal Home Loan
Bank of New York stock........................................... 69 10 79
-------- -------- --------
TOTAL INTEREST INCOME............................................ 15,953 2,196 18,149
INTEREST EXPENSE:
Interest on deposits............................................... 6,760 1,062 7,822
Interest on borrowings............................................. 902 -- 902
Interest on Corporation-Obligated mandatory redeemable capital
securities of subsidiary trust................................... 288 -- 288
-------- -------- --------
TOTAL INTEREST EXPENSE........................................... 7,950 1,062 9,012
-------- -------- --------
NET INTEREST INCOME............................................ 8,003 1,134 9,137
Provision for loan losses.......................................... 630 23 653
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............ 7,373 1,111 8,484
NON-INTEREST INCOME:
Gain (loss) on securities transactions-net......................... (3) 12 9
Gain on loans held for sale-net.................................... 7 -- 7
Service charges and fees........................................... 569 32 601
Other income....................................................... 298 3 301
-------- -------- --------
TOTAL NON-INTEREST INCOME........................................ 871 47 918
NON-INTEREST EXPENSES:
Salaries and employee benefits..................................... 2,665 354 3,019
Occupancy and equipment expense.................................... 944 92 1,036
Advertising and business development............................... 190 16 206
Professional fees.................................................. 354 62 416
Communications..................................................... 194 7 201
Stationery and printing............................................ 118 29 147
FDIC insurance..................................................... 22 15 37
Other expenses..................................................... 412 121 533
-------- -------- --------
TOTAL NON-INTEREST EXPENSES...................................... 4,899 696 5,595
-------- -------- --------
Income before income taxes......................................... 3,345 462 3,807
Provision for income taxes......................................... 1,013 193 1,206
-------- -------- --------
NET INCOME(3)(8)............................................... 2,332 269 2,601
Preferred dividends.................................................. 34 -- 34
-------- -------- --------
Income available to common stockholders.............................. $ 2,298 $ 269 $ 2,567
-------- -------- --------
-------- -------- --------
Basic earnings per share(2).......................................... $0.19 $0.19 $0.18
Diluted earnings per share(2)........................................ 0.17 0.19 0.17
</TABLE>
<TABLE>
<S> <C> <C> <C>
Weighted average shares(2)........................................... 12,374,610 1,397,104 13,883,374
Adjusted weighted average shares(2).................................. 13,265,184 1,431,368 14,810,953
</TABLE>
See accompanying Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited).
21
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
USB AND TAPPAN ZEE
USB TAPPAN ZEE(*) COMBINED
------------------ ------------------ ------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans......................................... $47,897 $5,004 $52,901
Interest on federal funds sold..................................... 597 505 1,102
Interest and dividends on securities............................... 21,894 3,780 25,674
Interest on deposits in other banks................................ 1 55 56
Dividends on Federal Home Loan
Bank of New York stock........................................... 523 49 572
-------- -------- --------
TOTAL INTEREST INCOME............................................ 70,912 9,393 80,305
INTEREST EXPENSE:
Interest on deposits............................................... 30,521 4,721 35,242
Interest on borrowings............................................. 4,814 -- 4,814
Interest on Corporation-Obligated mandatory redeemable capital
securities of subsidiary trust................................... 1,771 -- 1,771
-------- -------- --------
TOTAL INTEREST EXPENSE........................................... 37,106 4,721 41,827
-------- -------- --------
NET INTEREST INCOME............................................ 33,806 4,672 38,478
Provision for loan losses.......................................... 2,320 42 2,362
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............ 31,486 4,630 36,116
NON-INTEREST INCOME:
Gain on securities transactions-net................................ 1,004 109 1,113
Gain on loans held for sale-net.................................... 28 -- 28
Service charges and fees........................................... 2,236 140 2,376
Other income....................................................... 1,267 19 1,286
-------- -------- --------
TOTAL NON-INTEREST INCOME........................................ 4,535 268 4,803
NON-INTEREST EXPENSES:
Salaries and employee benefits..................................... 11,483 1,720 13,203
Occupancy and equipment expense.................................... 3,994 357 4,351
Advertising and business development............................... 1,056 58 1,114
Professional fees.................................................. 1,270 371 1,641
Communications..................................................... 708 25 733
Stationery and printing............................................ 450 52 502
FDIC insurance..................................................... 90 62 152
Other expenses..................................................... 2,337 365 2,702
-------- -------- --------
TOTAL NON-INTEREST EXPENSES...................................... 21,388 3,010 24,398
-------- -------- --------
Income before income taxes......................................... 14,633 1,888 16,521
Provision for income taxes......................................... 4,231 791 5,022
-------- -------- --------
NET INCOME(3)(8)............................................... 10,402 1,097 11,499
Preferred dividends.................................................. 45 -- 45
-------- -------- --------
Income available to common stockholders.............................. $10,357 $1,097 $11,454
-------- -------- --------
-------- -------- --------
Basic earnings per share(2).......................................... $0.84 $0.80 $0.83
Diluted earnings per share(2)........................................ 0.77 0.77 0.76
</TABLE>
<TABLE>
<S> <C> <C> <C>
Weighted average shares(2)........................................... 12,401,562 1,372,051 13,883,269
Adjusted weighted average shares(2).................................. 13,523,182 1,423,299 15,060,237
</TABLE>
- ------------------------
(*) Year ended March 31, 1998.
See accompanying Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited).
22
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
USB AND TAPPAN ZEE
USB TAPPAN ZEE(*) COMBINED
------------------ ------------------ ------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans......................................... $40,652 $4,721 $45,373
Interest on federal funds sold..................................... 693 234 927
Interest and dividends on securities............................... 15,670 3,513 19,183
Interest on deposits in other banks................................ 39 86 125
Dividends on Federal Home Loan
Bank of New York stock........................................... 162 37 199
-------- -------- --------
TOTAL INTEREST INCOME............................................ 57,216 8,591 65,807
INTEREST EXPENSE:
Interest on deposits............................................... 25,774 4,094 29,868
Interest on borrowings............................................. 1,827 12 1,839
-------- -------- --------
TOTAL INTEREST EXPENSE........................................... 27,601 4,106 31,707
-------- -------- --------
NET INTEREST INCOME............................................ 29,615 4,485 34,100
Provision for loan losses.......................................... 2,275 69 2,344
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............ 27,340 4,416 31,756
NON-INTEREST INCOME:
Gain on securities transactions-net................................ 819 23 842
Loss on loans held for sale-net.................................... (54) -- (54)
Net gain on sale of branch facility................................ 600 -- 600
Service charges and fees........................................... 2,419 119 2,538
Other income....................................................... 1,243 10 1,253
-------- -------- --------
TOTAL NON-INTEREST INCOME........................................ 5,027 152 5,179
NON-INTEREST EXPENSES:
Salaries and employee benefits..................................... 10,322 1,477 11,799
Occupancy and equipment expense.................................... 3,419 351 3,770
Advertising and business development............................... 867 73 940
Professional fees.................................................. 1,033 316 1,349
Communications..................................................... 625 25 650
Stationery and printing............................................ 387 52 439
FDIC insurance..................................................... 2 693 695
Other expenses..................................................... 1,524 400 1,924
-------- -------- --------
TOTAL NON-INTEREST EXPENSES...................................... 18,179 3,387 21,566
-------- -------- --------
Income before income taxes......................................... 14,188 1,181 15,369
Provision for income taxes......................................... 4,774 326 5,100
-------- -------- --------
NET INCOME(3)(8)............................................... 9,414 855 10,269
Preferred dividend................................................... 294 -- 294
-------- -------- --------
Income available to common stockholders.............................. $ 9,120 $ 855 $ 9,975
-------- -------- --------
-------- -------- --------
Basic earnings per share(2).......................................... $0.74 $0.60 $0.72
Diluted earnings per share(2)........................................ 0.70 0.59 0.68
</TABLE>
<TABLE>
<S> <C> <C> <C>
Weighted average shares(2)........................................... 12,330,222 1,426,735 13,870,988
Adjusted weighted average shares(2).................................. 13,025,994 1,449,400 14,591,238
</TABLE>
- ------------------------
(*) Year ended March 31, 1997.
See accompanying Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited).
23
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (UNAUDITED)
FOR YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
USB AND TAPPAN ZEE
USB TAPPAN ZEE(*) COMBINED
------------------ ------------------ ------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans......................................... $33,216 $4,465 $37,681
Interest on federal funds sold..................................... 1,013 639 1,652
Interest and dividends on securities............................... 15,166 2,387 17,553
Interest on deposits in other banks................................ 137 96 233
Dividends on Federal Home Loan
Bank of New York stock........................................... 160 37 197
-------- -------- --------
TOTAL INTEREST INCOME............................................ 49,692 7,624 57,316
INTEREST EXPENSE:
Interest on deposits............................................... 23,438 4,002 27,440
Interest on borrowings............................................. 880 -- 880
-------- -------- --------
TOTAL INTEREST EXPENSE........................................... 24,318 4,002 28,320
-------- -------- --------
NET INTEREST INCOME............................................ 25,374 3,622 28,996
Provision for loan losses.......................................... 1,200 90 1,290
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............ 24,174 3,532 27,706
NON-INTEREST INCOME:
Gain on securities transactions-net................................ 167 88 255
Gain on loans held for sale-net.................................... 57 -- 57
Net gain on sale of Royal Oak Savings Bank, F.S.B.................. 3,520 -- 3,520
Service charges and fees........................................... 2,599 109 2,708
Other income....................................................... 972 14 986
-------- -------- --------
TOTAL NON-INTEREST INCOME........................................ 7,315 211 7,526
NON-INTEREST EXPENSES:
Salaries and employee benefits..................................... 8,993 1,185 10,178
Occupancy and equipment expense.................................... 3,288 371 3,659
Advertising and business development............................... 905 51 956
Professional fees.................................................. 929 149 1,078
Communications..................................................... 577 28 605
Stationery and printing............................................ 380 35 415
FDIC insurance..................................................... 688 202 890
Other expenses..................................................... 2,091 276 2,367
-------- -------- --------
TOTAL NON-INTEREST EXPENSES...................................... 17,851 2,297 20,148
-------- -------- --------
Income before income taxes......................................... 13,638 1,446 15,084
Provision for income taxes......................................... 4,311 609 4,920
-------- -------- --------
NET INCOME(3)(8)............................................... 9,327 837 10,164
Preferred dividend................................................... 315 -- 315
-------- -------- --------
Income available to common stockholders.............................. $ 9,012 $ 837 $ 9,849
-------- -------- --------
-------- -------- --------
Basic earnings per share(2).......................................... $0.74 $0.31 $0.71
Diluted earnings per share(2)........................................ 0.71 0.31 0.69
</TABLE>
<TABLE>
<S> <C> <C> <C>
Weighted average shares(2)........................................... 12,117,283 1,495,086 13,866,950
Adjusted weighted average shares(2).................................. 12,609,516 1,495,086 14,359,183
</TABLE>
- ------------------------
(*) Year ended March 31, 1996.
See accompanying Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited).
24
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(1) The unaudited pro forma condensed combined balance sheet was prepared
assuming that the Merger had been consummated as of March 31, 1998, and the
pooling-of-interests method had been applied in accounting for the Merger. Pro
forma condensed combined income statement information has been prepared assuming
that the Merger had been consummated as of the beginning of each period
presented. The unaudited pro forma historical combined income statement
information for the periods presented reflects USB's income statement
information for its fiscal year ended December 31, combined with Tappan Zee's
income statement information for its fiscal year ended March 31, immediately
succeeding the applicable USB year-end. Financial information for the three
months ended March 31, 1998 and 1997 combine USB and Tappan Zee interim results
for the quarter then ended. An adjustment is recorded to pro forma combined
retained earnings to eliminate the duplication of recording Tappan Zee income
for the three month period ended March 31, 1998, that would have otherwise
occurred as a result of preparing the combined pro forma income statement
information in this manner (which is customary when fiscal year ends of the
companies are within 93 days of each other).
(2) Pro forma shares of common stock are based on the number of shares
outstanding plus additional shares assumed to be issued in the Merger in
exchange for outstanding Tappan Zee Common Stock based on an Exchange Ratio of
1.08 based on the 20 day average closing sales price of USB Common Stock on the
American Stock Exchange from June 9, 1998 to July 7, 1998 of $20.45.
USB pro forma combined basic and diluted earnings per share represents
historical net income available to common stockholders for USB and Tappan Zee
combined on the assumption that USB and Tappan Zee had been combined for the
periods presented on a pooling-of-interests basis, divided by the number of
weighted average shares (for basic earnings per share) and adjusted weighted
average shares, which includes the effect of potentially dilutive securities
such as stock options (for diluted earnings per share), as applicable, of USB
Common Stock which would have been issued and outstanding assuming the Merger
had been completed at the beginning of the period based on an Exchange Ratio of
1.08 shares of USB Common Stock for each share of Tappan Zee Common Stock, less
shares previously acquired by USB. Per common share amounts assuming dilution
were computed assuming the exercise of stock options and repurchase by the
respective companies of common stock with the proceeds resulting from such
exercise using the average market price per share of USB Common Stock or Tappan
Zee Common Stock, as appropriate, for the applicable period.
To the extent cash is paid to Tappan Zee stockholders in lieu of fractional
shares, cash, common stock outstanding and common stockholders' equity would be
reduced. The respective managements of the parties expect that the cash to be
issued at the time of surrender of certificates for an amount (without interest)
equal to the fractional shares multiplied by $22.00 will be less than $10,000
and, therefore, will not be considered significant. Accordingly, all shares of
Tappan Zee Common Stock have been included in the pro forma share data.
(3) The pro forma financial statements do not reflect payments for anticipated
merger costs (legal, accounting, tax, regulatory and severance) and integration
costs (conversion, promotional material, forms, etc.), which are estimated to be
$3.0 million to $3.5 million, net of taxes. The pro forma information also does
not reflect potential expense savings or revenue enhancements expected to be
realized subsequent to the consummation of the Merger. See "Management and
Operations After the Merger."
(4) The following are pro forma adjustments reflected in the "Pro Forma
Adjustments" column of the Pro Forma Condensed Combined Balance Sheet
(Unaudited). (Dollar amounts are in thousands.)
(A) Represents the cancellation of USB's investment in 100 shares of Tappan
Zee Common Stock.
<TABLE>
<S> <C> <C>
Additional paid-in capital............... $2
Securities-available for sale........ $2
</TABLE>
25
<PAGE>
(B) Represents the retirement of Tappan Zee's treasury stock.
<TABLE>
<S> <C> <C>
Additional paid-in capital............... $2,060
Treasury stock-at cost............... $2,060
</TABLE>
(C) Represents the issuance of shares of USB Common Stock in exchange for
outstanding Tappan Zee Common Stock based on an assumed exchange ratio of 1.06.
<TABLE>
<S> <C> <C>
Additional paid-in capital............... $7,965
Common stock......................... $7,965
</TABLE>
(5) Summary of Transaction
A summary of the pro forma entries above follows (dollar amounts are in
thousands):
<TABLE>
<CAPTION>
SHARES AMOUNT
---------- ---------
<S> <C> <C> <C>
USB Common Stock exchanged for outstanding
Tappan Zee Common Stock, excluding 100 shares
previously acquired by USB.................... 1,596,199 @$5.00-par value(a) $ 7,981
Less par value of Tappan Zee Common Stock....... (16)
---------
Subtotal.................................... 7,965
Cancellation/retirement of:
Tappan Zee treasury stock..................... 142,000 @-cost 2,060
Investment in Tappan Zee Common Stock......... 100 @-cost 2
---------
Total decrease in additional paid-in capital.... $ 10,027
---------
---------
</TABLE>
- ------------------------------
(a) On May 20, 1998, the stockholders of USB authorized an amendment to USB's
Certificate of Incorporation to increase the number of authorized shares of
common stock to 30,000,000 shares and reduce the par value to $0.01 per
share.
(6) The authorized, issued and outstanding share information at March 31, 1998
of USB and Tappan Zee, and on a combined basis assuming consummation of the
Merger, is as follows:
<TABLE>
<CAPTION>
TAPPAN ZEE
COMMON SHARES USB TAPPAN ZEE ADJUSTED COMBINED
- --------------------------------------------------------------- -------------- --------------- -------------- ----------
<S> <C> <C> <C> <C>
Par value...................................................... $5.00(a) $0.01 -- $5.00
Authorized..................................................... 20,000,000(a) 5,000,000 -- 20,000,000
Issued......................................................... 12,579,120 1,620,062(b) 1,596,199(c) 14,175,319
Outstanding.................................................... 12,450,089 1,478,062 1,596,199(c) 14,046,288
</TABLE>
<TABLE>
<CAPTION>
TAPPAN ZEE
PREFERRED SHARES USB TAPPAN ZEE ADJUSTED COMBINED
- --------------------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Par value.................. -- $0.01 -- --
Authorized................. 100,000 1,000,000 -- 100,000
Issued..................... -- -- -- --
Outstanding................ -- -- -- --
</TABLE>
-------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
(a) On May 20, 1998, the stockholders of USB authorized an amendment to USB's
Certificate of Incorporation to increase the number of authorized shares of
common stock to 30,000,000 shares and reduce the par value to $0.01 per
share.
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
(b) Prior to the cancellation/retirement of 142,000 common shares of Tappan Zee
treasury stock and USB's 100 share investment in Tappan Zee.
(c) Assumes an Exchange Ratio of 1.08.
</TABLE>
(7) The following summarizes common stock held for employee benefit plans of USB
at March 31, 1998, after consummation of the Merger. (Dollar amounts are in
thousands).
<TABLE>
<CAPTION>
SHARES AMOUNT
--------- ---------
<S> <C> <C>
Common stock held in trust for deferred compensation............................... 56,217 $ 1,152
Common stock held by employee stock ownership plan................................. 97,587 904
Common stock awarded under recognition and retention plans ("RRP")(a).............. 37,098 401
--------- ---------
Total 190,902 $ 2,457
--------- ---------
--------- ---------
</TABLE>
- ------------------------------
(a) Does not reflect acceleration of stock awarded under RRP as a result of
change in control, since such amount is not considered material.
(8) Also see Notes 2, 3 and 4 of "Selected Pro Forma Condensed Combined
Financial Information (Unaudited)" for a discussion of non-recurring items
affecting pro forma combined net income.
27
<PAGE>
SHAREHOLDER MEETING
This Proxy Statement/Prospectus is being furnished to Tappan Zee
shareholders in connection with the solicitation of proxies by the Board of
Directors of Tappan Zee for use at the Special Meeting to be held on August 19,
1998, and at any adjournment or postponement thereof. This Proxy Statement/
Prospectus also serves as a prospectus of USB in connection with the issuance of
USB Common Stock to holders of Tappan Zee Common Stock upon consummation of the
Merger.
HOLDERS OF TAPPAN ZEE COMMON STOCK ARE REQUESTED TO PROMPTLY COMPLETE, SIGN
AND DATE THE ACCOMPANYING PROXY CARD AND RETURN IT TO TAPPAN ZEE IN THE ENCLOSED
POSTAGE-PAID, ADDRESSED ENVELOPE.
TAPPAN ZEE SHAREHOLDERS SHOULD NOT FORWARD ANY TAPPAN ZEE STOCK CERTIFICATES
WITH THEIR PROXY CARDS.
This Proxy Statement/Prospectus, the Notice of 1998 Special Meeting of
Shareholders of Tappan Zee and the accompanying proxy solicited by the Board of
Directors of Tappan Zee, are first being mailed to the shareholders of Tappan
Zee on or about July 16, 1998.
The principal executive offices of Tappan Zee are located at 75 North
Broadway, Tarrytown, New York 10591, and its telephone number is (914) 631-0344.
SPECIAL MEETING OF TAPPAN ZEE SHAREHOLDERS
The Special Meeting will be held on August 19, 1998, commencing at 5:00
p.m., Eastern Time, at the office of Tarrytowns Bank, FSB, 75 North Broadway,
Tarrytown, New York 10591.
PURPOSE OF MEETING. The purposes of the Special Meeting are to consider and
vote upon: (i) a proposal to approve and adopt the Merger Agreement and (ii) a
proposal to authorize the Tappan Zee Board of Directors to vote upon such other
business as may properly be presented incident to the conduct of the Special
Meeting, including, without limitation, a motion to adjourn the Special Meeting
to another time or place for the purpose of soliciting additional proxies in
order to approve and adopt the transactions contemplated by the Merger Agreement
or otherwise. The Bylaws of Tappan Zee require that no business be transacted
and no corporate action be taken at a special meeting of shareholders other than
that stated in the Notice of Meeting. Tappan Zee's Board of Directors is not
aware of any other business that my properly come before the Special Meeting.
RECORD DATE AND VOTING RIGHTS. The Board of Directors of Tappan Zee has
fixed the close of business on July 2, 1998 as the record date for the
determination of Tappan Zee's shareholders entitled to notice of and to vote at
the Special Meeting. Accordingly, only holders of record of shares of Tappan Zee
Common Stock at the close of business on such date will be entitled to vote at
the Special Meeting. On the Record Date, there were 1,478,062 shares of Tappan
Zee Common Stock outstanding and entitled to vote, held by approximately 400
holders of record.
Each holder of shares of Tappan Zee Common Stock outstanding on the Record
Date will be entitled to one vote for each share held of record upon each matter
properly submitted at the Special Meeting and at any adjournment or postponement
thereof. The presence, in person or by proxy, of the holders of at least a
majority of the total number of outstanding shares of Tappan Zee Common Stock
entitled to vote at the Special Meeting is necessary to constitute a quorum.
Tappan Zee's Certificate of Incorporation requires that no person (as
defined therein, other than Tappan Zee or any compensation plan maintained by
Tappan Zee) may directly or indirectly hold beneficial ownership of more than
10% of the issued and outstanding Tappan Zee Common Stock (the "Limit"). As
provided in Tappan Zee's Certificate of Incorporation, record holders of Tappan
Zee Common Stock who beneficially own in excess of the Limit shall be entitled
to one hundredth (1/100) of one vote per share for each share in excess of the
Limit. A person or entity is deemed to beneficially own
28
<PAGE>
shares by an affiliate as well as person acting in concert with such person or
entity. Tappan Zee's Certificate of Incorporation authorizes its Board of
Directors (i) to make all determinations necessary to implement and apply the
Limit, including determining whether persons or entities are acting in concert,
and (ii) to demand that any person who is reasonably believed to beneficially
own Tappan Zee Common Stock in excess of the Limit supply information to Tappan
Zee to enable its Board of Directors to implement and apply the Limit.
All properly executed proxies received by Tappan Zee will be voted in
accordance with the instructions indicated thereon. IF NO INSTRUCTIONS ARE
GIVEN, EXECUTED PROXIES WILL BE VOTED "FOR" APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND "FOR" EACH OTHER PROPOSAL IDENTIFIED IN THE NOTICE OF SPECIAL
MEETING. Management of Tappan Zee is not aware of any matters other than those
set forth in the Notice of Special Meeting of Shareholders that may be brought
before the Special Meeting. If any other matters properly come before the
Special Meeting, the persons named in the accompanying Proxy Card will vote the
shares represented by all properly executed proxies on such matters in such
manner as shall be determined by a majority of the Board of Directors of Tappan
Zee.
IF YOU ARE A SHAREHOLDER WHOSE SHARES ARE NOT REGISTERED IN YOUR OWN NAME,
YOU WILL NEED APPROPRIATE DOCUMENTATION FROM YOUR RECORD HOLDER TO ATTEND AND TO
VOTE PERSONALLY AT THE SPECIAL MEETING. Examples of such documentation include a
broker's statement, letter or other document confirming your ownership of shares
of Tappan Zee.
VOTE REQUIRED. The affirmative vote of the holders of a majority of
outstanding shares of Tappan Zee Common Stock entitled to vote at the meeting
(after giving effect to the Limit) is required in order to approve and adopt the
Merger Agreement. The proposal to adjourn the Special Meeting, if necessary, and
to transact any other business requires the affirmative vote of a majority of
the outstanding shares of Tappan Zee Common Stock represented, in person or by
proxy, and entitled to vote thereon at the Special Meeting.
A failure to return a properly executed proxy card or to vote in person, or
abstaining from voting, will have the same effect as a vote against the Merger
Agreement. Shares as to which the "ABSTAIN" box has been selected on the Proxy
Card with respect to all matters will be counted as present and entitled to vote
and will have the effect of a vote against that proposal. Broker non-votes will
not be counted as having been voted in person or by proxy and will have the same
effect as a vote against the Merger Agreement. In contrast, since shares
underlying broker non-votes will not be counted as present and entitled to vote,
broker non-votes will have no effect on the vote on the proposals to adjourn the
Special Meeting and to transact any other business.
As of the Record Date, the directors and executive officers of Tappan Zee
and their affiliates in the aggregate beneficially owned and are entitled to
vote 200,458 shares or 13.6% of the outstanding Tappan Zee Common Stock
(exclusive of shares of Tappan Zee Common Stock which may be acquired upon the
exercise of outstanding stock options). The directors and executive officers of
Tappan Zee have signed the Tappan Zee Affiliate Agreement which provides, among
other things, that they will vote any shares of Tappan Zee Common Stock over
which they have voting power in favor of the Merger Agreement. See "Ownership of
Tappan Zee Common Stock by Certain Beneficial Owners and Management of Tappan
Zee."
REVOCABILITY OF PROXIES. A proxy may be revoked at any time before it is
voted by filing a written revocation of the proxy with the Secretary of Tappan
Zee or by submitting a duly executed proxy bearing a later date. A proxy also
may be revoked by attending and voting at the Special Meeting, only if a written
revocation is filed with the Secretary of the Special Meeting prior to the
voting of such proxy.
29
<PAGE>
COSTS
USB and Tappan Zee will share the costs of printing this Proxy
Statement/Prospectus and the accompanying proxy, as well as the registration fee
paid to the Commission. Each party will otherwise bear its own costs in the
transaction. Accordingly, Tappan Zee will bear the costs of soliciting proxies
from its shareholders. Proxies will be solicited by mail and may be further
solicited, for no additional compensation by officers, directors or employees of
Tappan Zee, by further mailing, by telephone or by other forms of communication.
Tappan Zee also will request persons, firms and corporations holding shares in
their names or in the name of their nominees, which are beneficially owned by
others, to send proxy materials to and obtain proxies from such beneficial
owners, and will reimburse such holders for reasonable expenses incurred in
connection therewith. In addition, Tappan Zee has retained Morrow & Co. to
assist in the solicitation of proxies. The estimated cost of such solicitation
is $5,000 plus expenses.
THE MERGER
THE FOLLOWING DESCRIPTION OF THE MATERIAL TERMS OF THE MERGER DOES NOT
PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
MERGER AGREEMENT AND STOCK OPTION AGREEMENT, COPIES OF WHICH ARE ATTACHED TO
THIS PROXY STATEMENT/PROSPECTUS AS APPENDIX A AND APPENDIX B, RESPECTIVELY. ALL
SHAREHOLDERS OF TAPPAN ZEE ARE URGED TO READ SUCH DOCUMENTS CAREFULLY.
GENERAL
Tappan Zee will be merged with and into USB, pursuant to the Merger
Agreement, with USB being the surviving corporation operating under the name
"U.S.B. Holding Co., Inc." The Boards of Directors of USB and Tappan Zee have
determined that the acquisition of Tappan Zee by USB is desirable and in the
best interests of USB's and Tappan Zee's respective shareholders, and Tappan
Zee's Board has unanimously approved the Merger and each of the members of USB's
Board also has approved the Merger, except for Mr. Kenneth J. Torsoe who was not
present for such vote. Mr. Torsoe has indicated his agreement with such action
taken by USB's Board, prior and subsequent to the Board's vote. THE BOARD OF
DIRECTORS OF TAPPAN ZEE UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. Upon consummation of
the Merger, each share of Tappan Zee Common Stock outstanding at the Effective
Time will be converted into and represent the right to receive a number of
shares of USB Common Stock, as described under "--Merger Consideration."
MERGER CONSIDERATION
The Merger Agreement provides that at the Effective Time of the Merger, each
share of USB Common Stock issued and outstanding immediately prior to the
Effective Time shall be unchanged and shall remain issued and outstanding; and
each share of Tappan Zee Common Stock outstanding immediately prior to the
Effective Time (excluding shares held, otherwise than in a fiduciary capacity
for the benefit of third parties or as a result of debts previously contracted,
by USB or any of its subsidiaries, which shares shall be cancelled and retired)
shall become and be converted into the right to receive that number of shares of
USB Common Stock equal to (i) if the Average Closing Price is greater than or
equal to $17.75 and less than or equal to $25.00, the quotient (rounded to the
nearest hundredth) determined by dividing (A) $22.00 by (B) the Average Closing
Price, (ii) if the Average Closing Price is less than $17.75, 1.24 shares, or
(iii) if the Average Closing Price is greater than $25.00, 0.88 shares. If,
however, the Average Closing Price is less than $15.00, Tappan Zee shall have
the right to terminate the Merger Agreement by giving written notice of such
termination to USB, subject to USB's option to increase the Exchange Ratio,
within a specified period, to a number (rounded to the nearest hundredth)
obtained by dividing $18.60 by the Average Closing Price, thereby eliminating
Tappan Zee's right to terminate the Merger Agreement. The number of shares of
USB Common Stock issuable in exchange for shares of Tappan Zee Common Stock is
subject to further adjustment to prevent dilution in the event of stock splits,
stock dividends, reclassifications or other similar events.
30
<PAGE>
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND OF THE MERGER. In June, 1997, the Board of Directors of Tappan
Zee directed management to update the Tappan Zee business plan which was adopted
in connection with the conversion of the Savings Bank from mutual to stock form
and concurrent initial public offering by Tappan Zee. Over the course of the
summer of 1997, management prepared the updated business plan which was to be
presented to the Board of Directors for review and approval at an early autumn
Board of Directors meeting. In early August, Mr. Stephen C. Byelick, President
and Chief Executive Officer of Tappan Zee, and Mr. Kevin J. Plunkett, a director
of Tappan Zee, were contacted by a shareholder of Tappan Zee regarding the
possibility of a negotiated transaction wherein the shareholder would acquire
all of the outstanding common stock of Tappan Zee. At a regularly scheduled
meeting of the Board of Directors held on August 25, 1997, the Board of
Directors considered whether to pursue discussions with this shareholder and
whether to pursue other strategic alternatives, including continuing under the
Tappan Zee business plan, as updated. At this meeting, management also presented
a draft of the updated business plan. At the conclusion of the meeting, it was
the consensus of the Board of Directors that the Board of Directors should
obtain a more detailed description of the suggested transaction from the
shareholder.
Mr. Byelick then met with the interested shareholder on September 3, 1997 to
clarify certain aspects of the shareholder's suggestion to allow for further
discussion among the Board of Directors. The shareholder presented Mr. Byelick
with a letter setting forth some of these clarifications. Upon receipt of this
letter, Mr. Byelick met with legal counsel and representatives of Tappan Zee's
financial advisor, Sandler O'Neill, to discuss the matter and Tappan Zee's
alternatives. Mr. Byelick reported these events to the Board of Directors at a
regularly scheduled meeting held on September 18, 1997. At a special meeting of
the Board of Directors held on September 29, 1997, presentations were made by
Sandler O'Neill and legal counsel concerning the matters discussed with the
shareholder. After discussing the presentations, the Board of Directors
determined that pursuing further discussions with the shareholder was not likely
to be the most attractive strategic alternative for Tappan Zee and its
shareholders. In order to determine what alternatives would most enhance
shareholder value and to allow the Board to better evaluate the business plan
being prepared by management, the Board engaged Sandler O'Neill to present
various strategic alternatives to the Board of Directors.
During the course of the next two months, Sandler O'Neill contacted 17
entities that were believed to be attractive partners for a possible business
combination with Tappan Zee (including the aforementioned shareholder), and
provided certain confidential information regarding Tappan Zee to 11
institutions who executed confidentiality agreements. During the same time,
management completed work on the updated business plan, which was approved at a
regularly scheduled meeting of the Board of Directors held on October 27, 1997.
The business plan did not alter any significant operating assumptions from the
business plan previously being followed, other than updates for the existing
interest rate environment. After the business plan was adopted, management
worked with Sandler O'Neill to prepare an alternative set of projected financial
results showing the potential impact of revising several of the significant
operating assumptions set forth in the business plan. These revisions to the
projected financial results were intended to provide the Board of Directors with
a full comparison of strategic alternatives to consider along with the receipt
of indications of interest gathered in connection with Sandler O'Neill's
engagement.
A deadline of November 21, 1997 was established for all interested parties
to submit written indications of interest for a possible transaction with Tappan
Zee. Two institutions submitted proposals on that date, one of which was USB.
The shareholder who had previously contacted Tappan Zee did not submit a
proposal. At a regularly scheduled Board of Directors meeting held on November
24, 1997, the Board considered the two proposals and received further
presentations from both Sandler O'Neill and legal counsel. Sandler O'Neill noted
to the Board that, although the USB proposal contemplated consideration in the
form of USB Common Stock and the other proposal contemplated a combination of
cash and common stock of that proponent, the financial value of the two
proposals was approximately the same. As a result, the Board determined that
more time was needed to evaluate the two proposals and requested Sandler O'Neill
to obtain more detailed information from the proponents.
31
<PAGE>
At a special meeting of the Board of Directors held on December 15, 1997,
Sandler O'Neill reported that USB had revised its proposal. The revised proposal
provided for stock consideration at a lower exchange ratio than previously
proposed, but did not contain any price protection features. Sandler O'Neill
also reported that the second proponent was holding a Board meeting the next day
to consider whether to revise its proposal.
At a special meeting of the Board of Directors held on December 22, 1997,
the Board of Directors considered the revised proposal from the second
proponent. The second proponent's revised proposal provided for an increase in
the overall proposed consideration and a willingness to include a mechanism for
protecting the price within certain parameters. Sandler O'Neill reported that it
had received no further contacts from USB. The Board considered the two revised
proposals and considered a presentation by management of the potential impact of
certain revisions to the business plan. The Board determined to adjourn the
meeting to the next day to further consider the proposals. At the reconvened
meeting held on December 23, 1997, the Board determined to continue to explore
the possibility of a business combination and to allow the second proponent to
conduct a due diligence review of Tappan Zee with the goal of working toward a
proposed definitive agreement that the Board would be able to consider in the
future.
During the month of January 1998, the management of Tappan Zee, its legal
counsel and financial advisors met with their counterparts at the second
proponent several times in order to work out the details of a definitive
agreement. In addition, each party conducted a due diligence review of the other
during this time. However, as the end of the month of January approached, the
management of Tappan Zee believed that little progress was being made on many
substantive issues. This was reported by management to the Board at a regularly
scheduled meeting held on January 30, 1998. The Board went on to consider the
possibility of again contacting USB to determine if they would be willing to
revise their proposal. Mr. Plunkett informed the Board that he had recently
received a phone call from Mr. Thomas E. Hales, President, Chief Executive
Officer and Chairman of the Board of USB, and that Mr. Byelick had received a
letter from Mr. Hales, in each case indicating that he was still interested in
discussing a possible transaction. The Board then authorized Sandler O'Neill to
contact USB to determine if USB was willing to revise its earlier proposal to
structure a transaction that included price protection for the Tappan Zee
shareholders.
Sandler O'Neill contacted USB on February 6, 1998 and USB responded in
writing on February 10, 1998. At a special Board meeting held on February 12,
1998, the Board considered the revised proposal of USB which contained a
mechanism to protect the price to be received by the Tappan Zee shareholders.
After hearing and discussing a presentation by Sandler O'Neill on the revised
USB proposal and the status of discussions on the existing proposal from the
second proponent, noting in particular the substantial delay in progress of the
discussions with the second proponent, the Board authorized management to engage
in discussions with USB, including the performance of due diligence reviews by
each party, while at the same time continuing its efforts with the second
proponent. Due diligence reviews were conducted from February 17, 1998 through
February 21, 1998 with discussions occurring during that time among the
management, legal counsel and financial advisors of Tappan Zee and USB. The
progress of these discussions and the discussions with the second proponent were
reported to the Board at a regularly scheduled meeting held on February 23,
1998.
During the course of the next 10 days, a draft of a definitive agreement was
prepared and circulated by counsel for USB and was negotiated by the parties. A
fully negotiated agreement was then presented to the Board of Directors of each
of Tappan Zee and USB on March 6, 1998, at which time the Board of Directors of
each institution approved the proposed transaction. A press release announcing
the transaction was issued after the close of business on March 6, 1998.
TAPPAN ZEE'S REASONS FOR THE MERGER. The Tappan Zee Board of Directors has
unanimously approved the Merger Agreement and has determined that the Merger is
in the best interests of Tappan Zee and its shareholders. The Tappan Zee Board
of Directors therefore unanimously recommends that holders of Tappan Zee Common
Stock vote FOR the adoption and approval of the Merger Agreement. The Tappan
32
<PAGE>
Zee Board of Directors believes that the Merger will enable holders of Tappan
Zee Common Stock to realize significant value on a tax-free basis.
In reaching its determination that the Merger and the Merger Agreement are
in the best interests of Tappan Zee and the holders of Tappan Zee Common Stock,
the Tappan Zee Board of Directors considered during the course of its strategic
deliberations a number of factors, both from a short-term and a long-term
perspective, including, without limitation, the following:
(i) The Tappan Zee Board's familiarity with and review of Tappan Zee's
business, financial condition, results of operations and prospects,
including, but not limited to, the quality of its loan portfolio and its
potential growth, development, productivity and profitability;
(ii) The current and prospective environment in which Tappan Zee
operates, including national and local economic conditions, the competitive
environment for banks and other financial institutions generally, the
increased regulatory burden on financial institutions generally and the
trend toward consolidation in the financial services industry;
(iii) The Tappan Zee Board's review with its legal and financial advisors
of alternatives to the Merger (including its review of and negotiations over
the proposals made by other proponents and the possibility of remaining
independent and growing internally);
(iv) The Tappan Zee Board's review, based in part on presentations by
Tappan Zee management and advisors, of USB's business, financial condition,
results of operations, management and the performance of the USB Common
Stock on both an historical and prospective basis, the strategic fit between
the parties, the enhanced opportunities for operating efficiencies that
could result from the Merger and the respective contributions the parties
would bring to a combined institution;
(v) The expectation that the Merger will provide holders of Tappan Zee
Common Stock with the opportunity to receive a substantial premium over the
historical trading prices for their shares and that the consideration
received will be tax-free for federal income tax purposes (except with
respect to cash received in lieu of fractional share interests in USB Common
Stock);
(vi) The review by the Tappan Zee Board with its legal and financial
advisors of the provisions of the Merger Agreement and the Stock Option
Agreement;
(vii) The review by the Tappan Zee Board with its legal and financial
advisors of the termination fee provided for in the Merger Agreement;
(viii) The oral presentation by Sandler O'Neill and the written opinion of
Sandler O'Neill that the consideration to be received by holders of Tappan
Zee Common Stock is fair to the holders thereof from a financial point of
view. See "-- Opinion of Tappan Zee's Financial Advisor;"
(ix) The similarity between USB's and Tappan Zee's views, approaches and
commitments to the communities and customers they each serve and their
respective employees;
(x) The expectation that USB will continue to provide quality service to
the communities and customers served by Tappan Zee; and
(xi) The expectation that USB will continue to operate the Savings Bank
as a separate savings bank.
The foregoing discussion of the information and factors discussed by the
Tappan Zee Board of Directors is not meant to be exhaustive, but includes all
material factors considered by the Tappan Zee Board of Directors. In reaching
its determination to approve and recommend the Merger, the Tappan Zee Board of
Directors did not assign relative or specific weights to the foregoing factors
and individual directors may have given differing weights to differing factors.
The directors of Tappan Zee believe that the Merger is in the best interests
of their organization and their shareholders. THE TAPPAN ZEE DIRECTORS
UNANIMOUSLY RECOMMEND THAT TAPPAN ZEE SHAREHOLDERS VOTE FOR THE APPROVAL OF THE
MERGER AGREEMENT.
33
<PAGE>
USB'S REASONS FOR THE MERGER. USB historically has grown primarily through
building its franchise internally without the acquisition of other financial
institutions. USB expects to continue to expand by opening new retail branches,
enhancing computerized and telephonic delivery channels, and expanding loan
originations in the Bank's market area. USB recognizes, however, that
opportunities also exist to enhance the value of USB's franchise by the
acquisition of other financial institutions. USB's Board of Directors believes
that potential acquisitions of other financial institutions and branch and
deposit acquisitions to augment USB's growth in present and contiguous markets
should be considered carefully.
USB's acquisition strategy consists of identifying financial institutions
which have business philosophies which are similar to those of USB, operate in
strong markets that are geographically compatible with the markets in which USB
operates, are financially sound and can be acquired with reasonable cost.
Acquisitions also are evaluated in terms of asset quality, interest rate risk,
potential operating efficiencies and revenue enhancements and management
capabilities.
In reaching its determination to approve the Merger Agreement and the
transactions contemplated thereby, the USB Board of Directors considered a
number of factors, including:
(i) The USB Board of Directors' review, with the assistance of senior
management and of Keefe, Bruyette & Woods, Inc. ("KBW"), financial advisor
to USB, of the financial condition, results of operations, business and
overall prospects of Tappan Zee;
(ii) The fact that Tappan Zee is located in Tarrytown, New York, an
attractive market located in Westchester County, New York, which is an
existing market of USB's;
(iii) The enhanced ability of the combined entity to compete against
larger competitors and provide quality service to its customers;
(iv) The financial presentations of senior management and KBW and the
opinion of KBW as to the fairness of the Exchange Ratio, from a financial
point of view, to the USB shareholders;
(v) The anticipated expense savings, operating synergies and revenue
enhancements available to the combined institution subsequent to
consummation of the Merger. See "Management and Operations after the
Merger;"
(vi) The expectation that the Merger will be a tax-free transaction to
USB and its subsidiaries. See "--Certain Federal Income Tax Consequences;"
(vii) The expectation that the Merger will qualify for
pooling-of-interests accounting treatment. See "--Accounting Treatment of
the Merger;" and
(viii) The nature of, and likelihood of obtaining, the regulatory
approvals that would be required in order to consummate the Merger. See
"--Regulatory Approvals."
The foregoing discussion of the information and factors discussed by the USB
Board of Directors is not meant to be exhaustive, but includes all material
factors considered by the USB Board of Directors. In reaching its determination
to approve and recommend the Merger, the USB Board of Directors did not assign
relative or specific weights to the foregoing factors and individual directors
may have given differing weights to different factors.
OPINION OF TAPPAN ZEE'S FINANCIAL ADVISOR
Pursuant to an engagement letter dated as of September 30, 1997 (the
"Sandler O'Neill Agreement"), Tappan Zee retained Sandler O'Neill as an
independent financial advisor in connection with Tappan Zee's consideration of a
possible business combination with a second party. Sandler O'Neill is a
nationally recognized investment banking firm whose principal business specialty
is banks and savings institutions, and as part of its investment banking
business, is regularly engaged in the valuation of such businesses and their
securities in connection with mergers and acquisitions and other corporate
transactions.
Pursuant to the terms of the Sandler O'Neill Agreement, Sandler O'Neill
acted as financial advisor to Tappan Zee in connection with the Merger. In
connection therewith, the Tappan Zee Board requested
34
<PAGE>
Sandler O'Neill to render its opinion as to the fairness, from a financial point
of view, of the Merger consideration to the holders of Tappan Zee Common Stock.
At the March 6, 1998 meeting at which Tappan Zee's Board approved and adopted
the Merger Agreement, Sandler O'Neill delivered to the Tappan Zee Board its oral
opinion, subsequently confirmed in writing, that, as of such date, the
consideration to be received by the holders of shares of Tappan Zee Common Stock
in the Merger was fair, from a financial point of view, to such shareholders.
Sandler O'Neill has also delivered to the Tappan Zee Board a written opinion
dated as of the date of this Joint Proxy Statement/Prospectus (the "Sandler
O'Neill Fairness Opinion") which is substantially identical to the March 6, 1998
opinion. THE FULL TEXT OF THE SANDLER O'NEILL FAIRNESS OPINION, WHICH SETS FORTH
THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND QUALIFICATIONS
AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH SUCH OPINION, IS
ATTACHED AS APPENDIX C TO THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED
HEREIN BY REFERENCE. THE DESCRIPTION OF THE OPINION SET FORTH HEREIN IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO APPENDIX C. HOLDERS OF SHARES OF
TAPPAN ZEE COMMON STOCK ARE URGED TO READ THE SANDLER O'NEILL FAIRNESS OPINION
IN ITS ENTIRETY IN CONNECTION WITH THEIR CONSIDERATION OF THE PROPOSED MERGER.
THE SANDLER O'NEILL FAIRNESS OPINION WAS PROVIDED TO TAPPAN ZEE'S BOARD FOR
ITS INFORMATION AND IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF
VIEW, OF THE CONSIDERATION TO BE RECEIVED BY HOLDERS OF SHARES OF TAPPAN ZEE
COMMON STOCK IN THE MERGER. IT DOES NOT ADDRESS THE UNDERLYING BUSINESS DECISION
OF TAPPAN ZEE TO ENGAGE IN THE MERGER OR ANY OTHER ASPECT OF THE MERGER AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF SHARES OF TAPPAN ZEE COMMON
STOCK AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE TAPPAN ZEE SPECIAL MEETING
WITH RESPECT TO THE MERGER AGREEMENT OR ANY OTHER MATTER RELATED THERETO.
In connection with rendering its March 6, 1998 opinion, Sandler O'Neill
performed a variety of financial analyses. The following is a summary of the
material analyses performed by Sandler O'Neill, but does not purport to be a
complete description of all the analyses underlying Sandler O'Neill's opinion.
The preparation of a fairness opinion is a complex process involving subjective
judgments and is not necessarily susceptible to a partial analysis or summary
description. Accordingly, Sandler O'Neill believes that its analyses must be
considered as a whole and that selecting portions of such analyses and the
factors considered by it, without considering all factors and analyses, could
create an incomplete view of the evaluation processes underlying its opinion. In
performing its analyses, Sandler O'Neill made numerous assumptions with respect
to industry performance, business and economic conditions and various other
matters, many of which cannot be predicted and are beyond the control of Tappan
Zee, USB and Sandler O'Neill. Any estimates contained in Sandler O'Neill's
analyses are not necessarily indicative of future results or values, which may
be significantly more or less favorable than such estimates. Estimates on the
values of companies do not purport to be appraisals or necessarily reflect the
prices at which companies or their securities may actually be sold. Because such
estimates are inherently subject to uncertainty, neither Tappan Zee, USB or
Sandler O'Neill assumes responsibility for their accuracy.
SUMMARY OF PROPOSAL. Sandler O'Neill reviewed the financial terms of the
proposed transaction. Based upon a transaction value per share of Tappan Zee
Common Stock of $22.00 and Tappan Zee's December 31, 1997 financial information,
Sandler O'Neill calculated the price to tangible book value and price to last
twelve months' earnings. This analysis yielded a price to tangible book value
multiple of 151% and a price to last twelve months' earnings multiple of 30.56x.
STOCK TRADING HISTORY. Sandler O'Neill reviewed the history of the reported
trading prices and volume of the Tappan Zee Common Stock and the USB Common
Stock, and the relationship between the movements in the prices of the Tappan
Zee Common Stock and the USB Common Stock, respectively, to movements in certain
stock indices, including the Standard & Poor's 500 Index, the NASDAQ Banking
Index and composite groups of publicly traded savings institutions (in the case
of Tappan Zee) and publicly traded commercial banks (in the case of USB),
identified below. During the one-year period ended March 2, 1998, Tappan Zee
Common Stock performed on a par with the Standard & Poor's 500 Index and the
composite group and underperformed the NASDAQ Banking Index. During the one-year
period ended March 2, 1998, USB Common Stock outperformed each of the indices to
which it was compared.
35
<PAGE>
ANALYSIS OF SELECTED PUBLICLY TRADED COMPANIES. Sandler O'Neill used
publicly available information to compare selected financial and market trading
information, including balance sheet composition, asset quality ratios, loan
loss reserve levels, profitability, capital adequacy, dividends and trading
multiples, for Tappan Zee and two different groups of savings institutions. The
first group consisted of Tappan Zee and the following 8 publicly-traded regional
savings institutions (the "Regional Group"): Peekskill Financial Corp., SFS
Bancorp Inc., AFSALA Bancorp Inc., Prestige Bancorp Inc., WHG Bancshares Corp.,
Albion Banc Corp., USABancshares, Inc. and Pennwood Bancorp Inc. Sandler O'Neill
also compared Tappan Zee to a group of 9 publicly-traded savings institutions
which had a return on average equity (based on last twelve months' earnings) of
greater than 14.5% and a price to tangible book value of greater than 205% (the
"Highly Valued Group"). The Highly Valued Group consisted of the following
institutions: Coastal Financial Corp., First Mutual Savings Bank, PVF Capital
Corp., Warren Bancorp Inc., First Citizens Corp., Winton Financial Corp.,
Ipswich Savings Bank, Home Port Bancorp Inc. and KSB Bancorp Inc. The analysis
compared publicly available financial information for Tappan Zee and each of the
groups as of and for each of the years ended December 31, 1992 through December
31, 1997 (or in some cases, through the twelve months ended September 30, 1997).
Sandler O'Neill also used publicly available information to perform a
similar comparison of selected financial and market trading information for USB
and two different groups of commercial banks. The first group consisted of USB
and the following 16 publicly-traded commercial banks (the "Peer Group"):
JeffBanks Inc., United National Bancorp, NBT Bancorp Inc., Commercial Bank of
New York, Merchants New York Bancorp, Harleysville National Corp., Sandy Spring
Bancorp, Inc., F&M Bancorp, Sterling Bancorp, Omega Financial Corp., Evergreen
Bancorp Inc., Mason-Dixon Bancshares Inc., Prime Bancorp Inc., FCNB Corp.,
Suffolk Bancorp and Arrow Financial Corp. Sandler O'Neill also compared USB to a
group of 15 publicly-traded commercial banks which had a return on average
equity (based on last twelve months' earnings) of greater than 16.0% and a price
to tangible book value of greater than 256% (the "Commercial Highly Valued
Group"). The Commercial Highly Valued Group consisted of USB and the following
institutions: Independent Bank Corp., Heritage Financial Services, Mississippi
Valley Bancshares, CVB Financial Corp., Sterling Bancshares Inc., Citizens
Bancshares Inc., Harleysville National Corp., Cape Cod Bank and Trust Co., West
Coast Bancorp, Suffolk Bancorp, Lakeland Financial Corp., Tompkins County
Trustco Inc., Premier Bancshares Inc. and Anchor Financial Corp. The analysis
compared publicly available financial information for USB and each of the groups
as of and for each of the years ended December 31, 1992 through December 31,
1997 (or in some cases, through the twelve months ended September 30, 1997).
ANALYSIS OF SELECTED MERGER TRANSACTIONS. Sandler O'Neill reviewed 78
transactions announced from January 1, 1997 through February 25, 1998 involving
public savings institutions nationwide as acquired institutions with transaction
values greater than $15 million ("Nationwide Transactions"), 16 transactions
announced from January 1, 1997 through February 25, 1998 involving public
savings institutions in the Mid-Atlantic Region (Delaware, District of Columbia,
Pennsylvania, Maryland, New Jersey and New York) as acquired institutions with
transaction values greater than $15 million ("Mid-Atlantic Transactions"), and
10 transactions announced from January 1, 1996 through February 25, 1998
involving public savings institutions nationwide as acquired institutions with
transaction values greater than $15 million and less than $100 million and where
the acquired institution had a tangible equity to assets ratio of greater than
15.0% and a return on average equity of less than 10.0% ("Selected
Transactions"). Sandler O'Neill reviewed the ratios of price to last twelve
months' earnings, price to book value, price to tangible book value, price to
deposits, price to assets and deposit premium paid in each such transaction and
computed high, low, mean, and median ratios and premiums for the respective
groups of transactions. These multiples were applied to Tappan Zee's financial
information as of and for the twelve months ended December 31, 1997. Based upon
the median multiples for Nationwide Transactions, Sandler O'Neill derived an
imputed range of values per share of the Tappan Zee Common Stock of $14.94 to
$29.59. Based upon the median multiples for Mid-Atlantic Transactions, Sandler
O'Neill derived an imputed range of values per share of the Tappan Zee Common
Stock of $13.74 to $29.86. Based upon the median multiples
36
<PAGE>
for Selected Transactions, Sandler O'Neill derived an imputed range of values
per share of the Tappan Zee Common Stock of $18.39 to $27.18.
No company involved in the transactions included in the above analysis is
identical to Tappan Zee and no transaction included in the above analysis is
identical to the Merger. Accordingly, an analysis of the results of the
foregoing analysis is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of Tappan Zee and USB and the companies to which they are being
compared.
DISCOUNTED DIVIDEND STREAM AND TERMINAL VALUE ANALYSIS. Sandler O'Neill
also performed an analysis which estimated the future stream of after-tax
dividend flows of Tappan Zee through March 31, 2002 under various circumstances,
assuming Tappan Zee performed in accordance with information regarding potential
future earnings provided by its management and certain variations thereof
(including variations with respect to the levels of assets, net interest spread,
non-interest income, non-interest expense and dividend payout ratio). To
approximate the terminal value of the Tappan Zee Common Stock at the end of the
five-year period, Sandler O'Neill applied price to earnings multiples ranging
from 14x to 32x and applied multiples of tangible book value ranging from 120%
to 210%. The dividend income streams and terminal values were then discounted to
present values using different discount rates (ranging from 9% to 14%) chosen to
reflect different assumptions regarding required rates of return of holders or
prospective buyers of the Tappan Zee Common Stock. This analysis, assuming the
current dividend payout ratio, indicated an imputed range of values per share of
the Tappan Zee Common Stock of between $8.12 and $20.57 when applying the price
to earnings multiples, and an imputed range of values per share of the Tappan
Zee Common Stock of between $12.97 and $26.32 when applying multiples of
tangible book value. In connection with its analysis, Sandler O'Neill
extensively used sensitivity analyses to illustrate the effects changes in the
underlying assumptions would have on the resulting present value, and discussed
these changes with the Tappan Zee Board. Sandler O'Neill noted that the
discounted dividend stream and terminal value analysis is a widely used
valuation methodology, but the results of such methodology are highly dependent
upon the numerous assumptions that must be made, and the results thereof are not
necessarily indicative of actual values or actual future results.
PRO FORMA MERGER ANALYSIS. Based upon earnings projections of Tappan Zee
and USB, expected one-time merger related charges, projected expense savings,
projected revenue enhancements and certain other assumptions discussed with
Tappan Zee's and USB's respective managements, Sandler O'Neill analyzed certain
potential pro forma effects of the Merger on USB over a five year period. This
analysis indicated that the Merger would be accretive to earnings per share in
all periods analyzed and accretive to tangible book value per share for all
periods analyzed. From the perspective of a shareholder of Tappan Zee, as
compared to the projected stand-alone performance of Tappan Zee, the Merger
would be accretive to earnings per share for all periods analyzed and dilutive
to tangible book value per share for all periods analyzed. The Merger would be
dilutive to dividends per share in the periods 1999 through 2001 and accretive
thereafter. The actual results achieved by USB may vary from projected results
and the variations may be material.
CONTRIBUTION ANALYSIS. Sandler O'Neill reviewed the relative contributions
to, among other things, total assets, total net loans, total deposits, total
equity, last twelve months' ("LTM") net income and market capitalization to be
made by Tappan Zee and USB to the combined institution based on data at and for
the twelve months ended December 31, 1997. This analysis indicated that Tappan
Zee's implied contribution was 11.0% of total assets, 9.5% of total net loans,
11.5% of total deposits, 25.6% of total equity, 9.0% of normalized LTM net
income and 9.2% of market capitalization. On a fully diluted basis, based upon
an Exchange Ratio of 0.99, holders of the Tappan Zee Common Stock would own
approximately 9.6% of the outstanding shares of the combined institution.
In connection with rendering its March 6, 1998 opinion, Sandler O'Neill
reviewed, among other things: (i) the Merger Agreement and exhibits thereto;
(ii) the Stock Option Agreement, dated as of
37
<PAGE>
March 6, 1998, by and between Tappan Zee and USB; (iii) Tappan Zee's audited
consolidated financial statements and management's discussion and analysis of
financial condition and results of operations as contained in its Annual Report
on Form 10-K for the year ended March 31, 1997; (iv) USB's audited consolidated
financial statements and management's discussion and analysis of financial
condition and results of operations incorporated by reference in its Annual
Report on Form 10-K for the year ended December 31, 1996; (v) Tappan Zee's
unaudited consolidated financial statements and management's discussion and
analysis of financial condition and results of operations contained in its
Quarterly Reports on Form 10-Q for the quarters ended June 30, September 30 and
December 31, 1997, respectively; (vi) USB's unaudited consolidated financial
statements and management's discussion and analysis of financial condition and
results of operations contained in its Quarterly Reports on Form 10-Q for the
quarters ended March 31, June 30 and September 30, 1997, respectively; (vii)
summary financial information contained in USB's press release dated January 27,
1998 concerning USB's financial condition and results of operations for the year
ended December 31, 1997; (viii) certain financial analyses and forecasts of
Tappan Zee prepared by and reviewed with management of Tappan Zee and the views
of senior management of Tappan Zee regarding Tappan Zee's past and current
business operations, results thereof, financial condition and future prospects;
(ix) certain financial analyses and forecasts of USB prepared by and reviewed
with management of USB and the views of senior management of USB regarding USB's
past and current business operations, results thereof, financial condition and
future prospects; (x) the pro forma impact of the Merger on USB; (xi) the
publicly reported historical price and trading activity for Tappan Zee's and
USB's common stock, including a comparison of certain financial and stock market
information for Tappan Zee and USB with similar publicly available information
for certain other companies the securities of which are publicly traded; (xii)
the financial terms of recent business combinations in the savings institution
industry, to the extent publicly available; (xiii) the current market
environment generally and the banking environment in particular; and (xiv) such
other information, financial studies, analyses and investigations and financial,
economic and market criteria as Sandler O'Neill considered relevant.
In connection with rendering the Sandler O'Neill Fairness Opinion, Sandler
O'Neill confirmed the appropriateness of its reliance on the analyses used to
render the March 6, 1998 opinion by performing procedures to update certain of
such analyses and by reviewing the assumptions upon which such analyses were
based and the factors considered in connection therewith.
In performing its reviews and analyses and preparing its opinion, Sandler
O'Neill assumed and relied upon, without independent verification, the accuracy
and completeness of all the financial information, analyses and other
information that was publicly available or otherwise furnished to, reviewed by
or discussed with it, and Sandler O'Neill does not assume any responsibility or
liability therefor. Sandler O'Neill did not make an independent evaluation or
appraisal of the specific assets, the collateral securing assets or the
liabilities (contingent or otherwise) of Tappan Zee or USB or any of their
respective subsidiaries, or the collectibility of any such assets, nor was it
furnished with any such evaluations or appraisals (relying, where relevant, on
the analyses and estimates of Tappan Zee and USB). Sandler O'Neill is not an
expert in the evaluation of allowances for loan losses and it has not made an
independent evaluation of the adequacy of the allowance for loan loses of Tappan
Zee or USB, nor has it reviewed any individual credit files relating to Tappan
Zee or USB. With Tappan Zee's consent, Sandler O'Neill has assumed that the
respective aggregate allowances for loan losses for both Tappan Zee and USB are
adequate to cover such losses and will be adequate on a pro forma basis for the
combined entity. In addition, Sandler O'Neill has not conducted any physical
inspection of the properties or facilities of Tappan Zee or USB. With respect to
the information regarding potential future financial performance provided by
each company's management, Sandler O'Neill assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the respective managements of the respective future financial
performances of Tappan Zee and USB and that such performances will be achieved.
Sandler O'Neill expressed no opinion as to such financial forecasts or the
assumptions on which they were based.
38
<PAGE>
Sandler O'Neill's opinion was necessarily based upon market, economic and
other conditions as they existed on, and could be evaluated as of, the date of
such opinion. For purposes of rendering its opinion, Sandler O'Neill assumed, in
all respects material to its analysis, that all of the representations and
warranties contained the Merger Agreement and all related agreements are true
and correct, that each party to such agreements will perform all of the
covenants required to be performed by such party under such agreements and that
the conditions precedent in the Merger Agreement are not waived. Sandler O'Neill
also assumed that there has been no material change in Tappan Zee's or USB's
assets, financial condition, results of operations, business or prospects since
the dates of the last financial statements made available to them, that the
Merger will be accounted for as a pooling-of-interests, that Tappan Zee and USB
will remain as going concerns for all periods relevant to its analyses and that
the Merger will qualify as a tax-free reorganization for federal income tax
purposes.
Under the Sandler O'Neill Agreement, Tappan Zee has agreed to pay Sandler
O'Neill a transaction fee in connection with the Merger, a substantial portion
of which is contingent upon the consummation of the Merger. Under the terms of
the Sandler O'Neill Agreement, Tappan Zee has agreed to pay Sandler O'Neill a
transaction fee equal to $100,000 plus 1% of the aggregate transaction value, of
which approximately 25% has been paid and the remainder is payable upon closing
of the transaction. Sandler O'Neill has also received a fee of $50,000 for
rendering its fairness opinion, which shall be credited against that portion of
the transaction fee payable at closing. Tappan Zee has also agreed to reimburse
Sandler O'Neill for its reasonable out-of-pocket expenses incurred in connection
with its engagement and to indemnify Sandler O'Neill and its affiliates and
their respective partners, directors, officers, employees, agents, and
controlling persons against certain expenses and liabilities, including
liabilities under securities laws.
Sandler O'Neill has in the past provided other financial advisory services
to Tappan Zee and has received compensation for such services. In the ordinary
course of its business, Sandler O'Neill may actively trade the equity securities
of Tappan Zee and USB and their respective affiliates for its own account and
for the accounts of its customers and, accordingly, may at any time hold a long
or short position in such securities.
SHAREHOLDERS' RIGHTS
At the Effective Time, holders of Tappan Zee Common Stock shall cease to be
and shall have no rights as shareholders of Tappan Zee, other than to receive
the consideration as set forth above. See "-- Merger Consideration." After the
Effective Time, there shall be no transfers on the transfer books of Tappan Zee
or USB of shares of Tappan Zee Common Stock and if certificates evidencing such
shares are presented for transfer after the Effective Time, they shall be
cancelled against delivery of certificates for whole shares of USB Common Stock
(plus cash in lieu of any fractional share interest) as herein provided. See
"--Procedures of Exchange of Tappan Zee Stock Certificates."
CASH IN LIEU OF FRACTIONAL SHARES
Notwithstanding any other provision hereof, no fractional shares of USB
Common Stock shall be issued to holders of Tappan Zee Common Stock. In lieu
thereof, each holder of shares of Tappan Zee Common Stock entitled to a fraction
of a share of USB Common Stock shall, at the time of surrender of the
certificate or certificates representing such holder's shares, receive an amount
of cash (without interest) equal to the product arrived at by multiplying such
fraction of a share of USB Common Stock by $22.00. No such holder shall be
entitled to dividends, voting rights or any other rights in respect of any
fractional share interest.
TREATMENT OF TAPPAN ZEE STOCK OPTIONS
The Merger Agreement also provides that each option to purchase shares of
Tappan Zee Common Stock under Tappan Zee's stock option plans which is
outstanding at the Effective Time, whether or not exercisable, shall be
converted into and become a right to purchase shares of USB Common Stock in
39
<PAGE>
accordance with the terms of the Tappan Zee stock option plan and Tappan Zee
option agreement by which it is evidenced, except that from and after the
Effective Time, among other things, (i) the number of shares of USB Common Stock
subject to each Tappan Zee option shall be equal to the number of shares of
Tappan Zee Common Stock subject to such option prior to the Effective Time
multiplied by the Exchange Ratio (with fractional shares rounded down to the
nearest share) and (ii) the exercise price per share of USB Common Stock
purchasable thereunder shall be that specified in the Tappan Zee option divided
by the Exchange Ratio (rounded up to the nearest cent). Notwithstanding the
foregoing, each Tappan Zee option which is an "incentive stock option" shall be
adjusted as required by Section 424 of the Internal Revenue Code of 1986, as
amended (the "Code"), and the regulations promulgated thereunder, so as not to
constitute a modification, extension or renewal of the option within the meaning
of Section 424(h) of the Code, and all Tappan Zee options shall be adjusted, if
necessary, so as not to impair the eligibility of the Merger for
pooling-of-interests accounting treatment.
USB has agreed to file, within thirty (30) days after the Effective Time, a
registration statement on Form S-3 or Form S-8 with respect to the shares of USB
Common Stock subject to Tappan Zee options which have been converted into the
right to purchase shares of USB Common Stock pursuant to the Merger Agreement.
USB also has agreed to use its reasonable best efforts to maintain the current
status of the prospectus or prospectuses contained in such registration
statement for so long as such options remain outstanding.
CONDITIONS TO THE MERGER
The Merger Agreement provides that consummation of the proposed transaction
is subject to the satisfaction of certain conditions, or the waiver of such
conditions by the party entitled to do so, at or before the Effective Time. Each
of the parties' obligations under the Merger Agreement is subject to the
following conditions, among others:
(a) approval by the requisite vote of the shareholders of Tappan Zee of
the Merger Agreement;
(b) receipt of all approvals and consents for the transactions
contemplated by the Merger Agreement from the Federal Reserve Board, the OTS
and any other governmental entity, the approval or consent of which is
required for the consummation of the Merger, and the other transactions
contemplated thereby and the expiration of all applicable statutory waiting
periods;
(c) none of USB, Tappan Zee or their respective subsidiaries is subject
to any statute, rule, regulation, injunction or other order or decree which
shall have been enacted, entered, promulgated or enforced by any
governmental or judicial authority which prohibits, restricts or makes
illegal consummation of the Merger or any of the other transactions
contemplated thereby;
(d) the Registration Statement has become effective under the Securities
Act, and USB shall have received all state securities laws or "blue sky"
permits and other authorizations or there shall be exemptions from
registration requirements necessary to issue the USB Common Stock in
connection with the Merger, and neither the Registration Statement nor any
such permit, authorization or exemption shall be subject to a stop order or
threatened stop order by the Commission or any state securities authority;
(e) the USB Common Stock to be issued in connection with the Merger
shall have been approved for listing on the AMEX;
(f) USB and Tappan Zee shall have received an opinion issued by either
USB's independent accountants or by Elias, Matz, Tiernan & Herrick L.L.P.,
to the effect that, among other things: (i) the Merger will be treated for
federal income tax purposes as a reorganization within the meaning of
Section 368 of the Code; (ii) no gain or loss will be recognized by the
shareholders of Tappan Zee who exchange their Tappan Zee Common Stock solely
for USB Common Stock pursuant to the Merger (except with respect to cash
received in lieu of a fractional share interest in USB Common Stock). See
"--Certain Federal Income Tax Consequences;"
40
<PAGE>
(g) KPMG Peat Marwick LLP shall have issued a letter dated as of the
Effective Time to Tappan Zee and Deloitte & Touche LLP shall have issued a
letter dated as of the Effective Time to USB, to the effect that the Merger
shall be accounted for as a pooling-of-interests under GAAP;
(h) the representations and warranties of the other party set forth in
the Merger Agreement being true and correct as of the date specified
therein;
(i) performance in all material respects by the other party of all
obligations and compliance with the covenants required to be performed by it
pursuant to the Merger Agreement on or prior to the Effective Time;
(j) USB shall have received the written opinion of Thacher Proffitt &
Wood, counsel to Tappan Zee and Tappan Zee shall have received the written
opinion of Elias, Matz, Tiernan & Herrick L.L.P., counsel to USB, dated the
Closing Date, with respect to certain legal matters;
(k) the delivery to each of USB and Tappan Zee of various letters,
certificates and other documents; and
(l) no order, injunction or decree shall have been issued by any court
or agency of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect.
PROCEDURES FOR EXCHANGE OF TAPPAN ZEE STOCK CERTIFICATES
On the Closing Date, USB shall issue to ChaseMellon Shareholder Services
L.L.C. (the "Exchange Agent") the number of shares of USB Common Stock issuable
and the amount of cash payable, in the case of fractional shares, to holders of
Tappan Zee Common Stock (which shall be held by the Exchange Agent in trust for
such holders of Tappan Zee Common Stock). Promptly after the Effective Time, the
Exchange Agent shall distribute USB Common Stock and cash as set forth below.
The Exchange Agent shall not be entitled to vote or exercise any rights of
ownership with respect to the shares of USB Common Stock held by it from time to
time in accordance with the Merger Agreement.
As promptly as practicable after the Effective Time, and in no event later
than ten days thereafter, the Exchange Agent shall mail to each holder of record
of Tappan Zee Common Stock as of the Effective Time, a form of letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to such certificate shall pass, only upon delivery of such
certificate to the Exchange Agent) advising such holder of the terms of the
exchange effected by the Merger and of the procedure for surrendering to the
Exchange Agent such certificate in exchange for a certificate or certificates
evidencing USB Common Stock (plus cash in lieu of any fractional share interest)
("Letter of Transmittal"). The Exchange Agent shall accept such certificates
upon compliance with such reasonable terms and conditions as the Exchange Agent
may impose to effect an orderly exchange thereof in accordance with customary
exchange practices.
Each outstanding certificate that prior to the Effective Time represented
Tappan Zee Common Stock and that is not surrendered to the Exchange Agent, in
accordance with the aforementioned shall, until duly surrendered to the Exchange
Agent be deemed to evidence ownership of the number of whole shares of USB
Common Stock (plus cash in lieu of any fractional share interest) into which
such Tappan Zee Common Stock shall have been converted by virtue of the Merger.
No holder of a certificate theretofore representing shares of Tappan Zee Common
Stock shall be entitled to receive any dividends in respect of USB Common Stock
into which such shares shall have been converted by virtue of the Merger until
the certificate representing such shares is surrendered in exchange for a
certificate or certificates representing whole shares of USB Common Stock (plus
cash in lieu of any fractional share interest). In the event that dividends are
declared and paid by USB in respect of USB Common Stock after the Effective Time
but prior to any holder's surrender of certificates representing shares of
Tappan Zee Common Stock, dividends payable to such holder in respect of whole
shares of USB Common Stock not then issued shall accrue (without interest). Any
such dividends shall be paid (without interest) upon surrender of the
certificates representing such shares of Tappan Zee Common Stock.
41
<PAGE>
USB shall not be obligated to deliver a certificate or certificates
representing shares of USB Common Stock (plus cash in lieu of any fractional
share interest) until such holder surrenders the certificate or certificates
representing the shares of Tappan Zee Common Stock for exchange in accordance
with the aforementioned exchange procedures. In the event any certificate
representing Tappan Zee Common Stock has been lost, stolen or destroyed, the
holder will be required to tender an appropriate affidavit of loss and indemnity
agreement and/or a bond in an amount as may be reasonably required in each case
by USB. If any certificate evidencing shares of USB Common Stock is to be issued
in a name other than that in which the certificate evidencing Tappan Zee Common
Stock surrendered in exchange therefor is registered, it shall be a condition of
the issuance thereof that any such certificate shall be endorsed properly and
otherwise in proper form for transfer and that the person requesting such
exchange pay to the Exchange Agent any transfer or other tax required by reason
of the issuance of a certificate for shares of USB Common Stock in any name
other than that of the registered holder of the certificate surrendered or
otherwise establish to the satisfaction of the Exchange Agent that such tax has
been paid or is not payable.
Any portion of the shares of USB Common Stock and cash delivered to the
Exchange Agent by USB that remains unclaimed by Tappan Zee's shareholders by the
second anniversary of the Effective Time shall be delivered to USB by the
Exchange Agent. Any shareholders of Tappan Zee who have not complied with the
exchange procedure described above shall look only to USB for the consideration
deliverable in respect of each share of Tappan Zee Common Stock such shareholder
holds as determined pursuant to the Merger Agreement without any interest
thereon. If outstanding certificates for shares of Tappan Zee Common Stock are
not surrendered or the payment for them is not claimed prior to the second
anniversary of the Effective Time (the "Old Certificates"), then USB may at any
time thereafter, with or without notice to the holders of record of the Old
Certificates which were converted into whole shares of USB Common Stock (plus
cash in lieu of any fractional share interest), sell for the accounts of such
holders any or all of the shares of USB Common Stock which such holders are
entitled to receive (the "Unclaimed Shares"); provided, however, that USB shall
not be obligated to make any sale of Unclaimed Shares (even if notice of sale of
the Unclaimed Shares has been given) and instead may issue to the holder of any
Old Certificates properly delivered to USB in accordance with the terms thereof
a certificate evidencing the number of whole shares of USB Common Stock (plus
cash in lieu of any fractional share interest) to which such holder is entitled.
In the event that USB elects to sell Unclaimed Shares, it may do so in a
registered public offering under the Securities Act and applicable state
securities laws, by private sale or by sale at any broker's board or in any
securities exchange, in each case in such manner and at such times as USB shall
determine. The net proceeds of any such sale of Unclaimed Shares shall be held
for the holders of the unsurrendered Old Certificates whose Unclaimed Shares
have been sold, to be paid to them upon surrender of their Old Certificates.
From and after any such sale, the sole right of the holders of the unsurrendered
Old Certificates whose Unclaimed Shares have been sold shall be the right to
collect the net sale proceeds held by USB for their respective accounts, and
such holders shall not be entitled to receive any interest on such net sale
proceeds held by USB.
USB and the Exchange Agent shall be entitled to rely upon the stock transfer
books of Tappan Zee to establish the identity of those persons entitled to
receive the consideration specified in the Merger Agreement, which books shall
be conclusive with respect thereto. In the event of a dispute with respect to
ownership of stock represented by any certificate, USB and the Exchange Agent
shall be entitled to deposit any consideration represented thereby in escrow
with an independent third party and thereafter be relieved with respect to any
claims thereto.
REGULATORY APPROVALS
Consummation of the Merger is subject to, among other things, prior receipt
of all requisite approvals from the Federal Reserve Board, the OTS and any other
regulatory agency of competent jurisdiction necessary to consummate the Merger
and expiration of all regulatory waiting periods applicable to the Merger.
Consummation of the acquisition of the Savings Bank by USB pursuant to the
Merger requires approval by the Federal Reserve Board under the Bank Holding
Company Act of 1956 (the "BHCA"),
42
<PAGE>
which requires the Federal Reserve Board to 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
BHCA prohibits the Federal Reserve Board from approving the acquisition of a
savings association, such as the Savings Bank, (1) if it 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; (2) if its effect 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 Federal Reserve Board finds that the
anticompetitive effects of the merger are clearly outweighed in the public
interest by the probable effect of the transaction in meeting the convenience
and needs of the communities to be served; or (3) if the applicant has failed to
provide the Federal Reserve Board with adequate assurances that it will make
available such information on the operations or activities of the applicant and
its affiliates that the Federal Reserve Board deems appropriate to determine and
enforce compliance with the BHCA and other applicable federal banking laws and
regulations. The Federal Reserve Board considers the financial condition and
managerial resources of the applicant, its subsidiaries and the savings
association to be acquired, and also has the authority to deny an application if
it concludes that the combined organization would have an inadequate capital
position. The Federal Reserve Board also considers the convenience and needs of
the communities and whether the acquiring organization meets the requirements of
the Community Reinvestment Act of 1977 (the "CRA"). The Federal Reserve Board
also will consider an assessment of each party's Year 2000 compliance efforts
and the impact of the Merger on such efforts. An application for approval was
filed with the Federal Reserve Board on June 30, 1998. While USB and Tappan Zee
anticipate receiving such approval, there can be no assurance that it will be
granted, or that it will be granted on a timely basis or that it will be granted
without conditions unacceptable to USB or Tappan Zee.
Since the conversion of the Savings Bank from the mutual to stock form was
completed less than three years prior to the date of the Merger Agreement,
pursuant to the provisions of 12 C.F.R. Section 563b.3(i)(3), approval by the
OTS for USB to acquire beneficial ownership of 100% of the outstanding shares of
Tappan Zee Common Stock and thereby acquire control of the Savings Bank is
required. USB applied to the OTS on April 18, 1998 for approval to acquire
Tappan Zee and the Savings Bank. The OTS may approve the transaction provided it
finds that neither the offer to acquire, nor the acquisition of, all the
outstanding shares of Tappan Zee by USB (i) would frustrate the purposes of the
provisions of 12 C.F.R. Part 563b governing conversions from mutual to stock
form; (ii) would be manipulative or deceptive; (iii) would subvert the fairness
of the Savings Bank's conversion; (iv) would be likely to result in injury to
the Savings Bank; (v) would not be consistent with economical home financing;
(vi) would otherwise be violative of law or regulation; or (vii) would not
contribute to the prudent deployment of the Savings Bank's conversion proceeds.
While USB and Tappan Zee anticipate receiving such approval, there can be no
assurance that it will be granted, or that it will be granted on a timely basis
or that it will be granted without conditions unacceptable to USB or Tappan Zee.
No other regulatory approvals are necessary in connection with the transactions
contemplated by the Merger Agreement.
BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, each of Tappan Zee and USB has agreed that
during the period from the date of the Merger Agreement and continuing until the
Effective time, except as expressly contemplated or permitted by the Merger
Agreement or with the prior written consent of the other party, each of Tappan
Zee and USB and their respective subsidiaries will carry on their respective
businesses in the ordinary course consistent with past practice. During such
period, each of Tappan Zee and USB also will use all commercially reasonable
efforts to (a) preserve their respective business organizations and that of the
Savings Bank and the Bank, (b) keep available the present services of the
employees of each of USB and Tappan Zee and the Bank and the Savings Bank and
(c) preserve the good will of the customers of each of USB and Tappan Zee and
the Bank and the Savings Bank and others with whom business relationships exist.
43
<PAGE>
Under the terms of the Merger Agreement, Tappan Zee has agreed not to take
certain actions, nor permit its subsidiaries to take certain actions, prior to
the Effective Time without the prior written consent of USB, including, among
other things, the following:
(i) declare, set aside, make or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect
of Tappan Zee Common Stock, except for regular quarterly cash dividends at a
rate per share of Tappan Zee Common Stock not in excess of $0.07 per share,
which shall be declared and paid at approximately the same time as dividends
on USB Common Stock, it being the intention of the parties that the
shareholders of Tappan Zee receive dividends for any particular calendar
quarter on either Tappan Zee Common Stock or USB Common Stock acquired in
exchange therefor pursuant to the terms of the Merger Agreement but not
both, provided, however, that no terms of the Merger Agreement shall be
deemed to affect the ability of its subsidiaries to pay dividends on its
capital stock to Tappan Zee;
(ii) issue any shares of its capital stock, except for the issuance of
Tappan Zee Common Stock pursuant to the terms of outstanding stock option
agreements and upon exercise of outstanding stock options of Tappan Zee, or
issue, grant, modify or authorize any rights, other than in accordance with
the Stock Option Agreement; purchase any shares of Tappan Zee Common Stock;
or effect any recapitalization, reclassification, stock dividend, stock
split or like change in capitalization;
(iii) amend its Certificate of Incorporation, Charter, Bylaws or similar
organizational documents; impose, or knowingly suffer the imposition, on any
share of stock or other ownership interest held by Tappan Zee in its
subsidiaries of any lien, charge or encumbrance or permit any such lien,
charge or encumbrance to exist; or waive or release any material right or
cancel or compromise any material debt or claim;
(iv) increase the rate of compensation of any of its directors, officers
or employees, or pay or agree to pay any bonus or severance to, or provide
any other new employee benefit or incentive to, any of its directors,
officers or employees, except (a) as may have been otherwise disclosed in
the Merger Agreement, (b) as may be required pursuant to binding commitments
existing on the date on which the Merger Agreement was executed, (c) as may
be required by law, and (d) merit increases in accordance with past
practices, normal cost-of-living increases and normal increases related to
promotions or increased job responsibilities;
(v) except as may have been otherwise disclosed in the Merger Agreement,
enter into or, except as may be required by law, modify any pension,
retirement, stock option, restricted stock, stock purchase, stock
appreciation right, savings, profit sharing, deferred compensation,
supplemental retirement, 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 employees; make any contributions to Tappan Zee's pension plan,
except as required by the presently existing terms of Tappan Zee's pension
plan or the policies under which it is operated as of the date on which the
Merger Agreement was executed; or make any contributions to Tappan Zee's
Employee Stock Ownership Plan, other than necessary to enable Tappan Zee's
ESOP to make required payments on its indebtedness as of the date on which
the Merger Agreement was executed;
(vi) enter into (a) any transaction, agreement, arrangement or
commitment not made in the ordinary course of business, (b) any agreement,
indenture or other instrument relating to the borrowing of money by Tappan
Zee or its subsidiaries or guarantee by Tappan Zee or any of its
subsidiaries of any such obligation, except in the case of the Savings Bank
for deposits, Federal Home Loan Bank ("FHLB") advances, federal funds
purchased and securities sold under agreements to repurchase in the ordinary
course of business consistent with past practice, (c) any agreement,
arrangement or commitment relating to the employment of an employee or
consultant, or amend any such existing agreement, arrangement or commitment,
provided that Tappan Zee and the Savings
44
<PAGE>
Bank may employ an employee or consultant in the ordinary course of business
if the employment of such employee or consultant is terminable by Tappan Zee
or the Savings Bank at will without liability, other than as required by
law; or (d) any contract, agreement or understanding with a labor union;
(vii) change its method of accounting in effect for the fiscal year ended
March 31, 1997, except as required by changes in laws or regulations or
GAAP, or change any of its methods of reporting income and deductions for
federal income tax purposes from those employed in the preparation of its
federal income tax return for the fiscal year ended March 31, 1997, except
as required by changes in laws or regulations;
(viii) make any capital expenditures in excess of $10,000 individually or
$50,000 in the aggregate, other than pursuant to binding commitments
existing on the date on which the Merger Agreement was executed, and other
than expenditures necessary to maintain existing assets in good repair; or
enter into as lessee any new lease of real property or any new lease of
personal property providing for annual payments in excess of $5,000;
(ix) file any applications or make any contract with respect to
branching or site location or relocation;
(x) acquire in any manner whatsoever (other than to realize upon
collateral for a defaulted loan) control over or any equity interest in any
business or entity, except for investments in marketable equity securities
in the ordinary course of business and not exceeding 2% of the outstanding
shares of any class;
(xi) enter into any futures contract, option contract, interest rate
caps, interest rate floors, interest rate exchange agreement or other
agreement for purposes of hedging the exposure of its interest-earning
assets and interest-bearing liabilities to changes in market rates of
interest (other than forward commitments to sell loans in the ordinary
course of business);
(xii) enter or agree to enter into any agreement or arrangement granting
any preferential right to purchase any of its assets or rights or requiring
the consent of any party to the transfer and assignment of any such assets
or rights;
(xiii) change or modify in any material respect any of its lending or
investment policies, except to the extent required by law or an applicable
regulatory authority;
(xiv) take any action that would prevent or impede the Merger from
qualifying (a) for pooling-of-interests accounting treatment under GAAP or
(b) as a reorganization within the meaning of Section 368 of the Code,
provided, however, that nothing contained in the Merger Agreement shall
limit the ability of Tappan Zee to comply with its obligations under its
stock option agreements;
(xv) take any action that would result in any of the representations and
warranties of Tappan Zee contained in the Merger Agreement not to be true
and correct in any material respect at the Effective Time;
(xvi) terminate the employment of Mr. Byelick or Mr. Murphy without
cause; or
(xvii) agree to do any of the foregoing.
Under the terms of the Merger Agreement, USB has agreed not to take certain
actions, nor permit its subsidiaries to take certain actions, prior to the
Effective Time without the prior written consent of Tappan Zee, including, among
other things, the following:
(i) amend its Certificate of Incorporation or Bylaws in a manner which
would adversely affect in any manner the terms of the USB Common Stock or
the ability of USB to consummate the transactions contemplated by the Merger
Agreement; or impose, or knowingly suffer the imposition,
45
<PAGE>
on any share of stock or other ownership interest held by USB in its
subsidiaries of any lien, charge or encumbrance or permit any such lien,
charge or encumbrance to exist;
(ii) make any acquisition or take any other action that individually or
in the aggregate could materially adversely affect the ability of USB to
consummate the transactions contemplated by the Merger Agreement, or enter
into any agreement providing for, or otherwise participate in, any merger,
consolidation or other transaction in which USB or any surviving corporation
may be required not to consummate the Merger or any of the other
transactions contemplated by the Merger Agreement in accordance with the
terms of the Merger Agreement;
(iii) declare, set aside, make or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect
of the USB Common Stock, except for regular quarterly cash dividends in an
amount determined by the Board of Directors of USB in the ordinary course of
business and consistent with past practice, provided, however, that nothing
contained in the Merger Agreement shall be deemed to affect the ability of
(x) a subsidiary of USB to pay dividends on its capital stock to USB or (y)
USB to repurchase shares of USB Common Stock, unless otherwise prohibited by
the following clause;
(iv) take any action that would prevent or impede the Merger from
qualifying (a) for pooling-of-interests accounting treatment under GAAP or
(b) as a reorganization within the meaning of Section 368 of the Code;
provided, however, that nothing contained in the Merger Agreement shall
limit the ability of USB to exercise its rights under the Stock Option
Agreement;
(v) take any action that would result in any of the representations and
warranties of USB contained in the Merger Agreement not to be true and
correct in any material respect at the Effective Time;
(vi) enter into an agreement with respect to an Acquisition Transaction
with a third party which is conditioned (explicitly or implicitly) on USB
not completing the Merger; provided, that the foregoing shall not prevent
USB or any of its subsidiaries from acquiring any other assets or businesses
or from discontinuing or disposing of any of its assets or business if such
action is, in the reasonable judgment of USB, desirable in the conduct of
the business of USB and its subsidiaries and would not, in the reasonable
judgment of USB, likely delay the Effective Time to a date subsequent to
December 31, 1998 ("Acquisition Transaction" shall mean (x) a merger or
consolidation, or any similar transaction, involving USB, (y) a purchase,
lease or other acquisition of all or substantially all of the assets of USB
or (z) 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 USB); or
(vii) agree to do any of the foregoing.
NO SOLICITATION
Tappan Zee has agreed not to and to cause each of its subsidiaries not to,
solicit or encourage inquiries or proposals with respect to, furnish any
information relating to, or participate in any negotiations or discussions
concerning, any acquisition, lease or purchase of all or a substantial portion
of the assets of, or any equity interest in, Tappan Zee or its subsidiaries
(other than with USB or an affiliate thereof), provided, however, that the Board
of Directors of Tappan Zee may furnish such information or participate in such
negotiations or discussions if Tappan Zee's Board of Directors, after having
consulted with and considered the advice of outside counsel, has determined that
the failure to do the same would cause the members of such Board of Directors to
breach their fiduciary duties under applicable law. Under the Merger Agreement,
Tappan Zee is required to promptly inform USB orally and in writing of any such
request for information or of any such negotiations or discussions, as well as
instruct its and its subsidiaries' directors, officers, representatives and
agents to refrain from taking any action described in this paragraph.
46
<PAGE>
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains representations and warranties of USB and
Tappan Zee that are customary in transactions of this type, including, but not
limited to, representations and warranties concerning: (a) the organization and
capitalization of USB and its subsidiaries and Tappan Zee and its subsidiaries;
(b) the authorization, execution, delivery and enforceability of the Merger
Agreement; (c) consents or approvals required, and the lack of conflicts or
violations under applicable articles of incorporation, bylaws, instruments and
laws, with respect to the transactions contemplated by the Merger Agreement; (d)
the documents to be filed by USB and Tappan Zee with the Commission and other
regulatory agencies; (e) financial statements; (f) the conduct of the respective
businesses of the parties and their subsidiaries in the ordinary and usual
course (excluding the incurrence of expenses related to the Merger Agreement)
and the absence of events that, individually or in the aggregate, have had or
may have a Material Adverse Effect (as defined in the Merger Agreement) on USB
or Tappan Zee; (g) the absence of material environmental violations, actions or
liabilities; (h) the filing of tax returns, payment of taxes and other tax
matters; (i) the absence of undisclosed material or pending litigation; (j)
compliance with laws; (k) the accuracy of the information provided by USB and
Tappan Zee in connection with the Registration Statement on Form S-4 filed with
the Commission in connection with the issuance of the USB Common Stock in the
Merger and this Proxy Statement/Prospectus; (l) retirement and other employee
plans and matters relating to the Employment Retirement Income Security Act of
1974 ("ERISA"); (m) the absence of certain undisclosed contractual obligations
by the respective parties and their subsidiaries relating to, among other
things, (i) the borrowing of money, (ii) employment, (iii) payments related to
the execution of the Merger Agreement and consummation of the Merger, and (iv)
indemnification of officers and directors of the parties; (n) the absence of
undisclosed brokers' or finders' fees; (o) the maintenance of adequate
insurance; (p) the quality of title to and the condition of assets and
properties; (q) the consistency of the allowance for loan losses with GAAP;
(r) the absence of certain undisclosed transactions by USB or Tappan Zee with
their respective affiliates; (s) the validity and binding nature of loans
reflected as assets in the financial statements of USB and Tappan Zee; and (t)
the accounting treatment of the Merger.
EFFECTIVE TIME OF THE MERGER; TERMINATION AND AMENDMENT
The Effective Time of the Merger will occur upon the filing of a Certificate
of Merger with the Secretary of State of the State of Delaware pursuant to the
DGCL, unless a later date and time is specified as the effective time in such
Certificate of Merger. Such a filing will occur only after the approval of the
Merger Agreement by the requisite vote of Tappan Zee's shareholders, receipt of
all requisite regulatory approvals, the expiration of all applicable regulatory
waiting periods and the satisfaction or waiver of all other conditions to the
Merger.
A closing (the "Closing") will take place immediately prior to the Effective
Time at 10:00 a.m., Eastern Time, on the fifth business day following the
satisfaction or waiver (to the extent permitted) of all the conditions to
consummation of the Merger, or on such other date as the parties may mutually
agree upon (the "Closing Date"). The parties expect the Closing will take place
during the third quarter of calendar 1998.
The Merger Agreement may be terminated, either before or after approval by
the shareholders of Tappan Zee, as follows:
(a) at any time on or prior to the Effective Time, by the mutual consent
in writing of the parties if the Board of Directors of each so determines by
a vote of a majority thereof;
(b) at any time on or prior to the Effective Time, by either party in
writing, if the Board of Directors of such party so determines by a vote of
a majority thereof, if the other party has, in any material respect,
breached (i) any material covenant or undertaking contained in the Merger
Agreement or (ii) any representation or warranty contained in the Merger
Agreement, in any case if
47
<PAGE>
such breach would have a Material Adverse Effect (as defined in the Merger
Agreement) on the non-breaching party and has not been cured by the earlier
of 30 days after the date on which written notice of such breach is given to
the party committing such breach or the Effective Time;
(c) at any time, by either party in writing, (i) if any application for
prior approval of a governmental entity which is necessary to consummate the
Merger is denied or withdrawn at the request or recommendation of the
governmental entity which must grant such approval, unless within the
twenty-day period following such denial or withdrawal a petition for
rehearing or an amended application has been filed with the applicable
governmental entity; provided, however, that no party shall have the right
to terminate the Merger Agreement pursuant to this provision if such denial
or request or recommendation for withdrawal shall be due to the failure of
the party seeking to terminate the Merger Agreement to perform or observe
the covenants and agreements of such party set forth therein, or (ii) if any
governmental entity of competent jurisdiction shall have issued a final
nonappealable order enjoining or otherwise prohibiting the consummation of
any of the transactions contemplated by the Merger Agreement;
(d) at any time, by either party in writing, if the shareholders of
Tappan Zee do not approve the Merger Agreement, unless the failure of such
occurrence shall be due to the failure of the party seeking to terminate to
perform or observe in any material respect its agreements set forth in the
Merger Agreement to be performed or observed by such party at or before the
Effective Time;
(e) by either party in writing if the Effective Time has not occurred by
the close of business on December 31, 1998, provided that this right to
terminate shall not be available to any party whose failure to perform an
obligation in breach of such party's obligations under the Merger Agreement
has been the cause of, or resulted in, the failure of the Merger and the
other transactions contemplated hereby to be consummated by such date; and
(f) by Tappan Zee if the Average Closing Price is less than $15.00,
subject to the following: (i) if Tappan Zee elects to exercise its
termination right pursuant to this section, it shall give written notice to
USB (provided that such notice of election to terminate may be withdrawn at
any time); (ii) during the five-day period commencing with its receipt of
such notice, USB shall have the option to increase the consideration to be
received by the holders of the Tappan Zee Common Stock hereunder by
adjusting the Exchange Ratio to equal a number (calculated to the nearest
one-hundredth) obtained by dividing (A) $18.60 by (B) the Average Closing
Price; and (iii) if USB so elects within such five-day period, it shall give
prompt written notice to Tappan Zee of such election and the revised
Exchange Ratio, whereupon no termination shall have occurred pursuant to
this section and the Merger Agreement shall remain in effect in accordance
with its terms (except as the Exchange Ratio shall have been so modified).
In the event of termination of the Merger Agreement, the Merger Agreement
shall thereafter become void and, subject to certain specified provisions of the
Merger Agreement dealing with termination fees, there will not be any liability
on the part of any party thereto or their respective officers or directors,
except that (a) any such termination shall be without prejudice to the rights of
such party arising out of the breach by any other party of any covenant,
representation or obligation contained in the Merger Agreement, (b) in certain
limited circumstances, a termination fee may become payable as described under
"-- Termination Fees" and (c) USB and Tappan Zee each will bear its respective
expenses in connection with the Merger Agreement and the transactions
contemplated thereby, except that USB and Tappan Zee will share all printing
expenses and Commission filing fees.
To the extent permitted under applicable law, at any time prior to the
consummation of the Merger, whether before or after approval thereof by the
shareholders of Tappan Zee, the parties may by written agreement (a) amend the
Merger Agreement, (b) extend the time for the performance of any of the
obligations or other acts of the other parties thereto, (c) waive any
inaccuracies in the representations and warranties contained therein or in any
document delivered pursuant thereto, or (d) waive compliance with
48
<PAGE>
any of the agreements or conditions contained therein. However, after any
approval of the Merger Agreement by the shareholders of Tappan Zee, there may
not be, without further approval of such shareholders, any amendment or waiver
of the Merger Agreement that modifies either the amount or the form of the
Merger Consideration to be delivered to the shareholders of Tappan Zee.
TERMINATION FEES
In order to increase the likelihood that the transactions contemplated by
the Merger Agreement will be consummated, the Merger Agreement provides that in
the event that the Merger Agreement is terminated by USB because of a material
breach of the Merger Agreement, as set forth therein, by Tappan Zee, and the
triggering events contemplated by the Stock Option Agreement have not occurred,
Tappan Zee will be required to pay USB a termination fee of $500,000. If certain
triggering events occur pursuant to the Stock Option Agreement within a 12 month
period specified in the Stock Option Agreement and USB elects to exercise its
right to exercise the Option granted thereunder, then USB will, concurrent with
exercise of such Option return to Tappan Zee the $500,000, referred to in the
previous sentence, together with interest earned thereon at the federal funds
rate. In the event Tappan Zee terminates the Merger Agreement because of a
material breach of its terms, as set forth therein, by USB, USB will be required
to pay Tappan Zee a termination fee of $250,000.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Tappan Zee Board of Directors,
shareholders should be aware that members of Tappan Zee's management and the
Tappan Zee Board of Directors have interests in the Merger that are in addition
to the interests of shareholders generally. The Tappan Zee Board of Directors
was aware of these interests and considered them, among other matters, in
approving the Merger Agreement and the transactions contemplated thereby.
TAPPAN ZEE STOCK OPTIONS. The directors and executive officers of Tappan
Zee hold stock options to acquire Tappan Zee Common Stock, under Tappan Zee's
1996 Stock Option Plan for Officers and Employees and its 1996 Stock Option Plan
for Outside Directors, which become vested and exercisable as to 20% of the
optioned shares on July 10, 1997, 1998, 1999, 2000 and 2001, assuming a
continuation of the option holder's service through the relevant vesting date,
with an acceleration of vesting upon death, disability, retirement or a change
in control. Approval of the Merger by the holders of Tappan Zee Common Stock
will constitute a change in control of Tappan Zee that will result in the
accelerated vesting of all options to acquire Tappan Zee Common Stock
outstanding to directors and executive officers. In consideration for entering
into a Consulting Agreement and an Employment Agreement, Mr. Byelick and Mr.
Murphy, respectively, have waived this acceleration. See "--Consulting Agreement
and Employment Agreement".
Outstanding options to purchase Tappan Zee Common Stock that are not
exercised prior to the consummation of the Merger will be converted into options
to acquire USB Common Stock as a result of the Merger. As of the Record Date,
the directors and executive officers of Tappan Zee beneficially own stock
options issued under Tappan Zee's stock option plans to purchase in the
aggregate 121,500 shares of Tappan Zee Common Stock. Based on an Exchange Ratio
of 1.06 assuming the Average Closing Price is $20.85, such Tappan Zee stock
options will be converted into options to purchase 128,790 shares of USB Common
Stock. See "--Treatment of Tappan Zee Stock Options."
TAPPAN ZEE RESTRICTED STOCK. The directors and executive officers of Tappan
Zee have received restricted stock awards under Tappan Zee's 1996 Recognition
and Retention Plan for Officers and Employees and its 1996 Recognition and
Retention Plan for Outside Directors, the balance of which will become vested in
equal installments on July 10, 1999, 2000 and 2001, with an acceleration of
vesting upon death, disability, retirement or a change in control. Approval of
the Merger by the holders of Tappan Zee Common Stock will constitute a change in
control of Tappan Zee that will result in the accelerated vesting
49
<PAGE>
of all unvested restricted stock awards outstanding to directors and executive
officers. In consideration of the Consulting Agreement and the Employment
Agreement, Mr. Byelick and Mr. Murphy, respectively, have waived this
acceleration. See "--Consulting Agreement and Employment Agreement." An
aggregate of 12,264 shares of Tappan Zee restricted stock will become vested
with respect to all officers and directors, except Mr. Byelick and Mr. Murphy as
a consequence of the approval of the Merger by the holders of Tappan Zee Common
Stock. Based on an Exchange Ratio of 1.08 assuming the Average Closing Price is
$20.45, unvested Tappan Zee restricted stock awards outstanding to Messrs.
Byelick and Murphy aggregating 19,440 shares will be converted into restricted
stock awards for 20,995 shares of USB Common Stock.
CONSULTING AGREEMENT AND EMPLOYMENT AGREEMENT. The Savings Bank will enter
into, as of the Effective Time, a Consulting Agreement with Stephen C. Byelick,
Tappan Zee's current President and Chief Executive Officer and a director of
Tappan Zee, and an Employment Agreement with Harry G. Murphy, Tappan Zee's
current Vice President and Secretary and a director of Tappan Zee. The
Consulting Agreement and the Employment Agreement will supersede the respective
current employment agreements of Messrs. Byelick and Murphy with Tappan Zee and
the Savings Bank.
CONSULTING AGREEMENT. The Consulting Agreement to be entered into by Mr.
Byelick and the Savings Bank provides that (i) Mr. Byelick's current employment
agreement with Tappan Zee, dated June 23, 1997 and a separate employment
agreement with the Savings Bank, also dated June 23, 1997, each will be
terminated concurrent with the execution of the Consulting Agreement, (ii) Mr.
Byelick will serve as a director emeritus of the Savings Bank and will provide
his personal advice and counsel to the Savings Bank in connection with the
business of banking and financial services for a period of three years from the
date of the Consulting Agreement, (iii) during the term of the Consulting
Agreement, Mr. Byelick's services shall be rendered at such times as shall be
mutually agreeable to the Savings Bank and Mr. Byelick and that Mr. Byelick
shall work a minimum of 10 hours per week not in accordance with any fixed
schedule, and (iv) Mr. Byelick agrees not to retire (as defined in the
Consulting Agreement) during the first 12 months following the date of the
Consulting Agreement.
Pursuant to the Consulting Agreement, the Savings Bank shall compensate Mr.
Byelick at a minimum rate of $77,000 per year, as may be increased from time to
time by the Board of Directors of the Savings Bank. In addition, in
consideration of Mr. Byelick's waiving all of his rights under his current
employment agreements referred to in the preceding paragraph and entering into
the Consulting Agreement, the Savings Bank will pay Mr. Byelick a lump sum cash
amount equal to $472,000 concurrent with the execution and delivery of the
Consulting Agreement. Mr. Byelick also shall be entitled to participate in the
Savings Bank's post-retirement health care and life insurance plans in
accordance with the terms of such plans and will also continue to vest in his
pre-existing stock option grants and restricted stock awards in accordance with
the vesting schedule in effect therefor.
The Consulting Agreement may be terminated by the Savings Bank or Mr.
Byelick for any reason, however, if such termination (i) by the Savings Bank is
other than for Cause (as defined in the Consulting Agreement), (ii) by Mr.
Byelick (a) due to a material breach of the Consulting Agreement by the Savings
Bank which has not been cured in accordance therewith, or (b) for Good Reason
(as defined in the Consulting Agreement), or (iii) due to Mr. Byelick's
Retirement, Disability (each as defined in the Consulting Agreement) or death,
then the Savings Bank shall, subject to limitations contained in the Consulting
Agreement, pay Mr. Byelick cash severance equal to Mr. Byelick's consulting fee
for the then remaining term of the Consulting Agreement, with such amount to be
paid in equal monthly installments over the then remaining term of the
Consulting Agreement, and unvested stock options to purchase USB Common Stock
and unvested restricted stock awards held by Mr. Byelick as of the date of
termination will become fully vested as of such date.
The Consulting Agreement provides for a limitation of benefits thereunder
under certain circumstances. If the payments and benefits payable under the
Consulting Agreement by the Savings Bank, USB
50
<PAGE>
or any affiliate of either of them would constitute a "parachute payment" under
Section 280G of the Code, then the payments and benefits payable by the Savings
Bank shall be reduced by the amount, if any, which is the minimum necessary to
result in no portion of such payments and benefits being non-deductible to the
Savings Bank pursuant to Section 280G of the Code and subject to the excise tax
imposed under Section 4999 of the Code. However, if any reduction in the
payments or benefits payable by the Savings Bank occurs, the Consulting
Agreement requires USB to provide the payments and benefits to Mr. Byelick that
may not be paid by the Savings Bank pursuant to the foregoing limitations in
subsequent years. In addition, the Consulting Agreement obligates USB to
indemnify Mr. Byelick for the amount of any excise taxes that may otherwise be
imposed under Section 4999 as a result of such payments and for the amount of
any income and employment taxes triggered by such indemnification.
The Consulting Agreement also provides for (i) Mr. Byelick's covenant and
agreement to not compete with the Savings Bank by employment or affiliation with
other financial institutions (as described in the Consulting Agreement) under
certain circumstances for a specified period, (ii) his agreement to keep certain
information concerning the Savings Bank, USB or any affiliates of either of them
confidential, and (iii) his covenant and agreement to not solicit (as defined
therein) any officers or employees of the Savings Bank, USB or any affiliates of
either of them for employment with other financial institutions (as described in
the Consulting Agreement) for a specific period, in each instance without the
written consent of the Savings Bank. Further, the Consulting Agreement contains
provisions relating to regulatory restrictions with respect to certain
agreements entered into by the Savings Bank under 12 C.F.R. Section563.39(b) and
12 U.S.C. Section1828(k). USB has guaranteed the Savings Bank's performance
under the Consulting Agreement.
EMPLOYMENT AGREEMENT. The Employment Agreement to be entered into by Mr.
Murphy and the Savings Bank provides that (i) Mr. Murphy's current employment
agreement with Tappan Zee, dated June 23, 1997, and a separate employment
agreement with the Savings Bank, also dated June 23, 1997, each will be
terminated concurrent with execution of the Employment Agreement and (ii) Mr.
Murphy will be employed by the Savings Bank as its Executive Vice President and
Secretary for a period of three years from the date of the Employment Agreement.
The Savings Bank shall compensate Mr. Murphy at a minimum base salary of
$165,000 per year, which may be increased from time to time by the Savings
Bank's Board of Directors. In addition to such base salary, Mr. Murphy shall be
entitled to receive during the term of the Employment Agreement such bonus
payments as may be determined by the Board of Directors of the Savings Bank.
During the term of the Employment Agreement, Mr. Murphy shall be entitled to
participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing plan, stock option plan, employee stock ownership
plan, or other plans, benefits and privileges given to employees and executives
of the Savings Bank, to the extent commensurate with Mr. Murphy's then duties
and responsibilities, as fixed by the Savings Bank and will also continue to
vest in his pre-existing stock option grants and restricted stock awards in
accordance with the vesting schedule in effect therefor. In consideration of Mr.
Murphy's entering into the Employment Agreement and waiving all of his rights
under his current employment agreements referred to above, the Savings Bank will
pay Mr. Murphy a signing bonus in a lump sum cash amount equal to $336,000
concurrent with the execution and delivery of the Employment Agreement.
The Employment Agreement may be terminated by the Savings Bank or Mr. Murphy
for any reason, however, if such termination (i) by the Savings Bank is for
other than Cause (as defined in the Employment Agreement), (ii) by Mr. Murphy
(a) due to a material breach of the Employment Agreement which has not been
cured in accordance therewith or (b) for Good Reason (as defined in the
Employment Agreement), or (iii) due to Mr. Murphy's Disability (as defined in
the Employment Agreement) or death, then the Savings Bank shall, subject to
limitations contained in the Employment Agreement, pay Mr. Murphy a cash
severance amount equal to his base salary for the then remaining term of the
Employment Agreement, with such amount to be paid in equal monthly installments
over the then remaining term of the Employment Agreement, and unvested stock
options to purchase USB Common
51
<PAGE>
Stock and unvested restricted stock awards held by Mr. Murphy as of the date of
termination will become fully vested as of such date.
The Employment Agreement provides for a limitation of benefits under certain
circumstances. If the payments and benefits payable under the Employment
Agreement by the Savings Bank, USB or any affiliate of either of them would
constitute a "parachute payment" under Section 280G of the Code, then the
payments and benefits payable by the Savings Bank shall be reduced by the
amount, if any, which is the minimum necessary to result in no portions of such
payments and benefits being non-deductible to the Savings Bank pursuant to
Section 280G of the Code and subject to the excise tax imposed under Section
4999 of the Code. However, if any reduction in the payments or benefits payable
by the Savings Bank occurs, the Employment Agreement requires USB to provide the
payments and benefits to Mr. Murphy that may not be paid by the Savings Bank
pursuant to the foregoing limitations in subsequent years. In addition, the
Employment Agreement obligates USB to indemnify Mr. Murphy for the amount of any
excise taxes that may otherwise be imposed under Section 4999 of the Code as a
result of such payments and for the amount of any income and employment taxes
triggered by such indemnification.
The Employment Agreement also provides for (i) Mr. Murphy's covenant and
agreement to not compete with the Savings Bank by employment or affiliation with
other financial institutions (as defined in the Employment Agreement) under
certain circumstances for a specified period, (ii) his agreement to keep certain
information concerning the Savings Bank, USB or any affiliates of either of them
confidential, and (iii) his covenant and agreement to not solicit (as defined in
the Employment Agreement) any officers or employees of the Savings Bank, USB or
any affiliates of either of them for employment with other financial
institutions (as described therein) for a specified period, in each instance
without the written consent of the Savings Bank. In addition, the Employment
Agreement contains provisions relating to regulatory restrictions with respect
to certain agreements entered into by the Savings Bank under 12 C.F.R.
Section563.39(b) and 12 U.S.C Section1828(k). USB has guaranteed the Savings
Bank's performance under the Employment Agreement.
DEFERRED COMPENSATION PLAN FOR DIRECTORS AND OFFICERS. The Savings Bank
maintains a Deferred Compensation Plan for Directors and Officers in which all
directors, other than Messrs. Logan and Plunkett, are participants. Participants
defer receipt of all or a portion of their compensation for services to the
Savings Bank. Amounts deferred are invested in Tappan Zee Common Stock or in
designated mutual funds or are used to pay premiums on a life insurance policy
on the life of the participant. Benefit payments are based on the ultimate value
of the investments made with deferred amounts and on the insurance coverage
provided by any applicable life insurance policy. Upon a change in control, any
life insurance policies purchased with deferred amounts must be fully paid up by
Tappan Zee in order that the level of insurance coverage (and, therefore, the
benefit payments derived therefrom) is maintained. Approval of the Merger by the
holders of Tappan Zee Common Stock will constitute a change in control for
purposes of the Deferred Compensation Plan for Directors and Officers and will
result in a requirement that Tappan Zee cause all insurance policies purchased
thereunder to be fully paid up.
BOARD AND CHAIRMAN'S COUNCIL MEMBERSHIP. USB has agreed to appoint Kevin J.
Plunkett, who currently serves a Director of Tappan Zee and the Savings Bank, to
the Board of Directors of USB effective as of the Effective Time. In addition,
USB will appoint those Directors of Tappan Zee who so desire, other than Mr.
Plunkett and Mr. Murphy, to serve on USB's Chairman's Council. USB's Chairman's
Council advises the Bank of community needs and opportunities and membership
thereon is at the discretion of USB's Chairman and without remuneration.
Following consummation of the Merger, the Board of Directors of the Savings Bank
will consist of John T. Cooney, Gerald L. Logan, Harry G. Murphy and Kevin J.
Plunkett, each of whom is a member of the Savings Bank's current Board of
Directors, and the remaining vacancies will be filled by USB, as the sole
shareholder of the Savings Bank. Stephen C. Byelick will be Director Emeritus of
the Savings Bank.
52
<PAGE>
INDEMNIFICATION AND INSURANCE. USB has agreed in the Merger Agreement to
indemnify each present and former director, officer or employee of Tappan Zee or
its subsidiaries and each officer or employee of Tappan Zee or its subsidiaries
that is serving or has served as a director or trustee of another entity
expressly at Tappan Zee's request or direction, from and after the Effective
Time through the sixth anniversary thereof. Such indemnification will be
applicable with respect to any costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of matters existing or occurring at or prior to the Effective Time
(including the transactions contemplated by the Merger Agreement, including the
entering into of the Stock Option Agreement), if first asserted or claimed prior
to the date of the Merger Agreement and previously disclosed in accordance
therewith, if first asserted or claimed between the date of the Merger Agreement
and the Effective Time and disclosed in accordance with Section 5.13 thereof or
if first asserted or claimed after the Effective Time, to the fullest extent, if
any, that such indemnified party, would have been entitled to indemnification or
the advancement of expenses by Tappan Zee under Article X of its Certificate of
Incorporation on the one hand or by the Savings Bank under Article XII of its
Bylaws on the other hand (the "Indemnification Rights"), as in effect on the
date of the Merger Agreement and previously disclosed in accordance therewith,
provided, however, that all rights to indemnification in respect of any claim
asserted or made within such period shall continue until the final disposition
thereof, and provided, further, that nothing contained in this provision shall
enlarge the rights to indemnification contained in the Indemnification Rights or
extend or be deemed a waiver of any applicable statute of limitations in respect
of any claim or claim for indemnification. Without limiting the foregoing, USB
also has agreed that all limitations of liability existing in favor of persons
indemnified in Article IX of the Tappan Zee Certificate of Incorporation, as on
the date of the Merger Agreement and previously disclosed in accordance
therewith, arising out of matters existing or occurring at or prior to the
Effective Time shall survive the Merger and shall continue in full force and
effect.
USB has agreed to maintain Tappan Zee's existing directors' and officers'
liability insurance policy (or purchase an insurance policy providing coverage
on substantially the same terms and conditions) for acts or omissions occurring
prior to the Effective Time by persons who are currently covered by such
insurance policy maintained by Tappan Zee for a period of six years following
the Effective Time, provided, however, that in no event shall USB be required to
expend on an annual basis more than 125% of the amount paid by Tappan Zee as of
the date of the Merger Agreement for such insurance coverage (the "Insurance
Amount") to maintain or procure such insurance coverage, and further provided
that if USB is unable to maintain or obtain the insurance called for pursuant to
this provision, USB shall use all reasonable efforts to obtain as much
comparable insurance as is available for the Insurance Amount. At the request of
USB, Tappan Zee shall use reasonable efforts to procure the insurance coverage
referred to in the preceding sentence prior to the Effective Time on the terms
set forth in such sentence.
In the event that USB or any of its respective successors or assigns (i)
consolidates with or merges into any other Person (as defined in the Merger
Agreement) and shall not be the continuing or surviving corporation or entity of
such consolidation or merger, or (ii) transfers all or substantially all of its
properties and assets to any Person, then, and in each such case the successors
and assigns of such entity shall assume the obligations set forth in Section 5.9
of the Merger Agreement relating to indemnification and insurance, which
obligations are expressly intended to be for the irrevocable benefit of, and
shall be enforceable by, each director and officer covered hereby.
53
<PAGE>
RESALE CONSIDERATIONS WITH RESPECT TO THE USB COMMON STOCK
The shares of USB Common Stock that will be issued in the Merger have been
registered under the Securities Act and listed on AMEX and will be freely
transferable, except for USB Common Stock received by persons, including
directors and executive officers of Tappan Zee, who may be deemed to be
"affiliates" of Tappan Zee for purposes of Rule 145, promulgated under the
Securities Act, and any Tappan Zee shareholder who may be deemed to be an
"affiliate" of USB for purposes of Rule 144 promulgated under the Securities Act
(each an "Affiliate"). Affiliates may not sell their shares of USB Common Stock
acquired pursuant to the Merger, except pursuant to an effective registration
statement under the Securities Act covering such USB Common Stock or in
compliance with Rule 145 or another applicable exemption from the registration
requirements of the Securities Act. Persons who may be deemed to be affiliates
of Tappan Zee generally include individuals or entities that control, are
controlled by, or are under common control with, Tappan Zee and may include
certain officers and directors of Tappan Zee as well as any shareholders who own
more than 10% of the Tappan Zee Common Stock.
Rules 144 and 145 restrict the sale of USB Common Stock received in the
merger by Affiliates and certain of their family members and related interests.
Generally, during the year following the Effective Time, those persons who are
Affiliates of Tappan Zee at the time of the Special Meeting, provided they are
not Affiliates of USB at or following the Effective Time, may publicly resell
any USB Common Stock received by them in the Merger, subject to certain
limitations as to, among other things, the amount of USB Common Stock sold by
them in any three-month period and as to the manner of sale. After the one year
period, such Affiliates may resell their shares without such restriction so long
as there is adequate current public information with respect to USB as required
by Rule 144. Persons who are Affiliates of USB after the Effective Time may
publicly resell the USB Common Stock received by them in the Merger subject to
similar limitations and subject to certain filing requirements specified in Rule
144.
The ability of Affiliates to resell shares of USB Common Stock received in
the Merger under Rule 144 or Rule 145 as summarized herein generally will be
subject to USB's having satisfied its Exchange Act reporting requirements for
specified periods prior to the time of sale. Affiliates also would be permitted
to resell USB Common Stock received in the Merger pursuant to an effective
registration statement under the Securities Act or an exemption therefrom. This
Proxy Statement/Prospectus does not cover any resales of USB Common Stock
received by persons who may be deemed to be Affiliates of USB or Tappan Zee.
Each director and executive officer of Tappan Zee and USB has entered into
an agreement with USB and Tappan Zee, respectively, providing that, among other
things, as an affiliate, he will not transfer any USB Common Stock received in
the Merger except in compliance with the Securities Act and will make no
dispositions of any USB Common Stock or Tappan Zee Common Stock during the
period commencing 30 days prior to the Effective Time through the date on which
financial results covering at least 30 days of combined operations of USB and
Tappan Zee after the Merger have been published within the meaning of Section
201.01 of the Commission's Codification of Financial Reporting Policies.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Elias, Matz, Tiernan & Herrick L.L.P., special counsel to USB, has rendered
an opinion to USB and Tappan Zee as to the principal federal income tax
consequences expected to result from the Merger. Such opinion is included as an
exhibit to the Registration Statement. Neither the opinion nor this summary
thereof addresses any tax considerations under foreign, state or local laws, or
the tax considerations to certain shareholders in light of their particular
circumstances, including persons who are not United States citizens, or who are
resident aliens, life insurance companies, dealers in securities, tax exempt
entities, shareholders who received their shares through the exercise of
employee stock options or through other compensation arrangements, and
shareholders who do not hold their shares as "capital assets" within the meaning
of Section 1221 of the Code.
54
<PAGE>
No rulings have been requested from the Internal Revenue Service ("IRS") as
to the federal income tax consequences of the Merger. Shareholders should be
aware that the opinion of Elias, Matz, Tiernan & Herrick L.L.P. is not binding
on the IRS. Shareholders also should be aware that some of the tax consequences
of the Merger are governed by provisions of the Code as to which there are no
final regulations and little or no judicial or administrative guidance. The
opinion of Elias, Matz, Tiernan & Herrick L.L.P. is based upon the federal
income tax laws as in effect on the date of such opinion and as those laws are
currently interpreted. There can be no assurance that future legislation,
regulations, administrative rulings or court decisions will not adversely affect
the accuracy of the statements contained therein.
The federal income tax consequences discussed below are conditioned upon,
and the opinion of Elias, Matz, Tiernan & Herrick L.L.P. is based upon, the
accuracy as of the date hereof and thereof and at, as of and after the Effective
Time of the Merger of certain assumptions, including, but not limited to, the
following (taking into account for purposes hereof all of the events which are
contemplated under the Merger Agreement) that (A) pursuant to the Merger, the
holders of Tappan Zee Common Stock receive USB Common Stock having a value as of
the Effective Time of the Merger of not less than fifty percent (50%) of the
value of the Tappan Zee Common Stock as of the same date; (B) following the
Merger, USB will continue the historic business of Tappan Zee or use a
significant portion of Tappan Zee's historic business assets in a business; and
(C) A BONA FIDE corporate business purpose exists for the Merger.
USB and Tappan Zee believe that all of the foregoing assumptions are
accurate as of the date hereof, and will be accurate at, as of and after the
Effective Time of the Merger. If either USB or Tappan Zee learns before the
Effective Time of the Merger that such assumptions are false and that its
counsel therefore believes that the Merger is unlikely to be treated as a
tax-free reorganization, then additional shareholder approval will be obtained
before consummation of the Merger.
Elias, Matz, Tiernan & Herrick L.L.P. has rendered an opinion to USB and
Tappan Zee, based upon the assumptions set forth therein and herein, that the
Merger will be treated as a reorganization within the meaning of Section 368 of
the Code and will have the following federal income tax consequences: (i) no
gain or loss will be recognized by USB or Tappan Zee as a result of the Merger;
(ii) no gain or loss will be recognized by the shareholders of Tappan Zee who
exchange their Tappan Zee Common Stock solely for shares of USB Common Stock
pursuant to the Merger (except with respect to cash received in lieu of a
fractional share interest in USB Common Stock); (iii) the tax basis of the
shares of USB Common Stock received by shareholders who exchange all of their
Tappan Zee Common Stock solely for USB Common Stock in the Merger will be the
same as the tax basis of the Tappan Zee Common Stock surrendered in exchange
therefor (reduced by any amount allocable to a fractional share interest for
which cash is received); and (iv) the holding period of such shares of USB
Common Stock will include the holding period of the Tappan Zee Common Stock for
which it is exchanged.
ACCOUNTING TREATMENT OF THE MERGER
The Merger is intended to qualify as a pooling-of-interests for accounting
and financial reporting purposes. Under this method of accounting, the recorded
assets and liabilities of USB and Tappan Zee will be carried forward to the
combined corporation at their recorded amounts; income of the combined
corporation will include income of both USB and Tappan Zee for the entire fiscal
year of USB in which the Merger occurs; and the reported income of the separate
corporations for prior periods will be combined and restated as income of the
combined corporation as if the Merger had taken place prior to the periods
covered by such financial statements. Expenses incurred in connection with the
Merger will constitute expenses for the accounting periods to which such
expenses relate.
It is a condition to completion of the Merger that USB and Tappan Zee each
receive an opinion from its respective independent accountants confirming that
the Merger will qualify as a pooling-of-interests for financial accounting
purposes. As of the date of this Proxy Statement/Prospectus, neither USB nor
Tappan
55
<PAGE>
Zee has any reason to believe that their respective independent accountants will
be unable to deliver an opinion that the Merger will qualify as a
pooling-of-interests for financial accounting purposes. See "Pro Forma Condensed
Combined Financial Statements (Unaudited)."
ABSENCE OF DISSENTERS' RIGHTS OF APPRAISAL
In connection with the Merger, holders of shares of Tappan Zee Common Stock
will not have the right to dissent under the DGCL and demand payment of the fair
market value of such shares of Tappan Zee Common Stock.
Under the DGCL, stockholders of a Delaware corporation who dissent from a
merger or consolidation of the corporation may be entitled to appraisal rights,
unless such corporation's shares are (a) either (i) listed on a national
securities exchange or designated as a national market system security of an
inter-dealer quotation system by the National Association of Securities Dealers,
Inc. ("NASD"), or (ii) held of record by more than 2,000 stockholders, and (b)
such stockholders receive only shares of stock or depository receipts of the
corporation surviving or resulting from the merger or consolidation, or shares
of stock or depository receipts of any other corporation, which at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security on an
inter-dealer quotation system by the NASD or held of record by more than 2,000
stockholders. Since the Tappan Zee Common Stock is presently listed on the
NASDAQ/NMS and the USB Common Stock to be received pursuant to the Merger is
presently listed on the AMEX, the holders of Tappan Zee Common Stock are not
entitled to appraisal rights.
EXPENSES OF THE MERGER
The Merger Agreement provides that USB and Tappan Zee each will bear and pay
all costs and expenses incurred by it in connection with the transactions
contemplated by the Merger Agreement, including legal, accounting, and financial
consulting expenses. Printing expenses and filing fees related to the Proxy
Statement/Prospectus and the Registration Statement, however, will be shared
equally by USB and Tappan Zee.
STOCK OPTION AGREEMENT
As a condition to USB entering into the Merger Agreement, USB and Tappan Zee
entered into a Stock Option Agreement, dated as of March 6, 1998, a copy of
which is attached to this Proxy Statement/ Prospectus as Appendix B and is
incorporated by reference herein. The following summary is qualified in its
entirety to the full text of the Stock Option Agreement.
Pursuant to the Stock Option Agreement, Tappan Zee granted to USB an option
to purchase, under certain circumstances, up to 294,134 shares of Tappan Zee
Common Stock (representing 19.9% of the outstanding shares of Tappan Zee Common
Stock as of March 6, 1998) at a price of $18.50 per share (the "Option").
The Stock Option Agreement is intended to increase the likelihood that the
Merger will be consummated in accordance with the terms of the Merger Agreement.
Consequently, certain aspects of the Stock Option Agreement may have the effect
of discouraging persons who might now or prior to the consummation of the Merger
be interested in acquiring all of or a significant interest in Tappan Zee from
considering or proposing such an acquisition, even if such person were prepared
to pay a higher price per share for Tappan Zee Common Stock than the value per
share contemplated by the Merger Agreement. The acquisition of Tappan Zee, a
significant portion of its consolidated assets or an interest in Tappan Zee, or
an agreement to do so, could cause the Option to become exercisable. The
existence of such Option could significantly increase the cost to a potential
acquiror of acquiring Tappan Zee compared to its cost had the Stock Option
Agreement not been executed. Such increased costs might discourage a potential
acquiror
56
<PAGE>
from considering or proposing an acquisition or might result in a potential
acquiror proposing to pay a lower price per share to acquire Tappan Zee than it
might otherwise have proposed to pay.
Pursuant to the Stock Option Agreement, USB may exercise the Option, in
whole or in part, at any time and from time to time, provided that (i) USB shall
not be, on the date of exercise, in material breach of the agreements or
covenants contained in the Merger Agreement or the Stock Option Agreement, and
(ii) no preliminary or permanent injunction or other order against the delivery
of shares covered by the Option issued by any court of competent jurisdiction in
the United States shall be in effect on the date of exercise, upon or after the
occurrence of a Purchase Event (as such term is hereinafter defined); and
provided further that the Option shall terminate and be of no further force and
effect upon the earliest to occur of (A) the Effective Time of the Merger, as
provided in the Merger Agreement, (B) termination of the Merger Agreement in
accordance with the terms thereof prior to the occurrence of a Purchase Event or
a Preliminary Purchase Event (as such term is hereinafter defined), other than a
termination of the Merger Agreement by USB pursuant to Section 7.1(b) thereof (a
"Default Termination"), (C) 12 months after the termination of the Merger
Agreement by USB pursuant to a Default Termination, and (D) 12 months after
termination of the Merger Agreement (other than pursuant to a Default
Termination) following the occurrence of a Purchase Event or a Preliminary
Purchase Event; and provided, further, that any purchase of shares upon exercise
of the Option shall be subject to compliance with applicable securities and
banking laws, including without limitation the BHCA, and the Home Owners' Loan
Act, as amended ("HOLA").
The term "Purchase Event" means the occurrence of any of the following
events:
(i) Without USB's prior written consent, Tappan Zee shall have authorized,
recommended or publicly-proposed, or publicly announced an intention to
authorize, recommend or propose, or entered into an agreement with any person
(other than USB or any subsidiary of USB) to effect (A) a merger, consolidation
or similar transaction involving Tappan Zee or any of its subsidiaries, (B) the
disposition, by sale, lease, exchange or otherwise, of assets of Tappan Zee or
any of its subsidiaries representing in either case 25% or more of the
consolidated assets of Tappan Zee and its subsidiaries, or (C) the issuance,
sale or other disposition of (including by way of merger, consolidation, share
exchange or any similar transaction) securities representing 20% or more of the
voting power of Tappan Zee or any of its subsidiaries (any of the foregoing an
"Acquisition Transaction"); or
(ii) any person (other than USB or any subsidiary of USB) shall have
acquired beneficial ownership (as such term is defined in Rule 13d-3 promulgated
under the Exchange Act) of or the right to acquire beneficial ownership of, or
any "group" (as such term is defined in Section 13(d)(3) of the Exchange Act)
shall have been formed which beneficially owns or has the right to acquire
beneficial ownership of, 20% or more of the then outstanding shares of Tappan
Zee Common Stock.
The term "Preliminary Purchase Event" means the occurrence of any of the
following events:
(i) any person (other than USB or any subsidiary of USB) 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 Tappan Zee Common
Stock such that, upon consummation of such offer, such person would own or
control 15% or more of the then outstanding shares of Tappan Zee Common Stock
(such an offer being referred to herein as a "Tender Offer" and an "Exchange
Offer," respectively); or
(ii) (A) the holders of Tappan Zee Common Stock shall not have approved the
Merger Agreement at the meeting of such shareholders held for the purpose of
voting on the Merger Agreement, (B) such meeting shall not have been held or
shall have been canceled prior to termination of the Merger Agreement or (C)
Tappan Zee's Board of Directors shall have withdrawn or modified in a manner
adverse to USB the recommendation of Tappan Zee's Board of Directors with
respect to the Merger Agreement, in each case after it shall have been publicly
announced that any person (other than USB or any subsidiary
57
<PAGE>
of USB) shall have (x) made, or disclosed an intention to make, a proposal to
engage in an Acquisition Transaction, (y) commenced a Tender Offer or filed a
registration statement under the Securities Act with respect to an Exchange
Offer, or (z) filed an application (or given notice), whether in draft or final
form, under the BHCA, the HOLA, the Bank Merger Act, as amended, or the Change
in Bank Control Act of 1978, as amended, for approval to engage in an
Acquisition Transaction; or
(iii) Tappan Zee shall have breached any representation, warranty, covenant
or obligation contained in the Merger Agreement and such breach would entitle
USB to terminate the Merger Agreement under Section 7.1(b) thereof (without
regard to the cure period provided for therein unless such cure is promptly
effected without jeopardizing consummation of the Merger pursuant to the terms
of the Merger Agreement) after (x) a bona fide proposal is made by any person
(other than USB or any subsidiary of USB) to Tappan Zee or its shareholders to
engage in an Acquisition Transaction, (y) any person (other than USB or any
subsidiary of USB) states its intention to Tappan Zee or its shareholders to
make a proposal to engage in an Acquisition Transaction if the Merger Agreement
terminates or (z) any person (other than USB or any subsidiary of USB) shall
have filed an application or notice with any Governmental Entity to engage in an
Acquisition Transaction.
As used in the Stock Option Agreement, the term "person" shall have the
meaning specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act.
The Stock Option Agreement provides that USB may require, under certain
circumstances, Tappan Zee to repurchase the Option and all shares of Tappan Zee
Common Stock purchased by USB pursuant to the Option on the terms and conditions
set forth in the Stock Option Agreement.
The Stock Option Agreement provides that it will terminate upon completion
of the transactions contemplated by the Merger Agreement.
The Stock Option Agreement, together with (i) Tappan Zee's agreement to not
solicit other transactions relating to the acquisition of Tappan Zee by a third
party (See "--No Solicitation") and (ii) the agreement of Tappan Zee's directors
to vote their shares of Tappan Zee Common Stock in favor of the Merger
Agreement, are intended to increase the likelihood that the Merger will be
completed in accordance with the terms of the Merger Agreement and may have the
effect of discouraging competing offers to the Merger.
AFFILIATE AGREEMENTS
In conjunction with the Merger Agreement, USB has entered into the Tappan
Zee Affiliate Agreement, dated as of March 6, 1998, with the directors of Tappan
Zee. Pursuant to the Tappan Zee Affiliate Agreement, each director of Tappan Zee
has agreed in his personal capacity, among other things, (i) to vote the shares
of Tappan Zee Common Stock beneficially owned by him in favor of the Merger
Agreement and (ii) to not transfer such shares of Tappan Zee Common Stock or
shares of USB Common Stock acquired upon consummation of the Merger or otherwise
during specified periods and to not enter into any transactions with respect to
any shares of USB Common Stock during specified periods.
Also in conjunction with the Merger Agreement, the directors and executive
officers of USB have entered into the USB Affiliate Agreement with Tappan Zee,
dated March 6, 1998. Pursuant to the USB Affiliate Agreement, each director and
executive officer of USB has agreed in his personal capacity to not transfer any
shares of USB Common Stock during specified periods.
58
<PAGE>
MANAGEMENT AND OPERATIONS AFTER THE MERGER
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors and executive officers of USB in office immediately
prior to the Effective Time of the Merger will constitute USB's Board of
Directors and executive officers after completion of the Merger, except with
respect to Kevin J. Plunkett, a current director of Tappan Zee and the Savings
Bank, whom USB has agreed to appoint to USB's Board of Directors as of the
Effective Time. See "-- Information Regarding Mr. Plunkett ." In addition, as
discussed in "Interests of Certain Persons in the Merger--Board and Chairman's
Council Memberships" above, USB will appoint those directors of Tappan Zee who
so desire, other than Mr. Plunkett and Mr. Murphy, to serve on USB's Chairman's
Council.
CONSOLIDATION OF OPERATIONS
USB expects to achieve certain expense savings and operating synergies as a
result of the Merger. These expense savings and operating synergies are
anticipated to aggregate approximately 40% to 50% of Tappan Zee's recurring
operating expenses. The rate of expected expense savings and operating synergies
is expected to be achieved by the end of twelve months from the Effective Time.
USB expects that such expense savings and operating synergies will be realized
primarily as the result of the elimination of duplicative administrative and
back office functions. Because of the uncertainties inherent in combining two
financial institutions, changes in the regulatory environment and changes in
economic conditions, no assurances can be given that any particular level of
expense savings will be realized, that any such expense savings will be realized
over the time period currently anticipated or that such expense savings will not
be offset to some degree by increases in other expenses, including expenses
relating to integrating the two companies.
Any such expected expense savings or synergies do not give effect to an
expected one-time charge of approximately $4.0 million to $5.0 million, ($3.0
million to $3.5 million, net of taxes), relating to Merger expenses, which will
be incurred upon completion of the Merger. Such expenses will be incurred
principally as a result of salaries and benefits, including payments pursuant to
employment and change in control agreements and other severance payments and
termination/merger of employee benefit plans ($2.3 million to $3.0 million),
estimated investment banking fees ($700,000 to $800,000), legal, accounting and
other professional fees ($500,000 to $600,000), and system conversion, printing
and other costs ($500,000 to $600,000).
INFORMATION REGARDING DIRECTOR TO BE ADDED TO USB'S BOARD OF DIRECTORS
As discussed above, Kevin J. Plunkett, who currently serves as a Director of
Tappan Zee and the Savings Bank, will be appointed to the Board of Directors of
USB effective at the Effective Time. Mr. Plunkett has served as a Director of
Tappan Zee since its formation in 1995 and has been a Director of the Savings
Bank since 1990. Mr. Plunkett has been a practicing attorney since 1975. Mr.
Plunkett was an Assistant District Attorney, Felony Trial Division, of
Westchester County from 1975 to 1979 and was an Acting Village Justice for the
Village of Tarrytown from 1985 to 1987. He is the Village Attorney for the
Village of Irvington, N.Y. and the Village of Dobbs Ferry, N.Y. Mr. Plunkett is
currently a member in the law firm of Plunkett & Jaffe, P.C., with offices in
White Plains, New York City and Albany. He is a member of the Board of Trustees
of Iona College, New Rochelle, New York.
Mr. Plunkett receives fees and benefits in accordance with the fee
arrangements and other benefits paid to all outside directors of Tappan Zee.
FEE ARRANGEMENTS. Currently, each outside director of Tappan Zee receives a
fee of $700 per meeting attended and, in addition to such fee, the Chairman of
the Board receives a fee of $200 per month for Board service. All committee
members receive a fee of $300 for attendance at each committee meeting,
59
<PAGE>
with the exception of members of the Examining and Audit Committee. The Chairman
and members of the Examining and Audit Committee receive a fee of $250 and $100,
respectively, for each committee meeting attended. When the Boards of Directors
of Tappan Zee and the Savings Bank meet on the same day, only one meeting fee is
paid to any director. In such a circumstance, the meeting fee is paid by the
Savings Bank.
DIRECTORS' RETIREMENT PLAN. Tappan Zee maintains a non-qualified retirement
plan for eligible outside directors (the "Directors' Retirement Plan"). This
Plan provides benefits to each eligible outside director of Tappan Zee
commencing on his termination of Board service at or after age 65. Each outside
director who served or agreed to serve on the Board of Directors of Tappan Zee
or the Savings Bank subsequent to the completion of the Conversion automatically
became a participant in the Plan unless prior to, or, on or after such date, the
director irrevocably elected to participate in the Deferred Compensation Plan
(described below) and waived benefits under the Directors' Retirement Plan.
Currently, there are only two outside directors participating in the Directors'
Retirement Plan. An eligible outside director retiring at or after age 65 will
be paid an annual retirement benefit equal to the amount of the aggregate
compensation for services as a director (excluding stock compensation) paid to
him for the 12-month period immediately prior to his termination of Board
service, multiplied by a fraction, the numerator of which is the number of his
years of service as an outside director (including service as a director or
trustee of the Savings Bank or any predecessor) and the denominator of which is
10. An individual who terminates Board service after having served as an outside
director for 10 years may elect to begin collecting benefits under the
Directors' Retirement Plan at or after attainment of age 50, but the annual
retirement benefits payable to him will be reduced pursuant to the Plan's early
retirement reduction formula to reflect the commencement of benefit payments
prior to age 65. An outside director may elect to have his benefits distributed
in any one of the following forms: (i) a single life annuity; (ii) a 50% or 100%
joint and survivor annuity; or (iii) a single life annuity with a 5, 10, or 15
year guaranteed term. In the event an outside director dies prior to the
commencement of benefit payments under the Directors' Retirement Plan, a 50%
survivor annuity will automatically be paid to his surviving spouse.
DEFERRED COMPENSATION PLAN FOR DIRECTORS. Tappan Zee also maintains a
non-qualified deferred compensation plan ("Deferred Compensation Plan") pursuant
to which directors may defer receipt of all or a portion of the compensation
received for their services to Tappan Zee or the Savings Bank and its affiliated
companies (including compensation paid to an officer-director for service as an
officer). Any director who elects to participate in the Deferred Compensation
Plan will be deemed to have irrevocably waived his benefits under the Directors'
Retirement Plan. Compensation deferred is applied to either the purchase of
investments (including shares of Tappan Zee Common Stock) for the account of the
director, in which case the amount of deferred benefits payable is based on the
investment performance of the investments made, or the compensation deferred is
used to pay annual premiums on life insurance policies owned by the Savings Bank
and covering the lives of the participants, in which case the amount of deferred
benefits payable is based on the value to the Savings Bank of expected death
benefit proceeds. Deferred benefits are paid in installments over a period of
ten years beginning upon termination of service as a director. In the event a
director dies prior to the complete distribution of his account in the Deferred
Compensation Plan, the remainder will be paid in a single sum payment to his
designated beneficiary. The Deferred Compensation Plan currently requires the
full funding of all premiums due under the four existing life insurance
contracts purchased for the Plan in the event a "change in control," such as the
Merger, were to occur. A separate trust fund has been established with an
independent fiduciary (the "Trustee") for the purpose of accumulating funds to
be used to satisfy Tappan Zee's obligations under the Deferred Compensation
Plan. The Trustee will vote any shares of Tappan Zee Common Stock purchased for
a participant's account in the Deferred Compensation Plan in accordance with the
directions given by such participant. See "The Merger--Interests of Certain
Persons in the Merger."
OUTSIDE DIRECTOR OPTION PLAN AND OUTSIDE DIRECTOR RRP. Tappan Zee has also
established, with the approval of its shareholders obtained at the 1996 annual
meeting (the "1996 Annual Meeting") the
60
<PAGE>
Outside Director Option Plan and the Outside Director Recognition and Retention
Plan. In general, only non-employee directors of Tappan Zee may participate and
receive awards under these Plans. At the 1996 Annual Meeting, when the Outside
Director Option Plan and Outside Director RRP first became effective, each
outside director was granted a non-qualified stock option to purchase 8,100
shares of Tappan Zee Common Stock and a restricted stock award covering 3,240
shares of Common Stock. The options and restricted stock awards vest at the rate
of 20% per year, on each anniversary of the award grant date, with full vesting
to occur after a five consecutive year period. In addition, the Outside Director
Option Plan and Outside Director RRP provide for the options granted to outside
directors to become immediately exercisable and for the shares of restricted
stock granted to them to become fully distributable--prior to the expiration of
the five year period--upon an outside director's retirement, death, disability,
or a "change in control," which, for this purpose, would include shareholder
approval of the Merger Agreement. See "--The Merger--Interests of Certain
Persons in the Merger."
ADDITIONAL PROPOSAL
The Bylaws of Tappan Zee require that no business be transacted and no
corporate action be taken at a special meeting of shareholders other than that
stated in the Notice of Meeting. Tappan Zee's Board of Directors is not aware of
any other business that may properly come before the Special Meeting. The Tappan
Zee Board of Directors seeks the authorization of the shareholders of Tappan
Zee, in the event such matters come before the meeting, including, but not
limited to, consideration of whether to postpone or adjourn the Special Meeting
once called to order to another time or place for the purpose of soliciting
additional proxies in order to approve and adopt the transactions contemplated
by the Merger Agreement, or otherwise, to direct the manner in which those
shares represented at the Special Meeting by proxies solicited pursuant to this
Proxy Statement/Prospectus shall be voted as to such other matters. As to all
such matters, Tappan Zee's Board of Directors intends that it would direct the
voting of such shares in the manner determined, in its discretion, and in the
exercise of its duties and responsibilities, to be in the best interests of
Tappan Zee and its shareholders, taken as a whole.
THE TAPPAN ZEE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS
VOTE "FOR" AUTHORIZATION OF THE BOARD OF DIRECTORS OF TAPPAN ZEE, IN ITS
DISCRETION, TO DIRECT THE VOTE OF THE PROXIES UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE SPECIAL MEETING, AND ANY ADJOURNMENT THEREOF,
INCLUDING, WITHOUT LIMITATION, A MOTION TO ADJOURN THE MEETING.
61
<PAGE>
OWNERSHIP OF TAPPAN ZEE COMMON STOCK
BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF TAPPAN ZEE
PRINCIPAL SHAREHOLDERS OF TAPPAN ZEE. The following table sets forth, as of
May 31, 1998, certain information as to Tappan Zee Common Stock beneficially
owned by persons owning in excess of 5% of the outstanding shares of Tappan Zee
Common Stock. Management knows of no person, except as listed below, who
beneficially owned more than 5% of the outstanding shares of Tappan Zee Common
Stock as of May 31, 1998. Except as otherwise indicated, the information
provided in the following table was obtained from filings with the Commission
and with Tappan Zee pursuant to the Exchange Act. Addresses provided are those
listed in such filings as the address of the person authorized to receive
notices and communications. Unless otherwise noted, each beneficial owner has
sole voting and sole investment power over the shares beneficially owned. For
purposes of the table below and the table set forth under "Stock Owned by
Management," in accordance with Rule 13d-3 promulgated under the Exchange Act, a
person is deemed to be the beneficial owner of any shares of Tappan Zee Common
Stock (1) over which he/she has or shares, directly or indirectly, voting or
investment power, or (2) of which he/she has the right to acquire beneficial
ownership at any time within 60 days after May 31, 1998. As used herein, "voting
power" is the power to vote or direct the voting of shares and "investment
power" is the power to dispose or direct the disposition of such shares.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF COMMON
NAME AND ADDRESS BENEFICIAL OWNERSHIP STOCK OUTSTANDING
- ----------------------------------------------------------------------- -------------------- ------------------
<S> <C> <C>
Compensation Committee of the Board of Directors of Tappan Zee 171,872 shares(1) 11.63%
Financial, Inc. in its capacity as the administrator of the Employee
Stock Ownership and Recognition and Retention Plans of Tappan Zee
Financial, Inc.
75 North Broadway
Tarrytown, NY 10591
The Employee Stock Ownership Plan Trust of Tappan Zee Financial, Inc. 129,600 shares(2) 8.77
and Certain Affiliates
250 Park Avenue
New York, NY 10177
Endeavour Capital Partners, L.P. 126,000 shares(3) 8.52
555 Madison Avenue
New York, NY 10022
BRT Realty Trust 119,950 shares(4) 8.12
60 Cutter Mill Road Suite 303
Great Neck, NY 11201
John Hancock Advisors, Inc. 87,500 shares(5) 5.92
P.O. Box 111
Boston, MA 02117
</TABLE>
- ------------------------
(1) The Compensation Committee administers the Employee Stock Ownership Plan of
Tappan Zee Financial, Inc., a tax-qualified employee stock ownership plan
covered by the provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). Individual accounts are maintained in the ESOP
for the accrued benefits of participating employees and their beneficiaries
(see note 2 below). The Compensation Committee also administers the 1996
Recognition and Retention Plan for Officers and Employees of Tappan Zee
Financial, Inc. ("Employee RRP") and the 1996 Recognition and Retention Plan
for Outside Directors of Tappan Zee Financial, Inc. ("Outside
(NOTES CONTINUED ON NEXT PAGE)
62
<PAGE>
Director RRP"), two non-qualified plans (collectively, the "RRPs"). The
assets of the ESOP and the RRPs are held in separate trusts (the "ESOP
Trust" and "RRP Trust," respectively) by Marine Midland Bank which serves as
trustee (the "Trustee") of these trusts. Since the Compensation Committee
has shared "investment power" defined to mean the power to dispose (or to
direct the disposition of) the assets of the ESOP and RRP Trusts, consisting
of 171,872 shares of Tappan Zee Common Stock, as of May 31, 1998, the
Compensation Committee may be deemed to have beneficial ownership of these
shares. Any unawarded shares held in the RRP Trust are generally required to
be voted by the Trustee as directed by the Compensation Committee to reflect
the votes of participating employees with respect to awarded shares. The
Committee has the power to direct the Trustee with respect to the
disposition or restriction of all shares held in the ESOP and RRP Trusts
except in the case of a tender or exchange offer and, in this case, the
Compensation Committee disclaims beneficial ownership of these shares. Each
member of the Compensation Committee disclaims beneficial ownership of such
shares.
(2) The ESOP Trust purchased the shares of Tappan Zee Common Stock shown in the
table above with funds borrowed from Tappan Zee. The shares purchased by the
ESOP Trust are held in a suspense account for release and allocation to
participants' accounts on an annual basis, on the last day of each calendar
year, following re-payment of the principal and interest due on the ESOP's
loan. As of May 31, 1997, a total of 35,537 shares purchased by the ESOP
Trust had been allocated to participants' accounts and the balance, 94,063
shares, remained unallocated and were held in the ESOP Trust's suspense
account. This represents the number of shares that had been allocated as of
December 31, 1997, the annual ESOP allocation date. The terms of the ESOP
provide that, subject to the ESOP Trustee's fiduciary responsibilities under
ERISA, the ESOP Trustee will vote, tender or exchange shares of Tappan Zee
Common Stock held in the ESOP Trust and allocated to participants in
accordance with instructions received from such participants. The ESOP
Trustee will vote allocated shares as to which no instructions are received
and any shares that have not been allocated to participants' accounts in the
same proportion as it votes the allocated shares with respect to which the
ESOP Trustee receives instructions. The ESOP Trustee will tender or exchange
any shares in the suspense account or that otherwise have not been allocated
to participants' accounts in the same proportion as the allocated shares
with respect to which the ESOP Trustee receives instructions are tendered or
exchanged. With respect to allocated shares as to which no instructions are
received, the ESOP Trustee will be deemed to have received instructions not
to tender or exchange such shares. Except as described in note 1 above, the
Compensation Committee has investment power, except in limited
circumstances, but no voting power over all Tappan Zee Common Stock held in
the ESOP Trust.
(3) Endeavour Capital Partners L.P. ("Endeavour") filed with the SEC a Schedule
13D, dated as of October 17, 1995. Based on Endeavour's Schedule 13D, it has
shared voting and investment power over the 126,000 shares with Michael J.
Katz and Lawrence M. Austin, the general partners of Endeavour. Endeavour is
a privately-owned investment partnership.
(4) BRT Realty Trust ("BRT") filed with the Commission a Schedule 13D, dated as
of June 2, 1997 and amended as of July 18, 1997 and October 31, 1997. Based
on BRT's Schedule 13D, BRT has sole voting and investment power over the
119,950 shares. BRT is a privately-owned Massachusetts business trust,
intended to qualify as a Real Estate Investment Trust.
(5) John Hancock Advisors, Inc. ("JHA") filed with the SEC a Schedule 13G, dated
as of January 28, 1997. Based on JHA's Schedule 13G, JHA is the investment
advisor for The John Hancock Bank and Thrift Opportunity Fund, a closed-end
diversified management company that holds 30,000 of the shares indicated,
and the John Hancock Regional Bank Fund, an open-end diversified management
company that hold the remaining 57,500 shares. As investment advisor, JHA
has sole voting and investment power over the 87,500 shares.
63
<PAGE>
STOCK OWNED BY MANAGEMENT. The following table sets forth information as of
May 31, 1998 with respect to the shares of Tappan Zee Common Stock beneficially
owned by each director of Tappan Zee, each executive officer and by all
directors and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE % OF
POSITION WITH OF BENEFICIAL COMMON STOCK
NAME TAPPAN ZEE (1) OWNERSHIP(2)(3)(4)(5)(6) OUTSTANDING(7)
- -------------------------------------------- ------------------------- ----------------------- ---------------
<S> <C> <C> <C>
Stephen C. Byelick.......................... President and Chief 49,945(8) 3.34%
Executive Officer and
Director
Harry G. Murphy............................. Vice President and 40,923(9) 2.74
Secretary and Director
John T. Cooney.............................. Director 13,480 *
Marvin Levy................................. Director and 10,832(10) *
Chairman
Gerald L. Logan............................. Director 10,980 *
Kevin J. Plunkett........................... Director 12,580(11) *
Paul R. Wheatley............................ Director 9,980(12) *
All directors and executive officers
as a group (7 persons).................... 249,058 16.31
</TABLE>
- ------------------------
* Less than one percent
(1) Titles are for both Tappan Zee and the Savings Bank.
(2) See "-Principal Shareholders of Tappan Zee" for a definition of "beneficial
ownership." All persons shown in the above table have sole voting and
investment power, except as otherwise indicated.
(3) Includes 12,960 shares of restricted stock awarded to each of Mr. Byelick
and Mr. Murphy under the Employee RRP, as to which each has sole voting
power but no investment power and 2,592 shares of restricted stock awarded
to each of Messrs. Cooney, Levy, Logan, Plunkett and Wheatley under the
Outside Director RRP, as to which each has sole voting power but no
investment power. See "Interests of Certain Persons in the Merger" for
details on the impact shareholder approval of the Merger Agreement will have
on the vesting of these awards.
(4) Includes 16,200 shares subject to options granted to each of Mr. Byelick and
Mr. Murphy pursuant to the Employee Option Plan which may be acquired within
60 days after May 31, 1998 and 3,240 shares subject to options granted to
each of Messrs. Cooney, Levy, Logan, Plunkett and Wheatley under the Outside
Director Option Plan which may be acquired within 60 days from May 31, 1998.
Does not include the 24,300 shares subject to options granted to each of Mr.
Byelick and Mr. Murphy pursuant to the Employee Option Plan which are not
currently exercisable and will not become exercisable within the next 60
days. Also does not include the 4,860 shares subject to options granted to
each of Messrs. Cooney, Levy, Logan, Plunkett and Wheatley which are not
currently exercisable and will not become exercisable in the next 60 days.
See "Interests of Certain Persons in the Merger" for a discussion of the
impact that shareholder approval of the Merger Agreement will have on the
vesting and exercisability of the stock options granted to these officers
and outside directors.
(5) The figures shown include shares held in trust pursuant to the ESOP that
have been allocated as of May 31, 1998 to individual accounts as follows:
Mr. Byelick, 6,545 shares, Mr. Murphy 5,423 shares and all directors and
executive officers as a group, 11,968 shares. Such persons have voting power
(subject to the legal duties of the Trustee) but no investment power, except
in limited circumstances, as to such shares. The figures shown for Messrs.
Byelick and Murphy do not include 94,063 shares held in trust pursuant to
the ESOP that have not been allocated to any individual's account and as to
(NOTES CONTINUED ON NEXT PAGE)
64
<PAGE>
which Messrs. Byelick and Murphy share voting power with other ESOP
participants. Also not included are 6,275 shares purchased by the Savings
Bank's tax-qualified defined benefit pension plan ("Pension Plan"). The
figures shown for all directors and executive officers as a group includes
such 94,063 shares as to which the members of Tappan Zee's ESOP Committee
(consisting of Messrs. Plunkett, Logan and Wheatley) may be deemed to have
sole investment power, except in limited circumstances, thereby causing each
such committee member to be deemed a beneficial owner of such shares. Each
of the members of the ESOP Committee disclaims beneficial ownership of such
shares. The figures shown for all directors and executive officers as a
group also includes the 6,275 shares as to which the members of the Savings
Bank's Pension Committee (composed of Messrs. Byelick, Murphy, Plunkett and
Wheatley) may be deemed to have sole investment power except in limited
circumstances, thereby causing each committee member to be deemed a
beneficial owner of such shares. Each member of the Pension Committee
disclaims beneficial ownership of such shares.
(6) The figures shown include shares held under the Savings Bank's Directors'
Deferred Compensation Plan that have been allocated as of December 31, 1997
to individual accounts as follows: Mr. Murphy, 1,050 shares, Mr. Levy, 1,500
shares and all directors and executive officers as a group, 2,550 shares.
Such persons have sole voting and investment power as to such shares.
(7) Percentages with respect to each person or group of persons have been
calculated on the basis of the number of shares of Tappan Zee Common Stock
outstanding as of May 31, 1998, plus the number of shares of Tappan Zee
Common Stock which such person or group has the right to acquire within 60
days after May 31, 1998 by the exercise of such options.
(8) Includes 4,000 shares as to which Mr. Byelick may be deemed to share voting
power, but has no investment power.
(9) Includes 550 shares as to which Mr. Murphy may be deemed to share voting
power, but has no investment power.
(10) Includes 1,000 shares as to which Mr. Levy may be deemed to share voting
power, but has no investment power.
(11) Includes 6,100 shares as to which Mr. Plunkett may be deemed to share
voting power, but has no investment power.
(12) Includes 3,000 shares as to which Mr. Wheatley shares voting and investment
power and 500 shares as to which Mr.Wheatley may be deemed to share voting
power, but has no investment power.
65
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
FOR USB AND TAPPAN ZEE
The USB Common Stock has been included for quotation on the American Stock
Exchange since April 16, 1997, and trades under the symbol "UBH." Prior to April
16, 1997, shares of USB Common Stock were traded sporadically in the
over-the-counter market and in private transactions. The Tappan Zee Common Stock
is included for quotation on the Nasdaq National Market ("NNM") under the symbol
"TPNZ." The table below sets forth, for the calendar quarters indicated, (i) the
high and low sales prices for USB Common Stock subsequent to April 16, 1997, as
reported by the AMEX, (ii) the high and low bid quotations for USB Common Stock
prior to April 16, 1997, based on data from National Quotation Bureau, Inc., a
service which accumulates security price quotations from broker-dealers, (iii)
the high and low closing prices for Tappan Zee Common Stock as reported by the
NNM, and (iv) the cash dividends declared per share by USB and Tappan Zee. The
market price information for the USB Common Stock prior to April 16, 1997 and
for the Tappan Zee Common Stock, reflects inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions. The market price information and the cash dividends paid per share
for the USB Common Stock have been retroactively adjusted for the two-for-one
stock splits distributed in December 1997 and 1996, and the 10% stock dividend
distributed in June 1996.
<TABLE>
<CAPTION>
USB COMMON STOCK TAPPAN ZEE COMMON STOCK
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
CASH CASH
DIVIDENDS DIVIDENDS
PAID PER PAID PER
1996 HIGH LOW SHARE HIGH LOW SHARE
--------- --------- ----------- --------- --------- -----------
First Quarter................................................ $ 6.54 $ 5.34 $ 0.0340 $ 12.750 $ 11.375 $ 0.05
Second Quarter............................................... 7.25 6.13 0.0375 12.250 11.750 0.05
Third Quarter................................................ 7.50 7.00 0.0375 13.000 12.000 0.05
Fourth Quarter............................................... 8.40 7.50 0.0400 14.125 13.625 0.05
1997
First Quarter................................................ 13.75 8.38 0.450 15.250 14.250 0.05
Second Quarter............................................... 16.88 12.31 0.450 17.500 14.000 0.07
Third Quarter................................................ 17.13 15.25 0.050 18.625 16.250 0.07
Fourth Quarter............................................... 26.75 15.00 0.050 22.625 18.000 0.07
1998
First Quarter................................................ 26.38 19.50 0.055 20.313 18.375 0.07
Second Quarter............................................... 25.06 19.75 0.060 20.750 19.750 0.07
Third Quarter................................................ 20.88 19.94 -- 19.880 19.880 --
(through July 9, 1998)
</TABLE>
Since the market price of the USB Common Stock is subject to fluctuation,
the market value of the USB Common Stock that holders of shares of Tappan Zee
Common Stock may receive in the Merger may increase or decrease prior to and
after the Merger.
As of the Record Date, there were approximately 1,200 record holders of USB
Common Stock and approximately 400 record holders of Tappan Zee Common Stock.
On March 5, 1998, the last full trading day prior to the execution and
delivery of the Merger Agreement and the public announcement thereof, the
closing sales prices per share of USB Common Stock and Tappan Zee Common Stock
as reported in the WALL STREET JOURNAL were $22.25 and $19.00, respectively. As
of July 9, 1998, the most recent practicable date prior to the printing of this
Proxy Statement/Prospectus, the last reported closing sales prices per share of
USB Common Stock and Tappan Zee Common Stock were $20.875 and $19.875 (as of
July 7, 1998; there was no trading in Tappan Zee Common Stock on July 8th or
July 9th), respectively.
SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE USB
COMMON STOCK AND TAPPAN ZEE COMMON STOCK, TO THE EXTENT POSSIBLE, PRIOR TO THE
SPECIAL MEETING.
66
<PAGE>
TAPPAN ZEE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TAPPAN ZEE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS CONSISTING OF
ESTIMATES WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
BUSINESS OF TAPPAN ZEE THAT ARE SUBJECT TO VARIOUS FACTORS WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THESE ESTIMATES. THESE FACTORS INCLUDE
CHANGES IN GENERAL, ECONOMIC AND MARKET, AND LEGISLATIVE AND REGULATORY
CONDITIONS, AND THE DEVELOPMENT OF AN INTEREST RATE ENVIRONMENT THAT ADVERSELY
AFFECTS THE INTEREST RATE SPREAD OR OTHER INCOME ANTICIPATED FROM TAPPAN ZEE'S
OPERATIONS AND INVESTMENTS.
GENERAL
Tappan Zee's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on its
interest-earning assets, such as loans and securities, and the interest expense
on its interest-bearing liabilities, such as deposits. Tappan Zee also generates
non-interest income such as service charges and other fees. Tappan Zee's
non-interest expense consists of compensation and benefits, occupancy expenses,
federal deposit insurance costs, data processing service fees, net costs of real
estate owned and other operating expenses. Tappan Zee's results of operations
are significantly affected by general economic and competitive conditions
(particularly changes in market interest rates), government policies, changes in
accounting standards and actions of regulatory agencies.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of Tappan Zee to generate sufficient cash flow to
meet funding needs, depositor withdrawals and operating expenses. Tappan Zee's
cash flows are derived from operating activities, investing activities and
financing activities. Cash flows from operating activities consist primarily of
interest income received and interest expense paid. Net cash flows from
investing activities consist primarily of loan originations and payments
(including amortization of principal and prepayments) and the purchase, maturity
and sale of securities, including mortgage-backed securities. During the years
ended March 31, 1998, 1997 and 1996, Tappan Zee's disbursements for loan
originations totaled $12.8 million, $11.9 million and $9.3 million,
respectively. Purchases of securities totaled $41.8 million, $29.7 million and
$33.8 million for the years ended March 31, 1998, 1997 and 1996, respectively.
Proceeds from the sales of available-for-sale securities totaled $27.0 million,
$13.9 million and $3.8 million for the years ended March 31, 1998, 1997 and
1996, respectively.
Financing activity cash flows are generated primarily from deposit activity.
For the fiscal years ended March 31, 1998, 1997 and 1996, Tappan Zee experienced
net increases in deposits (including the effect of interest credited) of $6.7
million, $8.4 million and $8.1 million, respectively, primarily relating to
certificates of deposit. As a result of the flat yield curve in recent years,
deposit products such as shorter term certificate of deposits have been a more
attractive investment alternative for Tappan Zee's customers than longer term
securities.
Tappan Zee has other sources of liquidity if a need for additional funds
arises, including borrowing capacity from the FHLB of New York of up to 25% of
the Savings Bank's assets, which amounts to $31.3 million at March 31, 1998.
There were no such borrowings outstanding at March 31, 1998. The utilization of
particular sources of funds depends on comparative costs and availability. While
maturities and scheduled amortization of loans and securities provide an
indication of the timing of the receipt of funds, changes in interest rates,
economic conditions, and competition strongly influence mortgage prepayment
rates and deposit flows, reducing the predictability of the timing of these cash
flows.
At March 31, 1998, Tappan Zee had outstanding loan origination commitments
of $1.0 million, undisbursed construction loans in process of $549,000 and
unadvanced commercial lines of credit of $15,000. Tappan Zee anticipates that it
will have sufficient funds available to meet its current origination and other
lending commitments. Certificates of deposit scheduled to mature in one year or
less from
67
<PAGE>
March 31, 1998 totaled $53.4 million with a weighted average rate of 5.75%.
Based upon Tappan Zee's most recent experience and pricing strategy, management
believes that a significant portion of such deposits will remain with the
Savings Bank.
The main source of liquidity for Tappan Zee is dividends from the Savings
Bank. Tappan Zee may access capital markets through the issuance of stock or
debt for additional sources of funds. The main cash outflows are payments of
dividends to shareholders and repurchases of Tappan Zee's common stock. Through
March 31, 1998, Tappan Zee has repurchased for its treasury 142,000 shares of
its common stock, or 8.8% of the shares issued in the Stock Offering at an
aggregate cost of $2.1 million. Tappan Zee's ability to pay dividends to
shareholders depends substantially on dividends received from the Savings Bank.
The Savings Bank may not declare or pay cash dividends on its common stock if
the effect thereof would cause equity to be reduced below applicable regulatory
capital requirements or the amount required to be maintained for the liquidation
account established in connection with the Conversion. Unlike the Savings Bank,
Tappan Zee is not subject to OTS regulatory restrictions on the payment of
dividends to its shareholders, however, it is subject to the requirements of
Delaware law. Delaware law generally limits dividends to an amount equal to the
excess of the net assets of Tappan Zee (the amount by which total assets exceed
total liabilities) over its statutory capital, or if there is no such excess, to
its profits for the current and/or immediately preceding fiscal year.
OTS regulations require minimum capital standards for savings associations,
such as the Savings Bank. The Savings Bank satisfied these minimum capital
standards at March 31, 1998 with tangible and Tier I (core) capital ratios of
13.8%, Tier I risk-based capital ratio of 43.3% and total risk-based capital
ratio of 44.6%. These capital requirements, which are applicable to the Savings
Bank only, do not consider additional capital held at the holding company level,
and require certain adjustments to the Savings Bank's total equity to arrive at
the various regulatory capital amounts.
68
<PAGE>
ANALYSIS OF NET INTEREST INCOME
The following table sets forth Tappan Zee's average balance sheets, average
yields and costs, and certain other information for fiscal 1998, 1997 and 1996.
The yields and costs were derived by dividing interest income or expense by the
average balance of assets or liabilities, respectively, for the periods shown.
Substantially all average balances were computed based on month-end balances,
producing results which approximate average daily balances. Interest income
includes the effect of deferred fees and discounts which are considered yield
adjustments.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996
----------------------------------- ----------------------------------- ----------------------
<CAPTION>
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
--------- ----------- ----------- --------- ----------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans (1)................. $ 57,779 $ 5,004 8.66% $ 55,354 $ 4,721 8.53% $ 51,621 $ 4,465
Mortgage-backed
securities (2).......... 44,566 3,175 7.12 38,141 2,719 7.13 25,660 1,811
Other securities (2)...... 9,379 605 6.45 12,500 794 6.35 10,338 576
Federal funds sold........ 9,342 505 5.41 4,538 234 5.16 10,846 639
FHLB stock................ 715 49 6.85 579 37 6.39 514 37
Other..................... 1,400 55 3.93 1,717 86 5.01 1,963 96
--------- ----------- --------- ----------- --------- -----------
Total interest-earning
assets................ 123,181 $ 9,393 7.63% 112,829 $ 8,591 7.61% 100,942 $ 7,624
----------- ----------- -----------
----------- ----------- -----------
Allowance for loan losses... (681) (657) (645)
Non-interest-earning
assets.................... 2,676 3,909 3,579
--------- --------- ---------
Total assets............ $ 125,176 $ 116,081 $ 103,876
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND EQUITY:
Interest-bearing
liabilities:
NOW and money market...... $ 6,508 $ 150 2.30% $ 6,491 $ 160 2.46% $ 8,798 $ 200
Savings accounts.......... 25,153 716 2.85 26,662 800 3.00 28,120 982
Short term borrowings..... -- -- -- 204 12 5.61 -- --
Certificate accounts and
other................... 68,102 3,855 5.66 57,136 3,134 5.49 49,288 2,820
--------- ----------- --------- ----------- --------- -----------
Total interest-bearing
liabilities........... 99,763 $ 4,721 4.73% 90,493 $ 4,106 4.54% 86,206 $ 4,002
----------- ----------- -----------
----------- ----------- -----------
Checking accounts........... 2,542 2,255 2,069
Other non-interest-bearing
liabilities............... 1,464 1,778 1,743
--------- --------- ---------
Total liabilities....... 103,769 94,526 90,018
Equity...................... 21,407 21,555 13,858
--------- --------- ---------
Total liabilities and
equity................ $ 125,176 $ 116,081 $ 103,876
--------- --------- ---------
--------- --------- ---------
Net interest income........... $ 4,672 $ 4,485 $ 3,622
----------- ----------- -----------
----------- ----------- -----------
Average interest rate spread
(3)......................... 2.90% 3.07%
Net interest margin (4)....... 3.79 3.98
Ratio of interest-earning
assets to interest-bearing
liabilities................. 123.47% 124.68% 117.09%
<CAPTION>
<S> <C>
AVERAGE
RATE
-----------
<S> <C>
ASSETS:
Interest-earning assets:
Loans (1)................. 8.65%
Mortgage-backed
securities (2).......... 7.06
Other securities (2)...... 5.57
Federal funds sold........ 5.89
FHLB stock................ 7.20
Other..................... 4.89
Total interest-earning
assets................ 7.55%
Allowance for loan losses...
Non-interest-earning
assets....................
Total assets............
LIABILITIES AND EQUITY:
Interest-bearing
liabilities:
NOW and money market...... 2.27%
Savings accounts.......... 3.49
Short term borrowings..... --
Certificate accounts and
other................... 5.72
Total interest-bearing
liabilities........... 4.64%
Checking accounts...........
Other non-interest-bearing
liabilities...............
Total liabilities.......
Equity......................
Total liabilities and
equity................
Net interest income...........
Average interest rate spread
(3)......................... 2.91%
Net interest margin (4)....... 3.59
Ratio of interest-earning
assets to interest-bearing
liabilities.................
</TABLE>
- ------------------------
(1) Balances are net of deferred loan fees, loan discounts and premiums, and
loans in process. Non-accrual loans are included in the balances.
(2) Balances represent amortized cost.
(3) Average interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average total
interest-earning assets.
69
<PAGE>
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected Tappan Zee's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
FISCAL 1998 VS. 1997 FISCAL 1997 VS. 1996
----------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
INCREASE INCREASE (DECREASE)
(DECREASE)
DUE TO DUE TO
---------------------- NET ----------------------
VOLUME RATE CHANGE VOLUME RATE
----------- --------- ----------- ----------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.................................................... $ 210 $ 73 $ 283 $ 319 $ (63)
Mortgage-backed securities............................... 460 (4) 456 889 19
Other securities......................................... (202) 13 (189) 131 87
Federal funds sold....................................... 259 12 271 (334) (71)
FHLB stock............................................... 9 3 12 4 (4)
Other.................................................... (14) (17) (31) (12) 2
----- --------- ----- ----- ---------
Total................................................ 722 80 802 997 (30)
----- --------- ----- ----- ---------
Interest-bearing liabilities:
NOW and money market accounts............................ -- (10) (10) (55) 15
Savings accounts......................................... (45) (39) (84) (49) (133)
Certificate accounts and other........................... 621 100 721 432 (118)
Short term FHLB borrowings............................... (12) -- (12) 12 --
----- --------- ----- ----- ---------
Total................................................ 564 51 615 340 (236)
----- --------- ----- ----- ---------
Net change in net interest income.......................... $ 158 $ 29 $ 187 $ 657 $ 206
----- --------- ----- ----- ---------
----- --------- ----- ----- ---------
<CAPTION>
<S> <C>
NET
CHANGE
-----------
<S> <C>
Interest-earning assets:
Loans.................................................... $ 256
Mortgage-backed securities............................... 908
Other securities......................................... 218
Federal funds sold....................................... (405)
FHLB stock............................................... --
Other.................................................... (10)
-----
Total................................................ 967
-----
Interest-bearing liabilities:
NOW and money market accounts............................ (40)
Savings accounts......................................... (182)
Certificate accounts and other........................... 314
Short term FHLB borrowings............................... 12
-----
Total................................................ 104
-----
Net change in net interest income.......................... $ 863
-----
-----
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND 1997
Total assets at March 31, 1998 increased $7.5 million, to $129.3 million
from $121.8 million at March 31, 1997, reflecting Tappan Zee's policy of
controlled growth. This increase in total assets reflects the securities
portfolio increase of $3.9 million to $58.4 million at March 31, 1998 from $54.5
million at March 31, 1997 in addition to an increase of $300,000 and $963,000 in
federal funds sold and interest-bearing deposits, respectively. Within the
securities portfolio, mortgage-backed securities totaled $53.1 million at March
31, 1998 compared to $38.9 million at March 31, 1997 reflecting a shift to these
securities from U.S. agency securities throughout the year. As a result of
management's intent to reinvest funds from deposit growth and the proceeds from
maturities of securities and sales of available-from-sale securities into
securities that will be held until their maturity, the available-for sale
securities portfolio decreased to $22.9 million at March 31, 1998, as compared
to $36.4 million at March 31, 1997. The held-to-maturity portfolio increased to
$35.5 million at March 31, 1998, from $18.1 million at March 31, 1997. The shift
in the securities portfolio was made principally in the third and fourth fiscal
quarters to higher credit quality mortgage-backed securities (principally GNMA
securities). In addition, loans, net, increased $2.5 million to $57.6 million at
March 31, 1998, compared to $55.1 million at March 31, 1997, primarily due to
the origination of one- to four-family mortgage loans. Deposits, which primarily
funded the securities and loan growth, amounted to $105.0 million at March 31,
1998, an increase of $6.7 million from $98.3 million at March 31, 1997. The
increase in deposits primarily reflects an increase of $8.2 million in
certificate accounts.
Shareholders' equity was $21.8 million at March 31, 1998, an increase of
$572,000 from $21.2 million at March 31, 1997. The increase primarily reflects
net earnings retained after dividends of $705,000, a $438,000 improvement in the
net unrealized gain (loss) on available-for-sale securities and an increase of
70
<PAGE>
$419,000 relating to the employee stock ownership plan ("ESOP") and the
recognition and retention plans ("RRPs"), substantially offset by the repurchase
during the year of 56,000 common shares for the treasury, at a cost of $990,000.
The ratio of shareholders' equity to total assets at March 31, 1998 was 16.85%,
as compared with 17.42% at March 31, 1997. Tappan Zee's tangible book value per
share was $14.75 at March 31, 1998 compared to $13.84 at March 31, 1997.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MARCH 31, 1998 AND
1997
GENERAL. Net income for the fiscal year ended March 31, 1998 amounted to
$1,097,000 or $0.80 basic earnings per share ($0.77 diluted earnings per share),
as compared to $855,000 or $0.60 basic earnings per share ($0.59 diluted
earnings per share) for the fiscal year ended March 31, 1997. The results for
the 1997 fiscal year include a non-recurring charge of $538,000 ($329,000 net of
taxes) for a special assessment imposed to recapitalize the SAIF of the FDIC, in
addition to a tax benefit of $166,000 due to a change in New York State tax law.
Excluding the SAIF assessment and the change in New York State tax law, net
income for the 1997 fiscal year was $1,018,000 or $0.71 basic earnings per share
($0.70 diluted earnings per share).
NET INTEREST INCOME. Net interest income for fiscal 1998 totaled $4.7
million as compared to $4.5 million for fiscal 1997. The increase is primarily
due to an overall increase in interest-earning assets, the effects of which were
primarily offset by a decline in the average spread. The average interest rate
spread and net interest margin decreased to 2.90% and 3.79% for fiscal 1998,
compared to 3.07% and 3.98%, respectively, for fiscal 1997. The decreases in
spread and margin for the fiscal year are due primarily to the increase in
certificates of deposit which have higher average costs than Tappan Zee's other
interest-bearing liabilities. The decrease in spread and margin for the year was
partially offset by the increased volume and yield in the securities portfolio,
and the increased volume and yield associated with the loan portfolio.
INTEREST INCOME. Total interest income for fiscal 1998 amounted to $9.4
million, as compared to $8.6 million for fiscal 1997. This increase primarily
reflects a $10.4 million increase in average interest-earning assets funded
primarily by deposit growth. The overall increase in average interest-earning
assets primarily reflects increases of $2.4 million in the average loan
portfolio, $6.4 million in the average mortgage-backed securities portfolio, and
a $4.8 million increase in federal funds sold, partially offset by a decline of
$3.1 million in the average other securities portfolio. The average yield on
interest-earning assets was 7.63% for fiscal 1998, a slight increase from 7.61%
for fiscal 1997.
The increase in the average balance of loans reflects Tappan Zee's general
strategy of emphasizing loan originations. The increase in the average balance
of mortgage-backed securities reflects management's efforts during the latter
part of the 1998 fiscal year to invest proceeds from the payment of other
securities and increased deposit flow into higher yielding mortgage-backed
securities. Because this effort occurred during the latter part of fiscal 1998,
such increase was not fully reflected in the average yield of such securities
for the entire year, which declined slightly from the 1997 fiscal year. In
addition, while the average yield of loans increased 13 basis points from 8.53%
in fiscal 1997 to 8.66% in fiscal 1998, the impact of this increase on the
average yield of interest-earning assets was partly offset by the increase in
the average balance of lower yielding federal funds sold.
INTEREST EXPENSE. Interest expense for the year ended March 31, 1998
totaled $4.7 million, an increase from $4.1 million for the 1997 fiscal year.
The increase is attributable to a $9.3 million increase in average
interest-bearing deposits coupled with the rise in the average cost of funds to
4.73%, from 4.54% for the prior year. The increases relate primarily to
certificate accounts and other interest-bearing liabilities which averaged $68.1
million at an average cost of 5.66% for the 1998 fiscal year, as compared to an
average balance of $57.1 million at an average cost of 5.49% for the 1997 fiscal
year. The growth in certificate accounts and other interest-bearing liabilities
was partially offset by a decline in savings accounts and NOW and money market
accounts, which have lower average costs than certificate accounts. The overall
deposit growth is consistent with management's strategy to increase retail
deposits.
PROVISION FOR LOAN LOSSES. For fiscal years 1998 and 1997, the provision
for loan losses was $42,000 and $69,000, respectively. The provision reflects
management's evaluation of the adequacy of the allowance for loan losses, the
level and composition of non-performing loans and their collateral, and the
71
<PAGE>
continued growth of the loan portfolio. The allowance for loan losses was
$702,000 at March 31, 1998, compared to $660,000 at March 31, 1997. There were
no charge-offs for fiscal 1998 compared to $63,000 in fiscal 1997.
Non-performing loans at March 31, 1998 were $1.6 million, compared to $1.7
million at March 31, 1997. The ratio of non-performing loans to total loans was
2.67% at March 31, 1998 compared to 2.97% at March 31, 1997.
NON-INTEREST INCOME. Non-interest income totaled $268,000 for the fiscal
year ended March 31, 1998 compared to $152,000 for fiscal 1997, reflecting
increased gains on the sales of available-for-sale securities and an increase in
service charges and other fees.
NON-INTEREST EXPENSE. Non-interest expense totaled $3.0 million and $3.4
million, respectively for fiscal years 1998 and 1997. The decrease in
non-interest expense in the current year is primarily attributable to the
$538,000 FDIC special assessment recognized in fiscal 1997, reductions in the
regular insurance premium assessed on deposits by the FDIC and a decrease in the
net cost of real estate owned, partially offset by increases in compensation and
benefits expense and professional services expenses. The increases in
compensation and benefits expense primarily reflect the increased recognition of
expense associated with the ESOP due to the higher average stock price of Tappan
Zee in the current year as compared to the prior year, a full year's recognition
of expense for Tappan Zee's RRP program in fiscal 1998 compared to nine months
of expense after the program was approved by Tappan Zee's shareholders in fiscal
1997 and performance-based increases for certain staff members. Professional
services expenses increased principally due to fees relating to the
identification and evaluation of strategic alternatives leading to the execution
of the Merger Agreement.
INCOME TAX EXPENSE. Income tax expense for the fiscal years ended March 31,
1998 and 1997 was $791,000 and $326,000, respectively, reflecting higher income
in the current year and an effective tax rate of 41.9% and 27.6%, respectively.
Tax expense for the year ended March 31, 1997 reflects a benefit of $166,000 due
to the reduction of a deferred tax liability caused by an amendment to the New
York State tax law enacted during the year. The amendment changed the base-year
for tax bad debt reserves to December 31, 1995 and eliminated the need for a
deferred tax liability previously recognized for reserves in excess of the
base-year amount. Without this one-time benefit, the effective tax rate would
have been 41.7% for fiscal 1997.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MARCH 31, 1997 AND
1996
GENERAL. Net income for the fiscal year ended March 31, 1997 was $855,000,
or $0.60 basic earnings per share ($0.59 diluted earnings per share), as
compared to $837,000 for the fiscal year ended March 31, 1996. Basic and diluted
earnings per share were $0.31 for the six-month period from Tappan Zee's initial
public offering to March 31, 1996. The results for fiscal 1997 reflect a
non-recurring charge of $538,000 ($329,000 net of taxes) for the special
assessment to recapitalize the SAIF. Also included in net income for fiscal 1997
was a tax benefit of $166,000 due to a change in New York State tax law.
NET INTEREST INCOME. Net interest income for fiscal 1997 totaled $4.5
million as compared to $3.6 million for fiscal 1996, an increase of 23.8%. The
average interest rate spread and net interest margin increased to 3.07% and
3.98%, respectively, for fiscal 1997, compared to 2.91% and 3.59%, respectively,
for fiscal 1996. These increases reflect: (i) greater average interest-earning
assets in fiscal 1997 primarily attributable to the investment of Stock Offering
proceeds for the entire fiscal year, compared to the investment of such funds
for only six months in fiscal 1996; (ii) slightly higher yield on total
interest-earning assets resulting from the shift in overall asset mix from
federal funds and treasury securities into higher yielding mortgage-backed
securities; and (iii) enhanced earnings from the increased volume of mortgage
loans. Net income also benefited from additional net interest income realized on
deposit growth.
INTEREST INCOME. Total interest income for fiscal 1997 amounted to $8.6
million, as compared to $7.6 million for fiscal 1996. This increase primarily
reflects an $11.9 million increase in average interest-earning assets
principally due to the investment of funds from the Stock Offering for a full
year (compared to six months in fiscal 1996) and deposit growth. The overall
increase in average interest-earning assets reflects increases of $3.7 million
in the average loan portfolio and $14.6 million in the average securities
portfolios, partially offset by a $6.4 million decrease in other earning assets
(principally federal funds sold). The
72
<PAGE>
increase in interest income for fiscal 1997 was also attributable to a slight
increase in the average yield on interest-earning assets, to 7.61% from 7.55%
for fiscal 1996, reflecting the shift from investments in short-term federal
funds and treasury securities into higher yielding mortgage-backed securities.
INTEREST EXPENSE. Interest expense for the year ended March 31, 1997
totaled $4.1 million, slightly higher than $4.0 million for the 1996 fiscal
year. The increase is attributable to a $4.1 million increase in average
interest-bearing deposits, primarily certificate accounts and other
interest-bearing liabilities which averaged $57.1 million at an average cost of
5.49% for the 1997 fiscal year, as compared to an average balance of $49.3
million at an average cost of 5.72% for the 1996 fiscal year. The growth in
certificate accounts and other interest-bearing liabilities was partially offset
by a decline in savings accounts and NOW and money market accounts, which have
lower average costs than certificate accounts. The overall deposit growth is
consistent with management's strategy to increase retail deposits. The effect of
deposit growth on interest expense was somewhat offset by the decline in the
average cost of funds to 4.54% in fiscal 1997, compared to 4.64% for the
previous year. The decrease in the cost of funds reflects the general decline in
market interest rates at the beginning of fiscal 1997.
PROVISION FOR LOAN LOSSES. For fiscal years 1997 and 1996, the provisions
for loan losses were $69,000 and $90,000, respectively. The provision in each
period reflects management's evaluation of the adequacy of the allowance for
loan losses, the level and composition of non-performing loans and their
collateral, and the continued growth of the loan portfolio. The allowance for
loan losses was $660,000 at March 31, 1997, compared to $654,000 at March 31,
1996. Net charge-offs for fiscal 1997 amounted to $63,000 compared to $86,000 in
fiscal 1996. Non-performing loans at March 31, 1997 were $1.66 million, compared
to $1.63 million at March 31, 1996. The ratio of non-performing loans to total
loans was 2.97% at March 31, 1997 compared to 3.15% at March 31, 1996.
NON-INTEREST INCOME. Non-interest income for the year ended March 31, 1997
amounted to $152,000, a decrease of $59,000 from $211,000 for the 1996 fiscal
year. The decrease is primarily due to the decline in the net gain on sales of
available-for-sale securities to $23,000 for fiscal 1997, as compared to $88,000
for fiscal 1996.
NON-INTEREST EXPENSE. For fiscal years 1997 and 1996, non-interest expense
totaled $3.4 million and $2.3 million, respectively. The $1.1 million increase
in non-interest expense in the current fiscal year is primarily attributable to
the $538,000 SAIF special assessment, as well as increases of $292,000 in
compensation and benefits expense, $167,000 in professional services expenses
and $122,000 in other non-interest expense. The increase in compensation and
benefits expense primarily reflects recognition of a full year of expense in
fiscal 1997 (compared to six months of expense in fiscal 1996) for the amended
deferred compensation plan for directors, the ESOP and the directors retirement
plan; recognition of expense in fiscal 1997 for a portion of the shares awarded
under the RRPs; and merit and performance-based increases for certain staff
members. Professional services expenses and other non-interest expense increased
principally due to increased professional fees, printing and other costs
associated with operations as a public company for a full year in fiscal 1997
compared to six months in fiscal 1996.
INCOME TAX EXPENSE. Income tax expense for the fiscal years ended March 31,
1997 and 1996 was $326,000 and $609,000, respectively, reflecting an effective
tax rate of 27.6% and 42.1%, respectively. Tax expense for the year ended March
31, 1997 reflects a benefit of $166,000 due to the reduction of a deferred tax
liability caused by an amendment to the New York State tax law enacted during
the year. The amendment changed the base-year for tax bad debt reserves to
December 31, 1995 and eliminated the need for a deferred tax liability
previously recognized for reserves in excess of the base-year amount. Without
this one-time benefit, the effective tax rate would have been 41.7% for fiscal
1997.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and other financial information
included in this report have been prepared in conformity with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increased cost of Tappan Zee's operations.
Unlike industrial companies, nearly all of the
73
<PAGE>
assets and liabilities of Tappan Zee are monetary in nature. As a result,
interest rates have a greater impact on Tappan Zee's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
YEAR 2000 COMPLIANCE
Tappan Zee, like all companies that utilize computer technology, is facing
significant challenges associated with the inability of computer systems to
recognize the year 2000 (the "Year 2000 Problem"). Many existing computer
programs and systems were originally programmed with six digit dates that
provided only two digits to identify the calendar year in the date field,
without considering the upcoming change in the century. With the impending
millennium, these programs and computers will recognize "00" as the year 1900
rather than the year 2000. Like most financial service providers, Tappan Zee and
its operations may be significantly affected by the Year 2000 Problem due to the
nature of financial information. Software, hardware, and equipment both within
and outside Tappan Zee's direct control and with whom Tappan Zee electronically
or operationally interfaces (e.g. third party vendors providing data processing,
information system management, maintenance of computer systems, and credit
bureau information) are likely to be affected. Furthermore, if computer systems
are not adequately changed to identify the Year 2000, many computer applications
could fail or create erroneous results. As a result, many calculations which
rely on the date field information, such as interest, payment or due dates and
other operating functions, will generate results which could be significantly
misstated, and Tappan Zee could experience a temporary inability to process
transactions, send invoices or engage in similar normal business activities. In
addition, under certain circumstances, failure to adequately address the Year
2000 Problem could adversely affect the viability of Tappan Zee's suppliers and
creditors and the creditworthiness of its borrowers. Thus, if not adequately
addressed, the Year 2000 Problem could result in a significant adverse impact on
Tappan Zee's products, services and competitive condition.
Tappan Zee has initiated formal communications with all of its significant
suppliers to determine the extent to which Tappan Zee is vulnerable to those
third parties' failure to remediate their own Year 2000 Problem. Tappan Zee
presently believes that with modifications to existing software and conversions
to new software, the Year 2000 Problem will be mitigated without causing a
material adverse impact on the operations of Tappan Zee. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Problem could have an impact on the operations of Tappan Zee. At this
time, management does not believe that the impact and any resulting costs will
be material.
Monitoring and managing the Year 2000 Problem will result in additional
direct and indirect costs to Tappan Zee. Direct costs include potential charges
by third party software vendors for product enhancements, costs involved in
testing software products for year 2000 compliance, and any resulting costs for
developing and implementing contingency plans for critical software products
which are not enhanced. Indirect costs will principally consist of the time
devoted by existing employees in monitoring software vendor progress, testing
enhanced software products and implementing any necessary contingency plans.
Tappan Zee does not believe that such costs will have a material effect on its
results of operations. Both direct and indirect costs of addressing the Year
2000 Problem will be charged to earnings as incurred. Such costs have not been
material to date.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss from adverse changes in market prices and
rates. Tappan Zee's market risk arises primarily from interest rate risk
inherent in its lending, investing and deposit taking activities. Tappan Zee's
real estate loan portfolio, concentrated primarily in Westchester County, New
York, is subject to risks associated with the local economy.
Tappan Zee's net income is dependent to a substantial extent on its net
interest income. Net interest income is derived from the "spread" between the
yield on interest-earning assets and interest-bearing liabilities. The net
interest income of savings institutions is significantly affected by many
factors including: interest rate fluctuations; general economic conditions;
product pricing; the relative mix and maturity of interest-earning assets and
interest-bearing liabilities; non-interest-bearing sources of funds; and asset
quality. Net interest income volatility arises because, as rates fluctuate,
interest income and interest
74
<PAGE>
expense do not change equally. The management of interest rate risk exposure is
an essential component of managing a savings institution. The extent of the
movement of interest rates, higher or lower, is an uncertainty that could have a
negative impact on the earnings of Tappan Zee.
Successful management of interest rate risk requires an awareness of changes
and trends in the financial marketplace and the ability to identify and assess
the sources of performance variability in an institution's operations. The
principal objectives of Tappan Zee's interest rate risk management activities
are to (i) evaluate the interest rate risk included in certain balance sheet and
off-balance sheet accounts, (ii) determine the level of risk appropriate given
Tappan Zee's business focus, operating environment, capital and liquidity
requirements, and performance objectives, (iii) establish prudent asset
concentration guidelines and (iv) manage the risk within prudent levels approved
by Tappan Zee's Board of Directors.
Tappan Zee has taken several actions, under various market conditions,
designed to manage its level of interest rate risk. These actions have included:
(i) purchasing adjustable and fixed rate mortgage-backed securities with varying
average lives; (ii) undertaking an effort to lengthen the maturities of its
certificates of deposit, the majority of which mature in less than one year; and
(iii) to a lesser extent, increasing the portfolio of adjustable-rate mortgage
loans through originations, as market conditions permit. Tappan Zee does not
currently engage in trading activities or use derivative instruments to control
interest rate risk. Even though such activities may be permitted with the
approval of Tappan Zee's Board of Directors, Tappan Zee does not intend to
engage in such activities in the immediate future.
One approach used by management to quantify interest rate risk is the
analysis of the change in Tappan Zee's net portfolio value ("NPV") arising from
movements in interest rates. This approach calculates the difference between the
present value of liabilities and the present value of expected cash flows from
assets and off-balance sheet items. The following table sets forth, at March 31,
1998, an analysis of Tappan Zee's interest rate risk as measured by the
estimated changes in NPV resulting from instantaneous and sustained parallel
shifts in the yield curve (+ or - 400 basis points, measured in 100 basis point
increments).
<TABLE>
<CAPTION>
ESTIMATED INCREASE
CHANGE IN ESTIMATED (DECREASE) IN NPV
INTEREST RATES NPV -----------------------
(BASIS POINTS) AMOUNT AMOUNT PERCENT
- --------------- ----------- ---------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
+400 $ 11,500 $ (13,928) (55)%
+300 14,877 (10,551) (41)
+200 18,457 (6,971) (27)
+100 22,113 (3,315) (13)
-- 25,428 -- --
-100 27,852 2,424 10
-200 29,068 3,640 14
-300 30,301 4,873 19
-400 32,124 6,696 26
</TABLE>
Certain assumptions utilized by the OTS in assessing the interest rate risk
of thrift institutions were employed in preparing data included in the preceding
table. These assumptions relate to interest rates, loan prepayment rates,
deposit decay rates, and the market values of certain assets under the various
interest rate scenarios. It was also assumed that delinquency rates will not
change as a result of changes in interest rates although there can be no
assurance that this will be the case. Even if interest rates change in the
designated amounts, there can be no assurance that Tappan Zee's assets and
liabilities would perform as set forth above. In addition, a change in U.S.
Treasury rates in the designated amounts accompanied by a change in the shape of
the Treasury yield curve would cause significantly different changes to the NPV
than indicated above.
75
<PAGE>
BUSINESS OF TAPPAN ZEE
Tappan Zee is the unitary savings bank holding company for the Savings Bank,
a federally chartered savings bank and wholly-owned subsidiary of Tappan Zee. On
October 5, 1995, the Savings Bank converted from a mutual savings bank to a
stock savings bank (the " Conversion"). Concurrent with the Conversion, Tappan
Zee sold 1,620,062 shares of its common stock in a subscription and community
offering at a price of $10 per share, for net proceeds of $14.9 million (the
"Stock Offering"). In March 1998, Tappan Zee established TPNZ Preferred Funding
Corporation ("TZPFC"), as a wholly-owned subsidiary. The purpose of TZPFC is to
acquire and manage a portfolio of mortgage loans and mortgage-backed securities.
TZPFC is intended to qualify as a real estate investment trust for tax purposes.
Tappan Zee's primary market area consists of the Village of Tarrytown and
its neighboring communities in Westchester County, New York with business
conducted from one office located in Tarrytown, New York. The Bank is a
community-oriented savings institution whose business primarily consists of
accepting deposits from customers within its market area and investing those
funds in mortgage loans secured by one- to four-family residences. To a
significantly lesser extent, funds are invested in multi-family, commercial real
estate, construction, commercial business and consumer loans. Tappan Zee also
invests in mortgage-backed and other securities. Tappan Zee has no significant
business activities other than its ownership of the Savings Bank.
Tappan Zee's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on its
interest-earning assets, such as loans and securities, and the interest expense
on its interest-bearing liabilities, such as deposits. Tappan Zee also generates
non-interest income such as service charges and other fees. Tappan Zee's
non-interest expense consists of compensation and benefits, professional service
fees, occupancy expenses, federal deposit insurance costs, data processing
service fees and other operating expenses. Tappan Zee's results of operations
are significantly affected by general economic and competitive conditions
(particularly changes in market interest rates), government policies, changes in
accounting standards and actions of regulatory agencies.
MARKET AREA AND COMPETITION
Tappan Zee's deposit gathering and lending markets are concentrated in the
communities surrounding its office in the Village of Tarrytown located in
Westchester County, New York, although Tappan Zee also lends to borrowers
located in other areas of Westchester County. Westchester County borders New
York City to the south, Connecticut to the east, northern New Jersey and the
County of Rockland in New York to the west and the New York County of Putnam to
the north. In addition to being a suburb of New York City, Westchester contains
villages, towns and cities with shopping, office and industrial centers, as well
as farms and rural areas. The population of Westchester County is approximately
885,000. The population of the Village of Tarrytown exceeds 10,000, with a
median household income of approximately $45,000.
Some of the nation's major corporations have Westchester operations,
including IBM Corporation, Texaco Inc., AT&T, NYNEX, PepsiCo, Inc., Readers
Digest, Inc., Tambrands, Inc., Kraft General Foods, Inc., Metro-North Commuter
Railroad Company and Consolidated Edison of New York, Inc. Many other
industrial, insurance, educational, financial and health service corporations
employ significant numbers of local residents and also serve to meet the
educational, cultural and social needs of the area. The labor force contains
larger percentages of professional, technical and clerical workers than New York
State as a whole. However, many companies have downsized their operations and
staff sizes in the last few years. This downsizing has not had a material
adverse effect on Tappan Zee's operations. However, there can be no assurances
as to whether any further downsizing will occur and that any such event will not
have a material adverse effect on Tappan Zee's operations.
The Northeast region of the United States, which includes Tappan Zee's
market area, was affected by the prolonged recession that occurred in the early
1990s, which resulted in a contraction of economic
76
<PAGE>
activity and a deterioration of the local real estate market. Since then, the
local economy has shown signs of improvement. However, if another recession were
to occur, and as a result Tappan Zee were to experience a significant increase
in non-performing assets, it is likely that Tappan Zee's future operating
results would be affected by (i) significant provisions for loan losses and
reduced interest income, (ii) significant provisions for real estate owned
losses, and (iii) significant costs incurred in connection with managing
foreclosed properties and collection efforts on delinquent loans.
Tappan Zee faces substantial competition for both the deposits it accepts
and the loans it makes. Westchester County has a high density of financial
institutions, including branch offices of major commercial banks, all of which
compete with Tappan Zee to varying degrees. The Village of Tarrytown has full-
service branch offices of the following commercial banks: First Union National
Bank, Chase Bank, Fleet Bank, Bank of New York and Union State Bank. Tappan Zee
also encounters significant competition for deposits from commercial banks,
savings banks and savings and loan associations located in Westchester County,
as well as short-term money market securities, money market mutual funds, and
corporate and government securities. Due to the size of Tappan Zee relative to
its competitors, Tappan Zee offers a more limited product line than many
competitors, with an emphasis on product delivery and customer service rather
than a very broad product line. Tappan Zee competes for deposits by offering a
variety of customer services and deposit accounts at generally competitive
interest rates. Tappan Zee's competition for loans comes principally from
savings banks, savings and loan associations, commercial banks, mortgage
bankers, brokers and other institutional lenders. Tappan Zee competes for loans
primarily by emphasizing the quality of its loan services and by charging loan
fees and interest rates that are generally competitive within its market area.
Changes in the demand for loans relative to the availability of credit may
affect the level of competition from financial institutions which may be more
willing than Tappan Zee or its competitors to make credit available but which
have not generally engaged in lending activities in Tappan Zee's market area in
the past. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. Tappan Zee's loan portfolio consists primarily
of conventional first mortgage loans secured by one- to four-family residences.
At March 31, 1998, Tappan Zee had total net loans outstanding of $57.6 million
(gross loans of $58.8 million less the allowance for loan losses, unearned
discounts and net deferred loan fees). A total of $45.1 million, or 78.4% of net
loans, were one- to four-family, residential mortgage loans.
77
<PAGE>
The following table sets forth the composition of Tappan Zee's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated:
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- ------------------ ------------------ ------------------
PERCENT
PERCENT PERCENT OF PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- ------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family... $45,146 78.35% $43,958 79.76% $38,762 75.75% $39,020 77.68% $36,011 79.98%
Multi-family......... 1,994 3.46 2,289 4.15 3,287 6.42 3,443 6.85 2,649 5.88
Commercial........... 4,618 8.01 3,910 7.09 3,561 6.96 4,019 8.00 2,965 6.59
Construction, net.... 3,157 5.48 1,719 3.12 2,462 4.81 1,115 2.22 824 1.83
Net deferred loan
fees............... (266) (0.46) (279) (0.51) (284) (0.55) (324) (0.64) (278) (0.62)
-------- -------- -------- -------- -------- ------- ------- -------- ------- --------
Total mortgage
loans............ 54,649 94.84 51,597 93.61 47,788 93.39 47,273 94.11 42,171 93.66
Commercial loans:
Commercial business
loans, net......... 2,447 4.25 2,831 5.14 2,727 5.33 2,415 4.81 2,211 4.91
Net deferred loan
fees............... -- -- (1) -- (1) -- (1) -- (1) --
-------- -------- -------- -------- -------- ------- ------- -------- ------- --------
Total commercial
loans............ 2,447 4.25 2,830 5.14 2,726 5.33 2,414 4.81 2,210 4.91
Consumer loans:
Automobile loans..... 683 1.18 781 1.42 724 1.41 603 1.20 415 0.92
Other consumer
loans.............. 751 1.30 797 1.45 821 1.60 789 1.57 1,003 2.23
Unearned discounts... (208) (0.36) (239) (0.43) (235) (0.46) (199) (0.40) (236) (0.52)
Net deferred loan
costs.............. 3 0.01 4 0.01 4 0.01 3 0.01 3 --
-------- -------- -------- -------- -------- ------- ------- -------- ------- --------
Total consumer
loans............ 1,229 2.13 1,343 2.45 1,314 2.56 1,196 2.38 1,185 2.63
Allowance for loan
losses............... (702) (1.22) (660) (1.20) (654) (1.28) (650) (1.30) (540) (1.20)
-------- -------- -------- -------- -------- ------- ------- -------- ------- --------
Total loans, net... $57,623 100.00% $55,110 100.00% $51,174 100.00% $50,233 100.00% $45,026 100.00%
-------- -------- -------- -------- -------- ------- ------- -------- ------- --------
-------- -------- -------- -------- -------- ------- ------- -------- ------- --------
</TABLE>
The types of loans that Tappan Zee may originate are subject to federal and
state laws and regulations. Interest rates charged by Tappan Zee on loans are
affected by the demand for such loans, the supply of money available for lending
purposes and the rates offered by competitors. These factors are affected by,
among other things, economic conditions, monetary policies of the federal
government, including the Federal Reserve Board, and legislative tax policies.
78
<PAGE>
LOAN MATURITY. The following table shows the contractual maturity of Tappan
Zee's gross loans at March 31, 1998. The table reflects the entire unpaid
principal balance in the maturity period that includes the final loan payment
dates and, accordingly, does not give effect to periodic principal repayments or
possible prepayments. Principal repayments and prepayments totaled $10.3
million, $7.9 million and $8.2 million for the years ended March 31, 1998, 1997
and 1996, respectively.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
----------------------------------------------------------------------------------
ONE- TO
FOUR- MULTI- COMMERCIAL COMMERCIAL
FAMILY FAMILY MORTGAGE CONSTRUCTION BUSINESS CONSUMER TOTAL
--------- -------- ---------- ------------ ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Contractual maturity:
One year or less.................. $ 2,025 $ 687 $1,017 $3,157 $1,333 $ 74 $ 8,293
--------- -------- ---------- ------ ---------- -------- -------
After one year:
More than 1 year to 5 years..... 1,867 892 3,026 -- 1,067 1,148 8,000
More than 5 years............... 41,254 415 575 -- 47 212 42,503
--------- -------- ---------- ------ ---------- -------- -------
Total after one year............ 43,121 1,307 3,601 -- 1,114 1,360 50,503
--------- -------- ---------- ------ ---------- -------- -------
Total amount due................ $45,146 $1,994 $4,618 $3,157 $2,447 $1,434 $58,796
--------- -------- ---------- ------ ---------- -------- -------
--------- -------- ---------- ------ ---------- -------- -------
</TABLE>
The following table sets forth the dollar amounts in each loan category at
March 31, 1998 that are contractually due after March 31, 1999, and whether such
loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER MARCH 31, 1999
-----------------------------
FIXED ADJUSTABLE TOTAL
------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans (1):
One- to four-family................... $32,156 $10,965 $43,121
Multi-family.......................... 1,122 185 1,307
Commercial............................ 3,377 224 3,601
Commercial business loans............... 879 235 1,114
Consumer loans.......................... 1,360 -- 1,360
------- ---------- -------
Total................................. $38,894 $11,609 $50,503
------- ---------- -------
------- ---------- -------
</TABLE>
- ------------------------
(1) There are no construction loans that are contractually due after March 31,
1999.
ORIGINATION, PURCHASE, SALE AND SERVICING OF LOANS. Tappan Zee's lending
activities are conducted through its office. Tappan Zee originates both
adjustable-rate mortgage loans and fixed-rate mortgage loans. Loan originations
are generally obtained from existing or past customers and members of the local
communities. Tappan Zee's ability to originate loans is dependent upon the
relative customer demand for fixed-rate or adjustable-rate mortgage loans, which
is affected by the current and expected future levels of interest rates. During
the fiscal year ended March 31, 1998, a substantial portion of Tappan Zee's loan
originations consisted of fixed-rate mortgage loans. Tappan Zee currently holds
for its portfolio all loans it originates and, from time to time, may purchase
participations in mortgage loans originated by other institutions. The
determination to purchase participations in specific loans or pools of loans is
based upon criteria substantially similar to Tappan Zee's underwriting policies,
such as the financial condition of the borrower, the location of the underlying
property and the appraised value of the property, among other factors. Tappan
Zee has no current plans to sell loans it originates in the future, but
continually reviews the merits of adopting such a program to increase liquidity
or reduce interest rate risk. Tappan Zee does not service loans for others and
has no current plans to begin such activities.
79
<PAGE>
The following table sets forth Tappan Zee's loan originations, repayments
and other portfolio activity for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
--------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Unpaid principal balances at beginning of year.................................. $ 56,986 $ 53,102 $ 52,239
Loans originated:
Mortgage loans:
One-to-four-family........................................................ 5,893 6,740 4,125
Multi-family.............................................................. 97 -- 150
Commercial................................................................ 800 1,085 --
Construction.............................................................. 3,112 1,475 2,580
Commercial business......................................................... 2,121 1,799 1,471
Consumer.................................................................... 624 790 967
---------- --------- ---------
Total loans originated.................................................... 12,647 11,889 9,293
---------- --------- ---------
---------- --------- ---------
Principal repayments.......................................................... (10,273) (7,942) (8,233)
Charge-offs................................................................... -- (63) (86)
Transfers to real estate owned................................................ -- -- (111)
---------- --------- ---------
Unpaid principal balances at end of year........................................ 59,360 56,986 53,102
Less:
Construction loans in process................................................. (549) (686) (738)
Unearned discounts............................................................ (208) (239) (235)
Unused lines of credit........................................................ (15) (15) (20)
Allowance for loan losses..................................................... (702) (660) (654)
Net deferred loan fees........................................................ (263) (276) (281)
---------- --------- ---------
Net loans at end of year........................................................ $ 57,623 $ 55,110 $ 51,174
---------- --------- ---------
---------- --------- ---------
</TABLE>
ONE- TO FOUR-FAMILY MORTGAGE LENDING. Tappan Zee offers both fixed-rate and
adjustable-rate mortgage loans, with maturities up to thirty years, which are
secured by one- to four-family residences. Substantially all such loans are
secured by owner-occupied properties located in Westchester County, New York. At
March 31, 1998, $45.1 million, or 78.4% of Tappan Zee's net loans outstanding,
were one- to four-family residential mortgage loans. Of the one- to four-family
residential mortgage loans outstanding at that date, 75.0%, or $33.9 million,
were fixed-rate loans and 25.0%, or $11.2 million, were adjustable-rate loans.
The interest rates for the majority of Tappan Zee's adjustable-rate mortgage
loans are indexed to the yield on one-year U.S. Treasury securities. Tappan Zee
currently offers a number of adjustable-rate mortgage loan programs with
interest rates which adjust either every one, three or five years. An
adjustable-rate mortgage loan may carry an initial interest rate that is less
than the fully-indexed rate for the loan. All adjustable-rate mortgage loans
offered have lifetime interest rate caps or ceilings. Generally, adjustable-rate
mortgage loans pose credit risks somewhat greater than the credit risk inherent
in fixed-rate loans primarily because, as interest rates rise, the underlying
payments of the borrowers rise, increasing the potential for default. It is
Tappan Zee's policy to underwrite its adjustable-rate mortgage loans based on
the fully-indexed rate. Tappan Zee currently has no mortgage loans that are
subject to negative amortization.
In view of its operating strategy, Tappan Zee adheres to its Board approved
underwriting guidelines for loan origination, which, though prudent in approach
to credit risk and evaluation of collateral, allow management flexibility with
respect to documentation of certain matters and certain credit requirements.
However, Tappan Zee generally originates loans using guidelines comparable to
Federal National Mort-
80
<PAGE>
gage Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC")
underwriting guidelines. Tappan Zee's policy is to originate one- to four-family
residential mortgage loans in amounts up to 80% of the lower of the appraised
value or the selling price of the property securing the loan. Tappan Zee has not
offered and currently does not offer products with a higher loan-to-value ratio
in conjunction with private mortgage insurance, and has no plans to do so in the
future. Mortgage loans originated by Tappan Zee generally include due-on-sale
clauses which provide Tappan Zee with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers ownership of the
property without Tappan Zee's consent. Due-on-sale clauses are an important
means of adjusting the rates on Tappan Zee's fixed-rate mortgage loan portfolio
and Tappan Zee has generally exercised its rights under these clauses.
MULTI-FAMILY MORTGAGE LENDING. Tappan Zee originates multi-family mortgage
loans generally secured by five- to ten-unit apartment buildings located in
Tappan Zee's market area. In reaching its decision on whether to make a
multi-family loan, Tappan Zee considers the qualifications of the borrower as
well as the underlying property. Some of the factors considered are: the net
operating income of the mortgaged premises before debt service and depreciation;
the debt service ratio (the ratio of the property's net cash flow to debt
service requirements); and the ratio of loan amount to appraised value. When
evaluating the qualifications of the borrower for a multi-family mortgage loan,
Tappan Zee considers the financial resources and income level of the borrower,
the borrower's experience in owning or managing similar properties, and Tappan
Zee's lending experience with the borrower. Tappan Zee requires that the
borrower be able to demonstrate strong management skills and the ability to
maintain the property from current rental income. The borrower is also required
to provide evidence of the ability to repay the mortgage and a history of making
mortgage payments on a timely basis. In making its assessment of the
creditworthiness of the borrower, Tappan Zee generally reviews the financial
statements, employment and credit history of the borrower, as well as other
related documentation.
Pursuant to Tappan Zee's underwriting policies, a multi-family mortgage loan
may only be made in an amount up to the lesser of (i) 75% of the appraised value
of the underlying property or (ii) Tappan Zee's current loans-to-one borrower
limit. See "Regulation and Supervision of Tappan Zee and the Savings Bank of
Federal Savings Association--Loans to One Borrower." Subsequent declines in the
real estate values in Tappan Zee's primary market area have resulted in an
increase in the loan-to-value ratios on certain multi-family mortgage loans.
Tappan Zee's multi-family mortgage loans are generally fixed-rate loans and may
be made with terms up to fifteen years, generally with a five-year balloon
maturity and a fifteen-year amortization schedule. Tappan Zee's multi-family
mortgage loan portfolio at March 31, 1998 was approximately $2.0 million, or
3.5% of net loans outstanding. Tappan Zee's largest multi-family mortgage loan
at March 31, 1998 had an outstanding balance of $263,000 and is secured by a
five-unit apartment house.
Mortgage loans secured by apartment buildings and other multi-family
residential properties are generally larger and involve a greater degree of risk
than one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to a greater extent to circumstances outside the borrower's control,
including adverse conditions in the real estate market or the economy. Tappan
Zee seeks to minimize these risks through its underwriting policies, which
require such loans to be qualified at origination on the basis of the property's
income and debt service ratio.
COMMERCIAL REAL ESTATE MORTGAGE LENDING. Tappan Zee originates commercial
real estate mortgage loans that are generally secured by a combination of
residential and retail facilities and, to a lesser extent, properties used for
business purposes, such as small office buildings, located in Tappan Zee's
market area. Tappan Zee's underwriting procedures provide that commercial real
estate loans may be made in amounts up to the lesser of (i) 75% of the lesser of
the appraised value or purchase price of the property or (ii) Tappan Zee's
current loans-to-one borrower limit. These loans are generally fixed-rate loans
and may be made with terms up to fifteen years, generally with a five-year
balloon maturity and a fifteen-year amortization schedule. Tappan Zee's
underwriting standards and procedures for these loans are similar to
81
<PAGE>
those applicable to its multi-family mortgage loans, whereby Tappan Zee
considers factors such as the net operating income of the property and the
borrower's expertise, credit history and profitability. At March 31, 1998,
Tappan Zee's commercial real estate mortgage portfolio was $4.6 million, or 8.0%
of net loans outstanding. The largest commercial real estate loan in Tappan
Zee's portfolio at March 31, 1998 was $787,000, which is comprised of a first
and second loan secured by the same commercial warehouse building.
Mortgage loans secured by commercial real estate properties, like
multi-family mortgage loans, are generally larger and involve a greater degree
of risk than one- to four-family residential mortgage loans. This risk is
attributable to the uncertain realization of projected income-producing cash
flows which are affected by vacancy rates, the ability to maintain rent levels
against competitively-priced properties and the ability to collect rent from
tenants on a timely basis. Because payments on loans secured by commercial real
estate properties are often dependent on the successful operation or management
of the properties, repayment of such loans may be subject to a greater extent to
circumstances outside the borrower's control, including adverse conditions in
the real estate market or the economy. Tappan Zee seeks to minimize these risks
through its underwriting standards, which require such loans to be qualified at
origination on the basis of the property's income and debt service ratio.
CONSTRUCTION LENDING. Tappan Zee originates loans for the acquisition and
development of property to contractors and individuals in its market area.
Tappan Zee's construction loans primarily have been made to finance the
construction of one- to four-family, owner-occupied residential properties,
multi-family properties and other properties. These loans are all fixed-rate
loans with maturities of one year or less. Tappan Zee's policies provide that
construction loans may be made in amounts up to 80% of the appraised value of
the property for construction of one- to four-family residences and multi-family
properties, and up to 75% of the appraised value of other types of properties.
All construction loans are subject to Tappan Zee's loans-to-one borrower limit.
If the borrower is a corporation, Tappan Zee generally requires personal
guarantees and a permanent loan commitment from another lender if Tappan Zee
will not be making the permanent loan. Loan proceeds are disbursed in
increments, subject to inspection by Tappan Zee inspectors as construction
progresses. Subject to Tappan Zee's limitation on loans-to-one borrower, during
favorable economic conditions, Tappan Zee will consider making up to two
residential construction loans to one borrower. If economic conditions are not
favorable, Tappan Zee will not make construction loans, unless there is a
confirmed permanent mortgage takeout or Tappan Zee has approved the borrower for
permanent financing. At March 31, 1998, Tappan Zee had $3.2 million (net of
undisbursed loan funds of $549,000) of construction loans which amounted to 5.5%
of Tappan Zee's net loans outstanding. The largest construction loan in Tappan
Zee's portfolio at March 31, 1998 was $500,000 (all of which had been disbursed)
and is secured by retail commercial property.
Construction lending generally involves additional risks to the lender as
compared with residential permanent mortgage lending. These risks are
attributable to the fact that loan funds are advanced upon the security of the
project under construction, predicated on the present value of the property and
the anticipated future value of the property upon completion of construction or
development. Moreover, because of the uncertainties inherent in delays resulting
from labor problems, materials shortages, weather conditions and other
contingencies, it is relatively difficult to evaluate the total funds required
to complete a project and to establish the loan-to-value ratio. If Tappan Zee's
initial estimate of the property's value at completion is inaccurate, Tappan Zee
may be confronted with a project, when completed, having an insufficient value
to assure full repayment.
COMMERCIAL BUSINESS LENDING. Tappan Zee also offers limited types of
short-term and medium-term commercial business loans on a secured and unsecured
basis to borrowers located in Tappan Zee's market area. These loans include time
and demand loans, term loans and lines of credit. At March 31, 1998, Tappan
Zee's commercial business loan portfolio amounted to $2.4 million, or 4.3% of
net loans outstanding. The largest commercial business loan outstanding at March
31, 1998 was a $325,000 loan secured by marketable securities.
82
<PAGE>
Tappan Zee's lines of credit are typically established for one year and are
subject to renewal upon satisfactory review of the borrower's financial
statements and credit history. Secured short-term commercial business loans are
usually collateralized by real estate and are generally guaranteed by a
principal of the borrower. Interest on these loans is usually payable monthly at
rates that fluctuate based on a spread above the prime rate. Tappan Zee offers
term loans with terms of up to ten years, although the majority of such loans
have terms of five years or less. Typically, term loans have floating interest
rates based on a spread above the prime rate. Tappan Zee also offers business
loans on a revolving basis, whereby the borrower pays interest only. Interest on
such loans fluctuates based on the prime rate. Normally these loans require
periodic interest payments during the loan term, with full repayment of
principal and interest at maturity.
Similar to construction loans and commercial mortgage loans, commercial
business loans generally carry greater credit risks than residential mortgage
loans because their repayment is more dependent on (i) the underlying financial
condition of the borrower, (ii) the value of any property or the cash flow from
any property securing the loan or the business being financed, and (iii) general
and local economic conditions.
CONSUMER LENDING. Tappan Zee offers various types of secured and unsecured
consumer loans, including automobile loans, home improvement loans and personal
loans. Tappan Zee's consumer loans have original maturities of not more than
five years, with the exception that home improvement loans may have original
maturities of up to ten years. Interest rates charged on such loans are set at
competitive rates, taking into consideration the type and term of the loan.
Consumer loan applications are reviewed and approved in conformance with
standards approved by Tappan Zee's Board of Directors. At March 31, 1998, Tappan
Zee's consumer loan portfolio totaled $1.2 million, or 2.1% of net loans
outstanding.
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Directors of Tappan
Zee establishes the lending policies of Tappan Zee and reviews properties
offered as security. The Board of Directors has established the following
lending authority: the Vice President may approve mortgage loans in amounts up
to $200,000 and commercial business loans in amounts up to $75,000; the
President may approve mortgage loans up to $350,000 and commercial business
loans up to $150,000; commercial business loans in excess of $150,000 and up to
$225,000 must be approved by both the President and Vice President or by the
Board of Directors; and mortgage loans above $350,000 and commercial business
loans above $225,000 require Board of Directors approval. The foregoing lending
limits are reviewed annually and, as needed, revised by the Board of Directors.
For all loans originated by Tappan Zee, upon receipt of a completed loan
application from a prospective borrower, a credit report is ordered and certain
other information is verified by an independent credit agency, and, if
necessary, additional financial information is required to be submitted by the
borrower. An appraisal of any real estate intended to secure the proposed loan
is required, which appraisal currently is performed by an independent appraiser
designated and approved by Tappan Zee. The Board of Directors annually approves
the independent appraisers used by Tappan Zee and approves Tappan Zee's
appraisal policy. It is Tappan Zee's policy to require title and hazard
insurance on all real estate loans. In connection with a borrower's request for
a renewal of a multi-family or commercial mortgage loan with a five-year balloon
maturity, Tappan Zee evaluates both the borrower's ability to service the
renewed loan applying an interest rate that reflects prevailing market
conditions, as well as the value of the underlying collateral property. The
evaluation of the property typically involves a letter update of the existing
appraisal unless in the appraiser's opinion the original appraisal is no longer
substantially relevant, in which case a full appraisal is obtained.
ASSET QUALITY
NON-PERFORMING LOANS. Loans are considered non-performing if they are in
foreclosure or are 90 or more days delinquent. Tappan Zee's management and Board
of Directors perform a monthly review of all
83
<PAGE>
delinquent loans. The actions taken by Tappan Zee with respect to delinquencies
vary depending on the nature of the loan and period of delinquency. Tappan Zee's
policies generally provide that delinquent mortgage loans be reviewed and that a
written late charge notice be mailed no later than the 15th day of delinquency.
Tappan Zee's policies provide that telephone contact be attempted to ascertain
the reasons for delinquency and the prospects of repayment. When contact is made
with the borrower at any time prior to foreclosure, Tappan Zee attempts to
obtain full payment or work out a repayment schedule with the borrower to avoid
foreclosure.
It is Tappan Zee's general policy to stop the accrual of interest on all
loans 90 days or more past due. Certain loans 90 days or more past due may
continue to accrue interest based on management's evaluation of the loan, the
underlying collateral and the creditworthiness of the borrower. When a loan is
placed on non-accrual status, unpaid interest is reversed against interest
income of the current period. Thereafter, interest payments received on
non-accrual loans are recognized as income unless future collections are
doubtful, in which case the payments received are applied as a reduction of
principal. A loan remains on non-accrual status until the factors that indicated
doubtful collectibility no longer exist or until a loan is determined to be
uncollectible and is charged off against the allowance for loan losses.
The classification of a loan as non-performing does not necessarily indicate
that loan principal or interest will not be collected. Historical experience
indicates that a portion of non-performing assets will eventually be recovered.
When all collection efforts have been exhausted, and management determines that
the borrower is unable to repay its obligation, Tappan Zee will commence
foreclosure procedures.
84
<PAGE>
The following table sets forth certain information regarding non-accrual
loans, other past due loans and real estate owned. Tappan Zee's prospective
adoption of Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan", effective April 1, 1995, had no impact on
the comparability of this information. See Note 3 to the Consolidated Financial
Statements in Item 8 for information concerning Tappan Zee's impaired loans
which are included in the non-accrual loans shown below.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED MARCH 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
One-to four-family........................................... $ 1,202 $ 1,355 $ 856 $ 523 $ 419
Commercial property.......................................... 238 123 126 -- --
Construction................................................. -- -- -- -- 326
Commercial business............................................ -- -- -- -- 30
--------- --------- --------- --------- ---------
Total........................................................ 1,440 1,478 982 523 775
--------- --------- --------- --------- ---------
Number of non-accrual loans.................................... 6 9 6 2 5
Accruing loans past due ninety days or more:
Mortgage loans:
One-to four-family........................................... $ -- $ -- $ 342 $ 885 $ 760
Multi-family................................................. -- -- -- 761 171
Commercial property.......................................... -- 72 266 331 180
Construction................................................. 108 100 -- -- --
Commercial business and consumer............................... 11 8 42 144 17
--------- --------- --------- --------- ---------
Total........................................................ 119 180 650 2,121 1,128
--------- --------- --------- --------- ---------
Number of accruing loans past due ninety days or more.......... 3 4 7 21 11
Total non-performing loans....................................... $ 1,559 $ 1,658 $ 1,632 $ 2,644 $ 1,903
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Number of non-performing loans................................... 9 13 13 23 16
Allowance for loan losses........................................ $ 702 $ 660 $ 654 $ 650 $ 540
Real estate owned, net........................................... $ -- $ 122 $ 402 $ 455 $ 367
Number of real estate owned properties........................... -- 1 2 2 3
Ratios:
Non-accrual loans to total loans............................... 2.47% 2.65% 1.89% 1.03% 1.70%
Non-performing loans to total loans............................ 2.67 2.97 3.15 5.20 4.18
Non-performing loans and real estate owned to total assets..... 1.21 1.46 1.77 3.40 2.63
Allowance for loan losses to:
Non-accrual loans............................................ 48.75 44.65 66.60 124.28 69.68
Non-performing loans......................................... 45.03 39.81 40.07 24.58 28.38
Total loans.................................................. 1.20 1.18 1.26 1.28 1.19
Contractual interest income that would have been recognized on
non-accrual loans.............................................. $ 133 $ 96 $ 93 $ 18 $ 81
Actual interest income recognized................................ 142 74 58 -- 9
--------- --------- --------- --------- ---------
Interest income (recognized) not recognized.................... $ (9) $ 22 $ 35 $ 18 $ 72
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
85
<PAGE>
Accrued interest receivable on accruing loans past due by 90 days or more
amounted to $0, $1,000, $8,000, $44,000, and $14,000 at March 31, 1998, 1997,
1996, 1995, and 1994, respectively. Accordingly, if Tappan Zee had placed all
such loans on non-accrual status at those dates, interest income for the fiscal
years ended March 31, 1998, 1997 and 1996 would have been increased by $1,000,
$7,000 and $36,000, respectively.
REAL ESTATE OWNED. Property acquired by Tappan Zee as a result of
foreclosure on a mortgage loan is classified as real estate owned ("REO") and is
initially recorded fair value, less estimated sales costs, with any resulting
writedown charged to the allowance for loan losses. Thereafter, an allowance for
losses on REO is established for any further declines in fair value less
estimated sales costs. Tappan Zee obtains an appraisal on REO property as soon
as practicable after it takes possession of the real property. Tappan Zee will
generally reassess the value of REO at least annually thereafter. There was no
REO at March 31, 1998.
CLASSIFIED ASSETS. Federal regulations require that the Savings Bank
utilize an internal asset classification system as a means of reporting problem
and potential problem assets. The Savings Bank has incorporated the OTS internal
asset classifications as a part of its credit monitoring system. The Savings
Bank currently classifies problem and potential problem assets as "Substandard,"
"Doubtful" or "Loss" assets. An asset is considered "Substandard" if it is
inadequately protected by the current equity and paying capacity of the obligor
or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"Doubtful" have all of the weaknesses inherent in those classified "Substandard"
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as "Loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is not warranted.
Assets which do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances, which is a regulatory term, represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
one or more assets, or portions thereof, as "Loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge-off such amount.
A savings institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS which
can order the establishment of additional general or specific loss allowances.
The OTS, in conjunction with the other federal banking agencies, has adopted an
interagency policy statement on the allowance for loan and lease losses. The
policy statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation guidelines. Generally, the policy statement
recommends that institutions have effective systems and controls to identify,
monitor and address asset quality problems; that management has analyzed all
significant factors that affect the collectability of the portfolio in a
reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that adequate specific and general loan loss
allowances have been established, actual losses are dependent upon future events
and, as such, further additions to the level of specific and general loan loss
allowances may become necessary.
86
<PAGE>
The Savings Bank's Internal Auditor reviews and classifies the Savings
Bank's assets monthly and reports the results to the Examining and Audit
Committee of Tappan Zee's Board of Directors on a monthly basis. The Examining
and Audit Committee then reviews the report of the Internal Auditor and reports
the results of its review to the Board of Directors. Assets are classified in
accordance with the management guidelines described above. At March 31, 1998,
all of the Savings Bank's classified assets were non-performing loans of which,
$436,000 were classsified as Special Mention, $1.1 million were classified as
Substandard, a $5,000 loan was classified as Loss and no loans were classified
as Doubtful. As of March 31, 1998, loans classified as Substandard included
loans totaling $766,000 secured by one- to four-family, owner-occupied
residences. These loans are classified as Substandard due to delinquencies or
other identifiable weaknesses.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in Tappan Zee's loan portfolio. The allowance for loan losses is
maintained at an amount management considers adequate to cover loan losses which
are deemed probable and estimable. The allowance is based upon a number of
factors, including asset classifications, economic trends, industry experience
and trends, industry and geographic concentrations, estimated collateral values,
historical loan loss experience, and Tappan Zee's underwriting policies. Tappan
Zee will continue to monitor and modify its allowance for loan losses as
conditions dictate. The OTS, as an integral part of its examination process,
periodically reviews Tappan Zee's allowance for loan losses. The OTS may require
Tappan Zee to establish additional allowances, based on its judgments of the
information available at the time of the examination.
The following table sets forth Tappan Zee's allowance for loan losses
allocated by loan category, the percent of the allocated allowances to the total
allowance, and the percent of loans in each category to total loans at the dates
indicated.
<TABLE>
<CAPTION>
MORTGAGE LOANS
--------------------------------------
ONE- TO COMMERCIAL
FOUR- MULTI- COM- CON- BUSINESS CONSUMER UN-
FAMILY FAMILY MERCIAL STRUCTION LOANS LOANS ALLOCATED TOTAL
------- ------ ------- --------- -------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
AT MARCH 31, 1998
Allowance amount.............. $212 $ 8 $70 $ 42 $24 $21 $325 $ 702
Percent of:
Total allowance............. 30% 1% 10% 6% 3% 3% 47% 100%
Total loans................. 78% 3% 8% 5% 4% 2% --% 100%
AT MARCH 31, 1997
Allowance amount.............. $211 $ 9 $49 $ 29 $28 $17 $317 $ 660
Percent of:
Total allowance............. 32% 1% 8% 4% 4% 3% 48% 100%
Total loans................. 78% 4% 7% 4% 5% 2% --% 100%
AT MARCH 31, 1996
Allowance amount.............. $184 $13 $56 $ 32 $29 $15 $325 $ 654
Percent of:
Total allowance............. 28% 2% 9% 5% 4% 2% 50% 100%
Total loans................. 75% 6% 7% 5% 5% 2% --% 100%
AT MARCH 31, 1995
Allowance amount.............. $204 $68 $66 $ 19 $24 $15 $254 $ 650
Percent of:
Total allowance............. 31% 11% 10% 3% 4% 2% 39% 100%
Total loans................. 76% 7% 8% 2% 5% 2% --% 100%
AT MARCH 31, 1994
Allowance amount.............. $128 $12 $32 $173 $24 $14 $157 $ 540
Percent of:
Total allowance............. 24% 2% 6% 32% 4% 3% 29% 100%
Total loans................. 79% 6% 6% 2% 5% 2% --% 100%
</TABLE>
87
<PAGE>
The following table sets forth activity in Tappan Zee's allowance for loan
losses and the allowance for losses on real estate owned for the periods
indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year................................... $660 $654 $650 $540 $482
Provision for losses........................................... 42 69 90 171 151
Charge-offs:
Mortgage loans:
One-to four-family......................................... -- (12) (48) -- (23)
Commercial................................................. -- -- -- -- --
Construction loans........................................... -- -- -- (30) --
Commercial business loans.................................... -- (40) (36) (31) (78)
Consumer loans............................................... -- (11) (2) (2) (4)
--------- --------- --------- --------- ---------
Total charge-offs.......................................... -- (63) (86) (63) (105)
Recoveries..................................................... -- -- -- 2 12
--------- --------- --------- --------- ---------
Balance at end of year......................................... $702 $660 $654 $650 $540
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of net charge-offs to average loans outstanding.......... --% 0.11% 0.17% 0.13% 0.20%
ALLOWANCE FOR LOSSES ON REAL ESTATE OWNED:
Balance at beginning of year................................... $ -- $ 38 $ 60 $ 59 $ 89
Provision for losses........................................... -- 38 -- 141 64
Net realized losses............................................ -- (76) (22) (140) (94)
--------- --------- --------- --------- ---------
Balance at end of year......................................... $ -- $ -- $ 38 $ 60 $ 59
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
INVESTMENT ACTIVITIES
INVESTMENT POLICIES. The investment policy of Tappan Zee, which is
established by the Board of Directors, is based upon Tappan Zee's
asset/liability management goals and emphasizes high credit quality and
diversified investments while seeking to optimize net interest income within
acceptable limits of safety and liquidity. The investment policy is designed to
provide and maintain liquidity to meet day-to-day, cyclical and long-term
changes in Tappan Zee's asset/liability structure. Tappan Zee's investment goal
has been to invest available funds in highly liquid instruments that have
adjustable and fixed rates and that generally, at the time of purchase, do not
exceed an average life of eight years with respect to collateralized mortgage
obligations ("CMOs") and eleven years with respect to other mortgage-backed
securities, or that meet specific requirements of Tappan Zee's asset/liability
goals. A CMO is a special type of debt security in which the stream of principal
and interest payments on the underlying mortgages or mortgage-backed securities
is used to create classes with different maturities and, in some cases,
amortization schedules as well as a residual interest, with each class
possessing different risk characteristics. At March 31, 1998, Tappan Zee's
securities portfolio amounted to $58.3 million (amortized cost) with an
estimated weighted average remaining life of 5.0 years.
Tappan Zee's investment policy permits it to invest in U.S. government
obligations; certain securities of various government-sponsored agencies,
including mortgage-backed securities issued/guaranteed by FNMA, FHLMC and the
Government National Mortgage Association ("GNMA"); certificates of deposit of
insured banks and savings associations; federal funds; and investment grade
corporate debt securities (typically issued by municipalities and utility
companies) and commercial paper.
88
<PAGE>
Tappan Zee's investment policy prohibits investment in certain types of
mortgage derivative securities that management considers to be high risk. Tappan
Zee generally purchases only short- and medium-term classes of CMOs guaranteed
by FNMA or FHLMC. A substantial portion of Tappan Zee's CMOs have consisted of
real estate mortgage investment conduits ("REMICs").
Thrift Bulletin Number 52, the OTS Policy Statement on securities portfolio
policies and unsuitable investment practices ("TB-52"), requires that
institutions classify mortgage derivative products acquired, including certain
tranches of CMOs, as "high-risk mortgage securities" if such products exhibit
greater price volatility than a benchmark fixed-rate 30-year mortgage-backed
pass-through security. Institutions may only hold high-risk mortgage securities
to reduce interest-rate risk in accordance with safe and sound practices and
must also follow certain prudent safeguards in the purchase and retention of
such securities. At March 31, 1998, Tappan Zee did not have any CMOs that were
identified as "high-risk mortgage securities." Tappan Zee has never invested in
CMO residual interests or in CMO tranches that met the definition of a high-risk
mortgage security at the time of investment.
MORTGAGE-BACKED SECURITIES. Tappan Zee invests in mortgage-backed
securities to complement its mortgage lending activities and supplement such
activities at times of low mortgage loan demand. At March 31, 1998, the carrying
value of mortgage-backed securities totaled $53.1 million, or 41.0% of total
assets. The fair value of all mortgage-backed securities totaled $53.5 million
at March 31, 1998. Mortgage-backed securities held in Tappan Zee's
available-for-sale portfolio are carried at fair value. Mortgage-backed
securities held in Tappan Zee's held-to-maturity portfolio are carried at
amortized cost. At March 31, 1998, all securities in Tappan Zee's
mortgage-backed securities portfolio were directly insured or guaranteed by
GNMA, FNMA or FHLMC, thereby providing the certificateholder a guarantee of
timely payments of interest and scheduled principal payments, whether or not
they have been collected. At March 31, 1998, all of Tappan Zee's mortgage-backed
securities are fixed-rate with a weighted average yield of 7.17% and an
estimated weighted average remaining life of 5.33 years. Tappan Zee's mortgage-
backed securities portfolio includes CMOs with a fair value at March 31, 1998 of
$778,000, a weighted average yield of 6.69% and a weighted average estimated
remaining life of 1.6 years.
Mortgage-backed securities generally yield less than the loans that underlie
such securities because of servicing fees and the cost of payment guarantees or
other credit enhancements that reduce credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize borrowings of Tappan Zee. In general, under OTS regulations
mortgage-backed securities issued or guaranteed by GNMA, FNMA and FHLMC and
certain AAA-rated mortgage-backed pass-through securities are weighted at no
more than 20% for risk-based capital purposes, compared to the 50% risk
weighting assigned to most non-securitized residential mortgage loans. See
"Regulation and Supervision of Tappan Zee and the Savings Bank--Regulation of
Federal Savings Association--Capital Requirements."
While mortgage-backed securities carry a reduced credit risk as compared to
whole loans, such securities remain subject to the risk that a fluctuating
interest rate environment, along with other factors such as the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of
such mortgage loans and so affect both the prepayment speed, and value, of such
securities. In contrast to mortgage-backed pass-through securities in which cash
flow is received (and, hence, prepayment risk is shared) pro rata by all
securities holders, the cash flows from the mortgages or mortgage-backed
securities underlying CMOs are segmented and paid in accordance with a
predetermined priority to investors holding various tranches of such securities
or obligations. A particular tranche of a CMO may therefore carry prepayment
risk that differs from that of both the underlying collateral and other
tranches. Tappan Zee typically purchases tranches of CMOs that are categorized
as "planned amortization classes," "targeted amortization classes" or "very
accurately defined maturities" and are intended to produce stable cash flows in
different interest rate environments.
89
<PAGE>
The following table sets forth activity in Tappan Zee's mortgage-backed
securities portfolio for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Amortized cost at beginning of year.......................... $ 39,357 $ 31,559 $ 23,935
Purchases.................................................... 38,569 22,648 14,137
Sales........................................................ (19,960) (11,890) (3,709)
Principal repayments......................................... (4,980) (2,985) (2,812)
Premium and discount amortization, net....................... (9) 25 8
--------- --------- ---------
Amortized cost at end of year................................ $ 52,977 $ 39,357 $ 31,559
--------- --------- ---------
--------- --------- ---------
</TABLE>
At March 31, 1998, Tappan Zee held no securities issued by any one entity
with a total carrying value in excess of 10% of Tappan Zee's equity at that
date, except for obligations of the U.S. government and government-sponsored
agencies and certain mortgage-backed securities which are fully collateralized
by mortgages held by single-purpose entities and guaranteed by
government-sponsored agencies.
The following table sets forth the amortized cost and fair value of Tappan
Zee's securities, by accounting classification category and by type of security,
at the dates indicated:
<TABLE>
<CAPTION>
AT MARCH 31,
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
---------------------- ---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
----------- --------- ----------- --------- ----------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
HELD-TO-MATURITY
Mortgage-backed securities:
CMOs................................................ $ 683 $ 690 $ 996 $ 994 $ 1,108 $ 1,113
Pass-through securities............................. 32,450 32,851 14,078 13,881 5,129 5,249
----------- --------- ----------- --------- ----------- ---------
33,133 33,541 15,074 14,875 6,237 6,362
Agency and other debt securities...................... 2,398 2,430 3,049 3,014 3,199 3,234
----------- --------- ----------- --------- ----------- ---------
Total............................................... 35,531 35,971 18,123 17,889 9,436 9,596
----------- --------- ----------- --------- ----------- ---------
AVAILABLE-FOR-SALE
Mortgage-backed securities:
CMOs................................................ 85 88 8,329 8,116 17,651 17,555
Pass-through securities............................. 19,759 19,901 15,954 15,799 7,671 7,622
----------- --------- ----------- --------- ----------- ---------
19,844 19,989 24,283 23,915 25,322 25,177
U.S. Treasury......................................... -- -- -- -- 6,490 6,493
Agency and other debt securities...................... 75 79 8,029 7,814 8,616 8,530
----------- --------- ----------- --------- ----------- ---------
75 79 8,029 7,814 15,106 15,023
Mutual fund investments............................... 2,800 2,800 4,655 4,655 1,344 1,344
Net unrealized gain (loss)............................ 149 -- (583) -- (228) --
----------- --------- ----------- --------- ----------- ---------
Total............................................... 22,868 22,868 36,384 36,384 41,544 41,544
----------- --------- ----------- --------- ----------- ---------
Total securities, net............................... $ 58,399 $ 58,839 $ 54,507 $ 54,273 $ 50,980 $ 51,140
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
</TABLE>
90
<PAGE>
The following table sets forth certain information regarding the amortized
cost, fair value and weighted average yield of Tappan Zee's debt securities at
March 31, 1998, by remaining period to contractual maturity. With respect to
mortgage-backed securities, the entire amount is reflected in the maturity
period that includes the final security payment date and, accordingly, no effect
has been given to periodic repayments or possible prepayments.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
--------------------------------- ---------------------------------
<CAPTION>
WEIGHTED WEIGHTED
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD
----------- --------- --------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities due:
In one year or less......................... $ -- $ -- --% $ 120 $ 121 7.34%
After one year through five years........... 699 694 5.94 391 391 6.00
After five years through ten years.......... -- -- -- 754 780 7.71
After ten years............................. 19,145 19,295 7.06 31,868 32,249 7.35
----------- --------- ----------- ---------
Total..................................... $ 19,844 $ 19,989 7.02% $ 33,133 $ 33,541 7.34%
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Agency and other debt securities due:
In one year or less......................... $ -- $ -- --% $ -- $ -- --%
After one year through five years........... 30 32 6.00 500 503 7.20
After five years through ten years.......... -- -- -- 1,699 1,723 7.30
After ten years............................. 45 47 5.50 199 204 5.75
----------- --------- ----------- ---------
Total..................................... $ 75 $ 79 5.70% $ 2,398 $ 2,430 7.15%
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Total due:
In one year or less......................... $ -- $ -- --% $ 120 $ 121 7.34%
After one year through five years........... 729 726 5.94 891 894 6.67
After five years through ten years.......... -- -- -- 2,453 2,503 7.43
After ten years............................. 19,190 19,342 7.06 32,067 32,453 7.34
----------- --------- ----------- ---------
Total..................................... $ 19,919 $ 20,068 7.01% $ 35,531 $ 35,971 7.33%
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposits, loan and security repayments and prepayments, proceeds
from sales of available-for-sale securities and cash flows generated from
operations are the primary sources of Tappan Zee's funds for use in lending,
investing and for other general purposes.
DEPOSITS. Tappan Zee offers a variety of deposit accounts with a range of
interest rates and terms. Tappan Zee's deposits consist of regular (passbook)
savings accounts, statement savings accounts, checking accounts, NOW accounts,
money market accounts and certificates of deposit. In recent years, Tappan Zee
has offered certificates of deposit with maturities of up to 30 months. At March
31, 1998, Tappan Zee's core deposits (which Tappan Zee considers to consist of
checking accounts, NOW accounts, money market accounts, regular savings accounts
and statement savings accounts) constituted 32.3% of total deposits, compared to
36.1% a year earlier. The flow of deposits is influenced significantly by
general economic conditions, changes in money market rates, prevailing interest
rates and competition. Tappan Zee's deposits are obtained predominantly from the
Village of Tarrytown and its neighboring communities in Westchester County, New
York. Tappan Zee relies primarily on customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing financial institutions
significantly affect Tappan Zee's ability to attract and retain
91
<PAGE>
deposits. Tappan Zee does not actively solicit certificate accounts in excess of
$100,000 or use brokers to obtain deposits.
The following table presents the deposit activity of Tappan Zee for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits........................................................................... $ 140,571 $ 151,962 $ 147,679
Withdrawals........................................................................ 138,612 147,624 143,571
--------- --------- ---------
Net cash inflow.................................................................... 1,959 4,338 4,108
Interest credited.................................................................. 4,707 4,081 3,987
--------- --------- ---------
Net increase in deposits......................................................... $ 6,666 $ 8,419 $ 8,095
--------- --------- ---------
--------- --------- ---------
</TABLE>
At March 31, 1998, Tappan Zee had $9.7 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
AMOUNT AVERAGE RATE
----------- ---------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Within three months....................................................... $ 1,561 5.49%
After three but within six months......................................... 2,441 5.57
After six but within 12 months............................................ 2,518 5.58
After 12 months........................................................... 3,153 5.89
----------- ---
Total..................................................................... $ 9,673 5.66%
----------- ---
----------- ---
</TABLE>
The following table sets forth the distribution of Tappan Zee's deposit
accounts and the related weighted average interest rates at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
-----------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- -------------------------------- ----------------------------
PERCENT WEIGHTED PERCENT WEIGHTED PERCENT WEIGHTED
OF TOTAL AVERAGE OF TOTAL AVERAGE OF TOTAL AVERAGE
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
-------- -------- -------- ------- ------------ -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Checking...................... $ 2,310 2.20% $2,771 2.82% $2,001 2.23%
NOW........................... 3,853 3.67 2.00% 3,756 3.82 2.00% 4,164 4.63 2.00%
Money market.................. 2,687 2.56 2.75 3,157 3.21 2.75 3,484 3.88 2.75
Regular savings............... 14,554 13.86 2.75 15,008 15.26 2.75 16,402 18.24 3.10
Statement savings............. 10,533 10.03 2.92 10,757 10.94 2.92 11,563 12.86 3.20
Certificate accounts:
Less than one year to
maturity.................... 53,403 50.86 5.75 49,026 49.86 5.72 40,448 44.99 5.68
One to three years to
maturity.................... 17,653 16.82 6.12 13,852 14.09 5.98 11,846 13.17 6.33
-------- -------- ------- ------ ------- --------
Total certificate
accounts.................. 71,056 67.68 5.84 62,878 63.95 5.78 52,294 58.16 5.83
-------- -------- ------- ------ ------- --------
Total..................... $104,993 100.00% 4.77% $98,327 100.00% 4.60% $89,908 100.00% 4.57%
-------- -------- ------- ------ ------- --------
-------- -------- ------- ------ ------- --------
</TABLE>
BORROWINGS. As part of its operating strategy, Tappan Zee may obtain
advances from the Federal Home Loan Bank ("FHLB") of New York as an alternative
to retail deposit funds. FHLB advances may also be used to acquire certain other
assets as may be deemed appropriate for investment purposes. These advances
would be collateralized primarily by certain of Tappan Zee's mortgage loans and
mortgage-backed securities and secondarily by Tappan Zee's investment in capital
stock of the FHLB. Such advances may be made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB will advance to member
institutions, including the Savings Bank, fluctuates from time to time in
accordance with the policies of the OTS and the FHLB. As of March 31, 1998, the
maximum amount of FHLB advances available to Tappan Zee was $18.9 million,
92
<PAGE>
based on the Savings Bank's current investment in FHLB stock; Tappan Zee's total
FHLB borrowing capacity (including advances), based on 25% of the Savings Bank's
assets, was $31.3 million. Tappan Zee did not borrow from the FHLB during fiscal
1998.
SUBSIDIARY ACTIVITIES
Tappan Zee has two wholly-owned subsidiaries: the Savings Bank and TZPFC, a
Delaware corporation established in March, 1998. TZPFC is intended to qualify as
a real estate investment trust for tax purposes. The Savings Bank and TZPFC do
not have any subsidiaries. At March 31, 1998 TZPFC had assets of $1.1 million.
PERSONNEL
As of March 31, 1998, Tappan Zee had 14 full-time employees and one
part-time employee. Tappan Zee has experienced a very low turnover rate among
its employees and, as of March 31, 1998, 11 of Tappan Zee's employees have been
with Tappan Zee for more than five years. The employees are not represented by a
collective bargaining unit and Tappan Zee considers its relationship with its
employees to be good.
REGULATION AND SUPERVISION OF
TAPPAN ZEE AND THE SAVINGS BANK
GENERAL
The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency, and the FDIC, as its deposit
insurer. The Savings Bank's deposit accounts are insured up to applicable limits
by the SAIF of the FDIC, and it is a member of FHLB of New York. The Savings
Bank must file reports with the OTS and the FDIC concerning its activities and
financial condition, and it must obtain regulatory approvals prior to entering
into certain transactions, such as mergers with, or acquisitions of, other
depository institutions. The OTS and the FDIC conduct periodic examinations to
assess the Savings Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which a savings association can engage and is intended primarily for the
protection of the insurance fund and depositors. Tappan Zee, as a savings
association holding company, is also required to file certain reports with, and
otherwise comply with, the rules and regulations of the Commission under the
federal securities laws.
The OTS and the FDIC have significant discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on Tappan Zee, the Savings Bank and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations, and it does not
purport to be a comprehensive description of all such statutes and regulations.
REGULATION OF FEDERAL SAVINGS ASSOCIATION
BUSINESS ACTIVITIES. The Savings Bank derives its lending and investment
powers from the HOLA and the regulations of the OTS thereunder. Under these laws
and regulations, the Savings Bank may invest in mortgage loans secured by
residential and commercial real estate, commercial and consumer loans, certain
types of debt securities, and certain other assets. The Savings Bank may also
establish service corporations that may engage in activities not otherwise
permissible for the Savings Bank, including certain real estate equity
investments and securities and insurance brokerage. These investment powers are
subject to various limitations, including (a) a prohibition against the
acquisition of any corporate debt security that is not
93
<PAGE>
rated in one of the four highest rating categories; (b) a limit of 400% of an
association's capital on the aggregate amount of loans secured by nonresidential
real estate property; (c) a limit of 20% of an association's assets on
commercial loans, with the amount of commercial loans in excess of 10% of assets
being limited to small business loans; (d) a limit of 35% of an association's
assets on the aggregate amount of consumer loans and acquisitions of certain
debt securities; (e) a limit of 5% of assets on non-conforming loans (loans in
excess of the specific limitations of HOLA); and (f) a limit of the greater of
5% of assets or an association's capital on certain construction loans made for
the purpose of financing what is or is expected to become residential property.
LOANS TO ONE BORROWER. Under HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. An additional amount may be
lent, equal to 10% of unimpaired capital and surplus, if such loan or extension
of credit is fully secured by readily-marketable collateral. Such collateral is
defined to include certain debt and equity securities and bullion, but generally
does not include real estate. At March 31, 1998, the Savings Bank's limit on
loans to one borrower was $2.6 million. At March 31, 1998, the Savings Bank's
largest aggregate amount of loans to one borrower was $787,000 and the second
largest borrower had an aggregate balance of $616,000.
QTL TEST. HOLA requires a savings association to meet a qualified thrift
lender ("QTL") test. Under the QTL test, a savings association is required to
maintain at least 65% of its "portfolio assets" in certain "qualified thrift
investments" in at least 9 months of the most recent 12-month period. "Portfolio
assets" means, in general, an association's total assets less the sum of (a)
specified liquid assets up to 20% of total assets, (b) goodwill and other
intangible assets, and (c) the value of property used to conduct the
association's business. "Qualified thrift investments" includes various types of
loans made for residential and housing purposes, investments related to such
purposes, including certain mortgage-backed and related securities, and loans
for personal, family, household and certain other purposes up to a limit of 20%
of an association's portfolio assets. Recent legislation broadened the scope of
"qualified thrift investments" to include 100% of an institution's credit card
loans, education loans, and small business loans. A savings association may also
satisfy the QTL test by qualifying as a "domestic building and loan association"
as defined in the Internal Revenue Code of 1986. At March 31, 1998, the Savings
Bank maintained 93.2% of its portfolio assets in qualified thrift investments.
The Savings Bank had also met the QTL test in each of the prior 12 months and,
therefore, was a qualified thrift lender.
A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions include prohibitions against (a) engaging in any new activity not
permissible for a national bank, (b) paying dividends not permissible under
national bank regulations, (c) obtaining new advances from any FHLB, and (d)
establishing any new branch office in a location not permissible for a national
bank in the association's home state. In addition, within one year of the date a
savings association ceases to meet the QTL test, any company controlling the
association would have to register under, and become subject to the requirements
of, the BHCA. If the savings association does not requalify under the QTL test
within the three-year period after it failed the QTL test, it would be required
to terminate any activity and to dispose of any investment not permissible for a
national bank and would have to repay as promptly as possible any outstanding
advances from an FHLB. A savings association that has failed the QTL test may
requalify under the QTL test and be free of such limitations, but it may do so
only once.
CAPITAL REQUIREMENTS. The OTS regulations require savings associations to
meet four minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations, a leverage ratio
requirement of 4% of Tier I (core) capital to such adjusted total assets, risk-
based capital ratio requirement of 4% of Tier I (core) capital to total
risk-weighted assets, and a risk-based capital ratio requirement of 8% of total
(core and supplementary) capital to total risk-weighted assets. The
94
<PAGE>
OTS and the federal banking regulators have proposed amendments to their minimum
capital regulations to provide that the minimum leverage capital ratio for a
depository institution that has been assigned the highest composite rating of 1
under the Uniform Financial Institutions Rating System will be 3% and that the
minimum leverage capital ratio for any other depository institution will be 4%,
unless a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the depository institution. In determining the
amount of risk-weighted assets for purposes of the risk-based capital
requirement, a savings association must compute its risk-based assets by
multiplying its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset.
Tangible capital is defined, generally, as common stockholder's equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related earnings, minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles other than certain mortgage
servicing rights and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
Supplementary capital currently includes cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, and the allowance for loan and lease losses.
The allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets, and the amount of
supplementary capital that may be included as total capital cannot exceed the
amount of core capital.
The OTS has adopted regulations to require a savings association to account
for interest rate risk when determining its compliance with the risk-based
capital requirement. A savings association with "above normal" interest rate
risk is required, by these regulations, to deduct a portion of its total capital
to account for any "above normal" interest rate risk. A savings association's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) resulting from a
hypothetical 2% increase or decrease in market rates of interest, divided by the
estimated economic value of the association's assets, as calculated in
accordance with guidelines set forth by the OTS. At the times when the 3-month
Treasury bond equivalent yield falls below 4%, an association may compute its
interest rate risk on the basis of a change equal to one-half of that Treasury
rate rather than on the basis of 2%. A savings association whose measured
interest rate risk exposure exceeds 2% would be considered to have "above
normal" risk. The interest rate risk component is an amount equal to one-half of
the difference between the association's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Any required deduction for
interest rate risk becomes effective on the last day of the third quarter
following the reporting date of the association's financial data on which the
interest rate risk was computed. The regulations do not require a savings
association with assets of less than $300 million and a risk-based capital ratio
in excess of 12% to comply with the standard reporting requirements for the
interest rate risk component, unless the OTS determines otherwise, and the
association may provide such selected information as the OTS determines.
Currently, the Savings Bank qualifies for this exemption from the filing
requirements. The regulations also authorize the Director of the OTS to waive or
defer an association's interest rate risk component on a case-by-case basis. The
OTS has indefinitely deferred implementation of the interest rate component in
the computation of an institution's risk-based capital requirement. The OTS
continues to monitor the interest rate risk of individual institutions and
retains the right to impose additional capital requirements on individual
institutions.
95
<PAGE>
See note 10 to the consolidated financial statements included elsewhere
herein for the Savings Bank's regulatory capital amounts and ratios as of March
31, 1998, compared to the OTS requirements at that date.
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations currently impose
limitations upon capital distributions by savings associations, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger, and other
distributions charged against capital. At least 30-days written notice must be
given to the OTS of a proposed capital distribution by a savings association,
and capital distributions in excess of specified earnings or by certain
institutions are subject to approval by the OTS. An association that has capital
in excess of all regulatory capital requirements before and after a proposed
capital distribution and that is not otherwise restricted in making capital
distributions, could, after prior notice but without the approval of the OTS,
make capital distributions during a calendar year equal to the greater of (a)
100% of its net earnings to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar year,
or (b) 75% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior OTS approval. In addition, the OTS can
prohibit a proposed capital distribution, otherwise permissible under the
regulation, if the OTS has determined that the association is in need of more
than normal supervision or if it determines that a proposed distribution by an
association would constitute an unsafe or unsound practice. Furthermore, under
the OTS prompt corrective action regulations, the Savings Bank would be
prohibited from making any capital distribution if, after the distribution, the
Savings Bank failed to meet its minimum capital requirements, as described
above. See "--Prompt Corrective Regulatory Action."
The OTS has proposed amendments of its capital distribution regulations to
reduce regulatory burdens on savings associations. If adopted as proposed,
certain savings associations will be permitted to pay capital distributions
within the amounts described above for Tier 1 institutions without notice to, or
the approval of, the OTS. However, a savings association subsidiary of a savings
and loan holding company, such as the Savings Bank, will continue to file a
notice unless the specific capital distribution requires an application.
LIQUIDITY. The Savings Bank is required to maintain an average daily
balance of liquid assets (cash, certain time deposits, certain bankers'
acceptances, specified United States Government, state and federal agency
obligations, shares of certain mutual funds and certain corporate debt
securities and commercial paper) equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement may be changed from time to time by the
OTS to any amount within the range of 4% to 10% depending upon economic
conditions and the savings flows of member institutions, and is currently 4%.
Monetary penalties may be imposed for failure to meet the liquidity requirement.
The Savings Bank's average liquidity ratio for the month ended March 31, 1998
was 58.5%, which exceeded the applicable requirement. The Savings Bank has never
been subject to monetary penalties for failure to meet its liquidity
requirement.
ASSESSMENTS. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
association's total assets, including consolidated subsidiaries, as reported in
the association's latest quarterly Thrift Financial Report. The assessments paid
by the Savings Bank for the fiscal years ended March 31, 1998, 1997 and 1996
totaled $38,000, $35,000 and $31,000, respectively.
BRANCHING. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States. The authority to establish such a branch is
available (a) in states that expressly authorize branches of savings
associations located in another state and (b) to an association that qualifies
as a "domestic building and loan association" under the Code, which imposes
qualification requirements similar to those for a "qualified thrift lender"
under HOLA. See "--QTL Test." The authority for a federal savings association to
establish an interstate branch
96
<PAGE>
network would facilitate a geographic diversification of the association's
activities. This authority under HOLA and the OTS regulations preempts any state
law purporting to regulate branching by federal savings associations.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings association,
to assess the association's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such association. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Savings Bank received a "Satisfactory" CRA
rating in its most recent examination. The OTS's CRA regulations establish an
assessment system that bases an association's rating on its actual performance
in meeting community needs. In particular, the assessment system focuses on
three tests: (a) a lending test, to evaluate the institution's record of making
loans in its service areas; (b) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
housing, and programs benefiting low or moderate income individuals and
businesses; and (c) a service test, to evaluate the institution's delivery of
services through its branches, ATMs, and other offices. Small savings
associations would be assessed pursuant to a streamlined approach focusing on a
lesser range of information and performance standards. The term "small savings
association" is defined as including associations with less than $250 million in
assets or an affiliate of a holding company with banking and thrift assets of
less than $1 billion, which would include the Savings Bank.
TRANSACTIONS WITH RELATED PARTIES. The Savings Bank's authority to engage
in transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an
affiliate of the Savings Bank is any company that controls the Savings Bank or
any other company that is controlled by a company that controls the Savings
Bank, excluding any Savings Bank subsidiary other than those that are insured
depository institutions. The OTS regulations prohibit a savings association (a)
from lending to any of its affiliates that is engaged in activities that are not
permissible for bank holding companies under Section 4(c) of the BHCA and (b)
from purchasing the securities of any affiliate other than a subsidiary. Section
23A limits the aggregate amount of transactions with any individual affiliate to
10% of the capital and surplus of the savings association and also limits the
aggregate amount of transactions with all affiliates to 20% of the savings
association's capital and surplus. Extensions of credit to affiliates are
required to be secured by collateral in an amount and of a type described in
Section 23A, and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the association as those prevailing at the time for comparable
transactions with nonaffiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to nonaffiliated companies.
The Savings Bank's authority to extend credit to its directors, executive
officers, and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the FRA and Regulation O of the Federal Reserve Board thereunder. Among other
things, these provisions require that extensions of credit to insiders (a) be
made on terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features and (b) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in
97
<PAGE>
part, on the amount of the association's capital. In addition, extensions of
credit in excess of certain limits must be approved by the association's board
of directors.
ENFORCEMENT. Under the Federal Deposit Insurance Act ("FDI Act"), the OTS
has primary enforcement responsibility over savings associations and has the
authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any shareholder, attorney,
appraiser and accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause more than a minimal
loss or other significant adverse effect on an insured savings association.
Civil penalties cover a wide range of violations and actions and range from
$5,000 for each day during which violations of law, regulations, orders, and
certain written agreements and conditions continue, up to $1,000,000 per day for
such violations if the person obtained a substantial pecuniary gain as a result
of such violation or knowingly or recklessly caused a substantial loss to the
institution. Criminal penalties for certain financial institution crimes include
fines of up to $1 million and imprisonment for up to 30 years. In addition,
regulators have substantial discretion to take enforcement action against an
institution that fails to comply with its regulatory requirements, particularly
with respect to its capital requirements. Possible enforcement actions range
from the types of action that may be taken under the "prompt corrective
actions," discussed below under "--Prompt Corrective Regulatory Action" to the
termination of deposit insurance. Under the FDI Act, the FDIC has the authority
to recommend to the Director of OTS that enforcement action be taken with
respect to a particular savings association. If action is not taken by the
Director of the OTS, the FDIC has authority to take such action under certain
circumstances.
STANDARDS FOR SAFETY AND SOUNDNESS. Pursuant to the FDI Act, as amended by
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the
Riegle Community Development and Regulatory Improvement Act of 1994 ("Community
Development Act"), the OTS and the other federal bank regulatory agencies have
adopted guidelines prescribing safety and soundness standards. The guidelines
establish general standards relating to internal controls and information
systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, asset quality, earnings, and compensation,
fees and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director or principal shareholder. In addition,
the OTS regulations authorize, but do not require, the OTS to order an
institution that has been given notice by the OTS that it is not satisfying any
of such safety and soundness standards to submit a compliance plan. If, after
being so notified, an institution fails to submit an acceptable compliance plan
or fails in any material respect to implement an accepted compliance plan, the
OTS must issue an order directing action to correct the deficiency and may issue
an order directing other actions of the types to which an undercapitalized
association is subject under the "prompt corrective action" provisions of
FDICIA. If an institution fails to comply with such an order, the OTS may seek
to enforce such order in judicial proceedings and to impose civil money
penalties.
PROMPT CORRECTIVE REGULATORY ACTION. FDICIA established a system of prompt
corrective action to resolve the problems of undercapitalized depository
institutions. Under this system, the federal banking regulators are required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends on the institution's degree of capitalization. For
this purpose, a savings association would be placed in one of five categories
based on the association's capital. Generally, a savings association is treated
as "well capitalized" if its ratio of total capital to risk-weighted assets is
at least 10.0%, its ratio of core capital to risk-weighted assets is at least
6.0%, its ratio of core capital to total assets is at least 5.0%, and it is not
subject to any order or directive by the OTS to meet a specific capital level. A
savings association will be treated as "adequately capitalized" if its ratio of
total capital to risk-weighted assets is at least 8.0%, its ratio of core
capital to risk-weighted assets is at least 4.0%, and its ratio of core capital
to
98
<PAGE>
total assets is at least 4.0% (3.0% if the association receives the highest
rating under the Uniform Financial Institutions Rating System). A savings
association that has a total risk-based capital of less than 8.0% or a leverage
ratio or a Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if
the association receives the highest rating under the Uniform Financial
Institutions Rating System) is considered to be "undercapitalized." A savings
association that has a total risk-based capital of less than 6.0% or a Tier 1
risk-based capital ratio or a leverage ratio of less than 3.0% is considered to
be "significantly undercapitalized." A savings association that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The elements of an association's capital for purposes of the
prompt corrective action regulations are defined generally as they are under the
regulations for minimum capital requirements. See "--Capital Requirements."
Generally, a capital restoration plan must be filed with the OTS within 45
days of the date an association receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." The OTS may
not accept a capital restoration 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 the 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. In
the event of a savings and loan holding company's bankruptcy, any commitment by
the savings and loan company to a federal bank regulatory agency to maintain the
capital of a subsidiary depository institution will be assumed by the bankruptcy
trustee and entitled to a priority of payment. If a depository institution fails
to submit an acceptable plan, it is treated as if it is "significantly
undercapitalized."
An undercapitalized association also becomes immediately subject to various
mandatory restrictions, including restrictions on growth of assets and other
forms of expansion. The OTS can also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors. "Significantly
undercapitalized" institutions are subject to more severe restrictions.
Generally, subject to a narrow exception, FDICIA requires the OTS to appoint a
receiver or conservator for a savings association that is critically
undercapitalized. As of March 31, 1998, the Savings Bank was considered "well
capitalized" by the OTS.
Where appropriate, the OTS can impose corrective action by a savings and
loan holding company under the "prompt corrective action" provisions of FDICIA.
INSURANCE OF DEPOSIT ACCOUNTS. Pursuant to FDICIA, the FDIC established a
risk-based assessment system for determining the deposit insurance assessments
to be paid by insured depository institutions. Under the assessment system, the
FDIC assigns an institution to one of three capital categories based on the
institution's financial information as of the reporting period ending seven
months before the assessment period. The three capital categories consist of (a)
well capitalized, (b) adequately capitalized, or (c) undercapitalized. The FDIC
also assigns an institution to one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. Under the regulation,
there are nine assessment risk classifications (i.e., combinations of capital
groups and supervisory subgroups) to which different assessment rates are
applied. Assessment rates currently range from 0.0% of deposits for an
institution in the highest category (i.e., well-capitalized and financially
sound, with no more than a few minor weaknesses) to 0.27% of deposits for an
institution in the lowest category (i.e., undercapitalized and substantial
supervisory concern). The Savings Bank's assessment rate for deposit insurance
was 0.0% for 1998 and 1997. The FDIC is authorized to raise
99
<PAGE>
the assessment rates as necessary to maintain the required reserve ratio of
1.25%; both the BIF and SAIF currently satisfy the reserve ratio requirement.
The Deposit Insurance Funds Act of 1996 (the "Funds Act") provides that the
FDIC cannot assess regular insurance assessments for an insurance fund unless
required to maintain or to achieve the designated reserve ratio of 1.25%, except
on those of its member institutions that are not classified as "well
capitalized" or that have been found to have "moderately severe" or
"unsatisfactory" financial, operational or compliance weaknesses. The Savings
Bank has not been so classified by the FDIC or the OTS.
In addition, the Funds Act expanded the assessment base for the payments on
the bonds ("FICO bonds") issued in the late 1980s by the Financing Corporation
to recapitalize the now defunct Federal Savings and Loan Insurance Corporation.
Beginning January 1, 1997, the deposits of both BIF- and SAIF-insured
institutions are assessed for the payments on the FICO bonds. Until December 31,
1999, or such earlier date on which the last savings association ceases to
exist, the rate of assessment for BIF-assessable deposits shall be one-fifth of
the rate imposed on SAIF-assessable deposits. The annual rate of assessment on
SAIF-assessable deposits for the payments on the FICO bonds for the semi-annual
period beginning January 1, 1997 was 0.0648%, for the semi-annual period
beginning on July 1, 1997, the annual rate was 0.063%, and currently the rate of
assessment is 0.0622%.
The Funds Act also provides for the merger of the BIF and SAIF on January 1,
1999, with such merger being conditioned upon the prior elimination of the
thrift charter. The Funds Act required the Secretary of the Treasury to conduct
a study of relevant factors with respect to the development of a common charter
for all insured depository institutions and the abolition of separate charters
for banks and thrifts and to report the Secretary's conclusions and the findings
to the Congress. The Secretary of the Treasury has recommended that the separate
charter for thrifts be eliminated only if other legislation is adopted that
permits bank holding companies to engage in certain non-financial activities.
Absent legislation permitting such non-financial activity, the Secretary of the
Treasury recommended retention of the thrift charter. The Secretary of the
Treasury also recommended the merger of the BIF and the SAIF irrespective of
whether the thrift charter is eliminated. Other proposed legislation has been
introduced in Congress to eliminate the federal thrift charter, but the future
of such legislation is uncertain.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Savings Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM. The Savings Bank is a member of the FHLB of
New York, which is one of the regional FHLBs composing the FHLB System. Each
FHLB provides a central credit facility primarily for its member institutions.
The Savings Bank, as a member of the FHLB of New York, is required to acquire
and hold shares of capital stock in the FHLB of New York in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each year
or 1/20 of its advances (borrowings) from the FHLB of New York. The Savings Bank
was in compliance with this requirement with an investment in FHLB of New York
stock at March 31, 1998, of $943,000. Any advances from a FHLB must be secured
by specified types of collateral, and all long-term advances may be obtained
only for the purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. For the fiscal years ended March
31, 1998, 1997 and 1996, dividends from the FHLB of New York to the Savings Bank
amounted to $49,000, $37,000 and $37,000,
100
<PAGE>
respectively. If dividends were reduced, or interest on future FHLB advances
increased, the Savings Bank's net interest income would likely also be reduced.
FEDERAL RESERVE SYSTEM. The Savings Bank is subject to provisions of the
FRA and the FRB's regulations pursuant to which depository institutions may be
required to maintain non-interest-earning reserves against their deposit
accounts and certain other liabilities. Currently, reserves must be maintained
against transaction accounts (primarily NOW and regular checking accounts). The
FRB regulations generally require that reserves be maintained in the amount of
3% of the aggregate of transaction accounts up to $47.8 million. The amount of
aggregate transaction accounts in excess of $47.8 million are currently subject
to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 12%.
The FRB regulations currently exempt $4.7 million of otherwise reservable
balances from the reserve requirements, which exemption is adjusted by the FRB
at the end of each year. The Savings Bank is in compliance with the foregoing
reserve requirements. Because required reserves must be maintained in the form
of either vault cash, a non-interest-bearing account at a FRB, or a pass-through
account as defined by the FRB, the effect of this reserve requirement is to
reduce the Savings Bank's interest-earning assets. The balances maintained to
meet the reserve requirements imposed by the FRB may be used to satisfy
liquidity requirements imposed by the OTS. FHLB System members are also
authorized to borrow from the Federal Reserve "discount window," but FRB
regulations require such institutions to exhaust all FHLB sources before
borrowing from a FRB.
HOLDING COMPANY REGULATION
GENERAL. Tappan Zee is a unitary bank holding company within the meaning of
the HOLA. As such, Tappan Zee is required to register with the OTS and is
subject to OTS examination, regulation and reporting requirements. The OTS has
enforcement authority over Tappan Zee. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the Savings Bank.
Tappan Zee is required to obtain the prior approval of the OTS to acquire
all, or substantially all, of the assets of another savings institution or
holding company thereof. Prior OTS approval is required for Tappan Zee to
acquire direct or indirect ownership or control of any voting securities of a
non-subsidiary savings institution, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA, if, after giving effect to such acquisition, Tappan Zee would, directly or
indirectly, own or control more than 5% of any class of voting shares of such
institution or company.
INTERSTATE BANKING. The OTS is prohibited from approving any acquisition
that would result in a multiple savings and loan holding company controlling
savings institutions in more than one state, subject to two exceptions: (i) the
approval of interstate supervisory acquisitions by savings and loan holding
companies, and (ii) the acquisition of a savings institution in another state if
the laws of the state of the target savings institution specifically permit such
acquisitions. Under New York law, reciprocal interstate acquisitions are
authorized for savings and loan holding companies and savings institutions.
Certain states do not authorize interstate acquisitions under any circumstances;
however, federal law authorizing acquisitions in supervisory cases preempts such
state law.
ACQUISITION OF THE HOLDING COMPANY. Federal law generally provides that no
person (including a company), or group acting in concert, directly or
indirectly, may acquire 10% or more of a class of the outstanding voting
securities of a savings association holding company without giving at least 60
days written notice to the OTS and providing the OTS an opportunity to
disapprove the proposed acquisition. Such acquisitions of control may be
disapproved if it is determined, among other things, that (i) the acquisition
would substantially lessen competition; (ii) the financial condition of the
acquiring person might jeopardize the financial stability of the savings
institution or prejudice the interests of its depositors; or (iii) the
competency, experience or integrity of the acquiring person or the proposed
management
101
<PAGE>
personnel indicates that it would not be in the interest of the depositors or
the public to permit the acquisition of control by such person.
In addition, federal regulations governing conversions of mutual savings
institutions to the stock form of organization prohibit the direct or indirect
acquisition without OTS approval of more than 10% of any equity security of a
savings institution within three years of the savings institution's conversion
to stock form. This limitation applies to acquisitions of the stock of Tappan
Zee. Such acquisition may be disapproved if it is found, among other things,
that the proposed acquisition (i) would frustrate the purposes of the provisions
of the regulations regarding conversions, (ii) would be manipulative or
deceptive, (iii) would subvert the fairness of the conversion, (iv) would be
likely to result in injury to the savings institution, (v) would not be
consistent with economical home financing, (vi) would otherwise violate law or
regulation, or (vii) would not contribute to the prudent deployment of the
savings institution's conversion proceeds.
FEDERAL SECURITIES LAWS. Tappan Zee's common stock is registered with the
Commission under Section 12(g) of the Exchange Act. Tappan Zee is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the Exchange Act.
FEDERAL TAXATION
GENERAL. Tappan Zee and the Savings Bank report their income for tax return
purposes on a calendar-year basis using the accrual method of accounting and are
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Savings Bank's tax reserves for bad
debts discussed below. Tappan Zee and the Savings Bank currently file separate
federal income tax returns on a calendar-year basis. The following discussion of
tax matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to Tappan Zee or the
Savings Bank. The Savings Bank was last audited by the IRS for its taxable year
ended December 31, 1994.
RECENT TAX LEGISLATION REGARDING TAX BAD DEBT RESERVES. Prior to the
enactment, on August 20, 1996, of the Small Business Job Protection Act of 1996
(the "Small Business Act"), for federal income tax purposes, thrift institutions
such as the Savings Bank, which met certain definitional tests primarily
relating to their assets and the nature of their business, were permitted to
establish tax reserves for bad debts and to make annual additions thereto, which
additions could, within specified limitations, be deducted in arriving at their
taxable income. The Savings Bank's deduction with respect to "qualifying loans,
" which are generally loans secured by certain interests in real property, could
be computed using an amount based on a six-year moving average of the Savings
Bank's actual loss experience (the "Experience Method"), or a percentage equal
to 8.0% of the Savings Bank's taxable income (the "PTI Method"), computed
without regard to this deduction and with additional modifications and reduced
by the amount of any permitted addition to the non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and the Savings
Bank, as a "small bank" (one with assets having an adjusted basis of $500
million or less) is required to use the Experience Method of computing additions
to its bad debt reserve for taxable years beginning with the Savings Bank's
taxable year beginning January 1, 1996. In addition, the Savings Bank is
required to recapture (i.e., take into taxable income) over a six-year period,
beginning with the Savings Bank's taxable year beginning January 1, 1996, the
excess of the balance of its bad debt reserves (other than supplemental
reserves) as of December 31, 1995 over the greater of (a) the balance of its
"base year reserve," i.e., its reserves as of December 31, 1987 or (b) an amount
that would have been the balance of such reserve as of December 31, 1995 had the
Savings Bank always computed the additions to its reserves using the Experience
Method. However, under the Small Business Act such recapture requirements are
suspended for each of the two successive taxable years beginning January 1, 1996
in which the Savings Bank originates a minimum
102
<PAGE>
amount of certain residential loans during such years that is not less than the
average of the principal amounts of such loans made by the Savings Bank during
its six taxable years preceding January 1, 1996.
DISTRIBUTIONS. To the extent that the Savings Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Savings Bank's base year reserve to the extent thereof
and then from its supplemental reserve for losses on loans, and an amount based
on the amount distributed will be included in the Savings Bank's taxable income.
Nondividend distributions include distributions in excess of the Savings Bank's
current and accumulated earnings and profits, distributions in redemption of
stock and distributions in partial or complete liquidation. However, dividends
paid out of the Savings Bank's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not constitute nondividend
distributions and, therefore, will not be included in the Savings Bank's income.
The amount of additional taxable income created from a nondividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the nondividend distribution would be includable in gross income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax ("AMT") on
alternative minimum taxable income ("AMTI") at a rate of 20%. AMTI is increased
by certain preference items and is also adjusted by determining the tax
treatment of certain items in a manner that negates the deferral of income
resulting from the regular tax treatment of those items. Only 90% of AMTI can be
offset by net operating loss carryovers, of which Tappan Zee currently has none.
AMTI is also adjusted by determining the tax treatment of certain items in a
manner that negates the deferral of income resulting from the regular tax
treatment of those items. Thus, Tappan Zee's AMTI is increased by an amount
equal to 75% of the amount by which Tappan Zee's adjusted current earnings
exceeds its AMTI (determined without regard to this adjustment and prior to
reduction for net operating losses). In addition, under pending legislative
proposals for taxable years beginning after December 31, 1997 and before January
1, 2009, an environmental tax of 0.12% of the excess of AMTI (with certain
modifications) over $2.0 million would be imposed on corporations, including the
Savings Bank, whether or not an AMT is paid.
DIVIDENDS RECEIVED DEDUCTION AND OTHER MATTERS. In any taxable period for
which Tappan Zee owns more than 80% of the Savings Bank's voting stock, Tappan
Zee may exclude from its income 100% of dividends received from the Savings Bank
as a member of the same affiliated group of corporations. The corporate
dividends received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which Tappan Zee and the Savings Bank will
not file a consolidated tax return, except that if Tappan Zee and the Savings
Bank own more than 20% of the stock of a corporation distributing a dividend,
then 80% of any dividends received may be deducted.
STATE TAXATION
NEW YORK. Tappan Zee and the Savings Bank are subject to New York State
franchise tax on net income or one of several alternative bases, whichever
results in the highest tax. "Net income" means federal taxable income with
adjustments. The New York State tax rate for the 1997 and 1996 calendar years
was 10.53% and 10.755%, respectively (including the Metropolitan Commuter
Transportation District Surcharge). In general, Tappan Zee will not be required
to pay New York state tax on dividends and interest received from the Savings
Bank or on gains realized on the sale of Savings Bank stock.
In July 1996, New York State enacted legislation to preserve the use of the
percentage of taxable income bad debt deduction for thrift institutions such as
the Savings Bank. In general, the legislation provides for a deduction equal to
32% of the Savings Bank's New York State taxable income, which is comparable to
the deductions permitted under the prior tax law. The legislation also provided
for a floating base year, which will allow the Savings Bank to switch from the
percentage of taxable income
103
<PAGE>
method to the experience method without a recapture of any reserve. Previously,
the Savings Bank had established a deferred New York State tax liability for the
excess of its New York State tax bad debt reserve over the amount of its
base-year reserve. Since the new legislation effectively eliminated the excess
state reserve for which a deferred tax liability had been recognized, Tappan Zee
reduced its deferred tax liability by $166,000, representing a state tax benefit
of $252,000 less related federal taxes of $86,000.
Generally, New York State tax law has requirements similar to federal
requirements regarding the recapture of base-year tax bad debt reserves. One
notable exception is that, after the recent legislation, New York continues to
require that the Savings Bank maintain its thrift institution charter and hold
at least 60% of its assets in specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations). The Savings Bank expects to continue to meet these
requirements and does not anticipate engaging in any transactions that would
require recaptures of its base-year reserve. Accordingly, it does not maintain a
deferred tax liability with respect to such reserve. The Savings Bank's
unrecognized deferred state taxes (net of related federal taxes) were
approximately $0.6 million at March 31, 1998.
DELAWARE STATE TAXATION. As a Delaware holding company not earning income
in Delaware, Tappan Zee is exempt from Delaware Corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
DESCRIPTION OF USB COMMON STOCK
The following is a summary of the material attributes of the USB Common
Stock.
GENERAL
The Amended Restated Certificate of Incorporation of USB (as amended, the
"USB Certificate") authorizes 30,100,000 shares of capital stock, consisting of
30,000,000 shares of Common Stock having a par value of $0.01 per share and
100,000 shares of preferred stock without par value ("USB Preferred Stock"). As
of May 31, 1998, 12,503,640 shares of USB Common Stock were outstanding and no
shares of USB Preferred Stock were outstanding. The USB Common Stock is quoted
on the AMEX. The USB Common Stock is not a savings account, deposit or other
obligation of any bank or non-bank subsidiary and is not insured by the FDIC or
any other government agency.
VOTING RIGHTS
Each share of USB Common Stock entitles the holder thereof to one vote for
the election of directors and for all other matters submitted to the
shareholders of USB for their consideration. USB shareholders are not entitled
to exercise cumulative voting in the election of directors.
Section 3.3 of the Bylaws of USB (the "USB Bylaws") provides that all
elections of directors will be determined by a plurality of the votes cast at a
meeting of shareholders by the holders of shares entitled to vote in the
election. Any other matters submitted to the shareholders of USB for their vote
will be decided by a majority of the votes cast at a meeting of shareholders by
the holders of shares present in person or represented by proxy and entitled to
vote thereon, except as otherwise required by law, the USB Certificate or the
USB Bylaws.
Article 8 of the USB Certificate provides that for the following
transactions, at least eighty percent (80%) of the common shares entitled to
vote must approve the transaction where less than sixty-six and two-thirds
percent (66 2/3%) of the entire USB Board of Directors approves the transaction.
Such transactions include:
(i) any merger or consolidation of USB or any subsidiary of USB with (a)
any Substantial Shareholder or (b) any other corporation which, after such
merger or consolidation, would be a Substantial Shareholder regardless of
which entity survives;
104
<PAGE>
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Substantial Shareholder of all or substantially all of the assets of USB or
any subsidiary of USB, or both;
(iii) the adoption of any plan or proposal for the liquidation of USB
proposed by or on behalf of a Substantial Shareholder; or
(iv) any transaction involving USB or any of its subsidiaries, including
the issuance or transfer of any securities of, any reclassification of
securities of, or any recapitalization of, USB or any of its subsidiaries,
or any merger or consolidation of USB with any of its subsidiaries (whether
or not involving a Substantial Shareholder), if the transaction would have
the effect, directly or indirectly, of increasing the proportionate share of
the outstanding shares of any class of equity or convertible securities of
USB or any subsidiary, of which a Substantial Shareholder is the Beneficial
Owner.
A "Substantial Shareholder" is generally defined in the USB Certificate as
any individual, corporation, partnership or other person which together with its
Affiliates and Associates (as defined in Rule 12b-2 under the Exchange Act) is
the Beneficial Owner (as defined in Rule 13d-3 of the Exchange Act) in the
aggregate of more than five percent (5%) of the outstanding shares of USB Common
Stock entitled to vote generally in an election of directors; and any Affiliate
or Associate of any such individual, corporation, partnership or other person or
entity.
The USB Certificate requires that the affirmative vote of the holders of at
least eighty percent (80%) of the shares of USB then entitled to vote in an
election of directors shall be required to amend or repeal or to adopt any
provision inconsistent with Article 5 (Board of Directors) and Article 8
(Approval of Certain Business Combinations) of the USB Certificate. In addition,
Article 9 (Limitation of Director's Personal Liability) of the USB Certificate
provides that any repeal or modification thereof by the shareholders of USB
shall be prospective only, and shall not adversely affect any limitation on the
personal liability of a USB director existing at the time of such repeal or
modifications.
Article 5 of the USB Certificate provides that the number of directors may
be changed by an affirmative vote of at least seventy-five percent (75%) of the
shares entitled to vote.
NOMINATION PROCEDURE; NUMBER OF DIRECTORS; CLASSIFIED BOARD OF DIRECTORS;
REMOVAL OF DIRECTORS
Pursuant to the USB Bylaws, the number of USB directors must be fixed at one
or more. The number of directors may be fixed or changed at a meeting of the
shareholders called for the purpose of electing directors at which a quorum is
present, upon the approval of at least 75% of the voting power of USB entitled
to vote thereon. The directors may change the number of directors by the
affirmative vote of a majority of the authorized number of directors and may
fill any director's office that is created by an increase in the number of
directors; however, the directors may not reduce the number of directors to less
than one.
The USB Board of Directors is divided into three classes, each as nearly
equal in number as possible; and the election of each class of directors
constitutes a separate election. Directors serve for terms of three years and
until their respective successors are duly elected and qualified, or until their
earlier resignation, removal from office or death. As a result of the
classification of the USB Board, a minimum of two annual meetings of
shareholders will be necessary for a majority of the members of the USB Board to
stand for election.
A director or directors of USB may be removed from office, pursuant to
Article 5, Section 3 of the USB Certificate, without cause, only by the
affirmative vote of the holders of at least 80% of the voting power of USB
entitling them to elect directors in place of those to be removed. A director or
directors of USB may be removed from office, with cause, by the affirmative vote
of the holders of a majority of the shares then entitled to vote in an election
of directors.
105
<PAGE>
PRE-EMPTIVE RIGHTS
Holders of USB Common Stock do not have pre-emptive rights.
DIVIDEND RIGHTS
Holders of outstanding USB Common Stock are entitled to receive dividends
when and if declared by the Board of Directors of USB from funds legally
available therefor. A Delaware corporation, such as USB, may pay dividends out
of surplus, however created.
USB and the Bank's ability to pay cash dividends in the future are
restricted by various regulatory requirements. USB's ability to pay cash
dividends to its shareholders is primarily dependent upon the receipt of
dividends from the Bank. The Bank's dividends to USB may not exceed the sum of
the Bank's net income for that year and its undistributed net income for the
preceding two years, less any required transfers to additional paid-in capital.
At December 31, 1997, the Bank could pay dividends to USB of $20.2 million
without having to obtain prior regulatory approval.
USB may not pay dividends on its common stock or preferred stock if it is in
default with respect to the junior subordinated debt or trust capital securities
issued in February 1997, or if USB elects to defer payment for up to five years
as permitted under the terms of such junior subordinated debt and trust capital
securities. In addition, USB could not pay dividends on its common stock if it
was in default of the terms of its preferred stock, all of which was redeemed in
February 1997.
In December 1993, USB implemented a Dividend Reinvestment Plan (the "DRIP").
The DRIP allows stockholders to invest cash dividends in shares of USB Common
Stock at fair value and, in the third quarter of 1994, a stock purchase feature
was added to allow stockholders to purchase additional common stock at fair
value of up to $2,500 per quarter. The DRIP was suspended for dividends paid
after January 1, 1996. As of December 31, 1997, 200,000 shares of common stock
had been authorized for issuance in connection with the DRIP, of which 98,020
shares have been issued.
LIQUIDATION RIGHTS
In the event of liquidation, after payment in full of all amounts required
to be paid to creditors or provision for such payment, each holder of USB Common
Stock will be entitled to share ratably, according to the number of shares of
USB Common Stock held by such shareholder, in all remaining assets legally
available for distribution to its shareholders.
ANTITAKEOVER PROVISIONS IN USB CERTIFICATE, USB BYLAWS AND STATE LAW
Article 8 of the USB Certificate provides that, for certain transactions, at
least eighty percent (80%) of the common shares entitled to vote must approve
the transaction where less than sixty-six and two-thirds (66 2/3%) of the entire
USB Board of Directors approves the transaction. See "-Voting Rights" for a
description of the types of transactions covered by Article 8.
The USB Board of Directors is divided into three classes, each as nearly
equal in number as possible; and the election of each class of directors
constitutes a separate election. Directors serve for terms of three years and
until their respective successors are duly elected and qualified, or until their
earlier resignation, removal from office or death. As a result of the
classification of the USB Board, a minimum of two annual meetings of
shareholders will be necessary for a majority of the members of the USB Board to
stand for election.
The USB Certificate also requires the affirmative vote of at least eighty
percent (80%) of the shares of USB then entitled to vote in an election of
directors to amend or repeal or to adopt any provision inconsistent with Article
5 (Board of Directors) and Article 8 (Approval of Certain Business Combinations)
of the USB Certificate.
106
<PAGE>
The Board of Directors of USB has the authority to provide for the issuance
of USB Preferred Stock in one or more series, to establish the number of shares
to be included in such series, and to fix the designation, powers, preferences
and rights, and the qualifications, limitations or restrictions thereof, of the
shares of each such series, without any further vote or action by shareholders
of USB. The USB Preferred Stock may be issued in distinctly designated series,
may be converted into USB Common Stock and may rank ahead of the USB Common
Stock as to dividend rights, liquidation preferences or both, and may have full
or limited voting rights. Accordingly, the issuance of USB Preferred Stock could
adversely affect the voting and other rights of holders of USB Common Stock.
In addition to the provisions contained in the USB Certificate, the DGCL
includes certain provisions applicable to Delaware corporations, such as USB,
which may be deemed to have an antitakeover effect. Such provisions include
requirements relating to certain business combinations.
Section 203 of the DGCL ("Section 203") imposes certain restrictions on
business combinations between USB and large shareholders. Specifically, Section
203 prohibits a "business combination" (as defined in Section 203, generally
includes mergers, sales and leases of assets, issuances of securities and
similar transactions) between USB or a subsidiary and an "interested
shareholder" (as defined pursuant Section 203, generally the beneficial owner of
15% or more of the USB Common Stock) within three years after the person or
entity becomes an interested shareholder, unless (i) prior to the person or
entity becoming an interested shareholder, the business combination or the
transaction pursuant to which such person or entity became an interested
shareholder shall have been approved by USB's Board of Directors, (ii) upon
consummation of the transaction in which the interested shareholder became such,
the interested shareholder holds at least 85% of the USB Common Stock (excluding
shares held by persons who are both officers and directors and shares held by
certain employee benefit plans), or (iii) the business combination is approved
by USB's Board of Directors and by the holders of at least two-thirds of the
outstanding USB Common Stock, excluding shares owned by the interested
shareholders.
One of the effects of Section 203 may be to prevent highly leveraged
takeovers, which depend upon getting access to the acquired corporation's assets
to support or repay acquisition indebtedness and certain coercive acquisition
tactics. By requiring approval of the holders of two-thirds of the shares held
by disinterested shareholders for business combinations involving an interested
shareholder, Section 203 may prevent any interested shareholder from taking
advantage of its position as a substantial, if not controlling, shareholder and
engaging in transactions with USB that may not be fair to USB's other
shareholders or that may otherwise not be in the best interests of USB, its
shareholders and other constituencies.
For similar reasons, however, these provisions may make more difficult or
discourage an acquisition of USB, or the acquisition of control of USB by a
principal shareholder, and thus the removal of incumbent management. In
addition, to the extent that Section 203 discourages takeovers that would result
in the change of USB's management, such a change may be less likely to occur.
COMPARISON OF RIGHTS OF HOLDERS OF USB COMMON STOCK AND
HOLDERS OF TAPPAN ZEE COMMON STOCK
GENERAL
The rights of holders of USB Common Stock are governed by the DGCL, the USB
Certificate and USB Bylaws, while the rights of holders of Tappan Zee Common
Stock are governed by the DGCL, Tappan Zee's Certificate of Incorporation (the
"Tappan Zee Certificate") and Bylaws (the "Tappan Zee Bylaws"). Upon
consummation of the Merger, shareholders of Tappan Zee will become shareholders
of USB and their rights as shareholders of USB will be governed by the USB
Certificate, the USB Bylaws and the DGCL.
THE FOLLOWING SUMMARY IS NOT INTENDED TO BE A COMPLETE STATEMENT OF THE
DIFFERENCES AFFECTING THE RIGHTS OF TAPPAN ZEE'S SHAREHOLDERS, BUT RATHER
SUMMARIZES THE MORE SIGNIFICANT DIFFERENCES AFFECTING THE RIGHTS OF
107
<PAGE>
SUCH SHAREHOLDERS AND CERTAIN IMPORTANT SIMILARITIES. THE SUMMARY IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE USB CERTIFICATE AND USB BYLAWS, THE TAPPAN
ZEE CERTIFICATE AND TAPPAN ZEE BYLAWS AND APPLICABLE LAWS AND REGULATIONS.
AUTHORIZED CAPITAL STOCK
USB's authorized capital stock consists of 30,000,000 shares of USB Common
Stock, of which 12,503,640 shares were outstanding on May 31, 1998 and 100,000
shares of USB Preferred Stock of which no shares were outstanding. The USB
Preferred Stock is issuable in series, each series having such rights and
preferences as USB's Board of Directors may fix and determine. The USB Common
Stock is quoted on the AMEX.
Tappan Zee's authorized capital stock consists of 5,000,000 shares of Tappan
Zee Common Stock, of which 1,478,062 shares were outstanding on May 31, 1998,
and 1,000,000 shares of preferred stock, no par value per share ("Tappan Zee
Preferred Stock"), of which no shares were issued and outstanding. The Tappan
Zee Preferred Stock is issuable in series, each series having such rights and
preferences as Tappan Zee's Board of Directors may fix and determine. The shares
of Tappan Zee Common Stock are traded on the Nasdaq Stock Market.
BOARD OF DIRECTORS
GENERAL. The USB Certificate and USB Bylaws provide for a classified Board
of Directors consisting of one or more directors, divided into three classes and
elected for three-year terms. The number of directors currently is set at seven,
but may be changed by the USB Board of Directors by the affirmative vote of a
majority of the authorized number of directors or by the affirmative vote of at
least seventy-five percent (75%) of the voting power of USB entitled to vote on
such change.
The Tappan Zee Certificate provides for a classified Board of Directors
which currently consists of seven directors, divided into three classes as
nearly equal in number as possible for three year terms, with one class to be
elected annually. The number of directors may be determined by resolution of the
Board of Directors, provided such number of directors may not be less than five
(5) nor greater than fifteen (15). In addition, a minimum of three (3) directors
shall be persons other than officers or employees of Tappan Zee or its
subsidiaries and shall not have a relationship which, in the opinion of the
Board (exclusive of such persons), would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director. No more
than two directors shall be officers or employees of Tappan Zee or its
subsidiaries.
NOMINATIONS. Article II, Section 11 ("Section 11") of the Tappan Zee Bylaws
govern nominations for election to the Tappan Zee Board of Directors. The
Nominating Committee of the Tappan Zee Board shall select nominees for election
as directors. Except in the case of a nominee substituted as a result of the
death, incapacity, withdrawal or other inability to serve of a nominee, the
Nominating Committee shall deliver written nominations to the Secretary of
Tappan Zee at least sixty (60) days prior to the date of the annual meeting.
Provided the Nominating Committee makes such nominations, no nominations for
directors except those made by the Nominating Committee shall be voted upon at
the annual meeting of shareholders unless other nominations by shareholders are
made in accordance with the provisions of Section 11. Section 11 provides that
nominations of individuals for election to the Board at an annual meeting of
shareholders may be made by any shareholder of record of Tappan Zee entitled to
vote for the election of directors at such meeting who provides timely notice in
writing to the Secretary of Tappan Zee as set forth in Section 11. To be timely,
a shareholder's notice must be delivered to or received by the Secretary of
Tappan Zee not later than the following dates: (i) with respect to an election
of directors to be held at an annual meeting of shareholders, sixty (60) days in
advance of such meeting if such meeting is to be held on a day which is within
thirty (30) days preceding the anniversary of the previous year's annual
meeting, or ninety (90) days in advance of such meeting if such meeting is to be
held on or after the anniversary of the previous year's annual meeting; and (ii)
with respect to an election to be held at an
108
<PAGE>
annual meeting of shareholders held at a time other than within the time periods
set forth in the immediately preceding clause (i), or at a special meeting of
shareholders for the election of directors, the close of business on the tenth
(10th) day following the date on which notice of such meeting is first given to
shareholders. Such shareholder's notice shall set forth certain information,
including as to each person whom the shareholder proposes to nominate for
election or re-election as a director, information regarding each nominee
proposed by such shareholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Commission (whether or not
Tappan Zee is then subject to such rules) and as to the shareholder giving the
notice. At the request of the Tappan Zee Board, any person nominated by the
Board for election as a director shall furnish to the Secretary that information
required to be set forth in a shareholder's notice of nomination which pertains
to the nominee together with the required written consent. No person shall be
elected as a director of Tappan Zee unless nominated in accordance with the
procedures set forth in Section 11.
The chairman of the meeting at which an election of directors of Tappan Zee
is to be held, if the facts warrant, shall determine and declare to the meeting
that a nomination was not properly brought before the meeting in accordance with
the provisions of Section 11 and, if the chairman should so determine, the
chairman shall declare to the meeting that such nomination was not properly
brought before the meeting and shall not be considered.
The USB Certificate and USB Bylaws do not indicate the manner for
nominations of directors.
MANDATORY RETIREMENT. Article IV, Section 3 of the Tappan Zee Bylaws
provides that no director shall serve beyond the end of the annual meeting of
Tappan Zee coincident with or immediately following the date on which his or her
seventy-third (73rd) birthday occurs.
There are no similar provisions in either the USB Certificate or USB Bylaws.
REMOVAL AND FILLING OF VACANCIES. A director or directors of USB may be
removed from office, pursuant to Article 5, Section 3 of the USB Certificate,
without cause, only by the affirmative vote of the holders of at least 80% of
the voting power of USB entitling them to elect directors in place of those to
be removed. A director or directors of USB may be removed from office, with
cause, by the affirmative vote of the holders of a majority of the shares then
entitled to vote in an election of directors. Vacancies in the Board of
Directors of USB and any newly-created directorships resulting from an increase
in the number of USB directors may be filled by the USB Board, acting by the
vote of a majority of the directors then in office, even if less than a quorum,
or by the sole remaining director. A director elected to the USB Board to fill a
vacancy will hold office for the unexpired portion of the term of the director
whose place has been filled. A director elected to the USB Board to fill a
newly-created directorship resulting from an increase in the number of directors
will hold office until the next election of the class for which the director was
elected.
Directors of Tappan Zee may be removed only with cause at a duly constituted
meeting of shareholders called expressly for that purpose upon the vote of the
holders of at least eighty percent (80%) of the total votes eligible to be cast
by shareholders. Cause for removal exists if the director whose removal is
proposed has engaged in the following conduct: (a) conduct as a director of
Tappan Zee or any subsidiary of Tappan Zee which conduct involves willful
material misconduct, breach of fiduciary duty involving personal pecuniary gain
or gross negligence in the performance of duties, (b) conduct, whether or not as
a director of Tappan Zee or a subsidiary of Tappan Zee, which conduct involves
dishonesty or breach of fiduciary duty and is punishable by imprisonment for a
term exceeding one year under state or federal law or (c) removal of such person
from the Board of Directors of the Savings Bank, if such person is so serving,
in accordance with the Federal Stock Charter and Bylaws of the Savings Bank. Any
vacancy occurring in the Board of Directors for any reason (including an
increase in the number of authorized directors) may be filled by the affirmative
vote of a majority of the Board of Directors then holding office, though less
than a quorum of the Board, and a director appointed to fill a vacancy shall
serve until the next succeeding annual election of directors and until his
successor has been elected and qualified.
109
<PAGE>
VOTING RIGHTS
Each share of USB Common Stock entitles the holder thereof to one vote for
the election of directors and for all other matters submitted to the
shareholders of USB for their consideration. USB shareholders are not entitled
to exercise cumulative voting in the election of directors.
Similarly, each share of Tappan Zee Common Stock entitles the holder thereof
to one vote for the election of directors and on such other matters submitted to
the shareholders of Tappan Zee for their consideration. Tappan Zee shareholders
also are not entitled to exercise cumulative voting in the election of
directors.
PAYMENT OF DIVIDENDS
USB can pay dividends on its outstanding Common Stock in accordance with the
terms of the DGCL. The DGCL generally provides that USB may declare and pay
dividends to its shareholders, either (1) out of its surplus, or (2) in case of
no such surplus, out of its net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. If the capital of USB,
computed in accordance with SectionSection154 and 244 of the DGCL, shall have
been diminished by depreciation in the value of its property, or by losses, or
otherwise, to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets, the directors of such corporation
shall not declare and pay out of such net profits any dividends upon any shares
of any classes of its capital stock until the deficiency in the amount of
capital represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets shall have been repaired. Please also
see the discussion of the dividend rights of USB shareholders in "DESCRIPTION OF
USB COMMON STOCK--Dividend Rights."
Tappan Zee has similar provisions regarding dividends.
SPECIAL MEETINGS OF SHAREHOLDERS
Section 2.4 of the USB Bylaws contains a provision pursuant to which special
meetings of shareholders may be called by the Board of Directors, Chairman of
the Board, the President or the Secretary.
Article VI, Section 7 of the Tappan Zee Certificate provides that special
meetings of the Tappan Zee shareholders, for any purpose or purposes, may be
called by the Chairman of the Board or by a resolution of at least three-fourths
of the entire Board.
SHAREHOLDER ACTION WITHOUT A MEETING
Section 2.14 of the USB Bylaws provides that any action permitted to be
taken by the shareholders at a meeting may be taken without a meeting if a
consent in writing setting forth the action so taken is signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted.
The Tappan Zee Certificate provides that no action may be taken by written
consent without a meeting.
PRE-EMPTIVE RIGHTS
Neither the shareholders of USB nor the shareholders of Tappan Zee have
pre-emptive rights.
110
<PAGE>
AMENDMENT OF CERTIFICATE OF INCORPORATION
Under the DGCL, an amendment to a certificate of incorporation must be
adopted by the affirmative vote of the holders of shares entitling them to
exercise a majority of the voting power of the corporation on the proposal, or a
different proportion, but not less than a majority of the voting power, as
provided in such certificate of incorporation and by a majority of the stock of
each class entitled to vote thereon as a class. The USB Certificate requires
that the affirmative vote of the holders of at least eighty percent (80%) of the
shares of USB then entitled to vote in an election of directors shall be
required to amend or repeal, or to adopt any provision inconsistent with Article
5 (Board of Directors) and Article 8 (Approval of Certain Business Combinations)
of the USB Certificate. In addition, Article 9 (Limitation of Director's
Personal Liability) of the USB Certificate provides that any repeal or
modification thereof by the shareholders of USB shall be prospective only, and
shall not adversely affect any limitation on the personal liability of a USB
director existing at the time of such repeal or modification.
The Tappan Zee Certificate generally provides that it may be amended as set
forth under the DGCL (i.e., generally upon the recommendation of the board of
directors and the affirmative vote of a majority of all of the stockholder votes
entitled to be cast on the matter), except that any amendment to Section 13 of
Article X (Indemnification), Article V (Limitation on Beneficial Ownership of
Stock), Article VI (Board of Directors), Article VII (Action by Shareholders
without a Meeting) and Article XI (Amendments) must be approved either (i) by
not less than a majority of the authorized number of directors and, if one or
more Interested Shareholders (as defined in the Tappan Zee Certificate) exist,
by not less than a majority of the Disinterested Directors (as defined in the
Tappan Zee Certificate), or (ii) by the affirmative vote of the holders of not
less than two-thirds of the total votes eligible to be cast of the then
outstanding shares entitled to vote.
Article X (Certain Business Combinations) of the Tappan Zee Certificate
shall be amended by either (i) a majority of the Disinterested Directors, or
(ii) the affirmative vote of not less than eighty percent (80%) of the total
number of votes eligible to be cast by the holders of all outstanding shares of
the Voting Stock (as defined in the Tappan Zee Certificate), voting together as
a single class, together with the affirmative vote of not less than fifty
percent (50%) of the total number of votes eligible to be cast by the holders of
all outstanding shares of the Voting Stock not beneficially owned by any
Interested Shareholder or Affiliate or Associate thereof (each as defined in the
Tappan Zee Certificate), voting together as a single class.
LIQUIDATION RIGHTS
In the event of liquidation, after payment in full of all amounts required
to be paid to creditors or provision for such payment, each holder of USB Common
Stock will be entitled to share ratably, according to the number of shares of
USB Common Stock held by such shareholder, in all remaining assets legally
available for distribution to its shareholders.
In the event of any liquidation, dissolution or winding up of the Savings
Bank, Tappan Zee, as a holder of the Savings Bank's capital stock (or USB after
completion of the Merger), would be entitled to receive, after payment of
provision for payment of all debts and liabilities of the Savings Bank
(including all deposit accounts and accrued interest thereon) and after
distribution of the balance in the special liquidation accounts established for
the benefit of certain account holders of the Savings Bank in connection with
its conversion to stock form, all assets of the Savings Bank available for
distribution. Upon any liquidation, dissolution or winding up of the affairs of
Tappan Zee, whether voluntary or involuntary, holders of Tappan Zee Common Stock
shall be entitled to receive pro rata the remaining assets of Tappan Zee after
the payment or provision for payment of Tappan Zee's debts and liabilities and
after the holders of any class of stock having preference over the Tappan Zee
Common Stock have been paid in full any sums to which they may be entitled.
111
<PAGE>
ANTITAKEOVER PROVISIONS AND STATUTES
The USB Certificate contains certain provisions which may be deemed to have
antitakeover effects. Such provisions include the ability of the USB Board of
Directors to issue shares of USB Preferred Stock without further approval by USB
shareholders, higher approval requirements of certain business combinations by
the USB Board and USB shareholders, classification of the USB Board, the
inability of USB shareholders to call special meetings of shareholders and
higher approval requirements for the amendment of certain provisions of the USB
Certificate. For a discussion of the foregoing provisions, see "Description of
USB Common Stock--Antitakeover Provisions in USB Certificate, USB Bylaws and
State Law" and "--Special Meeting of Shareholders."
The Tappan Zee Certificate also contains a number of provisions which may be
deemed to have antitakeover effects. Such provisions include the ability of the
Tappan Zee Board of Directors to issue shares of Tappan Zee preferred stock
without further approval by Tappan Zee shareholders, limitations on the
beneficial ownership of Tappan Zee Common Stock, classification of the Tappan
Zee Board, the inability of Tappan Zee shareholders to call special meetings of
shareholders or to take action without a meeting, and higher voting requirements
for certain business combinations and for amendments to certain provisions of
the Tappan Zee Certificate. For a discussion of certain of the foregoing
provisions, see "-- Mergers and Consolidations," "--Board of
Directors--General," "--Special Meetings of Shareholders," "--Shareholder Action
Without a Meeting" and "--Amendment of Certificate of Incorporation."
The Tappan Zee Certificate provides that the Tappan Zee Board of Directors
has the authority to issue Tappan Zee preferred stock, without further approval
by Tappan Zee shareholders, from time to time in one or more series, and to
designate such series and the powers, preferences and rights of the shares of
such series, and the qualifications, limitations or restrictions thereof. The
Tappan Zee preferred stock may be issued in distinctly designated series, may be
convertible into Tappan Zee Common Stock and may rank ahead of Tappan Zee Common
Stock as to dividend rights, liquidation preferences or both, and may have full
or limited voting rights. Accordingly, the issuance of Tappan Zee preferred
stock could adversely affect the voting and other rights of holders of Tappan
Zee Common Stock.
Article V of the Tappan Zee Certificate provides that no person shall
directly or indirectly offer to acquire or acquire the beneficial ownership of
more than 10% of the issued and outstanding voting shares of Tappan Zee. The
term "person" is broadly defined to prevent circumvention of this restriction.
The foregoing restriction does not apply to (i) any offer with a view toward
public resale made exclusively to Tappan Zee by underwriters or a selling group
acting on its behalf, in connection with a public offering of the Common Stock;
or (ii) any reclassification of securities, or recapitalization of Tappan Zee,
or any merger or consolidation of Tappan Zee with any of its subsidiaries. In
the event that shares are acquired in violation of Article V, each share
beneficially owned by any person in excess of 10% shall be considered an "Excess
Share" and shall be entitled to cast one hundredth (1/100) of one vote.
Article VIII, Section 1 of the Tappan Zee Certificate provides that in
addition to any affirmative vote required by law, the Tappan Zee Certificate or
by the provisions of any series of Tappan Zee preferred stock that may at the
time be outstanding, and except as otherwise expressly provided in Section 2 of
Article VIII, any Business Combination shall require the affirmative vote of not
less than eighty percent (80%) (to the extent permitted by law, but in no event
less than two-thirds) of the total number of votes eligible to be cast by the
holders of all the outstanding shares of Tappan Zee voting stock, voting
together as a single class, together with the affirmative vote of at least fifty
percent (50%) of the total number of votes eligible to be cast by the holders of
all outstanding shares of voting stock not beneficially owned by the Interested
Shareholder involved or any Affiliate or Associate thereof (as defined in the
Tappan Zee Certificate), voting together as a single class. An Interested
Shareholder is generally defined in the Tappan Zee Certificate as a Person
(which is broadly defined therein) who is the beneficial owner of ten percent
(10%) or more of the voting stock of Tappan Zee.
112
<PAGE>
The term "Business Combination" shall mean any transaction that is referred
to in any one or more of the following paragraphs (i) through (vi):
(i) any merger or consolidation of Tappan Zee or any of its subsidiaries
(other than a merger pursuant to Section 253 of the DGCL with (A) any
Interested Shareholder, or (B) any other entity (whether or not such other
entity is itself an Interested Shareholder) which is, or after such merger
or consolidation would be, an Affiliate or Associate of any Interested
Shareholder; or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Shareholder or any Affiliate or Associate of any Interested
Shareholder of any assets of Tappan Zee or any of its subsidiaries having an
aggregate Fair Market Value equal to five percent (5%) or more of the total
assets of Tappan Zee or any of its subsidiaries in question, as of the end
of its most recent fiscal year ending prior to the time the determination is
being made; or
(iii) the issuance or transfer by Tappan Zee or any of its subsidiaries
(in one transaction or a series of transactions) of any securities of Tappan
Zee or any of its subsidiaries to any Interested Shareholder or any
Affiliate or Associate of any Interested Shareholder other than (A) on a pro
rata basis to all holders of voting stock of Tappan Zee, (B) in connection
with the exercise or conversion of securities issued pro rata that are
exercisable for, or convertible into, securities of Tappan Zee or any of its
subsidiaries or (C) the issuance or transfer of such securities having an
aggregate Fair Market Value equal to less than one percent (1%) of the
aggregate Fair Market Value of all of the outstanding capital stock of
Tappan Zee; or
(iv) the adoption of any plan or proposal for the liquidation or
dissolution of Tappan Zee proposed by or on behalf of any Interested
Shareholder or any Affiliate or Associate of any Interested Shareholder; or
(v) any reclassification of securities (including any reverse stock
split), or recapitalization of Tappan Zee, or any merger or consolidation of
Tappan Zee with any of its subsidiaries or any other transaction (whether or
not with or into or otherwise involving an Interested Shareholder) which has
the effect, directly or indirectly, of increasing the proportionate share of
the outstanding shares of any class or series of equity or convertible
securities of Tappan Zee or any of its subsidiaries that is directly or
indirectly owned by any Interested Shareholder or any Affiliate or Associate
of any Interested Shareholder, except as a result of immaterial changes due
to fractional share adjustments, which changes do not exceed, in the
aggregate, 1% of the issued and outstanding shares of such class or series
of equity or convertible securities; or
(vi) the acquisition by Tappan Zee or any of its subsidiaries of any
securities of any Interested Shareholder or its Affiliates or Associates.
Such higher vote requirement is not applicable to a particular Business
Combination if (i) such transaction shall have been approved by a majority of
the Disinterested Directors of Tappan Zee then in office (as defined in the
Tappan Zee Certificate) or (ii) if, among other things, certain fair price and
form of consideration provisions are met, certain requirements are met as to
dividends paid by Tappan Zee and a proxy or information statement containing
certain information is distributed to Tappan Zee shareholders.
In addition to the provisions contained in the USB Certificate and the
Tappan Zee Certificate, the DGCL includes certain provisions applicable to
Delaware corporations, such as USB and Tappan Zee, which may be deemed to have
an antitakeover effect. Such provisions include requirements relating to certain
business combinations. See "Description of USB Common Stock -Antitakeover
Provisions in USB Certificate, USB Bylaws and State Law."
113
<PAGE>
DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
The USB Bylaws provide that USB will indemnify its directors or officers
against expenses (including, without limitation, attorneys' fees, filing fees,
court reporter's fees and transcript costs), judgments, fines and amounts paid
in settlement by reason of the fact that they are or were directors, officers,
employees or agents of USB or, at the request of USB, were serving another
entity in a similar capacity, if the directors or officers acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of USB. With regard to criminal matters, directors and officers will
be similarly indemnified by USB if the directors or officers had no reasonable
cause to believe their conduct was unlawful. Directors or officers claiming
indemnification will be presumed to have acted in good faith and in a manner
they reasonably believed to be in or not opposed to the best interests of USB
and, with respect to any criminal matter, to have had no reasonable cause to
believe their conduct was unlawful.
USB will not indemnify any officer or director of USB who was a party to any
completed action or suit instituted by (or in the right of) USB for any matter
asserted in such action as to which the officer or director has been adjudged to
be liable for acting with reckless disregard for the best interests of USB or
misconduct (other than negligence) in the performance of his or her duty to USB.
However, should the court in which the action was brought determine that the
officer or director is fairly and reasonably entitled to such indemnity, USB
must indemnify such officer or director to the extent permitted by the court.
Any indemnification not precluded by the USB Bylaws will be made by USB only
upon a determination that the director or officer has met the applicable
standard of conduct. Such determination may be made only (a) by a majority vote
of a quorum of disinterested directors, (b) by a committee of such directors
designated by majority vote of disinterested directors, even though less than a
quorum, (c) by the shareholders, or (d) if there are no disinterested directors,
or if such directors so direct, by independent legal counsel in a written
opinion. Expenses incurred in defending any action, suit or proceeding will be
paid by USB in advance upon receipt of an undertaking by or on behalf of the
director or officer to repay such amount if such director or officer is not
entitled to be indemnified by USB.
The USB Bylaws state that the indemnification provided thereby is not
exclusive of any other rights to which any person seeking indemnification may be
entitled. Additionally, the USB Bylaws provide that USB may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of USB, or who is or was serving another entity at the request
of USB, against any liability asserted against him or her and incurred by him or
her in such capacity, or arising out of his or her status as such, whether or
not USB would have the obligation or power to indemnify him or her under the USB
Bylaws.
Under Article 9 of the USB Certificate, a director of USB shall not be
personally liable to USB or its stockholders for monetary damages for breach of
fiduciary duty as a director except for liability (i) for any breach of the
director's duty of loyalty to USB or its stockholders (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL, as the same exists or hereafter may
be amended, or (iv) for any transaction from which the director derived an
improper personal benefit.
The Tappan Zee Certificate provides that a director of Tappan Zee will not
be personally liable to Tappan Zee or any of its stockholders for monetary
damages for breach of fiduciary duty as a director, except to the extent such
exemption from liability or limitation thereof is expressly prohibited by the
DGCL. The Certificate of Incorporation provides that any amendment or repeal of
these provisions will not adversely affect any right of a director of Tappan Zee
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
The Tappan Zee Certificate also provides that Tappan Zee shall indemnify and
advance expenses to all directors, officers, employees and agents to the fullest
extent provided by the law of the State of Delaware, but only if the indemnified
party conducted himself in good faith and reasonably believed in the
114
<PAGE>
case of conduct in his official capacity, that his conduct was in the best
interests of Tappan Zee and in all other cases, that his conduct was at least
not opposed to its best interests and, in the case of any criminal proceedings,
the indemnified party had no reasonable cause to believe his conduct was
unlawful. This indemnity will cover any director, officer, agent or employee
made a party, or threatened to be made a party to any threatened, pending or
completed, action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative, by reason of the fact that such person is or was a
director, officer, employee or agent of Tappan Zee or any predecessor of Tappan
Zee or is or was serving at the request of Tappan Zee against liability and
expenses (including court costs and attorney's fees), judgments, fines and/or
amounts paid in settlement or compromise and reasonably incurred by such person
in connection with such suit or action. The indemnity may continue as to a
person who has ceased to be a director, officer, employee or agent of Tappan Zee
and may inure to the benefit of his or her legatees, heirs, distributees,
executors and administrators. No right of indemnity provided to any person under
the Tappan Zee Certificate may be reduced or eliminated by any amendment of the
Certificate or Bylaws with respect to any act or omission by such persons before
such amendment.
The indemnification provisions also require Tappan Zee to pay reasonable
expenses of any director (and permit Tappan Zee to pay the reasonable expenses
of any officer, employee or agent of Tappan Zee) in advance of the final
disposition of any action, suit or proceeding as authorized by Tappan Zee's
Board of Directors, provided that the indemnified person furnishes Tappan Zee
with a written statement of such person's good faith belief that he or she has
met the required statutory standard of conduct and undertakes in writing to
repay Tappan Zee if it is ultimately determined that such person was not
entitled to indemnification. The directors and officers of Tappan Zee have a
personal interest in these provisions and may personally benefit from them, even
at the potential expense of the stockholders of Tappan Zee.
The determination of whether to indemnify a director, officer, employee or
agent of Tappan Zee or that the indemnification is permissible and the amount,
form of indemnification and the authorization of such indemnification shall be
made by: (a) the Board of Directors of Tappan Zee by a majority vote of
directors, even though less than a quorum, consisting of directors who are not
at that time parties to the proceeding; (b) if there are no such directors or if
such directors so direct, by independent legal counsel in a written opinion; or
(c) by the shareholders of Tappan Zee.
The rights of indemnification provided in the Tappan Zee Certificate are not
exclusive of any other rights which may be available under the Tappan Zee
Bylaws, any insurance or other agreement, by vote of shareholders or
disinterested directors or otherwise. In addition, the Tappan Zee Certificate
authorizes Tappan Zee to maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of Tappan Zee, whether or not Tappan
Zee would have the power to provide indemnification to such person. The rights
of indemnification provided to directors, officers, employees and agents of
Tappan Zee reduce the likelihood of certain shareholder derivative actions and
may discourage other third party claims against the directors or officers, even
if such actions otherwise would be beneficial to shareholders of Tappan Zee.
CERTAIN REGULATORY CONSIDERATIONS
USB is a bank holding company subject to supervision, regulation and
examination by the Federal Reserve Board under the BHC Act. See USB's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, incorporated by
reference herein. Tappan Zee is a unitary savings bank holding company subject
to supervision, regulation and examination by the OTS under the HOLA. See
"Regulation and Supervision of Tappan Zee and the Savings Bank--Holding Company
Regulation."
The Bank, as a New York-chartered commercial bank, is subject to
supervision, regulation and examination by the New York State Banking Department
and the FDIC. See USB's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, incorporated by reference herein. The Savings Bank, as a
federally chartered savings bank, is subject to supervision, regulation, and
examination by the
115
<PAGE>
OTS, as its chartering agency, and the FDIC, as its deposit insurer. See
"Regulation and Supervision of Tappan Zee and the Savings
Bank--General;--Regulation of Federal Savings Association." Almost every aspect
of the operations and financial condition of the Bank and the Savings Bank is
subject to extensive regulation and supervision and to various requirements and
restrictions under federal and state law, including requirements governing
capital adequacy, earnings, dividends, reserves against deposits, management
practices, branching, loans, investments and the provision of services.
Although Tappan Zee and the Savings Bank are subject to a different set of
laws and regulations and are supervised by a different regulatory authority than
USB and the Bank, Tappan Zee and the Savings Bank have not engaged in any
material activity that would not have been permissible to USB and the Bank,
respectively.
Supervision and regulation of bank holding companies and their subsidiaries
is intended primarily for the protection of depositors, the deposit insurance
funds administered by the FDIC and the banking system as a whole, not for the
protection of bank holding company shareholders or creditors.
Various legislation, including proposals to overhaul the bank regulatory
system, expand the powers of banking institutions and bank holding companies and
limit the investments that a depository institution may make with insured funds,
is from time to time introduced in Congress. Such legislation may change banking
statutes and the operating environment of USB and its subsidiaries in
substantial and unpredictable ways. USB cannot determine the ultimate effect
that potential legislation, if enacted, or implementing regulations, would have
upon the financial condition or results of operations of USB or its
subsidiaries.
SHAREHOLDER PROPOSALS
The Merger may be consummated prior to the 1998 Annual Meeting of
shareholders of Tappan Zee, in which event there would be no Tappan Zee 1998
Annual Meeting. If Tappan Zee holds a 1998 Annual Meeting of shareholders,
unless such 1998 meeting is delayed, any proposal which a Tappan Zee shareholder
wished to have included in the proxy materials of Tappan Zee must have been
presented to Tappan Zee not later than March 2, 1998. No such proposal was
received prior to March 2, 1998. If the meeting is delayed, any proposal which a
Tappan Zee shareholder wishes to have included in the proxy materials of Tappan
Zee must be received ten days following the date on which the notice of such
meeting is first given to shareholders.
LEGAL MATTERS
The legality of the of USB Common Stock to be issued in the Merger, certain
federal income tax consequences of the Merger and certain other legal matters
relating to the Merger are being passed upon for USB by Elias, Matz, Tiernan &
Herrick L.L.P, special counsel to USB. Legal matters relating to the Merger are
being passed upon for Tappan Zee by Thacher Proffitt & Wood, special counsel to
Tappan Zee.
EXPERTS
The consolidated financial statements of USB at December 31, 1997 and 1996,
and for each of the three years in the period ended December 31, 1997,
incorporated by reference in this Proxy Statement/ Prospectus have been audited
by Deloitte & Touche L.L.P., independent auditors, as stated in their report
thereon incorporated herein by reference, and have been so incorporated in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of Tappan Zee as of March 31, 1998,
1997 and 1996, and for each of the years in the three year period ended March
31, 1998, have been included in this Proxy Statement/Prospectus in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein and upon the authority of said firm as experts in
accounting and auditing.
116
<PAGE>
INDEX TO TAPPAN ZEE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
Independent Auditors' Report........................................................................ F-1
Consolidated Balance Sheets at March 31, 1998 and 1997.............................................. F-2
Consolidated Statements of Income for the years ended March 31, 1998, 1997 and 1996................. F-3
Consolidated Statements of Changes in Shareholders' Equity for the years ended
March 31, 1998, 1997 and 1996..................................................................... F-4
Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1997 and 1996..................................................................... F-5
Notes to Consolidated Financial Statements.......................................................... F-6
</TABLE>
117
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Tappan Zee Financial, Inc.:
We have audited the accompanying consolidated balance sheets of Tappan Zee
Financial, Inc. and subsidiaries as of March 31, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended March 31, 1998. 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 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 Tappan Zee
Financial, Inc. and subsidiaries as of March 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended March 31, 1998 in conformity with generally accepted accounting
principles.
/s/KPMG Peat Marwick LLP
Short Hills, New Jersey
April 28, 1998
F-1
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
ASSETS
Cash and due from banks................................................................... $ 783 $ 912
Interest-bearing deposits................................................................. 2,401 1,438
Federal funds sold........................................................................ 6,200 5,900
Securities (note 2):
Available-for-sale, at fair value (amortized cost of $22,719 in 1998 and $36,967 in
1997)................................................................................. 22,868 36,384
Held-to-maturity, at amortized cost (fair value of $35,971 in 1998 and $17,889 in
1997)................................................................................. 35,531 18,123
---------- ----------
Total securities...................................................................... 58,399 54,507
Loans, net (note 3):
Mortgage loans.......................................................................... 54,915 51,876
Other loans............................................................................. 3,673 4,170
Allowance for loan losses............................................................... (702) (660)
Net deferred loan fees.................................................................. (263) (276)
---------- ----------
Total loans, net...................................................................... 57,623 55,110
Federal Home Loan Bank stock.............................................................. 943 674
Real estate owned, net.................................................................... -- 122
Other assets (note 4)..................................................................... 2,996 3,178
---------- ----------
Total assets.......................................................................... $ 129,345 $ 121,841
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits (note 5)....................................................................... $ 104,993 $ 98,327
Other liabilities (note 4).............................................................. 2,552 2,286
---------- ----------
Total liabilities..................................................................... 107,545 100,613
---------- ----------
Shareholders' equity (notes 9 and 10):
Preferred stock (par value $0.01 per share; 1,000,000 shares authorized; none issued or
outstanding).......................................................................... -- --
Common stock (par value $0.01 per share; 5,000,000 shares authorized; 1,620,062 shares
issued)............................................................................... 16 16
Additional paid-in capital.............................................................. 15,086 14,942
Common stock held by employee stock ownership plan ("ESOP")............................. (904) (1,056)
Common stock awarded under recognition and retention plans ("RRPs")..................... (401) (524)
Treasury stock, at cost (142,000 shares in 1998 and 86,000 shares in 1997).............. (2,060) (1,070)
Retained earnings, substantially restricted............................................. 9,974 9,269
Net unrealized gain (loss) on available-for-sale securities, net of taxes
(note 2).............................................................................. 89 (349)
---------- ----------
Total shareholders' equity............................................................ 21,800 21,228
---------- ----------
Total liabilities and shareholders' equity............................................ $ 129,345 $ 121,841
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Interest income:
Mortgage loans..................................................................... $ 4,609 $ 4,331 $ 4,098
Other loans........................................................................ 395 390 367
Securities......................................................................... 3,780 3,513 2,387
Other earning assets............................................................... 609 357 772
--------- --------- ---------
Total interest income............................................................ 9,393 8,591 7,624
--------- --------- ---------
Interest expense:
Deposits........................................................................... 4,721 4,094 4,002
Federal Home Loan Bank advances.................................................... -- 12 --
--------- --------- ---------
Total interest expense........................................................... 4,721 4,106 4,002
--------- --------- ---------
Net interest income.............................................................. 4,672 4,485 3,622
Provision for loan losses (note 3)................................................... 42 69 90
--------- --------- ---------
Net interest income after provision for loan losses.............................. 4,630 4,416 3,532
--------- --------- ---------
Non-interest income:
Service charges and other fees..................................................... 140 119 109
Net gain on sales of available-for-sale securities (note 2)........................ 109 23 88
Other.............................................................................. 19 10 14
--------- --------- ---------
Total non-interest income.......................................................... 268 152 211
--------- --------- ---------
Non-interest expense:
Compensation and benefits (notes 8 and 9).......................................... 1,720 1,477 1,185
Professional services.............................................................. 371 316 149
Occupancy and equipment............................................................ 181 192 220
Data processing service fees....................................................... 176 159 151
Federal deposit insurance:
Regular premiums................................................................. 62 155 202
Special assessment (note 5)...................................................... -- 538 --
Net cost of real estate owned...................................................... 7 60 22
Other.............................................................................. 493 490 368
--------- --------- ---------
Total non-interest expense....................................................... 3,010 3,387 2,297
--------- --------- ---------
Income before income tax expense............................................... 1,888 1,181 1,446
Income tax expense (note 7).......................................................... 791 326 609
--------- --------- ---------
Net income..................................................................... $ 1,097 $ 855 $ 837
--------- --------- ---------
--------- --------- ---------
Basic earnings per share (note 11)................................................... $ 0.80 $ 0.60 $ 0.31
--------- --------- ---------
--------- --------- ---------
Diluted earnings per share (note 11)................................................. $ 0.77 $ 0.59 $ 0.31
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON
COMMON STOCK NET
ADDITIONAL STOCK AWARDED UNREALIZED
COMMON PAID-IN HELD UNDER TREASURY RETAINED GAIN (LOSS) ON
STOCK CAPITAL BY ESOP RRPS STOCK EARNINGS SECURITIES
------------- ----------- ----------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995.... $ -- $ -- $ -- $ -- $ -- $ 8,047 $ (229)
Net income................. -- -- -- -- -- 837 --
Dividends paid ($0.05 per
share)................... -- -- -- -- -- (81) --
Issuance of 1,620,062
common shares............ 16 14,885 -- -- -- -- --
Shares purchased by ESOP
(129,600 shares)......... -- -- (1,296) -- -- -- --
ESOP shares committed to be
released (8,124
shares).................. -- 8 81 -- -- -- --
Decrease in net unrealized
loss on available-for
sale securities, net of
taxes.................... -- -- -- -- -- -- 92
--- ----------- ----------- ----- ----------- ----------- -----
Balance at March 31, 1996.... 16 14,893 (1,215) -- -- 8,803 (137)
Net income................. -- -- -- -- -- 855 --
Dividends paid ($0.20 per
share)................... -- -- -- -- -- (291) --
Repurchase of 86,000
treasury shares.......... -- -- -- -- (1,070) -- --
Purchase of 52,840 shares
to fund awards under
RRP'S.................... -- -- -- (616) -- (98) --
Amortization of RRP
awards................... -- -- -- 92 -- -- --
ESOP shares committed to be
released (15,893
shares).................. -- 49 159 -- -- -- --
Increase in net unrealized
loss on available-for
sale securities, net of
taxes.................... -- -- -- -- -- -- (212)
--- ----------- ----------- ----- ----------- ----------- -----
Balance at March 31, 1997.... 16 14,942 (1,056) (524) (1,070) 9,269 (349)
Net income................. -- -- -- -- -- 1,097 --
Dividends paid ($0.28 per
share)................... -- -- -- -- -- (392) --
Repurchase of 56,000
treasury shares.......... -- -- -- -- (990) -- --
Amortization of RRP
awards................... -- -- -- 123 -- -- --
Tax benefit related to RRP
awards................... -- 22 -- -- -- -- --
ESOP shares committed to be
released (15,225
shares).................. -- 122 152 -- -- -- --
Decrease in net unrealized
loss on available-for
sale securities, net of
taxes.................... -- -- -- -- -- -- 438
--- ----------- ----------- ----- ----------- ----------- -----
Balance at March 31, 1998.... $ 16 $ 15,086 $ (904) $ (401) $ (2,060) $ 9,974 $ 89
--- ----------- ----------- ----- ----------- ----------- -----
--- ----------- ----------- ----- ----------- ----------- -----
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance at March 31, 1995.... $ 7,818
Net income................. 837
Dividends paid ($0.05 per
share)................... (81)
Issuance of 1,620,062
common shares............ 14,901
Shares purchased by ESOP
(129,600 shares)......... (1,296)
ESOP shares committed to be
released (8,124
shares).................. 89
Decrease in net unrealized
loss on available-for
sale securities, net of
taxes.................... 92
-------------
Balance at March 31, 1996.... 22,360
Net income................. 855
Dividends paid ($0.20 per
share)................... (291)
Repurchase of 86,000
treasury shares.......... (1,070)
Purchase of 52,840 shares
to fund awards under
RRP'S.................... (714)
Amortization of RRP
awards................... 92
ESOP shares committed to be
released (15,893
shares).................. 208
Increase in net unrealized
loss on available-for
sale securities, net of
taxes.................... (212)
-------------
Balance at March 31, 1997.... 21,228
Net income................. 1,097
Dividends paid ($0.28 per
share)................... (392)
Repurchase of 56,000
treasury shares.......... (990)
Amortization of RRP
awards................... 123
Tax benefit related to RRP
awards................... 22
ESOP shares committed to be
released (15,225
shares).................. 274
Decrease in net unrealized
loss on available-for
sale securities, net of
taxes.................... 438
-------------
Balance at March 31, 1998.... $ 21,800
-------------
-------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net income...................................................................... $ 1,097 $ 855 $ 837
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses..................................................... 42 69 90
Provision for real estate owned losses........................................ -- 38 --
Depreciation expense.......................................................... 56 58 73
Accretion of net deferred loan fees........................................... (69) (44) (61)
Net decrease (increase) in accrued interest receivable........................ 31 (80) (63)
Net gain on sales of securities............................................... (109) (23) (88)
Noncash ESOP and RRP expense.................................................. 397 300 89
Other adjustments, net........................................................ 97 (145) 113
--------- --------- ---------
Net cash provided by operating activities................................. 1,542 1,028 990
--------- --------- ---------
Cash flows from investing activities:
Purchases of securities:
Available-for-sale............................................................ (20,689) (19,596) (28,728)
Held-to-maturity.............................................................. (21,131) (10,069) (5,117)
Proceeds from principal payments, maturities and calls of securities:
Available-for-sale............................................................ 8,005 10,562 8,304
Held-to-maturity.............................................................. 3,730 1,381 1,424
Proceeds from sale of available-for-sale securities............................. 27,023 13,861 3,797
Disbursements for loan originations............................................. (12,759) (11,903) (9,314)
Principal collections on loans.................................................. 10,273 7,942 8,233
Purchases of FHLB stock......................................................... (269) (113) (57)
Proceeds from sales of real estate owned........................................ 124 249 225
Other investing cash flows, net................................................. (8) (49) (46)
--------- --------- ---------
Net cash used in investing activities..................................... (5,701) (7,735) (21,279)
--------- --------- ---------
Cash flows from financing activities:
Net increase in deposits........................................................ 6,666 8,419 8,095
Net proceeds from sale of common stock.......................................... -- -- 14,901
Common stock purchased by ESOP.................................................. -- -- (1,296)
Purchase of common stock for awards under RRP................................... -- (714) --
Purchase of treasury stock...................................................... (990) (1,070) --
Dividends paid.................................................................. (392) (291) (81)
Net increase (decrease) in mortgage escrow funds................................ 9 74 (344)
--------- --------- ---------
Net cash provided by financing activities................................. 5,293 6,418 21,275
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............................. 1,134 (289) 986
Cash and cash equivalents at beginning of year.................................... 8,250 8,539 7,553
--------- --------- ---------
Cash and cash equivalents at end of year.......................................... $ 9,384 $ 8,250 $ 8,539
--------- --------- ---------
--------- --------- ---------
Supplemental disclosures:
Interest paid................................................................... $ 4,721 $ 4,106 $ 4,002
Income taxes paid............................................................... 742 646 531
Securities transferred from held-to-maturity to available-for-sale.............. -- -- 11,320
Mortgage loans transferred to real estate owned................................. -- -- 111
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In June 1995, Tarrytown and North Tarrytown Savings and Loan Association
converted from a New York State chartered mutual savings and loan association to
a federally chartered mutual savings bank under the new name Tarrytowns Bank,
FSB (the "Bank"). Tappan Zee Financial, Inc. (the "Registrant") became the
holding company for the Bank on October 5, 1995 upon completion of the
conversion of the Bank from a mutual savings bank to a stock savings bank (the
"Conversion"). In March 1998, the Registrant established TPNZ Preferred Funding
Corporation ("TZPFC"), as a wholly owned subsidiary. The purpose of TZPFC is to
acquire and manage a portfolio of mortgage loans and mortgage-backed securities.
TZPFC is intended to qualify as a Real Estate Investment Trust for tax purposes.
Collectively, the Registrant, TZPFC and the Bank are referred to herein as the
"Company."
The Company's primary market area consists of the Village of Tarrytown and
its neighboring communities in Westchester County, New York. The Bank is a
community-oriented savings institution whose business primarily consists of
accepting deposits from customers within its market area and investing those
funds in mortgage loans secured by one- to four-family residences. To a
significantly lesser extent, funds are invested in multi-family, commercial real
estate, construction, commercial business and consumer loans. The Company also
invests in mortgage-backed and other securities. Deposits are insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation. The Company's primary regulator is the
Office of Thrift Supervision ("OTS").
The following is a summary of the significant accounting policies followed
by the Company in the preparation of the consolidated financial statements.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. These financial statements include the
accounts of the Registrant and its wholly-owned subsidiaries, the Bank and
TZPFC. All significant intercompany accounts and transactions have been
eliminated in the consolidated financial statements. Prior to the Conversion,
the Registrant had no operations other than those of an organizational nature.
All financial information included herein for periods prior to the Conversion
refers to the Bank.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
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 revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Certain reclassifications have been made to prior year amounts to conform to
the current year presentation. For purposes of reporting cash flows, cash
equivalents consist of overnight federal funds sold.
SECURITIES
The securities portfolio includes primarily debt securities. These debt
securities are principally mortgage-backed securities, consisting of
pass-through securities issued by United States government-sponsored entities
(Ginnie Mae, Fannie Mae and Freddie Mac) and collateralized mortgage obligations
("CMOs").
F-6
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Individual securities are classified as held-to-maturity securities, trading
securities, or available-for-sale securities. The held-to-maturity category
represents debt securities for which the entity has the positive intent and
ability to hold to maturity. Trading securities are debt and equity securities
that are bought principally for the purpose of selling them in the near term.
All other debt and equity securities are classified as available-for-sale.
Held-to-maturity securities are carried at amortized cost.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses excluded from earnings and reported on a net-of-tax basis as a
separate component of shareholders' equity. The Company has no trading
securities. Federal Home Loan Bank ("FHLB") stock is a non-marketable security
held in accordance with certain regulatory requirements and, accordingly, is
carried at cost.
Premiums and discounts on debt securities are amortized to interest income
on a level-yield basis over the expected terms of the securities. Realized gains
and losses on sales of securities are determined based on the amortized cost of
the specific securities sold. Unrealized losses on held-to-maturity and
available-for-sale securities are charged to earnings when the decline in fair
value of a security is judged to be other than temporary.
ALLOWANCE FOR LOAN LOSSES
Effective April 1, 1995, the Company prospectively adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118.
Under SFAS No. 114, a loan is considered to be impaired when, based on current
information and events, it is probable that the creditor will be unable to
collect all principal and interest contractually due. Creditors are permitted to
measure impaired loans based on (i) the present value of expected future cash
flows discounted at the loan's effective interest rate, (ii) the loan's
observable market price or (iii) the fair value of the collateral if the loan is
collateral dependent. If the approach used results in a measurement that is less
than an impaired loan's recorded investment, an impairment loss is recognized as
part of the allowance for loan losses. SFAS No. 118 allows creditors to continue
to use existing methods for recognizing interest income on impaired loans. The
Company's adoption of these statements did not affect its overall allowance for
loan losses or income recognition practices.
The allowance for loan losses is increased by provisions for losses charged
to operations. Losses on loans (including impaired loans) are charged to the
allowance for loan losses when all or a portion of a loan is deemed to be
uncollectible. Recoveries of loans previously charged-off are credited to the
allowance when realized. Management estimates the allowance for loan losses
based on an evaluation of the Company's past loan loss experience, known and
inherent risks in the portfolio, estimated value of underlying collateral, and
current economic conditions. In management's judgment, the allowance for loan
losses is adequate to absorb probable losses in the existing portfolio.
Establishing the allowance for loan losses involves significant management
judgments utilizing the best information available at the time of review. Those
judgments are subject to further review by various sources, including the
Company's regulators. Future adjustments to the allowance may be necessary based
on changes in economic and real estate market conditions, further information
obtained regarding known problem loans, the identification of additional problem
loans, and other factors.
F-7
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST AND FEES ON LOANS
Generally, a loan (including an impaired loan under SFAS No. 114) is placed
on non-accrual status when principal or interest payments become ninety days
past due, or earlier if the ability of the borrower to meet contractual payment
terms is in doubt. When loans are placed on non-accrual status, unpaid interest
is reversed against interest income of the current period. Thereafter, interest
payments received on non-accrual loans are either applied to reduce unpaid
principal balances or reported as interest income, depending on management's
judgment as to the likelihood of further collections. Loans are returned to
accrual status when collectibility is no longer considered doubtful.
Loan origination fees and certain direct loan origination costs are
deferred, and the net fee or cost is recognized as an adjustment to interest
income using the level-yield method over the contractual life of the related
loan. Net deferred fees and costs applicable to prepaid loans are recognized in
interest income at the time of prepayment. Discounts on consumer loans are
accreted using the level-yield method.
REAL ESTATE OWNED
Real estate owned consists of properties acquired through foreclosure or
deed in lieu of foreclosure. A property is initially recorded at fair value less
estimated sales costs, with any resulting writedown charged to the allowance for
loan losses. Thereafter, an allowance for losses on real estate owned is
established for any further declines in fair value less estimated sales costs.
Fair value estimates are based on recent appraisals and other available
information. Costs incurred to develop or improve properties are capitalized,
while holding costs are charged to expense.
OFFICE PROPERTY AND EQUIPMENT
Office property and equipment (included in other assets) is comprised of
land (carried at cost) and building, furniture, fixtures and equipment (carried
at cost less accumulated depreciation). Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
Costs incurred to improve or extend the life of existing assets are capitalized.
Repairs and maintenance, as well as renewals and replacements of a routine
nature are charged to expense.
INCOME TAXES
Using the asset and liability method, deferred taxes are recognized for the
estimated future tax effects attributable to temporary differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. A deferred tax liability is recognized for all temporary
differences that will result in future taxable income. A deferred tax asset is
recognized for all temporary differences that will result in future tax
deductions, subject to reduction of the asset by a valuation allowance in
certain circumstances. This valuation allowance is recognized if, based on an
analysis of available evidence, management determines that it is more likely
than not that some portion or all of the deferred tax asset will not be
realized.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax laws or rates is recognized in income
tax expense in the period that includes the enactment date of the change.
F-8
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
POSTRETIREMENT BENEFIT AND DEFERRED COMPENSATION PLANS
The Company has a non-contributory defined benefit pension plan which covers
substantially all employees. Pension costs are funded on a current basis. In
addition, the Company provides for postretirement health care benefits for
employees and directors. Costs for these benefits, as well as the Company's
directors' retirement plan and directors' deferred compensation plan, are
accounted for on an accrual basis as such benefits are earned by active
employees.
STOCK-BASED COMPENSATION PLANS
Compensation expense is recognized in an amount equal to the fair value of
ESOP shares that have been committed to be released for allocation to
participant accounts. To the extent that the fair value of these shares differs
from the original cost, the difference is charged or credited to shareholders'
equity (additional paid-in capital). The cost of unallocated ESOP shares not yet
committed to be released is reflected as a reduction of shareholders' equity.
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, compensation expense is recognized
only if the exercise price of the option is less than the fair value of the
underlying stock at the grant date. SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages entities to recognize the fair value of all
stock-based awards on the date of grant as compensation expense over the vesting
period. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma disclosures of net income
and earnings per share as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosures required by SFAS No.
123.
The fair value of the RRP shares awarded by the Company, measured as of the
grant date, is recognized as unearned compensation (a deduction from
shareholders' equity) and amortized to compensation expense as the shares become
vested. An excess of the cost to fund purchases of RRP shares over the
grant-date fair value is charged to retained earnings.
EARNINGS PER SHARE
In fiscal 1998, the Company retroactively adopted SFAS No. 128, "Earnings
Per Share," which establishes new standards for computing and presenting
earnings per share ("EPS") by all entities with complex capital structures. SFAS
No. 128 requires the presentation of basic EPS and diluted EPS and the
restatement of all prior-period EPS data. Basic EPS excludes dilution and is
computed by dividing net income available to common shareholders by the weighted
average number of common shares outstanding for the period. Unallocated ESOP
shares that have not been committed to be released to participants are excluded
from outstanding shares in computing EPS. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
(such as the Company's stock options) were exercised or converted into common
stock or resulted in the issuance of common stock. Diluted EPS is computed by
dividing adjusted net income by the weighted average number of common shares
outstanding for the period plus common stock equivalents. EPS is reported for
periods following the Conversion. The weighted average number of shares used in
the computation of basic EPS and diluted EPS for the year ended March 31, 1998
were 1,372,051 and 1,423,299, respectively.
F-9
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997.
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. However, certain FASB statements require
entities to report specific changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, as a separate
component of equity in the balance sheet. Such items, along with net income, are
components of comprehensive income. SFAS No. 130 requires that all items of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Additionally, SFAS No. 130
requires that the accumulated balance of other comprehensive income be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," effective for fiscal years beginning
after December 15, 1997. SFAS No. 131 establishes standards for the way public
business enterprises report information about operating segments in annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Generally, financial information is required to be reported on the basis that it
is used internally for evaluating segment performance and deciding how to
allocate resources to segments. SFAS No. 131 also requires descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used by the
enterprise in its general-purpose financial statements, and changes in the
measurement of segment amounts from period to period.
In February 1998, the FASB also issued SFAS No. 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits," effective for fiscal years
beginning after December 15, 1997. SFAS No. 132 amends the disclosure
requirements of SFAS No. 87, "Employers' Accounting for Pensions", SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Retirement Benefits Other Than Pensions." SFAS No. 132
standardizes the disclosure requirements of SFAS Nos. 87 and 106 to the extent
practicable and recommends a parallel format for presenting information about
pensions and other retirement benefits.
The Company will adopt these disclosure requirements beginning in the first
quarter of fiscal 1999. Management does not anticipate that these standards will
have a material impact on the Company's financial statements.
F-10
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SECURITIES
The following is a summary of available-for-sale securities and
held-to-maturity securities at March 31, 1998:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ------------------------ FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
AVAILABLE-FOR-SALE SECURITIES
Mortgage-backed securities:
CMOs..................................................................... $ 85 $ 3 $ -- $ 88
Pass-through securities.................................................. 19,759 167 (25) 19,901
----------- ----- ----- ---------
Total.................................................................. 19,844 170 (25) 19,989
U.S. Agency and other debt securities...................................... 75 4 -- 79
Mutual fund investments.................................................... 2,800 -- -- 2,800
----------- ----- ----- ---------
Total.................................................................. $ 22,719 $ 174 $ (25) $ 22,868
----------- ----- ----- ---------
----------- ----- ----- ---------
HELD-TO-MATURITY SECURITIES
Mortgage-backed securities:
CMOs..................................................................... $ 683 $ 8 $ (1) $ 690
Pass-through securities.................................................. 32,450 441 (40) 32,851
----------- ----- ----- ---------
Total.................................................................. 33,133 449 (41) 33,541
U.S. Agency and other debt securities...................................... 2,398 32 -- 2,430
----------- ----- ----- ---------
----------- ----- ----- ---------
Total.................................................................. $ 35,531 $ 481 $ (41) $ 35,971
----------- ----- ----- ---------
----------- ----- ----- ---------
</TABLE>
F-11
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SECURITIES (CONTINUED)
The following is a summary of available-for-sale securities and
held-to-maturity securities at March 31, 1997:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------------- FAIR
COST GAINS LOSSES VALUE
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
AVAILABLE-FOR-SALE
Mortgage-backed securities:
CMOs.................................................................... $ 8,329 $ 2 $ (215) $ 8,116
Pass-through securities................................................. 15,954 6 (161) 15,799
----------- ----- --------- ---------
Total................................................................. 24,283 8 (376) 23,915
U.S. Agency and other debt securities..................................... 8,029 2 (217) 7,814
Mutual fund investments................................................... 4,655 -- -- 4,655
----------- ----- --------- ---------
Total................................................................. $ 36,967 $ 10 $ (593) $ 36,384
----------- ----- --------- ---------
----------- ----- --------- ---------
HELD-TO-MATURITY
Mortgage-backed securities:
CMOs.................................................................... $ 996 $ 3 $ (5) $ 994
Pass-through securities................................................. 14,078 85 (282) 13,881
----------- ----- --------- ---------
Total................................................................. 15,074 88 (287) 14,875
U.S. Agency and other debt securities..................................... 3,049 14 (49) 3,014
----------- ----- --------- ---------
Total................................................................. $ 18,123 $ 102 $ (336) $ 17,889
----------- ----- --------- ---------
----------- ----- --------- ---------
</TABLE>
The net unrealized gain (loss) on available-for-sale securities was $149,000
($89,000 after taxes) at March 31, 1998 and ($583,000) (($349,000) after taxes)
at March 31, 1997. Changes in unrealized holding gains and losses resulted in
after-tax (decreases) increases in shareholders' equity of $438,000 in fiscal
1998, ($212,000) in fiscal 1997 and $92,000 in fiscal 1996. These gains and
losses will continue to fluctuate based on changes in the portfolio and market
conditions.
Sales of available-for-sale securities resulted in the following gross
realized gains and gross realized losses during the years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -----
<S> <C> <C> <C>
(IN THOUSANDS)
Gains................................................................... $ 171 $ 89 $ 90
Losses.................................................................. (62) (66) (2)
--------- --- ---
Net................................................................... $ 109 $ 23 $ 88
--------- --- ---
--------- --- ---
</TABLE>
F-12
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SECURITIES (CONTINUED)
The following is a summary of the amortized cost and fair value of debt
securities, other than mortgage-backed securities, by remaining term to
contractual maturity as of March 31, 1998. Actual maturities may differ from
these amounts because certain issuers have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
---------------------- ----------------------
<S> <C> <C> <C> <C>
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- --------- ----------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
One year or less......................................................... $ -- $ -- $ -- $ --
More than one year to five years......................................... 30 32 500 503
More than five years to ten years........................................ -- -- 1,699 1,723
More than ten years...................................................... 45 47 199 204
----- --------- ----------- ---------
Total.................................................................... $ 75 $ 79 $ 2,398 $ 2,430
----- --------- ----------- ---------
----- --------- ----------- ---------
</TABLE>
(3) LOANS
Loans are summarized as follows at March 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Mortgage loans:
Residential properties:
One- to four-family..................................................................... $ 45,146 $ 43,958
Multi- family........................................................................... 1,994 2,289
Commercial properties..................................................................... 4,618 3,910
Construction loans........................................................................ 3,706 2,405
Construction loans in process............................................................. (549) (686)
--------- ---------
54,915 51,876
--------- ---------
Other loans:
Commercial business loans................................................................. 2,462 2,846
Automobile loans.......................................................................... 683 781
Other consumer loans...................................................................... 751 797
Unearned discounts........................................................................ (208) (239)
Unused commercial lines of credit......................................................... (15) (15)
--------- ---------
3,673 4,170
--------- ---------
Total loans............................................................................. 58,588 56,046
Allowance for loan losses................................................................. (702) (660)
Net deferred loan fees.................................................................... (263) (276)
--------- ---------
Total loans, net........................................................................ $ 57,623 $ 55,110
--------- ---------
--------- ---------
</TABLE>
F-13
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) LOANS (CONTINUED)
The loan portfolio at March 31, 1998 consisted of fixed-rate loans of $46.1
million and adjustable-rate loans of $12.5 million with weighted average yields
of 8.50% and 8.36%, respectively. At March 31, 1997, fixed-rate loans were $42.4
million and adjustable-rate loans were $13.6 million.
The Company primarily originates mortgage loans secured by existing
single-family residential properties. The Company also originates multi-family
and commercial real estate loans, construction loans, commercial business loans
and consumer loans. A substantial portion of the loan portfolio is secured by
real estate properties located in Westchester County, New York. The ability of
the Company's borrowers to make principal and interest payments is dependent
upon, among other things, the level of overall economic activity and the real
estate market conditions prevailing within the Company's concentrated lending
area.
Loans to directors, executive officers and related parties at March 31, 1998
and 1997 amounted to $1.1 million. During fiscal 1998, there were new loans to
such persons of $11,000 and repayments of $19,000.
The following is a summary of loans on non-accrual status and accruing loans
past ninety days or more at March 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
NON-ACCRUAL LOANS:
Mortgage loans:
One-to four-family............................................................... $ 1,202 $ 1,355 $ 856
Commercial property.............................................................. 238 123 126
--------- --------- ---------
1,440 1,478 982
--------- --------- ---------
ACCRUING LOANS PAST DUE NINETY DAYS OR MORE:
Mortgage loans:
One-to four-family............................................................... -- -- 342
Commercial property.............................................................. -- 72 266
Construction..................................................................... 108 100 --
Commercial business and consumer................................................... 11 8 42
--------- --------- ---------
Total 119 180 650
--------- --------- ---------
Total non-performing loans........................................................... $ 1,559 $ 1,658 $ 1,632
--------- --------- ---------
--------- --------- ---------
</TABLE>
If interest payments on the foregoing non-accrual loans had been made during
the respective years in accordance with the loan agreements, interest income
would have (decreased) increased by ($9,000), $22,000 and $35,000 in fiscal
1998, 1997 and 1996, respectively.
SFAS No. 114 applies to loans that are individually evaluated for
collectibility in accordance with the Company's normal loan review procedures
(principally loans in the multi-family, commercial mortgage and construction
loan categories). The standard does not apply to smaller-balance, homogeneous
loans such as the Company's one- to four-family residential mortgage loans. The
Company's total recorded investment in impaired loans (which related to
commercial mortgage loans on non-accrual status) amounted to $238,000 and
$123,000 at March 31, 1998 and 1997, respectively. An allowance for loan
impairment under SFAS No. 114 was not required for these loans due to the
adequacy of the collateral value. The Company's average recorded investment in
impaired loans was $126,000 and $125,000 for fiscal 1998 and 1997,
F-14
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) LOANS (CONTINUED)
respectively. Interest collections and income recognized on impaired loans were
insignificant for both years.
Activity in the allowance for loan losses is summarized as follows for the
years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Balance at beginning of year.............................................................. $ 660 $ 654 $ 650
Provision for losses...................................................................... 42 69 90
Charge-offs............................................................................... -- (63) (86)
Recoveries................................................................................ -- -- --
--------- --------- ---------
Balance at end of year.................................................................... $ 702 $ 660 $ 654
--------- --------- ---------
--------- --------- ---------
</TABLE>
(4) OTHER ASSETS AND LIABILITIES
A summary of other assets and liabilities at March 31 follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
OTHER ASSETS:
Office property and equipment, net of accumulated depreciation of $380 in 1998 and $365 in
1997....................................................................................... $ 496 $ 544
Accrued interest receivable.................................................................. 747 778
Deferred income taxes (note 7)............................................................... 734 859
Intangible asset recognized for directors' deferred compensation plan (note 8)............... 360 510
Prepaid expenses and other................................................................... 659 487
--------- ---------
Total...................................................................................... $ 2,996 $ 3,178
--------- ---------
--------- ---------
OTHER LIABILITIES:
Obligation for directors' deferred compensation plan (note 8)................................ $ 1,035 $ 928
Mortgage escrow funds........................................................................ 793 784
Other........................................................................................ 724 574
--------- ---------
Total...................................................................................... $ 2,552 $ 2,286
--------- ---------
--------- ---------
</TABLE>
F-15
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) DEPOSITS
Deposit balances and weighted average stated interest rates at March 31 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- --------------------
<S> <C> <C> <C> <C>
AMOUNT RATE AMOUNT RATE
---------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Checking.................................................................... $ 2,310 $ 2,771
NOW......................................................................... 3,853 2.00% 3,756 2.00%
Money market................................................................ 2,687 2.75 3,157 2.75
Regular savings............................................................. 14,554 2.75 15,008 2.75
Statement savings........................................................... 10,533 2.92 10,757 2.92
---------- ---------
33,937 2.53 35,449 2.51
---------- ---------
Savings certificates by remaining period to maturity:
Under one year.............................................................. 53,403 5.75 49,026 5.72
One to three years.......................................................... 17,653 6.12 13,852 5.98
---------- ---------
71,056 5.84 62,878 5.78
---------- ---------
Total....................................................................... $ 104,993 4.77% $ 98,327 4.60%
---------- ---------
---------- ---------
</TABLE>
Savings certificates issued in denominations of $100,000 or more totaled
$9.7 million and $9.4 million at March 31, 1998 and 1997, respectively.
The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted into
law on September 30, 1996. Among other things, the Funds Act required depository
institutions to pay a one-time special assessment of 65.7 basis points on their
SAIF-assessable deposits held on March 31, 1995, in order to recapitalize the
SAIF to the level required by law. The Bank's special assessment of $538,000 was
accrued as a charge to non-interest expense for the quarter ended September 30,
1996. The assessment was paid in November 1996.
(6) FEDERAL HOME LOAN BANK ADVANCES
As a member of the FHLB of New York, the Bank has access to funds in the
form of FHLB advances. Based on the level of qualifying collateral available to
secure advances at March 31, 1998, the Bank's borrowing capacity was $31.3
million, none of which was used at that date. Advances are secured by the Bank's
investment in FHLB stock and by a blanket security agreement. This agreement
requires the Bank to maintain as collateral certain qualifying assets (such as
securities and single-family residential mortgage loans) with a fair value, as
defined, at least equal to 110% of the outstanding advances.
F-16
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended
March 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
FEDERAL:
Current............................................................. $ 776 $ 432 $ 465
Deferred............................................................ (124) 47 (14)
--------- --------- ---------
652 479 451
--------- --------- ---------
NEW YORK STATE:
Current............................................................. 184 94 94
Deferred............................................................ (45) (247) 64
--------- --------- ---------
139 (153) 158
--------- --------- ---------
TOTAL:
Current............................................................. 960 526 559
Deferred............................................................ (169) (200) 50
--------- --------- ---------
$ 791 $ 326 $ 609
--------- --------- ---------
--------- --------- ---------
</TABLE>
Total income tax expense differs from the amounts computed by applying the
applicable statutory federal income tax rate of 34% to income before income tax
expense. A reconciliation of the tax at the statutory rate to the Company's
actual tax expense follows for the years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Tax at federal statutory rate....................................... $ 642 $ 402 $ 492
State tax (benefit) expense, net of federal tax effect.............. 92 (101) 104
Other, net.......................................................... 57 25 13
--------- --------- ---------
Actual income tax expense........................................... $ 791 $ 326 $ 609
--------- --------- ---------
--------- --------- ---------
Effective income tax rate........................................... 41.9% 27.6% 42.1%
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-17
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to the Company's
deferred tax assets and liabilities at March 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
DEFERRED TAX ASSETS:
Allowance for loan losses................................................ $ 287 $ 270
Net unrealized loss on available-for-sale securities..................... -- 234
Loan origination fees.................................................... 108 113
Other.................................................................... 406 292
--------- ---------
Total deferred tax assets.............................................. 801 909
--------- ---------
DEFERRED TAX LIABILITIES:
Net unrealized gain on available-for-sale securities..................... (60) --
Other.................................................................... (7) (50)
--------- ---------
Total deferred tax liabilities......................................... (67) (50)
--------- ---------
Net deferred tax assets.................................................... $ 734 $ 859
--------- ---------
--------- ---------
</TABLE>
Based on the Company's historical and anticipated future pre-tax earnings,
management believes that it is more likely than not that the Company's deferred
tax assets will be realized.
As a thrift institution, the Bank is subject to special provisions in the
federal and New York state tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. These deductions historically have
been determined using methods based on loss experience or a percentage of
taxable income. Tax bad debt reserves represent the excess of allowable
deductions over actual bad debt losses and other reserve reductions. These
reserves consist of a defined base-year amount, plus additional amounts ("excess
reserves") accumulated after the base year. Deferred tax liabilities have been
recognized with respect to such excess reserves, as well as any portion of the
base-year amount which is expected to become taxable (or "recaptured") in the
foreseeable future.
Certain amendments to the federal and New York state tax laws regarding bad
debt deductions were enacted in 1996. The federal amendments include elimination
of the percentage-of-taxable-income method for tax years beginning after
December 31, 1995 and imposition of a requirement to recapture into taxable
income (over a six-year period) the bad debt reserves in excess of the base-year
amounts. This recapture requirement had no significant effect on the Bank since
its federal bad debt reserves approximated the base-year amounts. The New York
State amendments redesignate the Bank's state bad debt reserves at December 31,
1995 as the base-year amount and also provide for future additions to the base-
year reserve using the percentage-of-taxable-income method. This change
effectively eliminated the excess New York State reserves for which the Company
had recognized a deferred tax liability. Accordingly, the Company reduced its
deferred tax liability in the quarter ended September 30, 1996, by $166,000,
representing a state deferred tax benefit of $252,000 less related deferred
federal taxes of $86,000.
At March 31, 1998, the Bank's federal and state bad debt reserves were $1.2
million and $5.2 million, respectively, which equaled the base-year amounts.
Deferred tax liabilities have not been recognized with respect to these reserves
since the Company does not expect that such amounts will become taxable in the
foreseeable future. Under the tax laws as amended, events that would result in
taxation of these reserves
F-18
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
include (i) redemptions of the Bank's stock or certain excess distributions to
the Registrant, and (ii) failure of the Bank to maintain a specified qualifying
assets ratio or meet other thrift definition tests for New York State tax
purposes. At March 31, 1998, the Bank's unrecognized deferred tax liabilities
with respect to the federal and state base-year reserves were approximately $0.2
million and $0.6 million, respectively.
(8) POSTRETIREMENT BENEFITS AND DEFERRED COMPENSATION PLANS
PENSION PLANS AND DEFERRED COMPENSATION PLAN
All eligible employees are included in a non-contributory, multiple-employer
defined benefit pension plan (the "Pension Plan"). The Company's annual
contributions to the Pension Plan are based on actuarially determined funding
requirements. The Company has also established a non-qualified deferred
compensation plan for directors of the Bank or the Registrant, which was adopted
in its amended form upon Conversion (the "Deferred Compensation Plan").
The following is a reconciliation of the funded status of these plans and
the assets (liabilities) recognized in the consolidated balance sheets at March
31:
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION PLAN
PENSION PLAN
-------------------- ----------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
--------- --------- --------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation - vested................................ $ (1,173) $ (1,040) $ (1,035) $ (928)
Accumulated benefit obligation - non-vested............................ (1) -- -- --
--------- --------- --------- -----
Total accumulated benefit obligation................................. (1,174) (1,040) (1,035) (928)
Effect of projected future compensation levels......................... (198) (234) -- --
--------- --------- --------- -----
Projected benefit obligation for service rendered to date................ (1,372) (1,274) (1,035) (928)
Plan assets (insurance contract, at contract value)...................... 1,166 1,050 -- --
--------- --------- --------- -----
Projected benefit obligation in excess of plan assets.................... (206) (224) (1,035) (928)
Unrecognized prior service cost.......................................... -- -- 556 751
Unrecognized net loss (gain) from experience different from that assumed
and effect of changes in assumptions................................... 128 113 (196) (241)
Unrecognized net transition obligation................................... 82 90 -- --
Additional minimum liability recognized with a corresponding intangible
asset (note 4)......................................................... -- -- (360) (510)
--------- --------- --------- -----
Assets (Liabilities) recognized...................................... $ 4 $ (21) $ (1,035) $ (928)
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>
F-19
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) POSTRETIREMENT BENEFITS AND DEFERRED COMPENSATION PLANS (CONTINUED)
Plan expense consisted of the following components for the years ended March
31:
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION
PENSION PLAN PLAN
------------------ ---------
<S> <C> <C> <C> <C>
1998 1997 1996 1998
--------- ----- ----- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service cost (benefits earned during the period)........................... $ 31 $ 30 $ 28 $ 29
Interest cost on projected benefit obligation.............................. 91 87 81 72
Return on plan assets...................................................... (102) (80) (80) --
Net amortization and deferral.............................................. 18 13 9 166
--- --- --- ---------
Net expense.............................................................. $ 38 $ 50 $ 38 $ 267
--- --- --- ---------
--- --- --- ---------
<CAPTION>
<S> <C> <C>
1997 1996
----------- ---------
<S> <C> <C>
Service cost (benefits earned during the period)........................... $ 39 $ 23
Interest cost on projected benefit obligation.............................. 59 43
Return on plan assets...................................................... -- --
Net amortization and deferral.............................................. 158 98
----- ---------
Net expense.............................................................. $ 256 $ 164
----- ---------
----- ---------
</TABLE>
The actuarial present values of the projected benefit obligations at March
31,1998 were determined for the Pension Plan and the Deferred Compensation Plan
based on discount rates of 6.75% and 7.00%, respectively. The discount rate used
for both plans at March 31, 1997 was 7.50%. Actuarial amounts for the Pension
Plan were also based on rates of increase in future compensation levels of 4.50%
in 1998 and 5.5% in 1997, and expected long-term rates of return on plan assets
of 8.5% in both years.
Under the Deferred Compensation Plan, directors may defer all or part of
their compensation received for services to the Company (including compensation
paid to an officer-director for service as an officer). Deferred amounts are
applied to either the purchase of (i) a life insurance policy, in which case the
amount of deferred benefits payable is based on the value to the Company of
expected death benefit proceeds, or (ii) Company common stock and other
investments, in which case the amount of deferred benefits payable is based on
the investment performance of the investments made. Deferred benefits are paid
in installments over a ten-year period beginning upon termination of service as
a director. In the event of a change in control of the Registrant or the Bank,
the plan requires full funding of any previously-purchased life insurance
contracts. In connection with the Conversion, the Company established a trust
fund with an independent fiduciary for the purpose of accumulating funds to be
used to satisfy its obligations under the plan.
For financial reporting purposes the value of the life insurance contracts
are not considered plan assets but, instead, are included in the Company's
consolidated balance sheet. At March 31, 1998, the cash surrender values of
purchased life insurance policies were approximately $299,000. Compensation and
benefits expense for fiscal years 1998 and 1997 and for the six-month period
ended March 31, 1996 was reduced by $46,000, $91,000 and $60,000, respectively,
with respect to the recognition of additional cash surrender values on these
policies. The total death benefits payable under the insurance policies amounted
to approximately $916,000 at March 31, 1998. Although the Company may be
obligated for certain cash payments prior to the receipt of proceeds from the
purchased life insurance policies, the Company should ultimately be reimbursed
in whole from such life insurance proceeds.
The Company also has a retirement plan for directors, which is a
non-qualified plan that became effective upon the Conversion. Outside directors
are participants in this unfunded plan only if they have elected not to
participate in the Deferred Compensation Plan described above. Participants in
the directors' retirement plan who have attained age 65 and completed ten or
more years of service (including past service as a director of the Bank) will
receive an annual retirement benefit equal to the aggregate director
compensation received (excluding stock compensation) for the final year of board
service. Reduced benefits apply for shorter service periods and for early
retirement. Pension expense was $16,000
F-20
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) POSTRETIREMENT BENEFITS AND DEFERRED COMPENSATION PLANS (CONTINUED)
for the fiscal years 1998 and 1997 and $8,000 for the six-month period ended
March 31, 1996. The actuarial present value of the accumulated and projected
benefit obligations both were $78,000 at March 31, 1998 and $65,000 at March 31,
1997.
POSTRETIREMENT HEALTH CARE BENEFITS
Substantially all employees become eligible for postretirement health care
(medical and dental) benefits if they meet certain age and length of service
requirements. The cost of postretirement health care benefits is recognized on
an accrual basis as such benefits are earned by active employees.
The following is a reconciliation of the actuarial liabilities for
postretirement health care benefits, none of which have been funded, and the
liabilities recognized in the consolidated balance sheets at March 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Accumulated benefit obligation:
Retirees................................................................... $ (209) $ (62)
Fully-eligible employees................................................... (97) (74)
Other active participants.................................................. (214) (57)
--------- ---------
Total accumulated benefit obligation..................................... (520) (193)
Unrecognized net actuarial loss (gain)....................................... 280 (9)
--------- ---------
Liabilities recognized................................................... $ (240) $ (202)
--------- ---------
--------- ---------
</TABLE>
The net periodic postretirement benefit expense consisted of the following
components for the years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
(IN THOUSANDS)
Service cost (benefits earned during the period)......................... $ 12 $ 3 $ 3
Interest cost on accumulated benefit obligation.......................... 33 14 18
Net amortization and deferral............................................ 10 -- 4
--- --- ---
Net expense.......................................................... $ 55 $ 17 $ 25
--- --- ---
--- --- ---
</TABLE>
The accumulated postretirement benefit obligation was determined using the
projected unit credit cost method with a discount rate of 6.75% and 7.25% at
March 31, 1998 and 1997, respectively. The assumed rate of increase in future
health care costs was 7.0% for 1998, gradually decreasing to 5.0% in the year
2005 and remaining at that level thereafter. A one-percentage-point increase in
the assumed health care cost trend rate would increase the accumulated benefit
obligation by approximately $91,000 at March 31, 1998 with an insignificant
effect on expense recognized for the year then ended.
F-21
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCK-BASED COMPENSATION PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Conversion, the Company established an Employee Stock
Ownership Plan (the "ESOP") for eligible employees. The ESOP borrowed
approximately $1.3 million from the Registrant and used the funds to purchase
129,600 shares of the Registrant's common stock sold in the offering. The Bank
makes monthly contributions to the ESOP sufficient to fund the debt service
requirements over the ten-year term of the loan from the Registrant.
Shares purchased by the ESOP are held in a suspense account by the plan
trustee for allocation to participants as the loan is repaid. Shares released
from the suspense account are allocated to participants on the basis of their
relative compensation. Participants become vested in the shares allocated to
their respective accounts over a period not to exceed five years. Any forfeited
shares are allocated to other participants in the same proportion as
contributions. Shares allocated to participants or committed for release to
participants totaled 15,225 in fiscal 1998, 15,893 in fiscal 1997 and 8,124 in
the six-month period ended March 31, 1996. Expense recognized with respect to
such shares amounted to $274,000 in fiscal 1998, $208,000 in fiscal 1997 and
$89,000 in the six-month period ended March 31, 1996, based on the average fair
value of the Registrant's common stock for each period. The cost of the 90,358
shares which have not yet been committed to be released to participant accounts
at March 31, 1998 is reflected as a reduction of shareholders' equity in the
amount of $904,000. The fair value of these shares was approximately $1.8
million at that date.
STOCK OPTION PLANS
On July 10, 1996, the Company's shareholders approved the Tappan Zee
Financial, Inc. 1996 Stock Option Plan for Officers and Employees ("Stock Option
Plan") and the Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside
Directors ("Directors' Stock Option Plan").
Under the Stock Option Plan, 113,400 shares of authorized but unissued
Registrant stock are reserved for issuance upon option exercises. Options under
this plan may be either non-qualified stock options or incentive stock options.
Each option entitles the holder to purchase one share of common stock at an
exercise price equal to the fair market value on the date of grant. Options
expire no later than ten years following the date of grant.
Under the Directors' Stock Option Plan, 48,600 shares of authorized but
unissued Registrant stock are reserved for issuance to outside directors upon
option exercises. Options granted under this plan are non-qualified options.
Other option terms and conditions are similar to those under the Stock Option
Plan.
Effective July 10, 1996, initial option grants were made under the Stock
Option Plan and the Directors' Stock Option Plan for 81,000 shares and 40,500
shares, respectively, at an exercise price of $11.625 per share. These options
have a ten-year term and vest ratably over five years from the date of grant.
Each option, however, becomes fully exercisable upon a change in control of the
Registrant or the Bank, or upon the death, disability or retirement of the
option holder. No options were granted during the year ended March 31, 1998. All
options granted in July 1996 were outstanding at March 31, 1998 with a remaining
life of 8.3 years; 24,300 options were exercisable at that date. At March 31,
1998, shares available for future grants totaled 32,400 for the Stock Option
Plan and 8,100 for the Directors' Stock Option Plan.
F-22
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCK-BASED COMPENSATION PLANS (CONTINUED)
Options were granted at an exercise price equal to the fair value of the
common stock at the grant date. Therefore, in accordance with the provisions of
APB Opinion No. 25 related to fixed stock options, no compensation expense is
recognized with respect to options granted or exercised. Had the Company applied
the fair-value-based method of SFAS No. 123 to the options granted, using the
Black-Scholes option-pricing model, net income and earnings per share for the
years ended March 31, 1998 and 1997 would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
NET INCOME:
As reported............................................................... $ 1,097 $ 855
Pro forma (1)............................................................. $ 1,012 $ 795
BASIC EPS:
As reported............................................................... $ 0.80 $ 0.60
Pro forma (1)............................................................. $ 0.74 $ 0.56
DILUTED EPS:
As reported............................................................... $ 0.77 $ 0.59
Pro forma (1)............................................................. $ 0.71 $ 0.58
</TABLE>
- ------------------------
(1) The estimated per-share fair value of options granted in July 1996 was
$4.06, using the following assumptions: dividend yield of 2.0%; expected
volatility of 25.3%; risk-free interest rate of 7.1%; and expected option
life of 7 years. There were no options granted in fiscal 1998.
RECOGNITION AND RETENTION PLANS
On July 10, 1996, the Company's shareholders approved the Tappan Zee
Financial, Inc. Recognition and Retention Plan for Officers and Employees
("Employees' Plan") and the Tappan Zee Financial, Inc. Recognition and Retention
Plan for Outside Directors ("Directors' Plan"). The purpose of these plans is to
provide officers and non-employee directors of the Company with a proprietary
interest in the Company in a manner designed to encourage their retention. Total
shares authorized are 45,360 for the Employees' Plan and 19,440 for the
Directors' Plan.
Effective July 10, 1996, initial stock awards were made under the Employees'
Plan and the Directors' Plan for 32,400 shares and 19,440 shares, respectively.
These awards vest ratably over five years from the date of grant; however,
immediate vesting occurs upon a change in control of the Registrant or the Bank,
or upon the death, disability or retirement of the participant. An additional
grant of 1,000 shares was made under the Employees' Plan later in fiscal 1997.
The fair value of the shares awarded under the plans, totaling $616,000 at the
grant dates, is being amortized to compensation expense on a straight-line basis
over the five-year vesting periods. Compensation expense of $123,000 and $92,000
was recognized in fiscal 1998 and 1997. Unearned compensation cost of $401,000
is reflected as a reduction of shareholders' equity at March 31, 1998.
F-23
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) SHAREHOLDERS' EQUITY
LIQUIDATION ACCOUNT
In accordance with regulatory requirements, the Bank established a
liquidation account at the time of the Conversion in the amount of $7.8 million,
equal to its equity at March 31, 1995. The liquidation account is maintained for
the benefit of eligible account holders who continue to maintain their accounts
at the Bank after the Conversion. The liquidation account is reduced annually to
the extent that eligible account holders have reduced their qualifying deposits
as of each anniversary date. Subsequent increases do not restore an eligible
account holder's interest in the liquidation account. In the event of a complete
liquidation of the Bank, each eligible account holder and supplemental eligible
account holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held.
CAPITAL DISTRIBUTIONS
The Bank may not declare or pay cash dividends on or repurchase any of its
shares of common stock if the effect thereof would cause equity to be reduced
below applicable regulatory capital requirements or the amount required to be
maintained for the liquidation account. The OTS capital distribution regulations
applicable to savings institutions (such as the Bank) that meet their regulatory
capital requirements, generally limit dividend payments in any year to the
greater of (i) 100% of year-to-date net income plus an amount that would reduce
surplus capital by one-half or (ii) 75% of net income for the most recent four
quarters. Surplus capital is the excess of actual capital at the beginning of
the year over the institution's minimum regulatory capital requirement. The cash
dividends paid by the Bank to the Registrant in fiscal 1998, 1997 and 1996 were
not affected by this limitation.
Unlike the Bank, the Registrant is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders. The Registrant is
subject, however, to Delaware law which generally limits dividends to an amount
equal to the excess of the net assets of the Registrant (the amount by which
total assets exceed total liabilities) over its statutory capital, or if there
is no such excess, to its net profits for the current and/or immediately
preceding fiscal year.
To date, the Registrant has repurchased 142,000 shares of its common stock
(or approximately 8.8% of its common stock issued) for the treasury, in open
market transactions, at a total cost of $2.1 million or $14.51 per share.
REGULATORY CAPITAL REQUIREMENTS
OTS regulations require savings institutions to maintain a minimum ratio of
tangible capital to total adjusted assets of 1.5%; a minimum ratio of Tier I
(core) capital to total adjusted assets of 4.0% (3.0% at March 31, 1997); a
minimum ratio of Tier I (core) capital to risk-weighted assets of 4.0% (no
requirement at March 31, 1997); and a minimum ratio of total (core and
supplementary) capital to risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of savings institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
F-24
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) SHAREHOLDERS' EQUITY (CONTINUED)
Generally, an institution is considered well capitalized if it has a Tier I
(core) capital ratio of at least 5.0%; a Tier I risk-based capital ratio of at
least 6.0%; and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS about
capital components, risk weightings and other factors. These capital
requirements, which are applicable to the Bank only, do not consider additional
capital at the holding company level.
Management believes that, as of March 31, 1998 and 1997, the Bank met all
capital adequacy requirements to which it is subject. Further, the most recent
OTS notification categorized the Bank as a well-capitalized institution under
the prompt corrective action regulations. There have been no conditions or
events since that notification that management believes have changed the Bank's
capital classification.
The following is a summary of the Bank's actual capital amounts and ratios
as of March 31, 1998 and 1997, compared to the OTS requirements for
classification as a well-capitalized institution and for minimum capital
adequacy:
<TABLE>
<CAPTION>
FOR CLASSIFICATION AS
MINIMUM CAPITAL
BANK ACTUAL WELL CAPITALIZED ADEQUACY
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----- --------- ----- --------- -----
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
MARCH 31, 1998
Tangible Capital..................................... $ 17,292 13.8% N/A N/A $ 1,878 1.5%
Tier I (core) Capital................................ 17,292 13.8 $ 6,259 5.0% 5,007 4.0
Risk-based Capital:
Tier I............................................. 17,292 43.3 2,394 6.0 1,596 4.0
Total.............................................. 17,793 44.6 3,989 10.0 3,191 8.0
MARCH 31, 1997
Tangible Capital..................................... $ 16,607 14.1% N/A N/A $ 1,763 1.5%
Tier I (core) Capital................................ 16,607 14.1 $ 5,876 5.0% 3,526 3.0
Risk-based Capital:
Tier I............................................. 16,607 38.2 2,606 6.0 N/A N/A
Total.............................................. 17,151 39.5 4,344 10.0 3,475 8.0
</TABLE>
(11) EARNINGS PER SHARE
As discussed in note 1, the Company has adopted SFAS No. 128, "Earnings Per
Share" and restated its EPS data for all periods to present basic EPS and
diluted EPS in accordance with the new requirements. The following is an
analysis of the Company's EPS computations under SFAS No. 128 for the years
F-25
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) EARNINGS PER SHARE (CONTINUED)
ended March 31, 1998 and 1997 and the period from October 5, 1995 (the
Conversion date) to March 31, 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
BASIC EPS:
Net income available to common shareholders.......... $ 1,097 $ 855 $ 470
---------- ---------- ----------
Weighted average common shares outstanding........... 1,372,051 1,426,735 1,495,086
---------- ---------- ----------
Basic EPS............................................ $ 0.80 $ 0.60 $ 0.31
---------- ---------- ----------
---------- ---------- ----------
DILUTED EPS:
Net income........................................... $ 1,097 $ 855 $ 470
---------- ---------- ----------
Weighted average common shares outstanding........... 1,372,051 1,426,735 1,495,086
Dilutive common stock equivalents:
Common stock equivalents due to the dilutive effect
of stock options under the treasury stock
method........................................... 37,319 12,125 --
Common stock equivalents due to the dilutive effect
of RRP awards under the treasury stock method.... 13,929 10,540 --
---------- ---------- ----------
Total weighted average diluted shares................ 1,423,299 1,449,400 1,495,086
---------- ---------- ----------
Diluted EPS.......................................... $ 0.77 $ 0.59 $ 0.31
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(12) COMMITMENTS AND CONTINGENCIES
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Company's off-balance sheet financial instruments at March 31, 1998 and
1997 were limited to fixed-rate mortgage loan origination commitments with total
contractual amounts of $965,000 and $1.5 million, respectively, and weighted
average interest rates of 7.49% and 8.61%, respectively. These instruments
involve elements of credit risk and interest rate risk in addition to the
amounts recognized in the consolidated balance sheets. The contractual amounts
represent the Company's maximum potential exposure to credit loss, but do not
necessarily represent future cash requirements since certain commitments may
expire without being funded. Loan commitments generally have fixed expiration
dates or other termination clauses and may require the payment of a fee by the
customer. Commitments are subject to the credit approval process applied in the
Company's general lending activities, including a case-by-case evaluation of the
customer's creditworthiness and related collateral requirements.
LEGAL PROCEEDINGS
In the normal course of business, the Company is involved in various
outstanding legal proceedings. Management has discussed the nature of these
proceedings with legal counsel. In the opinion of
F-26
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES (CONTINUED)
management, the financial position of the Company will not be materially
affected as a result of the outcome of such legal proceedings.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires the Company to disclose fair value information about
financial instruments for which it is practicable to estimate fair value,
whether or not such financial instruments are recognized on the balance sheet.
Fair value is the amount at which a financial instrument could be exchanged in a
current transaction between willing parties, other than in a forced sale or
liquidation.
Quoted market prices are used to estimate fair values when those prices are
available. However, active markets do not exist for many types of financial
instruments. Consequently, fair values for these instruments must be estimated
by management using techniques such as discounted cash flow analysis and
comparison to similar instruments. Estimates developed using these methods are
highly subjective and require judgments regarding significant matters, such as
the amount and timing of future cash flows and the selection of discount rates
that appropriately reflect market and credit risks. Changes in these judgments
often have a material effect on the fair value estimates. In addition, since
these estimates are made as of a specific point in time, they are susceptible to
material near-term changes. Fair values disclosed in accordance with SFAS No.
107 do not reflect any premium or discount that could result from the sale of a
large volume of a particular financial instrument, nor do they reflect possible
tax ramifications or estimated transaction costs.
The following is a summary of the carrying values and estimated fair values
of the Company's financial assets and liabilities (none of which were held for
trading purposes) at March 31:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------------
<S> <C> <C> <C> <C>
1998 1997
------------------------ ------------------------
<CAPTION>
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks..................... $ 783 $ 783 $ 912 $ 912
Interest-bearing deposits................... 2,401 2,401 1,438 1,438
Federal funds sold.......................... 6,200 6,200 5,900 5,900
Securities.................................. 58,399 58,839 54,507 54,273
Loans, net.................................. 57,623 58,812 55,110 54,909
FHLB stock.................................. 943 943 674 674
Accrued interest receivable................. 747 747 778 778
FINANCIAL LIABILITIES:
Savings certificate accounts................ 71,056 71,173 62,878 62,816
Other deposit accounts...................... 33,937 33,937 35,449 35,449
</TABLE>
The following is a description of the principal valuation methods used by
the Company to estimate the fair values of its financial instruments:
SECURITIES. Fair values were determined by published market prices or
securities dealers' estimated prices.
F-27
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
LOANS. Fair values were estimated by portfolio, for loans with similar
financial characteristics. Loans were segregated by type, such as one-to four-
family residential, multi-family residential, commercial real estate, consumer
and commercial loans. Each loan category was further segmented into fixed and
adjustable-rate categories, and by performing and non-performing categories. The
pricing methodology for performing one- to four-family residential mortgage
loans was determined based on the zero-coupon yield curve plus the
option-adjusted spread for fixed-rate mortgages. The fair values for performing
loans in other portfolio categories were estimated by discounting the expected
cash flows using current market rates for loans with similar terms to borrowers
of similar credit quality. The fair values of non-performing loans were based on
management's analysis of estimated cash flows discounted at rates commensurate
with the credit risk involved.
DEPOSIT LIABILITIES. The fair value of savings certificate accounts
represents contractual cash flows discounted using interest rates currently
offered on accounts with similar characteristics and remaining maturities. In
accordance with SFAS No. 107, the fair values of other deposit accounts (those
with no stated maturity such as savings accounts) are equal to the carrying
amounts payable on demand. In accordance with SFAS No. 107, these fair values do
not include the value of core deposit relationships which comprise a significant
portion of the Company's deposit base. Management believes that the Company's
core deposit relationships provide a relatively stable, low-cost funding source
which has a substantial unrecognized value separate from the deposit balances.
OTHER FINANCIAL INSTRUMENTS. The other financial assets and liabilities
listed in the preceding table have fair values that approximate the respective
carrying values because the instruments are payable on demand or have short-term
maturities, and present relatively low credit risk and interest rate risk. Fair
values of the loan origination commitments described in note 12 were estimated
based on an analysis of the interest rates and fees currently charged to enter
into similar transactions, considering the remaining terms of the instruments
and the creditworthiness of the potential borrowers. At March 31, 1998 and 1997,
the fair values of these commitments approximated the related carrying values
which were not significant.
F-28
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Set forth below are the condensed balance sheets of Tappan Zee Financial,
Inc. as of March 31, 1998 and 1997, and its condensed statements of income and
cash flows for the years ended March 31, 1998 and 1997 and the period from
October 5, 1995 (the Conversion date) to March 31, 1996:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
<S> <C> <C>
CONDENSED BALANCE SHEETS 1998 1997
--------- ---------
<CAPTION>
(IN THOUSANDS)
--------------------
<S> <C> <C>
ASSETS
Cash.................................................................. $ 238 $ 271
Securities and interest-bearing deposits.............................. 2,820 4,662
Investment in subsidiaries............................................ 18,520 16,298
Other assets.......................................................... 241 8
--------- ---------
Total assets........................................................ $ 21,819 $ 21,239
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses...................................................... $ 19 $ 11
Shareholders' equity.................................................. 21,800 21,228
--------- ---------
Total liabilities and shareholders' equity.......................... $ 21,819 $ 21,239
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME 1998 1997 1996*
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Dividends from subsidiaries............................................................. $ 400 $ 360 $ 90
Interest income......................................................................... 203 255 78
Non-interest expense.................................................................... (182) (152) (22)
--------- --------- ---------
Income before income tax expense and equity in undistributed earnings of
subsidiaries........................................................................ 421 463 146
Income tax expense...................................................................... 8 38 33
--------- --------- ---------
Income before equity in undistributed earnings of subsidiaries........................ 413 425 113
Equity in undistributed earnings of subsidiaries........................................ 684 430 357
--------- --------- ---------
Net income.......................................................................... $ 1,097 $ 855 $ 470
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
* From the date of Conversion, October 5, 1995
F-29
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) PARENT COMPANY CONDENSED FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
PERIOD ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS 1998 1997 1996*
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................................................... $ 1,097 $ 855 $ 470
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries................................. (684) (430) (357)
Other adjustments, net........................................................... 194 297 6
--------- --------- ---------
Net cash provided by operating activities...................................... 607 722 119
--------- --------- ---------
Cash flows from investing activities:
Purchase of common stock of subsidiaries........................................... (1,100) -- (7,357)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from sale of common stock, exclusive of ESOP shares................... -- -- 13,605
Purchase of common stock for awards under RRP...................................... -- (714) --
Purchase of treasury stock......................................................... (990) (1,070) --
Dividends paid..................................................................... (392) (291) (81)
--------- --------- ---------
Net cash provided by financing activities........................................ (1,382) (2,075) 13,524
(Decrease) increase in cash and cash equivalents..................................... (1,875) (1,353) 6,286
Cash and cash equivalents at beginning of period..................................... 4,933 6,286 --
--------- --------- ---------
Cash and cash equivalents at end of period........................................... $ 3,058 $ 4,933 $ 6,286
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
* From the date of Conversion, October 5, 1995
(15) MERGER AGREEMENT
On March 6, 1998, the Registrant entered into a definitive agreement
("Merger Agreement") pursuant to which the Registrant will merge with and into
U.S.B. Holding Co., Inc. ("USB"), a registered bank holding company and parent
company of Union State Bank, a New York State chartered commercial bank. The
Bank will operate as a wholly-owned subsidiary of USB.
Under the terms of the Merger Agreement, each shareholder of the Registrant
will receive USB common stock that is anticipated to have a value of $22.00 per
share for each share of the Registrant. The exchange ratio will be fixed upon
receipt of all regulatory approvals. The minimum exchange ratio will be 0.88
shares of USB common stock for each share of the Registrant's common stock, if
USB's common stock has a value of $25.00 per share, or higher, and subject to
the exception below, the maximum exchange ratio will be 1.24 shares of USB
common stock for each share of Registrant common stock if USB's common stock has
a value of $17.75, or lower. If USB's common stock has a value of between $17.75
and $25.00 per share, the Exchange Ratio will be established to provide a value
to the Registrant's shareholders of $22.00 per share. If USB's common stock
falls below $15.00 per share, the Registrant will have the right to terminate
the transaction subject to USB's right to adjust the Exchange Ratio so as to
assure the Registrant's shareholders receive a value of $18.60 per Registrant
share.
The transaction is intended to be a tax free exchange of common shares and
will be accounted for as a pooling of interests. The transaction is subject to
receipt of regulatory approvals and the approval of the Registrant's
shareholders. The transaction will be presented for approval at a special
meeting of the Registrant's shareholders.
F-30
<PAGE>
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) MERGER AGREEMENT (CONTINUED)
In connection with the Merger Agreement, the Registrant and USB also entered
into a Stock Option Agreement which, under certain defined circumstances, would
enable USB to purchase up to 294,134, or 19.9%, of the Registrant's issued and
outstanding common stock at a price of $18.50 per share.
(16) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 1998 and 1997 is shown below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
<S> <C> <C> <C> <C>
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
--------- ------------- ------------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
FISCAL 1998
Interest income............................. $ 2,265 $ 2,327 $ 2,348 $ 2,453
Interest expense............................ 1,132 1,179 1,201 1,209
--------- ------ ------ -----------
Net interest income....................... 1,133 1,148 1,147 1,244
Provision for loan losses................... 11 10 11 10
Non-interest income......................... 50 48 79 91
Non-interest expense........................ 714 766 778 752
--------- ------ ------ -----------
Income before income tax expense.......... 458 420 437 573
Income tax expense.......................... 193 176 183 239
--------- ------ ------ -----------
Net income................................ $ 265 $ 244 $ 254 $ 334
--------- ------ ------ -----------
--------- ------ ------ -----------
Basic earnings per share.................. $ 0.19 $ 0.18 $ 0.19 $ 0.24
--------- ------ ------ -----------
--------- ------ ------ -----------
Diluted earnings per share................ $ 0.19 $ 0.17 $ 0.18 $ 0.23
--------- ------ ------ -----------
--------- ------ ------ -----------
FISCAL 1997
Interest income............................. $ 2,088 $ 2,155 $ 2,152 $ 2,196
Interest expense............................ 1,004 1,018 1,022 1,062
--------- ------ ------ -----------
Net interest income....................... 1,084 1,137 1,130 1,134
Provision for loan losses................... 6 20 20 23
Non-interest income......................... 40 34 31 47
Non-interest expense (1).................... 677 1,306 708 696
--------- ------ ------ -----------
Income (loss) before income tax expense... 441 (155) 433 462
Income tax expense (benefit) (1)............ 187 (229) 175 193
--------- ------ ------ -----------
Net income................................ $ 254 $ 74 $ 258 $ 269
--------- ------ ------ -----------
--------- ------ ------ -----------
Basic earnings per share.................. $ 0.17 $ 0.05 $ 0.18 $ 0.19
--------- ------ ------ -----------
--------- ------ ------ -----------
Diluted earnings per share................ $ 0.17 $ 0.05 $ 0.18 $ 0.19
--------- ------ ------ -----------
--------- ------ ------ -----------
</TABLE>
- ------------------------
(1) For the quarter ended September 30, non-interest expense includes the SAIF
special assessment of $538,000 and income tax benefit includes $166,000
attributable to a change in state tax law. See notes 5 and 7.
F-31
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BETWEEN
U.S.B. HOLDING CO., INC.
AND
TAPPAN ZEE FINANCIAL, INC.
DATED AS OF MARCH 6, 1998
<PAGE>
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger (the "Agreement"), dated as of March 6, 1998,
by and between U.S.B. Holding Co., Inc. (the "Acquiror"), a Delaware
corporation, and Tappan Zee Financial, Inc. (the "Company"), a Delaware
corporation.
W I T N E S S E T H:
WHEREAS, the Board of Directors of each of the Acquiror and the Company have
determined that it is in the best interests of their respective companies and
their shareholders to consummate the business combination transaction provided
for herein, including the merger of the Company with and into the Acquiror,
subject to the terms and conditions set forth herein; and
WHEREAS, the parties desire to provide for certain undertakings, conditions,
representations, warranties and covenants in connection with the transactions
contemplated hereby; and
WHEREAS, as a condition and inducement to the Acquiror's willingness to
enter into this Agreement, (i) the Company is concurrently entering into a Stock
Option Agreement with the Acquiror (the "Company Stock Option Agreement"), in
substantially the form attached hereto as Exhibit A, pursuant to which the
Company is granting to the Acquiror the option to purchase shares of Company
Common Stock (as defined herein) under certain circumstances, (ii) the directors
and certain officers of the Company are concurrently entering into an agreement
with the Acquiror (the "Company Affiliate Agreement"), in substantially the form
attached hereto as Exhibit B, pursuant to which, among other things, each such
stockholder agrees to vote his or her shares of Company Common Stock in favor of
this Agreement and the transactions contemplated hereby and (iii) Messrs.
Stephen C. Byelick and Harry G. Murphy are concurrently entering into letter
agreements, in substantially the forms attached hereto as Exhibits C and D,
respectively; and
WHEREAS, as a condition and inducement to the Company's willingness to enter
into this Agreement, the directors and certain officers of the Acquiror are
concurrently entering into an agreement with the Company (the "Acquiror
Affiliate Agreement"), in substantially the form attached hereto as Exhibit E;
and
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
and agreements herein contained, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
The following terms shall have the meanings ascribed to them for all
purposes of this Agreement.
"Acquiror Common Stock" shall mean the common stock, par value $5.00 per
share, of the Acquiror.
"Acquiror Employee Stock Benefit Plans" shall mean the following employee
benefit plans of the Acquiror, as amended and in effect from time to time: 1984
Incentive Stock Option Plan, 1993 Incentive Stock Option Plan, 1997 Employee
Stock Option Plan, U.S.B. Holding Co., Inc. Employee Stock Ownership Plan (with
401(k) Provision), Dividend Reinvestment and Stock Purchase Plan, Director Stock
Option Plan and Key Employees' Supplemental Investment Plan for Salaried
Employees.
"Acquiror Financial Statements" shall mean (i) the consolidated statements
of condition (including related notes and schedules, if any) of the Acquiror as
of December 31, 1996, 1995 and 1994 and the consolidated statements of income,
shareholders' equity and cash flows (including related notes and schedules, if
any) of the Acquiror for each of the three years ended December 31, 1996, 1995
and 1994 as filed by the Acquiror in its Securities Documents, and (ii) the
consolidated statements of condition of the Acquiror (including related notes
and schedules, if any) and the consolidated statements of income, shareholders'
equity and cash flows (including related notes and schedules, if any) of the
Acquiror included
A-2
<PAGE>
in the Securities Documents filed by the Acquiror with respect to the quarterly
and annual periods ended subsequent to December 31, 1996.
"Acquiror Bank" shall mean Union State Bank, a New York chartered bank and a
wholly-owned subsidiary of the Acquiror.
"Acquiror Preferred Stock" shall mean the shares of preferred stock, no par
value per share, of the Acquiror.
"Affiliate" means, with respect to any Person, any Person who directly, or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with, such Person and, without limiting the
generality of the foregoing, includes any executive officer or director of such
Person and any Affiliate of such executive officer or director.
"Average Closing Price" shall mean the average of the last reported sale
prices for the Acquiror Common Stock for the 20 consecutive AMEX Trading Days
ending with (and including) the date on which the last of the regulatory
approvals discussed in Section 6.1(b) required for consummation of the Merger is
obtained. "AMEX Trading Day" shall mean a full trading day for the American
Stock Exchange.
"Bank" shall mean Tarrytowns Bank, FSB, a federally-chartered savings bank
and a wholly-owned subsidiary of the Company.
"BHCA" shall mean the Bank Holding Company Act of 1956, as amended.
"BIF" means the Bank Insurance Fund administered by the FDIC or any
successor thereto.
"Closing" shall have the meaning set forth in Section 2.2 hereof.
"Closing Date" shall have the meaning set forth in Section 2.2 hereof.
"Certificate of Merger" shall have the meaning set forth in Section 2.2
hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall mean the Securities and Exchange Commission.
"Company Common Stock" shall mean the common stock, par value $0.01 per
share, of the Company.
"Company Employee Plans" shall have the meaning set forth in Section 3.14(a)
hereof and shall include the Company ESOP.
"Company ESOP" shall mean the Employee Stock Ownership Plan of Tappan Zee
Financial, Inc. and Affiliates.
"Company Financial Statements" shall mean (i) the consolidated statements of
financial condition (including related notes and schedules, if any) of the
Company as of March 31, 1997, 1996 and 1995 and the consolidated statements of
operations, shareholders' equity and cash flows (including related notes and
schedules, if any) of the Company for each of the three years ended March 31,
1997, 1996 and 1995 as filed by the Company in its Securities Documents, and
(ii) the consolidated statements of financial condition of the Company
(including related notes and schedules, if any) and the consolidated statements
of operations, shareholders' equity and cash flows (including related notes and
schedules, if any) of the Company included in the Securities Documents filed by
the Company with respect to the quarterly and annual periods ended subsequent to
March 31, 1997.
"Company Options" shall mean options to purchase shares of Company Common
Stock granted pursuant to the Company Stock Option Plans.
"Company Preferred Stock" shall mean the shares of preferred stock, par
value $0.01 per share, of the Company.
A-3
<PAGE>
"Company Stock Option Plans" shall mean the Company's 1996 Stock Option Plan
for Officers and Employees, as amended, and the Company's 1996 Stock Option Plan
for Outside Directors, as amended, each as in effect as of the date hereof.
"DGCL" shall mean the General Corporation Law of the State of Delaware, as
amended.
"DOJ" shall mean the United States Department of Justice.
"Effective Time" shall mean the date and time specified pursuant to Section
2.2 hereof as the effective time of the Merger.
"Environmental Claim" means any written notice from any Governmental Entity
or third party alleging potential liability (including, without limitation,
potential liability for investigatory costs, cleanup costs, governmental
response costs, natural resources damages, property damages, personal injuries
or penalties) arising out of, based on, or resulting from the presence, or
release into the environment, of any Materials of Environmental Concern.
"Environmental Laws" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with any governmental
entity relating to (1) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface soil, plant and
animal life or any other natural resource), and/or (2) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Materials of Environment Concern.
The term Environmental Law includes without limitation (1) the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
Section9601, ET SEQ; the Resource Conservation and Recovery Act, as amended, 42
U.S.C. Section6901, ET SEQ; the Clean Air Act, as amended, 42 U.S.C.
Section7401, ET SEQ; the Federal Water Pollution Control Act, as amended, 33
U.S.C. Section1251, ET SEQ; the Toxic Substances Control Act, as amended, 15
U.S.C. Section9601, ET SEQ; the Emergency Planning and Community Right to Know
Act, 42 U.S.C. Section1101, ET SEQ; the Safe Drinking Water Act, 42 U.S.C.
Section300f, ET SEQ; and all comparable state and local laws, and (2) any common
law (including without limitation common law that may impose 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 Materials of
Environmental Concern.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exchange Ratio" shall have the meaning set forth in Section 2.3(b) hereof.
"FDIA" shall mean the Federal Deposit Insurance Act, as amended.
"FDIC" shall mean the Federal Deposit Insurance Corporation or any successor
thereto.
"FHLB" shall mean Federal Home Loan Bank.
"Form S-4" shall mean the registration statement on Form S-4 (or on any
successor or other appropriate form) to be filed by the Acquiror in connection
with the issuance of shares of Acquiror Common Stock pursuant to the Merger,
including the Proxy Statement which forms a part thereof, as amended and
supplemented.
"FRB" means the Board of Governors of the Federal Reserve System or any
successor thereto.
"GAAP" means generally accepted accounting principles.
"Governmental Entity" shall mean any federal or state court, administrative
agency or commission or other governmental authority or instrumentality.
"HOLA" shall mean the Home Owners' Loan Act, as amended.
A-4
<PAGE>
"Material Adverse Effect" shall mean, with respect to the Acquiror or the
Company, respectively, any effect that (i) is material and adverse to the
financial condition, results of operations or business of the Acquiror and its
Subsidiaries taken as whole or the Company and its Subsidiaries taken as a
whole, respectively, or (ii) materially impairs the ability of the Company, on
the one hand, or the Acquiror, on the other hand, to consummate the transactions
contemplated by this Agreement, provided, however, that Material Adverse Effect
shall not be deemed to include the impact of (a) changes in laws and regulations
or interpretations thereof that are generally applicable to the banking or
savings industries, (b) changes in GAAP that are generally applicable to the
banking or savings industries, (c) expenses incurred in connection with the
transactions contemplated hereby or (d) actions or omissions of a party (or any
of its Subsidiaries) taken with the prior informed written consent of the other
party or parties in contemplation of the transactions contemplated hereby.
"Materials of Environmental Concern" means pollutants, contaminants, wastes,
toxic substances, petroleum and petroleum products and any other materials
regulated under Environmental Laws.
"Merger" shall mean the merger of the Company with and into the Acquiror
pursuant to the terms hereof.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"NYSBD" shall mean the New York State Banking Department.
"OTS" shall mean the Office of Thrift Supervision of the U.S. Department of
the Treasury or any successor thereto.
"PBGC" shall mean the Pension Benefit Guaranty Corporation, or any successor
thereto.
"Person" means any individual, corporation, partnership, joint venture,
association, trust or "group" (as that term is defined in Section 13(d)(3) of
the Exchange Act).
"Previously Disclosed" shall mean disclosed (i) in a letter dated the date
hereof delivered from the disclosing party to the other party specifically
referring to the appropriate section of this Agreement and describing in
reasonable detail the matters contained therein, or (ii) a letter dated after
the date hereof from the disclosing party specifically referring to this
Agreement and describing in reasonable detail the matters contained therein and
delivered by the other party pursuant to Section 5.13 hereof.
"Proxy Statement" shall mean the prospectus/proxy statement contained in the
Form S-4, as amended or supplemented, and to be delivered to shareholders of the
Company in connection with the solicitation of their approval of this Agreement
and the transactions contemplated hereby.
"Rights" shall mean warrants, options, rights, convertible securities and
other arrangements or commitments which obligate an entity to issue or dispose
of any of its capital stock or other ownership interests.
"SAIF" means the Savings Association Insurance Fund administered by the FDIC
or any successor thereto.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Securities Documents" shall mean all reports, offering circulars, proxy
statements, registration statements and all similar documents filed, or required
to be filed, pursuant to the Securities Laws.
"Securities Laws" shall mean the Securities Act; the Exchange Act; the
Investment Company Act of 1940, as amended; the Investment Advisers Act of 1940,
as amended; the Trust Indenture Act of 1939, as amended, and the rules and
regulations of the Commission promulgated thereunder.
"Severance Plan" shall mean the Severance Plan of Tarrytowns Bank, FSB.
A-5
<PAGE>
"Subsidiary" and "Significant Subsidiary" shall have the meanings set forth
in Rule 1-02 of Regulation S-X of the Commission.
Other terms used herein are defined in the preamble and elsewhere in this
Agreement.
ARTICLE II
THE MERGER
2.1 THE MERGER
(a) Subject to the terms and conditions of this Agreement, at the Effective
Time (as defined in Section 2.2 hereof), the Company shall be merged with and
into the Acquiror (the "Merger") in accordance with the provisions of Section
251 of the DGCL. The Acquiror shall be the surviving corporation (hereinafter
sometimes called the "Surviving Corporation") of the Merger, and shall continue
its corporate existence under the laws of the State of Delaware. The name of the
Surviving Corporation shall continue to be "U.S.B. Holding Co., Inc." Upon
consummation of the Merger, the separate corporate existence of the Company
shall terminate.
(b) From and after the Effective Time, the Merger shall have the effects set
forth in Section 259 of the DGCL.
(c) The Certificate of Incorporation and Bylaws of the Acquiror, as in
effect immediately prior to the Effective Time, shall be the Certificate of
Incorporation and Bylaws of the Surviving Corporation, respectively, until
altered, amended or repealed in accordance with their terms and applicable law.
(d) The authorized capital stock of the Surviving Corporation shall be as
stated in the Certificate of Incorporation of the Acquiror immediately prior to
the Effective Time.
(e) The directors and officers of the Acquiror immediately prior to the
Effective Time shall be the directors and officers of the Surviving Corporation,
subject to the provisions of Section 5.10 hereof, each to hold office in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation.
2.2 EFFECTIVE TIME; CLOSING
The Merger shall become effective upon the occurrence of the filing of a
Certificate of Merger with the Secretary of State of the State of Delaware
pursuant to the DGCL, unless a later date and time is specified as the effective
time in such Certificate of Merger (the "Effective Time"). A closing (the
"Closing") shall take place immediately prior to the Effective Time at 10:00
a.m., Eastern Time, on the fifth business day following the satisfaction or
waiver, to the extent permitted hereunder, of the conditions to the consummation
of the Merger specified in Article VI of this Agreement (other than the delivery
of certificates, opinions and other instruments and documents to be delivered at
the Closing) (the "Closing Date"), at the principal executive offices of the
Acquiror in Orangeburg, New York, or at such other place, at such other time, or
on such other date as the parties may mutually agree upon. At the Closing, there
shall be delivered to the Acquiror and the Company the opinions, certificates
and other documents required to be delivered under Article VI hereof. Subject to
the fulfillment or waiver at or prior to the Closing of the conditions to its
obligations set forth in Article VI, at the Closing each party shall execute and
deliver a Certificate of Merger for filing with the Secretary of State of the
State of Delaware.
2.3 TREATMENT OF CAPITAL STOCK
Subject to the provisions of this Agreement, at the Effective Time,
automatically by virtue of the Merger and without any action on the part of any
shareholder:
(a) each share of Acquiror Common Stock issued and outstanding immediately
prior to the Effective Time shall be unchanged and shall remain issued and
outstanding; and
A-6
<PAGE>
(b) subject to Section 2.6 hereof, each share of Company Common Stock issued
and outstanding immediately prior to the Effective Time (excluding shares held,
otherwise than in a fiduciary capacity for the benefit of third parties or as a
result of debts previously contracted, by the Acquiror or any of its
Subsidiaries, which shares shall be cancelled and retired) shall become and be
converted into the right to receive that number of shares of Acquiror Common
Stock equal to (i) if the Average Closing Price is greater than or equal to
$17.75 and less than or equal to $25.00, the quotient (rounded to the nearest
hundredth) determined by dividing (A) $22.00 by (B) the Average Closing Price,
(ii) if the Average Closing Price is less than $17.75, 1.24 shares or (iii) if
the Average Closing Price is greater than $25.00, 0.88 shares (subject to
possible adjustment as set forth in Sections 2.8 and 7.1(f) hereof, the
"Exchange Ratio").
2.4 SHAREHOLDER RIGHTS; STOCK TRANSFERS
At the Effective Time, holders of Company Common Stock shall cease to be and
shall have no rights as shareholders of the Company, other than to receive the
consideration provided under this Article II. After the Effective Time, there
shall be no transfers on the stock transfer books of the Company or the
Surviving Corporation of shares of Company Common Stock and if certificates
evidencing such shares are presented for transfer after the Effective Time, they
shall be cancelled against delivery of certificates for whole shares of Acquiror
Common Stock (plus cash in lieu of any fractional share interest) as herein
provided.
2.5 DISSENTING SHARES
Holders of shares of Company Common Stock will not have the right to dissent
under the DGCL and demand payment of the fair market value of such shares of
Company Common Stock.
2.6 FRACTIONAL SHARES
Notwithstanding any other provision hereof, no fractional shares of Acquiror
Common Stock shall be issued to holders of Company Common Stock. In lieu
thereof, each holder of shares of Company Common Stock entitled to a fraction of
a share of Acquiror Common Stock shall, at the time of surrender of the
certificate or certificates representing such holder's shares, receive an amount
of cash (without interest) equal to the product arrived at by multiplying such
fraction of a share of Acquiror Common Stock by $22.00. No such holder shall be
entitled to dividends, voting rights or any other rights in respect of any
fractional share interest.
2.7 EXCHANGE PROCEDURES
(a) On the Closing Date, the Acquiror shall issue to an agent, duly
appointed by the Acquiror and reasonably acceptable to the Company (the
"Exchange Agent"), the number of shares of Acquiror Common Stock issuable and
the amount of cash payable to holders of Company Common Stock pursuant to
Section 2.6 hereof (which shall be held by the Exchange Agent in trust for such
holders of Company Common Stock). Promptly after the Effective Time, the
Exchange Agent shall distribute Acquiror Common Stock and cash as provided
herein. The Exchange Agent shall not be entitled to vote or exercise any rights
of ownership with respect to the shares of Acquiror Common Stock held by it from
time to time hereunder.
(b) At or after the Effective Time, each holder of a certificate or
certificates theretofore evidencing issued and outstanding shares of Company
Common Stock (except as provided in Section 2.3(b) hereof), upon surrender of
the same to the Exchange Agent, shall be entitled to receive in exchange
therefor a certificate or certificates representing the number of whole shares
of Acquiror Common Stock into which the shares of Company Common Stock
theretofore represented by the certificate or certificates so surrendered shall
have been converted (plus cash in lieu of any fractional share interest), as
provided in Section 2.3 hereof. As promptly as practicable after the Effective
Time, and in no event later than ten days thereafter, the Exchange Agent shall
mail to each holder of record of an outstanding certificate which immediately
prior to the Effective Time evidenced shares of Company Common Stock, and which
is to be
A-7
<PAGE>
exchanged for Acquiror Common Stock (plus cash in lieu of any fractional share
interest), as provided in Section 2.3 hereof, a form of letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to such certificate shall pass, only upon delivery of such certificate to the
Exchange Agent) advising such holder of the terms of the exchange effected by
the Merger and of the procedure for surrendering to the Exchange Agent such
certificate in exchange for a certificate or certificates evidencing Acquiror
Common Stock (plus cash in lieu of any fractional share interest). The Exchange
Agent shall accept such certificates upon compliance with such reasonable terms
and conditions as the Exchange Agent may impose to effect an orderly exchange
thereof in accordance with customary exchange practices.
(c) Each outstanding certificate which prior to the Effective Time
represented Company Common Stock and which is not surrendered to the Exchange
Agent in accordance with the procedures provided for herein shall, except as
otherwise herein provided, until duly surrendered to the Exchange Agent be
deemed to evidence ownership of the number of whole shares of Acquiror Common
Stock (plus cash in lieu of any fractional share interest) into which such
Company Common Stock shall have been converted by virtue of the Merger.
(d) No holder of a certificate theretofore representing shares of Company
Common Stock shall be entitled to receive any dividends in respect of the
Acquiror Common Stock into which such shares shall have been converted by virtue
of the Merger until the certificate representing such shares is surrendered in
exchange for a certificate or certificates representing whole shares of Acquiror
Common Stock (plus cash in lieu of any fractional share interest). In the event
that dividends are declared and paid by the Acquiror in respect of Acquiror
Common Stock after the Effective Time but prior to any holder's surrender of
certificates representing shares of Company Common Stock, dividends payable to
such holder in respect of whole shares of Acquiror Common Stock not then issued
shall accrue (without interest). Any such dividends shall be paid (without
interest) upon surrender of the certificates representing such shares of Company
Common Stock.
(e) The Acquiror shall not be obligated to deliver a certificate or
certificates representing whole shares of Acquiror Common Stock (plus cash in
lieu of any fractional share interest) to which a holder of Company Common Stock
would otherwise be entitled as a result of the Merger until such holder
surrenders the certificate or certificates representing the shares of Company
Common Stock for exchange as provided in this Section 2.7, or, in default
thereof, an appropriate affidavit of loss and indemnity agreement and/or a bond
in an amount as may be reasonably required in each case by the Acquiror. If any
certificate evidencing shares of Acquiror Common Stock is to be issued in a name
other than that in which the certificate evidencing Company Common Stock
surrendered in exchange therefor is registered, it shall be a condition of the
issuance thereof that the certificate so surrendered shall be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange pay to the Exchange Agent any transfer or other tax required by reason
of the issuance of a certificate for shares of Acquiror Common Stock in any name
other than that of the registered holder of the certificate surrendered or
otherwise establish to the satisfaction of the Exchange Agent that such tax has
been paid or is not payable.
(f) Any portion of the shares of Acquiror Common Stock and cash delivered to
the Exchange Agent by the Acquiror pursuant to Section 2.7(a) hereof that
remains unclaimed by the shareholders of the Company by the second anniversary
of the Effective Time shall be delivered by the Exchange Agent to the Acquiror.
Any shareholders of the Company who have not theretofore complied with Section
2.7(b) hereof shall thereafter look only to the Acquiror for the consideration
deliverable in respect of each share of Company Common Stock such shareholder
holds as determined pursuant to this Agreement without any interest thereon. If
outstanding certificates for shares of Company Common Stock are not surrendered
or the payment for them is not claimed prior to the second anniversary of the
Effective Time (the "Old Certificates"), the Acquiror may at any time
thereafter, with or without notice to the holders of record of the Old
Certificates which were converted into whole shares of Acquiror Common Stock
(plus cash in lieu of any fractional share interest) pursuant to the terms of
this Agreement, sell for the accounts of such holders any or all of the shares
of Acquiror Common Stock which such holders are entitled to receive
A-8
<PAGE>
under Section 2.3(b) hereof (the "Unclaimed Shares"), provided, however, that
the Acquiror shall not be obligated to make any sale of Unclaimed Shares (even
if notice of sale of the Unclaimed Shares has been given) and instead may issue
to the holder of any Old Certificates properly delivered to the Acquiror in
accordance with the terms thereof a certificate evidencing the number of whole
shares of Acquiror Common Stock (plus cash in lieu of any fractional share
interest) to which such holder is entitled by virtue of Section 2.3(b) hereof.
In the event that the Acquiror elects to sell Unclaimed Shares, it may do so in
a registered public offering under the Securities Act and applicable state
securities laws, by private sale or by sale at any broker's board or in any
securities exchange, in each case in such manner and at such times as the
Acquiror shall determine. The net proceeds of any such sale of Unclaimed Shares
shall be held for the holders of the unsurrendered Old Certificates whose
Unclaimed Shares have been sold, to be paid to them upon surrender of their Old
Certificates. From and after any such sale, the sole right of the holders of the
unsurrendered Old Certificates whose Unclaimed Shares have been sold shall be
the right to collect the net sale proceeds held by the Acquiror for their
respective accounts, and such holders shall not be entitled to receive any
interest on such net sale proceeds held by the Acquiror.
(g) The Acquiror and the Exchange Agent shall be entitled to rely upon the
stock transfer books of the Company to establish the identity of those persons
entitled to receive the consideration specified in this Agreement, which books
shall be conclusive with respect thereto. In the event of a dispute with respect
to ownership of stock represented by any certificate, the Acquiror and the
Exchange Agent shall be entitled to deposit any consideration represented
thereby in escrow with an independent third party and thereafter be relieved
with respect to any claims thereto.
2.8 ANTI-DILUTION PROVISIONS
If after the date of this Agreement and prior to the Effective Time the
number of outstanding shares of Acquiror Common Stock or Company Common Stock
shall have been increased or decreased by reason of a dividend payable in shares
of common stock or a split or combination of outstanding shares, then (a) in the
case of any such event involving the Acquiror Common Stock the number of shares
of Acquiror Common Stock to be delivered to Company shareholders who are
entitled to receive shares of Acquiror Common Stock in exchange for shares of
Company Common Stock shall be adjusted so that each Company shareholder shall be
entitled to receive such number of shares of Acquiror Common Stock as such
shareholder would have been entitled to receive if the Effective Time had
occurred prior to the happening of such event and (b) in the case of any such
event involving the Company Common Stock the Exchange Ratio shall be adjusted by
multiplying the Exchange Ratio by a fraction the numerator of which shall be the
number of shares of Company Common Stock issued and outstanding immediately
prior to such event and the denominator of which shall be the number of shares
of Company Common Stock issued and outstanding immediately after such event. The
Exchange Ratio also shall be appropriately adjusted to reflect any capital
reorganization involving the reclassification of the Acquiror Common Stock or
the Company Common Stock subsequent to the date of this Agreement and prior to
the Effective Time. Similar adjustments shall be made to the amount payable in
lieu of fractional share interests.
2.9 COMPANY OPTIONS
(a) At the Effective Time, and except as may be contemplated by Section 5.11
hereof, each Company Option which is then outstanding, whether or not
exercisable, shall cease to represent a right to acquire shares of Company
Common Stock and shall be converted automatically into an option to purchase
shares of Acquiror Common Stock, and the Acquiror shall assume each Company
Option, in accordance with the terms of the Company Stock Option Plans and stock
option agreement by which it is evidenced, except that from and after the
Effective Time, (i) the Acquiror and its Board of Directors or a duly authorized
committee thereof shall be substituted for the Company and the Company's Board
of Directors or duly authorized committee thereof administering the Company
Stock Option Plan, (ii) each Company Option assumed by the Acquiror may be
exercised solely for shares of Acquiror Common Stock, (iii) the number of shares
of Acquiror Common Stock subject to such Company Options shall be equal to the
number of
A-9
<PAGE>
shares of Company Common Stock subject to such Company Options immediately prior
to the Effective Time multiplied by the Exchange Ratio, provided that any
fractional shares of Acquiror Common Stock resulting from such multiplication
shall be rounded down to the nearest share, and (iv) the per share exercise
price under each such Company Option shall be adjusted by dividing the per share
exercise price under each such Company Option by the Exchange Ratio, provided
that such exercise price shall be rounded up to the nearest cent.
Notwithstanding the preceding sentence, each Company Option which is an
"incentive stock option" shall be adjusted as required by Section 424 of the
Code, and the regulations promulgated thereunder, so as not to constitute a
modification, extension or renewal of the option within the meaning of Section
424(h) of the Code, and all Company Options shall be adjusted, if necessary, so
as not to impair the eligibility of the Merger for pooling of interests
accounting treatment. The Acquiror and the Company agree to take all necessary
steps to effect the foregoing provisions of this Section 2.9(a).
(b) As soon as practicable after the Effective Time, the Acquiror shall
deliver to each participant in the Company Stock Option Plans an appropriate
notice setting forth such participant's rights pursuant thereto and the grants
subject to the Company Stock Option Plans shall continue in effect on the same
terms and conditions, including without limitation the duration thereof, subject
to the adjustments required by Section 2.9(a)(iii) hereof after giving effect to
the Merger. Within 30 days after the Effective Time, the Acquiror shall file a
registration statement on Form S-3 or Form S-8, as the case may be (or any
successor or other appropriate forms), with respect to the shares of Acquiror
Common Stock subject to such Options and shall use its reasonable best efforts
to maintain the current status of the prospectus or prospectuses contained
therein for so long as such Options remain outstanding.
2.10 ADDITIONAL ACTIONS
If, at any time after the Effective Time, the Surviving Corporation shall
consider that any further assignments or assurances in law or any other acts are
necessary or desirable to (i) vest, perfect or confirm, of record or otherwise,
in the Surviving Corporation its right, title or interest in, to or under any of
the rights, properties or assets of the Company acquired or to be acquired by
the Surviving Corporation as a result of, or in connection with, the Merger, or
(ii) otherwise carry out the purposes of this Agreement, the Company and its
proper officers and directors shall be deemed to have granted to the Surviving
Corporation an irrevocable power of attorney to execute and deliver all such
proper deeds, assignments and assurances in law and to do all acts necessary or
proper to vest, perfect or confirm title to and possession of such rights,
properties or assets in the Surviving Corporation and otherwise to carry out the
purposes of this Agreement; and the proper officers and directors of the
Surviving Corporation are fully authorized in the name of the Company or
otherwise to take any and all such action.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Acquiror as follows:
3.1 CAPITAL STRUCTURE
The authorized capital stock of the Company consists of 5,000,000 shares of
Company Common Stock and 1,000,000 shares of Company Preferred Stock. As of the
date hereof, 1,478,062 shares of Company Common Stock are issued and
outstanding, 142,000 shares of Company Common Stock are directly or indirectly
held by the Company as treasury stock and no shares of Company Preferred Stock
are issued and outstanding. All outstanding shares of Company Common Stock have
been duly authorized and validly issued and are fully paid and nonassessable,
and none of the outstanding shares of Company Common Stock has been issued in
violation of the preemptive rights of any person, firm or entity. Except for the
Company Stock Option Agreement and for Company Options to acquire not more than
121,500 shares of Company Common Stock as of the date hereof, a schedule of
which has been Previously Disclosed, there are no Rights authorized, issued or
outstanding with respect to the capital stock of the Company.
A-10
<PAGE>
3.2 ORGANIZATION, STANDING AND AUTHORITY OF THE COMPANY
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware with full corporate power and
authority to own or lease all of its properties and assets and to carry on its
business as now conducted and is duly licensed or qualified to do business and
is in good standing in each jurisdiction in which its ownership or leasing of
property or the conduct of its business requires such licensing or
qualification, except where the failure to be so licensed, qualified or in good
standing would not have a Material Adverse Effect on the Company. The Company is
duly registered as a unitary savings and loan holding company under the HOLA and
the regulations of the OTS thereunder. The Company has heretofore delivered to
the Acquiror true and complete copies of the Certificate of Incorporation and
Bylaws of the Company as in effect as of the date hereof.
3.3 OWNERSHIP OF THE COMPANY SUBSIDIARIES
The Company has Previously Disclosed the name, jurisdiction of incorporation
and percentage ownership of each direct or indirect Company Subsidiary and
identified the Bank as its only Significant Subsidiary. Except for (x) capital
stock of the Company Subsidiaries, (y) securities and other interests held in a
fiduciary capacity and beneficially owned by third parties or taken in
consideration of debts previously contracted and (z) securities and other
interests which are Previously Disclosed, the Company does not own or have the
right to acquire, directly or indirectly, any outstanding capital stock or other
voting securities or ownership interests of any corporation, bank, savings
association, partnership, joint venture or other organization. The outstanding
shares of capital stock or other ownership interests of each Company Subsidiary
have been duly authorized and validly issued, are fully paid and nonassessable,
and are directly owned by the Company free and clear of all liens, claims,
encumbrances, charges, pledges, restrictions or rights of third parties of any
kind whatsoever. No Rights are authorized, issued or outstanding with respect to
the capital stock or other ownership interests of the Company Subsidiaries and
there are no agreements, understandings or commitments relating to the right of
the Company to vote or to dispose of such capital stock or other ownership
interests.
3.4 ORGANIZATION, STANDING AND AUTHORITY OF THE COMPANY SUBSIDIARIES
Each of the Company Subsidiaries is a corporation or partnership duly
organized, validly existing and in good standing under the laws of the United
States or the jurisdiction in which it is organized. Each of the Company
Subsidiaries (i) has full power and authority to own or lease all of its
properties and assets and to carry on its business as now conducted, and (ii) is
duly licensed or qualified to do business and is in good standing in each
jurisdiction in which its ownership or leasing of property or the conduct of its
business requires such qualification, except where the failure to be so
licensed, qualified or in good standing would not have a Material Adverse Effect
on the Company. The deposit accounts of the Bank are insured by the SAIF to the
maximum extent permitted by the FDIA. The Bank has paid all deposit insurance
premiums and assessments required by the FDIA and the regulations thereunder.
The Company has heretofore delivered or made available to the Acquiror true and
complete copies of the Articles of Incorporation, Charter, Bylaws and other
governing documents of each Company Subsidiary as in effect as of the date
hereof.
3.5 AUTHORIZED AND EFFECTIVE AGREEMENT
(a) The Company has all requisite corporate power and authority to enter
into this Agreement and (subject to receipt of all necessary governmental
approvals and the approval of the Company's shareholders of this Agreement) to
perform all of its obligations under this Agreement. The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
have been duly and validly authorized by all necessary corporate action in
respect thereof on the part of the Company, except for the approval of this
Agreement by the Company's shareholders. This Agreement has been duly and
validly executed and delivered by the Company and, assuming due authorization,
execution and delivery by the Acquiror, constitutes a legal, valid and binding
obligation of the Company which is enforceable against
A-11
<PAGE>
the Company in accordance with its terms, subject, as to enforceability, to
bankruptcy, insolvency and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles.
(b) Neither the execution and delivery of this Agreement, nor consummation
of the transactions contemplated hereby (including the Merger), nor compliance
by the Company with any of the provisions hereof (i) does or will conflict with
or result in a breach of any provisions of the Certificate of Incorporation or
Bylaws of the Company or, except as Previously Disclosed, the equivalent
documents of any Company Subsidiary, (ii) violate, conflict with or result in a
breach of any term, condition or provision of, or constitute a default (or an
event which, with notice or lapse of time, or both, would constitute a default)
under, or give rise to any right of termination, cancellation or acceleration
with respect to, or result in the creation of any lien, charge or encumbrance
upon any property or asset of the Company or a Company Subsidiary pursuant to,
any material note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which the Company or a Company
Subsidiary is a party, or by which any of their respective properties or assets
may be bound or affected, or (iii) subject to receipt of all required
governmental and shareholder approvals, violate any order, writ, injunction,
decree, statute, rule or regulation applicable to the Company or a Company
Subsidiary.
(c) Except for (i) the filing of applications and notices with, and the
consents and approvals of, as applicable, the FRB and the OTS, (ii) the filing
and effectiveness of the Form S-4 with the Commission, (iii) the approval of
this Agreement by the requisite vote of the shareholders of the Company, (iv)
the filing of a Certificate of Merger with the Secretary of State of the State
of Delaware pursuant to the DGCL in connection with the Merger and (v) review of
the Merger by the DOJ under federal antitrust laws, and except for such filings,
registrations, consents or approvals which are Previously Disclosed, no consents
or approvals of or filings or registrations with any Governmental Entity or with
any third party are necessary on the part of the Company or the Bank in
connection with the execution and delivery by the Company of this Agreement and
the consummation by the Company of the transactions contemplated hereby.
(d) As of the date hereof, the Company is not aware of any facts or
circumstances relating to the Company or the Bank (including without limitation
Community Reinvestment Act compliance) why all consents and approvals shall not
be procured from all regulatory agencies having jurisdiction over the
transactions contemplated by this Agreement as shall be necessary for
consummation of the transactions contemplated by this Agreement.
3.6 SECURITIES DOCUMENTS AND REGULATORY REPORTS
(a) Since June 30, 1995, the Company has timely filed with the Commission
(and the NASD to the extent specifically required by the rules and regulations
thereof) all Securities Documents required by the Securities Laws and such
Securities Documents complied in all material respects with the Securities Laws
and did not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(b) Since June 30, 1995, each of the Company and the Bank has duly filed
with the OTS, the FDIC and any other applicable federal or state banking
authority, as the case may be, in correct form the reports required to be filed
under applicable laws and regulations and such reports were in all material
respects complete, accurate and in compliance with the requirements of
applicable laws and regulations. In connection with the most recent examinations
of the Company or the Bank by the OTS or the FDIC, neither the Company nor the
Bank was required to correct or change any action, procedure or proceeding which
the Company or the Bank believes has not been corrected or changed as required
as of the date hereof and which could have a Material Adverse Effect on the
Company.
3.7 FINANCIAL STATEMENTS
(a) The Company has previously delivered or made available to the Acquiror
accurate and complete copies of the Company Financial Statements which, in the
case of the consolidated statements of financial
A-12
<PAGE>
condition of the Company as of March 31, 1997, 1996 and 1995 and the
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years ended March 31, 1997, 1996 and 1995, are accompanied by
the audit reports of KPMG Peat Marwick LLP, independent public accountants with
respect to the Company. The Company Financial Statements referred to herein, as
well as the Company Financial Statements to be delivered pursuant to Section 5.8
hereof, fairly present or will fairly present, as the case may be, the
consolidated financial condition of the Company as of the respective dates set
forth therein, and the consolidated results of operations, shareholders' equity
and cash flows of the Company for the respective periods or as of the respective
dates set forth therein.
(b) Each of the Company Financial Statements referred to in Section 3.7(a)
has been or will be, as the case may be, prepared in accordance with GAAP
consistently applied during the periods involved, except as stated therein. The
audits of the Company and the Company Subsidiaries have been conducted in all
material respects in accordance with generally accepted auditing standards. The
books and records of the Company and the Company Subsidiaries are being
maintained in material compliance with applicable legal and accounting
requirements, and such books and records accurately reflect in all material
respects all dealings and transactions in respect of the business, assets,
liabilities and affairs of the Company and its Subsidiaries.
(c) Except and to the extent (i) reflected, disclosed or provided for in the
consolidated statement of financial condition of the Company as of December 31,
1997 (including related notes) and (ii) of liabilities incurred since December
31, 1997 in the ordinary course of business (including without limitation
liabilities assumed or incurred in connection with actions by the Company
consistent with the terms of Section 5.6(a) hereof), neither the Company nor any
Company Subsidiary has any liabilities, whether absolute, accrued, contingent or
otherwise, material to the financial condition, results of operations or
business of the Company on a consolidated basis.
3.8 MATERIAL ADVERSE CHANGE
Since December 31, 1997, (i) the Company and its Subsidiaries have conducted
their respective businesses in the ordinary and usual course (excluding the
incurrence of expenses in connection with this Agreement and the transactions
contemplated hereby) and (ii) no event has occurred or circumstance arisen that,
individually or in the aggregate, has had or is reasonably likely to have a
Material Adverse Effect on the Company.
3.9 ENVIRONMENTAL MATTERS
(a) To the best of the Company's knowledge, the Company and its Subsidiaries
are in compliance with all Environmental Laws except to the extent any
non-compliance would not have a Material Adverse Effect on the Company. Neither
the Company nor a Company Subsidiary has received any communication alleging
that the Company or a Company Subsidiary is not in such compliance and, to the
best knowledge of the Company, there are no present circumstances that would
prevent or interfere with the continuation of such compliance.
(b) To the best of the Company's knowledge, none of the properties owned,
leased or operated by the Company or a Company Subsidiary or properties which
secure or otherwise act as collateral for loans or other extensions of credit
made by the Company or any Company Subsidiary has been or is in violation of or
liable under any Environmental Law except to the extent any violation or
liability would not have a Material Adverse Effect on the Company.
(c) To the best of the Company's knowledge, there are no past or present
actions, activities, circumstances, conditions, events or incidents that could
reasonably form the basis of any Environmental Claim or other claim or action or
governmental investigation that could result in the imposition of any material
liability arising under any Environmental Law against the Company or a Company
Subsidiary or against any person or entity whose liability for any Environmental
Claim the Company or a Company Subsidiary has or may have retained or assumed
either contractually or by operation of law or with respect
A-13
<PAGE>
to any of the properties owned, leased or operated by the Company or a Company
Subsidiary or properties which secure or otherwise act as collateral for loans
or other extensions of credit made by the Company or any Company Subsidiary.
(d) Except as Previously Disclosed, the Company has not conducted any
environmental studies during the past five years with respect to any properties
owned or leased by it or a Company Subsidiary or which secures or otherwise acts
as collateral for a loan or other extension of credit held by the Company or a
Company Subsidiary as of the date hereof.
3.10 TAX MATTERS
(a) The Company and its Subsidiaries have timely filed all federal, state
and local (and, if applicable, foreign) income, franchise, bank, excise, real
property, personal property and other tax returns required by applicable law to
be filed by them (including, without limitation, estimated tax returns, income
tax returns, information returns and withholding and employment tax returns) and
have paid, or where payment is not required to have been made, have set up an
adequate reserve or accrual for the payment of, all material taxes required to
be paid in respect of the periods covered by such returns and, as of the
Effective Time, will have paid, or where payment is not required to have been
made, will have set up an adequate reserve or accrual for the payment of, all
material taxes for any subsequent periods ending on or prior to the Effective
Time. Neither the Company nor a Company Subsidiary will have any material
liability for any such taxes in excess of the amounts so paid or reserves or
accruals so established.
(b) All federal, state and local (and, if applicable, foreign) income,
franchise, bank, excise, real property, personal property and other tax returns
filed by the Company and its Subsidiaries are complete and accurate in all
material respects. Neither the Company nor a Company Subsidiary is delinquent in
the payment of any tax, assessment or governmental charge or, except as
Previously Disclosed, has requested any extension of time within which to file
any tax returns in respect of any fiscal year or portion thereof which have not
since been filed. Except as Previously Disclosed, the federal, state and local
income tax returns of the Company and its Subsidiaries have been examined by the
applicable tax authorities (or are closed to examination due to the expiration
of the applicable statute of limitations) and no deficiencies for any tax,
assessment or governmental charge have been proposed, asserted or assessed
(tentatively or otherwise) against the Company or a Company Subsidiary as a
result of such examinations or otherwise which have not been settled and paid.
There are currently no agreements in effect with respect to the Company or a
Company Subsidiary to extend the period of limitations for the assessment or
collection of any tax. As of the date hereof, no audit, examination or
deficiency or refund litigation with respect to such return is pending or, to
the best of the Company's knowledge, threatened.
(c) Except as Previously Disclosed, neither the Company nor any Company
Subsidiary (i) is a party to any agreement providing for the allocation or
sharing of taxes, (ii) is required to include in income any adjustment pursuant
to Section 481(a) of the Code by reason of a voluntary change in accounting
method initiated by the Company or a Company Subsidiary (nor does the Company
have any knowledge that the Internal Revenue Service has proposed any such
adjustment or change of accounting method) or (iii) has filed a consent pursuant
to Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code
apply.
3.11 LEGAL PROCEEDINGS
Except as Previously Disclosed, there are no actions, suits, claims,
governmental investigations or proceedings instituted, pending or, to the best
knowledge of the Company, threatened against the Company or a Company Subsidiary
or against any asset, interest or right of the Company or a Company Subsidiary,
or against any officer, director or employee of any of them that individually or
in the aggregate, if decided adversely, would have a Material Adverse Effect on
the Company. Except as Previously Disclosed, neither the Company nor a Company
Subsidiary is a party to any order, judgment or decree which has or could
reasonably be expected to have a Material Adverse Effect on the Company.
A-14
<PAGE>
3.12 COMPLIANCE WITH LAWS
(a) Each of the Company and the Company Subsidiaries has all permits,
licenses, certificates of authority, orders and approvals of, and has made all
filings, applications and registrations with, federal, state, local and foreign
governmental or regulatory bodies that are required in order to permit it to
carry on its business as it is presently being conducted and the absence of
which could reasonably be expected to have a Material Adverse Effect on the
Company; all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect; and to the best knowledge of the
Company, no suspension or cancellation of any of the same is threatened.
(b) Neither the Company nor a Company Subsidiary is in violation of its
respective Certificate of Incorporation, Charter or other organizational
document or Bylaws, or of any applicable federal, state or local law or
ordinance or any order, rule or regulation of any federal, state, local or other
governmental agency or body (including, without limitation, all banking
(including without limitation all regulatory capital requirements), securities,
municipal securities, safety, health, environmental, zoning,
anti-discrimination, antitrust, and wage and hour laws, ordinances, orders,
rules and regulations), or in default with respect to any order, writ,
injunction or decree of any court, or in default under any order, license,
regulation or demand of any governmental agency, any of which violations or
defaults, individually or in the aggregate, could reasonably be expected to have
a Material Adverse Effect on the Company; and neither the Company nor a Company
Subsidiary has received any notice or communication from any federal, state or
local governmental authority asserting that the Company or a Company Subsidiary
is in violation of any of the foregoing which could reasonably be expected to
have a Material Adverse Effect on the Company. Neither the Company nor a Company
Subsidiary is subject to any regulatory or supervisory cease and desist order,
agreement, written directive, memorandum of understanding or written commitment
(other than those of general applicability to all savings associations or
savings and loan holding companies issued by governmental authorities), and none
of them has received any written communication requesting that it enter into any
of the foregoing.
3.13 CERTAIN INFORMATION
None of the information relating to the Company and its Subsidiaries
supplied or to be supplied in writing by the Company or representatives or
agents thereof for inclusion or incorporation by reference in (i) the Form S-4
will, at the time the Form S-4 and any amendment thereto becomes effective under
the Securities Act, contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and (ii) the Proxy
Statement, as of the date such Proxy Statement is mailed to shareholders of the
Company and up to and including the date of the meeting of shareholders to which
such Proxy Statement relates, will contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading,
provided that information as of a later date shall be deemed to modify
information as of an earlier date. The Proxy Statement mailed by the Company to
its shareholders in connection with the meeting of shareholders at which this
Agreement will be considered by such shareholders will comply as to form in all
material respects with the Exchange Act and the rules and regulations
promulgated thereunder.
3.14 EMPLOYEE BENEFIT PLANS
(a) The Company has Previously Disclosed all stock option, stock grant,
employee stock purchase and stock bonus plans, qualified pension or
profit-sharing plans, any deferred compensation, consultant, bonus or group
insurance contract or any other incentive, health and welfare or employee
benefit plan or agreement maintained for the benefit of employees or former
employees of the Company or any Company Subsidiary (the "Company Employee
Plans"), whether written or oral, and the Company has previously furnished or
made available to the Acquiror accurate and complete copies of the same together
with (i) the most recent actuarial and financial reports prepared with respect
to any plans, (ii) the most recent annual
A-15
<PAGE>
reports filed with any governmental agency, and (iii) all rulings and
determination letters and any open requests for rulings or letters that pertain
to any qualified plan.
(b) None of the Company, any Company Subsidiary, any Company Employee Plan
constituting an "employee benefit plan" within the meaning of Section 3(2) of
ERISA ("Company Pension Plan") or, to the best of the Company's knowledge, any
fiduciary of such Company Pension Plan, has incurred any direct or indirect
material liability to the PBGC, the Internal Revenue Service or any present or
former employees of the Company or a Company Subsidiary with respect to any such
Company Pension Plan. To the best of the Company's knowledge, no reportable
event under Section 4043(b) of ERISA has occurred with respect to any such
Company Pension Plan.
(c) Except as Previously Disclosed, neither the Company nor any Company
Subsidiary participates in or has incurred any liability under Section 4201 of
ERISA for a complete or partial withdrawal from a multi-employer plan (as such
term is defined in ERISA).
(d) A favorable determination letter has been issued by the Internal Revenue
Service with respect to each Company Pension Plan which is intended to qualify
under Section 401 of the Code to the effect that such plan is qualified under
Section 401 of the Code and the trust associated with such Company Pension Plan
is tax exempt under Section 501 of the Code. No such letter has been revoked or,
to the best of the Company's knowledge, is threatened to be revoked and the
Company does not know of any ground on which such revocation may be based.
Neither the Company nor any Company Subsidiary has any liability under any such
Company Pension Plan that is not reflected on the consolidated statement of
financial condition of the Company at December 31, 1997 included in the Company
Financial Statements, other than liabilities incurred in the ordinary course of
business in connection therewith subsequent to the date thereof.
(e) To the best of the Company's knowledge, no prohibited transaction (which
shall mean any transaction prohibited by Section 406 of ERISA and not exempt
under Section 408 of ERISA or Section 4975 of the Code) has occurred with
respect to any Company Employee Plan which would result in the imposition,
directly or indirectly, of a material excise tax under Section 4975 of the Code
or otherwise have a Material Adverse Effect on the Company.
(f) Full payment has been made (or proper accruals have been established) of
all contributions which are required for periods prior to the date hereof, and
full payment will be so made (or proper accruals will be so established) of all
contributions which are required for periods after the date hereof and prior to
the Effective Time, under the terms of each Company Employee Plan or ERISA; no
accumulated funding deficiency (as defined in Section 302 of ERISA or Section
412 of the Code), whether or not waived, exists with respect to any Company
Pension Plan, and there is no "unfunded current liability" (as defined in
Section 412 of the Code) with respect to any Company Pension Plan.
(g) To the best of the Company's knowledge, the Company Employee Plans have
been operated in compliance in all material respects with the terms of the
operative plan documents and the applicable provisions of ERISA, the Code, all
regulations, rulings and announcements promulgated or issued thereunder and all
other applicable governmental laws and regulations.
(h) There are no pending or, to the best knowledge of the Company,
threatened claims (other than routine claims for benefits) by, on behalf of or
against any of the Company Employee Plans or any trust related thereto or any
fiduciary thereof.
3.15 CERTAIN CONTRACTS
(a) Except as Previously Disclosed, neither the Company nor a Company
Subsidiary is a party to, is bound or affected by, receives, or is obligated to
pay, benefits under (i) any agreement, arrangement or commitment, including
without limitation any agreement, indenture or other instrument, relating to the
borrowing of money by the Company or a Company Subsidiary (other than in the
case of the Bank
A-16
<PAGE>
deposits, FHLB advances, federal funds purchased and securities sold under
agreements to repurchase in the ordinary course of business) or the guarantee by
the Company or a Company Subsidiary of any obligation, other than by the Bank in
the ordinary course of its banking business, (ii) any agreement, arrangement or
commitment relating to the employment of a consultant or the employment,
election or retention in office of any present or former director, officer or
employee of the Company or a Company Subsidiary, (iii) any agreement,
arrangement or understanding pursuant to which any payment (whether of severance
pay or otherwise) became or may become due to any director, officer or employee
of the Company or a Company Subsidiary upon execution of this Agreement or upon
or following consummation of the transactions contemplated by this Agreement
(either alone or in connection with the occurrence of any additional acts or
events); (iv) any agreement, arrangement or understanding pursuant to which the
Company or a Company Subsidiary is obligated to indemnify any director, officer,
employee or agent of the Company or a Company Subsidiary; (v) any agreement,
arrangement or understanding to which the Company or a Company Subsidiary is a
party or by which any of the same is bound which limits the freedom of the
Company or a Company Subsidiary to compete in any line of business or with any
person, (vi) any assistance agreement, supervisory agreement, memorandum of
understanding, consent order, cease and desist order or condition of any
regulatory order or decree with or by the OTS, the FDIC or any other regulatory
agency, (vii) any other agreement, arrangement or understanding which would be
required to be filed as an exhibit to the Company's Annual Report on Form 10-K
under the Exchange Act and which has not been so filed or (viii) any other
agreement, arrangement or understanding which, if entered into after the date
hereof, would require the consent of the Acquiror under Section 5.6(a) hereof.
(b) Neither the Company nor any Company Subsidiary is in default or in
non-compliance, which default or non-compliance could reasonably be expected to
have a Material Adverse Effect on the Company, under any contract, agreement,
commitment, arrangement, lease, insurance policy or other instrument to which it
is a party or by which its assets, business or operations may be bound or
affected, whether entered into in the ordinary course of business or otherwise
and whether written or oral, and there has not occurred any event that with the
lapse of time or the giving of notice, or both, would constitute such a default
or non-compliance.
3.16 BROKERS AND FINDERS
Except as Previously Disclosed, neither the Company nor any Company
Subsidiary nor any of their respective directors, officers or employees, has
employed any broker or finder or incurred any liability for any broker or finder
fees or commissions in connection with the transactions contemplated hereby.
3.17 INSURANCE
Each of the Company and its Subsidiaries is insured for reasonable amounts
with financially sound and reputable insurance companies against such risks as
companies engaged in a similar business would, in accordance with commercially
reasonable business practice, customarily be insured and has maintained all
insurance required by applicable laws and regulations.
3.18 PROPERTIES
All real and personal property owned by the Company or its Subsidiaries or
presently used by any of them in its respective business is in an adequate
condition (ordinary wear and tear excepted) and is sufficient to carry on the
business of the Company and its Subsidiaries in the ordinary course of business
consistent with their past practices. The Company has good and marketable title
free and clear of all liens, encumbrances, charges, defaults or equities (other
than equities of redemption under applicable foreclosure laws) to all of the
material properties, real and personal, reflected on the consolidated statement
of financial condition of the Company as of December 31, 1997 included in the
Company Financial Statements or acquired after such date, except (i) liens for
current taxes not yet due or payable (ii) pledges to secure deposits and other
liens incurred in the ordinary course of its banking business, (iii) such
imperfections of title, easements and encumbrances, if any, as are not material
in character, amount or
A-17
<PAGE>
extent and (iv) as reflected on the consolidated statement of financial
condition of the Company as of December 31, 1997 included in the Company
Financial Statements. All real and personal property which is material to the
Company's business on a consolidated basis and leased or licensed by the Company
or a Company Subsidiary is held pursuant to leases or licenses which are valid
and enforceable in accordance with their respective terms and such leases will
not terminate or lapse prior to the Effective Time.
3.19 ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses reflected, and to be reflected, in the
Company's reports referred to in Section 3.6(b) hereof, and shown, and to be
shown, on the balance sheets contained in the Company Financial Statements have
been, and will be, established in accordance with the requirements of, and was
and will be adequate under, GAAP and all applicable regulatory criteria.
3.20 RELATED PARTY TRANSACTIONS
Except as (i) Previously Disclosed, (ii) disclosed in the Company's proxy
statement dated June 30, 1997 or (iii) disclosed in the footnotes to the Company
Financial Statements, the Company is not a party to any transaction (including
any loan or other credit accommodation but excluding deposits in the ordinary
course of business) with any Affiliate of the Company (except a Company
Subsidiary); and all such transactions (a) were made in the ordinary course of
business, (b) were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and (c) did not involve more than the normal
risk of collectability or present other unfavorable features. Except as
Previously Disclosed, no loan or credit accommodation to any Affiliate of the
Company is presently in default or, during the three year period prior to the
date of this Agreement, has been in default or has been restructured, modified
or extended. Neither the Company nor the Bank has been notified that principal
and interest with respect to any such loan or other credit accommodation will
not be paid when due or that the loan grade classification accorded such loan or
credit accommodation by the Bank is inappropriate.
3.21 LOANS
Each loan reflected as an asset in the Company Financial Statements (i) is
evidenced by notes, agreements or other evidences of indebtedness which are
true, genuine and correct (ii) to the extent secured, has been secured by valid
liens and security interests which have been perfected, and (ii) is the legal,
valid and binding obligation of the obligor named therein, enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
conveyance and other laws of general applicability relating to or affecting
creditors' rights and to general equity principles, in each case other than
loans as to which the failure to satisfy the foregoing standards would not have
a Material Adverse Effect on the Company.
3.22 ACCOUNTING FOR THE MERGER; REORGANIZATION
As of the date hereof, the Company, after consultation with KPMG Peat
Marwick LLP, does not have any reason to believe that the Merger will fail to
qualify (i) for pooling-of-interests accounting treatment under GAAP, or (ii) as
a reorganization under Section 368(a) of the Code.
3.23 FAIRNESS OPINION
The Company has received a written opinion from Sandler O'Neill & Partners
L.P. to the effect that, as of the date hereof, the consideration to be received
by shareholders of the Company pursuant to this Agreement is fair, from a
financial point of view, to such shareholders.
3.24 LABOR
No work stoppage involving the Company or a Company Subsidiary is pending
or, to the best knowledge of the Company, threatened. Neither the Company nor a
Company Subsidiary is involved in, or threatened with or affected by, any labor
dispute, arbitration, lawsuit or administrative proceeding involving the
employees of the Company or a Company Subsidiary which could have a Material
Adverse
A-18
<PAGE>
Effect on the Company. Employees of the Company and the Company Subsidiaries are
not represented by any labor union nor are any collective bargaining agreements
otherwise in effect with respect to such employees, and to the best of the
Company's knowledge, there have been no efforts to unionize or organize any
employees of the Company or any of the Company Subsidiaries during the past five
years.
3.25 REQUIRED VOTE; INAPPLICABILITY OF ANTITAKOVER STATUTES
(a) Assuming the accuracy of the representation and warranty of the Acquiror
contained in Section 4.18 hereof, the affirmative vote of the holders of a
majority of the issued and outstanding shares of Company Common Stock is
necessary to approve this Agreement and the transactions contemplated hereby on
behalf of the Company.
(b) A majority of the Disinterested Directors of the Company (as defined in
Section 3(g) of Article VIII of the Certificate of Incorporation of the Company)
have approved the Merger and this Agreement such that the provisions of Section
1 of Article VIII of the Certificate of Incorporation of the Company are
inapplicable to this Agreement and the transactions contemplated hereby.
(c) Assuming the accuracy of the representation and warranty of the Acquiror
contained in Section 4.18 hereof, the Acquiror is not an "interested
stockholder," as defined in Section 203(c)(5) of the DGCL and, as a result, the
provisions of Section 203 of the DGCL do not apply to the Merger and the other
transactions contemplated hereby.
3.26 OWNERSHIP OF ACQUIROR COMMON STOCK
As of the date hereof, neither the Company nor, to its best knowledge, any
of its Affiliates or associates, (i) beneficially own, directly or indirectly,
or (ii) are parties to any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of, in each case, shares of
Acquiror Common Stock which in the aggregate represent 5% or more of the
outstanding shares of Acquiror Common Stock (other than shares held in a
fiduciary capacity and beneficially owned by third parties and shares taken in
consideration of debts previously contracted).
3.27 DISCLOSURES
The representations and warranties of the Company made pursuant to this
Agreement are true, correct and complete in all material respects, and do not
omit statements necessary to make them not misleading under all facts and
circumstances.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE ACQUIROR
The Acquiror represents and warrants to the Company as follows:
4.1 CAPITAL STRUCTURE
The authorized capital stock of the Acquiror consists of 20,000,000 shares
of Acquiror Common Stock and 100,000 shares of Acquiror Preferred Stock. As of
the date hereof, there were 12,441,000 shares of Acquiror Common Stock issued
and outstanding, 128,122 shares of Acquiror Common Stock were held as treasury
stock and not outstanding and there were no shares of Acquiror Preferred Stock
issued and outstanding. All outstanding shares of Acquiror Common Stock have
been duly authorized and validly issued and are fully paid and nonassessable,
and none of the outstanding shares of Acquiror Common Stock has been issued in
violation of the preemptive rights of any person, firm or entity. As of the date
hereof, there are no Rights authorized, issued or outstanding with respect to
the capital stock of the Acquiror, except for (i) shares of Acquiror Common
Stock issuable pursuant to the Acquiror Employee Stock Benefit Plans, a schedule
of which has been Previously Disclosed, and (ii) by virtue of this Agreement.
A-19
<PAGE>
4.2 ORGANIZATION, STANDING AND AUTHORITY OF THE ACQUIROR
The Acquiror is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware with full corporate power and
authority to own or lease all of its properties and assets and to carry on its
business as now conducted and is duly licensed or qualified to do business and
is in good standing in each jurisdiction in which its ownership or leasing of
property or the conduct of its business requires such licensing or
qualification, except where the failure to be so licensed, qualified or in good
standing would not have a Material Adverse Effect on the Acquiror. The Acquiror
is duly registered as a bank holding company under the BHCA and the regulations
of the FRB thereunder. The Acquiror has heretofore delivered to the Company true
and complete copies of the Certificate of Incorporation and Bylaws of the
Acquiror as in effect as of the date hereof.
4.3 OWNERSHIP OF THE ACQUIROR SUBSIDIARIES
The Acquiror has Previously Disclosed the name, jurisdiction of
incorporation and percentage ownership of each direct or indirect Acquiror
Subsidiary and identified the Acquiror Bank as its only Significant Subsidiary.
The outstanding shares of capital stock or other ownership interest of each of
the Acquiror Subsidiaries have been duly authorized and validly issued, are
fully paid and nonassessable and, except as Previously Disclosed, are directly
or indirectly owned by the Acquiror free and clear of all liens, claims,
encumbrances, charges, pledges, restrictions or rights of third parties of any
kind whatsoever. No Rights are authorized, issued or outstanding with respect to
the capital stock or other ownership interests of any Acquiror Subsidiary and
there are no agreements, understandings or commitments relating to the right of
the Acquiror to vote or to dispose of such capital stock or other ownership
interests.
4.4 ORGANIZATION, STANDING AND AUTHORITY OF THE ACQUIROR SUBSIDIARIES
Each Acquiror Subsidiary is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction in which it is
organized. Each of the Acquiror Subsidiaries (i) has full power and authority to
own or lease all of its properties and assets and to carry on its business as
now conducted, and (ii) is duly licensed or qualified to do business and is in
good standing in each jurisdiction in which its ownership or leasing of property
or the conduct of its business requires such qualification, except where the
failure to be so licensed, qualified or in good standing would not have a
Material Adverse Effect on the Acquiror. The deposit accounts of the Acquiror
Bank are insured by the BIF to the maximum extent permitted by the FDIA, and the
Acquiror Bank has paid all premiums and assessments required by the FDIA and the
regulations thereunder. The Acquiror has heretofore delivered or made available
to the Company true and complete copies of the Articles of Incorporation,
Charter, Bylaws and other governing documents of each Acquiror Subsidiary as in
effect as of the date hereof.
4.5 AUTHORIZED AND EFFECTIVE AGREEMENT
(a) The Acquiror has all requisite corporate power and authority to enter
into this Agreement and (subject to receipt of all necessary governmental
approvals) to perform all of its obligations under this Agreement. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action in respect thereof on the part of the Acquiror. This Agreement
has been duly and validly executed and delivered by the Acquiror and, assuming
due authorization, execution and delivery by the Company, constitutes a legal,
valid and binding obligation of the Acquiror which is enforceable against the
Acquiror in accordance with its terms, subject, as to enforceability, to
bankruptcy, insolvency and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles.
(b) Neither the execution and delivery of this Agreement, nor consummation
of the transactions contemplated hereby (including the Merger) nor compliance by
the Acquiror with any of the provisions hereof (i) does or will conflict with or
result in a breach of any provisions of the Certificate of Incorporation or
Bylaws of the Acquiror or the equivalent documents of any Acquiror Subsidiary,
(ii) violate, conflict with or result in a breach of any term, condition or
provision of, or constitute a default
A-20
<PAGE>
(or an event which, with notice or lapse of time, or both, would constitute a
default) under, or give rise to any right of termination, cancellation or
acceleration with respect to, or result in the creation of any lien, charge or
encumbrance upon any property or asset of the Acquiror or any Acquiror
Subsidiary pursuant to, any material note, bond, mortgage, indenture, deed of
trust, license, lease, agreement or other instrument or obligation to which the
Acquiror or any Acquiror Subsidiary is a party, or by which any of their
respective properties or assets may be bound or affected, or (iii) subject to
receipt of all required governmental and shareholder approvals, violate any
order, writ, injunction, decree, statute, rule or regulation applicable to the
Acquiror or any Acquiror Subsidiary.
(c) Except for (i) the filing of applications and notices with, and the
consents and approvals of, as applicable, the FRB and the OTS (ii) the filing
and effectiveness of the Form S-4 with the Commission, (iii) compliance with
applicable state securities or "blue sky" laws in connection with the issuance
of Acquiror Common Stock pursuant to this Agreement, (iv) the filing of a
Certificate of Merger with the Secretary of State of the State of Delaware
pursuant to the DGCL in connection with the Merger and (v) review of the Merger
by the DOJ under federal antitrust laws, and except for such filings,
registrations, consents or approvals as are Previously Disclosed, no consents or
approvals of or filings or registrations with any Governmental Entity or with
any third party are necessary on the part of the Acquiror or Acquiror Bank in
connection with the execution and delivery by the Acquiror of this Agreement and
the consummation by the Acquiror of the transactions contemplated hereby.
(d) As of the date hereof, the Acquiror is not aware of any reasons relating
to the Acquiror or any of its Subsidiaries (including without limitation
Community Reinvestment Act compliance) why all consents and approvals shall not
be procured from all regulatory agencies having jurisdiction over the
transactions contemplated by this Agreement as shall be necessary for
consummation of the transactions contemplated by this Agreement.
4.6 SECURITIES DOCUMENTS AND REGULATORY REPORTS
(a) Since January 1, 1995, the Acquiror has timely filed with the Commission
(and since April 1997 the AMEX to the extent specifically required by the rules
and regulations thereof) all Securities Documents required by the Securities
Laws and such Securities Documents complied in all material respect with the
Securities Laws and did not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
(b) Since January 1, 1995, the Acquiror and the Acquiror Bank has duly filed
with the FRB, the FDIC, the NYSBD and any other applicable federal or state
banking authority, as the case may be, in correct form the reports required to
be filed under applicable laws and regulations and such reports were in all
material respects complete and accurate and in compliance with the requirements
of applicable laws and regulations. In connection with the most recent
examinations of the Acquiror or the Acquiror Bank by the FRB, the FDIC or the
NYSBD, as the case may be, neither the Acquiror nor the Acquiror Bank was
required to correct or change any action, procedure or proceeding which the
Acquiror or the Acquiror Bank believes has not been corrected or changed as
required as of the date hereof and which could have a Material Adverse Effect on
the Acquiror.
4.7 FINANCIAL STATEMENTS
(a) The Acquiror has previously delivered or made available to the Company
accurate and complete copies of the Acquiror Financial Statements which, in the
case of the consolidated statements of condition of the Acquiror as of December
31, 1996, 1995 and 1994 and the consolidated statements of income, shareholders'
equity and cash flows for each of the three years ended December 31, 1996, 1995
and 1994, are accompanied by the audit reports of Deloitte & Touche, LLP,
independent public accountants with respect to the Acquiror. The Acquiror
Financial Statements referred to herein, as well as the Acquiror Financial
Statements to be delivered pursuant to Section 5.8 hereof, fairly present or
will fairly present, as
A-21
<PAGE>
the case may be, the consolidated condition of the Acquiror as of the respective
dates set forth therein, and the consolidated income, shareholders' equity and
cash flows of the Acquiror for the respective periods or as of the respective
dates set forth therein.
(b) Each of the Acquiror Financial Statements referred to in Section 4.7(a)
has been or will be, as the case may be, prepared in accordance with GAAP
consistently applied during the periods involved, except as stated therein. The
audits of the Acquiror and the Acquiror Subsidiaries have been conducted in all
material respects in accordance with generally accepted auditing standards. The
books and records of the Acquiror and the Acquiror Subsidiaries are being
maintained in material compliance with applicable legal and accounting
requirements, and all such books and records accurately reflect in all material
respects all dealings and transactions in respect of the business, assets,
liabilities and affairs of the Acquiror and the Acquiror Subsidiaries.
(c) Except and to the extent (i) reflected, disclosed or provided for in the
consolidated statement of financial condition of the Acquiror as of September
30, 1997 (including related notes) and (ii) of liabilities incurred since
September 30, 1997 in the ordinary course of business (including without
limitation liabilities assumed or incurred in connection with actions by the
Acquiror consistent with the terms of Section 5.6(b) hereof), neither the
Acquiror nor any Acquiror Subsidiary has any liabilities, whether absolute,
accrued, contingent or otherwise, material to the financial condition, results
of operations or business of the Acquiror on a consolidated basis.
4.8 MATERIAL ADVERSE CHANGE
Since September 30, 1997, (i) the Acquiror and its Subsidiaries have
conducted their respective businesses in the ordinary and usual course
(excluding the incurrence of expenses in connection with this Agreement and the
transactions contemplated hereby) and (ii) no event has occurred or circumstance
arisen that, individually or in the aggregate, has had or is reasonably likely
to have a Material Adverse Effect on the Acquiror.
4.9 ENVIRONMENTAL MATTERS
(a) To the best of the Acquiror's knowledge, the Acquiror and its
Subsidiaries are in compliance with all Environmental Laws except to the extent
any non-compliance would not have a Material Adverse Effect on the Acquiror.
Neither the Acquiror nor an Acquiror Subsidiary has received any communication
alleging that the Acquiror or an Acquiror Subsidiary is not in such compliance
and, to the best knowledge of the Acquiror, there are no present circumstances
that would prevent or interfere with the continuation of such compliance.
(b) To the best of the Acquiror's knowledge, none of the properties owned,
leased or operated by the Acquiror or an Acquiror Subsidiary or properties which
secure or otherwise act as collateral for loans or other extensions of credit
made by the Acquiror or any Acquiror Subsidiary has been or is in violation of
or liable under any Environmental Law except to the extent any violation or
liability would not have a Material Adverse Effect on the Acquiror.
(c) To the best of the Acquiror's knowledge, there are no past or present
actions, activities, circumstances, conditions, events or incidents that could
reasonably form the basis of any Environmental Claim or other claim or action or
governmental investigation that could result in the imposition of any material
liability arising under any Environmental Law against the Acquiror or an
Acquiror Subsidiary or against any person or entity whose liability for any
Environmental Claim the Acquiror or an Acquiror Subsidiary has or may have
retained or assumed either contractually or by operation of law or with respect
to any of the properties owned, leased or operated by the Acquiror or an
Acquiror Subsidiary or properties which secure or otherwise act as collateral
for loans or other extensions of credit made by the Acquiror or any Acquiror
Subsidiary.
A-22
<PAGE>
(d) Except as Previously Disclosed, the Acquiror has not conducted any
environmental studies during the past five years with respect to any properties
owned or leased by it or an Acquiror Subsidiary or which secures or otherwise
acts as collateral for a loan or other extension of credit held by the Acquiror
or an Acquiror Subsidiary as of the date hereof.
4.10 TAX MATTERS
(a) The Acquiror and the Acquiror Subsidiaries have timely filed all
federal, state and local (and, if applicable, foreign) income, franchise, bank,
excise, real property, personal property and other tax returns required by
applicable law to be filed by them (including, without limitation, estimated tax
returns, income tax returns, information returns and withholding and employment
tax returns) and have paid, or where payment is not required to have been made,
have set up an adequate reserve or accrual for the payment of, all material
taxes required to be paid in respect of the periods covered by such returns and,
as of the Effective Time, will have paid, or where payment is not required to
have been made, will have set up an adequate reserve or accrual for the payment
of, all material taxes for any subsequent periods ending on or prior to the
Effective Time. Neither the Acquiror nor any of the Acquiror Subsidiaries will
have any material liability for any such taxes in excess of the amounts so paid
or reserves or accruals so established.
(b) All federal, state and local (and, if applicable, foreign) income,
franchise, bank, excise, real property, personal property and other tax returns
filed by the Acquiror and its Subsidiaries are complete and accurate in all
material respects. Neither the Acquiror nor an Acquiror Subsidiary is delinquent
in the payment of any tax, assessment or governmental charge or, except as
Previously Disclosed, has requested any extension of time within which to file
any tax returns in respect of any fiscal year or portion thereof which have not
since been filed. Except as Previously Disclosed, the federal, state and local
income tax returns of the Acquiror and its Subsidiaries have been examined by
the applicable tax authorities (or are closed to examination due to the
expiration of the applicable statute of limitations) and no deficiencies for any
tax, assessment or governmental charge have been proposed, asserted or assessed
(tentatively or otherwise) against the Acquiror or any Acquiror Subsidiary as a
result of such examinations or otherwise which have not been settled and paid.
Except as Previously Disclosed, there are currently no agreements in effect with
respect to the Acquiror or an Acquiror Subsidiary to extend the period of
limitations for the assessment or collection of any tax. Except as Previously
Disclosed, as of the date hereof, no audit, examination or deficiency or refund
litigation with respect to such return is pending or, to the best of the
Acquiror's knowledge, threatened.
(c) Except as Previously Disclosed, neither the Acquiror nor any Acquiror
Subsidiary (i) is a party to any agreement providing for the allocation or
sharing of taxes, (ii) is required to include in income any adjustment pursuant
to Section 481(a) of the Code by reason of a voluntary change in accounting
method initiated by the Acquiror or an Acquiror Subsidiary (nor does the
Acquiror have any knowledge that the Internal Revenue Service has proposed any
such adjustment or change of accounting method) or (iii) has filed a consent
pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of
the Code apply.
4.11 LEGAL PROCEEDINGS
There are no actions, suits, claims, governmental investigations or
proceedings instituted, pending or, to the best knowledge of the Acquiror
threatened against the Acquiror or any Acquiror Subsidiary or against any asset,
interest or right of the Acquiror or any Acquiror Subsidiary, or against any
officer, director or employee of any of them that individually or in the
aggregate, if decided adversely, would have a Material Adverse Effect on the
Acquiror. Neither the Acquiror nor any of the Acquiror Subsidiaries is a party
to any order, judgment or decree which has or could reasonably be expected to
have a Material Adverse Effect on the Acquiror.
A-23
<PAGE>
4.12 COMPLIANCE WITH LAWS
(a) The Acquiror and each of the Acquiror Subsidiaries has all permits,
licenses, certificates of authority, orders and approvals of, and has made all
filings, applications and registrations with, federal, state, local and foreign
governmental or regulatory bodies that are required in order to permit it to
carry on its business as it is presently being conducted and the absence of
which could reasonably be expected to have a Material Adverse Effect on the
Acquiror; all such permits, licenses, certificates of authority, orders and
approvals are in full force and effect; and to the best knowledge of the
Acquiror, no suspension or cancellation of any of the same is threatened.
(b) Neither the Acquiror nor any of the Acquiror Subsidiaries is in
violation of its respective Certificate of Incorporation, Charter or other
organizational document or Bylaws, or of any applicable federal, state or local
law or ordinance or any order, rule or regulation of any federal, state, local
or other governmental agency or body (including, without limitation, all banking
(including without limitation all regulatory capital requirements), securities,
municipal securities, safety, health, environmental, zoning,
anti-discrimination, antitrust, and wage and hour laws, ordinances, orders,
rules and regulations), or in default with respect to any order, writ,
injunction or decree of any court, or in default under any order, license,
regulation or demand of any governmental agency, any of which violations or
defaults, individually or in the aggregate, could reasonably be expected to have
a Material Adverse Effect on the Acquiror; and neither the Acquiror nor any
Acquiror Subsidiary has received any notice or communication from any federal,
state or local governmental authority asserting that the Acquiror or any
Acquiror Subsidiary is in violation of any of the foregoing which could
reasonably be expected to have a Material Adverse Effect on the Acquiror.
Neither the Acquiror nor any Acquiror Subsidiary is subject to any regulatory or
supervisory cease and desist order, agreement, written directive, memorandum of
understanding or written commitment (other than those of general applicability
to all banks or holding companies thereof, as applicable, issued by governmental
authorities), and none of them has received any written communication requesting
that it enter into any of the foregoing.
4.13 CERTAIN INFORMATION
None of the information relating to the Acquiror and the Acquiror
Subsidiaries to be included or incorporated by reference in (i) the Form S-4
will, at the time the Form S-4 and any amendment thereto becomes effective under
the Securities Act, contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and (ii) the Proxy
Statement, as of the date such Proxy Statement is mailed to shareholders of the
Company and up to and including the date of the meeting of shareholders to which
such Proxy Statement relates, will contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading,
provided that information as of a later date shall be deemed to modify
information as of an earlier date. The Proxy Statement mailed by the Company to
its shareholders in connection with the meeting of shareholders at which this
Agreement will be considered by such shareholders will comply as to form in all
material respects with the Securities Act and the Exchange Act and the rules and
regulations promulgated thereunder.
4.14 EMPLOYEE BENEFIT PLANS
(a) The Acquiror has Previously Disclosed all stock option, stock grant,
employee stock purchase and stock bonus plans, qualified pension or
profit-sharing plans, any deferred compensation, consultant, bonus or group
insurance contract or any other incentive, health and welfare or employee
benefit plan or agreement maintained for the benefit of employees or former
employees of the Acquiror or any Acquiror Subsidiary (the "Acquiror Employee
Plans"), whether written or oral, and the Acquiror has previously furnished or
made available to the Company accurate and complete copies of the same together
with (i) the most recent actuarial and financial reports prepared with respect
to any plans, (ii) the most recent
A-24
<PAGE>
annual reports filed with any governmental agency, and (iii) all rulings and
determination letters and any open requests for rulings or letters that pertain
to any qualified plan.
(b) To the best of the Acquiror's knowledge, the Acquiror Employee Plans
have been operated in compliance in all material respects with the terms of the
operative plan documents and the applicable provisions of ERISA, the Code, all
regulations, rulings and announcements promulgated or issued thereunder and all
other applicable governmental laws and regulations.
4.15 CERTAIN CONTRACTS
(a) Except as Previously Disclosed, neither the Acquiror nor an Acquiror
Subsidiary is a party to, is bound or affected by, receives, or is obligated to
pay, benefits under (i) any agreement, arrangement or understanding pursuant to
which any payment (whether of severance pay or otherwise) became or may become
due to any director, officer or employee of the Acquiror or an Acquiror
Subsidiary upon execution of this Agreement or upon or following consummation of
the transactions contemplated by this Agreement (either alone or in connection
with the occurrence of any additional acts or events); (ii) any agreement,
arrangement or understanding pursuant to which the Acquiror or an Acquiror
Subsidiary is obligated to indemnify any director, officer, employee or agent of
the Acquiror or an Acquiror Subsidiary, (iii) any agreement, arrangement or
understanding to which the Acquiror or an Acquiror Subsidiary is a party or by
which any of the same is bound which limits the freedom of the Acquiror or an
Acquiror Subsidiary to compete in any line of business or with any person, (iv)
any assistance agreement, supervisory agreement, memorandum of understanding,
consent order, cease and desist order or condition of any regulatory order or
decree with or by the FRB, the FDIC, the NYSBD or any other regulatory agency,
(v) any other agreement, arrangement or understanding which would be required to
be filed as an exhibit to the Acquiror's Annual Report on Form 10-K under the
Exchange Act and which has not been so filed or (vi) any other agreement,
arrangement or understanding which, if entered into after the date hereof, would
require the consent of the Company under Section 5.6(b) hereof.
(b) Neither the Acquiror nor any Acquiror Subsidiary is in default or in
non-compliance, which default or non-compliance could reasonably be expected to
have a Material Adverse Effect on the Acquiror, under any contract, agreement,
commitment, arrangement, lease, insurance policy or other instrument to which it
is a party or by which its assets, business or operations may be bound or
affected, whether entered into in the ordinary course of business or otherwise
and whether written or oral, and there has not occurred any event that with the
lapse of time or the giving of notice, or both, would constitute such a default
or non-compliance.
4.16 BROKERS AND FINDERS
Except as Previously Disclosed, neither the Acquiror nor any Acquiror
Subsidiary, nor any of their respective directors, officers or employees, has
employed any broker or finder or incurred any liability for any broker or finder
fees or commissions in connection with the transactions contemplated hereby.
4.17 INSURANCE
The Acquiror and each Acquiror Subsidiary is insured for reasonable amounts
with financially sound and reputable insurance companies against such risks as
companies engaged in a similar business would, in accordance with commercially
reasonable business practice, customarily be insured and has maintained all
insurance required by applicable laws and regulations.
4.18 ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses reflected, and to be reflected, in the
Acquiror's reports referred to in Section 4.6(b) hereof, and shown, and to be
shown, on the balance sheets contained in the Acquiror Financial Statements have
been, and will be, established in accordance with the requirements of, and was
and will be adequate under, GAAP and all applicable regulatory criteria.
A-25
<PAGE>
4.19 LOANS
Each loan reflected as an asset in the Acquiror Financial Statements (i) is
evidenced by notes, agreements or other evidences of indebtedness which are
true, genuine and correct (ii) to the extent secured, has been secured by valid
liens and security interests which have been perfected, and (ii) is the legal,
valid and binding obligation of the obligor named therein, enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
conveyance and other laws of general applicability relating to or affecting
creditors' rights and to general equity principles, in each case other than
loans as to which the failure to satisfy the foregoing standards would not have
a Material Adverse Effect on the Acquiror.
4.20 ACCOUNTING FOR THE MERGER; REORGANIZATION
As of the date hereof, the Acquiror, after consultation with Deloitte &
Touche LLP, does not have any reason to believe that the Merger will fail to
qualify (i) for pooling-of-interests treatment under GAAP, or (ii) as a
reorganization under Section 368(a) of the Code.
4.21 FAIRNESS OPINION
The Acquiror has received a written opinion from Keefe, Bruyette & Woods,
Inc. to the effect that, as of the date hereof, the consideration to be paid
pursaunt to Article II hereof is fair, from a financial point of view, to the
shareholders of the Acquiror.
4.22 LABOR
No work stoppage involving the Acquiror or an Acquiror Subsidiary is pending
or, to the best knowledge of the Acquiror, threatened. Neither the Acquiror nor
an Acquiror Subsidiary is involved in, or threatened with or affected by, any
labor dispute, arbitration, lawsuit or administrative proceeding involving the
employees of the Acquiror or an Acquiror Subsidiary which could have a Material
Adverse Effect on the Acquiror. Employees of the Acquiror and the Acquiror
Subsidiaries are not represented by any labor union nor are any collective
bargaining agreements otherwise in effect with respect to such employees, and to
the best of the Acquiror's knowledge, there have been no efforts to unionize or
organize any employees of the Acquiror or any of the Acquiror Subsidiaries
during the past five years.
4.23 OWNERSHIP OF COMPANY COMMON STOCK
As of the date hereof, neither the Acquiror nor, to its best knowledge, any
of its Affiliates or associates, (i) beneficially own, directly or indirectly,
or (ii) are parties to any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of, in each case, shares of
Company Common Stock which in the aggregate represent 5% or more of the
outstanding shares of Company Common Stock (other than shares held in a
fiduciary capacity and beneficially owned by third parties, shares taken in
consideration of debts previously contracted or in the case of the Acquiror
shares which may be acquired pursuant to the Company Stock Option Agreement).
4.24 DISCLOSURES
The representations and warranties of the Acquiror made pursuant to this
Agreement are true, correct and complete in all material respects, and do not
omit statements necessary to make them not misleading under all facts and
circumstances.
A-26
<PAGE>
ARTICLE V
COVENANTS
5.1 REASONABLE BEST EFFORTS
Subject to the terms and conditions of this Agreement, each of the Company
and the Acquiror 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 or advisable under applicable laws and regulations so as to permit
consummation of the Merger as promptly as reasonably practicable, and to
otherwise enable consummation of the transactions contemplated hereby, and shall
cooperate fully with the other party hereto to that end.
5.2 SHAREHOLDER MEETING
The Company shall take all action necessary to properly call and convene a
meeting of its shareholders as soon as practicable after the date hereof to
consider and vote upon this Agreement and the transactions contemplated hereby.
The Board of Directors of the Company will recommend that the shareholders of
the Company approve this Agreement and the transactions contemplated hereby,
provided that the Board of Directors of the Company may fail to make such
recommendation, or withdraw, modify or change any such recommendation, if such
Board of Directors, after having consulted with and considered the advice of
outside counsel, has determined that the making of such recommendation, or the
failure to withdraw, modify or change such recommendation, would constitute a
breach of the fiduciary duties of such directors under applicable law.
5.3 REGULATORY MATTERS
(a) The parties hereto shall cooperate with each other in the preparation
of, and the prompt filing of the Form S-4, including the Proxy Statement. Each
of the Acquiror and the Company shall use its reasonable best efforts to have
the Form S-4 declared effective under the Securities Act as promptly as
practicable after such filing, and the Company shall thereafter promptly mail
the Proxy Statement to its shareholders. The Acquiror also shall use its
reasonable best efforts to obtain all necessary state securities law or "blue
sky" permits and approvals required to carry out the issuance of Acquiror Common
Stock pursuant to the Merger and all other transactions contemplated by this
Agreement, and the Company shall furnish all information concerning the Company
and the holders of the Company Common Stock as may be reasonably requested in
connection with any such action.
(b) The parties hereto shall cooperate with each other and use their
reasonable best efforts to prepare and, within 60 days of the date hereof, file
all necessary documentation, to effect all applications, notices, petitions and
filings, and to obtain as promptly as practicable all permits, consents,
approvals and authorizations of all Governmental Entities and third parties
which are necessary or advisable to consummate the transactions contemplated by
this Agreement (including without limitation the Merger). The Acquiror and the
Company shall have the right to review in advance, and to the extent practicable
each will consult with the other on, in each case subject to applicable laws
relating to the exchange of information, all the information which appears in
any filing made with or written materials submitted to any third party or any
Governmental Entity in connection with the transactions contemplated by this
Agreement. In exercising the foregoing right, each of the parties hereto shall
act reasonably and as promptly as practicable. The parties hereto agree that
they will consult with each other with respect to the obtaining of all permits,
consents, approvals and authorizations of all third parties and Governmental
Entities necessary or advisable to consummate the transactions contemplated by
this Agreement and each party will keep the other apprised of the status of
matters relating to completion of the transactions contemplated herein.
(c) The Acquiror and the Company shall, upon request, furnish each other
with all information concerning themselves, their respective Subsidiaries,
directors, officers and shareholders and such other matters as may be reasonably
necessary or advisable in connection with the Proxy Statement, the Form S-4 or
any other statement, filing, notice or application made by or on behalf of the
Acquiror, the Company or any of their respective Subsidiaries to any
Governmental Entity in connection with the Merger and the other transactions
contemplated hereby.
A-27
<PAGE>
(d) The Acquiror and the Company shall promptly furnish each other with
copies of written communications received by the Acquiror or the Company, as the
case may be, or any of their respective Subsidiaries from, or delivered by any
of the foregoing to, any Governmental Entity in respect of the transactions
contemplated hereby.
5.4 INVESTIGATION AND CONFIDENTIALITY
(a) Each party shall permit the other party and its representatives
reasonable access to its properties and personnel, and shall disclose and make
available to such other party all books, papers and records relating to the
assets, stock ownership, properties, operations, obligations and liabilities of
it and its Subsidiaries, including, but not limited to, all books of account
(including the general ledger), tax records, minute books of meetings of boards
of directors (and any committees thereof) and shareholders, organizational
documents, bylaws, material contracts and agreements, filings with any
regulatory authority, accountants' work papers, litigation files, loan files,
plans affecting employees, and any other business activities or prospects in
which the other party may have a reasonable interest, provided that such access
shall be reasonably related to the transactions contemplated hereby and, in the
reasonable opinion of the respective parties providing such access, not unduly
interfere with normal operations. Each party and its Subsidiaries shall make
their respective directors, officers, employees and agents and authorized
representatives (including counsel and independent public accountants) available
to confer with the other party and its representatives, provided that such
access shall be reasonably related to the transactions contemplated hereby and
shall not unduly interfere with normal operations.
(b) The Acquiror may request, within 45 days from the date hereof, the
Company to conduct at the Acquiror's expense environmental audits by an
independent qualified environmental engineer or consultant (the "Environmental
Consultant") of any parcel or parcels of real property owned by the Company. The
Environmental Consultant shall conduct any audits or other investigations
pursuant to this Section 5.4(b) with reasonable care and subject to customary
practices among environmental consultants and engineers, including without
limitation, following completion thereof the restoration of any site to the
extent practicable to its condition prior to such audit or investigation and the
removal of all monitoring wells.
(c) All information furnished previously in connection with the transactions
contemplated by this Agreement or pursuant hereto shall be treated as the sole
property of the party furnishing the information until consummation of the
transactions contemplated hereby and, if such transactions shall not occur, the
party receiving the information shall either destroy or return to the party
which furnished such information all documents or other materials containing,
reflecting or referring to such information, shall use its best efforts to keep
confidential all such information, and shall not directly or indirectly use such
information for any competitive or other commercial purposes. The obligation to
keep such information confidential shall continue for five years from the date
the proposed transactions are abandoned but shall not apply to (i) any
information which (x) the party receiving the information can establish was
already in its possession prior to the disclosure thereof by the party
furnishing the information; (y) was then generally known to the public; or (z)
became known to the public through no fault of the party receiving the
information; or (ii) disclosures pursuant to a legal requirement or in
accordance with an order of a court of competent jurisdiction, provided that the
party which is the subject of any such legal requirement or order shall use its
best efforts to give the other party at least ten business days prior notice
thereof and shall cooperate with the other party so that the other party may
seek an appropriate protective order.
5.5 PRESS RELEASES
The Acquiror and the Company shall agree with each other as to the form and
substance of any press release related to this Agreement or the transactions
contemplated hereby, and consult with each other as to the form and substance of
other public disclosures which may relate to the transactions contemplated by
this Agreement, provided, however, that nothing contained herein shall prohibit
either party, following notification to the other party, from making any
disclosure which is required by law or regulation.
A-28
<PAGE>
5.6 BUSINESS OF THE PARTIES
(a) During the period from the date of this Agreement and continuing until
the Effective Time, except as expressly contemplated or permitted by this
Agreement or with the prior written consent of the Acquiror, the Company and its
Subsidiaries shall carry on their respective businesses in the ordinary course
consistent with past practice. During such period, the Company also will use all
commercially reasonable efforts to (x) preserve its business organization and
that of the Bank intact, (y) keep available to itself and the Acquiror the
present services of the employees of the Company and the Bank and (z) preserve
for itself and the Acquiror the goodwill of the customers of the Company and the
Bank and others with whom business relationships exist. Without limiting the
generality of the foregoing, except with the prior written consent of the
Acquiror or as expressly contemplated hereby, between the date hereof and the
Effective Time, the Company shall not, and shall cause each Company Subsidiary
not to:
(i) declare, set aside, make or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect
of the Company Common Stock, except for regular quarterly cash dividends at
a rate per share of Company Common Stock not in excess of $0.07 per share,
which shall be declared and paid at approximately the same time as dividends
on the Acquiror Common Stock, it being the intention of the parties that the
shareholders of the Company receive dividends for any particular calendar
quarter on either the Company Common Stock or the Acquiror Common Stock
acquired in exchange therefor pursuant to the terms of this Agreement but
not both, provided, however, that nothing contained herein shall be deemed
to affect the ability of a Company Subsidiary to pay dividends on its
capital stock to the Company;
(ii) issue any shares of its capital stock, other than in the case of
the Company pursuant to the Company Stock Option Agreement and upon exercise
of the Company Options referred to in Section 3.1 hereof, or issue, grant,
modify or authorize any Rights, other than the Company Stock Option
Agreement; purchase any shares of Company Common Stock; or effect any
recapitalization, reclassification, stock dividend, stock split or like
change in capitalization;
(iii) amend its Certificate of Incorporation, Charter, Bylaws or similar
organizational documents; impose, or knowingly suffer the imposition, on any
share of stock or other ownership interest held by the Company in a Company
Subsidiary of any lien, charge or encumbrance or permit any such lien,
charge or encumbrance to exist; or waive or release any material right or
cancel or compromise any material debt or claim;
(iv) increase the rate of compensation of any of its directors, officers
or employees, or pay or agree to pay any bonus or severance to, or provide
any other new employee benefit or incentive to, any of its directors,
officers or employees, except (i) as Previously Disclosed, (ii) as may be
required pursuant to binding commitments existing on the date hereof, (iii)
as may be required by law and (iv) merit increases in accordance with past
practices, normal cost-of-living increases and normal increases related to
promotions or increased job responsibilities;
(v) except as Previously Disclosed, enter into or, except as may be
required by law, modify any pension, retirement, stock option, restricted
stock, stock purchase, stock appreciation right, savings, profit sharing,
deferred compensation, supplemental retirement, 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 employees; make any contributions to the Company
Pension Plan, except as required by the presently existing terms of the
Company Pension Plan or the policies under which it is operated as of the
date hereof; or make any contributions to the Company ESOP, other than
necessary to enable the Company ESOP to make required payments on its
indebtedness as of the date hereof;
(vi) enter into (w) any transaction, agreement, arrangement or
commitment not made in the ordinary course of business, (x) any agreement,
indenture or other instrument relating to the
A-29
<PAGE>
borrowing of money by the Company or a Company Subsidiary or guarantee by
the Company or any Company Subsidiary of any such obligation, except in the
case of the Bank for deposits, FHLB advances, federal funds purchased and
securities sold under agreements to repurchase in the ordinary course of
business consistent with past practice, (y) any agreement, arrangement or
commitment relating to the employment of an employee or consultant, or amend
any such existing agreement, arrangement or commitment, provided that the
Company and the Bank may employ an employee or consultant in the ordinary
course of business if the employment of such employee or consultant is
terminable by the Company or the Bank at will without liability, other than
as required by law; or (z) any contract, agreement or understanding with a
labor union;
(vii) change its method of accounting in effect for the fiscal year
ended March 31, 1997, except as required by changes in laws or regulations
or GAAP, or change any of its methods of reporting income and deductions for
federal income tax purposes from those employed in the preparation of its
federal income tax return for the fiscal year ended March 31, 1997, except
as required by changes in laws or regulations;
(viii) make any capital expenditures in excess of $10,000 individually
or $50,000 in the aggregate, other than pursuant to binding commitments
existing on the date hereof and other than expenditures necessary to
maintain existing assets in good repair; or enter into as lessee any new
lease of real property or any new lease of personal property providing for
annual payments in excess of $5,000;
(ix) file any applications or make any contract with respect to
branching or site location or relocation;
(x) acquire in any manner whatsoever (other than to realize upon
collateral for a defaulted loan) control over or any equity interest in any
business or entity, except for investments in marketable equity securities
in the ordinary course of business and not exceeding 2% of the outstanding
shares of any class;
(xi) enter into any futures contract, option contract, interest rate
caps, interest rate floors, interest rate exchange agreement or other
agreement for purposes of hedging the exposure of its interest-earning
assets and interest-bearing liabilities to changes in market rates of
interest (other than forward commitments to sell loans in the ordinary
course of business);
(xii) enter or agree to enter into any agreement or arrangement granting
any preferential right to purchase any of its assets or rights or requiring
the consent of any party to the transfer and assignment of any such assets
or rights;
(xiii) change or modify in any material respect any of its lending or
investment policies, except to the extent required by law or an applicable
regulatory authority;
(xiv) take any action that would prevent or impede the Merger from
qualifying (A) for pooling-of-interests accounting treatment under GAAP or
(B) as a reorganization within the meaning of Section 368 of the Code,
provided, however, that nothing contained herein shall limit the ability of
the Company to comply with its obligations under the Company Stock Option
Agreement;
(xv) take any action that would result in any of the representations and
warranties of the Company contained in this Agreement not to be true and
correct in any material respect at the Effective Time;
(xvi) terminate the employment of Mr. Byelick or Mr. Murphy without
cause; or
(xvii) agree to do any of the foregoing.
(b) During the period from the date of this Agreement and continuing until
the Effective Time, the Acquiror shall continue to conduct its business and the
business of the Acquiror Subsidiaries in the
A-30
<PAGE>
ordinary course consistent with past practice. During such period, the Acquiror
also will use all commercially reasonable efforts to (x) preserve its business
organization and that of the Acquiror Bank intact, (y) keep available to itself
the present services of the employees of the Acquiror and the Acquiror Bank and
(z) preserve for itself the goodwill of the customers of the Acquiror and the
Acquiror Bank and others with whom business relationships exist. Without
limiting the generality of the foregoing, except with the prior written consent
of the Company or as expressly contemplated hereby, between the date hereof and
the Effective Time, the Acquiror shall not, and shall cause each Acquiror
Subsidiary not to:
(i) amend its Certificate of Incorporation or Bylaws in a manner which
would adversely affect in any manner the terms of the Acquiror Common Stock
or the ability of the Acquiror to consummate the transactions contemplated
hereby; or impose, or knowingly suffer the imposition, on any share of stock
or other ownership interest held by the Acquiror in an Acquiror Subsidiary
of any lien, charge or encumbrance or permit any such lien, charge or
encumbrance to exist;
(ii) make any acquisition or take any other action that individually or
in the aggregate could materially adversely affect the ability of the
Acquiror to consummate the transactions contemplated hereby, or enter into
any agreement providing for, or otherwise participate in, any merger,
consolidation or other transaction in which the Acquiror or any surviving
corporation may be required not to consummate the Merger or any of the other
transactions contemplated hereby in accordance with the terms of this
Agreement;
(iii) declare, set aside, make or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect
of the Acquiror Common Stock, except for regular quarterly cash dividends in
an amount determined by the Board of Directors in the ordinary course of
business and consistent with past practice, provided, however, that nothing
contained herein shall be deemed to affect the ability of (x) an Acquiror
Subsidiary to pay dividends on its capital stock to the Acquiror or (y) the
Acquiror to repurchase shares of Acquiror Common Stock, unless otherwise
prohibited by clause (iv) below;
(iv) take any action that would prevent or impede the Merger from
qualifying (A) for pooling-of-interests accounting treatment under GAAP or
(B) as a reorganization within the meaning of Section 368 of the Code;
provided, however, that nothing contained herein shall limit the ability of
the Acquiror to exercise its rights under the Company Stock Option
Agreement;
(v) take any action that would result in any of the representations and
warranties of the Acquiror contained in this Agreement not to be true and
correct in any material respect at the Effective Time; or
(vi) enter into an agreement with respect to an Acquisition Transaction
with a third party which is conditioned (explicitly or implicitly) on the
Acquiror not completing the Merger; provided, that the foregoing shall not
prevent the Acquiror or any Acquiror Subsidiary from acquiring any other
assets or businesses or from discontinuing or disposing of any of its assets
or business if such action is, in the reasonable judgment of the Acquiror,
desirable in the conduct of the business of the Acquiror and the Acquiror
Subsidiaries and would not, in the reasonable judgment of the Acquiror,
likely delay the Effective Time to a date subsequent to the date set forth
in Section 7.1(e) of this Agreement. For purposes of this Agreement,
"Acquisition Transaction" shall mean (x) a merger or consolidation, or any
similar transaction, involving the Acquiror, (y) a purchase, lease or other
acquisition of all or substantially all of the assets of the Acquiror or (z)
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 Acquiror.
(vii) agree to do any of the foregoing.
A-31
<PAGE>
5.7 CERTAIN ACTIONS
The Company shall not, and shall cause each Company Subsidiary not to,
solicit or encourage inquiries or proposals with respect to, furnish any
information relating to, or participate in any negotiations or discussions
concerning, any acquisition, lease or purchase of all or a substantial portion
of the assets of, or any equity interest in, the Company or a Company Subsidiary
(other than with the Acquiror or an Affiliate thereof), provided, however, that
the Board of Directors of the Company may furnish such information or
participate in such negotiations or discussions if such Board of Directors,
after having consulted with and considered the advice of outside counsel, has
determined that the failure to do the same would cause the members of such Board
of Directors to breach their fiduciary duties under applicable law. The Company
will promptly inform the Acquiror orally and in writing of any such request for
information or of any such negotiations or discussions, as well as instruct its
and its Subsidiaries' directors, officers, representatives and agents to refrain
from taking any action prohibited by this Section 5.7. The Company will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations previously conducted with any parties other than the
Acquiror with respect to any of the foregoing.
5.8 CURRENT INFORMATION
During the period from the date of this Agreement to the Effective Time,
each party shall, upon the request of the other party, cause one or more of its
designated representatives to confer on a monthly or more frequent basis with
representatives of the other party regarding its financial condition, operations
and business and matters relating to the completion of the transactions
contemplated hereby. As soon as reasonably available, but in no event more than
45 days after the end of each calendar quarter ending after the date of this
Agreement (other than the last quarter of each fiscal year ending December 31 in
the case of the Acquiror and March 31 in the case of the Company), the Company
and the Acquiror will deliver to the other party its quarterly report on Form
10-Q under the Exchange Act, and, as soon as reasonably available, but in no
event more than 90 days after the end of each fiscal year ending December 31 in
the case of the Acquiror and March 31 in the case of the Company, the Company
and the Acquiror will deliver to the other party its Annual Report on Form 10-K.
Within 35 days after the end of each month, the Company and the Acquiror will
deliver to the other party a consolidated balance sheet and a consolidated
statement of operations, without related notes, for such month prepared in
accordance with GAAP.
5.9 INDEMNIFICATION; INSURANCE
(a) From and after the Effective Time through the sixth anniversary of the
Effective Time, the Acquiror, in the case of an indemnification obligation of
the Company, or the applicable Company Subsidiary or its successor by merger, in
the case of an indemnification obligation of a Company Subsidiary (the Acquiror
or such Company Subsidiary, as applicable, being referred to herein as the
"Indemnifying Party") shall provide indemnification (including advancement of
expenses, if applicable) to each present and former director, officer or
employee of the Company or a Company Subsidiary and each officer or employee of
the Company or its Subsidiaries that is serving or has served as a director or
trustee of another entity expressly at the Company's request or direction, in
each case determined as of the Effective Time (the "Indemnified Parties"), with
respect to any costs or expenses (including reasonable attorneys' fees),
judgments, fines, losses, claims, damages or liabilities incurred in connection
with any claim, action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, arising out of matters existing or
occurring at or prior to the Effective Time, (including the transactions
contemplated by this Agreement, including the entering into of the Company Stock
Option Agreement), if first asserted or claimed prior to the date hereof and
Previously Disclosed, if first asserted or claimed between the date hereof and
the Effective Time and disclosed pursuant to Section 5.13 hereof or if first
asserted or claimed after the Effective Time, to the fullest extent, if any,
that such Indemnified Party, would have been entitled to indemnification or the
advancement of expenses by the Company under Article X of its Certificate of
Incorporation on the one hand or by the Bank under Article XII of its Bylaws on
the other hand ("the
A-32
<PAGE>
Indemnification Rights"), as in effect on the date hereof and Previously
Disclosed, provided, however, that all rights to indemnification in respect of
any claim asserted or made within such period shall continue until the final
disposition of such claim, and provided, further, that nothing contained herein
shall enlarge the rights to indemnification contained in the Indemnification
Rights or extend or be deemed a waiver of any applicable statute of limitations
in respect of any claim or claim for indemnification. Without limiting the
foregoing, the Acquiror also agrees that all limitations of liability existing
in favor of the Indemnified Parties in Article IX of the Certificate of
Incorporation of the Company, as in effect on the date hereof and Previously
Disclosed, arising out of matters existing or occurring at or prior to the
Effective Time shall survive the Merger and shall continue in full force and
effect.
(b) Any Indemnified Party wishing to claim indemnification under Section
5.9(a), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify the Indemnifying Party, but the failure to
so notify shall not relieve the Indemnifying Party of any liability it may have
to such Indemnified Party if such failure does not materially prejudice the
Indemnifying Party. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i) the
Indemnifying Party shall have the right to assume the defense thereof and the
Indemnifying Party shall not be liable to such Indemnified Parties for any legal
expenses of other counsel or any other expenses subsequently incurred by such
Indemnified Parties in connection with the defense thereof, except that if the
Indemnifying Party elects not to assume such defense or counsel for the
Indemnified Parties advises that there are issues which raise conflicts of
interest between the Indemnifying Party and the Indemnified Parties, the
Indemnified Parties may retain counsel which is reasonably satisfactory to the
Indemnifying Party, and the Indemnifying Party shall pay, promptly as statements
therefor are received, the reasonable fees and expenses of such counsel for the
Indemnified Parties (which may not exceed one firm in any jurisdiction unless
the use of one counsel for such Indemnified Parties would present such counsel
with a conflict of interest) in accordance with the obligations set forth in
Section 5.9(a) hereof, (ii) the Indemnified Parties will cooperate in the
defense of any such matter, (iii) the Indemnifying Party shall not be liable for
any settlement effected without its prior written consent and (iv) the
Indemnifying Party shall have no obligation hereunder in the event a federal
banking agency or a court of competent jurisdiction shall ultimately determine,
and such determination shall have become final and nonappealable, that
indemnification of an Indemnified Party in the manner contemplated hereby is
prohibited by applicable law.
(c) The Acquiror shall maintain the Company's existing directors' and
officers' liability insurance policy (or purchase an insurance policy providing
coverage on substantially the same terms and conditions) for acts or omissions
occurring prior to the Effective Time by persons who are currently covered by
such insurance policy maintained by the Company for a period of six years
following the Effective Time, provided, however, that in no event shall the
Acquiror be required to expend on an annual basis more than 125% of the amount
paid by the Company as of the date hereof for such insurance coverage (the
"Insurance Amount") to maintain or procure such insurance coverage, and further
provided that if the Acquiror is unable to maintain or obtain the insurance
called for hereby, the Acquiror shall use all reasonable efforts to obtain as
much comparable insurance as is available for the Insurance Amount. At the
request of the Acquiror, the Company shall use reasonable efforts to procure the
insurance coverage referred to in the preceding sentence prior to the Effective
Time on the terms set forth in such sentence.
(d) In the event that the Acquiror or any of its respective successors or
assigns (i) consolidates with or merges into any other Person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any Person, then, and in each such case the successors and assigns of such
entity shall assume the obligations set forth in this Section 5.9, which
obligations are expressly intended to be for the irrevocable benefit of, and
shall be enforceable by, each director and officer covered hereby.
A-33
<PAGE>
5.10 DIRECTORS
The Acquiror agrees to take all action necessary to appoint or elect,
effective as of the Effective Time, one director of the Company as of the date
hereof selected by the Acquiror as a director of the Acquiror, to serve as a
Class II director (as described in the Acquiror's most recent proxy statement)
and until his successor is elected and qualified. Further, the Acquiror agrees
to take all action necessary to appoint or elect, effective as of the Effective
Time, those directors of the Company as of the date hereof who so desire, other
than the director who becomes a member of the Acquiror's Board of Directors, to
serve on the Acquiror's Chairman's Council. Each such person shall serve at the
discretion of the Chairman of the Board of the Acquiror.
5.11 BENEFIT PLANS AND ARRANGEMENTS
(a) As soon as administratively practicable after the Effective Time, and at
the discretion of the Acquiror, the Acquiror will take all reasonable action so
that employees of the Company and its Subsidiaries will be entitled to
participate in the Acquiror Employee Plans of general applicability, and until
such time the Company Employee Plans shall remain in effect, provided that no
employee of the Company or a Company Subsidiary who becomes an employee of the
Acquiror and subject to the Acquiror's medical insurance plans shall be excluded
from coverage thereunder on the basis of a preexisting condition that was not
also excluded under the Company's medical insurance plans, except to the extent
such preexisting condition was excluded from coverage under the Company's
medical insurance plans, in which case this Section 5.11(a) shall not require
coverage for such preexisting condition. For purposes of determining eligibility
to participate in and the vesting of benefits (but not for purposes of benefit
accrual) under the Acquiror Employee Plans, the Acquiror shall recognize years
of service with the Company and a Company Subsidiary prior to the Effective
Time.
(b) All employees of the Company or a Company Subsidiary as of the Effective
Time shall become employees of the Acquiror or an Acquiror Subsidiary as of the
Effective Time, provided that the Acquiror or an Acquiror Subsidiary shall have
no obligation to continue the employment of any such person and nothing
contained in this Agreement shall give any employee of the Company or any
Company Subsidiary a right to continuing employment with the Acquiror or an
Acquiror Subsidiary after the Effective Time. To the extent that the employment
of any employee of the Company or any Company Subsidiary (other than any
employee who is party to an employment agreement, employee retention agreement
as Previously Disclosed) is involuntarily terminated within one year of the
Effective Time, such employee will be entitled to receive severance and other
benefits, in accordance with, and to the extent provided by the Company's
Severance Plan, which has been Previously Disclosed. For purposes of determining
benefits under the Company's Severance Plan, the Acquiror shall recognize years
of service and unused vacation with the Company and a Company Subsidiary prior
to the Effective Time.
(c) Following the Merger, the Surviving Corporation and the Bank shall honor
in accordance with their terms the agreements to be entered into, as of the
Effective Time, by Mr. Byelick and Mr. Murphy and the Bank, in the forms as
attached hereto as Exhibits F and G, respectively. These agreements will replace
and supersede the employment agreements entered into by Mr. Byelick and the
Company and the Bank and Mr. Murphy and the Company and the Bank, all as
Previously Disclosed. Following the Merger, the Surviving Corporation shall, or
shall cause the Bank to, honor in accordance with their terms the Company or
Bank employee retention agreements which have been Previously Disclosed. The
provisions of this Section 5.11(c) are intended to be for the benefit of, and
shall be enforceable by, each party to, or beneficiary of, the foregoing
agreements or arrangements, and his or her representatives.
5.12 RESERVES AND MERGER-RELATED COSTS
On or before the Closing Date, and at the written request of the Acquiror,
the Company shall establish such additional accruals and reserves as may be
necessary to conform the accounting reserve practices and methods (including
credit loss practices and methods) of the Company to those of the
A-34
<PAGE>
Acquiror (as such practices and methods are to be applied to the Company from
and after the Effective Time) and Acquiror's plans with respect to the conduct
of the business of the Company following the Merger and otherwise to reflect
Merger-related expenses and costs incurred by the Company, provided, however,
that the Company shall not be required to take such action (a) more than five
business days prior to the Closing Date; and (b) unless the Acquiror agrees in
advance in writing that all conditions to closing set forth in Sections 6.1 and
6.3 have been satisfied or waived (except for the expiration of any applicable
waiting periods). No accrual or reserve made by the Company or any Company
Subsidiary pursuant to this subsection, or any litigation or regulatory
proceeding arising out of any such accrual or reserve, shall constitute or be
deemed to be a breach or violation of any representation, warranty, covenant,
condition or other provision of this Agreement or to constitute a termination
event within the meaning of Section 7.1(b) hereof.
5.13 DISCLOSURE SUPPLEMENTS
From time to time prior to the Effective Time, each party shall promptly
supplement or amend any materials Previously Disclosed and delivered to the
other party pursuant hereto with respect to any matter hereafter arising which,
if existing, occurring or known at the date of this Agreement, would have been
required to be set forth or described in materials Previously Disclosed to the
other party or which is necessary to correct any information in such materials
which has been rendered materially inaccurate thereby; no such supplement or
amendment to such materials shall be deemed to have modified the
representations, warranties and covenants of the parties for the purpose of
determining whether the conditions set forth in Article VI hereof have been
satisfied.
5.14 FAILURE TO FULFILL CONDITIONS
In the event that either of the parties hereto determines that a condition
to its respective obligations to consummate the transactions contemplated may
not be fulfilled on or prior to the termination of this Agreement, it will
promptly notify the other party. Each party will promptly inform the other party
of any facts applicable to it that would be likely to prevent or materially
delay approval of the Merger by any Governmental Entity or third party or which
would otherwise prevent or materially delay completion of the Merger.
5.15 AFFILIATES
Promptly, but in any event within two weeks, after the execution and
delivery of this Agreement, the Company shall deliver to the Acquiror (a) a
letter identifying all persons who, to the knowledge of the Company, may be
deemed to be affiliates of the Company under Rule 145 of the Securities Act and
the pooling-of-interests accounting rules, including, without limitation, all
directors and executive officers of the Company and (b) copies of letter
agreements, each substantially in the form of Exhibit B, executed by each such
person so identified as an affiliate of the Company agreeing to comply with Rule
145 and to refrain from transferring shares of either Company Common Stock or
Acquiror Common Stock, as the case may be, as required by the
pooling-of-interests accounting rules. The Acquiror agrees to publish as soon as
possible, but in no event later than 60 days following the consummation of the
Merger, combined revenues and net income figures as contemplated by and in
accordance with the terms of SEC Accounting Series Release No. 135.
A-35
<PAGE>
ARTICLE VI
CONDITIONS PRECEDENT
6.1 CONDITIONS PRECEDENT--THE ACQUIROR AND THE COMPANY
The respective obligations of the Acquiror and the Company to effect the
Merger shall be subject to satisfaction of the following conditions at or prior
to the Effective Time.
(a) All corporate action necessary to authorize the execution and delivery
of this Agreement and consummation of the Merger shall have been duly and
validly taken by the Acquiror and the Company, including approval by the
requisite vote of the shareholders of the Company of this Agreement.
(b) All approvals and consents from any Governmental Entity the approval or
consent of which is required for the consummation of the Merger shall have been
received, without the imposition of any term or condition that could have a
Material Adverse Effect on the Acquiror upon completion of the Merger, and all
statutory waiting periods in respect thereof shall have expired; and the
Acquiror and the Company shall have procured all other approvals, consents and
waivers of each person (other than the Governmental Entities referred to above)
whose approval, consent or waiver is necessary to the consummation of the
Merger.
(c) None of the Acquiror, the Company or their respective Subsidiaries shall
be subject to any statute, rule, regulation, injunction or other order or decree
which shall have been enacted, entered, promulgated or enforced by any
governmental or judicial authority which prohibits, restricts or makes illegal
consummation of the Merger.
(d) The Form S-4 shall have become effective under the Securities Act, and
the Acquiror shall have received all state securities laws or "blue sky" permits
and other authorizations or there shall be exemptions from registration
requirements necessary to issue the Acquiror Common Stock in connection with the
Merger, and neither the Form S-4 nor any such permit, authorization or exemption
shall be subject to a stop order or threatened stop order by the Commission or
any state securities authority.
(e) The shares of Acquiror Common Stock to be issued in connection with the
Merger shall have been approved for listing on the American Stock Exchange.
(f) The Acquiror and the Company shall have received the written opinion of
either the Acquiror's independent public accountants or counsel to the Acquiror
which is reasonably satisfactory to the Company, which opinion shall be
addressed to each of the Acquiror and the Company and reasonably satisfactory to
it, to the effect that the Merger will constitute a reorganization within the
meaning of Section 368 of the Code and that (i) except for cash received in lieu
of fractional share interests, holders of Company Common Stock who exchange such
stock for Acquiror Common Stock in the Merger will not recognize income, gain or
loss for federal income tax purposes, (ii) the basis of such Acquiror Common
Stock will equal the basis of the Company Common Stock for which it is exchanged
and (iii) the holding period of such Acquiror Common Stock will include the
holding period of the Company Common Stock for which it is exchanged, assuming
that such stock is a capital asset in the hands of the holder thereof at the
Effective Time. Such opinion shall be based on such written representations from
the Acquiror, the Company and others as such independent public accountants or
counsel shall reasonably request as to factual matters.
(g) KPMG Peat Marwick LLP shall have issued a letter dated as of the
Effective Time to the Company and Deloitte & Touche LLP shall have issued a
letter dated as of the Effective Time to the Acquiror, to the effect that, based
on a review of this Agreement and related agreements and the facts and
circumstances then known to it, the Merger shall be accounted for as a
pooling-of-interests under GAAP, and the Acquiror and the Company shall have
received from the Affiliates of the Company and the Acquiror the agreements
attached hereto as Exhibits B and E, respectively, to the extent necessary to
A-36
<PAGE>
ensure in the reasonable judgment of the Acquiror and the Company that the
Merger shall be accounted for in such manner.
6.2 CONDITIONS PRECEDENT--THE COMPANY
The obligations of the Company to effect the Merger shall be subject to
satisfaction of the following conditions at or prior to the Effective Time
unless waived by the Company pursuant to Section 7.4 hereof.
(a) The representations and warranties of the Acquiror set forth in Article
IV hereof shall be true and correct in all material respects as of the date of
this Agreement and as of the Closing Date as though made on and as of the
Closing Date, except to the extent that a representation and warranty
specifically relates to an earlier date, in which case it shall be true and
correct in all material respects as of such earlier date.
(b) The Acquiror shall have performed in all material respects all
obligations and complied with all covenants required to be performed and
complied with by it pursuant to this Agreement on or prior to the Effective
Time.
(c) The Acquiror shall have delivered to the Company a certificate, dated
the date of the Closing and signed by its President and Chief Executive Officer
and by its Chief Financial Officer, to the effect that the conditions set forth
in Sections 6.2(a) and 6.2(b) have been satisfied.
(d) No order, injunction or decree shall have been issued by any court or
agency of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect.
(e) The Company shall have received an opinion of Elias, Matz, Tiernan &
Herrick LLP, counsel to the Acquiror, dated the Closing Date, in form and
substance reasonably satisfactory to the Company and its counsel to the effect
set forth in Exhibit H attached hereto.
(f) The Acquiror shall have furnished the Company with such certificates of
its respective officers or others and such other documents to evidence
fulfillment of the conditions set forth in Sections 6.1 and 6.2 as such
conditions relate to the Acquiror as the Company may reasonably request.
6.3 CONDITIONS PRECEDENT--THE ACQUIROR
The obligations of the Acquiror to effect the Merger shall be subject to
satisfaction of the following conditions at or prior to the Effective Time
unless waived by the Acquiror pursuant to Section 7.4 hereof.
(a) The representations and warranties of the Company set forth in Article
III hereof shall be true and correct in all material respects as of the date of
this Agreement and as of the Closing Date as though made on and as of the
Closing Date, except to the extent that a representation and warranty
specifically relates to an earlier date, in which case it shall be true and
correct in all material respects as of such earlier date.
(b) The Company shall have performed in all material respects all
obligations and covenants required to be performed by it pursuant to this
Agreement on or prior to the Effective Time.
(c) The Company shall have delivered to the Acquiror a certificate, dated
the date of the Closing and signed by its President and Chief Executive Officer
and by its Chief Financial Officer, to the effect that the conditions set forth
in Sections 6.3(a) and 6.3(b) have been satisfied.
(d) No order, injunction or decree shall have been issued by any court or
agency of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect.
A-37
<PAGE>
(e) The Acquiror shall have received an opinion of Thacher Proffitt & Wood,
counsel to the Company, dated the Closing Date, in form and substance reasonably
satisfactory to the Acquiror and its counsel to the effect set forth on Exhibit
I attached hereto.
(f) The Company shall have furnished the Acquiror with such certificates of
its officers or others and such other documents to evidence fulfillment of the
conditions set forth in Sections 6.1 and 6.3 as such conditions relate to the
Company as the Acquiror may reasonably request.
ARTICLE VII
TERMINATION, WAIVER AND AMENDMENT
7.1 TERMINATION
This Agreement may be terminated:
(a) at any time on or prior to the Effective Time, by the mutual consent in
writing of the parties hereto, if the Board of Directors of each so determines
by vote of a majority thereof;
(b) at any time on or prior to the Effective Time, by the Acquiror or the
Company in writing, if its Board of Directors so determine by vote of a majority
thereof, if the other party has, in any material respect, breached (i) any
material covenant or undertaking contained herein or (ii) any representation or
warranty contained herein, in any case if such breach would have a Material
Adverse Effect on the party and has not been cured by the earlier of 30 days
after the date on which written notice of such breach is given to the party
committing such breach or the Effective Time;
(c) at any time, by either party hereto in writing, (i) if any application
for prior approval of a Governmental Entity which is necessary to consummate the
Merger is denied or withdrawn at the request or recommendation of the
Governmental Entity which must grant such approval, unless within the twenty-day
period following such denial or withdrawal a petition for rehearing or an
amended application has been filed with the applicable Governmental Entity,
provided, however, that no party shall have the right to terminate this
Agreement pursuant to this Section 7(c)(i) if such denial or request or
recommendation for withdrawal shall be due to the failure of the party seeking
to terminate this Agreement to perform or observe the covenants and agreements
of such party set forth herein, or (ii) if any Governmental Entity of competent
jurisdiction shall have issued a final nonappealable order enjoining or
otherwise prohibiting the consummation of any of the transactions contemplated
by this Agreement;
(d) at any time, by either party hereto in writing, if the shareholders of
the Company do not approve this Agreement after a vote taken thereon at a
meeting duly called for such purpose (or at any adjournment thereof), unless the
failure of such occurrence shall be due to the failure of the party seeking to
terminate to perform or observe in any material respect its agreements set forth
herein to be performed or observed by such party at or before the Effective
Time;
(e) by either the Company or the Acquiror in writing if the Effective Time
has not occurred by the close of business on December 31, 1998, provided that
this right to terminate shall not be available to any party whose failure to
perform an obligation in breach of such party's obligations under this Agreement
has been the cause of, or resulted in, the failure of the Merger and the other
transactions contemplated hereby to be consummated by such date;
(f) by the Company if the Average Closing Price is less than $15.00, subject
to the next three sentences. If the Company elects to exercise its termination
right pursuant to this Section 7.1(f), it shall give written notice to the
Acquiror (provided that such notice of election to terminate may be withdrawn at
any time). During the five-day period commencing with its receipt of such
notice, the Acquiror shall have the option to increase the consideration to be
received by the holders of the Company Common Stock hereunder by adjusting the
Exchange Ratio to equal a number (calculated to the nearest one-hundredth)
obtained by dividing (A) $18.60 by (B) the Average Closing Price. If the
Acquiror so elects within such
A-38
<PAGE>
five-day period, it shall give prompt written notice to the Company of such
election and the revised Exchange Ratio, whereupon no termination shall have
occurred pursuant to this Section 7.1(f) and this Agreement shall remain in
effect in accordance with its terms (except as the Exchange Ratio shall have
been so modified).
7.2 EFFECT OF TERMINATION
In the event that this Agreement is terminated pursuant to Section 7.1
hereof, this Agreement shall become void and have no effect, except that (i) the
provisions relating to confidentiality, expenses and termination fee set forth
in Section 5.4(c) and Section 8.1, respectively, and this Section 7.2 shall
survive any such termination and (ii) a termination pursuant to Section 7.1(b),
(c), (d) or (e) shall not relieve the breaching party from liability for willful
breach of any covenant, undertaking, representation or warranty giving rise to
such termination.
7.3 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
All representations, warranties and covenants in this Agreement or in any
instrument delivered pursuant hereto shall expire on, and be terminated and
extinguished at, the Effective Time other than covenants that by their terms are
to be performed after the Effective Time (including without limitation the
covenants set forth in Sections 5.9, 5.10 and 5.11 hereof), provided that the
covenant of the Acquiror contained in Section 5.6(b)(iv) hereof shall survive
and be applicable following the Effective Time, and further provided that no
such representations, warranties or covenants shall be deemed to be terminated
or extinguished so as to deprive the Acquiror or the Company (or any director,
officer or controlling person thereof) of any defense at law or in equity which
otherwise would be available against the claims of any person, including,
without limitation, any shareholder or former shareholder of either the Acquiror
or the Company.
7.4 WAIVER
Each party hereto by written instrument signed by an executive officer of
such party, may at any time (whether before or after approval of this Agreement
by the shareholders of the Company) extend the time for the performance of any
of the obligations or other acts of the other party hereto and may waive (i) any
inaccuracies of the other party in the representations or warranties contained
in this Agreement or any document delivered pursuant hereto, (ii) compliance
with any of the covenants, undertakings or agreements of the other party, (iii)
to the extent permitted by law, satisfaction of any of the conditions precedent
to its obligations contained herein or (iv) the performance by the other party
of any of its obligations set forth herein, provided that any such waiver
granted, or any amendment or supplement pursuant to Section 7.5 hereof executed
after shareholders of the Company have approved this Agreement shall not modify
either the amount or form of the consideration to be provided hereby to the
holders of Company Common Stock upon consummation of the Merger or otherwise
materially adversely affect such shareholders without the approval of the
shareholders who would be so affected.
7.5 AMENDMENT OR SUPPLEMENT
This Agreement may be amended or supplemented at any time by mutual
agreement of the Acquiror and the Company, subject to the proviso to Section 7.4
hereof. Any such amendment or supplement must be in writing and authorized by or
under the direction of their respective Boards of Directors.
ARTICLE VIII
MISCELLANEOUS
8.1 EXPENSES; TERMINATION FEE
(a) Each party hereto shall bear and pay all costs and expenses incurred by
it in connection with the transactions contemplated by this Agreement, including
fees and expenses of its own financial consultants, accountants and counsel,
provided that (i) expenses of printing the Form S-4 and the registration fee to
be
A-39
<PAGE>
paid to the Commission in connection therewith shall be shared equally between
the Company and the Acquiror and (ii) notwithstanding anything to the contrary
contained in this Agreement, neither the Acquiror nor the Company shall be
released from any liabilities or damages arising out of its willful breach of
any provision of this Agreement.
(b) In the event that this Agreement is terminated by the Acquiror pursuant
to Section 7.1(b), and no Purchase Event or Preliminary Purchase Event, as
defined in the Company Stock Option Agreement, shall have occurred, the Company
shall pay to the Acquiror within five business days of any such termination by
the Acquiror, in immediately available funds, the sum of $500,000. In the event
that a Purchase Event, as defined in the Company Stock Option Agreement, shall
have occurred during the 12 month period referred to in Section 3(a)(C) of the
Company Stock Option Agreement and the Acquiror shall elect to exercise its
right to exercise the Option granted to it pursuant to the Company Stock Option
Agreement, then the Acquiror shall, concurrently with such Option exercise
return to the Company the $500,000 received pursuant to the prior sentence,
together with interest earned thereon at the federal funds rate from the date of
receipt to the date of repayment. In the event that this Agreement is terminated
by the Company pursuant to Section 7.1(b), the Acquiror shall pay to the Company
within five business days of any such termination by the Company, in immediately
available funds, the sum of $250,000.
8.2 ENTIRE AGREEMENT
This Agreement contains the entire agreement among the parties with respect
to the transactions contemplated hereby and supersedes all prior arrangements or
understandings with respect thereto, written or oral, other than documents
referred to herein. The terms and conditions of this Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
successors. Nothing in this Agreement, expressed or implied, is intended to
confer upon any party, other than the parties hereto, and their respective
successors, any rights, remedies, obligations or liabilities other than as set
forth in Sections 5.9, 5.10 and 5.11(b) and (c) hereof.
8.3 NO ASSIGNMENT
None of the parties hereto may assign any of its rights or obligations under
this Agreement to any other person.
8.4 NOTICES
All notices or other communications which are required or permitted
hereunder shall be in writing and sufficient if delivered personally, telecopied
(with confirmation) or sent by overnight mail service or by registered or
certified mail (return receipt requested), postage prepaid, addressed as
follows:
If to the Acquiror:
U.S.B. Holding Co., Inc.
100 Dutch Hill Road
Orangeburg, New York 10962
Attn: Steven T. Sabatini
Senior Executive Vice President and Chief
Financial Officer
Fax: (914) 365-4695
With a required copy to:
Elias, Matz, Tiernan & Herrick L.L.P.
12th Floor
734 15th Street, N.W.
Washington, D.C. 20005
Attn: Daniel P. Weitzel, Esq.
Fax: (202) 347-2172
A-40
<PAGE>
If to the Company:
Tappan Zee Financial, Inc.
75 North Broadway
Tarrytown, New York 10591
Attn: Stephen C. Byelick
President and Chief Executive Officer
Fax: (914) 631-0344
With a required copy to:
Thacher Proffitt & Wood
Two World Trade Center, 39th Floor
New York, New York 10048
Attn: Robert C. Azarow, Esq.
Fax: (212) 432-2898
8.5 ALTERNATIVE STRUCTURE
Notwithstanding any provision of this Agreement to the contrary, the
Acquiror may, with the written consent of the Company, which shall not be
unreasonably withheld, elect, subject to the filing of all necessary
applications and the receipt of all required regulatory approvals, to modify the
structure of the acquisition of the Company set forth herein, provided that (i)
the federal income tax consequences of any transactions created by such
modification shall not be other than those set forth in Section 6.1(f) hereof,
(ii) the transaction will still be accounted for as a pooling-of-interests under
GAAP, (iii) consideration to be paid to the holders of the Company Common Stock
is not thereby changed in kind or reduced in amount as a result of such
modification and (iv) such modification will not materially delay or jeopardize
receipt of any required regulatory approvals or any other condition to the
obligations of the Acquiror set forth in Sections 6.1 and 6.3 hereof.
8.6 INTERPRETATION
The captions contained in this Agreement are for reference purposes only and
are not part of this Agreement.
8.7 COUNTERPARTS
This Agreement may be executed in any number of counterparts, and each such
counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
8.8 GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York applicable to agreements made and entirely to be
performed within such jurisdiction.
A-41
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers and their corporate
seal to be hereunto affixed and attested by their officers thereunto duly
authorized, all as of the day and year first above written.
<TABLE>
<S> <C> <C> <C>
U.S.B. HOLDING CO., INC.
Attest:
/s/ MICHAEL H. FURY By: /s/ THOMAS E. HALES
- ------------------------------------------ --------------------------------------------
Name: Michael H. Fury Name: Thomas E. Hales
Title: Secretary Title: President and Chief
Executive Officer
TAPPAN ZEE FINANCIAL, INC.
Attest:
/s/ HARRY G. MURPHY By: /s/ STEPHEN C. BYELICK
- ------------------------------------------ --------------------------------------------
Name: Harry G. Murphy Name: Stephen C. Byelick
Title: Vice President and Secretary Title: President and Chief
Executive Officer
</TABLE>
A-42
<PAGE>
APPENDIX B
THE TRANSFER OF THIS AGREEMENT IS
SUBJECT TO CERTAIN PROVISIONS CONTAINED
HEREIN AND MAY BE SUBJECT TO TRANSFER
RESTRICTIONS UNDER
FEDERAL AND STATE LAW
STOCK OPTION AGREEMENT
Stock Option Agreement, dated as of March 6, 1998 (the "Agreement"), between
Tappan Zee Financial, Inc., a Delaware corporation ("Issuer"), and U.S.B.
Holding Co., Inc., a Delaware corporation ("Grantee").
WITNESSETH:
WHEREAS, Issuer and Grantee have entered into an Agreement and Plan of
Merger, dated as of March 6, 1998 (the "Plan"), providing for, among other
things, the merger of Issuer with and into Grantee (the "Merger"), with Grantee
as the surviving corporation; and
WHEREAS, as a condition and inducement to Grantee's execution of the Plan,
Grantee has required that Issuer agree, and Issuer has agreed, to grant to
Grantee the Option (as hereinafter defined);
NOW THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and in
the Plan, and intending to be legally bound hereby, Issuer and Grantee agree as
follows:
1. DEFINED TERMS. Capitalized terms which are used but not defined herein
shall have the meanings ascribed to such terms in the Plan.
2. GRANT OF OPTION. Subject to the terms and conditions set forth herein,
Issuer hereby grants to Grantee an irrevocable option (the "Option") to purchase
up to 294,134 shares (as adjusted as set forth herein) (the "Option Shares,"
which shall include the Option Shares before and after any transfer of such
Option Shares) of Common Stock, par value $0.01 per share ("Issuer Common
Stock"), of Issuer at a purchase price per Option Share (as adjusted as set
forth herein, the "Purchase Price") of $18.50, provided, however, that in no
event shall the number of Option Shares for which the Option is exercisable
exceed 19.9% of the issued and outstanding shares of Issuer Common Stock without
giving effect to any shares subject to or issued pursuant to the Option.
3. EXERCISE OF OPTION.
(a) Provided that (i) Grantee or Holder (as hereinafter defined), as
applicable, shall not be in material breach of the agreements or covenants
contained in this Agreement or the Plan, and (ii) no preliminary or permanent
injunction or other order against the delivery of shares covered by the Option
issued by any court of competent jurisdiction in the United States shall be in
effect, Holder may exercise the Option, in whole or in part, at any time and
from time to time following the occurrence of a Purchase Event (as hereinafter
defined); provided that the Option shall terminate and be of no further force
and effect upon the earliest to occur of (A) the Effective Time of the Merger,
(B) termination of the Plan in accordance with the terms thereof prior to the
occurrence of a Purchase Event or a Preliminary Purchase Event, other than a
termination of the Plan by Grantee pursuant to Section 7.1(b) thereof (a
"Default Termination"), (C) 12 months after the termination of the Plan by
Grantee pursuant to a Default Termination, and (D) 12 months after termination
of the Plan (other than pursuant to a Default Termination) following the
occurrence of a Purchase Event or a Preliminary Purchase Event; and provided,
further, that any purchase of shares upon exercise of the Option shall be
subject to compliance
B-1
<PAGE>
with applicable laws, including without limitation the Bank Holding Company Act
of 1956, as amended (the "BHCA"), and the Home Owners' Loan Act, as amended
("HOLA"). The term "Holder" shall mean the holder or holders of the Option from
time to time, and which is initially Grantee. The rights set forth in Section 8
hereof shall terminate when the right to exercise the Option terminates (other
than as a result of a complete exercise of the Option) as set forth above.
(b) As used herein, a "Purchase Event" means any of the following events:
(i) Without Grantee's prior written consent, Issuer shall have
authorized, recommended or publicly-proposed, or publicly announced an
intention to authorize, recommend or propose, or entered into an agreement
with any person (other than Grantee or any subsidiary of Grantee) to effect
(A) a merger, consolidation or similar transaction involving Issuer or any
of its subsidiaries, (B) the disposition, by sale, lease, exchange or
otherwise, of assets of Issuer or any of its subsidiaries representing in
either case 25% or more of the consolidated assets of Issuer and its
subsidiaries, or (C) the issuance, sale or other disposition of (including
by way of merger, consolidation, share exchange or any similar transaction)
securities representing 20% or more of the voting power of Issuer or any of
its subsidiaries (any of the foregoing an "Acquisition Transaction"); or
(ii) any person (other than Grantee or any subsidiary of Grantee) shall
have acquired beneficial ownership (as such term is defined in Rule 13d-3
promulgated under the Exchange Act) of or the right to acquire beneficial
ownership of, or any "group" (as such term is defined in Section 13(d)(3) of
the Exchange Act) shall have been formed which beneficially owns or has the
right to acquire beneficial ownership of, 20% or more of the then
outstanding shares of Issuer Common Stock.
(c) As used herein, a "Preliminary Purchase Event" means any of the
following events:
(i) any person (other than Grantee or any subsidiary of Grantee) 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
Issuer Common Stock such that, upon consummation of such offer, such person
would own or control 15% or more of the then outstanding shares of Issuer
Common Stock (such an offer being referred to herein as a "Tender Offer" and
an "Exchange Offer," respectively); or
(ii) (A) the holders of Issuer Common Stock shall not have approved the
Plan at the meeting of such stockholders held for the purpose of voting on
the Plan, (B) such meeting shall not have been held or shall have been
canceled prior to termination of the Plan or (C) Issuer's Board of Directors
shall have withdrawn or modified in a manner adverse to Grantee the
recommendation of Issuer's Board of Directors with respect to the Plan, in
each case after it shall have been publicly announced that any person (other
than Grantee or any subsidiary of Grantee) shall have (x) made, or disclosed
an intention to make, a proposal to engage in an Acquisition Transaction,
(y) commenced a Tender Offer or filed a registration statement under the
Securities Act with respect to an Exchange Offer, or (z) filed an
application (or given notice), whether in draft or final form, under the
BHCA, the HOLA, the Bank Merger Act, as amended, or the Change in Bank
Control Act of 1978, as amended, for approval to engage in an Acquisition
Transaction; or
(iii) Issuer shall have breached any representation, warranty, covenant
or obligation contained in the Plan and such breach would entitle Grantee to
terminate the Plan under Section 7.1(b) thereof (without regard to the cure
period provided for therein unless such cure is promptly effected without
jeopardizing consummation of the Merger pursuant to the terms of the Plan)
after (x) a bona fide proposal is made by any person (other than Grantee or
any subsidiary of Grantee) to Issuer or its stockholders to engage in an
Acquisition Transaction, (y) any person (other than Grantee or any
subsidiary of Grantee) states its intention to Issuer or its stockholders to
make a proposal to engage in an Acquisition Transaction if the Plan
terminates or (z) any person (other than Grantee or any
B-2
<PAGE>
subsidiary of Grantee) shall have filed an application or notice with any
Governmental Entity to engage in an Acquisition Transaction.
As used in this Agreement, "person" shall have the meaning specified in
Sections 3(a)(9) and 13(d)(3) of the Exchange Act.
(d) Issuer shall notify Grantee promptly in writing of the occurrence of any
Preliminary Purchase Event or Purchase Event, it being understood that the
giving of such notice by Issuer shall not be a condition to the right of Holder
to exercise the Option.
(e) In the event Holder wishes to exercise the Option, it shall send to
Issuer a written notice (the date of which being herein referred to as the
"Notice Date") specifying (i) the total number of Option Shares it intends to
purchase pursuant to such exercise, and (ii) a date not earlier than three
business days nor later than 15 business days from the Notice Date for the
closing (the "Closing") of such purchase (the "Closing Date"), provided that the
first notice of exercise shall be sent to Issuer within 180 days after the first
Purchase Event of which Grantee has been notified and, provided further, that if
prior notification to or approval of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"), the Office of Thrift Supervision
("OTS") or any other Governmental Entity is required in connection with such
purchase, Holder shall promptly file the required notice or application for
approval and shall expeditiously process the same and the three business day and
15 business day period of time that otherwise would run pursuant to this
sentence shall run instead from the date on which any required notification
periods have expired or been terminated or such approvals have been obtained and
any requisite waiting period or periods shall have passed. Any exercise of the
Option shall be deemed to occur on the Notice Date relating thereto.
4. PAYMENT AND DELIVERY OF CERTIFICATES.
(a) On each Closing Date, Holder shall (i) pay to Issuer, in immediately
available funds by wire transfer to a bank account designated by Issuer, an
amount equal to the Purchase Price multiplied by the number of Option Shares to
be purchased on such Closing Date, and (ii) present and surrender this Agreement
to Issuer at the address of Issuer specified in Section 12(f) hereof.
(b) At each Closing, simultaneously with the delivery of immediately
available funds and surrender of this Agreement as provided in Section 4(a), (i)
Issuer shall deliver to Holder (A) a certificate or certificates representing
the Option Shares to be purchased at such Closing, which Option Shares shall be
free and clear of all liens, claims, charges and encumbrances of any kind
whatsoever and subject to no preemptive rights, and (B) if the Option is
exercised in part only, an executed new agreement with the same terms as this
Agreement evidencing the right to purchase the balance of the shares of Issuer
Common Stock purchasable hereunder, and (ii) Holder shall deliver to Issuer a
letter agreeing that Holder shall not offer to sell or otherwise dispose of such
Option Shares in violation of applicable federal and state law or of the
provisions of this Agreement.
(c) In addition to any other legend that is required by applicable law,
certificates for the Option Shares delivered at each Closing shall be endorsed
with a restrictive legend which shall read substantially as follows:
THE TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
PURSUANT TO THE TERMS OF A STOCK OPTION AGREEMENT DATED AS OF MARCH ,
1998. A COPY OF SUCH AGREEMENT WILL BE PROVIDED TO THE HOLDER HEREOF WITHOUT
CHARGE UPON RECEIPT BY ISSUER OF A WRITTEN REQUEST THEREFOR.
It is understood and agreed that the above legend shall be removed by
delivery of substitute certificate(s) without such legend if Holder shall have
delivered to Issuer a copy of a letter from the staff of
B-3
<PAGE>
the Commission, or an opinion of counsel in form and substance reasonably
satisfactory to Issuer and its counsel, to the effect that such legend is not
required for purposes of the Securities Act.
(d) Upon the giving by Holder to Issuer of the written notice of exercise of
the Option provided for under Section 3(e), the tender of the applicable
Purchase Price in immediately available funds and the tender of this Agreement
to Issuer, Holder shall be deemed to be the holder of record of the shares of
Issuer Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of Issuer shall then be closed or that certificates representing
such shares of Issuer Common Stock shall not then be actually delivered to
Holder.
(e) Issuer agrees (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Issuer Common Stock so that the Option may be exercised without additional
authorization of Issuer Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase Issuer Common
Stock, (ii) that it will not, by charter amendment or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid or seek to avoid the observance or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
Issuer, (iii) promptly to take all action as may from time to time be required
(including (A) complying with all premerger notification, reporting and waiting
period requirements and (B) in the event prior approval of or notice to any
Governmental Entity is necessary before the Option may be exercised, cooperating
fully with Holder in preparing such applications or notices and providing such
information to such Governmental Entity as it may require) in order to permit
Holder to exercise the Option and Issuer duly and effectively to issue shares of
Issuer Common Stock pursuant hereto, and (iv) promptly to take all action
provided herein to protect the rights of Holder against dilution.
5. REPRESENTATIONS AND WARRANTIES OF ISSUER. Issuer hereby represents and
warrants to Grantee (and Holder, if different than Grantee) as follows:
(a) DUE AUTHORIZATION. Issuer has all requisite corporate power and
authority to enter into this Agreement, and subject to any approvals referred to
herein, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Issuer, and this Agreement has been duly executed and delivered by Issuer.
(b) NO VIOLATIONS. The execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby and compliance by Issuer
with any of the provisions hereof will not (i) conflict with or result in a
breach of any provision of its Certificate of Incorporation or Bylaws or a
default (or give rise to any right of termination, cancellation or acceleration)
under any of the terms, conditions or provisions of any note, bond, debenture,
mortgage, indenture, license, material agreement or other material instrument or
obligation to which Issuer is a party, or by which it or any of its properties
or assets may be bound, or (ii) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to Issuer or any of its properties or
assets.
(c) AUTHORIZED STOCK. Issuer has taken all necessary corporate and other
action to authorize and reserve and to permit it to issue, and at all times from
the date hereof until the obligation to deliver Issuer Common Stock upon the
exercise of the Option terminates, will have reserved for issuance upon exercise
of the Option that number of shares of Issuer Common Stock equal to the maximum
number of shares of Issuer Common Stock at any time and from time to time
purchasable upon exercise of the Option, and all such shares, upon issuance
pursuant to the Option, will be duly and validly issued, fully paid and
nonassessable, and will be delivered free and clear of all liens, claims,
charges and encumbrances of any kind or nature whatsoever and not subject to any
preemptive rights.
6. REPRESENTATIONS AND WARRANTIES OF GRANTEE. Grantee hereby represents
and warrants to Issuer as follows:
B-4
<PAGE>
(a) DUE AUTHORIZATION. Grantee has all requisite corporate power and
authority to enter into this Agreement and, subject to any approvals or consents
referred to herein, to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Grantee, and this Agreement has been duly
executed and delivered by Grantee.
(b) NO VIOLATIONS. The execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby and compliance by Grantee
with any of the provisions hereof will not (i) conflict with or result in a
breach of any provision of its Certificate of Incorporation or Bylaws or a
default (or give rise to any right of termination, cancellation or acceleration)
under any of the terms, conditions or provisions of any note, bond, debenture,
mortgage, indenture, license, material agreement or other material instrument or
obligation to which Grantee is a party, or by which it or any of its properties
or assets may be bound, or (ii) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to Grantee or any of its properties or
assets.
7. ADJUSTMENT UPON CHANGES IN ISSUER CAPITALIZATION, ETC.
(a) In the event of any change in Issuer Common Stock by reason of a stock
dividend, stock split, split-up, recapitalization, combination, exchange of
shares or similar transaction, the type and number of shares or securities
subject to the Option, and the Purchase Price therefor, shall be adjusted
appropriately, and proper provision shall be made in the agreements governing
such transactions so that Holder shall receive, upon exercise of the Option, the
number and class of shares or other securities or property that Holder would
have received in respect of Issuer Common Stock if the Option had been exercised
immediately prior to such event, or the record date therefor, as applicable. If
any additional shares of Issuer Common Stock are issued after the date of this
Agreement (other than pursuant to an event described in the first sentence of
this Section 7(a)), the number of shares of Issuer Common Stock subject to the
Option shall be adjusted so that, after such issuance, it, together with any
shares of Issuer Common Stock previously issued pursuant hereto, equals 19.9% of
the number of shares of Issuer Common Stock then issued and outstanding, without
giving effect to any shares subject to or issued pursuant to the Option.
(b) In the event that Issuer shall enter in an agreement: (i) to consolidate
with or merge into any person, other than Grantee or one of its subsidiaries,
and shall not be the continuing or surviving corporation of such consolidation
or merger, (ii) to permit any person, other than Grantee or one of its
subsidiaries, to merge into Issuer and Issuer shall be the continuing or
surviving corporation, but, in connection with such merger, the then outstanding
shares of Issuer Common Stock shall be changed into or exchanged for stock or
other securities of Issuer or any other person or cash or any other property or
the outstanding shares of Issuer Common Stock immediately prior to such merger
shall after such merger represent less than 50% of the outstanding shares and
share equivalents of the merged company, or (iii) to sell or otherwise transfer
assets representing more than 50% of the consolidated assets of Issuer and its
subsidiaries to any person, other than Grantee or one of its subsidiaries, then,
and in each such case (but at the election of the Holder in the case of clause
(iii)), the agreement governing such transaction shall make proper provisions so
that the Option shall, upon the consummation of any such transaction and upon
the terms and conditions set forth herein, be converted into, or exchanged for,
an option (the "Substitute Option"), at the election of Holder, of any of (x)
the Acquiring Corporation (as hereinafter defined), (y) any person that controls
the Acquiring Corporation or (z) in the case of a merger described in clause
(ii), Issuer (such person being referred to as "Substitute Option Issuer").
(c) The Substitute Option shall have the same terms as the Option, provided
that, if the terms of the Substitute Option cannot, for legal reasons, be the
same as the Option, such terms shall be as similar as possible and in no event
less advantageous to Holder. Substitute Option Issuer also shall enter into an
agreement with Holder in substantially the same form as this Agreement, which
shall be applicable to the Substitute Option.
B-5
<PAGE>
(d) The Substitute Option shall be exercisable for such number of shares of
Substitute Common Stock (as hereinafter defined) as is equal to the Assigned
Value (as hereinafter defined) multiplied by the number of shares of Issuer
Common Stock for which the Option was theretofore exercisable, divided by the
Average Price (as hereinafter defined). The exercise price of the Substitute
Option per share of Substitute Common Stock (the "Substitute Option Price")
shall then be equal to the Purchase Price multiplied by a fraction of which the
numerator is the number of shares of Issuer Common Stock for which the Option
was theretofore exercisable and the denominator is the number of shares of the
Substitute Common Stock for which the Substitute Option is exercisable.
(e) The following terms have the meanings indicated:
(1) "Acquiring Corporation" shall mean (i) the continuing or surviving
corporation of a consolidation or merger with Issuer (if other than Issuer),
(ii) Issuer in a merger in which Issuer is the continuing or surviving
person, or (iii) the transferee of assets representing more than 50% of the
consolidated assets of Issuer and its subsidiaries.
(2) "Substitute Common Stock" shall mean the shares of capital stock (or
similar equity interest) with the greatest voting power in respect of the
election of directors (or persons similarly responsible for the direction of
the business and affairs) of the Substitute Option Issuer.
(3) "Assigned Value" shall mean the highest of (w) the price per share
of Issuer Common Stock at which a Tender Offer or an Exchange Offer therefor
has been made, (x) the price per share of Issuer Common Stock to be paid by
any third party pursuant to an agreement with Issuer, (y) the highest
closing price for shares of Issuer Common Stock within the six-month period
immediately preceding the consolidation, merger or sale in question and (z)
in the event of a sale of assets representing more than 50% of the
consolidated assets of Issuer and its subsidiaries or deposits, an amount
equal to (i) the sum of the price paid in such sale for such assets (and/or
deposits) and the current market value of the remaining assets of Issuer, as
determined by a nationally-recognized investment banking firm selected by
Holder, divided by (ii) the number of shares of Issuer Common Stock
outstanding at such time. In the event that a Tender Offer or an Exchange
Offer is made for Issuer Common Stock or an agreement is entered into for a
merger or consolidation involving consideration other than cash, the value
of the securities or other property issuable or deliverable in exchange for
Issuer Common Stock shall be determined by a nationally-recognized
investment banking firm selected by Holder.
(4) "Average Price" shall mean the average closing price of a share of
Substitute Common Stock for the one year immediately preceding the
consolidation, merger or sale in question, but in no event higher than the
closing price of the shares of Substitute Common Stock on the day preceding
such consolidation, merger or sale; provided that if Issuer is the issuer of
the Substitute Option, the Average Price shall be computed with respect to a
share of common stock issued by Issuer, the person merging into Issuer or by
any company which controls such person, as Holder may elect.
(f) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than 19.9% of the aggregate of the
shares of Substitute Common Stock outstanding prior to exercise of the
Substitute Option. In the event that the Substitute Option would be exercisable
for more than 19.9% of the aggregate of the shares of Substitute Common Stock
but for the limitation in the first sentence of this Section 7(f), Substitute
Option Issuer shall make a cash payment to Holder equal to the excess of (i) the
value of the Substitute Option without giving effect to the limitation in the
first sentence of this Section 7(f) over (ii) the value of the Substitute Option
after giving effect to the limitation in the first sentence of this Section
7(f). This difference in value shall be determined by a nationally-recognized
investment banking firm selected by Holder.
(g) Issuer shall not enter into any transaction described in Section 7(b)
unless the Acquiring Corporation and any person that controls the Acquiring
Corporation assume in writing all the obligations of Issuer hereunder and take
all other actions that may be necessary so that the provisions of this Section 7
B-6
<PAGE>
are given full force and effect (including, without limitation, any action that
may be necessary so that the holders of the other shares of common stock issued
by Substitute Option Issuer are not entitled to exercise any rights by reason of
the issuance or exercise of the Substitute Option and the shares of Substitute
Common Stock are otherwise in no way distinguishable from or have lesser
economic value (other than any diminution in value resulting from the fact that
the shares of Substitute Common Stock are restricted securities, as defined in
Rule 144 under the Securities Act or any successor provision) than other shares
of common stock issued by Substitute Option Issuer).
8. REPURCHASE AT THE OPTION OF HOLDER.
(a) Subject to the last sentence of Section 3(a), at the request of Holder
at any time commencing upon the first occurrence of a Repurchase Event (as
defined in Section 8(d)) and ending 12 months immediately thereafter, Issuer
shall repurchase from Holder (i) the Option and (ii) all shares of Issuer Common
Stock purchased by Holder pursuant hereto with respect to which Holder then has
beneficial ownership. The date on which Holder exercises its rights under this
Section 8 is referred to as the "Request Date." Such repurchase shall be at an
aggregate price (the "Section 8 Repurchase Consideration") equal to the sum of:
(i) the aggregate Purchase Price paid by Holder for any shares of Issuer
Common Stock acquired pursuant to the Option with respect to which Holder
then has beneficial ownership;
(ii) the excess, if any, of (x) the Applicable Price (as defined below)
for each share of Issuer Common Stock over (y) the Purchase Price (subject
to adjustment pursuant to Section 7), multiplied by the number of shares of
Issuer Common Stock with respect to which the Option has not been exercised;
and
(iii) the excess, if any, of the Applicable Price over the Purchase
Price (subject to adjustment pursuant to Section 7) paid (or, in the case of
Option Shares with respect to which the Option has been exercised but the
Closing Date has not occurred, payable) by Holder for each share of Issuer
Common Stock with respect to which the Option has been exercised and with
respect to which Holder then has beneficial ownership, multiplied by the
number of such shares.
(b) If Holder exercises its rights under this Section 8, Issuer shall,
within 10 business days after the Request Date, pay the Section 8 Repurchase
Consideration to Holder in immediately available funds, and contemporaneously
with such payment Holder shall surrender to Issuer the Option and the
certificates evidencing the shares of Issuer Common Stock purchased thereunder
with respect to which Holder then has beneficial ownership, and shall warrant
that it has sole record and beneficial ownership of such shares and that the
same are then free and clear of all liens, claims, charges and encumbrances of
any kind whatsoever. Notwithstanding the foregoing, to the extent that prior
notification to or approval of the Federal Reserve Board, the OTS or any other
Governmental Entity is required in connection with the payment of all or any
portion of the Section 8 Repurchase Consideration, Holder shall have the ongoing
option to revoke its request for repurchase pursuant to Section 8, in whole or
in part, or to require that Issuer deliver from time to time that portion of the
Section 8 Repurchase Consideration that it is not then so prohibited from paying
and promptly file the required notice or application for approval and
expeditiously process the same (and each party shall cooperate with the other in
the filing of any such notice or application and the obtaining of any such
approval), in which case the ten-day period referred to in the first sentence of
this Section 8(b) shall run instead from the date on which any required
notification periods have expired or been terminated or such approvals have been
obtained and any requisite waiting period or periods shall have passed. If the
Federal Reserve Board, the OTS or any other Governmental Entity disapproves of
any part of Issuer's proposed repurchase pursuant to this Section 8, Issuer
shall promptly give notice of such fact to Holder. If the Federal Reserve Board,
the OTS or any other Governmental Entity prohibits the repurchase in part but
not in whole, then Holder shall have the right (i) to revoke the repurchase
request or (ii) to the extent permitted by the Federal Reserve Board, the OTS or
other Governmental Entity, determine whether the repurchase should apply to the
Option and/or
B-7
<PAGE>
Option Shares and to what extent to each, and Holder shall thereupon have the
right to exercise the Option as to the number of Option Shares for which the
Option was exercisable at the Request Date less the sum of the number of shares
covered by the Option in respect of which payment has been made pursuant to
Section 8(a)(ii) and the number of shares covered by the portion of the Option
(if any) that has been repurchased. Holder shall notify Issuer of its
determination under the preceding sentence within five business days of receipt
of notice of disapproval of the repurchase.
Notwithstanding anything herein to the contrary, all of Grantee's rights
under this Section 8 shall terminate on the date of termination of the Option
pursuant to Section 3(a).
(c) For purposes of this Agreement, the "Applicable Price" means the highest
of (i) the highest price per share of Issuer Common Stock paid for any such
share by the person or groups described in Section 8(d)(i), (ii) the price per
share of Issuer Common Stock received by holders of Issuer Common Stock in
connection with any merger or other business combination transaction described
in Section 7(b)(i), 7(b)(ii) or 7(b)(iii), or (iii) the highest closing sales
price per share of Issuer Common Stock quoted on the Nasdaq Stock Market's
National Market ("NASDAQ/NMS") (or if Issuer Common Stock is not quoted on
NASDAQ/NMS, the highest bid price per share as quoted on the principal trading
market or securities exchange on which such shares are traded, as reported by a
recognized source chosen by Holder) during the 60 business days preceding the
Request Date; provided, however, that in the event of a sale of less than all of
Issuer's assets, the Applicable Price shall be the sum of the price paid in such
sale for such assets and the current market value of the remaining assets of
Issuer as determined by a nationally-recognized investment banking firm selected
by Holder, divided by the number of shares of Issuer Common Stock outstanding at
the time of such sale. If the consideration to be offered, paid or received
pursuant to either of the foregoing clauses (i) or (ii) shall be other than in
cash, the value of such consideration shall be determined in good faith by an
independent nationally-recognized investment banking firm selected by Holder and
reasonably acceptable to Issuer, which determination shall be conclusive for all
purposes of this Agreement.
(d) As used herein, a "Repurchase Event" shall occur if (i) any person
(other than Grantee or any subsidiary of Grantee) shall have acquired beneficial
ownership of (as such term is defined in Rule 13d-3 promulgated under the
Exchange Act), or the right to acquire beneficial ownership of, or any "group"
(as such term is defined in Section 13(d)(3) of the Exchange Act) shall have
been formed which beneficially owns or has the right to acquire beneficial
ownership of, 50% or more of the then outstanding shares of Issuer Common Stock,
or (ii) any of the transactions described in Section 7(b)(i), Section 7(b)(ii)
or Section 7(b)(iii) shall be consummated.
9. REGISTRATION RIGHTS.
(a) DEMAND REGISTRATION RIGHTS. Issuer shall, subject to the conditions of
Section 9(c), if requested by any Holder, as expeditiously as possible prepare
and file a registration statement under the Securities Act if such registration
is necessary in order to permit the sale or other disposition of any or all
shares of Issuer Common Stock or other securities that have been acquired by or
are issuable to Holder upon exercise of the Option in accordance with the
intended method of sale or other disposition stated by Holder in such request,
including without limitation a "shelf" registration statement under Rule 415
under the Securities Act or any successor provision, and Issuer shall use its
best efforts to qualify such shares or other securities for sale under any
applicable state securities laws.
(b) ADDITIONAL REGISTRATION RIGHTS. If Issuer at any time after the
exercise of the Option proposes to register any shares of Issuer Common Stock
under the Securities Act in connection with an underwritten public offering of
such Issuer Common Stock, Issuer will promptly give written notice to Holder of
its intention to do so and, upon the written request of Holder given within 30
days after receipt of any such notice (which request shall specify the number of
shares of Issuer Common Stock intended to be included in such underwritten
public offering by Holder), Issuer will cause all such shares for which a Holder
shall have requested participation in such registration to be so registered and
included in such underwritten
B-8
<PAGE>
public offering; provided, however, that Issuer may elect to not cause any such
shares to be so registered (i) if the underwriters in good faith object for
valid business reasons, or (ii) in the case of a registration solely to
implement an employee benefit plan or a registration filed on Form S-4 under the
Securities Act or any successor form; provided, further, however, that such
election pursuant to clause (i) may only be made one time. If some but not all
the shares of Issuer Common Stock with respect to which Issuer shall have
received requests for registration pursuant to this Section 9(b) shall be
excluded from such registration, Issuer shall make appropriate allocation of
shares to be registered among Holders permitted to register their shares of
Issuer Common Stock in connection with such registration pro rata in the
proportion that the number of shares requested to be registered by each such
Holder bears to the total number of shares requested to be registered by all
such Holders then desiring to have Issuer Common Stock registered for sale.
(c) CONDITIONS TO REQUIRED REGISTRATION. Issuer shall use all reasonable
efforts to cause each registration statement referred to in Section 9(a) to
become effective and to obtain all consents or waivers of other parties which
are required therefor and to keep such registration statement effective;
provided, however, that Issuer may delay any registration of Option Shares
required pursuant to Section 9(a) for a period not exceeding 90 days if Issuer
shall in good faith determine that any such registration would adversely affect
an offering or contemplated offering of other securities by Issuer, and Issuer
shall not be required to register Option Shares under the Securities Act
pursuant to Section 9(a):
(i) prior to the earliest of (A) termination of the Plan pursuant to
Article VII thereof, and (B) a Purchase Event or a Preliminary Purchase
Event;
(ii) on more than one occasion during any calendar year and on more than
two occasions in total;
(iii) within 90 days after the effective date of a registration referred
to in Section 9(b) pursuant to which the Holder or Holders concerned were
afforded the opportunity to register such shares under the Securities Act
and such shares were registered as requested; and
(iv) unless a request therefor is made to Issuer by the Holder or
Holders of at least 25% or more of the aggregate number of Option Shares
(including shares of Issuer Common Stock issuable upon exercise of the
Option) then outstanding.
In addition to the foregoing, Issuer shall not be required to maintain the
effectiveness of any registration statement after the expiration of nine months
from the effective date of such registration statement. Issuer shall use all
reasonable efforts to make any filings, and take all steps, under all applicable
state securities laws to the extent necessary to permit the sale or other
disposition of the Option Shares so registered in accordance with the intended
method of distribution for such shares, provided, however, that Issuer shall not
be required to consent to general jurisdiction or to qualify to do business in
any state where it is not otherwise required to so consent to such jurisdiction
or to so qualify to do business.
(d) EXPENSES. Issuer will pay all expenses (including without limitation
registration fees, qualification fees, blue sky fees and expenses, accounting
expenses, legal expenses and printing expenses incurred by it) in connection
with each registration pursuant to Section 9(a) or (b) and all other
qualifications, notifications or exemptions pursuant to Section 9(a) or (b);
provided, however, that underwriting discounts and commissions relating to
Option Shares, fees and disbursements of counsel to the Holder(s) of Option
Shares being registered and any other expenses incurred by such Holder(s) in
connection with any such registration shall be borne by such Holder(s).
(e) INDEMNIFICATION. In connection with any registration under Section
9(a) or (b), Issuer hereby indemnifies each Holder, and each underwriter
thereof, including each person, if any, who controls such Holder or underwriter
within the meaning of Section 15 of the Securities Act, against all expenses,
losses, claims, damages and liabilities caused by any untrue, or alleged untrue,
statement of a material fact contained in any registration statement or
prospectus or notification or offering circular (including any amendments or
supplements thereto) or any preliminary prospectus, or caused by any omission,
or alleged
B-9
<PAGE>
omission, to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
expenses, losses, claims, damages or liabilities of such indemnified party are
caused by any untrue statement or alleged untrue statement that was included by
Issuer in any such registration statement or prospectus or notification or
offering circular (including any amendments or supplements thereto) in reliance
upon, and in conformity with, information furnished in writing to Issuer by such
indemnified party expressly for use therein, and Issuer and each officer,
director and controlling person of Issuer shall be indemnified by such Holder,
or by such underwriter, as the case may be, for all such expenses, losses,
claims, damages and liabilities caused by any untrue, or alleged untrue,
statement that was included by Issuer in any such registration statement or
prospectus or notification or offering circular (including any amendments or
supplements thereto) in reliance upon, and in conformity with, information
furnished in writing to Issuer by such Holder or such underwriter, as the case
may be, expressly for such use.
Promptly upon receipt by a party indemnified under this Section 9(e) of
notice of the commencement of any action against such indemnified party in
respect of which indemnity or reimbursement may be sought against any
indemnifying party under this Section 9(e), such indemnified party shall notify
the indemnifying party in writing of the commencement of such action, but,
except to the extent of any actual prejudice to the indemnifying party, the
failure so to notify the indemnifying party shall not relieve it of any
liability which it may otherwise have to any indemnified party under this
Section 9(e). In case notice of commencement of any such action shall be given
to the indemnifying party as above provided, the indemnifying party shall be
entitled to participate in and, to the extent it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense of such
action at its own expense, with counsel chosen by it and reasonably satisfactory
to such indemnified party. The indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel (other than reasonable costs of
investigation) shall be paid by the indemnified party unless (i) the
indemnifying party agrees to pay the same, (ii) the indemnifying party fails to
assume the defense of such action with counsel reasonably satisfactory to the
indemnified party, or (iii) the indemnified party has been advised by counsel
that one or more legal defenses may be available to the indemnifying party that
may be contrary to the interest of the indemnified party, in which case the
indemnifying party shall be entitled to assume the defense of such action
notwithstanding its obligation to bear fees and expenses of such counsel. No
indemnifying party shall be liable for any settlement entered into without its
consent, which consent may not be unreasonably withheld.
If the indemnification provided for in this Section 9(e) is unavailable to a
party otherwise entitled to be indemnified in respect of any expenses, losses,
claims, damages or liabilities referred to herein, then the indemnifying party,
in lieu of indemnifying such party otherwise entitled to be indemnified, shall
contribute to the amount paid or payable by such party to be indemnified as a
result of such expenses, losses, claims, damages or liabilities in such
proportion as is appropriate to reflect the relative fault of Issuer, the
selling Holders and the underwriters in connection with the statement or
omissions which results in such expenses, losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The amount
paid or payable by a party as a result of the expenses, losses, claims, damages
and liabilities referred to above shall be deemed to include any legal or other
fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim; provided, however, that in no
case shall the selling Holders be responsible, in the aggregate, for any amount
in excess of the net offering proceeds attributable to its Option Shares
included in the offering. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(g) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. Any obligation by any Holder to indemnify shall be several
and not joint with other Holders.
In connection with any registration pursuant to Section 9(a) or (b) above,
Issuer and each selling Holder (other than Grantee) shall enter into an
agreement containing the indemnification provisions of this Section 9(e).
B-10
<PAGE>
(f) MISCELLANEOUS REPORTING. Issuer shall comply with all reporting
requirements and will do all such other things as may be necessary to permit the
expeditious sale at any time of any Option Shares by the Holder(s) in accordance
with and to the e x t e n t permitted by any rule or regulation permitting
nonregistered sales of securities promulgated by the Commission from time to
time, including, without limitation, Rule 144A. Issuer shall at its expense
provide the Holder with any information necessary in connection with the
completion and filing of any reports or forms required to be filed by them under
the Securities Act or the Exchange Act, or required pursuant to any state
securities laws or the rules of any stock exchange.
(g) ISSUE TAXES. Issuer will pay all stamp taxes in connection with the
issuance and the sale of the Option Shares and in connection with the exercise
of the Option, and will save any Holder harmless, without limitation as to time,
against any and all liabilities, with respect to all such taxes.
10. QUOTATION; LISTING. If Issuer Common Stock or any other securities to
be acquired upon exercise of the Option are then authorized for quotation or
trading or listing on NASDAQ/NMS or any securities exchange, Issuer, upon the
request of Holder, will promptly file an application, if required, to authorize
for quotation or trading or listing the shares of Issuer Common Stock or other
securities to be acquired upon exercise of the Option on NASDAQ/NMS or such
other securities exchange and will use its best efforts to obtain approval, if
required, of such quotation or listing as soon as practicable.
11. DIVISION OF OPTION. Upon the occurrence of a Purchase Event or a
Preliminary Purchase Event, this Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of Holder, upon presentation and
surrender of this Agreement at the principal office of the Issuer for other
Agreements providing for Options of different denominations entitling the holder
thereof to purchase in the aggregate the same number of shares of Issuer Common
Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein
include any other Agreements and related Options for which this Agreement (and
the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
12. MISCELLANEOUS.
(a) EXPENSES. Except as otherwise provided in Section 9, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
(b) WAIVER AND AMENDMENT. Any provision of this Agreement may be waived at
any time by the party that is entitled to the benefits of such provision by
written instrument signed by a duly authorized executive officer of such party.
This Agreement may not be modified, amended, altered or supplemented except upon
the execution and delivery of a written agreement executed by the parties
hereto.
(c) ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; SEVERABILITY. This
Agreement, together with the Plan and the other documents and instruments
referred to herein and therein, between Grantee and Issuer (i) constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, between the parties with respect to the subject matter hereof,
and (ii) is not intended to confer upon any person other than the parties hereto
(other than the indemnified parties under Section 9(e) and any transferee of the
Option Shares or any permitted transferee of this Agreement pursuant to Section
12(h)) any rights or remedies hereunder. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or a
federal or state regulatory agency to be invalid, void or
B-11
<PAGE>
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated. If for any reason such court or
regulatory agency determines that the Option does not permit Holder to acquire,
or does not require Issuer to repurchase, the full number of shares of Issuer
Common Stock as provided in Sections 3 and 8 (as adjusted pursuant to Section
7), it is the express intention of Issuer to allow Holder to acquire or to
require Issuer to repurchase such lesser number of shares as may be permissible
without any amendment or modification hereof.
(d) GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of New York without regard to any
applicable conflicts of law rules.
(e) DESCRIPTIVE HEADINGS. The descriptive headings contained herein are
for convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
(f) NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation) or sent by overnight mail service or mailed by registered or
certified mail (return receipt requested) postage prepaid, to the parties at the
following address (or at such other address for a party as shall be specified by
like notice):
If to Grantee: U.S.B. Holding Co., Inc.
100 Dutch Hill Road
Orangeburg, New York 10962
Attn: Steven T. Sabatini
Senior Executive Vice President and
Chief Financial Officer
Fax: (914) 365-4695
With a required copy to: Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W., 11th Floor
Washington, D.C. 20005
Attn: Daniel P. Weitzel, Esq.
Fax: (202) 347-2172
If to Issuer: Tappan Zee Financial, Inc.
75 North Broadway
Tarrytown, New York 10591-0187
Attn: Stephen C. Byelick
President and Chief Executive Officer
Fax: (914) 631-0344
With a required copy to: Thacher Proffitt & Wood
Two World Trade Center, 39th Floor
New York, New York 10048
Attn: Robert C. Azarow, Esq.
Fax: (212) 432-2898
(g) COUNTERPARTS. This Agreement and any amendments hereto may be executed
in two counterparts, each of which shall be considered one and the same
agreement and shall become effective when both counterparts have been signed, it
being understood that both parties need not sign the same counterpart.
(h) ASSIGNMENT. Neither this Agreement nor any of the rights, interests or
obligations hereunder or under the Option shall be assigned by any of the
parties hereto (whether by operation of law or otherwise)
B-12
<PAGE>
without the prior written consent of the other party, except that Holder may
assign this Agreement to a wholly-owned subsidiary of Holder and Holder may
assign its rights hereunder in whole or in part after the occurrence of a
Purchase Event. Subject to the preceding sentence, this Agreement shall be
binding upon, inure to the benefit of and be enforceable by the parties and
their respective successors and assigns.
(i) FURTHER ASSURANCES. In the event of any exercise of the Option by
Holder, Issuer and Holder shall execute and deliver all other documents and
instruments and take all other action that may be reasonably necessary in order
to consummate the transactions provided for by such exercise.
(j) SPECIFIC PERFORMANCE. The parties hereto agree that this Agreement may
be enforced by either party through specific performance, injunctive relief and
other equitable relief. Both parties further agree to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any such
equitable relief and that this provision is without prejudice to any other
rights that the parties hereto may have for any failure to perform this
Agreement.
IN WITNESS WHEREOF, Issuer and Grantee have caused this Stock Option
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the day and year first written above.
<TABLE>
<S> <C> <C> <C>
U.S.B. HOLDING CO., INC.
Attest:
/s/ MICHAEL H. FURY By: /s/ THOMAS E. HALES
- ------------------------------------------ --------------------------------------------
Name: Michael H. Fury Name: Thomas E. Hales
Title: Secretary Title: President and Chief
Executive Officer
TAPPAN ZEE FINANCIAL, INC.
Attest:
/s/ HARRY G. MURPHY By: /s/ STEPHEN C. BYELICK
- ------------------------------------------ --------------------------------------------
Name: Harry G. Murphy Name: Stephen C. Byelick
Title: Vice President and Secretary Title: President and Chief
Executive Officer
</TABLE>
B-13
<PAGE>
[Sandler O'Neill & Partners, L.P. letterhead]
APPENDIX C
July , 1998
Board of Directors
Tappan Zee Financial, Inc.
75 North Broadway
Tarrytown, NY 10691
Gentlemen:
Tappan Zee Financial, Inc. ("Tappan Zee") and U.S.B. Holding Co., Inc.
("USB") have entered into an Agreement and Plan of Merger, dated as of March 6,
1998 (the "Agreement"), pursuant to which Tappan Zee will be merged with and
into USB (the "Merger"). Upon consummation of the Merger, each share of Tappan
Zee common stock, par value $0.01 per share, issued and outstanding immediately
prior to the Merger (the "Tappan Zee Shares"), other than certain shares
specified in the Agreement, will be converted into the right to receive that
number of shares of USB common stock, par value $5.00 per share (the "USB Common
Stock"), equal to the quotient of $22.00 divided by the Average Closing Price
(as defined in the Agreement) of USB Common Stock, subject to a maximum of 1.24
shares and a minimum of 0.88 shares (the "Merger Consideration"). The terms and
conditions of the Merger are more fully set forth in the Agreement. You have
requested our opinion as to the fairness, from a financial point of view, of the
Merger Consideration to the holders of Tappan Zee Shares.
Sandler O'Neill & Partners, L.P., as part of its investment banking
business, is regularly engaged in the valuation of financial institutions and
their securities in connection with mergers and acquisitions and other corporate
transactions. In connection with this opinion, we have reviewed, among other
things: (i) the Agreement and exhibits thereto; (ii) the Stock Option Agreement,
dated as of March 6, 1998, by and between Tappan Zee and USB; (iii) Tappan Zee's
audited consolidated financial statements and management's discussion and
analysis of financial condition and results of operations as contained in its
Annual Reports on Form 10-K for the years ended March 31, 1997 and 1998; (iv)
USB's audited consolidated financial statements and management's discussion and
analysis of financial condition and results of operations as contained in its
Annual Reports on Form 10-K for the years ended December 31, 1996 and 1997; (v)
Tappan Zee's unaudited consolidated financial statements and management's
discussion and analysis of financial condition and results of operations
contained in its Quarterly Reports on Form 10-Q for the quarters ended June 30,
September 30 and December 31, 1997, respectively; (vi) USB's unaudited
consolidated financial statements and management's discussion and analysis of
financial condition and results of operations contained in its Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998; (vii) certain financial
analyses and forecasts of Tappan Zee prepared by and reviewed with management of
Tappan Zee and the views of senior management of Tappan Zee regarding Tappan
Zee's past and current business operations, results thereof, financial condition
and future prospects; (viii) certain financial analyses and forecasts of USB
prepared by and reviewed with management of USB and the views of senior
management of USB regarding USB's past and current business operations, results
thereof, financial condition and future prospects; (ix) the pro forma impact of
the Merger on USB; (x) the publicly reported historical price and trading
activity for Tappan Zee's and USB's common stock, including a comparison of
certain financial and stock market information for Tappan Zee and USB with
similar publicly available information for certain other companies the
securities of which are publicly traded; (xi) the financial terms of recent
business combinations in the savings institution industry, to the extent
publicly available; (xii) the current market environment generally and the
banking environment in particular; and
C-1
<PAGE>
Board of Directors
Tappan Zee Financial, Inc.
July , 1998
Page 2
(xiii) such other information, financial studies, analyses and investigations
and financial, economic and market criteria as we considered relevant.
In performing our review, we have assumed and relied upon, without
independent verification, the accuracy and completeness of all the financial
information, analyses and other information that was publicly available or
otherwise furnished to, reviewed by or discussed with us, and we do not assume
any responsibility or liability for the accuracy or completeness thereof. We did
not make an independent evaluation or appraisal of the specific assets, the
collateral securing assets or the liabilities (contingent or otherwise) of
Tappan Zee or USB or any of their subsidiaries, or the collectibility of any
such assets, nor have we been furnished with any such evaluations or appraisals
(relying, where relevant, on the analyses and estimates of Tappan Zee and USB).
With respect to the financial projections reviewed with management, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the respective managements of the
respective future financial performances of Tappan Zee and USB and that such
performances will be achieved, and we express no opinion as to such financial
projections or the assumptions on which they are based. We have also assumed
that there has been no material change in Tappan Zee's or USB's assets,
financial condition, results of operations, business or prospects since March
31, 1998, the date of the last financial statements noted above. We have assumed
in all respects material to our analysis that Tappan Zee and USB will remain as
going concerns for all periods relevant to our analyses, that all of the
representations and warranties contained in the Agreement and all related
agreements are true and correct, that each party to such agreements will perform
all of the covenants required to be performed by such party under such
agreements and that the conditions precedent in the Agreement are not waived. We
have also assumed that the Merger will be accounted for as a pooling of
interests.
Our opinion is necessarily based on financial, economic, market and other
conditions as in effect on, and the information made available to us as of, the
date hereof. Events occurring after the date hereof could materially affect this
opinion. We have not undertaken to update, revise or reaffirm this opinion or
otherwise comment upon events occurring after the date hereof. We are expressing
no opinion herein as to what the value of USB common stock will be when issued
to Tappan Zee's shareholders pursuant to the Agreement or the prices at which
Tappan Zee's or USB's common stock will trade at any time.
We have acted as Tappan Zee's financial advisor in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon consummation of the Merger. We have also received a fee for
rendering this opinion. In the past, we have also provided certain other
investment banking services for Tappan Zee and have received compensation for
such services.
In the ordinary course of our business, we may actively trade the equity
securities of Tappan Zee and USB for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
Our opinion is directed to the Board of Directors of Tappan Zee in
connection with its consideration of the Merger and does not constitute a
recommendation to any stockholder of Tappan Zee as to how such stockholder
should vote at any meeting of stockholders called to consider and vote upon the
Merger. Our opinion is not to be quoted or referred to, in whole or in part, in
a registration statement, prospectus, proxy statement or in any other document,
nor shall this opinion be used for any other purposes, without Sandler O'Neill's
prior written consent; PROVIDED, HOWEVER, that we hereby consent to the
inclusion of this opinion as an appendix to Tappan Zee's and USB's Joint Proxy
Statement/Prospectus dated the date hereof and to the references to this opinion
therein.
C-2
<PAGE>
Board of Directors
Tappan Zee Financial, Inc.
July , 1998
Page 3
Based upon and subject to the foregoing, it is our opinion, as of the date
hereof, that the Merger Consideration is fair, from a financial point of view,
to the holders of Tappan Zee Shares.
Very truly yours,
Sandler O'Neill & Partners, L.P.
C-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the DGCL sets forth circumstances under which directors,
officers, employees and agents may be insured or indemnified against liability
that they may incur in their capacity as such.
Furthermore, Article 8 of the Registrant's Bylaws provide as follows:
"8.1 INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director or an officer of the
Corporation, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding to the fullest extent and in the manner set
forth in and permitted by the General Corporation Law, and any other applicable
law, as from time to time in effect. Such right of indemnification shall not be
deemed exclusive of any other rights to which such director or officer may be
entitled apart from the foregoing provisions. The foregoing provisions of this
Section 8.1 shall be deemed to be a contract between the Corporation and each
director and officer who serves in such capacity at any time while this Article
8 and the relevant provisions of the General Corporation Law and other
applicable law, if any, are in effect and any repeal or modification thereof
shall not affect any rights or obligations then existing with respect to any
state of facts then or theretofore or thereafter brought or threatened based in
whole or in part upon any such state of facts if he acted in good faith and in a
matter he reasonably believed to be in or not opposed to the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful, provided that the
Corporation shall not be liable for any amounts which may be due to any person
in connection with a settlement of any action, suit or proceeding effected
without its prior written consent or any action, suit or proceeding initiated by
any person seeking indemnification hereunder without its prior written consent.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation and, with respect to any criminal action
or proceeding, that such person had reasonable cause to believe that his conduct
was unlawful.
8.2 INDEMNIFICATION OF OTHER PERSONS. The Corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding whether civil,
criminal, administrative or investigative by reason of the fact that he is or
was a director, officer, employee, or agent of the Corporation, or is or was an
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding to the extent and in the manner set forth in and permitted by the
General Corporation Law, and any other applicable law, as from time to time in
effect. Such right of indemnification shall not be deemed exclusive of any other
rights to which any such person may be entitled apart from the foregoing
provisions.
8.3 INSURANCE. The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the written request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have
II-1
<PAGE>
the power or would be required to indemnify him against such liability under the
provisions of Sections 8.1 and 8.3 of the Bylaws or under Section 145 of the
General Corporation Law or any other provision of law."
Article 9 of the Registrant's Certificate of Incorporation provides as
follows:
"9. LIMITATION OF DIRECTOR'S PERSONAL LIABILITY.
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, as the same exists or hereafter may be amended, or (iv) for any transaction
from which the director derived an improper personal benefit. This Article shall
not eliminate or limit the liability of a director for or with respect to any
act or omission occurring prior to the effective date of the Amendment adding
this Article to the Certificate of Incorporation. If the Delaware General
Corporation Law hereafter is amended to authorize the further elimination or
limitation of the liability of directors, then the liability provided herein,
shall be limited to the fullest extent permitted by the amended Delaware General
Corporation Law. Any repeal or modification of this paragraph by the
stockholders of the Corporation shall be prospective only and shall not
adversely affect any limitation on the personal liability of a director of the
Corporation existing at the time of such repeal or modification."
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
2 Agreement and Plan of Merger, dated as of March 6, 1998, between Registrant and Tappan Zee
(incorporated herein by reference to Registrant's Current Report on Form 8-K filed on March 12, 1998)
4 Form of Stock Certificate of U.S.B. Holding Co., Inc. (incorporated herein by reference from
Registrant's Registration Statement on Form S-3, as amended, file no. 33-72788)
5 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. regarding legality of securities being registered
8 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. regarding certain federal income tax consequences
23(a) Consent of Elias, Matz, Tiernan & Herrick L.L.P. (contained in the opinion included as Exhibit 5)
23(b) Consent of Elias, Matz, Tiernan & Herrick L.L.P. (contained in the opinion included as Exhibit 8)
23(c) Consent of KPMG Peat Marwick LLP
23(d) Consent of Deloitte & Touche L.L.P.
23(e) Consent of Sandler O'Neill & Partners, L.P.
23(f) Consent of Mr. Kevin J. Plunkett
24 Powers of Attorney (included in the signature page to the initial filing of this Registration
Statement)
</TABLE>
- ------------------------
(b) Financial Statement Schedules.
No financial statement schedules are filed because the required information
is not applicable or is included in the consolidated financial statements or
related notes.
II-2
<PAGE>
(c) Appraisal Report.
The fairness opinion rendered by Sandler O'Neill & Partners L.P. is not
included hereunder because it is furnished as part of the Proxy
Statement/Prospectus included in this Registration Statement.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
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 end 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 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(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 of 1933, each 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;
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934) 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;
(5) 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;
(6) 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;
(7) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to
II-3
<PAGE>
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form;
(8) That every prospectus: (i) that is filed pursuant to paragraph (7)
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, will be filed as part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, 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
of 1933 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 of 1933 and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Orangeburg, State of New
York, on the 13th day of July, 1998.
U.S.B HOLDING CO., INC.
BY: /S/ THOMAS E. HALES
-----------------------------------------
Thomas E. Hales
CHAIRMAN OF THE BOARD, PRESIDENT,
CHIEF EXECUTIVE OFFICER AND DIRECTOR
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
hereby authorizes Thomas E. Hales or Michael H. Fury to execute in the name of
such person and to file any amendment to this Registration Statement that
Registrant deems appropriate, and appoints such agent as his attorney-in-fact to
sign on his behalf individually and in each capacity stated below and file all
amendments and post-effective amendments to this Registration Statement.
/s/ THOMAS E. HALES Date: July 13, 1998
- ------------------------------
Thomas E. Hales
Chairman of the Board,
President, Chief
Executive Officer and Director
(principal executive officer)
- ------------------------------
Howard V. Ruderman
Director
/s/ FRED F. GRAZIANO Date: July 13, 1998
- ------------------------------
Fred F. Graziano, M.D.
Treasurer and Director
- ------------------------------
Kenneth J. Torsoe
Director
/s/ MICHAEL H. FURY Date: July 13, 1998
- ------------------------------
Michael H. Fury, Esq.
Secretary and Director
/s/ HERBERT PECKMAN Date: July 13, 1998
- ------------------------------
Herbert Peckman
Director
II-5
<PAGE>
<TABLE>
<S> <C>
/s/ RAYMOND J. CROTTY Date: July 13, 1998
- ------------------------------
Raymond J. Crotty
Senior Executive Vice
President, Chief
Credit Officer, Assistant
Secretary and
Director
/s/ STEVEN T. SABATINI Date: July 13, 1998
- ------------------------------
Steven T. Sabatini
Senior Executive Vice
President, Chief
Financial Officer, and
Assistant Secretary (principal
financial and accounting
officer)
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
2 Agreement and Plan of Merger, dated as of March 6, 1998, between Registrant and Tappan Zee
(incorporated herein by reference to Registrant's Current Report on Form 8-K filed on March 12,
1998).
4 Form of Stock Certificate of U.S.B. Holding Co., Inc. (incorporated herein by reference from
Registrant's Registration Statement on Form S-3, as amended, file no. 33-72788)
5 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. regarding legality of securities being registered
8 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. regarding certain federal income tax consequences
23(a) Consent of Elias, Matz, Tiernan & Herrick L.L.P. (contained in the opinion included as Exhibit 5)
23(b) Consent of Elias, Matz, Tiernan & Herrick L.L.P. (contained in the opinion included as Exhibit 8)
23(c) Consent of KPMG Peat Marwick LLP
23(d) Consent of Deloitte & Touche L.L.P.
23(e) Consent of Sandler O'Neill & Partners, L.P.
23(f) Consent of Mr. Kevin J. Plunkett
24 Powers of Attorney (included in the signature page to the initial filing of this Registration
Statement)
</TABLE>
<PAGE>
REVOCABLE PROXY
TAPPAN ZEE FINANCIAL, INC.
75 NORTH BROADWAY
TARRYTOWN, NEW YORK 10951
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF TAPPAN ZEE
FINANCIAL, INC.
FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON AUGUST 19, 1998.
The undersigned shareholder of Tappan Zee Financial, Inc. hereby appoints
Steven C. Byelick, Harry G. Murphy and Marvin Levy, or any of them, with full
powers of substitution, to represent and to vote as proxy, as designated, all
shares of common stock of Tappan Zee Financial, Inc. held of record by the
undersigned on July 2, 1998, at the Special Meeting of Shareholders (the
"Special Meeting") to be held at 5:00 p.m. on August 19, 1998, or at any
adjournment or postponement thereof, upon the matters described in the
accompanying Notice of Special Meeting of Shareholders and Proxy
Statement/Prospectus. The undersigned hereby revokes all prior proxies.
This Proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. IF PROPERLY EXECUTED BUT NO DIRECTION IS
GIVEN, THIS PROXY WILL BE VOTED FOR THE PROPOSALS LISTED IN ITEMS 1 AND 2.
PLEASE MARK, SIGN AND DATE THIS PROXY ON THE REVERSE SIDE
AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
<PAGE>
<TABLE>
<S> <C> <C>
Please mark your
vote as
indicated in
this example /X/
</TABLE>
The Board of Directors unanimously recommends a vote "FOR" each of the proposals
in Items 1and 2.
<TABLE>
<S><C> <C> <C> <C> <C>
1. The approval and adoption of
the Agreement and Plan of
Merger between U.S.B. Holding
Co., Inc. ("USB") and Tappan
Zee Financial, Inc., dated as FOR AGAINST ABSTAIN
of March 6, 1998 (the "Merger / / / / / /
Agreement") which provides,
among other things, for the
merger of Tappan Zee with and
into USB.
2. The authorization of the Board The undersigned hereby
of Directors, in its acknowledges receipt of the
discretion, to direct the vote Notice of the Special Meeting
of proxies upon such other of Shareholders and the Proxy
business as may properly be Statement/Prospectus, dated
presented incident to the FOR AGAINST ABSTAIN July 15, 1998 for the Special
Special Meeting, and any / / / / / / Meeting.
adjournment or postponement ------------------------------
thereof, including, without ------------------------------
limitation, a motion to (Signature(s)
adjourn the Special Meeting. Dated: -------------------- ,
1998
Please sign exactly as your
name appears on this proxy.
Joint owners should each sign
personally. If signing as
attorney, executor,
administrator, trustee, or
guardian, please include your
full title. Corporate or
partnership proxy should be
signed by an authorized
officer.
</TABLE>
FOLD AND DETACH HERE
<PAGE>
EXHIBIT 5
[Elias, Matz, Tiernan & Herrick LLP Letterhead]
July 13, 1998
Board of Directors
U.S.B. Holding Co., Inc.
100 Dutch Hill Road
Orangeburg, New York 10962
Re: Registration Statement on Form S-4
1,832,797 Shares of Common Stock
Gentlemen:
We have acted as special counsel to U.S.B. Holding Co., Inc. (the
"Company") in connection with the preparation and filing with the Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended, of the
registration statement on Form S-4 (the "Registration Statement") relating to
the issuance of up to 1,832,797 shares of the Company's common stock, $.01 par
value per share (the "Shares"), in connection with the proposed merger of Tappan
Zee Financial, Inc. with and into the Company, all as described
in the Registration Statement. As such counsel, we have made such legal and
factual examinations and inquiries as we deemed advisable for the purpose of
rendering this opinion.
Based upon the foregoing, it is our opinion that the Shares, when issued,
delivered and sold in the manner described in the Registration Statement, will
be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Company's Registration Statement, and we consent to the use of our name under
the heading "Legal Matters" in the Proxy Statement/Prospectus constituting a
part thereof.
Very truly yours,
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
By: /s/ Daniel P. Weitzel
----------------------------------
Daniel P. Weitzel, a Partner
<PAGE>
Exhibit 8
ELIAS, MATZ, TIERNAN & HERRICK LLP
734 15TH Street, N.W.
Washington D.C. 20005
202-347-0300
July 13, 1998
Board of Directors
U.S.B. Holding Co., Inc.
100 Dutch Hill Road
Orangeburg, New York 10962
Board of Directors
Tappan Zee Financial, Inc.
75 North Broadway
Tarrytown, New York 10591
Re: Acquisition of Tappan Zee Financial, Inc. by
U.S.B. Holding Co., Inc.
Gentlemen:
We have acted as special counsel to U.S.B. Holding Co., Inc. ("USB") in
connection with the Agreement and Plan of Merger, dated March 6, 1998, between
Tappan Zee Financial, Inc. ("Tappan Zee") and USB (the "Agreement"), which sets
forth the terms and conditions under which Tappan Zee will merge with and into
USB (the "Merger"). Terms used and not defined herein shall have the same
meaning ascribed to them in the Agreement. At your request, and pursuant to
Section 6.1(f) of the Agreement, we are rendering our opinion concerning certain
of the income tax consequences of the Merger under the Internal Revenue Code of
1986, as amended (the "Code").
In connection with our opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
the Agreement, the exhibits thereto, and such other documents as we have deemed
necessary or appropriate for the opinions set forth below. In our examination,
we have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies, and the
authenticity of such latter documents. Further, for purposes of the opinions
set forth below, we have relied, with the consent of both USB and Tappan Zee,
upon the accuracy and completeness of the statements and representations (which
statements and representations we have neither investigated nor verified)
contained, respectively, in the letters dated July 10, 1998 to us from certain
officers of USB and Tappan Zee. In addition, for purposes of such opinions, we
have assumed that the Merger will be consummated in accordance with the terms
of the Agreement and the description thereof contained in the Registration
Statement on Form S-4 filed by USB with the Securities and Exchange
Commission. The opinions expressed herein are conditioned on the initial and
continuing accuracy of the facts, information, and representations contained
in the aforesaid documents or otherwise referred to above.
<PAGE>
Board of Directors
July 13, 1998
Page 2
Based solely upon the foregoing and upon the assumptions set forth herein,
and subject to the qualifications and caveats set forth herein, we are of the
opinion that, under present law, for federal income tax purposes:
(i) No gain or loss will be recognized by USB or Tappan Zee
as a result of the Merger;
(ii) No gain or loss will be recognized by the shareholders of
Tappan Zee who exchange their Tappan Zee Common Stock solely for shares of
USB Common Stock pursuant to the Merger (except with respect to cash
received in lieu of a fractional share interest in USB Common Stock);
(iii) The tax basis of the shares of USB Common Stock received
by shareholders who exchange all of their Tappan Zee Common Stock solely
for USB Common Stock in the Merger will be the same as the tax basis of the
Tappan Zee Common Stock surrendered in exchange therefor (reduced by any
amount allocable to a fractional share interest for which cash is
received); and
(iv) The holding period of such shares of USB Common Stock will
include the holding period of the Tappan Zee Common Stock for which it is
exchanged.
Our opinions do not address any tax considerations under foreign, state
or local laws, or the tax considerations to certain shareholders in light of
their particular circumstances, including persons who are not United States
citizens, or who are resident aliens, life insurance companies, dealers in
securities, tax exempt entities, shareholders who received their shares
through the exercise of employee stock options or through other compensation
arrangements, and shareholders who do not hold their shares as "capital
assets" within the meaning of Section 1221 of the Code.
Our opinions are based on the Code, applicable Treasury Regulations,
current published administrative decisions of the Internal Revenue Service
("IRS") and existing judicial decisions as of the date hereof. No assurance
can be given that legislative, administrative or judicial decisions or
interpretations may not be forthcoming that will significantly change the
opinions set forth herein. Further, our opinions are not binding on the IRS,
and the tax effects discussed above are not subject to absolute resolution
prior to the running of the statute of limitations or the rendering of a
final determination by a court of law or by closing agreement with the IRS.
We hereby consent to the filing of this opinion as an exhibit to the
Company's Registration Statement, and we consent to the use of our name under
the heading "Certain Federal Income Tax Consequences" in the Proxy
Statement/Prospectus constituting a part thereof.
Very truly yours,
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
By: /s/ Daniel P. Weitzel
----------------------------------
Daniel P. Weitzel, a Partner
<PAGE>
Exhibit 23(c)
Independent Auditors' Consent
The Board of Directors and Shareholders
Tappan Zee Financial, Inc.:
We consent to the use of our report dated April 28, 1998 on the consolidated
balance sheets of of Tappan Zee Financial, Inc. and subsidiaries as of March 31,
1998 and 1997, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three year
period ended March 31, 1998, which report is included in the Form S-4 filed by
U.S.B. Holding Co., Inc., and to the reference to our firm under the heading
"Experts".
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
July 13, 1998
<PAGE>
EXHIBIT 23(d)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
U.S.B. Holding Co., Inc. (the "Company") on Form S-4 of our report dated
January 28, 1998 (March 6, 1998 as to Note 19 related to a merger agreement)
incorporated by reference in the Company's 1997 Annual Report on Form 10-K and
appearing in the Company's 1997 Annual Report to Shareholders and to the
reference to us under the heading "Experts" in the Proxy Statement/Prospectus
which is part of this Registration Statement.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
July 13, 1998
<PAGE>
Exhibit 23(e)
CONSENT OF SANDLER O'NEILL & PARTNERS, L.P.
We hereby consent to the inclusion of our opinion letter to the Board of
Directors of Tappan Zee Financial, Inc. (the "Company") as an Appendix to the
Joint Proxy Statement/Prospectus relating to the proposed merger of the Company
with and into U.S.B. Holding Co., Inc. contained in the Registration Statement
on Form S-4 as filed with the Securities and Exchange Commission on the date
hereof, and to the references to our firm and such opinion in such Joint Proxy
Statement/Prospectus. 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 (the "Act"), or the rules and regulations of
the Securities and Exchange Commission thereunder (the "Regulations"), nor do we
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 Act or the
Regulations.
/s/ Sandler O'Neill & Partners, L.P.
July 13, 1998
<PAGE>
Exhibit 23(f)
Rule 438 Consent
The undersigned, a proposed director of U.S.B. Holding Co., Inc. ("USB")
upon consummation of the proposed acquisition of Tappan Zee Financial, Inc.
by USB, hereby consents to the inclusion of his name in the Registration
Statement on Form S-4 in connection with his proposed appointment as a
director of USB.
/s/ Kevin J. Plunkett
------------------------
Kevin J. Plunkett
July 13, 1998
