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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File number 1-12811
U.S.B. HOLDING CO., INC.
(Exact name of registrant as specified in its charter)
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Delaware 36-3197969
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 Dutch Hill Rd., Orangeburg, New York 10962
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 365-4600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each Class which registered
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Common Stock ($0.01 par value) American Stock Exchange
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Securities registered pursuant to section 12(g) of the Act:
Title of Class
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None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Class Outstanding at February 26, 1999
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Common Stock 16,013,113 Shares
($0.01 par value)
The aggregate market value on February 26, 1999 of voting stock held by
non-affiliates of the Registrant was approximately $134,141,000.
Documents incorporated by reference:
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1998 are incorporated by reference in Part II of this report.
Portions of the registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders are incorporated by reference in Part III of this
report.
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PART I
ITEM 1. BUSINESS
U.S.B. Holding Co., Inc. (the "Company"), a Delaware corporation
incorporated in 1982, is a bank holding company registered under the Bank
Holding Company Act of 1956, as amended, which provides financial services
through its wholly-owned subsidiaries. The Company and its subsidiaries derive
substantially all of their revenue and income from the furnishing of banking and
related financial services, primarily to customers in Rockland and Westchester
Counties, New York.
Union State Bank (the "Bank"), the Company's commercial banking
subsidiary, is a New York chartered commercial bank established in 1969. The
Bank offers a wide range of banking services to individuals, municipalities,
corporations and small and medium-size businesses through its 20 retail banking
facilities and a limited branch office in Westchester County. The Bank's
corporate offices are located in Rockland County. The Bank's products and
services include checking accounts, NOW accounts, money market accounts, savings
accounts (passbook and statement), certificates of deposit, retirement accounts,
business, personal, residential, construction, home equity (second mortgage) and
condominium mortgage loans, consumer loans, credit cards, safe deposit
facilities and other consumer oriented financial services. The Bank also makes
available to its customers automated teller machines (ATMs) and has a remote
banking service for business customers. The deposits of the Bank are insured to
the extent permitted by law pursuant to the Federal Deposit Insurance Act of
1950, as amended ("FDIA").
In 1996, the Bank formed a wholly-owned subsidiary, U.S.B. Realty Corp.
("Realty Corp."), primarily for the purpose of acquiring and managing a
portfolio of loans collateralized by real estate and other investment securities
previously owned by the Bank. Realty Corp. was dissolved on October 29,1998.
In 1997, the Bank established two new nonbank wholly-owned subsidiaries.
Dutch Hill Realty Corp. owns and operates certain real estate acquired in
foreclosure from the Bank. U.S.B. Financial Services, Inc. will begin to offer
sales of various financial products, such as mutual funds, stocks and bonds,
annuities and life insurance in 1999. Such sales will be offered through an
arrangement with a third party brokerage and insurance firm specializing in bank
financial product sales.
Tarrytowns Bank, FSB ("Tarrytowns") was acquired by the Company on August
31, 1998. Tarrytowns also provides a wide range of services, similar to that of
the Bank. Tarrytowns is a federally chartered thrift institution located in
Tarrytown, New York. Tarrytowns' deposits are insured to the extent permitted by
law pursuant to the FDIA.
TPNZ Preferred Funding Corporation, a wholly-owned subsidiary of
Tarrytowns, is a Real Estate Investment Trust formed in 1998 for the purpose of
investing in certain mortgage-backed and other securities and mortgage loans.
In February 1997, the Company established Union State Capital Trust I, a
Delaware business trust, solely for the purpose of issuing trust capital
securities. See Note 10 to the Consolidated Financial Statements.
The Company's nonbank subsidiary, Ad Con, Inc., provides advertising
services for the Bank. Ad Con, Inc. does not expect to provide services to other
banks in the near future.
Union State Bank and Tarrytowns Bank, FSB, are collectively referred to
herein as the "Banks."
Employees
As of December 31, 1998, the Company employed a total of 255 full-time and
27 part-time employees. The Company and its subsidiaries provide a variety of
benefit plans, including group life, health, and stock ownership plans.
Management considers its employee relations to be satisfactory.
Competition
The Bank's main office and fourteen of its branch offices are located in
Rockland County, New York. Six of the Bank's branch offices and the two
Tarrytowns' offices are located in Westchester County, New York. The Bank also
has a limited branch office which only closes loans and disburses funds in
Tarrytown, New York. The Company's current market shares are approximately 13.0
percent and 1.0 percent of Rockland and Westchester deposits, respectively.
The Bank is the largest independent bank headquartered in Rockland County
and has been successful in penetration of the Westchester market. The Bank
believes it is able to attract and retain customers because of its knowledge of
its local markets, and the ability of its professional staff to provide a high
degree of service to its customers. Tarrytowns has a significant market
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share, 25.0 percent, in its primary service area of Tarrytown and Sleepy Hollow,
New York, and primarily attracts consumer business due to its high level of
service and competitive products and rates. Within its market area, the Bank and
Tarrytowns encounter competition from many other financial institutions offering
comparable products. These competitors include other commercial banks (both
locally based independent banks and local offices of major New York City
commercial banks) and savings banks, as well as mortgage bankers, savings and
loan associations and credit unions. In addition, the Bank and Tarrytowns
experience competition in marketing some of its services from the local
operations of insurance companies and brokerage firms.
The Company expects to continue to expand by opening new retail branches,
enhancing computerized and telephonic delivery channels, and expanding loan
originations in its market area. Acquisitions of other smaller financial
institutions and branches will be considered to supplement growth in the
Company's present markets and in contiguous markets.
Supervision and Regulation
The references under this heading to various aspects of supervision and
regulation are brief summaries which do not purport to be complete and which are
qualified in their entirety by reference to applicable laws, rules and
regulations.
The Company, as a "bank holding company" under the Bank Holding Company
Act of 1956 (the "BHC Act"), is regulated and examined by the Board of Governors
of the Federal Reserve System (the "FRB") and is required to file with the FRB
an annual report and such other information as may be required. The BHC Act
restricts the business activities and acquisitions that may be engaged in or
made by the Company. The FRB may make examinations of the Company and has the
authority (which it has not exercised) to regulate provisions of certain bank
holding company debt. The BHC Act requires every bank holding company to obtain
the prior approval of the FRB before acquiring substantially all the assets of,
or direct or indirect ownership or control of more than five percent of the
voting shares of, any bank which is not already majority-owned. Subject to
certain limitations and restrictions, a bank holding company, with the prior
approval of the FRB, may acquire an out-of-state bank. A national or state bank
may also establish a de novo branch out of state if such branching is expressly
permitted by the other state.
The BHC Act also prohibits a bank holding company, with certain
exceptions, from engaging in or acquiring direct or indirect control of more
than five percent of the voting shares of any company engaged in non-banking
activities. One of the principal exceptions to these prohibitions is engaging
in, or acquiring shares of a company engaged in, activities found by the FRB, by
order or regulations, to be so closely related to banking or the management of
banks as to be a proper incident thereto. Activities determined by the FRB to be
so closely related to banking within the meaning of the BHC Act include
operating a mortgage company, finance company, credit card company, factoring
company, trust company or savings association; performing certain data
processing operations; providing limited securities brokerage services; acting
as an investment or financial advisor; acting as an insurance agent for certain
types of credit-related insurance; leasing personal property on a full-payout,
nonoperating basis; providing tax planning and preparation services; operating a
collection agency; and providing certain courier services. The FRB also has
determined that certain other activities, including real estate brokerage and
syndication, land development, property management and underwriting of life
insurance unrelated to credit transactions, are not closely related to banking
and therefore are not a proper incident thereto.
Effective April 21, 1997, the FRB completed a major revision of its
regulations affecting bank holding companies and their nonbank subsidiaries.
These revisions expand the list of nonbank activities permitted (see above) and
significantly liberalize the FRB's approval process of nonbank activities. In
addition, the new rules remove tying restrictions on bank holding companies and
their nonbank subsidiaries and create exceptions from statutory restrictions on
bank tying arrangements to allow banks greater flexibility in packaging their
products with affiliates. The new rules also streamline the bank acquisition
application process for "well managed," "well capitalized" institutions, with
satisfactory or better Community Reinvestment Act records.
The Company is a legal entity separate and distinct from its subsidiaries.
The ability of holders of debt and equity securities of the Company to benefit
from the distribution of assets from any subsidiary upon the liquidation or
reorganization of such subsidiary is subordinate to prior claims of creditors of
the subsidiary (including depositors in the case of banking subsidiaries),
except to the extent that a claim of the Company as a creditor may be
recognized.
There are various statutory and regulatory limitations regarding the
extent to which present and future banking subsidiaries of the Company can
finance or otherwise transfer
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funds to the Company or its nonbanking subsidiaries, whether in the form of
loans, extensions of credit, investments or asset purchases, including
regulatory limitations on the payment of dividends directly or indirectly to the
Company from the Banks. Federal and state bank regulatory agencies also have the
authority to limit further the Banks' payment of dividends based on such factors
as the maintenance of adequate capital for such subsidiary banks, which could
reduce the amount of dividends otherwise payable. Under applicable banking
statutes, at December 31, 1998, the Bank and Tarrytowns could have declared
additional dividends of approximately $27.6 million and $1.1 million,
respectively, to the Company without prior regulatory approval.
Under the policy of the FRB, the Company is expected to act as a source of
financial strength to the Banks and to commit resources to support the Banks in
circumstances where the Company might not do so absent such policy. In addition,
any subordinated loans by the Company to the Banks would also be subordinate in
right of payment to depositors and obligations to general creditors of such
subsidiary banks.
The Bank is organized under the Banking Law of the State of New York. Its
operations are subject to Federal and State laws applicable to commercial banks
and to extensive regulation, supervision and examination by the Superintendent
of Banks and the Banking Board of the State of New York, as well as by the
Federal Deposit Insurance Corporation ("FDIC"), as its primary Federal regulator
and insurer of deposits. The Superintendent of Banks and the FDIC examine the
affairs of the Bank for the purpose of determining its financial condition and
compliance with laws and regulations.
Tarrytowns is subject to extensive regulation, examination and supervision
by the Office of Thrift Supervision ("OTS"), as its chartering agency and
primary Federal regulator, and the FDIC, as its deposit insurer. Tarrytowns must
file reports with the OTS and FDIC concerning its activities and financial
condition. The OTS and the FDIC conduct periodic examinations to assess
Tarrytowns' 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 Federal deposit insurance fund and depositors.
The OTS, the FDIC and the New York Superintendent of Banks 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, Congress, the New York Superintendent of Banks or the New York Legislature
could have a material adverse impact on the Bank or Tarrytowns, as the case may
be.
The Company is subject to risk-based capital and leverage guidelines
issued by the FRB. The Bank and Tarrytowns, as institutions whose deposits are
insured by the FDIC, are subject to similar guidelines. These guidelines are
utilized to evaluate capital adequacy. The regulatory agencies are required by
law to take specific prompt corrective actions with respect to institutions that
do not meet minimum capital standards. As of December 31, 1998, the Bank and
Tarrytowns were "well-capitalized." See Management's Discussion and Analysis of
Financial Condition and Results of Operations under Capital Resources, and Note
12 to the Consolidated Financial Statements.
Federal laws and regulations also limit, with certain exceptions, the
ability of banks and thrifts to engage in activities or make equity investments
that are not permissible for national banks. The Company does not expect such
provisions to have a material adverse effect on the Banks or the Company.
The Company plans to merge Tarrytowns with and into the Bank in 1999, and
has filed applications with the New York State Banking Department and the
Federal Deposit Insurance Corporation ("FDIC") for approval of such merger.
Government Monetary Policies and Economic Controls
The earnings and growth of the banking industry, the Company, and the
Banks are affected by general economic conditions, as well as by the credit
policies of monetary authorities, including the Federal Reserve System. An
important function of the Federal Reserve System is to regulate the national
supply of bank credit in order to combat recession and curb inflationary
pressures. Its policies are used in varying combinations to influence overall
growth of bank loans, investments and deposits and may also affect interest
rates charged on loans or paid for deposits.
In view of changing conditions in the national economy and the money
markets, as well as the effect of actions by monetary and fiscal authorities,
including the Federal Reserve System, no prediction can be made by the Company
as to possible future changes in interest rates, deposit levels, loan demand or
their effect on the business and earnings of the Company and the Banks.
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ITEM 2. PROPERTIES
The main office of the Company and the Bank, including the Executive
Offices, Finance, Commercial and Consumer Loan, Loan Administration, Human
Resources, Internal Audit, Operations Center, Transit and Data Processing
Departments, and Marketing Departments, is located at its Corporate Headquarters
which is owned by the Bank at 100 Dutch Hill Road, Orangeburg, New York. The
Bank's main branch is located at 46 College Avenue, Nanuet, New York in premises
which are leased by the Bank. The Bank also has a limited purpose branch located
at 660 White Plains Road in Tarrytown, New York which may originate loans and
disburse funds, and a residential mortgage loan office located in Nanuet, New
York. Both of these locations are leased. The Company also owns other real
property in Orange County, where it may open a future branch of the Bank.
In addition to the main office in Nanuet, the Bank operates thirteen
branches in Rockland County, New York: 270 South Little Tor Road, New City; 87
Route 59, Monsey; 115 South Main Street, New City; 45 Kennedy Drive, Spring
Valley; 35 South Liberty Drive, Stony Point; One Broadway, Haverstraw; Route 9W
and Railroad Avenue, West Haverstraw; 338 Route 59, Central Nyack; 230 North
Middletown Road, Pearl River; 747 Chestnut Ridge Road, Chestnut Ridge; 7 College
Avenue, Nanuet; 65 Dutch Hill Road, Orangeburg; and 59 Route 59, Suffern. The
premises of the Little Tor Road, Spring Valley, Central Nyack, Chestnut Ridge,
Nanuet, and Orangeburg branch offices are leased, while the other Rockland
branch offices are owned by the Bank. The Bank also operates six branches in
Westchester County, New York: 131 Central Avenue, Tarrytown; 299 Bedford Road,
Bedford Hills; and 3000 East Main Street, Peekskill, which are owned, and leased
locations at 76 Virginia Road, North White Plains; 88 Croton Avenue, Ossining;
and 28 Le Count Place, New Rochelle.
Tarrytowns owns and operates its main office branch at 75 North Broadway,
Tarrytown, New York. Tarrytowns also leases from the Bank (which in turn leases
such premises from a third party) a location at 60 Mitchell Place, White Plains,
New York.
In the opinion of management, the premises, fixtures, and equipment used
by the Company and the Banks are adequate and suitable for the conduct of their
businesses. All the facilities are well maintained and provide adequate parking.
ITEM 3. LEGAL PROCEEDINGS
Various actions and proceedings are presently pending to which the Company
is a party. Management is of the opinion that the aggregate liabilities, if any,
arising from such actions would not have a material adverse effect on the
Consolidated Financial Statements of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Market Information and Holders
The Company's common stock was held of record as of February 26, 1999 by
approximately 1,500 shareholders and has been listed on the American Stock
Exchange since April 16, 1997. Prior to such listing, the Company's common stock
was traded sporadically in the over-the-counter market and in private
transactions.
The common stock price information below is based on transactions as
reported by the American Stock Exchange since its listing on April 16, 1997, and
prior to April 16,1997, based on data from National Quotation Bureau, Inc., a
service which accumulates security price quotations from broker-dealers and
reports high and low bid prices for the Company's common stock. Prices quoted by
the American Stock Exchange or National Quotation Bureau, Inc. (or actual sale
prices where no such quote is available), adjusted for the 10% stock dividend to
shareholders in December 1998, are as follows:
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1998 1997
High Low High Low
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First Quarter $23.64 $17.95 $12.50 $ 7.61
Second Quarter 22.78 17.95 15.34 11.19
Third Quarter 19.09 12.27 15.56 13.86
Fourth Quarter 17.19 12.39 24.31 13.64
First Quarter 1999, through
February 26, 1999 16.13 14.63
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The foregoing prices represent quotations without adjustment for retail
markup, markdown or commission.
Under the Company's Dividend Reinvestment and Stock Purchase Plan (the
"Plan"), which has been suspended since
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1996, participants were permitted to reinvest cash dividends in common stock at
100 percent of the current market price (as determined under the Plan). In the
third quarter of 1994, a stock purchase feature of the Plan was added to allow
stockholders to purchase at fair market value up to $2,500 of common stock per
quarter.
Dividends
The Board of Directors of the Company has adopted a policy of paying
quarterly cash dividends to holders of its common stock. In 1998, quarterly cash
dividends were paid as follows: $0.052 to shareholders of record on March 31;
$0.056 per share to shareholders of record on June 30; and $0.055 to
shareholders of record on September 30 and December 31. In 1997, quarterly cash
dividends of $0.044 per share were paid to shareholders of record on March 31
and June 30, and $0.048 per share to shareholders of record on September 30, and
$0.041 to shareholders of record on December 31.
A stock dividend of 10 percent was declared by the Company for
shareholders of record on December 7, 1998 and distributed on December 21, 1998.
In addition, a two-for-one stock split in the form of 100% stock dividend was
declared for stockholders of record on December 15, 1997, and distributed on
December 24, 1997.
Any funds which the Company may require in the future to pay cash
dividends, as well as various Company expenses, are expected to be obtained by
the Company chiefly in the form of cash dividends from the Banks and secondarily
from other Stock Option Plans. The ability of the Company to declare and pay
dividends in the future will depend not only upon its future earnings and
financial condition, but also upon the future earnings and financial condition
of the Banks and its nonbank subsidiaries and upon the ability of the Bank and
Tarrytowns to transfer funds to the Company in the form of cash dividends and
otherwise. The Company is a separate and distinct legal entity from its
subsidiaries. The Company's right to participate in any distribution of the
assets or earnings of its subsidiaries is subject to prior claims of creditors
of the subsidiaries.
Under New York Banking Law, a New York bank may declare and pay dividends
not more often than quarterly and no dividends may be declared, credited, or
paid so long as there is any impairment of capital stock. In addition, except
with the approval of the New York State Superintendent of Banks, the total of
all dividends declared in any year may not exceed the sum of a bank's net
profits for that year and its undistributed net profits for the preceding two
years, less any required transfers to surplus. A bank may be required to
transfer to surplus up to 10 percent of its net profits in any accounting period
if its combined capital stock, surplus and undivided profit accounts do not
equal 10 percent of its net deposit liabilities.
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. Generally,
at least 30-days written notice must be given to the OTS of a proposed capital
distribution by a savings association, which is a subsidiary of a savings and
loan holding company. Capital distributions in excess of specified earnings or
by certain institutions are subject to approval by the OTS. An association which
is a subsidiary of a savings and loan holding company, 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 100% of its net
earnings to date during the calendar year plus the amount of its retained
earnings for the preceding two years. Because the Company is not a savings and
loan holding company, the prior notice requirement does not apply for
Tarrytowns. 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,
Tarrytowns would be prohibited from making any capital distribution if, after
the distribution, it failed to meet its minimum capital requirements.
The Company may not pay dividends on its common stock or preferred stock
if it is in default with respect to the junior subordinated debt or the Capital
Securities issued in February 1997, or if the Company elects to defer payment
for up to five years as permitted under the terms of such junior subordinated
debt and Capital Securities.
The payment of dividends by the Company may also be limited by the Federal
Reserve Board's capital adequacy and dividend payment guidelines applicable to
bank holding companies (see Item 1 - Business-Supervision and Regulation). Under
these guidelines, the Company may not pay any
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dividends on shares of the Company's common stock until such time as its debt to
equity ratio (as defined, including long-term debt qualifying as capital) is
below 30 percent.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference from
the table entitled "Selected Financial Data" of the Company's 1998 Annual Report
to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated by reference from
the Company's 1998 Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference from
the Company's 1998 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference from
the Company's 1998 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
The information required by Items 10, 11, 12 and 13 is incorporated by
reference from the Company's definitive Proxy Statement for its Annual Meeting
of Shareholders which will be filed with the Commission not later than 120 days
after December 31, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) Documents Filed as a Part of this Report:
1. and 2. Financial Statements and Schedules
The following financial statements and schedules of the Company and its
subsidiaries are incorporated in Item 8 by reference from the Company's 1998
Annual Report to Shareholders:
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED STATEMENTS OF CONDITION, DECEMBER 31, 1998 AND 1997
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997
AND 1996
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31,
1998, 1997 AND 1996
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998,
1997 AND 1996
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Schedules are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the Consolidated Financial Statements and the Notes thereto.
3. EXHIBITS
Exhibit No. Exhibit
(3) (a) Amended and Restated Certificate of Incorporation of Registrant
(incorporated herein by reference to Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998Exhibit ((3)(a)).
(3) (b) Bylaws of Registrant (incorporated herein by reference from
Registrant's Registration Statement on Form S-14 (file no.
2-79734), Exhibit 3(b)).
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(4) (a) Junior Subordinated Indenture, dated February 5, 1997, between
Registrant and The Chase Manhattan Bank, as trustee (incorporated
herein by reference to Registrant's annual report on Form 10-K for
the year ended December 31, 1996 ("1996 10-K"), Exhibit (4)(a)).
(4) (b) Guarantee Agreement, dated February 5, 1997, by and between
Registrant and The Chase Manhattan Bank, as trustee for the holders
of 9.58% Capital Securities of Union State Capital Trust I
(incorporated herein by reference to Registrant's 1996 10-K,
Exhibit (4)(b)).
(4) (c) Amended and Restated Declaration of Trust of Union State Capital
Trust I (incorporated herein by reference to Registrant's 1996
10-K, Exhibit (4)(c)).
(10) (a) Agreement of Employment dated as of November 16, 1998 between the
Company and the Bank and Thomas E. Hales.*
(10) (b) Agreement of Employment dated as of November 16, 1998 between the
Company and the Bank and Raymond J. Crotty.*
(10) (c) Agreement of Employment dated as of November 16, 1998 between the
Company and the Bank and Steven T. Sabatini.*
(10) (d) Registrant's 1984 Incentive Stock Option Plan (incorporated herein
by reference from Form S-8 Registration Statement, file No.
2-90674, Exhibit 28 (b)).
(10) (e) Registrant's 1993 Incentive Stock Option Plan (incorporated herein
by reference from Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993 ("1993 10-K"), Exhibit (10)(c)).
(10) (f) Registrant's Employee Stock Ownership Plan (With Code Section
401(k) Provisions) (incorporated herein by reference from
Registrant's 1993 10-K, Exhibit (10)(d)).
(10) (g) Registrant's Dividend Reinvestment and Stock Purchase Plan
(incorporated herein by reference from Registrant's Form S-3
Registration Statement, file No. 33-72788).
(10) (h) Registrant's Director Stock Option Plan (incorporated herein by
reference to Registrant's 1996 10-K, Exhibit (10)(f)).
(10) (i) Registrant's 1998 Director Stock Option Plan (incorporated herein
by reference to Registrant's Form S-8 Registration Statement, filed
June 5, 1998, Exhibit (10)(d)).
(10) (j) Registrant's Key Employees' Supplemental Investment Plan, as
amended July 1, 1997 and September 1, 1998.*
(10) (k) Registrant's Key Employees' Supplemental Diversified Investment
Plan, dated September 1, 1998.*
(10) (l) Purchase Agreement, dated January 31, 1997, by and among
Registrant, Union State Capital Trust I and Keefe, Bruyette &
Woods, Inc. (incorporated herein by reference to Registrant's 1996
10-K, Exhibit (10)(h)).
(10) (m) Registration Rights Agreement, dated February 5, 1997, by and among
Registrant, Union State Capital Trust I and Keefe, Bruyette &
Woods, Inc. (incorporated herein by reference to Registrant's 1996
10-K, Exhibit (10)(i)).
(10) (n) Registrant's 1997 Employee Stock Option Plan (incorporated herein
by reference to Registrant's Proxy Statement filed April 18, 1997).
(10) (o) Agreement and Plan of Merger, dated as of March 6, 1998, between
U.S.B. Holding Co., Inc. and Tappan Zee Financial, Inc.
(incorporated herein by reference to Registrant's Current Report on
Form 8-K dated as of March 6, 1998).
(10) (p) Stock Option Agreement, dated as of March 6, 1998, between U.S.B.
Holding Co., Inc. and Tappan Zee Financial, Inc. (incorporated
herein by reference to Registrant's Current Report on Form 8-K
dated as of March 6, 1998).
(10) (q) Tappan Zee Financial, Inc. 1996 Stock Option Plan for Officers and
Employees ("Employees Stock Option Plan") (incorporated herein by
reference to Exhibit B to Tappan Zee Financial, Inc.'s Proxy
Statement for use in connection with its 1996 annual meeting
("Tappan Zee 1996 Proxy Statement")).
84
<PAGE>
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(10) (r) Amendment No. 1 to the Employees Stock Option Plan (incorporated
herein by reference to Tappan Zee Financial, Inc.'s Annual Report
on Form 10-K for the fiscal year ended March 31, 1997 (the "Tappan
Zee 1997 10-K"), Exhibit 10.1.1).
(10) (s) Amendment No. 2 to the Employees Stock Option Plan (incorporated
herein by reference to Exhibit A to Tappan Zee Financial, Inc.'s
Proxy Statement for use in connection with its 1997 Annual Meeting
of shareholders (the "Tappan Zee 1997 Proxy Statement")).
(10) (t) Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside
Directors ("Outside Director Option Plan") (incorporated herein by
reference to Exhibit B to the Tappan Zee 1997 Proxy Statement).
(10) (u) Amendment No. 1 to the Outside Director Option Plan (incorporated
herein by reference to the Tappan Zee 1997 10-K, Exhibit 10.2.1).
(10) (v) Amendment No. 2 to the Outside Director Option Plan (incorporated
herein by reference to Exhibit B to the Tappan Zee 1997 Proxy
Statement).
(10) (w) Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for
Officers and Employees ("Employee RRP") (incorporated herein by
reference to Exhibit B to the Tappan Zee 1996 Proxy Statement).
(10) (x) Amendment No. 1 to the Employee RRP (incorporated herein by
reference to the Tappan Zee 1997 10-K, Exhibit 10.3.1).
(10) (y) Amendment No. 2 to the Employee RRP (incorporated herein by
reference to Exhibit C to the Tappan Zee 1997 Proxy Statement).
(10) (z) Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for
Outside Directors ("Outside Directors RRP") (incorporated herein by
reference to Exhibit D to the Tappan Zee 1997 Proxy Statement).
(10) (aa) Amendment No. 1 to the Outside Directors RRP (incorporated herein
by reference to the Tappan Zee 1997 10-K, Exhibit 10.4.1).
(10) (bb) Amendment No. 2 to the Outside Directors RRP (incorporated herein
by reference to Exhibit D to the Tappan Zee 1997 Proxy Statement).
(10) (cc) Employee Stock Ownership Plan of Tappan Zee Financial, Inc. and
Certain Affiliates, as amended.*
(10) (dd) Loan Agreement to the Employee Stock Ownership Plan Trust of
Tappan Zee Financial, Inc. and Certain Affiliates (incorporated
herein by refer- ence to the Tappan Zee Financial, Inc.'s Annual
Report on Form 10-K for the fiscal year ended March 31, 1996 (the
"Tappan Zee 1996 10-K"), Exhibit 10.7).
(10) (ee) Deferred Compensation Plan for Directors of Tarrytowns Bank, FSB
(Incorporated herein by reference to the Registration Statement on
Form S-1, No 33-94128, filed on June 30, 1995, as amended (the
"Tappan Zee Registration Statement"), Exhibit 10.7).
(10) (ff) Retirement Plan for Board Members of Tappan Zee Financial, Inc. and
Certain Affiliates, adopted effective as of October 5, 1995
(incorporated herein by reference to the Tappan Zee 1996 10-K,
Exhibit 10.9).
(10) (gg) Consulting Agreement by and between Tarrytowns Bank, FSB and
Stephen C. Byelick, dated effective as of August 31, 1998
(incorporated herein by reference to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998 (the
"September 30, 1998 10-Q"), Exhibit (10)(dd)).
(10) (hh) Employment Agreement by and between Tarrytowns Bank, FSB and Harry
G. Murphy, dated effective as of August 31, 1998 (incorporated
herein by reference to the September 30, 1998 10-Q, Exhibit
(10)(cc)).
(10) (ii) Employee Retention Agreement by and among Tappan Zee Financial,
Inc., Tarrytowns Bank, FSB and Christina Vidal, effective as of
October 5, 1995 (incorporated herein by reference to the Tappan Zee
1996 10-K, Exhibit 10.15).
(10) (jj) Employee Retention Agreement by and among Tappan Zee Financial,
Inc., Tarrytowns Bank, FSB and Margaret E. Sampson, effective as of
October 5, 1995 (incorporated herein by reference to the Tappan Zee
1996 10-K, Exhibit 10.16).
85
<PAGE>
- --------------------------------------------------------------------------------
(10) (kk) Employee Retention Agreement by and among Tappan Zee Financial,
Inc., Tarrytowns Bank, FSB and Valerie Wilson, effective as of
October 5, 1995 (incorporated herein by reference to the Tappan Zee
1996 10-K, Exhibit 10.17).
(10)(ll) Employee Retention Agreement by and among Tappan Zee Financial,
Inc., Tarrytowns Bank, FSB and James D. Haralambie effective as of
June 23,1997.*
(10) (mm) Forms of Stock Option Agreement by and between Tappan Zee
Financial, Inc., and recipients of stock options granted pursuant
to the Employee Option Plan and the Outside Director Option Plan
(incorporated herein by reference to the Tappan Zee 1997 10-K ,
Exhibit 10.16).
(10) (nn) Forms of Restricted Stock Option award Notices to award recipients,
pursuant to the Employee RRP and the Outside Directors RRP
(incorporated herein by reference to the Tappan Zee 1997 10-K,
Exhibit 10.17).
(11) Computation of earnings per share.*
(13) Registrant's Annual Report to Shareholders for the year ended
December 31, 1998* (portions incorporated by reference in Form
10-K).
(21) Subsidiaries of the Registrant.*
(23) Consent of Deloitte & Touche LLP.*
(27) Financial Data Schedule.*
(99) Opinion of KPMG Peat Marwick LLP, dated April 28, 1998, relating to
the Consolidated Financial Statements of Tappan Zee Financial, Inc.
as of March 31, 1998 and for each of the two years in the period
ended March 31, 1998, which financial statements are not seperately
included or incorporated herein.*
* Filed Herewith
(B) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended
December 31, 1998:
o Current report on Form 8-K dated as of October 23, 1998 reported under
item 5, "Other Events," that the Company issued a press release reporting
certain operating results for the Company for the quarter ended September 30,
1998.
o Current report on Form 8-K dated as of November 30, 1998, reported under
item 5, "Other Events," that a press release was issued announcing that the
Company had declared a cash dividend on its common stock in the amount of $0.06
per share to shareholders of record December 31, 1998, payable January 15, 1999,
and a 10% stock dividend to shareholders of record December 7, 1998, to be
distributed December 21, 1998.
86
<PAGE>
USB[LOGO]
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 24, 1999.
U.S.B. HOLDING CO., INC.
/s/ THOMAS E. HALES
----------------------------------
By: Thomas E. Hales,
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on March 24, 1999.
<TABLE>
<S> <C>
/s/ THOMAS E. HALES /s/ STEVEN T. SABATINI
- ------------------------------------------------------ ----------------------------------------------------
Thomas E. Hales, Chairman of the Board, President Steven T. Sabatini, Senior Executive Vice President,
and Chief Executive Officer and Director Chief Financial Officer and Assistant Secretary
/s/ RAYMOND J. CROTTY /s/ HOWARD V. RUDERMAN
- ------------------------------------------------------ ----------------------------------------------------
Raymond J. Crotty, Senior Executive Vice President, Howard V. Ruderman, Director
Chief Credit Officer, Assistant Secretary and Director
/s/ FRED F. GRAZIANO /s/ KENNETH J. TORSOE
- ------------------------------------------------------ ----------------------------------------------------
Fred F. Graziano, M.D., Treasurer and Director Kenneth J. Torsoe, Director
/s/ MICHAEL H. FURY /s/ HERBERT PECKMAN
- ------------------------------------------------------ ----------------------------------------------------
Michael H. Fury, Esq., Secretary and Director Herbert Peckman, Director
/s/ KEVIN J. PLUNKETT
- ------------------------------------------------------
Kevin J. Plunkett, Director
</TABLE>
87
<PAGE>
U.S.B. HOLDING CO., INC. USB[LOGO]
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(000's, except share data and percentages)
1998 1997 Change
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Year $ 43,128 $ 38,351 12%
Net interest income 1,239 2,362 (48)
Provisons for loan losses 15,381 16,521 (7)
Income before income taxes
Income before income taxes, excluding merger
related expenses and costs related to the
liquidation of U.S.B. Realty Corp. 20,284 16,521 23
Income taxes 3,372 5,022 (33)
Net income 12,009 11,499 4
Net income, exluding merger related
expenses and tax benefit, net of associated costs,
related to the liquidation of U.S.B. Realty Corp. 13,423 11,499 17
- --------------------------------------------------------------------------------------------------------
Per Common Share $ 0.77 $ 0.75 3%
Basic earnings 0.72 0.69 4
Diluted earnings
Diluted earnings, excluding merger related
expenses and tax benefit, net of associated costs,
related to the liquidation of U.S.B. Realty Corp. 0.81 0.69 17
Book value at December 31 6.10 5.54 10
Cash dividends declared 0.22 0.18 22
Adjusted weighted average shares 16,550,236 16,628,882 --
- --------------------------------------------------------------------------------------------------------
At Year End
Total loans $ 731,368 $ 621,992 18%
Allowance for loan losses 8,889 8,260 8
Total assets 1,288,812 1,152,743 12
Total deposits 958,640 902,788 6
Borrowings 200,115 133,803 50
Common stockholders' equity 97,439 85,878 13
Tier 1 capital 115,213 104,375 10
Risk weighted assets 769,819 683,901 13
- --------------------------------------------------------------------------------------------------------
Selected Financial Ratios
Return on average assets 0.99% 1.09% (9)%
Return on average common
stockholders' equity 13.15 14.47 (9)
Leverage capital ration (Tier 1 capital to average assets) 9.13 9.37 (3)
Tier 1 capital ratio (to risk weighted assets) 14.97 15.26 (2)
Total capital ratio (to risk weighted assets) 16.12 16.47 (2)
- --------------------------------------------------------------------------------------------------------
</TABLE>
Form 10-K is included in this Annual Report. Additional copies are available on
request from Steven T. Sabatini, Senior Executive Vice President & Chief
Financial Officer.
- --------------------------------------------------------------------------------
3
<PAGE>
Consolidated Statements of Condition
December 31, 1998 and 1997
U.S.B. Holding Co., Inc.
USB[LOGO]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(000's, except share data)
1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 23,660 $ 20,405
Federal funds sold 45,500 32,000
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents 69,160 52,405
Interest bearing deposits in other banks 1,877 2,401
Securities:
Available for sale (at estimated fair value) 379,514 266,589
Held to maturity (estimated fair value of $70,284 in 1998
and $175,842 in 1997) 67,019 172,708
Loans held for sale 3,283 340
Loans, net of allowance for loan losses
of $8,889 in 1998 and $8,260 in 1997 719,196 613,392
Premises and equipment, net 11,210 10,883
Accrued interest receivable 7,161 8,034
Other real estate owned (OREO) 415 2,021
Federal Home Loan Bank of New York stock 17,849 14,666
Other assets 12,128 9,304
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,288,812 $ 1,152,743
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits $ 137,270 $ 108,348
Interest bearing deposits 821,370 794,440
- ------------------------------------------------------------------------------------------------------
Total deposits 958,640 902,788
Accrued interest payable 4,529 3,665
Dividend payable 958 618
Accrued expenses and other liabilities 7,131 5,854
Securities sold under agreements to repurchase 165,780 74,643
Federal Home Loan Bank of New York advances 34,335 59,160
- ------------------------------------------------------------------------------------------------------
Total 1,171,373 1,046,728
- ------------------------------------------------------------------------------------------------------
Corporation-Obligated mandatory redeemable capital
securities of subsidiary trust 20,000 20,000
Minority interest-junior preferred stock of consolidated subsidiary -- 137
Commitments and contingencies (Notes 6, 11 and 16)
Stockholders' equity:
Preferred stock, no par value
Authorized shares: 100,000; no shares outstanding -- --
Common stock, $0.01 par value in 1998 and $5 par value in 1997
Authorized shares: 30,000,000 in 1998 and 20,000,000 in 1997
Issued shares: 16,165,175 in 1998 and 14,213,313 in 1997 162 71,067
Additional paid-in capital 96,919 4,975
Retained earnings 1,513 10,619
Treasury stock at cost, 201,628 shares in 1998 and
128,122 shares in 1997 (2,223) (866)
Common stock held for benefit plans (1,628) (2,746)
Deferred compensation obligation 675 1,441
Accumulated other comprehensive income 2,021 1,388
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 97,439 85,878
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,288,812 $ 1,152,743
======================================================================================================
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
Consolidated Statements of Income
For the Years Ended December 31, 1998, 1997 and 1996
U.S.B. Holding Co., Inc.
USB[LOGO]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(000's, except share data)
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 58,735 $ 52,732 $ 45,268
Interest on federal funds sold 1,595 1,101 927
Interest and dividends on securities:
U.S. Treasury and government agencies 6,383 10,305 5,812
Mortgage-backed securities 19,448 12,047 9,592
Obligations of states and political subdivisions 3,157 3,261 3,194
Corporate and other 58 63 585
Interest on deposits in other banks 68 55 125
Dividends on Federal Home Loan Bank of New York stock 1,098 572 199
- ------------------------------------------------------------------------------------------------------
Total interest income 90,542 80,136 65,702
- ------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 38,180 35,200 29,837
Interest on borrowings 7,282 4,814 1,839
Interest on Corporation - Obligated mandatory
redeemable capital securities of subsidiary trust 1,952 1,771 --
- ------------------------------------------------------------------------------------------------------
Total interest expense 47,414 41,785 31,676
- ------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 43,128 38,351 34,026
Provision for loan losses 1,239 2,362 2,344
- ------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 41,889 35,989 31,682
- ------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Gain on securities transactions - net 1,382 1,113 842
Net gain on sale of branch facility -- -- 600
Mortgage servicing income 186 223 244
Service charges and fees 2,756 2,695 2,654
Other income 1,090 899 913
- ------------------------------------------------------------------------------------------------------
Total non-interest income 5,414 4,930 5,253
- ------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Salaries and employee benefits 15,593 13,203 11,799
Occupancy and equipment expense 4,838 4,175 3,611
Advertising and business development 1,243 1,119 949
Professional fees 1,440 1,640 1,318
Communications 814 733 650
Stationery and printing 609 502 439
FDIC insurance 166 152 695
OREO (income) expense - net (82) 183 216
Other expenses 2,911 2,691 1,889
Merger related expenses 4,390 -- --
- ------------------------------------------------------------------------------------------------------
Total non-interest expenses 31,922 24,398 21,566
- ------------------------------------------------------------------------------------------------------
Income before income taxes 15,381 16,521 15,369
Provision for income taxes 3,372 5,022 5,100
- ------------------------------------------------------------------------------------------------------
NET INCOME $12,009 $11,499 $10,269
======================================================================================================
BASIC EARNINGS PER SHARE $ 0.77 $ 0.75 $ 0.65
======================================================================================================
DILUTED EARNINGS PER SHARE $ 0.72 $ 0.69 $ 0.62
======================================================================================================
WEIGHTED AVERAGE SHARES 15,493,765 15,331,962 15,320,858
======================================================================================================
ADJUSTED WEIGHTED AVERAGE SHARES 16,550,236 16,628,882 16,114,131
======================================================================================================
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
Consolidated Statements of Comprehensive Income For the Years Ended December 31,
1998, 1997 and 1996
U.S.B. Holding Co., Inc.
USB[LOGO]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(000's)
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $12,009 $11,499 $10,269
- ----------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax:
Unrealized holding gain (loss) on securities available
for sale arising during the year 1,256 3,897 (1,305)
Income tax effect (515) (1,598) 535
- ----------------------------------------------------------------------------------------------------------------------
741 2,299 (770)
Unrealized holding gain as a result of reclassification of
Tappan Zee Financial, Inc. securities from held to maturity
to available for sale 843 -- --
Income tax effect (337) -- --
- ----------------------------------------------------------------------------------------------------------------------
506 -- --
Reclassification adjustment for net (gain) loss realized
that were held at the beginning of the year (1,041) 14 (1,949)
Income tax effect 427 (6) 799
- ----------------------------------------------------------------------------------------------------------------------
(614) 8 (1,150)
- ----------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 633 2,307 (1,920)
- ----------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $12,642 $13,806 $ 8,349
======================================================================================================================
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
U.S.B. Holding Co., Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(000's)
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 12,009 $ 11,499 $ 10,269
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,239 2,362 2,344
Depreciation and amortization 1,747 1,546 1,382
Amortization/accretion of premiums (discounts) on securities - net 754 272 303
Merger expenses not yet paid 1,830 -- --
Deferred income taxes (1,589) (1,634) (1,366)
Gain on securities transactions - net (1,327) (1,113) (842)
Net gain on sale of branch facility -- -- (600)
Tappan Zee Financial, Inc. fiscal year conversion (334) -- --
Noncash ESOP and RRP expense 510 419 300
Origination of loans held for sale (3,289) (1,254) (2,415)
Proceeds from sales of loans held for sale -- 1,129 573
Decrease (increase) in accrued interest receivable 873 (1,436) (612)
Increase in accrued interest payable 864 1,770 126
Payment of income taxes related to sale of Royal Oak Savings Bank, F.S.B -- -- (1,530)
Other - net (1,925) (100) (727)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,362 13,460 7,205
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 94,443 144,601 91,552
Proceeds from principal paydowns, redemptions and maturities of:
Securities available for sale 118,078 43,898 39,929
Securities held to maturity 77,246 19,980 7,800
Purchases of securities available for sale (283,214) (244,942) (126,714)
Purchases of securities held to maturity (12,161) (93,744) (37,486)
Purchases of Federal Home Loan Bank of New York stock (3,183) (9,754) (2,695)
Net decrease (increase) in interest bearing deposits in other banks 524 (864) 2,990
Loans originated, net of principal collections and charge-offs (106,937) (65,211) (116,050)
Purchases of premises and equipment - net (2,063) (1,766) (1,660)
Proceeds from sale of branch facility -- -- 900
Proceeds from sales of OREO 1,884 1,514 1,804
- ---------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (115,383) (206,288) (139,630)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in non-interest bearing deposits, NOW,
money market and savings accounts 106,511 22,164 54,346
(Decrease) increase in time deposits, net of
withdrawals and maturities (50,659) 100,017 25,718
Net (decrease) increase in securities sold under agreements to
repurchase - short term (33,863) 5,438 29,425
Net (decrease) increase in Federal Home Loan
Bank of New York advances - short-term (35,000) 30,000 5,000
Proceeds from securities sold under agreements to
repurchase - long term 125,000 39,780 --
Proceeds from Federal Home Loan
Bank of New York advances - long-term 21,935 -- 20,267
Repayment of Federal Home
Loan Bank of New York advances - long term (11,760) (1,107) (5,000)
Net proceeds from issuance of Corporation - Obligated mandatory
redeemable capital securities of subsidiary trust -- 18,810 --
(Redemption of) proceeds from sale of junior preferred stock of
consolidated subsidiary (137) 137 --
Redemption of preferred stock -- (3,250) (500)
Cash dividends paid (3,492) (2,794) (2,423)
Proceeds from issuance of common stock and tax
benefit of stock options 3,598 231 19
Proceeds from sale of treasury stock 1 469 440
Purchase of treasury stock (1,358) (1,095) (1,070)
Purchase of common stock for awards under RRP -- -- (714)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 120,776 208,800 125,508
- ---------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16,755 15,972 (6,917)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 52,405 36,433 43,350
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 69,160 $ 52,405 $ 36,433
===============================================================================================================
Supplemental Disclosures:
- ---------------------------------------------------------------------------------------------------------------
Interest paid $ 46,550 $ 40,015 $ 31,550
- ---------------------------------------------------------------------------------------------------------------
Income tax payments $ 4,814 $ 6,036 $ 8,058
- ---------------------------------------------------------------------------------------------------------------
Transfer of assets to OREO - net $ 240 $ 2,149 $ 1,226
- ---------------------------------------------------------------------------------------------------------------
Transfer of securities held to maturity
to securities available for sale $ 39,462 $ -- $ --
- ---------------------------------------------------------------------------------------------------------------
Transfer of loans held for sale to loans held to maturity at
lower of cost or fair value $ 340 $ 58 $ 1,962
- ---------------------------------------------------------------------------------------------------------------
Change in shares held in trust for deferred compensation $ 766 $ (1,441) $ --
- ---------------------------------------------------------------------------------------------------------------
Change in deferred compensation obligation $ (766) $ 1,441 $ --
- ---------------------------------------------------------------------------------------------------------------
Change in accumulated other comprehensive income $ 633 $ 2,307 $ (1,920)
===============================================================================================================
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
U.S.B. Holding Co., Inc.
USB[LOGO]
- --------------------------------------------------------------------------------
(000's, except share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Common Stock
Stock -------------------- Additional
No Par Shares Par Paid-in Retained
Value Outstanding Value Capital Earnings
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996, as previously reported $ 3,750 2,794,081 $ 14,402 $ 19,046 $ 14,072
- ------------------------------------------------------------------------------------------------------------------------------------
Pooling-of-interests with Tappan Zee Financial, Inc. -- 412,348 2,062 12,847 8,803
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1996, as restated 3,750 3,206,429 16,464 31,893 22,875
- ------------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- -- 10,269
Cash dividends:
Common ($0.14 per share) -- -- -- -- (2,129)
Preferred -- -- -- -- (294)
Employee common stock options exercised
($1.93 to $4.32 per share) -- 3,095 15 16 --
10% stock dividend -- 319,441 1,597 7,079 (8,690)
Two-for-one stock split -- 3,516,743 17,972 (17,972) --
Redemption of preferred stock (500) -- -- -- --
Sale of treasury stock -- 20,108 -- 260 --
Purchase of treasury stock -- (20,975) -- -- --
Retirement of treasury stock -- -- (105) (965) --
Purchase shares to fund awards under RRP -- -- -- -- (98)
Amortization of RRP awards -- -- -- -- --
ESOP shares committed to be released -- -- -- 49 --
Other comprehensive loss -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 3,250 7,044,841 35,943 20,360 21,933
Net income -- -- -- -- 11,499
Cash dividends:
Common ($0.18 per share) -- -- -- -- (2,749)
Preferred -- -- -- -- (34)
Junior preferred stock of consolidated subsidiary -- -- -- -- (11)
Employee common stock options exercised
($1.30 to $4.84 per share) -- 10,292 52 (12) --
Director common stock options exercised
($2.12 to $2.23 per share) -- 10,008 50 (2) --
Tax benefit of exercised stock options -- -- -- 143 --
Two-for-one stock split -- 7,038,560 35,193 (15,174) (20,019)
Redemption of preferred stock (3,250) -- -- -- --
Sale of treasury stock -- 20,650 -- 335 --
Purchase of treasury stock -- (39,160) -- -- --
Retirement of treasury stock -- -- (171) (819) --
Amortization of RRP awards -- -- -- -- --
Tax benefit related to RRP awards -- -- -- 22 --
ESOP shares committed to be released -- -- -- 122 --
Change in shares held in trust for deferred compensation -- -- -- -- --
Change in deferred compensation obligation -- -- -- -- --
Other comprehensive income -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 -- 14,085,191 71,067 4,975 10,619
Net income -- -- -- -- 12,009
Cash dividends:
Common ($0.22 per share) -- -- -- -- (3,447)
Junior preferred stock of consolidated subsidiary -- -- -- -- (45)
Employee common stock options exercised
($2.02 to $16.68 per share) -- 472,079 111 2,169 --
Director common stock options exercised
($2.11 to $2.44 per share) -- 39,897 44 44 --
Tax benefit of exercised stock options -- -- -- 1,230 --
10% stock dividend -- 1,439,886 14 17,269 (17,289)
Reduction of par value of common stock from $5.00
per share to $0.01 per share -- -- (71,074) 71,074 --
Sale of treasury stock -- 100 -- -- --
Purchase of treasury stock -- (73,606) -- -- --
Amortization of RRP awards -- -- -- -- --
Tax benefit related to RRP awards -- -- -- 69 --
ESOP shares committed to be released -- -- -- 89 --
Change in shares held in trust for deferred compensation -- -- -- -- --
Change in deferred compensation obligation -- -- -- -- --
Other comprehensive income -- -- -- -- --
Adjustment for pooling of company with different
fiscal year end -- -- -- -- (334)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ -- 15,963,547 $ 162 $ 96,919 $ 1,513
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Common
Stock Accumulated
Held For Deferred Other
Treasury Benefit Compensation Comprehensive
Stock Plans Obligation Income
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996, as previously reported $ (1,075) $ -- $ -- $ 1,138
- -----------------------------------------------------------------------------------------------------------------------
Pooling-of-interests with Tappan Zee Financial, Inc. -- (1,215) -- (137)
- -----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1996, as restated (1,075) (1,215) -- 1,001
- -----------------------------------------------------------------------------------------------------------------------
Net income -- -- -- --
Cash dividends:
Common ($0.14 per share) -- -- -- --
Preferred -- -- -- --
Employee common stock options exercised
($1.93 to $4.32 per share) -- -- -- --
10% stock dividend -- -- -- --
Two-for-one stock split -- -- -- --
Redemption of preferred stock -- -- -- --
Sale of treasury stock 180 -- -- --
Purchase of treasury stock (1,070) -- -- --
Retirement of treasury stock 1,070 -- -- --
Purchase shares to fund awards under RRP -- (616) -- --
Amortization of RRP awards -- 92 -- --
ESOP shares committed to be released -- 159 -- --
Other comprehensive loss -- -- -- (1,920)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 (895) (1,580) -- (919)
Net income -- -- -- --
Cash dividends:
Common ($0.18 per share) -- -- -- --
Preferred -- -- -- --
Junior preferred stock of consolidated subsidiary -- -- -- --
Employee common stock options exercised
($1.30 to $4.84 per share) -- -- -- --
Director common stock options exercised
($2.12 to $2.23 per share) -- -- -- --
Tax benefit of exercised stock options -- -- -- --
Two-for-one stock split -- -- -- --
Redemption of preferred stock -- -- -- --
Sale of treasury stock 134 -- -- --
Purchase of treasury stock (1,095) -- -- --
Retirement of treasury stock 990 -- -- --
Amortization of RRP awards -- 123 -- --
Tax benefit related to RRP awards -- -- -- --
ESOP shares committed to be released -- 152 -- --
Change in shares held in trust for deferred compensation -- (1,441) -- --
Change in deferred compensation obligation -- -- 1,441 --
Other comprehensive income -- -- -- 2,307
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 (866) (2,746) 1,441 1,388
Net income -- -- -- --
Cash dividends:
Common ($0.22 per share) -- -- -- --
Junior preferred stock of consolidated subsidiary -- -- -- --
Employee common stock options exercised
($2.02 to $16.68 per share) -- -- -- --
Director common stock options exercised
($2.11 to $2.44 per share) -- -- -- --
Tax benefit of exercised stock options -- -- -- --
10% stock dividend -- -- -- --
Reduction of par value of common stock from $5.00
per share to $0.01 per share -- -- -- --
Sale of treasury stock 1 -- -- --
Purchase of treasury stock (1,358) -- -- --
Amortization of RRP awards -- 243 -- --
Tax benefit related to RRP awards -- -- -- --
ESOP shares committed to be released -- 109 -- --
Change in shares held in trust for deferred compensation -- 766 -- --
Change in deferred compensation obligation -- -- (766) --
Other comprehensive income -- -- -- 633
Adjustment for pooling of company with different
fiscal year end -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ (2,223) $ (1,628) $ 675 $ 2,021
=======================================================================================================================
</TABLE>
See notes to consolidated financial statements.
25
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Notes to Consolidated Financial Statements
U.S.B. Holding Co., Inc.
- --------------------------------------------------------------------------------
Balance sheet information as of December 31, 1996, 1995 and 1994 and income
statement information for the years ended December 31, 1995 and 1994 are not
covered by the independent auditors' report included on page 54.
1. NATURE OF OPERATIONS
U.S.B. Holding Co., Inc. (the "Company"), a Delaware corporation
incorporated on July 6, 1982, is a bank holding company which provides financial
services through its wholly-owned subsidiaries. The Company and its subsidiaries
derive substantially all of their revenue and income from the furnishing of
banking and related services primarily to customers in Rockland and Westchester
Counties, New York. The Company is a separate and distinct legal entity from its
subsidiaries.
Union State Bank (the "Bank"), the Company's wholly-owned banking
subsidiary, is a New York State chartered full-service commercial bank which was
established in 1969. The Bank offers a complete range of community banking
services to individuals, municipalities, corporations, and small and medium-size
businesses. These services include checking accounts, NOW accounts, money market
deposit accounts, savings accounts (passbook and statement), certificates of
deposit, retirement accounts, business loans, personal loans, residential,
construction, home equity (second mortgage) and condominium mortgage loans,
consumer loans, credit cards, safe deposit facilities and other consumer
oriented financial services.
U.S.B. Realty Corp. ("Realty Corp."), a wholly-owned subsidiary of the
Bank, was formed in 1996, primarily for the purpose of acquiring and managing a
portfolio of loans collateralized by real estate and other investment securities
previously owned by the Bank. Realty Corp. was liquidated and dissolved during
1998 (See Note 18).
In the fourth quarter of 1997, the Bank established two new subsidiaries,
Dutch Hill Realty Corp., which manages and sells real estate acquired in
foreclosure by the Bank, and U.S.B. Financial Services, Inc., which in 1999,
will begin sales of mutual funds, annuities and life insurance products in
conjunction with an agreement with a third party brokerage and insurance firm.
Both subsidiaries were capitalized in 1998.
Tarrytowns Bank, FSB ("Tarrytowns"), is the Company's Federal thrift
subsidiary located in Tarrytown, New York. Tarrytowns, which was acquired on
August 31, 1998 (See Note 2), also offers a complete range of services to
individuals and businesses similar to that of the Bank. Tarrytowns currently
operates banking facilities in the Village of Tarrytown and the City of White
Plains, Westchester County, New York.
TPNZ Preferred Funding Corporation ("TPNZ") is a wholly-owned subsidiary
of Tarrytowns. TPNZ was formed in March 1998 to manage certain mortgage-backed
and other securities and mortgage loans previously owned by Tarrytowns. TPNZ
qualifies as a Real Estate Investment Trust for tax purposes.
Union State Capital Trust I (the "Trust") is a Delaware business trust
established in 1997 for the purpose of issuing trust capital securities (see
Note 10). Ad Con, Inc. is a nonbank subsidiary of the Company which provides
advertising services for the Bank.
2. ACQUISITION OF TAPPAN ZEE FINANCIAL, INC.
On August 31, 1998, the Company completed its acquisition of Tappan Zee
Financial, Inc. ("Tappan Zee"), the parent company of Tarrytowns and TPNZ,
pursuant to a definitive agreement signed on March 6, 1998. As of August 31,
1998, Tappan Zee had approximately $140 million in assets. The transaction was
structured as a tax free exchange of common shares and has been accounted for as
a pooling-of-interests. Accordingly, prior year financial statements have been
restated to reflect the Company and Tappan Zee on a combined basis as of the
earliest period presented. Tappan Zee was merged into the Company, and
Tarrytowns and TPNZ (subsequently transferred to Tarrytowns) are wholly-owned
subsidiaries of the Company and Tarrytowns, respectively.
Under the terms of the acquisition, each Tappan Zee shareholder received
Company common stock that had a value of $22.00 per share for each share of
Tappan Zee common stock. The exchange ratio, which was determined based on the
average of the last reported sale prices for a share of Company stock for the 20
consecutive full trading days on the American Stock Exchange ended on the date
(August 19, 1998) on which the last of the regulatory approvals required for
consummation of the acquisition was obtained, was 1.12 Company shares for each
Tappan Zee share (the "Exchange Ratio"). The total value of the transaction
based on the average Company stock price as calculated for the purposes of
determining the exchange ratio was approximately $32.5 million, which
represented 1.47 times Tappan Zee's book value as of June 30, 1998.
The Company and Tappan Zee had different fiscal periods for financial
reporting purposes. The consolidated financial information for the periods
presented reflects U.S.B. Holding Co., Inc. and its wholly-owned subsidiaries,
Union State Bank, Ad Con, Inc., and Union State Capital Trust I ("Company
Information"), as of and for the year ended December 31, 1998, combined with
Tappan Zee's income statement and cash flow information for the same period. For
the years ended December 31, 1997 and 1996, Company Information is included for
those periods, while Tappan
26
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Zee information is included for the years ended March 31, 1998 and 1997,
respectively. An adjustment of $334,000 is recorded to combined retained
earnings to eliminate the duplication of recording Tappan Zee net income for the
three month period ended March 31, 1998, that would otherwise have occurred as a
result of preparing the consolidated financial information in this manner.
Merger related expenses of approximately $4.4 million ($3.3 million, net
of tax) were recorded in 1998 as a result of the acquisition and consist of:
payments in connection with existing employment contracts - $0.8 million;
expenses incurred in connection with acceleration of benefits under various
employee and director benefit plans - $0.9 million; professional fees - $1.0
million; investment banking fees - $0.7 million; and other expenses -$1.0
million. The transaction is expected to be accretive to earnings per share in
1999.
The Company plans to merge Tarrytowns with and into the Bank in 1999, and
has filed applications with the New York State Banking Department and the
Federal Deposit Insurance Corporation ("FDIC") for approval of such merger.
Separate and combined results of operations for the periods prior to acquisition
of Tappan Zee are as follows:
- --------------------------------------------------------------------------------
(000's)
Year Ended December 31,
1997 1996
- --------------------------------------------------------------------------------
Net Interest Income:
Company $33,679 $29,541
Tappan Zee 4,672 4,485
- --------------------------------------------------------------------------------
$38,351 $34,026
================================================================================
Provision for Loan Losses:
Company $ 2,320 $ 2,275
Tappan Zee 42 69
- --------------------------------------------------------------------------------
$ 2,362 $ 2,344
================================================================================
Net Income:
Company $10,402 $ 9,414
Tappan Zee 1,097 855
- --------------------------------------------------------------------------------
$11,499 $10,269
================================================================================
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The Consolidated Financial Statements include
the accounts of the Company and its wholly-owned subsidiaries, the Bank
(including its wholly-owned subsidiaries, Realty Corp. through October 29, 1998,
the date of its dissolution, Dutch Hill Realty Corp. and U.S.B. Financial
Services, Inc.), Tarrytowns (including TPNZ), the Trust and Ad Con, Inc. The
Bank and Tarrytowns are herein after referred to as the "Banks." All significant
intercompany accounts and transactions are eliminated in consolidation.
Basis of Financial Statement Presentation: The Consolidated Financial
Statements have been prepared in accordance with generally accepted accounting
principles and predominant practices used within the banking industry. In
preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of actual and contingent assets
and liabilities as of the dates of the Consolidated Statements of Condition and
the revenues and expenses for the periods reported. Actual results could differ
significantly from those estimates.
Estimates that are particularly susceptible to significant change relate
to the determination of the allowance for loan losses and the valuation of other
real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for loan losses and
other real estate owned, management obtains independent appraisals for
significant properties.
Forward-Looking Statements: The Company has made, and may continue to
make, various forward-looking statements with respect to earnings, credit
quality and other financial and business matters for periods subsequent to
December 31, 1998. The Company cautions that these forward-looking statements
are subject to numerous assumptions, risks and uncertainties, and that
statements relating to subsequent periods increasingly are subject to greater
uncertainty because of the increased likelihood of changes in underlying factors
and assumptions. Actual results could differ materially from forward-looking
statements.
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements; competitive
pressures on loan and deposit product pricing; other actions of competitors;
changes in economic conditions; the extent and timing of actions of the Federal
Reserve Board; customer deposit disintermediation; changes in customers'
acceptance of the Banks' products and services; ability to achieve cost savings,
estimates of merger related costs, and other assumptions related to the
acquisition of Tappan Zee (See Note 2); degree of expected compliance with the
Year 2000 issues that are more fully discussed in Management's Discussions and
Analysis of Financial Condition and Results of Operations; increases in Federal
and state income taxes and/or the Company's effective income tax rate; and the
extent and timing of legislative and regulatory actions and reform.
The Company's forward-looking statements are only as of the date on which
such statements are made. By making any
27
<PAGE>
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forward-looking statements, the Company assumes no duty to update them to
reflect new, changing or unanticipated events or circumstances.
Securities: In accordance with Statement of Financial Accounting Standards
("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity
Securities," the Company's investment policies include a determination of the
appropriate classification of securities at the time of purchase. Securities
that may be sold as part of the Company's asset/liability or liquidity
management, or in response to or in anticipation of changes in interest rates
and resulting prepayment risk, or for similar factors, are classified as
available for sale. Securities that the Company has the ability and positive
intent to hold to maturity are classified as held to maturity and carried at
amortized cost. Realized gains and losses on the sales of all securities,
determined by using the specific identification method, are reported in
earnings. Securities available for sale are shown in the Consolidated Statements
of Condition at estimated fair value and the resulting net unrealized gains and
losses, net of tax, are shown as a component of accumulated other comprehensive
income.
The decision to sell securities available for sale is based on
management's assessment of changes in economic or financial market conditions,
interest rate risk, and the Company's financial position and liquidity.
Estimated fair values for securities are based on quoted market prices, where
available. If quoted market prices are not available, estimated fair values are
based on quoted market prices of comparable instruments.
The Company does not acquire securities for the purpose of engaging in
trading activities.
Interest Rate Contracts: The Company, from time to time, uses various
interest rate contracts such as forward rate agreements, interest rate swaps and
caps, primarily as hedges against specific assets, liabilities or anticipated
transactions. Contracts accounted for as hedges must meet certain criteria
including the following: the hedged item must expose the Company to interest
rate risk; the interest rate contract must reduce that exposure; and must have a
high correlation of change in fair value of the interest rate contract and
change in fair value of the item hedged. For contracts designated as hedges,
gains or losses are deferred and recognized as adjustments to interest income or
expense of the underlying assets or liabilities over the life of the contract.
Net payments on interest rate swaps designated as hedges are accounted for on
the accrual basis. Gains or losses resulting from early terminations of
contracts are deferred and amortized over the remaining term of the underlying
assets or liabilities. If the contracts do not meet the criteria for hedge
accounting, the contract is valued at its estimated fair value and any gain or
loss is recorded in the Consolidated Statements of Income. Any fees received or
disbursed which represent adjustments to the yield on interest rate contracts
are capitalized and amortized over the term of the interest rate contracts.
Loans: Loans are reported at the principal amount outstanding, net of
unearned income and the allowance for loan losses. Interest income on loans is
recorded on an accrual basis unless an interest or principal payment is more
than 90 days past due or sooner if, in the opinion of management, there is a
question as to the ability of the debtor to continue to make payments. At the
time a loan is placed on nonaccrual status, interest accrued but not collected
is reversed. Interest payments received while a loan is on nonaccrual status are
either applied to reduce principal or, based on management's estimate of
collectibility, recognized as income. Loans are returned to accrual status when
factors indicating doubtful collectibility no longer exist.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and the net amount is amortized as an adjustment of the
related loan's yield over the contractual life of the related loan, using a
method that approximates the interest method of amortization. Unamortized net
fees for loans sold are recognized in income at the time the loan is sold.
Certain residential mortgage loans held for sale are carried at the lower
of aggregate cost or estimated fair value, and are reported separately in the
Consolidated Statements of Condition as "Loans held for sale." Gains and losses
on sales of mortgage loans held for sale are included in other income in the
Consolidated Statements of Income.
Allowance for Loan Losses: The allowance for loan losses is available to
absorb charge-offs from any loan category, while additions are made through
charges to income and recoveries of loans previously charged off. An evaluation
of the quality of the loan portfolio is performed by management on a quarterly
basis as an integral part of the loan review function, which includes the
identification of past due loans, non-performing loans, impaired loans,
assessment of the expected effects of the current economic environment on the
loan portfolio, review of historical loss experience and the impact of the Year
2000 issue on the Company's borrowers.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize possible loan losses, future
additions to the allowance may be necessary based on changes in economic
conditions, particularly in the Company's primary service areas, Rockland and
Westchester Counties, New York. In addition, regulatory agencies, as an integral
part of their examination process, periodically
28
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review the allowance for loan losses. Such agencies may require adjustments to
the allowance based on their judgments of information available to them at the
time of their examination.
SFAS No. 114, "Accounting for Impairment of a Loan," as amended by SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosures," requires recognition of an impairment of a loan when it is
probable that either principal and/or interest are not collectible in accordance
with the terms of the loan agreement. Measurement of the impairment is based on
the present value of expected cash flows discounted at the loan's effective
rate, the loan's observable market price, or the estimated fair value of the
collateral if the loan is collateral-dependent. If the estimated fair value of
the impaired loan is less than the related recorded amount, a specific valuation
allowance is established or a write down is charged against the allowance for
loan losses if the impairment is considered to be permanent. Small homogenous
loans such as residential mortgage, home equity, and installment loans are
collectively reviewed for impaired status. Such loans are typically
collateralized by residential or other personal property and require monthly
payments. Separate allocations of the allowance for loan losses are made based
on payment trends and prior loss experience and the composition of credit risk
inherent in these loan types.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed on a
straight-line basis over the estimated useful lives (20 to 50 years for
buildings and 3 to 10 years for furniture, fixtures and equipment) of the
related assets. Amortization of leasehold improvements is computed on a
straight-line basis over the term of the applicable lease or, if shorter, the
estimated useful lives of the assets.
Other Real Estate Owned ("OREO"): OREO includes properties acquired in
satisfaction of loans. OREO properties are recorded at the lower of cost or
estimated fair value, less estimated costs to sell. Losses arising at the time
of acquisition of such properties are charged against the allowance for loan
losses. Net costs of maintaining and operating foreclosed properties and any
subsequent provisions for changes in valuation are charged or credited to
operations when incurred. Gains and losses realized from the sale of OREO are
included in OREO (income) expense-net. Sales of OREO financed by the Banks are
required to meet the Banks' underwriting standards.
Accounting for Impairment of Long-Lived Assets: SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," requires that long-lived assets and certain identifiable intangibles, and
goodwill related to those assets, to be held and used by an entity, be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review for
recoverability, the Company estimates the future cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized.
Measurement of an impairment loss for long-lived assets and identifiable
intangibles that an entity expects to hold and use is based on the estimated
fair value of the asset.
Income Taxes: The Company accounts for income taxes under the provisions
of SFAS No. 109, "Accounting for Income Taxes." This statement establishes
financial accounting and reporting standards for the effects of income taxes
that result from an enterprise's activities during the current and preceding
years. It requires an asset and liability approach for financial accounting and
reporting for deferred income taxes based on prevailing statutory tax rates. The
Company and its subsidiaries (Tarrytowns from its date of acquisition), except
Realty Corp. and TPNZ , file a consolidated Federal tax return and a combined
New York State tax return.
Accounting for Stock-Based Compensation: SFAS No. 123, "Accounting for
Stock-Based Compensation," establishes a fair value based method of accounting
for stock-based compensation plans and encourages, but does not require,
entities to adopt that method in place of the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," for all arrangements under which employees receive shares of stock
or other equity instruments of the employer or the employer incurs liabilities
to employees in amounts based on the price of the Company's stock. SFAS No. 123
requires significantly expanded disclosure in complete financial statements,
including disclosure of pro forma net income and earnings per share as if the
fair value based method were used to account for stock-based compensation, if
the intrinsic value method of APB No. 25 is retained. SFAS No. 123 also
establishes fair value as the measurement basis for transactions in which an
entity acquires goods or services from non-employees in exchange for equity
instruments. Effective January 1, 1996, the Company adopted SFAS No. 123 and has
elected to continue to measure compensation cost for employee stock compensation
plans in accordance with the provisions of APB No. 25.
Earnings per Share ("EPS"): The Company adopted SFAS No. 128, "Earnings
per Share," for the year ended December 31, 1997 and EPS data is provided in the
Consolidated Financial Statements for all years presented based on the
requirements of this statement. SFAS No. 128 establishes standards for computing
and presenting "Basic" and "Diluted" EPS. SFAS No. 128 states that Basic EPS
excludes dilution and is computed by dividing net
29
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income available to common stockholders (net income after preferred stock
dividend requirements) by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that would then share in the earnings of the entity, reduced by common
stock that could be repurchased by the Company with the assumed proceeds of such
exercise or conversion. Diluted EPS is based on net income available to common
stockholders divided by the weighted average number of common shares outstanding
and common equivalent shares ("adjusted weighted average shares"). Stock options
granted but not yet exercised under the Company's stock option plans and
restricted stock issued under the Company's Recognition and Retention Stock
Plans ("RRP") but not yet vested are considered common stock equivalents for
Diluted EPS calculations.
Transfers and Servicing of Financial Assets: SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
specifies accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities and for distinguishing
whether a transfer of financial assets in exchange for cash or other
consideration should be accounted for as a sale or as a pledge of collateral in
a secured borrowing. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, except for certain provisions (relating to the accounting for secured
borrowings and collateral, and the accounting for transfers and servicing of
repurchase agreements, dollar rolls, securities lending and similar
transactions) which became effective as of January 1,1998, in accordance with
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125." The adoption of these standards did not have a material
impact on the Company's Consolidated Financial Statements.
Reporting Comprehensive Income: SFAS No. 130, "Reporting Comprehensive
Income," became effective as of January 1, 1998. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. This statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as are the other financial
statements. Comprehensive income is defined as the change in equity (net assets)
of a business enterprise during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity during a
period, except those resulting from investments by owners and distributions to
owners.
The Company's Statements of Comprehensive Income for the years ended
December 31, 1998, 1997 and 1996, are presented as part of the Consolidated
Financial Statements.
Disclosures about Segments of an Enterprise and Related Information: In
September 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131 "Disclosures About Segments of an Enterprise and Related Information."
This statement is effective for the Company's 1998 Consolidated Financial
Statements.
SFAS No. 131 establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in subsequent interim financial reports issued to shareholders. It also
establishes standards for related disclosure about products and services,
geographic areas, and major customers. The statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and assess performance. The statement also requires that
public business enterprises report a measure of segment profit or loss, certain
specific revenue and expense items and segment assets. It also requires that
information be reported about revenues derived from the enterprises' products or
services, or about the countries in which the enterprises earn revenues and
holds assets, and about major customers, regardless of whether that information
is used in making operating decisions. The Company has one operating segment,
"Community Banking." Disclosure required by this statement is included in Note
19.
Consolidated Statements of Cash Flows: For purposes of presenting the
Consolidated Statements of Cash Flows, cash equivalents include cash and due
from banks and Federal funds sold.
The cash flow information for the year ended December 31, 1998 includes
Tappan Zee fiscal year conversion adjustments. These adjustments are necessary
to eliminate the duplication of recording Tappan Zee income and expense
components for the three month period ended March 31, 1998, as the December 31,
1997 Consolidated Statements of Condition contains Tappan Zee information as of
March 31, 1998.
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Reclassifications: Certain reclassifications have been made to prior year
accounts to conform to the current year's presentation.
Pending Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities: In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that
all derivatives be recognized in the statement of condition, either as assets or
as liabilities, and be measured at their fair value. This statement requires
that changes in a derivative's fair value be recognized in current earnings
unless specific hedge accounting criteria are met. Hedge accounting for
qualifying hedges permits a derivative's gains and losses to offset the related
results on the hedged item. An entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk.
For the Company, SFAS No. 133 is effective January 1, 2000. A company may
also implement this statement as of the beginning of any fiscal quarter after
issuance but cannot apply the statement retroactively. The Company does not
anticipate that the statement will have a material impact on its consolidated
financial position or results of operations.
Accounting for Mortgage-backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise:
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise, an amendment of FASB Statement No. 65." This
statement amends SFAS No. 65 "Accounting for Certain Mortgage Banking
Activities," to conform the subsequent accounting to that required (under SFAS
No. 115) for securities retained after the securitization of mortgage loans by a
mortgage banking enterprise to the accounting applicable to non-mortgage banking
enterprises. The statement allows a mortgage banking enterprise to classify
securities retained after a securitization of mortgage loans held for sale based
on its ability and intent to sell or hold those investments. However, such
securities must be classified as trading for any securities that a company
commits to sell before or during the securitization process. On the date of
initial application, a mortgage banking enterprise may reclassify
mortgage-backed securities and other beneficial interests retained after
securitization of mortgage loans held for sale from the trading category, except
for those with sales commitments in place.
The Company adopted this statement effective January 1, 1999 with no
material impact on its financial position or results of operations.
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4. SECURITIES
A summary of the amortized cost, estimated fair value of securities and
related gross unrealized gains and losses at December 31, 1998 and 1997,
follows:
SECURITIES
A summary of the amortized cost, estimated fair value of securities arid related
gross unrealized gains and losses at December 1, 1998 and 1997, follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(000's)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and government agencies $ 54,532 $1,110 $ 4 $ 55,638
Mortgage-backed securities 319,345 2,277 30 321,592
Obligations of States and political subdivisions 1,539 101 -- 1,640
Corporate securities 472 -- -- 472
Other 172 -- -- 172
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $376,060 $3,488 $ 34 $379,514
===================================================================================================================================
Held to Maturity:
Mortgage-backed securities $ 9,774 $ 118 $ 7 $ 9,885
Obligations of states and political subdivisions 57,245 3,154 -- 60,399
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 67,019 $3,272 $ 7 $70,284
===================================================================================================================================
<CAPTION>
(000's)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and government agencies $117,494 $1,067 $ 43 $118,518
Mortgage-backed securities 142,541 1,393 83 143,851
Obligations of states and political subdivisions 1,241 65 1,306
Corporate securities 2,800 -- -- 2,800
Other 114 -- -- 114
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $264,190 $2,525 $126 $266,589
===================================================================================================================================
Held to Maturity
U.S. Treasury and government agencies $ 46,988 $ 16 $236 $ 46,768
Mortgage-backed securities 62,924 661 183 63,402
Obligations of states and political subdivisions 62,696 2,875 -- 65,571
Corporate securities 100 1 -- 101
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $172,708 $3,553 $419 $175,842
===================================================================================================================================
</TABLE>
As a result of the acquisition of Tappan Zee and its wholly-owned
subsidiaries, Tarrytowns and TPNZ, approximately $39.5 million of Tarrytowns'
held to maturity securities were reclassified to available for sale. The
reclassification was made pursuant to SFAS No. 115 to maintain the combined
entities interest rate risk profile. Classification of these and other
securities as available for sale gives management the ability to react to
changes in interest rates. As a result of this reclassification, available for
sale securities were increased by the unrealized gain on the reclassified
securities of $843,000, and accumulated other comprehensive income was increased
by the unrealized gain, net of tax, of approximately $506,000.
During 1998, 1997 and 1996, gross gains from sales of securities were
$1,396,000, $1,341,000, and $955,000, respectively, and gross losses were
$14,000, $228,000 and $113,000, respectively.
32
<PAGE>
USB[LOGO]
- --------------------------------------------------------------------------------
The following tables present the amortized cost of securities at December
31, 1998, distributed based on contractual maturity or earlier call date for
securities expected to be called, and unaudited weighted average yields computed
on a tax equivalent basis. Mortgage-backed securities which may have principal
prepayments are distributed to a maturity category based on estimated average
lives. Actual maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Maturities of Securities Available for Sale
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(000's, except percentages)
After 1 After 5
Within But Within But Within
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------------------------
Amt. Yield Amt. Yield Amt. Yield
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
government agencies $ 10,511 6.16% $ 44,021 7.14% $ -- --%
Mortgage-backed securities 32,699 6.13 120,345 6.41 159,872 6.69
Obligations of states and
political subdivisions -- -- 130 10.24 1,166 7.69
Corporate securities 472 4.96 -- -- -- --
Other -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------
Total securities available
for sale $ 43,682 6.12% $164,496 6.61% $161,038 6.70%
- --------------------------------------------------------------------------------------------------
Estimated fair value $ 43,729 $166,253 $162,516
==================================================================================================
</TABLE>
After
10 Years Total
- ------------------------------------------------------------------------
Amt. Yield Amt. Yield
- ------------------------------------------------------------------------
U.S. Treasury and
government agencies $ -- --% $ 54,532 6.95%
Mortgage-backed securities 6,429 5.72 319,345 6.51
Obligations of states and
political subdivisions 243 9.16 1,539 8.14
Corporate securities -- -- 472 4.96
Other 172 -- 172 --
- ------------------------------------------------------------------------
Total securities available
for sale $ 6,844 5.70% $376,060 6.57%
- ------------------------------------------------------------------------
Estimated fair value $ 7,016 $379,514
========================================================================
Maturities of Securities Held to Maturity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(000's, except percentages)
After 1 After 5
Within But Within But Within
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------------------------
Amt. Yield Amt. Yield Amt. Yield
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities $ -- --% $ 1,008 5.50% $ -- --%
Obligations of states and
political subdivisions 5,540 6.67 29,705 8.25 22,000 8.10
Total Securities held to
maturity $ 5,540 6.67% $ 30,713 8.16% $ 22,000 8.10%
- --------------------------------------------------------------------------------------------------
Estimated fair value $ 5,569 $ 32,189 $ 23,641
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
After
10 Years Total
- ------------------------------------------------------------------------
Amt. Yield Amt. Yield
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 8,766 6.25% $ 9,774 6.18%
Obligations of states and
political subdivisions -- -- 57,245 8.04
Total Securities held to
maturity $ 8,766 6.25% $ 67,019 7.77%
- ------------------------------------------------------------------------
Estimated fair value $ 8,885 $ 70,284
========================================================================
</TABLE>
Securities having a total par value of approximately $322.9 million at
December 31, 1998, were pledged to secure public deposits, as required or
permitted by law, and securities sold under agreements to repurchase
transactions.
33
<PAGE>
- --------------------------------------------------------------------------------
5. LOANS
Major classifications of loans, including loans held for sale, at December
31, are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(000's)
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Time and demand loans $ 53,869 $ 33,947 $ 31,567 $ 25,324 $ 13,480
Installment loans 23,296 15,520 16,263 16,432 22,149
Credit card 8,338 8,042 8,264 2,592 --
Real estate loans
- Commercial 307,651 313,675 271,721 216,076 196,560
- Residential 157,137 129,461 125,737 108,429 101,904
- Construction and land development 148,761 84,890 73,008 44,351 28,065
- Home equity 30,762 32,095 28,844 25,221 21,734
Other 3,710 5,739 5,184 5,902 1,808
- ----------------------------------------------------------------------------------------------------------------------------------
733,524 623,369 560,588 444,327 385,700
Deferred net commitment fees (1,994) (1,169) (1,068) (923) (981)
Unearned discount (162) (208) (239) (235) (266)
Allowance for loan losses (8,889) (8,260) (6,402) (4,558) (3,970)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $722,479 $613,732 $552,879 $438,611 $380,483
==================================================================================================================================
</TABLE>
Loans held for sale of $3,283,000 and $340,000 at December 31, 1998 and
1997, respectively, which are included in the above table, and commitments of
$1,061,000 at December 31, 1998 (none at December 31,1997), which have not yet
closed, are fixed rate residential real estate loans with an aggregate cost of
$4,344,000 and market value of $4,336,000 at December 31, 1998, and a cost of
$340,000 and market value of $341,000 at December 31, 1997.
A substantial amount of the Company's commercial and residential lending
activities are with customers located in Rockland and Westchester Counties, New
York. Although lending activities are diversified, a substantial portion of the
Company's customers' net worth is dependent on these counties' real estate
values.
Credit policies, applicable to each type of lending activity, have been
established, to evaluate the creditworthiness of each customer and, in most
cases, require collateral to be pledged. Generally, credit extension does not
exceed 60 to 80 percent of the estimated fair value of the collateral at the
date of extension (with occasional exceptions), depending on the evaluation of
the borrower's creditworthiness. The fair value of collateral is monitored on an
ongoing basis. Real estate is the primary form of collateral. While collateral
provides assurance as a secondary source of repayment, the primary source of
repayment is ordinarily based on the borrower's ability to generate continuing
cash flow, which is a principal underwriting criteria for approving a loan.
34
<PAGE>
USB[LOGO]
- --------------------------------------------------------------------------------
A summary of the allowance for loan losses for the years ended December
31, is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(000's, except percentages)
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net loans outstanding at end of the year $ 722,479 $ 613,732 $ 552,879 $ 438,611 $ 380,483
- -----------------------------------------------------------------------------------------------------------------
Average net loans outstanding during the year 657,171 582,267 499,677 403,220 352,117
- -----------------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Balance at beginning of the year $ 8,260 $ 6,402 $ 4,558 $ 3,970 $ 3,392
Adjustment for pooling of company with
different fiscal year end (10) -- -- -- --
Provision charged to expense 1,239 2,362 2,344 1,290 1,164
- -----------------------------------------------------------------------------------------------------------------
9,489 8,764 6,902 5,260 4,556
- -----------------------------------------------------------------------------------------------------------------
Charge-offs and recoveries during the year:
Charge-offs:
Real estate (75) (339) (356) (427) (499)
Time and demand (300) (3) (77) (236) (76)
Installment (319) (327) (165) (110) (96)
Recoveries:
Time and demand 3 104 83 20 37
Installment 91 61 15 51 48
- -----------------------------------------------------------------------------------------------------------------
Net charge-offs during the year (600) (504) (500) (702) (586)
- -----------------------------------------------------------------------------------------------------------------
Balance at end of the year $ 8,889 $ 8,260 $ 6,402 $ 4,558 $ 3,970
- -----------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average net loans
outstanding during the year 0.09% 0.09% 0.10% 0.17% 0.17%
Ratio of allowance for loan losses to loans
outstanding at end of the year 1.22% 1.33% 1.14% 1.03% 1.03%
Ratio of provision to net charge-offs (times) 2.07 4.69 4.69 1.84 1.99
=================================================================================================================
</TABLE>
Real estate charge-offs ordinarily are incurred in connection with
transfers to OREO and, as a result, related recoveries, if any, generally reduce
OREO expense rather than being treated as a recovery of a charged-off loan.
The following table summarizes the Company's nonaccrual and restructured
loans, OREO and related interest income not recorded on nonaccrual loans as of
and for the year ended December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(000's, except percentages)
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans at year end $2,335 $7,254 $9,568 $5,018 $6,427
OREO at year end 415 2,021 773 1,341 999
Restructured loans at year end 718 867 2,101 4,074 5,787
Additional interest income that would have been
recorded if these borrowers had complied
with contractual loan terms 123 542 936 319 518
Nonperforming assets to total assets at year end 0.21% 0.80% 1.12% 0.80% 1.07%
=================================================================================================
</TABLE>
Substantially all of the nonaccruing loans are collateralized by real
estate, except for certain loans made by the Bank to Bennett Funding Group
("Bennett"), a lease finance company, which are collateralized by cash and lease
receivables. At December 31, 1998, the Company has no commitments to lend
additional funds to any customers with nonaccrual or restructured loan balances.
At December 31, 1998, there are loans aggregating approximately $773,000,
which are not on nonaccrual status, that were potential problem loans that may
result in their being placed on nonaccrual status in the future.
At December 31, 1998 and 1997, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 approximated $1.6 million and $4.8
million, respectively (including those loans to Bennett), of which $1.2 million
and $4.4 million, respectively, were in nonaccrual status. Each impaired loan
has a related allowance for loan losses determined in accordance with SFAS No.
114.
Restructured loans in the amounts of $0.4 million at both December 31,
1998 and 1997, that are considered to be impaired due to a reduction in the
contractual interest rate are
35
<PAGE>
- --------------------------------------------------------------------------------
on accrual status since the collateral securing these loans is sufficient to
protect the contractual principal and interest of the restructured loans. These
loans have been performing for a reasonable period of time. Interest accrued on
these loans not yet collected as of December 31, 1998 and 1997 is immaterial.
The total allowance for loan losses specifically allocated to impaired loans was
$0.5 million and $1.8 million as of December 31, 1998 and 1997, respectively.
The average recorded investment in impaired loans for the years ended December
31, 1998, 1997 and 1996 was approximately $3.4 million, $6.3 million and $7.5
million, respectively. For the years ended December 31, 1998, 1997 and 1996,
interest income recognized by the Company on impaired loans was not material.
At December 31, 1998, the Bank has approximately $0.8 million ($3.3
million at December 31,1997) of outstanding loans, collateralized by cash and
lease receivables, to Bennett, which filed for bankruptcy protection during the
first quarter of 1996. Collection of the Bank's loans continues to be delayed by
the bankruptcy proceedings. However, as a result of a favorable ruling in the
second quarter of 1998 by the Bankruptcy Court, the Bank collected an initial
payment of $1.4 million, reducing the original balance of $3.3 million to $1.9
million. Additional collections of $0.8 million were received through December
31, 1998 and $0.3 million was charged-off during 1998, reducing the recorded
balance of the loans to $0.8 million. Further collections are anticipated. The
ruling by the Bankruptcy Court is subject to appeal by the Trustee. The Bennett
loans are on nonaccrual status and a specific allocation is included in the
allowance for loan losses of $0.4 million in accordance with SFAS No. 114.
The following table summarizes impaired loans by loan type and measurement
method pursuant to SFAS 114:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(000's)
As of December 31,
1998 1997
Present Value Fair Value Present Value Fair Value
of expected of of expected of
cash flows collateral cash flows collateral
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate - Commercial $124 $718 $ 68 $1,450
Other 726 -- 3,303 --
- -------------------------------------------------------------------------------------------------------------
Totals $850 $718 $3,371 $1,450
=============================================================================================================
</TABLE>
6. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, follows:
(000's)
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Land $ 2,574 $ 2,632
Buildings 7,029 7,009
Leasehold improvements 476 360
Furniture, fixtures and equipment 6,520 5,537
- --------------------------------------------------------------------------------
16,599 15,538
Less accumulated depreciation and amortization 5,389 4,655
- --------------------------------------------------------------------------------
Premises and equipment, net $11,210 $10,883
================================================================================
The Banks lease certain premises and equipment under noncancellable
operating leases. Certain of these lease agreements provide for periodic
increases in annual rental payments based on published price indices, renewal
options for varying periods and purchase options at amounts which are expected
to approximate the fair values of the related assets at the dates the options
are exercisable.
Rent expense for premises and equipment was $895,000 in 1998, $727,000 in
1997 and $582,000 in 1996 .
The Bank leases a portion of its corporate headquarters, and the Company
leased a bank branch facility through December 1996 to tenants under operating
leases and recorded rental income of approximately $362,000 in 1998, $371,000 in
1997 and $525,000 in 1996. The tenant of the bank branch facility purchased the
facility for the fair value of the property in December 1996.
36
<PAGE>
USB[LOGO]
- --------------------------------------------------------------------------------
As of December 31, 1998, future minimum lease payments are as follows:
- --------------------------------------------------------------------------------
Year Ending December 31, (000's)
- --------------------------------------------------------------------------------
1999 $ 872
2000 724
2001 583
2002 527
2003 396
After 2003 1,929
- --------------------------------------------------------------------------------
Total minimum lease payments $5,031
================================================================================
As of December 31, 1998, future minimum lease receipts are as follows:
- --------------------------------------------------------------------------------
Year Ending December 31, (000's)
- --------------------------------------------------------------------------------
1999 $306
2000 287
2001 138
2002 96
2003 72
After 2003 --
- --------------------------------------------------------------------------------
Total minimum lease receipts $899
================================================================================
7. DEPOSITS
A summary of deposits at December 31, follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(000's)
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-interest bearing:
Deposits of:
Individuals, partnerships and corporations $124,352 $ 94,152
Certified and official checks 11,230 11,694
States and political subdivisions 1,688 2,502
- -------------------------------------------------------------------------------------------------------------------------------
Total non-interest bearing 137,270 108,348
- -------------------------------------------------------------------------------------------------------------------------------
Interest bearing:
NOW accounts 59,229 48,646
Money market accounts 37,424 39,350
Savings deposits 331,033 268,695
Time deposits of individuals, partnerships and corporations 265,035 247,722
States and political subdivisions 68,933 128,232
IRA's and Keogh's 59,716 61,795
- -------------------------------------------------------------------------------------------------------------------------------
Total interest bearing 821,370 794,440
- -------------------------------------------------------------------------------------------------------------------------------
Total deposits $958,640 $902,788
===============================================================================================================================
</TABLE>
Time deposits, including IRA's and Keogh's and time deposits of states and
political subdivisions, classified by time remaining to maturity for each of the
five years following December 31, 1998 are as follows:
- --------------------------------------------------------------------------------
(000's)
- --------------------------------------------------------------------------------
Less than 12 months $323,616
Over 12 months through 24 months 46,747
Over 24 months through 36 months 5,844
Over 36 months through 48 months 1,902
Over 48 months through 60 months 1,183
- --------------------------------------------------------------------------------
Total $379,292
================================================================================
At December 31, 1998 and 1997, certificates of deposits and other time
deposits of $100,000 or more totalled $121,874,000 and $176,272,000,
respectively. Certificates of deposit and other time deposits of $100,000 or
more include deposits of states and political subdivisions which are acquired on
a bid basis. The Banks generally do not acquire brokered deposits. At December
31, 1998, such deposits classified by time remaining to maturity were as
follows:
- --------------------------------------------------------------------------------
(000's)
- --------------------------------------------------------------------------------
3 months or less $ 77,497
Over 3 months through 6 months 20,118
Over 6 months through 12 months 15,831
Over 12 months 8,428
- --------------------------------------------------------------------------------
Total $121,874
================================================================================
37
<PAGE>
- --------------------------------------------------------------------------------
8. INCOME TAXES
The components of the provision for income taxes for the years ended
December 31, are as follows:
- --------------------------------------------------------------------------------
(000's)
1998 1997 1996
- --------------------------------------------------------------------------------
Federal:
Current $ 3,369 $ 5,721 $ 4,828
Deferred (1,182) (1,268) (862)
State:
Current 1,592 935 1,638
Deferred (407) (366) (504)
- --------------------------------------------------------------------------------
Total $ 3,372 $ 5,022 $ 5,100
================================================================================
The income tax provision includes income taxes related to net gains on
securities transactions of approximately $566,000, $466,000 and $353,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
The tax effects of temporary differences that give rise to the significant
portions of deferred tax assets at December 31, 1998 and 1997, are as follows:
- --------------------------------------------------------------------------------
(000's)
1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets, net:
Allowance for loan losses $3,776 $3,042
Deferred compensation and
benefit plan expenses 1,104 663
Deferred loan fees 822 492
Depreciation and other 257 118
- --------------------------------------------------------------------------------
Total deferred tax assets, net $5,959 $4,315
================================================================================
In addition to amounts in the above table, the Company recorded a deferred
tax liability of $1,433,000 in 1998 and $1,011,000 in 1997, relating to
available for sale securities valued at fair value in accordance with SFAS No.
115. Management believes it is more likely than not that the net deferred tax
assets will be realized.
The following is a reconciliation of the statutory Federal and effective tax
rates as a percentage of income before taxes for the years ended December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory Federal income tax rate 35.0% 35.0% 35.0%
Interest on obligations of states and political subdivisions (6.2) (5.8) (6.2)
State income taxes, net of Federal tax benefit 5.0 2.2 4.8
Liquidation of subsidiary (15.7) -- --
Merger related expenses 4.0 -- --
Other (0.2) (1.0) (0.4)
- ---------------------------------------------------------------------------------------------
Effective tax rate 21.9% 30.4% 33.2%
=============================================================================================
</TABLE>
Tarrytowns, as a thrift institution, is subject to special provisions of
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
accumulated after the base year.
At December 31, 1998, Tarrytowns' 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 for Federal tax purposes since the Company does not expect that such
amounts will become taxable in the foreseeable future. At December 31, 1998,
Tarrytowns' unrecognized deferred tax liability with respect to the Federal
base-year reserves was approximately $0.4 million. Under the tax law, as
amended, events that would result in taxation of these reserves include (i)
redemptions of Tarrytowns' stock or certain excess distributions,
38
<PAGE>
USB[LOGO]
- --------------------------------------------------------------------------------
(ii) failure of Tarrytowns to maintain a specified qualifying assets ratio or
meet other thrift definition tests for New York State tax purposes, and (iii) a
change in the tax law. As a result of the planned merger of Tarrytowns with and
into the Bank, the reserves for state purposes will become taxable. Accordingly,
a deferred tax liability of $0.6 million has been recorded as part of the merger
related expenses.
9. BORROWINGS AND LONG-TERM DEBT
The Company utilizes borrowings primarily to meet the funding requirements
for its asset growth and to manage its interest rate risk. Short-term borrowings
include securities sold under agreements to repurchase, Federal funds purchased,
and short-term Federal Home Loan Bank of New York ("FHLB") advances.
The Bank may borrow up to $50.0 million from two primary investment firms
under master security sale and repurchase agreements. In addition, the Bank and
Tarrytowns have the ability to borrow from the FHLB under similar master
security sale and repurchase agreements and, to a lesser extent, its customers.
Short-term securities sold under agreements to repurchase mature between one and
365 days. At December 31, 1998 and 1997, the Bank had $1.0 million and $34.9
million of such short-term borrowings outstanding, respectively, with terms of
365 days in 1998, and 21 to 31 days in 1997, and at interest rates of between
5.75 percent and 6.00 percent. The borrowings are collateralized by securities
with an aggregate amortized cost and fair value of $1.0 million and $1.0 million
in 1998, and $35.5 million and $35.6 million in 1997, respectively.
Federal funds purchased represent overnight funds. The Bank has Federal
funds purchase lines available with five financial institutions for a total of
$36.0 million. At December 31, 1998 and 1997, the Bank had no Federal funds
purchased balances outstanding.
Short-term FHLB advances are borrowings with original maturities of
between one and 365 days. At December 31, 1998, the Banks had no such borrowings
outstanding. At December 31, 1997, the Bank had short-term FHLB advances of
$35.0 million outstanding with terms of 14 to 365 days, and at interest rates
ranging from 6.00 percent to 6.13 percent.
Additional information with respect to short-term borrowings for the three
years ended December 31, 1998, 1997 and 1996 is presented in the following
table.
- --------------------------------------------------------------------------------
(000's, except percentages)
Short-Term Borrowings 1998 1997 1996
- --------------------------------------------------------------------------------
Balance at December 31 $ 1,000 $ 69,863 $ 34,425
Average balance outstanding 9,678 48,765 12,812
Weighted-average interest rate*
As of December 31 5.75% 6.05% 5.85%
Paid during year 6.07% 5.80% 5.67%
- --------------------------------------------------------------------------------
*The weighted-average interest rates have been adjusted to reflect the effect of
an interest rate swap used to convert a variable rate borrowing to a fixed rate
(See Note 16).
At December 31, 1998, long-term FHLB advances totalled $34.3 million,
compared with $24.2 million as of December 31, 1997. At December 31, 1998,
long-term FHLB advances aggregating $9.0 million are single principal payments
and may not be repaid prior to maturity without penalty. Long-term FHLB advances
aggregating $25.3 million are amortizing advances having scheduled payments,
that also may not be repaid in full prior to maturity without penalty.
The Banks also have long-term borrowings of $164.8 million and $39.7
million in securities sold under agreements to repurchase as of December 31,
1998 and 1997, respectively. At December 31, 1998, these borrowings include $9.8
million having an original term of three years at an interest rate of 6.08
percent, and $155.0 million having original terms of between five and ten years
at interest rates of between 4.13 percent and 5.67 percent that are callable at
the option of the counterparty to the repurchase agreements every three months
after five years from the initial date of the transaction. The borrowings are
collateralized by securities with an aggregate amortized cost and fair value of
$147.9 million and $149.5 million in 1998, respectively, and $41.5 million in
both aggregate amortized cost and fair value in 1997. Also, as of December 31,
1998, the Bank has pledged to the FHLB, in addition to the securities, certain
mortgage-related assets pertaining to a repurchase agreement borrowing of $20.0
million.
The Banks have an additional borrowing capacity of up to $355.0 million at
December 31, 1998 from the FHLB at various terms collateralized by FHLB stock
owned and to be purchased and certain other assets. The Bank may also borrow an
additional $40.2 million under its master security sale and repurchase
agreements and $36.0 million under overnight Federal funds lines.
At December 31, 1998 and 1997, the Company holds 178,485 and 146,664
shares, respectively, of capital stock in the FHLB
The following table is a summary of long-term debt distributed based upon
remaining contractual maturity at December 31, 1998, with comparative totals for
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(000's, except percentages)
After 1
Within But Within After 1998 1997 1996
1 Year 5 Years 5 Years Total Total Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total long-term debt - fixed rate advances $9,000 $33,767 $156,348 $199,115 $63,940 $25,267
Weighted-average interest rate 6.37% 5.56% 5.18% 5.30% 5.92% 6.20%
====================================================================================================================================
</TABLE>
39
<PAGE>
- --------------------------------------------------------------------------------
with a carrying value of $17.8 million and $14.7 million, respectively, which is
required in order to borrow under the short and long-term advances and
securities sold under agreements to repurchase programs from the FHLB. The Banks
may borrow up to an aggregate of 30 percent of total assets, excluding
securities sold under agreements to repurchase, upon the prerequisite purchase
of additional shares of FHLB stock. Any advances made from the FHLB are required
to be collateralized by the FHLB stock and certain other assets of the Banks.
10. CORPORATION-OBLIGATED MANDATORY REDEEMABLE CAPITAL SECURITIES OF SUBSIDIARY
TRUST
On February 5, 1997, the Company completed its issuance of trust capital
securities (the "Capital Securities") that raised $20 million of capital ($18.8
million net proceeds after issuance expenses). The 9.58% Capital Securities, due
February 1, 2027, were issued by the Trust, a Delaware business trust that was
formed by the Company solely to issue the Capital Securities and related common
stock, and advance the proceeds to the Company by purchasing junior subordinated
debt of the Company. The Capital Securities may not be redeemed, except under
limited circumstances, until February 1, 2007, and thereafter at a premium which
reduces over a ten year period. The Company may also reduce outstanding Capital
Securities through open market purchases. Dividends are paid semiannually, in
February and August.
The Capital Securities qualify as Tier I or core capital for the Company
under the Federal Reserve Board's risk-based capital guidelines. The proceeds of
the sale of the Capital Securities are available for general corporate purposes.
In February 1997, the Company made an additional capital contribution of $14.5
million to the Bank and also redeemed the Company's existing outstanding
preferred stock in the amount of $3,250,000 with a portion of the proceeds of
the Capital Securities. Payments on the junior subordinated debt, which are in
turn passed through the Trust to the Capital Securities holders, will be
serviced through existing liquidity and cash flow sources of the Company. The
Company will be permitted to deduct payments on the Capital Securities under
current Federal tax law.
As long as no default has occurred and is continuing, the Company has the
right under the junior subordinated indenture to defer the payment of interest
at any time or from time to time for a period not exceeding 10 consecutive
semiannual periods for any one extension (each such period an "Extension
Period"); provided, however, that no Extension Period may extend beyond the
stated maturity of the junior subordinated debt securities. During any Extension
Period, the Company may not (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire or make a liquidation payment with respect to,
any of the Company's capital stock (which includes common and preferred stock),
(ii) make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu
with or junior in interest to the junior subordinated debt securities, or (iii)
make any guarantee payments with respect to any guarantee by the Company of the
debt securities of any subsidiary of the Company if such guarantee ranks pari
passu with or junior in interest to the junior subordinated debt securities, in
each case subject to certain exceptions.
Pursuant to the terms of the documents governing the Company's junior
subordinated debt and the Capital Securities of the Trust, if the Company is in
default under such securities, the Company is prohibited from repurchasing or
making distributions, including dividends, on or with respect to its common or
preferred stock and from making payments on any debt or guarantees which rank
pari passu or junior to such securities.
In addition, under the terms of the indenture governing its junior
subordinated debt, the Company may not merge or consolidate with, or sell
substantially all of its assets to, any other corporation, person or entity
unless (a) the surviving corporation is a domestic corporation which expressly
assumes the Company's obligations with respect to the junior subordinated debt
and the Capital Securities and related documents, (b) there is no, and the
merger or other transaction would not cause a, default under the junior
subordinated debt, and (c) certain other conditions are met.
11. STOCKHOLDERS' EQUITY
The Company declared 10 percent stock dividends to shareholders of record
on December 7, 1998, and May 31, 1996, which were distributed on December 21,
1998 and June 14, 1996, respectively. In addition, the Company declared
two-for-one stock splits in the form of a 100% stock dividend to stockholders of
record on December 15, 1997 and December 13, 1996, which were distributed on
December 24, 1997 and December 30, 1996, respectively.
The weighted average shares outstanding and per share amounts have been
adjusted to reflect the stock dividends and splits, as well as the
pooling-of-interests acquisition of Tappan Zee.
During the third quarter of 1998 and fourth quarter of 1997, Realty Corp.
declared and paid dividends totaling $45,210 and $10,960, respectively, to its
non-affiliate minority-interest junior preferred shareholders.
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At the Company's annual meeting of shareholders held on May 20, 1998, an
amendment to the Company's Certificate of Incorporation was approved by the
shareholders of the Company. This amendment increased the authorized number of
shares of common stock from 20,000,000 to 30,000,000, and reduced the par value
of the common stock from $5.00 per share to $0.01 per share.
In accordance with regulatory requirements, Tarrytowns established a
liquidation account at the time of its conversion to a stock company
("Conversion") in the amount of $7.8 million, equal to its net worth at March
31, 1995. The liquidation account is maintained for the benefit of eligible
account holders who continue to maintain their accounts at Tarrytowns 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 Tarrytowns (or successor insured depository institution), 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 eligible accounts
then held.
The ability of the Company, the Bank and Tarrytowns to pay cash dividends
in the future is restricted by various regulatory requirements. The Company's
ability to pay cash dividends to its shareholders is primarily dependent upon
the receipt of dividends from the Bank and Tarrytowns. The Bank's dividends to
the Company 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, 1998, the Bank could
pay dividends to the Company of $27.6 million without having to obtain prior
regulatory approval.
Tarrytowns 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. The Office of Thrift Supervision ("OTS") capital distribution
regulations applicable to savings institutions (such as Tarrytowns) that meet
their regulatory capital requirements, generally limit dividend payments in any
year to 100% of year-to-date net income, plus the amount of its retained net
income for the preceding two years. At December 31, 1998, Tarrytowns could pay,
pursuant to the above regulations, dividends to the Company of $1.1 million.
The Company may not pay dividends on its common stock or preferred stock
if it is in default with respect to the Capital Securities or related junior
subordinated debt, or if the Company elects to defer payment for up to five
years as permitted under the terms of the Capital Securities and related junior
subordinated debt (See Note 10).
In December 1993, the Company implemented a Dividend Reinvestment Plan
("DRIP"). The DRIP allows stockholders to invest cash dividends in shares of the
Company's common stock at fair value. 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, 1998, 200,000 shares of
common stock are authorized for issuance in connection with the DRIP, of which
98,020 shares have been issued.
The dividend rate on the Company's Series "A" cumulative nonvoting
preferred stock issued to a single investor was determined quarterly and was
subject to certain minimum and maximum per annum dividend rates. The weighted
average dividend was at the minimum rate of 8.4 percent for 1997 and 1996. In
1996, $500,000 of the preferred stock was redeemed by the Company at stated
value. The Company redeemed the remaining outstanding amount of $3,250,000 of
preferred stock at stated value on February 14,1997.
The Company sold 100, 20,650 and 20,108 shares of treasury stock in 1998,
1997 and 1996, respectively. These shares were purchased by the Company's
Employee Stock Ownership Plan (With Code Section 401(k) Provisions) ("KSOP") and
the Bank's Key Employees' Supplemental Investment Plan ("KESIP") at fair value.
In addition, the Company purchased 73,606, 39,160 and 20,975 common shares at
fair value for the treasury in 1998, 1997 and 1996, respectively. The 1998
purchases were made in connection with stock option exercises. Common shares
totaling 55,135 purchased by Tappan Zee in 1997 and 1996 for the treasury were
retired in connection with the acquisition of Tappan Zee.
In connection with the Bank's KESIP, amounts deferred by participating
employees and contributed by the Bank are invested in Company stock. This
investment in Company stock of $0.7 million at December 31, 1998 and $1.4
million at December 31, 1997 is included in common stock held for benefit plans,
which is shown as a reduction of stockholders' equity. The related deferred
compensation obligation is also shown as a component of stockholders' equity
(See Note 17).
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12. REGULATORY MATTERS
The Company, the Bank and Tarrytowns are subject to various regulatory
capital requirements administered by the Federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and, also with respect to the Bank and Tarrytowns,
regulatory framework for prompt corrective action, the Company, Bank and
Tarrytowns must meet or exceed specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain off balance
sheet items, as calculated under regulatory accounting practices and as
presented in the table below. The Company's, Bank's and Tarrytowns' capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(000's, except percentages)
Minimum
Minimum To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
- ------------------------------------------------------------------------------------------------------------------------------
Company Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to Risk Weighted Assets) $124,102 16.12% $ 61,586 8.0% N/A N/A
Tier I Capital (to Risk Weighted Assets) 115,213 14.97% 30,793 4.0% N/A N/A
Tier I Capital (to Average Assets) 115,213 9.13% 50,500 4.0% N/A N/A
As of December 31, 1997
Total Capital (to Risk Weighted Assets) $112,635 16.47% $ 54,712 8.0% N/A N/A
Tier I Capital (to Risk Weighted Assets) 104,375 15.26% 27,356 4.0% N/A N/A
Tier I Capital (to Average Assets) 104,375 9.37% 44,540 4.0% N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
Bank
- ------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1998
Total Capital (to Risk Weighted Assets) $ 99,368 13.71% $ 57,999 8.0% $72,499 10.0%
Tier I Capital (to Risk Weighted Assets) 91,194 12.58% 29,000 4.0% 43,499 6.0%
Tier I Capital (to Average Assets) 91,194 8.14% 44,828 4.0% 56,035 5.0%
As of December 31, 1997
Total Capital (to Risk Weighted Assets) $ 87,166 13.55% $ 51,470 8.0% $64,337 10.0%
Tier I Capital (to Risk Weighted Assets) 79,471 12.35% 25,735 4.0% 38,602 6.0%
Tier I Capital (to Average Assets) 79,471 8.09% 39,295 4.0% 49,119 5.0%
- ------------------------------------------------------------------------------------------------------------------------------
Tarrytowns
- ------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1998
Total Capital (to Risk Weighted Assets) $ 21,309 45.89% $ 3,714 8.0% $ 4,643 10.0%
Tier I Capital (to Risk Weighted Assets) 20,727 44.64% 1,857 4.0% 2,786 6.0%
Core Capital (to Adjusted Tangible Assets) 20,727 13.05% 6,355 4.0% 7,943 5.0%
Tangible Capital (to Tangible Assets) 20,727 13.05% 2,383 1.5% N/A N/A
As of December 31, 1997
Total Capital (to Risk Weighted Assets) $ 17,793 44.60% $ 3,191 8.0% $ 3,989 10.0%
Tier I Capital (to Risk Weighted Assets) 17,292 43.30% 1,596 4.0% 2,394 6.0%
Core Capital (to Adjusted Tangible Assets) 17,292 13.80% 5,007 4.0% 6,259 5.0%
Tangible Capital (to Tangible Assets) 17,292 13.80% 1,878 1.5% N/A N/A
==============================================================================================================================
</TABLE>
N/A - Not Applicable
Capital ratios are computed excluding unrealized gains or losses on
available for sale securities, net of tax effect, which is included in the
"Accumulated other comprehensive income" component of stockholders' equity for
financial reporting purposes.
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Quantitative measures established by regulation to ensure capital adequacy
require the Company and Banks to maintain or exceed minimum capital amounts and
ratios as defined in the regulations, and set forth in the tables on page 42.
Management believes, as of December 31, 1998, that the Company and the Banks
meet all capital adequacy requirements to which it is subject, and are
considered well capitalized under regulatory guidelines.
As of December 31, 1998, the most recent notification from the FDIC
categorized the Bank and Tarrytowns as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed that category.
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
(000's, except share amounts)
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income $ 12,009 $ 11,499 $ 10,269
Less preferred stock dividends 45 45 294
- -------------------------------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings per share - net income available
to common stockholders $ 11,964 $ 11,454 $ 9,975
=========================================================================================================================
Denominator:
Denominator for basic earnings per share - weighted average shares 15,493,765 15,331,962 15,320,858
Effects of dilutive securities:
Director and employee stock options 1,046,025 1,279,759 780,288
Restricted stock not vested 10,446 17,161 12,985
- -------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted weighted average shares 16,550,236 16,628,882 16,114,131
=========================================================================================================================
Basic earnings per share $ 0.77 $ 0.75 $ 0.65
Diluted earnings per share $ 0.72 $ 0.69 $ 0.62
=========================================================================================================================
</TABLE>
Note 17 describes the Company's director and employee stock option and
recognition and retention plans.
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," as
amended by SFAS No. 119, "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments," requires disclosure of the estimated fair
values for certain financial instruments. The estimated fair values disclosed
below are as of December 31, 1998 and 1997, and have been determined by using
available market information and various valuation estimation methodologies.
Considerable judgment is required to interpret the effects on fair value of such
items as future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. The
estimates presented herein are not necessarily indicative of the amounts that
the Company would realize in a current market exchange. Also, the use of
different market assumptions and /or estimation methodologies may have a
material effect on the determination of the estimated fair values.
The fair value estimates presented below are based on pertinent
information available to the Company as of December 31, 1998 and 1997. Although
the Company is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued since December 31, 1998 and 1997, and therefore, current estimates of
fair value may differ significantly from the amounts presented below.
Fair value methods and assumptions are as follows:
Cash, Cash Equivalents and Other Short-Term Investments The carrying
amount is a reasonable estimate of fair value.
Securities and Accrued Interest Receivable- The fair value of securities
is estimated based on quoted market prices or dealer quotes, if available. If a
quote is not available, fair value is estimated using quoted market prices for
similar securities. Accrued interest is stated at its carrying amount.
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Loans, Loans Held for Sale and Accrued Interest Receivable - For certain
homogeneous fixed rate categories of loans, such as residential mortgages, fair
value is estimated using quoted market prices for securities backed by similar
loans. The fair value of other fixed rate loans has been estimated by
discounting projected cash flows using current rates for similar loans with
equivalent credit risk. For loans for which there has been no impairment in
credit risk and which reprice frequently to market rates, the carrying amount is
a reasonable estimate of fair value. The fair value of impaired and nonaccrual
loans is estimated by reducing such amounts by specific and general loan loss
allowances. Accrued interest is stated at its carrying amount.
Deposits Without Stated Maturities and Accrued Interest Payable - Under
SFAS No. 107, the estimated fair value of deposits with no stated maturity, such
as non-interest bearing demand deposits, NOW accounts, money market and savings
accounts, is equal to the amount payable on demand. Accrued interest payable, as
applicable, is stated at its carrying amount.
Time Deposits and Accrued Interest Payable - The fair value of
certificates of deposits is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered at the
reporting date for deposits of similar remaining maturities. Accrued interest
payable is stated at its carrying amount.
Securities Sold Under Agreements to Repurchase, FHLB Advances and
Corporation-Obligated Mandatory Redeemable Capital Securities of Subsidiary
Trust, and Accrued Interest Payable - The carrying amount is a reasonable
estimate of fair value for borrowings which are either short-term or for which
applicable interest rates reprice based upon changes in market rates. For medium
and long-term borrowings, fair value is based on discounted cash flow through
contractual maturity at rates currently offered at the balance sheet date for
similar terms. Accrued interest payable is stated at its carrying amount.
Financial Instruments with Off-Balance Sheet Risk - As described in Note
16, the Company is a party to financial instruments with off-balance sheet risk
at December 31, 1998 and 1997. Such financial instruments include commitments to
extend permanent financing and letters of credit. If the commitments are
exercised by the prospective borrowers, these financial instruments will become
interest-earning assets of the Company. If the commitments expire, the Company
retains any fees paid by the counterparty in order to obtain the commitment or
guarantee. The fair value of commitments is estimated based upon fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
For fixed rate commitments, the fair value estimation takes into consideration
an interest rate risk factor. The fair value of guarantees and letters of credit
is based on fees currently charged for similar agreements. The fair value of
these off-balance sheet items at December 31, 1998 and 1997, respectively,
approximates the recorded amounts of the related fees, which are not material to
the consolidated financial position of the Company. The Company also has
off-balance sheet interest rate contracts which are further described in Note
16. The fair value of these contracts is not material at December 31, 1998 and
1997.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
As of December 31,
1998 1997
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------------------
Assets: (In millions)
<S> <C> <C> <C> <C>
Cash, cash equivalents and other
short-term investments $ 71.0 $ 71.0 $ 54.8 $ 54.8
Securities and accrued interest receivable 449.4 452.7 443.3 446.5
Loans, loans held for sale and accrued interest
receivable 726.7 740.3 617.7 622.3
Liabilities:
Deposits without stated maturities and accrued
interest payable 579.6 579.6 473.1 473.1
Time deposits and accrued interest payable 381.3 382.9 432.1 432.9
Securities sold under agreements to repurchase
and accrued interest payable 167.0 171.6 74.9 76.3
FHLB advances and accrued interest payable 34.5 34.6 59.3 60.7
Corporation - Obligated mandatory redeemable
capital securities of subsidiary trust and accrued
interest payable 20.8 23.0 20.8 22.6
=================================================================================================================================
</TABLE>
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15. RELATED PARTY TRANSACTIONS
A summary of the transactions for the year ended December 31, 1998, with
respect to loans (in excess of $60,000 with respect to each party) to directors,
senior executive officers, stockholders or companies in which they had a 10
percent or more beneficial interest is as follows:
- --------------------------------------------------------------------------------
(000's)
- --------------------------------------------------------------------------------
Balance, December 31, 1997 $1,978
New loans 200
Borrowers no longer considered
to be related parties (1,292)
Repayments (38)
- --------------------------------------------------------------------------------
Balance, December 31, 1998 $848
================================================================================
The Company has made payments to organizations in which certain directors
have a beneficial interest for services rendered by such organizations. Such
payments are not considered to be material in the aggregate.
16. COMMITMENTS AND CONTINGENCIES
At December 31, 1998, the Company and Bank are committed under employment
agreements with the Chairman, President and Chief Executive Officer ("CEO"),
Senior Executive Vice President and Chief Lending Officer and Senior Executive
Vice President and Chief Financial Officer requiring an annual salary of
$560,000, $160,000 and $160,000, respectively; annual bonus payments equal to
six, one and one percent of net income (as defined) of the Company,
respectively, under the Executive Incentive Bonus Plan; and annual stock option
grants of 106,480 shares, 39,930 shares and 39,930 shares, respectively, issued
at fair value (110 percent of fair value for incentive stock options if the key
officer's ownership of the Company equals or exceeds 10 percent at the date of
grant); and other benefits for the term of the agreements. The CEO's employment
agreement is for a five year term, expiring November 16, 2003, while the Senior
Executive Vice Presidents' agreements are for three year terms, expiring
November 16, 2001.
The CEO's contract also requires minimum annual salary increases of
$30,000. All of the agreements include change in control provisions, requiring
certain payments, including three times annual salary and average bonus payments
(as defined), in the event of a voluntary or involuntary termination connected
with a change in control.
At December 31, 1998, Tarrytowns is committed under an employment
agreement and consulting agreement with an Executive Vice President of
Tarrytowns and the former President of Tarrytowns, respectively. Under the
employment agreement, Tarrytowns will make payments of $165,000 per year for
services to be performed for a period of three years. Under the consulting
agreement, payments of $77,000 per year for services to be performed will be
made for a period of three years. Both agreements were effective as of August
31,1998. Payments under these agreements accelerate in the event of a change in
control of the Company. Tarrytowns is also committed under employment agreements
with four other employees. Under the terms of the agreements, payments
aggregating $122,000 are required for the remaining term of employment.
In the normal course of business, various commitments to extend credit are
made which are not reflected in the accompanying Consolidated Financial
Statements. At December 31, 1998 and 1997, formal credit line and loan
commitments, which are primarily loans collateralized by real estate and credit
card lines approximated $204.6 million and $154.8 million, and outstanding
letters of credit totalled $25.3 million and $24.3 million, respectively. Such
amounts represent the maximum risk of loss on these commitments.
During 1997 and 1996, the Bank, which is an approved Federal Home Loan
Mortgage Corporation ("FHLMC") seller/servicer, sold mortgage loans to FHLMC,
with net proceeds totalling $1.1 million and $0.6 million, respectively. The
Bank did not sell mortgage loans to FHLMC during 1998. At December 31, 1998, the
principal balance of the loans sold and exchanged which remain uncollected
totalled $57.6 million. The Bank is committed to service these loans.
In connection with its asset and liability management program, the Bank
entered into a protected rate agreement ("cap") which has a remaining aggregate
notional amount of $2.0 million at December 31, 1998 ($2.5 million at December
31, 1997). The premium paid in the amount of $85,000 was deferred and is being
amortized over the five year life of the cap which expires in 1999. Under the
terms of the cap, the Bank will be reimbursed for increases in one-month LIBOR
for any month during the term of the agreement in which such rate exceeds the
"strike level" of 8.1875%. Interest rate cap agreements allow the Bank to limit
its exposure to unfavorable interest rate fluctuations over and above the
"capped" rate. The purchased cap hedges income payments from mortgage-backed
securities with floating interest rates that are subject to a lifetime cap. The
Bank was also party to an interest rate swap contract, which effectively
adjusted the short-term interest rate on a security sold under agreement to
repurchase borrowing to a long-term fixed interest rate. Under the terms of the
contract, the Bank was required to pay a fixed interest rate payment equal to
6.16% of a notional amount of $10.0 million, and received a payment equal to
three-month LIBOR. The agreement expired on October 2, 1998. These agreements
are subject to the counterparty's ability to perform in accordance with
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the terms of the agreement. The Company's risk of loss on the interest rate cap
is equal to the unamortized premium paid to enter into this agreement, while the
risk of loss on the interest rate swap was the fair value amount to be paid to
terminate the contract.
The Company, from time to time, enters into forward commitments to sell
residential first mortgage loans to reduce market risk associated with
originating and holding loans for sale. A risk associated with these commitments
arises from the Company's potential inability to generate loans to fulfill the
contracts. To control the risk associated with changes in interest rates, the
Company may also use options to hedge loans closed and expected to close. No
such contracts were outstanding at December 31, 1998 and 1997.
In the ordinary course of business, the Company is party to various legal
proceedings, none of which, in the opinion of management, will have a material
effect on the Company's consolidated financial position or results of
operations.
The Banks are required to report deposits directly to the Federal Reserve
and to maintain reserves on a portion of these deposits. At December 31, 1998,
the reserve requirement for the Banks totalled $3.3 million.
17. EMPLOYEE BENEFIT PLANS
Executive Incentive Bonus Plan
The Company provides an Executive Incentive Bonus Plan whereby certain key
officers of the Company and/or the Bank (two of whom are directors and
shareholders at December 31, 1998) are entitled to compensation in addition to
their salaries at varying percentages of the Company's or Bank's net income (as
defined). The total amount of such additional compensation cannot exceed 15
percent of the Company's net income (as defined) in any year. During 1998, 1997
and 1996, such additional compensation aggregated $1,694,000, $1,166,000, and
$989,000, respectively.
Employee Stock Ownership Plan (With Code Section 401(k) Provisions)
The Company maintains for the benefit of its employees an Employee Stock
Ownership Plan (With Code Section 401(k) Provisions). Under the Employee Stock
Ownership feature, covering substantially all of the Company's full-time
employees, the annual contribution determined by the Board of Directors,
intended to be invested primarily in the Company's common stock, was $240,000,
$240,000 and $180,000, for the years ended December 31, 1998, 1997 and 1996,
respectively. The 401(k) feature of the KSOP allows eligible employees of the
Company and its affiliates to elect either to invest their voluntary
contributions in a fund which purchases common stock of the Company or in six
other investment funds. Employees may elect to defer, through voluntary
contributions, up to fifteen percent of compensation ($10,000 maximum), and the
Company can elect to match fifty percent of the employee's voluntary
contributions up to a maximum of four percent of the employee's compensation.
Employer matching contributions for the years ended December 31,1998, 1997 and
1996, aggregated $289,000, $254,000 and $200,000, respectively.
Tarrytowns also has an Employee Stock Ownership Plan (the "ESOP") for
eligible Tarrytowns employees, which has been assumed by the Company. In 1995,
the ESOP borrowed approximately $1.3 million from Tarrytowns and used the funds
to purchase 159,667 shares of Company common stock. Tarrytowns makes monthly
contributions to the ESOP sufficient to fund the debt service requirements over
the ten year term of the loan.
The 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 18,011 and 18,915 at December 31, 1998 and 1997,
respectively. Expense recognized with respect to such shares amounted to
$198,000 and $274,000 for the years ended December 31, 1998 and 1997,
respectively, based on the average fair value of company common stock for each
period. The cost of the 97,875 shares which have not yet been committed to be
released to participant accounts at December 31, 1998 is reflected as a
reduction of stockholders' equity in the amount of $794,000. The fair value of
these shares was approximately $1.7 million at that date.
Key Employees' Supplemental Investment Plans
The Bank maintains a Key Employees' Supplemental Investment Plan. The
KESIP was established solely for the purpose of providing, to certain key
management personnel who participate in the KSOP, benefits attributable to
contribution allocations which would otherwise be made under the KSOP but for
Internal Revenue Service ("IRS") limitations.
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Under the KESIP, salary reduction contributions may be made in excess of the
limitations on annual contributions imposed by the Internal Revenue Code Section
415, and the Bank may elect to match fifty percent of the employee's voluntary
contribution under the KESIP up to a maximum of 4 percent of compensation (less
the amount of the employer matching contribution under the KSOP). The Bank may
also contribute an amount equivalent to the ESOP (optional) contribution that
would otherwise have been made to participating employees in the KSOP had it not
been for IRS limitations. The Bank's matching and optional contributions under
the KESIP for the years ended December 31, 1998, 1997 and 1996 was $14,000,
$105,000 and $41,000, respectively.
Effective September 1, 1998, the Bank amended its KESIP as a result of
changes in accounting required by Emerging Issues Task Force Consensus No. 97-
14, "Accounting for Deferred Compensation Arrangements Where Amounts Earned are
in a Rabbi Trust and Invested" ("EITF Consensus No. 97-14"), which prescribes
accounting for deferred compensation plans in which investments are made in
company stock. The amendment revises the KESIP so that all compensation deferred
into this plan is immediately invested in whole shares of Company stock. In
addition, distributions from the KESIP will now only be made in Company stock.
As a result of the amendment to the KESIP and application of EITF Consensus No.
97-14, the accounting for the KESIP resulted in a revaluation of the deferred
compensation obligation and the shares held in trust for deferred compensation
to reflect the obligation and shares held in trust at their historical cost. In
addition, in accordance with EITF Consensus No. 97-14, the deferred compensation
obligation and shares held in trust for deferred compensation (which is included
in common stock held for benefit plans) are included as components of
stockholders' equity.
In 1998, the Bank also established a Key Employees Supplemental
Diversified Investment Plan ("KESDIP"). The KESDIP is similar in terms to the
KESIP, except that investments made by the KESDIP trust may be in diversified
assets and are not limited to Company stock. The Bank's matching and optional
contributions (which are reduced to the extent of contributions made to the KSOP
and KESIP) under the KESDIP for the year ended December 31,1998 was $71,000.
STOCK OPTION PLANS
The Company provides fixed stock option plans to the Company's Board of
Directors, Tarrytowns' Board of Directors and certain employees, which are
described below, for the purchase of Company common stock at prices at least
equal to the fair market value of the Company's common stock on the date of
grant. As discussed in Note 3, the Company has elected to continue to report
compensation expense from stock options under APB No. 25, and to provide pro
forma disclosures of compensation expense measured by the fair value based
method as defined by SFAS No. 123.
Pro forma information on the Company's net income and basic and diluted
earnings per share, as required by SFAS No. 123, has been determined as if the
Company had accounted for its stock options under the fair value method of that
standard. The fair value for these options was estimated at the date of grant
using a Black-Scholes option-pricing model and is recognized over the options'
vesting period. The following table compares the Company's net income and basic
and diluted earnings per share, as reported, to the pro forma results as if the
fair value method of accounting for options prescribed by SFAS No. 123 had been
applied for the years ended December 31, 1998, 1997 and 1996. The effect on pro
forma net income may not be representative of compensation expense for future
years when the impact of the amortization of multiple option grants would be
reflected in the pro forma disclosures.
- ----------------------------------------------------------------------------
(000's, except share data)
Year Ended December 31,
1998 1997 1996
- ----------------------------------------------------------------------------
Net income As reported $12,009 $11,499 $10,269
Pro forma 10,236 10,041 9,669
Basic earnings As reported $ 0.77 $ 0.75 $ 0.65
per share Pro forma 0.66 0.65 0.61
Diluted earnings As reported $ 0.72 $ 0.69 $ 0.62
per share Pro forma 0.62 0.60 0.58
============================================================================
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Director Stock Option Plan
In 1989 and 1998, the stockholders of the Company approved Director Stock
Option Plans (the "Director Plans") for an aggregate of 694,093 and 440,000
shares (after adjustment for stock splits and dividends), respectively, of the
Company's common stock to be issued to all non-employee members of the Company's
Board of Directors. Under the terms of the 1998 Director Plan, each eligible
director will automatically receive, effective as of the close of each annual
meeting of stockholders of the Company, a non-qualified option (after adjustment
for stock splits and stock dividends) to purchase 18,634 shares of common stock
at an exercise price equal to the fair market value of such shares on the date
of the grant. The 1998 Director Plan has a term of ten years. Final awards under
the 1989 Director Plan were made, effective with approval of the 1998 Director
Plan. Options may not be exercised prior to the first anniversary of the date of
grant and expire ten years after the date of grant. There were 440,000 shares
remaining to be granted at December 31, 1998 under the 1998 Director Plan.
Under the Tappan Zee Directors' Stock Option Plan (the "Tappan Zee
Directors Plan"), which was assumed by the Company, 59,875 shares of authorized
but unissued Company stock were reserved for issuance to outside Directors for
option exercises. Option terms and conditions are similar to those under the
Tappan Zee Stock Option Plan (see Employee Stock Option Plans below), except
that all director options are "non-qualified" options. There have been 49,896
options issued under this plan. Upon the change in control which resulted upon
the acquisition of Tappan Zee by the Company, all options under this plan became
vested. There are 9,979 shares available for future grant under this plan.
- --------------------------------------------------------------------------------
A summary of the Director Plans and the Tappan Zee Directors Plan activity
and related information for the years ended December 31, 1998, 1997 and 1996,
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 486,097 $ 6.71 414,945 $ 4.88 271,879 $ 3.53
Granted 93,170 18.86 93,170 13.78 143,066 7.46
Exercised 43,892 2.08 22,018 2.18 -- --
- --------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31 535,375 $ 9.21 486,097 $ 6.71 414,945 $ 4.88
- --------------------------------------------------------------------------------------------------------------------------
Exercisable at December 31 442,205 $ 7.17 353,011 $ 4.54 271,879 $ 3.53
Weighted-average fair value of
options granted during the year $ 7.48 $ 5.48 $ 2.10
==========================================================================================================================
</TABLE>
The fair value of each option grant is estimated on the date of grant
using a Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend
yields of 1.40 percent for all three years; volatility factors of the expected
market price of the Company's common stock of 35.93, 33.62 and 26.10 percent;
risk free interest rates of 5.67, 6.58 and 6.89 percent; and expected lives of
6.28, 6.28 and 6.76 years.
- --------------------------------------------------------------------------------
The following table summarizes the range of exercise prices on stock
options outstanding and exercisable for the Director Plans and the Tappan Zee
Directors Plan at December 31, 1998:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.87 to $9.44 349,035 6.22 years $ 5.41 349,035 $ 5.41
13.78 to 18.86 186,340 8.92 years 16.32 93,170 18.70
- ---------------------------------------------------------------------------------------------------------------------------------
$1.87 to $18.86 535,375 7.16 years $ 9.21 442,205 $ 7.17
=================================================================================================================================
</TABLE>
48
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Employee Stock Option Plans
Under the 1984 and 1993 Incentive Stock Option Plans and the 1997 Employee
Stock Option Plan for key employees of the Company and its subsidiaries, and the
Tappan Zee Stock Option Plan, which was assumed by the Company, (the "Employee
Stock Option Plans"), options for the issuance of both incentive and
nonqualified stock options up to an aggregate of 3,496,801 shares (after
adjustment for stocks splits and stock dividends) were authorized for grant at
prices at least equal to the fair market value of the Company's common stock at
the time the options are granted (for incentive stock options, 110 percent of
fair value, for grants to an employee who, at the time of the grant, owns stock
aggregating 10 percent or more of the combined voting power of all classes of
stock of the Company).
For the 1984 and 1993 Incentive Stock Option Plans and the 1997 Employee
Stock Option Plan, each option holder may exercise up to 50 percent of his or
her options after a three month period subsequent to the grant date and may
exercise the remaining 50 percent six months after the grant date. The options
granted have a maximum exercisable term of ten years from the date of grant,
(not more than five years in the case of incentive stock options granted to an
employee who, at the time of grant, owns stock aggregating 10 percent or more of
the total combined voting power of all classes of stock of the Company). The
option shares and related prices are adjusted for stock splits and stock
dividends. Shares totalling 436,722 have been granted under the 1997 Employee
Stock Option Plan, and 883,278 shares remain available for grant under this
plan. No additional shares will be granted under the 1984 and 1993 Incentive
Stock Option Plans.
Options under the Tappan Zee Plan 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 Tappan Zee or Tarrytowns, or upon the
death, disability or retirement of the option holder. Upon the acquisition of
Tappan Zee by the Company, all options became exercisable, except for 59,875
unvested options held by the Executive Vice President and former President
pursuant to the terms of certain employment and consulting agreements. These
options will vest according to their original terms. At December 31, 1998,
shares available for future grants totaled 39,916 for the Tappan Zee Stock
Option Plan.
The fair value of each option grant is estimated on the date of grant
using a Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend
yields of 1.40 percent for all three years; volatility factors of the expected
market price of the Company's common stock of 36.63, 33.20, and 25.77 percent;
risk-free interest rates of 5.56, 6.38 and 6.82 percent; and expected lives of
5.98, 6.05 and 6.56 years.
- --------------------------------------------------------------------------------
A summary of the Employee Stock Option Plans' activity and related
information for the years ended December 31, 1998, 1997and 1996, follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 1,733,220 $ 6.06 1,476,616 $ 4.27 1,111,706 $3.24
Granted 295,115 18.54 279,268 15.21 379,060 7.22
Exercised 503,533 4.52 22,664 1.83 14,150 2.22
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31 1,524,802 $ 8.99 1,733,220 $ 6.06 1,476,616 $4.27
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable at December 31 1,426,970 $ 8.78 1,653,386 $ 5.90 1,376,824 $3.90
Weighted-average fair value of
options granted during the year $7.26 $5.81 $2.33
====================================================================================================================================
</TABLE>
The following table summarizes the range of exercise prices on stock
options outstanding and exercisable under the Employee Stock Option Plans at
December 31, 1998:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.95 to $9.44 990,349 4.34 years $ 4.64 930,474 $ 4.33
15.17 to 20.75 534,453 9.02 years 17.05 496,496 17.12
- ------------------------------------------------------------------------------------------------------------------------------------
$1.95 to $20.75 1,524,802 5.98 years $ 8.99 1,426,970 $ 8.78
====================================================================================================================================
</TABLE>
49
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Recognition and Retention Plans ("RRP Plans")
In 1996, the shareholders of Tappan Zee 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"), both of which have been assumed by the
Company. The purpose of the RRP Plans is to provide officers and non-employee
directors of Tarrytowns with a proprietary interest in the Company in a manner
designed to encourage their retention. Total shares authorized are 55,883 for
the Employees Plan and 23,950 for the Directors Plan.
Effective July 10, 1996, initial stock awards were made under the
Employees' Plan and the Directors' Plan for 39,916 shares and 23,950 shares,
respectively. An additional grant of 1,232 shares was made under the Employees
Plan in 1997. These awards vest ratably over five years from the date of grant;
however, immediate vesting occurs upon a change in control of Tappan Zee or
Tarrytowns, or upon the death, disability or retirement of the participant. Upon
acquisition of Tappan Zee by the Company, 15,110 shares were immediately vested.
Shares awarded to the Executive Vice President and former President aggregating
23,950 were not vested pursuant to the terms of certain employment and
consulting agreements. These shares will vest over the original five year
vesting period. The fair value of the shares awarded under the plans totaled
$616,000 at the grant dates. The remaining recorded value of the shares not yet
vested of $159,000 is being amortized to compensation expense on a straight-line
basis over the five-year vesting period. Compensation expense of $243,000 and
$123,000 was recognized during the years ended December 31, 1998 and 1997,
respectively, of which $166,000 is included in merger related expenses as a
result of acceleration of vesting attributable to the Tappan Zee acquisition in
1998.
Pension Plans
All of Tarrytowns' eligible employees are included in a noncontributory,
multiple-employer defined benefit pension plan (the "Employee Pension Plan").
The annual contributions to the Employee Pension Plan are based on actuarially
determined funding requirements. On September 1, 1998, Tarrytowns elected to
terminate the Employee Pension Plan and benefits under the Employee Pension Plan
were frozen as of October 1, 1998. At December 31, 1998, the estimated
accumulated benefit obligation is $1.1 million and Employee Pension Plan assets
totaled $1.0 million. An additional accrual of $0.4 million was made during the
year ended December 31, 1998 to provide for additional contributions that will
be required to fully fund the Employee Pension Plan for purposes of its
termination and planned distributions of vested amounts to participants. The
actuarial present values of the accumulated benefit obligation is based on a
discount rate of 5.16 percent . Employee Pension Plan expense for the years
ended December 31, 1998 and 1997 was $416,000 and $38,000, respectively. (All of
which is included in merger related expenses.)
Tarrytowns has a retirement plan for directors, which is a nonqualified
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 below. 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 Tarrytowns) 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 is not significant. This plan was terminated
effective August 31, 1998, benefits were frozen at that date and vested benefits
were paid to participants in November 1998.
Deferred Compensation Plan
Tarrytowns has a nonqualified Deferred Compensation Plan for Directors.
Under the Deferred Compensation Plan, directors may defer all or part of their
compensation (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 Tarrytowns 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
Tappan Zee or Tarrytowns, which occurred upon the acquisition of Tappan Zee by
the Company, the plan required full funding of any previously purchased life
insurance contracts. However, the Board of Directors of Tarrytowns waived this
requirement. The Company has established a trust fund with an independent
fiduciary for the purpose of accumulating funds to be used to satisfy its
obligations under this plan.
The accumulated projected benefit obligation of the Deferred Compensation
Plan aggregated $1.2 million at December 31, 1998. An accrual of $0.4 million
was recorded during the year ended December 31, 1998, to provide for the full
present value obligation of this plan. The present value of
50
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the accumulated projected benefit obligation is based on a discount rate of
6.0%.
For financial reporting purposes, the cash surrender value of the life
insurance contracts are not considered plan assets but, instead are included in
the Company's Consolidated Statement of Condition. At December 31, 1998 and
1997, the cash surrender values of purchased life insurance policies were
approximately $331,000 and $321,000, respectively. The total death benefits
payable under the insurance policies amounted to approximately $972,000 at
December 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.
Postretirement Health Care Benefits
Substantially all Tarrytowns employees were eligible for postretirement
health care (medical and dental) benefits if they met certain age and length of
service requirements. This plan was terminated on September 1, 1998, and only
employees vested on that date will continue to receive benefits under this plan.
A liability of $0.2 million has been recorded to provide for the present value
of future obligations under this plan.
The Bank also has established a Postretirement Health Care Plan. Under this
plan, eligible retirees are entitled to participate in the Bank's group health
care plan but are responsible for premium payments.
18. DISSOLUTION OF U.S.B. REALTY CORP.
On April 16, 1998, the Company announced that it intended to dissolve the
Bank's Real Estate Investment Trust subsidiary, Realty Corp., in a tax free
liquidation. A proxy statement was mailed to the common and junior preferred
shareholders of Realty Corp., and a special meeting was held on April 29, 1998,
at which time the shareholders of Realty Corp. approved the proposal. The
Company believes that dissolution of Realty Corp. makes assets previously owned
by Realty Corp. more readily available for collateralization of Bank borrowings
and will result in a reduction of the cost of administration. The dissolution of
Realty Corp. was completed on October 29, 1998.
Dissolution of Realty Corp. has decreased the effective tax rate for the
Company's 1998 tax provision, but may increase the effective tax rate in future
years. For the year ended December 31, 1998, net income includes a reduction of
tax expense, net of associated expenses, of $1.9 million resulting from
liquidating distributions of earnings from Realty Corp.
19. SEGMENT INFORMATION
The Company has one reportable segment, "Community Banking." All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the others.
For example, commercial lending is dependent upon the ability of the Banks to
fund themselves with retail deposits and other borrowings and to manage interest
rate and credit risk. This situation is also similar for consumer and
residential mortgage lending. Accordingly, all significant operating decisions
are based upon analysis of the Company as one operating segment or unit.
General information required by SFAS No. 131 is disclosed in the
Consolidated Financial Statements and accompanying notes. The Company operates
only in the U.S. domestic market, specifically the lower Hudson Valley, which
includes the counties of Rockland, Westchester, Orange, Putnam and Dutchess, New
York, as well as New York City and Long Island, New York, northern New Jersey
and southern Connecticut. For the years ended December 31, 1998, 1997 and 1996,
there is no customer that accounted for more than 10% of the Company's revenue.
51
<PAGE>
- --------------------------------------------------------------------------------
20. CONDENSED FINANCIAL INFORMATION OF U.S.B.HOLDING CO., INC. (PARENT COMPANY
ONLY)
Condensed statements of condition are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
(000's)
Year Ended December 31,
1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,461 $ 4,206
Securities available for sale (at estimated fair value) 136 78
Investment in common stock of subsidiaries 114,186 99,506
Other assets 4,054 3,766
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $120,837 $107,556
==========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 3,398 $ 1,678
Corporation - Obligated mandatory redeemable
capital securities of subsidiary trust 20,000 20,000
Stockholders' equity 97,439 85,878
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $120,837 $107,556
==========================================================================================================================
</TABLE>
Condensed statements of income are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(000's)
Year Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries $ 4,400 $ 4,900 $ 2,110
Gain on sale of available for sale securities -- -- 41
Net gain on sale of branch facility -- -- 600
Other income 173 204 397
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 4,573 5,104 3,148
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Interest on Corporation - Obligated mandatory redeemable capital
securities of subsidiary trust 1,952 1,771 --
Other expenses 712 755 580
Merger related expenses 2,759 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 5,423 2,526 580
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in undistributed income of subsidiaries
and provision (benefit) for income taxes (850) 2,578 2,568
Equity in undistributed income of subsidiaries 11,710 9,005 7,998
Provision (benefit) for income taxes (1,149) 84 297
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 12,009 $11,499 $10,269
====================================================================================================================================
</TABLE>
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Condensed statements of cash flow are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(000's)
Year Ended December 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 12,009 $ 11,499 $ 10,269
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Gain on sale of available for sale securities -- -- (41)
Net gain on sale of branch facility -- -- (600)
Merger expenses not yet paid 997 -- --
Equity in undistributed income of subsidiaries (11,710) (9,005) (7,998)
Tappan Zee fiscal year conversion (334) -- --
Other - net 1,129 (820) (1,764)
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 2,091 1,674 (134)
- -----------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from sale of available for sale securities -- -- 59
Purchase of available for sale securities (2,622) (15) (59)
Capital Contribution of available for sale securities to
subsidiary 2,557 -- --
Proceeds from principal payments available for sale securities 7 -- --
Proceeds from sale of branch facility -- -- 900
Net increase in investment in subsidiary (2,572) (15,600) --
Other - net -- -- 12
- -----------------------------------------------------------------------------------------------------
Net cash (used for) provided by investing activities (2,630) (15,615) 912
- -----------------------------------------------------------------------------------------------------
Financing activities:
Dividends paid - Common (3,447) (2,749) (2,129)
- Preferred -- (34) (294)
Net proceeds from issuance of Corporation - Obligated
mandatory redeemable capital securities of subsidiary trust -- 18,810 --
Redemption of preferred stock -- (3,250) (500)
Purchase of common stock to fund awards under RRPs -- -- (714)
Net proceeds from issuances of common stock and tax benefit
of stock options 3,598 231 19
Proceeds from sale of treasury stock 1 469 440
Purchase of treasury stock (1,358) (1,095) (1,070)
- -----------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (1,206) 12,382 (4,248)
- -----------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (1,745) (1,559) (3,470)
Cash and cash equivalents at beginning of year 4,206 5,765 9,235
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,461 $ 4,206 $ 5,765
=====================================================================================================
</TABLE>
53
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Independent Auditors' Report
USB[LOGO]
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Deloitte &
Touche
- ----------
[LOGO]
To the Board of Directors and Stockholders
U.S.B. Holding Co., Inc.
We have audited the accompanying consolidated statements of condition of U.S.B.
Holding Co., Inc. and its subsidiaries (the "Company") as of December 31, 1998
and 1997 and the related consolidated statements of income, comprehensive
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31,1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated
financial statements give retroactive effect to the merger of Tappan Zee
Financial, Inc. into the Company, which has been accounted for as a
pooling-of-interests as described in Note 2 to the consolidated financial
statements. We did not audit the consolidated balance sheet of Tappan Zee
Financial, Inc. as of March 31, 1998, or the related consolidated statements of
income, stockholders' equity and cash flows of Tappan Zee Financial, Inc. for
each of the two years in the period ended March 31, 1998, which statements
reflect total assets of $129.3 million as of March 31,1998 and net interest
income of $4.7 million, and $4.5 million for the years ended March 31, 1998 and
1997, respectively. Those statements were audited by other auditors whose
unqualified report dated April 28, 1998, has been furnished to us, and our
opinion insofar as it relates to the amounts included for Tappan Zee Financial,
Inc. and subsidiaries in the 1997 and 1996 consolidated financial statements of
U.S.B. Holding Co., Inc. and its subsidiaries is based solely on the report of
such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of U.S.B. Holding Co., Inc. and its
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
January 28, 1999
Stamford, Connecticut
54
<PAGE>
1998 Management Report
USB[LOGO]
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January 28, 1999
To the Stockholders
U.S.B. Holding Co., Inc.
U.S.B. Holding Co., Inc. (the "Company") is responsible for the preparation,
integrity, and fair presentation of its published financial statements as of
December 31, 1998 and for the year then ended, which include the consolidated
financial statements of its wholly-owned commercial bank subsidiary, Union State
Bank and subsidiaries (the "Bank"). The consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and,
as such, include amounts based on informed judgments and estimates made by
management.
The consolidated financial statements have been audited by an independent
accounting firm, Deloitte & Touche LLP, which was given unrestricted access to
management and personnel, and to all financial records and related data,
including minutes of all meetings of stockholders, the Board of Directors, and
committees of the Board. Management believes that all representations made to
the independent auditors during their audit were valid and appropriate. The
independent auditors' report is presented on page 54.
Internal Control
Management is responsible for establishing and maintaining internal control over
the preparation of its published financial statements. The Company's internal
control is intended to provide reasonable assurance to the Company's Board of
Directors and management regarding the preparation of financial statements in
conformity with generally accepted accounting principles, and for the Bank, also
in conformity with the Federal Financial Institutions Examination Council
instructions for Consolidated Reports of Condition and Income ("Call Report
Instructions").
There are inherent limitations in the effectiveness of internal control,
including the possibility of human error and the circumvention or overriding of
controls. Accordingly, even effective internal control can provide only
reasonable assurance with respect to financial statement preparation. Further,
because of changes in conditions, the effectiveness of internal control may vary
over time.
Management assessed the Bank's internal control over financial reporting,
including safeguarding of assets, presented in conformity with both generally
accepted accounting principles and the Call Report Instructions as of December
31, 1998. This assessment was based on criteria for effective internal control
over financial reporting, including safeguarding of assets, described in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that the Bank maintained effective internal control over financial
reporting, including safeguarding of assets, presented in conformity with both
generally accepted accounting principles and the Call Report Instructions as of
December 31,1998.
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Compliance with Laws and Regulations
Management is also responsible for ensuring compliance with the federal laws and
regulations concerning loans to insiders and the federal and state laws and
regulations concerning dividend restrictions, both of which are designated by
the FDIC as safety and soundness laws and regulations.
Management assessed its compliance with those designated safety and soundness
laws and regulations and has maintained records of its determinations and
assessments as required by the FDIC. Based on this assessment, management
believes that the Company's insured depository bank subsidiary, Union State
Bank, has complied, in all material respects, with the designated safety and
soundness laws and regulations referred to above for the year ended December 31,
1998.
/s/ Thomas E. Hales /s/ Steven T. Sabatini
Thomas E. Hales Steven T. Sabatini
Chairman, President and Senior Executive
Chief Executive Officer Vice President and
Chief Financial Officer
56
<PAGE>
Independent Accountants' Report
USB[LOGO]
- --------------------------------------------------------------------------------
Deloitte &
Touche
- ----------
[LOGO]
To the Board of Directors
Union State Bank
We have examined management's assertion that, as of December 31, 1998, Union
State Bank and subsidiaries (the "Bank") maintained effective internal control
over financial reporting, including safeguarding of assets, presented in
conformity with both generally accepted accounting principles and Federal
Financial Institutions Examination Council Instructions for Consolidated Reports
of Condition and Income ("Call Report Instructions") included in the
accompanying 1998 Management Report to the stockholders of U.S.B. Holding Co.,
Inc.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of internal control over financial reporting, testing
and evaluating the design and operating effectiveness of internal control over
financial reporting, including safeguarding of assets, and such other controls
as we considered necessary in the circumstances. We believe that our examination
provides a reasonable basis for our opinion.
Because of inherent limitations in any internal control, misstatements due to
error or fraud may occur and not be detected. Also, projections of any
evaluation of internal control over financial reporting to future periods are
subject to the risk that internal control may become inadequate because of
changes in conditions, or that the degree of compliance with the policies may
deteriorate.
In our opinion, management's assertion that, as of December 31, 1998, the Bank
maintained effective internal control over financial reporting, including
safeguarding of assets, presented in conformity with both generally accepted
accounting principles and the Call Report Instructions is fairly stated, in all
material respects, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
/s/ Deloitte & Touche LLP
January 28, 1999
Stamford, Connecticut
57
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
This section presents discussion and analysis of the financial condition
and results of operations of U.S.B. Holding Co., Inc. (the "Company") and its
subsidiaries, including its banking subsidiaries (the "Banks"), Union State Bank
(the "Bank") and its wholly-owned subsidiary U.S.B. Realty Corp. ("Realty
Corp.") through October 29, 1998, its date of dissolution, and Tarrytowns Bank,
FSB ("Tarrytowns") and its wholly-owned subsidiary TPNZ Preferred Funding
Corporation ("TPNZ"), and Royal Oak Savings Bank, F.S.B. ("Royal") through
December 31, 1995, the date of its sale. This discussion and analysis should be
read in conjunction with the financial statements and supplemental financial
data contained elsewhere in this report.
<TABLE>
<CAPTION>
Selected Financial Data (000's, except share data)
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results:
Total interest income $ 90,542 $ 80,136 $ 65,702 $ 57,275 $ 46,097
Total interest expense 47,414 41,785 31,676 28,291 18,820
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 43,128 38,351 34,026 28,984 27,277
Provision for loan losses 1,239 2,362 2,344 1,290 1,164
Income before income taxes 15,381 16,521 15,369 15,084 11,570
Net income 12,009 11,499 10,269 10,164 7,834
Basic earnings per share 0.77 0.75 0.65 0.65 0.51
Diluted earning per share 0.72 0.69 0.62 0.63 0.49
Weighted average shares 15,493,765 15,331,962 15,320,858 15,169,835 14,721,714
Adjusted weighted average shares 16,550,236 16,628,882 16,114,131 15,711,291 15,218,786
Cash dividends per common share 0.22 0.18 0.14 0.12 0.10
====================================================================================================================================
<CAPTION>
December 31,
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Position:
Total loans, net $ 722,479 $ 613,732 $ 552,879 $ 438,611 $ 380,483
Total assets 1,288,812 1,152,743 925,290 793,573 693,752
Total deposits 958,640 902,788 780,607 700,543 625,675
Borrowings 200,115 133,803 59,692 10,000 15,900
Long-term debt qualifying
as regulatory capital -- -- -- -- 1,800
Corporation-Obligated mandatory redeemable
capital securities of subsidiary trust 20,000 20,000 -- -- --
Stockholders' equity 97,439 85,878 78,092 73,693 46,137
====================================================================================================================================
<CAPTION>
Quarterly Results of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
1998 Quarters 1997 Quarters
Fourth Third Second First Fourth Third Second First
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $23,141 $23,035 $22,576 $21,790 $21,349 $20,620 $19,949 $18,218
Net interest income 11,245 10,983 10,629 10,271 10,176 9,547 9,479 9,149
Provision for loan losses 308 311(2) 310 310 360 521 840 641
Income before income taxes 5,214 712(2) 4,672 4,783 4,496 4,204 4,018 3,803
Net income 3,460 10(2) 5,254(1) 3,285 3,212 2,946 2,744 2,597
Basic earnings per share 0.22 -- 0.34 0.21 0.21 0.19 0.18 0.17
Diluted earnings per share 0.21 -- 0.31 0.19 0.19 0.18 0.17 0.16
====================================================================================================================================
</TABLE>
(1) Reflects tax benefit, net of associated expenses, of $1.9 million from the
liquidation of Realty Corp. (2) Reflects merger related expenses of $4.4
million, $3.3 million after tax, related to the acquisition of Tappan Zee.
58
<PAGE>
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<TABLE>
<CAPTION>
(000's, except percentages)
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Interest bearing deposits $ 2,145 $ 68 3.17% $ 1,772 $ 55 3.10%
Federal funds sold 29,675 1,595 5.37 20,202 1,101 5.45
Securities:
U.S. Treasury and
government agencies 88,945 6,392 7.19 144,069 10,314 7.16
Mortgage-backed securities 298,042 19,448 6.53 177,553 12,047 6.79
Obligations of states and
political subdivisions 60,564 4,941 8.16 63,486 5,090 8.02
Corporate, FHLB
stock, and other securities 16,044 1,156 7.21 9,107 647 7.10
Loans, net 657,171 58,735 8.94 582,267 52,732 9.06
- -------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 1,152,586 92,335 8.01% 998,456 81,986 8.21%
- -------------------------------------------------------------------------------------------------------------------------
Non-interest earning assets:
Other assets 59,508 57,558
- -------------------------------------------------------------------------------------------------------------------------
TOTAL $1,212,094 $1,056,014
=========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
NOW $ 57,739 $ 897 1.55% $ 49,801 $ 854 1.71%
Money market 45,456 1,174 2.58 49,868 1,314 2.63
Savings 300,068 11,727 3.91 262,194 10,285 3.92
Time 436,811 24,382 5.58 403,306 22,747 5.64
Federal funds purchased,
securities sold under
agreements to repurchase
and FHLB advances 128,277 7,282 5.68 81,028 4,814 5.94
Corporation - Obligated
mandatory redeemable
capital securities of
subsidiary trust 20,000 1,952 9.76 18,027 1,771 9.82
- -------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 988,351 47,414 4.80 864,224 41,785 4.83
- -------------------------------------------------------------------------------------------------------------------------
Non-interest bearing liabilities
and stockholders' equity:
Demand deposits 122,847 103,334
Other liabilities 9,889 8,665
Stockholders' equity 91,007 79,791
- -------------------------------------------------------------------------------------------------------------------------
TOTAL $1,212,094 $1,056,014
=========================================================================================================================
NET INTEREST EARNINGS $ 44,921 $ 40,201
=========================================================================================================================
NET YIELD ON INTEREST
EARNING ASSETS 3.90% 4.03%
=========================================================================================================================
</TABLE>
-----------------------------------------
1996
-----------------------------------------
Average Yield/
Balance Interest Rate
- -------------------------------------------------------------------------------
ASSETS
Interest earning assets:
Interest bearing deposits $ 2,105 $ 125 5.94%
Federal funds sold 17,463 927 5.31
Securities:
U.S. Treasury and
government agencies 86,920 5,824 6.70
Mortgage-backed securities 143,006 9,592 6.71
Obligations of states and
political subdivisions 63,807 4,998 7.83
Corporate, FHLB
stock, and other securities 10,203 784 7.68
Loans, net 499,677 45,276 9.06
- -------------------------------------------------------------------------------
Total interest earning assets 823,181 67,526 8.20%
- -------------------------------------------------------------------------------
Non-interest earning assets:
Other assets 44,276
- -------------------------------------------------------------------------------
TOTAL $ 867,457
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
NOW $ 44,765 $ 722 1.61%
Money market 56,575 1,537 2.72
Savings 233,594 8,885 3.80
Time 338,314 18,693 5.53
Federal funds purchased,
securities sold under
agreements to repurchase
and FHLB advances 31,061 1,839 5.92
Corporation - Obligated
mandatory redeemable
capital securities of
subsidiary trust -- -- --
- -------------------------------------------------------------------------------
Total interest bearing liabilities 704,309 31,676 4.50
- -------------------------------------------------------------------------------
Non-interest bearing liabilities
and stockholders' equity:
Demand deposits 84,746
Other liabilities 4,313
Stockholders' equity 74,089
- -------------------------------------------------------------------------------
TOTAL $ 867,457
===============================================================================
NET INTEREST EARNINGS $ 35,850
===============================================================================
NET YIELD ON INTEREST
EARNING ASSETS 4.36%
===============================================================================
The statistical data contained herein has been adjusted to a tax equivalent
basis, based on the Federal statutory tax rate of 35% and applicable state tax
rates.
59
<PAGE>
- --------------------------------------------------------------------------------
Summary of Results
The Company (including results reported for the Bank prior to the
Company's formation as a holding company) reported its twentieth consecutive
year of increased net income in 1998. Net income was $12.0 million for the year
ended December 31, 1998, a 4.4 percent increase over 1997. Net income was $11.5
million for the year ended December 31, 1997, a 12.0 percent increase over 1996
net income of $10.3 million. Net income for the year ended December 31, 1998
includes expenses related to the acquisition of Tappan Zee, including benefit
payments required under employment contracts and benefit plans, investment
banking fees, printing costs, and professional fees incurred in connection with
the acquisition ("merger related expenses"). Such expenses approximated $3.3
million net of tax. Before merger related expenses, net income for the year
ended December 31, 1998 was $15.3 million, an increase of 33.4% over the prior
year period. The 1998 period also includes a reduction of tax expense, net of
associated expenses, of approximately $1.9 million resulting from tax free
liquidating distributions of earnings from the Bank's Real Estate Investment
Trust subsidiary, Realty Corp. Excluding this net tax benefit and merger related
expenses, net income for the year ended December 31, 1998 was $13.4 million or
an increase of 16.7% over the prior year. The increases in 1998 net income,
compared to the prior year before the effects of the merger related expenses and
the liquidation of Realty Corp., primarily reflects higher net interest income,
securities gains and other income and a lower provision for loan losses,
partially offset by higher operating expenses. The increased net income for 1997
compared to 1996, reflects higher net interest income and securities gains and a
lower effective tax rate, partially offset by lower other non-interest income
(due to the nonrecurring gain from sale of a branch facility in 1996), and
higher operating expenses.
Diluted earnings per share of $0.72 in 1998, increased 4.3 percent over
the $0.69 recorded in 1997, while diluted earnings per share increased 11.3
percent in 1997 compared to the $0.62 recorded in 1996, reflecting the higher
net income, and in 1997, the reduction of preferred stock dividends due to
redemptions of preferred stock, which was partially offset by an increase in
adjusted weighted average shares. Excluding the effects of the merger related
expenses, diluted earnings per share increased $0.23 or 33.3 percent in 1998
over the prior year. Excluding the Realty Corp. net tax benefit and the merger
related expenses, diluted earnings per share was $0.81 per share, a 17.4 percent
increase over the prior year. Per share amounts reflect the 10 percent stock
dividend distributed December 21, 1998. Return on average common stockholders'
equity was 13.15 percent in 1998, compared to 14.47 percent in 1997, and 14.13
percent in 1996. Return on average total assets in 1998 was 0.99 percent,
compared to 1.09 percent in 1997, and 1.18 percent in 1996.
Net interest income for 1998 rose to $43.1 million, a 12.5 percent
increase over the $38.4 million recorded in 1997, while 1997 net interest income
increased 12.7 percent compared to the $34.0 million recorded in 1996. These
increases result principally from continuing growth in interest earning assets,
primarily loans, security investments and Federal funds sold, partially offset
by a narrowing interest rate margin. The interest rate margin on a tax
equivalent basis decreased in 1998 to 3.90 percent, compared to 1997 and
decreased to 4.03 percent in 1997 from 4.36 percent in 1996, as a result of a
flat yield curve and the effects of additional leveraging of the balance sheet.
Non-interest income for 1998 increased $484,000 compared to 1997, as a result of
higher security gains, service charges and fees and other income, partially
offset by lower mortgage servicing income. Non-interest income in 1997 decreased
compared to 1996, primarily as a result of the gain from sale of a Royal branch
facility. Excluding the gain on the sale of a Royal branch facility in 1996,
non-interest income in 1997 increased $277,000 compared to 1996 primarily due to
higher securities gains. The overall increases in revenues were partially offset
by 30.8 percent (10.7 percent excluding merger related expenses and $513,000 of
expenses incurred in connection with the liquidation of Realty Corp.) and 13.1
percent increases in non-interest expense in 1998 and 1997, respectively,
reflecting increases in such costs as salaries and employee benefits, occupancy
and equipment expense and other costs, as a result of the continuing growth of
the Company and its investment in people, new products, branches and technology,
and in 1998, merger related expenses which accounted for 58.3 percent of the
increase. A lower effective tax rate in 1998 (primarily as a result of the
liquidation of Realty Corp.) and 1997 also increased net income compared to the
preceding year.
The Company's total capital ratio under the risk-based capital guidelines
exceeds regulatory guidelines of 8 percent, as the total ratio equaled 16.12
percent and 16.47 percent at December 31, 1998 and 1997, respectively. The
leverage capital ratio was 9.13 percent at December 31, 1998 and 9.37 percent in
1997.
60
<PAGE>
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Interest Differential
The following table sets forth the dollar amount of changes in interest
income, interest expense and net interest income between the years ended
December 31, 1998 and 1997, and the years ended December 31, 1997 and 1996, on a
tax equivalent basis.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
(000's)
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
- ----------------------------------------------------------------------------------------------------------------------------
Total Total
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Interest bearing deposits $ 11.8 $ 1.2 $ 13.0 $ (17.4) $ (52.6) $ (70.0)
Federal funds sold 509.4 (15.4) 494.0 148.7 25.3 174.0
Securities:
U.S. Treasury and government agencies (3,961.3) 39.3 (3,922.0) 4,066.6 423.4 4,490.0
Mortgage-backed securities 7,878.9 (477.9) 7,401.0 2,342.8 112.2 2,455.0
Obligations of states and
political subdivisions (237.2) 88.2 (149.0) (25.3) 117.3 92.0
Corporate, FHLB stock,
and other securities 499.7 9.3 509.0 (80.5) (56.5) (137.0)
Loans, net 6,702.8 (699.8) 6,003.0 7,479.6 (23.6) 7,456.0
- ----------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 11,404.1 (1,055.1) 10,349.0 13,914.5 545.5 14,460.0
- ----------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits:
NOW 128.0 (85.0) 43.0 84.5 47.5 132.0
Money market (114.4) (25.6) (140.0) (177.8) (45.2) (223.0)
Savings 1,480.3 (38.3) 1,442.0 1,115.0 285.0 1,400.0
Time 1,872.3 (237.3) 1,635.0 3,658.4 395.6 4,054.0
Federal funds purchased, securities sold under
agreements to repurchase and FHLB advances 2,691.1 (223.1) 2,468.0 2,968.6 6.4 2,975.0
Corporation - Obligated mandatory redeem-
able capital securities of subsidiary trust 192.6 (11.6) 181.0 1,771.0 -- 1,771.0
- ----------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 6,249.9 (620.9) 5,629.0 9,419.7 689.3 10,109.0
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest differential $ 5,154.2 $ (434.2) $ 4,720.0 $ 4,494.8 $ (143.8) $ 4,351.0
============================================================================================================================
</TABLE>
The variance, not solely due to rate or volume, is allocated between the rate
and volume variances based upon their absolute relative weights to the total
change.
Net Interest Income
Net interest income, the difference between interest income and interest
expense, is the most significant component of the Company's consolidated
earnings. Net interest income of $44.9 million on a tax equivalent basis for
1998 reflects an 11.7 percent increase over the $40.2 million in 1997. Net
interest income on a tax equivalent basis for 1997 rose 12.1 percent over the
$35.9 million for 1996. Net interest income benefited from the increase in the
excess of average interest earning assets over average interest bearing
liabilities to $164.2 million in 1998, from $134.2 million and $118.9 million
for 1997 and 1996, respectively.
Interest income is determined by the volume of, and related rates earned
on, interest earning assets. Volume increases in interest bearing deposits,
Federal funds sold, mortgage-backed securities, corporate, FHLB stock and other
securities, and loans, partially offset by lower volume for all other categories
and overall lower rates on interest-earning assets (primarily mortgage-backed
securities and loans), contributed to higher interest income in 1998, as
compared to 1997. Volume increases also contributed to higher net interest
income in 1997, particularly in Federal funds sold, U.S. Treasury and
61
<PAGE>
- --------------------------------------------------------------------------------
government agencies and mortgage-backed securities and loans, partially offset
by volume decreases in all other interest earning asset categories, while the
overall yield on interest earning assets increased slightly, primarily in
securities. Average interest earning assets increased in 1998 to $1,152.6
million over the $998.5 million in 1997, compared to $823.2 million in 1996,
reflecting a 15.4 percent and 21.3 percent increase in 1998 and 1997,
respectively. The Company's ability to make changes in the asset mix allows
management to capitalize on more desirable yields, as available, on various
interest earning assets.
Loans are the largest component of interest earning assets and, due to
their significance, are carefully reviewed with respect to the Company's overall
interest sensitivity position. In 1998, average net loan balances increased
$74.9 million to $657.2 million compared to 1997, while average net loans
increased $82.6 million in 1997 compared to 1996. Net loans outstanding
increased $108.7 million to $722.5 million at December 31, 1998 from $613.7
million at December 31, 1997, or a 17.7 percent increase, compared to an
increase of $60.9 million in 1997 over 1996, or 11.0 percent. Interest income on
loans in both 1998 and 1997, increased due to higher volume, and partially
offset in 1998 by lower interest rates. Loan interest income was also affected
by interest income not recorded on nonaccrual loans of $123,000 in 1998,
$542,000 in 1997, and $936,000 in 1996.
The average balances of total securities increased in both 1998 and 1997,
due principally to efforts to effectively leverage capital, as well as
management's efforts to balance the risk and liquidity of the entire portfolio.
Overall, the net volume increase in securities resulted in increased interest
income on securities in both years. Interest income on securities was also
affected by generally lower short to medium-term yields on average in 1998,
primarily for mortgage-backed securities, while interest rates were slightly
higher in most securities categories in 1997, as compared to the prior year.
Interest expense is a function of the volume of, and rates paid for,
interest bearing liabilities. Interest expense in 1998 increased $5.6 million,
or 13.5 percent to $47.4 million, following the 1997 increase of $10.1 million,
or 31.9 percent, compared to 1996. Average balances in substantially all
categories, except for money market accounts, increased in both 1998 and 1997.
Retail deposits increased principally due to the opening of the New Rochelle
branch in 1998 and the Suffern branch in 1997, and Tarrytowns' White Plains
branch in 1998, as well as continuing growth of deposits in existing branches.
In addition, management decided to increase leveraging of capital by increasing
time deposits of municipalities, FHLB advances and borrowings under securities
sold with agreements to repurchase, and investing these funds in short and
medium-term investments and loan originations. Interest expense also increased
due to the issuance of $20 million of Capital Securities in February 1997. The
Capital Securities, issued at an effective rate of 9.8 percent, resulted in $2.0
million and $1.8 million of additional interest expense in 1998 and 1997,
respectively. These Capital Securities are included in the Company's Tier 1
capital, and as a result the Company increased borrowings to purchase securities
at reasonable spreads to further leverage capital. The level of non-interest
bearing average demand deposits which increased in 1998 to $122.8 million from
$103.3 million in 1997, compared to $84.7 million in 1996, is an integral aspect
of liability management and has a direct impact on the determination of net
interest income. In 1998, interest rates on average interest bearing deposits
and borrowings decreased slightly, due to a lower interest rate environment.
Interest rates on average interest bearing deposits and borrowings generally
increased in 1997, due to a higher rate environment compared to the prior year
and an increase in the level of higher rate products. The interest rate spread
on a tax equivalent basis for each of the three years in the period ended
December 31, 1998 is as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Average interest rate on:
- --------------------------------------------------------------------------------
Total average interest-
earning assets 8.01% 8.21% 8.20%
Total average interest-
bearing liabilities 4.80% 4.83% 4.50%
- --------------------------------------------------------------------------------
Total interest rate spread 3.21% 3.38% 3.70%
================================================================================
In 1998 and 1997, the interest rate spread decreased primarily due to the
continuing flat yield curve and increased leveraging of the balance sheet at
tighter spreads. Also impacting the spread in 1998, is the lower interest rate
environment, as assets generally reprice more fully than liabilities, especially
transaction accounts. Although the effects of balance sheet leveraging tends to
decrease the interest rate spread, it adds net interest income without adding
significant operating costs. Management cannot predict what impact market
conditions will have on its interest rate spread, and, therefore, further
compression in the net interest spread may occur.
Non-Interest Income
Non-interest income for 1998 was $5,414,000 compared to $4,930,000 for
1997. Non-interest income for 1997 decreased $323,000 compared to 1996,
primarily as a result of the gain
62
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on sale of a branch facility of $600,000 in 1996. The increase in 1998 primarily
reflects higher net gains on security sales of $269,000, service charges and
fees of $61,000 and other income of $191,000 (such as credit card, letter of
credit and loan prepayment fees), partially offset by lower mortgage servicing
income. Excluding the gain on sale of the branch facility in 1996, other income
increased $277,000 in 1997, primarily reflecting higher security gains.
Net gains on securities transactions principally result from the sales of
securities to restructure the portfolio, manage cash flow and reduce long-term
market value volatility of the portfolio in response to changes in interest
rates.
Mortgage servicing fees decreased to $186,000 in 1998, a 16.6 percent
decrease from $223,000 in 1997, an 8.6 percent decrease from $244,000 in 1996.
Mortgage servicing fees decreased due to a decline in volume of primarily fixed
rate loans sold to FHLMC with servicing retained, as the Bank decided to retain
approximately $48.0 million and $15.0 million of residential loan originations
in portfolio in 1998 and 1997, respectively. Although the Company expects to
continue to originate and sell/swap residential mortgages in the secondary
market as opportunities exist, activity in 1998, 1997 and 1996 has been limited.
Service charges and fees on deposit accounts increased 2.3 percent and 1.5
percent in 1998 and 1997, respectively. The increase reflects a higher level of
accounts and fees charged.
Other income increased in 1998 by $191,000 compared to 1997, and decreased
$14,000 in 1997 compared to 1996. The increase in 1998 reflects higher income
from merchant credit card transactions, letter of credit, loan prepayment and
other fees.
Non-Interest Expense
Non-interest expense rose to $31.9 million for 1998, or 30.8 percent over
the $24.4 million for 1997, compared to a 13.1 percent increase in 1997 over the
$21.6 million for 1996. Excluding merger related expenses and expenses related
to the liquidation of Realty Corp. in 1998, the increase was $2.6 million or
10.7 percent. These increases (excluding merger related expenses and expenses
incurred in connection with the liquidation of Realty Corp.) reflect the overall
growth of the Company. The Company's efficiency ratio (a lower ratio indicates
greater efficiency) which compares non-interest expense to total adjusted
revenue (taxable equivalent net interest income, plus non-interest income,
excluding gain on securities transactions and loans held for sale and net gain
on sale of branch facility) was 65.2 percent in 1998 (55.2 percent excluding
merger related expenses and expenses incurred in connection with the liquidation
of Realty Corp.), compared to 54.3 percent in 1997 and 53.5 percent in 1996.
Salaries and employee benefits, the largest component of non-interest
expense, rose 18.1 percent in 1998 to $15.6 million, compared to an 11.9 percent
increase in 1997 to $13.2 million from the $11.8 million in 1996. During 1998
the Company opened two branches and one in 1997, resulting in increased staff.
The increases in both years also reflect the costs of additional personnel
necessary for the Banks to accommodate the increases in both deposits and loans
resulting from the expansion of services and products available to customers, as
well as annual merit increases. Increases in salaries and employee benefits in
both 1998 and 1997 were also attributable to incentive compensation programs and
other benefit plans necessary to be competitive in attracting and retaining high
quality and experienced personnel, and higher health care costs and costs
associated with related payroll taxes. The percentages of salaries and employee
benefits as a percentage of total non-interest expense before merger related
expenses, increased in 1998 compared to 1997, and decreased slightly in 1997 as
compared to 1996.
63
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Employees at December 31,
Full-time employees 255 235 220
Part-time employees 27 32 24
- --------------------------------------------------------------------------------
Salaries and employee benefits (000's, except percentages)
Salaries $ 9,183 $ 7,926 $ 7,475
Payroll taxes 902 780 721
Medical plans 1,177 952 787
Incentive compensation plans 2,485 1,869 1,539
Deferred compensation plans 207 267 256
Employee retirement & stock plans 979 1,002 722
Other 660 407 299
- --------------------------------------------------------------------------------
Total $15,593 $13,203 $11,799
================================================================================
Percentage of total non-interest
expense (before merger related
expenses) 56.6% 54.1% 54.7%
================================================================================
Occupancy and equipment expenses rose to $4.8 million in 1998, a 15.9
percent increase over 1997, compared to $4.2 million in 1997, a 15.6 percent
increase over 1996. The increases are due to a full year of expenses for the
branches opened in the prior year, current year branch openings and increased
utilization of the Corporate Headquarters by the Bank. Equipment expense also
continued to increase as a result of higher depreciation and maintenance costs
associated with the Bank's in-house IBM AS-400 computer and capital investments
over the last several years in systems designed to enhance bank-wide operating
and processing capabilities. All years also reflect the rising costs of such
items as fuel, electricity, real estate taxes and other costs of operating the
Company's facilities.
Advertising and business development expense increased to $1,243,000 or
11.1 percent, compared to the $1,119,000 recorded in 1997, which reflected an
increase of 17.9 percent compared to 1996. The increases are principally due to
increased deposit promotions, mortgage/home equity loan promotional campaigns,
the expansion of the Chairman's Council business development campaign programs,
and in 1998, a new advertising campaign.
Professional fees decreased 12.2 percent to $1,440,000 in 1998 from
$1,640,000 in 1997, which was a 24.4 percent increase from the $1,318,000
recorded in 1996. The decrease in 1998 reflects lower professional fees
associated with loan workouts, collections and foreclosure, and the addition of
in-house counsel, offset by increased fees associated with the liquidation of
Realty Corp. The increase in 1997 was due to professional fees associated with
loan collections and foreclosures and other litigation costs, higher examination
and audit fees, and higher consulting fees.
Communications expense increased 11.1 percent in 1998 to $814,000 from
$733,000 in 1997, a 12.8 percent increase from $650,000 in 1996. The increases
were due principally to the additional communication lines required for computer
hookups and telephones for the new branches and increases in business volume.
Stationery and printing expense increased to $609,000 in 1998 from
$502,000 in 1997, or 21.3 percent, and increased 14.4 percent in 1997, as
compared to the $439,000 recorded in 1996. The increases reflect the new
branches and higher business volume.
FDIC insurance increased to $166,000 in 1998 compared to 1997 and
decreased by $543,000 to $152,000 in 1997 compared to 1996. The increase in 1998
reflects a higher volume of insured deposits. The decrease in 1997 primarily
reflects a one time special assessment paid by Tarrytowns in 1996 of $538,000 in
order to recapitalize the Savings Association Insurance Fund ("SAIF") to the
level required by law.
The Company incurred $(82,000), 183,000 and $216,000 in 1998, 1997 and
1996, respectively, in net (income) expense related to gains on sales of
foreclosed properties, offset by costs of maintaining such properties and
additional write-downs of carrying values on such properties. Gains on sale of
OREO exceeded costs to maintain properties in 1998. Costs incurred in 1997 and
1996 reflect a higher level of OREO. Expenditures associated with expenses in
this category are comprised of real estate taxes, insurance, utilities,
maintenance and other charges required to protect the Company's interest in the
properties. In general, the longer the foreclosed properties are held, the total
cost to maintain such properties will increase; however, to the extent time
between acquisition of a property and its sale is reduced, the holding cost per
property should decline. In general, the Company seeks to dispose of OREO as
expeditiously as possible. However, the ability to dispose of OREO is highly
dependent on market conditions in the area in which a property is located.
Other non-interest expenses, as reflected in the following table,
increased 8.2 percent in 1998, and 42.5 percent in 1997 compared to the prior
year. The increases reflect higher outside service fees, including computer
program licensing fees, and higher stockholder relations expenses and stock
exchange listing fees, and contributions to U.S.B. Foundation, Inc. in 1998 and
1997, while no contribution was made in 1996.
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- --------------------------------------------------------------------------------
1998 1997 1996
Other non-interest expenses (000's, except percentages)
- --------------------------------------------------------------------------------
Other insurance $ 271 $ 284 $ 270
Courier fees 248 223 196
Dues, meetings and seminars 422 294 274
Outside services 762 638 450
U.S.B. Foundation, Inc. 240 250 --
Credit card related expense 294 232 210
Other 674 770 489
- --------------------------------------------------------------------------------
Total $2,911 $2,691 $1,889
- --------------------------------------------------------------------------------
Percentage of total non-interest
expense (before merger related
expenses) 10.6% 11.0% 8.8%
================================================================================
Merger related expenses of approximately $4.4 million were recorded in
1998 as a result of the acquisition of Tappan Zee (See Note 2 to the
Consolidated Financial Statements) and consist of: payments in connection with
existing employment contracts - $0.8 million; expenses incurred in connection
with acceleration of benefits under various employee and director benefit plans
- - $0.9 million; professional fees - $1.0 million; investment banking fees - $0.7
million; and other expenses - $1.0 million.
To monitor and control the level of non-interest expenses, as well as
non-interest income, the Company continually monitors the system of internal
budgeting, including analysis and follow-up of budget variances.
Income Taxes
Income tax provisions of $3,372,000, $5,022,000 and $5,100,000 were
recorded in 1998, 1997 and 1996, respectively. The Company is currently subject
to both a statutory incremental Federal tax rate of 35 percent (34 percent for
the first $10 million of taxable income), and a New York State tax rate of 9
percent, plus a surcharge of 17 percent in 1998 and 1997 and 19 1/2 percent in
1996. The Company's overall effective tax rate was 21.9 percent, 30.4 percent
and 33.2 percent in 1998, 1997 and 1996, respectively.
The decrease in the overall effective tax rate in 1998 primarily reflects
the reduction in tax expense of approximately $2.4 million as a result of the
liquidation of Realty Corp. The decrease in 1997 reflects lower state taxes.
Other pertinent tax information is set forth in the Notes to Consolidated
Financial Statements included elsewhere herein.
Securities Portfolio
Securities are selected to provide safety of principal, liquidity, and
produce income on excess funds during structural changes in the composition of
deposits, as well as during cyclical and seasonal changes in loan demand and to
leverage capital. In order to manage liquidity and control interest rate risk,
the Company's investment strategy focuses on securities which have short
maturities, adjustable-rate securities, or those whose cash flow patterns result
in a lower degree of interest rate risk.
The securities portfolio, including investment in FHLB stock, of $464.4
million and $454.0 million at December 31, 1998 and 1997, respectively, consists
of securities held to maturity totalling $67.0 million and $172.7 million,
securities available for sale totalling $379.5 million and $266.6 million, and
FHLB stock of $17.8 million and $14.7 million, respectively.
In accordance with SFAS No. 115, the Banks' investment policies includes a
determination of the appropriate classification of securities at the time of
purchase. If management has the intent and ability to hold securities until
maturity, they are classified as held to maturity and carried at amortized
historical cost. Securities held for indefinite periods of time and not intended
to be held to maturity include securities that management intends to use as part
of its asset/liability strategy and that may be sold in response to changes in
interest rates, resultant prepayment risk and other factors. Such securities are
classified as available for sale and carried at fair value.
Securities represent 40.2 percent, 39.5 percent and 36.9 percent of
average interest-earning assets in 1998, 1997 and 1996, respectively. Emphasis
on the securities portfolio will continue to be an important part of the
Company's investment strategy. The size of the securities portfolio will depend
on deposit and loan growth, and the ability of the Company to take advantage of
leverage opportunities. The carrying value, fair value, weighted average yields
and maturity distributions of securities, are included in the Notes to the
Consolidated Financial Statements included elsewhere herein.
Obligations of U.S. Treasury and government agencies principally include
U.S. Treasury securities and Federal Home Loan Bank, Federal National Mortgage
Association ("FNMA") and FHLMC debentures and notes. At December 31, 1998 and
1997, the outstanding balances held in such securities totalled $55.6 million
and $165.5 million, respectively. The balances outstanding at December 31, 1998
and 1997 decreased $109.9 million and increased $69.2 million, respectively,
primarily due to redemptions at call dates and sales of such securities prior to
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call in 1998, and net new purchases of callable U.S. government agency bonds in
1997 as yields were attractive in that period. Management expects these bonds to
be called prior to maturity based upon its evaluation of interest rates at the
time of purchase. Due to the lower interest rate levels in 1998, the Company
sold or did not replace redeemed callable agency securities with new similar
issues.
The Company invests in mortgage-backed securities, including
collateralized mortgage obligations ("CMOs"), that are primarily issued by the
Government National Mortgage Association ("GNMA"), FNMA and FHLMC. GNMA
securities are backed by the full faith and credit of the U.S. Treasury,
assuring investors of receiving all of the principal and interest due from the
mortgages backing the securities. FNMA and FHLMC guarantee the payment of
interest at the applicable certificate rate and the full collection on the
mortgages backing the securities; however, such securities are not backed by the
full faith and credit of the U.S. government.
Mortgage-backed securities and CMOs increased $124.6 million to $331.4
million and $67.5 million to $206.8 million at December 31, 1998 and 1997,
respectively, as compared to the balance of $139.3 million at December 31, 1996.
The increases for 1998 and 1997 were due to purchases of $269.0 million and
$185.2 million that were offset by sales of $53.5 million and $108.7 million,
principal paydown and redemptions of $91.2 million and $10.6 million, and other
increases of $0.3 million and $1.6 million, respectively.
The following table sets forth additional information concerning
mortgage-backed securities, including CMOs, as of the periods indicated:
- --------------------------------------------------------------------------------
(000's)
December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
U.S. government agency:
Mortgage-backed securities
Fixed rate $251,725 $ 91,723 $ 38,015
Adjustable rate -- -- 13,071
Collateralized mortgage
obligations
Fixed rate 15,673 31,541 45,745
Adjustable rate 63,903 83,170 42,013
Other 65 341 470
- --------------------------------------------------------------------------------
Total $331,366 $206,775 $139,314
================================================================================
For 1998, purchases of fixed rate mortgage-backed securities totaling
$205.2 million were offset by sales of similar fixed rate instruments totaling
$13.3 million. The increase in 1997 in mortgage-backed securities was due
primarily to the purchases of fixed rate securities totaling $98.6 million,
offset by sales of fixed and adjustable rate investments of $39.5 million and
$11.3 million, respectively. The sales were transacted to take advantage of
market opportunities to restructure the portfolio, including the sales of
adjustable rate securities, whose market values would decline as principal
prepayments accelerate in a lower interest rate environment. For 1998 and 1997,
sales of low-yielding fixed rate CMOs totaling $18.7 million and $22.3 million
to restructure the portfolio were partially offset by purchases totaling $5.0
million and $8.6 million, respectively. Also, in 1998 and 1997, purchases of
adjustable rate CMOs totaling $58.8 million and $77.9 million were partially
offset by sales and redemptions of $41.5 million and $35.7 million,
respectively. The sales were transacted as the market values of these securities
would decline as principal prepayments accelerate in a lower interest rate
environment. Interest rates on floating rate CMO securities periodically adjust
at certain spreads to market indices and typically contain maximum lifetime
caps. These investments generally result in a shortening of the portfolio's
average interest rate repricing period.
The outstanding balances in obligations of states and political
subdivisions at December 31, 1998 and 1997 were $58.9 million and $64.0 million,
respectively, with purchases of $2.0 million and $7.6 million and maturities of
$7.1 million and $6.3 million during 1998 and 1997, respectively. The
obligations are principally New York State political subdivisions with
diversified final maturities and substantially all are classified as held to
maturity. The Company considers such securities as core investments having
favorable tax equivalent yields.
The Company invests in FHLB stock, medium-term corporate debt securities
and other securities which are rated investment grade by nationally recognized
credit rating organizations. The Company, as a matter of policy, does not invest
in nonrated securities or securities rated less than investment grade at the
time of purchase. At December 31, 1998 and 1997, FHLB stock, corporate and other
securities increased $0.8 million and $6.9 million to balances outstanding of
$18.5 million and $17.7 million, respectively. The net increases for 1998 and
1997 were due primarily to purchases of FHLB stock of $3.2 million and $9.8
million, and a net decrease in corporate and other securities of $2.4 million
and $2.9 million, respectively. The total investment in FHLB stock is $17.8
million and $14.7 million at December 31, 1998 and 1997, respectively. The Banks
are members of the FHLB and during 1998 have increased their outstanding
borrowings under the various advance programs offered by the FHLB. As a
prerequisite to obtaining increased funding from the FHLB, the Banks must
purchase additional shares of FHLB stock.
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The Company has continued to exercise its conservative approach to
investing by purchasing high credit quality investments and controlling interest
rate risk by averaging investments in medium-term maturities or with securities
having interest rates that reprice periodically. Generally, most securities may
be used to collateralize borrowings and public deposits, and therefore the
investment portfolio is an integral part of the Company's funding strategy.
Except for securities of the U. S. Treasury and government agencies
(principally callable and mortgage-backed securities) and FHLB stock, there were
no obligations of any single issuer which exceeded ten percent of stockholders'
equity at December 31, 1998.
Loan Portfolio
During 1998, the average balances of net loans of the Company increased
$74.9 million to $657.2 million, and increased $82.6 million in 1997 to $582.3
million, as compared to the 1996 balance of $499.7 million. At December 31,
1998, gross loans outstanding increased $110.2 million to $733.5 million, or a
17.7 percent increase compared to the prior year. Loans outstanding at December
31, 1997 increased $62.8 million, or 11.2 percent over 1996. This growth
resulted primarily from: an increase of $42.0 million in 1997, in commercial
mortgages; increases in construction and land development loans, principally
variable rate loans which are based on the prime rate as published in the Wall
Street Journal, of $63.9 million and $11.9 million, respectively, as both the
real estate market and business activity increased during each year; increases
in time and demand loans of $19.9 million and $2.4 million, respectively; an
increase in 1998 of $7.8 million in installment loans; as well as a $26.3
million and $7.0 million net increase in 1998 and 1997, respectively, in
residential real estate loans and home equity loans; and an increase in credit
card loans of $0.3 million in 1998; while commercial real estate loans declined
$6.0 million in 1998 and all other loans declined $2.0 million and $0.5 million
in 1998 and 1997, respectively.
Real estate collateralized loans consisting of construction mortgages,
interim and permanent commercial mortgages, home equity and residential
mortgages, represent 87.8 percent and 89.9 percent of total gross loans in 1998
and 1997, respectively. The Bank is approved by FHLMC and FNMA as a preferred
seller of residential mortgages, which allows more active participation in the
home mortgage market, enabling the Company to meet the community's needs for
housing. This also allows the Company the flexibility to determine if profit
margins are best achieved by retention or sale of earning assets and also
generates loan origination fees and loan servicing income from the collection
and processing of monthly loan payments.
As part of secondary marketing activities, certain 15 and 30 year
residential real estate loans with fixed rates are originated with an intent of
selling qualifying loans. During 1997 and 1996, the Company took advantage of
the secondary market by selling for cash $1.1 million and $0.6 million of such
loans to FHLMC. The Bank did not sell mortgage loans to FHLMC during 1998.
Commercial mortgages and construction and land development loans, which in the
aggregate increased significantly in both 1998 and 1997, will continue to be
emphasized, as such loans represent quality real estate secured loans. At
December 31, 1998, the Company has approximately $86.3 million and $27.7 million
of committed but unissued (including lines of credit) commercial mortgage,
construction and land development loans, and residential mortgages, both first
and junior liens, respectively. At December 31, 1998 and 1997, approximately
$4.3 million and $0.3 million, respectively, of fixed rate residential loans
(including commitments) were held for sale.
Installment loans to individuals and businesses represented 3.2 percent,
2.5 percent and 2.9 percent of total gross loans in 1998, 1997 and 1996,
respectively. The increase in installment loans to gross loans in 1998 reflects
the Company's emphasis on non-real estate lending to diversify the portfolio.
The Bank currently provides Affinity cards to the Masons of Iowa,
Maryland, New Hampshire and Washington State, and a Union State Bank Visa card
and MasterCard are also offered. At December 31, 1998, the Bank had unused
credit card lines of $29.7 million, and outstanding balances of $8.3 million.
The credit card business allows the Company to increase its consumer lending
business and also diversify the loan portfolio.
It is the Company's policy to discontinue the accrual of interest on loans
when, in the opinion of management, a reasonable doubt exists as to the timely
collectibility of the amounts due. Regulatory requirements generally prohibit
the accrual of interest on certain loans when principal or interest is due and
remains unpaid for 90 days or more, unless the loan is both well secured and in
the process of collection. Nonaccrual loans, which are primarily secured by real
estate, lease receivables and cash, decreased in 1998 and 1997 to $2.3 million
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and $7.3, respectively, from $9.6 million in 1996. Nonaccrual loans include the
Bennett Funding Group loans of $0.8 million in 1998 ($3.3 million in 1997 and
1996), which are collateralized by lease receivables and cash. The Bennett
Funding Group filed for Bankruptcy during 1996, and collection of these loans
has been delayed by the bankruptcy proceedings. Net income is adversely impacted
by the level of non-performing assets caused by the deterioration of borrowers'
ability to meet scheduled interest and principal payments. In addition to
forgone revenue, the Company must increase the level of provisions for loan
losses, incur higher collection costs, and other costs associated with the
management and disposition of foreclosed properties.
The most significant non-performing loans have been in construction loans
and real estate related commercial loans and, the Bennett Funding Group loans
discussed above. Although the Bank has an aggressive foreclosure policy, the
process is slow and is hampered by legal and market factors. Non-performing
assets negatively impact the Company's net interest income and operating
results. Net loan charge-offs against the allowance for loan losses increased in
1998 to $600,000 compared to 1997 and increased slightly in 1997 to $504,000
from $500,000 in 1996. At December 31, 1998, restructured loans decreased to
$0.7 million from $0.9 million in 1997, compared to $2.1 million in 1996. Loans
considered to be impaired under SFAS No. 114 approximated $1.6 million and $4.8
million (including the Bennett Funding Group loans) at December 31, 1998 and
1997, respectively.
Provision for Loan Losses
The allowance for loan losses is available to absorb charge-offs from any
loan category, while additions are made through charges to income and recoveries
of loans previously charged-off. An evaluation of the quality of the loan
portfolio is performed by management on a quarterly basis as an integral part of
the loan review function, which includes the identification of past due loans,
non-performing loans and impaired loans, assessments of the expected effects of
the current economic environment on the loan portfolio, a review of the
historical loss experience and the impact of the year 2000 issue on loan
customers (see "Year 2000 issue" on page 75). Based upon management's assessment
of the degree of risk associated with the various elements of the loan
portfolio, it is estimated that at December 31, 1998 and 1997, 4 percent and 4
percent of the allowance for loan losses, respectively, is applicable to time
and demand loans, 84 percent and 68 percent, respectively, relate to loans
secured by real estate, including commercial and construction loans, and 12
percent and 28 percent, respectively, is applicable to installment, credit card
and other loans.
As with any financial institution, poor economic conditions, high
inflation, high interest rates, or high unemployment may lead to increased
losses in the loan portfolio. Conversely, improvements in economic conditions
tend to reduce the amounts charged against the allowance. Management has
established various controls, in addition to strict underwriting standards, in
order to limit future losses, such as (1) a "watchlist" of possible problem
loans, (2) various loan policies concerning loan administration (loan file
documentation, disclosures, approvals, etc.), and (3) a loan review staff
employed by the Company to determine compliance with established controls and to
review the quality and anticipated collectibility of the portfolio. Management
determines which loans are possibly uncollectible and makes additional
provisions, if necessary, to state the allowance at a satisfactory level.
Management takes a prudent and cautious position in evaluating various
business and economic uncertainties in relation to the Company's loan portfolio.
In management's judgment, the allowance is considered adequate to absorb
potential losses inherent in the credit portfolio. A substantial portion (87.8
percent at December 31, 1998) of the loans of the Company are collateralized by
real estate, primarily located in the New York Metropolitan area. The
collectibility of the loan portfolio of the Company is subject to changes in the
real estate market in which the Company operates. The provisions for loan losses
established in 1998, 1997 and 1996, and the related allowance for loan losses
reflect net charge-offs and losses incurred with respect to real estate
foreclosures, and the effect of the real estate market in the New York
metropolitan area on the loan portfolio.
Management believes the allowance for loan losses at December 31, 1998,
appropriately reflects the risk elements inherent in the total loan portfolio at
that time. There is no assurance that the Company will not be required to make
future adjustments to the allowance in response to changing economic conditions
or regulatory examinations. During 1998, the New York State Banking Department,
and during 1997 the FDIC, completed examinations of the Bank. In 1998, the New
York State Banking department examined the Company and the Federal Reserve
completed an off-site examination of the Company. The Office of Thrift
Supervision examined Tarrytowns in 1997. The regulatory agencies concluded that
the process of internal asset review and the allowance for loan losses were
adequate.
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Loan Maturities and Sensitivity to Change in Interest Rates
The following table presents the maturities of loans outstanding at December 31,
1998 (excluding installment loans to individuals and real estate loans other
than construction loans), and the amount of such loans by maturity date that
have predetermined interest rates and the amounts that have floating rates.
<TABLE>
<CAPTION>
December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
After
1 But
Within Within After
(000's, except percentages) 1 Year 5 Years 5 Years Total Percent
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans:
Time and demand loans $ 47,258 $ 5,521 $1,090 $ 53,869 31.7%
Commercial installment loans 2,653 13,756 1,427 17,836 10.5
Mortgage construction loans 63,873 34,255 -- 98,128 57.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total $113,784 $53,532 $2,517 $169,833 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate Sensitivity:
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed or predetermined interest rates $ 16,218 $13,180 $ 292 $ 29,690 17.5%
Floating or adjustable interest rates 97,566 40,352 2,225 140,143 82.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total $113,784 $53,532 $2,517 $169,833 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Percent 67.0% 31.5% 1.5% 100.0%
====================================================================================================================================
</TABLE>
Deposits
The Company's fundamental source of funds supporting interest earning
assets continues to be deposits, consisting of demand deposits (non-interest
bearing), NOW, money market, savings, and various forms of time deposits. The
maintenance of a strong deposit base is key to the development of lending
opportunities and creates long term customer relationships, which enhance the
ability to cross sell services. Depositors include individuals, small and large
businesses and governmental units. To meet the requirements of a diverse
customer base, a full range of deposit instruments are offered, which has
allowed the Company to maintain and expand the deposit base despite intense
competition from other banking institutions and non-bank financial service
providers.
Total deposits at the end of 1998 increased 6.2 percent to $958.6 million,
from $902.8 million at December 31, 1997, an increase of 15.7 percent from
$780.6 million in 1996. Average deposits outstanding increased 10.9 percent in
1998 and 14.6 percent in 1997. Excluding municipal CD's, which are acquired on a
bid basis, total deposits increased 15.6 percent and 8.9 percent, and average
deposits increased 11.3 percent and 12.2 percent, respectively. Average
non-interest bearing deposits increased 18.9 percent or $19.5 million at
December 31, 1998 compared to 1997, and 21.9 percent in 1997 compared to 1996,
due to business development efforts. Average interest bearing deposits in 1998
increased $74.9 million and in 1997 increased $91.9 million, reflecting
increases in all deposit categories, except for money market accounts, IRA and
Keogh accounts, and in 1998, municipal CD's. Average balances in NOW deposits
increased $7.9 million in 1998 and $5.0 million in 1997, due principally to
increased account activity by customers. The decrease of $4.4 million in 1998
and $6.7 million in 1997 in average money market deposit balances principally
resulted from decreased deposits of local municipalities and customers, as the
rate on the money market account was maintained at a lower competitive rate, and
customers switched to other higher rate accounts. Savings deposits average
balances increased $37.9 million in 1998 and $28.6 million in 1997, due to the
marketing of higher interest rate savings accounts in both years. In 1998 and
1997, average time deposits outstanding increased $33.5 million and $65.0
million, respectively, due to promotion of attractive rate products, effected in
1998 by a decrease, and in 1997 by an increase, in municipal time deposits which
are acquired on a bid basis. In general, the lower interest rate environment in
1998 compared to 1997 caused deposit interest rates to decline slightly in 1998.
Deposit costs generally increased in 1997 during a period of increasing interest
rates, in all accounts except for the money market account. Municipal deposits
are used to fund security purchases and balance sheet leverage. Due to lower
rates for wholesale borrowings and other sources of funds, municipal deposits
decreased in 1998. In 1998, time deposits over $100,000 decreased $54.4 million
compared to 1997, and in 1997 increased $65.4 million. Deposits of over $100,000
are generally for maturities of 30 to 180 days and are acquired to fund loans
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and securities, under the Company's asset liability policy and to leverage
excess capital by matching such funds with investments and loan production in
excess of deposit growth. The Company does not generally acquire brokered
deposits.
At December 31, 1998, short-term rates remained high compared to longer
term rates. Accordingly, it is expected that depositors will continue to favor
short-term deposit products, which result in higher volatility of interest
margins due to the quick repricing of deposits during periods of both rising and
declining interest rates.
The following table summarizes the average amounts and rates of various
classifications of deposits for the periods indicated:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(000's, except percentages)
Year Ended December 31,
1998 1997 1996
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $122,847 -- $103,334 -- $ 84,746 --
NOW accounts 57,739 1.55% 49,801 1.71% 44,765 1.61%
Money market accounts 45,456 2.58 49,868 2.63 56,575 2.72
Savings deposits 300,068 3.91 262,194 3.92 233,594 3.80
Time deposits 436,811 5.58 403,306 5.64 338,314 5.53
- ------------------------------------------------------------------------------------------------------------------------------------
Total $962,921 3.97% $868,503 4.05% $757,994 3.94%
====================================================================================================================================
</TABLE>
Capital Resources
Strong capitalization is fundamental to the successful operation of a
banking organization. Stockholders' equity increased to $97.4 million in 1998,
or 13.5 percent over $85.9 million in 1997. There was a 10.0 percent increase in
1997, over the $78.1 million in 1996. The increases in all years were
principally due to the Company's record net income and common stock issuances
under the Company's various stock plans, offset by cash dividends and repayments
of $3,250,000 and $500,000 of preferred stock in 1997 and 1996, respectively,
and treasury stock transactions. Stockholders' equity also increased $0.6
million at December 31, 1998 and by $2.3 million at December 31, 1997, as a
result of the effect of net unrealized gains and losses on available for sale
securities, net of tax. Cash dividends on the Company's common stock have been
paid since 1986, the first dividend paid in the Company's history. In the first
quarter of 1988, the Board of Directors authorized a quarterly cash dividend
policy. Cash dividends on the Company's preferred stock commenced in 1989, and
terminated in February 1997 upon redemption of all outstanding preferred stock.
In 1997, junior preferred stock of consolidated subsidiary was issued, and
dividends were paid in 1997 and 1998 on such stock. The junior preferred stock
was redeemed in October 1998, in connection with the liquidation and dissolution
of Realty Corp.
The various components and changes in stockholders' equity are reflected
in the Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996, included elsewhere herein.
Regulatory capital was further increased in February 1997 with the
issuance of $20 million, 9.58% Capital Securities which qualify for Tier I
capital treatment by the Federal Reserve Bank.
Management believes that the Capital Securities, future retained earnings,
and stock purchases under the employee benefit plans, will provide the necessary
capital for current operations and the planned growth in total assets. In
addition, capital growth can be acquired through the reinstatement of the
Company's Dividend Reinvestment and Optional Stock Purchase Plan, which has been
suspended.
All banks and bank holding companies are subject to risk-based capital
guidelines. These guidelines define capital as Tier I and Total capital. Tier I
capital consists of common stockholders' equity and qualifying preferred stock,
less intangibles; and Total capital consists of Tier I capital plus the
allowance for possible loan losses up to certain limits, preferred stock and
certain subordinated and term-debt securities. The guidelines require a minimum
total risk-based capital ratio of 8.0 percent, and a minimum Tier I risk-based
capital ratio of 4.0 percent.
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The risk-based capital ratios at December 31,
follows:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Tier I Capital:
Company 14.97% 15.26% 13.32%
Bank 12.58% 12.35% 10.36%
Tarrytowns 44.64% 43.30% 38.20%
Total Capital:
Company 16.12% 16.47% 14.38%
Bank 13.71% 13.55% 11.41%
Tarrytowns 45.89% 44.60% 39.50%
================================================================================
Banks and bank holding companies must also maintain a minimum leverage
ratio of at least 3 percent, which consists of Tier I capital based on
risk-based capital guidelines, divided by average tangible assets (excluding
intangible assets that were deducted to arrive at Tier I capital).
The leverage ratios were as follows at December 31:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Company 9.13% 9.37% 8.45%
Bank 8.14% 8.09% 7.01%
================================================================================
Pursuant to the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 ("FIRREA") and further expanded by FDICIA, Tarrytowns is required to
meet minimum regulatory tangible (1.50 percent), core leverage (3 percent), and
risk-based capital ratios. At all times, Tarrytowns exceeded all current and
fully-phased-in capital requirements as stipulated by each of these acts.
To be considered "well-capitalized" under FDICIA, an institution must
generally have a leverage ratio of at least 5 percent, Tier I ratio of 6 percent
and Total capital ratio of 10 percent. The Banks exceed all current regulatory
capital requirements and were in the "well-capitalized" category at December 31,
1998. Management fully expects that the Banks will maintain a strong capital
position in the future.
Liquidity
The Asset/Liability Committee ("ALCO") establishes specific policies and
operating procedures governing the Company's liquidity levels and develops plans
to address future liquidity needs. The primary functions of asset/liability
management are to provide safety of depositor and investor funds, assure
adequate liquidity and maintain an appropriate balance between interest earning
assets and interest bearing liabilities. Liquidity manage-ment involves the
ability to meet the cash flow requirements of customers who may be either
depositors wanting to withdraw funds or borrowers needing assurance that
sufficient funds will be available to meet their credit needs. Interest rate
sensitivity management seeks to avoid fluctuating net interest margins and to
enhance consistent growth of net interest income through periods of changing
interest rates.
Aside from cash on hand and due from banks, the Banks' liquid assets are
federal funds sold, which are available daily, and interest bearing deposits
with banks. The Banks invest excess liquid funds by selling federal funds, which
mature daily, to other financial institutions in need of funds. At December 31,
1998, the Banks sold overnight federal funds in the amount of $45.5 million.
Other sources of asset liquidity include maturities and principal and
interest payments on securities and loans. The securities and loan portfolios
are of high credit quality and of mixed maturity, providing a constant stream of
maturing and reinvestable assets, which can be converted into cash should the
need arise. The ability to redeploy these funds is an important source of medium
to long-term liquidity. The amortized cost of securities available for sale
having contractual maturities or expected call dates or average lives of one
year or less amounted to $43.7 million, while held to maturity securities
maturing in one year or less amounted to $5.5 million, for a total of $49.2
million at December 31, 1998. This represented 11.1 percent of the amortized
cost of the securities portfolio, compared to 20.9 percent of the securities
portfolio maturing within one year at December 31, 1997. Excluding installment
loans to individuals and real estate loans other than construction loans, $113.8
million, or 15.5 percent of loans (including loans held for sale) at December
31, 1998, mature in one year or less. As a preferred seller of mortgages to both
FHLMC and FNMA, the Bank may increase liquidity by selling residential
mortgages, or exchanging them for mortgage backed securities that may be sold,
in the secondary market.
The Banks are members of the FHLB. The Banks have a borrowing capacity of
up to $355.0 million at December 31, 1998, at various terms secured by FHLB
stock owned and to be purchased and certain other assets of the Banks. In
addition, the Banks have arrangements with two primary investment firms to
borrow up to $50.0 million under master securities sales and repurchase
agreements, of which $9.8 million was outstanding at December 31, 1998. The
Banks had advances aggregating $34.3 million from the FHLB and the Banks
borrowed $165.8 million under securities sold under agreements to repurchase at
December 31, 1998. The Banks may also borrow up to $36.0 million overnight
under Federal funds purchase
71
<PAGE>
- --------------------------------------------------------------------------------
agreements with five correspondent banks. Additional liquidity is provided by
the ability to borrow from the Federal Reserve Bank's discount window, which
borrowings must be collateralized with U.S. Treasury and government agency
securities.
The Banks pledge certain of their assets as collateral for deposits of
municipalities, FHLB borrowings and repurchase agreements. By utilizing
collateralized funding sources, the Banks are able to access a variety of cost
effective sources of funds. The assets pledged consist of mortgage-backed and
other securities. Management monitors its liquidity requirements by assessing
assets pledged, the level of assets available for sale, additional borrowing
capacity and other factors. Management does not anticipate any negative impact
to its liquidity from its pledging activities.
Demand deposits from individuals, businesses and institutions, as well as
retail time deposits ("core deposits") are a relatively stable, low-cost source
of funds. The deposits of the Banks generally have shown a steady growth trend.
However, the trend of the deposit mix has generally been toward deposits of
shorter average maturity, with a larger percentage of funds in savings deposits
and shorter term certificates of deposit, while money market accounts as a
percentage of total deposits declined as depositors favored the higher rates
offered by higher rate savings accounts and time deposit products.
Another source of funding for the Company is capital market funds, which
includes preferred stock, convertible debentures, the Capital Securities, common
stock, retained earnings and long-term debt qualifying as regulatory capital.
Each of the Company's sources of liquidity is vulnerable to various
uncertainties beyond the control of the Company. Scheduled loan and security
payments are a relatively stable source of funds, while loan and security
prepayments and calls, and deposit flows vary widely in reaction to market
conditions, primarily prevailing interest rates. Asset sales are influenced by
general market interest rates and other unforeseen market conditions. The
Company's ability to borrow at attractive rates is affected by its financial
condition and other market conditions.
Management considers the Company's sources of liquidity to be adequate to
meet any expected funding needs and also to be responsive to changing interest
rate markets.
Market Risk
Market risk is the potential for economic losses to be incurred on market
risk sensitive instruments arising from adverse changes in market indices such
as interest rates, foreign currency exchange rates and commodity prices. Since
all Company transactions are denominated in U.S. dollars with no direct foreign
exchange or changes in commodity price exposures, the Company's primary market
risk exposure is interest rate risk.
Interest rate risk is the exposure of net interest income to changes in
interest rates. Interest rate sensitivity is the relationship between market
interest rates and net interest income due to the repricing characteristics of
assets and liabilities. If more liabilities than assets reprice in a given
period (a liability-sensitive position), market interest rate changes will be
reflected more quickly in liability rates. If interest rates decline, such
positions will generally benefit net interest income. Alternatively, where
assets reprice more quickly than liabilities in a given period (an
asset-sensitive position), a decline in market rates could have an adverse
effect on net interest income. Excessive levels of interest rate risk can result
in a material adverse effect on the Company's future financial condition and
results of operations. Accordingly, effective risk management techniques that
maintain interest rate risk at prudent levels is essential to the Company's
safety and soundness.
All market risk sensitve instruments are held to maturity or available for
sale. The Company has no financial instruments entered into for trading
purposes. Federal funds, both purchases and sales, on which rates change daily,
and loans and deposits tied to certain indices, such as the prime rate and
Federal Discount rate, are the most market rate sensitive and have the most
stable fair values. The least sensitive instruments include long-term fixed rate
loans and securities and fixed rate retail savings deposits, which have the
least stable fair values. On those types falling between these extremes, the
management of maturity distributions is as important as the balances maintained.
The management techniques for maturity distributions involve the matching of
interest rate maturities, as well as principal maturities, and is a key
determinant of net interest income. In periods of rapidly changing interest
rates, an imbalance ("gap") between the rate sensitive assets and liabilities
can cause major fluctuations in net interest income and in earnings. The
Company's management of liquidity and interest rate sensitivity has been
successful in the past, as evidenced by the continued net interest income
growth. Continuing to establish patterns of sensitivity which will
72
<PAGE>
USB[LOGO]
- --------------------------------------------------------------------------------
enhance future growth regardless of frequent shifts in market conditions is one
of the objectives of the Company's asset/liability management strategy.
Evaluating the Company's exposure to changes in interest rates is the
responsibility of ALCO and includes assessing both the adequacy of the
management process used to control interest rate risk and the quantitative level
of exposure. When assessing the interest rate risk management process, the
Company seeks to ensure that appropriate policies, procedures, management
information systems and internal controls are in place to maintain interest rate
risk at appropriate levels. Evaluating the quantitative level of interest rate
risk exposure requires the Company to assess the existing and potential future
effects of changes in interest rates on its consolidated financial condition,
including capital adequacy, earnings, liquidity, and asset quality.
The Company uses two methods to evaluate its market risk to changes in
interest rates. A "Static Gap" evaluation and a simulation analysis of the
impact of changes in interest rates on the Company's net interest income.
Although, as further discussed below, the "Static Gap" analysis shows the
Company as liability-sensitive in the one-year time frame, the simulation
analysis indicates more of an asset sensitive position. This difference is due
primarily to the expected behavior of certain deposit accounts which do not
reprice to the full extent of changes in interest rates (i.e., NOW, money market
and savings accounts). The Company believes the simulation analysis is a more
accurate analysis of its interest rate risk.
The "Static Gap" is presented in the table on page 74. Balance sheet items
are appropriately categorized by contractual maturity, expected average lives
for mortgage-backed securities, or repricing dates, with prime rate indexed
loans and certificates of deposit, NOW accounts, savings accounts tied to the
Federal Discount rate, and retail money market deposits constituting the bulk of
the floating rate category. The determination of the interest rate sensitivity
of noncontractual items is arrived at in a subjective fashion. Passbook and
statement savings accounts are viewed as a relatively stable source of funds and
are therefore classified as intermediate funds.
On December 31, 1998, the "Static Gap" shows a negative cumulative gap of
$65.6 million in the one day to one year repricing period, due principally to
fixed rate securities and loans in the over one year to five years and over five
year categories to maximize yield on assets and the treatment of deposit
accounts as previously discussed above. A significant portion of the loans in
the over one year to five year category represents three and five years
adjustable rate commercial mortgages. Origination of such loans has allowed the
Company to generate an asset repriceable within three to five years to reduce
long-term interest rate risk.
The Company uses the simulation analysis to estimate the effect that
specific movements in interest rates would have on net interest income. This
analysis incorporates management assumptions about the levels of future balance
sheet trends, different patterns of interest rate movements, and changing
relationships between interest rates (i.e. basis risk). These assumptions have
been developed through a combination of historical analysis and future expected
pricing behavior. For a given level of market interest rate changes, the
simulation can consider the impact of the varying behavior of cash flows from
principal prepayments on the loan portfolio and mortgage-backed securities, call
activities on investment securities, balance changes on noncontractual maturity
deposit products (demand deposits, NOW, money market and passbook savings
accounts), and embedded option risk by taking into account the effects of
interest rate caps and floors. The impact of planned growth and anticipated new
business activities is not integrated into the simulation analysis. The Company
can assess the results of the simulation and, if necessary, implement suitable
strategies to adjust the structure of its assets and liabilities to reduce
potential unacceptable risks to net interest income.
The Company's policy limit on interest rate risk is that if interest rates
were to gradually increase or decrease 200 basis points from current rates, the
percentage change in estimated net interest income for the subsequent 12 month
measurement period should not decline by more than 5.0 percent. Net interest
income is forecasted using various interest rate scenarios that management
believes are reasonably likely to impact the Company's financial condition. A
base case scenario, in which current interest rates remain stable, is used for
comparison to other scenario simulations. The table below illustrates the
estimated exposures under a rising rate scenario and a declining rate scenario
calculated as a percentage change in estimated net interest income from the base
case scenario, assuming a gradual shift in interest rates for the next 12 month
measurement period, beginning December 31,1998. Information on the percentage
change in estimated net cash flows from the base case scenario is also shown.
The cash flows are scheduled by expected maturity and reflect the effects of
changes in market rates.
- ---------------------------------------------------------------------
Gradual Percentage Change Percentage Change
Change in in Estimated Net In Estimated Net
Interest Rates Interest Income Cash Flows
- ---------------------------------------------------------------------
+ 200 basis points 1.9% (2.7)%
- - 200 basis points 0.3 11.8
=====================================================================
As with any method of measuring interest rate risk, there are certain
limitations inherent in the method of analysis presented.
73
<PAGE>
- --------------------------------------------------------------------------------
Actual results may differ significantly from simulated results should market
conditions and management strategies, among other factors, vary from the
assumptions used in the analysis. The model assumes that certain assets and
liabilities of similar maturity or period to repricing will react the same to
changes in interest rates, but, in reality, they may react in different degrees
to changes in market interest rates. Specific types of financial instruments may
fluctuate in advance of changes in market interest rates, while other types of
financial instruments may lag behind changes in market interest rates.
Additionally, other assets, such as adjustable-rate loans, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. Furthermore, in the event of a change in interest rates, expected
rates of prepayments on loans and securities and early withdrawals from time
deposits could deviate significantly from those assumed in the simulation.
One way to minimize interest rate risk is to maintain a balanced or
matched interest rate sensitivity position. However, profits are not always
maximized by matched funding. To increase net interest earnings, the Company
selectively mismatches asset and liability repricing to take advantage of
short-term interest rate movements and the shape of the U.S. Treasury yield
curve. The magnitude of the mismatch depends on a careful assessment of the
risks presented by forecasted interest rate movements. The risk inherent in such
a mismatch, or gap, is that interest rates may not move as anticipated.
Interest rate risk exposure is reviewed in weekly meetings in which
guidelines are established for the following week and the longer term exposure.
The structural interest rate mismatch is reviewed periodically by ALCO.
Risk is mitigated by matching maturities or repricing more closely, and by
reducing interest rate risk by the use of interest rate contracts. The Company
does not use derivative financial instruments extensively. However, as
circumstances warrant, the Company purchases derivatives such as interest rate
contracts to manage its interest rate exposure. Any derivative financial
instruments are carefully evaluated to determine the impact on the Company's
interest rate risk in rising and declining interest rate environments, as well
as the fair value of the derivative instruments. Use of derivative financial
instruments is included in the Bank's investment policy, which has been approved
by the Board of Directors. Additional information on derivative financial
instruments is presented in Note 16 to the Consolidated Financial Statements.
INTEREST RATE SENSITIVITY ANALYSIS
BY REPRICING DATE
<TABLE>
<CAPTION>
December 31, 1998 (000's, except percentages)
- ------------------------------------------------------------------------------------------------------------------------------------
One Over Over Over
Day and One Day Three One Year Over Non-
Floating to Three Months to to Five Five Interest
Rate Months One Year Years Years Bearing Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans $239,552 $25,330 $ 83,916 $235,705 $137,976 $ -- $ 722,479
Mortgage-backed securities -- 77,758 39,109 158,948 55,551 -- 331,366
Other securities 471 5,029 7,665 76,233 25,769 -- 115,167
Other earning assets 47,377 -- -- -- -- -- 47,377
Other assets -- 17,849 -- -- -- 54,574 72,423
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 287,400 125,966 130,690 470,886 219,296 54,574 1,288,812
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Equity:
Interest bearing deposits 322,075 82,934 191,983 222,743 1,635 -- 821,370
Other borrowed funds -- 619 12,088 37,096 150,312 -- 200,115
Corporation-Obligated mandatory
redeemable capital securities of
subsidiary trust -- -- -- -- 20,000 -- 20,000
Demand deposits -- -- -- -- -- 137,270 137,270
Other liabilities -- -- -- -- -- 12,618 12,618
Stockholders' equity -- -- -- -- -- 97,439 97,439
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity 322,075 83,553 204,071 259,839 171,947 247,327 1,288,812
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest rate sensitivity gap $(34,675) $42,413 $(73,381) $211,047 $ 47,349 $(192,753) $ --
====================================================================================================================================
Cumulative gap $(34,675) $ 7,738 $(65,643) $145,404 $192,753 $ -- $ --
====================================================================================================================================
Cumulative gap to
Interest-earning assets (2.8)% 0.6% (5.3)% 11.8% 15.6% --% --%
====================================================================================================================================
</TABLE>
74
<PAGE>
USB[LOGO]
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Year 2000 Issue
The Company continues to monitor the Year 2000 ("Y2K") issue. The Company
has identified all information technology ("IT") systems and non-IT systems
(primarily telephone, vault and security systems that include micro-processors)
and evaluated their status as to Y2K readiness. The Company's Y2K Committee
reports progress to the Company's Board of Directors on a quarterly basis.
All significant IT and non-IT systems are vendor supported. Vendors have
represented to the Company that all significant systems are or will be Y2K
compliant. In particular, the Company's major core system software vendor has
certified that its software is Y2K compliant. For those systems not yet
compliant, software vendors are in the process of providing updates to ensure
such systems become compliant. The Company has further determined which systems
are mission critical, i.e., those systems that are critical to the Company's
ability to operate and provide service to its customers without any interruption
to the Company's normal business operations. Each of these systems have been
certified or represented by its vendor that they are or will be Y2K compliant.
These systems include the IBM AS-400 computer, Kirchman D-3000 (core banking)
system, ATM systems, Automated Clearing House (ACH) system, and CR
(communications) system. The Company has completed testing each mission critical
system according to an overall Y2K testing plan, except the ATM system which
will be tested by June 30, 1999. An additional IBM AS-400 computer has been
leased to facilitate testing in a controlled production environment.
Testing of systems identified as significant but not mission critical,
i.e. systems for which alternative processes are available but provide a
significant level of efficiency, are also in the process of being tested.
Testing of these systems is expected to be completed during the second quarter
of 1999.
The Company has also evaluated significant customers' Y2K readiness and/or
progress toward Y2K compliance to evaluate the potential impact on the Company
for their failure to remediate their Y2K issues. In this connection, the Company
designed a Y2K risk assessment process. Customers with potential Y2K issues have
been identified and the Company has taken steps to mitigate the impact of such
issues to the Company. In addition, the Company has implemented a loan policy
which requires an evaluation of the Y2K status for each loan customer prior to
approving a new loan or renewal of an existing loan. The Company has also
evaluated and will continue to evaluate the impact of loan customers' Y2K status
on the allowance for loan losses. As a result, the Company has allocated
$500,000 of the allowance for loan losses at December 31,1998 to provide for any
loan losses that may occur as a consequence of the Y2K issue.
The Company has also evaluated the potential impact of the Y2K readiness
of other significant vendors, particularly utility companies. To the Company's
knowledge, the major utility companies serving the Company have made
representations in their public documents that they believe the possibility of
significant Y2K problems will be significantly reduced with the implementation
of their Y2K plans.
The worst case Y2K scenario would involve no utility service, mission
critical system failure and Federal Reserve, Clearing House and ACH failure. In
this circumstance, the Company would be required to significantly curtail its
operations. Preparation of paper reports prior to year end 1999 will allow the
Company to monitor limited business activity. However, processing of accruals,
customer statements and the like would not be practical. It is expected that
mission critical systems will be compliant or are not date sensitive, based on
completed Y2K remediation, and the vendors' certification and representations
regarding Y2K compliance. A contingency plan has been prepared to guide
operations in the event that a mission critical system is not Y2K compliant in
the Company's operating environment and cannot be immediately remediated or for
Federal Reserve, Clearing House, ACH and major vendor and/or utility service
failure. For other significant systems, an alternative process exists and such
process will be utilized as a contingent process if such a system fails to be
Y2K compliant. The Company is also developing a contingent liquidity plan in the
event of increased deposit withdrawals or loan commitment usage.
There can be no guarantee that the systems of other entities on which the
Company's systems rely will be timely converted, or that a failure to convert by
another entity, or a conversion that is incompatible with the Company's systems,
would not have a material adverse effect of the Company.
Excluding the allocation of $500,000 of the allowance for loan losses at
December 31, 1998 for the potential impact of Y2K related issues on the loan
portfolio, the Company's Y2K project costs have been $165,000 to date. The
estimate of total expenditures for the Y2K project is approximately $250,000.
Such costs are being expensed as incurred. Y2K project costs will be funded
through normal operating cash flow and include approximately $75,000 of costs
that are part of the Company's IT capital budget. The cost of the project and
the date on which the Company plans to complete the Y2K modifications are based
on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. No major IT projects have been deferred due to the
Company's Y2K efforts.
The Company will continue to evaluate all issues with respect to the Y2K
problem to minimize the impact on its operations and financial condition.
75
<PAGE>
- --------------------------------------------------------------------------------
Financial Ratios
Significant ratios of the Company for the periods indicated are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Year Ended December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings Ratio
Net income as a percentage of:
Average earning assets 1.04% 1.15% 1.25%
Average total assets 0.99% 1.09% 1.18%
Average common stockholders' equity 13.15% 14.47% 14.13%
Average total stockholders' equity 13.20% 14.41% 13.86%
Capital Ratios
Average common stockholders' equity to average total assets 7.51% 7.50% 8.14%
Average total stockholders' equity to average total assets 7.51% 7.56% 8.54%
Average total stockholders' equity, and Corporation-Obligated
mandatory redeemable capital securities of subsidiary trust 9.16% 9.26% 8.54%
Average net loans as a multiple of average total stockholders' equity 7.2 7.3 6.7
Leverage capital 9.13% 9.37% 8.45%
Tier I capital (to risk weighted assets) 14.97% 15.26% 13.32%
Total risk-based capital (to risk weighted assets) 16.12% 16.47% 14.38%
Other
Allowance for loan losses as a percentage of year-end loans 1.22% 1.33% 1.14%
Loans (net) as a percentage of year-end total assets 56.06% 53.24% 59.75%
Loans (net) as a percentage of year-end total deposits 75.36% 67.98% 70.83%
Securities as a percentage of year-end total assets 34.65% 38.11% 32.89%
Average interest-earning assets as a percentage of average interest-
bearing liabilities 116.62% 115.53% 116.88%
Dividends per share as a percentage of diluted earnings per share 30.56% 26.09% 22.58%
=========================================================================================================
</TABLE>
76
EMPLOYMENT AGREEMENT
by and between
U.S.B. HOLDING CO., INC.
UNION STATE BANK
and
THOMAS E. HALES
---------------------------
Made and Entered Into As of
November 16, 1998
---------------------------
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as of
November 16, 1998 by and between U.S.B. HOLDING CO., INC., a publicly held
business corporation organized and operating under the laws of the State of
Delaware (the "Company") and Union State Bank (the "Bank"), both having an
office at 100 Dutch Hill Road, Orangeburg, New York 10962 and THOMAS E. HALES,
an individual residing at 66 Brookwood Drive, Briarcliff Manor, New York 10510
("Mr. Hales").
WITNESSETH:
WHEREAS, Mr. Hales currently serves the Company and the Bank in the
capacity of Chairman of the Board, President and Chief Executive Officer; and
WHEREAS, the Company and the Bank desire to assure for themselves the
continued availability of Mr. Hales' services and the ability of Mr. Hales to
perform such services; and
WHEREAS, Mr. Hales is willing to continue to serve the Company and the
Bank on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and conditions hereinafter set forth, the Company and the Bank and Mr. Hales
hereby agree as follows:
Section 1. Employment
The Company and the Bank agree to continue to employ Mr. Hales in the
capacities stated above, and Mr. Hales hereby agrees to such continued
employment, during the period and upon the terms and conditions set forth in
this Agreement.
Section 2. Employment Period; Remaining Unexpired Employment Period
(a) The terms and conditions of this Agreement shall be and remain in
effect during the period of employment established under this Section 2
("Employment Period"). The Employment Period shall be for a term of five years
beginning on the date of this Agreement and ending on the fifth anniversary date
of this Agreement (an "Anniversary Date"), plus such extensions, if any, as are
provided for in this Agreement or otherwise agreed to by the Boards of Directors
of the Company and the Bank (collectively, the "Boards").
(b) Nothing in this Agreement shall be deemed to prohibit the Company
and/or the Bank at any time from terminating Mr. Hales' employment during the
Employment Period with or without notice for any reason; provided, however, that
the relative rights and obligations of the Company and the Bank and Mr. Hales in
the event of any such termination shall be determined under this Agreement.
Page 1 of 15
<PAGE>
Section 3. Duties
Mr. Hales shall serve as Chairman of the Board, President and Chief
Executive Officer of the Company and the Bank, having such power, authority and
responsibility and performing such duties as are prescribed by or under the
By-Laws of the Company or the Bank and as are customarily associated with such
position. Mr. Hales shall devote his full business time and attention (other
than during weekends, holidays, approved vacation periods, and periods of
illness or approved leaves of absence) to the business and affairs of the
Company and the Bank and shall use his best efforts to advance the interests of
the Company and the Bank.
Section 4. Cash Compensation
In consideration for the services to be rendered by Mr. Hales hereunder,
the Company and the Bank shall together pay to him a salary at an initial annual
rate of FIVE HUNDRED SIXTY THOUSAND DOLLARS ($560,000), payable in approximately
equal installments in accordance with the Company's and Bank's customary payroll
practices for senior officers. On July 1st of each year occurring during the
Employment Period, Mr. Hales' annual rate of salary shall be increased by
$30,000 per annum. In addition to salary, Mr. Hales may receive other cash
compensation from the Company or the Bank for services hereunder at such times,
in such amounts and on such terms and conditions as the respective Boards may
determine from time to time.
The Company and the Bank agree to pay to Mr. Hales a minimum annual bonus
of 6.0 percent, or a percent as otherwise provided on mutual agreement between
the parties, to be computed based upon the net profits realized by the
consolidated earnings of the Company and the Bank and their affiliates in
accordance with the Executive Compensation Plan which has been adopted by the
Board.
Mr. Hales shall be granted stock options by the Company of no less than
96,800 shares each year during the term of this Agreement under the Company's
Employee Stock Option Plans as may be established by the Company, such stock
options to be adjusted for stock dividends and stock splits after the date of
this Agreement by the Company during the term of this Agreement. Upon the
exercise of options with existing owned stock, additional options to purchase
stock will be issued to Mr. Hales in an amount equivalent to such Company stock
utilized in the exercise. In addition, if Mr. Hales sells existing owned stock
or stock acquired as a result of such exercise of options to pay income taxes as
a result of the exercise of options or sells stock acquired upon exercise of
options ("cashless exercise"), Mr. Hales shall be awarded new options to
purchase Company stock equivalent to the number of shares of Company stock sold
under the circumstances described in this sentence.
The foregoing salary shall be in addition to the monthly Board fees
presently paid to Mr. Hales or as hereafter provided by the Boards or any Board
of Directors of an affiliate of the Company or the Bank.
Mr. Hales, at his option, shall be allowed to defer any portion of his
cash compensation in accordance with any plan approved by the Company or the
Bank.
Page 2 of 15
<PAGE>
Section 5. Insurance
If Mr. Hales should become disabled during the term of this Agreement, the
Company and the Bank will compensate Mr. Hales for the difference between any
disability insurance, the premiums for which are paid by the Company and the
Bank, and Mr. Hales' full salary for the balance of the term of this Agreement
and thereafter for a period of six months after the termination of this
Agreement. Full fringe benefits will continue through the earlier of (i) the
balance of the term of this Agreement or (ii) the period of Mr. Hales'
disability.
In accordance with the foregoing, the Company and/or the Bank will
maintain and pay the premiums for the following life insurance policies on the
life of Mr. Hales: Life Policy No. 03260443 and Life Policy No. 83001432 of the
CNA Insurance Company in the amounts of $500,000 and $1,000,000, respectively,
and Universal Life Policy No. 1224430 of Security Mutual Life Insurance Company
in the amount of $2,000,000. The beneficiaries under these three (3) policies of
insurance shall be designated by Mr. Hales.
Further, the Company and/or the Bank shall maintain and pay the premiums
for three (3) disabilities policies as follows: Disability Policy Nos. D223373,
D290049 and D290633 of the CNA Insurance Company.
Section 6. Employee Benefit Plans and Programs
During the Employment Period, Mr. Hales shall be treated as an employee of
the Company and the Bank and shall be entitled to participate in and receive
benefits under any and all qualified or non-qualified retirement, pension,
savings, profit-sharing or stock bonus plans, any and all group life, health
(including hospitalization, medical and major medical), dental, accident and
long-term disability insurance plans, and any other employee benefit and
compensation plans (including but not limited to, any incentive compensation
plans or programs, stock option and appreciation rights plans and restricted
stock plans) as may from time to time be maintained by, or cover employees of,
the Company or the Bank, in accordance with the terms and conditions of such
employee benefit plans and programs and compensation plans and programs which
are consistent with the Company's and the Bank's customary practices.
Section 7. Indemnification and Insurance
(a) During the Employment Period and for a period of six (6) years
thereafter, the Company or the Bank shall cause Mr. Hales to be covered by and
named as an insured under any policy or contract of insurance obtained by it to
insure its directors and officers against personal liability for acts or
omissions in connection with service as an officer or director of the Company or
the Bank or service in other capacities at the request of the Company or the
Bank. The coverage provided to Mr. Hales pursuant to this Section 7 shall be of
the same scope and on the same terms and conditions as the coverage (if any)
provided to other officers or directors of the Company and the Bank.
(b) To the maximum extent permitted under applicable law, during the
Employment Period and for a period of six (6) years thereafter, the Company and
the Bank shall indemnify Mr. Hales against and hold him harmless from any costs,
liabilities, losses and expenses to the fullest
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<PAGE>
extent and on the most favorable terms and conditions that similar
indemnification is offered to any director or officer of the Company, the Bank
or any subsidiary or affiliate thereof.
Section 8. Outside Activities
Mr. Hales may serve as a member of a board of directors of such business,
community and charitable organizations as he may disclose to and as may be
approved by the Boards, which approval shall not be unreasonably withheld;
provided, however, that such service shall not materially interfere with the
performance of his duties under this Agreement. Mr. Hales may also engage in
personal business and investment activities which do not materially interfere
with the performance of his duties hereunder; provided, however, that such
activities are not prohibited under any code of conduct or investment or
securities trading policy established by the Company and/or Bank and generally
applicable to all similarly situated executives. Mr. Hales may also serve as an
officer or director of any subsidiary of the Company or the Bank. If Mr. Hales
is discharged or suspended, or is subject to any regulatory prohibition or
restriction with respect to participation in the affairs of the Company or the
Bank. he shall continue to perform services for the Company and the Bank in
accordance with this Agreement but shall not directly or indirectly provide
services to or participate in the affairs of the Company and the Bank in a
manner inconsistent with the terms of such discharge or suspension or any
applicable regulatory order.
Section 9. Working Facilities and Expenses
Mr. Hales' principal place of employment shall be at the Company's and the
Bank's executive offices at the address first above written, or at such other
location at which the Company or the Bank shall maintain its principal executive
offices, or at such other location as the Company and the Bank and Mr. Hales may
mutually agree upon. The Company or the Bank shall provide Mr. Hales at his
principal place of employment with a private office, secretarial services, an
automobile, and other support services and facilities suitable to his position
with the Company and the Bank and necessary or appropriate in connection with
the performance of his assigned duties under this Agreement. The Company or the
Bank shall provide to Mr. Hales for his exclusive use an automobile owned or
leased by the Company or the Bank appropriate to his position, to be used in the
performance of his duties hereunder, including commuting to and from his
personal residence. The Company or the Bank shall reimburse Mr. Hales for his
ordinary and necessary business expenses, including, without limitation, all
expenses associated with his business use of the aforementioned automobile, fees
for memberships in such clubs and organizations as Mr. Hales and the Company or
the Bank shall mutually agree are necessary and appropriate for business
purposes, and his travel and entertainment expenses incurred in connection with
the performance of his duties under this Agreement, in each case upon
presentation to the Company or the Bank of an itemized account of such expenses
in such form as the Company or the Bank may reasonably require.
The Company and the Bank shall specifically pay the annual membership fees
of the Sleepy Hollow and the Rockland Country Clubs for the membership of Mr.
Hales.
Section 10. Vacation
Mr. Hales shall be entitled annually to vacation time of five (5) weeks in
total and two (2) personal days, or any additional vacation and personal time
agreed to by the parties or permitted by
Page 4 of 15
<PAGE>
Company or Bank policy.
Section 11. Termination of Employment with Severance Benefits
(a) Mr. Hales shall be entitled to the severance benefits described herein
in the event that his employment with the Company or the Bank terminates during
the Employment Period under any of the following circumstances:
(i) Mr. Hales' voluntary resignation from employment with the Company and
the Bank within ninety (90) days following:
(A) the failure of the Boards to appoint or re-appoint or elect or
re-elect Mr. Hales to the office of the Chairman, President or C.E.O. (or
a more senior office) of the Company and the Bank;
(B) the failure of the stockholders of the Company or the Bank to
elect or re-elect Mr. Hales as a director of the Boards or the failure of
the Boards (or the nominating committee thereof) to nominate Mr. Hales for
such election or re-election;
(C) the expiration of a thirty (30) day period following the date on
which Mr. Hales gives written notice to the Company and/or the Bank of its
material failure, whether by amendment of the Company's or the Bank's
Organization Certificate or By-laws, action of the Boards or the Company's
or the Bank's stockholders or otherwise, to vest in Mr. Hales the
functions, duties, or responsibilities prescribed in Section 3 of this
Agreement, unless, during such thirty (30) day period, the Company and/or
the Bank cures such failure in a manner determined by Mr. Hales and the
Boards to be satisfactory; or
(D) the expiration of a thirty (30) day period following the date on
which Mr. Hales gives written notice to the Company and/or the Bank of its
material breach of any term, condition or covenant contained in this
Agreement (including, without limitation any reduction of Mr. Hales' rate
of base salary in effect from time to time and any change in the terms and
conditions of any compensation or benefit program in which Mr. Hales
participates which, either individually or together with other changes,
has a material adverse effect on the aggregate value of his total
compensation package), unless, during such thirty (30) day period, the
Company and/or the Bank cures such failure in a manner determined by Mr.
Hales and the Boards to be satisfactory; or
(ii) Mr. Hales' death; or
(iii) subject to the provisions of Section 12, the termination of Mr.
Hales' employment with the Company or the Bank for any other reason not
described in Section 11(a).
(b) Upon the termination of Mr. Hales' employment with the Company and/or
the Bank under circumstances described in Section 11(a) of this Agreement, the
Company or the Bank shall pay and provide to Mr. Hales (or, in the event of his
death, to his estate):
Page 5 of 15
<PAGE>
(i) his earned but unpaid compensation (including, without limitation, all
items which constitute wages under Section 190.1 of the New York Labor Law
and the payment of which is not otherwise provided for under this Section
11(b)) as of the date of the termination of his employment with the
Company and the Bank, such payment to be made at the time and in the
manner prescribed by law applicable to the payment of wages but in no
event later than thirty (30) days after termination of employment;
(ii) the benefits, if any, to which he is entitled as a former employee
under the employee benefit plans and programs and compensation plans and
programs maintained for the benefit of the Company's and the Bank's
officers and employees;
(iii) continued group life, health (including hospitalization, medical and
major medical and the insurance provided under Section 5), dental,
accident and long term disability insurance benefits, in addition to that
provided pursuant to Section 11 (b)(ii), and after taking into account the
coverage provided by any subsequent employer, if and to the extent
necessary to provide for Mr. Hales, for the Remaining Unexpired Employment
Period, coverage equivalent to the coverage to which he would have been
entitled under such plans (as in effect on the date of his termination of
employment, or, if his termination of employment occurs after a Change of
Control, on the date of such Change of Control, whichever benefits are
greater), if he had continued working for the Company and the Bank during
the Remaining Unexpired Employment Period at the highest annual rate of
compensation achieved during that portion of the Employment Period which
is prior to Mr. Hales' termination of employment with the Company or the
Bank;
(iv) within thirty (30) days following his termination of employment with
the Company and/or the Bank, a lump sum payment, in an amount equal to the
present value of the salary that Mr. Hales would have earned if he had
continued working for the Company and the Bank for three years at the
highest annual rate of salary achieved during that portion of the
Employment Period which is prior to Mr. Hales' termination of employment
with the Company and the Bank, where such present value is to be
determined using a discount rate equal to the applicable short-term
federal rate prescribed under Section 1274(d) of the Internal Revenue Code
of 1986 ("Code"), compounded using the compounding period corresponding to
the Company's and the Bank's regular payroll periods for its officers,
such lump sum to be paid in lieu of all other payments of salary provided
for under this Agreement in respect of the period following any such
termination. At the option of Mr. Hales, such payments may be made in
equal monthly installments over a period of not less than three years, nor
more than five years, in which case such payments will not be discounted;
(v) within thirty (30) days following his termination of employment with
the Company and/or the Bank, a lump sum payment in an amount equal to the
present value of the additional employer contributions to which he would
have been entitled under any and all qualified and non-qualified defined
contribution plans maintained by, or covering employees of, the Company
and the Bank, if he were 100% vested thereunder and had continued working
for the Company and the Bank, during the Remaining Unexpired Employment
Period at the highest annual rate of compensation achieved during that
portion of the Employment Period which is prior to Mr. Hales' termination
of employment with the
Page 6 of 15
<PAGE>
Company or the Bank, and making the maximum amount of employee
contributions, if any, required under such plan or plans, such present
value to be determined on the basis of a discount rate, compounded using
the compounding period that corresponds to the frequency with which
employer contributions are made to the relevant plan, equal to the
applicable PBGC Rate. At the option of Mr. Hales, such payments may be
made in equal monthly installments over a period of not less than three,
nor more than five years, in which case such payments will not be
discounted;
(vi) the payment that would have been made to Mr. Hales under any cash
bonus or long-term or short-term cash incentive compensation plan
maintained by, or covering employees of, the Company or the Bank, if he
had continued working for the Company or the Bank during the Remaining
Unexpired Employment Period and had earned the maximum bonus or incentive
award in each calendar year that ends during the Remaining Unexpired
Employment Period, such payments to be equal to the product of:
(A) the maximum percentage rate at which an award was ever available
to Mr. Hales under such incentive compensation plan, multiplied by
(B) net income of the Company for the most recent fiscal year which
is prior to Mr. Hales' termination of employment with the Company;
such payments to be made in a lump sum payment in an amount equal to the
present value of such payments as if made in accordance with Company's
and/or Bank's Executive Bonus Plan, where such present value is to be
determined using a discount rate equal to the applicable short-term
federal rate prescribed under Section 1274(d) of the Code, within thirty
(30) days following Mr. Hales' termination of employment At the option of
Mr. Hales, such payments may be made in equal monthly installments over a
period of not less than three, nor more than five years, in which case
such payments will not be discounted;
(vii) at the election of the Company and the Bank made within thirty (30)
days following his termination of employment with the Company and the
Bank, upon the surrender of stock options or stock appreciation rights
issued to Mr. Hales under any stock option and appreciation rights plan or
program maintained by, or covering employees of, the Company and the Bank,
a lump sum payment in an amount equal to the product of:
(A) the excess of (i) the fair market value of a share of stock of
the same class as the stock subject to the option or appreciation right,
determined as of the date of termination of employment, over (ii) the
exercise price per share for such option or appreciation right, as
specified in or under the relevant plan or program; multiplied by
(B) the number of shares with respect to which options or
appreciation rights are being surrendered.
For purposes of this Section 11(b)(vii) and for purposes of determining
Mr. Hales' right following his termination of employment with the Company
or Bank to exercise any options or appreciation rights not surrendered
pursuant hereto, Mr. Hales shall be deemed fully vested in all options and
appreciation rights under any stock option or appreciation rights
Page 7 of 15
<PAGE>
plan or program maintained by, or covering employees of, the Company or
Bank, even if he is not vested under such plan or program, and shall have
a period of three months from the date of termination of employment to
exercise such stock options or appreciation rights.
(viii) at the election of the Company or the Bank made within thirty (30)
days following Mr. Hales' termination of employment with the Company and
the Bank, upon the surrender of any shares awarded to Mr. Hales under any
restricted stock plan maintained by, or covering employees of, the Company
and the Bank, a lump sum payment in an amount equal to the product of:
(A) the fair market value of a share of stock of the same class of
stock granted under such plan, determined as of the date of Mr. Hales
termination of employment; multiplied by
(B) the number of shares which are being surrendered.
For purposes of this Section 11(b)(viii) and for purposes of determining
Mr. Hales' right following his termination of employment with the Company
and the Bank to any stock not surrendered pursuant hereto, Mr. Hales shall
be deemed fully vested in all shares awarded under any restricted stock
plan maintained by, or covering employees of the Company and the Bank,
even if he is not vested under such plan;
(ix) the title to the car then currently provided to Mr. Hales shall be
transferred to Mr. Hales.
The Company and the Bank and Mr. Hales hereby stipulate that the damages which
may be incurred by Mr. Hales following any such termination of employment are
not capable of accurate measurement as of the date first above written and that
the payments and benefits contemplated by this Section 11(b) constitute
reasonable damages under the circumstances and shall be payable without any
requirement of proof of actual damage and without regard to Mr. Hales' efforts,
if any, to mitigate damages. The Company and the Bank and Mr. Hales further
agree that the Company and the Bank may condition the payments and benefits (if
any) due under Sections 11(b)(iii), (iv), (v), (vi), and (vii) on the receipt of
Mr. Hales' resignation from any and all positions which he holds as an officer,
director or committee member with respect to the Company, the Bank or any
subsidiary or affiliate of either of them.
Section 12. Termination without Additional Company/Bank Liability
(a) In the event that Mr. Hales employment with the Company and the Bank
shall terminate during the Employment Period on account of:
(i) the discharge of Mr. Hales for "cause," which, for purposes of this
Agreement shall mean: (A) Mr. Hales intentionally engages in dishonest
conduct in connection with his performance of services for the Company or
the Bank resulting in his conviction of a felony; (B) Mr. Hales is
convicted of, or pleads guilty or nolo contendere to, a felony or any
crime involving moral turpitude; (C) Mr. Hales willfully fails or refuses
to perform his duties under this Agreement and fails to cure such breach
within sixty (60) days following written notice
Page 8 of 15
<PAGE>
thereof from the Company or the Bank; (D) Mr. Hales breaches his fiduciary
duties to the Company or the Bank for personal profit; or (E) Mr. Hales'
willful breach or violation of any law, rule or regulation (other than
traffic violations or similar offenses), or final cease and desist order
in connection with his performance of services for the Company or the
Bank;
(ii) Mr. Hales' voluntary resignation from employment with the Company and
the Bank for reasons other than those specified in Section 11(a); or
(iii) a determination that Mr. Hales is eligible for long-term disability
benefits under the Company's or Bank's long-term disability insurance
program or, if there is no such program, under the federal Social Security
Act;
then the Company and the Bank shall have no further obligations under this
Agreement, other than the payment to Mr Hales (or, in the event of his death, to
his estate) of his earned but unpaid salary as of the date of the termination of
his employment, and the provision of such other benefits, if any, to which he is
entitled as a former employee under the employee benefit plans and programs and
compensation plans and programs maintained by, or covering employees of, the
Company or the Bank.
(b) For purposes of Section 12(a)(i)(A) or (B), no act or failure to act,
on the part of Mr. Hales, shall be considered "willful" unless it is done, or
omitted to be done, by Mr. Hales in bad faith or without reasonable belief that
Mr. Hales' action or omission was in the best interests of the Company or the
Bank. Any act, or failure to act, based upon authority given pursuant to a
resolution duly adopted by the Boards or based upon the written advice of
counsel for the Company or the Bank shall be conclusively presumed to be done,
or omitted to be done, by Mr. Hales in good faith and in the best interests of
the Company or the Bank. The cessation of employment by Mr. Hales shall not be
deemed to be for "cause" within the meaning of Section 12(a)(i) unless and until
there shall have been delivered to Mr. Hales a copy of a resolution duly adopted
by the affirmative vote of three-fourths of the non-employee members of the
Boards at a meeting of the Boards called and held for such purpose (after
reasonable notice is provided to Mr. Hales and Mr. Hales is given an
opportunity, together with counsel, to be heard before the Boards), finding
that, in the good faith opinion of the Boards, Mr. Hales is guilty of the
conduct described in Section 12(a)(i) above, and specifying the particulars
thereof in detail.
Section 13. Termination Upon or Following a Change of Control
(a) A change of control of the Company or the Bank ("Change of Control")
shall be deemed to have occurred upon the happening of any of the following
events:
(i) approval by the stockholders of the Company or the Bank of a
transaction that would result in the reorganization, merger or
consolidation of the Company or the Bank, respectively, with one or more
other persons, other than a transaction following which:
(A) at least 51% of the equity ownership interests of the entity
resulting from such transaction are beneficially owned (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) in substantially the
same relative proportions by persons who, immediately prior to such
transaction, beneficially owned (within the meaning of Rule 13d-3
promulgated
Page 9 of 15
<PAGE>
under the Exchange Act) at least 51% of the outstanding equity ownership
interests in the Company or the Bank; and
(B) at least 51% of the securities entitled to vote generally in the
election of directors of the entity resulting from such transaction are
beneficially owned (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) in substantially the same relative proportions by persons
who, immediately prior to such transaction, beneficially owned (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of
the securities entitled to vote generally in the election of directors of
the Company or the Bank;
(ii) the acquisition of all or substantially all of the assets of the
Company or the Bank or beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 20% or more of the
outstanding securities of the Company or the Bank entitled to vote
generally in the election of directors by any person or by any persons
acting in concert, or approval by the stockholders of the Company or the
Bank of any transaction which would result in such an acquisition;
(iii) a complete liquidation or dissolution of the Company or the Bank, or
approval by the stockholders of the Company or the Bank of a plan for such
liquidation or dissolution;
(iv) the occurrence of any event if, immediately following such event, at
least 50% of the members of the board of directors of the Company or the
Bank do not belong to any of the following groups:
(A) individuals who were members of the board of directors of the
Company or the Bank on the date of this Agreement; or
(B) individuals who first became members of the board of directors
of the Company or the Bank after the date of this Agreement either:
(I) upon election to serve as a member of the board of
directors of the Company or the Bank by affirmative vote of
three-quarters of the members of such board, in office at the time
of such first election; or
(II) upon election by the stockholders to serve as a member of
the board of directors of the Company or the Bank, but only if
nominated for election by affirmative vote of three-quarters of the
members of the board of directors of the Company or the Bank, or of
a nominating committee thereof, in office at the time of such first
nomination;
provided, however, that such individual's election or nomination did not
result from an actual or threatened election contest (within the meaning
of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents (within the
meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) other than by or on behalf of the Board of the Company or the Bank.
Page 10 of 15
<PAGE>
In no event, however, shall a Change of Control be deemed to have occurred as a
result of any acquisition of securities or assets of the Company, the Bank, or a
subsidiary of either of them, by the Company, the Bank, or a subsidiary of
either of them, or by any employee benefit plan maintained by any of them. For
purposes of this Section 13(a), the term "person" shall have the meaning
assigned to it under Sections 13(d)(3) or 14(d)(2) of the Exchange Act.
(b) In the event of a Change of Control, Mr. Hales shall be entitled to
the payments and benefits contemplated by Section 11(b), provided, however, that
with respect to any such benefits or payments to be made thereunder, the
benefits or payments contemplated by Section 11(b) will be calculated as if the
remaining Unexpired Employment Period is equal to three years, in the event of
his termination of employment with the Company or the Bank under any of the
circumstances described in Section 11(a) of this Agreement or under any of the
following circumstances:
(i) resignation, voluntary or otherwise, by Mr. Hales at any time during
the Employment Period following his demotion, loss of title, office or
significant authority or responsibility, or following any reduction in any
element of his package of compensation and benefits;
(ii) resignation, voluntary or otherwise, by Mr. Hales at any time during
the Employment Period following any relocation of his principal place of
employment or any change in working conditions at such principal place of
employment which Mr. Hales, in his reasonable discretion, determines to be
embarrassing, derogatory or otherwise adverse;
(iii) resignation, voluntary or otherwise, by Mr. Hales at any time during
the Employment Period following the failure of any successor to the
Company or the Bank in the Change of Control to include Mr. Hales in any
compensation or benefit program maintained by it or covering any of its
executive officers, unless Mr. Hales is already covered by a substantially
similar plan of the Company which is at least as favorable to him; or
(iv) resignation, voluntary or otherwise, for any other reason whatsoever
following the effective date of the Change of Control.
Section 14. Tax Indemnification
(a) This Section 14 shall apply if Mr. Hales' employment is terminated
upon or following (i) a Change of Control (as defined in Section 13 of this
Agreement); or (ii) a change "in the ownership or effective control" of the
Company or the Bank or "in the ownership of a substantial portion of the assets"
of the Company or the Bank within the meaning of Section 280G of the Code. If
this Section 14 applies, then, if for any taxable year, Mr. Hales shall be
liable for the payment of an excise tax under Section 4999 of the Code with
respect to any payment in the nature of compensation made by the Company, the
Bank or any direct or indirect subsidiary or affiliate of the Company or the
Bank to (or for the benefit of) Mr. Hales, the Company or the Bank shall pay to
Mr. Hales an amount equal to X determined under the following formula:
X = E x P
--------------------------------
1-[(FI x (1-SLI)) + SLI + E + M]
where
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<PAGE>
E = the rate at which the excise tax is assessed under Section 4999 of
the Code;
P = the amount with respect to which such excise tax is assessed,
determined without regard to this Section 14;
FI = the highest marginal rate of income tax applicable to Mr. Hales
under the Code for the taxable year in question;
SLI = the sum of the highest marginal rates of income tax applicable to
Mr. Hales under all applicable state and local laws for the taxable
year in question; and
NI = the highest marginal rate of Medicare tax applicable to Mr. Hales
under the Code for the taxable year in question.
With respect to any payment in the nature of compensation that is made to (or
for the benefit of) Mr. Hales under the terms of this Agreement, or otherwise,
and on which an excise tax under Section 4999 of the Code will be assessed, the
payment determined under this Section 14(a) shall be made to Mr. Hales on the
earlier of (i) the date the Company, the Bank or any direct or indirect
subsidiary or affiliate of the Company or the Bank is required to withhold such
tax, or (ii) the date the tax is required to be paid by Mr. Hales.
(b) Notwithstanding anything in this Section 14 to the contrary, in the
event that Mr. Hales' liability for the excise tax under Section 4999 of the
Code for a taxable year is subsequently determined to be different than the
amount determined by the formula (X + P) x E, where X, P and E have the meanings
provided in Section 14(a), Mr. Hales, the Company or the Bank, as the case may
be, shall pay to the other party at the time that the amount of such excise tax
is finally determined, an appropriate amount, plus interest, such that the
payment made under Section 14(a), when increased by the amount of the payment
made to Mr. Hales under this Section 14(b) by the Company or the Bank, or when
reduced by the amount of the payment made to the Company or the Bank under the
Section 14(b) by Mr. Hales, equals the amount that should have properly been
paid to Mr. Hales under Section 14(a). The interest paid under this Section
14(b) shall be determined at the rate provided under Section 1274(b)(2)(B) of
the Code. To confirm that the proper amount, if any, was paid to Mr. Hales under
this Section 14, Mr. Hales shall furnish to the Company a copy of each tax
return which reflects a liability for an excise tax payment made by the Company
or the Bank, at least 20 days before the date on which such return is required
to be filed with the Internal Revenue Service.
Section 15. Confidentiality
Unless he obtains the prior written consent of the Company or the Bank,
Mr. Hales shall keep confidential and shall refrain from using for the benefit
of himself, or any person or entity other than the Company or the Bank or any
entity which is a subsidiary of the Company or the Bank or of which the Company
is a subsidiary, any material document or information obtained from the Company
or the Bank, or from its parent or subsidiaries, in the course of his employment
with any of them concerning their properties. operations or business (unless
such document or information is readily ascertainable from public or published
information or trade sources or has otherwise been made available to the public
through no fault of his own) until the same ceases to be material (or becomes
Page 12 of 15
<PAGE>
so ascertainable or available); provided, however, that nothing in this Section
15 shall prevent Mr. Hales, with or without the Company's or Bank's consent,
from participating in or disclosing documents or information in connection with
any judicial or administrative investigation, inquiry or proceeding to the
extent that such participation or disclosure is required under applicable law.
Section 16. No Effect on Employee Benefit Plans or Programs
The termination of Mr. Hales' employment during the term of this Agreement
or thereafter, whether by the Company or the Bank or by Mr. Hales, shall have no
effect on the rights and obligations of the parties hereto under the Company's
or Bank's qualified or non-qualified retirement, pension, savings, thrift,
profit-sharing or stock bonus plans, group life, health (including
hospitalization, medical and major medical), dental, accident and long term
disability insurance plans or such other employee benefit plans or programs, or
compensation plans or programs, as may be maintained by, or cover employees of,
the Company or the Bank from time to time.
Section 17. Successors and Assigns
This Agreement will inure to the benefit of and be binding upon Mr. Hales,
his legal representatives and testate or intestate distributees, and the Company
and the Bank, and its successors and assigns, including any successor by merger
or consolidation or a statutory receiver or any other person or firm or
corporation to which all or substantially all of the assets and business of the
Company or the Bank may be sold or otherwise transferred. Failure of the Company
and the Bank to obtain from any successor its express written assumption of the
Company's and the Bank's obligations hereunder at least sixty (60) days in
advance of the scheduled effective date of any such succession shall be deemed a
material breach of this Agreement.
Section 18. Notices
Any communication required or permitted to be given under this Agreement,
including any notice, direction, designation, consent, instruction objection or
waiver, shall be in writing and shall be deemed to have been given at such time
as it is delivered personally, or five (5) days after mailing if mailed, postage
prepaid, by registered or certified mail, return receipt requested, addressed to
such party at the address listed below or at such other address as one such
party may by written notice specify to the other party:
If to Mr. Hales:
Mr. Thomas E. Hales
66 Brookwood Drive
Briarcliff Manor, New York 10510
If to the Company or the Bank:
U.S.B. Holding Co., Inc.
Union State Bank
100 Dutch Hill Road
Orangeburg, New York 10962
Attention: Corporate Secretary
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<PAGE>
Section 19. Indemnification for Attorneys' Fees
The Company and the Bank shall indemnify, hold harmless and defend Mr.
Hales against reasonable costs, including legal fees, incurred by him in
connection with or arising out of any action suit or proceeding in which he may
be involved, as a result of his efforts, in good faith, to defend or enforce the
terms of this Agreement; provided, however, that Mr. Hales shall have
substantially prevailed on the merits pursuant to a judgment, decree or order of
a court of competent jurisdiction or of an arbitrator in an arbitration
proceeding, or in a settlement. For purposes of this Agreement, any settlement
agreement which provides for payment of any amounts in settlement of the
Company's and Bank's obligations hereunder shall be conclusive evidence of Mr.
Hales' entitlement to indemnification hereunder, and any such indemnification
payments shall be in addition to amounts payable pursuant to such settlement
agreement, unless such settlement agreement expressly provides otherwise.
Section 20. Severability
A determination that any provision of this Agreement is invalid or
unenforceable shall not affect the validity or enforceability of any other
provision hereof.
Section 21. Waiver
Failure to insist upon strict compliance with any of the terms, covenants
or conditions hereof shall not be deemed a waiver of such term, covenant, or
condition. A waiver of any provision of this Agreement must be made in writing,
designated as a waiver, and signed by the party against whom its enforcement is
sought. Any waiver or relinquishment of any right or power hereunder at any one
or more times shall not be deemed a waiver or relinquishment of such right or
power at any other time or times.
Section 22. Counterparts
This Agreement may be executed in two (2) or more counterparts, each of
which shall be deemed an original, and all of which shall constitute one and the
same Agreement.
Section 23. Governing Law
This Agreement shall be governed by and construed and enforced in
accordance with the federal laws of the United States and, to the extent that
federal law is inapplicable, in accordance with the laws of the State of New
York applicable to contracts entered into and to be performed entirely within
the State of New York.
Section 24. Headings and Construction
The headings of sections in this Agreement are for the convenience of
reference only and are not intended to qualify the meaning of any section. Any
reference to a section number shall refer to a section of this Agreement, unless
otherwise stated.
Section 25. Entire Agreement: Modifications
This instrument contains the entire agreement of the parties relating to
the subject matter
Page 14 of 15
<PAGE>
hereof, and supersedes in its entirety any and all prior agreements,
understandings or representations relating to the subject matter hereof. No
modifications of this Agreement shall be valid unless made in writing and signed
by the parties hereto.
Section 26. Non-duplication
In the event that Mr. Hales performs services for the Company, the Bank or
an other direct or indirect subsidiary of the Company or the Bank, any
compensation or benefits provided to Mr. Hales by such other employer shall be
applied to offset the obligations of the Company and the Bank hereunder, it
being intended that this Agreement set forth the aggregate compensation and
benefits payable to Mr. Hales for all services to the Company, the Bank, and all
of its direct or indirect subsidiaries.
In Witness Whereof, the Company and the Bank have caused this Agreement to
be executed by their duly authorized officers and Mr. Hales has hereunto set his
hand, all as of the day and year first above written.
/s/ Thomas E. Hales
----------------------------------
THOMAS E. HALES
ATTEST: U.S.B. HOLDING CO., INC.
By /s/ [ILLEGIBLE] By /s/ [ILLEGIBLE]
-------------------------------- --------------------------------
Secretary Name:
Title:
UNION STATE BANK
By /s/ [ILLEGIBLE] By /s/ [ILLEGIBLE]
-------------------------------- --------------------------------
Secretary Name:
Title:
Page 15 of 15
EMPLOYMENT AGREEMENT
by and between
U.S.B. HOLDING CO, INC.
UNION STATE BANK
and
RAYMOND J. CROTTY
---------------------------
Made and Entered Into As of
November 16, 1998
---------------------------
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as of
November 16, 1998 by and between U.S.B. HOLDING CO., INC., a publicly held
business corporation organized and operating under the laws of the State of
Delaware (the "Company") and Union State Bank (the "Bank"), both having an
office at 100 Dutch Hill Road, Orangeburg, New York 10962 and RAYMOND J. CROTTY,
an individual residing at 11 Dickens Street, Stony Point, New York 10980 ("Mr.
Crotty").
WITNESSETH:
WHEREAS, Mr. Crotty currently serves the Company and the Bank in the
capacity of Senior Executive Vice President, Chief Credit Officer and Assistant
Secretary; and
WHEREAS, the Company and the Bank desire to assure for themselves the
continued availability of Mr. Crotty's services and the ability of Mr. Crotty to
perform such services; and
WHEREAS, Mr. Crotty is willing to continue to serve the Company and the
Bank on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and conditions hereinafter set forth, the Company and the Bank and Mr. Crotty
hereby agree as follows:
Section 1. Employment
The Company and the Bank agree to continue to employ Mr. Crotty in the
capacities stated above, and Mr. Crotty hereby agrees to such continued
employment, during the period and upon the terms and conditions set forth in
this Agreement.
Section 2. Employment Period: Remaining Unexpired Employment Period
(a) The terms and conditions of this Agreement shall be and remain in
effect during the period of employment established under this Section 2
("Employment Period"). The Employment Period shall be for al term of three years
beginning on the date of this Agreement and ending on the third anniversary date
of this Agreement (an "Anniversary Date"), plus such extensions, if any, as are
provided for in this Agreement or otherwise agreed to by the Boards of Directors
of the Company and the Bank (collectively, the "Boards").
(b) Nothing in this Agreement shall be deemed to prohibit the Company
and/or the Bank at any time from terminating Mr. Crotty's employment during the
Employment Period with or without notice for any reason; provided, however, that
the relative rights and obligations of the Company and the Bank and Mr. Crotty
in the event of any such termination shall be determined under this Agreement.
Page 1 of 15
<PAGE>
Section 3. Duties
Mr. Crotty shall serve as Senior Executive Vice President, Chief Credit
Officer and Assistant Secretary of the Company and the Bank, having such power,
authority and responsibility and performing such duties as are prescribed by or
under the By-Laws of the Company or the Bank and as are customarily associated
with such position. Mr. Crotty shall devote his full business time and attention
(other than during weekends, holidays, approved vacation periods, and periods of
illness or approved leaves of absence) to the business and affairs of the
Company and the Bank and shall use his best efforts to advance the interests of
the Company and the Bank.
Section 4. Cash Compensation
In consideration for the services to be rendered by Mr. Crotty hereunder,
the Company and the Bank shall together pay to him a salary at an initial annual
rate of ONE HUNDRED SIXTY THOUSAND DOLLARS ($160,000), payable in approximately
equal installments in accordance with the Company's and Bank's customary payroll
practices for senior officers. On each Anniversary Date occurring during the
Employment Period, Mr. Crotty's annual rate of salary shall be reviewed and
increased as determined by the Chairman of the Board, President and Chief
Executive Officer of the Company and/or the Bank. In addition to salary, Mr.
Crotty may receive other cash compensation from the Company or the Bank for
services hereunder at such times, in such amounts and on such terms and
conditions as determined by the Chairman of the Board, President and Chief
Executive Officer of the Company and/or the Bank from time to time.
The Company and the Bank agree to pay to Mr. Crotty a minimum annual bonus
of 1.0 percent, or a percent as otherwise provided on mutual agreement between
the parties, to be computed based upon the net profits realized by the
consolidated earnings of the Company and the Bank and their affiliates in
accordance with the Executive Compensation Plan which has been adopted by the
Board.
Mr. Crotty shall be granted stock options by the Company of no less than
36,300 shares each year during the term of this Agreement under the Company's
Employee Stock Option Plans as may be established by the Company, such stock
options to be adjusted for stock dividends and stock splits after the date of
this Agreement by the Company during the term of this Agreement. Upon the
exercise of options with existing owned stock, additional options to purchase
stock will be issued to Mr. Crotty in an amount equivalent to such Company stock
utilized in the exercise. In addition, if Mr. Crotty sells existing owned stock
or stock acquired as a result of such exercise of options to pay income taxes as
a result of the exercise of options or sells stock acquired upon exercise of
options ("cashless exercise"), Mr. Crotty shall be awarded new options to
purchase Company stock equivalent to the number of shares of Company stock sold
under the circumstances described in this sentence.
The foregoing salary shall be in addition to the monthly Board fees
presently paid to Mr. Crotty or as hereafter provided by the Boards or any Board
of Directors of an affiliate of the Company or the Bank.
Mr. Crotty, at his option, shall be allowed to defer any portion of his
cash compensation in accordance with any plan approved by the Company or the
Bank.
Page 2 of 15
<PAGE>
Section 5. Insurance
If Mr. Crotty should become disabled during the term of this Agreement,
the Company and the Bank will compensate Mr. Crotty for the difference between
any disability insurance, the premiums for which are paid by the Company and the
Bank, and Mr. Crotty's full salary for the balance of the term of this Agreement
and thereafter for a period of six months after the termination of this
Agreement. Full fringe benefits will continue through the earlier of (i) the
balance of the term of this Agreement or (ii) the period of Mr. Crotty's
disability.
In accordance with the foregoing, the Company and/or the Bank will
maintain and pay the premiums for the following life insurance policy on the
life of Mr. Crotty: Universal Life Policy No. 001224102 of Security Mutual Life
Insurance Company in the amount of $1,000,000. The beneficiaries under the
foregoing policy of insurance shall be designated by Mr. Crotty.
Section 6. Employee Benefit Plans and Programs
During the Employment Period, Mr. Crotty shall be treated as an employee
of the Company and the Bank and shall be entitled to participate in and receive
benefits under any and all qualified or non-qualified retirement, pension,
savings, profit-sharing or stock bonus plans, any and all group life, health
(including hospitalization, medical and major medical), dental, accident and
long-term disability insurance plans, and any other employee benefit and
compensation plans (including but not limited to, any incentive compensation
plans or programs, stock option and appreciation rights plans and restricted
stock plans) as may from time to time be maintained by, or cover employees of,
the Company or the Bank, in accordance with the terms and conditions of such
employee benefit plans and programs and compensation plans and programs which
are consistent with the Company's and the Bank's customary practices.
Section 7. Indemnification and Insurance
(a) During the Employment Period and for a period of six (6) years
thereafter, the Company or the Bank shall cause Mr. Crotty to be covered by and
named as an insured under any policy or contract of insurance obtained by it to
insure its directors and officers against personal liability for acts or
omissions in connection with service as an officer or director of the Company or
the Bank or service in other capacities at the request of the Company or the
Bank. The coverage provided to Mr. Crotty pursuant to this Section 7 shall be of
the same scope and on the same terms and conditions as the coverage (if any)
provided to other officers or directors of the Company and the Bank.
(b) To the maximum extent permitted under applicable law, during the
Employment Period and for a period of six (6) years thereafter, the Company and
the Bank shall indemnify Mr. Crotty against and hold him harmless from any
costs, liabilities, losses and expenses to the fullest extent and on the most
favorable terms and conditions that similar indemnification is offered to any
director or officer of the Company, the Bank or any subsidiary or affiliate
thereof
Page 3 of 15
<PAGE>
Section 8. Outside Activities
Mr. Crotty may serve as a member of a board of directors of such business,
community and charitable organizations as he may disclose to and as may be
approved by the Chairman of the Board, President and Chief Executive Officer of
the Company and/or the Bank, which approval shall not be unreasonably withheld;
provided, however, that such service shall not materially interfere with the
performance of his duties under this Agreement. Mr. Crotty may also engage in
personal business and investment activities which do not materially interfere
with the performance of his duties hereunder; provided, however, that such
activities are not prohibited under any code of conduct or investment or
securities trading policy established by the Company and/or Bank and generally
applicable to all similarly situated executives. Mr. Crotty may also serve as an
officer or director of any subsidiary of the Company or the Bank. If Mr. Crotty
is discharged or suspended, or is subject to any regulatory prohibition or
restriction with respect to participation in the affairs of the Company or the
Bank, he shall continue to perform services for the Company and the Bank in
accordance with this Agreement but shall not directly or indirectly provide
services to or participate in the affairs of the Company and the Bank in a
manner inconsistent with the terms of such discharge or suspension or any
applicable regulatory order.
Section 9. Working Facilities and Expenses
Mr. Crotty's principal place of employment shall be at the Company's and
the Bank's executive offices at the address first above written, or at such
other location at which the Company or the Bank shall maintain its principal
executive offices, or at such other location as the Company and the Bank and Mr.
Crotty may mutually agree upon. The Company or the Bank shall provide Mr. Crotty
at his principal place of employment with a private office, secretarial
services, an automobile, and other support services and facilities suitable to
his position with the Company and the Bank and necessary or appropriate in
connection with the performance of his assigned duties under this Agreement. The
Company or the Bank shall provide to Mr. Crotty for his exclusive use an
automobile owned or leased by the Company or the Bank appropriate to his
position, to be used in the performance of his duties hereunder, including
commuting to and from his personal residence. The Company or the Bank shall
reimburse Mr. Crotty for his ordinary and necessary business expenses,
including, without limitation, all expenses associated with his business use of
the aforementioned automobile, fees for memberships in such clubs and
organizations as Mr. Crotty and the Company or the Bank shall mutually agree are
necessary and appropriate for business purposes, and his travel and
entertainment expenses incurred in connection with the performance of his duties
under this Agreement, in each case upon presentation to the Company or the Bank
of an itemized account of such expenses in such form as the Company or the Bank
may reasonably require.
The Company and the Bank shall specifically pay the annual membership fees
of one Country Club membership for Mr. Crotty.
Section 10. Vacation
Mr. Crotty shall be entitled annually to vacation time of five (5) weeks
in total and two (2) personal days, or any additional vacation and personal time
agreed to by the parties or permitted by Company or Bank policy.
Page 4 of l5
<PAGE>
Section 11. Termination of Employment with Severance Benefits
(a) Mr. Crotty shall be entitled to the severance benefits described
herein in the event that his employment with the Company or the Bank terminates
during the Employment Period under any of the following circumstances:
(i) Mr. Crotty's voluntary resignation from employment with the Company
and the Bank within ninety (90) days following:
(A) the failure of the Boards to appoint or re-appoint or elect or
re-elect Mr. Crotty to the office of Senior Executive Vice President,
Chief Credit Officer and Assistant Secretary (or a more senior office) of
the Company and the Bank;
(B) the failure of the stockholders of the Company or the Bank to
elect or re-elect Mr. Crotty as a director of the Boards or the failure of
the Boards (or the nominating committee thereof) to nominate Mr. Crotty
for such election or re-election;
(C) the expiration of a thirty (30) day period following the date on
which Mr. Crotty gives written notice to the Company and/or the Bank of
its material failure, whether by amendment of the Company's or the Bank's
Organization Certificate or By-laws, action of the Boards or the Company's
or the Bank's stockholders or otherwise, to vest in Mr. Crotty the
functions, duties, or responsibilities prescribed in Section 3 of this
Agreement, unless, during such thirty (30) day period, the Company and/or
the Bank cures such failure in a manner determined by Mr. Crotty and the
Boards to be satisfactory; or
(D) the expiration of a thirty (30) day period following the date on
which Mr. Crotty gives written notice to the Company and/or the Bank of
its material breach of any term, condition or covenant contained in this
Agreement (including, without limitation any reduction of Mr. Crotty's
rate of base salary in effect from time to time and any change in the
terms and conditions of any compensation or benefit program in which Mr.
Crotty participates which, either individually or together with other
changes, has a material adverse effect on the aggregate value of his total
compensation package), unless, during such thirty (30) day period, the
Company and/or the Bank cures such failure in a manner determined by Mr.
Crotty and the Boards to be satisfactory; or
(ii) Mr. Crotty's death; or
(iii) subject to the provisions of Section 12, the termination of Mr.
Crotty's employment with the Company or the Bank for any other reason not
described in Section 11(a).
(b) Upon the termination of Mr. Crotty's employment with the Company
and/or the Bank under circumstances described in Section 11(a) of this
Agreement, the Company or the Bank shall pay and provide to Mr. Crotty (or, in
the event of his death, to his estate):
(i) his earned but unpaid compensation (including, without limitation, all
items which constitute wages under Section 190.1 of the New York Labor Law
and the payment of which is not otherwise provided for under this Section
11(b)) as of the date of the termination of
Pages 5 of 15
<PAGE>
his employment with the Company and the Bank, such payment to be made at
the time and in the manner prescribed by law applicable to the payment of
wages but in no event later than thirty (30) days after termination of
employment;
(ii) the benefits, if any, to which he is entitled as a former employee
under the employee benefit plans and programs and compensation plans and
programs maintained for the benefit of the Company's and the Bank's
officers and employees;
(iii) continued group life, health (including hospitalization, medical and
major medical and the insurance provided under Section 5), dental,
accident and long term disability insurance benefits, in addition to that
provided pursuant to Section 11(b)(ii), and after taking into account the
coverage provided by any subsequent employer, if and to the extent
necessary to provide for Mr. Crotty, for the Remaining Unexpired
Employment Period, coverage equivalent to the coverage to which he would
have been entitled under such plans (as in effect on the date of his
termination of employment, or, if his termination of employment occurs
after a Change of Control, on the date of such Change of Control,
whichever benefits are greater), if he had continued working for the
Company and the Bank during the Remaining Unexpired Employment Period at
the highest annual rate of compensation achieved during that portion of
the Employment Period which is prior to Mr. Crotty's termination of
employment with the Company or the Bank;
(iv) within thirty (30) days following his termination of employment with
the Company and/or the Bank, a lump sum payment in an amount equal to the
present value of the salary that Mr. Crotty would have earned if he had
continued working for the Company and the Bank for one year at the highest
annual rate of salary achieved during that portion of the Employment
Period which is prior to Mr. Crotty's termination of employment with the
Company and the Bank, where such present value is to be determined using a
discount rate equal to the applicable short-term federal rate prescribed
under Section 1274(d) of the Internal Revenue Code of 1986 ("Code"),
compounded using the compounding period corresponding to the Company's and
the Bank's regular payroll periods for its officers, such lump sum to be
paid in lieu of all other payments of salary provided for under this
Agreement in respect of the period following any such termination. At the
option of Mr. Crotty, such payments may be made in equal monthly
installments over a period of not less than three years, nor more than
five years, in which case such payments will not be discounted;
(v) within thirty (30) days following his termination of employment with
the Company and/or the Bank, a lump sum payment in an amount equal to the
present value of the additional employer contributions to which he would
have been entitled under any and all qualified and non-qualified defined
contribution plans maintained by, or covering employees of, the Company
and the Bank, if he were 100% vested thereunder and had continued working
for the Company and the Bank, during the Remaining Unexpired Employment
Period at the highest annual rate of compensation achieved during that
portion of the Employment Period which is prior to Mr. Crotty's
termination of employment with the Company or the Bank, and making the
maximum amount of employee contributions, if any, required under such plan
or plans, such present value to be determined on the basis of a discount
rate, compounded using the compounding period that corresponds to the
frequency
Page 6 of 15
<PAGE>
with which employer contributions are made to the relevant plan, equal to
the applicable PBGC Rate. At the option of Mr. Crotty, such payments may
be made in equal monthly installments over a period of not less than
three, nor more than five years, in which case such payments will not be
discounted;
(vi) the payment that would have been made to Mr. Crotty under any cash
bonus or long-term or short-term cash incentive compensation plan
maintained by, or covering employees of, the Company or the Bank, if he
had continued working for the Company or the Bank during the Remaining
Unexpired Employment Period and had earned the maximum bonus or incentive
award in each calendar year that ends during the Remaining Unexpired
Employment Period, such payments to be equal to the product of:
(A) the maximum percentage rate at which an award was ever available
to Mr. Crotty under such incentive compensation plan, multiplied by
(B) net income of the Company for the most recent fiscal year which
is prior to Mr. Crotty's termination of employment with the Company;
such payments to be made in a lump sum payment in an amount equal to the
present value of such payments as if made in accordance with Company's
and/or Bank's Executive Bonus Plan, where such present value is to be
determined using a discount rate equal to the applicable short-term
federal rate prescribed under Section 1274(d) of the Code, within thirty
(30) days following Mr. Crotty's termination of employment. At the option
of Mr. Crotty, such payments may be made in equal monthly installments
over a period of not less than three, nor more than five years, in which
case such payments will not be discounted;
(vii) at the election of the Company and the Bank made within thirty (30)
days following his termination of employment with the Company and the
Bank, upon the surrender of stock options or stock appreciation rights
issued to Mr. Crotty under any stock option and appreciation rights plan
or program maintained by, or covering employees of, the Company and the
Bank, a lump sum payment in an amount equal to the product of:
(A) the excess of (i) the fair market value of a share of stock of
the same class as the stock subject to the option or appreciation right,
determined as of the date of termination of employment, over (ii) the
exercise price per share for such option or appreciation right, as
specified in or under the relevant plan or program; multiplied by
(B) the number of shares with respect to which options or
appreciation rights are being surrendered.
For purposes of this Section 11(b)(vii) and for purposes of determining
Mr. Crotty's right following his termination of employment with the
Company or the Bank to exercise any options or appreciation rights not
surrendered pursuant hereto, Mr. Crotty shall be deemed fully vested in
all options and appreciation rights under any stock option or appreciation
rights plan or program maintained by, or covering employees of, the
Company or Bank, even if he is not vested under such plan or program, and
shall have a period of three months from the date of termination of
employment to exercise such stock options or appreciation rights.
Page 7 of l5
<PAGE>
(viii) at the election of the Company or the Bank made within thirty (30)
days following Mr. Crotty's termination of employment with the Company and
the Bank, upon the surrender of any shares awarded to Mr. Crotty under any
restricted stock plan maintained by, or covering employees of, the Company
and the Bank, a lump sum payment in an amount equal to the product of:
(A) the fair market value of a share of stock of the same class of
stock granted under such plan, determined as of the date of Mr. Crotty
termination of employment; multiplied by
(B) the number of shares which are being surrendered.
For purposes of this Section 11(b)(viii) and for purposes of determining
Mr. Crotty's right following his termination of employment with the
Company and the Bank to any stock not surrendered pursuant hereto, Mr.
Crotty shall be deemed fully vested in all shares awarded under any
restricted stock plan maintained by, or covering employees of, the Company
and the Bank, even if he is not vested under such plan;
(ix) the title to the car then currently provided to Mr. Crotty shall be
transferred to Mr. Crotty.
The Company and the Bank and Mr. Crotty hereby stipulate that the damages which
may be incurred by Mr. Crotty following any such termination of employment are
not capable of accurate measurement as of the date first above written and that
the payments and benefits contemplated by this Section 11(b) constitute
reasonable damages under the circumstances and shall be payable without any
requirement of proof of actual damage and without regard to Mr. Crotty's
efforts, if any, to mitigate damages. The Company and the Bank and Mr. Crotty
further agree that the Company and the Bank may condition the payments and
benefits (if any) due under Sections 11(b)(iii), (iv), (v), (vi), and (vii) on
the receipt of Mr. Crotty's resignation from any and all positions which he
holds as an officer, director or committee member with respect to the Company,
the Bank or any subsidiary or affiliate of either of them.
Section 12. Termination without Additional Company/Bank Liability
(a) In the event that Mr. Crotty employment with the Company and the Bank
shall terminate during the Employment Period on account of:
(i) the discharge of Mr. Crotty for "cause," which, for purposes of this
Agreement shall mean: (A) Mr. Crotty intentionally engages in dishonest
conduct in connection with his performance of services for the Company or
the Bank resulting in his conviction of a felony; (B) Mr. Crotty is
convicted of, or pleads guilty or nolo contendere to, a felony or any
crime involving moral turpitude; (C) Mr. Crotty willfully fails or refuses
to perform his duties under this Agreement and fails to cure such breach
within sixty (60) days following written notice thereof from the Company
or the Bank; (D) Mr. Crotty breaches his fiduciary duties to the Company
or the Bank for personal profit; or (E) Mr. Crotty's willful breach or
violation of any law, rule or regulation (other than traffic violations or
similar offenses), or final cease and desist order in connection with his
performance of services for the Company
Page 8 of 15
<PAGE>
or the Bank;
(ii) Mr. Crotty's voluntary resignation from employment with the Company
and the Bank for reasons other than those specified in Section 11(a); or
(iii) a determination that Mr. Crotty is eligible for long-term disability
benefits under the Company's or Bank's long-term disability insurance
program or, if there is no such program, under the federal Social Security
Act;
then the Company and the Bank shall have no further obligations under this
Agreement, other than the payment to Mr. Crotty (or, in the event of his death,
to his estate) of his earned but unpaid salary as of the date of the termination
of his employment, and the provision of such other benefits, if any, to which he
is entitled as a former employee under the employee benefit plans and programs
and compensation plans and programs maintained by, or covering employees of, the
Company or the Bank.
(b) For purposes of Section 12(a)(i)(A) or (B), no act or failure to act,
on the part of Mr. Crotty, shall be considered "willful" unless it is done, or
omitted to be done, by Mr. Crotty in bad faith or without reasonable belief that
Mr. Crotty's action or omission was in the best interests of the Company or the
Bank. Any act, or failure to act, based upon authority given pursuant to a
resolution duly adopted by the Boards or based upon the written advice of
counsel for the Company or the Bank shall be conclusively presumed to be done,
or omitted to be done, by Mr. Crotty in good faith and in the best interests of
the Company or the Bank. The cessation of employment by Mr. Crotty shall not be
deemed to be for "cause" within the meaning of Section 12(a)(i) unless and until
there shall have been delivered to Mr. Crotty a copy of a resolution duly
adopted by the affirmative vote of three-fourths of the non-employee members of
the Boards at a meeting of the Boards called and held for such purpose (after
reasonable notice is provided to Mr. Crotty and Mr. Crotty is given an
opportunity, together with counsel, to be heard before the Boards), finding
that, in the good faith opinion of the Boards, Mr. Crotty is guilty of the
conduct described in Section 12(a)(i) above, and specifying the particulars
thereof in detail.
Section 13. Termination Upon or Following a Change of Control
(a) A change of control of the Company or the Bank ("Change of Control")
shall be deemed to have occurred upon the happening of any of the following
events:
(i) approval by the stockholders of the Company or the Bank of a
transaction that would result in the reorganization, merger or
consolidation of the Company or the Bank, respectively, with one or more
other persons, other than a transaction following which:
(A) at least 51% of the equity ownership interests of the entity
resulting from such transaction are beneficially owned (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) in substantially the
same relative proportions by persons who, immediately prior to such
transaction, beneficially owned (within the meaning of Rule 13d-3
promulgated under the Exchange Act) at least 51% of the outstanding equity
ownership interests in the Company or the Bank; and
Page 9 of 15
<PAGE>
(B) at least 51% of the securities entitled to vote generally in the
election of directors of the entity resulting from such transaction are
beneficially owned (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) in substantially the same relative proportions by persons
who, immediately prior to such transaction, beneficially owned (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of
the securities entitled to vote generally in the election of directors of
the Company or the Bank;
(ii) the acquisition of all or substantially all of the assets of the
Company or the Bank or beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 20% or more of the
outstanding securities of the Company or the Bank entitled to vote
generally in the election of directors by any person or by any persons
acting in concert, or approval by the stockholders of the Company or the
Bank of any transaction which would result in such an acquisition;
(iii) a complete liquidation or dissolution of the Company or the Bank, or
approval by the stockholders of the Company or the Bank of a plan for such
liquidation or dissolution;
(iv) the occurrence of any event if, immediately following such event, at
least 50% of the members of the board of directors of the Company or the
Bank do not belong to any of the following groups:
(A) individuals who were members of the board of directors of the
Company or the Bank on the date of this Agreement; or
(B) individuals who first became members of the board of directors
of the Company or the Bank after the date of this Agreement either:
(I) upon election to serve as a member of the board of
directors of the Company or the Bank by affirmative vote of
three-quarters of the members of such board, in office at the time
of such first election; or
(II) upon election by the stockholders to serve as a member of
the board of directors of the Company or the Bank, but only if
nominated for election by affirmative vote of three-quarters of the
members of the board of directors of the Company or the Bank, or of
a nominating committee thereof, in office at the time of such first
nomination;
provided, however, that such individual's election or nomination did not
result from an actual or threatened election contest (within the meaning
of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents (within the
meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) other than by or on behalf of the Board of the Company or the Bank.
In no event, however, shall a Change of Control be deemed to have occurred as a
result of any acquisition of securities or assets of the Company, the Bank, or a
subsidiary of either of them, by the Company, the Bank, or a subsidiary of
either of them, or by any employee benefit plan maintained
Page 10 of 15
<PAGE>
by any of them. For purposes of this Section 13(a), the term "person" shall have
the meaning assigned to it under Sections 13(d)(3) or 14(d)(2) of the Exchange
Act.
(b) In the event of a Change of Control, Mr. Crotty shall be entitled to
the payments and benefits contemplated by Section 11(b), provided, however, that
with respect to any such benefits or payments to be made thereunder, the
benefits or payments contemplated by Section 11(b) will be calculated as if the
remaining Unexpired Employment Period is equal to three years in the event of
his termination of employment with the Company or the Bank under any of the
circumstances described in Section 11(a) of this Agreement or under any of the
following circumstances:
(i) resignation, voluntary or otherwise, by Mr. Crotty at any time during
the Employment Period following his demotion, loss of title, office or
significant authority or responsibility, or following any reduction in any
element of his package of compensation and benefits;
(ii) resignation, voluntary or otherwise, by Mr. Crotty at any time during
the Employment Period following any relocation of his principal place of
employment or any change in working conditions at such principal place of
employment which Mr. Crotty, in his reasonable discretion, determines to
be embarrassing, derogatory or otherwise adverse;
(iii) resignation, voluntary or otherwise, by Mr. Crotty at any time
during the Employment Period following the failure of any successor to the
Company or the Bank in the Change of Control to include Mr. Crotty in any
compensation or benefit program maintained by it or covering any of its
executive officers, unless Mr. Crotty is already covered by a
substantially similar plan of the Company which is at least as favorable
to him; or
(iv) resignation, voluntary or otherwise, for any other reason whatsoever
following the effective date of the Change of Control.
Section 14. Tax Indemnification
(a) This Section 14 shall apply if Mr. Crotty's employment is terminated
upon or following (i) a Change of Control (as defined in Section 13 of this
Agreement); or (ii) a change "in the ownership or effective control" of the
Company or the Bank or "in the ownership of a substantial portion of the assets"
of the Company or the Bank within the meaning of Section 280G of the Code. If
this Section 14 applies, then, if for any taxable year, Mr. Crotty shall be
liable for the payment of an excise tax under Section 4999 of the Code with
respect to any payment in the nature of compensation made by the Company, the
Bank or any direct or indirect subsidiary or affiliate of the Company or the
Bank to (or for the benefit of) Mr. Crotty, the Company or the Bank shall pay to
Mr. Crotty an amount equal to X determined under the following formula:
X = ExP
--------------------------------
1- [(FI x(1 -SLI))+ SLI + E + M]
where
E = the rate at which the excise tax is assessed under Section 4999 of
the Code;
Page 11 of 15
<PAGE>
P = the amount with respect to which such excise tax is assessed,
determined without regard to this Section 14;
FI = the highest marginal rate of income tax applicable to Mr. Crotty
under the Code for the taxable year in question;
SLI = the sum of the highest marginal rates of income tax applicable to
Mr. Crotty under all applicable state and local laws for the taxable
year in question; and
M = the highest marginal rate of Medicare tax applicable to Mr. Crotty
under the Code for the taxable year in question.
With respect to any payment in the nature of compensation that is made to (or
for the benefit of) Mr. Crotty under the terms of this Agreement, or otherwise,
and on which an excise tax under Section 4999 of the Code will be assessed, the
payment determined under this Section 14(a) shall be made to Mr. Crotty on the
earlier of (i) the date the Company, the Bank or any direct or indirect
subsidiary or affiliate of the Company or the Bank is required to withhold such
tax, or (ii) the date the tax is required to be paid by Mr. Crotty.
(b) Notwithstanding anything in this Section 14 to the contrary, in the
event that Mr. Crotty's liability for the excise tax under Section 4999 of the
Code for a taxable year is subsequently determined to be different than the
amount determined by the formula (X + P) x E, where X, P and E have the meanings
provided in Section 14(a), Mr. Crotty, the Company or the Bank, as the case may
be, shall pay to the other party at the time that the amount of such excise tax
is finally determined, an appropriate amount, plus interest, such that the
payment made under Section 14(a), when increased by the amount of the payment
made to Mr. Crotty under this Section 14(b) by the Company or the Bank, or when
reduced by the amount of the payment made to the Company or the Bank under the
Section 14(b) by Mr. Crotty, equals the amount that should have properly been
paid to Mr. Crotty under Section 14(a). The interest paid under this Section
14(b) shall be determined at the rate provided under Section 1274(b)(2)(B) of
the Code. To confirm that the proper amount, if any, was paid to Mr. Crotty
under this Section 14, Mr. Crotty shall furnish to the Company a copy of each
tax return which reflects a liability for an excise tax payment made by the
Company or the Bank, at least 20 days before the date on which such return is
required to be filed with the Internal Revenue Service.
Section 15. Confidentiality
Unless he obtains the prior written consent of the Company or the Bank,
Mr. Crotty shall keep confidential and shall refrain from using for the benefit
of himself, or any person or entity other than the Company or the Bank or any
entity which is a subsidiary of the Company or the Bank or of which the Company
is a subsidiary, any material document or information obtained from the Company
or the Bank, or from its parent or subsidiaries, in the course of his employment
with any of them concerning their properties, operations or business (unless
such document or information is readily ascertainable from public or published
information or trade sources or has otherwise been made available to the public
through no fault of his own) until the same ceases to be material (or becomes so
ascertainable or available); provided, however, that nothing in this Section 15
shall prevent Mr. Crotty, with or without the Company's or Bank's consent, from
participating in or
Page 12 of 15
<PAGE>
disclosing documents or information in connection with any judicial or
administrative investigation, inquiry or proceeding to the extent that such
participation or disclosure is required under applicable law.
Section 16. No Effect on Employee Benefit Plans or Programs
The termination of Mr. Crotty's employment during the term of this
Agreement or thereafter, whether by the Company or the Bank or by Mr. Crotty,
shall have no effect on the rights and obligations of the parties hereto under
the Company's or Bank's qualified or non-qualified retirement, pension, savings,
thrift, profit-sharing or stock bonus plans, group life, health (including
hospitalization, medical and major medical), dental, accident and long term
disability insurance plans or such other employee benefit plans or programs, or
compensation plans or programs, as may be maintained by, or cover employees of,
the Company or the Bank from time to time.
Section 17. Successors and Assigns
This Agreement will inure to the benefit of and be binding upon Mr.
Crotty, his legal representatives and testate or intestate distributees, and the
Company and the Bank, and its successors and assigns, including any successor by
merger or consolidation or a statutory receiver or any other person or firm or
corporation to which all or substantially all of the assets and business of the
Company or the Bank may be sold or otherwise transferred. Failure of the Company
and the Bank to obtain from any successor its express written assumption of the
Company's and the Bank's obligations hereunder at least sixty (60) days in
advance of the scheduled effective date of any such succession shall be deemed a
material breach of this Agreement.
Section 18. Notices
Any communication required or permitted to be given under this Agreement,
including any notice, direction, designation, consent, instruction objection or
waiver, shall be in writing and shall be deemed to have been given at such time
as it is delivered personally, or five (5) days after mailing if mailed, postage
prepaid, by registered or certified mail, return receipt requested, addressed to
such party at the address listed below or at such other address as one such
party may by written notice specify to the other party:
If to Mr. Crotty:
Mr. Raymond J. Crotty
11 Dickens Street
Stony Point, New York 10980
If to the Company or the Bank:
U.S.B. Holding Co., Inc.
Union State Bank
100 Dutch Hill Road
Orangeburg, New York 10962
Attention: Corporate Secretary
Page 13 of 15
<PAGE>
Section 19. Severability
A determination that any provision of this Agreement is invalid or
unenforceable shall not affect the validity or enforceability of any other
provision hereof.
Section 20. Waiver
Failure to insist upon strict compliance with any of the terms, covenants
or conditions hereof shall not be deemed a waiver of such term, covenant, or
condition. A waiver of any provision of this Agreement must be made in writing,
designated as a waiver, and signed by the party against whom its enforcement is
sought. Any waiver or relinquishment of any right or power hereunder at any one
or more times shall not be deemed a waiver or relinquishment of such right or
power at any other time or times.
Section 21. Counterparts
This Agreement may be executed in two (2) or more counterparts, each of
which shall be deemed an original, and all of which shall constitute one and the
same Agreement.
Section 22. Governing Law
This Agreement shall be governed by and construed and enforced in
accordance with the federal laws of the United States and, to the extent that
federal law is inapplicable, in accordance with the laws of the State of New
York applicable to contracts entered into and to be performed entirely within
the State of New York.
Section 23. Headings and Construction
The headings of sections in this Agreement are for the convenience of
reference only and are not intended to qualify the meaning of any section. Any
reference to a section number shall refer to a section of this Agreement, unless
otherwise stated.
Section 24. Entire Agreement; Modifications
This instrument contains the entire agreement of the parties relating to
the subject matter hereof, and supersedes in its entirety any and all prior
agreements, understandings or representations relating to the subject matter
hereof. No modifications of this Agreement shall be valid unless made in writing
and signed by the parties hereto.
Section 25. Non-duplication
In the event that Mr. Crotty performs services for the Company, the Bank
or an other direct or indirect subsidiary of the Company or the Bank, any
compensation or benefits provided to Mr. Crotty by such other employer shall be
applied to offset the obligations of the Company and the Bank hereunder, it
being intended that this Agreement set forth the aggregate compensation and
benefits payable to Mr. Crotty for all services to the Company, the Bank, and
all of its direct or indirect subsidiaries.
Page 14 of 15
<PAGE>
In Witness Whereof, the Company and the Bank have caused this Agreement to
be executed by their duly authorized officers and Mr. Crotty has hereunto set
his hand, all as of the day and year first above written.
/s/ Raymond J. Crotty
----------------------------------------
RAYMOND J. CROTTY
ATTEST: U.S.B. HOLDING CO., INC.
By /s/ [ILLEGIBLE] By /s/ Thomas E. Hales
---------------------------------- -------------------------------------
Secretary Name: Thomas E. Hales
Title: CHAIRMAN, PRES. & CEO
UNION STATE BANK
By /s/ [ILLEGIBLE] By /s/ Thomas E. Hales
---------------------------------- -------------------------------------
Secretary Name: Thomas E. Hales
Title: CHAIRMAN, PRES & CEO
Page 15 of 15
EMPLOYMENT AGREEMENT
by and between
U.S.B. HOLDING CO., INC.
UNION STATE BANK
and
STEVEN T. SABATINI
---------------------------
Made and Entered Into As of
November 16, 1998
---------------------------
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as of
November 16, 1998 by and between U.S.B. HOLDING CO., INC., a publicly held
business corporation organized and operating under the laws of the State of
Delaware (the "Company") and Union State Bank (the "Bank"), both having an
office at 100 Dutch Hill Road, Orangeburg, New York 10962 and STEVEN T.
SABATINI, an individual residing at 21 Indian Hill Road, Warwick, New York 10990
("Mr. Sabatini").
WITNESSETH:
WHEREAS, Mr. Sabatini currently serves the Company and the Bank in the
capacity of Senior Executive Vice President, Chief Financial Officer and
Assistant Secretary; and
WHEREAS, the Company and the Bank desire to assure for themselves the
continued availability of Mr. Sabatini's services and the ability of Mr.
Sabatini to perform such services; and
WHEREAS, Mr. Sabatini is willing to continue to serve the Company and the
Bank on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and conditions hereinafter set forth, the Company and the Bank and Mr. Sabatini
hereby agree as follows:
Section 1. Employment
The Company and the Bank agree to continue to employ Mr. Sabatini in the
capacities stated above, and Mr. Sabatini hereby agrees to such continued
employment, during the period and upon the terms and conditions set forth in
this Agreement.
Section 2. Employment Period; Remaining Unexpired Employment Period
(a) The terms and conditions of this Agreement shall be and remain in
effect during the period of employment established under this Section 2
("Employment Period"). The Employment Period shall be for a term of three years
beginning on the date of this Agreement and ending on the third anniversary date
of this Agreement (an "Anniversary Date"), plus such extensions, if any, as are
provided for in this Agreement or otherwise agreed to by the Boards of Directors
of the Company and the Bank (collectively, the "Boards").
(b) Nothing in this Agreement shall be deemed to prohibit the Company
and/or the Bank at any time from terminating Mr. Sabatini's employment during
the Employment Period with or without notice for any reason; provided, however,
that the relative rights and obligations of the Company and the Bank and Mr.
Sabatini in the event of any such termination shall be determined under this
Agreement.
Page 1 of 15
<PAGE>
Section 3. Duties
Mr. Sabatini shall serve as Senior Executive Vice President, Chief
Financial Officer and Assistant Secretary of the Company and the Bank, having
such power, authority and responsibility and performing such duties as are
prescribed by or under the By-Laws of the Company or the Bank and as are
customarily associated with such position. Mr. Sabatini shall devote his full
business time and attention (other than during weekends, holidays, approved
vacation periods, and periods of illness or approved leaves of absence) to the
business and affairs of the Company and the Bank and shall use his best efforts
to advance the interests of the Company and the Bank.
Section 4. Cash Compensation
In consideration for the services to be rendered by Mr. Sabatini
hereunder, the Company and the Bank shall together pay to him a salary at an
initial annual rate of ONE HUNDRED SIXTY THOUSAND DOLLARS ($160,000), payable in
approximately equal installments in accordance with the Company's and Bank's
customary payroll practices for senior officers. On each Anniversary Date
occurring during the Employment Period, Mr. Sabatini's annual rate of salary
shall be reviewed and increased as determined by the Chairman of the Board,
President and Chief Executive Officer of the Company and/or the Bank. In
addition to salary, Mr. Sabatini may receive other cash compensation from the
Company or the Bank for services hereunder at such times, in such amounts and on
such terms and conditions as determined by the Chairman of the Board, President
and Chief Executive Officer of the Company and/or the Bank from time to time.
The Company and the Bank agree to pay to Mr. Sabatini a minimum annual
bonus of 1.0 percent, or a percent as otherwise provided on mutual agreement
between the parties, to be computed based upon the net profits realized by the
consolidated earnings of the Company and the Bank and their affiliates in
accordance with the Executive Compensation Plan which has been adopted by the
Board.
Mr. Sabatini shall be granted stock options by the Company of no less than
36,300 shares each year during the term of this Agreement under the Company's
Employee Stock Option Plans as may be established by the Company, such stock
options to be adjusted for stock dividends and stock splits after the date of
this Agreement by the Company during the term of this Agreement. Upon the
exercise of options with existing owned stock, additional options to purchase
stock will be issued to Mr. Sabatini in an amount equivalent to such Company
stock utilized in the exercise. In addition, if Mr. Sabatini sells existing
owned stock or stock acquired as a result of such exercise of options to pay
income taxes as a result of the exercise of options or sells stock acquired upon
exercise of options ("cashless exercise"), Mr. Sabatini shall be awarded new
options to purchase Company stock equivalent to the number of shares of Company
stock sold under the circumstances described in this sentence.
The foregoing salary shall be in addition to the monthly Board fees
presently paid to Mr. Sabatini or as hereafter provided by the Boards or any
Board of Directors of an affiliate of the Company or the Bank.
Mr. Sabatini, at his option, shall be allowed to defer any portion of his
cash compensation in accordance with any plan approved by the Company or the
Bank.
Page 2 of 15
<PAGE>
Section 5. Insurance
If Mr. Sabatini should become disabled during the term of this Agreement,
the Company and the Bank will compensate Mr. Sabatini for the difference between
any disability insurance, the premiums for which are paid by the Company and the
Bank, and Mr. Sabatini's full salary for the balance of the term of this
Agreement and thereafter for a period of six months after the termination of
this Agreement. Full fringe benefits will continue through the earlier of (i)
the balance of the term of this Agreement or (ii) the period of Mr. Sabatini's
disability.
In accordance with the foregoing, the Company and/or the Bank will
maintain and pay the premiums for the following life insurance policy on the
life of Mr. Sabatini: Universal Life Policy No. 00122102 of Security Mutual Life
Insurance Company in the amount of $1,000,000. The beneficiaries under the
foregoing policy of insurance shall be designated by Mr. Sabatini.
Section 6. Employee Benefit Plans and Programs
During the Employment Period, Mr. Sabatini shall be treated as an employee
of the Company and the Bank and shall be entitled to participate in and receive
benefits under any and all qualified or non-qualified retirement, pension,
savings, profit-sharing or stock bonus plans, any and all group life, health
(including hospitalization, medical and major medical), dental, accident and
long-term disability insurance plans, and any other employee benefit and
compensation plans (including but not limited to, any incentive compensation
plans or programs, stock option and appreciation rights plans and restricted
stock plans) as may from time to time be maintained by, or cover employees of,
the Company or the Bank, in accordance with the terms and conditions of such
employee benefit plans and programs and compensation plans and programs which
are consistent with the Company's and the Bank's customary practices.
Section 7. Indemnification and Insurance
(a) During the Employment Period and for a period of six (6) years
thereafter, the Company or the Bank shall cause Mr. Sabatini to be covered by
and named as an insured under any policy or contract of insurance obtained by it
to insure its directors and officers against personal liability for acts or
omissions in connection with service as an officer or director of the Company or
the Bank or service in other capacities at the request of the Company or the
Bank. The coverage provided to Mr. Sabatini pursuant to this Section 7 shall be
of the same scope and on the same terms and conditions as the coverage (if any)
provided to other officers or directors of the Company and the Bank.
(b) To the maximum extent permitted under applicable law, during the
Employment Period and for a period of six (6) years thereafter, the Company and
the Bank shall indemnify Mr. Sabatini against and hold him harmless from any
costs, liabilities, losses and expenses to the fullest extent and on the most
favorable terms and conditions that similar indemnification is offered to any
director or officer of the Company, the Bank or any subsidiary or affiliate
thereof.
Section 8. Outside Activities
Mr. Sabatini may serve as a member of a board of directors of such
business, community and
Page 3 of 15
<PAGE>
charitable organizations as he may disclose to and as may be approved by the
Chairman of the Board, President and Chief Executive Officer of the Company
and/or the Bank, which approval shall not be unreasonably withheld; provided,
however, that such service shall not materially interfere with the performance
of his duties under this Agreement. Mr. Sabatini may also engage in personal
business and investment activities which do not materially interfere with the
performance of his duties hereunder; provided, however, that such activities are
not prohibited under any code of conduct or investment or securities trading
policy established by the Company and/or Bank and generally applicable to all
similarly situated executives. Mr. Sabatini may also serve as an officer or
director of any subsidiary of the Company or the Bank. If Mr. Sabatini is
discharged or suspended, or is subject to any regulatory prohibition or
restriction with respect to participation in the affairs of the Company or the
Bank, he shall continue to perform services for the Company and the Bank in
accordance with this Agreement but shall not directly or indirectly provide
services to or participate in the affairs of the Company and the Bank in a
manner inconsistent with the terms of such discharge or suspension or any
applicable regulatory order.
Section 9. Working Facilities and Expenses
Mr. Sabatini's principal place of employment shall be at the Company's and
the Bank's executive offices at the address first above written, or at such
other location at which the Company or the Bank shall maintain its principal
executive offices, or at such other location as the Company and the Bank and Mr.
Sabatini may mutually agree upon. The Company or the Bank shall provide Mr.
Sabatini at his principal place of employment with a private office, secretarial
services, an automobile, and other support services and facilities suitable to
his position with the Company and the Bank and necessary or appropriate in
connection with the performance of his assigned duties under this Agreement. The
Company or the Bank shall provide to Mr. Sabatini for his exclusive use an
automobile owned or leased by the Company or the Bank appropriate to his
position, to be used in the performance of his duties hereunder, including
commuting to and from his personal residence. The Company or the Bank shall
reimburse Mr. Sabatini for his ordinary and necessary business expenses,
including, without limitation, all expenses associated with his business use of
the aforementioned automobile, fees for memberships in such clubs and
organizations as Mr. Sabatini and the Company or the Bank shall mutually agree
are necessary and appropriate for business purposes, and his travel and
entertainment expenses incurred in connection with the performance of his duties
under this Agreement, in each case upon presentation to the Company or the Bank
of an itemized account of such expenses in such form as the Company or the Bank
may reasonably require.
The Company and the Bank shall specifically pay the annual membership fees
of one Country Club membership for Mr. Sabatini.
Section 10. Vacation
Mr. Sabatini shall be entitled annually to vacation time of five (5) weeks
in total and two (2) personal days, or any additional vacation and personal time
agreed to by the parties or permitted by Company or Bank policy.
Section 11. Termination of Employment; Severance Benefits
(a) Mr. Sabatini shall be entitled to the severance benefits described
herein in the event
Page 4 of 15
<PAGE>
that his employment with the Company or the Bank terminates during the
Employment Period under any of the following circumstances:
(i) Mr. Sabatini's voluntary resignation from employment with the Company
and the Bank within ninety (90) days following:
(A) the failure of the Boards to appoint or re-appoint or elect or
re-elect Mr. Sabatini to the office of Senior Executive Vice President,
Chief Financial Officer and Assistant Secretary (or a more senior office)
of the Company and the Bank;
(B) the expiration of a thirty (30) day period following the date on
which Mr. Sabatini gives written notice to the Company and/or the Bank of
its material failure, whether by amendment of the Company's or the Bank's
Organization Certificate or By-laws, action of the Boards or the Company's
or the Bank's stockholders or otherwise, to vest in Mr. Sabatini the
functions, duties, or responsibilities prescribed in Section 3 of this
Agreement, unless, during such thirty (30) day period, the Company and/or
the Bank cures such failure in a manner determined by Mr. Sabatini and the
Boards to be satisfactory; or
(C) the expiration of a thirty (30) day period following the date on
which Mr. Sabatini gives written notice to the Company and/or the Bank of
its material breach of any term, condition or covenant contained in this
Agreement (including, without limitation any reduction of Mr. Sabatini's
rate of base salary in effect from time to time and any change in the
terms and conditions of any compensation or benefit program in which Mr.
Sabatini participates which, either individually or together with other
changes, has a material adverse effect on the aggregate value of his total
compensation package), unless, during such thirty (30) day period, the
Company and/or the Bank cures such failure in a manner determined by Mr.
Sabatini and the Boards to be satisfactory; or
(ii) Mr. Sabatini's death; or
(iii) subject to the provisions of Section 12, the termination of Mr.
Sabatini's employment with the Company or the Bank for any other reason
not described in Section 11(a).
(b) Upon the termination of Mr. Sabatini's employment with the Company
and/or the Bank under circumstances described in Section 11(a) of this
Agreement, the Company or the Bank shall pay and provide to Mr. Sabatini (or, in
the event of his death, to his estate):
(i) his earned but unpaid compensation (including, without limitation, all
items which constitute wages under Section 190.1 of the New York Labor Law
and the payment of which is not otherwise provided for under this Section
11(b)) as of the date of the termination of his employment with the
Company and the Bank, such payment to be made at the time and in the
manner prescribed by law applicable to the payment of wages but in no
event later than thirty (30) days after termination of employment;
(ii) the benefits, if any, to which he is entitled as a former employee
under the employee benefit plans and programs and compensation plans and
programs maintained for the benefit
Page 5 of 15
<PAGE>
of the Company's and the Bank's officers and employees;
(iii) continued group life, health (including hospitalization, medical and
major medical and the insurance provided under Section 5), dental,
accident and long term disability insurance benefits, in addition to that
provided pursuant to Section 11(b)(ii), and after taking into account the
coverage provided by any subsequent employer, if and to the extent
necessary to provide for Mr. Sabatini, for the Remaining Unexpired
Employment Period, coverage equivalent to the coverage to which he would
have been entitled under such plans (as in effect on the date of his
termination of employment, or, if his termination of employment occurs
after a Change of Control, on the date of such Change of Control,
whichever benefits are greater), if he had continued working for the
Company and the Bank during the Remaining Unexpired Employment Period at
the highest annual rate of compensation achieved during that portion of
the Employment Period which is prior to Mr. Sabatini's termination of
employment with the Company or the Bank;
(iv) within thirty (30) days following his termination of employment with
the Company and/or the Bank, a lump sum payment, in an amount equal to the
present value of the salary that Mr. Sabatini would have earned if he had
continued working for the Company and the Bank for one year at the highest
annual rate of salary achieved during that portion of the Employment
Period which is prior to Mr. Sabatini's termination of employment with the
Company and the Bank, where such present value is to be determined using a
discount rate equal to the applicable short-term federal rate prescribed
under Section 1274(d) of the Internal Revenue Code of 1986 ("Code"),
compounded using the compounding period corresponding to the Company's and
the Bank's regular payroll periods for its officers, such lump sum to be
paid in lieu of all other payments of salary provided for under this
Agreement in respect of the period following any such termination. At the
option of Mr. Sabatini, such payments may be made in equal monthly
installments over a period of not less than three years, nor more than
five years, in which case such payments will not be discounted;
(v) within thirty (30) days following his termination of employment with
the Company and/or the Bank, a lump sum payment in an amount equal to the
present value of the additional employer contributions to which he would
have been entitled under any and all qualified and non-qualified defined
contribution plans maintained by, or covering employees of, the Company
and the Bank, if he were 100% vested thereunder and had continued working
for the Company and the Bank, during the Remaining Unexpired Employment
Period at the highest annual rate of compensation achieved during that
portion of the Employment Period which is prior to Mr. Sabatini's
termination of employment with the Company or the Bank, and making the
maximum amount of employee contributions, if any, required under such plan
or plans, such present value to be determined on the basis of a discount
rate, compounded using the compounding period that corresponds to the
frequency with which employer contributions are made to the relevant plan,
equal to the applicable PBGC Rate. At the option of Mr. Sabatini, such
payments may be made in equal monthly installments over a period of not
less than three, nor more than five years, in which case such payments
will not be discounted;
(vi) the payment that would have been made to Mr. Sabatini under any cash
bonus or
Page 6 of 15
<PAGE>
long-term or short-term cash incentive compensation plan maintained by, or
covering employees of, the Company or the Bank, if he had continued
working for the Company or the Bank during the Remaining Unexpired
Employment Period and had earned the maximum bonus or incentive award in
each calendar year that ends during the Remaining Unexpired Employment
Period, such payments to be equal to the product of:
(A) the maximum percentage rate at which an award was ever available
to Mr. Sabatini under such incentive compensation plan, multiplied by
(B) net income of the Company for the most recent fiscal year which
is prior to Mr. Sabatini's termination of employment with the Company;
such payments to be made in a lump sum payment in an amount equal to the
present value of such payments as if made in accordance with Company's
and/or Bank's Executive Bonus Plan, where such present value is to be
determined using a discount rate equal to the applicable short-term
federal rate prescribed under Section 1274(d) of the Code, within thirty
(30) days following Mr. Sabatini's termination of employment. At the
option of Mr. Sabatini, such payments may be made in equal monthly
installments over a period of not less than three, nor more than five
years, in which case such payments will not be discounted;
(vii) at the election of the Company and the Bank made within thirty (30)
days following his termination of employment with the Company and the
Bank, upon the surrender of stock options or stock appreciation rights
issued to Mr. Sabatini under any stock option and appreciation rights plan
or program maintained by, or covering employees of, the Company and the
Bank, a lump sum payment in an amount equal to the product of:
(A) the excess of (i) the fair market value of a share of stock of
the same class as the stock subject to the option or appreciation right,
determined as of the date of termination of employment, over (ii) the
exercise price per share for such option or appreciation right, as
specified in or under the relevant plan or program; multiplied by
(B) the number of shares with respect to which options or
appreciation rights are being surrendered.
For purposes of this Section 11(b)(vii) and for purposes of determining
Mr. Sabatini's right following his termination of employment with the
Company or Bank to exercise any options or appreciation rights not
surrendered pursuant hereto, Mr. Sabatini shall be deemed fully vested in
all options and appreciation rights under any stock option or appreciation
rights plan or program maintained by, or covering employees of the Company
or Bank, even if he is not vested under such plan or program, and shall
have a period of three months from the date of termination of employment
to exercise such stock options or appreciation rights.
(viii) at the election of the Company or the Bank made within thirty (30)
days following Mr. Sabatini's termination of employment with the Company
and the Bank, upon the surrender of any shares awarded to Mr. Sabatini
under any restricted stock plan maintained by, or covering employees of,
the Company and the Bank, a lump sum payment in an amount equal to the
product of:
Page 7 of 15
<PAGE>
(A) the fair market value of a share of stock of the same class of
stock granted under such plan, determined as of the date of Mr. Sabatini
termination of employment; multiplied by
(B) the number of shares which are being surrendered.
For purposes of this Section 11(b)(viii) and for purposes of determining
Mr. Sabatini's right following his termination of employment with the
Company and the Bank to any stock not surrendered pursuant hereto, Mr.
Sabatini shall be deemed fully vested in all shares awarded under any
restricted stock plan maintained by, or covering employees of, the Company
and the Bank, even if he is not vested under such plan;
(ix) the title to the car then currently provided to Mr. Sabatini shall be
transferred to Mr. Sabatini.
The Company and the Bank and Mr. Sabatini hereby stipulate that the damages
which may be incurred by Mr. Sabatini following any such termination of
employment are not capable of accurate measurement as of the date first above
written and that the payments and benefits contemplated by this Section 11(b)
constitute reasonable damages under the circumstances and shall be payable
without any requirement of proof of actual damage and without regard to Mr.
Sabatini's efforts, if any, to mitigate damages. The Company and the Bank and
Mr. Sabatini further agree that the Company and the Bank may condition the
payments and benefits (if any) due under Sections 11(b)(iii), (iv), (v), (vi),
and (vii) on the receipt of Mr. Sabatini's resignation from any and all
positions which he holds as an officer, director or committee member with
respect to the Company, the Bank or any subsidiary or affiliate of either of
them.
Section 12. Termination without Additional Company/Bank Liability
(a) In the event that Mr. Sabatini employment with the Company and the
Bank shall terminate during the Employment Period on account of:
(i) the discharge of Mr. Sabatini for "cause," which, for purposes of this
Agreement shall mean: (A) Mr. Sabatini intentionally engages in dishonest
conduct in connection with his performance of services for the Company or
the Bank resulting in his conviction of a felony; (B) Mr. Sabatini is
convicted of, or pleads guilty or nolo contendere to, a felony or any
crime involving moral turpitude; (C) Mr. Sabatini willfully fails or
refuses to perform his duties under this Agreement and fails to cure such
breach within sixty (60) days following written notice thereof from the
Company or the Bank; (D) Mr. Sabatini breaches his fiduciary duties to the
Company or the Bank for personal profit; or (E) Mr. Sabatini's willful
breach or violation of any law, rule or regulation (other than traffic
violations or similar offenses), or final cease and desist order in
connection with his performance of services for the Company or the Bank;
(ii) Mr. Sabatini's voluntary resignation from employment with the Company
and the Bank for reasons other than those specified in Section 11(a); or
(iii) a determination that Mr. Sabatini is eligible for long-term
disability benefits under
Page 8 of 15
<PAGE>
the Company's or Bank's long-term disability insurance program or, if
there is no such program, under the federal Social Security Act;
then the Company and the Bank shall have no further obligations under this
Agreement, other than the payment to Mr Sabatini (or, in the event of his death,
to his estate) of his earned but unpaid salary as of the date of the termination
of his employment, and the provision of such other benefits, if any, to which he
is entitled as a former employee under the employee benefit plans and programs
and compensation plans and programs maintained by, or covering employees of, the
Company or the Bank.
(b) For purposes of Section 12(a)(i)(A) or (B), no act or failure to act,
on the part of Mr. Sabatini, shall be considered "willful" unless it is done, or
omitted to be done, by Mr. Sabatini in bad faith or without reasonable belief
that Mr. Sabatini's action or omission was in the best interests of the Company
or the Bank. Any act, or failure to act, based upon authority given pursuant to
a resolution duly adopted by the Boards or based upon the written advice of
counsel for the Company or the Bank shall be conclusively presumed to be done,
or omitted to be done, by Mr. Sabatini in good faith and in the best interests
of the Company or the Bank. The cessation of employment by Mr. Sabatini shall
not be deemed to be for "cause" within the meaning of Section 12(a)(i) unless
and until there shall have been delivered to Mr. Sabatini a copy of a resolution
duly adopted by the affirmative vote of three-fourths of the non-employee
members of the Boards at a meeting of the Boards called and held for such
purpose (after reasonable notice is provided to Mr. Sabatini and Mr. Sabatini is
given an opportunity, together with counsel, to be heard before the Boards),
finding that, in the good faith opinion of the Boards, Mr. Sabatini is guilty of
the conduct described in Section 12(a)(i) above, and specifying the particulars
thereof in detail.
Section 13. Termination Upon or Following a Change of Control
(a) A change of control of the Company or the Bank ("Change of Control")
shall be deemed to have occurred upon the happening of any of the following
events:
(i) approval by the stockholders of the Company or the Bank of a
transaction that would result in the reorganization, merger or
consolidation of the Company or the Bank, respectively, with one or more
other persons, other than a transaction following which:
(A) at least 51% of the equity ownership interests of the entity
resulting from such transaction are beneficially owned (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) in substantially the
same relative proportions by persons who, immediately prior to such
transaction, beneficially owned (within the meaning of Rule 13d-3
promulgated under the Exchange Act) at least 51% of the outstanding equity
ownership interests in the Company or the Bank; and
(B) at least 51% of the securities entitled to vote generally in the
election of directors of the entity resulting from such transaction are
beneficially owned (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) in substantially the same relative proportions by persons
who, immediately prior to such transaction. beneficially owned (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of
the securities entitled to vote generally in the election of directors of
the Company or the
Page 9 of 15
<PAGE>
Bank;
(ii) the acquisition of all or substantially all of the assets of the
Company or the Bank or beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 20% or more of the
outstanding securities of the Company or the Bank entitled to vote
generally in the election of directors by any person or by any persons
acting in concert, or approval by the stockholders of the Company or the
Bank of any transaction which would result in such an acquisition;
(iii) a complete liquidation or dissolution of the Company or the Bank, or
approval by the stockholders of the Company or the Bank of a plan for such
liquidation or dissolution;
(iv) the occurrence of any event if, immediately following such event, at
least 50% of the members of the board of directors of the Company or the
Bank do not belong to any of the following groups:
(A) individuals who were members of the board of directors of the
Company or the Bank on the date of this Agreement; or
(B) individuals who first became members of the board of directors
of the Company or the Bank after the date of this Agreement either:
(I) upon election to serve as a member of the board of
directors of the Company or the Bank by affirmative vote of
three-quarters of the members of such board, in office at the time
of such first election; or
(II) upon election by the stockholders to serve as a member of
the board of directors of the Company or the Bank, but only if
nominated for election by affirmative vote of three-quarters of the
members of the board of directors of the Company or the Bank, or of
a nominating committee thereof, in office at the time of such first
nomination;
provided, however, that such individual's election or nomination did not
result from an actual or threatened election contest (within the meaning
of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents (within the
meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) other than by or on behalf of the Board of the Company or the Bank.
In no event, however, shall a Change of Control be deemed to have occurred as a
result of any acquisition of securities or assets of the Company, the Bank, or a
subsidiary of either of them, by the Company, the Bank, or a subsidiary of
either of them, or by any employee benefit plan maintained by any of them. For
purposes of this Section 13(a), the term "person" shall have the meaning
assigned to it under Sections 13(d)(3) or 14(d)(2) of the Exchange Act.
(b) In the event of a Change of Control, Mr. Sabatini shall be entitled to
the payments and benefits contemplated by Section 11(b), provided, however, that
with respect to any such benefits or payments to be made thereunder, the
benefits or payments contemplated by Section 11(b)
Page 10 of 15
<PAGE>
will be calculated as if the remaining Unexpired Employment Period is equal to
three years, in the event of his termination of employment with the Company or
the Bank under any of the circumstances described in Section 11(a) of this
Agreement or under any of the following circumstances:
(i) resignation, voluntary or otherwise, by Mr. Sabatini at any time
during the Employment Period following his demotion, loss of title, office
or significant authority or responsibility, or following any reduction in
any element of his package of compensation and benefits;
(ii) resignation, voluntary or otherwise, by Mr. Sabatini at any time
during the Employment Period following any relocation of his principal
place of employment or any change in working conditions at such principal
place of employment which Mr. Sabatini, in his reasonable discretion,
determines to be embarrassing, derogatory or otherwise adverse;
(iii) resignation, voluntary or otherwise, by Mr. Sabatini at any time
during the Employment Period following the failure of any successor to the
Company or the Bank in the Change of Control to include Mr. Sabatini in
any compensation or benefit program maintained by it or covering any of
its executive officers, unless Mr. Sabatini is already covered by a
substantially similar plan of the Company which is at least as favorable
to him; or
(iv) resignation, voluntary or otherwise, for any other reason whatsoever
following the effective date of the Change of Control.
Section 14. Tax Indemnification
(a) This Section 14 shall apply if Mr. Sabatini's employment is terminated
upon or following (i) a Change of Control (as defined in Section 13 of this
Agreement); or (ii) a change "in the ownership or effective control" of the
Company or the Bank or "in the ownership of a substantial portion of the assets"
of the Company or the Bank within the meaning of Section 280G of the Code. If
this Section 14 applies, then, if for any taxable year, Mr. Sabatini shall be
liable for the payment of an excise tax under Section 4999 of the Code with
respect to any payment in the nature of compensation made by the Company, the
Bank or any direct or indirect subsidiary or affiliate of the Company or the
Bank to (or for the benefit of) Mr. Sabatini, the Company or the Bank shall pay
to Mr. Sabatini an amount equal to X determined under the following formula:
X = E x P
--------------------------------
1-[(FI x (1-SLI)) + SLI + E + M]
where
E = the rate at which the excise tax is assessed under Section 4999 of
the Code;
P = the amount with respect to which such excise tax is assessed,
determined without regard to this Section 14;
Page 11 of 15
<PAGE>
FI = the highest marginal rate of income tax applicable to Mr. Sabatini
under the Code for the taxable year in question;
SLI = the sum of the highest marginal rates of income tax applicable to
Mr. Sabatini under all applicable state and local laws for the
taxable year in question; and
M = the highest marginal rate of Medicare tax applicable to Mr. Sabatini
under the Code for the taxable year in question.
With respect to any payment in the nature of compensation that is made to (or
for the benefit of) Mr. Sabatini under the terms of this Agreement, or
otherwise, and on which an excise tax under Section 4999 of the Code will be
assessed, the payment determined under this Section 14(a) shall be made to Mr.
Sabatini on the earlier of (i) the date the Company, the Bank or any direct or
indirect subsidiary or affiliate of the Company or the Bank is required to
withhold such tax, or (ii) the date the tax is required to be paid by Mr.
Sabatini.
(b) Notwithstanding anything in this Section 14 to the contrary, in the
event that Mr. Sabatini's liability for the excise tax under Section 4999 of the
Code for a taxable year is subsequently determined to be different than the
amount determined by the formula (X + P) x E, where X, P and E have the meanings
provided in Section 14(a), Mr. Sabatini, the Company or the Bank, as the case
may be, shall pay to the other party at the time that the amount of such excise
tax is finally determined, an appropriate amount, plus interest, such that the
payment made under Section 14(a), when increased by the amount of the payment
made to Mr. Sabatini under this Section 14(b) by the Company or the Bank, or
when reduced by the amount of the payment made to the Company or the Bank under
the Section 14(b) by Mr. Sabatini, equals the amount that should have properly
been paid to Mr. Sabatini under Section 14(a). The interest paid under this
Section 14(b) shall be determined at the rate provided under Section
1274(b)(2)(B) of the Code. To confirm that the proper amount, if any, was paid
to Mr. Sabatini under this Section 14, Mr. Sabatini shall furnish to the Company
a copy of each tax return which reflects a liability for an excise tax payment
made by the Company or the Bank, at least 20 days before the date on which such
return is required to be filed with the Internal Revenue Service.
Section 15. Confidentiality
Unless he obtains the prior written consent of the Company or the Bank,
Mr. Sabatini shall keep confidential and shall refrain from using for the
benefit of himself, or any person or entity other than the Company or the Bank
or any entity which is a subsidiary of the Company or the Bank or of which the
Company is a subsidiary, any material document or information obtained from the
Company or the Bank, or from its parent or subsidiaries, in the course of his
employment with any of them concerning their properties, operations or business
(unless such document or information is readily ascertainable from public or
published information or trade sources or has otherwise been made available to
the public through no fault of his own) until the same ceases to be material (or
becomes so ascertainable or available); provided, however, that nothing in this
Section 15 shall prevent Mr. Sabatini, with or without the Company's or Bank's
consent, from participating in or disclosing documents or information in
connection with any judicial or administrative investigation, inquiry or
proceeding to the extent that such participation or disclosure is required under
applicable law.
Page 12 of 15
<PAGE>
Section 16. No Effect on Employee Benefit Plans or Programs
The termination of Mr. Sabatini's employment during the term of this
Agreement or thereafter, whether by the Company or the Bank or by Mr. Sabatini,
shall have no effect on the rights and obligations of the parties hereto under
the Company's or Bank's qualified or non-qualified retirement, pension, savings,
thrift, profit-sharing or stock bonus plans, group life, health (including
hospitalization, medical and major medical), dental, accident and long term
disability insurance plans or such other employee benefit plans or programs, or
compensation plans or programs, as may be maintained by, or cover employees of,
the Company or the Bank from time to time.
Section 17. Successors and Assigns
This Agreement will inure to the benefit of and be binding upon Mr.
Sabatini, his legal representatives and testate or intestate distributees, and
the Company and the Bank, and its successors and assigns, including any
successor by merger or consolidation or a statutory receiver or any other person
or firm or corporation to which all or substantially all of the assets and
business of the Company or the Bank may be sold or otherwise transferred.
Failure of the Company and the Bank to obtain from any successor its express
written assumption of the Company's and the Bank's obligations hereunder at
least sixty (60) days in advance of the scheduled effective date of any such
succession shall be deemed a material breach of this Agreement.
Section 18. Notices
Any communication required or permitted to be given under this Agreement,
including any notice, direction, designation, consent, instruction objection or
waiver, shall be in writing and shall be deemed to have been given at such time
as it is delivered personally, or five (5) days after mailing if mailed, postage
prepaid, by registered or certified mail, return receipt requested, addressed to
such party at the address listed below or at such other address as one such
party may by written notice specify to the other party:
If to Mr. Sabatini:
Mr. Steven T. Sabatini
21 Indian Hill Road
Warwick, New York 10990
If to the Company or the Bank:
U.S.B. Holding Co., Inc.
Union State Bank
100 Dutch Hill Road
Orangeburg, New York 10962
Attention: Corporate Secretary
Page 13 of 15
<PAGE>
Section 19. Severability
A determination that any provision of this Agreement is invalid or
unenforceable shall not affect the validity or enforceability of any other
provision hereof.
Section 20. Waiver
Failure to insist upon strict compliance with any of the terms, covenants
or conditions hereof shall not be deemed a waiver of such term, covenant, or
condition. A waiver of any provision of this Agreement must be made in writing,
designated as a waiver, and signed by the party against whom its enforcement is
sought. Any waiver or relinquishment of any right or power hereunder at any one
or more times shall not be deemed a waiver or relinquishment of such right or
power at any other time or times.
Section 21. Counterparts
This Agreement may be executed in two (2) or more counterparts, each of
which shall be deemed an original, and all of which shall constitute one and the
same Agreement.
Section 22. Governing Law
This Agreement shall be governed by and construed and enforced in
accordance with the federal laws of the United States and, to the extent that
federal law is inapplicable, in accordance with the laws of the State of New
York applicable to contracts entered into and to be performed entirely within
the State of New York.
Section 23. Headings and Construction
The headings of sections in this Agreement are for the convenience of
reference only and are not intended to qualify the meaning of any section. Any
reference to a section number shall refer to a section of this Agreement unless
otherwise stated.
Section 24. Entire Agreement; Modifications
This instrument contains the entire agreement of the parties relating to
the subject matter hereof, and supersedes in its entirety any and all prior
agreements, understandings or representations relating to the subject matter
hereof. No modifications of this Agreement shall be valid unless made in writing
and signed by the parties hereto.
Section 25. Non-duplication
In the event that Mr. Sabatini performs services for the Company, the Bank
or an other direct or indirect subsidiary of the Company or the Bank, any
compensation or benefits provided to Mr. Sabatini by such other employer shall
be applied to offset the obligations of the Company and the Bank hereunder, it
being intended that this Agreement set forth the aggregate compensation and
benefits payable to Mr. Sabatini for all services to the Company, the Bank, and
all of its direct or indirect subsidiaries.
Page 14 of 15
<PAGE>
In Witness Whereof, the Company and the Bank have caused this Agreement to
be executed by their duly authorized officers and Mr. Sabatini has hereunto set
his hand, all as of the day and year first above written.
/s/ Steven T. Sabatini
----------------------------------
STEVEN T. SABATINI
ATTEST: U.S.B. HOLDING CO., INC.
By /s/ [Illegible] By /s/ Thomas E. Hales
-------------------------------- --------------------------------
Secretary Name: THOMAS E. HALES
Title: CHAIRMAN, PRESIDENT & CEO
UNION STATE BANK
By /s/ [Illegible] By /s/ Thomas E. Hales
-------------------------------- --------------------------------
Secretary Name: THOMAS E. HALES
Title: CHAIRMAN, PRESIDENT & CEO
Page 15 of 15
UNION STATE BANK
KEY EMPLOYEES' SUPPLEMENTAL
INVESTMENT PLAN
Adopted Effective December 1, 1994
Restated and Amended Effective July 1, 1997
<PAGE>
UNION STATE BANK
KEY EMPLOYEES' SUPPLEMENTAL INVESTMENT PLAN
The Supplemental Employees' Investment Plan for Salaried Employees of
Union State Bank (the "Plan") was adopted effective December 1, 1994. The Plan
was established and maintained by Union State Bank solely for the purpose of
providing to a select group of highly compensated or management personnel who
participate in the U.S.B. Holding Co., Inc. Employee Stock Ownership Plan (with
401(k) Provisions) ("Qualified Plan") benefits attributable to (i) contribution
allocations which would otherwise be made under the Qualified Plan but for the
compensation limitation of Internal Revenue Code ("Code") Section 401(a)(17),
and (ii) contributions equal to amounts in excess of the limitations on annual
additions imposed by Code Section 415.
Union State Bank desires to expand the purposes of the Plan to permit
certain key executive employees designated by its Board of Directors to defer
portions of their compensation, in order to continue to attract and retain
talented executives with a competitive compensation package. Accordingly, Union
State Bank has adopted the Plan for its key executive employees, and has
restated and amended the Plan to provide for such deferral of compensation
effective as of July 1, 1997.
It is the intention of the parties that the arrangements contemplated by
the Plan be unfunded for tax purposes and for purposes of Title I of ERISA.
Accordingly, Union State Bank hereby adopts, amends and restates the Plan
pursuant to the terms and provisions set forth below:
1
<PAGE>
ARTICLE I
DEFINITIONS
Wherever used herein the following terms shall have the meanings
hereinafter set forth. Words in the masculine gender shall include the feminine
and the singular shall include the plural, and vice versa, unless qualified by
the context. Any headings used herein are included for ease of reference only,
and are not to be construed so as to alter the terms hereof.
1.1 "Board" means the Board of Directors of the Company.
1.2 "Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any regulations relating thereto.
1.3 "Company" means Union State Bank, a New York State banking
association, or, to the extent provided in Section 8.7 below, any successor
corporation or other entity resulting from a merger or consolidation into or
with the Company or a transfer or sale of substantially all of the assets of the
Company.
1.4 "Deferred Compensation Account" means the account maintained by the
Company under the plan for a Participant that is credited with amounts
contributed under Section 3.1 and 3.3 of the Plan.
1.5 "Matching Contribution" means the Matching Contribution made by the
Company for the benefit of a Participant under and in accordance with the terms
of Section 3.3 of the Plan in any Plan Year.
1.6 "Optional Contribution" means the Optional Contribution made by the
Company for the benefit of a Participant under and in accordance with the terms
of Section 3.4 of the Plan in any Plan Year.
1.7 "Participant" means a salaried employee of the Company to whom or with
respect to whom contributions may be made under the Plan.
2
<PAGE>
1.8 "Plan" means the Key Employees' Supplemental Investment Plan.
1.9 "Plan Year" means the calendar year. However, the first Plan Year was
the period commencing December 1, 1994, and ending December 31, 1994.
1.10 "Qualified Plan" means the U.S.B. Holding Company, Inc. Employee
Stock Ownership Plan (with 401(k) Provisions), and each predecessor, successor,
or replacement plan.
1.11 "Salary Reduction Agreement" means the written salary reduction
agreement entered into by a Participant with the Company pursuant to the Plan.
1.12 "Salary Reduction Contribution" means the salary reduction
contribution made by the Company for the benefit of a Participant under and in
accordance with the terms of Section 3.1 of the Plan in any Plan Year.
ARTICLE II
ELIGIBILITY
An employee who is one of a select group of highly compensated or
management personnel who is designated eligible to participate by the Board,
shall be eligible to participate in the Plan.
ARTICLE III
CONTRIBUTIONS
3.1 Salary Reduction Contributions. The Salary Reduction Contribution to be made
by the Company for the benefit of a Participant for any Plan Year shall be in an
amount equal to the difference between (a) and (b) below:
(a) Any portion of the Participant's gross compensation (salary, bonus,
other cash compensation for services) for a Plan Year
3
<PAGE>
Less
(b) The amount of the Qualified Plan Salary Reduction Contribution
actually allocated to the Qualified Plan account of the Participant
for the Plan Year.
Salary Reduction Contributions made for the benefit of the Participant
shall be credited to the Deferred Compensation Account in the name of such
Participant within 30 days after the date such compensation would otherwise be
payable, but for the Salary Reduction Agreement.
3.2 Salary Reduction Agreement. As a condition to the Company's obligation
to make a Salary Reduction Contribution for the benefit of a Participant
pursuant to Section 3.1, the Participant must execute a Salary Reduction
Agreement in the form attached hereto. The Agreement for any Plan Year shall be
made before the beginning of that Year and shall remain in full force and effect
for subsequent Plan Years unless revoked by a Participant by written instrument
delivered to the Company prior to the beginning of the Plan Year in which such
revocation is to be effective.
3.3 Matching Contributions. The Matching Contribution made by the Company
for the benefit of a Participant for any Plan Year shall be in an amount equal
to the difference between (a) and (b) below:
(a) The lesser of the matching contribution that would be allocated to
Participant at the matching rate specified in the Qualified Plan with respect to
the aggregate amount of Salary Reduction Contribution actually made by
Participant to the Qualified Plan and this Plan, or the Qualified Plan Company
Matching Contribution which would have been allocated to the Qualified Plan
account of the Participant for the Plan Year if the Participant had contributed
to the Qualified Plan the maximum percentage of his gross compensation provided
by the Qualified Plan, without giving effect to any reduction in the Qualified
Plan Salary Reduction Contribution required by the limitations imposed by Code
Sections 402(g) or 415 of the Code on the Qualified Plan.
4
<PAGE>
Less
(b) The amount of the Qualified Plan Company Matching Contribution
actually allocated to the Qualified Plan account of the Participant
for the Plan Year.
Company Matching Contributions made for the benefit of a Participant for
any Plan Year shall be credited to the Deferred Compensation Account maintained
under the Plan in the name of such participant at the same time as related
Salary Reduction Contributions are credited in accordance with Section 3.1 of
the Plan. Company Matching Contributions for each plan year shall become 100%
vested on the last day of each such plan year, provided that the Participant
remains an employee of the Company on such date; otherwise, all Company Matching
Contributions for such plan year shall be forfeited.
3.4 Optional Contributions. The Optional Contribution made by the Company
for the benefit of a Participant for any Plan Year shall be an amount equal to
the difference between (a) and (b) below:
(a) The Qualified Plan Company Optional Contribution which would have
been allocated to the Qualified Plan account of the Participant for
the Plan Year, considering the full amount of the Participant's
compensation, without giving effect to any reduction in the
Qualified Plan Company Optional Contribution required by the
limitations on compensation imposed on the Qualified Plan by Code
Sections 401(a)(17) and/or 415
Less
(b) The amount of the Qualified Plan Company Optional Contribution
actually allocated to the Qualified Plan account of the Participant
for the Plan Year.
ARTICLE IV
INVESTMENT OF CONTRIBUTIONS
Amounts credited hereunder to the Deferred Compensation Account of a
Participant shall be treated as if they were actually invested in the Qualified
Plan account of the Participant and
5
<PAGE>
credited with gains and losses at the same time and in the same manner as is
applicable to amounts invested in the Qualified Plan account of such
Participant. Alternatively, the Company may credit each Participant's Account
with amounts actually earned by the funding vehicles it may have selected to
cover its potential liability.
ARTICLE V
DISTRIBUTIONS
All amounts credited to a Participant's Deferred Compensation Account,
including gains and losses credited in accordance with Article IV of the Plan,
shall be distributed, to or with respect to a Participant only upon termination
of the Participant's employment with the Company and all affiliates thereof for
any reason including death. All amounts distributable under the Plan shall be
distributed in the manner selected by Participant in his most recent Salary
Reduction Agreement containing a distribution election, or in the manner
selected by Participant on a Special Distribution Election Form furnished by the
Company and filed with the Company not less than twelve (12) months prior to
Participant's termination of employment with Company or any affiliate. If
termination occurs by reason of death, disability or involuntary termination
without "cause", such Form filed at any time before such event shall be valid.
Distribution shall be made in cash, in kind, or in a combination of both;
provided, however that if assets are invested in stock of the Company or its
parent Company and liquidation thereof for a single cash distribution might be
disruptive, such stock may be sold and cash distributed in an orderly fashion.
The Participant may, in the manner provided above, choose the following
alternative modes of distribution:
1. Distribution of a Participant's Deferred Compensation Account in a
single distribution immediately within 30 days or at some later
date; or
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2. Distribution of a Participant's Deferred Compensation Account in
substantially equal annual installments over a period not exceeding
fifteen (15) years (provided that such period does not exceed the
life expectancy of the Participant); or
3. Any combination of the foregoing.
If no such election is made, the distribution will be made in a single
distribution within 2 years of termination of employment. If no such elections
made on account of death, disability or retirement, the distribution will be
made in a single distribution within 1 year of termination of employment.
If a Participant should die before distribution of the full amount of the
Deferred Compensation Account had been made to him, any remaining amounts shall
be distributed to his beneficiary in the same manner and to the same extent as
the Participant would have received distributions in accordance with the
foregoing.
ARTICLE VI
ADMINISTRATION OF THE PLANS
6.1 Administration by the Company. The Company shall be responsible for
the general operation and administration of the Plan and for carrying out the
provisions thereof.
6.2 General Powers of Administration. The Company shall be entitled to
rely conclusively upon all tables, valuations, certificates, opinion and reports
furnished by any actuary, accountant, controller, counsel or other person
employed or engaged by the Company with respect to the Plan.
ARTICLE VII
AMENDMENT OR TERMINATION
7.1 Amendment or Termination. The Company intends the Plan to be permanent
but reserves the right to amend or terminate the Plan when, in the sole opinion
of the Company, such
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amendment or termination is advisable. Any such amendment or termination shall
be made pursuant to a resolution of the Board and shall be effective as of the
date of such resolution.
7.2 Effect of Amendment or Termination. No amendment or termination of the
Plan shall directly or indirectly reduce the balance of the Deferred
Compensation Account held hereunder as of the effective date of such amendment
or termination. Upon termination of the Plan, distribution of amounts in the
Deferred Compensation Account shall be made to the Participant or his
beneficiary in the manner and at the time described in Article V of the Plan. No
additional credits of Salary Reduction or Matching Contributions shall be made
to the Deferred Compensation Account of a Participant after termination of the
Plan, but the Company shall continue to credit gains to the Deferred
Compensation Account pursuant to Article IV until the balance of the Deferred
Compensation Account has been fully distributed to the Participant or his
beneficiary.
ARTICLE VII
GENERAL PROVISIONS
8.1 Participant's Rights Unsecured. The Plan at all times shall be
entirely unfunded and no provision shall at any time be made with respect to
segregating any assets of the Company for payment of any distributions
hereunder; provided, however, that the Company in its sole discretion may
establish a reserve, segregate specific assets, or create a trust or other
vehicle, to hold assets for purposes of administering the Plan or for its own
financial purposes. The right of a Participant or his designated beneficiary to
receive a distribution hereunder shall be an unsecured claim against the general
assets of the Company, and neither the Participant nor a designated beneficiary
shall have any rights in or against any specific assets of the Company,
including any reserve, segregated assets, or trust assets that may be maintained
by the Company. All amounts credited to the Deferred Compensation Accounts of
Participants shall constitute general assets of the Company and may be disposed
of by the Company at such time and for such purposes as it may deem appropriate.
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8.2 No Guarantee of Benefits. Nothing contained in the Plan shall
constitute a guaranty by the Company or any other person or entity that the
assets of the Company will be sufficient to pay any benefit hereunder.
8 3 No Enlargement of Employee Rights. No Participant shall have any right
to receive a distribution of contributions made under the Plan except in
accordance with the terms of the Plan. Establishment of the Plan shall not be
construed to give any Participant the right to be retained in the service of the
Company.
8.4 Spendthrift Provisions. No interest of any person or entity in, or
right to receive a distribution under, the Plan shall be subject in any manner
to sale, transfer, assignment, pledge, attachment, garnishment, anticipation, or
other alienation or encumbrance of any kind; nor may such interest or right to
receive a distribution be taken, either voluntarily or involuntarily for the
satisfaction of the debts of, or other obligations or claims against, such
person or entity, including claims for alimony, support, separate maintenance,
and claims in bankruptcy proceedings.
8.5 Applicable Law. The Plan shall be construed and administered under the
laws of the State of New York.
8.6 Incapacity of Recipient. If any person entitled to a distribution
under the Plan is deemed by the Company to be incapable of personally receiving
and giving a valid receipt for such payment, then, unless and until claim
therefor shall have been made by a duly appointed guardian or other legal
representative of such person, the Company may provide for such payment or any
part thereof to be made to any other person or institution then contributing
toward or providing for the care and maintenance of such person. Any such
payment shall be a payment for the account of such person and a complete
discharge of any liability of the Company and the Plan therefor.
8.7 Corporate Successors. The Plan shall not be automatically terminated
by a transfer or sale of assets of the Company or by the merger or consolidation
of the Company into or with any other corporation or other entity, but the Plan
shall be continued after such sale, merger, or consolidation only if and to the
extent that the transferee, purchaser, or successor
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<PAGE>
entity agrees to continue the Plan. In the event that the Plan is not continued
by the transferee, purchaser, or successor entity, then the Plan shall terminate
subject to the provisions of Section 7.2.
8.8 Unclaimed Benefit. Each Participant shall keep the Company informed of
his current address and the current address of his designated beneficiary. The
Company shall not be obligated to search for the whereabouts of any person. If
the location of a Participant is not made known to the Company within three (3)
years after the date on which payment of the Participant's Deferred Compensation
Accounts may first be made, payment may be made as though the Participant had
died at the end of the three-year period. If, within one additional year after
such three-year period has elapsed, or, within three year after the actual death
of a Participant, the Company is unable to locate any designated beneficiary of
the Participant, then the Company shall have no further obligation to pay any
benefit hereunder to such Participant or designated beneficiary and such benefit
shall be irrevocably forfeited.
8.9 Limitations on liability. Notwithstanding any of the preceding
provisions of the Plan, neither the Company nor any individual acting as
employee or agent of the Company shall be liable to any Participant, former
Participant or other person for any claim, loss, liability, or expense incurred
in connection with the Plan. However, the preceding sentence shall not apply to
liability for criminal acts or willful misconduct.
IN WITNESS WHEREOF, the Company has formally adopted this restated and
amended Plan effective on July 1, 1997.
UNION STATE BANK
By: /s/ Thomas E. Hales
--------------------------------------------------
Thomas E. Hales - Chairman, President and CEO
10
<PAGE>
UNION STATE BANK
KEY EMPLOYEES' SUPPLEMENTAL INVESTMENT PLAN
AMENDMENT NO. 1
The Union State Bank Key Employees' Supplemental Investment Plan ("Plan") is
hereby amended effective September 1, 1998 as follows:
1. New Section 1.13 is added to read as follows:
"1.13 "USB Stock" means common stock of U.S.B. Holding Co., Inc."
2. The last paragraph of Section 3.1 is amended in its entirety to read as
follows:
"Salary Reduction Contributions for the benefit of a Participant shall be
credited to the Deferred Compensation Account maintained under the Plan in
the name of the Participant on the date the compensation would otherwise
have been payable, but for the Salary Reduction Agreement."
3. The last paragraph of Section 3.3 is amended in its entirety to read as
follows:
"Company Matching Contributions for the benefit of a Participant for any
Plan Year shall be credited to the Deferred Compensation Account
maintained under the Plan in the name of the Participant on the last day
of such Plan Year."
4. A new last paragraph is added to Section 3.4 to read as follows:
"Any Optional Contributions for the benefit of a Participant for any Plan
Year shall be credited to the Deferred Compensation Account maintained
under the Plan in the name of the Participant on the last day of such Plan
Year."
5. A new Section 3.5 is added to the Plan to read as follows:
"3.5 Whole Share Price Limitation on Contributions Notwithstanding the
provisions of above Sections 3.1, 3.2, 3.3 and 3.4, all contributions to
this Plan shall be limited to amounts that will purchase whole shares of
USB Stock at the market price paid for such shares on the date the
contribution(s) are to be credited to Participants' Deferred Compensation
Accounts. Any additional amounts that would be contributed to the Plan but
for this Section shall (i) be returned to the Participant or to the
Company, and shall not be credited to Participants' Plan accounts or
applied to purchase fractional shares of USB Stock, or (ii) if diminimus,
held for future purchase of Company Stock for the benefit of the
Participant.
6. Article IV is amended in its entirety to read as follows:
1
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"INVESTMENT OF CONTRIBUTIONS; DIVIDENDS
4.1 Investment of Contributions Amounts credited hereunder to a
Participant's Deferred Compensation Account shall be treated as if they
were actually invested in USB Stock on the dates amounts are credited to
the Deferred Compensation Account pursuant to Article III hereof. For
purposes of reporting to Participants, each Deferred Compensation Account
shall be credited with appreciation, depreciation, gains, and/or losses as
if actually invested in USB Stock.
If the Company elects to fund any of its liability hereunder through a
trust or other funding mechanism, the Company shall do so only with shares
of USB Stock, and shall acquire, issue or release from Treasury such
shares of USB Stock on the dates amounts are credited to Participants'
Deferred Compensation Accounts pursuant to Article III hereof.
4.2 Application of Dividends If the Company elects to fund any of its
liability hereunder through a trust or other funding mechanism, dividends
paid on USB Stock held by such trust or other funding vehicle shall be
paid to such trust or other funding vehicle and shall be applied on the
date received to the purchase of additional shares of USB Stock. The Plan
administrator and/or the trustee or other funding vehicle shall accept
only such amounts of dividends as shall equal (on the date received) the
purchase price of the maximum number of whole shares of USB Stock, at the
market price (paid for such shares) on the date dividends are paid, that
can be purchased without any excess cash or other property remaining in
the Plan, trust or other vehicle. The Plan administrator shall apply any
excess amounts as it deems appropriate, provided they do not become part
of the Plan's assets at any time unless such amount is diminimus inasmuch
as such dividend may be held to purchase Company Stock in the future for
the benefit of the participant."
7. The second paragraph of Article V is amended in its entirety to read as
follows:
"Distribution shall be made solely in shares of USB Stock."
8. Section 8.1 is amended by deletion of the last sentence thereof.
9. New Section 6.3 is added to the Plan to read as follows:
"6.3 Financial Accounting The Company intends this Plan to qualify, under
EITF Consensus dated July 23, 1998 relating to Issue 97-14 ("EITF 97-14"),
for financial accounting, in the Company's financial statements, as a
"Plan A" type program, under which USB Stock held by any trust or other
funding mechanism utilized by the Company and the related deferred
compensation obligation of the Company each shall be recorded in
stockholders, Equity, in an amount equal to the original amounts of
deferred compensation credited under the Plan without the need to adjust
the USB Stock or the obligation to a market value level. To the extent
this Plan must be interpreted at any time, it shall be interpreted to have
the meaning which conforms to the requirements of EITF 97-14."
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<PAGE>
IN WITNESS WHEREOF, the Company has formally adopted Amendment No. 1 to
the Key Employees' Supplemental Investment Plan effective September 1, 1998.
UNION STATE BANK
By: /s/ Thomas E. Hales
--------------------------------------------------
Thomas E. Hales - Chairman, President and CEO
3
UNION STATE BANK
KEY EMPLOYEES' SUPPLEMENTAL
DIVERSIFIED INVESTMENT PLAN
Adopted Effective September 1, 1998
<PAGE>
UNION STATE BANK
KEY EMPLOYEES' SUPPLEMENTAL DIVERSIFIED
INVESTMENT PLAN
The Supplemental Employees' Diversified Investment Plan for Salaried
Employees of Union State Bank (the "Plan") is adopted effective September 1,
1998. The Plan is established and maintained by Union State Bank solely for the
purpose of providing to a select group of highly compensated or management
personnel who participate in the U.S.B. Holding Co., Inc. Employee Stock
Ownership Plan (with 401(k) Provisions) ("Qualified Plan") benefits attributable
to (i) contribution allocations which would otherwise be made under the
Qualified Plan but for the compensation limitation of Internal Revenue Code
("Code") Section 401(a)(17), and (ii) contributions equal to amounts in excess
of the limitations on annual additions imposed by Code Section 415.
Union State Bank desires to permit certain key executive employees
designated by its Board of Directors to defer portions of their compensation, in
order to continue to attract and retain talented executives with a competitive
compensation package. Accordingly, Union State Bank has adopted the Plan for its
key executive employees, to provide for such deferral of compensation effective
as of September 1, 1998.
It is the intention of the parties that the arrangements contemplated by
the Plan be unfunded for tax purposes and for purposes of Title I of ERISA.
Accordingly, Union State Bank hereby adopts the Plan pursuant to the terms
and provisions set forth below:
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<PAGE>
ARTICLE I
DEFINITIONS
Wherever used herein the following terms shall have the meanings
hereinafter set forth. Words in the masculine gender shall include the feminine
and the singular shall include the plural, and vice versa, unless qualified by
the context. Any headings used herein are included for ease of reference only,
and are not to be construed so as to alter the terms hereof.
1.1 "Board" means the Board of Directors of the Company.
1.2 "Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any regulations relating thereto.
1.3 "Company" means Union State Bank, a New York State banking
association, or, to the extent provided in Section 8.7 below, any successor
corporation or other entity resulting from a merger or consolidation into or
with the Company or a transfer or sale of substantially all of the assets of the
Company.
1.4 "Deferred Compensation Account" means the account maintained by the
Company under the plan for a Participant that is credited with amounts
contributed under Section 3.1 and 3.3 of the Plan.
1.5 "Key Employees Supplemental Diversified Investment Plan (KESIP)" means
the nonqualified plan established for certain highly compensated personnel for
which salary deferrals and related Company match are invested only in U.S.B.
Holding Co., Inc., stock.
1.6 "Matching Contribution" means the Matching Contribution made by the
Company for the benefit of a Participant under and in accordance with the terms
of Section 3.3 of the Plan in any Plan Year.
1.7 "Optional Contribution" means the Optional Contribution made by the
Company for the benefit of a Participant under and in accordance with the terms
of Section 3.4 of the Plan in any Plan Year.
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<PAGE>
1.8 "Participant" means a salaried employee of the Company to whom or with
respect to whom contributions may be made under the Plan.
1.9 "Plan" means the Key Employees' Supplemental Diversified Investment
Plan.
1.10 "Plan Year" means the calendar year. However, the first Plan Year was
the period commencing September 1, 1998, and ending December 31, 1998.
1.11 "Qualified Plan" means the U.S.B. Holding Co., Inc. Employee
Stock Ownership Plan (with 401(k) Provisions), and each predecessor, successor,
or replacement plan.
1.12 "Salary Reduction Agreement" means the written salary reduction
agreement entered into by a Participant with the Company pursuant to the Plan.
1.13 "Salary Reduction Contribution" means the salary reduction
contribution made by the Company for the benefit of a Participant under and in
accordance with the terms of Section 3.1 of the Plan in any Plan Year.
ARTICLE II
ELIGIBILITY
An employee who is one of a select group of highly compensated or
management personnel who is designated eligible to participate by the Board,
shall be eligible to participate in the Plan.
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<PAGE>
ARTICLE III
CONTRIBUTIONS
3.1 Salary Reduction Contributions. The Salary Reduction Contribution to be made
by the Company for the benefit of a Participant for any Plan Year shall be in an
amount equal to the difference between (a) and (b) below:
(a) Any portion of the Participant's gross compensation (salary, bonus,
other cash compensation for services) for a Plan Year
Less
(b) the sum of:
(i) The amount of the Qualified Plan Salary Reduction Contribution
actually allocated to the Qualified Plan account of the Participant
for the Plan Year, and
(ii) The amount of the KESIP Reduction Contribution actually allocated to
the KESIP account of the participant for the Plan Year.
Salary Reduction Contributions made for the benefit of the Participant
shall be credited to the Deferred Compensation Account in the name of such
Participant within 30 days after the date such compensation would otherwise be
payable, but for the Salary Reduction Agreement.
3.2 Salary Reduction Agreement. As a condition to the Company's obligation
to make a Salary Reduction Contribution for the benefit of a Participant
pursuant to Section 3.1, the Participant must execute a Salary Reduction
Agreement in the form attached hereto. The Agreement for any Plan Year shall be
made before the beginning of that Year and shall remain in full force and effect
for subsequent Plan Years unless revoked by a Participant by written instrument
delivered to the Company prior to the beginning of the Plan Year in which such
revocation is to be effective.
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<PAGE>
3.3 Matching Contributions. The Matching Contribution made by the Company
for the benefit of a Participant for any Plan Year shall be in an amount equal
to the difference between (a) and (b) below:
(a) The lesser of the matching contribution that would be allocated to
Participant at the matching rate specified in the Qualified Plan with respect to
the aggregate amount of Salary Reduction Contribution actually made by
Participant to the Qualified Plan, KESIP and this Plan, or the Qualified Plan
Company Matching Contribution which would have been allocated to the Qualified
Plan account of the Participant for the Plan Year if the Participant had
contributed to the Qualified Plan the maximum percentage of his gross
compensation provided by the Qualified Plan, without giving effect to any
reduction in the Qualified Plan Salary Reduction Contribution required by the
limitations imposed by Code Sections 402(g) or 415 of the Code on the Qualified
Plan.
Less
(b) the sum of:
(i) The amount of the Qualified Plan Company Matching Contribution
actually allocated to the Qualified Plan account of the Participant
for the Plan Year, and
(ii) The amount of the KESIP Company Matching Contribution actually
allocated to the KESIP account of the participant for the Plan Year.
Company Matching Contributions made for the benefit of a Participant for
any Plan Year shall be credited to the Deferred Compensation Account maintained
under the Plan in the name of such participant at the same time as related
Salary Reduction Contributions are credited in accordance with Section 3.1 of
the Plan. Company Matching Contributions for each plan year shall become 100%
vested on the last day of each such plan year, provided that the Participant
remains an employee of the Company on such date; otherwise, all Company Matching
Contributions for such plan year shall be forfeited.
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<PAGE>
3.4 Optional Contributions. The Optional Contribution made by the Company
for the benefit of a Participant for any Plan Year shall be an amount equal to
the difference between (a) and (b) below:
(a) The Qualified Plan Company Optional Contribution which would have
been allocated to the Qualified Plan account of the Participant for
the Plan Year, considering the full amount of the Participant's
compensation, without giving effect to any reduction in the
Qualified Plan Company Optional Contribution required by the
limitations on compensation imposed on the Qualified Plan by Code
Sections 401(a)(17) and/or 415
Less
(b) the sum of:
(i) The amount of the Qualified Plan Company Optional Contribution
actually allocated to the Qualified Plan account of the Participant
for the Plan Year, and
(ii) The amount of KESIP Optional Contribution actually allocated to the
KESIP account of the participant for the Plan Year.
ARTICLE IV
INVESTMENT OF CONTRIBUTIONS
If funded, amounts credited hereunder to the Deferred Compensation Account
of a Participant shall be invested in funding vehicles selected by the Trustee
or the Company. Each Participant's Account will be credited with amounts
actually earned by such funding vehicles. If the Company elects not to fund
amounts credited hereunder, each Participant's Account shall be credited with
amounts determined by the Company.
6
<PAGE>
ARTICLE V
DISTRIBUTIONS
All amounts credited to a Participant's Deferred Compensation Account,
including gains and losses credited in accordance with Article IV of the Plan,
shall be distributed, to or with respect to a Participant only upon termination
of the Participant's employment with the Company and all affiliates thereof for
any reason including death. All amounts distributable under the Plan shall be
distributed in the manner selected by Participant in his most recent Salary
Reduction Agreement containing a distribution election, or in the manner
selected by Participant on a Special Distribution Election Form furnished by the
Company and filed with the Company not less than twelve (12) months prior to
Participant's termination of employment with Company or any affiliate. If
termination occurs by reason of death, disability or involuntary termination
without "cause", such Form filed at any time before such event shall be valid.
Distribution shall be made in cash, in kind, or in a combination of both;
provided, however that if assets are invested in stock of the Company or its
parent Company and liquidation thereof for a single cash distribution might be
disruptive, such stock may be sold and cash distributed in an orderly fashion.
The Participant may, in the manner provided above, choose the following
alternative modes of distribution:
1. Distribution of a Participant's Deferred Compensation Account in a
single distribution immediately within 30 days or at some later
date; or
2. Distribution of a Participant's Deferred Compensation Account in
substantially equal annual installments over a period not exceeding
fifteen (15) years (provided that such period does not exceed the
life expectancy of the Participant); or
3. Any combination of the foregoing.
If no such election is made, the distribution will be made in a single
distribution within 2 years of termination of employment. If no such elections
made on account of death, disability or
7
<PAGE>
retirement, the distribution will be made in a single distribution within 1 year
of termination of employment.
If a Participant should die before distribution of the full amount of the
Deferred Compensation Account had been made to him, any remaining amounts shall
be distributed to his beneficiary in the same manner and to the same extent as
the Participant would have received distributions in accordance with the
foregoing.
ARTICLE VI
ADMINISTRATION OF THE PLANS
6.1 Administration by the Company. The Company shall be responsible for
the general operation and administration of the Plan and for carrying out the
provisions thereof.
6.2 General Powers of Administration. The Company shall be entitled to
rely conclusively upon all tables, valuations, certificates, opinions and
reports furnished by any actuary, accountant, controller, counsel or other
person employed or engaged by the Company with respect to the Plan.
ARTICLE VII
AMENDMENT OR TERMINATION
7.1 Amendment or Termination. The Company intends the Plan to be permanent
but reserves the right to amend or terminate the Plan when, in the sole opinion
of the Company, such amendment or termination is advisable. Any such amendment
or termination shall be made pursuant to a resolution of the Board and shall be
effective as of the date of such resolution.
8
<PAGE>
7.2 Effect of Amendment or Termination. No amendment or termination of the
Plan shall directly or indirectly reduce the balance of the Deferred
Compensation Account held hereunder as of the effective date of such amendment
or termination. Upon termination of the Plan, distribution of amounts in the
Deferred Compensation Account shall be made to the Participant or his
beneficiary in the manner and at the time described in Article V of the Plan. No
additional credits of Salary Reduction or Matching Contributions shall be made
to the Deferred Compensation Account of a Participant after termination of the
Plan, but the Company shall continue to credit gains to the Deferred
Compensation Account pursuant to Article IV until the balance of the Deferred
Compensation Account has been fully distributed to the Participant or his
beneficiary.
ARTICLE VII
GENERAL PROVISIONS
8.1 Participant's Rights Unsecured. The Plan at all times shall be
entirely unfunded and no provision shall at any time be made with respect to
segregating any assets of the Company for payment of any distributions
hereunder; provided, however, that the Company in its sole discretion may
establish a reserve, segregate specific assets, or create a trust or other
vehicle, to hold assets for purposes of administering the Plan or for its own
financial purposes. The right of a Participant or his designated beneficiary to
receive a distribution hereunder shall be an unsecured claim against the general
assets of the Company, and neither the Participant nor a designated beneficiary
shall have any rights in or against any specific assets of the Company,
including any reserve, segregated assets, or trust assets that may be maintained
by the Company. All amounts credited to the Deferred Compensation Accounts of
Participants shall constitute general assets of the Company and may be disposed
of by the Company at such time and for such purposes as it may deem appropriate.
8.2 No Guarantee of Benefits. Nothing contained in the Plan shall
constitute a guaranty by the Company or any other person or entity that the
assets of the Company will be sufficient to pay any benefit hereunder.
9
<PAGE>
8.3 No Enlargement of Employee Rights. No Participant shall have any right
to receive a distribution of contributions made under the Plan except in
accordance with the terms of the Plan. Establishment of the Plan shall not be
construed to give any Participant the right to be retained in the service of the
Company.
8.4 Spendthrift Provisions. No interest of any person or entity in, or
right to receive a distribution under, the Plan shall be subject in any manner
to sale, transfer, assignment, pledge, attachment, garnishment, anticipation, or
other alienation or encumbrance of any kind; nor may such interest or right to
receive a distribution be taken, either voluntarily or involuntarily for the
satisfaction of the debts of, or other obligations or claims against, such
person or entity, including claims for alimony, support, separate maintenance,
and claims in bankruptcy proceedings.
8.5 Applicable Law. The Plan shall be construed and administered under the
laws of the State of New York.
8.6 Incapacity of Recipient. If any person entitled to a distribution
under the Plan is deemed by the Company to be incapable of personally receiving
and giving a valid receipt for such payment, then, unless and until claim
therefor shall have been made by a duly appointed guardian or other legal
representative of such person, the Company may provide for such payment or any
part thereof to be made to any other person or institution then contributing
toward or providing for the care and maintenance of such person. Any such
payment shall be a payment for the account of such person and a complete
discharge of any liability of the Company and the Plan therefor.
8.7 Corporate Successors. The Plan shall not be automatically terminated
by a transfer or sale of assets of the Company or by the merger or consolidation
of the Company into or with any other corporation or other entity, but the Plan
shall be continued after such sale, merger, or consolidation only if and to the
extent that the transferee, purchaser, or successor entity agrees to continue
the Plan. In the event that the Plan is not continued by the transferee,
purchaser, or successor entity, then the Plan shall terminate subject to the
provisions of Section 7.2.
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8.8 Unclaimed Benefit. Each Participant shall keep the Company informed of
his current address and the current address of his designated beneficiary. The
Company shall not be obligated to search for the whereabouts of any person. If
the location of a Participant is not made known to the Company within three (3)
years after the date on which payment of the Participant's Deferred Compensation
Accounts may first be made, payment maybe made as though the Participant had
died at the end of the three-year period. If, within one additional year after
such three-year period has elapsed, or, within three year after the actual death
of a Participant, the Company is unable to locate any designated beneficiary of
the Participant, then the Company shall have no further obligation to pay any
benefit hereunder to such Participant or designated beneficiary and such benefit
shall be irrevocably forfeited.
8.9 Limitations on liability. Notwithstanding any of the preceding
provisions of the Plan, neither the Company nor any individual acting as
employee or agent of the Company shall be liable to any Participant, former
Participant or other person for any claim, loss, liability, or expense incurred
in connection with the Plan. However, the preceding sentence shall not apply to
liability for criminal acts or willful misconduct.
IN WITNESS WHEREOF, the Company has formally adopted this Plan effective
on September 1, 1998.
UNION STATE BANK
By: /s/ Thomas E. Hales
--------------------------------------------------
Thomas E. Hales - Chairman, President and CEO
11
<PAGE>
UNION STATE BANK
100 Dutch Hill Road
Orangeburg, New York 10962
KEY EMPLOYEES' SUPPLEMENTAL DIVERSIFIED INVESTMENT PLAN
SALARY REDUCTION AGREEMENT
As a condition to receiving a Supplemental Salary Reduction and Matching
Contribution under the Key Employees' Supplemental Diversified Investment Plan
(the "Plan") of Union State Bank (the "Bank"), I hereby agree that the salary,
inclusive of bonuses, otherwise payable to me by Union State Bank for any Plan
Year commencing with the year which begins September 1, 1998, shall be reduced
by _________ percent per pay period after I have met all 401k qualified plan
provisions under the Bank's Employee Stock Ownership Plan (With 401(k)
Provisions) ("KSOP") and also less any amounts deferred under the Key Employees'
Supplemental Investment Plan. Such amount shall be paid by the Bank as a salary
reduction contribution for my benefit pursuant to the terms of the Plan.
_________________________ ________________________________
Date Participant
EMPLOYEE STOCK OWNERSHIP PLAN
0F
TAPPAN ZEE FINANCIAL, INC.
AND
CERTAIN AFFILIATES
Adopted on July 25, 1995
Effective October 5, 1995
Incorporating Amendment Nos. 1 and 2
<PAGE>
TABLE 0F CONTENTS
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ARTICLE I
DEFINITIONS
Section 1.1 Account .........................................................1
Section 1.2 Affiliated Employer .............................................1
Section 1.3 Allocation Compensation .........................................1
Section 1.4 Board ...........................................................2
Section 1.5 Beneficiary .....................................................2
Section 1.6 Break in Service ................................................2
Section 1.7 Change in Control ...............................................2
Section 1.8 Code ............................................................2
Section 1.9 Committee .......................................................2
Section 1.10 Designated Beneficiary ..........................................2
Section 1.11 Disability ......................................................3
Section 1.12 Domestic Relations Order ........................................3
Section 1.13 Effective Date ..................................................3
Section 1.14 Eligible Employee ...............................................4
Section 1.15 Eligible Participant ............................................4
Section 1.16 Employee ........................................................4
Section 1.17 Employer ........................................................4
Section 1.18 Employment Commencement .........................................4
Section 1.19 ERISA ...........................................................4
Section 1.20 ESOP Contribution ...............................................4
Section 1.21 Fair Market Value ...............................................4
Section 1.22 Family Member ...................................................5
Section 1.23 Financed Share ..................................................5
Section 1.24 Five Percent Owner ..............................................5
Section 1.25 Forfeitures .....................................................5
Section 1.26 Former Participant ..............................................5
Section 1.27 General Investment Account ......................................5
Section 1.28 Highly Compensated Employee .....................................5
Section 1.29 Hour of Service .................................................7
Section 1.30 Investment Account ..............................................7
Section 1.31 Investment Fund .................................................7
Section 1.32 Loan Repayment Account ..........................................7
Section 1.33 Loan Repayment Contribution .....................................7
Section 1.34 Maternity or Paternity Leave ....................................7
Section 1.35 Military Service ................................................8
Section 1.36 Named Fiduciary .................................................8
Section 1.37 Officer .........................................................8
Section 1.38 Participant .....................................................8
Section 1.39 Period of Service ...............................................8
(i)
<PAGE>
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Section 1.40 Period of Severance .............................................8
Section 1.41 Plan ............................................................8
Section 1.42 Plan Administrator ..............................................9
Section 1.43 Plan Year .......................................................9
Section 1.44 Qualified Domestic Relations Order ..............................9
Section 1.45 Qualified Military Service ......................................9
Section 1.46 Qualified Participant ...........................................9
Section 1.47 Retirement ......................................................9
Section 1.48 Retroactive Contribution ........................................9
Section 1.49 Share ...........................................................9
Section 1.50 Share Acquisition Loan ..........................................9
Section 1.51 Share Investment Account ........................................9
Section 1.52 Tender Offer ....................................................9
Section 1.53 Total Compensation .............................................10
Section 1.54 Trust ..........................................................11
Section 1.55 Trust Agreement ................................................11
Section 1.56 Trust Fund .....................................................11
Section 1.57 Trustee ........................................................11
Section 1.58 Valuation Date .................................................11
ARTICLE II
PARTICIPATION
Section 2.1 Eligibility for Participation ..................................11
Section 2.2 Commencement of Participation ..................................12
Section 2.3 Termination of Participation ...................................12
Section 2.4 Adjustments to Period of Service ...............................12
ARTICLE III
SPECIAL PROVISIONS
Section 3.1 Military Service ...............................................13
Section 3.2 Maternity or Paternity Leave ...................................13
Section 3.3 Leave of Absence ...............................................14
(ii)
<PAGE>
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ARTICLE IV
CONTRIBUTIONS BY PARTICIPANTS NOT PERMITTED
Section 4.1 Contributions by Participants Not Permitted ....................14
ARTICLE V
CONTRIBUTIONS BY THE EMPLOYER
Section 5.1 In General .....................................................15
Section 5.2 Loan Repayment Contributions ...................................15
Section 5.3 ESOP Contributions .............................................15
Section 5.4 Retroactive Contributions ......................................16
Section 5.5 Time and Manner of Payment .....................................16
ARTICLE VI
SHARE ACQUISITION LOANS
Section 6.1 In General .....................................................17
Section 6.2 Collateral; Liability for Repayment ............................17
Section 6.3 Loan Repayment Account .........................................18
Section 6.4 Release of Financed Shares .....................................19
Section 6.5 Restrictions on Financed Shares ................................20
ARTICLE VII
ALLOCATION 0F CONTRIBUTIONS
Section 7.1 Allocation Among Eligible Participants .........................20
Section 7.2 Allocation of Released Shares or Other Property ................20
Section 7.3 Allocation of ESOP Contributions ...............................20
Section 7.4 No Allocation After Termination of Participation ...............21
(iii)
<PAGE>
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ARTICLE VIII
LIMITATIONS ON ALLOCATIONS
Section 8.1 Optional Limitations on Allocations 0f ESOP Contributions ......21
Section 8.2 General Limitations on Contributions ...........................21
ARTICLE IX
VESTING
Section 9.1 Vesting ........................................................25
Section 9.2 Vesting on Death, Disability, Retirement or Change in Control ..25
Section 9.3 Forfeitures on Termination of Employment .......................26
Section 9.4 Amounts Credited Upon Re-Employment ............................26
Section 9.5 Allocation 0f Forfeitures ......................................26
Section 9.6 Accelerated Vesting Upon Change in Control .....................26
ARTICLE X
THE TRUST FUND
Section 10.1 The Trust Fund .................................................28
Section 10.2 Investments ....................................................29
Section 10.3 Diversification of Investments .................................30
Section 10.4 Use of Commingled Trust Funds ..................................31
Section 10.5 Management and Control of Assets ...............................31
ARTICLE XI
VALUATION 0F INTERESTS IN THE TRUST FUND
Section 11.1 Establishment of Investment Accounts ...........................31
Section 11.2 Share Investment Accounts ......................................31
Section 11.3 General Investment Accounts ....................................32
Section 11.4 Valuation of Investment Accounts ...............................32
Section 11.5 Annual Statements ..............................................33
(iv)
<PAGE>
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ARTICLE XII
SHARES
Section 12.1 Specific Allocation of Shares ..................................33
Section 12.2 Dividends ......................................................33
Section 12.3 Voting Rights ..................................................34
Section 12.4 Tender Offers ..................................................36
ARTICLE XIII
PAYMENT 0F BENEFITS
Section 13.1 In General .....................................................38
Section 13.2 Designation of Beneficiaries ...................................38
Section 13.3 Distributions to Participants and Former Participants ..........39
Section 13.4 Manner of Payment ..............................................42
Section 13.5 Put Options ....................................................43
Section 13.6 Right of First Refusal .........................................43
Section 13.7 Minimum Required Distributions .................................44
Section 13.8 Direct Rollover of Eligible Rollover Distributions .............46
Section 13.9 Valuation of Shares Upon Settlement to a Participant ...........47
ARTICLE XIV
ADMINISTRATION
Section 14.1 Named Fiduciaries ..............................................47
Section 14.2 Plan Administrator .............................................48
Section 14.3 Committee Responsibilities .....................................49
Section 14.4 Claims Procedure ...............................................50
Section 14.5 Claims Review Procedure ........................................51
Section 14.8 Allocation of Fiduciary Responsibilities and Employment
of Advisors ..............................................51
Section 14.9 Other Administrative Provisions ................................52
(v)
<PAGE>
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ARTICLE XV
AMENDMENT, TERMINATION AND TAX QUALIFICATION
Section 15.1 Amendment and Termination by Tappan Zee Financial, Inc.
(Before September 1, 1998) and U.S.B. Holding Co.,
Inc. (After August 3l, 1998) ..............................53
Section 15.2 Amendment or Termination Other Than by Tappan Zee Financial,
Inc. (Before September 1, 1998) and U.S.B. Holding
Co., Inc. (After August 31, 1998). ........................53
Section 15.3 Conformity to Internal Revenue Code ............................53
Section 15.4 Contingent Nature of Contributions .............................54
ARTICLE XVI
SPECIAL RULES FOR TOP HEAVY PLAN YEARS
Section 16.1 In General .....................................................55
Section 16.2 Definition of Top Heavy Plan ...................................55
Section 16.3 Determination Date .............................................56
Section 16.4 Cumulative Accrued Benefits ....................................56
Section 16.5 Key Employees ..................................................57
Section 16.6 Required Aggregation Group .....................................58
Section 16.7 Permissible Aggregation Group ..................................58
Section 16.8 Special Requirements During Ton Heavy Plan Years ...............58
ARTICLE XVII
MISCELLANEOUS PROVISIONS
Section 17.1 Governing Law ..................................................59
Section 17.2 No Right to Continued Employment ...............................59
Section 17.3 Construction of Language .......................................59
Section 17.4 Headings .......................................................59
Section 17.5 Merger with Other Plans ........................................60
Section 17.6 Non-alienation of Benefits .....................................60
Section 17.7 Procedures Involving Domestic Relations Orders .................61
Section 17.8 Leased Employees ...............................................61
Section 17.9 Status as an Employee Stock Ownership Plan .....................62
(vi)
<PAGE>
EMPLOYEE STOCK OWNERSHIP PLAN
OF
TAPPAN ZEE FINANCIAL, INC.
AND
CERTAIN AFFILIATES
ARTICLE I
DEFINITIONS
The following definitions shall apply for the purposes of the Plan,
unless a different meaning is clearly indicated by the context:
Section 1.1 Account means an account established for each
Participant to which is allocated such Participant's share, if any, of all
Financed Shares and other property that are released from the Loan Repayment
Account in accordance with section 6.4, together with his share, if any, of any
ESOP Contributions that may be made by the Employer.
Section 1.2 Affiliated Employer means any corporation which is a
member of a controlled group of corporations (as defined in section 414(b) of
the Code) that includes the Employer; any trade or business (whether or not
incorporated) that is under common control (as defined in section 414(c) of the
Code) with the Employer; any organization (whether or not incorporated) that is
a member of an affiliated service group (as defined in section 414(m) of the
Code) that includes the Employer; any leasing organization (as defined in
section 414(n) of the Code) to the extent that any of its employees are required
pursuant to section 414(n) of the Code to be treated as employees of the
Employer; and any other entity that is required to be aggregated with the
Employer pursuant to regulations under section 414(o) of the Code.
Section 1.3 Allocation Compensation during any period means the
compensation taken into account in determining the allocation of benefits and
contributions among Participants and consists of the aggregate compensation
received by an Employee from the Employer with respect to such period as
reported to the Internal Revenue Service as wages for such period pursuant to
section 6041(a) of the Code, plus the amount by which such Employee's
compensation with respect to such period has been reduced pursuant to a
compensation reduction agreement under the terms of any of the following plans
which may be maintained by the Employer:
(a) a qualified cash or deferred arrangement described in section
401(k) of the Code;
<PAGE>
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(b) a salary reduction simplified employee pension plan described in
section 408(k) of the Code;
(c) a tax deferred annuity plan described in section 403(b) of the
Code; or
(d) a cafeteria plan described in section 125 of the Code.
In no event, however, shall an Employee's Allocation Compensation for any
calendar year include any compensation in excess of $150,000. The $150,000
limitation set forth in the preceding sentence shall be indexed in accordance
with regulations prescribed under section 401(a)(17) of the Code. If there are
less than twelve (12) months in the Plan Year, the $150,000 limitation (as
adjusted) shall be prorated by multiplying such limitation by a fraction, the
numerator of which is the number of months in the Plan Year and the denominator
of which is twelve (12). For purposes of applying the foregoing limitations in
Plan Years beginning before January 1, 1997 to any person who is a Five Percent
Owner or who is one of the ten Highly Compensated Employees with the highest
Total Compensation (determined prior to the application of this sentence), any
Allocation Compensation paid to the spouse of such person or to any lineal
descendant of such person who has not attained age 19 on or before the last day
of such calendar year shall be deemed to have been paid to such person.
Section 1.4 Board means the Board of Directors of Tappan Zee
Financial, Inc. through the close of business on August 31, 1998 and the Board
of Directors of U.S.B. Holding Co., Inc. thereafter.
Section 1.5 Beneficiary means the person or persons designated by a
Participant or Former Participant or other person entitled to a benefit under
the Plan, or otherwise determined to be entitled to a benefit under the Plan. If
more than one person is designated, each shall have an equal share unless the
person making the designation directed otherwise. The word "person" includes an
individual, a trust, an estate or any other person that is permitted to be named
as a Beneficiary.
Section 1.6 Break in Service means a Period of Severance of at least
365 consecutive days.
Section 1.7 Change in Control means an event described in section
9.6(b).
Section 1.8 Code means the Internal Revenue Code of 1986 (including
the corresponding provisions of any succeeding law).
Section 1.9 Committee means the Compensation Committee described in
section 14.3.
Section 1.10 Designated Beneficiary means a natural person
designated by a Participant or Former Participant as a Beneficiary and shall not
include any Beneficiary designated by a person other than a Participant or
Former Participant or any Beneficiary other than a natural
<PAGE>
-3-
person. If a natural person is the beneficiary of a trust which a Participant or
Former Participant has named as his Beneficiary, such natural person shall be
treated as a Designated Beneficiary if: (a) the trust is a valid trust under
applicable state law (or would be a valid trust except for the fact that it does
not have a corpus); (b) the trust is irrevocable or will, by its terms, become
irrevocable upon the death of the Participant or Former Participant; (c) the
beneficiaries of the trust who are beneficiaries with respect to the trust's
interest as a Beneficiary are identifiable from the terms of the trust
instrument; and (d) the following information is furnished to the Committee:
(i) by the Participant or Former Participant, if any distributions
are required to be made pursuant to section 13.3 prior to the death of the
Participant or Former Participant, either: (A) a copy of the trust
instrument, together with a written undertaking by the Participant or
Former Participant to furnish to the Committee a copy of any subsequent
amendment within a reasonable time after such amendment is made; or (B)(I)
a list of ah of the beneficiaries of the trust (including contingent and
remainderman beneficiaries with a description of the conditions on their
entitlement); (II) a certification of the Participant or Former
Participant to the effect that, to the best of his knowledge, such list is
correct and complete and that the conditions of section 1.10(a), (b) and
(c) are satisfied; (III) a written undertaking to provide a new
certification to the extent that an amendment changes any information
previously certified; and (IV) a written undertaking to furnish a copy of
the trust instrument to the Committee on demand; and
(ii) by the trustee of the trust within nine months after the death
of the Participant or Former Participant, if any distributions are
required to be made pursuant to section 13.3 after the death of the
Participant or Former Participant, either: (A) a copy of the actual trust
instrument for the trust; or (B)(I) a final list of all of the
beneficiaries of the trust (including contingent and remainderman
beneficiaries with a description of the conditions on their entitlement)
as of the date of death; (II) a certification of the trustee to the effect
that, to the best of his knowledge, such list is correct and complete and
that the conditions of section 1.10(a), (b) and (c) are satisfied; and
(III) a written undertaking to furnish a copy of the trust instrument to
the Committee on demand.
Section 1.11 Disability means a condition of total incapacity,
mental or physical, for further performance of duty with the Employer, which the
Plan Administrator shall have determined, on the basis of competent medical
evidence, is likely to be permanent.
Section 1.12 Domestic Relations Order means a judgment, decree or
order (including the approval of a property settlement) that is made pursuant to
a state domestic relations or community property law and relates to the
provision of child support, alimony payments, or marital property rights to a
spouse, child or other dependent of a Participant or Former Participant.
Section 1.13 Effective Date means October 5, 1995.
<PAGE>
-4-
Section 1.14 Eligible Employee means an Employee who is eligible for
participation in the Plan in accordance with Article II.
Section 1.15 Eligible Participant means, for any Plan Year, an
Employee who is a Participant on the last day of such Plan Year and an Employee
who was a Participant during all or any part of such Plan Year.
Section 1.16 Employee means any person, including an officer, who is
employed by the Employer.
Section 1.17 Employer means (a) through the close of business on
August 31, 1998, Tappan Zee Financial, Inc., and any successor thereto and any
Affiliated Employer which, with the prior written approval of the Board of
Directors of Tappan Zee Financial, Inc. and subject to such terms and conditions
as may be imposed by the Board of Directors of Tappan Zee Financial, Inc., shall
adopt this Plan; and (b) thereafter, U.S.B. Holding Co., Inc., and any successor
thereto and any Affiliated Employer which, with the prior written approval of
the Board of Directors of U.S.B. Holding Co., Inc. and subject to such terms and
conditions as may be imposed by the Board of Directors of U.S.B. Holding Co.,
Inc., shall adopt this Plan
Section 1.18 Employment Commencement Date means the date on which a
person first performs an Hour of Service, except that if an Employee separates
from service with the Employer, incurs a Break in Service and subsequently
returns to service with the Employer, his Employment Commencement Date shall be
the date on which he first performs an Hour of Service following the Break in
Service.
Section 1.19 ERISA means the Employee Retirement Income Security Act
of 1974, as amended from time to time (including the corresponding provisions of
any succeeding law).
Section 1.20 ESOP Contribution means Shares or amounts of money
contributed to the Plan by the Employer in accordance with section 5.3.
Section 1.21 Fair Market Value on any date means:
(a) with respect to a Share:
(i) the final quoted sale price on the date in question (or,
if there is no reported sale on such date, on the last preceding
date on which any reported sale occurred) as reported in the
principal consolidated reporting system with respect to securities
listed or admitted to trading on the principal United States
securities exchange on which like Shares are listed or admitted to
trading; or
(ii) if like Shares are not listed or admitted to trading on
and such exchange, the closing bid quotation with respect to a Share
on such
<PAGE>
-5-
date on the National Association of Securities Dealers Automated
Quotation System, or, if no such quotation is provided, on another
similar system, selected by the Committee, then in use; or
(iii) if sections 1.21(a)(i) and (ii) are not applicable, the
fair market value of a Share as determined by an appraiser
independent of the Employer and experienced and expert in the field
of corporate appraisal.
(b) with respect to property other than Shares, the fair market
value determined in the manner determined by the Trustee.
Section 1.22 Family Member means, with respect to and person, such
person's spouse and lineal ascendants or descendants and the spouses of such
lineal ascendants or descendants.
Section 1.23 Financed Share means: (a) a Share that has been
purchased with the proceeds of a Share Acquisition Loan, but has been allocated
to the Lean Repayment Account in accordance with section 6.3 and that has not
been released in accordance with section 6.4; or (b) a Share that constitutes a
dividend paid with respect to a Share described in section 1.23(a), that has
been allocated to the Loan Repayment Account in accordance with section 6.3 and
that has not been released in accordance with section 6.4.
Section 1.24 Five Percent Owner means, for and Plan Year, a person
who, during such Plan Year, owned (or was considered as owning for purposes of
section 318 of the Code): (a) more than 5% of the value of all classes of
outstanding stock of the Employer; or (b) stock possessing more than 5% of the
combined voting power of all classes of outstanding stock of the Employer.
Section 1.25 Forfeitures means the amounts forfeited by Participants
and Former Participants on termination of employment prior to full vesting,
pursuant to section 9.3, less amounts credited because of re-employment,
pursuant to section 9.4.
Section 1.26 Former Participant means a Participant whose
participation in the Plan has terminated pursuant to section 2.3.
Section 1.27 General Investment Account means an Investment Account
established and maintained in accordance with Article XI.
Section 1.28 Highly Compensated Employee means, for any Plan Year,
an Employee who:
(a) for Plan Years beginning before January 1, 1997, any Employee or
person employed by an Affiliated Employer who:
<PAGE>
-6-
(i) at and time during such Plan Year or the immediately
preceding Plan Year was a Five Percent Owner; or
(ii) is a member of the group consisting of the 100 Employees
and persons employed by and Affiliated Employer who received the
greatest Total Compensation for such Plan Year and during such Plan
Year:
(A) received Total Compensation for such Plan Year in
excess of $75,000 (or such higher amount as may be permitted
under section 414(q) of the Code); or
(B) received Total Compensation for such Plan Year that
was in excess of both (I) $50,000 (or such higher amount as
may be permitted under section 414(q) of the Code) and (II)
the Total Compensation for such Plan Year of at least 80% of
the Employees and persons employed by and Affiliated Employer
for such Plan Year; or
(C) was an Officer of the Employer or and Affiliated
Employer and received Total Compensation for such Plan Year in
excess of 50% of the amount in effect under section
415(b)(1)(A) of the Code for such Plan Year; or
(iii) during the immediately preceding Plan Year:
(A) received Total Compensation for such Plan Year in
excess of $75,000 (or such higher amount as may be permitted
under section 414(q) of the Code); or
(B) received Total Compensation for such Plan Year that
was in excess of both (I) $50,000 (or such higher amount as
may be permitted under section 414(q) of the Code) and (II)
the Total Compensation for such Plan Year of at least 80% of
the Employees and persons employed by an Affiliated Employer
for such Plan Year; or
(C) was an Officer of the Employer or any Affiliated
Employer and received Total Compensation for such Plan Year in
excess of 50% of the amount in effect under section
415(b)(1)(A) of the Code for such Plan Year; or
(b) for Plan Years beginning after December 31, 1996, any Employee
or person employed by an Affiliated Employer who:
<PAGE>
-7-
(i) was a Five Percent Owner at and time during such Plan Year
or and prior Plan Year; or
(ii) received Total Compensation during the immediately
preceding Plan Year (A) in excess of $80,000 (or such other amount
as may be prescribed by the Secretary of the Treasury pursuant to
section 401(a)(17) of the Code); and (B) if elected by the Committee
in such form and manner as the Secretary of the Treasury may
prescribe, in excess of the Total Compensation received for such
preceding Plan Year by at least 80% of the Employees and persons
employed by Affiliated Employers.
The determination of who is a Highly Compensated Employee will be made in
accordance with section 414(q) of the Code and the regulations thereunder. In
Plan Years beginning before January 1, 1997 for purposes of applying and
provisions of the Plan applicable to Highly Compensated Employees, and person
who is a Family Member of a Five Percent Owner or one of the ten Highly
Compensated Employees with the highest Total Compensation for a Plan Year shall
not be treated as a separate person for such Plan Year, and any Total
Compensation or Allocation Compensation paid to such person for such Plan Year,
as well as his share of allocations of contributions or Shares under this Plan,
shall be attributed to the Five Percent Owner or Highly Compensated Employee
and, in such case, the provisions of the Plan shall apply to each person based
on the ratio of his Total Compensation or Allocation Compensation to the sum of
the Total Compensation or Allocation Compensation of all persons treated as one
person with him.
Section 1.29 Hour of Service means each hour for which a person is
paid, or entitled to payment, for the performance of duties for the Employer or
any Affiliated Employer.
Section 1.30 Investment Account means either a General Investment
Account or a Share Investment Account.
Section 1.31 Investment Fund means and one of the tree or more funds
as may be established from time to time by the Committee which, together with
any and all Shares and other investments held under the Plan, constitute the
Trust Fund.
Section 1.32 Loan Repayment Account means an account established and
maintained in accordance with section 6.3.
Section 1.33 Loan Repayment Contribution means amounts of money
contributed to the Plan by the Employer in accordance with section 5.2.
Section 1.34 Maternity or Paternity Leave means a person's absence
from work for the Employer and all Affiliated Employers: (a) by reason of the
pregnancy of such person; (b) by reason of the birth of a child of such person;
(c) by reason of the placement of a child with the person in connection with the
adoption of such child by such person; or (d) for purposes of caring for a child
of such person immediately following the birth of the child or the placement of
the child with such person.
<PAGE>
-8-
Section 1.35 Military Service means service in the armed forces of
the United States, including but not limited to Qualified Military Service. It
may also include, if and to the extent that the Board so provides and if all
Participants and Former Participants in like circumstances are similarly
treated, special service for the government of the United States and other
public service.
Section 1.36 Named Fiduciary means any person, committee,
corporation or organization as described in section 14.1.
Section 1.37 Officer means an employee who is an administrative
executive in regular and continued service with the Employer or any Affiliated
Employer; provided, however, that at no time shall more than the lesser of (a)
50 employees or (b) the greater of: (i) 3 employees or (ii) 10% of all employees
be treated as Officers. The determination of whether an employee is to be
considered an Officer shall be made in accordance with section 416(i) of the
Code.
Section 1.38 Participant means any person who has satisfied the
eligibility requirements set fort in section 2.1, who has become a Participant
in accordance with section 2.2, and whose participation has not terminated under
section 2.3.
Section 1.39 Period of Service means a period of consecutive days
commencing on a person's Employment Commencement Date and ending on the date a
Period of Severance begins, with any adjustments required under section 2.4.
Whenever used in the Plan, a Period of Service "of year(s)" means the quotient
of the Period of Service divided by 365, any and fractional part of a year shall
for such purposes be disregarded.
Section 1.40 Period of Severance means a period of consecutive days
commencing with the earlier of:
(a) the date on which a person terminates service with the Employer
and all Affiliated Employers by reason of resignation, retirement,
discharge or death; or
(b) the first anniversary of the date on which a person terminates
service with the Employer and all Affiliated Employers for and other
reason including layoff, disability, leave of absence or any other
cessation of service not otherwise included as service under the Plan;
and ending on the first date following such separation from service on which
such person performs an Hour of Service.
Section 1.41 Plan means the Employee Stock Ownership Plan of Tappan
Zee Financial, Inc. and Certain Affiliates as amended from time to time. The
Plan may be referred to as the "Employee Stock Ownership Plan of Tappan Zee
Financial, Inc. and Certain Affiliates."
<PAGE>
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Section 1.42 Plan Administrator means any person, committee,
corporation or organization designated in section 14.2, or appointed pursuant to
section 14.2, to perform the responsibilities of that office.
Section 1.43 Plan Year means the period commencing on the Effective
Date and ending on December 31, 1995 and each calendar year thereafter.
Section 1.44 Qualified Domestic Relations Order means a Domestic
Relations Order that: (a) clearly specifies (i) the name and last known mailing
address of the Participant or Former Participant and of each person given rights
under such Domestic Relations Order, (ii) the amount or percentages of the
Participant's or Former Participant's benefits under this Plan to be paid to
each person covered by such Domestic Relations Order, (iii) the number of
payments or the period to which such Domestic Relations Order applies, and (iv)
the name of this Plan; and (b) does not require the payment of a benefit in a
form or amount that is (i) not otherwise provided for under the Plan, or (ii)
inconsistent with a previous Qualified Domestic Relations Order.
Section 1.45 Qualified Military Service means with respect to any
person on any date, and service in the uniformed services of the United States
(as defined in chapter 43 of Title 38 of the United States Code) completed prior
to such date, but only if, on such date, such person is entitled to
re-employment rights with respect to the Employer or and Affiliated Employer on
account of such service.
Section 1.46 Qualified Participant means a Participant who has
attained age 55 and who has been a Participant in the Plan for at least 10
years.
Section 1.47 Retirement means: (a) any termination of participation
in the Plan at or after attainment of age 65; and (b) and retirement under an
applicable qualified defined benefit plan of the Employer as in effect from time
to time with entitlement to a normal or early retirement allowance.
Section 1.48 Retroactive Contribution means a contribution made on a
retroactive basis in respect of a period of Qualified Military Service in
accordance with sections 5.3.
Section 1.49 Share means a share of and class of stock issued by the
Employer or any Affiliated Employer; provided that such share is a "qualifying
employer security" within the meaning section 409(1) of the Code and section
407(d)(5) of ERISA.
Section 1.50 Share Acquisition Loan means a loan obtained by the
Trustee in accordance with Article VI.
Section 1.51 Share Investment Account means an Investment Account
established and maintained in accordance with Article XI.
Section 1.52 Tender Offer means a tender offer made to holders of
and one or more classes of Shares generally, or and other offer, made to holders
of and one or more classes
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of Shares generally, to purchase, exchange, redeem or otherwise transfer Shares,
whether for cash or other consideration.
Section 1.53 Total Compensation during and period means an
employee's aggregate total compensation paid by the Employer and any Affiliated
Employer with respect to such period, including earned income, wages, salaries,
fees for professional services actually rendered in the course of employment
with the Employer any and Affiliated Employer (including, but not limited to,
commissions paid to salesmen, compensation for services on the basis of a
percentage of profits, commissions on insurance premiums, tips and bonuses) but
excluding the following:
(a) contributions by the Employer and any Affiliated Employer (i)
under a deferred compensation plan to the extent not included in the
employee's gross income for the taxable year in which contributed, or (ii)
under a simplified employee pension to the extent the contributions are
excludable under section 402(h) of the Code (in calendar years beginning
after December 31, 1986) or deductible under section 219(b)(2) of the Code
(in calendar years beginning before January 1, 1987), or (iii) for the
purchase of an annuity contract under section 403(b) of the Code (whether
or not made under a salary reduction agreement or excludable from gross
income);
(b) distributions from a deferred compensation plan, whether or not
includible in the employee's gross income; and
(c) other amounts that qualify for special tax benefits under the
Code, such as premiums for group life insurance to the extent not
includible as gross income.
In addition, for purposes of applying the provisions of section 8.2 to
Limitations Years beginning on or after December 31, 1997 and for purposes of
identifying those employees who are Highly Compensated Employees, each
employee's Total Compensation shall include any amounts by which the employee's
compensation paid by the Employer or and Affiliated Employer has been reduced
pursuant to a compensation reduction agreement under the terms of and qualified
cash or deferred arrangement described in section 401(k) of the Code, and salary
reduction simplified employee pension plan described in section 408(k) of the
Code, and tax deferred annuity plan described in section 403(b) of the Code, or
and cafeteria plan described in section 125 of the Code. In no event, however,
shall an employee's Total Compensation for (i) and calendar year beginning after
December 31, 1988 and before January 1, 1994, include and compensation in excess
of $200,000 (or such higher amount as may be permitted under section 401(a)(17)
of the Code) and (ii) for and calendar year beginning after January 1, 1994,
include any compensation in excess of $150,000 (or such higher amount as may be
permitted under section 401(a)(17) of the Code). For purposes of applying the
foregoing limitations in and Plan Year beginning before January 1, 1997 to any
person who is a Five Percent Owner or who is one of the ten Highly Compensated
Employees with the highest Total Compensation (determined prior to the
application of this sentence), and Total Compensation paid to the spouse of such
person or to and lineal descendant of such person
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who has not attained age 19 on or before the last day of such calendar year,
shall be deemed to have been paid to such person.
Section 1.54 Trust means the legal relationship created by the Trust
Agreement pursuant to which the Trustee holds the Trust Fund in trust. The Trust
may be referred to as the "Employee Stock Ownership Plan Trust of Tappan Zee
Financial, Inc. and Certain Affiliates."
Section 1.55 Trust Agreement means the agreement between Tappan Zee
Financial, Inc. and the Trustee therein named or its successors pursuant to
which the Trust Fund shall be held in trust.
Section 1.56 Trust Fund means the corpus (consisting of
contributions paid over to the Trustee, and investments thereof), and all
earnings, appreciations or additions thereof and thereto, held by the Trustee
under the Trust Agreement in accordance with the Plan, less and depreciation
thereof and any payments made therefrom pursuant to the Plan.
Section 1.57 Trustee means the Trustee of the Trust Fund from time
to time in office. The Trustee shall serve as Trustee until it is removed or
resigns from office and is replaced by a successor Trustee appointed in
accordance with the terms of the Trust Agreement.
Section 1.58 Valuation Date means the last business day of March,
June, September and December.
ARTICLE II
PARTICIPATION
Section 2.1 Eligibility for Participation.
(a) Only Eligible Employees may be or become Participants in the
Plan. An Employee shall be an Eligible Employee if he is a common-law employee
of an Employer and is not excluded under section 2.1(b).
(b) An Employee is not an Eligible Employee if he:
(i) is an Employee who has waived and claim to participation in the
Plan; or
(ii) is an Employee or in a unit of Employees covered by a
collective bargaining agreement with the Employer where retirement
benefits were the subject of good faith bargaining, unless such agreement
expressly provides that Employees such as he be covered under the Plan: or
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(iii) is a "leased employee" as defined in section 17.8(a); or
(iv) was not an employee of Tappan Zee Financial, Inc. or Tarrytowns
Bank, FSB on August 31, 1998 and was not a Participant at any time during
the period beginning January 1, 1998 and ending August 31, 1998.
Section 2.2 Commencement of Participation.
Every Employee who is an Eligible Employee on the Effective Date
shall automatically become a Participant on the Effective Date. An Employee who
becomes an Eligible Employee after the Effective Date shall automatically become
a Participant on the first day of the month following the month in which he
becomes an Eligible Employee.
Section 2.3 Termination 0f Participation.
Participation in the Plan shall cease, and a Participant shall
become a Former Participant, upon termination of employment with the Employer,
death, Disability or Retirement, failure to return to work upon the expiration
of a leave of absence granted by the Employer pursuant to section 3.3 or
becoming an Employee who is excluded under section 2.1(b).
Section 2.4 Adjustments to Period of Service.
(a) The Period of Service of an Employee shall include any period
during which the Employee is separated from the service of the Employer and all
Affiliated Employers if such period is less than 365 consecutive days measured
from the date on which such Employee terminates service and ending with the
first date following such termination for which the Employer is credited with an
Hour of Service.
(b) The Period of Service of an Employee who returns to the service
of the Employer and all Affiliated Employers following a separation from service
shall commence with the first date following such separation from service for
which the Employer is credited with an Hour of Service, and he shall be given
credit for any Period of Service prior to such separation, except that if such
separation includes a Break in Service, such credit shall not be given until he
completes a Period of Service of one year following such Break in Service.
(c) The Period of Service of an Employee who is absent on Maternity
or Paternity Leave shall exclude any period of such absence that occurs after
the first anniversary of the commencement of such absence.
(d) An Employee's Period of Service shall also be adjusted to the
extent required by the Family and Medical Leave Act or any regulations
promulgated thereunder.
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ARTICLE III
SPECIAL PROVISIONS
Section 3.1 Military Service.
In the case of a termination of employment of any Employee to enter
directly into Military Service, the entire period of his absence shall be
treated, for purposes of vesting and eligibility for participation (but not,
except as required by law, for purposes of eligibility to share in allocations
of contributions in accordance with Article VII), as if he had worked for the
Employer during the period of his absence. In the event of the re-employment of
such person by the Employer within a period of not more than six months:
(a) after he becomes entitled to release or discharge, if he has
entered into the uniformed services of the United States;
(b) release from hospitalization continuing after discharge from the
uniformed services of the United States for a period of not more than one
year; or
(c) after such service terminates, if he has entered into other
service defined as Military Service;
such period, also, shall be deemed to be Military Service.
Section 3.2 Maternity or Paternity Leave.
(a) Subject to section 3.2(b), in the event of an Employee's absence
from work in the service of the Employer and all Affiliated Employers for a
period:
(i) that commences on or after October 1, 1985;
(ii) for which the person is not paid or entitled to payment by the
Employer or and Affiliated Employer;
(iii) that constitutes Maternity or Paternity Leave; and
(iv) that exceeds one year;
then solely for purposes of determining when a Break in Service has occurred or
when a Period of Severance of five years has occurred for purposes of section
9.4, the period of such an absence commencing on the first anniversary of such
absence and ending on the second anniversary of the
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commencement of such absence (or, if earlier, on the last day of such absence)
shall not be treated as a Period of Severance.
(b) Notwithstanding anything in the Plan to the contrary, this
section 3.2 shall not apply unless the person furnishes to the Plan
Administrator such information as the Plan Administrator may reasonably require
in order to establish: (i) that the person's absence is one described in section
3.2(a); and (ii) the number of working days during such absence.
Section 3.3 Leave of Absence.
In the event of temporary absence from work in the service of the
Employer and all Affiliated Employers for and period of two years or less for
which a Participant shall have been granted a leave of absence by the Employer,
the entire period of his absence shall be treated for purposes of vesting and
eligibility for participation (but not for purposes of eligibility to share in
the allocation of contributions in accordance with Article VII), as if he had
worked for the Employer during the period of his absence. Absence from work for
a period greater than, or failure to return to work upon the expiration of, the
period of leave of absence granted by the Employer shall terminate participation
in the Plan as of the date on which such period ended. In granting leaves of
absence for purposes of the Plan, all Employees in like circumstances shall be
similarly treated.
ARTICLE IV
CONTRIBUTIONS BY PARTICIPANTS NOT PERMITTED
Section 4.1 Contributions by Participants Not Permitted.
Participants shall not be required, nor shall they be permitted, to
make contributions to the Plan.
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ARTICLE V
CONTRIBUTIONS BY THE EMPLOYER
Section 5.1 In General.
Subject to the limitations of Article VIII, for each Plan Year, the
Employer shall contribute to the Plan the amount, if any, determined by the
Board, but in no event less than the amount described in section 5.2(a). The
amount contributed for any Plan Year shall be treated as a Loan Repayment
Contribution, an ESOP Contribution, or a combination thereof, in accordance with
the provisions of this Article V.
Section 5.2 Loan Repayment Contributions.
For each Plan Year, a portion of the Employer's contributions, if
any, to the Plan for such Plan Year equal to the sum of:
(a) the minimum amount required to be added to the Loan Repayment
Account in order to provide adequate funds for the payment of the
principal and interest then required to be repaid under the terms of any
outstanding Share Acquisition Loan obtained by the Trustee; plus
(b) the additional amount, if any, designated by the Committee to be
applied to the prepayment of principal or interest under the terms of any
outstanding Share Acquisition Loan obtained by the Trustee;
shall be treated as a Loan Repayment Contribution for such Plan Year. A Loan
Repayment Contribution for a Plan Year shall be allocated to the Loan Repayment
Account and shall be applied by the Trustee, in the manner directed by the
Committee, to the payment of accrued interest and to the reduction of the
principal balance of and Share Acquisition Loan obtained by the Trustee that is
outstanding on the date on which the Loan Repayment Contribution is made. To the
extent that a Loan Repayment Contribution for a Plan Year results in a release
of Financed Shares in accordance with section 6.4, such Shares shall be
allocated among the Accounts of Eligible Participants for such Plan Year in
accordance with section 7.2.
Section 5.3 ESOP Contributions.
In the event that the amount of the Employer's contributions to the
Plan for a Plan Year exceeds the amount of the Loan Repayment Contributions for
such Plan Year, such excess shall be treated as an ESOP Contribution and shall
be allocated among the Accounts of the Eligible Participants for such Plan Year
in accordance with section 7.3.
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Section 5.4 Retroactive Contributions.
The Employer shall make a Retroactive Contribution in respect of any
individual who is re-employed by the Employer after December 12, 1994 following
the completion of a period of Qualified Military Service. Such Retroactive
Contribution shall be made in the following manner for each Plan Year that
includes the period of Qualified Military Service:
(a) An allocation percentage shall be computed by dividing (i) the
sum of the Fair Market Value of all Financed Shares allocated to Eligible
Participants for such Plan Year plus the dollar amount of all ESOP
Contributions made in cash for such Plan Year plus the Fair Market Value
of all ESOP Contributions made in Shares for such Plan Year, divided by
(ii) the aggregate amount of Allocation Compensation used in the
allocation for such Plan Year. Fair Market Value for such purposes shall
be determined as of the last day of the Plan Year.
(b) A notional allocation shall be determined by multiplying (A) the
percentage determined under section 5.4(a) by (B) the Allocation
Compensation which the individual would have had for the calendar year
ending during such Plan Year if he had remained in the service of the
Employer in the same capacity and earning Allocation Compensation and
Total Compensation at the annual rates in effect immediately prior to the
commencement of the Qualified Military Leave (or, if such rates are not
reasonably certain, at an annual rate equal to the actual Allocation
Compensation and Total Compensation, respectively, paid to him for the
12-month period immediately preceding the Qualified Military Service).
(c) An actual Retroactive Contribution for the Plan Year shall be
determined by computing the excess of (A) the notional allocation
determined under section 5.4(b) over (B) the sum of the dollar amount of
any ESOP Contribution in cash, the Fair Market Value of any ESOP
Contribution in Shares and the Fair Market Value of any Financed Shares
actually allocated to such individual for such Plan Year.
Section 5.5 Time and Manner of Payment.
(a) Payment of contributions made pursuant to this Article V shall
be made:
(i) in cash, in the case of a Loan Repayment Contribution; and
(ii) in cash, in Shares or in a combination of cash and Shares, in
the case of an ESOP Contribution or a Retroactive Contribution.
(b) Contributions made pursuant to this Article V for a Plan Year
shall be paid to the Trust Fund on or before the due date (including and
extensions thereof) of the Employer's federal income tax return for its taxable
year during which such Plan Year ends. All such
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contributions shall be allocated to the Accounts of the Eligible Participants,
in the case of an ESOP Contribution, to the Account of the Participant for whom
it is made in the case of a Retroactive Contribution, and to the Loan Repayment
Account, in the case of a Loan Repayment Contribution, as soon as is practicable
following the payment thereof to the Trust Fund.
ARTICLE VI
SHARE ACQUISITION LOANS
Section 6.1 In General.
The Committee may, with the prior approval of the Board, direct the
Trustee to obtain a Share Acquisition Loan on behalf of the Plan, the proceeds
of which shall be applied on the earliest practicable date:
(a) to purchase Shares; or
(b) to make payments of principal or interest, or a combination of
principal and interest, with respect to such Share Acquisition Loan; or
(c) to make payments of principal and interest, or a combination of
principal and interest, with respect to a previously obtained Share
Acquisition Loan that is then outstanding.
And such Share Acquisition Loan shall be obtained on such terms and conditions
as the Committee may approve; provided, however, that such terms and conditions
shall provide for the payment of interest at no more than a reasonable rate and
shall permit such Share Acquisition Loan to satisfy the requirements of section
4975(d)(3) of the Code and section 408(b)(3) of ERISA.
Section 6.2 Collateral; Liability for Repayment.
(a) The Committee may direct the Trustee to pledge, at the time a
Share Acquisition Loan is obtained, the following assets of the Plan as
collateral for such Share Acquisition Loan:
(i) any Shares purchased with the proceeds of such Share Acquisition
Loan and any earnings attributable thereto;
(ii) any Financed Shares then pledged as collateral for a prior
Share Acquisition Loan which is repaid with the proceeds of such Share
Acquisition Loan and any earnings attributable thereto; and
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(iii) pending the application thereof to purchase Shares or repay a
prior Share Acquisition Loan, the proceeds of such Share Acquisition Loan
and any earnings attributable thereto.
Except as specifically provided in this section 6.2(a), no assets of the Plan
shall be pledged as collateral for the repayment of any Share Acquisition Loan.
(b) No person entitled to payment under a Share Acquisition Loan
shall have any right to the assets of the Plan except for:
(i) Financed Shares that have been pledged as collateral for such
Share Acquisition Loan pursuant to section 6.2(a);
(ii) Loan Repayment Contributions made pursuant to section 5.2; and
(iii) earnings attributable to Financed Shares described in section
6.2(b)(i) and to Loan Repayment Contributions described in section
6.2(b)(ii).
Except in the event of a default or a refinancing pursuant to which an existing
Share Acquisition Loan is repaid, the aggregate amount of all payments of
principal and interest made by the Trustee with respect to all Share Acquisition
Loans obtained on behalf of the Plan shall at no time exceed the aggregate
amount of all Loan Repayment Contributions theretofore made plus the aggregate
amount of all earnings (other than dividends paid in the form of Shares)
attributable to Financed Shares and to such Loan Repayment Contributions.
(c) Any Share Acquisition Loan shall be without recourse against the
Plan and Trust.
Section 6.3 Loan Repayment Account.
In the event that one or more Share Acquisition Loans shall be
obtained, a Loan Repayment Account shall be established under the Plan. The Loan
Repayment Account shall be credited with all Shares acquired with the proceeds
of a Share Acquisition Loan, all Loan Repayment Contributions and all earnings
(including dividends paid in the form of Shares) or appreciation attributable to
such Shares and Loan Repayment Contributions. The Loan Repayment Account shall
be charged with all payments of principal and interest made by the Trustee with
respect to any Share Acquisition Loan, all Shares released in accordance with
section 6.4 and all losses, depreciation or expenses attributable to Shares or
to other property credited thereto. The Financed Shares, as well as and earnings
thereon, shall be allocated to such Loan Repayment Account and shall be
accounted for separately from all other amounts contributed under the Plan.
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Section 6.4 Release of Financed Shares.
As of the last day of each Plan Year during which a Share
Acquisition Loan is outstanding, a portion of the Financed Shares purchased with
the proceeds of such Share Acquisition Loan and allocated to the Loan Repayment
Account shall be released. The number of Financed Shares released in any such
Plan Year shall be equal to the amount determined according to one of the
following methods:
(a) by computing the product of: (i) the number of Financed Shares
purchased with the proceeds of such Share Acquisition Loan and allocated
to the Loan Repayment Account immediately before the release is effected;
multiplied by (ii) a fraction, the numerator of which is the aggregate
amount of the principal and interest payments (other than payments made
upon the refinancing of a Share Acquisition Loan as contemplated by
section 6.1(c)) made with respect to such Share Acquisition Loan during
such Plan Year, and the denominator of which is the aggregate amount of
all principal and interest remaining to be paid with respect to such Share
Acquisition Loan as of the first day of such Plan Year; or
(b) by computing the product of: (i) the number of Financed Shares
purchased with the proceeds of such Share Acquisition Loan and allocated
to the Loan Repayment Account immediately before the release is effected;
multiplied by (ii) a fraction, the numerator of which is the aggregate
amount of the principal payments (other than payments made upon the
refinancing of a Share Acquisition Loan as contemplated by section 6.1(c))
made with respect to such Share Acquisition Loan during such Plan Year,
and the denominator of which is the aggregate amount of all of principal
remaining to be paid with respect to such Share Acquisition Loan as of the
first day of such Plan Year; provided, however, that the method described
in this section 6.4(b) may be used only if the Share Acquisition Loan does
not extend for a period in excess of 10 years after the date of
origination and only to the extent that principal payments on such Share
Acquisition Loan are made at least as rapidly as under a ban of like
principal amount with a like interest rate and term requiring level
amortization of principal and interest.
The method to be used shall be specified in the documents governing the Share
Acquisition Loan or, if not specified therein, prescribed by the Committee, in
its discretion. In the event that property other than, or in addition to,
Financed Shares shall be held in the Loan Repayment Account and pledged as
collateral for a Share Acquisition Loan, then the property to be released
pursuant to this section 6.4 shall be property having a Fair Market Value
determined by applying the method to be used to the Fair Market Value of all
property pledged as collateral for such Share Acquisition Loan; provided,
however, that no property other than Financed Shares shall be released pursuant
to this section 6.4 unless all Financed Shares have previously been released.
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Section 6.5 Restrictions on Financed Shares.
Except to the extent required under and applicable law, rule or
regulation, no Shares purchased with the proceeds of a Share Acquisition Loan
shall be subject to a put, call or other option, or to any buy-sell or similar
arrangement, while held by the Trustee or when distributed from the Plan. The
provisions of this section 6.5 shall continue to apply in the event that this
Plan shall cease to be an employee stock ownership plan, within the meaning of
section 4975(e)(7) of the Code.
ARTICLE VII
ALLOCATION 0F CONTRIBUTIONS
Section 7.1 Allocation Among Eligible Participants.
Subject to the limitations of Article VIII, ESOP Contributions for a
Plan Year made in accordance with section 5.3 and Financed Shares and other
property that are released from the Loan Repayment Account for a Plan Year in
accordance with section 6.4 shall be allocated among the Eligible Participants
for such Plan Year, in the manner provided in this Article VII.
Section 7.2 Allocation of Released Shares or Other Property.
Subject to the limitations of Article VIII, in the event that
Financed Shares or other property are released from the Loan Repayment Account
for a Plan Year in accordance with section 6.4, such released Shares or other
property shall be allocated among the Accounts of the Eligible Participants for
the Plan Year in the proportion that each such Eligible Participant's
Allocation Compensation for the portion of the Plan Year during which he was a
Participant bears to the aggregate Allocation Compensation of all Eligible
Participants for the portion of the Plan Year during which they were
Participants.
Section 7.3 Allocation of ESOP Contributions.
Subject to the limitations of Article VIII, in the event that the
Employer makes an ESOP Contribution for a Plan Year, such ESOP Contribution
shall be allocated among the Accounts of the Eligible Participants for such Plan
Year in the proportion that each such Eligible Participant's Allocation
Compensation for the portion of the Plan Year during which he was a Participant
bears to the aggregate Allocation Compensation of all Eligible Participants for
the portion of such Plan Year during which they were Eligible Participants.
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Section 7.4 No Allocation After Termination of Participation.
No amount of the Employer's contributions for a Plan Year, nor any
Financed Shares or other property released during a Plan Year, shall be
allocated to the account of any person who is not an Eligible Participant for
such Plan Year, even if such person was a Participant during part of such Plan
Year.
ARTICLE VIII
LIMITATIONS ON ALLOCATIONS
Section 8.1 Optional Limitations on Allocations of ESOP
Contributions.
If, for any Plan Year, the application of sections 7.2 and 7.3 would
result in more than one-third of the number of Shares or of the amount of money
or property to be allocated thereunder being allocated to the Accounts of
Eligible Participants for such Plan Year who are also Highly Compensated
Employees for such Plan Year, then the Committee may, but shall not be required
to, direct that this section 8.1 shall apply in lieu of sections 7.2 and 7.3. If
the Committee gives such a direction, then the Committee shall impose a maximum
dollar limitation on the amount of Allocation Compensation that may be taken
into account for each Eligible Participant. The dollar limitation which shall be
imposed shall be the limitation which produces the result that the aggregate
Allocation Compensation taken into account for Eligible Participants who are
Highly Compensated Employees, constitutes exactly one-third of the aggregate
Allocation Compensation taken into account for all Eligible Participants. In
determining whether more than one-third of the number of Shares or of the amount
of money or property to be allocated under the Plan for a Plan Year beginning
before January 1, 1997 would be allocated to the Highly Compensated Employees,
any allocation to be made to the Account of a Family Member of a Highly
Compensated Employee who is either a Five Percent Owner or one of the ten Highly
Compensated Employees with the highest Total Compensation, shall be treated as
an allocation to such Highly Compensated Employee.
Section 8.2 General Limitations on Contributions.
(a) No amount shall be allocated to a Participant's Account under
this Plan for any Limitation Year, to the extent that such an allocation would
result in an Annual Addition of an amount greater than the lesser of (i) $30,000
(or such other amount as is permissible under section 415(c)(1)(A) of the Code,
or (ii) 25% of the Participant's Total Compensation for such Limitation Year.
(b) In the case of a Participant who may be entitled to benefits
under any qualified defined benefit plan (whether or not terminated) now in
effect or ever maintained by the
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Employer, such Participant's Annual Additions under this Plan shall, in addition
to the limitations provided under section 8.2(a), be further limited 50 that the
sum of the Participant's Defined Contribution Plan Fraction plus his Defined
Benefit Plan Fraction does not exceed 1.0 for any Limitation Year beginning
prior to January 1, 2000; provided, however, that for any Limitation Year ending
prior to January 1, 1983, the sum of this Defined Contribution Plan Fraction
plus his Defined Benefit Plan Fraction shall not exceed 1.4; and provided
further, that this limitation shall only apply if and to the extent that the
benefits under the Employer's Retirement Plan are not limited so that such sum
is not exceeded.
(c) For purposes of this section 8.2, the following special
definitions shall apply:
(i) Annual Addition means the sum of the following amounts allocated
on behalf of a Participant for a Limitation Year:
(A) all contributions by the Employer (including contributions
made under a salary reduction agreement pursuant to sections 401(k),
408(k) or 403(b) of the Code) under and qualified defined
contribution plan (other than this Plan) maintained by the Employer,
as well as the Participant's allocable share, if any, of any
forfeitures under such plans; plus
(B) (1) for Limitation Years that began prior to January 1,
1987, the lesser of (1) 50% of the Participant's voluntary
nondeductible contributions to all qualified defined contribution
plans maintained by the Employer, or (2) the amount by which the
Participant's nondeductible voluntary contributions to such plans
exceeds 6% of his Total Compensation; and (II) for Limitation Years
that begin after December 31, 1986, all of the Participant's
voluntary nondeductible contributions to such plans; plus
(C) all ESOP Contributions under this Plan; plus
(D) except as hereinafter provided in this section 8.2(c)(i),
a portion of the Employer's Loan Repayment Contributions to the Plan
for such Limitation Year which bears the same proportion to the
total amount of the Employer's Loan Repayment Contributions for the
Limitation Year that the number of Shares (or the Fair Market Value
of property other than Shares) allocated to the Participant's
Account pursuant to section 7.2 or 8.1, whichever is applicable,
bears to the aggregate number of Shares (or Fair Market Value of
property other than Shares) so allocated to all Participants for
such Limitation Year.
Notwithstanding section 8.2(c)(i)(D), if, for any Limitation Year, the
aggregate amount of ESOP Contributions allocated to the Accounts of the
individuals who are Highly Compensated Employees for such Limitation Year,
when added to such Highly Compensated Employees' allocable share of any
Loan Repayment
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Contributions for such Limitation Year, does not exceed one-third of the
total of all ESOP Contributions and Loan Repayment Contributions for such
Limitation Year, then that portion, if any, of the Loan Repayment
Contributions for such Limitation Year that is applied to the payment of
interest on a Share Acquisition Loan shall not be included as an Annual
Addition. In determining whether more than one-third of the number of
Shares or of the amount of money or property to be allocated under the
Plan for a Plan Year beginning before January 1, 1997 would be allocated
to the Highly Compensated Employees, any allocation to be made to the
Account of a Family Member of a Highly Compensated Employee who is either
a Five Percent Owner or one of the ten Highly Compensated Employees with
the highest Total Compensation, shall be treated as an allocation to such
Highly Compensated Employee.
(ii) Employer means Tappan Zee Financial, Inc. (before September 1,
1998) and U.S.B. Holding Co., Inc. (after August 31, 1998), and all
members of a controlled group of corporations, as defined in section
414(b) of the Code, as modified by section 415(h) of the Code, all
commonly controlled trades or businesses, as defined in section 414(c) of
the Code, as modified by section 415(h) of the Code, all affiliated
service groups, as defined in section 414(m) of the Code, of which Tappan
Zee Financial, Inc. (before September 1, 1998) and U.S.B. Holding Co.,
Inc. (after August 31, 1998), is a member, as well as any leasing
organization, as defined in section 17.8, that employs any person who is
considered an employee under section 17.8 and any other entity that is
required to be aggregated with the Employer pursuant to regulations under
section 414(o) of the Code.
(iii) Defined Benefit Plan Fraction means, for and Participant for
any Limitation Year, a fraction, the numerator of which is the Projected
Annual Benefit (determined as of the end of such Limitation Year) of the
Participant under and qualified defined benefit plans (whether or not
terminated) maintained by the Employer for the current and all prior
Limitation Years, and the denominator of which is as follows: (A) for
Limitation Years ending prior to January 1, 1983, the lesser of (1) the
dollar limitation in effect under section 415(b)(1) (A) of the Code for
such Limitation Year, or (II) the amount which may be taken into account
under section 415(b)(1)(B) of the Code with respect to such Participant
for such Limitation Year; and (B) in all other cases, the lesser of (I)
(except as provided in section 16.8(b) for a Top Heavy Plan Year) the
product of 1.25 multiplied by the dollar limitation in effect under
section 415(b)(1)(A) of the Code for such Limitation Year, or (II) the
product of 1.4 multiplied by the amount which may be taken into account
under section 415(b)(1)(B) of the Code with respect to such Participant
for such Limitation Year.
(iv) Defined Contribution Plan Fraction means, for any Participant
for any Limitation Year, a fraction (A) the numerator of which is the sum
of such
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Participant's Annual Additions (determined as of the end of such
Limitation Year) under this Plan and any other qualified defined
contribution plans (whether or not terminated) maintained by the Employer
for the current and all prior Limitation Years, and (B) the denominator of
which is as follows: (I) for Limitation Years ending prior to January 1,
1983, the sum of the lesser of the following amounts for such Limitation
Year and for each prior Limitation Year during which such Participant was
employed by the Employer: (1) the Maximum Permissible Amount for such
Limitation Year (without regard to section 415(c)(6) of the Code), or (2)
the amount which may be taken into account under section 415(c)(1)(B) of
the Code with respect to such Participant for such Limitation Year; and
(II) in all other cases, the sum of the lesser of the following amounts
for such Limitation Year and for each prior Limitation during which such
Participant was employed by the Employer: (1) (except as provided in
section 16.8(b) for a Top Heavy Plan Year) the product of 1.25 multiplied
by the Maximum Permissible Amount for such Limitation Year (determined
without regard to section 415(c)(6) of the Code), or (2) the product of
1.4 multiplied by the amount which may be taken into account under section
415(c)(l)(B) of the Code (or section 415(c)(7) of the Code, if applicable)
with respect to such Participant for such Limitation Year; provided,
however, that the Plan Administrator may, at his election, adopt the
transition rule set forth in section 415(e)(6) of the Code in making the
computation set forth in this section 8.2(c)(iv). If the sum of a
Participant's Defined Benefit Plan Fraction and Defined Contribution Plan
Fraction exceeded 1.0 as of September 30, 1983, then such Participant's
Defined Contribution Plan Fraction shall be determined under regulations
to be prescribed by the Secretary of the Treasury so that the sum of the
fractions does not exceed 1.0.
(v) Limitation Year means the Plan Year; provided, however, that if
the Employer changes the Limitation Year, the new Limitation Year shall
begin on a date within the Limitation Year in which the amendment is made.
(vi) Maximum Permissible Amount means (A) $25,000 (or such higher
amount as may be permitted under section 415(d) of the Code because of
cost of living increases) for Limitation Years beginning prior to January
1, 1983, and (B) the greater of (I) $30,000, or (II) 25% of the dollar
limitation in effect under section 415(b)(1)(A) of the Code for Limitation
Years beginning on or after January 1, 1983.
(vii) Projected Annual Benefit means a Participant's annual
retirement benefit (adjusted to the actuarial equivalent of a straight
life annuity if expressed in a form other than a straight life or
qualified joint and survivor annuity) under and qualified defined benefit
plan maintained by the Employer, whether or not terminated, assuming that
the Participant will continue employment until the later of current age or
normal retirement age under such plan, and that the Participant's Total
Compensation for the Limitation Year and all other relevant factors used
to
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determine benefits under such plan will remain constant for all future
Limitation Years.
(d) When a Participant's Annual Addition to this Plan must be
reduced to satisfy the limitations of section 8.2(a) or (b), such reduction
shall be applied first to ESOP Contributions; and second, if necessary, to
Shares allocated as a result of a Loan Repayment Contribution which are included
as an Annual Addition. The amount by which and Participant's Annual Addition to
this Plan is reduced shall be allocated in accordance with Articles V and VII as
a contribution by the Employer in the next succeeding Limitation Year.
(e) Prior to determining a Participant's actual Total Compensation
for a Limitation Year, the Employer may determine the limitations under this
section 8.2 for a Participant on the basis of a reasonable estimation of the
Participant's Total Compensation for the Limitation Year that is uniformly
determined for all Participants who are similarly situated. As soon as it is
administratively feasible after the end of the Limitation Year, the limitations
of this section 8.2 shall be determined on the basis of the Participant's actual
Total Compensation for the Limitation Year.
ARTICLE IX
VESTING
Section 9.1 Vesting.
Subject to the provisions of section 9.6(a), the balance credited to
each Employee's Account shall become vested in accordance with the following
schedule:
Period of Service Vested
In Years Percentage
----------------- ----------
0 but less than 1 10%
1 but less than 2 20%
2 but less than 3 40%
3 but less than 4 60%
4 but less than 5 80%
5 or more 100%
Section 9.2 Vesting on Death, Disability, Retirement or Change in
Control.
And previously unvested portion of the remainder of the balance
credited to the Account of a Participant or of a person who is a Former
Participant solely because he is excluded
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from participation under section 2.1(b) shall become fully vested in him
immediately upon attainment of age 65, or, if earlier, upon the termination of
his participation by reason of death, Disability, Retirement or upon the
occurrence of a Change in Control of the Employer.
Section 9.3 Forfeitures on Termination of Employment.
Upon the termination of employment of a Participant or Former
Participant for any reason other than death, Disability, Retirement, that
portion of the balance credited to his Account which is not vested at the date
of such termination shall be forfeited as of the last Valuation Date for the
Plan Year in which such termination of employment occurs. The proceeds of such
forfeitures, less amounts, if any, required to be credited because of
re-employment pursuant to section 9.4, shall be treated as Forfeitures and shall
be disposed of as provided in section 9.5.
Section 9.4 Amounts Credited Upon Re-Employment.
If an Employee forfeited any amount of the balance credited to his
Account upon his termination of employment with the Employer, and is re-employed
prior to the occurrence of a Period of Severance of five years, then:
(i) an amount equal to the Fair Market Value of the Shares
forfeited, determined as of the date of forfeiture; and
(ii) the amount credited to his General Investment Account that was
forfeited, determined as of the date of forfeiture;
shall be credited back to his Account from the proceeds of forfeitures which are
redeemed pursuant to section 9.3 during the Plan Year in which he is
re-employed, unless such proceeds are insufficient, in which case the Employer
shall make an additional contribution in the amount of such deficiency.
Section 9.5 Allocation of Forfeitures.
And Forfeitures that occur during a Plan Year shall be used to
reduce the contributions required of the Employer under the Plan and shall be
treated as Loan Repayment Contributions and ESOP Contributions in the
proportions designated by the Committee in accordance with Article V.
Section 9.6 Accelerated Vesting Upon Change in Control.
(a) The balance credited to each Participant's Account shall become
100% vested upon the occurrence of a Change in Control of the Employer.
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(b) A Change in Control of the Employer shall be deemed to have
occurred upon the happening of any of the following events:
(i) approval by the stockholders of Tappan Zee Financial, Inc. of a
transaction that would result in the reorganization, merger or
consolidation of Tappan Zee Financial, Inc. with one or more other
persons, other than transaction following which:
(A) at least 51% of the equity ownership interests of the
entity resulting from such transaction are beneficially owned
(within the meaning of Rule 13d-3 promulgated under the Securities
Exchange Act of 1934 "Exchange Act") in substantially the same
relative proportions by persons who, immediately prior to such
transaction, beneficially owned (within the meaning of Rule 13d-3
promulgated under the Exchange Act) at least 51% of the outstanding
equity ownership interests in Tappan Zee Financial, Inc.; and
(B) at least 51% of the securities entitled to vote generally
in the election of directors of the entity resulting from such
transaction are beneficially owned (within the meaning of Rule 13d-3
promulgated under the Exchange Act) in substantially the same
relative proportions by persons who, immediately prior to such
transaction, beneficially owned (within the meaning of Rule 13d-3
promulgated under the Exchange Act) at least 51% of the securities
entitled to vote generally in the election of directors of Tappan
Zee Financial, Inc.
(ii) the acquisition of all or substantially all of the assets of
Tappan Zee Financial, Inc. or beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the
outstanding securities of Tappan Zee Financial, Inc. entitled to vote
generally in the election of directors by any person or by any persons
acting in concert, or approval by the stockholders of Tappan Zee
Financial, Inc. of any transaction which would result in such an
acquisition;
(iii) a complete liquidation or dissolution of Tappan Zee Financial,
Inc., or approval by its stockholders of a plan for such liquidation or
dissolution;
(iv) the occurrence of and event if, immediately following such
event, at least 50% of the members of the Board of Tappan Zee Financial,
Inc. do not belong to any of the following groups;
(A) individuals who were members of the Board of Tappan Zee
Financial, Inc. on the Effective Date of this Plan; or
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(B) individuals who first became members of the Board of
Tappan Zee Financial, Inc. after the Effective Date of this Plan
either:
(I) upon election to serve as a member of such Board by
affirmative vote of three-quarters of the members of such
Board, or of a nominating committee thereof, in office at the
time of such first election; or
(II) upon election by the stockholders of Tappan Zee
Financial, Inc. to serve as a member of the Board of Tappan
Zee Financial, Inc., but only if nominated for election by
affirmative vote of three-quarters of the members of the
Board, or of a nominating committee thereof, in office at the
time of such first nomination;
provided, however, that such individual's election or nomination did
not result from an actual or threatened election contest (within the
meaning of Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies
or consents (within the meaning of Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) other than by or on behalf of
the Board of Tappan Zee Financial, Inc.; or
(v) any event which would be described in section 9.6(b)(i), (ii),
(iii) or (iv) if the name of Tarrytowns Bank, FSB were substituted for the
name "Tappan Zee Financial, Inc." therein.
In no event, however, shall a Change in Control be deemed to have occurred as a
result of any acquisition of securities or assets of Tappan Zee Financial, Inc.,
an Affiliated Employer, or a subsidiary of either of them, by Tappan Zee
Financial, Inc., an Affiliated Employer, or a subsidiary of either of them, or
by and employee benefit plan maintained by any of them. For purposes of this
section 9.6(b), the term "person" shall have the meaning assigned to it under
sections 13(d)(3) or 14(d)(2) of the Exchange Act.
ARTICLE X
THE TRUST FUND
Section 10.1 The Trust Fund.
The Trust Fund shall be held and invested under the Trust Agreement
with the Trustee. The provisions of the Trust Agreement shall vest such powers
in the Trustee as to invest-
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ment, control and disbursement of the Trust Fund, and such other provisions not
inconsistent with the Plan, including provision for the appointment of one or
more "investment managers" within the meaning of section 3(38) of ERISA to
manage and control (including acquiring and disposing of) all or any of the
assets of the Trust Fund, as the Board may from time to time authorize. Except
as required by ERISA, no bond or other security shall be required of any Trustee
at any time in office.
Section 10.2 Investments.
(a) Except to the extent provided to the contrary in section 10.3,
the Trust Fund shall be invested in:
(i) Shares;
(ii) units of interest in such Investment Funds as may be
established from time to time by the Committee; and
(iii) such other investments as may be permitted under the Trust
Agreement;
in such proportions as shall be determined by the Committee or, if so provided
under the Trust Agreement, as directed by one or more investment managers or by
the Trustee, in its discretion; provided, however, that the investments of the
Trust Fund shall consist primarily of Shares. Notwithstanding the immediately
preceding sentence, the Trustee may temporarily invest the Trust Fund in
short-term obligations of, or guaranteed by, the United States Government or an
agency thereof, or may retain uninvested, or sell investments to provide,
amounts of cash required for purposes of the Plan.
(b) Initially, the value of each unit in each Investment Fund shall
be $1, and one unit in any such Investment Fund shall be credited to each
Participant or Former Participant, or the Beneficiary of a deceased Participant
or Former Participant, for each $1 applicable to the purchase for him of units
in such Investment Fund. Thereafter, the Plan Administrator shall determine the
value of units in each such Investment Fund as of each Valuation Date by
dividing the fair market value of all property in each such Investment Fund as
of such Valuation Date (after deducting any expenses or other amounts then
properly chargeable against the particular Investment Fund) by the number of
units then outstanding in each such Investment Fund, and making such other
adjustments as shall be necessary to properly reflect transactions occurring
subsequent to the immediately preceding Valuation Date. For the purposes of this
Article X, fractions of units computed to three decimal places, as well as whole
units, in any of the Investment Funds may be redeemed or purchased for the
credit of Employees, Participants or Former Participants or their Beneficiaries.
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Section 10.3 Diversification of Investments.
(a) Notwithstanding section 10.2, each Qualified Participant may:
(i) during the first 90 days of each of the first four Plan Years to
begin after the Plan Year in which he first becomes a Qualified
Participant, elect that such percentage of the balance credited to his
Account as he may specify, but in no event more than 25% of the balance
credited to his Account, be invested in one or more of the Investment
Funds; and
(ii) during the first 90 days of the fifth Plan Year to begin after
the Plan Year in which he first becomes a Qualified Participant or of any
Plan Year thereafter, elect that such percentage of the balance credited
to his Account as he may specify, but in no event more than 50% of the
balance credited to his Account, be invested in one or more of the
Investment Funds.
For purposes of an election under this section 10.3, the balance credited to a
Participant's Account shall be the balance credited to his Account determined as
of the last Valuation Date to occur in the Plan Year immediately preceding the
Plan Year in which such election is made.
(b) An election made under section 10.3(a) shall be made in writing,
in the form and manner prescribed by the Plan Administrator, and shall be filed
with the Plan Administrator during the election period specified in section
10.3(a). As soon as is practicable following the end of the election period
during which such election is made, the Plan Administrator shall take such
actions as are necessary to cause the specified percentage of the balance
credited to the Account of the Qualified Participant making the election to be
invested in the specified Investment Funds. Any investments made pursuant to
this section 10.3 shall be specifically allocated to the General Investment
Account of the Qualified Participant for whom they are made.
(c) An election made under section 10.3(a) may be changed or revoked
at any time during the election period described in section 10.3(a) during which
it is initially made, during any subsequent election period described in section
10.3(a) or, upon at least 15 days' advance written notice given in the form and
manner prescribed by the Plan Administrator, as of the first day of any calendar
quarter of any Plan Year that begins after the Participant first becomes a
Qualified Participant. In no event, however, shall any election under this
section 10.3 result in more than 25% of the balance credited to the
Participant's Account being invested at the direction of the Participant, if
such election is made during a Plan Year to which section l0.3(a)(i) applies, or
result in more than 50% of the balance credited to the Participant's Account
being invested at the direction of the Participant, if such election is made
during the Plan Year to which section 10.3(a)(ii) applies or thereafter.
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Section 10.4 Use of Commingled Trust Funds.
Subject to the provisions of the Trust Agreement, amounts held in
the Trust Fund may be invested in:
(a) any commingled or group trust fund described in section 401(a)
of the Code and exempt under section 501(a) of the Code; or
(b) any common trust fund exempt under section 584 of the Code
maintained exclusively for the collective investment of the assets of
trusts that are exempt under section 501(a) of the Code;
provided that the trustee of such commingled, group or common trust fund is a
bank or trust company.
Section 10.5 Management and Control of Assets.
All assets of the Plan shall be held by the Trustee in trust for the
exclusive benefit of Participants, Former Participants and their Beneficiaries.
No part of the corpus or income of the Trust Fund shall be used for, or diverted
to, purposes other than for the exclusive benefit of Participants, Former
Participants and their Beneficiaries, and for defraying reasonable
administrative expenses of the Plan and Trust Fund. No person shall have any
interest in or right to any part of the earnings of the Trust Fund, or any
rights in, to or under the Trust Fund or any part of its assets, except to the
extent expressly provided in the Plan.
ARTICLE XI
VALUATION OF INTERESTS IN THE TRUST FUND
Section 11.1 Establishment of Investment Accounts.
The Plan Administrator shall establish, or cause to be established,
for each person for whom an Account is maintained a Share Investment Account and
a General Investment Account. Such Share Investment Accounts and General
Investment Accounts shall be maintained in accordance with this Article XI.
Section 11.2 Share Investment Accounts.
The Share Investment Account established for a person in accordance
with section 11.1 shall be credited with: (a) all Shares allocated to such
person's Account; (b) all Shares pur-
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chased with amounts of money or property allocated to such person's Account; (c)
all dividends paid in the form of Shares with respect to Shares credited to his
Account; and (d) all Shares purchased with amounts credited to such person's
General Investment Account. Such Share Investment Account shall be charged with
all Shares that are sold or exchanged to acquire other investments or to provide
cash and with all Shares that are distributed in kind.
Section 11.3 General Investment Accounts.
The General Investment Account that is established for a person in
accordance with section 11.1 shall be credited with: (a) all amounts, other than
Shares, allocated to such person's Account; (b) all dividends paid in a form
other than Shares with respect to Shares credited to such person's Share
Investment Account; (c) the proceeds of any sale of Shares credited to such
person's Share Investment Account; and (d) any earnings attributable to amounts
credited to such person's General Investment Account. Such General Investment
Account shall be charged with all amounts credited thereto that are applied to
the purchase of Shares, any losses or depreciation attributable to amounts
credited thereto, any expenses allocable thereto and any distributions of
amounts credited thereto.
Section 11.4 Valuation of Investment Accounts.
(a) The Plan Administrator shall determine, or cause to be
determined, the aggregate value of each person's Share Investment Account as of
each Valuation Date by multiplying the number of Shares credited to such Share
Investment Account on such Valuation Date by the Fair Market Value of a Share on
such Valuation Date.
(b) The Plan Administrator shall determine, or cause to be
determined, the aggregate value of each person's General Investment Account as
of each Valuation Date as follows:
(i) To the extent that all or a portion of such person's General
Investment Account is invested in one or more of the Investment Funds, the
Plan Administrator shall multiply the number of units in each Investment
Fund credited to such person as of the immediately preceding Valuation
Date by the value of a unit in such Investment Fund as of the current
Valuation Date.
(ii) To the extent that all or a portion of such person's General
Investment Account is invested in investments other than the Investment
Funds, the Plan Administrator shall adjust the balance in such manner as
it shall deem appropriate to reflect earnings, losses, expenses, benefit
payments and other transactions properly chargeable to such Account.
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Section 11.5 Annual Statements.
There shall be furnished, by mail or otherwise, at least once in
each Plan Year to each person who would then be entitled to receive all or part
of the balance credited to any Account if the Plan were then terminated, a
statement of his interest in the Plan as of such date as shall be selected by
the Plan Administrator, which statement shall be deemed to have been accepted as
correct and be binding on such person unless the Plan Administrator receives
written notice to the contrary within 30 days after the statement is mailed or
furnished to such person.
ARTICLE XII
SHARES
Section 12.1 Specific Allocation of Shares.
All Shares purchased under the Plan shall be specifically allocated
to the Share Investment Accounts of Participants, Former Participants and their
Beneficiaries in accordance with section 11.2, with the exception of Financed
Shares, which shall be allocated to the Loan Repayment Account.
Section 12.2 Dividends.
(a) Dividends paid with respect to Shares held under the Plan shall
be credited to the Loan Repayment Account, if paid with respect to Financed
Shares. Such dividends shall be: (i) applied to the payment of principal and
accrued interest with respect to any Share Acquisition Loan, if paid in cash; or
(ii) held in the Loan Repayment Account as Financed Shares for release in
accordance with section 6.4, if paid in the form of Shares.
(b) Dividends paid with respect to Shares allocated to a person's
Share Investment Account shall be credited to such person's Share Investment
Account. Cash dividends credited to a person's General Investment Account shall
be, at the direction of the Board, either: (i) held in such General Investment
Account and invested in accordance with sections 10.2 and 11.2; (ii) distributed
immediately to such person; (iii) distributed to such person within 90 days of
the close of the Plan Year in which such dividends were paid; or (iv) used to
make payments of principal or interest on a Share Acquisition Loan; provided,
however, that the Fair Market Value of Financed Shares released from the Loan
Repayment Account equals or exceeds the amount of the dividend.
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Section 12.3 Voting Rights.
(a) Each person shall direct the manner in which all voting rights
appurtenant to Shares allocated to his Share Investment Account will be
exercised, provided that such Shares were allocated to his Share Investment
Account as of the applicable record date. Such person shall, for such purpose,
be deemed a "named fiduciary" within the meaning of section 402(a)(2) of ERISA.
Such a direction shall be given by completing and filing with the inspector of
elections, the Trustee or such other person who shall be independent of the
Employer as the Committee shall designate, at least 10 days prior to the date of
the meeting of holders of Shares at which such voting rights will be exercised,
a written direction in the form and manner prescribed by the Committee. The
inspector of elections, the Trustee or such other person designated by the
Committee shall tabulate the directions given on a strictly confidential basis,
and shall provide the Committee with only the final results of the tabulation.
The final results of the tabulation shall be followed by the Committee in
directing the Trustee as to the manner in which such voting rights shall be
exercised. The Plan Administrator shall make a reasonable effort to furnish, or
cause to be furnished, to each person for whom a Share Investment Account is
maintained all annual reports, proxy materials and other information known by
the Plan Administrator to have been furnished by the issuer of the Shares, or by
any solicitor of proxies, to the holders of Shares.
(b) To the extent that any person shall fail to give instructions
with respect to the exercise of voting rights appurtenant to Shares allocated to
his Share Investment Account:
(i) the Trustee shall, with respect to each matter to be voted upon:
(A) cast a number of affirmative votes equal to the product of (I) the
number of allocated Shares for which no written instructions have been
given, multiplied by (II) a fraction, the numerator of which is the number
of allocated Shares for which affirmative votes will be cast in accordance
with written instructions given as provided in section 12.3(a) and the
denominator of which is the aggregate number of affirmative and negative
votes which will be cast in accordance with written instructions given as
aforesaid, and (B) cast a number of negative votes equal to the excess (if
any) of (I) the number of allocated Shares for which no written
instructions have been given over (II) the number of affirmative votes
being cast with respect to such allocated Shares pursuant to section
12.3(b)(i)(A); or
(ii) if the Trustee shall determine that it may not, consistent with
its fiduciary duties, vote the allocated Shares for which no written
instructions have been given in the manner described in section
12.3(b)(i), it shall vote such Shares in such manner as it, in its
discretion, may determine to be in the best interests of the persons to
whose Share Investment Accounts such Shares have been allocated.
(c) (i) The voting rights appurtenant to Financed Shares shall be
exercised as follows with respect to each matter as to which holders of Shares
may vote:
(A) a number of votes equal to the product of (I) the total number
of votes appurtenant to Financed Shares allocated to the Loan Repayment
Account on
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the applicable record date; multiplied by (II) a fraction, the numerator
of which is the total number of affirmative votes cast by Participants,
Former Participants and the Beneficiaries of deceased Former Participants
with respect to such matter pursuant to section 12.3(a) and the
denominator of which is the total number of affirmative and negative votes
cast by Participants, Former Participants and the Beneficiaries of
deceased Former Participants, shall be cast in the affirmative; and
(B) a number of votes equal to the excess of (I) the total number of
votes appurtenant to Financed Shares allocated to the Loan Repayment
Account on the applicable record date, over (II) the number of affirmative
votes cast pursuant to section 12.3(c)(i)(A) shall be cast in the
negative.
To the extent that the Financed Shares consist of more than one class of Shares,
this section 12.3(c)(i) shall be applied separately with respect to each class
of Shares.
(ii) If voting rights are to be exercised with respect to Financed
Shares as provided in section 12.3(c)(i)(A) and (B) at a time when there are no
Shares allocated to the Share Investment Accounts of Participants, Former
Participants and the Beneficiaries of deceased Former Participants, then the
voting rights appurtenant to Financed Shares shall be exercised as follows with
respect to each matter as to which holders of Shares may vote:
(A) Each person who is a Participant on the applicable record date
and who was a Participant on the last day of the Plan Year ending on or
immediately prior to such record date will be granted a number of votes
equal to the quotient, rounded to the nearest integral number, of (I) such
Participant's Allocation Compensation for the Plan Year ending on or
immediately prior to such record date (or for the portion of such Plan
Year during which he was a Participant); divided by (II) $1,000.00; and
(B) a number of votes equal to the product of (I) the total number
of Financed Shares allocated to the Loan Repayment Account on the
applicable record date; multiplied by (II) a fraction, the numerator of
which is the total number of votes that are cast in the affirmative with
respect to such matter pursuant to section 12.3(c)(ii)(A) and the
denominator of which is the total number of votes that are cast either in
the affirmative or in the negative with respect to such matter pursuant to
section 12.3(c)(ii)(A), shall be cast in the affirmative; and
(C) a number of votes equal to the excess of (I) the total number of
Financed Shares allocated to the Loan Repayment Account on the applicable
record date, over (II) the number of affirmative votes cast with respect
to such matter pursuant to section 12.3(c)(ii)(B), shall be cast in the
negative.
To the extent that the Financed Shares consist of more than one class of Shares,
this section 12.3(c)(ii) shall be applied separately with respect to each class
of Shares.
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Section 12.4 Tender Offers.
(a) Each person shall direct whether Shares allocated to his Share
Investment Account will be delivered in response to any Tender Offer. Such
person shall, for such purpose, be deemed a "named fiduciary" within the meaning
of section 402(a)(2) of ERISA. Such a direction shall be given by completing and
filing with the Trustee or such other person who shall be independent of the
Employer as the Committee shall designate, at least 10 days prior to the latest
date for exercising a right to deliver Shares pursuant to such Tender Offer, a
written direction in the form and manner prescribed by the Committee. The
Trustee or other person designated by the Committee shall tabulate the
directions given on a strictly confidential basis, and shall provide the
Committee with only the final results of the tabulation. The final results of
the tabulation shall be followed by the Committee in directing the number of
Shares to be delivered. The Plan Administrator shall make a reasonable effort to
furnish, or cause to be furnished, to each person for whom a Share Investment
Account is maintained, all information known by the Plan Administrator to have
been furnished by the issuer or by or on behalf of any person making such Tender
Offer, to the holders of Shares in connection with such Tender Offer.
(b) To the extent that any person shall fail to give instructions
with respect to Shares allocated to his Share Investment Account:
(i) the Trustee shall (A) tender or otherwise offer for purchase,
exchange or redemption a number of such Shares equal to the product of (I)
the number of allocated Shares for which no written instructions have been
given, multiplied by (II) a fraction, the numerator of which is the number
of allocated Shares tendered or otherwise offered for purchase, exchange
or redemption in accordance with written instructions given as provided in
section 12.4(a) and the denominator of which is the aggregate number of
allocated Shares for which written instructions have been given as
aforesaid, and (B) withhold a number of Shares equal to the excess (if
any) of (I) the number of allocated Shares for which no written
instructions have been given over (II) the number of Shares being tendered
or otherwise offered pursuant to section 12.4(b)(i)(A); or
(ii) if the Trustee shall determine that it may not, consistent with
its fiduciary duties, exercise the tender or other rights appurtenant to
allocated Shares for which no written instructions have been given in the
manner described in section 12.4(b)(i), it shall tender, or otherwise
offer, or withhold such Shares in such manner as it, in its discretion,
may determine to be in the best interests of the persons to whose Share
Investment Accounts such Shares have been allocated.
(c) In the case of any Tender Offer, any Financed Shares held in the
Loan Repayment Account shall be dealt with as follows:
(i) If such Tender Offer occurs at a time when there are no Shares
allocated to the Share Investment Accounts of Participants, Former
Participants and
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the Beneficiaries of deceased Former Participants, then the disposition of
the Financed Shares shall be determined as follows:
(A) each person who is a Participant on the applicable record
date and who was a Participant on the last day of the Plan Year
ending on or immediately prior to such record date will be granted a
number of tender rights equal to the quotient, rounded to the
nearest integral number, of (I) such Participant's Allocation
Compensation for the Plan Year ending on or immediately prior to
such record date (or for the portion of such Plan Year during which
he was a Participant), divided by (II) $1,000.00; and
(B) on the last day for delivering Shares or otherwise
responding to such Tender Offer, a number of Shares equal to the
product of (I) the total number of Financed Shares allocated to the
Loan Repayment Account on the last day of the effective period of
such Tender Offer; multiplied by (II) a fraction, the numerator of
which is the total number of tender rights exercised in favor of the
delivery of Shares in response to the Tender Offer pursuant to
section 12.4(c)(i)(A) and the denominator of which is the total
number of tender rights that are exercisable in response to the
Tender Offer pursuant to section 12.4(c)(i)(A), shall be delivered
in response to the Tender Offer; and
(C) a number of Shares equal to the excess of (I) the total
number of Financed Shares allocated to the Loan Repayment Account on
the last day of the effective period of such Tender Offer; over (II)
the number of Shares to be delivered in response to the Tender Offer
pursuant to section 12.4(c)(i)(B), shall be withheld from delivery.
(ii) If such Tender Offer occurs at a time when the voting rights
appurtenant to such Financed Shares are to be exercised in accordance with
section 12.3(c)(i), then:
(A) on the last day for delivering Shares or otherwise
responding to such Tender Offer, a number of Financed Shares equal
to the product of (I) the total number of Financed Shares allocated
to the Loan Repayment Account on the last day of the effective
period of such Tender Offer; multiplied by (II) a fraction, the
numerator of which is the total number of Shares delivered from the
Share Investment Accounts of Participants, Former Participants and
the Beneficiaries of deceased Former Participants in response to
such Tender Offer pursuant to section 12.4(a), and the denominator
of which is the total number of Shares allocated to the Share
Investment Accounts of Participants, Former Participants and
Beneficiaries of deceased Former Participants immediately prior to
the last day for delivering Shares or otherwise responding to such
Tender Offer, shall be delivered; and
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(B) a number of Financed Shares equal to the excess of (I) the
total number of Financed Shares allocated to the Loan Repayment
Account on the last day for delivering Shares or otherwise
responding to such Tender Offer; over (II) the number of Financed
Shares to be delivered pursuant to section 12.4(c)(ii)(A), shall be
withheld from delivery.
To the extent that the Financed Shares consist of more than one class of Shares,
this section 12.4(c) shall be applied separately with respect to each class of
Shares.
ARTICLE XIII
PAYMENT OF BENEFITS
Section 13.1 In General.
The balance credited to a Participant's or Former Participant's
Account under the Plan shall be paid only at the times, to the extent, in the
manner and to the persons provided in this Article XIII.
Section 13.2 Designation of Beneficiaries.
(a) Subject to section 13.2(b), any person entitled to a benefit
under the Plan may designate a Beneficiary to receive any amount to which he is
entitled that remains undistributed on the date of his death. Such person shall
designate his Beneficiary (and may change or revoke any such designation) in
writing in the form and manner prescribed by the Plan Administrator. Such
designation, and any change or revocation thereof, shall be effective only if
received by the Plan Administrator prior to such person's death and shall become
irrevocable upon such person's death.
(b) A Participant or Former Participant who is married shall
automatically be deemed to have designated his spouse as his Beneficiary,
unless, prior to the time such designation would, under section 13.2(a), become
irrevocable:
(i) the Participant or Former Participant designates an additional
or a different Beneficiary in accordance with this section 13.2; and
(ii) (A) the spouse of such Participant or Former Participant
consents to such designation in a writing that acknowledges the effect of
such consent and is witnessed by a Plan representative or a notary public;
or (B) the spouse of such Participant or Former Participant has previously
consented to such designation by signing a written waiver of any right to
consent to any designation made by the
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Participant or Former Participant, and such waiver acknowledged the effect
of the waiver and was witnessed by a Plan representative or a notary
public; or (C) it is established to the satisfaction of a Plan
representative that the consent required under section 13.2(b)(ii)(A) may
not be obtained because such spouse cannot be located or because of other
circumstances permitted under regulations issued by the Secretary of the
Treasury.
(c) In the event that a Beneficiary entitled to payments hereunder
shall die after the death of the person who designated him but prior to
receiving payment of his entire interest in the Account of the person who
designated him, then such Beneficiary's interest in the Account of such person,
or any unpaid balance thereof, shall be paid as provided in section 13.3 to the
Beneficiary who has been designated by the deceased Beneficiary, or if there is
none, to the executor or administrator of the estate of such deceased
Beneficiary, or if no such executor or administrator is appointed within such
time as the Plan Administrator, in his sole discretion, shall deem reasonable,
to such one or more of the spouse and descendants and blood relatives of such
deceased Beneficiary as the Plan Administrator may select. If a person entitled
to a benefit under the Plan and any of the Beneficiaries designated by him shall
die in such circumstances that there shall be substantial doubt as to which of
them shall have been the first to die, for all purposes of the Plan, the person
who made the Beneficiary designation shall be deemed to have survived such
Beneficiary.
(d) If no Beneficiary survives the person entitled to the benefit
under the Plan or if no Beneficiary has been designated by such person, such
benefit shall be paid to the executor or administrator of the estate of such
person, or if no such executor or administrator is appointed within such time as
the Plan Administrator, in his sole discretion, shall deem reasonable, to such
one or more of the spouse and descendants and blood relatives of such deceased
person as the Plan Administrator may select.
Section 13.3 Distributions to Participants and Former Participants.
(a)(i) The vested portion of the balance credited to a Participant's
or a Former Participant's Account shall be distributed to him commencing as of
the last Valuation Date to occur in the Plan Year in which the Participant or
Former Participant terminates employment with the Employer or attains age 65,
whichever is later, unless the Participant or Former Participant elects
otherwise pursuant to section 13.3(a)(ii), and the payment, or first in a series
of payments, is actually made within sixty (60) days following such Valuation
Date; provided, however, that required minimum distributions shall be made
earlier in accordance with section 13.7; and provided, further, that if
termination of employment occurs prior to January 1, 1998 and the total vested
balance credited to his Account at termination of employment is $3,500 or less,
or if termination of employment occurs after December 31, 1998 and the total
vested balance credited to his Account at termination of employment is $5,000
(or such higher amount as may be prescribed by law) or less, his entire vested
interest in his Account shall be paid to him in a single lump sum as soon as
practicable after termination of employment.
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(ii) A Participant or Former Participant may, upon request on a form
provided by the Plan Administrator and filed with the Plan Administrator not
later than 15 days prior to the date on which his employment with the Employer
terminates, elect that his vested interest in his Account be paid commencing as
of any earlier or later Valuation Date after his termination of employment, but
in no event later than the last Valuation Date to occur in the calendar year in
which the Participant or Former Participant attains age 70 1/2, in which case
the payment, or first in a series of payments, shall be made within three months
following such Valuation Date.
(b)(i) Subject to section 13.3(b)(ii), the vested portion of the
balance credited to the Account of a Participant or Former Participant will be
paid to him, commencing as of the Valuation Date determined under section
13.3(a), in substantially equal annual installments over a fixed period equal to
the greater of:
(A) five years; or
(B) if the vested portion of the balance credited to the Account of
the Participant or Former Participant, determined as of the Valuation Date
determined under section 13.3(a), is greater than $500,000 (or such larger
amount as may be prescribed by the Secretary of the Treasury pursuant to
section 409(o) of the Code), the sum of five years plus the lesser of (I)
five additional years, or (II) one additional year for each $100,000 (or
fraction thereof) by which the vested portion of the balance credited to
the Participant's or Former Participant's Account exceeds $500,000 (or
such larger amount as may be prescribed by the Secretary of the Treasury
pursuant to section 409(o) of the Code).
(ii) A Participant or Former Participant may, upon request on a form
provided by the Plan Administrator and filed with the Plan Administrator not
later than 15 days prior to the date on which his employment terminates, elect
that the vested portion of the balance credited to his Account be paid,
commencing as of the Valuation Date determined under section 13.3(a):
(A) in substantially equal annual installments over a fixed period
not to exceed the lesser of (I) 10 years, or (II) the life expectancy of
the Participant or Former Participant, or, if his Beneficiary is a natural
person, the joint life and last survivor expectancy of the Participant or
Former Participant and his Beneficiary; or
(B) subject to section 13.4, in a lump sum payment.
(c) If any person entitled to a benefit under the Plan dies before
his entire benefit has been distributed to him, then the remainder of such
benefit shall be paid to the Beneficiary designated by him under section 13.2
either:
(i) in a lump sum distribution as of the Valuation Date next
following the date of his death, and the amount thereof shall be based
upon the vested portion of the balance credited to his Account as of such
Valuation Date; or
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(ii) if, prior to the death of the Participant or Former Participant
whose vested Account is being distributed, an election pursuant to section
13.3(b)(ii)(B) is in effect for him, in a lump sum distribution as of the
Valuation Date specified in such election, or, if earlier, as of the
latest Valuation Date that would permit payment to be made within five
years after the Participant's or Former Participant's death, and the
amount thereof shall be based upon the vested portion of the balance
credited to his Account as of such Valuation Date; or
(iii) if, prior to the death of the Participant or Former
Participant whose vested Account is being distributed, an election
pursuant to section 13.3(b)(ii)(A) is in effect for him:
(A) over the period and at the times set forth in such
election, if distribution has begun prior to the Participant's or
Former Participant's death; or
(B) commencing at the time set forth in such election and over
the period set forth in such election (or, if less, over a period
equal to the life expectancy of the Beneficiary of the deceased
Participant or Former Participant), if the deceased Participant's or
Former Participant's spouse is his Beneficiary and distribution has
not begun prior to the deceased Participant's or Former
Participant's death; or
(C) commencing on the date specified in such election (or, if
earlier, the last Valuation Date that will permit payment to begin
within one year after the deceased Participant's or Former
Participant's death) and over the period set forth in such election
(or, if less, over a period equal to the life expectancy of the
Beneficiary of the deceased Participant or Former Participant), if
the deceased Participant's or Former Participant's Beneficiary is a
natural person other than his spouse and distribution has not begun
prior to the deceased Participant's or Former Participant's death;
and the amount thereof shall be based upon the vested portion of the
balance credited to his Account as of the Valuation Dates as of which
payments are determined; or
(iv) upon written application of the Beneficiary made in such form
and manner as the Plan Administrator may prescribe, at another time or in
another manner permitted under section 13.3(a) or (b), subject to the
following limitations:
(A)(I) If such Beneficiary is a Designated Beneficiary other
than the spouse of the deceased Participant or Former Participant
whose vested Account is being distributed, a distribution that
commences within one year after such deceased Participant's or
Former Participant's death shall be
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made over a fixed period that does not exceed the life expectancy of
such Designated Beneficiary when distribution commences.
(II) If such Designated Beneficiary is the spouse of the
deceased Participant or Former Participant whose vested Account is
being distributed, a distribution that commences no later than the
later of: (1) the date on which the deceased Participant or Former
Participant would have attained age 70 1/2 had he lived; or (2) the
first anniversary of the death of such deceased Participant or
Former Participant; shall be made over a fixed period that does not
exceed the life expectancy of such Designated Beneficiary when
distribution commences.
(III) In all other cases where the spouse of the deceased
Participant or Former Participant whose vested Account is being
distributed is not the Beneficiary, payment must be completed within
five years after the death of such deceased Participant or Former
Participant.
(B) In cases where distribution has commenced prior to the
death of the deceased Participant or Former Participant whose vested
Account is being distributed, distribution must be completed as
least as rapidly as under the method in effect prior to such
deceased Participant's or Former Participant's death.
Section 13.4 Manner of Payment.
(a) Subject to section 13.4(b), payments of distributions made
pursuant to section 13.3 or section 13.7 shall be paid, in accordance with the
written direction of the person requesting the payment, in whole Shares, in
cash, or in a combination of cash and whole Shares. Such written direction shall
be given in such form and manner as the Plan Administrator may prescribe. If no
such direction is given, then payment shall be made in the maximum number of
whole Shares that may be acquired with the amount of the payment, plus, if
necessary, an amount of money equal to any remaining amount of the payment that
is less than the Fair Market Value of a whole Share.
(b) No distribution of a lump sum payment shall be made in cash to
the extent that the making of such distribution, when combined with all other
distributions to be made in cash as of the same Valuation Date, would require
the sale of Shares constituting 1% or more of all outstanding Shares; provided,
however, that this section 13.4(b) shall not apply to or in respect of a
Participant or Former Participant:
(i) following such Participant's or Former Participant's termination
of employment with the Employer on account of his Retirement or
Disability; or
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(ii) following such Participant's or Former Participant's 65th
birthday; or
(iii) following the death of such Participant or Former Participant.
Section 13.5 Put Options.
(a) Except as provided otherwise in section 13.5(b), each
Participant or Former Participant to whom Shares are distributed under the Plan,
each Beneficiary of a deceased Participant or Former Participant, including the
estate of a deceased Participant or Former Participant, to whom Shares are
distributed under the Plan, and each person to whom such a Participant, Former
Participant or Beneficiary gives Shares that have been distributed under the
Plan shall have the right to require the Employer to purchase from him all or
any portion of such Shares. A person shall exercise such right by delivering to
the Employer a written notice, in such form and manner as the Employer may by
written notice to such person prescribe, setting forth the number of Shares to
be purchased by the Employer, the number of the stock certificate evidencing
such person's ownership of such Shares, and the effective date of purchase. Such
notice shall be given, and the effective date of the purchase specified therein
shall be, no later than the last day of the fifteenth calendar month to begin
after the date on which the Shares to be purchased by the Employer were
distributed from the Plan. As soon as practicable following its receipt of such
notice, the Employer shall take such actions as are necessary to purchase the
Shares specified in such notice at a price per Share equal to the Fair Market
Value of a Share determined as of the effective date of the purchase.
(b) The Employer shall have no obligation to purchase any Share (i)
pursuant to a notice given, or on an effective date of purchase, after the last
day of the fifteenth calendar month to begin after the date on which such Share
was distributed from the Plan; (ii) following the earliest date on which Shares
are publicly traded on an established market; or (iii) if the Employer is a
"bank" within the meaning of section 581 of the Code and is prohibited by law
from redeeming or purchasing its own securities.
Section 13.6 Right of First Refusal.
(a) For any period during which Shares are not publicly traded on
any established market, no person who owns Shares that were distributed from the
Plan, other than a person to whom such Shares were sold in compliance with this
section 13.6, shall sell such Shares to any person other than the Employer
without first offering to sell such Shares to the Employer (or person designated
by the Employer) in accordance with this section 13.6.
(b) In the event that a person to whom this section 13.6 applies
shall receive and desire to accept from a person other than the Employer a bona
fide offer to purchase Shares to which this section 13.6 applies, he shall
furnish to the Employer a written notice which shall:
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(i) include a copy of such offer to purchase;
(ii) offer to sell to the Employer the Shares subject to such offer
to purchase at a price per Share that is equal to the greater of:
(A) the price per Share specified in such offer to purchase;
or
(B) the Fair Market Value of a Share as of the date of
purchase;
and otherwise upon the same terms and conditions as those specified in
such offer to purchase; and
(iii) include an indication of his intention to accept such offer to
purchase if the Employer does not accept his offer to sell.
(c) The Employer shall have the right to purchase the Shares covered
by the offer to sell contained in a notice given pursuant to section 13.6(b), on
the terms and conditions specified in such notice, by written notice given to
the party making the offer to sell not later than the fourteenth day after the
notice described in section 13.6(b) is given. If the Employer does not give such
a notice during the prescribed fourteen day period, then the person owning such
Shares may accept the offer to purchase described in the notice.
Section 13.7 Minimum Required Distributions.
(a) Required minimum distributions of a Participant's or Former
Participant's Account shall commence no later than:
(i) if the Participant or Former Participant attained age 70 1/2
prior to January 1, 1988 and was not a Five Percent Owner at any time
during the Plan Year ending in the calendar year in which he attained age
70 1/2, during any of the four preceding Plan Years or during any
subsequent years, the later of (A) the calendar year in which he attains
or attained age 70 1/2 or (B) the calendar year in which he terminates
employment with the Employer; or
(ii) if the Participant or Former Participant attained age 70 1/2
prior to January 1, 1988 and is or was a Five Percent Owner at any time
during the Plan Year ending in the calendar year in which he attained age
70 1/2, or during any of the four preceding Plan Years or during any
subsequent years, the later of (A) the calendar year in which he attains
age 70 1/2 or (B) the calendar year in which he first becomes a Five
Percent Owner; or
(iii) if the Participant or Former Participant attains age 70 1/2
after December 31, 1987 and before January 1, 1997, in all other cases,
the calendar year in which the Participant or Former Participant attains
age 70 1/2; or
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(iv) if the Participant or Former Participant attains age 70 1/2
after December 31, 1998 and was not a Five Percent Owner at any time
during the Plan Year ending in the calendar year in which he attained age
70 1/2, during any of the four preceding Plan Years or during any
subsequent years, the later of (A) the calendar year in which he attains
or attained age 70 1/2 or (B) the calendar year in which he terminates
employment with the Employer and all Affiliated Employers; or
(v) if the Participant or Former Participant attains age 70 1/2
after December 31, 1998 and is or was a Five Percent Owner at any time
during the Plan Year ending in the calendar year in which he attained age
70 1/2, during any of the four preceding Plan Years or during any
subsequent years, the later of (A) the calendar year in which he attains
age 70 1/2 or (B) the calendar year in which he first becomes a Five
Percent Owner;
provided, however, that any Participant who is employed by an Employer after
December 31, 1996 may elect not to receive, or to discontinue receiving, such
required minimum distributions until April 1 of the year following the year in
which such Participant terminates employment or is or becomes a Five Percent
Owner, whichever is earlier.
(b) The required minimum distributions contemplated by section
13.7(a) shall be made as follows:
(i) The minimum required distribution to be made for the calendar
year for which the first minimum distribution is required shall be no
later than April 1st of the immediately following calendar year and shall
be equal to the quotient obtained by dividing (A) the vested balance
credited to the Participant's or Former Participant's Account as of the
last Valuation Date to occur in the calendar year immediately preceding
the calendar year in which the first minimum distribution is required
(adjusted to account for any additions thereto or subtractions therefrom
after such Valuation Date but on or before December 31st of such calendar
year); by (B) the Participant's or Former Participant's life expectancy
(or, if his Beneficiary is a natural person, the joint life and last
survivor expectancy of him and his Beneficiary); and
(ii) the minimum required distribution to be made for each calendar
year following the calendar year for which the first minimum distribution
is required shall be made no later than December 31st of the calendar year
for which the distribution is required and shall be equal to the quotient
obtained by dividing (A) the vested balance credited to the Participant's
or Former Participant's Account as of the last Valuation Date to occur in
the calendar year prior to the calendar year for which the distribution is
required (adjusted to account for any additions thereto or subtractions
therefrom after such Valuation Date but on or before December 31st of such
calendar year and, in the case of the distribution for the calendar year
immediately following the calendar year for which the first minimum
distribution
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is required, reduced by any distribution for the prior calendar year that
is made in the current calendar year); by (B) the Participant's or Former
Participant's life expectancy (or, if his Beneficiary is a Designated
Beneficiary, the joint life and last survivor expectancy of him and his
Beneficiary).
For purposes of this section 13.7, the life expectancy of a Participant or
Former Participant (or the joint life and last survivor expectancy of a
Participant or Former Participant and his Designated Beneficiary) for the
calendar year in which the Participant or Former Participant attains age 70 1/2
shall be determined on the basis of Tables V and VI, as applicable, of section
1.72-9 of the Income Tax Regulations as of the Participant's or Former
Participant's and Beneficiary's birthday in such year. Such life expectancy or
joint life and last survivor expectancy for any subsequent year shall be equal
to the excess of (1) the life expectancy or joint life and last survivor
expectancy for the year in which the Participant or Former Participant attains
age 70 1/2, over (2) the number of whole years that have elapsed since the
Participant or Former Participant attained age 70 1/2.
(c) Payment of the distributions required to be made to a
Participant or Former Participant under this section 13.7 shall be made in
accordance with section 13.4.
Section 13.8 Direct Rollover of Eligible Rollover Distributions.
(a) A Distributee may elect, at the time and in the manner
prescribed by the Plan Administer, to have any portion of an Eligible Rollover
Distribution paid directly to an Eligible Retirement Plan specified by the
Distributee in a Direct Rollover.
(b) The following rules shall apply with respect to Direct Rollovers
made pursuant to this section 13.8:
(i) A Participant may only elect to make a Direct Rollover of an
Eligible Rollover Distribution if such Eligible Rollover Distribution
(when combined with other Eligible Rollover Distributions made or to be
made in the same calendar year) is reasonably expected to be at least
$200;
(ii) If a Participant elects a Direct Rollover of a portion of an
Eligible Rollover Distribution, that portion must be equal to at least
$500; and
(iii) A Participant may not divide his or her Eligible Rollover
Distribution into separate distributions to be transferred to two or more
Eligible Retirement Plans.
(c) For purposes of this section 13.8 and any other applicable
section of the Plan, the following definitions shall have the following
meanings:
(i) "Direct Rollover" means a payment by the Plan to the Eligible
Retirement Plan specified by the Distributee.
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(ii) "Distributee" means an Employee or former Employee. In
addition, the Employee's or former Employee's surviving spouse and the
Employee's spouse or former spouse who is the alternate payee under a
Qualified Domestic Relations Order are considered Distributees with regard
to the interest of the spouse or former spouse.
(iii) "Eligible Retirement Plan" means an individual retirement
account described in section 408(a) of the Code, an individual retirement
annuity described in section 408(b) or the Code, an annuity plan described
in section 403(a) of the Code, or a qualified trust described in section
401(a) of the Code that accepts the Distributee's Eligible Rollover
Distribution. However, in the case of an Eligible Rollover Distribution to
the current or former spouse who is the alternative payee under a
Qualified Domestic Relations Order or to a surviving spouse, an Eligible
Retirement Plan is an individual retirement account or individual
retirement annuity.
(iv) "Eligible Rollover Distribution" means any distribution of all
or any portion of the balance to the credit of the Distributee, except
that an Eligible Rollover Distribution does not include: any distribution
that is one of a series of substantially equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) of the
Distributee or the joint lives (or joint life expectancies) of the
Distributee's designated Beneficiary, or for a specified period of ten
(10) years or more; any distribution to the extent such distribution is
required under section 401(a)(9) of the Code; and the portion of any
distribution that is not includible in gross income (determined without
regard to the exclusion for net unrealized appreciation with respect to
employer securities).
Section 13.9 Valuation of Shares Upon Settlement to a Participant.
Notwithstanding any contrary provision in this Article XIII, in the
event that all or a portion of a payment of a distribution to a Participant is
to be made in cash, such Participant shall only be entitled to receive the
proceeds of the Shares allocated to his Account that are sold in connection with
such distribution and which are valued as of the date of such sale.
ARTICLE XIV
ADMINISTRATION
Section 14.1 Named Fiduciaries.
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The term "Named Fiduciary" shall mean (but only to the extent of the
responsibilities of each of them) the Plan Administrator, the Committee, the
Board and the Trustee. This Article XIV is intended to allocate to each Named
Fiduciary the responsibility for the prudent execution of the functions assigned
to him or it, and none of such responsibilities or any other responsibility
shall be shared by two or more of such Named Fiduciaries. Whenever one Named
Fiduciary is required by the Plan or Trust Agreement to follow the directions of
another Named Fiduciary, the two Named Fiduciaries shall not be deemed to have
been assigned a shared responsibility, but the responsibility of the Named
Fiduciary giving the directions shall be deemed his sole responsibility, and the
responsibility of the Named Fiduciary receiving those directions shall be to
follow them insofar as such instructions are on their face proper under
applicable law.
Section 14.2 Plan Administrator.
There shall be a Plan Administrator, who shall be the Senior Human
Resources Officer of the Employer, or such Employee or officer as may be
designated by the Committee, as hereinafter provided, and who shall, subject to
the responsibilities of the Committee and the Board, have the responsibility for
the day-to-day control, management, operation and administration of the Plan
(except trust duties). The Plan Administrator shall have the following
responsibilities:
(a) To maintain records necessary or appropriate for the
administration of the Plan;
(b) To give and receive such instructions, notices, information,
materials, reports and certifications to the Trustee as may be necessary
or appropriate in the administration of the Plan;
(c) To prescribe forms and make rules and regulations consistent
with the terms of the Plan and with the interpretations and other actions
of the Committee;
(d) To require such proof of age or evidence of good health of an
Employee, Participant or Former Participant or the spouse of either, or of
a Beneficiary as may be necessary or appropriate in the administration of
the Plan;
(e) To prepare and file, distribute or furnish all reports, plan
descriptions, and other information concerning the Plan, including,
without limitation, filings with the Secretary of Labor and communications
with Participants, Former Participants and other persons, as shall be
required of the Plan Administrator under ERISA;
(f) To determine any question arising in connection with the Plan,
and the Plan Administrator's decision or action in respect thereof shall
be final and conclusive and binding upon the Employer, the Trustee,
Participants, Former
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Participants, Beneficiaries and any other person having an interest under
the Plan; provided, however, that any question relating to inconsistency
or omission in the Plan, or interpretation of the provisions of the Plan,
shall be referred to the Committee by the Plan Administrator and the
decision of the Committee in respect thereof shall be final;
(g) Subject to the provisions of section 14.5, to review and dispose
of claims under the Plan filed pursuant to section 14.4;
(h) If the Plan Administrator shall determine that by reason of
illness, senility, insanity, or for any other reason, it is undesirable to
make any payment to a Participant, Former Participant, Beneficiary or any
other person entitled thereto, to direct the application of any amount so
payable to the use or benefit of such person in any manner that he may
deem advisable or to direct in his discretion the withholding of any
payment under the Plan due to any person under legal disability until a
representative competent to receive such payment in his behalf shall be
appointed pursuant to law;
(i) To discharge such other responsibilities or follow such
directions as may be assigned or given by the Committee or the Board; and
(j) To perform any duty or take any action which is allocated to the
Plan Administrator under the Plan.
The Plan Administrator shall have the power and authority necessary or
appropriate to carry out his responsibilities. The Plan Administrator may resign
only by giving at least 30 days' prior written notice of resignation to the
Committee, and such resignation shall be effective on the date specified in such
notice.
Section 14.3 Committee Responsibilities.
The Committee shall, subject to the responsibilities of the Board,
have the following responsibilities:
(a) To review the performance of the Plan Administrator;
(b) To hear and decide appeals, pursuant to the claims procedure
contained in section 14.5 of the Plan, taken from the decisions of the
Plan Administrator;
(c) To hear and decide questions, including interpretation of the
Plan, as may be referred to the Committee by the Plan Administrator;
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(d) To review the performance of the Trustee and such investment
managers as may be appointed in or pursuant to the Trust Agreement in
investing, managing and controlling the assets of the Plan;
(e) To the extent required by ERISA, to establish a funding policy
and method consistent with the objectives of the Plan and the requirements
of ERISA, and to review such policy and method at least annually;
(f) To report and make recommendations to the Board regarding
changes in the Plan, including changes in the operation and management of
the Plan and removal and replacement of the Trustee and such investment
managers as may be appointed in or pursuant to the Trust Agreement;
(g) To designate an Alternate Plan Administrator to serve in the
event that the Plan Administrator is absent or otherwise unable to
discharge his responsibilities;
(h) To remove and replace the Plan Administrator or Alternate, or
both of them, and to fill a vacancy in either office;
(i) To the extent provided under and subject to the provisions of
the Trust Agreement, to appoint "investment managers" as defined in
section 3(38) of ERISA to manage and control (including acquiring and
disposing of) all or any of the assets of the Plan;
(j) With the prior approval of the Board, to direct the Trustee to
obtain one or more Share Acquisition Loans;
(k) To develop and provide procedures and forms necessary to enable
Participants to give voting and tendering directions on a confidential
basis;
(l) To discharge such other responsibilities or follow such
directions as may be assigned or given by the Board; and
(m) To perform any duty or take any action which is allocated to the
Committee under the Plan.
The Committee shall have the power and authority necessary or appropriate to
carry out its responsibilities.
Section 14.4 Claims Procedure.
Any claim relating to benefits under the Plan shall be filed with
the Plan Administrator on a form prescribed by him. If a claim is denied in
whole or in part, the Plan
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Administrator shall give the claimant written notice of such denial, which
notice shall specifically set forth:
(a) The reasons for the denial;
(b) The pertinent Plan provisions on which the denial was based;
(c) Any additional material or information necessary for the
claimant to perfect his claim and an explanation of why such material or
information is needed; and
(d) An explanation of the Plan's procedure for review of the denial
of the claim.
In the event that the claim is not granted and notice of denial of a claim is
not furnished by the 30th day after such claim was filed, the claim shall be
deemed to have been denied on that day for the purpose of permitting the
claimant to request review of the claim.
Section 14.5 Claims Review Procedure.
Any person whose claim filed pursuant to section 14.4 has been
denied in whole or in part by the Plan Administrator may request review of the
claim by the Committee, upon a form prescribed by the Plan Administrator. The
claimant shall file such form (including a statement of his position) with the
Committee no later than 60 days after the mailing or delivery of the written
notice of denial provided for in section 14.4, or, if such notice is not
provided, within 60 days after such claim is deemed denied pursuant to section
14.4. The claimant shall be permitted to review pertinent documents. A decision
shall be rendered by the Committee and communicated to the claimant not later
than 30 days after receipt of the claimant's written request for review.
However, if the Committee finds it necessary, due to special circumstances (for
example, the need to hold a hearing), to extend this period and so notifies the
claimant in writing, the decision shall be rendered as soon as practicable, but
in no event later than 120 days after the claimant's request for review. The
Committee's decision shall be in writing and shall specifically set forth:
(a) The reasons for the decision; and
(b) The pertinent Plan provisions on which the decision is based.
Any such decision of the Committee shall be binding upon the claimant and the
Employer, and the Plan Administrator shall take appropriate action to carry out
such decision.
Section 14.8 Allocation of Fiduciary Responsibilities and Employment
of Advisors.
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Any Named Fiduciary may:
(a) Allocate any of his or its responsibilities (other than trustee
responsibilities) under the Plan to such other person or persons as he or
it may designate, provided that such allocation and designation shall be
in writing and filed with the Plan Administrator;
(b) Employ one or more persons to render advice to him or it with
regard to any of his or its responsibilities under the Plan; and
(c) Consult with counsel, who may be counsel to the Employer.
Section 14.9 Other Administrative Provisions.
(a) Any person whose claim has been denied in whole or in part must
exhaust the administrative review procedures provided in section 14.5 prior to
initiating any claim for judicial review.
(b) No bond or other security shall be required of a member of the
Committee, the Plan Administrator, or any officer or Employee of the Employer to
whom fiduciary responsibilities are allocated by a Named Fiduciary, except as
may be required by ERISA.
(c) Subject to any limitation on the application of this section
14.9(c) pursuant to ERISA, neither the Plan Administrator, nor a member of the
Committee, nor any officer or Employee of the Employer to whom fiduciary
responsibilities are allocated by a Named Fiduciary, shall be liable for any act
of omission or commission by himself or by another person, except for his own
individual willful and intentional malfeasance.
(d) The Plan Administrator or the Committee may, except with respect
to actions under section 14.5, shorten, extend or waive the time (but not beyond
60 days) required by the Plan for filing any notice or other form with the Plan
Administrator or the Committee, or taking any other action under the Plan.
(e) The Plan Administrator or the Committee may direct that the
costs of services provided pursuant to section 14.6, and such other reasonable
expenses as may be incurred in the administration of the Plan, shall be paid out
of the funds of the Plan unless the Employer shall pay them.
(f) Any person, group of persons, committee, corporation or
organization may serve in more than one fiduciary capacity with respect to the
Plan.
(g) Any action taken or omitted by any fiduciary with respect to the
Plan, including any decision, interpretation, claim denial or review on appeal,
shall be conclusive and binding on all interested parties and shall be subject
to judicial modification or reversal only to the
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extent it is determined by a court of competent jurisdiction that such action or
omission was arbitrary and capricious and contrary to the terms of the Plan.
ARTICLE XV
AMENDMENT, TERMINATION AND TAX QUALIFICATION
Section 15.1 Amendment and Termination by Tappan Zee Financial, Inc.
(Before September 1, 1998) and U.S.B. Holding Co., Inc.
(After August 31, 1998).
The Employer expects to continue the Plan indefinitely, but
specifically reserves the right, in its sole discretion, at any time, by
appropriate action of the Board, to amend, in whole or in part, any or all of
the provisions of the Plan and to terminate the Plan at any time. Subject to the
provisions of section 15.2, no such amendment or termination shall permit any
part of the Trust Fund to be used for or diverted to purposes other than for the
exclusive benefit of Participants, Former Participants, Beneficiaries or other
persons entitled to benefits, and no such amendment or termination shall reduce
the accrued benefit of any Participant, Former Participant, Beneficiary or other
person who may be entitled to benefits, without his consent. In the event of a
termination or partial termination of the Plan, or in the event of a complete
discontinuance of the Employer's contributions to the Plan, the Accounts of each
affected person shall forthwith become nonforfeitable and shall be payable in
accordance with the provisions of Article XIII.
Section 15.2 Amendment or Termination Other Than by Tappan Zee
Financial, Inc. (Before September 1, 1998) and U.S.B.
Holding Co., Inc. (After August 31, 1998).
In the event that a corporation or trade or business other than
Tappan Zee Financial, Inc. (before September 1, 1998) and U.S.B. Holding Co.,
Inc. (after August 31, 1998) shall adopt this Plan, such corporation or trade or
business shall, by adopting the Plan, empower Tappan Zee Financial, Inc.(before
September 1, 1998) and U.S.B. Holding Co., Inc. (after August 31, 1998) to amend
or terminate the Plan, insofar as it shall cover employees of such corporation
or trade or business, upon the terms and conditions set forth in section 15.1;
provided, however, that any such corporation or trade or business may, by action
of its board of directors or other governing body, amend or terminate the Plan,
insofar as it shall cover employees of such corporation or trade or business, at
different times and in a different manner. In the event of any such amendment or
termination by action of the board of directors or other governing body of such
a corporation or trade or business, a separate plan shall be deemed to have been
established for the employees of such corporation or trade or business, and the
assets of such plan shall be segregated from the
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assets of this Plan at the earliest practicable date and shall be dealt with in
accordance with the documents governing such separate plan.
Section 15.3 Conformity to Internal Revenue Code.
The Employer has established the Plan with the intent that the Plan
and Trust will at all times be qualified under section 401(a) and exempt under
section 501(a) of the Code and with the intent that contributions under the Plan
will be allowed as deductions in computing the net income of the Employer for
federal income tax purposes, and the provisions of the Plan and Trust Agreement
shall be construed to effectuate such intentions. Accordingly, notwithstanding
anything to the contrary hereinbefore provided, the Plan and the Trust Agreement
may be amended at any time without prior notice to Participants, Former
Participants, Beneficiaries or any other persons entitled to benefits, if such
amendment is deemed by the Board to be necessary or appropriate to effectuate
such intent.
Section 15.4 Contingent Nature of Contributions.
(a) All ESOP Contributions to the Plan are conditioned upon the
issuance by the Internal Revenue Service of a determination that the Plan and
Trust are qualified under section 401(a) of the Code and exempt under section
501(a) of the Code. If the Employer applies to the Internal Revenue Service for
such a determination within 90 days after the date on which it files its federal
income tax return for its taxable year that includes the last day of the Plan
Year in which the Plan is adopted, and if the Internal Revenue Service issues a
determination that the Plan and Trust are not so qualified or exempt, all ESOP
Contributions made by the Employer prior to the date of receipt of such a
determination may, at the election of the Employer, be returned to the Employer
within one year after the date of such determination.
(b) All ESOP Contributions and Loan Repayment Contributions to the
Plan are made upon the condition that such ESOP Contributions and Loan Repayment
Contributions will be allowed as a deduction in computing the net income of the
Employer for federal income tax purposes. To the extent that any such deduction
is disallowed, the amount disallowed may, at the election of the Employer, be
returned to the Employer within one year after the deduction is disallowed.
(c) Any contribution to the Plan made by the Employer as a result of
a mistake of fact may, at the election of the Employer, be returned to the
Employer within one year after such contribution is made.
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ARTICLE XVI
SPECIAL RULES FOR TOP HEAVY PLAN YEARS
Section 16.1 In General.
As of the Determination Date for each Plan Year, the Plan
Administrator shall determine whether the Plan is a Top Heavy Plan in accordance
with the provisions of this Article XVI. If, as of such Determination Date, the
Plan is a Top Heavy Plan, then the Plan Year immediately following such
Determination Date shall be a Top Heavy Plan Year and the special provisions of
this Article XVI shall be in effect; provided, however, that if, as of the
Determination Date for the Plan Year in which the Effective Date occurs, the
Plan is a Top Heavy Plan, such Plan Year shall be a Top Heavy Plan Year, and the
provisions of this Article XVI shall be given retroactive effect for such Plan
Year.
Section 16.2 Definition of Top Heavy Plan.
(a) Subject to section 16.2(c), the Plan is a Top Heavy Plan if, as
of a Determination Date: (i) it is not a member of a Required Aggregation Group,
and (ii)(A) the sum of the Cumulative Accrued Benefits of all Key Employees
exceeds 60% of (B) the sum of the Cumulative Accrued Benefits of all Employees
(excluding former Key Employees), former Employees (excluding former Key
Employees and other former Employees who have not performed any services for the
Employer or any Affiliated Employer during the immediately preceding five Plan
Years), and their Beneficiaries.
(b) Subject to section 16.2(c), the Plan is a Top Heavy Plan if, as
of a Determination Date: (i) the Plan is a member of a Required Aggregation
Group, and (ii)(A) the sum of the Cumulative Accrued Benefits of all Key
Employees under all plans that are members of the Required Aggregation Group
exceeds 60% of (B) the sum of the Cumulative Accrued Benefits of all Employees
(excluding former Key Employees), former Employees (excluding former Key
Employees and other former Employees who have not performed any services for the
Employer or any Affiliated Employer during the immediately preceding five Plan
Years), and their Beneficiaries under all plans that are members of the Required
Aggregation Group.
(c) Notwithstanding sections 16.2(a) and 16.2(b), the Plan is not a
Top Heavy Plan if, as of a Determination Date: (i) the Plan is a member of a
Permissible Aggregation Group, and (ii)(A) the sum of the Cumulative Accrued
Benefits of all Key Employees under all plans that are members of the
Permissible Aggregation Group does not exceed 60% of (B) the sum of the
Cumulative Accrued Benefits of all Employees (excluding former Key Employees),
former Employees (excluding former Key Employees and other former Employees who
have not performed any services for the Employer or any Affiliated Employer
during the immediately preceding five Plan Years), and their Beneficiaries under
all plans that are members of the Permissible Aggregation Group.
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Section 16.3 Determination Date.
The Determination Date for the Plan Year in which the Effective Date
occurs shall be the last day of such Plan Year, and the Determination Date for
each Plan Year beginning after the Plan Year in which the Effective Date occurs
shall be the last day of the preceding Plan Year. The Determination Date for any
other qualified plan maintained by the Employer for a plan year shall be the
last day of the preceding plan year of each such plan, except that in the case
of the first plan year of such plan, it shall be the last day of such first plan
year.
Section 16.4 Cumulative Accrued Benefits.
(a) An individual's Cumulative Accrued Benefits under this Plan as
of a Determination Date are equal to the sum of:
(i) the balance credited to such individual's Account under this
Plan as of the most recent Valuation Date preceding the
Determination Date;
(ii) the amount of any ESOP Contributions or Loan Repayment
Contributions made after such Valuation Date but on or before
the Determination Date; and
(iii) the amount of any distributions of such individual's
Cumulative Accrued Benefits under the Plan during the five
year period ending on the Determination Date.
For purposes of this section 16.4(a), the computation of an individual's
Cumulative Accrued Benefits, and the extent to which distributions, rollovers
and transfers are taken into account, will be made in accordance with section
416 of the Code and the regulations thereunder.
(b) For purposes of this Plan, the term "Cumulative Accrued
Benefits" with respect to any other qualified plan, shall mean the cumulative
accrued benefits determined for purposes of section 416 of the Code under the
provisions of such plans.
(c) For purposes of determining the top heavy status of a Required
Aggregation Group or a Permissible Aggregation Group, the Cumulative Accrued
Benefits under this Plan and the Cumulative Accrued Benefits under any other
plan shall be determined as of the Determination Date that falls within the same
calendar year as the Determination Dates for all other members of such Required
Aggregation Group or Permissible Aggregation Group.
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Section 16.5 Key Employees.
(a) For purposes of the Plan, the term Key Employee means any
employee or former employee of the Employer or any Affiliated Employer who is at
any time during the current Plan Year or was at any time during the immediately
preceding four Plan Years:
(i) a Five Percent Owner;
(ii) a person who would be described in section 1.23 if the number
"1%" were substituted for the number "5%" in section 1.23 and
who has an annual Total Compensation from the Employer and any
Affiliated Employer of more than $150,000;
(iii) an Officer of the Employer or any Affiliated Employer who has
an annual Total Compensation greater than 50% of the amount in
effect under section 415(b)(1)(A) of the Code for any such
Plan Year; or
(iv) one of the ten persons owning the largest interests in the
Employer and having an annual Total Compensation from the
Employer or any Affiliated Employer in excess of the dollar
limitation in effect under section 415(c)(1)(A) of the Code
for such Plan Year.
(b) For purposes of section 16.5(a):
(i) for purposes of section 16.5(a)(iii), in the event the
Employer or any Affiliated Employer has more officers than are
considered Officers, the term Key Employee shall mean those
officers, up to the maximum number, with the highest annual
compensation in any one of the five consecutive Plan Years
ending on the Determination Date; and
(ii) for purposes of section 16.5(a)(iv), if two or more persons
have equal ownership interests in the Employer, each such
person shall be considered as having a larger ownership
interest than any such person with a lower annual compensation
from the Employer or any Affiliated Employer.
(c) For purposes of section 16.5(a): (i) a person's compensation
from Affiliated Employers shall be aggregated, but his ownership interests in
Affiliated Employers shall not be aggregated; (ii) an employee shall only be
deemed to be an officer if he has the power and responsibility of a person who
is an officer within the meaning of section 416 of the Code; and (iii) the term
Key Employee shall also include the Beneficiary of a deceased Key Employee.
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Section 16.6 Required Aggregation Group.
For purposes of this Article XVI, a Required Aggregation Group shall
consist of (a) this Plan; (b) any other qualified plans maintained by the
Employer and any Affiliated Employers that cover Key Employees; and (c) any
other qualified plans that are required to be aggregated for purposes of
satisfying the requirements of sections 401(a)(4) or 410(b) of the Code.
Section 16.7 Permissible Aggregation Group.
For purposes of this Article XVI, a Permissible Aggregation Group
shall consist of (a) the Required Aggregation Group and (b) any other qualified
plans maintained by the Employer and any Affiliated Employers; provided,
however, that the Permissible Aggregation Group must satisfy the requirements of
sections 401(a)(4) and 410(b) of the Code.
Section 16.8 Special Requirements During Top Heavy Plan Years.
(a) Notwithstanding any other provision of the Plan to the contrary,
for each Top Heavy Plan Year, in the case of a Participant (other than a Key
Employee) on the last day of such Top Heavy Plan Year who is not also a
participant in another qualified plan which satisfies the minimum contribution
and benefit requirements of section 416 of the Code with respect to such
Participant, the sum of the ESOP Contributions and Loan Repayment Contributions
made with respect to such Participant, when expressed as a percentage of his
Total Compensation for such Top Heavy Plan Year, shall not be less than 3% of
such Participant's Total Compensation for such Top Heavy Plan Year or, if less,
the highest combined rate, expressed as a percentage of Total Compensation at
which ESOP Contributions and Loan Repayment Contributions were made on behalf of
a Key Employee for such Top Heavy Plan Year. The Employer shall make an
additional contribution to the Account of each Participant to the extent
necessary to satisfy the foregoing requirement.
(b) For any Top Heavy Plan Year beginning before January 1, 2000,
the number "1.0" shall be substituted for the number "1.25" in sections
8.2(c)(iii) and 8.2(c)(iv), except that:
(i) this section 16.8(b) shall not apply to any individual for a Top
Heavy Plan Year that is not a Super Top Heavy Plan Year if the
requirements of section 16.8(a) would be satisfied for such Super Top
Heavy Plan Year if the number "4%" were substituted for the number 3% in
section 16.8(a); and
(ii) this section 16.8(b) shall not apply to an individual for a Top
Heavy Plan Year if, during such Top Heavy Plan Year, there are no ESOP
Contributions or Loan Repayment Contributions allocated to such individual
under this Plan, there are no contributions under any other qualified
defined contribution plan main-
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tained by the Employer, and there are no accruals for such individual
under any qualified defined benefit plan maintained by the Employer.
For purposes of this section 16.8(b), the term Super Top Heavy Plan Year means a
Top Heavy Plan Year in which the Plan would meet the definitional requirements
of sections 16.2(a) or 16.2(b) if the term "90%" were substituted for the term
"60%" in sections 16.2(a), 16.2(b) and 16.2(c).
ARTICLE XVII
MISCELLANEOUS PROVISIONS
Section 17.1 Governing Law.
The Plan shall be construed, administered and enforced according to
the laws of the State of New York without giving effect to the conflict of laws
principles thereof, except to the extent that such laws are preempted by federal
law.
Section 17.2 No Right to Continued Employment.
Neither the establishment of the Plan, nor any provisions of the
Plan or of the Trust Agreement establishing the Trust Fund nor any action of the
Plan Administrator, the Committee or the Trustee, shall be held or construed to
confer upon any Employee any right to a continuation of employment by the
Employer. The Employer reserves the right to dismiss any Employee or otherwise
deal with any Employee to the same extent as though the Plan had not been
adopted.
Section 17.3 Construction of Language.
Wherever appropriate in the Plan, words used in the singular may be
read in the plural, words used in the plural may be read in the singular, and
words importing the masculine gender may be read as referring equally to the
feminine and the neuter. Any reference to an Article or section number shall
refer to an Article or section of the Plan, unless otherwise indicated.
Section 17.4 Headings.
The headings of Articles and sections are included solely for
convenience of reference. If there is any conflict between such headings and the
text of the Plan, the text shall control.
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Section 17.5 Merger with Other Plans.
The Plan shall not be merged or consolidated with, nor transfer its
assets or liabilities to, any other plan unless each Participant, Former
Participant, Beneficiary and other person entitled to benefits, would (if that
plan then terminated) receive a benefit immediately after the merger,
consolidation or transfer which is equal to or greater than the benefit he would
have been entitled to receive if the Plan had terminated immediately before the
merger, consolidation or transfer.
Section 17.6 Non-alienation of Benefits.
(a) Except as provided in section 17.6(b) and (c), the right to
receive a benefit under the Plan shall not be subject in any manner to
anticipation, alienation or assignment, nor shall such right be liable for or
subject to debts, contracts, liabilities or torts. Should any Participant,
Former Participant or other person attempt to anticipate, alienate or assign his
interest in or right to a benefit, or should any person claiming against him
seek to subject such interest or right to legal or equitable process, all the
interest or right of such Participant or Former Participant or other person
entitled to benefits in the Plan shall cease, and in that event such interest or
right shall be held or applied, at the direction of the Plan Administrator, for
or to the benefit of such Participant or Former Participant, or other person or
his spouse, children or other dependents in such manner and in such proportions
as the Plan Administrator may deem proper.
(b) This section 17.6 shall not prohibit the Plan Administrator from
recognizing a Domestic Relations Order that is determined to be a Qualified
Domestic Relations Order in accordance with section 17.7.
(c) Notwithstanding anything in the Plan to the contrary, a
Participant's, Former Participant's or Beneficiary's Accounts under the Plan may
be offset by any amount such Participant, Former Participant or Beneficiary is
required or ordered to pay to the Plan if:
(i) the order or requirement to pay arises: (A) under a judgment
issued on or after August 5, 1997 of conviction for a crime involving the
Plan; (B) under a civil judgment (including a consent order or decree)
entered by a court on or after August 5, 1997 in an action brought in
connection with a violation (or alleged violation) of part 4 of subtitle B
of title I of ERISA; or (C) pursuant to a settlement agreement entered
into on or after August 5, 1997 between the Participant, Former
Participant or Beneficiary and one or both of the United States Department
of Labor and the Pension Benefit Guaranty Corporation in connection with a
violation (or alleged violation) of part 4 of subtitle B of title I of
ERISA by a fiduciary or any other person; and
(ii) the judgment, order, decree or settlement agreement expressly
provides for the offset of all or part of the amount ordered or required
to be paid
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to the Plan against the Participant's, For Participant's or Beneficiary's
benefits under the Plan.
Section 17.7 Procedures Involving Domestic Relations Orders.
Upon receiving a Domestic Relations Order, the Plan Administrator
shall segregate in a separate account or in an escrow account or separately
account for the amounts payable to any person pursuant to such Domestic
Relations Order, pending a determination whether such Domestic Relations Order
constitutes a Qualified Domestic Relations Order, and shall give notice of the
receipt of the Domestic Relations Order to the Participant or Former Participant
and each other person affected thereby. If, within 18 months after receipt of
such Domestic Relations Order, the Plan Administrator, a court of competent
jurisdiction or another appropriate authority determines that such Domestic
Relations Order constitutes a Qualified Domestic Relations Order, the Plan
Administrator shall direct the Trustee to pay the segregated amounts (plus any
interest thereon) to the person or persons entitled thereto under the Qualified
Domestic Relations Order. If it is determined that the Domestic Relations Order
is not a Qualified Domestic Relations Order or if no determination is made
within the prescribed 18-month period, the segregated amounts shall be
distributed as though the Domestic Relations Order had not been received, and
any later determination that such Domestic Relations Order constitutes a
Qualified Domestic Relations Order shall be applied only with respect to
benefits that remain undistributed on the date of such determination. The Plan
Administrator shall be authorized to establish such reasonable administrative
procedures as he deems necessary or appropriate to administer this section 17.7.
This section 17.7 shall be construed and administered so as to comply with the
requirements of section 401(a)(13) of the Code.
Section 17.8 Leased Employees.
(a) Subject to section 17.8%, a leased employee shall be treated as
an Employee for purposes of the Plan. For purposes of this section 17.8, the
term "leased employee" means any person (i) who would not, but for the
application of this section 17.8, be an Employee and (ii) who pursuant to an
agreement between the Employer and any other person ("leasing organization") has
performed for the Employer (or for the Employer and related persons determined
in accordance with section 414(n)(6) of the Code), on a substantially full-time
basis for a period of at least one year; (i) prior to January 1, 1997, services
of a type historically performed by employees in the business field of the
Employer; and (ii) after December 31, 1996, services under the primary direction
or control of the Employer.
(b) For purposes of the Plan:
(i) contributions or benefits provided to the leased employee by the
leasing organization which are attributable to services performed for the
Employer shall be treated as provided by the Employer; and
<PAGE>
-62-
(ii) section 17.8(a) shall not apply to a leased employee if:
(A) the number of leased employees performing services for the
Employer does not exceed 20% of the number of the Employer's
Employees who are not Highly Compensated Employees; and
(B) such leased employee is covered by a money purchase
pension plan providing (I) a nonintegrated contribution rate of at
least 10% of the leased employee's compensation; (II) immediate
participation; (III) full and immediate vesting; and (IV) coverage
for all of the employees of the leasing organization (other than
employees who perform substantially all of their services for the
leasing organization).
Section 17.9 Status as an Employee Stock Ownership Plan.
It is intended that the Plan constitute an "employee stock ownership
plan," as defined in section 4975(e)(7) of the Code and section 407(d)(6) of
ERISA. The Plan shall be construed and administered to give effect to such
intent.
<PAGE>
================================================================================
EMPLOYEE STOCK OWNERSHIP PLAN OF TAPPAN ZEE FINANCIAL, INC.
NOTICE TO ALL EMPLOYEES
General Information
1. Employer's Name: U.S.B. Holding Co., Inc.,
successor by merger to Tappan
Zee Financial, Inc.
2. Employer's Address: 100 Dutch Hill Road, Orangeburg,
NY 10962
3. Employer's Federal Tax ID Number: U.S.B. Holding Co., Inc.: 36-3197969
Tappan Zee Financial, Inc.: 13-3840352
4. Address of IRS Key District Director: Internal Revenue Service
P.O. Box 192,
Covington, KY 41012-0192
5. Name of Plan: Employee Stock Ownership Plan of
Tappan Zee Financial, Inc.
6. Plan Number: 002
7. Eligible Employees: Employees of Tappan Zee
Financial, Inc. prior to August
31, 1998
8. Name of Plan Administrator: Mr. Harry G. Murphy
9. Address of Plan Administrator: 100 Dutch Hill Road,
Orangeburg, NY 10962
Attention: Tappan Zee ESOP Plan
Administrator
Qualified Status of Plan
An application is to be made to the Internal Revenue Service for a
determination of the qualification of the Plan identified above, as amended. The
application will be filed on March 8, 1999 with the Key District Director,
Internal Revenue Service, at the address listed above, for an advance
determination as to whether the Plan, as amended meets the qualification
requirements of section 401(a) of the Internal Revenue Code of 1986 ("Code").
The Internal Revenue Service has previously issued a determination with respect
to the qualification of this Plan.
Rights of Interested Parties
Right to Comment. You have the right to submit to the Key District
Director, Internal Revenue Service, at the address listed above, either
individually or jointly with other interested parties, your comments as to
whether the Plan meets the qualification requirements of the Code. You may
instead, individually or jointly with other interested parties, request the
Department of Labor to submit, on your behalf, comments to the Key District
Director regarding the qualified status of the Plan. If the Department of Labor
declines to comment on all or some of the matters you raise, you may,
individually, or jointly if your request of the Department of Labor was made
jointly, submit your comments on these matters directly to the Key District
Director.
Conditions for Comments by the Department of Labor. The Department of
Labor may not comment on behalf of interested parties unless requested to do so
by the lesser of 10 employees or 10% of the employees who qualify as interested
parties. The number of persons needed for the Department of Labor to comment
with respect to the Plan is 2. If you request the Department of Labor to
comment, your request must be in writing and specify: the information listed at
items 1, 2, 3, 5 and 6 in the General Information section of this Notice; the
matters upon which comments are requested; and the number of persons needed for
the Department of Labor to comment. A request of the Department of Labor to
comment would be addressed as follows: Deputy Assistant Secretary, Pension and
Welfare Benefits Administration, U.S. Department of Labor, 200 Constitution
Avenue, N.W., Washington, D.C. 20210, Attention: 3001 Comment Request.
Deadline for Submitting Comments. Comments submitted by you to the IRS Key
District Director must be in writing and must be received by him by April 22,
1999. However, if there are matters that you request the Department of Labor to
comment upon on your behalf and the Department of Labor declines to comment, you
may submit comments on these matters to the Key District Director to be received
by him within 15 days after the date on which the Department of Labor notifies
you that it will not comment on a particular matter, or by April 22, 1999,
whichever is later, but in no event later than May 7, 1999. A request of the
Department of Labor to comment on your behalf must be received by it by March
23, 1999, if you wish to preserve your right to comment on a matter upon which
the Department of Labor declines to comment, or by April 2, 1999, if you wish to
waive that right.
Additional Information
Detailed instructions regarding the requirements for notification of
interested parties may be found in sections 17 and 18 of Revenue Procedure 99-6.
Additional information concerning the Plan (including an updated copy of the
Plan and related trust, the application for determination and any additional
documents that have been submitted to the IRS, and copies of section 17 of the
Revenue Procedure 99-6) is available at the Plan Administrator's office, at the
address listed above, during normal working hours, for inspection and copying.
(There may be a nominal charge for copying and/or mailing).
THIS NOTICE IS REQUIRED BY LAW; IT REQUIRES NO ACTION ON YOUR PART.
February 26, 1999
================================================================================
EMPLOYEE RETENTION AGREEMENT
by and among
TARRYTOWNS BANK, FSB,
TAPPAN ZEE FINANCIAL, INC.
and
JAMES D. HARALAMBIE
---------------------------
Made and Entered Into As of
June 23, 1997
---------------------------
---------------------------
THACHER PROFFITT & WOOD
Two World Trade Center
New York, New York 10048
<PAGE>
EMPLOYEE RETENTION AGREEMENT
This EMPLOYEE RETENTION AGREEMENT ("Agreement") is made and entered
into as of the 23rd day of June, 1997, by and among TARRYTOWNS BANK, FSB, a
savings bank organized and operating under the federal laws of the United States
and having its executive offices at 75 North Broadway, Tarrytown, New York
10591-0187 ("Bank"); TAPPAN ZEE FINANCIAL, Inc., a business corporation
organized and existing under the laws of the State of Delaware and also having
its executive offices at 75 Broadway, Tarrytown, New York 10591-0187 ("Holding
Company"); and James D. Haralambie, an individual residing at 2042 Palmer
Avenue, Larchmont, New York 10538 ("Employee").
W I T N E S S E T H :
WHEREAS, effective as of October 5, 1997, the Bank converted from a
federal mutual savings bank to a federal stock savings bank and has become a
wholly-owned subsidiary of the Holding Company; and
WHEREAS, the Bank desires to secure for itself the continued
availability of the Employee's services; and
WHEREAS, the Bank recognizes that a third party may at some time in
the future pursue a Change of Control of the Bank or the Holding Company and
that this possibility may result in the departure or distraction of the Bank's
employees; and
WHEREAS, the Bank has determined that appropriate steps should be
taken to encourage the continued attention and dedication of the Bank's
employees, including the Employee, to their duties for the Bank without the
distraction that may arise from the possibility of a Change of Control of the
Bank or the Holding Company; and
WHEREAS, the Bank believes that, by assuring certain employees,
including the Employer, of reasonable financial security in the event of a
Change of Control of the Bank or the Holding Company, such employees will be in
a position to perform their duties free from financial self interest and in the
best interests of the Bank and its shareholders; and
WHEREAS, for purposes of securing the Employee's services for the
Bank, the Board of Directors of the Bank ("Board") has authorized the proper
officers of the Bank to enter into an employee retention agreement with the
Employee on the terms and conditions set forth herein; and
WHEREAS, the Board of Directors of the Holding Company has
authorized the Holding Company to guarantee the Bank's obligations under such an
employee retention agreement; and
<PAGE>
-2-
WHEREAS, the Employee is willing to make the Employee's services
available to the Bank on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and obligations hereinafter set forth, the Bank, the Holding Company
and the Employee hereby agree as follows:
Section 1. Effective Date.
(a) This Agreement shall be effective as of the date first above
written and shall remain in effect during the term of this Agreement which shall
be for a period of three (3) years commencing on the date of this Agreement,
plus such extensions as are provided pursuant to section 1(b); provided,
however, that if the term of this Agreement has not otherwise terminated, the
term of this Agreement will terminate on the date of the Employee's termination
of employment with the Bank; and provided, further, that the obligations under
section 8 of this Agreement shall survive the term of this Agreement if payments
become due hereunder.
(b) Prior to each anniversary date of this Agreement, the Board
shall consider the advisability of an extension of the term in light of the
circumstances then prevailing and may, in its discretion, approve an extension
to take effect as of the upcoming anniversary date. If an extension is approved,
the term of this Agreement shall be extended so that it will expire three (3)
years after such anniversary date.
(c) Notwithstanding anything herein contained to the contrary: (i)
the Employee's employment with the Bank may be terminated at any time, subject
to the terms and conditions of this Agreement; and (ii) nothing in this
Agreement shall mandate or prohibit a continuation of the Employee's employment
following the expiration of the Assurance Period upon such terms and conditions
as the Bank and the Employee may mutually agree upon.
Section 2. Assurance Period.
(a) The assurance period ("Assurance Period") shall be for a period
commencing on the date of a Change of Control, as defined in section 10 of this
Agreement, and ending on the second (2nd) anniversary of the date on which the
Assurance Period commences, plus such extensions as are provided pursuant to the
following sentence. The Assurance Period shall be automatically extended for one
(1) additional day each day, unless either the Bank or the Employee elects not
to extend the Assurance Period further by giving written notice to the other
party, in which case the Assurance Period shall become fixed and shall end on
the second (2nd) anniversary of the date on which such written notice is given;
provided, however, that if following a Change of Control, the Office of Thrift
Supervision (or its successor) is the Bank's primary federal regulator, the
Agreement shall be subject to extension not more frequently than annually and
only upon review and approval of the Board.
<PAGE>
-3-
(b) Upon termination of the Employee's employment with the Bank, any
daily extensions provided pursuant to the preceding sentence, if not theretofore
discontinued, shall cease and the remaining unexpired Assurance Period under
this Agreement shall be a fixed period ending on the later of the second (2nd)
anniversary of the date of the Change of Control, as defined in section 10 of
this Agreement, or the second anniversary of the date on which the daily
extensions were discontinued.
Section 3. Duties.
During the period of the Employee's employment that falls within the
Assurance Period, the Employee shall: (a) except to the extent allowed under
section 6 of this Agreement, devote his full business time and attention (other
than during weekends, holidays, vacation periods, and periods of illness,
disability or approved leave of absence) to the business and affairs of the Bank
and use his best efforts to advance the Bank's interests; (b) serve in the
position to which the Employee is appointed by the Bank, which, during the
Assurance Period, shall be the position that the Employee held on the day before
the Assurance Period commenced or any higher office at the Bank to which he may
subsequently be appointed; and (c) subject to the direction of the Board and the
By-laws of the Bank, have such functions, duties, responsibilities and authority
commonly associated with such position.
Section 4. Compensation.
In consideration for the services rendered by the Employee during
the Assurance Period, the Bank shall pay to the Employee during the Assurance
Period a salary at an annual rate equal to the greater of:
(a) the annual rate of salary in effect for the Employee on the day
before the Assurance Period commenced; or
(b) such higher annual rate as may be prescribed by or under the
authority of the Board;
provided, however, that in no event shall the Employee's annual rate of salary
under this Agreement in effect at a particular time during the Assurance Period
be reduced without the Employee's prior written consent. The annual salary
payable under this section 4 shall be subject to review at least once annually
and shall be paid in approximately equal installments in accordance with the
Bank's customary payroll practices. Nothing in this section 4 shall be deemed to
prevent the Employee from receiving additional compensation other than salary
for his services to the Bank, or additional compensation for his services to the
Holding Company, upon such terms and conditions as may be prescribed by or under
the authority of the Board or the Board of Directors of the Holding Company.
<PAGE>
-4-
Section 5. Employee Benefit Plans and Programs.
Except as otherwise provided in this Agreement, the Employee shall,
during the Assurance Period, be treated as an employee of the Bank and be
eligible to participate in and receive benefits under The Tarrytown and North
Tarrytown Savings and Loan Association Retirement Income Plan ("Retirement
Plan"), group life, health (including hospitalization, medical and major
medical), dental, accident and long term disability insurance plans, and such
other employee benefit plans and programs, including, but not limited to, any
incentive compensation plans or programs (whether or not employee benefit plans
or programs), any stock option and appreciation rights plan, employee stock
ownership plan and restricted stock plan, as may from time to time be maintained
by, or cover employees of, the Bank, in accordance with the terms and conditions
of such employee benefit plans and programs and compensation plans and programs
and with the Bank's customary practices.
Section 6. Board Memberships.
The Employee may serve as a member of the boards of directors of
such business, community and charitable organizations as he may disclose to and
as may be approved by the Board (which approval shall not be unreasonably
withheld), and he may engage in personal business and investment activities for
his own account; provided, however, that such service and personal business and
investment activities shall not materially interfere with the performance of his
duties under this Agreement.
Section 7. Working Facilities and Expenses.
During the Assurance Period, the Employee's principal place of
employment shall be at the Bank's executive offices at the address first above
written, or at such other location within Westchester County at which the Bank
shall maintain its principal executive offices, or at such other location as the
Bank and the Employee may mutually agree upon. The Bank shall provide the
Employee, at his principal place of employment, with a private office,
stenographic services and other support services and facilities suitable to his
position with the Bank and necessary or appropriate in connection with the
performance of his assigned duties under this Agreement. The Bank shall
reimburse the Employee for his ordinary and necessary business expenses,
including, without limitation, the Employee's travel and entertainment expenses,
incurred in connection with the performance of the Employee's duties under this
Agreement, upon presentation to the Bank of an itemized account of such expenses
in such form as the Bank may reasonably require.
Section 8. Termination of Employment with Bank Liability.
(a) In the event that the Employee's employment with the Bank shall
terminate during the Assurance Period, or prior to the commencement of the
Assurance Period but within three (3) months of and in connection with a Change
of Control as defined in section 10 of this Agreement on account of:
<PAGE>
-5-
(i) The Employee's voluntary resignation from employment with the
Bank within ninety (90) days following:
(A) the failure of the Bank's Board to appoint or re-appoint
or elect or re-elect the Employee to serve in the same position in
which the Employee was serving, on the day before the Assurance
Period commenced or a more senior office;
(B) the failure of the stockholders of the Holding Company to
elect or re-elect the Employee as a member of the Board, if he was a
member of the Board on the day before the Assurance Period
commenced;
(C) the expiration of a thirty (30) day period following the
date on which the Employee gives written notice to the Bank of its
material failure, whether by amendment of the Bank's Organization
Certificate or By-laws, action of the Board or the Holding Company's
stockholders or otherwise, to vest in the Employee the functions,
duties, or responsibilities vested in the Employee on the day before
the Assurance Period commenced (or the functions, duties and
responsibilities of a more senior office to which the Employee may
be appointed), unless during such thirty (30) day period, the Bank
fully cures such failure;
(D) the failure of the Bank to cure a material breach of this
Agreement by the Bank, within thirty (30) days following written
notice from the Employee of such material breach;
(E) a reduction in the compensation provided to the Employee,
or a material reduction in the benefits provided to the Employee
under the Banks's program of employee benefits, compared with the
compensation and benefits that were provided to the Employee on the
day before the Assurance Period commenced;
(F) a change in the Employee's principal place of employment
that would result in a one-way commuting time in excess of the
greater of (I) 30 minutes or (II) the Employee's commuting time
immediately prior to such change; or
(ii) the discharge of the Employee by the Bank for any reason other
than for "cause" as provided in section 9(a);
then, subject to section 21, the Bank shall provide the benefits and pay to the
Employee the amounts provided for under section 8(b) of this Agreement;
provided, however, that if benefits or payments become due hereunder as a result
of the Employee's termination of employment prior to the commencement of the
Assurance Period, the benefits and payments provided for under section 8(b) of
this Agreement shall be determined as though the Employee had remained in the
<PAGE>
-6-
service of the Bank (upon the terms and conditions in effect at the time of his
actual termination of service) and had not terminated employment with the Bank
until the date on which the Employee's Assurance Period would have commenced.
(b) Upon the termination of the Employee's employment with the Bank
under circumstances described in section 8(a) of this Agreement, the Bank shall
pay and provide to the Employee (or, in the event of the Employee's death, to
the Employee's estate):
(i) the Employee's earned but unpaid compensation (including,
without limitation, all items which constitute wages under section 190.1
of the New York Labor Law and the payment of which is not otherwise
provided for under this section 8(b)) as of the date of the termination of
the Employee's employment with the Bank, such payment to be made at the
time and in the manner prescribed by law applicable to the payment of
wages but in no event later than thirty (30) days after termination of
employment;
(ii) the benefits, if any, to which the Employee is entitled as a
former employee under the employee benefit plans and programs and
compensation plans and programs maintained for the benefit of the Bank's
Employees and employees;
(iii) continued group life, health (including hospitalization,
medical and major medical), dental, accident and long term disability
insurance benefits, in addition to that provided pursuant to section
8(b)(ii) and after taking into account the coverage provided by any
subsequent employer, if and to the extent necessary to provide for the
Employee, for the remaining unexpired Assurance Period, coverage
equivalent to the coverage to which the Employee would have been entitled
under such plans (as in effect on the date of his termination of
employment, or, if his termination of employment occurs after a Change of
Control, on the date of such Change of Control, whichever benefits are
greater) if the Employee had continued working for the Bank during the
remaining unexpired Assurance Period at the highest annual rate of
compensation achieved during the Employee's period of actual employment
with the Bank;
(iv) within thirty (30) days following the Employee's termination of
employment with the Bank, a lump sum payment, in an amount equal to the
present value of the salary that the Employee would have earned if the
Employee had continued working for the Bank during the remaining unexpired
Assurance Period at the highest annual rate of salary achieved during the
Employee's period of actual employment with the Bank, where such present
value is to be determined using a discount rate equal to the applicable
short-term federal rate prescribed under section 1274(d) of the Internal
Revenue Code of 1986 ("Code"), compounded using the compounding periods
corresponding to the Bank's regular payroll periods for its Employees,
such lump sum to be paid in lieu of all other payments of salary provided
for under this Agreement in respect of the period following any such
termination;
<PAGE>
-7-
(v) within thirty (30) days following the Employee's termination of
employment with the Bank, a lump sum payment in an amount equal to the
excess, if any, of:
(A) the present value of the aggregate benefits to which the
Employee would be entitled under any and all qualified and
non-qualified defined benefit pension plans maintained by, or
covering employees of, the Bank if the Employee were 100% vested
thereunder and had continued working for the Bank during the
remaining unexpired Assurance Period such benefits to be determined
as of the date of termination of employment by adding to the service
actually recognized under such plans an additional period equal to
the remaining unexpired Assurance Period and by adding to the
compensation recognized under such plans for the year in which
termination of employment occurs all amounts payable under sections
8(b)(i), (vii), (viii) and (ix);
(B) the present value of the benefits to which the Employee is
actually entitled under such defined benefit pension plans as of the
date of his termination;
where such present values are to be determined using the mortality tables
prescribed under section 415(b)(2)(E)(v) of the Code and a discount rate,
compounded monthly, equal to the annualized rate of interest prescribed by
the Pension Benefit Guaranty Corporation for the valuation of immediate
annuities payable under terminating single-employer defined benefit plans
for the month in which the Employee's termination of employment occurs
("Applicable PBGC Rate").
(vi) within thirty (30) days following the Employee's termination of
employment with the Bank, a lump sum payment in an amount equal to the
present value of the additional employer contributions to which he would
have been entitled under any and all qualified and non-qualified defined
contribution plans maintained by, or covering employees of, the Bank, if
he were 100% vested thereunder and had continued working for the Bank
during the remaining unexpired Assurance Period at the highest annual rate
of compensation achieved during the Employee's period of actual employment
with the Bank, and making the maximum amount of employee contributions, if
any, required under such plan or plans, such present value to be
determined on the basis of the discount rate, compounded using the
compounding period that corresponds to the frequency with which employer
contributions are made to the relevant plan, equal to the Applicable PBGC
Rate;
(vii) the payments that would have been made to the Employee under
any cash bonus or long-term or short-term cash incentive compensation plan
maintained by, or covering employees of, the Bank, if he had continued
working for the Bank during the remaining unexpired Assurance Period and
had earned the maximum
<PAGE>
-8-
bonus or incentive award in each calendar year that ends during the
remaining unexpired Assurance Period, such payments to be equal to the
product of:
(A) the maximum percentage rate at which an award was ever
available to the Employee under such incentive compensation plan;
multiplied by
(B) the salary that would have been paid to the Employee
during each such calendar year at the highest annual rate of salary
achieved during the remaining unexpired Assurance Period, such
payments to be made (without discounting for early payment) within
thirty (30) days following the Employee's termination of employment.
(viii) at the election of the Bank made within thirty (30) days
following the Employee's termination of employment with the Bank, upon the
surrender of options or appreciation rights issued to the Employee under
any stock option and appreciation rights plan or program maintained by, or
covering employees of, the Bank, a lump sum payment in an amount equal to
the product of:
(A) the excess of (I) the fair market value of a share of
stock of the same class as the stock subject to the option or
appreciation right, determined as of the date of termination of
employment, over (II) the exercise price per share for such option
or appreciation right, as specified in or under the relevant plan or
program; multiplied by
(B) the number of shares with respect to which options or
appreciation rights are being surrendered.
For purposes of this section 8(b)(viii) and for purposes of determining
the Employee's right following his termination of employment with the Bank
to exercise any options or appreciation rights not surrendered pursuant
hereto, the Employee shall be deemed to be fully vested in all options and
appreciation rights under any stock option or appreciation rights plan or
program maintained by, or covering employees of, the Bank, even if the
Employee is not vested under such plan or program; and
(ix) at the election of the Bank made within thirty (30) days
following the Employee's termination of employment with the Bank, upon the
surrender of any shares awarded to the Employee under any restricted stock
plan maintained by, or covering employees of, the Bank, a lump sum payment
in an amount equal to the product of:
(A) the fair market value of a share of stock of the same
class of stock granted under such plan, determined as of the date of
the Employee's termination of employment; multiplied by
<PAGE>
-9-
(B) the number of shares which are being surrendered.
For purposes of this section 8(b)(ix) and for purposes of determining the
Employee's right following his termination of employment with the Bank to
any stock not surrendered pursuant hereto, the Employee shall be deemed to
be fully vested in all shares awarded under any restricted stock plan
maintained by, or covering employees of, the Bank, even if the Employee is
not vested under such plan.
The Bank and the Employee hereby stipulate that the damages which may be
incurred by the Employee following any such termination of employment are not
capable of accurate measurement as of the date first above written and that the
payments and benefits contemplated by this section 8(b) constitute reasonable
damages under the circumstances and shall be payable without any requirement of
proof of actual damage and without regard to the Employee's efforts, if any, to
mitigate damages.
Section 9. Termination without Additional Bank Liability.
In the event that the Employee's employment with the Bank shall
terminate during the Assurance Period on account of:
(a) the discharge of the Employee for "cause," which, for purposes
of this Agreement shall mean personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any
law, rule or regulation (other than traffic violations or similar
offenses) or final cease and desist order, or any material breach of this
Agreement, in each case as measured against standards generally prevailing
at the relevant time in the savings and community banking industry;
provided, however, that the Employee shall not be deemed to have been
discharged for cause unless and until he shall have received a written
notice of termination from the Board, accompanied by a resolution duly
adopted by affirmative vote of a majority of the entire Board at a meeting
called and held for such purpose (after reasonable notice to the Employee
and a reasonable opportunity for the Employee to make oral and written
presentations to the members of the Board, on his own behalf, or through a
representative, who may be his legal counsel, to refute the grounds for
the proposed determination) finding that in the good faith opinion of the
Board grounds exist for discharging the Employee for cause; or
(b) the Employee's voluntary resignation from employment with the
Bank for reasons other than those specified in section 8(a)(i); or
(c) the Employee's death; or
<PAGE>
-10-
(d) a determination that the Employee is eligible for long-term
disability benefits under the Bank's long-term disability insurance
program or, if there is no such program, under the federal Social Security
Act;
then the Bank shall have no further obligations under this Agreement, other than
the payment to the Employee (or, in the event of his death, to his estate) of
his earned but unpaid salary as of the date of the termination of his
employment, and the provision of such other benefits, if any, to which the
Employee is entitled as a former employee under the employee benefit plans and
programs and compensation plans and programs maintained by, or covering
employees of, the Bank.
Section 10. Change of Control.
(a) A Change of Control of the Bank ("Change of Control") shall be
deemed to have occurred upon the happening of any of the following events:
(i) approval by the stockholders of the Bank of a transaction that
would result in the reorganization, merger or consolidation of the Bank,
respectively, with one or more other persons, other than a transaction
following which:
(A) at least 51% of the equity ownership interests of the
entity resulting from such transaction are beneficially owned
(within the meaning of Rule 13d-3 promulgated under the Exchange
Act) in substantially the same relative proportions by persons who,
immediately prior to such transaction, beneficially owned (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) at
least 51% of the outstanding equity ownership interests in the Bank;
and
(B) at least 51% of the securities entitled to vote generally
in the election of directors of the entity resulting from such
transaction are beneficially owned (within the meaning of Rule 13d-3
promulgated under the Exchange Act) in substantially the same
relative proportions by persons who, immediately prior to such
transaction, beneficially owned (within the meaning of Rule 13d-3
promulgated under the Exchange Act) at least 51% of the securities
entitled to vote generally in the election of directors of the Bank;
(ii) the acquisition of substantially all of the assets of the Bank
or beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 20% or more of the outstanding securities of
the Bank entitled to vote generally in the election of directors by any
person or by any persons acting in concert, or approval by the
stockholders of the Bank of any transaction which would result in an
acquisition; or
(iii) a complete liquidation or dissolution of the Bank, or approval
by the stockholders of the Bank of a plan for such liquidation or
dissolution;
<PAGE>
-11-
(iv) the occurrence of any event if, immediately following such
event, at least fifty percent (50%) of the members of the Board do not
belong to any of the following groups:
(A) individuals who were members of the Board on the date of
this Agreement; or
(B) individuals who first became members of the Board after
the date of this Agreement either:
(1) upon election to serve as a member of the Board by
affirmative vote of three-quarters (3/4) of the members of
such Board, or a nominating committee thereof, in office at
the time of such first election; or
(2) upon election by the stockholders of the Board to
serve as a member of the Board, but only if nominated for
election by affirmative vote of three-quarters (3/4) of the
members of the Board, or of a nominating committee thereof, in
office at the time of such first nomination;
provided, however, that such individual's election or nomination did not
result from an actual or threatened election contest (within the meaning
of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents (within the
meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) other than by or on behalf of the Board of the Bank;
(v) any event which would be described in section 10(a)(i), (ii),
(iii) or (iv) if the term "Holding Company" were substituted for the term
"Bank" therein.
(b) In no event, however, shall a Change of Control be deemed to
have occurred as a result of any acquisition of securities or assets of the
Holding Company, the Bank or any subsidiary of either of them, by the Holding
Company, the Bank or any subsidiary of either of them, or by any employee
benefit plan maintained by any of them.
Section 11. No Effect on Employee Benefit Plans or Programs.
The termination of the Employee's employment during the Assurance
Period or thereafter, whether by the Bank or by the Employee, shall have no
effect on the rights and obligations of the parties hereto under the Bank's
Retirement Plan, group life, health (including hospitalization, medical and
major medical), dental, accident and long term disability insurance plans or
such other employee benefit plans or programs, or compensation plans or programs
(whether or not employee benefit plans or programs) and any defined contribution
plan, employee stock ownership plan, stock option and appreciation rights plan,
and restricted stock plan, as may
<PAGE>
-12-
be maintained by, or cover employees of, the Bank from time to time; provided,
however, that nothing in this Agreement shall be deemed to duplicate any
compensation or benefits provided under any agreement, plan or program covering
the Employee to which the Bank or the Holding Company is a party and any
duplicative amount payable under any such agreement, plan or program shall be
applied as an offset to reduce the amounts otherwise payable hereunder.
Section 12. Successors and Assigns.
This Agreement will inure to the benefit of and be binding upon the
Employee, his legal representatives and testate or intestate distributees, and
the Bank and the Holding Company, their respective successors and assigns,
including any successor by merger or consolidation or a statutory receiver or
any other person or firm or corporation to which all or substantially all of the
respective assets and business of the Bank or the Holding Company may be sold or
otherwise transferred.
Section 13. Notices.
Any communication required or permitted to be given under this
Agreement, including any notice, direction, designation, consent, instruction,
objection or waiver, shall be in writing and shall be deemed to have been given
at such time as it is delivered personally, or five (5) days after mailing if
mailed, postage prepaid, by registered or certified mail, return receipt
requested, addressed to such party at the address listed below or at such other
address as one such party may by written notice specify to the other party:
If to the Employee:
Mr. James D. Haralambie
2042 Palmer Avenue
Larchmont, New York 10538
If to the Bank:
Tarrytowns Bank, FSB
75 North Broadway
Tarrytown, New York 10591-0187
Attention: Corporate Secretary
<PAGE>
-13-
with a copy to..
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
Attention: W. Edward Bright, Esq.
If to the Holding Company:
Tappan Zee Financial, Inc.
75 North Broadway
Tarrytown, New York 10591
Attention: Chairman of the Board
with a copy to:
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
Attention: W. Edward Bright, Esq.
Section 14. Indemnification and Attorneys' Fees.
The Bank shall indemnify, hold harmless and defend the Employee
against reasonable costs, including legal fees, incurred by the Employee in
connection with or arising out of any action, suit or proceeding in which the
Employee may be involved, as a result of the Employee's efforts, in good faith,
to defend or enforce the terms of this Agreement; provided, however, that the
Employee shall have substantially prevailed on the merits pursuant to a
judgment, decree or order of a court of competent jurisdiction or of an
arbitrator in an arbitration proceeding, or in a settlement. For purposes of
this Agreement, any settlement agreement which provides for payment of any
amounts in settlement of the Bank's obligations hereunder shall be conclusive
evidence of the Employee's entitlement to indemnification hereunder, and any
such indemnification payments shall be in addition to amounts payable pursuant
to such settlement agreement, unless such settlement agreement expressly
provides otherwise.
Section 15. Severability.
A determination that any provision of this Agreement is invalid or
unenforceable shall not affect the validity or enforceability of any other
provision hereof.
<PAGE>
-14-
Section 16. Waiver.
Failure to insist upon strict compliance with any of the terms,
covenants or conditions hereof shall not be deemed a waiver of such term,
covenant, or condition. A waiver of any provision of this Agreement must be made
in writing, designated as a waiver, and signed by the party against whom its
enforcement is sought. Any waiver or relinquishment of any right or power
hereunder at any one or more times shall not be deemed a waiver or
relinquishment of such right or power at any other time or times.
Section 17. Counterparts.
This Agreement may be executed in two (2) or more counterparts, each
of which shall be deemed an original, and all of which shall constitute one and
the same Agreement.
Section 18. Governing Law.
This Agreement shall be governed by and construed and enforced in
accordance with the federal laws of the United States, and in the absence of
controlling federal law, the laws of the State of New York, without reference to
conflicts of law principles.
Section 19. Headings and Construction.
The headings of sections in this Agreement are for convenience of
reference only and are not intended to qualify the meaning of any section. Any
reference to a section number shall refer to a section of this Agreement, unless
otherwise stated.
Section 20. Entire Agreement; Modifications.
This instrument contains the entire agreement of the parties
relating to the subject matter hereof, and supersedes in its entirety any and
all prior agreements, understandings or representations relating to the subject
matter hereof. No modifications of this Agreement shall be valid unless made in
writing and signed by the parties hereto.
Section 21. Required Regulatory Provisions.
The following provisions are included for the purposes of complying
with various laws, rules and regulations applicable to the Bank:
(a) Notwithstanding anything herein contained to the contrary, in no
event shall the aggregate amount of compensation payable to the Employee
under section 8(b) hereof (exclusive of amounts described in section
8(b)(i), (viii) and (ix)) exceed the three times the Employee's average
annual total compensation for the last five consecutive calendar years to
end prior to his termination of employment with the Bank (or for his
entire period of employment with the Bank if less than five calendar
years).
<PAGE>
-15-
(b) Notwithstanding anything herein contained to the contrary, any
payments to the Employee by the Bank, whether pursuant to this Agreement
or otherwise, are subject to and conditioned upon their compliance with
section 18(k) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C.
ss.1828(k), and any regulations promulgated thereunder.
(c) Notwithstanding anything herein contained to the contrary, if
the Employee is suspended from office and/or temporarily prohibited from
participating in the conduct of the affairs of the Bank pursuant to a
notice served under section 8(e)(3) or 8(g)(1) of the FDI Act, 12 U.S.C.
ss.1818(e)(3) or 18l8(g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service of such notice, unless stayed
by appropriate proceedings. If the charges in such notice are dismissed,
the Bank, in its discretion, may (i) pay to the Employee all or part of
the compensation withheld while the Bank's obligations hereunder were
suspended and (ii) reinstate, in whole or in part, any of the obligations
which were suspended.
(d) Notwithstanding anything herein contained to the contrary, if
the Employee is removed and/or permanently prohibited from participating
in the conduct of the Bank's affairs by an order issued under section
8(e)(4) or 8(g)(1) of the FDI Act, 12 U.S.C. ss.1818(e)(4) or (g)(1), all
prospective obligations of the Bank under this Agreement shall terminate
as of the effective date of the order, but vested rights and obligations
of the Bank and the Employee shall not be affected.
(e) Notwithstanding anything herein contained to the contrary, if
the Bank is in default (within the meaning of section 3(x)(1) of the FDI
Act, 12 U.S.C. ss.1813(x)(1), all prospective obligations of the Bank
under this Agreement shall terminate as of the date of default, but vested
rights and obligations of the Bank and the Employee shall not be affected.
(f) Notwithstanding anything herein contained to the contrary, all
prospective obligations of the Bank hereunder shall be terminated, except
to the extent that a continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of
Thrift Supervision ("OTS") or his designee or the Federal Deposit
Insurance Corporation ("FDIC"), at the time the FDIC enters into an
agreement to provide assistance to or on behalf of the Bank under the
authority contained in section 13(c) of the FDI Act, 12 U.S.C. ss.1823(c);
(ii) by the Director of the OTS or his designee at the time such Director
or designee approves a supervisory merger to resolve problems related to
the operation of the Bank or when the Bank is determined by such Director
to be in an unsafe or unsound condition. The vested rights and obligations
of the parties shall not be affected.
Section 22. Guaranty.
<PAGE>
-16-
The Holding Company hereby irrevocably and unconditionally
guarantees to the Employee the payment of all amounts, and the performance of
all other obligations, due from the Bank in accordance with the terms of this
Agreement as and when due without any requirement of presentment, demand of
payment, protest or notice of dishonor or nonpayment.
IN WITNESS WHEREOF, the Bank and the Holding Company have caused
this Agreement to be executed and the Employee has hereunto set his hand, all as
of the day and year first above written.
/s/ James D. Haralambie
-------------------------------
JAMES D. HARALAMBIE
ATTEST: TARRYTOWNS BANK, FSB
By /s/ [ILLEGIBLE]
---------------
Secretary By /s/ Marvin Levy
----------------------------
Name: Marvin Levy
Title: Chairman of the Board
[Seal]
ATTEST: TAPPAN ZEE FINANCIAL, INC.
By /s/ [ILLEGIBLE]
---------------
Secretary By /s/ Marvin Levy
----------------------------
Name: Marvin Levy
Title: Chairman of the Board
[Seal]
<PAGE>
STATE OF NEW YORK )
:ss.:
COUNTY OF WESTCHESTER )
On this 8 day of July, 1997, before me personally came James D.
Haralambie, to me known, and known to me to be the individual described in the
foregoing instrument, who, being by me duly sworn, did depose and say that he
resides at the address set forth in said instrument, and that he signed his name
to the foregoing instrument.
/s/ Christina Vidal
-------------------
Notary Public
CHRISTINA VIDAL
Notary Public, State of New York
No. 4915964
Qualified in Westchester County
Commission Expires May 2, 1998
STATE OF NEW YORK )
:ss.:
COUNTY OF WESTCHESTER )
On this 8 day of July, 1997, before me personally came Marvin Levy,
to me known, who, being by me duly sworn, did depose and say that he resides at
257 Benedict Avenue, Tarrytown, New York 10591 that he is a member of the Board
of Directors of TARRYTOWNS BANK, FSB, the savings bank described in and which
executed the foregoing instrument; that he knows the seal of said savings bank;
that the seal affixed to said instrument is such seal; that it was so affixed by
authority of the Board of Directors of said savings bank; and that he signed his
name thereto by like authority.
/s/ Christina Vidal
-------------------
Notary Public
CHRISTINA VIDAL
Notary Public, State of New York
No. 4915964
Qualified in Westchester County
Commission Expires May 2, 1998
STATE OF NEW YORK )
:ss.:
COUNTY OF WESTCHESTER )
On this 8 day July, 1997, before me personally came Marvin Levy, to
me known, who, being by me duly sworn, did depose and say that he resides at 257
Benedict Avenue, Tarrytown, New York 10591, that he is a member of the Board of
Directors of TAPPAN ZEE FINANCIAL, INC., the corporation described in and which
executed the foregoing instrument; that he knows the seal of said corporation;
that the seal affixed to said instrument is such seal; that it was so affixed by
order of the Board of Directors of said corporation; and that he signed his name
thereto by like order.
/s/ Christina Vidal
-------------------
Notary Public
CHRISTINA VIDAL
Notary Public, State of New York
No. 4915964
Qualified in Westchester County
Commission Expires May 2, 1998
EXHIBIT 11
U.S.B. HOLDING CO., INC.
COMPUTATION OF EARNINGS PER SHARE
For the Three Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(000's, except share amount)
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net Income $ 12,009 $ 11,499 $ 10,269
Less preferred stock dividends 45 45 294
- ------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings
per share - net income available to
common stockholders $ 11,964 $ 11,454 $ 9,975
- ------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share -
weighted average shares 15,493,765 15,331,962 15,320,858
Effects of dilutive securities:
Director and employee stock options 1,046,025 1,279,759 780,288
Restricted stock not vested 10,446 17,161 12,985
- ------------------------------------------------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted average shares 16,550,236 16,628,882 16,114,131
- ------------------------------------------------------------------------------------------
Basic earnings per share $ 0.77 $ 0.75 $ 0.65
Diluted earnings per share $ 0.72 $ 0.69 $ 0.62
- ------------------------------------------------------------------------------------------
</TABLE>
U.S.B. HOLDING CO., INC.
SUBSIDIARIES
EXHIBIT 21
December 31, 1998
Union State Bank
100 Dutch Hill Road
Orangeburg, New York 10962
U.S.B. Financial Services, Inc. (subsidiary of Union State Bank)
100 Dutch Hill Road
Orangeburg, New York 10962
Dutch Hill Realty Corp. (subsidiary of Union State Bank)
100 Dutch Hill Road
Orangeburg, New York 10962
Union State Capital Trust I
100 Dutch Hill Road
Orangeburg, New York 10962
Ad Con, Inc.
100 Dutch Hill Road
Orangeburg, New York 10962
Tarrytowns Bank, FSB
75 North Broadway
Tarrytown, New York 10591
TPNZ Preferred Funding Corporation (subsidiary of Tarrytowns Bank, FSB)
75 North Broadway
Tarrytown, New York 10591
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-72788 of U.S.B. Holding Co., Inc. (the "Company") on Form S-3 and
Registration Statement Nos. 333-56169, 333-43797, 333-27451, 33-80678 and
2-90674 on Forms S-8 of our report dated January 28, 1999 incorporated by
reference in the Company's 1998 Annual Report on Form 10-K and appearing in the
Company's 1998 Annual Report to Shareholders.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Stamford, Connecticut
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 23,660
<INT-BEARING-DEPOSITS> 1,877
<FED-FUNDS-SOLD> 45,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 379,514
<INVESTMENTS-CARRYING> 67,019
<INVESTMENTS-MARKET> 70,284
<LOANS> 731,368
<ALLOWANCE> 8,889
<TOTAL-ASSETS> 1,288,812
<DEPOSITS> 958,640
<SHORT-TERM> 200,115
<LIABILITIES-OTHER> 7,131
<LONG-TERM> 0
0
0
<COMMON> 162
<OTHER-SE> 97,277
<TOTAL-LIABILITIES-AND-EQUITY> 1,298,812
<INTEREST-LOAN> 58,735
<INTEREST-INVEST> 29,046
<INTEREST-OTHER> 2,761
<INTEREST-TOTAL> 90,542
<INTEREST-DEPOSIT> 38,180
<INTEREST-EXPENSE> 47,414
<INTEREST-INCOME-NET> 43,128
<LOAN-LOSSES> 1,239
<SECURITIES-GAINS> 1,382
<EXPENSE-OTHER> 31,922
<INCOME-PRETAX> 15,381
<INCOME-PRE-EXTRAORDINARY> 15,381
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,009
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.72
<YIELD-ACTUAL> 8.01
<LOANS-NON> 2,355
<LOANS-PAST> 173
<LOANS-TROUBLED> 718
<LOANS-PROBLEM> 773
<ALLOWANCE-OPEN> 8,260
<CHARGE-OFFS> 694
<RECOVERIES> 94
<ALLOWANCE-CLOSE> 8,889
<ALLOWANCE-DOMESTIC> 8,889
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 20,405
<INT-BEARING-DEPOSITS> 2,401
<FED-FUNDS-SOLD> 32,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 266,589
<INVESTMENTS-CARRYING> 172,708
<INVESTMENTS-MARKET> 175,842
<LOANS> 621,992
<ALLOWANCE> 8,260
<TOTAL-ASSETS> 1,152,743
<DEPOSITS> 902,788
<SHORT-TERM> 133,803
<LIABILITIES-OTHER> 5,854
<LONG-TERM> 0
0
0
<COMMON> 71,067
<OTHER-SE> 14,811
<TOTAL-LIABILITIES-AND-EQUITY> 1,152,743
<INTEREST-LOAN> 52,732
<INTEREST-INVEST> 25,676
<INTEREST-OTHER> 1,728
<INTEREST-TOTAL> 80,136
<INTEREST-DEPOSIT> 35,200
<INTEREST-EXPENSE> 41,785
<INTEREST-INCOME-NET> 38,351
<LOAN-LOSSES> 2,362
<SECURITIES-GAINS> 1,113
<EXPENSE-OTHER> 24,398
<INCOME-PRETAX> 16,521
<INCOME-PRE-EXTRAORDINARY> 16,521
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,499
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.69
<YIELD-ACTUAL> 8.21
<LOANS-NON> 7,254
<LOANS-PAST> 216
<LOANS-TROUBLED> 867
<LOANS-PROBLEM> 150
<ALLOWANCE-OPEN> 6,402
<CHARGE-OFFS> 669
<RECOVERIES> 165
<ALLOWANCE-CLOSE> 8,260
<ALLOWANCE-DOMESTIC> 8,260
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 19,733
<INT-BEARING-DEPOSITS> 1,537
<FED-FUNDS-SOLD> 16,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 205,138
<INVESTMENTS-CARRYING> 99,142
<INVESTMENTS-MARKET> 101,012
<LOANS> 559,281
<ALLOWANCE> 6,402
<TOTAL-ASSETS> 925,290
<DEPOSITS> 780,607
<SHORT-TERM> 59,692
<LIABILITIES-OTHER> 4,476
<LONG-TERM> 0
0
3,250
<COMMON> 40,224
<OTHER-SE> 34,618
<TOTAL-LIABILITIES-AND-EQUITY> 925,290
<INTEREST-LOAN> 45,268
<INTEREST-INVEST> 19,183
<INTEREST-OTHER> 1,251
<INTEREST-TOTAL> 65,702
<INTEREST-DEPOSIT> 29,837
<INTEREST-EXPENSE> 31,676
<INTEREST-INCOME-NET> 34,026
<LOAN-LOSSES> 2,344
<SECURITIES-GAINS> 842
<EXPENSE-OTHER> 21,566
<INCOME-PRETAX> 15,369
<INCOME-PRE-EXTRAORDINARY> 15,369
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,269
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.62
<YIELD-ACTUAL> 8.20
<LOANS-NON> 9,568
<LOANS-PAST> 295
<LOANS-TROUBLED> 2,101
<LOANS-PROBLEM> 650
<ALLOWANCE-OPEN> 4,558
<CHARGE-OFFS> 598
<RECOVERIES> 98
<ALLOWANCE-CLOSE> 6,402
<ALLOWANCE-DOMESTIC> 6,402
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 24,050
<INT-BEARING-DEPOSITS> 4,527
<FED-FUNDS-SOLD> 19,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 212,433
<INVESTMENTS-CARRYING> 69,702
<INVESTMENTS-MARKET> 72,280
<LOANS> 443,169
<ALLOWANCE> 4,558
<TOTAL-ASSETS> 793,573
<DEPOSITS> 700,543
<SHORT-TERM> 10,000
<LIABILITIES-OTHER> 6,774
<LONG-TERM> 0
0
3,750
<COMMON> 23,474
<OTHER-SE> 46,469
<TOTAL-LIABILITIES-AND-EQUITY> 793,573
<INTEREST-LOAN> 37,640
<INTEREST-INVEST> 17,644
<INTEREST-OTHER> 1,991
<INTEREST-TOTAL> 57,275
<INTEREST-DEPOSIT> 27,411
<INTEREST-EXPENSE> 28,291
<INTEREST-INCOME-NET> 28,984
<LOAN-LOSSES> 1,290
<SECURITIES-GAINS> 255
<EXPENSE-OTHER> 20,148
<INCOME-PRETAX> 15,084
<INCOME-PRE-EXTRAORDINARY> 15,084
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,164
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.63
<YIELD-ACTUAL> 8.26
<LOANS-NON> 5,018
<LOANS-PAST> 650
<LOANS-TROUBLED> 4,074
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,970
<CHARGE-OFFS> 773
<RECOVERIES> 71
<ALLOWANCE-CLOSE> 4,558
<ALLOWANCE-DOMESTIC> 4,558
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
Exhibit 99
[Letterhead of KPMG]
Independent Auditors' Report
Board of Directors and Shareholders
Tappan Zee Financial, Inc.:
We have audited the accompanying consolidated balance sheet of Tappan Zee
Financial, Inc. and subsidiaries as of March 31, 1998, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the two-year period ended 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, such 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 the results of their
operations and their cash flows for each of the years in the two-year period
ended March 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Short Hills, New Jersey
April 28, 1998
