<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-26466
TAPPAN ZEE FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3840352
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
75 NORTH BROADWAY, TARRYTOWN, NEW YORK 10591-0187
(Address of principal executive offices) (Zip Code)
(914) 631-0344
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(Not applicable)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), 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. [ ]
As of May 31, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $18,524,000 based on the closing price on
the that date and a total of 1,534,062 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Shareholders for fiscal 1997
are incorporated herein by reference into Item 1 of Part I and Items 5,6,7
and 8 of Part II.
(2) Portions of the definitive Proxy Statement for the Registrant's 1997
Annual Meeting of Shareholders are incorporated herein by reference into
Items 10, 11, 12 and 13 of Part III.
<PAGE> 2
TAPPAN ZEE FINANCIAL, INC.
PART I
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1. Business 2
Item 2. Properties 25
Item 3. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 25
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 25
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and Management 26
Item 13. Certain Relationships and Related Transactions 26
26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 27
Signatures 30
</TABLE>
Explanatory Note: This Annual Report on Form 10-K contains certain
forward-looking statements consisting of estimates with respect to the financial
condition, results of operations and business of the Company that are subject to
various factors which could cause actual results to differ materially from these
estimates. These factors include changes in general, economic and market, and
legislative and regulatory conditions, and the development of an interest rate
environment that adversely affects the interest rate spread or other income
anticipated from the Company's operations and investments.
1
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PART I
ITEM 1. BUSINESS
GENERAL
Tappan Zee Financial, Inc. (the "Registrant") is the unitary savings
bank holding company for Tarrytowns Bank, FSB (the "Bank"), a federally
chartered savings bank and wholly-owned subsidiary of the Registrant. On October
5, 1995, the Bank converted from a mutual savings bank to a stock savings bank
(the " Conversion"). Collectively, the Registrant and the Bank are referred to
herein as the "Company." Concurrent with the Conversion, the Registrant sold
1,620,062 shares of its common stock in a subscription and community offering at
a price of $10 per share, for net proceeds of $14.9 million (the "Stock
Offering").
The Company's primary market area consists of the Village of Tarrytown
and its neighboring communities in Westchester County, New York with business
conducted from one office located in Tarrytown, New York. The Bank is a
community-oriented savings institution whose business primarily consists of
accepting deposits from customers within its market area and investing those
funds in mortgage loans secured by one- to four-family residences. To a
significantly lesser extent, funds are invested in multi-family, commercial real
estate, construction, commercial business and consumer loans. The Company also
invests in mortgage-backed and other securities. The Registrant has no business
activities other than its ownership of the Bank.
The Company's results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
its interest-earning assets, such as loans and securities, and the interest
expense on its interest-bearing liabilities, such as deposits. The Company also
generates non-interest income such as service charges and other fees. The
Company's non-interest expense consists of compensation and benefits, occupancy
expenses, federal deposit insurance costs, data processing service fees, net
costs of real estate owned and other operating expenses. The Company's results
of operations are significantly affected by general economic and competitive
conditions (particularly changes in market interest rates), government policies,
changes in accounting standards and actions of regulatory agencies.
MARKET AREA AND COMPETITION
The Company's deposit gathering and lending markets are concentrated in
the communities surrounding its office in the Village of Tarrytown located in
Westchester County, New York, although the Company also lends to borrowers
located in other areas of Westchester County. Westchester County borders New
York City to the south, Connecticut to the east, northern New Jersey and the
County of Rockland in New York to the west and the New York County of Putnam to
the north. In addition to being a suburb of New York City, Westchester contains
villages, towns and cities with shopping, office and industrial centers, as well
as farms and rural areas. The population of Westchester County is approximately
885,000. The population of the Village of Tarrytown exceeds 10,000, with a
median household income of approximately $45,000.
Some of the nation's major corporations have Westchester operations,
including IBM Corporation, Texaco Inc., AT&T, NYNEX, PepsiCo, Inc., Readers
Digest, Inc., Tambrands, Inc., Kraft General Foods, Inc., Metro-North Commuter
Railroad Company and Consolidated Edison of New York, Inc. Many other
industrial, insurance, educational, financial and health service corporations
employ significant numbers of local residents and also serve to meet the
educational, cultural and social needs of the area. The labor force contains
larger percentages of professional, technical and clerical workers than New York
State as a whole. However, many companies have downsized their operations and
staff sizes in the last few years. For example, in June 1996 General Motors
closed its plant located in the Village of North Tarrytown, which employed
approximately 2,100 people. Many of the employees who worked at the plant did
not live in Tarrytown or its neighboring communities, therefore, the plant
closing has not had a material adverse effect on the Company's operations.
However, it is the Company's understanding that a substantial portion of North
Tarrytown's tax base is attributable to the General Motors plant. It is possible
that the commercial businesses and homeowners in North Tarrytown and Tarrytown
(which comprise a single school district) will face higher property tax
assessments due to the plant closing. This could adversely affect the ability of
those commercial businesses and homeowners who are borrowers of the Company to
continue to repay their outstanding loans in a timely fashion. The Company,
however, is unable to determine at this time the ultimate impact of any such
event.
The Northeast region of the United States, which includes the Company's
market area, was affected by the prolonged recession that occurred in the early
1990s, which resulted in a contraction of economic activity and a deterioration
of the local real estate market. Since then, the local economy has shown signs
of improvement. However, if another recession were to occur, and as a result the
Company were to experience a significant increase in non-performing assets, it
is likely that the
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Company's future operating results would be affected by (i) significant
provisions for loan losses and reduced interest income, (ii) significant
provisions for real estate owned losses, and (iii) significant costs incurred in
connection with managing foreclosed properties and collection efforts on
delinquent loans.
The Company faces substantial competition for both the deposits it
accepts and the loans it makes. Westchester County has a high density of
financial institutions, including branch offices of major commercial banks, all
of which compete with the Company to varying degrees. The Village of Tarrytown
has full-service branch offices of the following commercial banks: First Union
National Bank, Chase Bank, Fleet Bank, Bank of New York and Union State Bank.
The Company also encounters significant competition for deposits from commercial
banks, savings banks and savings and loan associations located in Westchester
County, as well as short-term money market securities, money market mutual
funds, and corporate and government securities. Due to the size of the Company
relative to its competitors, the Company offers a more limited product line than
many competitors, with an emphasis on product delivery and customer service
rather than a very broad product line. The Company competes for deposits by
offering a variety of customer services and deposit accounts at generally
competitive interest rates. The Company's competition for loans comes
principally from savings banks, savings and loan associations, commercial banks,
mortgage bankers, brokers and other institutional lenders. The Company competes
for loans primarily by emphasizing the quality of its loan services and by
charging loan fees and interest rates that are generally competitive within its
market area. Changes in the demand for loans relative to the availability of
credit may affect the level of competition from financial institutions which may
be more willing than the Company or its competitors to make credit available but
which have not generally engaged in lending activities in the Company's market
area in the past. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions.
LENDING ACTIVITIES
Loan Portfolio Composition. The Company's loan portfolio consists
primarily of conventional first mortgage loans secured by one- to four-family
residences. At March 31, 1997, the Company had total net loans outstanding of
$55.1 million (gross loans of $56.3 million less the allowance for loan losses,
unearned discounts and net deferred loan fees). A total of $44.0 million, or
79.8% of net loans, were one- to four-family, residential mortgage loans. The
following table sets forth the composition of the Company's loan portfolio in
dollar amounts and as a percentage of the portfolio at the dates indicated:
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------------------------------------------------
1997 1996
---------------------------- ---------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ --------
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $ 43,958 79.76% $ 38,762 75.75%
Multi-family 2,289 4.15 3,287 6.42
Commercial 3,910 7.09 3,561 6.96
Construction,net 1,719 3.12 2,462 4.81
Net deferred loan fees (279) (0.51) (284) (0.55)
-------- ----- -------- -----
Total mortgage loans 51,597 93.61 47,788 93.39
Commercial loans:
Commercial business loans, net 2,831 5.14 2,727 5.33
Net deferred loan fees (1) -- (1) --
-------- ----- -------- -----
Total commercial loans 2,830 5.14 2,726 5.33
Consumer loans:
Automobile loans 781 1.42 724 1.41
Other consumer loans 797 1.45 821 1.60
Unearned discounts (239) (0.43) (235) (0.46)
Net deferred loan costs 4 0.01 4 0.01
-------- ----- -------- -----
Total consumer loans 1,343 2.45 1,314 2.56
Allowance for loan losses (660) (1.20) (654) (1.28)
-------- ----- -------- -----
Total loans, net $ 55,110 100.00% $ 51,174 100.00%
======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------------------------------------------------------------------
1995 1994 1993
-------------------------- -------------------------- -----------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $ 39,020 77.68% $ 36,011 79.98% $ 35,634 77.11%
Multi-family 3,443 6.85 2,649 5.88 2,757 5.97
Commercial 4,019 8.00 2,965 6.59 2,958 6.40
Construction,net 1,115 2.22 824 1.83 1,462 3.16
Net deferred loan fees (324) (0.64) (278) (0.62) (237) (0.51)
-------- ----- -------- ----- -------- -----
Total mortgage loans 47,273 94.11 42,171 93.66 42,574 92.13
Commercial loans:
Commercial business loans, net 2,415 4.81 2,211 4.91 2,878 6.23
Net deferred loan fees (1) -- (1) -- -- --
-------- ----- -------- ----- -------- -----
Total commercial loans 2,414 4.81 2,210 4.91 2,878 6.23
Consumer loans:
Automobile loans 603 1.20 415 0.92 501 1.08
Other consumer loans 789 1.57 1,003 2.23 994 2.15
Unearned discounts (199) (0.40) (236) (0.52) (258) (0.56)
Net deferred loan costs 3 0.01 3 -- 4 0.01
-------- ----- -------- ----- -------- -----
Total consumer loans 1,196 2.38 1,185 2.63 1,241 2.68
Allowance for loan losses (650) (1.30) (540) (1.20) (482) (1.04)
-------- ----- -------- ----- -------- -----
Total loans, net $ 50,233 100.00% $ 45,026 100.00% $ 46,211 100.00%
======== ===== ======== ===== ======== =====
</TABLE>
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The types of loans that the Company may originate are subject to
federal and state laws and regulations. Interest rates charged by the Company on
loans are affected by the demand for such loans, the supply of money available
for lending purposes and the rates offered by competitors. These factors are
affected by, among other things, economic conditions, monetary policies of the
federal government, including the Federal Reserve Board ("FRB"), and legislative
tax policies.
Loan Maturity. The following table shows the contractual maturity
of the Company's gross loans at March 31, 1997. The table reflects the entire
unpaid principal balance in the maturity period that includes the final loan
payment dates and, accordingly, does not give effect to periodic principal
repayments or possible prepayments. Principal repayments and prepayments totaled
$7.9 million, $8.2 million and $9.5 million for the years ended March 31, 1997,
1996 and 1995, respectively.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
----------------------------------------------------------------
ONE-TO FOUR- MULTI- COMMERCIAL
FAMILY FAMILY MORTGAGE CONSTRUCTION
------ ------ -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Contractual maturity:
One year or less $ 1,058 $ 485 $ 441 $1,719
------- ------ ------ ------
After one year:
More than 1 year to 5 years 2,085 1,334 2,644 --
More than 5 years 40,815 470 825 --
------- ------ ------ ------
Total after one year 42,900 1,804 3,469 --
------- ------ ------ ------
Total amount due $43,958 $2,289 $3,910 $1,719
======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1997
------------------------------------------
COMMERCIAL
BUSINESS CONSUMER TOTAL
-------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Contractual maturity:
One year or less $1,571 $ 81 $ 5,355
------ ------ -------
After one year:
More than 1 year to 5 years 1,100 1,280 8,443
More than 5 years 160 217 42,487
------ ------ -------
Total after one year 1,260 1,497 50,930
------ ------ -------
Total amount due $2,831 $1,578 $56,285
====== ====== =======
</TABLE>
The following table sets forth the dollar amounts in each loan
category at March 31, 1997 that are contractually due after March 31, 1998, and
whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER MARCH 31, 1998
-----------------------------------------------------------
FIXED ADJUSTABLE TOTAL
---------------- --------------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans (1):
One-to four-family $30,541 $ 12,359 $42,900
Multi-family 1,601 203 1,804
Commercial 3,227 242 3,469
Commercial business loans 935 325 1,260
Consumer loans 1,497 -- 1,497
-------- ---------- --------
Total $37,801 $ 13,129 $50,930
======== ========== ========
</TABLE>
(1) There are no construction loans that are contractually due after March
31, 1998.
Origination, Purchase, Sale and Servicing of Loans. The Company's
lending activities are conducted through its office. The Company originates both
adjustable-rate mortgage loans and fixed-rate mortgage loans. Loan originations
are generally obtained from existing or past customers and members of the local
communities. The Company's ability to originate loans is dependent upon the
relative customer demand for fixed-rate or adjustable-rate mortgage loans, which
is affected by the current and expected future levels of interest rates. During
the fiscal year ended March 31, 1997, the Company experienced an increase in
fixed-rate mortgage loan originations, as compared to originations of
adjustable-rate mortgage loans. The Company currently holds for its portfolio
all loans it originates and, from time to time, may purchase participations in
mortgage loans originated by other institutions. The determination to purchase
participations in specific loans or pools of loans is based upon criteria
substantially similar to the Company's underwriting policies, such as the
financial condition of the borrower, the location of the underlying property and
the appraised value of the property, among other factors. The Company has no
current plans to sell loans it originates in the future, but continually reviews
the merits of adopting such a program to increase liquidity or reduce interest
rate risk. The Company does not service loans for others and has no current
plans to begin such activities.
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The following table sets forth the Company's loan originations,
repayments and other portfolio activity for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
---------------------------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Unpaid principal balances at beginning of year $ 53,102 $ 52,239 $ 46,160
Loans originated:
Mortgage loans:
One- to four-family 6,740 4,125 8,201
Multi-family -- 150 1,399
Commercial 1,085 -- 1,257
Construction 1,475 2,580 2,280
Commercial business 1,799 1,471 2,289
Consumer 790 967 732
-------- -------- --------
Total loans originated 11,889 9,293 16,158
-------- -------- --------
Principal repayments (7,942) (8,233) (9,462)
Charge-offs (63) (86) (63)
Transfers to real estate owned -- (111) (554)
-------- -------- --------
Unpaid principal balances at end of year 56,986 53,102 52,239
Less:
Construction loans in process (686) (738) (815)
Unearned discounts (239) (235) (199)
Unused lines of credit (15) (20) (20)
Allowance for loan losses (660) (654) (650)
Net deferred loan fees (276) (281) (322)
-------- -------- --------
Net loans at end of year $ 55,110 $ 51,174 $ 50,233
======== ======== ========
</TABLE>
One- to Four-Family Mortgage Lending. The Company offers both
fixed-rate and adjustable-rate mortgage loans, with maturities up to thirty
years, which are secured by one- to four-family residences. Substantially all
such loans are secured by owner-occupied properties located in Westchester
County, New York. At March 31, 1997, $44.0 million, or 79.8% of the Company's
net loans outstanding, were one- to four-family residential mortgage loans. Of
the one- to four-family residential mortgage loans outstanding at that date,
71.8%, or $31.6 million, were fixed-rate loans and 28.2%, or $12.4 million, were
adjustable-rate loans. The interest rates for the majority of the Company's
adjustable-rate mortgage loans are indexed to the yield on one-year U.S.
Treasury securities. The Company currently offers a number of adjustable-rate
mortgage loan programs with interest rates which adjust either every one, three
or five years. An adjustable-rate mortgage loan may carry an initial interest
rate that is less than the fully-indexed rate for the loan. All adjustable-rate
mortgage loans offered have lifetime interest rate caps or ceilings. Generally,
adjustable-rate mortgage loans pose credit risks somewhat greater than the
credit risk inherent in fixed-rate loans primarily because, as interest rates
rise, the underlying payments of the borrowers rise, increasing the potential
for default. It is the Company's policy to underwrite its adjustable-rate
mortgage loans based on the fully-indexed rate. The Company currently has no
mortgage loans that are subject to negative amortization.
In view of its operating strategy, the Company adheres to its Board
approved underwriting guidelines for loan origination, which, though prudent in
approach to credit risk and evaluation of collateral, allow management
flexibility with respect to documentation of certain matters and certain credit
requirements. However, the Company generally originates loans using guidelines
comparable to Federal National Mortgage Association ("FNMA") or Federal Home
Loan Mortgage Corporation ("FHLMC") underwriting guidelines. The Company's
policy is to originate one- to four-family residential mortgage loans in amounts
up to 80% of the lower of the appraised value or the selling price of the
property securing the loan. The Company
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has not offered and currently does not offer products with a higher
loan-to-value ratio in conjunction with private mortgage insurance, and has no
plans to do so in the future. Mortgage loans originated by the Company generally
include due-on-sale clauses which provide the Company with the contractual right
to deem the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Company's consent. Due-on-sale clauses are
an important means of adjusting the rates on the Company's fixed-rate mortgage
loan portfolio and the Company has generally exercised its rights under these
clauses.
Multi-Family Mortgage Lending. The Company originates multi-family
mortgage loans generally secured by five- to ten-unit apartment buildings
located in the Company's market area. In reaching its decision on whether to
make a multi-family loan, the Company considers the qualifications of the
borrower as well as the underlying property. Some of the factors considered are:
the net operating income of the mortgaged premises before debt service and
depreciation; the debt service ratio (the ratio of the property's net cash flow
to debt service requirements); and the ratio of loan amount to appraised value.
When evaluating the qualifications of the borrower for a multi-family mortgage
loan, the Company considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar properties,
and the Company's lending experience with the borrower. The Company requires
that the borrower be able to demonstrate strong management skills and the
ability to maintain the property from current rental income. The borrower is
also required to provide evidence of the ability to repay the mortgage and a
history of making mortgage payments on a timely basis. In making its assessment
of the creditworthiness of the borrower, the Company generally reviews the
financial statements, employment and credit history of the borrower, as well as
other related documentation.
Pursuant to the Company's underwriting policies, a multi-family
mortgage loan may only be made in an amount up to the lesser of (i) 75% of the
appraised value of the underlying property or (ii) the Company's current
loans-to-one borrower limit. See "Regulation -- Regulation of Federal Savings
Association -- Loans to One Borrower." Subsequent declines in the real estate
values in the Company's primary market area have resulted in an increase in the
loan-to-value ratios on certain multi-family mortgage loans. The Company's
multi-family mortgage loans are generally fixed-rate loans and may be made with
terms up to fifteen years, generally with a five-year balloon maturity and a
fifteen-year amortization schedule. The Company's multi-family mortgage loan
portfolio at March 31, 1997 was approximately $2.3 million, or 4.2% of net loans
outstanding. The Company's largest multi-family mortgage loan at March 31, 1997
had an outstanding balance of $267,000 and is secured by a five-unit apartment
house.
Mortgage loans secured by apartment buildings and other multi-family
residential properties are generally larger and involve a greater degree of risk
than one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to a greater extent to circumstances outside the borrower's control,
including adverse conditions in the real estate market or the economy. The
Company seeks to minimize these risks through its underwriting policies, which
require such loans to be qualified at origination on the basis of the property's
income and debt service ratio.
Commercial Real Estate Mortgage Lending. The Company originates
commercial real estate mortgage loans that are generally secured by a
combination of residential and retail facilities and, to a lesser extent,
properties used for business purposes, such as small office buildings, located
in the Company's market area. The Company's underwriting procedures provide that
commercial real estate loans may be made in amounts up to the lesser of (i) 75%
of the lesser of the appraised value or purchase price of the property or (ii)
the Company's current loans-to-one borrower limit. These loans are generally
fixed-rate loans and may be made with terms up to fifteen years, generally with
a five-year balloon maturity and a fifteen-year amortization schedule. The
Company's underwriting standards and procedures for these loans are similar to
those applicable to its multi-family mortgage loans, whereby the Company
considers factors such as the net operating income of the property and the
borrower's expertise, credit history and profitability. At March 31, 1997, the
Company's commercial real estate mortgage portfolio was $3.9 million, or 7.1% of
net loans outstanding. The largest commercial real estate loan in the Company's
portfolio at March 31, 1997 was $559,000 and is secured by a light industrial
office and warehouse.
Mortgage loans secured by commercial real estate properties, like
multi-family mortgage loans, are generally larger and involve a greater degree
of risk than one- to four-family residential mortgage loans. This risk is
attributable to the uncertain realization of projected income-producing cash
flows which are affected by vacancy rates, the ability to maintain rent levels
against competitively-priced properties and the ability to collect rent from
tenants on a timely basis. Because payments on loans secured by commercial real
estate properties are often dependent on the successful operation or management
of the properties, repayment of such loans may be subject to a greater extent to
circumstances outside the borrower's control, including adverse conditions in
the real estate market or the economy. The Company seeks to minimize these risks
through its underwriting standards, which require such loans to be qualified at
origination on the basis of the property's income and debt service ratio.
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Construction Lending. The Company originates loans for the acquisition
and development of property to contractors and individuals in its market area.
The Company's construction loans primarily have been made to finance the
construction of one- to four-family, owner-occupied residential properties,
multi-family properties and other properties. These loans are all fixed-rate
loans with maturities of one year or less. The Company's policies provide that
construction loans may be made in amounts up to 80% of the appraised value of
the property for construction of one- to four-family residences and multi-family
properties, and up to 75% of the appraised value of other types of properties.
All construction loans are subject to the Company's loans-to-one borrower limit.
If the borrower is a corporation, the Company generally requires personal
guarantees and a permanent loan commitment from another lender if the Company
will not be making the permanent loan. Loan proceeds are disbursed in
increments, subject to inspection by Company inspectors as construction
progresses. Subject to the Company's limitation on loans-to-one borrower, during
favorable economic conditions, the Company will consider making up to two
residential construction loans to one borrower. If economic conditions are not
favorable, the Company will not make construction loans, unless there is a
confirmed permanent mortgage takeout or the Company has approved the borrower
for permanent financing. At March 31, 1997, the Company had $1.7 million (net of
undisbursed loan funds of $686,000) of construction loans which amounted to 3.1%
of the Company's net loans outstanding. The largest construction loan in the
Company's portfolio at March 31, 1997 was $500,000 (all of which had been
disbursed) and is secured by retail commercial property.
Construction lending generally involves additional risks to the lender
as compared with residential permanent mortgage lending. These risks are
attributable to the fact that loan funds are advanced upon the security of the
project under construction, predicated on the present value of the property and
the anticipated future value of the property upon completion of construction or
development. Moreover, because of the uncertainties inherent in delays resulting
from labor problems, materials shortages, weather conditions and other
contingencies, it is relatively difficult to evaluate the total funds required
to complete a project and to establish the loan-to-value ratio. If the Company's
initial estimate of the property's value at completion is inaccurate, the
Company may be confronted with a project, when completed, having an insufficient
value to assure full repayment.
Commercial Business Lending. The Company also offers limited types of
short-term and medium-term commercial business loans on a secured and unsecured
basis to borrowers located in the Company's market area. These loans include
time and demand loans, term loans and lines of credit. At March 31, 1997, the
Company's commercial business loan portfolio amounted to $2.8 million, or 5.1%
of net loans outstanding. The largest commercial business loan outstanding at
March 31, 1997 was a $325,000 loan secured by marketable securities.
The Company's lines of credit are typically established for one year
and are subject to renewal upon satisfactory review of the borrower's financial
statements and credit history. Secured short-term commercial business loans are
usually collateralized by real estate and are generally guaranteed by a
principal of the borrower. Interest on these loans is usually payable monthly at
rates that fluctuate based on a spread above the prime rate. The Company offers
term loans with terms of up to ten years, although the majority of such loans
have terms of five years or less. Typically, term loans have floating interest
rates based on a spread above the prime rate. The Company also offers business
loans on a revolving basis, whereby the borrower pays interest only. Interest on
such loans fluctuates based on the prime rate. Normally these loans require
periodic interest payments during the loan term, with full repayment of
principal and interest at maturity.
Similar to construction loans and commercial mortgage loans, commercial
business loans generally carry greater credit risks than residential mortgage
loans because their repayment is more dependent on (i) the underlying financial
condition of the borrower, (ii) the value of any property or the cash flow from
any property securing the loan or the business being financed, and (iii) general
and local economic conditions.
Consumer Lending. The Company offers various types of secured and
unsecured consumer loans, including automobile loans, home improvement loans and
personal loans. The Company's consumer loans have original maturities of not
more than five years, with the exception that home improvement loans may have
original maturities of up to ten years. Interest rates charged on such loans are
set at competitive rates, taking into consideration the type and term of the
loan. Consumer loan applications are reviewed and approved in conformance with
standards approved by the Company's Board of Directors. At March 31, 1997, the
Company's consumer loan portfolio totaled $1.3 million, or 2.5% of net loans
outstanding.
Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies of the Company and reviews properties offered
as security. The Board of Directors has established the following lending
authority: the Vice President may approve mortgage loans in amounts up to
$200,000 and commercial business loans in amounts up to $75,000; the President
may approve mortgage loans up to $350,000 and commercial business loans up to
$150,000; commercial business loans in excess of $150,000 and up to $225,000
must be approved by both the President and Vice President or by the
7
<PAGE> 9
Board; and mortgage loans above $350,000 and commercial business loans above
$225,000 require Board approval. The foregoing lending limits are reviewed
annually and, as needed, revised by the Board of Directors.
For all loans originated by the Company, upon receipt of a completed
loan application from a prospective borrower, a credit report is ordered and
certain other information is verified by an independent credit agency, and, if
necessary, additional financial information is required to be submitted by the
borrower. An appraisal of any real estate intended to secure the proposed loan
is required, which appraisal currently is performed by an independent appraiser
designated and approved by the Company. The Board annually approves the
independent appraisers used by the Company and approves the Company's appraisal
policy. It is the Company's policy to require title and hazard insurance on all
real estate loans. In connection with a borrower's request for a renewal of a
multi-family or commercial mortgage loan with a five-year balloon maturity, the
Company evaluates both the borrower's ability to service the renewed loan
applying an interest rate that reflects prevailing market conditions, as well as
the value of the underlying collateral property. The evaluation of the property
typically involves a letter update of the existing appraisal unless in the
appraiser's opinion the original appraisal is no longer substantially relevant,
in which case a full appraisal is obtained.
ASSET QUALITY
Non-Performing Loans. Loans are considered non-performing if they are
in foreclosure or are 90 or more days delinquent. Management and the Board of
Directors perform a monthly review of all delinquent loans. The actions taken by
the Company with respect to delinquencies vary depending on the nature of the
loan and period of delinquency. The Company's policies generally provide that
delinquent mortgage loans be reviewed and that a written late charge notice be
mailed no later than the 15th day of delinquency. The Company's policies provide
that telephone contact be attempted to ascertain the reasons for delinquency and
the prospects of repayment. When contact is made with the borrower at any time
prior to foreclosure, the Company attempts to obtain full payment or work out a
repayment schedule with the borrower to avoid foreclosure.
Non-performing loans amounted to $1.66 million at March 31, 1997, as
compared to $1.63 million at March 31, 1996, representing 13 loans at both
dates. The following table sets forth delinquencies in the Company's loan
portfolio at the dates indicated:
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
---------------------------- -------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE
-------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family 5 $ 890 8 $1,355
Multi-family 1 143 -- --
Commercial - -- 2 195
Construction 1 500 1 100
Commercial business loans - -- -- --
Consumer loans - -- 2 8
= ====== == ======
Total 7 $1,533 13 $1,658
= ====== == ======
0.98% 2.75% 1.83% 2.97%
==== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------------- ----------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE
-------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family 2 $286 8 $1,198
Multi-family 1 266 -- --
Commercial 1 144 2 392
Construction - -- -- --
Commercial business loans - -- 1 40
Consumer loans 1 4 2 2
= ==== == ======
Total 5 $700 13 $1,632
= ==== == ======
0.71% 1.35% 1.84% 3.15%
==== ==== ==== ======
</TABLE>
It is the Company's general policy to stop the accrual of interest on
all loans 90 days or more past due. Certain loans 90 days or more past due may
continue to accrue interest based on management's evaluation of the loan, and
the underlying collateral and the credit worthiness of the borrower.
When a loan is placed on non-accrual status, unpaid interest is
reversed against interest income of the current period. Thereafter, interest
payments received on non-accrual loans are recognized as income unless future
collections are doubtful, in which case the payments received are applied as a
reduction of principal. A loan remains on non-accrual status until the factors
that indicated doubtful collectibility no longer exist or until a loan is
determined to be uncollectible and is charged-off against the allowance for loan
losses.
The classification of a loan as non-performing does not necessarily
indicate that loan principal or interest will not be collected. Historical
experience indicates that a portion of non-performing assets will eventually be
recovered. When all collection efforts have been exhausted, and management
determines that the borrower is unable to repay its obligation, the Company will
commence foreclosure procedures.
8
<PAGE> 10
Real Estate Owned. Property acquired by the Company as a result of
foreclosure on a mortgage loan is classified as real estate owned ("REO") and is
initially recorded fair value, less estimated sales costs, with any resulting
writedown charged to the allowance for loan losses. Thereafter, an allowance for
losses on REO is established for any further declines in fair value less
estimated sales costs. The Company obtains an appraisal on a REO property as
soon as practicable after it takes possession of the real property. The Company
will generally reassess the value of REO at least annually thereafter. At March
31, 1997, REO amounted to $122,000 and related to one single-family residence.
See page 10 of the 1997 Annual Report to Shareholders (the "1997 Annual
Report") herein incorporated by reference, for further information regarding
non-accrual loans, other past due loans and real estate owned.
Classified Assets. Federal regulations require that the Bank utilize an
internal asset classification system as a means of reporting problem and
potential problem assets. The Bank has incorporated the Office of Thrift
Supervision ("OTS") internal asset classifications as a part of its credit
monitoring system. The Bank currently classifies problem and potential problem
assets as "Substandard," "Doubtful" or "Loss" assets. An asset is considered
"Substandard" if it is inadequately protected by the current equity and paying
capacity of the obligor or of the collateral pledged, if any. "Substandard"
assets include those characterized by the "distinct possibility" that the
insured institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "Doubtful" have all of the weaknesses inherent
in those classified "Substandard" with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances, which is a regulatory term, represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
one or more assets, or portions thereof, as "Loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge-off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectability of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that adequate specific and general loan loss
allowances have been established, actual losses are dependent upon future events
and, as such, further additions to the level of specific and general loan loss
allowances may become necessary.
The Bank's Internal Auditor reviews and classifies the Bank's assets
monthly and reports the results to the Examining and Audit Committee of the
Board of Directors on a monthly basis. The Examining and Audit Committee then
reviews the report of the Internal Auditor and reports the results of its review
to the Board of Directors. Assets are classified in accordance with the
management guidelines described above. At March 31, 1997, the Bank had $1.8
million of assets classified as Substandard ($1.7 million of non-performing
loans and $122,000 of REO) and no assets classified as Special Mention, Doubtful
or Loss. As of March 31, 1997, loans classified as Substandard included six
loans totaling $1.0 million secured by one- to four-family, owner-occupied
residences. These loans are classified as Substandard due to delinquencies or
other identifiable weaknesses.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in the Company's loan portfolio. The allowance for loan losses is
maintained at an amount management considers adequate to cover loan losses which
are deemed probable and estimable. The allowance is based upon a number of
factors, including asset classifications, economic trends, industry experience
and trends, industry and geographic concentrations, estimated collateral values,
historical loan loss experience, and the Company's underwriting policies. At
March 31, 1997, the Company's allowance for loan losses was $660,000, or 1.2% of
total loans and 39.8% of non-performing loans, as compared to $654,000, or 1.3%
of total loans and 40.1% of non-performing loans, at March 31,
9
<PAGE> 11
1996. The Company will continue to monitor and modify its allowance for loan
losses as conditions dictate. The OTS, as an integral part of its examination
process, periodically reviews the Company's allowance for loan losses. The OTS
may require the Company to establish additional allowances, based on its
judgments of the information available at the time of the examination. See page
11 of the 1997 Annual Report for the activity in the Company's allowance for
loan losses.
The following table sets forth the Company's allowance for loan losses
allocated by loan category, the percent of the allocated allowances to the total
allowance, and the percent of loans in each category to total loans at the dates
indicated.
<TABLE>
<CAPTION>
MORTGAGE LOANS
---------------------------------------------------------------
ONE- TO
FOUR- MULTI- COM- CON-
FAMILY FAMILY MERCIAL STRUCTION
------ ------ ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AT MARCH 31, 1997
Allowance amount $211 $ 9 $49 $ 29
Percent of allowance to
total allowance 32% 1% 8% 4%
Percent of loans in each
category to total loans 78% 4% 7% 4%
AT MARCH 31, 1996
Allowance amount $184 $13 $56 $ 32
Percent of allowance to
total allowance 28% 2% 9% 5%
Percent of loans in each
category to total loans 75% 6% 7% 5%
AT MARCH 31, 1995
Allowance amount $204 $68 $66 $ 19
Percent of allowance to
total allowance 31% 11% 10% 3%
Percent of loans in each
category to total loans 76% 7% 8% 2%
AT MARCH 31, 1994
Allowance amount $128 $12 $32 $173
Percent of allowance to
total allowance 24% 2% 6% 32%
Percent of loans in each
category to total loans 79% 6% 6% 2%
AT MARCH 31, 1993
Allowance amount $112 $27 $30 $ 85
Percent of allowance to
total allowance 23% 6% 6% 18%
Percent of loans in each
category to total loans 76% 6% 6% 3%
</TABLE>
<TABLE>
<CAPTION>
COMMERCIAL
BUSINESS CONSUMER UN-
LOANS LOANS ALLOCATED TOTAL
----- ----- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AT MARCH 31, 1997
Allowance amount $28 $17 $317 $660
Percent of allowance to
total allowance 4% 3% 48% 100%
Percent of loans in each
category to total loans 5% 2% - % 100%
AT MARCH 31, 1996
Allowance amount $29 $15 $325 $654
Percent of allowance to
total allowance 4% 2% 50% 100%
Percent of loans in each
category to total loans 5% 2% - % 100%
AT MARCH 31, 1995
Allowance amount $24 $15 $254 $650
Percent of allowance to
total allowance 4% 2% 39% 100%
Percent of loans in each
category to total loans 5% 2% - % 100%
AT MARCH 31, 1994
Allowance amount $24 $14 $157 $540
Percent of allowance to
total allowance 4% 3% 29% 100%
Percent of loans in each
category to total loans 5% 2% - % 100%
AT MARCH 31, 1993
Allowance amount $54 $16 $158 $482
Percent of allowance to
total allowance 11% 3% 33% 100%
Percent of loans in each
category to total loans 6% 3% - % 100%
</TABLE>
10
<PAGE> 12
INVESTMENT ACTIVITIES
Investment Policies. The investment policy of the Company, which is
established by the Board of Directors, is based upon the Company's
asset/liability management goals and emphasizes high credit quality and
diversified investments while seeking to optimize net interest income within
acceptable limits of safety and liquidity. The investment policy is designed to
provide and maintain liquidity to meet day-to-day, cyclical and long-term
changes in the Company's asset/liability structure. The Company's investment
goal has been to invest available funds in highly liquid instruments that have
adjustable and fixed rates and that generally, at the time of purchase, do not
exceed an average life of eight years with respect to collateralized mortgage
obligations ("CMOs") and eleven years with respect to other mortgage-backed
securities, or that meet specific requirements of the Company's asset/liability
goals. A CMO is a special type of debt security in which the stream of principal
and interest payments on the underlying mortgages or mortgage-backed securities
is used to create classes with different maturities and, in some cases,
amortization schedules as well as a residual interest, with each class
possessing different risk characteristics. At March 31, 1997, the Company's
securities portfolio amounted to $55.1 million (amortized cost) with an
estimated weighted average remaining life of 4.0 years.
The Company's investment policy permits it to invest in U.S. government
obligations; certain securities of various government-sponsored agencies,
including mortgage-backed securities issued/guaranteed by FNMA, FHLMC and the
Government National Mortgage Association ("GNMA"); certificates of deposit of
insured banks and savings associations; federal funds; and investment grade
corporate debt securities (typically issued by municipalities and utility
companies) and commercial paper.
The Company's investment policy prohibits investment in certain types
of mortgage derivative securities that management considers to be high risk. The
Company generally purchases only short-and medium-term classes of CMOs
guaranteed by FNMA or FHLMC. A substantial portion of the Company's CMOs have
consisted of real estate mortgage investment conduits ("REMICs").
Thrift Bulletin Number 52, the OTS Policy Statement on securities
portfolio policies and unsuitable investment practices ("TB-52"), requires that
institutions classify mortgage derivative products acquired, including certain
tranches of CMOs, as "high-risk mortgage securities" if such products exhibit
greater price volatility than a benchmark fixed-rate 30-year mortgage-backed
pass-through security. Institutions may only hold high-risk mortgage securities
to reduce interest-rate risk in accordance with safe and sound practices and
must also follow certain prudent safeguards in the purchase and retention of
such securities. At March 31, 1997, the Company did not have any CMOs that were
identified as "high-risk mortgage securities." The Company has never invested in
CMO residual interests or in CMO tranches that met the definition of a high-risk
mortgage security at the time of investment.
Mortgage-Backed Securities. The Company invests in mortgage-backed
securities to complement its mortgage lending activities and supplement such
activities at times of low mortgage loan demand. At March 31, 1997, the carrying
value of mortgage-backed securities totaled $39.4 million, or 32.3% of total
assets. The fair value of all mortgage-backed securities totaled $38.8 million
at March 31, 1997. Mortgage-backed securities held in the Company's
available-for-sale portfolio are carried at fair value. Mortgage-backed
securities held in the Company's held-to-maturity portfolio are carried at
amortized cost. At March 31, 1997, $37.4 million of the Company's
mortgage-backed securities are fixed-rate with a weighted average yield of 7.35%
and an estimated weighted average remaining life of 4.82 years. The Company's
adjustable-rate mortgage-backed securities at March 31, 1997 totaled $2.0
million with a weighted average yield of 7.00% and an estimated weighted average
remaining life of 1.82 years. The Company's mortgage-backed securities portfolio
includes CMOs with a fair value at March 31, 1997 of $9.1 million, a weighted
average yield of 6.54% and a weighted average estimated remaining life of 2.91
years.
At March 31, 1997, all securities in the Company's mortgage-backed
securities portfolio were directly insured or guaranteed by GNMA, FNMA or FHLMC,
thereby providing the certificate holder a guarantee of timely payments of
interest and scheduled principal payments, whether or not they have been
collected. The Company's mortgage-backed securities portfolio had a weighted
average yield of 7.33% at March 31, 1997.
Mortgage-backed securities generally yield less than the loans that
underlie such securities because of servicing fees and the cost of payment
guarantees or credit enhancements that reduce credit risk. In addition,
mortgage-backed securities are more liquid than individual mortgage loans and
may be used to collateralize borrowings of the Company. In general, under OTS
regulations mortgage-backed securities issued or guaranteed by GNMA, FNMA and
FHLMC and certain AAA-rated mortgage-backed pass-through securities are weighted
at no more than 20% for risk-based capital purposes, compared to the 50% risk
weighting assigned to most non-securitized residential mortgage loans. See
"Regulation--Regulation of Federal
11
<PAGE> 13
Savings Association--Capital Requirements."
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed,
and value, of such securities. In contrast to mortgage-backed pass-through
securities in which cash flow is received (and, hence, prepayment risk is
shared) pro rata by all securities holders, the cash flows from the mortgages or
mortgage-backed securities underlying CMOs are segmented and paid in accordance
with a predetermined priority to investors holding various tranches of such
securities or obligations. A particular tranche of a CMO may therefore carry
prepayment risk that differs from that of both the underlying collateral and
other tranches. It is the Company's strategy to purchase tranches of CMOs that
are categorized as "planned amortization classes," "targeted amortization
classes" or "very accurately defined maturities" and are intended to produce
stable cash flows in different interest rate environments.
The following table sets forth activity in the Company's
mortgage-backed securities portfolio for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Amortized cost at beginning of year $31,559 $23,935 $21,157
Purchases 22,648 14,137 5,510
Sales (11,890) (3,709) --
Principal repayments (2,985) (2,812) (2,733)
Premium and discount amortization, net 25 8 1
---------------- ---------------- -----------------
Amortized cost at end of year $39,357 $31,559 $23,935
================ ================ =================
</TABLE>
At March 31, 1997, the Company held no securities issued by any one
entity with a total carrying value in excess of 10% of the Company's equity at
that date, except for obligations of the U.S. government and
government-sponsored agencies and certain mortgage-backed securities which are
fully collateralized by mortgages held by single-purpose entities and guaranteed
by government-sponsored agencies.
12
<PAGE> 14
The following table sets forth the amortized cost and fair value of the
Company's securities, by accounting classification category and by type of
security, at the dates indicated:
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
HELD-TO-MATURITY
Mortgage-backed securities:
CMOs $ 996 $ 994 $ 1,108 $ 1,113 $ 6,177 $ 5,968
Pass-through securities 14,078 13,881 5,129 5,249 7,688 7,648
------------- -------------- ------------- ------------- -------------- ------------
15,074 14,875 6,237 6,362 13,865 13,616
Agency and other debt securities 3,049 3,014 3,199 3,234 3,199 3,031
------------- -------------- ------------- ------------- -------------- ------------
Total 18,123 17,889 9,436 9,596 17,064 16,647
------------- -------------- ------------- ------------- -------------- ------------
AVAILABLE-FOR-SALE
Mortgage-backed securities:
CMOs 8,329 8,116 17,651 17,555 7,773 7,487
Pass-through securities 15,954 15,799 7,671 7,622 2,297 2,307
------------- -------------- ------------- ------------- -------------- ------------
24,283 23,915 25,322 25,177 10,070 9,794
Other debt securities:
U.S. Treasury -- -- 6,490 6,493 1,008 983
Agency and other 8,029 7,814 8,616 8,530 2,610 2,517
------------- -------------- ------------- ------------- -------------- ------------
8,029 7,814 15,106 15,023 3,618 3,500
Equity securities 4,655 4,655 1,344 1,344 23 23
Net unrealized loss (583) -- (228) -- (394) --
------------- -------------- ------------- ------------- -------------- ------------
Total 36,384 36,384 41,544 41,544 13,317 13,317
------------- -------------- ------------- ------------- -------------- ------------
Total securities, net $ 54,507 $54,273 $ 50,980 $51,140 $ 30,381 $29,964
============= ============== ============= ============= ============== ============
</TABLE>
13
<PAGE> 15
The following table sets forth certain information regarding the amortized
cost, fair value and weighted average yield of the Company's debt securities at
March 31, 1997, by remaining period to contractual maturity. With respect to
mortgage-backed securities, the entire amount is reflected in the maturity
period that includes the final security payment date and, accordingly, no effect
has been given to periodic repayments or possible prepayments.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
----------------------------------------------------
AVAILABLE-FOR-SALE
----------------------------------------------------
WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
------------------- ----------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-backed securities due:
After one year through five years $ 1,359 $ 1,325 6.50%
After five years through ten years 953 947 7.48
After ten years 21,971 21,643 7.28
-------- -------
Total $ 24,283 $23,915 7.25%
======== =======
Agency and other debt securities due:
In one year or less $ -- $ -- -- %
After one year through five years 3,454 3,397 5.89
After five years through ten years 4,530 4,372 6.75
After ten years 45 45 5.50
-------- -------
Total $ 8,029 $ 7,814 6.37%
======== =======
Total due:
In one year or less $ -- $ -- -- %
After one year through five years 4,813 4,722 6.06
After five years through ten years 5,483 5,319 6.87
After ten years 22,016 21,688 7.28
-------- -------
Total $ 32,312 $31,729 7.03%
======== =======
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1997
-------------------------------------------------
HELD-TO-MATURITY
-------------------------------------------------
WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
------------------- ---------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-backed securities due:
After one year through five years $ 671 $ 661 6.46%
After five years through ten years 864 873 7.84
After ten years 13,539 13,341 7.37
-------- -------
Total $ 15,074 $14,875 7.35%
======== =======
Agency and other debt securities due:
In one year or less $ 50 $ 50 7.13%
After one year through five years 100 100 7.25
After five years through ten years 2,700 2,660 7.19
After ten years 199 204 5.75
-------- --------
Total $ 3,049 $ 3,014 7.10%
======== ========
Total due:
In one year or less $ 50 $ 50 7.13%
After one year through five years 771 761 6.56
After five years through ten years 3,564 3,533 7.35
After ten years 13,738 13,545 7.34
-------- -------
Total $ 18,123 $17,889 7.31%
======== =======
</TABLE>
SOURCES OF FUNDS
General. Deposits, loan and security repayments and prepayments,
proceeds from sales of available-for-sale securities and cash flows generated
from operations are the primary sources of the Company's funds for use in
lending, investing and for other general purposes.
Deposits. The Company offers a variety of deposit accounts with a range
of interest rates and terms. The Company's deposits consist of regular
(passbook) savings accounts, statement savings accounts, checking accounts,
money market accounts and certificates of deposit. In recent years, the Company
has offered certificates of deposit with maturities of up to 30 months. At March
31, 1997, the Company's core deposits (which the Company considers to consist of
checking accounts, NOW accounts, money market accounts, regular savings accounts
and statement savings accounts) constituted 36.1% of total deposits, compared to
41.8% a year earlier. The flow of deposits is influenced significantly by
general economic conditions, changes in money market rates, prevailing interest
rates and competition. The Company's deposits are obtained predominantly from
the areas nearby its office location. The Company relies primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect the Company's ability to attract and
retain deposits. The Company does not actively solicit
14
<PAGE> 16
certificate accounts in excess of $100,000 or use brokers to obtain deposits.
The following table presents the deposit activity of the Company for
the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
---------------------------------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits $151,962 $147,679 $107,186
Withdrawals 147,624 143,571 105,777
-------- -------- --------
Net cash inflow 4,338 4,108 1,409
Interest credited 4,081 3,987 2,894
-------- -------- --------
Net increase in deposits $ 8,419 $ 8,095 $ 4,303
======== ======== ========
</TABLE>
At March 31, 1997, the Company had $9.4 million in certificate accounts
in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
AMOUNT AVERAGE RATE
------ ------------
(DOLLAR IN THOUSANDS)
<S> <C> <C>
Within three months $ 1,655 5.33 %
After three but within six months 2,182 5.64
After six but within 12 months 2,470 5.63
After 12 months 3,139 5.65
-----
Total $ 9,446 5.58 %
=======
</TABLE>
The following table sets forth the distribution of the Company's
deposit accounts and the related weighted average interest rates at the dates
indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------------------------------------------------------------------
1997 1996
--------------------------------------- --------------------------------------
PERCENT WEIGHTED PERCENT WEIGHTED
OF TOTAL AVERAGE OF TOTAL AVERAGE
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
------- --------- --------- ------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Checking $ 2,771 2.82% $ 2,001 2.23%
NOW 3,756 3.82 2.00% 4,164 4.63 2.00%
Money market 3,157 3.21 2.75 3,484 3.88 2.75
Regular savings 15,008 15.26 2.75 16,402 18.24 3.10
Statement savings 10,757 10.94 2.92 11,563 12.86 3.20
Certificate accounts:
Less than one year to maturity 49,026 49.86 5.72 40,448 44.99 5.68
One to three years to maturity 13,852 14.09 5.98 11,846 13.17 6.33
------- --------- --------- ------- --------- ---------
Total certificate accounts 62,878 63.95 5.78 52,294 58.16 5.83
------- --------- --------- ------- --------- ---------
Total $98,327 100.00% 4.60% $89,908 100.00% 4.57%
======= ========= ========= ======= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------------------------
1995
---------------------------------------
PERCENT WEIGHTED
OF TOTAL AVERAGE
AMOUNT DEPOSITS RATE
------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Checking $ 1,554 1.90%
NOW 4,423 5.41 2.00%
Money market 3,865 4.72 3.00
Regular savings 17,940 21.93 3.25
Statement savings 11,070 13.53 3.88
Certificate accounts:
Less than one year to maturity 34,753 42.48 5.33
One to three years to maturity 8,208 10.03 6.01
------- --------- ---------
Total certificate accounts 42,961 52.51 5.46
------- --------- ---------
Total $81,813 100.00% 4.35%
======= ========= =========
</TABLE>
Borrowings. As part of its operating strategy, the Company may obtain
advances from the Federal Home Loan Bank ("FHLB") of New York as an alternative
to retail deposit funds. FHLB advances may also be used to acquire certain other
assets as may be deemed appropriate for investment purposes. These advances
would be collateralized primarily by certain of the Company's mortgage loans and
mortgage-backed securities and secondarily by the Company's investment in
capital stock of the FHLB. Such advances may be made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, fluctuates from time to time in accordance
with the policies of the OTS and the FHLB. As of March 31, 1997, the maximum
amount of FHLB advances available to the Company was $13.5 million, based on the
Bank's current investment in FHLB
15
<PAGE> 17
stock; the Company's total FHLB borrowing capacity (including advances), based
on 25% of the Bank's assets, was $29.3 million. Although the Company
historically had not used borrowings as a source of funds, during the fiscal
1997 the Company utilized short-term advances from the FHLB, the balance of
which averaged $204,000 for the year. No such borrowings were outstanding at
March 31, 1997.
SUBSIDIARY ACTIVITIES
The sole subsidiary of the Registrant is the Bank. The Bank does not
have any subsidiaries.
PERSONNEL
As of March 31, 1997, the Company had 12 full-time employees and one
part-time employee. The Company has experienced a very low turnover rate among
its employees and, as of March 31, 1997, 11 of the Company's employees have been
with the Company for more than five years. The employees are not represented by
a collective bargaining unit and the Company considers its relationship with its
employees to be good.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Registrant and the Bank report their income for tax return
purposes on a calendar-year basis using the accrual method of accounting and are
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Bank's tax reserve for bad debts
discussed below. The Registrant and the Bank currently file separate federal
income tax returns on a calendar-year basis. The following discussion of tax
matters is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Registrant. The Bank
was last audited by the IRS for its taxable year ended December 31, 1994.
Recent Tax Legislation Regarding Tax Bad Debt Reserves. Prior to the
enactment, on August 20, 1996, of the Small Business Job Protection Act of 1996
(the "Small Business Act"), for federal income tax purposes, thrift institutions
such as the Bank, which met certain definitional tests primarily relating to
their assets and the nature of their business, were permitted to establish tax
reserves for bad debts and to make annual additions thereto, which additions
could, within specified limitations, be deducted in arriving at their taxable
income. The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, could be computed
using an amount based on a six-year moving average of the Bank's actual loss
experience (the "Experience Method"), or a percentage equal to 8.0% of the
Bank's taxable income (the "PTI Method"), computed without regard to this
deduction and with additional modifications and reduced by the amount of any
permitted addition to the non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and the Bank,
as a "small bank" (one with assets having an adjusted basis of $500 million or
less) will be required to use the Experience Method of computing additions to
its bad debt reserve for taxable years beginning with the Bank's taxable year
beginning January 1, 1996. In addition, the Bank will be required to recapture
(i.e., take into taxable income) over a six-year period, beginning with the
Bank's taxable year beginning January 1, 1996, the excess of the balance of its
bad debt reserves (other than the supplemental reserve) as of December 31, 1995
over the greater of (a) the balance of its "base year reserve," i.e., its
reserves as of December 31, 1987 or (b) an amount that would have been the
balance of such reserves as of December 31, 1995 had the Bank always computed
the additions to its reserves using the Experience Method. However, under the
Small Business Act such recapture requirements will be suspended for each of the
two successive taxable years beginning January 1, 1996 in which the Bank
originates a minimum amount of certain residential loans during such years that
is not less than the average of the principal amounts of such loans made by the
Bank during its six taxable years preceding January 1, 1996.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's base year reserve to the extent thereof and
then from its supplemental reserve for losses on loans, and an amount based on
the amount distributed will be included in the Bank's taxable income.
Nondividend distributions include distributions in excess of the Bank's current
and accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid out of
the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not constitute nondividend distributions and,
therefore, will not be included in the Bank's income.
16
<PAGE> 18
The amount of additional taxable income created from an nondividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the nondividend distribution would be includable in gross income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate.
Corporate Alternative Minimum Tax. The Internal Revenue Code (the
"Code") imposes a tax ("AMT") on alternative minimum taxable income ("AMTI") at
a rate of 20%. AMTI is increased by certain preference items. Only 90% of AMTI
can be offset by net operating loss carryovers, of which the Company currently
has none. AMTI is also adjusted by determining the tax treatment of certain
items in a manner that negates the deferral of income resulting from the regular
tax treatment of those items. Thus, the Company's AMTI is increased by an amount
equal to 75% of the amount by which the Company's adjusted current earnings
exceeds its AMTI (determined without regard to this adjustment and prior to
reduction for net operating losses). In addition, for taxable years beginning
after December 31, 1986, and before January 1, 1996, an environmental tax of
.12% of the excess of AMTI (with certain modifications) over $2.0 million is
imposed on corporations, including the Bank, whether or not an Alternative
Maximum Tax ("AMT") is paid. Under President Clinton's fiscal year 1998 budget
proposal, as submitted to Congress on February 6, 1997 ("President Clinton's
Proposal"), the corporate environmental income tax would be reinstated for
taxable years beginning after December 31, 1996 and before January 1, 2008.
Under Congressional legislative proposals, the AMT would be repealed for "small
corporations," effective for taxable years beginning after December 31, 1997.
The Company does not expect to be subject to the AMT or the environmental tax
liability.
Dividends Received Deduction and Other Matters. In any taxable period
for which the Registrant owns more than 80% of the Bank's voting stock, the
Registrant may exclude from its income 100% of dividends received from the Bank
as a member of the same affiliated group of corporations. The corporate
dividends received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which the Registrant and the Bank will not
file a consolidated tax return, except that if the Registrant and the Bank own
more than 20% of the stock of a corporation distributing a dividend then 80% of
any dividends received may be deducted. Under President Clinton's proposal, the
70% dividends received deduction would be reduced to 50%.
STATE TAXATION
New York. The Bank and the Registrant are subject to New York state
franchise tax on net income or one of several alternative bases, whichever
results in the highest tax. "Net income" means federal taxable income with
adjustments. The New York state tax rate for the 1997 and 1996 calendar years
was 10.53% and 10.755%, respectively (including commuter transportation and
other surcharges). In general, the Registrant will not be required to pay New
York state tax on dividends and interest received from the Bank or on gains
realized on the sale of Bank stock.
In July 1996, New York state enacted legislation to preserve the use of
the percentage of taxable income bad debt deduction for thrift institutions such
as the Bank. In general, the legislation provides for a deduction equal to 32%
of the Bank's New York state taxable income, which is comparable to the
deductions permitted under the prior tax law. The legislation also provides for
a floating base year, which will allow the Bank's to switch from the percentage
of taxable income method to the experience method without recapture of any
reserve. Previously, the Bank had established a deferred New York state tax
liability for the excess of its New York state tax bad debt reserve over the
amount of its base-year reserve. Since the new legislation effectively
eliminated the excess state reserve for which a deferred tax liability had been
recognized, the Company reduced its deferred tax liability by $166,000,
representing a state tax benefit of $252,000 less related federal taxes of
$86,000.
Generally, New York state tax law has requirements similar to federal
requirements regarding the recapture of base-year tax bad debt reserves. One
notable exception is that, after the recent legislation, New York continues to
require that the Bank maintain its thrift institution charter and hold at least
60% of its assets in specified assets (generally, loans secured by residential
real estate or deposits, educational loans, cash and certain government
obligations). The Bank expects to continue to meet these requirements and does
not anticipate engaging in any transactions which would require recapture of its
base-year reserve. Accordingly, it does not maintain a deferred tax liability
with respect to such reserve. The Bank's unrecognized deferred state taxes (net
of related federal taxes) were approximately $0.3 million at March 31, 1997.
Delaware. As a Delaware holding company not earning income in Delaware,
the Registrant is exempt from Delaware corporate income tax but is required to
file an annual report with and pay an annual franchise tax to the State of
Delaware.
17
<PAGE> 19
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency, and the Federal Deposit
Insurance Corporation ("FDIC'), as its deposit insurer. The Bank's deposit
accounts are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF') of the FDIC, and it is a member of FHLB of New York. The
Bank must file reports with the OTS and the FDIC concerning its activities and
financial condition, and it must obtain regulatory approvals prior to entering
into certain transactions, such as mergers with, or acquisitions of, other
depository institutions. The OTS and the FDIC conduct periodic examinations to
assess the Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which a savings association can engage and is intended primarily for the
protection of the insurance fund and depositors. The Registrant, as a savings
association holding company, is also required to file certain reports with, and
otherwise comply with, the rules and regulations of the OTS and of the
Securities and Exchange Commission (the "SEC") under the federal securities
laws.
The OTS and the FDIC have significant discretion in connection with
their supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Registrant, the Bank and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations, and it does not
purport to be a comprehensive description of all such statutes and regulations.
REGULATION OF FEDERAL SAVINGS ASSOCIATION
Business Activities. The Bank derives its lending and investment powers
from the Home Owner's Loan Act, as amended ("HOLA") and the regulations of the
OTS thereunder. Under these laws and regulations, the Bank may invest in
mortgage loans secured by residential and commercial real estate, commercial and
consumer loans, certain types of debt securities, and certain other assets. The
Bank may also establish service corporations that may engage in activities not
otherwise permissible for the Bank, including certain real estate equity
investments and securities and insurance brokerage. These investment powers are
subject to various limitations, including (a) a prohibition against the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories; (b) a limit of 400% of an association's capital on
the aggregate amount of loans secured by nonresidential real estate property;
(c) a limit of 20% of an association's assets on commercial loans; (d) a limit
of 35% of an association's assets on the aggregate amount of consumer loans and
acquisitions of certain debt securities; (e) a limit of 5% of assets on
non-conforming loans (loans in excess of the specific limitations of HOLA); and
(f) a limit of the greater of 5% of assets or an association's capital on
certain construction loans made for the purpose of financing what is or is
expected to become residential property.
Loans to One Borrower. Under HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. An additional amount may be
lent, equal to 10% of unimpaired capital and surplus, if such loan or extension
of credit is fully secured by readily-marketable collateral. Such collateral is
defined to include certain debt and equity securities and bullion, but generally
does not include real estate. At March 31, 1997, the Bank's limit on loans to
one borrower was $2.4 million. At March 31, 1997, the Bank's largest aggregate
amount of loans to one borrower was $626,000 and the second largest borrower had
an aggregate balance of $625,000.
QTL Test. HOLA requires a savings association to meet a qualified
thrift lender ("QTL") test. Under the QTL test, a savings association is
required to maintain at least 65% of its "portfolio assets" in certain
"qualified thrift investments" in at least 9 months of the most recent 12-month
period. "Portfolio assets" means, in general, an association's total assets less
the sum of (a) specified liquid assets up to 20% of total assets, (b) certain
intangibles, including goodwill and credit card servicing rights, and (c) the
value of property used to conduct the association's business. "Qualified thrift
investments" includes various types of loans made for residential and housing
purposes, investments related to such purposes, including certain
mortgage-backed and related securities, and consumer loans. At March 31, 1997,
the Bank maintained 85.3% of its portfolio assets in qualified thrift
investments. The Bank had also met the QTL test in each of the prior 12 months
and, therefore, was a qualified thrift lender.
18
<PAGE> 20
A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions include prohibitions against (a) engaging in any new activity not
permissible for a national bank, (b) paying dividends not permissible under
national bank regulations, (c) obtaining new advances from any FHLB, and (d)
establishing any new branch office in a location not permissible for a national
bank in the association's home state. In addition, within one year of the date a
savings association ceases to meet the QTL test, any company controlling the
association would have to register under, and become subject to the requirements
of, the Bank Holding Company Act of 1956, as amended. If the savings association
does not requalify under the QTL test within the three-year period after it
failed the QTL test, it would be required to terminate any activity and to
dispose of any investment not permissible for a national bank and would have to
repay as promptly as possible any outstanding advances from an FHLB. A savings
association that has failed the QTL test may requalify under the QTL test and be
free of such limitations, but it may do so only once.
Capital Requirements. The OTS regulations require savings associations
to meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations, a leverage ratio
requirement of 3% of core capital to such adjusted total assets, and a
risk-based capital ratio requirement of 8% of core and supplementary capital to
total risk-based assets. In determining the amount of risk-weighted assets for
purposes of the risk-based capital requirement, a savings association must
compute its risk-based assets by multiplying its assets and certain off-balance
sheet items by risk-weights, which range from 0% for cash and obligations issued
by the United States Government or its agencies to 100% for consumer and
commercial loans, as assigned by the OTS capital regulation based on the risks
OTS believes are inherent in the type of asset.
Tangible capital is defined, generally, as common stockholder's equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related earnings, minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles other than certain mortgage
servicing rights and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
Supplementary capital currently includes cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, and the allowance for loan and lease losses.
The allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets, and the amount of
supplementary capital that may be included as total capital cannot exceed the
amount of core capital.
The OTS has adopted regulations to require a savings association to
account for interest rate risk when determining its compliance with the
risk-based capital requirement. A savings association with "above normal"
interest rate risk is required, by these regulations, to deduct a portion of its
total capital to account for any "above normal" interest rate risk. A savings
association's interest rate risk is measured by the decline in the net portfolio
value of its assets (i.e., the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts)
resulting from a hypothetical 2% increase or decrease in market rates of
interest, divided by the estimated economic value of the association's assets,
as calculated in accordance with guidelines set forth by the OTS. At the times
when the 3-month Treasury bond equivalent yield falls below 4%, an association
may compute its interest rate risk on the basis of a change equal to one-half of
that Treasury rate rather than on the basis of 2%. A savings association whose
measured interest rate risk exposure exceeds 2% would be considered to have
"above normal" risk. The interest rate risk component is an amount equal to
one-half of the difference between the association's measured interest rate risk
and 2%, multiplied by the estimated economic value of the association's assets.
That dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement. Any required
deduction for interest rate risk becomes effective on the last day of the third
quarter following the reporting date of the association's financial data on
which the interest rate risk was computed. The regulations do not require a
savings association with assets of less than $300 million and a risk-based
capital ratio in excess of 12% to comply with the standard reporting
requirements for the interest rate risk component, unless the OTS determines
otherwise, and the association may provide such selected information as the OTS
determines. Currently, the Bank qualifies for this exemption from the filing
requirements. The regulations also authorize the Director of the OTS to waive or
defer an association's interest rate risk component on a case-by-case basis. The
OTS has indefinitely deferred implementation of the interest rate component in
the computation of an institution's risk-based capital requirement.
19
<PAGE> 21
At March 31, 1997, the Bank met each of its capital requirements. The table
below presents the Bank's regulatory capital amounts and ratios as of March 31,
1997, compared to the OTS requirements at that date.
<TABLE>
<CAPTION>
AMOUNT ASSETS(1)
------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
GAAP capital $16,298 13.9%
======= =========
Tangible capital:
Capital level (2) $16,607 14.1%
Requirement 1,763 1.5
------- ---------
Excess $14,844 12.6%
======= =========
Core capital:
Capital level (2) $16,607 14.1%
Requirement 3,526 3.0
------- ---------
Excess $13,081 11.1%
======= =========
Total risk-based capital:
Capital level (2) $17,151 39.5%
Requirement 3,475 8.0
------- ---------
Excess $13,676 31.5%
======= =========
</TABLE>
(1) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as a percentage of adjusted assets. Risk-based capital
levels are shown as a percentage of risk-weighted assets.
(2) The difference between capital under generally accepted accounting
principles ("GAAP") and regulatory tangible and core capital is an adjustment to
increase regulatory capital by the amount of the net unrealized loss on
available-for-sale securities recognized for GAAP purposes. Regulatory
risk-based capital reflects this adjustment and the inclusion of a portion of
the general allowance for loan losses.
Limitation on Capital Distributions. OTS regulations currently impose
limitations upon capital distributions by savings associations, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger, and other
distributions charged against capital. At least 30-days written notice must be
given to the OTS of a proposed capital distribution by a savings association,
and capital distributions in excess of specified earnings or by certain
institutions are subject to approval by the OTS. An association that has capital
in excess of all regulatory capital requirements before and after a proposed
capital distribution and that is not otherwise restricted in making capital
distributions, could, after prior notice but without the approval of the OTS,
make capital distributions during a calendar year equal to the greater of (a)
100% of its net earnings to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar year,
or (b) 75% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior OTS approval. In addition, the OTS can
prohibit a proposed capital distribution, otherwise permissible under the
regulation, if the OTS has determined that the association is in need of more
than normal supervision or if it determines that a proposed distribution by an
association would constitute an unsafe or unsound practice. Furthermore, under
the OTS prompt corrective action regulations, the Bank would be prohibited from
making any capital distribution if, after the distribution, the Bank failed to
meet its minimum capital requirements, as described above. See "-- Prompt
Corrective Regulatory Action."
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of certain
mutual funds and certain corporate debt securities and commercial paper) equal
to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the savings flows of
member institutions, and is currently 5%. OTS regulations also require each
savings association to maintain an average daily balance of short-term liquid
assets at a specified percentage (currently 1%) of the total of its net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's average liquidity ratio for the month ended March 31,
1997 was 13.5%, which exceeded the applicable requirements. The Bank has never
been subject to monetary penalties for failure to meet its liquidity
requirements.
Assessments. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
association's total assets, including consolidated subsidiaries, as reported in
the association's latest quarterly Thrift Financial Report. The assessments
20
<PAGE> 22
paid by the Bank for the fiscal years ended March 31, 1997, 1996 and 1995
totaled $35,000, $31,000 and $29,000, respectively.
Branching. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States. The authority to establish such a branch is
available (a) in states that expressly authorize branches of savings
associations located in another state and (b) to an association that qualifies
as a "domestic building and loan association" under the Code, which imposes
qualification requirements similar to those for a "qualified thrift lender"
under HOLA. See "-- QTL Test." The authority for a federal savings association
to establish an interstate branch network would facilitate a geographic
diversification of the association's activities. This authority under HOLA and
the OTS regulations preempts any state law purporting to regulate branching by
federal savings associations.
Community Reinvestment. Under the Community Reinvestment Act ("CRA"),
as implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings association,
to assess the association's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such association. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating
in its most recent examination. The OTS's CRA regulations establish an
assessment system that bases an association's rating on its actual performance
in meeting community needs. In particular, the assessment system focuses on
three tests: (a) a lending test, to evaluate the institution's record of making
loans in its service areas; (b) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
housing, and programs benefiting low or moderate income individuals and
businesses; and (c) a service test, to evaluate the institution's delivery of
services through its branches, ATMs, and other offices. Small savings
associations would be assessed pursuant to a streamlined approach focusing on a
lesser range of information and performance standards. The term "small savings
association" is defined as including associations with less than $250 million in
assets or an affiliate of a holding company with banking and thrift assets of
less than $1 billion, which would include the Bank.
Transactions with Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an
affiliate of the Bank is any company that controls the Bank or any other company
that is controlled by a company that controls the Bank, excluding any Bank
subsidiary other than those that are insured depository institutions. The OTS
regulations prohibit a savings association (a) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the Bank Holding Company Act ("BHC Act")
and (b) from purchasing the securities of any affiliate other than a subsidiary.
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings association and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings association's capital and surplus. Extensions of credit to affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A, and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the association as those prevailing at the time for comparable
transactions with nonaffiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to nonaffiliated companies.
The Bank's authority to extend credit to its directors, executive
officers, and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the FRA and Regulation O of the FRB thereunder. Among other things, these
provisions require that extensions of credit to insiders (a) be made on terms
that are substantially the same as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features and (b) not exceed certain
limitations on the amount of credit extended to such persons, individually and
in the aggregate, which limits are based, in part, on the amount of the
association's capital. In addition, extensions of credit in excess of certain
limits must be approved by the association's board of directors.
Enforcement. Under the Federal Deposit Insurance Act ("FDI Act"), the
OTS has primary enforcement responsibility over savings associations and has the
authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any shareholder, attorney,
appraiser and accountant who knowingly or recklessly participates in
<PAGE> 23
any violation of applicable law or regulation or breach of fiduciary duty or
certain other wrongful actions that causes or is likely to cause more than a
minimal loss or other significant adverse effect on an insured savings
association. Civil penalties cover a wide range of violations and actions and
range from $5,000 for each day during which violations of law, regulations,
orders, and certain written agreements and conditions continue, up to $1,000,000
per day for such violations if the person obtained a substantial pecuniary gain
as a result of such violation or knowingly or recklessly caused a substantial
loss to the institution. Criminal penalties for certain financial institution
crimes include fines of up to $1 million and imprisonment for up to 30 years. In
addition, regulators have substantial discretion to take enforcement action
against an institution that fails to comply with its regulatory requirements,
particularly with respect to its capital requirements. Possible enforcement
actions range from the types of action that may be taken under the "prompt
corrective actions," discussed below under "---Prompt Corrective Regulatory
Action" to the termination of deposit insurance. Under the FDI Act, the FDIC has
the authority to recommend to the Director of OTS that enforcement action be
taken with respect to a particular savings association. If action is not taken
by the Director of the OTS, the FDIC has authority to take such action under
certain circumstances.
Standards for Safety and Soundness. Pursuant to the FDI Act, as amended
by Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and
the Riegle Community Development and Regulatory Improvement Act of 1994
("Community Development Act"), the OTS and the other federal bank regulatory
agencies have adopted guidelines prescribing safety and soundness standards. The
guidelines establish general standards relating to internal controls and
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, asset quality, earnings, and
compensation, fees and benefits. In general, the guidelines require, among other
things, appropriate systems and practices to identify and manage the risks and
exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director or principal
shareholder. In addition, the OTS regulations authorize, but do not require, the
OTS to order an institution that has been given notice by the OTS that it is not
satisfying any of such safety and soundness standards to submit a compliance
plan. If, after being so notified, an institution fails to submit an acceptable
compliance plan or fails in any material respect to implement an accepted
compliance plan, the OTS must issue an order directing action to correct the
deficiency and may issue an order directing other actions of the types to which
an undercapitalized association is subject under the "prompt corrective action"
provisions of FDICIA. If an institution fails to comply with such an order, the
OTS may seek to enforce such order in judicial proceedings and to impose civil
money penalties.
Prompt Corrective Regulatory Action. FDICIA established a system of
prompt corrective action to resolve the problems of undercapitalized depository
institutions. Under this system, the federal banking regulators are required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends on the institution's degree of capitalization. For
this purpose, a savings association would be placed in one of five categories
based on the association's capital. Generally, a savings association is treated
as "well capitalized" if its ratio of total capital to risk-weighted assets is
at least 10.0%, its ratio of core capital to risk-weighted assets is at least
6.0%, its ratio of core capital to total assets is at least 5.0%, and it is not
subject to any order or directive by the OTS to meet a specific capital level. A
savings association will be treated as "adequately capitalized" if its ratio of
total capital to risk-weighted assets is at least 8.0%, its ratio of core
capital to risk-weighted assets is at least 4.0%, and its ratio of core capital
to total assets is at least 4.0% (3.0% if the association receives the highest
rating on the CAMEL financial institutions rating system). A savings association
that has a total risk-based capital of less than 8.0% or a leverage ratio or a
Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if the
association receives the highest rating on the CAMEL financial institutions
rating system) is considered to be "undercapitalized." A savings association
that has a total risk-based capital of less than 6.0% or a Tier 1 risk-based
capital ratio or a leverage ratio of less than 3.0% is considered to be
"significantly undercapitalized." A savings association that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The elements of an association's capital for purposes of the
prompt corrective action regulations are defined generally as they are under the
regulations for minimum capital requirements. See "-- Capital Requirements."
Generally, a capital restoration plan must be filed with the OTS within
45 days of the date an association receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." The OTS may not accept a capital restoration plan without
determining, among other things, that the plan is based on realistic assumptions
and is likely to succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution will
comply with such capital restoration plan. The aggregate liability of the parent
holding company is limited to the lesser of (i) an amount equal to the five
percent of the depository institution's total assets at the time it became
"undercapitalized," and (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all capital standards
applicable with respect to such institution as of the time it fails to comply
with the plan. In the event of a savings and loan holding company's bankruptcy,
any commitment by the savings and loan company to a federal bank regulatory
agency to maintain the capital of a subsidiary
<PAGE> 24
depository institution will be assumed by the bankruptcy trustee and entitled to
a priority of payment. If a depository institution fails to submit an acceptable
plan, it is treated as if it is "significantly undercapitalized."
An undercapitalized association also becomes immediately subject to
various mandatory restrictions, including restrictions on growth of assets and
other forms of expansion. The OTS can also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors. "Significantly
undercapitalized" institutions are subject to more severe restrictions.
Generally, subject to a narrow exception, FDICIA requires the OTS to appoint a
receiver or conservator for a savings association that is critically
undercapitalized. As of March 31, 1997, the Bank was considered "well
capitalized" by the OTS.
Where appropriate, the OTS can impose corrective action by a savings
and loan holding company under the "prompt corrective action" provisions of
FDICIA.
Insurance of Deposit Accounts. Pursuant to FDICIA, the FDIC established
a risk-based assessment system for determining the deposit insurance assessments
to be paid by insured depository institutions. Under the assessment system, the
FDIC assigns an institution to one of three capital categories based on the
institution's financial information as of the reporting period ending seven
months before the assessment period. The three capital categories consist of (a)
well capitalized, (b) adequately capitalized, or (c) undercapitalized. The FDIC
also assigns an institution to one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. Under the regulation,
there are nine assessment risk classifications (i.e., combinations of capital
groups and supervisory subgroups) to which different assessment rates are
applied. For the first three quarters of 1996, assessment rates for SAIF-insured
institutions ranged from 0.23% of deposits for an institution in the highest
category (i.e., well-capitalized and financially sound, with no more than a few
minor weaknesses), such as the Bank, to 0.31% of deposits for an institution in
the lowest category (i.e., undercapitalized and substantial supervisory
concern). In contrast, the least risky institutions insured under the Bank
Insurance Fund ("BIF") paid deposit insurance assessments at the annual minimum
of $2,000, and the other BIF-insured institutions paid assessments at rates that
ranged from 0.03% to 0.27% of deposits.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the
"Funds Act") was enacted into law to address, among other things, the disparity
in the deposit insurance assessment rates imposed on BIF-insured and on
SAIF-insured institutions. The Funds Act amended the FDIA in several ways to
recapitalize the SAIF and to reduce the disparity in the assessment rates for
the BIF and the SAIF. To recapitalize the SAIF, the Funds Act authorized the
FDIC to impose a special assessment on all institutions with SAIF-assessable
deposits in the amount necessary to recapitalize the SAIF. As implemented by the
FDIC, the special assessment was fixed, subject to adjustment, at 0.657% of an
institution's SAIF-assessable deposits, and the special assessment was paid on
November 27, 1996. The special assessment was based on the amount of
SAIF-assessable deposits held at March 31, 1995, as adjusted under the Funds
Act. For the Bank, the special assessment on the deposits held on March 31,
1995, was $538,000 ($329,000 net of taxes).
The Funds Act also provides that the FDIC cannot assess regular
insurance assessments for an insurance fund unless required to maintain or to
achieve the designated reserve ratio of 1.25%, except on those of its member
institutions that are not classified as "well capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. The Bank has not been so classified by the FDIC or the
OTS. In view of the recapitalization of the SAIF, the FDIC reduced the annual
assessment rates for SAIF-assessable deposits for periods beginning on October
1, 1996. For the last quarter of 1996, the reduced annual assessment rates
ranged from 0.18% to 0.27% of deposits. Beginning with January 1, 1997, the
annual assessment rates are the same for both BIF-insured and SAIF-insured
institutions, with the annual assessment rates ranging from 0.0% to 0.27% of
deposits. The Bank's assessment rate for deposit insurance is 0.0% of deposits
for calendar 1997.
In addition, the Funds Act expanded the assessment base for the payments on
the bonds ("FICO bonds") issued in the late 1980s by the Financing Corporation
to recapitalize the now defunct Federal Savings and Loan Insurance Corporation.
Beginning January 1, 1997, the deposits of both BIF- and SAIF-insured
institutions are assessed for the payments on the FICO bonds. Until December 31,
1999, or such earlier date on which the last savings association ceases to
exist, the rate of assessment for BIF-assessable deposits shall be one-fifth of
the rate imposed on SAIF-assessable deposits. The rate of assessments for the
payments on the FICO bonds is currently 0.013% for BIF-assessable deposits and
0.0648% for SAIF-assessable deposits.
23
<PAGE> 25
The Funds Act also provides for the merger of the BIF and SAIF on
January 1, 1999, with such merger being conditioned upon the prior elimination
of the thrift charter. The Funds Act required the Secretary of the Treasury to
conduct a study of relevant factors with respect to the development of a common
charter for all insured depository institutions and the abolition of separate
charters for banks and thrifts and to report the Secretary's conclusions and the
findings to the Congress. The Secretary of the Treasury has recommended that the
separate charter for thrifts be eliminated only if other legislation is adopted
that permits bank holding companies to engage in certain non-financial
activities. Absent legislation permitting such non-financial activity, the
Secretary of the Treasury recommended retention of the thrift charter. The
Secretary of the Treasury also recommended the merger of the BIF and the SAIF
irrespective of whether the thrift charter is eliminated. Other proposed
legislation has been introduced in Congress that would require thrift
institutions to convert to bank charters.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of the regional FHLBs composing the FHLB System. Each FHLB
provides a central credit facility primarily for its member institutions. The
Bank, as a member of the FHLB of New York, is required to acquire and hold
shares of capital stock in the FHLB of New York in an amount at least equal to
the greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year or 1/20 of
its advances (borrowings) from the FHLB of New York. The Bank was in compliance
with this requirement with an investment in FHLB of New York stock at March 31,
1997, of $674,000. Any advances from a FHLB must be secured by specified types
of collateral, and all long-term advances may be obtained only for the purpose
of providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. For the fiscal years ended March
31, 1997, 1996 and 1995, dividends from the FHLB of New York to the Bank
amounted to $37,000, $37,000 and $36,000, respectively. If dividends were
reduced, or interest on future FHLB advances increased, the Bank's net interest
income would likely also be reduced.
Federal Reserve System. The Bank is subject to provisions of the FRA
and the FRB's regulations pursuant to which depository institutions may be
required to maintain non-interest-earning reserves against their deposit
accounts and certain other liabilities. Currently, reserves must be maintained
against transaction accounts (primarily NOW and regular checking accounts). The
FRB regulations generally require that reserves be maintained in the amount of
3% of the aggregate of transaction accounts up to $49.3 million. The amount of
aggregate transaction accounts in excess of $49.3 million are currently subject
to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 12%.
The FRB regulations currently exempt $4.4 million of otherwise reservable
balances from the reserve requirements, which exemption is adjusted by the FRB
at the end of each year. The Bank is in compliance with the foregoing reserve
requirements. Because required reserves must be maintained in the form of either
vault cash, a non-interest-bearing account at a FRB, or a pass-through account
as defined by the FRB, the effect of this reserve requirement is to reduce the
Bank's interest-earning assets. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy liquidity requirements
imposed by the OTS. FHLB System members are also authorized to borrow from the
Federal Reserve "discount window," but FRB regulations require such institutions
to exhaust all FHLB sources before borrowing from a FRB.
HOLDING COMPANY REGULATION
General. The Registrant is a unitary bank holding company within the
meaning of the HOLA. As such, the Registrant is required to register with the
OTS and is subject to OTS examination, regulation and reporting requirements.
The OTS has enforcement authority over the Registrant. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the Bank.
The Registrant is required to obtain the prior approval of the OTS to
acquire all, or substantially all, of the assets of another savings institution
or holding company thereof. Prior OTS approval is required for the Registrant to
acquire direct or indirect ownership or control of any voting securities of a
non-subsidiary savings institution, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA, if, after giving effect to such acquisition, the Registrant would,
directly or indirectly, own or control more than 5% of any class of voting
shares of such institution or company.
Interstate Banking. The OTS is prohibited from approving any
acquisition that would result in a multiple savings and loan holding company
controlling savings institutions in more than one state, subject to two
exceptions: (i) the approval of interstate supervisory acquisitions by savings
and loan holding companies, and (ii) the acquisition of a savings institution in
24
<PAGE> 26
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. Under New York law, reciprocal interstate
acquisitions are authorized for savings and loan holding companies and savings
institutions. Certain states do not authorize interstate acquisitions under any
circumstances; however, federal law authorizing acquisitions in supervisory
cases preempts such state law.
Acquisition of the Holding Company. Federal law generally provides that
no person (including a company), or group acting in concert, directly or
indirectly, may acquire 10% or more of a class of the outstanding voting
securities of a savings association holding company without giving at least 60
days written notice to the OTS and providing the OTS an opportunity to
disapprove the proposed acquisition. Such acquisitions of control may be
disapproved if it is determined, among other things, that (i) the acquisition
would substantially lessen competition; (ii) the financial condition of the
acquiring person might jeopardize the financial stability of the savings
institution or prejudice the interests of its depositors; or (iii) the
competency, experience or integrity of the acquiring person or the proposed
management personnel indicates that it would not be in the interest of the
depositors or the public to permit the acquisition of control by such person.
In addition, federal regulations governing conversions of mutual
savings institutions to the stock form of organization prohibit the direct or
indirect acquisition without OTS approval of more than 10% of any equity
security of a savings institution within three years of the savings
institution's conversion to stock form. This limitation applies to acquisitions
of the stock of the Registrant. Such acquisition may be disapproved if it is
found, among other things, that the proposed acquisition (i) would frustrate the
purposes of the provisions of the regulations regarding conversions, (ii) would
be manipulative or deceptive, (iii) would subvert the fairness of the
conversion, (iv) would be likely to result in injury to the savings institution,
(v) would not be consistent with economical home financing, (vi) would otherwise
violate law or regulation, or (vii) would not contribute to the prudent
deployment of the savings institution's conversion proceeds.
Federal Securities Laws. The Registrant's common stock is registered
with the SEC under Section 12(g) of the Securities Exchange Act of 1934, as
amended ("Exchange Act"). The Registrant is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the
Exchange Act.
ITEM 2. PROPERTIES
The Company conducts its business through its office located in
Tarrytown, New York. The property, which had a net book value of $466,000 as of
March 31, 1997, was acquired in 1973. Management believes that the Company's
current facilities are adequate to meet the present and immediately foreseeable
needs of the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings in the aggregate are believed by management to be
immaterial to the Company's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
None.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item appears on page 1 of the 1997
Annual Report incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item appears on pages 3 through 11 of
the 1997 Annual Report incorporated herein by reference.
25
<PAGE> 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears on pages 12 through 34 of
the 1997 Annual Report incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information required by this item appears under the captions
"Election of Directors," "Nominees for Election as Director," "Continuing
Directors," "Committees and Meetings of the Board of Directors of the Company"
and "Executive Officers" on pages 6 through 10 and "Section 16 (a) Beneficial
Ownership Reporting Compliance" on page 19 of the Registrant's Proxy Statement,
previously filed with the Commission, for its Annual Meeting of Shareholders to
be held on August 6, 1997 (the "1997 Proxy Statement") incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears under the captions
"Compensation of Directors" on pages 8 through 10 and "Summary Compensation
Table," "Employment Agreements," and "Benefits" on pages 11 through 18 of the
1997 Proxy Statement incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears under the captions
"Principal Shareholders of the Company" on page 3 and 4, and "Stock Owned by
Management" on page 5 of the 1997 Proxy Statement incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears under the caption
"Transactions with Certain Related Persons" on page 19 of the 1997 Proxy
Statement incorporated herein by reference.
26
<PAGE> 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements of the Registrant, its
bank subsidiary, and the independent auditors' report thereon, are included on
pages 12 through 34 of the 1997 Annual Report incorporated herein by reference.
1. Consolidated Financial Statements:
Balance Sheets at March 31, 1997 and 1996;
Statements of Income for the years ended March 31, 1997, 1996 and
1995;
Statements of Changes in Shareholders' Equity for the years ended
March 31, 1997, 1996 and 1995; Statements of Cash Flows for the
years ended March 31, 1997, 1996 and 1995; and
Notes to Consolidated Financial Statements.
2. All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated financial
statements or the notes thereto.
3. Exhibits
(a) The following exhibits are filed as part of this report, except as
otherwise indicated.
DESIGNATION DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation of Tappan Zee Financial, Inc.
(incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-1, No. 33-94128, filed on
June 30, 1995, as amended (the "Registration Statement"))
3.2 Bylaws of Tappan Zee Financial, Inc. (incorporated by
reference to Exhibit 3.2 to the Registration Statement)
4.1 Certificate of Incorporation of Tappan Zee Financial, Inc.
(see Exhibit 3.1 hereto)
4.2 Bylaws of Tappan Zee Financial, Inc. (see Exhibit 3.2
hereto)
4.3 Specimen Stock Certificate (incorporated by reference to
Exhibit 4.3 to the Registration Statement)
10.1.0 Tappan Zee Financial, Inc. 1996 Stock Option Plan for
Officers and Employees ("Employee Option Plan")
(incorporated by reference to Exhibit A to the Registrant's
Proxy Statement for use in connection with its 1996 Annual
Meeting of Shareholders (the "1996 Proxy Statement"),
previously filed with the Commission
10.1.1 Amendment No. 1 to the Employee Option Plan
10.1.2 Amendment No. 2 to the Employee Option Plan (incorporated by
reference to Exhibit A to the 1997 Proxy Statement)
10.2.0 Tappan Zee Financial, Inc. 1996 Stock Option Plan for
Outside Directors ("Outside Director Option Plan")
(incorporated by
27
<PAGE> 29
reference to Exhibit B to the 1996 Proxy Statement)
10.2.1 Amendment No. 1 to the Outside Director Option Plan
10.2.2 Amendment No. 2 to the Outside Director Option Plan
(incorporated by reference to Exhibit B to the 1997 Proxy
Statement)
10.3.0 Tappan Zee Financial, Inc. 1996 Recognition and Retention
Plan for Officers and Employees ("Employee RRP")
(incorporated by reference to Exhibit C to the 1996 Proxy
Statement)
10.3.1 Amendment No. 1 to the Employee RRP
10.3.2 Amendment No. 2 to the Employee RRP (incorporated by
reference to Exhibit C to the 1997 Proxy Statement)
10.4.0 Tappan Zee Financial, Inc. 1996 Recognition and Retention
Plan for Outside Directors ("Outside Director RRP")
(incorporated by reference to Exhibit D to the 1996 Proxy
Statement)
10.4.1 Amendment No. 1 to the Outside Director RRP
10.4.2 Amendment No. 2 to the Outside Director RRP (incorporated by
reference to Exhibit D to the 1997 Proxy Statement)
10.5 Employee Stock Ownership Plan of Tappan Zee Financial, Inc.
and Certain Affiliates, as amended (incorporated by
reference to Exhibit 10.6 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1996 (the
"1996 10-K"))
10.6 Loan Agreement to the Employee Stock Ownership Plan Trust of
Tappan Zee Financial, Inc. and Certain Affiliates
(incorporated by reference to Exhibit 10.7 to the 1996 10-K)
10.7 Tarrytowns Bank Deferred Compensation Plan for Directors of
Tarrytowns Bank, FSB (Incorporated by reference to Exhibit
10.7 to the Registration Statement)
10.8 Retirement Plan for Board Members of Tappan Zee Financial,
Inc. and Certain Affiliates, adopted effective as of October
5, 1995 (incorporated by reference to Exhibit 10.9 to the
1996 10-K)
10.09 Employment Agreement by and between Tappan Zee Financial,
Inc. and Stephen C. Byelick, adopted effective as of October
5, 1995 (incorporated by reference to Exhibit 10.10 to the
1996 10-K)
10.10 Employment Agreement by and between Tappan Zee Financial,
Inc. and Harry G. Murphy, adopted effective as of October 5,
1995 (incorporated by reference to Exhibit 10.11 to the 1996
10-K)
10.11 Employment Agreement by and between Tarrytowns Bank, FSB and
Stephen C. Byelick, effective as of October 5, 1995
(incorporated by reference to Exhibit 10.12 to the 1996
10-K)
10.12 Employment Agreement by and between Tarrytowns Bank, FSB and
Harry G. Murphy, effective as of October 5, 1995
(incorporated by reference to Exhibit 10.13 to the 1996
10-K)
28
<PAGE> 30
10.13 Employee Retention Agreement by and among Tappan Zee
Financial, Inc., Tarrytowns Bank, FSB and Christina Vidal,
effective as of October 5, 1995 (incorporated by reference
to Exhibit 10.15 to the 1996 10-K)
10.14 R Employee Retention Agreement by and among Tappan Zee Fi
Financial, Inc., Tarrytowns Bank, FSB and Margaret E.
Sampson, effective as of October 5, 1995 (incorporated by
reference to Exhibit 10.16 to the 1996 10-K)
10.15 Employee Retention Agreement by and among Tappan Zee
Financial, Inc., Tarrytowns Bank, FSB and Valerie Wilson,
effective as of October 5, 1995 (incorporated by reference
to Exhibit 10.17 to the 1996 10-K)
10.16 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
10.17 Forms of Restricted Stock Award Notices to award recipients,
pursuant to the Employee RRP and the Outside Director RRP
10.18 Agency Agreement, by and among Tappan Zee Financial, Inc.,
Tarrytowns Bank FSB, and Sandler O'Neill & Partners, L.P.,
dated August 14, 1995 (incorporated by reference to Exhibit
1.2 to the Registration Statement.
11 Statement re: Computation of Earnings Per Share
13.1 1997 Annual Report to Shareholders
21.1 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21.1 to the Registration Statement)
27 Financial Data Schedule (EDGAR filing only)
99.1 Proxy Statement for 1997 Annual Meeting of Shareholders
29
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Tappan Zee Financial, Inc.
Dated: June 23, 1997 By: /s/Stephen C. Byelick
----------------------
Stephen C. Byelick
President and Chief Executive Officer
Dated: June 23, 1997 By: /s/Harry G. Murphy
-------------------
Harry G. Murphy
Vice President and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/Marvin Levy Chairman June 23, 1997
- -------------------------
Marvin Levy
/s/ Stephen C. Byelick Director June 23, 1997
- -------------------------
Stephen C. Byelick
/s/ John T. Cooney Director June 23, 1997
- -------------------------
John T. Cooney
/s/Gerald L. Logan Director June 23, 1997
- -------------------------
Gerald L. Logan
/s/Harry G. Murphy Director June 23, 1997
- -------------------------
Harry G. Murphy
/s/Kevin J. Plunkett Director June 23, 1997
- -------------------------
Kevin J. Plunkett
/s/Paul R. Wheatley Director June 23, 1997
- -------------------------
Paul R. Wheatley
</TABLE>
30
<PAGE> 32
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
3.1 Certificate of Incorporation of Tappan Zee Financial, Inc.
(incorporated by reference to Exhibit 3.1 to the Registration Statement
on Form S-1, No. 33-94128, filed on June 30, 1995, as amended (the
"Registration Statement"))
3.2 Bylaws of Tappan Zee Financial, Inc. (incorporated by reference to
Exhibit 3.2 to the Registration Statement)
4.1 Certificate of Incorporation of Tappan Zee Financial, Inc. (see Exhibit
3.1 hereto)
4.2 Bylaws of Tappan Zee Financial, Inc. (see Exhibit 3.2 hereto)
4.3 Specimen Stock Certificate (incorporated by reference to Exhibit 4.3 to
the Registration Statement)
10.1.0 Tappan Zee Financial Inc. 1996 Stock Option Plan for Officers and
Employees ("Employee Option Plan") (incorporated by reference to
Exhibit A to the Registrant's Proxy Statement for use in connection
with its 1996 Annual Meeting of Shareholders (the "1996 Proxy
Statement"), previously filed with the Commission
10.1.1 Amendment No. 1 to the Employee Option Plan ...........................
10.1.2 Amendment No. 2 to the Employee Option Plan (incorporated by reference
to Exhibit A to the 1997 Proxy Statement)
10.2.0 Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside Directors
("Outside Director Option Plan") (incorporated by reference to Exhibit
B to the 1996 Proxy Statement)
10.2.1 Amendment No. 1 to the Outside Director Option Plan ...................
10.2.2 Amendment No. 2 to the Outside Director Option Plan (incorporated by
reference to Exhibit B to the 1997 Proxy Statement)
10.3.0 Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for
Officers and Employees ("Employee RRP") (incorporated by reference to
Exhibit C to the 1996 Proxy Statement)
10.3.1 Amendment No. 1 to the Employee RRP ...................................
</TABLE>
<PAGE> 33
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
EXHIBITS
to
FORM 10-K
SEC File No. 0-26466
----------------
TAPPAN ZEE FINANCIAL, INC.
Tarrytown, New York
- -------------------------------------------------------------------------------
<PAGE> 34
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
10.3.2 Amendment No. 2 to the Employee RRP (incorporated by reference to
Exhibit C to the 1997 Proxy Statement)
10.4.0 Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for
Outside Directors ("Outside Director RRP") (incorporated by reference
to Exhibit D to the 1996 Proxy Statement)
10.4.1 Amendment No. 1 to the Outside Director RRP...........................
10.4.2 Amendment No. 2 to the Outside Director RRP (incorporated by reference
to Exhibit D to the 1997 Proxy Statement)
10.5 Employee Stock Ownership Plan of Tappan Zee Financial, Inc. and Certain
Affiliates, as amended (incorporated by reference to Exhibit 10.6 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996 ("the 1996 10-K"))
10.6 Loan Agreement to the Employee Stock Ownership Plan Trust of Tappan Zee
Financial, Inc. and Certain Affiliates (incorporated by reference to
Exhibit 10.7 to the 1996 10-K)
10.7 Tarrytowns Bank Deferred Compensation Plan for Directors of Tarrytowns
Bank, FSB (incorporated by reference to Exhibit 10.7 to the
Registration Statement)
10.8 Retirement Plan for Board Members of Tappan Zee Financial, Inc. and
Certain Affiliates, adopted effective as of October 5, 1995
(incorporated by reference to Exhibit 10.9 to the 1996 10-K)
10.9 Employment Agreement by and between Tappan Zee Financial, Inc. and
Stephen C. Byelick, adopted effective as of October 5, 1995
(incorporated by reference to Exhibit 10.10 to the 1996 10-K)
10.10 Employment Agreement by and between Tappan Zee Financial, Inc. and
Harry G. Murphy, adopted effective as of October 5, 1995 (incorporated
by reference to Exhibit 10.11 to the 1996 10-K)
10.11 Employment Agreement by and between Tarrytowns Bank, FSB and Stephen C.
Byelick, adopted effective as of October 5, 1995 (incorporated by
reference to Exhibit 10.12 to the 1996 10-K)
</TABLE>
<PAGE> 35
<TABLE>
<CAPTION>
DESIGNATION DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
10.12 Employment Agreement by and between Tarrytowns Bank, FSB and Harry G.
Murphy, effective as of October 5, 1995 (incorporated by reference to
Exhibit 10.13 to the 1996 10-K)
10.13 Employee Retention Agreement by and among Tappan Zee Financial, Inc.,
Tarrytowns Bank, FSB and Christine Vidal, effective as of October 5,
1995 (incorporated by reference to Exhibit 10.15 to the 1996 10-K)
10.14 Employee Retention Agreement by and among Tappan Zee Financial, Inc.,
Tarrytowns Bank, FSB and Margaret E. Sampson, effective as of October
5, 1995 (incorporated by reference to Exhibit 10.16 to the 1996 10-K)
10.15 Employee Retention Agreement by and among Tappan Zee Financial, Inc.,
Tarrytowns Bank, FSB and Valerie Wilson, effective as of October 5,
1995 (incorporated by reference to Exhibit 10.17 to the 1996 10-K)
10.16 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..................................................................
10.17 Forms of Restricted Stock Award Notices to award recipients, pursuant
to the Employee RRP and the Outside Director RRP.....................
10.18 Agency Agreement, by and among Tappan Zee Financial, Inc., Tarrytowns
Bank, FSB and Sandler O'Neill & Partners, L.P., dated August 14, 1995
(incorporated by reference to Exhibit 1.2 to the Registration
Statement)
11 Statement re: Computation of Earnings Per Share......................
13.1 1997 Annual Report to Shareholders...................................
21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit
21.1 to the Registration Statement)
27 Financial Data Schedule (EDGAR Filing only)..........................
99.1 Proxy Statement for 1997 Annual Meeting of Shareholders..............
</TABLE>
<PAGE> 1
EXHIBIT 10.1.1
TAPPAN ZEE FINANCIAL, INC. 1996
STOCK OPTION PLAN
FOR OFFICERS AND EMPLOYEES
(Adopted on March 25, 1996
Effective as of July 11, 1996)
AMENDMENT
1. Article II - Effective as of July 11, 1996, section 2.3(e) shall be
amended by replacing the word "FInancial" with the word "Financial" where the
latter word appears therein.
2. Article II - Effective as of July 11, 1996, Article II shall be amended by
deleting section 2.15 therefrom and redesignating all remaining sections of
Article II and all cross-references thereto accordingly.
3. Article II - Effective as of July 11, 1996, section 2.23 shall be amended
by by replacing the word "Suprevision" with the word "Supervision" each time the
latter word appears therein.
4. Article IV - Effective as of July 11, 1996, Article IV shall be amended by
deleting section 4.9 therefrom and redesignating the remaining section of
Article IV and all cross-references thereto accordingly.
5. Article IV - Effective as of July 11, 1996, section 4.9, as redesignated,
shall be amended as follows: first, the phrase "at any time prior to October 5,
1996," shall be deleted from subsection (b) and second, the first clause in
subsection (c) shall be amended and restated to read:
(c) each Option granted under the Plan shall become exercisable as
follows:
6. Article IV - Effective as of July 11, 1996, section 5.3 shall be amended
and restated in its entirety to read as follows:
Page 1 of 3
<PAGE> 2
SECTION 5.3 ADJUSTMENTS IN THE EVENT OF A BUSINESS REORGANIZATION.
(a) In the event of any merger, consolidation, or other
business reorganization in which the Company is the surviving entity,
and in the event of any stock split, stock dividend or other event
generally affecting the number of Shares held by each Person who is
then a holder of record of Shares, the number of Shares covered by each
outstanding Option and the number of Shares available pursuant to
section 4.2 shall be adjusted to account for such event. Such adjust
ment shall be effected by multiplying such number of Shares by an
amount equal to the number of Shares that would be owned after such
event by a Person who, immediately prior to such event, was the holder
of record of one Share, and the Exercise Price of the Options shall be
adjusted by dividing the Exercise Price by such number of Shares;
provided, however, that the Committee may, in its discretion, establish
another appropriate method of adjustment.
(b) In the event of any merger, consolidation, or other
business reorganization in which the Company is not the surviving
entity, any exercisable Options granted under the Plan which remain
outstanding may be cancelled as of the effective date of such merger,
consolidation, business reorganization, liquidation or sale by the
Board upon 30 days' written notice to the Option holder; provided,
however, that on or as soon as practicable following the date of
cancellation, each Option holder shall receive a monetary payment in
such amount, or other property of such kind and value, as the Board
determines in good faith to be equivalent in value to the Options that
have been cancelled.
(c) In the event that the Company shall declare and pay any
dividend with respect to Shares (other than a dividend payable in
Shares) which results in a nontaxable return of capital to the holders
of Shares for federal income tax purposes or otherwise than by dividend
makes distribution of property to the holders of its Shares, the
Company shall, in the discretion of the Committee, either:
(i) make an equivalent payment to each Person
holding an outstanding Option as of the record date for such
dividend. Such payment shall be made at substantially the same
time, in substantially the same form and in substantially the
same amount per optioned Share as the dividend or other
distribution paid with respect to outstanding Shares;
provided, however, that if any dividend or distribution on
outstanding Shares is paid in property other than cash, the
Company, in the Committee's discretion, may make such payment
in a cash amount per optioned Share equal in fair market value
to the fair market value of the non-cash dividend or
distribution; or
(ii) adjust the Exercise Price of each outstanding
Option in such manner as the Committee may determine to be
appropriate to equitably reflect the payment of the dividend;
or
Page 2 of 3
<PAGE> 3
(iii) take the action described in section
5.3(c)(i) with respect to certain outstanding Options and the
action described in section 5.3(c)(ii) with respect to the
remaining outstanding Options;
provided, however, that no such action shall be taken without the
approval of the Office of Thrift Supervision until the stockholders of
the Company have voted to approve the provisions of this section 5.3(c)
in a vote taken after October 5, 1996.
7. Article VI - Effective as of July 11, 1996, section 6.8 shall be amended as
follows: first, the first sentence in such section shall be amended by deleting
therefrom the words "and Limited Stock Appreciation Rights" and second, the
second sentence of section 6.8 shall be amended by deleting therefrom the words
"or Limited Stock Appreciation Rights" each time such words appear therein.
Page 3 of 3
<PAGE> 1
EXHIBIT 10.2.1
TAPPAN ZEE FINANCIAL, INC. 1996
STOCK OPTION PLAN
FOR OUTSIDE DIRECTORS
(Adopted on March 25, 1996
Effective as of July 11, 1996)
AMENDMENT
1. Article II - Effective as of July 11, 1996, Article II shall be amended by
deleting section 2.13 therefrom and redesignating all remaining sections of
Article II and all cross-references thereto accordingly.
2. Article IV - Effective as of July 11, 1996, section 4.2(b) shall be amended
by substituting the date "July 11, 1997" for the date "October 5, 1996" therein.
3. Article IV - Effective as of July 11, 1996, Article IV shall be amended by
deleting section 4.7 therefrom.
4. Article V - Effective as of July 11, 1996, section 5.3 shall be amended and
restated in its entirety to read as follows:
SECTION 5.3 ADJUSTMENTS IN THE EVENT OF A BUSINESS REORGANIZATION.
(a) In the event of any merger, consolidation, or other
business reorganization in which the Company is the surviving entity,
and in the event of any stock split, stock dividend or other event
generally affecting the number of Shares held by each Person who is
then a holder of record of Shares, the number of Shares covered by each
outstanding Option and the number of Shares available pursuant to
section 4.1 shall be adjusted to account for such event. Such adjust
ment shall be effected by multiplying such number of Shares by an
amount equal to the number of Shares that would be owned after such
event by a Person who, immediately prior to such event, was the holder
of record of one Share, and the Exercise Price of the Options shall be
adjusted by dividing the Exercise Price by such number of Shares;
provided, however, that the Committee may, in its discretion, establish
another appropriate method of adjustment.
(b) In the event of any merger, consolidation, or other
business reorganization in which the Company is not the surviving
entity, any exercisable
Page 1 of 2
<PAGE> 2
Options granted under the Plan which remain outstanding may be
cancelled as of the effective date of such merger, consolidation,
business reorganization, liquidation or sale by the Board upon 30 days'
written notice to the Option holder; provided, however, that on or as
soon as practicable following the date of cancellation, each Option
holder shall receive a monetary payment in such amount, or other
property of such kind and value, as the Board determines in good faith
to be equivalent in value to the Options that have been cancelled.
(c) In the event that the Company shall declare and pay any
dividend with respect to Shares (other than a dividend payable in
Shares) which results in a nontaxable return of capital to the holders
of Shares for federal income tax purposes or otherwise than by dividend
makes distribution of property to the holders of its Shares, the
Company shall, in the discretion of the Committee, either:
(i) make an equivalent payment to each Person
holding an outstanding Option as of the record date for such
dividend. Such payment shall be made at substantially the same
time, in substantially the same form and in substantially the
same amount per optioned Share as the dividend or other
distribution paid with respect to outstanding Shares;
provided, however, that if any dividend or distribution on
outstanding Shares is paid in property other than cash, the
Company, in the Committee's discretion, may make such payment
in a cash amount per optioned Share equal in fair market value
to the fair market value of the non-cash dividend or
distribution; or
(ii) adjust the Exercise Price of each outstanding
Option in such manner as the Committee may determine to be
appropriate to equitably reflect the payment of the dividend;
or
(iii) take the action described in section
5.3(c)(i) with respect to certain outstanding Options and the
action described in section 5.3(c)(ii) with respect to the
remaining outstanding Options;
provided, however, that no such action shall be taken without the
approval of the Office of Thrift Supervision until the stockholders of
the Company have voted to approve the provisions of this section 5.3(c)
in a vote taken after October 5, 1996.
5. Article VI - Effective as of July 11, 1996, section 6.8 shall be amended as
follows: first, the first sentence in such section shall be amended by deleting
therefrom the words "and Limited Stock Appreciation Rights" and second, the
second sentence of section 6.8 shall be amended by deleting therefrom the words
"or Limited Stock Appreciation Rights" each time such words appear therein.
Page 2 of 2
<PAGE> 1
EXHIBIT 10.3.1
RECOGNITION AND RETENTION PLAN
FOR OFFICERS AND EMPLOYEES OF
TAPPAN ZEE FINANCIAL, INC.
(Adopted on March 25, 1996
Effective as of July 11, 1996)
AMENDMENT
1. Article V - Effective as of July 11, 1996, the first sentence of section
5.4(a) shall be amended and restated to read in its entirety as follows:
Any cash dividends or distributions declared and paid with
respect to Shares in the Trust Fund that are, as of the record
date for such dividend, allocated to an Eligible Employee in
connection with an Award shall be held in the Trust Fund and
distributed to such Eligible Employee (with any earnings
attributable thereto) at the same time as the related Shares.
2. Article V - Effective as of July 11, 1996, sections 5.7(a)(ii) and (iii)
shall be amended to read as follows:
(ii) no individual may be granted Awards under the
Plan covering in excess of Sixteen Thousand Two Hundred
(16,200) Shares;
(iii) each Award granted under the Plan shall
become vested and distributable as follows:
3 Article VII - Effective as of July 11, 1996, section 7.3 shall be amended
by adding the following new subsection "(c)" which shall read in its entirety as
follows:
(c) Nothing in this section 7.3 shall be deemed
to change the otherwise applicable vesting schedule for any
Eligible Employee.
Page 1 of 1
<PAGE> 1
EXHIBIT 10.4.1
RECOGNITION AND RETENTION PLAN
FOR OUTSIDE DIRECTORS OF
TAPPAN ZEE FINANCIAL, INC.
(Adopted on March 25, 1996
Effective as of July 11, 1996)
AMENDMENT
1. Article V - Effective as of July 11, 1996, the first sentence of section
5.3(a) shall be amended and restated to read in its entirety as follows:
Any cash dividends or distributions declared and paid with
respect to Shares in the Trust Fund that are, as of the record
date for such dividend, allocated to an Eligible Director in
connection with an Award shall be held in the Trust Fund and
distributed to such Eligible Director (with any earnings
attributable thereto) at the same time as the related Shares.
2. Article VI - Effective as of July 11, 1996, the first clause of section
5.6(a)(ii) shall be amended by replacing the words "prior to October 5, 1996"
with the words "under the Plan."
3. Article VII - Effective as of July 11, 1996, section 7.3 shall be amended
by adding the following new subsection "(c)" which shall read in its entirety as
follows:
(c) Nothing in this section 7.3 shall be deemed
to change the otherwise applicable vesting schedule for any
Eligible Director.
Page 1 of 1
<PAGE> 1
EXHIBIT 10.16
TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN
FOR OFFICERS AND EMPLOYEES
INCENTIVE STOCK OPTION AGREEMENT
- -
- ----------------------------------------- ------ -------- ------
Name of Optionee Social Security Number
- --------------------------------------------------------------------------------
Street Address
- -------------------------- -------------------- ----------------------------
City State ZIP Code
This Incentive Stock Option Agreement is intended to set forth the terms and
conditions on which an Incentive Stock Option has been granted under the Tappan
Zee Financial, Inc. 1996 Stock Option Plan for Officers and Employees. Set forth
below are the specific terms and conditions applicable to this Incentive Stock
Option. Attached as Exhibit A are its general terms and conditions. The
Agreement set forth herein shall be effective as of July 11, 1996 and shall
amend and supersede, in its entirety, any other Incentive Stock Option Agreement
issued to the Optionee as of such date.
<TABLE>
<CAPTION>
=======================================================================================================================
Option Grant (A) (B) (C) (D) (E)
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
Grant Date:
- -----------------------------------------------------------------------------------------------------------------------
Class of Optioned Shares* Common Common Common Common Common
- -----------------------------------------------------------------------------------------------------------------------
No. of Optioned Shares*
- -----------------------------------------------------------------------------------------------------------------------
Exercise Price Per Share*
- -----------------------------------------------------------------------------------------------------------------------
VESTING
- -----------------------------------------------------------------------------------------------------------------------
Earliest Exercise Date*
- -----------------------------------------------------------------------------------------------------------------------
Option Expiration Date*
=======================================================================================================================
</TABLE>
*Subject to adjustment as provided in the Plan and the General Terms and
Conditions.
By signing where indicated below, Tappan Zee Financial, Inc. (the "Company")
grants this Incentive Stock Option upon the specified terms and conditions, and
the Optionee acknowledges receipt of this Incentive Stock Option Agreement,
including Exhibit A, and agrees to observe and be bound by the terms and
conditions set forth herein.
TAPPAN ZEE FINANCIAL, INC. OPTIONEE
By
------------------------------- ----------------------------
Name:
Title:
- --------------------------------------------------------------------------------
INSTRUCTIONS: This page should be completed by or on behalf of the Compensation
Committee. Any blank space intentionally left blank should be crossed out. An
option grant consists of a number of optioned shares with uniform terms and
conditions. Where options are granted on the same date with varying terms and
conditions (for example, varying exercise prices or earliest exercise dates),
the options should be recorded as a series of grants each with its own uniform
terms and conditions.
<PAGE> 2
EXHIBIT A
TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN FOR OFFICERS AND EMPLOYEES
INCENTIVE STOCK OPTION AGREEMENT
GENERAL TERMS AND CONDITIONS
SECTION 1. INCENTIVE STOCK OPTION. The Company intends the Option
evidenced hereby to be an "incentive stock option" within the meaning of section
422 of the Internal Revenue Code of 1986.
SECTION 2. OPTION PERIOD. (a) Subject to section 2(b), the
Optionee shall have the right to purchase all or any portion of the optioned
Common Stock at any time during the period ("Option Period") commencing on the
Earliest Exercise Date and ending on the earliest to occur of the following
dates:
(i) removal for cause in accordance with the Company's
bylaws; or
(ii) the last day of the ten-year period commencing on the
date on which the Option was granted.
(b) Upon the termination of the Optionee's Service with the Company,
any Option granted hereunder whose Earliest Exercise Date has not occurred is
deemed forfeited. For this purpose, an Optionee's Service shall be deemed to
continue for so long as the Optionee is serving as an officer, employee, outside
director, advisory director, emeritus director or consultant to the Company or
is subject to and is observing the terms of a written agreement restricting his
ability to compete or imposing other restrictive covenants. In the event of the
Optionee's death or disability (as defined in the Plan) while in Service, the
date of death or disability shall be the Earliest Exercise Date of any Options
that are not currently exercisable. To the extent authorized pursuant to a Plan
provision that is approved by the Company's shareholders after October 5, 1996,
in the event of the Optionee's retirement (as defined in the Plan) or a change
of control (as defined in the Plan), the date of such retirement or change of
control shall be the Earliest Exercise Date of any Options that are not already
exercisable.
SECTION 3. EXERCISE PRICE. During the Option Period, and after the
applicable Earliest Exercise Date, the Optionee shall have the right to purchase
all or any portion of the Optioned Common Stock at the Exercise Price per Share.
SECTION 4. METHOD OF EXERCISE. The Optionee may, at any time
during the Option Period provided by section 2, exercise his right to purchase
all or any part of the optioned Common Stock then available for purchase;
provided, however, that the minimum number of shares of optioned Common Stock
which may be purchased shall be one hundred (100) or, if less, the total number
of shares of optioned Common Stock then available for pur chase. The Optionee
shall exercise such right by:
(a) giving written notice to the Committee, in the form attached
hereto as Appendix A; and
(b) delivering to the Committee full payment of the Exercise Price
for the Optioned Shares to be purchased.
The date of exercise shall be the earliest date practicable following the date
the requirements of this section 4 have been satisfied, but in no event more
than three (3) days after such date. Payment shall be made (i) in United States
dollars by certified check, money order or bank draft made payable to the order
of Tappan Zee Financial, Inc., (ii) in Shares duly endorsed for transfer and
with all necessary stock transfer tax stamps attached, already owned by the
Optionee and having a fair market value equal to the Exercise Price, such fair
market value to be determined in such manner as may be provided by the Committee
or as may be required in order to comply with or conform to the requirements of
any applicable laws or regulations, or (iii) in a combination of (i) and (ii).
SECTION 5. DELIVERY AND REGISTRATION OF OPTIONED SHARES. As soon
as is practicable following the date on which the Optionee has satisfied the
requirements of section 4, the Committee shall take such action as is necessary
to cause the Company to issue a stock certificate evidencing the Optionee's
ownership of the optioned Common Stock that has been purchased. The Optionee
shall have no right to vote or to receive dividends, nor have
-2-
<PAGE> 3
any other rights with respect to optioned Common Stock, prior to the date as of
which such optioned Common Stock is transferred to the Optionee on the stock
transfer records of the Company, and no adjustments shall be made for any
dividends or other rights for which the record date is prior to the date as of
which such transfer is effected. The obligation of the Company to deliver Common
Stock under this Agreement shall, if the Committee so requests, be conditioned
upon the receipt of a representation as to the investment intention of the
person to whom such Common Stock is to be delivered, in such form as the
Committee shall determine to be necessary or advisable to comply with the
provisions of applicable federal, state or local law. It may be provided that
any such representation shall become inoperative upon a registration of the
Common Stock or upon the occurrence of any other event eliminating the necessity
of such representation. The Company shall not be required to deliver any Common
Stock under this Agreement prior to (a) the admission of such Common Stock to
listing on any stock exchange on which Common Stock may then be listed, or (b)
the completion of such registration or other qualification under any state or
federal law, rule or regulations as the Committee shall determine to be
necessary or advisable.
SECTION 6. ADJUSTMENTS IN THE EVENT OF REORGANIZATION. In the
event of any merger, consolidation, or other business reorganization in which
the Company is the surviving entity, and in the event of any stock split, stock
dividend or other event generally affecting the number of shares of Common Stock
held by each per son who is then a shareholder of record, the number of shares
of Common Stock subject to the option granted hereunder and the Exercise Price
per share of such option shall be adjusted in accordance with section 5.3 of the
Plan to account for such event. In the event of any merger, consolidation, or
other business reorganization in which the Company is not the surviving entity,
the option granted hereunder shall be cancelled or adjusted in accordance with
the Plan. In the event that the Company shall declare and pay any dividend with
respect to Shares (other than a dividend payable in Shares or a regular
quarterly cash dividend), including a dividend which results in a nontaxable
return of capital to the holders of Shares for federal income tax purposes, or
otherwise than by dividend makes distribution of property to the holders of its
Shares, the Company shall, in the discretion of the Committee, (a) make an
equivalent payment to each Person holding an outstanding Option as of the record
date for such dividend in accordance with section 5.3(c)(i) of the Plan or (b)
adjust the Exercise Price per Share of outstanding Options in such a manner as
the Committee may determine to be appropriate to equitably reflect the payment
of the dividend or (c) take the action described in this section 6(a) with
respect to certain outstanding Options and the action described in section 6(b)
with respect to the remaining outstanding Options provided, however, that no
such action shall be taken without the approval of the Office of Thrift
Supervision until the stockholders of the Company have voted to approve the
provisions of section 5.3(c) of the Plan in a vote taken after October 5, 1996.
SECTION 7. NO RIGHT TO CONTINUED SERVICE. Nothing in this
Agreement nor any action of the Board or Committee with respect to this
Agreement shall be held or construed to confer upon the Optionee any right to a
continuation of service by the Company. The Optionee may be dismissed or
otherwise dealt with as though this Agreement had not been entered into.
SECTION 8. TAXES. Where any person is entitled to receive shares
pursuant to the exercise of the Option granted hereunder, the Company shall have
the right to require such person to pay to the Company the amount of any tax
which the Company is required to withhold with respect to such shares, or, in
lieu thereof, to retain, or to sell without notice, a sufficient number of
shares to cover the amount required to be withheld.
SECTION 9. NOTICES. Any communication required or permitted to be
given under the Plan, including any notice, direction, designation, comment,
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:
(a) If to the Committee:
Tappan Zee Financial, Inc.
75 Broadway
Tarrytown, New York 10591
Attention: Compensation Committee
-3-
<PAGE> 4
(b) If to the Optionee, to the Optionee's address as shown in the
Company's personnel records.
SECTION 10. RESTRICTIONS ON TRANSFER. The option granted hereunder
shall not be subject in any manner to anticipation, alienation or assignment,
nor shall such option be liable for or subject to debts, contracts, liabilities,
engagements or torts, nor shall it be transferable by the Optionee other than by
will or by the laws of descent and distribution or as otherwise permitted by the
Plan.
SECTION 11. SUCCESSORS AND ASSIGNS. This Agreement shall inure to
the benefit of and shall be binding upon the Company and the Optionee and their
respective heirs, successors and assigns.
SECTION 12. CONSTRUCTION OF LANGUAGE. Whenever appropriate in the
Agreement, 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 or the neuter. Any reference to
a section shall be a reference to a section of this Agreement, unless the
context clearly indicates otherwise. Capitalized terms not specifically defined
herein shall have the meanings assigned to them under the Plan.
SECTION 13. GOVERNING LAW. This Agreement 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 the federal law.
SECTION 14. AMENDMENT. This Agreement may be amended, in whole or
in part and in any manner not inconsistent with the provisions of the Plan, at
any time and from time to time, by written agreement between the Company and the
Optionee.
SECTION 15. PLAN PROVISIONS CONTROL. This Agreement and the rights
and obligations created hereunder shall be subject to all of the terms and
conditions of the Plan. In the event of any conflict between the provisions of
the Plan and the provisions of this Agreement, the terms of the Plan, which are
incorporated herein by reference, shall control. By signing this Agreement, the
Optionee acknowledges receipt of a copy of the Plan.
SECTION 16. CHANGE IN CONTROL. A "change in control" shall be as
defined in the Plan.
-4-
<PAGE> 5
APPENDIX A TO INCENTIVE STOCK OPTION AGREEMENT
Tappan Zee Financial, Inc. 1996 Stock Option Plan for Officers and Employees
NOTICE OF EXERCISE OF INCENTIVE STOCK OPTION
1. INSTRUCTIONS. Use this Notice to inform the Committee administering the
Tappan Zee Financial, Inc. 1996 Stock Option Plan for Officers and
Employees ("Plan") that you are exercising your right to purchase
shares of common stock ("Shares") of Tappan Zee Financial, Inc.
("Tappan Zee") pursuant to a non-qualified stock option ("Option")
granted under the Plan. If you are not the person to whom the Option
was granted ("Option Recipient"), you must attach to this Notice proof
of your right to exercise the Option granted under the Incentive Stock
Option Agreement entered into between Tappan Zee and the Option
Recipient ("Agreement"). This Notice should be personally delivered or
mailed by certified mail, return receipt requested to: Tappan Zee
Financial, Inc., 75 Broadway, Tarrytown, New York 10591, Attention:
Compensation Committee. The effective date of the exercise of the
Option shall be the earliest date practicable following the date this
Notice is received by the Committee, but in no event more than three
days after such date ("Effective Date"). Except as specifically
provided to the contrary herein, capitalized terms shall have the
meanings assigned to them under the Plan. This Notice is subject to all
of the terms and conditions of the Plan and the Agreement.
2. PURCHASE OF SHARES. Pursuant to the Agreement made and entered into as
of _____________________, 19 ___ [enter date of Agreement] by and
between Tappan Zee and [enter the name of the Option Recipient], I
hereby exercise my right to purchase __________ Shares at an Exercise
Price per Share of $_________, for a Total Exercise Price of
$_____________ [enter the product of the number of Shares multiplied by
the Exercise Price per Share]. As a payment for such Shares, I [check
and complete one or more; the sum of the amounts shown in (a), (b) and
(c), must equal the Total Exercise Price shown above:
<TABLE>
<S> <C> <C> <C>
(A) [ ] enclose a certified check, money order, or bank draft $__________
payable to the order of Tappan Zee Financial, Inc. in
the amount of
(B) [ ] enclose Shares duly endorsed for transfer to Tappan Zee $__________
with all necessary stock transfer stamps attached and
having a fair market value of
Total Exercise Price $__________
</TABLE>
3. ISSUANCE OF CERTIFICATES. I hereby direct that the stock certificates
representing the Shares purchased pursuant to section 2 above be issued
to the following person(s) in the amount specified below:
<TABLE>
<CAPTION>
Name and Address Social Security No. No of Shares
---------------- ------------------- ------------
<S> <C> <C>
- ------------------------------------------- - -
- ------------------------------------------- ------ ------ -------- ---------------
- ------------------------------------------- - -
- ------------------------------------------- ------ ------ -------- ---------------
</TABLE>
4. WITHHOLDING ELECTIONS. [For Employee Option Recipients only.
Beneficiaries and Outside Directors should not complete.] I understand
that I am responsible for the amount of federal, state and local taxes
required to be withheld with respect to the Shares to be issued to me
pursuant to this Notice, but that I may request Tappan Zee to retain or
sell a sufficient number of such Shares to cover the amount to be
withheld. I hereby request that any taxes required to be withheld be
paid in the following manner [check one]:
(A) [ ] With a certified or bank check that I will deliver
to the Administrator on the day after the Effective
Date of my Option exercise.
(B) [ ] With the proceeds from a sale of Shares that would
otherwise be distributed to me.
I understand that the withholding elections I have made on this form are
not binding on the Committee, and that the Committee will decide the
amount to be withheld and the method of withholding and advise me of its
decision prior to the Effective Date. I further understand that the
Committee may request additional information or assurances regarding the
manner and time at which I will report the income attributable to the
distribution to be made to me.
I further understand that if I have elected to have Shares sold to
satisfy tax withholding, I may be asked to pay a minimal amount of such
taxes in cash in order to avoid the sale of more Shares than are
necessary.
5. COMPLIANCE WITH TAX AND SECURITIES LAWS. I understand that I must rely
on, and consult with, my own tax and legal counsel (and not Tappan Zee
Financial, Inc.) regarding the application of all laws -- particularly
tax and securities laws -- to the transactions to be effected pursuant
to my Option and this Notice. I understand that I will be responsible
for paying any federal, state and local taxes that may become due upon
the sale (including a sale pursuant to a "cashless exercise") or other
disposition of Shares issued pursuant to this Notice and that I must
consult with my own tax advisor regarding how and when such income will
be reportable.
- ---------------------------------- -------------------------
Signature Date
- --------------------------------------------------------------------------------
Address
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
COMPENSATION COMMITTEE
Received [check one]: [ ] By Hand [ ] By Mail Post Marked
------------------
Date of Post Mark
By
---------------------------------------- ------------------
Authorized Signature Date of Receipt
<PAGE> 6
TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
NON-QUALIFIED STOCK OPTION AGREEMENT
- -
- ----------------------------------------- ------ -------- ------
Name of Optionee Social Security Number
- --------------------------------------------------------------------------------
Street Address
- -------------------------- -------------------- ----------------------------
City State ZIP Code
This Non-Qualified Stock Option Agreement is intended to set forth the terms and
conditions on which a Non-Qualified Stock Option has been granted under the
Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside Directors. Set
forth below are the specific terms and conditions applicable to this
Non-Qualified Stock Option. Attached as Exhibit A are its general terms and
conditions. The Agreement set forth herein shall be effective as of July 11,
1996 and shall amend and supersede, in its entirety, any other Non-Qualified
Stock Option Agreement issued to the Optionee as of such date.
<TABLE>
<CAPTION>
========================================================================================================================
Option Grant (A) (B) (C) (D) (E)
========================================================================================================================
<S> <C> <C> <C> <C> <C>
Grant Date:
- ------------------------------------------------------------------------------------------------------------------------
Class of Optioned Shares* Common Common Common Common Common
- ------------------------------------------------------------------------------------------------------------------------
No. of Optioned Shares*
- ------------------------------------------------------------------------------------------------------------------------
Exercise Price Per Share*
- ------------------------------------------------------------------------------------------------------------------------
VESTING
- ------------------------------------------------------------------------------------------------------------------------
Earliest Exercise Date*
- ------------------------------------------------------------------------------------------------------------------------
Option Expiration Date*
========================================================================================================================
</TABLE>
*Subject to adjustment as provided in the Plan and the General Terms and
Conditions.
By signing where indicated below, Tappan Zee Financial, Inc. (the "Company")
grants this Non-Qualified Stock Option upon the specified terms and conditions,
and the Optionee acknowledges receipt of this Non-Qualified Stock Option
Agreement, including Exhibit A, and agrees to observe and be bound by the terms
and conditions set forth herein.
TAPPAN ZEE FINANCIAL, INC. OPTIONEE
By
------------------------------- ----------------------------
Name:
Title:
- --------------------------------------------------------------------------------
INSTRUCTIONS: This page should be completed by or on behalf of the Compensation
Committee. Any blank space intentionally left blank should be crossed out. An
option grant consists of a number of optioned shares with uniform terms and
conditions. Where options are granted on the same date with varying terms and
conditions (for example, varying exercise prices or earliest exercise dates),
the options should be recorded as a series of grants each with its own uniform
terms and conditions.
<PAGE> 7
EXHIBIT A
TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
NON-QUALIFIED STOCK OPTION AGREEMENT
GENERAL TERMS AND CONDITIONS
SECTION 1. NON-QUALIFIED STOCK OPTION. The Company intends the
Option evidenced hereby not to be an "incentive stock option" within the meaning
of section 422 of the Internal Revenue Code of 1986.
SECTION 2. OPTION PERIOD. (a) Subject to section 2(b), the
Optionee shall have the right to purchase all or any portion of the optioned
Common Stock at any time during the period ("Option Period") commencing on the
Earliest Exercise Date and ending on the earliest to occur of the following
dates:
(i) removal for cause in accordance with the Company's
bylaws; or
(ii) the last day of the ten-year period commencing on the
date on which the Option was granted.
(b) Upon the termination of the Optionee's Service with the
Company, any Option granted hereunder whose Earliest Exercise Date has not
occurred is deemed forfeited. For this purpose, an Optionee's Service shall be
deemed to continue for so long as the Optionee is serving as an officer,
employee, outside director, advisory director, emeritus director or consultant
to the Company or is subject to and is observing the terms of a written
agreement restricting his ability to compete or imposing other restrictive
covenants. In the event of the Optionee's death or disability (as defined in
the Plan) while in Service, the date of death or disability shall be the
Earliest Exercise Date of any Options that are not currently exercisable. To
the extent authorized pursuant to a Plan provision that is approved by the
Company's shareholders after October 5, 1996, in the event of the Optionee's
retirement (as defined in the Plan) or a change of control (as defined in the
Plan), the date of such retirement or change of control shall be the Earliest
Exercise Date of any Options that are not already exercisable.
SECTION 3. EXERCISE PRICE. During the Option Period, and after the
applicable Earliest Exercise Date, the Optionee shall have the right to purchase
all or any portion of the Optioned Common Stock at the Exercise Price per Share.
SECTION 4. METHOD OF EXERCISE. The Optionee may, at any time
during the Option Period provided by section 2, exercise his right to purchase
all or any part of the optioned Common Stock then available for purchase;
provided, however, that the minimum number of shares of optioned Common Stock
which may be purchased shall be one hundred (100) or, if less, the total number
of shares of optioned Common Stock then available for pur chase. The Optionee
shall exercise such right by:
(a) giving written notice to the Committee, in the form
attached hereto as Appendix A; and
(b) delivering to the Committee full payment of the Exercise
Price for the Optioned Shares to be purchased.
The date of exercise shall be the earliest date practicable following the date
the requirements of this section 4 have been satisfied, but in no event more
than three (3) days after such date. Payment shall be made (i) in United States
dollars by certified check, money order or bank draft made payable to the order
of Tappan Zee Financial, Inc., (ii) in Shares duly endorsed for transfer and
with all necessary stock transfer tax stamps attached, already owned by the
Optionee and having a fair market value equal to the Exercise Price, such fair
market value to be determined in such manner as may be provided by the Committee
or as may be required in order to comply with or conform to the requirements of
any applicable laws or regulations, or (iii) in a combination of (i) and (ii).
SECTION 5. DELIVERY AND REGISTRATION OF OPTIONED SHARES. As soon
as is practicable following the date on which the Optionee has satisfied the
requirements of section 4, the Committee shall take such action as is necessary
to cause the Company to issue a stock certificate evidencing the Optionee's
ownership of the optioned Common Stock that has been purchased. The Optionee
shall have no right to vote or to receive dividends, nor have
-2-
<PAGE> 8
any other rights with respect to optioned Common Stock, prior to the date as of
which such optioned Common Stock is transferred to the Optionee on the stock
transfer records of the Company, and no adjustments shall be made for any
dividends or other rights for which the record date is prior to the date as of
which such transfer is effected. The obligation of the Company to deliver Common
Stock under this Agreement shall, if the Committee so requests, be conditioned
upon the receipt of a representation as to the investment intention of the
person to whom such Common Stock is to be delivered, in such form as the
Committee shall determine to be necessary or advisable to comply with the
provisions of applicable federal, state or local law. It may be provided that
any such representation shall become inoperative upon a registration of the
Common Stock or upon the occurrence of any other event eliminating the necessity
of such representation. The Company shall not be required to deliver any Common
Stock under this Agreement prior to (a) the admission of such Common Stock to
listing on any stock exchange on which Common Stock may then be listed, or (b)
the completion of such registration or other qualification under any state or
federal law, rule or regulations as the Committee shall determine to be
necessary or advisable.
SECTION 6. ADJUSTMENTS IN THE EVENT OF REORGANIZATION. In the
event of any merger, consolidation, or other business reorganization in which
the Company is the surviving entity, and in the event of any stock split, stock
dividend or other event generally affecting the number of shares of Common Stock
held by each per son who is then a shareholder of record, the number of shares
of Common Stock subject to the option granted hereunder and the Exercise Price
per share of such option shall be adjusted in accordance with section 5.3 of the
Plan to account for such event. In the event of any merger, consolidation, or
other business reorganization in which the Company is not the surviving entity,
the option granted hereunder shall be cancelled or adjusted in accordance with
the Plan. In the event that the Company shall declare and pay any dividend with
respect to Shares (other than a dividend payable in Shares or a regular
quarterly cash dividend), including a dividend which results in a nontaxable
return of capital to the holders of Shares for federal income tax purposes, or
otherwise than by dividend makes distribution of property to the holders of its
Shares, the Company shall, in the discretion of the Committee, (a) make an
equivalent payment to each Person holding an outstanding Option as of the record
date for such dividend in accordance with section 5.3(c)(i) of the Plan or (b)
adjust the Exercise Price per Share of outstanding Options in such a manner as
the Committee may determine to be appropriate to equitably reflect the payment
of the dividend or (c) take the action described in this section 6(a) with
respect to certain outstanding Options and the action described in section 6(b)
with respect to the remaining outstanding Options provided, however, that no
such action shall be taken without the approval of the Office of Thrift
Supervision until the stockholders of the Company have voted to approve the
provisions of section 5.3(c) of the Plan in a vote taken after October 5, 1996.
SECTION 7. NO RIGHT TO CONTINUED SERVICE. Nothing in this
Agreement nor any action of the Board or Committee with respect to this
Agreement shall be held or construed to confer upon the Optionee any right to a
continuation of service by the Company. The Optionee may be dismissed or
otherwise dealt with as though this Agreement had not been entered into.
SECTION 8. TAXES. Where any person is entitled to receive shares
pursuant to the exercise of the Option granted hereunder, the Company shall have
the right to require such person to pay to the Company the amount of any tax
which the Company is required to withhold with respect to such shares, or, in
lieu thereof, to retain, or to sell without notice, a sufficient number of
shares to cover the amount required to be withheld.
SECTION 9. NOTICES. Any communication required or permitted to be
given under the Plan, including any notice, direction, designation, comment,
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:
(a) If to the Committee:
Tappan Zee Financial, Inc.
75 Broadway
Tarrytown, New York 10591
Attention: Compensation Committee
-3-
<PAGE> 9
(b) If to the Optionee, to the Optionee's address as shown in the
Company's personnel records.
SECTION 10. RESTRICTIONS ON TRANSFER. The option granted hereunder
shall not be subject in any manner to anticipation, alienation or assignment,
nor shall such option be liable for or subject to debts, contracts, liabilities,
engagements or torts, nor shall it be transferable by the Optionee other than by
will or by the laws of descent and distribution or as otherwise permitted by the
Plan.
SECTION 11. SUCCESSORS AND ASSIGNS. This Agreement shall inure to
the benefit of and shall be binding upon the Company and the Optionee and their
respective heirs, successors and assigns.
SECTION 12. CONSTRUCTION OF LANGUAGE. Whenever appropriate in the
Agreement, 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 or the neuter. Any reference to
a section shall be a reference to a section of this Agreement, unless the
context clearly indicates otherwise. Capitalized terms not specifically defined
herein shall have the meanings assigned to them under the Plan.
SECTION 13. GOVERNING LAW. This Agreement 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 the federal law.
SECTION 14. AMENDMENT. This Agreement may be amended, in whole or
in part and in any manner not inconsistent with the provisions of the Plan,
at any time and from time to time, by written agreement between the Company and
the Optionee.
SECTION 15. PLAN PROVISIONS CONTROL. This Agreement and the rights
and obligations created hereunder shall be subject to all of the terms and
conditions of the Plan. In the event of any conflict between the provisions of
the Plan and the provisions of this Agreement, the terms of the Plan, which are
incorporated herein by reference, shall control. By signing this Agreement, the
Optionee acknowledges receipt of a copy of the Plan.
SECTION 16. CHANGE IN CONTROL. A "change in control" shall be as
defined in the Plan.
-4-
<PAGE> 10
APPENDIX A TO NON-QUALIFIED STOCK OPTION AGREEMENT
Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside Directors
NOTICE OF EXERCISE OF NON-QUALIFIED STOCK OPTION
1. INSTRUCTIONS. Use this Notice to inform the Committee administering the
Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside Directors
("Plan") that you are exercising your right to purchase shares of
common stock ("Shares") of Tappan Zee Financial, Inc. ("Tappan Zee")
pursuant to a non-qualified stock option ("Option") granted under the
Plan. If you are not the person to whom the Option was granted ("Option
Recipient"), you must attach to this Notice proof of your right to
exercise the Option granted under the Non-Qualified Stock Option
Agreement entered into between Tappan Zee and the Option Recipient
("Agreement"). This Notice should be personally delivered or mailed by
certified mail, return receipt requested to: Tappan Zee Financial,
Inc., 75 Broadway, Tarrytown, New York 10591, Attention: Compensation
Committee. The effective date of the exercise of the Option shall be
the earliest date practicable following the date this Notice is
received by the Committee, but in no event more than three days after
such date ("Effective Date"). Except as specifically provided to the
contrary herein, capitalized terms shall have the meanings assigned to
them under the Plan. This Notice is subject to all of the terms and
conditions of the Plan and the Agreement.
2. PURCHASE OF SHARES. Pursuant to the Agreement made and entered into as
of _____________________, 19 ___ [enter date of Agreement] by and
between Tappan Zee and [enter the name of the Option Recipient], I
hereby exercise my right to purchase __________ Shares at an Exercise
Price per Share of $_________, for a Total Exercise Price of
$_____________ [enter the product of the number of Shares multiplied by
the Exercise Price per Share]. As a payment for such Shares, I [check
and complete one or more; the sum of the amounts shown in (a), (b) and
(c), must equal the Total Exercise Price shown above:
<TABLE>
<S> <C> <C> <C>
(A) [ ] enclose a certified check, money order, or bank draft $__________
payable to the order of Tappan Zee Financial, Inc. in
the amount of
(B) [ ] enclose Shares duly endorsed for transfer to Tappan Zee $__________
with all necessary stock transfer stamps attached and
having a fair market value of
Total Exercise Price $__________
</TABLE>
3. ISSUANCE OF CERTIFICATES. I hereby direct that the stock certificates
representing the Shares purchased pursuant to section 2 above be issued
to the following person(s) in the amount specified below:
<TABLE>
<CAPTION>
Name and Address Social Security No. No of Shares
---------------- ------------------- ------------
<S> <C> <C>
- ------------------------------------------- - -
- ------------------------------------------- ------ ------ -------- ---------------
- ------------------------------------------- - -
- ------------------------------------------- ------ ------ -------- ---------------
</TABLE>
4. WITHHOLDING ELECTIONS. [For Employee Option Recipients only.
Beneficiaries and Outside Directors should not complete.] I understand
that I am responsible for the amount of federal, state and local taxes
required to be withheld with respect to the Shares to be issued to me
pursuant to this Notice, but that I may request Tappan Zee to retain or
sell a sufficient number of such Shares to cover the amount to be
withheld. I hereby request that any taxes required to be withheld be
paid in the following manner [check one]:
(A) [ ] With a certified or bank check that I will deliver
to the Administrator on the day after the Effective
Date of my Option exercise.
(B) [ ] With the proceeds from a sale of Shares that would
otherwise be distributed to me.
I understand that the withholding elections I have made on this form are
not binding on the Committee, and that the Committee will decide the amount
to be withheld and the method of withholding and advise me of its decision
prior to the Effective Date. I further understand that the Committee may
request additional information or assurances regarding the manner and time
at which I will report the income attributable to the distribution to be
made to me.
I further understand that if I have elected to have Shares sold to satisfy
tax withholding, I may be asked to pay a minimal amount of such taxes in
cash in order to avoid the sale of more Shares than are necessary.
5. COMPLIANCE WITH TAX AND SECURITIES LAWS. I understand that I must rely on,
and consult with, my own tax and legal counsel (and not Tappan Zee
Financial, Inc.) regarding the application of all laws -- particularly tax
and securities laws -- to the transactions to be effected pursuant to my
Option and this Notice. I understand that I will be responsible for paying
any federal, state and local taxes that may become due upon the sale
(including a sale pursuant to a "cashless exercise") or other disposition
of Shares issued pursuant to this Notice and that I must consult with my
own tax advisor regarding how and when such income will be reportable.
- ---------------------------------- -------------------------
Signature Date
- -------------------------------------------------------------------------------
Address
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
COMPENSATION COMMITTEE
Received [check one]: [ ] By Hand [ ] By Mail Post Marked
------------------
Date of Post Mark
By
---------------------------------------- ------------------
Authorized Signature Date of Receipt
<PAGE> 1
EXHIBIT 10.17
TAPPAN ZEE FINANCIAL, INC. RECOGNITION AND RETENTION PLAN
FOR OFFICERS AND EMPLOYEES
RESTRICTED STOCK AWARD NOTICE
- -
- ----------------------------------------- ------ -------- ------
Name of Award Recipient Social Security Number
- --------------------------------------------------------------------------------
Street Address
- -------------------------- -------------------- ----------------------------
City State ZIP Code
This Restricted Stock Award Notice is intended to set forth the terms and
conditions on which a Restricted Stock Award has been granted under the Tappan
Zee Financial, Inc. Recognition and Retention Plan for Officers and Employees.
Set forth below are the specific terms and conditions applicable to this
Restricted Stock Award. Attached as Exhibit A are its general terms and
conditions. This Restricted Stock Award Notice shall be effective as of July 11,
1996 and shall amend and supersede, in its entirety, any other Restricted Stock
Award issued to the Award Recipient as of such date.
<TABLE>
<CAPTION>
============================================================================================================================
Restricted Stock Award (A) (B) (C) (D) (E)
============================================================================================================================
<S> <C> <C> <C> <C> <C>
Effective Date
- ----------------------------------------------------------------------------------------------------------------------------
Class of Shares*
- ----------------------------------------------------------------------------------------------------------------------------
No. of Awarded Shares*
- ----------------------------------------------------------------------------------------------------------------------------
Vesting Date*
============================================================================================================================
</TABLE>
*Subject to adjustment as provided in the Plan and the General Terms and
Conditions.
By signing where indicated below, Tappan Zee Financial, Inc. (the "Company")
grants this Restricted Stock Award upon the specified terms and conditions, and
the Award Recipient acknowledges receipt of this Restricted Stock Award Notice,
including Exhibit A, and agrees to observe and be bound by the terms and
conditions set forth herein.
TAPPAN ZEE FINANCIAL, INC. AWARD RECIPIENT
By
----------------------------------- ------------------------
Name:
Title:
INSTRUCTIONS: This page should be completed by or on behalf of the Compensation
Committee. Any blank space intentionally left blank should be crossed out. A
Restricted Stock Award consists of a number of Awarded Shares with uniform terms
and conditions. Where Awarded Shares are awarded on the same date with varying
terms and conditions (for example, varying vesting dates), the awards should be
recorded as a series of grants each with its own uniform terms and conditions.
<PAGE> 2
EXHIBIT A
TAPPAN ZEE FINANCIAL, INC. RECOGNITION AND RETENTION PLAN
FOR OFFICERS AND EMPLOYEES
RESTRICTED STOCK AWARD
GENERAL TERMS AND CONDITIONS
Section 1. Ownership of Shares. The shares of Common Stock, par value
$.01 per share, of Tappan Zee Financial Inc. ("Shares") covered by this Award
("Awarded Shares") are held in trust by Marine Midland Bank, N.A., the Trustee
of the Plan, for your benefit until such time as they are distributed to you or,
if earlier, until you forfeit your rights to the Awarded Shares.
Section 2. Vesting. In general the Awarded Shares shall become vested
and available for distribution to you at the dates set forth in the Restricted
Stock Award Notice. In the event that your service with the Company terminates
on account of your death or Disability, then any Awarded Shares not theretofore
forfeited shall become immediately vested. In addition, to the extent authorized
pursuant to a Plan provision that is approved by the Company's shareholders
after October 5, 1996, in the event your service terminates due to retirement
(as defined in the Plan) or in the event a change of control (as defined in the
Plan) occurs, then any Awarded Shares not theretofore forfeited shall become
immediately vested.
Section 3. Forfeitures. In the event that your service with the Company
terminates before all of the Awarded Shares become vested, any Awarded Shares
that have not yet become vested pursuant to section 2 of this Award Notice shall
be forfeited. Following such a forfeiture, you will have no rights whatsoever
with respect to the Awarded Shares forfeited. For purposes of determining any
forfeitures, you will not be deemed to have terminated service with the Company
for so long as you provide services to the Company or any subsidiary or
affiliate of the Company as an employee, officer, director, advisory director,
director emeritus, or consultant or for so long as you are bound by and are
observing the terms of any contract which imposes restrictions on your right to
perform services for a competitor of the Company or any of its subsidiaries or
affiliates or provides other restrictive covenants.
Section 4. Dividends. Any cash dividends or distributions declared and
paid with respect to Awarded Shares not forfeited shall be held in the Trust
Fund in accordance with the terms of the Plan and distributed to you (with any
earnings attributable thereto) at the same time as the related Awarded Shares.
Any stock dividends declared and paid with respect to Awarded Shares not
forfeited shall be allocated to you, and such stock dividends shall be held in
the Trust Fund and shall be subject to such restrictions and shall become vested
under the same terms and conditions as the Awarded Shares to which they pertain.
Section 5. Voting Rights. You shall have the exclusive right to direct
the manner in which all voting rights appurtenant to Awarded Shares not
forfeited will be exercised while such Awarded Shares are held in the Trust
Fund. Such a direction shall be given by completing and filing a written
direction, in the form and manner prescribed by the Committee, with such person
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.
Section 6. Distribution Upon Vesting. As soon as practicable following
the date any Awarded Shares become vested pursuant to the Award Notice, the
Company will issue to you, or your Beneficiary entitled to such Awarded Shares,
a stock certificate evidencing ownership of the Shares. Any additional Shares
attributable to stock dividends paid with respect to the Awarded Shares then
being distributed pursuant to this section 6 shall also be distributed and shall
be evidenced by such stock certificate.
Section 7. Registration of Shares. The Company's obligation to deliver
Shares pursuant to this Award Notice shall, if the Committee so requests, be
conditioned upon the receipt of a representation as to the investment intention
of you or your Beneficiary to whom such Shares are to be delivered, in such form
as the Committee shall determine to be necessary or advisable to comply with the
provisions of applicable federal, state or local law. It may be provided that
any such representation shall become inoperative upon a registration of the
Shares or upon the occurrence of any other event eliminating the necessity of
such representation. The Company shall not be required to deliver any Shares
under the Plan prior to (a) the admission of such Shares to listing on any stock
exchange on which Shares may then be listed, or (b) the completion of such
registration or other qualification under any state or federal law, rule or
regulation as the Committee shall determine to be necessary or advisable.
<PAGE> 3
Section 8. No Right to Continued Employment. Nothing in this Award
Notice nor any action of the Board or the Committee with respect to this Award
Notice shall be held or construed to confer upon you any right to a continuation
of service with the Company or any of its affiliates which employ you. You may
be dismissed or otherwise dealt with to the same extent as though this Award had
not been made.
Section 9. Taxes. The Company, the Committee or the Trustee shall have
the right to require you to pay the amount of any tax which is required to be
withheld with respect to the Awarded Shares, or, in lieu thereof, to retain, or
to sell without notice, a sufficient number of Awarded Shares to cover the
amount required to be withheld.
Section 10. Notices. Any communication required or permitted to be
given under the Plan, including any notice, direction, designation, comment,
instruction, objection or waiver, shall be in writing and shall be deemed to
have been given at such time as it is personally delivered 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:
(a) If to the Committee:
Tappan Zee Financial, Inc.
75 Broadway
Tarrytown, New York 10591
Attention: Compensation Committee
(b) If to you, to your address as shown in
the Company's personnel records.
Section 11. No Assignment. The Awarded Shares shall not be transferable
by you other than by will or by the laws of descent and distribution, and the
Awarded Shares shall be distributable only to you during your lifetime.
Section 12. Successors and Assigns. This Award Notice shall inure to
the benefit of and shall be binding upon you and the Company and your respective
heirs, successors and assigns.
Section 13. Construction of Language. Whenever appropriate in this
Award Notice, 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 or the neuter. Any
reference to a section shall be a reference to a section of this Award Notice,
unless the context clearly indicates otherwise. Capitalized terms not
specifically defined herein shall have the meanings assigned to them under the
Plan.
Section 14. Governing Law. This Award Notice shall be construed and
enforced in accordance with 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 the federal laws of the United States of America.
Section 15. Amendment. This Award Notice may be amended, in whole or in
part and in any manner not inconsistent with the provisions of the Plan, at any
time and from time to time, by written agreement between you and the Company.
Section 16. Plan Provisions Control. This Award Notice, and the rights
and obligations created hereunder, shall be subject to all of the terms and
conditions of the Plan. In the event of any conflict between the provisions of
the Plan and the provisions of this Award Notice, the terms of the Plan, which
are incorporated herein by reference, shall control. By signing this Award
Notice, you acknowledge receipt of a copy of the Plan.
<PAGE> 4
TAPPAN ZEE FINANCIAL, INC. RECOGNITION AND RETENTION PLAN
FOR OUTSIDE DIRECTORS
RESTRICTED STOCK AWARD NOTICE
- -
- ----------------------------------------- ------ -------- ------
Name of Award Recipient Social Security Number
- --------------------------------------------------------------------------------
Street Address
- -------------------------- -------------------- ----------------------------
City State ZIP Code
This Restricted Stock Award Notice is intended to set forth the terms and
conditions on which a Restricted Stock Award has been granted under the Tappan
Zee Financial, Inc. Recognition and Retention Plan for Outside Directors. Set
forth below are the specific terms and conditions applicable to this Restricted
Stock Award. Attached as Exhibit A are its general terms and conditions. This
Restricted Stock Award Notice shall be effective as of July 11, 1996 and shall
amend and supersede, in its entirety, any other Restricted Stock Award issued to
the Award Recipient as of such date.
<TABLE>
<CAPTION>
===========================================================================================================================
Restricted Stock Award (A) (B) (C) (D) (E)
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
Effective Date
- ---------------------------------------------------------------------------------------------------------------------------
Class of Shares* Common Common Common Common Common
- ---------------------------------------------------------------------------------------------------------------------------
No. of Awarded Shares*
- ---------------------------------------------------------------------------------------------------------------------------
Vesting Date*
===========================================================================================================================
</TABLE>
*Subject to adjustment as provided in the Plan and the General Terms and
Conditions.
By signing where indicated below, Tappan Zee Financial, Inc. (the "Company")
grants this Restricted Stock Award upon the specified terms and conditions, and
the Award Recipient acknowledges receipt of this Restricted Stock Award Notice,
including Exhibit A, and agrees to observe and be bound by the terms and
conditions set forth herein.
TAPPAN ZEE FINANCIAL, INC. AWARD RECIPIENT
By
------------------------------- -------------------------
Name:
Title:
- --------------------------------------------------------------------------------
INSTRUCTIONS: This page should be completed by or on behalf of the Compensation
Committee. Any blank space intentionally left blank should be crossed out. A
Restricted Stock Award consists of a number of Awarded Shares with uniform terms
and conditions. Where Awarded Shares are awarded on the same date with varying
terms and conditions (for example, varying vesting dates), the awards should be
recorded as a series of grants each with its own uniform terms and conditions.
<PAGE> 5
EXHIBIT A
TAPPAN ZEE FINANCIAL, INC. RECOGNITION AND RETENTION PLAN
FOR OUTSIDE DIRECTORS
RESTRICTED STOCK AWARD
GENERAL TERMS AND CONDITIONS
Section 1. Ownership of Shares. The shares of Common Stock,
par value $.01 per share, of Tappan Zee Financial Inc. ("Shares") covered by
this Award ("Awarded Shares") are held in trust by Marine Midland Bank, N.A.,
the Trustee of the Plan, for your benefit until such time as they are
distributed to you or, if earlier, until you forfeit your rights to the Awarded
Shares.
Section 2. Vesting. In general the Awarded Shares shall become
vested and available for distribution to you at the dates set forth in the
Restricted Stock Award Notice. In the event that your service with the Company
terminates on account of your death or Disability, then any Awarded Shares not
theretofore forfeited shall become immediately vested. In addition, to the
extent authorized pursuant to a Plan provision that is approved by the Company's
shareholders after October 5, 1996, in the event your service terminates due to
retirement (as defined in the Plan) or in the event a change of control (as
defined in the Plan) occurs, then any Awarded Shares not theretofore forfeited
shall become immediately vested.
Section 3. Forfeitures. In the event that your service with
the Company terminates before all of the Awarded Shares become vested, any
Awarded Shares that have not yet become vested pursuant to section 2 of this
Award Notice shall be forfeited. Following such a forfeiture, you will have no
rights whatsoever with respect to the Awarded Shares forfeited. For purposes of
determining any forfeitures, you will not be deemed to have terminated service
with the Company for so long as you provide services to the Company or any
subsidiary or affiliate of the Company as an employee, officer, director,
advisory director, director emeritus, or consultant or for so long as you are
bound by and are observing the terms of any contract which imposes restrictions
on your right to perform services for a competitor of the Company or any of its
subsidiaries or affiliates or provides other restrictive covenants.
Section 4. Dividends. Any cash dividends or distributions
declared and paid with respect to Awarded Shares not forfeited shall be held in
the Trust Fund in accordance with the terms of the Plan and distributed to you
(with any earnings attributable thereto) at the same time as the related Awarded
Shares. Any stock dividends declared and paid with respect to Awarded Shares not
forfeited shall be allocated to you, and such stock dividends shall be held in
the Trust Fund and shall be subject to such restrictions and shall become vested
under the same terms and conditions as the Awarded Shares to which they pertain.
Section 5. Voting Rights. You shall have the exclusive right
to direct the manner in which all voting rights appurtenant to Awarded Shares
not forfeited will be exercised while such Awarded Shares are held in the Trust
Fund. Such a direction shall be given by completing and filing a written
direction, in the form and manner prescribed by the Committee, with such person
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.
Section 6. Distribution Upon Vesting. As soon as practicable
following the date any Awarded Shares become vested pursuant to the Award
Notice, the Company will issue to you, or your Beneficiary entitled to such
Awarded Shares, a stock certificate evidencing ownership of the Shares. Any
additional Shares attributable to stock dividends paid with respect to the
Awarded Shares then being distributed pursuant to this section 6 shall also be
distributed and shall be evidenced by such stock certificate.
Section 7. Registration of Shares. The Company's obligation to
deliver Shares pursuant to this Award Notice shall, if the Committee so
requests, be conditioned upon the receipt of a representation as to the
investment intention of you or your Beneficiary to whom such Shares are to be
delivered, in such form as the Committee shall determine to be necessary or
advisable to comply with the provisions of applicable federal, state or local
law. It may be provided that any such representation shall become inoperative
upon a registration of the Shares or upon the occurrence of any other event
eliminating the necessity of such representation. The Company shall not be
required to deliver any Shares under the Plan prior to (a) the admission of such
Shares to listing on any stock exchange on which Shares may then be listed, or
(b) the completion of such registration or other qualification under any state
or federal law, rule or regulation as the Committee shall determine to be
necessary or advisable.
<PAGE> 6
Section 8. No Right to Continued Employment. Nothing in this
Award Notice nor any action of the Board or the Committee with respect to this
Award Notice shall be held or construed to confer upon you any right to a
continuation of service with the Company or any of its affiliates which employ
you. You may be dismissed or otherwise dealt with to the same extent as though
this Award had not been made.
Section 9. Taxes. The Company, the Committee or the Trustee
shall have the right to require you to pay the amount of any tax which is
required to be withheld with respect to the Awarded Shares, or, in lieu thereof,
to retain, or to sell without notice, a sufficient number of Awarded Shares to
cover the amount required to be withheld.
Section 10. Notices. Any communication required or permitted
to be given under the Plan, including any notice, direction, designation,
comment, instruction, objection or waiver, shall be in writing and shall be
deemed to have been given at such time as it is personally delivered 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:
(a) If to the Committee:
Tappan Zee Financial, Inc.
75 Broadway
Tarrytown, New York 10591
Attention: Compensation Committee
(b) If to you, to your address as shown in the
Company's personnel records.
Section 11. No Assignment. The Awarded Shares shall not be
transferable by you other than by will or by the laws of descent and
distribution, and the Awarded Shares shall be distributable only to you during
your lifetime.
Section 12. Successors and Assigns. This Award Notice shall
inure to the benefit of and shall be binding upon you and the Company and your
respective heirs, successors and assigns.
Section 13. Construction of Language. Whenever appropriate in
this Award Notice, 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 or the neuter.
Any reference to a section shall be a reference to a section of this Award
Notice, unless the context clearly indicates otherwise. Capitalized terms not
specifically defined herein shall have the meanings assigned to them under the
Plan.
Section 14. Governing Law. This Award Notice shall be
construed and enforced in accordance with 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 the federal laws of the United States of
America.
Section 15. Amendment. This Award Notice may be amended, in
whole or in part and in any manner not inconsistent with the provisions of the
Plan, at any time and from time to time, by written agreement between you and
the Company.
Section 16. Plan Provisions Control. This Award Notice, and
the rights and obligations created hereunder, shall be subject to all of the
terms and conditions of the Plan. In the event of any conflict between the
provisions of the Plan and the provisions of this Award Notice, the terms of the
Plan, which are incorporated herein by reference, shall control. By signing this
Award Notice, you acknowledge receipt of a copy of the Plan.
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED
MARCH 31,
--------------------------------
1997 1996*
---- -----
<S> <C> <C>
Net income (in thousands) $ 855 $ 470
========== ==========
Weighted average shares outstanding (1) ** 1,438,348 1,495,086
Common stock equivalents due to the dilutive effect of
stock options under the treasury stock method 14,041 --
---------- ----------
Weighted average shares outstanding and
common stock equivalents 1,452,389 1,495,086
Primary earnings per share $ 0.59 $ 0.31
========== ==========
Weighted average shares outstanding and
common stock equivalents (above) 1,452,389 1,495,086
Additional dilutive common stock equivalents using period end
market value versus average market value for the period 8,341 --
---------- ----------
Fully diluted weighted average shares and
common stock equivalents 1,460,730 1,495,086
Fully diluted earnings per share $ 0.59 $ 0.31
========== ==========
</TABLE>
* Six-month period following the Bank's conversion to stock form.
** Includes only the portion of ESOP shares committed to be released to
participants.
<PAGE> 1
TAPPAN ZEE FINANCIAL, INC.
[TAPPAN ZEE FINANCIAL, INC. LOGO]
1997 ANNUAL REPORT
<PAGE> 2
DESCRIPTION OF BUSINESS: On October 5, 1995, Tappan Zee Financial, Inc. (the
"Company") became the holding company for Tarrytowns Bank, FSB upon completion
of the conversion of the Bank from a mutual savings bank to a stock savings
bank. Tarrytowns Bank, FSB was originally founded in 1891 as Tarrytown and North
Tarrytown Building and Loan Association. In 1995, the Bank became a federally
chartered mutual savings bank and assumed its current name. The Bank offers
traditional financial products with personal service from its office in
Tarrytown, New York.
Explanatory Note: This report contains certain forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and business of the Company that are subject to various factors which
could cause actual results to differ materially from these estimates. These
factors include changes in general, economic and market, and legislative and
regulatory conditions, and the development of an interest rate environment that
adversely affects the interest rate spread or other income anticipated from the
Company's operations and investments.
<PAGE> 3
SELECTED CONSOLIDATED FINANCIAL DATA
At or for the Fiscal Year Ended March 31
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $121,841 $114,790 $91,149 $86,388 $84,636
Loans, net 55,110 51,174 50,233 45,026 46,211
Mortgage-backed securities 38,989 31,414 23,659 21,157 21,915
Other securities 15,518 19,566 6,722 9,637 7,668
Deposits 98,327 89,908 81,813 77,510 77,042
Shareholders' equity (1) 21,228 22,360 7,818 7,201 6,199
SELECTED OPERATING DATA:
Interest income $ 8,591 $ 7,624 $ 6,547 $ 6,346 $ 6,724
Interest expense 4,106 4,002 2,912 2,766 3,356
-------- -------- ------- ------- -------
Net interest income 4,485 3,622 3,635 3,580 3,368
Provision for loan losses 69 90 171 151 315
-------- -------- ------- ------- -------
Net interest income after provision for loan losses 4,416 3,532 3,464 3,429 3,053
Non-interest income 152 211 67 158 32
Non-interest expense (excluding special assessment) 2,849 2,297 2,087 1,832 1,609
SAIF special assessment (2) 538 -- -- -- --
-------- -------- ------- ------- -------
Income before income tax expense and cumulative
effect of changes in accounting principles 1,181 1,446 1,444 1,755 1,476
Income tax expense (3) 326 609 610 741 704
-------- -------- ------- ------- -------
Income before cumulative effect of changes in
accounting principles 855 837 834 1,014 772
Cumulative effect of changes in accounting principles:
Income taxes -- -- -- 100) --
Postretirement health care benefits, net -- -- -- (100) --
-------- -------- ------- ------- -------
Net income $ 855 $ 837 $ 834 $ 1,014 $ 772
======== ======== ======= ======= =======
SELECTED STATISTICAL DATA: (4)
Return on average assets (5) 0.74% 0.81% 0.93% 1.18% 0.94%
Return on average equity (5) 3.97 6.04 10.81 15.25 13.66
Net interest margin (6) 3.98 3.59 4.16 4.26 4.23
Average interest rate spread (7) 3.07 2.91 3.80 3.94 3.90
Equity to total assets at end of period 17.42 19.48 8.58 8.34 7.32
Average equity to average assets 18.57 13.34 8.65 7.74 6.90
Efficiency ratio (8) 72.11 60.75 50.80 47.51 46.17
Non-interest expense to average assets(5) 2.92 2.21 2.34 2.13 1.97
Non-performing loans to total loans 2.97 3.15 5.20 4.18 5.31
Allowance for loan losses to non-performing loans 39.81 40.07 24.58 28.38 19.44
Allowance for loan losses to total loans 1.18 1.26 1.28 1.19 1.03
Non-performing assets to total assets 1.46 1.77 3.40 2.63 3.46
Dividend payout ratio (9) 34.04 17.23
Book value per share (10) $ 13.84 $ 13.80
Earnings per share (11) $ 0.59 $ 0.31
Cash dividends per share $ 0.20 $ 0.05
</TABLE>
(1) For 1997 and 1996, reflects net proceeds of $14.9 million from the sale of
the Company's common stock in connection with the Bank's conversion to stock
form on October 5, 1995.
(2) Represents the Bank's share of a special assessment imposed on all financial
institutions with deposits insured by the Savings Association Insurance Fund
("SAIF"). After taxes, this charge reduced net income by approximately
$329,000. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Impact of Recent Legislation -- SAIF
Recapitalization."
(3) Income tax expense for fiscal 1997 has been reduced by a tax benefit of
$166,000 resulting from a change in New York state tax law. See Note 8 to
the Consolidated Financial Statements.
(4) With the exception of end-of-period ratios, all ratios are based on average
balances.
(5) If the after-tax SAIF charge and the state tax benefit described in notes
(2) and (3) above were excluded, net income for fiscal 1997 would have been
$1,018,000, resulting in a return on average assets of 0.88% and a return on
average equity of 4.72%. The ratio of non-interest expense to average assets
would have been 2.45% without the SAIF charge.
(6) Net interest income divided by average interest-earning assets.
(7) The difference between the weighted average yield on interest-earning assets
and the weighted average cost of interest-bearing liabilities.
(8) Non-interest expense, excluding real estate owned expenses, divided by net
interest income plus non-interest income, excluding securities gains/losses.
Excluding also the SAIF special assessment, the efficiency ratio for fiscal
1997 would have been 60.45%.
(9) Dividends paid as a percentage of net income. Ratio for fiscal 1996 is based
on dividends paid in the fourth quarter ended March 31, 1996 as a percentage
of net income for the six-month period following the Bank's conversion. If
based on net income for the fourth quarter, the ratio would have been
32.93%.
(10) Shareholders' equity divided by total shares of common stock outstanding at
March 31 (1,534,062 in 1997 and 1,620,062 in 1996).
(11) Earnings per share for fiscal 1996 is stated from the date of the Bank's
conversion.
1
<PAGE> 4
TO OUR SHAREHOLDERS:
In the 18 months following our initial public offering, our Company has met
the challenges of doing business as a public company and succeeded in providing
value to our shareholders. At the same time, we have continued our 106 year
tradition of providing quality banking services to our customers and being
actively involved in our community. It is with pleasure that I present our
second Annual Report as a public company for the fiscal year ended March 31,
1997.
In fiscal 1997, Congress finally passed legislation to reduce the disparity
between the cost of deposit insurance for the Company's subsidiary, Tarrytowns
Bank, FSB, and the cost incurred by our commercial bank competitors. The
legislation required the Bank to pay a one-time special assessment of $538,000,
before taxes, for the recapitalization of the Savings Association Insurance Fund
("SAIF") of the FDIC. The Bank's total deposit insurance costs, including the
special assessment, were $693,000 in fiscal 1997. With the recapitalization of
the SAIF now complete, the Bank's deposit insurance costs are expected to be
approximately $60,000 for fiscal 1998, a significant savings, but still more
than our commercial bank competitors.
Despite the numerous challenges of our competitive and multi-regulated
environment, our Company remains profitable and financially sound. Our capital
ratios are strong and we continue to enjoy a sound market share in our target
market. This success is largely due to our community bank strategy and our
dedicated staff who provide modern banking services with personal service.
Net income for the fiscal year ended March 31, 1997 was $855,000, a slight
increase from $837,000 for the prior year. On a per share basis, net earnings
were $0.59 for fiscal 1997 and $0.31 for the six-month period following our
initial public offering in fiscal 1996. Had it not been for the special SAIF
assessment and a one-time benefit due to a change in state tax law, the
Company's net income would have been $1,018,000, or $0.70 per share for fiscal
1997. Net interest income, the primary contributor to our earnings, was $4.5
million in fiscal 1997, compared to $3.6 million in fiscal 1996. Non-performing
loans were $1.66 million as compared to $1.63 million a year ago. Total assets
at March 31, 1997 amounted to $121.8 million, an increase of $7.0 million from
$114.8 million a year earlier. Our asset growth reflects an expansion in
interest-earning assets funded by an increase in our deposit base, which grew
$8.4 million to $98.3 million at March 31, 1997 from $89.9 million at March 31,
1996.
Shareholders' equity decreased from $22.4 million to $21.2 million during
fiscal 1997, while tangible book value per share increased from $13.80 at March
31, 1996 to $13.84 at March 31, 1997. This was due to the positive effect of
treasury share repurchases and earnings retained for the year. Shareholders who
entrusted us with their investment capital have been rewarded with increased
value in their shares. The closing market value of the Company's stock increased
by 18.75% or $2.25 per share to $14.25 at March 31, 1997 from $12.00 a year
earlier. The Company also paid four quarterly dividends of $0.05 per share in
fiscal 1997. In April, the Board of Directors declared the Company's sixth
consecutive quarterly dividend to shareholders of record on May 8, 1997. The
dividend, which was paid on May 28, 1997, was increased to $0.07 per share from
$0.05. The Company's ratio of shareholders' equity to total assets was 17.42% at
March 31, 1997 compared with 19.48% at March 31, 1996.
We remain committed to enhancing the value of our shareholders investment by
prudently deploying our capital and depositors' funds in our local community. On
behalf of the Board of Directors, I wish to thank our customers, staff and
shareholders for their continued loyalty and confidence.
Sincerely,
/s/Stephen C. Byelick
- ---------------------
Stephen C. Byelick
President and Chief Executive Officer
2
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Tappan Zee Financial, Inc. (the "Holding Company") is the unitary savings
bank holding company for Tarrytowns Bank, FSB (the "Bank"), a federally
chartered savings bank and wholly-owned subsidiary of the Holding Company. On
October 5, 1995, the Bank converted from a mutual savings bank to a stock
savings bank (the "Conversion"). Collectively, the Holding Company and the Bank
are referred to herein as the "Company." Concurrent with the Conversion, the
Holding Company sold 1,620,062 shares of its common stock in a subscription and
community offering at a price of $10 per share, for net proceeds of $14.9
million (the "Stock Offering").
The Company's primary market area consists of the Village of Tarrytown and
its neighboring communities in Westchester County, New York with business
conducted from one office located in Tarrytown, New York. The Bank is a
community-oriented savings institution whose business primarily consists of
accepting deposits from customers within its market area and investing those
funds in mortgage loans secured by one- to four-family residences. To a
significantly lesser extent, funds are invested in multi-family, commercial real
estate, construction, commercial business and consumer loans. The Company also
invests in mortgage-backed and other securities. The Holding Company has no
business activities other than its ownership of the Bank.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on its
interest-earning assets, such as loans and securities, and the interest expense
on its interest-bearing liabilities, such as deposits. The Company also
generates non-interest income such as service charges and other fees. The
Company's non-interest expense consists of compensation and benefits, occupancy
expenses, federal deposit insurance costs, data processing service fees, net
costs of real estate owned and other operating expenses. The Company's results
of operations are significantly affected by general economic and competitive
conditions (particularly changes in market interest rates), government policies,
changes in accounting standards and actions of regulatory agencies.
IMPACT OF RECENT LEGISLATION
SAIF Recapitalization. For the period from January 1 through September 30,
1996, there existed a disparity of 23 cents per $100 of deposits in the minimum
deposit insurance assessment rates applicable to deposits insured by the Bank
Insurance Fund ("BIF") and the higher assessment rates applicable to deposits
insured by the Savings Association Insurance Fund ("SAIF"). In response to this
disparity, on September 30, 1996 the Deposit Insurance Funds Act of 1996 (the
"Funds Act") was enacted into law. The Funds Act authorized the Federal Deposit
Insurance Corporation ("FDIC") to impose a special assessment on all financial
institutions with SAIF-assessable deposits in the amount necessary to
recapitalize the SAIF. Pursuant to such authority, the FDIC imposed a special
assessment of 65.7 basis points per $100 of an institution's SAIF-assessable
deposits held on March 31, 1995. The Company's special SAIF assessment of
$538,000 before taxes ($329,000 net of taxes) was charged to expense in
September 1996 and paid in November 1996. In view of the recapitalization of the
SAIF, the FDIC reduced the assessment rates for SAIF-assessable deposits. For
the calendar year 1997, the SAIF assessment rates range from 0 to 27 basis
points, which is the same range of rates applicable to the BIF. Prior to the
SAIF recapitalization, all SAIF-insured institutions were subject to a minimum
assessment of 23 basis points. The Funds Act also expanded the assessment base
to include BIF-insured, as well as SAIF-insured, institutions to fund payments
on the bonds issued by the Financing Corporation ("FICO bonds") to recapitalize
the now defunct Federal Savings and Loan Insurance Corporation. In order to fund
such interest payments, a separate assessment of 1.3 basis points for
BIF-assessable deposits and 6.48 basis points for SAIF-assessable deposits
became effective on January 1, 1997. The Funds Act requires that, until December
31, 1999 or such earlier date on which the last savings association ceases to
exist, the rates of assessment for FICO bond payments imposed on BIF-assessable
deposits will be one-fifth of the rate imposed on SAIF-assessable deposits. As a
result of the lower overall assessment rates, the Bank's non-interest expense
for the three months ended March 31, 1997 was reduced by $45,000 compared to the
same period in 1996.
The Funds Act also provides for the merger of the BIF and SAIF on January 1,
1999, with such merger being conditioned upon the prior elimination of the
thrift charter. The Funds Act required the Secretary of Treasury to conduct a
study of relevant factors with respect to the development of a common charter
for all insured depository institutions and the abolition of separate charters
for banks and thrifts and to report the Secretary's conclusions and the findings
to Congress. The Secretary of the Treasury has recommended that the separate
charter for thrifts be eliminated only if other legislation is adopted that
permits bank holding companies to engage in certain non-financial activities.
Absent legislation permitting such non-financial activity, the Secretary of the
Treasury recommended retention of the thrift charter. Other proposed legislation
has been introduced in Congress that would require thrift institutions to
convert to bank charters. The Secretary of the Treasury also recommended that
the BIF and the SAIF be merged irrespective of the elimination of the thrift
charter.
Tax Bad Debt Reserves. Federal tax law changes were enacted in August 1996
to eliminate the "thrift bad debt" method of calculating bad debt deductions for
tax years after 1995 and to require thrifts to recapture into taxable income
(over a six-year period) all bad debt reserves accumulated after 1987. Since the
Bank's federal bad debt reserves approximated the 1987 base-year amounts, this
recapture requirement had no significant impact. The tax law changes also
provide that taxes associated with the recapture of pre-1988 bad debt reserves
would become payable under more limited circumstances than
3
<PAGE> 6
under prior law. For example, such taxes would no longer be payable in the event
that the thrift charter is eliminated and the Bank is required to convert to a
bank charter.
Amendments to the New York state tax law redesignate the Bank's state bad
debt reserve at December 31, 1995 as the base-year amount and also provide for
future additions to the base-year reserve using the percentage-of-taxable-income
method. This change eliminated the excess New York state reserve for which the
Company had recognized a deferred tax liability. Accordingly, the Company
reduced its deferred tax liability in the quarter ended September 30, 1996, by
$166,000, representing a state deferred tax benefit of $252,000 less related
deferred federal taxes of $86,000. Taxes associated with the recapture of the
state base-year reserve would still become payable under various circumstances,
including conversion to a bank charter or failure to meet various thrift
definition tests. See Note 8 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of the Company to generate sufficient cash flow to
meet funding needs, depositor withdrawals and operating expenses. The Bank is
required to maintain an average daily balance of liquid assets as a percentage
of net withdrawable deposit accounts plus short-term borrowings as defined by
the regulations of the Office of Thrift Supervision ("OTS"). The minimum
required liquidity ratio is currently 5.0%. At March 31, 1997, the Bank's
liquidity ratio of 13.5% was in compliance with the OTS liquidity regulations.
The Company's cash flows are derived from operating activities, investing
activities and financing activities. Cash flows from operating activities
consist primarily of interest income received and interest expense paid. Net
cash flows from investing activities consist primarily of loan originations and
payments (including amortization of principal and prepayments) and the purchase,
maturity and sale of securities, including mortgage-backed securities. During
the years ended March 31, 1997, 1996 and 1995, the Company's disbursements for
loan originations totaled $11.9 million, $9.3 million and $15.5 million,
respectively. Purchases of securities totaled $29.7 million, $33.8 million and
$5.5 million for the years ended March 31, 1997, 1996 and 1995, respectively.
Financing activity cash flows are generated primarily from deposit activity.
For the fiscal years ended March 31, 1997, 1996 and 1995, the Company
experienced net increases in deposits (including the effect of interest
credited) of $8.4 million, $8.1 million and $4.3 million, respectively. The
increases reflect the generally higher market interest rates, particularly in
the past two fiscal years, which made deposit products such as shorter term
certificates of deposit a more attractive investment alternative for the
Company's customers.
The Company has other sources of liquidity if a need for additional funds
arises, including borrowing capacity from the Federal Home Loan Bank ("FHLB") of
New York of up to 25% of the Bank's assets, which amounts to $29.3 million at
March 31, 1997. There were no such borrowings outstanding at March 31, 1997. The
utilization of particular sources of funds depends on comparative costs and
availability. While maturities and scheduled amortization of loans and
securities provide an indication of the timing of the receipt of funds, changes
in interest rates, economic conditions, and competition strongly influence
mortgage prepayment rates and deposit flows, reducing the predictability of the
timing of these cash flows.
At March 31, 1997, the Company had outstanding loan origination commitments
of $1.5 million, undisbursed construction loans in process of $686,000 and
unadvanced commercial lines of credit of $15,000. The Company anticipates that
it will have sufficient funds available to meet its current origination and
other lending commitments. Certificates of deposit scheduled to mature in one
year or less from March 31, 1997 totaled $49.0 million. Based upon the Company's
most recent experience and pricing strategy, management believes that a
significant portion of such deposits will remain with the Bank.
The main sources of liquidity for the Holding Company are net proceeds from
the sale of stock and dividends from the Bank. The main cash outflows are
payments of dividends to shareholders and repurchases of the Holding Company's
common stock. Through March 31, 1997, the Holding Company has repurchased for
its treasury 86,000 shares of its common stock, or 5.3% of the shares issued in
the Stock Offering at an aggregate cost of $1.1 million. At that date, the
Holding Company had OTS authorization to repurchase up to an additional 71,950
shares (approximately 4.7% of outstanding shares) prior to November 1997. Also
during fiscal 1997, 52,840 common shares were purchased to fund awards under the
management and directors' recognition and retention plans ("RRPs"). The Holding
Company's ability to pay dividends to shareholders depends substantially on
dividends received from the Bank. The Bank may not declare or pay cash dividends
on its common stock if the effect thereof would cause equity to be reduced below
applicable regulatory capital requirements or the amount required to be
maintained for the liquidation account established in connection with the
Conversion. Unlike the Bank, the Holding Company is not subject to OTS
regulatory restrictions on the payment of dividends to its shareholders,
however, it is subject to the requirements of Delaware law. Delaware law
generally limits dividends to an amount equal to the excess of the net assets of
the Holding Company (the amount by which total assets exceed total liabilities)
over its statutory capital, or if there is no such excess, to its profits for
the current and/or immediately preceding fiscal year.
OTS regulations require savings associations, such as the Bank, to meet
three minimum capital standards: a tangible capital ratio of 1.5% of total
assets as adjusted under the OTS regulations; a leverage ratio of 3% of core
capital to such adjusted total assets; and a risk-based capital ratio of 8% of
core and supplementary capital to total risk-weighted assets. The Bank satisfied
these minimum capital standards at March 31, 1997 with tangible and leverage
capital ratios of 14.1% and a total risk-based capital ratio of 39.5%. In
determining the amount of risk-weighted assets for purposes of the risk-based
capital requirement, a savings association multiplies its assets and certain
off-balance sheet items by risk-weights, which range from 0% for cash and
obligations issued by the United States Government or its agencies to 100% for
consumer and commercial loans, as assigned by the OTS capital regulations. These
capital requirements, which are applicable to the Bank
4
<PAGE> 7
only, do not consider additional capital held at the Holding Company level, and
require certain adjustments to the Bank's total equity to arrive at the various
regulatory capital amounts.
At the time of the Conversion, the Bank was required to establish a
liquidation account equal to its capital as of March 31, 1995. This liquidation
account is reduced to the extent that eligible account holders have reduced
their qualifying deposits. In the unlikely event of a complete liquidation of
the Bank, each eligible account holder will be entitled to receive a
distribution from the liquidation account. The Bank is not permitted to declare
or pay dividends on its capital stock, or repurchase any of its outstanding
stock, if the effect thereof would cause its shareholder's equity to be reduced
below the amount required for the liquidation account or applicable regulatory
capital requirements.
INTEREST RATE RISK MANAGEMENT
The Company's net income is dependent to a substantial extent on its net
interest income. Net interest income is derived from the "spread" between the
yield on interest-earning assets and interest-bearing liabilities. The net
interest income of savings institutions is significantly affected by many
factors including: interest rate fluctuations; general economic conditions;
product pricing; the relative mix and maturity of interest-earning assets and
interest-bearing liabilities; non-interest-bearing sources of funds; and asset
quality. Net interest income volatility arises because, as rates fluctuate,
interest income and interest expense do not change equally. The management of
interest rate risk is an essential component of managing a savings institution.
The extent of the movement of interest rates, higher or lower, is an uncertainty
that could have a negative impact on the earnings of the Company.
Successful management of interest rate risk requires an awareness of changes
and trends in the financial marketplace and the ability to identify and assess
the sources of performance variability in an institution's operations. The
principal objectives of the Company's interest rate risk management activities
are to (i) evaluate the interest rate risk included in certain balance sheet and
off-balance sheet accounts, (ii) determine the level of risk appropriate given
the Company's business focus, operating environment, capital and liquidity
requirements, and performance objectives, (iii) establish prudent asset
concentration guidelines and (iv) manage the risk within prudent levels approved
by the Board of Directors.
One aspect of the Company's interest-rate risk position, is that as of March
31, 1997, approximately 25.1% of the Company's interest-earning assets are
invested in fixed-rate loans, with remaining maturities greater than five years.
In addition, approximately 49.9% of the Company's deposits are certificates of
deposit maturing in one year or less. The Company seeks to minimize any
resultant interest-rate risk through the management of its available-for-sale
securities portfolio which is comprised mainly of mortgage-backed securities
guaranteed by government agencies and represents 30.6% of interest-earning
assets. The Company has taken several other actions, under various market
conditions, designed to manage its level of interest rate risk. These actions
have included: (i) purchasing adjustable and fixed rate mortgage-backed
securities with varying average lives; (ii) undertaking an effort to lengthen
the maturities of its certificates of deposit, the majority of which mature in
less than one year; and (iii) to a lesser extent, increasing the portfolio of
adjustable-rate mortgage loans through originations, as market conditions
permit. The Company does not currently engage in trading activities or use
derivative instruments to control interest rate risk. Even though such
activities may be permitted with the approval of the Board of Directors, the
Company does not intend to engage in such activities in the immediate future.
One approach used by management to quantify interest rate risk is the
analysis of the change in the Bank's net portfolio value ("NPV") arising from
movements in interest rates. This approach calculates the difference between the
present value of liabilities and the present value of expected cash flows from
assets and off-balance sheet items. The following table sets forth, at March 31,
1997, an analysis of the Bank's interest rate risk as measured by the estimated
changes in NPV resulting from instantaneous and sustained parallel shifts in the
yield curve (+ or - 400 basis points, measured in 100 basis point increments).
<TABLE>
<CAPTION> Estimated Increase
Change in (Decrease) in NPV
Interest Rates Estimated NPV ---------------------
(Basis Points) Amount Amount Percent
-------------- ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C>
+400 $ 7,518 $(11,552) (61)%
+300 10,226 (8,844) (46)
+200 13,117 (5,953) (31)
+100 16,118 (2,952) (15)
-- 19,070 -- --
-100 21,596 2,526 13
-200 23,174 4,104 22
-300 24,521 5,451 29
-400 26,109 7,039 37
</TABLE>
Certain assumptions utilized by the OTS in assessing the interest rate risk
of thrift institutions were employed in preparing data for the Bank included in
the preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under the
various interest rate scenarios. It was also assumed that delinquency rates will
not change as a result of changes in interest rates although there can be no
assurance that this will be the case. Even if interest rates change in the
designated amounts, there can be no assurance that the Bank's assets and
liabilities would perform as set forth above. In addition, a change in U.S.
Treasury rates in the designated amounts accompanied by a change in the shape of
the Treasury yield curve would cause significantly different changes to the NPV
than indicated above. The Holding Company's assets (excluding its investment in
the Bank), which are excluded from the NPV analysis set forth above, consist
primarily of money market funds. On a consolidated basis, the Company's NPV
based on current interest rates is $23.7 million; an instantaneous 200 basis
point increase in interest rates would decrease that amount by $6.0 million, or
25%.
5
<PAGE> 8
ANALYSIS OF NET INTEREST INCOME
The following table sets forth the Company's average balance sheets, average
yields and costs, and certain other information for fiscal 1997, 1996 and 1995.
The yields and costs were derived by dividing interest income or expense by the
average balance of assets or liabilities, respectively, for the periods shown.
Substantially all average balances were computed based on month-end balances,
producing results which approximate average daily balances. Interest income
includes the effect of deferred fees and discounts which are considered yield
adjustments.
<TABLE>
<CAPTION>
For the Year Ended March 31,
-----------------------------------------------------------------------------
1997 1996
-------------------------------------- ----------------------------------
Average Average Average Average Average
Balance Interest Rate Balance Interest Rate
--------- --------- -------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans (1) $ 55,354 $4,721 8.53% $ 51,621 $4,465 8.65%
Mortgage-backed securities (2) 38,141 2,719 7.13 25,660 1,811 7.06
Other securities (2) 12,500 794 6.35 10,338 576 5.57
Federal funds sold 4,538 234 5.16 10,846 639 5.89
FHLB stock 579 37 6.39 514 37 7.20
Other 1,717 86 5.01 1,963 96 4.89
-------- ------ -------- ------
Total interest-earning assets 112,829 $8,591 7.61% 100,942 $7,624 7.55%
======== ====== ======
Allowance for loan losses (657) (645)
Non-interest-earning assets 3,909 3,579
-------- --------
Total assets $116,081 $103,876
======== ========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW and money market $ 6,491 $160 2.46% $ 8,798 $ 200 2.27%
Savings accounts 26,662 800 3.00 28,120 982 3.49
Short term FHLB borrowings 204 12 5.61 -- -- --
Certificate accounts and other 57,136 3,134 5.49 49,288 2,820 5.72
-------- ------ -------- ------
Total interest-bearing liabilities 90,493 $4,106 4.54% 86,206 $4,002 4.64%
====== ======
Checking accounts 2,255 2,069
Other non-interest-bearing liabilities 1,778 1,743
-------- --------
Total liabilities 94,526 90,018
Equity 21,555 13,858
-------- --------
Total liabilities and equity $116,081 $103,876
======== ========
Net interest income $4,485 $3,622
====== ======
Average interest rate spread (3) 3.07% 2.91%
Net interest margin (4) 3.98 3.59
Ratio of interest-earning assets to
interest-bearing liabilities 124.68% 117.09%
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended March 31,
-----------------------------------
1995
----------------------------------
Average Average
Balance Interest Rate
--------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans (1) $47,275 $4,078 8.63%
Mortgage-backed securities (2) 23,001 1,661 7.22
Other securities (2) 7,620 406 5.33
Federal funds sold 6,685 313 4.68
FHLB stock 466 36 7.73
Other 2,251 53 2.35
------- ------
Total interest-earning assets 87,298 $6,547 7.50%
======
Allowance for loan losses (569)
Non-interest-earning assets 2,475
-------
Total assets $89,204
=======
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW and money market $ 8,536 $ 195 2.28%
Savings accounts 32,826 1,038 3.16
Short term FHLB borrowings -- -- --
Certificate accounts and other 37,377 1,679 4.49
------- ------
Total interest-bearing liabilities 78,739 $2,912 3.70%
======
Checking accounts 1,456
Other non-interest-bearing liabilities 1,291
-------
Total liabilities 81,486
Equity 7,718
-------
Total liabilities and equity $89,204
=======
Net interest income $3,635
======
Average interest rate spread (3) 3.80%
Net interest margin (4) 4.16
Ratio of interest-earning assets to
interest-bearing liabilities 110.87%
</TABLE>
(1) Balances are net of deferred loan fees, loan discounts and premiums, and
loans in process. Non-accrual loans are included in the balances.
(2) Balances represent amortized cost.
(3) Average interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average total
interest-earning assets.
6
<PAGE> 9
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Fiscal 1997 vs. 1996 Fiscal 1996 vs. 1995
------------------------------------- ------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------- Net --------------------- Net
Volume Rate Change Volume Rate Change
------- ----- ------- ------- ----- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 319 $ (63) $ 256 $ 377 $ 10 $ 387
Mortgage-backed securities 889 19 908 188 (38) 150
Other securities 131 87 218 153 17 170
Federal funds sold (334) (71) (405) 249 77 326
FHLB stock 4 (4) -- 4 (3) 1
Other (12) 2 (10) (7) 50 43
----- ----- ----- ----- ----- ------
Total 997 (30) 967 964 113 1,077
----- ----- ----- ----- ----- ------
Interest-bearing liabilities:
NOW and money market accounts (55) 15 (40) 6 (1) 5
Savings accounts (49) (133) (182) (149) 93 (56)
Certificate accounts and other 432 (118) 314 574 567 1,141
Short term FHLB borrowings 12 -- 12 -- -- --
----- ----- ----- ----- ----- ------
Total 340 (236) 104 431 659 1,090
----- ----- ----- ----- ----- ------
Net change in net interest income $ 657 $ 206 $ 863 $ 533 $(546) $ (13)
===== ===== ===== ===== ===== ======
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND 1996
Total assets increased $7.0 million to $121.8 million at March 31, 1997 from
$114.8 million at March 31, 1996, reflecting management's strategy of controlled
growth, particularly with respect to retail deposits. Deposits, the primary
source of funds for the asset growth, increased $8.4 million to $98.3 million at
March 31, 1997 from $89.9 million at March 31, 1996. Asset growth was primarily
in the securities and loan portfolios. The securities portfolio increased $3.5
million to $54.5 million at March 31, 1997 from $51.0 million at March 31, 1996.
Within the securities portfolio, mortgage-backed securities increased $7.6
million and other securities decreased $4.1 million, reflecting a shift from
treasury securities into higher yielding mortgage-backed securities. Net loans
increased $3.9 million to $55.1 million at March 31, 1997, compared to $51.2
million at March 31, 1996, primarily due to the origination of one- to
four-family mortgage loans.
Shareholders' equity was $21.2 million at March 31, 1997, a decrease of $1.2
million from $22.4 million at March 31, 1996. The decrease primarily reflects
common share repurchases for the treasury and purchases to fund the RRPs,
partially offset by net earnings retained for the year. A total of 86,000 shares
were repurchased for the Company's treasury at a cost of $1.1 million. Also,
52,840 shares were purchased at a cost of $714,000 to fund awards under the
RRPs. The ratio of shareholders' equity to total assets at March 31, 1997 was
17.42%, as compared to 19.48% at March 31, 1996. The Company's tangible book
value per share was $13.84 at March 31, 1997 compared to $13.80 at March 31,
1996.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MARCH 31, 1997 AND
1996
General. Net income for the fiscal year ended March 31, 1997 was $855,000,
or $0.59 per share, as compared to $837,000 for the fiscal year ended March 31,
1996. Earnings per share was $0.31 for the six-month period from the Company's
initial public offering to March 31, 1996. The results for fiscal 1997 reflect a
non-recurring charge of $538,000 ($329,000 net of taxes) for the special
assessment to recapitalize the SAIF. Also included in net income for fiscal 1997
was a tax benefit of $166,000 due to a change in New York State tax law. See
"Impact of Recent Legislation -- Tax Bad Debt Reserves."
Net Interest Income. Net interest income for fiscal 1997 totaled $4.5
million as compared to $3.6 million for fiscal 1996, an increase of 23.8%. The
average interest rate spread and net interest margin increased to 3.07% and
3.98%, respectively, for fiscal 1997, compared to 2.91% and 3.59%, respectively,
for fiscal 1996. These increases reflect: (i) greater average interest-earning
assets in fiscal 1997 primarily attributable to the investment of Stock Offering
proceeds for the entire fiscal year, compared to the investment of such funds
for only six months in fiscal 1996; (ii) slightly higher yield on total
interest-earning assets resulting from the shift in overall asset mix from
federal funds and treasury securities into higher yielding mortgage-backed
securities; and (iii) enhanced earnings from the increased volume of mortgage
loans. Net income also benefited from additional net interest income realized on
deposit growth.
7
<PAGE> 10
Interest Income. Total interest income for fiscal 1997 amounted to $8.6
million, as compared to $7.6 million for fiscal 1996. This increase primarily
reflects an $11.9 million increase in average interest-earning assets
principally due to the investment of funds from the Stock Offering for a full
year (compared to six months in fiscal 1996) and deposit growth. The overall
increase in average interest-earning assets reflects increases of $3.7 million
in the average loan portfolio and $14.6 million in the average securities
portfolios, partially offset by a $6.4 million decrease in other earning assets
(principally federal funds sold). The increase in interest income for fiscal
1997 was also attributable to a slight increase in the average yield on
interest-earning assets, to 7.61% from 7.55% for fiscal 1996, reflecting the
shift from investments in short-term federal funds and treasury securities into
higher yielding mortgage-backed securities.
Interest Expense. Interest expense for the year ended March 31, 1997 totaled
$4.1 million, slightly higher than $4.0 million for the 1996 fiscal year. The
increase is attributable to a $4.1 million increase in average interest-bearing
deposits, primarily certificate accounts and other interest-bearing liabilities
which averaged $57.1 million at an average cost of 5.49% for the 1997 fiscal
year, as compared to an average balance of $49.3 million at an average cost of
5.72% for the 1996 fiscal year. The growth in certificate accounts and other
interest-bearing liabilities was partially offset by a decline in savings
accounts and NOW and money market accounts, which have lower average costs than
certificate accounts. The overall deposit growth is consistent with management's
strategy to increase retail deposits. The effect of deposit growth on interest
expense was somewhat offset by the decline in the average cost of funds to 4.54%
in fiscal 1997, compared to 4.64% for the previous year. The decrease in the
cost of funds reflects the general decline in market interest rates at the
beginning of fiscal 1997.
Provision for Loan Losses. For fiscal years 1997 and 1996, the provisions
for loan losses were $69,000 and $90,000, respectively. The provision in each
period reflects management's evaluation of the adequacy of the allowance for
loan losses, the level and composition of non-performing loans and their
collateral, and the continued growth of the loan portfolio. The allowance for
loan losses was $660,000 at March 31, 1997, compared to $654,000 at March 31,
1996. Net charge-offs for fiscal 1997 amounted to $63,000 compared to $86,000 in
fiscal 1996. Non-performing loans at March 31, 1997 were $1.66 million, compared
to $1.63 million at March 31, 1996. The ratio of non-performing loans to total
loans was 2.97% at March 31, 1997 compared to 3.15% at March 31, 1996. See
"Asset Quality."
Non-Interest Income. Non-interest income for the year ended March 31, 1997
amounted to $152,000, a decrease of $59,000 from $211,000 for the 1996 fiscal
year. The decrease is primarily due to the decline in the net gain on sales of
available-for-sale securities to $23,000 for fiscal 1997, as compared to $88,000
for fiscal 1996.
Non-Interest Expense. For fiscal years 1997 and 1996, non-interest expense
totaled $3.4 million and $2.3 million, respectively. The $1.1 million increase
in non-interest expense in the current fiscal year is primarily attributable to
the $538,000 SAIF special assessment, as well as increases of $292,000 in
compensation and benefits expense and $289,000 in other non-interest expense.
See "Impact of Recent Legislation -- SAIF Recapitalization." The increase in
compensation and benefits expense primarily reflects recognition of a full year
of expense in fiscal 1997 (compared to six months of expense in fiscal 1996) for
the amended deferred compensation plan for directors, the Company's employee
stock ownership plan ("ESOP") and the directors retirement plan; recognition of
expense in fiscal 1997 for a portion of the shares awarded under the RRPs; and
merit and performance-based increases for certain staff members. Other
non-interest expense increased principally due to increased professional fees,
printing and other costs associated with operations as a public company for a
full year in fiscal 1997 compared to six months in fiscal 1996.
Income Tax Expense. Income tax expense for the fiscal years ended March 31,
1997 and 1996 was $326,000 and $609,000, respectively, reflecting an effective
tax rate of 27.6% and 42.1%, respectively. Tax expense for the year ended March
31, 1997 reflects a benefit of $166,000 due to the reduction of a deferred tax
liability caused by an amendment to the New York State tax law enacted during
the year. The amendment changed the base-year for tax bad debt reserves to
December 31, 1995 and eliminated the need for a deferred tax liability
previously recognized for reserves in excess of the base-year amount. Without
this one-time benefit, the effective tax rate would have been 41.7% for fiscal
1997. See "Impact of Recent Legislation -- Tax Bad Debt Reserves."
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MARCH 31, 1996 AND
1995
General. For the year ended March 31, 1996, the Company reported net income
of $837,000, a slight increase from $834,000 for the prior year. The increase in
interest income resulting from the deployment of Stock Offering proceeds and
deposit growth was offset primarily by the increase in interest paid on
certificate accounts. Decreases in the provision for loan losses and the
provision for losses on real estate owned, and an increase in the net gain on
sales of available-for-sale securities in the 1996 fiscal year were
substantially offset by the increase in non-interest expense relating to
additional benefit plans which became effective upon the Conversion, and
increased costs associated with operating as a public company.
Net Interest Income. Net interest income for the year ended March 31, 1996
remained relatively stable at $3.6 million. The average interest rate spread and
the net interest margin for the 1996 fiscal year dropped to 2.91% and 3.59%,
respectively, as compared to 3.80% and 4.16%, respectively, for the prior year.
These declines reflect the continued shifting of funds from savings accounts to
higher costing certificate accounts and the initial investment of the Stock
Offering proceeds in shorter-
8
<PAGE> 11
term, lower yielding investments. In addition, the higher rates paid on
certificates of deposits as a result of an increase in short-term market
interest rates had a negative impact on the Company's average interest rate
spread and net interest margin. The flat yield curve and the continuing
uncertainty about the federal budget and its effect on the future direction of
interest rates were factors considered by the Company in delaying the
reinvestment of the Stock Offering proceeds in longer term investments. At March
31, 1996, the Company had over 12.5% of its assets invested in federal funds,
and treasury and other securities with an expected maturity of one year or less.
Interest Income. Total interest income for the 1996 fiscal year amounted to
$7.6 million, a 16.5% increase from last year. This increase relates to a $13.6
million increase in average interest-earning assets which is primarily due to
the investment of funds from the Stock Offering and deposit growth. Of the
increase in average interest-earning assets, $4.3 million was attributable to
the loan portfolio, $5.4 million related to the securities portfolios, and $3.9
million related to other earning assets (principally federal funds sold). The
increase in interest income for the year ended March 31, 1996, was also
attributable to a slight increase in the average yield on interest-earning
assets to 7.55%, from 7.50% for the 1995 fiscal year. This slight increase
reflects the disparate impact that market interest rates had on the Company's
interest-earning assets, which is attributable to the flat yield curve
experienced during the year.
Interest Expense. Interest expense on deposits for the year ended March 31,
1996 totaled $4.0 million, a 37.4% increase from $2.9 million for the 1995
fiscal year. The increase is attributable to a $7.5 million increase in average
interest-bearing deposits, in addition to the rise in the average rate paid on
deposits to 4.64%, from 3.70% for the prior year. The deposit growth is
consistent with management's strategy to increase retail deposits. The average
rate paid on deposits increased due to the general rise in interest rates and
the shift from savings accounts to higher yielding certificates of deposit.
Certificate accounts and other interest-bearing liabilities averaged $49.3
million at an average cost of 5.72% for the 1996 fiscal year as compared to an
average balance of $37.4 million at an average cost of 4.49% for the 1995 fiscal
year. The average balance of savings accounts decreased to $28.1 million for the
year ended March 31, 1996 from $32.8 million for the prior year, while the
average rate paid on savings accounts for the 1996 fiscal year increased to
3.49% from 3.16% for the 1995 fiscal year.
Provision for Loan Losses. The provision for loan losses for the year ended
March 31, 1996 decreased to $90,000, from $171,000 in the prior year. The
$81,000 decrease is primarily attributable to a $1.0 million reduction in
non-performing loans which totaled $1.6 million at March 31, 1996. The decline
in non-performing loans is a result of a combination of factors including
collections, charge-offs and the emergence of fewer new problem loans. The ratio
of the allowance for loan losses to non-performing loans was 40.07% at March 31,
1996, as compared to 24.58% a year earlier. See "Asset Quality."
Non-Interest Income. Non-interest income for the year ended March 31, 1996
amounted to $211,000, an increase from $67,000 for the 1995 fiscal year. The
increase primarily reflects a net gain on the sale of available-for-sale
securities of $88,000, as compared to a net loss of $44,000 reported in the 1995
fiscal year.
Non-Interest Expense. Non-interest expense increased 10.1% to $2.3 million
for the year ended March 31, 1996 from $2.1 million for the year ended March 31,
1995. This increase was primarily attributable to higher compensation and
benefits expense and costs associated with operations as a public company,
partially offset by a decline in real estate owned costs. The compensation and
benefits expense increase primarily reflects the recognition of costs associated
with the ESOP ($89,000) and the directors retirement plan ($8,000) which became
effective upon Conversion; increased expense recognized for the deferred
compensation plan for the directors ($104,000), as adopted in its amended form
upon Conversion; and performance-based salary increases. The net cost of real
estate owned decreased to $22,000 in the 1996 fiscal year, from $184,000 for the
prior year due to the lower provision for losses on the sale of real estate
owned. Real estate owned costs in the prior year reflected the costs associated
with the rehabilitation of real estate owned properties prior to their sale.
Despite the increase in expenses, the Company's ratio of non-interest expenses
to average assets decreased to 2.21% in the 1996 fiscal year from 2.34% in the
1995 fiscal year, reflecting the Company's asset growth.
Income Tax Expense. Income tax expense for the years ended March 31, 1996
and 1995 was $609,000 and $610,000, respectively, reflecting an effective tax
rate of 42.1% and 42.2%, respectively.
ASSET QUALITY
Loans are classified as non-performing when they became 90 days past due as
to interest or principal payments, or earlier if the ability of the borrower to
meet the contractual payment terms is in doubt. Management and the Board of
Directors perform a monthly review of all delinquent loans. The actions taken by
the Company with respect to delinquencies vary depending on the nature of the
loan and period of delinquency. It is the Company's general policy to stop the
accrual of interest on all loans 90 days or more past due. Certain loans 90 days
or more past due may continue to accrue interest based on management's
evaluation of the loan, the underlying collateral and the credit worthiness of
the borrower.
When a loan is placed on non-accrual status, unpaid interest is reversed
against interest income of the current period. Thereafter, interest payments
received on non-accrual loans are recognized as income unless future collections
are doubtful, in which case the payments received are applied as a reduction of
principal. A loan remains on non-accrual status until the factors that indicated
doubtful collectibility no longer exist or until a loan is determined to be
uncollectible and is charged off against the allowance for loan losses.
9
<PAGE> 12
The classification of a loan as non-performing does not necessarily indicate
that loan principal or interest will not be collected. Historical experience
indicates that a portion of non-performing assets will eventually be recovered.
When all collection efforts have been exhausted, and management determines that
the borrower is unable to repay its obligation, the Company will commence
foreclosure procedures.
The following table sets forth certain information regarding non-accrual
loans, other past due loans and real estate owned. The Company's prospective
adoption of Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan," effective April 1, 1995, had no impact on
the comparability of this information. See Note 3 to the Consolidated Financial
Statements for information concerning the Company's impaired loans which are
included in the non-accrual loans shown below.
<TABLE>
<CAPTION>
At or for the Year Ended March 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
NON-ACCRUAL LOANS:
Mortgage loans:
One- to four-family $1,355 $ 856 $ 523 $ 419 $ 245
Commercial property 123 126 -- -- --
Construction -- -- -- 326 326
Commercial business -- -- -- 30 --
------ ------ ------ ------ ------
Total 1,478 982 523 775 571
------ ------ ------ ------ ------
Number of non-accrual loans 9 6 2 5 2
ACCRUING LOANS PAST DUE NINETY DAYS OR MORE:
Mortgage loans:
One- to four-family $ -- $ 342 $ 885 $ 760 $ 631
Multi-family -- -- 761 171 378
Commercial property 72 266 331 180 --
Construction 100 -- -- -- 542
Commercial business and consumer 8 42 144 17 357
------ ------ ------ ------ ------
Total 180 650 2,121 1,128 1,908
------ ------ ------ ------ ------
Number of accruing loans past due ninety days or more 4 7 21 11 18
Total non-performing loans $1,658 $1,632 $2,644 $1,903 $2,479
====== ====== ====== ====== ======
Number of non-performing loans 13 13 23 16 20
Allowance for loan losses $ 660 $ 654 $ 650 $ 540 $ 482
====== ====== ====== ====== ======
Real estate owned, net $ 122 $ 402 $ 455 $ 367 $ 449
====== ====== ====== ====== ======
Number of real estate owned properties 1 2 2 3 3
RATIOS:
Non-accrual loans to total loans 2.65% 1.89% 1.03% 1.70% 1.22%
Non-performing loans to total loans 2.97 3.15 5.20 4.18 5.31
Non-performing loans and real estate owned to 1.46 1.77 3.40 2.63 3.46
total assets
Allowance for loan losses to:
Non-accrual loans 44.65 66.60 124.28 69.68 84.41
Non-performing loans 39.81 40.07 24.58 28.38 19.44
Total loans 1.18 1.26 1.28 1.19 1.03
Contractual interest income that would have been
recognized on non-accrual loans $ 96 $ 93 $ 18 $ 81 $ 61
Actual interest income recognized 74 58 -- 9 27
------ ------ ------ ------ ------
Interest income not recognized $ 22 $ 35 $ 18 $ 72 $ 34
====== ====== ====== ====== ======
</TABLE>
Accrued interest receivable on accruing loans past due by 90 days or more
amounted to $1,000, $8,000, $44,000, $14,000 and $62,000 at March 31, 1997,
1996, 1995, 1994 and 1993, respectively. Accordingly, if the Company had placed
all such loans on non-accrual status at those dates, interest income for the
fiscal years ended March 31, 1997, 1996 and 1995 would have been increased
(decreased) by $7,000, $36,000 and ($30,000), respectively.
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risks inherent in the Company's
loan portfolio and the general economy. The allowance for loan losses is
maintained at an amount management considers adequate to cover loan losses which
are deemed probable and estimable. The allowance is based upon a number of
factors, including asset classifications, economic trends, industry experience
and trends, industry and geographic concentrations, estimated collateral values,
management's assessment of the credit risk
10
<PAGE> 13
inherent in the portfolio, historical loan loss experience, and the Company's
underwriting policies. The Company will continue to monitor and modify its
allowance for loan losses as conditions dictate. Various regulatory agencies, as
an integral part of their examination process, periodically review the Company's
allowance for loan losses. These agencies may require the Company to establish
additional allowances, based on their judgments of the information available at
the time of the examination.
The following table sets forth activity in the Company's allowance for loan
losses and the allowance for losses on real estate owned for the periods
indicated.
<TABLE>
<CAPTION>
For the Year Ended March 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year $ 654 $ 650 $ 540 $ 482 $ 303
Provision for losses 69 90 171 151 315
Charge-offs:
Mortgage loans:
One- to four-family (12) (48) -- (23) (35)
Commercial property -- -- -- -- (50)
Construction loans -- -- (30) -- --
Commercial business loans (40) (36) (31) (78) (22)
Consumer loans (11) (2) (2) (4) (29)
----- ----- ----- ----- -----
Total charge-offs (63) (86) (63) (105) (136)
Recoveries -- -- 2 12 --
----- ----- ----- ----- -----
Balance at end of year $ 660 $ 654 $ 650 $ 540 $ 482
===== ===== ===== ===== =====
Ratio of net charge-offs to average loans outstanding 0.11% 0.17% 0.13% 0.20% 0.29%
ALLOWANCE FOR LOSSES ON REAL ESTATE OWNED:
Balance at beginning of year $ 38 $ 60 $ 59 $ 89 $ 89
Provision for losses 38 -- 141 64 --
Net realized losses (76) (22) (140) (94) --
----- ----- ----- ----- -----
Balance at end of year $ -- $ 38 $ 60 $ 59 $ 89
===== ===== ===== ===== =====
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and other financial information
included in this report have been prepared in conformity with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increased cost of the Company's operations.
Unlike industrial companies, nearly all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
11
<PAGE> 14
MANAGEMENT'S REPORT
Management is responsible for the preparation and integrity of the
consolidated financial statements and other information presented in this annual
report. The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and reflect
management's judgments and estimates with respect to certain events and
transactions.
Management is responsible for establishing and maintaining effective
internal controls to provide reasonable assurance that transactions are recorded
in accordance with management's authorization, assets are safeguarded against
loss or unauthorized use, and underlying financial records support the
preparation of financial statements. Internal controls include the communication
of written policies and procedures, selection of qualified personnel,
appropriate segregation of responsibilities, and the ongoing internal audit
function.
The Board of Directors meets periodically with Company management, the
internal auditor, and the independent auditors, KPMG Peat Marwick LLP, to review
matters relative to the quality of financial reporting, internal controls, and
the nature, extent and result of the audit efforts.
The independent auditors conduct an annual audit to enable them to express
an opinion on the Company's consolidated financial statements. In connection
with the audit, the independent auditors consider internal controls in order to
determine the nature, timing and extent of their auditing procedures.
/s/Stephen C. Byelick /s/Harry G. Murphy
- --------------------- ------------------
Stephen C. Byelick Harry G. Murphy
President and Chief Executive Officer Vice President and Secretary
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Tappan Zee Financial, Inc.:
We have audited the accompanying consolidated balance sheets of Tappan Zee
Financial, Inc. and subsidiary as of March 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended March 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tappan Zee
Financial, Inc. and subsidiary as of March 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1997 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Stamford, Connecticut
April 29, 1997
12
<PAGE> 15
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31,
--------------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 912 $ 581
Interest-bearing deposits 1,438 2,458
Federal funds sold 5,900 5,500
Securities (note 2):
Available-for-sale, at fair value (amortized cost of $36,967 in 1997
and $41,772 in 1996) 36,384 41,544
Held-to-maturity, at amortized cost (fair value of $17,889 in 1997 and $9,596 in 1996) 18,123 9,436
-------- --------
Total securities 54,507 50,980
Loans, net (note 3):
Mortgage loans 51,876 48,072
Other loans 4,170 4,037
Allowance for loan losses (660) (654)
Net deferred loan fees (276) (281)
-------- --------
Total loans, net 55,110 51,174
Federal Home Loan Bank stock 674 561
Real estate owned, net (note 4) 122 402
Other assets (note 5) 3,178 3,134
-------- --------
Total assets $121,841 $114,790
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits (note 6) $ 98,327 $ 89,908
Other liabilities (note 5) 2,286 2,522
-------- --------
Total liabilities 100,613 92,430
-------- --------
SHAREHOLDERS' EQUITY (notes 11 and 12):
Preferred stock (par value $0.01 per share; 1,000,000 shares
authorized; none issued or outstanding) -- --
Common stock (par value $0.01 per share; 5,000,000 shares
authorized; 1,620,062 shares issued) 16 16
Additional paid-in capital 14,942 14,893
Common stock held by employee stock ownership plan ("ESOP") (1,056) (1,215)
Common stock awarded under recognition and retention plans ("RRPs") (524) --
Treasury stock, at cost (86,000 shares) (1,070) --
Retained earnings, substantially restricted 9,269 8,803
Net unrealized loss on available-for-sale securities, net of taxes (note 2) (349) (137)
-------- --------
Total shareholders' equity 21,228 22,360
-------- --------
Total liabilities and shareholders' equity $121,841 $114,790
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 16
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
INTEREST INCOME:
Mortgage loans $ 4,331 $ 4,098 $ 3,767
Other loans 390 367 311
Securities 3,513 2,387 2,067
Other earning assets 357 772 402
------- ------- -------
Total interest income 8,591 7,624 6,547
------- ------- -------
INTEREST EXPENSE:
Deposits 4,094 4,002 2,912
Federal Home Loan Bank advances 12 -- --
------- ------- -------
Total interest expense 4,106 4,002 2,912
------- ------- -------
Net interest income 4,485 3,622 3,635
Provision for loan losses (note 3) 69 90 171
------- ------- -------
Net interest income after provision
for loan losses 4,416 3,532 3,464
------- ------- -------
NON-INTEREST INCOME:
Service charges and other fees 119 109 103
Net gain (loss) on sales of available-for-sale 23 88 (44)
securities (note 2)
Other 10 14 8
------- ------- -------
Total non-interest income 152 211 67
------- ------- -------
NON-INTEREST EXPENSE:
Compensation and benefits (notes 10 and 11) 1,477 1,185 969
Occupancy and equipment 192 220 229
Federal deposit insurance:
Regular premiums 155 202 182
Special assessment (note 6) 538 -- --
Data processing service fees 159 151 132
Net cost of real estate owned (note 4) 60 22 184
Other (note 9) 806 517 391
------- ------- -------
Total non-interest expense 3,387 2,297 2,087
------- ------- -------
Income before income tax expense 1,181 1,446 1,444
Income tax expense (note 8) 326 609 610
------- ------- -------
Net income $ 855 $ 837 $ 834
======= ======= =======
Earnings per share, from date of conversion (note 12) $ 0.59 $ 0.31
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 17
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Common Common Net
Additional Stock Stock Unrealized Total
Common Paid-in Held Awarded Treasury Retained Loss on Shareholders'
Stock Capital by ESOP Under RRPs Stock Earnings Securities Equity
-------- -------- -------- -------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1994 $-- $ -- $ -- $ -- $ -- $7,213 $ (12) $ 7,201
Net income -- -- -- -- -- 834 -- 834
Reversal of net unrealized
loss on equity securities -- -- -- -- -- -- 12 12
Net unrealized loss on
available-for-sale securities,
net of taxes:
As of April 1, 1994 -- -- -- -- -- -- (99) (99)
Net increase during the year -- -- -- -- -- -- (130) (130)
--- ------- ------- ----- ------- ------ ----- -------
BALANCE AT MARCH 31, 1995 -- -- -- -- -- 8,047 (229) 7,818
Net income -- -- -- -- -- 837 -- 837
Dividends paid ($0.05 per share) -- -- -- -- -- (81) -- (81)
Issuance of 1,620,062
common shares 16 14,885 -- -- -- -- -- 14,901
Shares purchased by ESOP
(129,600 shares) -- -- (1,296) -- -- -- -- (1,296)
ESOP shares committed to be
released (8,124 shares) -- 8 81 -- -- -- -- 89
Decrease in net unrealized loss
on available-for-sale
securities, net of taxes -- -- -- -- -- -- 92 92
--- ------- ------- ----- ------- ------ ----- -------
BALANCE AT MARCH 31, 1996 16 14,893 (1,215) -- -- 8,803 (137) 22,360
Net income -- -- -- -- -- 855 -- 855
Dividends paid ($0.20 per share) -- -- -- -- -- (291) -- (291)
Repurchase of 86,000
treasury shares -- -- -- -- (1,070) -- -- (1,070)
Purchase of 52,840 shares to
fund awards under the RRPs -- -- -- (616) -- (98) -- (714)
Amortization of awards -- -- -- 92 -- -- -- 92
ESOP shares committed to be
released (15,893 shares) -- 49 159 -- -- -- -- 208
Increase in net unrealized loss on
available-for-sale
securities, net of taxes -- -- -- -- -- -- (212) (212)
--- ------- ------- ----- ------- ------ ----- -------
BALANCE AT MARCH 31, 1997 $16 $14,942 $(1,056) $(524) $(1,070) $9,269 $(349) $21,228
=== ======= ======= ===== ======= ====== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 18
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 855 $ 837 $ 834
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 69 90 171
Provision for real estate owned losses 38 -- 141
Depreciation expense 58 73 93
Accretion of net deferred loan fees (44) (61) (47)
Net increase in accrued interest receivable (80) (63) (65)
Net (gain) loss on sales of available-for-sale securities (23) (88) 44
Other adjustments, net 155 202 (301)
-------- -------- --------
Net cash provided by operating activities 1,028 990 870
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities:
Available-for-sale (19,596) (28,728) (526)
Held-to-maturity (10,069) (5,117) (4,984)
Proceeds from principal payments, maturities and calls of securities:
Available-for-sale 10,562 8,304 3,070
Held-to-maturity 1,381 1,424 762
Proceeds from sales of available-for-sale securities 13,861 3,797 1,664
Disbursements for loan originations (11,903) (9,314) (15,498)
Principal collections on loans 7,942 8,233 9,462
Proceeds from sales of real estate owned 249 225 345
Other investing cash flows, net (162) (103) 31
-------- -------- --------
Net cash used in investing activities (7,735) (21,279) (5,674)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 8,419 8,095 4,303
Net proceeds from sale of common stock -- 14,901 --
Common stock purchased by ESOP -- (1,296) --
Purchase of common stock to fund awards under RRPs (714) -- --
Repurchase of treasury stock (1,070) -- --
Dividends paid (291) (81) --
Net increase (decrease) in mortgage escrow funds 74 (344) 54
-------- -------- --------
Net cash provided by financing activities 6,418 21,275 4,357
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (289) 986 (447)
Cash and cash equivalents at beginning of year 8,539 7,553 8,000
-------- -------- --------
Cash and cash equivalents at end of year $ 8,250 $ 8,539 $ 7,553
======== ======== ========
SUPPLEMENTAL INFORMATION:
Interest paid $ 4,106 $ 4,002 $ 2,912
Income taxes paid 646 531 750
Securities transferred from held-to-maturity to available-for-sale -- 11,320 --
Mortgage loans transferred to real estate owned -- 111 554
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In June 1995, Tarrytown and North Tarrytown Savings and Loan Association
converted from a New York State chartered mutual savings and loan association to
a federally chartered mutual savings bank under the new name Tarrytowns Bank,
FSB (the "Bank"). As discussed in note 12, Tappan Zee Financial, Inc. (the
"Holding Company") became the holding company for the Bank on October 5, 1995
upon completion of the conversion of the Bank from a mutual savings bank to a
stock savings bank (the "Conversion"). Collectively, the Holding Company and the
Bank are referred to herein as the "Company".
The Company's primary market area consists of the Village of Tarrytown and
its neighboring communities in Westchester County, New York. The Bank is a
community-oriented savings institution whose business primarily consists of
accepting deposits from customers within its market area and investing those
funds in mortgage loans secured by one- to four-family residences. To a
significantly lesser extent, funds are invested in multi-family, commercial real
estate, construction, commercial business and consumer loans. The Company also
invests in mortgage-backed and other securities. Deposits are insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation. The Company's primary regulator is the
Office of Thrift Supervision ("OTS").
The following is a summary of the significant accounting policies followed
by the Company in the preparation of the consolidated financial statements.
Basis of Presentation
The consolidated financial statements include the accounts of the Holding
Company and its wholly-owned subsidiary, the Bank. All significant intercompany
accounts and transactions have been eliminated in consolidation. Prior to the
Conversion, the Holding Company had no operations other than those of an
organizational nature. Subsequent thereto, the Holding Company's only business
activity is the ownership of the Bank. All financial information included herein
for periods prior to the Conversion refers to the Bank.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, income and expense. A
material estimate that is particularly susceptible to near-term change is the
allowance for loan losses, which is discussed below.
Certain reclassifications have been made to prior year amounts to conform to
the current year presentation. For purposes of reporting cash flows, cash
equivalents consist of overnight federal funds sold.
Securities
The securities portfolio includes debt securities and, to a much lesser
extent, equity securities. Debt securities are principally mortgage-backed
securities, consisting of collateralized mortgage obligations ("CMOs") and
pass-through securities issued by United States government-sponsored entities
(Ginnie Mae, Fannie Mae and Freddie Mac).
The Company accounts for securities in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Individual securities are classified
as held-to-maturity securities, trading securities, or available-for-sale
securities. SFAS No. 115 limits the held-to-maturity category to debt securities
for which the entity has the positive intent and ability to hold to maturity.
Trading securities are debt and equity securities that are bought principally
for the purpose of selling them in the near term. All other debt and equity
securities are classified as available-for-sale.
Held-to-maturity securities are carried at amortized cost.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses excluded from earnings and reported on a net-of-tax basis as a
separate component of shareholders' equity. The Company has no trading
securities. Federal Home Loan Bank ("FHLB") stock is a non-marketable security
held in accordance with certain regulatory requirements and, accordingly, is
carried at cost.
Premiums and discounts on debt securities are amortized to interest income
on a level-yield basis over the expected terms of the securities. Realized gains
and losses on sales of securities are determined based on the amortized cost of
the specific securities sold. Unrealized losses on held-to-maturity and
available-for-sale securities are charged to earnings when the decline in fair
value of a security is judged to be other than temporary.
Allowance for Loan Losses
Effective April 1, 1995, the Company prospectively adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118.
Under SFAS No. 114, a loan is considered to be impaired when, based on current
information and events, it is probable that the creditor will be unable to
collect all principal and interest contractually due. Creditors are permitted to
measure impaired loans based on (i) the present value of expected future cash
flows discounted at the loan's effective interest rate, (ii) the loan's
observable market price or (iii) the fair value of the collateral if the loan is
collateral dependent. If the approach used results in a mea-
17
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
surement that is less than an impaired loan's recorded investment, an impairment
loss is recognized as part of the allowance for loan losses. SFAS No. 118 allows
creditors to continue to use existing methods for recognizing interest income on
impaired loans. The Company's adoption of these statements did not affect its
overall allowance for loan losses or income recognition practices.
The allowance for loan losses is increased by provisions for losses charged
to operations. Losses on loans (including impaired loans) are charged to the
allowance for loan losses when all or a portion of a loan is deemed to be
uncollectible. Recoveries of loans previously charged-off are credited to the
allowance when realized. Management estimates the allowance for loan losses
based on an evaluation of the Company's past loan loss experience, known and
inherent risks in the portfolio, estimated value of underlying collateral, and
current economic conditions. In management's judgment, the allowance for loan
losses is adequate to absorb probable losses in the existing portfolio.
Establishing the allowance for loan losses involves significant management
judgments utilizing the best information available at the time of review. Those
judgments are subject to further review by various sources, including the
Company's regulators. Future adjustments to the allowance may be necessary based
on changes in economic and real estate market conditions, further information
obtained regarding known problem loans, the identification of additional problem
loans, and other factors.
Interest and Fees on Loans
Generally, a loan (including an impaired loan under SFAS No. 114) is placed
on non-accrual status when principal or interest payments become ninety days
past due, or earlier if the ability of the borrower to meet contractual payment
terms is in doubt. When loans are placed on non-accrual status, unpaid interest
is reversed against interest income of the current period. Thereafter, interest
payments received on non-accrual loans are either applied to reduce unpaid
principal balances or reported as interest income, depending on management's
judgment as to the likelihood of further collections. Loans are returned to
accrual status when collectibility is no longer considered doubtful.
Loan origination fees and certain direct loan origination costs are
deferred, and the net fee or cost is recognized as an adjustment to interest
income using the level-yield method over the contractual life of the related
loan. Net deferred fees and costs applicable to prepaid loans are recognized in
interest income at the time of prepayment. Discounts on consumer loans are
accreted using the level-yield method.
Real Estate Owned
Real estate owned consists of properties acquired through foreclosure or
deed in lieu of foreclosure. A property is initially recorded at fair value less
estimated sales costs, with any resulting writedown charged to the allowance for
loan losses. Thereafter, an allowance for losses on real estate owned is
established for any further declines in fair value less estimated sales costs.
Fair value estimates are based on recent appraisals and other available
information. Costs incurred to develop or improve properties are capitalized,
while holding costs are charged to expense.
Office Property and Equipment
Office property and equipment is comprised of land (carried at cost) and
building, furniture, fixtures and equipment (carried at cost less accumulated
depreciation). Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets. Costs incurred to improve or
extend the life of existing assets are capitalized. Repairs and maintenance, as
well as renewals and replacements of a routine nature, are charged to expense.
Income Taxes
In accordance with the asset and liability method required by SFAS No. 109,
"Accounting for Income Taxes," deferred taxes are recognized for the estimated
future tax effects attributable to temporary differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
A deferred tax liability is recognized for all temporary differences that will
result in future taxable income. A deferred tax asset is recognized for all
temporary differences that will result in future tax deductions, subject to
reduction of the asset by a valuation allowance in certain circumstances. This
valuation allowance is recognized if, based on an analysis of available
evidence, management determines that it is more likely than not that a portion
or all of the deferred tax asset will not be realized.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax laws or rates is recognized in income
tax expense in the period that includes the enactment date of the change.
Postretirement Benefit and Deferred Compensation Plans
The Company has a non-contributory defined benefit pension plan which covers
substantially all employees. Pension costs are funded on a current basis. Costs
for this plan, as well as the Company's directors' retirement plan and
directors' deferred compensation plan, are accounted for in accordance with SFAS
No. 87, "Employers' Accounting for Pensions."
18
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
The cost of postretirement health care benefits is recognized on an accrual
basis as such benefits are earned by active employees in accordance with SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions."
Stock-Based Compensation Plans
Compensation expense is recognized in an amount equal to the fair value of
ESOP shares that have been committed to be released for allocation to
participant accounts. To the extent that the fair value of these shares differs
from the original cost, the difference is charged or credited to shareholders'
equity (additional paid-in capital). The cost of unallocated ESOP shares not yet
committed to be released is reflected as a reduction of shareholders' equity.
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, compensation expense is recognized
only if the exercise price of the option is less than the fair value of the
underlying stock at the grant date. SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages entities to recognize the fair value of all
stock-based awards on the date of grant as compensation expense over the vesting
period. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma disclosures of net income
and earnings per share as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosures required by SFAS No.
123.
The Company's RRPs are also accounted for in accordance with APB Opinion No.
25. The fair value of the shares awarded, measured as of the grant date, is
recognized as unearned compensation (a deduction from shareholders' equity) and
amortized to compensation expense as the shares become vested. An excess of the
cost to fund purchases of RRP shares over the grant-date fair value is charged
to retained earnings.
Earnings per Share
Earnings per share is reported for periods following the Conversion based on
net income divided by the weighted average number of common shares outstanding
and common stock equivalents. Unallocated ESOP shares that have not been
committed to be released to participants are excluded from outstanding shares in
computing earnings per share.
(2)SECURITIES
The following is a summary of available-for-sale and held-to-maturity
securities at March 31, 1996:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized --------------------- Fair
Cost Gains Losses Value
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Mortgage-backed securities:
CMOs $ 8,329 $ 2 $(215) $ 8,116
Pass-through securities 15,954 6 (161) 15,799
------- ------- ------- -------
Total 24,283 8 (376) 23,915
U.S. Agency and other debt securities 8,029 2 (217) 7,814
Mutual fund investments 4,655 -- -- 4,655
------- ------- ------- -------
Total $36,967 $ 10 $(593) $36,384
======= ======= ======= =======
HELD-TO-MATURITY SECURITIES
Mortgage-backed securities:
CMOs $ 996 $ 3 $ (5) $ 994
Pass-through securities 14,078 85 (282) 13,881
------- ------- ------- -------
Total 15,074 88 (287) 14,875
U.S. Agency and other debt securities 3,049 14 (49) 3,014
------- ------- ------- -------
Total $18,123 $102 $(336) $17,889
======= ======= ======= =======
</TABLE>
19
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
The following is a summary of available-for-sale and held-to-maturity
securities at March 31, 1996:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized --------------------- Fair
Cost Gains Losses Value
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Mortgage-backed securities:
CMOs $17,651 $ 93 $(189) $17,555
Pass-through securities 7,671 18 (67) 7,622
------- ------- ------- -------
Total 25,322 111 (256) 25,177
Other debt securities:
U.S. Treasury 6,490 3 -- 6,493
U.S. Agency and other 8,616 10 (96) 8,530
Mutual fund investments 1,344 -- -- 1,344
------- ------- ------- -------
Total $41,772 $124 $(352) $41,544
======= ======= ======= =======
HELD-TO-MATURITY SECURITIES
Mortgage-backed securities:
CMOs $ 1,108 $ 5 $ -- $ 1,113
Pass-through securities 5,129 141 (21) 5,249
------- ------- ------- -------
Total 6,237 146 (21) 6,362
U.S. Agency and other debt securities 3,199 35 -- 3,234
------- ------- ------- -------
Total $ 9,436 $181 $ (21) $ 9,596
======= ======= ======= =======
</TABLE>
The net unrealized loss on available-for-sale securities was $583,000
($349,000 after taxes) at March 31, 1997 and $228,000 ($137,000 after taxes) at
March 31, 1996. Changes in unrealized holding gains and losses resulted in
after-tax (decreases) increases in shareholders' equity of ($212,000) in fiscal
1997, $92,000 in fiscal 1996 and ($130,000) in fiscal 1995. These gains and
losses will continue to fluctuate based on changes in the portfolio and market
conditions.
Sales of available-for-sale securities resulted in the following gross
realized gains and gross realized losses during the years ended March 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Gains $ 89 $ 90 $ 1
Losses (66) (2) (45)
---- ---- ----
Net $ 23 $ 88 $(44)
==== ==== ====
</TABLE>
In November 1995, the Financial Accounting Standards Board ("FASB") issued a
special report on SFAS No. 115 which provided a one-time opportunity to
reclassify securities from the held-to-maturity category to the
available-for-sale category prior to December 31, 1995, without calling into
question the intent to hold other securities to maturity. In December 1995, the
Company reclassified securities with an amortized cost and a fair value of $11.3
million and $11.5 million, respectively, from the held-to-maturity category to
the available-for-sale category.
20
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the amortized cost and fair value of debt
securities, other than mortgage-backed securities, by remaining term to
contractual maturity as of March 31, 1997. Actual maturities may differ from
these amounts because certain issuers have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
--------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
One year or less $ -- $ -- $ 50 $ 50
More than one year to five years 3,454 3,397 100 100
More than five years to ten years 4,530 4,372 2,700 2,660
More than ten years 45 45 199 204
------ ------ ------ ------
Total $8,029 $7,814 $3,049 $3,014
====== ====== ====== ======
</TABLE>
(3) LOANS
Loans are summarized as follows at March 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Mortgage loans:
Residential properties:
One- to four-family $43,958 $38,762
Multi-family 2,289 3,287
Commercial properties 3,910 3,561
Construction loans 2,405 3,200
Construction loans in process (686) (738)
-------- --------
51,876 48,072
-------- --------
Other loans:
Commercial business loans 2,846 2,747
Automobile loans 781 724
Other consumer loans 797 821
Unearned discounts (239) (235)
Unused commercial lines of credit (15) (20)
-------- --------
4,170 4,037
-------- --------
Total loans 56,046 52,109
Allowance for loan losses (660) (654)
Net deferred loan fees (276) (281)
-------- --------
Total loans, net $55,110 $51,174
======== ========
</TABLE>
The loan portfolio at March 31, 1997 consisted of fixed-rate loans of $42.4
million and adjustable-rate loans of $13.6 million with weighted average yields
of 8.48% and 8.43%, respectively. At March 31, 1996, fixed-rate loans were $37.0
million and adjustable-rate loans were $15.1 million.
The Company primarily originates mortgage loans secured by existing
single-family residential properties. The Company also originates multi-family
and commercial real estate loans, construction loans, commercial business loans
and consumer loans. A substantial portion of the loan portfolio is secured by
real estate properties located in Westchester County, New York. The ability of
the Company's borrowers to make principal and interest payments is dependent
upon, among other things, the level of overall economic activity and the real
estate market conditions prevailing within the Company's concentrated lending
area.
21
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of loans on non-accrual status and accruing
loans past due ninety days or more at March 31:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(In thousands)
<S> <C> <C> <C>
NON-ACCRUAL LOANS:
Mortgage loans:
One- to four-family $1,355 $ 856 $ 523
Commercial property 123 126 --
------ ------ ------
Total 1,478 982 523
------ ------ ------
ACCRUING LOANS PAST DUE NINETY DAYS OR MORE:
Mortgage loans:
One- to four-family -- 342 885
Multi-family -- -- 761
Commercial property 72 266 331
Construction 100 -- --
Commercial business and consumer 8 42 144
------ ------ ------
Total 180 650 2,121
------ ------ ------
Total non-performing loans $1,658 $1,632 $2,644
====== ====== ======
</TABLE>
If interest payments on the foregoing non-accrual loans had been made during
the respective years in accordance with the loan agreements, additional interest
income of $22,000, $35,000 and $18,000 would have been recognized in fiscal
1997, 1996 and 1995, respectively.
SFAS No. 114 applies to loans that are individually evaluated for
collectibility in accordance with the Company's normal loan review procedures
(principally loans in the multi-family, commercial mortgage and construction
loan categories). The standard does not apply to smaller-balance, homogeneous
loans such as the Company's one- to four-family residential mortgage loans. The
Company had one impaired loan (a commercial mortgage loan on non-accrual status)
with a recorded investment of $123,000 and $126,000 at March 31, 1997 and 1996,
respectively. An allowance for loan impairment under SFAS No. 114 was not
required for this loan due to the adequacy of the collateral value. The
Company's average recorded investment in impaired loans was $125,000 and
$128,000 for fiscal 1997 and 1996, respectively. Interest collections and income
recognized on impaired loans were insignificant for both years.
Activity in the allowance for loan losses is summarized as follows for the
years ended March 31:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $654 $650 $540
Provision for losses 69 90 171
Charge-offs (63) (86) (63)
Recoveries -- -- 2
----- ----- -----
Balance at end of year $660 $654 $650
===== ===== =====
</TABLE>
22
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) REAL ESTATE OWNED
Real estate owned properties at March 31, 1997 and 1996 consisted of
single-family residences. Activity in the allowance for losses on real estate
owned is summarized as follows for the years ended March 31:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 38 $ 60 $ 59
Provision for losses 38 -- 141
Net realized losses (76) (22) (140)
----- ----- -----
Balance at end of year $ -- $ 38 $ 60
===== ===== =====
</TABLE>
In addition to the provision for losses, the net cost of real estate owned
reported in the consolidated statements of income includes operating expenses of
$22,000, $22,000 and $43,000 in fiscal 1997, 1996 and 1995, respectively.
(5) OTHER ASSETS AND LIABILITIES
A summary of other assets and liabilities at March 31 follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(In thousands)
<S> <C> <C>
OTHER ASSETS:
Office property and equipment, net of accumulated depreciation
of $365 in 1997 and $364 in 1996 $ 544 $ 560
Accrued interest receivable 778 698
Deferred income taxes (note 8) 859 516
Intangible asset recognized for directors' deferred compensation plan (note 10) 510 946
Prepaid expenses and other 487 414
------ ------
Total $3,178 $3,134
====== ======
OTHER LIABILITIES:
Obligation for directors' deferred compensation plan (note 10) $ 928 $1,110
Mortgage escrow funds 784 710
Accrued expenses and other 574 702
------ ------
Total $2,286 $2,522
====== ======
</TABLE>
(6) DEPOSITS
Deposit balances and weighted average stated interest rates at March 31 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Checking $ 2,771 $ 2,001
NOW 3,756 2.00% 4,164 2.00%
Money market 3,157 2.75 3,484 2.75
Regular savings 15,008 2.75 16,402 3.10
Statement savings 10,757 2.92 11,563 3.20
------- --------
35,449 2.51 37,614 2.81
------- --------
Savings certificates by remaining period to maturity:
Under one year 49,026 5.72 40,448 5.68
One to three years 13,852 5.98 11,846 6.33
------- --------
62,878 5.78 52,294 5.83
------- --------
Total $98,327 4.60% $89,908 4.57%
======= ==== ======== ====
</TABLE>
23
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Savings certificates issued in denominations of $100,000 or more totaled
$9.4 million and $7.6 million at March 31, 1997 and 1996, respectively.
The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted into
law on September 30, 1996. Among other things, the Funds Act required depository
institutions to pay a one-time special assessment of 65.7 basis points on their
SAIF-assessable deposits held on March 31, 1995, in order to recapitalize the
SAIF to the level required by law. The Bank's special assessment of $538,000 was
accrued as a charge to non-interest expense for the quarter ended September 30,
1996. The assessment was paid in November 1996.
(7) FEDERAL HOME LOAN BANK ADVANCES
As a member of the FHLB of New York, the Bank has access to funds in the
form of FHLB advances. Based on the level of qualifying collateral available to
secure advances at March 31, 1997, the Bank's borrowing capacity was $29.3
million, none of which was used at that date. Advances are secured by the Bank's
investment in FHLB stock and by a blanket security agreement. This agreement
requires the Bank to maintain as collateral certain qualifying assets (such as
securities and single-family residential mortgage loans) with a fair value, as
defined, at least equal to 115% of the outstanding advances.
(8) INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended
March 31:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(In thousands)
<S> <C> <C> <C>
FEDERAL:
Current $ 432 $465 $520
Deferred 47 (14) (90)
----- ----- ----
479 451 430
----- ----- ----
NEW YORK STATE:
Current 94 94 146
Deferred (247) 64 34
----- ----- ----
(153) 158 180
----- ----- ----
TOTAL:
Current 526 559 666
Deferred (200) 50 (56)
----- ----- ----
$ 326 $609 $610
===== ==== ====
</TABLE>
Total income tax expense differs from the amounts computed by applying the
applicable statutory federal income tax rate of 34% to income before income tax
expense. A reconciliation of the tax at the statutory rate to the Company's
actual tax expense follows for the years ended March 31:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C>
Tax at federal statutory rate $ 402 $ 492 $ 491
State tax (benefit) expense, net of federal tax effect (101) 104 119
Other, net 25 13 --
----- ----- -----
Actual income tax expense $ 326 $ 609 $ 610
===== ===== =====
Effective income tax rate 27.6% 42.1% 42.2%
===== ===== =====
</TABLE>
24
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to the Company's
deferred tax assets and liabilities at March 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands)
<S> <C> <C>
DEFERRED TAX ASSETS:
Allowance for loan losses $270 $285
Net unrealized loss on available-for-sale securities 234 91
Loan origination fees 113 116
Other 292 193
---- ----
Total deferred tax assets 909 685
---- ----
DEFERRED TAX LIABILITIES:
New York State bad debt reserve in excess of base-year amount -- (161)
Other (50) (8)
---- ----
Total deferred tax liabilities (50) (169)
---- ----
Net deferred tax assets $859 $516
==== ====
</TABLE>
Based on the Company's historical and anticipated future pre-tax earnings,
management believes that it is more likely than not that the Company's deferred
tax assets will be realized.
As a thrift institution, the Bank is subject to special provisions in the
federal and New York state tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. These deductions historically have
been determined using methods based on loss experience or a percentage of
taxable income. Tax bad debt reserves represent the excess of allowable
deductions over actual bad debt losses and other reserve reductions. These
reserves consist of a defined base-year amount, plus additional amounts ("excess
reserves") accumulated after the base year. SFAS No. 109 requires recognition of
deferred tax liabilities with respect to such excess reserves, as well as any
portion of the base-year amount which is expected to become taxable (or
"recaptured") in the foreseeable future.
Certain amendments to the federal and New York state tax laws regarding bad
debt deductions were enacted in July and August 1996. The federal amendments
include elimination of the percentage-of-taxable-income method for tax years
beginning after December 31, 1995 and imposition of a requirement to recapture
into taxable income (over a six-year period) the bad debt reserves in excess of
the base-year amounts. This recapture requirement did not have a significant
effect on the Bank since its federal bad debt reserves approximated the
base-year amounts. The New York amendments redesignate the Bank's state bad debt
reserve at December 31, 1995 as the base-year amount and also provide for future
additions to the base-year reserve using the percentage-of-taxable-income
method. This change effectively eliminated the excess New York state reserve for
which the Company had recognized a deferred tax liability. Accordingly, the
Company reduced its deferred tax liability in the quarter ended September 30,
1996, by $166,000, representing a state deferred tax benefit of $252,000 less
related deferred federal taxes of $86,000.
At March 31, 1997, the Bank's federal and state bad debt reserves were $1.5
million and $3.9 million, respectively, which equaled the base-year amounts. In
accordance with SFAS No. 109, deferred tax liabilities have not been recognized
with respect to these reserves since the Company does not expect that such
amounts will become taxable in the foreseeable future. Under the tax laws as
amended, events that would result in taxation of certain of these reserves
include (i) redemptions of the Bank's stock or certain excess distributions to
the Holding Company, and (ii) failure of the Bank to maintain a specified
qualifying assets ratio or meet other thrift definition tests for New York state
tax purposes. At March 31, 1997, the Bank's unrecognized deferred tax
liabilities with respect to the federal and state base-year reserves were
approximately $0.5 million and $0.3 million, respectively.
25
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) OTHER NON-INTEREST EXPENSE
The components of other non-interest expense are as follows for the years
ended March 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Professional services $316 $149 $ 73
Advertising 73 51 49
Stationery, printing and supplies 52 35 23
Supervisory exams and assessments 35 33 32
Insurance and surety bond premiums 54 52 46
Other 276 197 168
---- ---- ----
Total $806 $517 $391
==== ==== ====
</TABLE>
(10) POSTRETIREMENT BENEFITS AND DEFERRED COMPENSATION PLANS
Pension Plans and Deferred Compensation Plan
All eligible employees are included in a non-contributory, multiple-employer
defined benefit pension plan (the "Pension Plan"). The Company's annual
contributions to the Pension Plan are based on actuarially determined funding
requirements. The Company has also established a non-qualified deferred
compensation plan for directors of the Bank or the Holding Company, which was
adopted in its amended form upon Conversion (the "Deferred Compensation Plan").
The following is a reconciliation of the funded status of these plans and
the liabilities recognized in the consolidated balance sheets at March 31:
<TABLE>
<CAPTION>
Deferred
Pension Plan Compensation Plan
---------------------- ----------------------
1997 1996 1997 1996
------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation -- vested $(1,040) $ (978) $ (928) $(1,110)
Accumulated benefit obligation -- nonvested -- (11) -- --
------- ------- ------- -------
Total accumulated benefit obligation (1,040) (989) (928) (1,110)
Effect of projected future compensation levels (234) (209) -- --
------- ------- ------- -------
Projected benefit obligation for service rendered to date (1,274) (1,198) (928) (1,110)
Plan assets (insurance contract, at contract value) 1,050 970 -- --
------- ------- ------- -------
Projected benefit obligation in excess of plan assets (224) (228) (928) (1,110)
Unrecognized prior service cost -- -- 751 946
Unrecognized net loss (gain) from experience different from
that assumed and effect of changes in assumptions 113 127 (241) --
Unrecognized net transition obligation 90 98 -- --
Additional minimum liability recognized with a
corresponding intangible asset (note 5) -- -- (510) (946)
------- ------- ------- -------
Liabilities recognized $ (21) $ (3) $ (928) $(1,110)
======= ======= ======= =======
</TABLE>
26
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Plan expense consisted of the following components for the years ended
March 31:
<TABLE>
<CAPTION>
Deferred
Pension Plan Compensation Plan
------------------------------ -----------------
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Service costs (benefits earned during the period) $ 30 $ 28 $ 32 $ 39 $ 23
Interest costs on projected benefit obligations 87 81 89 59 43
Return on plan assets (80) (80) (79) -- --
Net amortization and deferral 13 9 9 158 98
---- ---- ---- ---- ----
Net expense $ 50 $ 38 $ 51 $256 $164
==== ==== ==== ==== ====
</TABLE>
For both plans, the actuarial present values of the projected benefit
obligations at March 31, 1997 and 1996 were determined based on discount rates
of 7.5% and 7.0%, respectively. Actuarial amounts for the Pension Plan were also
based on rates of increase in future compensation levels of 5.5% in 1997 and
5.0% in 1996, and expected long-term rates of return on plan assets of 8.5% in
both years.
Under the Deferred Compensation Plan, directors may defer all or part of
their compensation received for services to the Company (including compensation
paid to an officer-director for service as an officer). Deferred amounts are
applied principally to the purchase of life insurance policies naming the
Company as beneficiary. The plan provides for benefit payments by the Company in
installments over a ten-year period beginning upon termination of a
participant's service as a director. In the event of a change in control of the
Holding Company or the Bank, the plan requires full funding of any
previously-purchased life insurance contracts. In connection with the
Conversion, the Company established a trust fund with an independent fiduciary
for the purpose of accumulating funds to be used to satisfy its obligations
under the Deferred Compensation Plan. For financial reporting purposes, the life
insurance contracts are not considered plan assets but, instead, are included in
the Company's consolidated balance sheet at their cash surrender values
($267,000 at March 31, 1997). Compensation and benefits expense for fiscal year
1997 and for the six-month period ended March 31, 1996 was reduced by $91,000
and $60,000, respectively, with respect to the recognition of cash surrender
values. The total death benefits payable to the Company under the insurance
policies amounted to approximately $919,000 at March 31, 1997. Although the
Company may be obligated for certain cash payments to participants prior to the
receipt of proceeds from the purchased life insurance policies, the Company
expects that it will ultimately be reimbursed in whole from such life insurance
proceeds.
The Company also has a retirement plan for directors, which is a
non-qualified plan that became effective upon the Conversion. Outside directors
are participants in this unfunded plan only if they have elected not to
participate in the Deferred Compensation Plan described above. Participants in
the directors' retirement plan who have attained age 65 and completed ten or
more years of service (including past service as a director of the Bank) will
receive an annual retirement benefit equal to the aggregate director
compensation received (excluding stock compensation) for the final year of board
service. Reduced benefits apply for shorter service periods and for early
retirement. Pension expense was $16,000 for the fiscal year 1997 and $8,000 for
the six-month period ended March 31, 1996. The actuarial present value of the
accumulated and projected benefit obligations both were $65,000 at March 31,
1997 and $50,000 at March 31, 1996.
Postretirement Health Care Benefits
Substantially all employees become eligible for postretirement health care
(medical and dental) benefits if they meet certain age and length of service
requirements. In accordance with SFAS No. 106, the cost of postretirement health
care benefits is recognized on an accrual basis as such benefits are earned by
active employees.
27
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of the actuarial liabilities for
postretirement health care benefits, none of which have been funded, and the
liabilities recognized in the consolidated balance sheets at March 31:
<TABLE>
<CAPTION>
1997 1996
----- -----
(In thousands)
<S> <C> <C>
Accumulated benefit obligation:
Retirees $ (62) $ (87)
Fully-eligible employees (74) (120)
Other active participants (57) (60)
----- -----
Total accumulated benefit obligation (193) (267)
Unrecognized (gain) loss (9) 70
----- -----
Liabilities recognized $(202) $(197)
===== =====
</TABLE>
Plan expense consisted of the following components for the years ended March
31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 3 $ 3 $ 1
Interest cost on accumulated benefit obligation 14 18 14
Net amortization and deferral -- 4 --
--- --- ---
Net expense $17 $25 $15
=== === ===
</TABLE>
The accumulated postretirement benefit obligation was determined using the
projected unit credit cost method, as required by SFAS No. 106, and discount
rates of 7.25% and 7.0% at March 31, 1997 and 1996, respectively. At March 31,
1997, the assumed rate of increase in future health care costs was 9.5% for
1997, gradually decreasing to 5.5% in the year 2005 and remaining at that level
thereafter. A one-percentage-point increase in the assumed health care cost
trend rate would increase the accumulated benefit obligation by approximately
$22,000 at March 31, 1997 with an insignificant effect on expense recognized for
the year then ended.
(11) STOCK-BASED COMPENSATION PLANS
Employee Stock Ownership Plan
In connection with the Conversion, the Company established an ESOP for
eligible employees. The ESOP borrowed approximately $1.3 million from the
Holding Company and used the funds to purchase 129,600 shares of the Holding
Company's common stock sold in the offering. The Bank makes monthly
contributions to the ESOP sufficient to fund the debt service requirements over
the ten-year term of the loan from the Holding Company.
Shares purchased by the ESOP are held in a suspense account by the plan
trustee for allocation to participants as the loan is repaid. Shares released
from the suspense account are allocated to participants on the basis of their
relative compensation. Participants become vested in the shares allocated to
their respective accounts over a period not to exceed five years. Any forfeited
shares are allocated to other participants in the same proportion as
contributions. Shares allocated to participants or committed for release to
participants totaled 15,893 in fiscal 1997 and 8,124 in the six-month period
ended March 31, 1996. Expense recognized with respect to such shares amounted to
$208,000 in fiscal 1997 and $89,000 in the six-month period ended March 31,
1996, based on the average fair value of the Holding Company's common stock for
each period. The cost of the 105,583 shares which have not yet been committed to
be released to participant accounts at March 31, 1997 is reflected as a
reduction of shareholders' equity in the amount of $1.1 million. The fair value
of these shares was approximately $1.5 million at that date. Stock Option Plans
On July 10, 1996, the Company's shareholders approved the Tappan Zee
Financial, Inc. 1996 Stock Option Plan for Officers and Employees ("Employee
Option Plan") and the Tappan Zee Financial, Inc. 1996 Stock Option Plan for
Outside Directors ("Outside Director Option Plan").
Under the Employee Option Plan, 113,400 shares of authorized but unissued
Holding Company stock are reserved for issuance upon option exercises. Options
under this plan may be either non-qualified stock options or incentive stock
options. Each option entitles the holder to purchase one share of common stock
at an exercise price equal to the fair market value on the date of grant.
Options expire no later than ten years following the date of grant.
28
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the Outside Director Option Plan, 48,600 shares of authorized but
unissued Holding Company stock are reserved for issuance to outside directors
upon option exercises. Options granted under this plan are non-qualified
options. Other option terms and conditions are similar to those under the
Employee Option Plan.
Effective July 10, 1996, initial option grants were made under the Employee
Option Plan and the Outside Director Option Plan for 81,000 shares and 40,500
shares, respectively, at an exercise price of $11.625 per share. These options
have a ten-year term and vest ratably over five years from the date of grant.
Each option, however, becomes fully exercisable upon a change in control of the
Holding Company or the Bank, or upon the death, disability or retirement of the
option holder. All options granted in July 1996 were outstanding at March 31,
1997 with a remaining life of 9.3 years, although no options were exercisable at
that date. At March 31, 1997, shares available for future grants totaled 32,400
for the Employee Option Plan and 8,100 for the Outside Director Option Plan.
Options were granted at an exercise price equal to the fair value of the
common stock at the grant date. Therefore, in accordance with the provisions of
APB Opinion No. 25 related to fixed stock options, no compensation expense is
recognized with respect to options granted or exercised. Under the alternative
fair-value-based method defined in SFAS No. 123, the fair value of all fixed
stock options on the grant date would be recognized as expense over the vesting
period. The estimated per-share fair value of options granted in July 1996 was
$4.06, estimated using the Black-Scholes option-pricing model with assumptions
approximately as follows: dividend yield of 2.0%; expected volatility rate of
25.3%; risk-free interest rate of 7.1%; and expected option life of 7 years. Had
the Company applied the fair-value-based method of accounting to the options
granted, net income and earnings per share for fiscal 1997 would have been
$795,000 and $0.55, respectively, compared to the reported amounts of $855,000
and $0.59, respectively.
Recognition and Retention Plans
On July 10, 1996, the Company's shareholders approved the Tappan Zee
Financial, Inc. Recognition and Retention Plan for Officers and Employees
("Employee RRP") and the Tappan Zee Financial, Inc. Recognition and Retention
Plan for Outside Directors ("Outside Director RRP"). The purpose of these plans
is to provide officers and non-employee directors of the Company with a
proprietary interest in the Company in a manner designed to encourage their
retention. Total shares authorized are 45,360 for the Employee RRP and 19,440
for the Outside Director RRP.
Effective July 10, 1996, initial stock awards were made under the Employee
RRP and the Outside Director RRP for 32,400 shares and 19,440 shares,
respectively. These awards vest ratably over five years from the date of grant;
however, immediate vesting occurs upon a change in control of the Holding
Company or the Bank, or upon the death, disability or retirement of the
participant. An additional grant of 1,000 shares was made under the Employee RRP
later in fiscal 1997. The fair value of the shares awarded under the plans,
totaling $616,000 at the grant dates, is being amortized to compensation expense
on a straight-line basis over the five-year vesting periods. Compensation
expense of $92,000 was recognized in fiscal 1997. Unearned compensation cost of
$524,000 is reflected as a reduction of shareholders' equity at March 31, 1997.
(12) SHAREHOLDERS' EQUITY
Stock Conversion
Concurrent with the Conversion, the Holding Company sold 1,620,062 shares of
its common stock on October 5, 1995 in a subscription and community offering at
a price of $10 per share, for net proceeds of $14.9 million, after deducting
conversion costs of $1.3 million. The Holding Company used $7.4 million of the
net proceeds to acquire all of the common stock issued by the Bank in the
Conversion.
In accordance with regulatory requirements, the Bank established a
liquidation account at the time of the Conversion in the amount of $7.8 million,
equal to its equity at March 31, 1995. The liquidation account is maintained for
the benefit of eligible account holders who continue to maintain their accounts
at the Bank after the Conversion. The liquidation account is reduced annually to
the extent that eligible account holders have reduced their qualifying deposits
as of each anniversary date. Subsequent increases will not restore an eligible
account holder's interest in the liquidation account. In the unlikely event of a
complete liquidation of the Bank, each eligible account holder will be entitled
to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.
Earnings per Share
Earnings per share ("EPS") of $0.59 for fiscal 1997 and $0.31 for the
six-month period ended March 31, 1996 were based on weighted-average common and
common equivalent shares of 1,452,389 and 1,495,086, respectively. EPS data has
not been presented for periods prior to the Conversion.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which
requires presentation of both basic EPS and diluted EPS by all entities with
complex capital structures. Basic EPS excludes dilution and is computed by
29
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
dividing income available to common shareholders 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
(such as the Company's stock options) were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. As required, the Company will adopt SFAS No. 128 in its
fiscal quarter ending December 31, 1997 and will restate all prior-period EPS
data at that time.
Capital Distributions
The Bank may not declare or pay cash dividends on or repurchase any of its
shares of common stock if the effect thereof would cause equity to be reduced
below applicable regulatory capital requirements or the amount required to be
maintained for the liquidation account. The OTS capital distribution regulations
applicable to savings institutions (such as the Bank) that meet their regulatory
capital requirements, generally limit dividend payments in any year to the
greater of (i) 100% of year-to-date net income plus an amount that would reduce
surplus capital by one-half or (ii) 75% of net income for the most recent four
quarters. Surplus capital is the excess of actual capital at the beginning of
the year over the institution's minimum regulatory capital requirement. The cash
dividends paid by the Bank to the Holding Company in fiscal 1997 and 1996 were
not affected by this limitation.
Unlike the Bank, the Holding Company is not subject to OTS regulatory
restrictions on the payment of dividends to its shareholders. The Holding
Company is subject, however, to Delaware law which generally limits dividends to
an amount equal to the excess of the net assets of the Holding Company (the
amount by which total assets exceed total liabilities) over its statutory
capital, or if there is no such excess, to its net profits for the current
and/or immediately preceding fiscal year.
In April and November 1996, the Holding Company received approvals from the
OTS to repurchase in each case up to 5% of its outstanding common stock. During
fiscal 1997, the Holding Company repurchased 86,000 shares (or approximately
5.3%) of its common stock for its treasury, in open market transactions, at a
total cost of $1,070,000 or $12.44 per share. At March 31, 1997, an additional
71,950 shares (or approximately 4.7% of outstanding shares) were authorized for
repurchase prior to November 1997.
Regulatory Capital Requirements
OTS regulations require savings institutions to maintain a minimum ratio of
tangible capital to total adjusted assets of 1.5%; a minimum ratio of Tier I
(core) capital to total adjusted assets of 3.0%; and a minimum ratio of total
(core and supplementary) capital to risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of savings institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a Tier I (core) capital
ratio of at least 5.0%; a Tier I risk-based capital ratio of at least 6.0%; and
a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off- balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS about
capital components, risk weightings and other factors. These capital
requirements, which are applicable to the Bank only, do not consider additional
capital at the Holding Company level.
Management believes that, as of March 31, 1997 and 1996, the Bank met all
capital adequacy requirements to which it is subject. Further, the most recent
OTS notification categorized the Bank as a well-capitalized institution under
the prompt corrective action regulations. There have been no conditions or
events since that notification that management believes have changed the Bank's
capital classification.
30
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the Bank's actual capital amounts and ratios
as of March 31, 1997 and 1996, compared to the OTS requirements for
classification as a well-capitalized institution and for minimum capital
adequacy:
<TABLE>
<CAPTION>
For Classifications as Minimum Capital
Bank Actual Well Capitalized Adequacy
--------------------- ---------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
March 31, 1997
- --------------
Tangible capital $16,607 14.1% N/A N/A $1,763 1.5%
Tier I (core) capital 16,607 14.1 $5,876 5.0% 3,526 3.0
Risk-based capital:
Tier I 16,607 38.2 2,606 6.0 N/A N/A
Total 17,151 39.5 4,344 10.0 3,475 8.0
March 31, 1996
- --------------
Tangible capital $16,220 14.9% N/A N/A $1,637 1.5%
Tier I (core) capital 16,220 14.9 $5,458 5.0% 3,275 3.0
Risk-based capital:
Tier I 16,220 36.8 2,645 6.0 N/A N/A
Total 16,772 38.0 4,409 10.0 3,527 8.0
</TABLE>
(13) COMMITMENTS AND CONTINGENCIES
The Company's off-balance sheet financial instruments at March 31, 1997 and
1996 were limited to fixed-rate mortgage loan origination commitments with total
contractual amounts of $1.5 million and $1.1 million, respectively, and weighted
average interest rates of 8.61% and 7.73%, respectively. These instruments
involve elements of credit risk and interest rate risk in addition to the
amounts recognized in the consolidated balance sheets. The contractual amounts
represent the Company's maximum potential exposure to credit loss, but do not
necessarily represent future cash requirements since certain commitments may
expire without being funded. Loan commitments generally have fixed expiration
dates or other termination clauses and may require the payment of a fee by the
customer. Commitments are subject to the credit approval process applied in the
Company's general lending activities, including a case-by-case evaluation of the
customer's creditworthiness and related collateral requirements.
In the normal course of business, the Company is involved in various
outstanding legal proceedings. Management has discussed the nature of these
proceedings with legal counsel. In the opinion of management, the financial
position of the Company will not be materially affected as a result of the
outcome of such legal proceedings.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires the Company to disclose fair value information about
financial instruments for which it is practicable to estimate fair value,
whether or not such financial instruments are recognized on the balance sheet.
Fair value is the amount at which a financial instrument could be exchanged in a
current transaction between willing parties, other than in a forced sale or
liquidation.
Quoted market prices are used to estimate fair values when those prices are
available. However, active markets do not exist for many types of financial
instruments. Consequently, fair values for these instruments must be estimated
by management using techniques such as discounted cash flow analysis and
comparison to similar instruments. Estimates developed using these methods are
highly subjective and require judgments regarding significant matters, such as
the amount and timing of future cash flows and the selection of discount rates
that appropriately reflect market and credit risks. Changes in these judgments
often have a material effect on the fair value estimates. In addition, since
these estimates are made as of a specific point in time, they are susceptible to
material near-term changes. Fair values disclosed in accordance with SFAS No.
107 do not reflect any premium or discount that could result from the sale of a
large volume of a particular financial instrument, nor do they reflect possible
tax ramifications or estimated transaction costs.
31
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the carrying values and estimated fair values
of the Company's financial assets and liabilities (none of which were held for
trading purposes) at March 31:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 912 $ 912 $ 581 $ 581
Interest-bearing deposits 1,438 1,438 2,458 2,458
Federal funds sold 5,900 5,900 5,500 5,500
Securities 54,507 54,273 50,980 51,140
Loans, net 55,110 54,909 51,174 51,701
FHLB stock 674 674 561 561
Accrued interest receivable 778 778 698 698
Financial liabilities:
Savings certificate accounts 62,878 62,816 52,294 52,556
Other deposit accounts 35,449 35,449 37,614 37,614
</TABLE>
The following is a description of the principal valuation methods used by
the Company to estimate the fair values of its financial instruments:
Securities. Fair values were determined by published market prices or
securities dealers' estimated prices.
Loans. Fair values were estimated by portfolio, for loans with similar
financial characteristics. Loans were segregated by type, such as one- to
four-family residential, multi-family residential, commercial real estate,
consumer and commercial loans. Each loan category was further segmented into
fixed and adjustable-rate categories, and by performing and non-performing
categories. The pricing methodology for performing one- to four-family
residential mortgage loans was determined based on the zero-coupon yield curve
plus the option-adjusted spread for fixed-rate mortgages. The fair values for
performing loans in other portfolio categories were estimated by discounting the
expected cash flows using current market rates for loans with similar terms to
borrowers of similar credit quality. The fair values of non-performing loans
were based on management's analysis of estimated cash flows discounted at rates
commensurate with the credit risk involved.
Deposit Liabilities. The fair value of savings certificate accounts
represents contractual cash flows discounted using interest rates currently
offered on accounts with similar characteristics and remaining maturities. In
accordance with SFAS No. 107, the fair values of other deposit accounts (those
with no stated maturity such as savings accounts) are equal to the carrying
amounts payable on demand. In accordance with SFAS No. 107, these fair values do
not include the value of core deposit relationships which comprise a significant
portion of the Company's deposit base. Management believes that the Company's
core deposit relationships provide a relatively stable, low-cost funding source
which has a substantial unrecognized value separate from the deposit balances.
Other Financial Instruments. The other financial assets and liabilities
listed in the preceding table have fair values that approximate the respective
carrying values because the instruments are payable on demand or have short-term
maturities, and present relatively low credit risk and interest rate risk. Fair
values of the loan origination commitments described in note 13 were estimated
based on an analysis of the interest rates and fees currently charged to enter
into similar transactions, considering the remaining terms of the instruments
and the creditworthiness of the potential borrowers. At March 31, 1997 and 1996,
the fair values of these commitments approximated the related carrying values
which were not significant.
32
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Set forth below are the condensed balance sheets of Tappan Zee
Financial, Inc. as of March 31, 1997 and 1996, and its condensed statements of
income and cash flows for the year ended March 31, 1997 and the period from
October 5, 1995 (the Conversion date) to March 31, 1996:
<TABLE>
<CAPTION>
March 31,
---------------------
1997 1996
------- -------
(In thousands)
<S> <C> <C>
CONDENSED BALANCE SHEETS
Assets:
Cash $ 271 $ 481
Securities and interest-bearing deposits 4,662 5,805
Investment in subsidiary 16,298 16,080
Other assets 8 --
------- -------
Total assets $21,239 $22,366
======= =======
Liabilities and Shareholders' Equity:
Accrued expenses $ 11 $ 6
Shareholders' equity 21,228 22,360
------- -------
Total liabilities and shareholders' equity $21,239 $22,366
======= =======
</TABLE>
<TABLE>
<CAPTION>
Period Ended March 31,
-------------------------
1997 1996*
-------- --------
(In thousands)
<S> <C> <C>
CONDENSED STATEMENTS OF INCOME
Dividends from subsidiary $ 360 $ 90
Interest income 255 78
Non-interest expense (152) (22)
------- -------
Income before income tax expense and equity in undistributed earnings of subsidiary 463 146
Income tax expense 38 33
------- -------
Income before equity in undistributed earnings of subsidiary 425 113
Equity in undistributed earnings of subsidiary 430 357
------- -------
Net income $ 855 $ 470
======= =======
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income $ 855 $ 470
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiary (430) (357)
Other adjustments, net 297 6
------- -------
Net cash provided by operating activities 722 119
------- -------
Cash flows from investing activities:
Purchase of subsidiary's common stock -- (7,357)
------- -------
Cash flows from financing activities:
Net proceeds from sale of common stock, exclusive of ESOP shares -- 13,605
Purchase of common stock to fund awards under RRPs (714) --
Repurchase of treasury stock (1,070) --
Dividends paid (291) (81)
------- -------
Net cash (used in) provided by financing activities (2,075) 13,524
------- -------
Net (decrease) increase in cash and cash equivalents (1,353) 6,286
Cash and cash equivalents at beginning of period 6,286 --
------- -------
Cash and cash equivalents at end of period $ 4,933 $ 6,286
======= =======
</TABLE>
*From the date of Conversion, October 5, 1995
33
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 1997 and 1996 is shown
below:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------
June 30 September 30 December 31 March 31
------- ------------ ----------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
FISCAL 1997
Interest income $2,088 $2,155 $2,152 $2,196
Interest expense 1,004 1,018 1,022 1,062
------ ------ ------ ------
Net interest income 1,084 1,137 1,130 1,134
Provision for loan losses 6 20 20 23
Non-interest income 40 34 31 47
Non-interest expense(1) 677 1,306 708 696
------ ------ ------ ------
Income (loss) before income taxes 441 (155) 433 462
Income tax expense (benefit)(1) 187 (229) 175 193
------ ------ ------ ------
Net income $ 254 $ 74 $ 258 $ 269
====== ====== ====== ======
Earnings per share $ 0.17 $ 0.05 $ 0.18 $ 0.19
====== ====== ====== ======
FISCAL 1996
Interest income $1,767 $1,823 $2,017 $2,017
Interest expense 939 1,040 1,023 1,000
------ ------ ------ ------
Net interest income 828 783 994 1,017
Provision for loan losses 30 25 25 10
Non-interest income 33 31 32 115
Non-interest expense 480 513 625 679
------ ------ ------ ------
Income before income taxes 351 276 376 443
Income tax expense 150 110 152 197
------ ------ ------ ------
Net income $ 201 $ 166 $ 224 $ 246
====== ====== ====== ======
Earnings per share $ 0.15 $ 0.16
====== ======
</TABLE>
(1) For the quarter ended September 30, non-interest expense includes the SAIF
special assessment of $538,000 and income tax benefit includes $166,000
attributable to a change in state tax law. See Notes 6 and 8.
34
<PAGE> 37
NOTES
35
<PAGE> 38
CORPORATE INFORMATION
BOARD OF DIRECTORS Marvin Levy , Chairman of the Board, President of Greller
and Company P.C.
Stephen C. Byelick
John T. Cooney, Vice President of County Asphalt, Inc.
Gerald L. Logan, Registered representative of The Windmill
Group
Harry G. Murphy
Kevin J. Plunkett, Attorney, Plunkett & Jaffe, P.C.
Paul R. Wheatley, Retired President of Beck & Wheatley Inc.
OFFICERS Stephen C. Byelick, President and Chief Executive Officer
Harry G. Murphy, Vice President and Secretary
OFFICE LOCATION 75 North Broadway, Tarrytown, NY 10591 (914) 631-0344
SHAREHOLDERS'
INFORMATION ANNUAL MEETING
The annual meeting of shareholders will be held on August
6, 1997 at 5:15 p.m. at the office of Tarrytowns Bank, 75
North Broadway, Tarrytown, NY.
<TABLE>
<S> <C>
TRANSFER AGENT AND REGISTRAR: GENERAL INQUIRIES:
ChaseMellon Shareholder Services Tappan Zee Financial, Inc.
PO Box 590 c/o Tarrytowns Bank, FSB
Ridgefield Park, NJ 07660 75 North Broadway
Attn: Shareholder Relations Tarrytown, NY 10591
(800) 851-9677 (914) 631-0344
</TABLE>
ANNUAL REPORT ON FORM 10-K
OUR ANNUAL REPORT ON FORM 10-K (EXCLUDING EXHIBITS), FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION, MAY BE
OBTAINED, WITHOUT CHARGE, BY WRITING TO HARRY G. MURPHY,
VICE PRESIDENT, AT THE ABOVE ADDRESS.
STOCK MARKET DATA
The shares of common stock are quoted on the Nasdaq Stock Market under the
symbol "TPNZ." The table below sets forth the dividends declared and the high
and low closing sale price per common share for the quarters indicated.
<TABLE>
<CAPTION>
Closing Sale Price
Cash ------------------------------------
Dividends
Quarter Ended Declared High Low End of Period
-------- ------- ------- -------------
<S> <C> <C> <C> <C>
December 31, 1995 -- $13 1/8 $10 $12 5/8
March 31, 1996 $0.05 12 3/4 11 3/8 12
June 30, 1996 0.05 12 1/4 11 3/4 12
September 30, 1996 0.05 13 12 12 1/2
December 31, 1996 0.05 14 1/8 13 5/8 13 5/8
March 31, 1997 0.05 15 1/4 14 1/4 14 1/4
</TABLE>
As of June 20, 1997, there were approximately 340 shareholders of record. This
does not reflect the number of persons or entities who hold their common stock
in nominee or "street" name through various brokerage firms.
36
<PAGE> 39
CORPORATE INFORMATION
BOARD OF DIRECTORS Marvin Levy, Chairman of the Board
Stephen C. Byelick
John T. Cooney
Gerald L. Logan
Harry G. Murphy
Kevin J. Plunkett
Paul R. Wheatley
OFFICERS Stephen C. Byelick, President and Chief Executive Officer
Harry G. Murphy, Vice President and Secretary
OFFICE LOCATION 75 North Broadway, Tarrytown, NY 10591 (914) 631-0344
SHAREHOLDERS'
INFORMATION Annual Meeting
The annual meeting of shareholders will be held on July
10, 1996 at 5:00 p.m. at the Tarrytown Hilton, Tarrytown,
NY.
<TABLE>
<S> <C>
Transfer Agent and Registrar: General Inquiries:
Chemical Mellon Shareholder Services Tappan Zee Financial, Inc.
PO Box 590 c/o Tarrytowns Bank, FSB
Ridgefield Park, NJ 07660 75 North Broadway
Att: Shareholder Relations Tarrytown, NY 10591
(800) 851-9677 (914) 631-0344
</TABLE>
Form 10K
Our annual report on Form 10K, filed with the Securities
and Exchange Commission, may be obtained by writing to
Harry G. Murphy, Vice President and Secretary, at the
above address.
STOCK MARKET DATA
The shares of common stock are quoted on The Nasdaq Stock Market under the
symbol "TPNZ." The table below sets forth the dividends declared and the high
and low closing sale price per common share for the quarters indicated.
<TABLE>
<CAPTION>
CLOSING SALE PRICE
CASH ----------------------------------
DIVIDENDS
DECLARED HIGH LOW END OF PERIOD
-------- ------- --- --------------
QUARTER ENDED
------------
<S> <C> <C> <C> <C>
December 31, 1995 $ -- $13 1/8 $10 $12 5/8
March 31, 1996 $0.05 12 3/4 11 3/8 12
</TABLE>
As of May 17, 1996 there were approximately 340 shareholders of record. This
does not reflect the number of persons or entities who hold their common stock
in nominee or "street" name through various brokerage firms.
<PAGE> 40
[LOGO]TAPPAN ZEE FINANCIAL, INC.
75 North Broadway
P.O. Box 187
Tarrytown, NY 10591
(914) 631-0344
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<MULTIPLIER> 1,000
<CASH> 912
<INT-BEARING-DEPOSITS> 1,438
<FED-FUNDS-SOLD> 5,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 36,384
<INVESTMENTS-CARRYING> 18,123
<INVESTMENTS-MARKET> 17,889
<LOANS> 55,770
<ALLOWANCE> 660
<TOTAL-ASSETS> 121,841
<DEPOSITS> 98,327
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,286
<LONG-TERM> 0
0
0
<COMMON> 16
<OTHER-SE> 21,212
<TOTAL-LIABILITIES-AND-EQUITY> 121,841
<INTEREST-LOAN> 4,721
<INTEREST-INVEST> 3,513
<INTEREST-OTHER> 357
<INTEREST-TOTAL> 8,591
<INTEREST-DEPOSIT> 4,094
<INTEREST-EXPENSE> 4,106
<INTEREST-INCOME-NET> 4,485
<LOAN-LOSSES> 69
<SECURITIES-GAINS> 23
<EXPENSE-OTHER> 3,387
<INCOME-PRETAX> 1,181
<INCOME-PRE-EXTRAORDINARY> 1,181
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 855
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
<YIELD-ACTUAL> 3.98
<LOANS-NON> 1,478
<LOANS-PAST> 180
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 654
<CHARGE-OFFS> 63
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 660
<ALLOWANCE-DOMESTIC> 660
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
TAPPAN ZEE FINANCIAL, INC.
75 NORTH BROADWAY
TARRYTOWN, NY 10591
June 30, 1997
Dear Shareholder:
You are cordially invited to attend the 1997 Annual Meeting of
Shareholders (the "Annual Meeting") of Tappan Zee Financial, Inc. ("Tappan Zee
Financial" or the "Company"), the holding company for Tarrytowns Bank, FSB,
Tarrytown, New York, which will be held on August 6, 1997, at 5:15 p.m., at the
office of Tarrytowns Bank FSB, 75 North Broadway, Tarrytown, New York 10591.
The attached Notice of Annual Meeting of Shareholders and Proxy
Statement describe the formal business to be transacted at the Annual Meeting.
Directors and officers of Tappan Zee Financial, as well as a representative of
KPMG Peat Marwick LLP, the accounting firm appointed by the Board of Directors
to be the Company's independent auditors for the fiscal year ending March 31,
1998, will be present at the Annual Meeting to respond to appropriate questions
that our shareholders may have.
The Board of Directors of Tappan Zee Financial has determined that an
affirmative vote on each matter to be considered at the Annual Meeting is in the
best interests of the Company and its shareholders and unanimously recommends a
vote "FOR" each of these matters.
Please complete, sign and return the enclosed proxy card promptly
whether or not you plan to attend the Meeting. YOUR VOTE IS IMPORTANT REGARDLESS
OF THE NUMBER OF SHARES YOU OWN. VOTING BY PROXY WILL NOT PREVENT YOU FROM
VOTING IN PERSON AT THE ANNUAL MEETING, BUT WILL ASSURE THAT YOUR VOTE IS
COUNTED IF YOU ARE UNABLE TO ATTEND. IF YOU ARE A SHAREHOLDER WHOSE SHARES ARE
NOT REGISTERED IN YOUR OWN NAME, YOU WILL NEED ADDITIONAL DOCUMENTATION FROM
YOUR RECORD HOLDER TO ATTEND AND TO VOTE PERSONALLY AT THE ANNUAL MEETING.
EXAMPLES OF SUCH DOCUMENTATION INCLUDE A BROKER'S STATEMENT, LETTER OR OTHER
DOCUMENT CONFIRMING YOUR OWNERSHIP OF SHARES OF THE COMPANY.
On behalf of the Board of Directors and the employees of Tappan Zee
Financial and Tarrytowns Bank, FSB, we thank you for your continued support and
appreciate your interest.
Sincerely yours,
[facsimile signature]
Stephen C. Byelick
President and Chief Executive Officer
<PAGE> 2
TAPPAN ZEE FINANCIAL, INC.
75 NORTH BROADWAY
TARRYTOWN, NEW YORK 10591
(914) 631-0344
NOTICE OF 1997 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 6, 1997
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of Shareholders
(the "Annual Meeting") of Tappan Zee Financial, Inc. (the "Company") will be
held at the office of Tarrytowns Bank, FSB, 75 North Broadway, Tarrytown, New
York 10591 on August 6, 1997 at 5:15 p.m., local time, to consider and vote
upon:
1. The election of two directors for terms of three
years each.
2. The approval of Amendment No. 2 to the Tappan Zee
Financial, Inc. 1996 Stock Option Plan for Officers
and Employees.
3. The approval of Amendment No. 2 to the Tappan Zee
Financial, Inc. 1996 Stock Option Plan for Outside
Directors.
4. The approval of Amendment No. 2 to the Tappan Zee
Financial, Inc. 1996 Recognition and Retention Plan
for Officers and Employees.
5. The approval of Amendment No. 2 to the Tappan Zee
Financial, Inc. 1996 Recognition and Retention Plan
for Outside Directors.
6. The ratification of the appointment of KPMG Peat
Marwick LLP as independent auditors for the fiscal
year ending March 31, 1998; and
7. The authorization of the Board of Directors, in its
discretion, to direct the vote of the proxies upon
such other business as may properly come before the
meeting, and any adjournment thereof, including,
without limitation, a motion to adjourn the meeting.
Management is not aware of any such business.
The Board of Directors has fixed June 20, 1997 as the record date for
the determination of shareholders entitled to notice of and to vote at the
Annual Meeting and any adjournment or postponement thereof. Only shareholders of
record at the close of business on that date will be entitled to notice of and
to vote at the Annual Meeting and any adjournment or postponement thereof. A
list of shareholders entitled to vote at the Annual Meeting will be available at
Tappan Zee Financial, Inc., 75 North Broadway, Tarrytown, New York 10591 for a
period of at least ten days prior to the Annual Meeting and will also be
available at the Annual Meeting itself.
By Order of the Board of Directors
[facsimile signature]
Harry G. Murphy
Vice President and Secretary
Tarrytown, New York
June 30, 1997
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. IT IS IMPORTANT
THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU OWN. THE BOARD OF
DIRECTORS URGES YOU TO MARK, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE. RETURNING THE PROXY CARD WILL NOT PREVENT YOU
FROM VOTING IN PERSON IF YOU ATTEND THE ANNUAL MEETING.
<PAGE> 3
TAPPAN ZEE FINANCIAL, INC.
PROXY STATEMENT FOR THE
1997 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 6, 1997
GENERAL INFORMATION
GENERAL
This Proxy Statement and accompanying proxy card (the "Proxy Card") are
being furnished to the shareholders of Tappan Zee Financial, Inc. (the
"Company") in connection with the solicitation of proxies by the Board of
Directors of the Company from holders of the shares of the Company's issued and
outstanding common stock, par value $.01 per share (the "Common Stock"), as of
the close of business on June 20, 1997 (the "Record Date"), for the use at the
1997 Annual Meeting of Shareholders of the Company to be held on August 6, 1997
at the office of Tarrytowns Bank, FSB, 75 North Broadway, Tarrytown, New York
10591, at 5:15 p.m., local time, and at any adjournment or postponement thereof
(the "Annual Meeting"). This Proxy Statement, together with the enclosed Proxy
Card, is first being mailed to shareholders on or about June 30, 1997.
On October 5, 1995, the Company became the holding company for
Tarrytowns Bank, FSB (the "Bank") upon completion of the conversion of the Bank
from a mutual savings bank to a stock savings bank (the "Conversion"). The
Company, a Delaware corporation, operates as a savings bank holding company for
its wholly-owned subsidiary, the Bank.
RECORD DATE AND VOTING RIGHTS
The Board of Directors of the Company has fixed the close of business
on June 20, 1997 as the record date for the determination of the Company's
shareholders entitled to notice of and to vote at the Annual Meeting.
Accordingly, only holders of record of shares of Common Stock at the close of
business on such date will be entitled to vote at the Annual Meeting. On the
Record Date, there were 1,497,062 shares of Common Stock issued and outstanding.
Each holder of shares of Common Stock outstanding on the Record Date
will be entitled to one vote for each share held of record upon each matter
properly submitted at the Annual Meeting and at any adjournment or postponement
thereof. The presence, in person or by proxy, of the holders of at least a
majority of the total number of outstanding shares of Common Stock entitled to
vote at the Annual Meeting is necessary to constitute a quorum.
The Company's Certificate of Incorporation requires that no person (as
defined therein, other than the Company or any compensation plan maintained by
the Company) may directly or indirectly hold beneficial ownership of more than
10% of the issued and outstanding Common Stock (the "Limit"). As provided in the
Company's Certificate of Incorporation, record holders of Common Stock who
beneficially own in excess of the Limit shall be entitled to one hundredth
(1/100) of one vote per share for each share in excess of the Limit. A person or
entity is deemed to beneficially own shares owned by an affiliate as well as
persons acting in concert with such person or entity. The Company's Certificate
of Incorporation authorizes the Board of Directors (i) to make all
determinations necessary to implement and apply the Limit, including determining
whether persons or entities are acting in concert, and (ii) to demand that any
1
<PAGE> 4
person who is reasonably believed to beneficially own Common Stock in excess of
the Limit supply information to the Company to enable the Board of Directors to
implement and apply the Limit.
All properly executed proxies received by the Company will be voted in
accordance with the instructions indicated thereon. IF NO INSTRUCTIONS ARE
GIVEN, EXECUTED PROXIES WILL BE VOTED FOR THE ELECTION OF THE TWO NOMINEES FOR
DIRECTOR, AND FOR EACH OTHER PROPOSAL IDENTIFIED IN THE NOTICE OF ANNUAL
MEETING. Management is not aware of any matters other than those set forth in
the Notice of Annual Meeting that may be brought before the Annual Meeting. If
any other matters properly come before the Annual Meeting, the persons named in
the accompanying Proxy Card will vote the shares represented by all properly
executed proxies on such matters in such manner as shall be determined by a
majority of the Board of Directors of the Company.
IF YOU ARE A SHAREHOLDER WHOSE SHARES ARE NOT REGISTERED IN YOUR OWN
NAME, YOU WILL NEED APPROPRIATE DOCUMENTATION FROM YOUR RECORD HOLDER TO ATTEND
AND TO VOTE PERSONALLY AT THE ANNUAL MEETING. Examples of such documentation
include a broker's statement, letter or other document confirming your ownership
of shares of the Company.
VOTE REQUIRED
Directors are elected by a plurality of the votes cast in person or by
proxy at the Annual Meeting. The holders of Common Stock may not vote their
shares cumulatively for the election of directors. Proposals 2, 3, 4, 5, 6 and 7
each requires the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock represented, in person or by proxy, and
entitled to vote thereon.
Shares as to which the "ABSTAIN" box has been selected on the Proxy
Card with respect to all matters except the election of directors will be
counted as present and entitled to vote and will have the effect of a vote
against that proposal. In contrast, shares underlying broker non-votes will not
be counted as present and entitled to vote and will have no effect on the vote
on such matters presented.
REVOCABILITY OF PROXIES
A proxy may be revoked at any time before it is voted by filing a
written revocation of the proxy with the Secretary of the Company or by
submitting a duly executed proxy bearing a later date. A proxy also may be
revoked by attending and voting at the Annual Meeting, only if a written
revocation is filed with the Secretary of the Annual Meeting prior to the voting
of such proxy.
SOLICITATION OF PROXIES
The Company will bear the costs of soliciting proxies from its
shareholders. In addition to the use of mail, proxies may be solicited by
officers, directors or employees of the Company and the Bank, by telephone or
through other forms of communication. The Company will also request persons,
firms and corporations holding shares in their names or in the name of their
nominees, which are beneficially owned by others, to send proxy materials to and
obtain proxies from such beneficial owners, and will reimburse such holders for
reasonable expenses incurred in connection therewith. In addition, the Company
has retained Morrow & Co. to assist in the solicitation of proxies. The
estimated cost of such solicitation is $3,500 plus expenses.
2
<PAGE> 5
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Certain terms of the stock options and restricted stock awards granted
to directors, officers and employees of the Company and the Bank will be
modified if shareholders approve the proposed Amendment No. 2 to each of the
Tappan Zee Financial, Inc. 1996 Stock Option Plan for Officers and Employees
(the "Employee Option Plan"), the Tappan Zee Financial, Inc. 1996 Stock Option
Plan for Outside Directors (the "Outside Director Option Plan"), the Tappan Zee
Financial, Inc. 1996 Recognition and Retention Plan for Officers and Employees
(the "Employee RRP"), and the Tappan Zee Financial, Inc. 1996 Recognition and
Retention Plan for Outside Directors (the "Outside Director RRP"). For complete
descriptions of these Plans and Amendments No. 2, see "Proposal 2," "Proposal
3," "Proposal 4" and "Proposal 5."
PRINCIPAL SHAREHOLDERS OF THE COMPANY
The following table sets forth, as of May 31, 1997, certain information
as to the Common Stock beneficially owned by persons owning in excess of 5% of
the outstanding shares of Common Stock. Management knows of no person, except as
listed below, who beneficially owned more than 5% of the Company's outstanding
shares of Common Stock as of May 31, 1997. Except as otherwise indicated, the
information provided in the following table was obtained from filings with the
Securities and Exchange Commission ("SEC") and with the Company pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Addresses
provided are those listed in such filings as the address of the person
authorized to receive notices and communications. Unless otherwise noted, each
beneficial owner has sole voting and sole investment power over the shares
beneficially owned. For purposes of the table below and the table set forth
under "Stock Owned by Management," in accordance with Rule 13d-3 promulgated
under the Exchange Act, a person is deemed to be the beneficial owner of any
shares of Common Stock (1) over which he has or shares, directly or indirectly,
voting or investment power, or (2) of which he has the right to acquire
beneficial ownership at any time within 60 days after May 31, 1997. As used
herein, "voting power" is the power to vote or direct the voting of shares and
"investment power" is the power to dispose or direct the disposition of such
shares.
3
<PAGE> 6
<TABLE>
<CAPTION>
Amount and Nature of Percent of Common
Name and Address Beneficial Ownership Stock Outstanding
---------------- -------------------- -----------------
<S> <C> <C>
The Employee Stock Ownership Plan Trust of 129,600 shares(1) 8.45%
Tappan Zee Financial, Inc. and Certain Affiliates
250 Park Avenue
New York, NY 10177
Endeavour Capital Partners, L.P. 126,000 shares(2) 8.21%
555 Madison Avenue
New York, NY 10022
BRT Realty Trust 106,950 shares(3) 6.97%
60 Cutter Mill Road Suite 303
Great Neck, NY 11201
John Hancock Advisors, Inc. 87,500 shares(4) 5.70%
P.O. Box 111
Boston, Mass 02117
</TABLE>
- ---------------------
(1) The Company's Employee Stock Ownership Plan ("ESOP") is administered by
a committee of the Company's Board of Directors. The ESOP's assets are
held in a trust (the "ESOP Trust"), for which Marine Midland Bank
serves as trustee (the "ESOP Trustee"). The ESOP Trust purchased these
shares with funds borrowed from the Company in the Conversion. The
shares purchased by the ESOP Trust are held in a suspense account for
release and allocation to participants' accounts in annual
installments. As of March 31, 1997, 20,184 shares held by the ESOP
Trust have been allocated. The terms of the ESOP provide that, subject
to the ESOP Trustee's fiduciary responsibilities under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), the ESOP
Trustee will vote, tender or exchange shares of Common Stock held in
the ESOP Trust and allocated to participants in accordance with
instructions received from such participants. The ESOP Trustee will
vote allocated shares as to which no instructions are received and any
shares that have not been allocated to participants' accounts in the
same proportion as it votes the allocated shares with respect to which
the ESOP Trustee receives instructions. The ESOP Trustee will tender or
exchange any shares in the suspense account or that otherwise have not
been allocated to participants' accounts in the same proportion as the
allocated shares with respect to which the ESOP Trustee receives
instructions are tendered or exchanged. With respect to allocated
shares as to which no instructions are received, the ESOP Trustee will
be deemed to have received instructions not to tender or exchange such
shares. Except as described above, the ESOP committee of the Company's
Board of Directors (the "ESOP Committee") has sole investment power,
except in limited circumstances, but no voting power over all Common
Stock held in the ESOP Trust.
(2) Endeavor Capital Partners L.P. ("Endeavor") filed with the SEC a
Schedule 13D, dated as of October 17, 1995. Based on Endeavor's
Schedule 13D, it has shared voting and investment power over the
126,000 shares with Michael J. Katz and Laurence M. Austin, the general
partners of Endeavour. Endeavor is a privately-owned investment
partnership.
(3) BRT Realty Trust ("BRT") filed with the SEC a Schedule 13D, dated as of
June 2, 1997. Based on BRT's Schedule 13D, BRT has sole voting and
investment power over the 106,950 shares. BRT is a privately-owned
Massachusetts business trust, intended to qualify as a Real Estate
Investment Trust.
(4) John Hancock Advisors, Inc ("JHA") filed with the SEC a Schedule 13G,
dated as of January 28, 1997. Based on JHA's Schedule 13G, JHA is the
investment advisor for The John Hancock Bank and Thrift Opportunity
Fund, a closed-end diversified management company that holds 30,000 of
the shares indicated, and the John Hancock Regional Bank Fund, an
open-end diversified management company that holds the remaining 57,500
shares. As investment advisor, JHA has sole voting and investment power
over the 87,500 shares.
4
<PAGE> 7
STOCK OWNED BY MANAGEMENT
The following table sets forth information as of May 31, 1997 with
respect to the shares of Common Stock beneficially owned by each director of the
Company, each Named Executive Officer identified in the Summary Compensation
Table, included elsewhere herein, and by all directors and executive officers as
a group.
<TABLE>
<CAPTION>
Amount and Nature Percent of
Position with of Beneficial Common Stock
Name the Company (1) Ownership(2)(3)(4)(5)(6) Outstanding (7)
---- --------------- ------------------------ ---------------
<S> <C> <C> <C>
Stephen C. Byelick President and Chief Executive 39,286 (8) 2.55%
Officer and Director
Harry G. Murphy Vice President and Secretary 30,264 (9) 1.96%
and Director
John T. Cooney Director 11,860 *
Marvin Levy Director and Chairman 9,860 (10) *
Gerald L. Logan Director 9,360 *
Kevin J. Plunkett Director 10,960 (11) *
Paul R. Wheatley Director 8,360 (12) *
All directors and
executive officers as a
group (7 persons) 234,141 15.02%
</TABLE>
- ------------------
* Less than one percent
(1) Titles are for both the Company and the Bank.
(2) See "Principal Shareholders of the Company" for a definition of
"beneficial ownership." All persons shown in the above table have sole
voting and investment power, except as otherwise indicated.
(3) Includes 16,200 shares of restricted stock awarded to each of Mr.
Byelick and Mr. Murphy under the Employee RRP, as to which each has
sole voting power but no investment power and 3,240 shares of
restricted stock awarded to each of Messrs. Cooney, Levy, Logan,
Plunkett and Wheatley under the Outside Director RRP, as to which each
has sole voting power but no investment power.
(4) Includes 8,100 shares subject to options granted to each of Mr. Byelick
and Mr. Murphy pursuant to the Employee Option Plan which may be
acquired within 60 days after May 31, 1997 and 1,620 shares subject to
options granted to each of Messrs. Cooney, Levy, Logan, Plunkett and
Wheatley under the Outside Director Option Plan which may be acquired
within 60 days from May 31, 1997. Does not include the 32,400 shares
subject to options granted to each of Mr. Byelick and Mr. Murphy
pursuant to the Employee Option Plan which are not currently
exercisable and will not become exercisable within the next 60 days.
Also does not include the 6,480 shares subject to options granted to
each of Messrs. Cooney, Levy, Logan, Plunkett and Wheatley which are
not currently exercisable and will not become exercisable in the next
60 days.
(5) The figures shown include shares held in trust pursuant to the ESOP
that have been allocated as of May 31, 1997 to individual accounts as
follows: Mr. Byelick, 3,986 shares, Mr. Murphy 2,864 shares and all
directors and executive officers as a group, 6,850 shares. Such persons
have voting power (subject to the legal duties of the trustee) but no
investment power, except in limited circumstances, as to such shares.
The figures shown for Messrs. Byelick and Murphy do not include 109,416
shares held in trust pursuant to the ESOP that have not been allocated
to any individual's account and as to which Messrs. Byelick and Murphy
share voting power with other ESOP participants. Also not included are
4,775 shares purchased by the Bank's tax-qualified defined benefit
pension plan ("Pension Plan"). The figures shown for all directors and
executive officers as a group includes such 109,416 shares as to which
the members of the Company's ESOP Committee (consisting of Messrs.
Plunkett, Logan and Wheatley) may be deemed to have sole investment
power, except in limited circumstances, thereby causing each such
committee member to be deemed a beneficial owner of such shares. Each
of the members of the ESOP Committee disclaims beneficial ownership of
such shares. The figures shown for all directors and executive officers
as a group also includes the 4,775 shares as to which the members of
the Bank's Pension Committee (composed of Messrs. Byelick, Murphy,
Plunkett and Wheatley) may be deemed to have sole investment power
except in limited circumstances, thereby causing each committee member
to be deemed a beneficial owner of such shares. Each member of the
Pension Committee disclaims beneficial ownership of such shares.
(6) The figures shown include shares held under the Tarrytowns Bank, FSB
Directors' Deferred Compensation Plan that have been allocated as of
December 31, 1996 to individual accounts as follows: Mr. Murphy, 1,050
shares, Mr. Levy, 1,500 shares and all directors and executive officers
as a group, 2,550 shares. Such persons have sole voting and investment
power as to such shares.
(7) Percentages with respect to each person or group of persons have been
calculated on the basis of 1,534,062 shares of Common Stock, the number
of shares of Common Stock outstanding as of May 31, 1997, plus the
number of shares of Common Stock which such person or group has the
right to acquire within 60 days after May 31, 1997 by the exercise of
such options.
(8) Includes 4,000 shares as to which Mr. Byelick may be deemed to share
voting power, but has no investment power.
(9) Includes 550 shares as to which Mr. Murphy may be deemed to share
voting power, but has no investment power.
(10) Includes 1,000 shares as to which Mr. Levy may be deemed to share
voting power, but has no investment power.
(11) Includes 6,100 shares as to which Mr. Plunkett may be deemed to share
voting power, but has no investment power.
(12) Includes 3,000 shares as to which Mr. Wheatley shares voting and
investment power and 500 shares as to which Mr.Wheatley may be deemed
to share voting power, but has no investment power.
5
<PAGE> 8
--------------------------------------
PROPOSAL 1
ELECTION OF DIRECTORS
--------------------------------------
ELECTION OF DIRECTORS
The Certificate of Incorporation and Bylaws of the Company provide for
the election of directors by the shareholders. For this purpose, the Board of
Directors of the Company is divided into three classes, as nearly equal in
number as possible. The terms of office of the members of one class expire, and
a successor class is to be elected, at each annual meeting of shareholders.
There are currently seven directors of the Company.
The terms of two directors expire at the Annual Meeting. Each of the
two incumbent directors, Gerald L. Logan and Harry G. Murphy, has been nominated
by the Nominating Committee to be re-elected at the Annual Meeting for a
three-year term expiring at the annual meeting of shareholders in 2000. The
terms of the remaining two classes of directors expire at the Company's annual
meetings of shareholders to be held in 1998 and 1999, respectively, or when
their successors are otherwise duly elected. Each nominee has consented to being
named in this Proxy Statement and to serve if elected.
In the event that any nominee for election as a director at the Annual
Meeting is unable or declines to serve, which the Board of Directors has no
reason to expect, the persons named as proxies in the Proxy Card will vote for a
substitute nominee designated by the present Board of Directors.
Information as to Nominees and Continuing Directors. The following
table sets forth certain information with respect to each nominee for election
as a director and each director whose term does not expire at the Annual Meeting
("Continuing Director"). There are no arrangements or understandings between the
Company and any director or nominee pursuant to which such person was elected or
nominated to be a director of the Company. For information with respect to the
security ownership of directors, see "Stock Owned by Management."
<TABLE>
<CAPTION>
DIRECTOR TERM POSITION(S) HELD WITH THE
NOMINEES AGE(1) SINCE(2) EXPIRES COMPANY AND THE BANK
- -------- ------ -------- ------- --------------------
<S> <C> <C> <C> <C>
Gerald L. Logan 59 1990 1997 Director of the Company and the Bank
Harry G. Murphy 40 1989 1997 Vice President and Secretary and
Director of the Company and the Bank
<CAPTION>
CONTINUING
DIRECTORS
- ----------
<S> <C> <C> <C> <C>
Stephen C. Byelick 72 1983 1998 President and Chief Executive
Officer and Director of the Company
and Bank
John T. Cooney 62 1982 1998 Director of the Company and the Bank
Marvin Levy 71 1980 1999 Director and Chairman of the Company
and the Bank
Kevin J. Plunkett 47 1990 1999 Director of the Company and the Bank
Paul R. Wheatley 66 1989 1999 Director of the Company and the Bank
</TABLE>
- ---------------------
(1) As of April 30, 1997.
(2) Includes service as a Director or Director Emeritus of Tarrytowns Bank,
FSB and its predecessor, Tarrytown and North Tarrytown Saving and Loan
Association.
6
<PAGE> 9
The principal occupation and business experience of each nominee for
election as director and each Continuing Director is set forth below.
NOMINEES FOR ELECTION AS DIRECTOR
Gerald L. Logan has served as a Director of the Company since its
formation in 1995 and has been a Director of the Bank since 1990. Since 1995,
Mr. Logan has been a registered representative of The Windmill Group, Inc., a
financial planning firm. Mr. Logan was employed as a vice president of
Axe-Houghton Management, an investment management firm from 1954 to 1992. Mr.
Logan has been a member of the National Association of Securities Dealers, Inc.
since 1958. Mr. Logan is also associated with USF&G-AHM, an insurance company,
as a consultant.
Harry G. Murphy has served as Vice President and Secretary and Director
of the Company since its formation in 1995. Mr. Murphy has been a Vice President
of the Bank since 1983, Vice President and Secretary of the Bank since 1987 and
a Director of the Bank since 1989. Mr. Murphy is also the Community Reinvestment
Officer of the Bank. Prior to 1983, Mr. Murphy was an assistant treasurer with
The Bank of New York.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
NOMINEES FOR ELECTION AS DIRECTORS
CONTINUING DIRECTORS
Stephen C. Byelick has served as President and Chief Executive Officer
of the Company since its formation in 1995 and has been a Director or Director
Emeritus of the Bank and its Chief Executive Officer since 1983. Prior to 1983,
Mr. Byelick was a vice president with The Bank of New York, serving in a variety
of functions including branch management, lending and marketing.
John T. Cooney has served as a Director of the Company since its
formation in 1995 and has been a Director of the Bank since 1982. Mr. Cooney is
a Vice President of County Asphalt Inc., a manufacturer of asphalt paving
materials, and has been with this company for more than 25 years. Mr. Cooney is
also a Vice President of Westchester Industries, Inc., a real estate and holding
corporation, and a partner in Cooney Realty Co., a real estate partnership, and
has been with such entities for greater than 25 years.
Marvin Levy has served as a Director and Chairman of the Company since
its formation in 1995, a Director of the Bank since 1980 and Director and
Chairman of the Board of the Bank since 1990. Mr. Levy is a C.P.A. and has been
the President of Greller and Company P.C., a professional corporation of
certified public accountants, for in excess of 25 years.
Kevin J. Plunkett has served as a Director of the Company since its
formation in 1995 and has been a Director of the Bank since 1990. Mr. Plunkett
has been a practicing attorney since 1975. Mr. Plunkett was an Assistant
District Attorney, Felony Trial Division, of Westchester County from 1975 to
1979 and was an Acting Village Justice for the Village of Tarrytown from 1985 to
1987. He is the Village Attorney for the Village of Irvington, N.Y. and the
Village of Dobbs Ferry, N.Y. Mr. Plunkett is currently a member in the law firm
of Plunkett & Jaffe, P.C., with offices in White Plains, New York City and
Albany. He is a member of the Board of Trustees of Iona College, New Rochelle,
New York.
Paul R. Wheatley has served as a Director of the Company since its
formation in 1995 and has been a Director of the Bank since 1989. Mr. Wheatley
was President of Beck & Wheatley Inc., an insurance agency and real estate
brokerage concern, from 1970 until his retirement in 1993.
7
<PAGE> 10
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE COMPANY
The Board of Directors meets on a monthly basis and may have additional
special meetings upon the request of the Chairman of the Board. The Company's
Board of Directors met 17 times during the fiscal year ended March 31, 1997. No
director attended fewer than 75% of the total number of Board meetings and
committee meetings of which such director was a member.
The Board of Directors of the Company has established the following
committees:
The Executive Committee consists of all members of the Board of
Directors. The purpose of this committee is to monitor and manage the Company's
interest rate risk against Board and regulatory standards and coordinate such
interest rate risk management with the Company's operating plan. This committee,
from time to time, also reviews regulatory issues and reports of regulatory
examinations. This committee meets as requested by the Board of Directors. The
Company did not call Executive Committee meetings solely for these specific
functions during fiscal 1997 but instead dealt with these responsibilities at
regular and special meetings of the Company's and the Bank's board of directors.
The Compensation Committee consists of Messrs. Plunkett (Chairman),
Logan and Wheatley. This committee establishes the compensation of the Chief
Executive Officer, approves the compensation of other officers, and determines
compensation and benefits to be paid to employees of the Bank. The committee
meets yearly and as requested by the Board of Directors. The Compensation
Committee of the Company met once in fiscal 1997. In addition, the Compensation
Committee of the Bank, which committee consists of the same board members as the
Company's Compensation Committee, met five times during fiscal 1997.
The Examining and Audit Committee consists of Messrs. Logan (Chairman),
Cooney and Wheatley. The Bank's Internal Auditor reports to this committee. The
purpose of this committee is to provide assurance that the Company's internal
controls are adequate and that financial disclosures made by management portray
the Bank's financial condition and results of operations. The committee is
responsible for the classification of assets and the establishment of adequate
valuation allowances. The committee also maintains a liaison with the outside
auditors and reviews the adequacy of internal controls. The committee meets at
least annually or as called by the Committee Chairman. The Examining and Audit
Committee met once in fiscal 1997. In addition, the Examining and Audit
Committee of the Bank met twelve times during fiscal 1997.
The Nominating Committee consists of Messrs. Cooney (Chairman),
Byelick, Plunkett and Wheatley. The nominating committee nominates candidates
for the election of directors. The committee meets as called by the Committee
Chairman. This committee met once during fiscal 1997 and on April 28, 1997, to
select the nominees for election as directors at the Annual Meeting. In
accordance with the Company's Bylaws, no nominations for election as director,
except those made by the Nominating Committee, shall be voted upon at the Annual
Meeting unless properly made by a shareholder in accordance with the procedures
set forth below under "Additional Information -- Notice of Business to be
Conducted at Annual Meeting."
COMPENSATION OF DIRECTORS
Fee Arrangements. Currently, each outside director of the Company
receives a fee of $500 per meeting attended. All committee members receive a fee
of $200 for attendance at each committee meeting, with the exception of members
of the Examining and Audit Committee. The Chairman and members of the Examining
and Audit Committee receive a fee of $100 and $50, respectively, for each
committee
8
<PAGE> 11
meeting attended. When the Company's Board and the Bank's Board meet on the same
day, only one meeting fee is paid to any director. In such a circumstance, the
meeting fee is paid by the Bank.
Directors' Retirement Plan. The Company has adopted a non-qualified
Retirement Plan for Outside Directors of the Company and the Bank (the
"Directors' Retirement Plan"), which will provide benefits to each eligible
Outside Director commencing on his termination of Board service at or after age
65. Each Outside Director who served or agreed to serve as an Outside Director
subsequent to the completion of the Conversion automatically became a
participant in the Plan unless prior to, on or after such date, the Outside
Director elected to participate in the Deferred Compensation Plan described
below. In such case, the Outside Director will be deemed to have irrevocably
waived his benefits under the Directors' Retirement Plan. An eligible Outside
Director retiring at or after age 65 will be paid an annual retirement benefit
equal to the amount of the aggregate compensation for services as a director
(excluding stock compensation) paid to him for the 12-month period immediately
prior to his termination of Board service, multiplied by a fraction, the
numerator of which is the number of his years of service as an Outside Director
(including service as a director or trustee of the Bank or any predecessor) and
the denominator of which is 10. An individual who terminates Board service after
having served as an Outside Director for 10 years may elect to begin collecting
benefits under the Directors' Retirement Plan at or after attainment of age 50,
but the annual retirement benefits payable to him will be reduced pursuant to
the Plan's early retirement reduction formula to reflect the commencement of
benefit payments prior to age 65. An Outside Director may elect to have his
benefits distributed in any one of the following forms: (i) a single life
annuity; (ii) a 50% or 100% joint and survivor annuity; or (iii) a single life
annuity with a 5, 10, or 15 year guaranteed term. In the event an Outside
Director dies prior to the commencement of benefit payments under the Directors'
Retirement Plan, a 50% survivor annuity will automatically be paid to his
surviving spouse.
Deferred Compensation Plan for Directors. The Company has established a
non-qualified Deferred Compensation Plan for directors of the Bank or the
Company pursuant to which directors may defer all or part of the compensation
received for their services to the Company or the Bank and its affiliated
companies (including compensation paid to an officer-director for service as an
officer). Any director who elects to participate in the Deferred Compensation
Plan will be deemed to have irrevocably waived his benefits under the Directors'
Retirement Plan. Compensation deferred is applied to either the purchase of
investments (including shares of Common Stock of the Company) for the account of
the director, in which case the amount of deferred benefits payable is based on
the investment performance of the investments made, or the compensation deferred
is used to purchase a life insurance policy, in which case the amount of
deferred benefits payable is based on the value to the Bank of expected death
benefit proceeds. Deferred benefits are paid in installments over a period of
ten years beginning upon termination of service as a director. In the event a
director dies prior to the complete distribution of his account in the Deferred
Compensation Plan, the remainder will be paid in a single sum payment to his
designated beneficiary. In the event of a change in control, the Plan requires
full funding of any life insurance contracts previously purchased. The Bank has
established a trust fund with an independent fiduciary (the "Trustee") for the
purpose of accumulating funds to be used to satisfy its obligations under the
Deferred Compensation Plan. The Trustee will vote any shares of Common Stock
purchased for a participant's account in the Deferred Compensation Plan in
accordance with the directions given by such participant.
Outside Directors' Option Plan and Outside Directors' RRP. The Outside
Director Option Plan and Outside Director RRP were adopted by the Board of
Directors of the Company and subsequently approved by the Company's shareholders
at the last annual meeting (the "1996 Annual Meeting.") In general, only
non-employee directors of the Company and the Bank are eligible to participate
and receive awards under these Plans. On the effective date of the Outside
Director Option Plan, each Eligible Director was granted
9
<PAGE> 12
a non-qualified stock option to purchase 8,100 shares of Common Stock. These
options are scheduled to vest at the rate of 20% per year, over a five-year
period and will become immediately exercisable upon a Director's death or
disability. Pursuant to the proposed Amendment No. 2 to the Outside Director
Option Plan, these options will also become immediately exercisable upon the
"retirement" of an Eligible Director or a "change in control" of the Company, as
such terms are defined in the Outside Director Option Plan. Similarly, on the
effective date of the Outside Director RRP, restricted stock awards were granted
to each Eligible Director with respect to 3,240 shares of Common Stock. These
awards are also scheduled to vest in 20% increments over a five-year period,
with accelerated vesting to occur in the event of the Director's death or
disability. Pursuant to the proposed Amendment No. 2 to the Outside Director
RRP, awards made under this Plan will also become automatically vested upon the
"retirement" of the Eligible Director or a "change in control" of the Company as
such terms are defined in the Plan.
For complete descriptions of the Outside Director Option Plan and the
Outside Director RRP and the proposed Amendments to these Plans, see "Proposal
3" and "Proposal 5."
EXECUTIVE OFFICERS
The following individuals are executive officers of the Company and
hold the offices set forth below opposite their names. There are no executive
officers of the Company who are not also directors.
NAME POSITIONS HELD WITH THE COMPANY
Stephen C. Byelick President and Chief Executive Officer
Harry G. Murphy Vice President and Secretary
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The Company has
entered into an Employment Agreement with its executive officers which sets
forth the terms of their employment. See "-- Employment Agreements."
Since the formation of the Company, none of the executive officers or
other employee personnel has received remuneration from the Company.
10
<PAGE> 13
SUMMARY COMPENSATION TABLE
The following table sets forth the cash compensation paid by the
Company and the Bank for services rendered in all capacities during the fiscal
year ended March 31, 1997 and for the two preceding fiscal years, to the Chief
Executive Officer and the executive officers of the Company and the Bank whose
annual salary and bonus for such fiscal year was in excess of $100,000 ("Named
Executive Officers").
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------- -------------------------- -------
OPTIONS/
OTHER RESTRICTED STOCK
ANNUAL STOCK APPRECIATION LTIP ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS RIGHTS PAYOUTS COMPENSATION
POSITIONS YEAR ($)(1) ($) ($)(2) ($) (3) ("SARs")(#)(4) ($) ($)(5)
- ------------------ ---- ------ ----- ------------ ---------- -------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen C. Byelick, 1997 $154,500 $17,290 -- $188,325 40,500 -- $42,674
President and 1996 $158,567 $18,083 -- -- -- -- $11,110
Chief Executive 1995 $144,300 $17,100 -- -- -- -- --
Officer
Harry G. Murphy, 1997 $ 95,000 $12,220 -- $188,325 40,500 -- $30,656
Vice President 1996 $ 97,900 $12,530 -- -- -- -- $ 7,687
and Secretary 1995 $ 97,400 $11,700 -- -- -- -- --
</TABLE>
- ---------------------
(1) Includes compensation under the Deferred Compensation Plan for
Directors and, for the period prior to the Company's stock conversion
in 1996 and in 1995, fees earned as a director of the Bank.
(2) For 1997, 1996 and 1995, there were no (a) perquisites over the lesser
of $50,000 or 10% of the individual's total salary and bonus for the
year; (b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term
incentive plans prior to settlement or maturation; (d) tax payment
reimbursements; or (e) preferential discounts on stock.
(3) Includes 16,200 shares granted to each of Mr. Byelick and Mr. Murphy
pursuant to the Employee RRP approved by shareholders at the 1996
Annual Meeting. The value of the 16,200 share award as shown in the
table above is based on a per share price of $11.625, the final quoted
sales price of a share on the date of the award. Stock awards vest in
five equal installments on the first, second, third, fourth and fifth
anniversaries of the grant date, subject to earlier vesting upon
termination of employment. In the case of termination of employment due
to death or disability, all shares granted become immediately vested.
At March 31, 1997, the aggregate value of Mr. Byelick's and Mr.
Murphy's restricted share awards was $230,850, based on the final
quoted sales price of $14.25 per share as of such date.
(4) Includes 40,500 shares subject to options granted to each of Mr.
Byelick and Mr. Murphy pursuant to the Employee Option Plan approved by
shareholders at the 1996 Annual Meeting. At March 31, 1997, none of the
options held by Mr. Byelick and Mr. Murphy under the Employee Option
Plan to purchase shares of Common Stock at the exercise price of
$11.625 per share were exercisable. On July 11, 1997, 8,100 of the
options granted to Mr. Byelick and Mr. Murphy will first become
exercisable. The options granted under the Employee Option Plan are
intended to qualify as "incentive stock options" under Section 422 of
the Internal Revenue Code of 1986, as amended ("Code") to the maximum
extent possible and any options that do not so qualify will constitute
non-qualified stock options. The Employee Option Plan provides for
options to become exercisable in five equal installments on the first,
second, third, fourth and fifth anniversaries of the grant date and to
generally remain exercisable until the tenth anniversary of the grant
date, subject to earlier expiration upon termination of employment. In
the case of death or disability, all options granted become immediately
exercisable.
(5) Includes shares of Common Stock allocated to the accounts of Messrs.
Byelick and Murphy, pursuant to the ESOP. Mr. Byelick was allocated
3,132 shares in fiscal 1997 and 880 shares in fiscal 1996. Mr. Murphy
was allocated 2,250 shares in fiscal 1997 and 609 shares in fiscal
1996. The value of the shares were based on a price per share of
$13.375 and $12.625 respectively, the final quoted sales price of the
Common Stock on the Nasdaq Stock Market on December 31, 1996 and
December 31, 1995, the dates of allocation.
11
<PAGE> 14
REPORT OF COMPENSATION COMMITTEE
The following Report of the Company's Compensation Committee is
provided in accordance with the rules and regulations of the SEC. Pursuant to
such rules and regulations, this Report shall not be deemed "soliciting
material" filed with the SEC subject to Regulation 14A or 14C of the SEC or
subject to the liabilities of Section 18 of the Exchange Act.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Tappan Zee Financial, Inc. (the "Company") was formed in 1995 for the
purpose of becoming the holding company for Tarrytowns Bank, FSB (the "Bank") in
a stock conversion that took effect in October 1995. For the fiscal year ended
March 31, 1997, substantially all of the business of the Company was conducted
through the Bank. During such fiscal year, the Company's Chief Executive Officer
and other executive officers also served as the Chief Executive Officer and
executive officers, respectively, of the Bank and performed substantially all of
their services in connection with the management and operation of the Bank. As a
result, all compensation of the Chief Executive Officer and all other executive
officers for such period was paid by the Bank and determined by the Board of
Directors of the Bank on the recommendation of its Compensation Committee (the
"Bank Compensation Committee"). The Board of Directors of the Bank accepted
without modification all of the Bank Compensation Committee's recommendations on
executive compensation for the fiscal year ended March 31, 1997. The composition
of the Bank Compensation Committee is the same as that of the Company's
Compensation Committee.
It is the Company's policy to compensate its executive officers, either
directly or through its affiliates, using a combination of cash compensation
(consisting of base salary and discretionary cash bonuses) and fringe benefit
plans. These elements are intended to provide an overall compensation package
that is commensurate with the Company's financial resources, that is appropriate
to assure the retention of experienced management personnel and to align their
financial interests with those of the Company's shareholders, and that is
responsive to the immediate and long-term needs of executive officers and their
families. The compensation practices of other savings and community banks in the
New York City metropolitan area are considered in establishing the overall level
of compensation and the components of the compensation package; however, it has
not been a goal or policy to set compensation at levels designed to achieve a
predetermined percentile ranking among an identified group of peer institutions.
For the fiscal year ended March 31, 1997, base salaries of all
executive officers were set at levels determined, in the subjective judgment of
the Bank Compensation Committee, to be commensurate with the executive officers'
customary respective duties and responsibilities and to enable them to maintain
appropriate standards of living within their communities. The Compensation
Committee recognizes the significant additional efforts required of the Chief
Executive Officer and other executive officers of the Bank and the Company in
bringing about the Bank's successful stock conversion and the Company's initial
public offering. It also recognizes that successfully managing and operating a
public company entails additional ongoing duties and responsibilities for each
executive officer. No additional cash compensation was awarded on this basis. It
is the Compensation Committee's judgment that such compensation will take the
form of stock-based compensation under the long-term stock benefit plans
approved by the shareholders at the 1996 Annual Meeting. In this connection,
during fiscal 1997, the Bank discontinued its prior practice of granting lump
sum salary supplements during each fiscal year. The discontinuation of this
practice resulted in a reduction in the regular base salaries of the Named
Executed Officers.
12
<PAGE> 15
After shareholder approval of the Company's stock-based incentive
compensation plans at the 1996 Annual Meeting, certain recurring base salary
adjustments were eliminated that decreased base salary amounts for executives by
approximately 2.5% when compared to the prior year's levels. Discretionary
bonuses for the fiscal year ended March 31, 1997 were determined, in the
subjective judgment of the Bank Compensation Committee, with the intention of
rewarding effort, performance and results at levels above and beyond those
assumed in establishing base salary rates. Fringe benefit plans, consisting of a
pension plan and group insurance coverage, are designed to provide for the
health and welfare of the executives and their families and as well as for their
long-term financial needs. In addition, all executive officers participated in
the Company's ESOP for the calendar plan year ended December 31, 1996. Each
executive officer has an individual account within the ESOP Trust which is
invested primarily if not exclusively in employer securities, with the result
that a portion of each executive officer's long-term retirement savings is tied
to the performance of the Bank and the Company.
The determination of the Chief Executive Officer's compensation for the
fiscal year ended March 31, 1997 was based on the same general principles
applied to other executive officers and resulted in a similar adjustment in base
salary due to the implementation of the stock-based incentive compensation plans
approved by the Company's shareholders at the 1996 Annual Meeting.
COMPENSATION COMMITTEE OF
TAPPAN ZEE FINANCIAL, INC.
Kevin J. Plunkett, Chairman
Gerald L. Logan, Member
Paul R. Wheatley, Member
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are no other interlocks, as defined under the rules and
regulations of the SEC, between the Compensation Committee and corporate
affiliates of members of the Compensation Committee or otherwise. The
Compensation Committee consists of Messrs. Plunkett (Chairman), Logan and
Wheatley.
13
<PAGE> 16
PERFORMANCE GRAPH
Pursuant to the regulations of the SEC, the graph below compares the
performance of the Company with that of the Center for Research for Securities
Prices of the University of Chicago ("CRSP") Total Return Index for the Nasdaq
Stock Market, United States and the CRSP Financial Stock Total Return Index for
the Nasdaq Stock Market from October 5, 1995, the date of the Conversion,
through March 31, 1997. On October 5, 1995, the Bank completed the Conversion
and the Company offered 1,620,062 of shares of its Common Stock at a
subscription price of $10.00 per share. Immediately thereafter, the Common Stock
began trading on the Nasdaq Stock Market. The graph assumes the reinvestment of
dividends in additional shares of the same class of equity securities as those
listed below.
<TABLE>
<CAPTION>
Performance Graph 10/05/95 10/31/95 12/31/95 3/31/96 06/30/96 09/30/96 12/31/96 03/31/97
- ----------------- -------- -------- -------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Return Nasdaq
Stock Market (U.S.)...... 99.830 99.427 101.220 105.948 114.792 119.356 122.992 111.231
Nasdaq Financial Stocks.... 100.164 100.443 107.279 111.610 114.082 123.297 128.171 128.532
Tappan Zee Financial, Inc.
"Total Return"........... 100.000 120.000 126.250 120.500 121.000 126.500 138.250 145.000
</TABLE>
THERE CAN BE NO ASSURANCE THAT STOCK PERFORMANCE WILL CONTINUE INTO THE FUTURE
WITH THE SAME OR SIMILAR TRENDS TO THOSE DEPICTED IN THE GRAPH ABOVE.
EMPLOYMENT AGREEMENTS
The Company and the Bank have entered into employment agreements
(collectively, the "Employment Agreements") with Messrs. Byelick and Murphy (the
"Senior Executive(s)"). These Employment Agreements establish the respective
duties and compensation of the Senior Executives and are intended to ensure that
the Bank and the Company will be able to maintain a stable and competent
management. The continued success of the Bank and the Company depends to a
significant degree on the skills and competence of the Senior Executives.
The Employment Agreements provide for three-year terms. The Bank's
Employment Agreements provide that, commencing on the first anniversary date and
continuing each anniversary date thereafter,
14
<PAGE> 17
the Board of Directors may, with the Senior Executive's concurrence, extend its
Employment Agreements for an additional year, so that the remaining terms shall
be three years, after conducting a performance evaluation of the Senior
Executive. The Company's Employment Agreements provide for automatic daily
extensions such that the remaining terms of the Employment Agreements shall be
three years unless written notice of non-renewal is given by the Board of
Directors or the Senior Executive. The Employment Agreements provide that the
Senior Executive's base salary will be reviewed annually. It is anticipated that
this review will be performed by the Compensation Committee of the Board and the
Senior Executive's base salary may be increased on the basis of his job
performance and the overall performance of the Company and the Bank. As of May
31, 1997, the base salaries for Messrs. Byelick and Murphy are $159,000 and
$98,000, respectively. In addition to base salaries, the Employment Agreements
provide for, among other things, entitlement to participation in stock,
retirement and welfare benefit plans and eligibility for fringe benefits
applicable to executive personnel such as a company car and fees for club and
organization memberships deemed appropriate by the Bank or Company and the
Senior Executive. The Employment Agreements provide for termination by the Bank
or the Company at any time for cause as defined in the Employment Agreements. In
the event the Bank or the Company chooses to terminate the Senior Executive's
employment for reasons other than for cause, or in the event of the Senior
Executive's resignation from the Bank and the Company upon: (i) failure to
re-appoint, elect or re-elect the Senior Executive to his current offices; (ii)
a material adverse change in the Senior Executive's functions, duties or
responsibilities; (iii) a relocation of the Senior Executive's principal place
of employment outside Westchester County without the Senior Executive's consent;
(iv) a liquidation or dissolution of the Bank or the Company; (v) a change of
control (as defined in the Employment Agreements); or (vi) a breach of the
Employment Agreement by the Bank or the Company, the Senior Executive or, in the
event of death, his beneficiary would be entitled to a lump sum cash payment in
an amount equal to the remaining base salary and bonus payments due to the
Senior Executive and the additional contributions or benefits that would have
been earned under any employee benefit plans of the Bank or the Company during
the remaining terms of the Employment Agreements. The Bank and the Company would
also continue the Senior Executive's life, health and disability insurance
coverage for the remaining terms of the Employment Agreements.
Payments to the Senior Executives under the Bank's Employment
Agreements will be guaranteed by the Company in the event that payments or
benefits are not paid by the Bank. To the extent that payments under the
Company's Employment Agreements and the Bank's Employment Agreements are
duplicative, payments due under the Company's Employment Agreements would be
offset by amounts actually paid by the Bank. Senior Executives would be entitled
to reimbursement of certain costs incurred in negotiating, interpreting or
enforcing the Employment Agreements. Each Employment Agreement also provides for
the Bank and the Company to indemnify the Senior Executive to the fullest extent
allowable under federal and Delaware law, respectively.
Cash and benefits paid to a Senior Executive under the Employment
Agreements together with payments under other benefit plans following a "change
in control" of the Bank or the Company may constitute an "excess parachute"
payment under Section 280G of the Code, resulting in the imposition of a 20%
excise tax on the recipient and the denial of the deduction for such excess
amounts to the Company and the Bank. The Company's Employment Agreements each
include a provision indemnifying each Senior Executive on an after-tax basis for
any "golden parachute" excise taxes.
BENEFITS
Retirement Plan. The Bank has maintained a non-contributory,
tax-qualified defined benefit pension plan (the "Retirement Plan") for eligible
employees, since 1957. All employees at least age 21 who have completed at least
one year of service are eligible to participate in the Retirement Plan. The
15
<PAGE> 18
Retirement Plan provides for a benefit for each participant, including executive
officers named in the Summary Compensation Table above, equal to 2% of the
participant's average annual earnings (average W-2 compensation during the
highest 36 consecutive months of the participant's final 120 months of
employment) multiplied by the participant's years (and any fraction thereof) of
eligible employment (up to a maximum of 30 years). A participant is fully vested
in his or her benefit under the Retirement Plan after five years of service. The
Retirement Plan is funded by the Bank on an actuarial basis. The Plan is
administered by the Pension Committee of the Bank's Board of Directors and
operates on a calendar year basis. The Bank has established a trust for the
Retirement Plan ("Retirement Plan Trust") and has appointed an unrelated trustee
("Trustee") to administer the Trust. Up to 10% of the Retirement Plan's assets
may be invested by the Trustee in shares of the Common Stock, in such amounts
and upon such terms and conditions as the Pension Committee may determine to be
in the best interests of the Plan participants and beneficiaries. These shares
may be acquired through open market purchases, if permitted, or from authorized
but unissued shares. To date, the Retirement Plan has purchased 4,775 shares of
Common Stock. These shares are held unallocated to any participants in the
Retirement Plan Trust. The Trustee, subject to its fiduciary duty, will vote the
shares of Common Stock held in the Retirement Plan Trust in accordance with the
directions given by the Pension Committee.
The following table illustrates the annual benefit payable upon normal
retirement at age 65 (in single life annuity amounts with no offset for Social
Security benefits) at various levels of compensation and years of service:
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------
Remuneration(1) 15 20 25 30 35(4)
--------------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$125,000 $37,500 $50,000 $ 62,500 $ 75,000 $ 75,000
150,000(2) 45,000 60,000 75,000 90,000 90,000
175,000(2) 52,500 70,000 87,500 105,000 105,000
200,000(2) 60,000 80,000 100,000 120,000(3) 120,000(3)
</TABLE>
- ---------------------
(1) The annual retirement benefits shown in the table do not reflect a
deduction for Social Security benefits and there are no other offsets
to benefits. The amounts shown in the table include salary and bonus as
reported in the Summary Compensation Table but do not include
additional benefits payable to Messrs. Byelick and Murphy under the
Deferred Compensation Plan for Directors. See "Deferred Compensation
Plan for Directors."
(2) For 1996, the average final compensation for computing benefits under
the Retirement Plan cannot exceed $150,000 (as adjusted for subsequent
years pursuant to the Code).
(3) Under current law, the maximum annual benefit payable under the
Retirement Plan cannot exceed $120,000 (as adjusted for subsequent
years pursuant to the Code).
(4) The maximum years of service credited for benefit purposes is 30 years.
The years of credited service and the average annual earnings (as
defined above) determined as of December 31, 1996, the end of the 1996 plan
year, for each of Stephen C. Byelick and Harry G. Murphy, the Named Executive
Officers listed in the Summary Compensation Table, were 14.0 years and $148,243
and 13.5 years and $101,041, respectively.
Employee Stock Ownership Plan and Trust. The Company has established,
and the Bank has adopted, for the benefit of eligible employees, an ESOP and
related trust which became effective upon the Conversion. All employees of the
Bank or the Company are eligible to become participants in the ESOP. The ESOP
purchased, with funds borrowed from the Company, eight percent (8%) of the
Common Stock
16
<PAGE> 19
(129,600 shares) issued in the Conversion. The Company or the Bank intends to
make annual contributions to the ESOP in an aggregate amount at least equal to
the principal and interest requirement on the debt. The term of the ESOP loan is
10 years, with an interest rate of 8% per annum.
Shares purchased by the ESOP are initially pledged as collateral for
the loan, and are held in a suspense account until released for allocation among
participants in the ESOP when the loan is repaid. The pledged shares are
released annually from the suspense account in an amount proportional to the
repayment of the ESOP loan for each plan year. The released shares are allocated
among the accounts of participants on the basis of the participant's
compensation for the year of allocation. Benefits generally become vested at the
rate of 20% per year with 100% vesting after five years of service. Participants
also become immediately vested upon termination of employment due to death,
retirement at age 65, permanent disability or upon the occurrence of a change in
control. Forfeitures are reallocated among remaining participating employees, in
the same proportion as contributions. Vested benefits may be paid in a single
sum or installment payments and are payable upon death, retirement at age 65,
disability or separation from service.
In connection with the establishment of the ESOP, the ESOP Committee of
the Company's Board of Directors was appointed to administer the ESOP. Marine
Midland Bank has been appointed the corporate trustee for the ESOP. The ESOP
Committee may instruct the trustee regarding investment of funds contributed to
the ESOP. The ESOP Trustee, subject to its fiduciary duty, must vote all
allocated shares held in the ESOP in accordance with the instructions of the
participating employees. Under the ESOP, unallocated shares will be voted in a
manner calculated to most accurately reflect the instructions it has received
from participants regarding the allocated stock as long as such vote is in
accordance with the provisions of ERISA.
Employee Option Plan and Employee RRP. The Employee Option Plan and
Employee RRP were adopted by the Board of Directors of the Company and approved
by the shareholders of the Company at the 1996 Annual Meeting. The purpose of
the Plans is to promote the growth of the Company and its affiliates by linking
the incentive compensation of officers and key executives with the profitability
of the Company. Options are granted to eligible officers and executives in such
amounts and on such terms as may be determined by the Committee appointed to
administer the Employee Option Plan. Restricted stock awards are awarded under
the Employee RRP on a discretionary basis to eligible officers and executives.
Option grants and restricted stock awards generally vest at the rate of 20% per
year over a five-year period, with accelerated vesting to occur upon the
grantee's death or disability. Under proposed Amendments No. 2 to the Employee
Option Plan and Employee RRP, vesting will also be accelerated upon the
"retirement" of an option holder or award recipient or upon the "change in
control" of the Company, as such terms are defined in the Plans.
For complete descriptions of the Employee Option Plan and the Employee
RRP and the proposed Amendments to these Plans, see "Proposal 2" and "Proposal
4."
17
<PAGE> 20
The following table summarizes the grants that were made to the Named
Executive Officers during fiscal 1997.
OPTION / SAR GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATE OF
NUMBER OF OPTIONS/ STOCK PRICE
SECURITIES SARs APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS/SARs EMPLOYEES IN EXERCISE OR
GRANTED FISCAL YEAR BASE PRICE EXPIRATION 5% 10%
NAME (#) (%) ($ PER SHARE) DATE ($) ($)
- ------------------------- ------------- ------------ ------------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
STEPHEN C. BYELICK, 40,500 50% $11.625 7/9/2006 296,091 750,354
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
HARRY G. MURPHY, 40,500 50% $11.625 7/9/2006 296,091 750,354
VICE PRESIDENT
AND SECRETARY
</TABLE>
- ---------------------
(1) All options granted are qualified options which become exercisable in
five equal installments on the first, second, third, fourth, and fifth
anniversaries of the grant date and generally remain exercisable until
the tenth anniversary of the grant date, subject to earlier expiration
upon termination of employment. In the case of death or disability, all
Options granted become immediately exercisable. If Amendment No. 2 to
the Employee Option Plan is approved by shareholders, these options
will also become immediately exercisable upon an option holder's
"retirement" or a "Change in Control" of the Company, as such terms are
defined in the Employee Option Plan. See "-- Employee Option Plan."
The following table provides certain information with respect to the
number of shares of Common Stock acquired through the exercise of, or
represented by outstanding, stock options held by the Named Executive Officers
on March 31, 1997. Also reported is the value for "in-the-money" options, which
represent the positive spread between the exercise price of any such existing
stock options and the fiscal year-end Common Stock price of $14.25 per share.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARs AT FISCAL OPTIONS/SARs AT FISCAL
YEAR-END (1) (2) YEAR-END
# ($)
NAME EXERCISABLE / UNEXERCISABLE EXERCISABLE / UNEXERCISABLE
- ------------------------- --------------------------- ---------------------------
<S> <C> <C>
Stephen C. Byelick, -- / 40,500 -- / 106,313
President and
Chief Executive Officer
Harry G. Murphy, -- / 40,500 -- / 106,313
Vice President
and Secretary
</TABLE>
- ---------------------
(1) None of the Named Executive Officers exercised options during the
fiscal year ended March 31, 1997.
(2) None of the outstanding stock options held by the Named Executive
Officers were exercisable as of March 31, 1997.
18
<PAGE> 21
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Financial Institutions Reform, Recovery and Enforcement Act of
1989, as amended, ("FIRREA") requires that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more than
the normal risk of repayment or present other unfavorable features. It is the
policy of the Bank not to make loans to executive officers and directors. As of
the Record Date, none of the Bank's directors and executive officers had loans
outstanding to the Bank. The Bank, however, may make loans or extend credit to
certain persons related to executive officers and directors. All such loans were
made by the Bank in the ordinary course of business and were not made with more
favorable terms or involved more than the normal risk of collectible or
presented unfavorable features. The Bank intends that any transactions in the
future between the Bank and its executive officers, directors, holders of 10% or
more of the shares of any class of its common stock and affiliates thereof, will
contain terms no less favorable to the Bank than could have been obtained by it
in arm's-length negotiations with unaffiliated persons and will be approved by a
majority of independent outside directors of the Bank not having any interest in
the transaction.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than 10% of the Company's
common stock to file with the SEC reports of ownership and changes of ownership.
Officers, directors and greater than 10% shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file. Other than the annual statements of changes in beneficial ownership of
securities on Form 5 for each officer and director, which were accurate in all
respects but filed on May 16, 1997, based solely on its review of the copies of
such forms received by it, or written representations from certain reporting
persons, the Company believes that all filing requirements applicable to its
executive officers, directors and greater than 10% beneficial owners were
complied with.
-------------------------------------------------
PROPOSAL 2
APPROVAL OF AMENDMENT NO. 2 TO THE
TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN
FOR OFFICERS AND EMPLOYEES
-------------------------------------------------
GENERAL PLAN INFORMATION
The Company's Board of Directors adopted the Tappan Zee Financial, Inc.
1996 Stock Option Plan For Officers and Employees ("Employee Option Plan") on
March 25, 1996, subject to approval by the shareholders, and the shareholders
approved the Plan on July 10, 1996 ("Effective Date"). Pursuant to regulations
of the Office of the Thrift Supervision (the "OTS") applicable to stock option
plans established or implemented within one year following the completion of a
mutual-to-stock conversion, the Employee Option Plan contained certain
restrictions and limitations, including among others: provisions requiring the
vesting of options granted to occur no more rapidly than ratably over a five
year period; and the resultant prohibition against accelerated vesting of option
grants upon retirement of the optionee or the
19
<PAGE> 22
occurrence of a Change in Control (as defined in the Employee Option Plan) of
the Company. In addition, OTS ruling positions may restrict the Company's
ability to implement anti-dilutive provisions contained in the Employee Option
Plan that would apply in the event that an extraordinary dividend, including a
non-taxable return of capital, is to be paid to shareholders.
OTS ruling positions permit the elimination of the provisions of the
Employee Option Plan which reflect the restrictions and limitations described
above, provided that shareholder approval therefor is obtained more than one
year following the completion of the mutual-to-stock conversion. The Board of
Directors has adopted amendments to the Employee Option Plan, subject to
approval by shareholders of the Company, for the purpose of eliminating such
restrictions and limitations (these changes to the Employee Option Plan are
collectively referred to herein as "Amendment No. 2"). Amendment No. 2 does not
increase the number of shares reserved for issuance under the Plan, decrease the
price per share at which Options may be granted under the Plan or alter the
classes of individuals eligible to participate in the Plan. In the event that
Amendment No. 2 is not approved by shareholders at the Annual Meeting, Amendment
No. 2 will not take effect, but the Employee Option Plan will remain in effect.
The principal provisions of the Employee Option Plan, as it would be amended by
Amendment No. 2, are described below. The full text of the Amendment No. 2 is
set forth as Appendix A to this Proxy Statement, to which reference is made, and
the summary of Amendment No. 2 provided below is qualified in its entirety by
such reference.
PURPOSE OF THE EMPLOYEE OPTION PLAN
The purpose of the Employee Option Plan is to promote the growth and
profitability of the Company, to provide certain key officers and employees of
the Company and its affiliates with an incentive to achieve corporate
objectives, to attract and retain individuals of outstanding competence and to
provide such individuals with an equity interest in the Company. The Employee
Option Plan provides for the grant of options to purchase common stock of the
Company ("Options") to certain officers and employees of the Company.
DESCRIPTION OF THE EMPLOYEE OPTION PLAN
Administration. A Committee consisting of members of the Compensation
Committee of the Board (or any successor committee) or such other committee as
the Board may designate ("Committee") administers the Employee Option Plan. Such
Committee is comprised of at least two directors of the Company, and all
directors on the Committee are "disinterested directors" (as that term is
defined under Section 162(m) of the Code) who are not currently and have not at
any time during the immediately preceding one-year period been an employee of
the Company, the Bank or any affiliate. The Committee will determine, within the
limitations of the Employee Option Plan, the officers and employees to whom
Options will be granted, the number of shares subject to each Option, the terms
of such Options (including provisions regarding exercisability and acceleration
of exercisability) and the procedures by which the Options may be exercised.
Subject to certain specific limitations and restrictions set forth in the
Employee Option Plan, the Committee has full and final authority to interpret
the Employee Option Plan, to prescribe, amend and rescind rules and regulations,
if any, relating to the Employee Option Plan and to make all determinations
necessary or advisable for the administration of the Employee Option Plan. The
costs and expenses of administering the Employee Option Plan will be borne by
the Company.
Stock Subject to the Employee Option Plan. The Company has reserved
113,400 shares of the Common Stock (the "Shares") for issuance upon exercise of
Options. Such Shares may be authorized and unissued shares or shares previously
issued and reacquired by the Company. Any Shares subject to grants under the
Employee Option Plan which expire or are terminated, forfeited or canceled
without having been
20
<PAGE> 23
exercised or vested in full, shall again be available for purposes of the
Employee Option Plan. As of May 31, 1997, the aggregate fair market value of the
Shares reserved for issuance was $1,956,150, based on the closing sales price
per share of Common Stock of $17.25 on The Nasdaq Stock Market as of such date.
Eligibility. Any employee of the Company (or a participating affiliate)
who is selected by the Committee is eligible to participate in the Employee
Option Plan as an "Eligible Individual." As of May 31, 1997, there were two
Eligible Individuals. Members of the Board or of the board of directors of the
Bank who are not employees or officers of the Company or Bank are not eligible
to participate in the Plan.
Terms and Conditions of Options Granted to Officers and Employees. The
Employee Option Plan provides for the grant of Options which qualify for
favorable federal income tax treatment as "incentive stock options" ("ISOs") and
non-qualified stock options which do not so qualify ("NQSOs"). Unless otherwise
designated by the Committee, Options granted under the Employee Option Plan will
be ISOs, that will be exercisable at a price per Share equal to the fair market
value of a Share on the date of the Option grant. In general, ISOs will be
exercisable for a period of ten years after the date of grant, (or for a shorter
period ending three months after the option holder's termination of employment
for reasons other than death, disability or retirement or discharge for cause);
one year after termination of employment due to death, disability or retirement;
or immediately upon termination for cause. In no event may an Option be granted
with an exercise price per Share that is less than the fair market value of a
Share when the Option is granted, or for a term exceeding ten years from the
date of grant.
Upon the exercise of an Option, the Exercise Price must be paid in
full. Payment may be made in cash or in such other consideration as the
Committee deems appropriate, including, but not limited to, Shares already owned
by the option holder or Shares to be acquired by the option holder upon exercise
of the Option, provided that the delivery of Shares concurrently with the
exercise of an Option does not violate Section 16(b) of the Exchange Act, or any
rules or regulations promulgated thereunder.
Currently, the Employee Option Plan requires that Options granted to
Eligible Individuals become exercisable no more rapidly than ratably over a
five-year period (with acceleration only upon death or disability) and would
prohibit the accelerated vesting of Options upon retirement or a Change in
Control (as such terms are defined in the Plan). As permitted by OTS ruling
positions, Amendment No. 2 would eliminate these requirements, both with respect
to outstanding Options and any Options that may be granted in the future.
Pursuant to the Employee Option Plan, as amended by Amendment No. 2, upon a
Change in Control or retirement of an Eligible Individual, all Options granted
to such Individual that are outstanding as of the date of such Individual's
retirement or a Change in Control will automatically become fully vested and
exercisable. The amended Employee Option Plan also permits the Committee to
establish a vesting schedule that is either more or less favorable than the five
year vesting schedule to be applicable to an Option granted to an Eligible
Individual under the Plan.
Adjustments for Extraordinary Dividends. Under OTS ruling positions
applicable to stock benefit plans established or implemented within one year
after a mutual-to-stock conversion, any adjustment in the exercise price of
outstanding Options to reflect the payment of any extraordinary dividend
requires the prior approval of the OTS, and the OTS will not permit a cash
payment in lieu of a price adjustment, unless plan provisions authorizing these
actions are approved by shareholders at least one year after the mutual-to-stock
conversion. Under applicable tax regulations, the adjustment of the exercise
price of outstanding Options granted to certain executive officers of the
Company may, in certain circumstances, cause the Company to lose the federal
income tax deduction that would otherwise be available to it upon exercise of
the Option. However, the making of a cash payment would not affect the
availability of the deduction. Accordingly, the Employee Option Plan has been
amended to permit the Committee, on a case-by-case, to authorize either a price
adjustment or a cash payment to an option holder to reflect the payment of an
extraordinary
21
<PAGE> 24
dividend. This provision provides the Committee with necessary flexibility to
maximize the tax benefits available to the Company with respect to the Employee
Option Plan.
TERMINATION OR AMENDMENT OF THE EMPLOYEE OPTION PLAN
Unless sooner terminated, the Employee Option Plan will terminate
automatically on the day preceding the tenth anniversary of the Effective Date
of the Plan. The Board may suspend or terminate the Employee Option Plan in
whole or in part at any time prior to the tenth anniversary of the Effective
Date by giving written notice of such suspension or termination to the
Committee. In the event of any suspension or termination of the Employee Option
Plan, all Options theretofore granted under the Employee Option Plan that are
outstanding on the date of such suspension or termination of the Employee Option
Plan will remain outstanding under the terms of the agreements granting such
Options.
The Board may amend or revise the Employee Option Plan in whole or in
part at any time, but if the amendment or revision (i) materially increases the
benefits accruing under the Employee Option Plan, (ii) materially increases the
number of Shares which may be issued under the Employee Option Plan or (iii)
materially modifies the requirements as to eligibility for Options under the
Employee Option Plan, such amendment or revision will be subject to approval by
the shareholders of the Company. Subject to the above provisions, the Board will
also have broad authority to amend the Employee Option Plan to take into account
changes in applicable financial institution, securities and tax laws and
accounting standards, as well as other developments.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is intended only as a summary and does not
purport to be a comprehensive description of the federal tax laws, regulations
and policies affecting the Company and recipients of ISOs and NQSOs that may be
granted under the Employee Option Plan and any descriptions of the provisions of
any law, regulation or policy. Any change in applicable law or regulation or in
the policies of various taxing authorities may have a material effect on the
discussion contained herein.
There are no federal income tax consequences for the Company or the
option holder at the time an ISO is granted or for the Company upon the exercise
of an ISO. Upon the exercise of an ISO, the option holder does not recognize
income for tax purposes but the difference between the fair market value of the
Shares acquired upon exercise and the exercise price is an item of tax
preference that may affect the option holder's liability for alternative minimum
tax. If there is no sale or other disposition of the Shares acquired upon the
exercise of an ISO within two years after the date the ISO was granted, or
within one year after the exercise of the ISO, then at no time will any amount
be deductible by the Company with respect to the ISO. If the option holder
exercises an ISO and sells or otherwise disposes of the Shares so acquired after
satisfying the foregoing holding period requirements, then he will realize a
capital gain or loss on the sale or disposition. If the option holder exercises
his ISO and sells or disposes of his Shares prior to satisfying the foregoing
holding period requirements, then an amount equal to the difference between the
amount realized upon the sale or other disposition of such Shares and the price
paid for such Shares upon the exercise of the ISO will be includible in the
ordinary income of such person, and such amount will ordinarily be deductible by
the Company at the time it is includible in such person's income.
With respect to the grant of NQSOs, there are no federal income tax
consequences for the Company or the option holder at the date of the grant. Upon
the exercise of a NQSO, an amount equal to the difference between the fair
market value of the Shares to be purchased on the date of exercise and the
aggregate purchase price of such Shares is generally includible in the ordinary
income of the person exercising such NQSO, although such inclusion may be at a
later date in the case of an option holder whose
22
<PAGE> 25
disposition of such Shares could result in liability under Section 16(b) of the
Exchange Act. The Company will ordinarily be entitled to a deduction for federal
income tax purposes at the time the option holder is taxed on the exercise of
the NQSO equal to the amount which the option holder is required to include as
ordinary income.
The foregoing statements are intended to summarize the general
principles of current federal income tax law applicable to Options that may be
granted under the Employee Option Plan. State and local tax consequences may
also be significant. PARTICIPANTS ARE ADVISED TO CONSULT WITH THEIR TAX ADVISOR
AS TO THE TAX CONSEQUENCES OF THE EMPLOYEE OPTION PLAN.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" THE APPROVAL OF AMENDMENT NO. 2 TO THE TAPPAN ZEE FINANCIAL, INC. 1996
STOCK OPTION PLAN FOR OFFICERS AND EMPLOYEES.
-------------------------------------------------
PROPOSAL 3
APPROVAL OF AMENDMENT NO. 2 TO THE
TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN
FOR OUTSIDE DIRECTORS
-------------------------------------------------
GENERAL PLAN INFORMATION
The Company's Board of Directors adopted the Tappan Zee Financial, Inc.
1996 Stock Option Plan For Outside Directors ("Outside Director Option Plan") on
March 25, 1996, subject to approval by the shareholders, and the shareholders
approved the Plan on July 10, 1996 ("Effective Date"). Pursuant to regulations
of the OTS applicable to stock option plans established or implemented within
one year following the completion of a mutual-to-stock conversion, the Outside
Director Option Plan contained certain restrictions and limitations, including
among others: provisions requiring the vesting of options granted to occur no
more rapidly than ratably over a five year period; and the resultant prohibition
against accelerated vesting of option grants upon retirement of the optionee or
the occurrence of a Change in Control (as defined in the Outside Director Option
Plan) of the Company. In addition, OTS ruling positions may restrict the
Company's ability to implement anti-dilutive provisions contained in the Outside
Director Option Plan that would apply in the event that an extraordinary
dividend, including a non-taxable return of capital, were to be paid to
shareholders.
OTS ruling positions permit the elimination of the provisions of the
Outside Director Option Plan which reflect the restrictions and limitations
described above, provided that shareholder approval therefor is obtained more
than one year following the completion of the mutual-to-stock conversion. The
Board of Directors has adopted amendments to the Outside Director Option Plan,
subject to approval by shareholders of the Company, for the purpose of
eliminating such restrictions and limitations (these changes to the Outside
Director Option Plan are collectively referred to herein as "Amendment No. 2").
Amendment No. 2 does not increase the number of Shares reserved for issuance
under the Plan, decrease the price per Share at which Options may be granted
under the Outside Director Option Plan or alter the classes of individuals
eligible to participate in the Outside Director Option Plan. In the event that
Amendment No. 2 is not approved by shareholders at the Annual Meeting, Amendment
No. 2 will not take effect, but the Outside
23
<PAGE> 26
Director Option Plan will remain in effect. The principal provisions of the
Outside Director Option Plan, as it would be amended by Amendment No. 2, are
described below. The full text of the Amendment No. 2 is set forth as Appendix B
to this Proxy Statement, to which reference is made, and the summary of
Amendment No. 2 provided below is qualified in its entirety by such reference.
PURPOSE OF THE OUTSIDE DIRECTOR OPTION PLAN
The purpose of the Outside Director Option Plan is to advance the
interests of the Company and its shareholders by providing outside directors of
the Company and its affiliates with an incentive to achieve corporate objectives
and by attracting and retaining individuals of outstanding competence through
the award of equity interests in the Company.
DESCRIPTION OF THE OUTSIDE DIRECTOR OPTION PLAN
Administration. A Committee consisting of members of the Compensation
Committee of the Board (or any successor committee) or such other committee as
the Board may designate ("Committee") administers the Outside Director Option
Plan. All stock options ("Options") granted under the Outside Director Option
Plan are determined by automatic formula grant, thus the Committee has no
discretion over such grants. However, subject to certain limitations and
restrictions set forth in the Outside Director Option Plan, the Committee has
the authority to interpret the Plan, to prescribe, amend and rescind rules and
regulations, if any relating to the Plan and to make all determinations
necessary or advisable for the administration of the Option Plan. The costs and
expenses of the Outside Director Option Plan are paid for by the Company and are
not charged to the grant of any Option or to a director participating in the
Plan.
Stock Subject to the Outside Director Option Plan. The Company has
reserved 48,600 Shares for issuance upon exercise of Options. Such Shares may be
authorized and unissued shares or shares previously issued and reacquired by the
Company. Any Shares subject to grants under the Outside Director Option Plan
which expire or are terminated, forfeited or canceled without having been
exercised or vested in full, shall again be available for purposes of the
Outside Director Option Plan. As of May 31, 1997, the aggregate fair market
value of the Shares reserved for issuance was $838,350, based on the closing
sales price per share of Common Stock of $17.25 on the Nasdaq Stock Market as of
such date.
Eligibility. Members of the Board, or of the board of directors of the
Bank, who are not employees of the Company or the Bank are eligible to
participate in the Outside Director Option Plan as an "Eligible Director." As of
May 31, 1997, there were five Eligible Directors participating in the Plan.
Terms and Conditions of Options Granted to Outside Directors. On the
effective date of the Outside Director Option Plan, each Eligible Director was
granted a NQSO to purchase 8,100 Shares. These Options have an exercise price of
$11.625 which equals the fair market value of a Share on the date the Options
were granted. On the first anniversary of the grant date and continuing for each
consecutive anniversary date occurring thereafter, each of the outstanding
Options will become exercisable for 20% of the total number of Shares subject to
the Option. All optioned Shares not previously purchased or available for
purchase will become available for purchase, on the date of the optionee's
death, disability, retirement or a Change in Control. The Outside Director
Option Plan also provides for each newly elected Eligible Director to receive an
Option to purchase 500 Shares upon joining the Board plus an additional 500
Shares each January thereafter, subject to the availability of the reserved
Shares.
All Options granted under the Outside Director Option Plan will be
NQSOs. The Outside Director Option Plan requires the purchase price to be paid
in full upon exercise of the Option. Payment may be made in cash or in such
other consideration as the Committee deemed appropriate, including but not
limited
24
<PAGE> 27
to, Shares already owned by the optionee or Shares to be acquired by the
optionee upon the exercise of the Options, provided that the delivery of such
Shares will not violate Section 16(b) of the Exchange Act or any rules or
regulations promulgated thereunder.
Currently, the Outside Director Option Plan requires that Options
granted to Eligible Directors become exercisable no more rapidly than ratably
over a five-year period (with accelerated vesting triggered only upon a
Director's death or disability) and would prohibit the accelerated vesting of
Options upon retirement or a Change in Control (as such terms are defined in the
Plan). As permitted by OTS ruling positions, Amendment No. 2 would eliminate
these requirements, both with respect to outstanding Options and any Options
that may be granted in the future. Pursuant to the Outside Director Option Plan,
as amended by Amendment No. 2, upon a Change in Control or retirement of an
Eligible Director, all Options granted to such Director that are outstanding as
of the date of such Director's retirement or a Change in Control will
automatically become fully vested and exercisable.
Adjustments for Extraordinary Dividends. Under OTS ruling positions
applicable to stock benefit plans established or implemented within one year
after a mutual-to-stock conversion, any adjustment in the exercise price of
outstanding options to reflect the payment of any extraordinary dividend
requires the prior approval of the OTS, and the OTS will not permit a cash
payment in lieu of a price adjustment, unless plan provisions authorizing these
actions are approved by shareholders at least one year after the mutual-to-stock
conversion. Accordingly, the Outside Director Option Plan has been amended to
permit the Committee, on a case-by-case, to authorize either a price adjustment
or a cash payment to an option holder to reflect the payment of an extraordinary
dividend.
TERMINATION OR AMENDMENT OF THE OUTSIDE DIRECTOR OPTION PLAN
Unless sooner terminated, the Outside Director Option Plan will
terminate automatically on the day preceding the tenth anniversary of the
Effective Date of the Plan. The Board may suspend or terminate the Outside
Director Option Plan in whole or in part at any time prior to the tenth
anniversary of the Effective Date by giving written notice of such suspension or
termination to the Committee. In the event of any suspension or termination of
the Outside Director Option Plan, all Options theretofore granted that are
outstanding on the date of such suspension or termination of the Plan will
remain outstanding under the terms of the agreements granting such Options.
The Board may amend or revise the Outside Director Option Plan in whole
or in part at any time, but if the amendment or revision (i) materially
increases the benefits accruing under the Outside Director Option Plan, (ii)
materially increases the number of Shares which may be issued under the Outside
Director Option Plan or (iii) materially modifies the requirements as to
eligibility for Options under the Outside Director Option Plan, such amendment
or revision will be subject to approval by the shareholders of the Company.
Subject to the above provisions, the Board will also have broad authority to
amend the Outside Director Option Plan to take into account changes in
applicable financial institution, securities and tax laws and accounting
standards, as well as other developments.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is intended only as a summary and does not
purport to be a comprehensive description of the federal tax laws, regulations
and policies affecting the Company and recipients of NQSOs granted under the
Outside Director Option Plan and any descriptions of the provisions of any law,
regulation or policy. Any change in applicable law or regulation or in the
policies of various taxing authorities may have a material effect on the
discussion contained herein.
25
<PAGE> 28
There are no federal income tax consequences for the Company or the
option holder at the date of the grant of NQSOs. Upon the exercise of a NQSO, an
amount equal to the difference between the fair market value of the Shares to be
purchased on the date of exercise and the aggregate purchase price of such
Shares is generally includible in the ordinary income of the person exercising
such NQSO, although such inclusion may be at a later date in the case of an
option holder whose disposition of such Shares could result in liability under
Section 16(b) of the Exchange Act. The Company will ordinarily be entitled to a
deduction for federal income tax purposes at the time the option holder is taxed
on the exercise of the NQSO equal to the amount which the option holder is
required to include as ordinary income.
The foregoing statements are intended to summarize the general
principles of current federal income tax law applicable to Options granted under
the Outside Director Option Plan. State and local tax consequences may also be
significant. PARTICIPANTS ARE ADVISED TO CONSULT WITH THEIR TAX ADVISOR AS TO
THE TAX CONSEQUENCES OF THE OUTSIDE DIRECTOR OPTION PLAN.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" THE APPROVAL OF AMENDMENT NO. 2 TO THE TAPPAN ZEE FINANCIAL, INC. 1996
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS.
-----------------------------------
PROPOSAL 4
APPROVAL OF AMENDMENT NO. 2 TO THE
TAPPAN ZEE FINANCIAL, INC.
1996 RECOGNITION AND RETENTION PLAN
FOR OFFICERS AND EMPLOYEES
-----------------------------------
GENERAL PLAN INFORMATION
The Company's Board of Directors adopted the Tappan Zee Financial, Inc.
1996 Recognition and Retention Plan for Officers and Employees ("Employee RRP"
or "Plan") on March 25, 1996, subject to approval by the shareholders, and the
shareholders approved the Plan on July 10, 1996 ("Effective Date"). Pursuant to
regulations of the OTS applicable to stock benefit plans established or
implemented within one year following the completion of a mutual-to-stock
conversion, the Employee RRP contained certain restrictions and limitations,
including among others: provisions requiring the vesting of restricted stock
awards to occur no more rapidly than ratably over a five year period; the
resultant prohibition against accelerated vesting of restricted stock awards
upon retirement of the award recipient or the occurrence of a Change of Control
(as defined in the Employee RRP) of the Company; and a prohibition against the
distribution of cash dividends to a participant prior to the vesting of the
underlying stock award.
OTS ruling positions permit the elimination of the provisions of the
Employee RRP which reflect the restrictions and limitations described above,
provided that shareholder approval therefor is obtained more than one year
following the completion of the mutual-to-stock conversion. The Board of
Directors has adopted amendments to the Employee RRP, subject to approval by
shareholders of the Company, for the purpose of eliminating such restrictions
and limitations (these changes to the Employee RRP are collectively referred to
herein as "Amendment No. 2"). Amendment No. 2 does not increase the number of
shares available for distribution under the Plan, change the Plan's eligibility
requirements, or alter the
26
<PAGE> 29
types of restricted stock awards that may be made to participants in the
Employee RRP. In the event that Amendment No. 2 is not approved by shareholders
at the Annual Meeting, Amendment No. 2 will not take effect, but the Employee
RRP will remain in effect. The principal provisions of the Employee RRP, as it
would be amended by Amendment No. 2, are described below. The full text of the
Amendment No. 2 is set forth as Appendix C to this Proxy Statement, to which
reference is made, and the summary of Amendment No. 2 provided below is
qualified in its entirety by such reference.
PURPOSE OF THE EMPLOYEE RRP
The purpose of the Employee RRP is to advance the interest of the
Company and its shareholders by providing current officers and employees of the
Company and its affiliates with an incentive to achieve corporate objectives and
by attracting and retaining officers and employees of outstanding competence
through the award of equity interests in the Company.
DESCRIPTION OF THE EMPLOYEE RRP
Administration. A Committee comprised of at least three directors of
the Company, all qualifying as "disinterested directors" (as that term is
defined under Section 16(b) of the Exchange Act and the rules and regulations
promulgated thereunder), who are not currently and have not at any time during
the immediately preceding one-year period been an employee of the Company, the
Bank or any affiliates administers the Employee RRP. The Committee determines,
subject to the terms and conditions of the Employee RRP, described below, the
officers and employees to whom restricted stock awards ("Awards") will be
granted, the number of Shares subject to Awards, and all other terms of such
Awards. Subject to certain specific limitations and restrictions set forth in
the Employee RRP, the Committee has full and final authority to interpret the
Employee RRP, to prescribe, amend and rescind rules and regulations, if any,
relating to the Employee RRP and to make all determinations necessary or
advisable for the administration of the Employee RRP. The costs and expenses of
administering the Employee RRP will be borne by the Company and are not charged
to any grant of an Award nor to any participating officer or employee.
Stock Subject to the Employee RRP. The Company has established a trust
("Trust") to which it contributes, from time to time, amounts of money or
property determined by the Board, in its discretion. Contributions by
participants are not permitted. The trustee will generally invest the assets of
the Trust in Shares and in such other investments including savings accounts,
time or other interest bearing deposits in or other interest bearing obligations
of the Company, in such proportions as shall be determined by the Committee.
However, in no event shall the assets of the Trust be used to purchase more than
45,360 Shares. As of May 31, 1997, the aggregate fair market value of the Shares
authorized for the Employee RRP was $782,460, based on the closing sales prices
per share of $17.25 on the Nasdaq Stock Market as of such date.
Eligibility. Any employee of the Company (or a participating affiliate)
who is selected by the Committee is eligible to participate in the Employee RRP
as an "Eligible Individual." As of May 31, 1997, there were two Eligible
Individuals participating in the Employee RRP.
Terms and Conditions of Awards. The Committee may, in its discretion,
grant Awards of restricted stock to Eligible Individuals. The Committee will
determine at the time of the grant the number of Shares subject to an Award and
the vesting schedule applicable to the Award and may, in its discretion,
establish other terms and conditions applicable to the Award. Pursuant to the
terms of the Employee RRP, Shares subject to Awards are held in the RRP Trust
until vested. An individual to whom an Award is granted will be entitled to
exercise voting rights. The Committee will exercise voting rights with respect
to Shares in the Employee RRP Trust that have not been allocated as directed by
the individuals eligible to participate
27
<PAGE> 30
in the Employee RRP, whether or not such individuals have been granted as Award.
Shares covered by an Award will become vested in accordance with the terms of
the Award and, as soon as practicable following such vesting, the trustee will
transfer the Shares to the Award recipient.
Currently the Employee RRP provides that unless the Committee
determines to impose a less favorable vesting schedule, Shares covered by an
Award will vest at the rate of 20% each year, with full vesting to occur after
five years or upon the disability or death of the option holder. In addition,
the Employee RRP currently provides for dividends declared and paid with respect
to Shares subject to an outstanding Award to be retained in the RRP Trust until
the Shares underlying the Award have vested. As permitted by OTS ruling
positions, these restrictions on vesting and distribution of dividends may be
removed through shareholder approval of Amendment No. 2 to the Employee RRP.
Accordingly, pursuant to the Employee RRP, as amended by Amendment No. 2, all
Shares covered by an outstanding Award will become 100% vested upon the death,
disability or retirement of an Award recipient or a Change of Control of the
Company. The amended Employee RRP also permits the Committee to establish a
vesting schedule that is either more or less favorable than the five year
vesting schedule to be applicable to an Award made to an Eligible Individual
under the Plan. In addition, pursuant to the Employee RRP, as amended, the
Committee may distribute cash payments representing dividends declared and paid
on Shares, whether or not vested, covered by an Award held by a recipient under
the Employee RRP.
TERMINATION OR AMENDMENT OF THE EMPLOYEE RRP
The Board may suspend or terminate the Employee RRP in whole or in part
at any time prior to the tenth anniversary of the Effective Date of the Employee
RRP, by giving written notice of such suspension or termination to the
Committee, but the Employee RRP may not be terminated while there are
outstanding Awards that may thereafter become vested. Upon the termination of
the Employee RRP, the trustee shall make distributions from the Trust in such
amounts and to such persons as the Committee may direct and shall return the
remaining assets of the Trust, if any, to the Company.
The Board may amend or revise the Employee RRP in whole or in part at
any time, but if the amendment or revision (i) materially increases the benefits
accruing under the Employee RRP, (ii) materially increases the number of Shares
which may be issued under the Employee RRP or (iii) materially modifies the
requirements as to eligibility for Awards under the Employee RRP, such amendment
or revision will be subject to approval by the shareholders of the Company.
Subject to the above provisions, the Board will also have broad authority to
amend the Employee RRP to take into account changes in applicable securities and
tax laws and accounting rules, as well as other developments.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is intended only as a summary and does not
purport to be a comprehensive description of the federal tax laws, regulations
and policies affecting the company and recipients of Awards that may be granted
under the Employee RRP. Any descriptions of the provisions of any law,
regulation or policy contained herein are qualified in their entirety by
reference to the particular law, regulation or policy. Any change in applicable
law or regulation or in the policies of various taxing authorities may have a
material effect on the discussion contained herein. The Employee RRP does not
constitute a qualified plan under Section 401(a) of the Code.
The grant of an Award of Shares under the Employee RRP does not result
in federal income tax consequences to either the Company or the Award recipient.
Upon the vesting of an Award and distribution of the vested Shares, the Award
recipient will generally be required to include in ordinary income, for the
taxable year in which the vesting date occurs, an amount equal to the fair
market value of the Shares on the
28
<PAGE> 31
vesting date, and the Company will generally be allowed to claim a deduction,
for compensation expense, in a like amount. To the extent that dividends are
paid with respect to unvested Shares held under the Employee RRP and distributed
to the Award recipient, such dividend amounts will likewise be includible in the
ordinary income of the recipient and generally allowable as a deduction, for
compensation expense to the Company. Dividends declared and paid with respect to
vested Shares, as well as any gain or loss realized upon an Award recipient's
disposition of the Shares, will be treated as dividend income and capital gain
or loss, respectively, in the same manner for other shareholders.
The foregoing statements are intended to summarize the general
principles of current federal income tax law applicable to Awards that may be
granted under the Employee RRP. State and local tax consequences may also be
significant. PARTICIPANTS ARE ADVISED TO CONSULT WITH THEIR TAX ADVISOR AS TO
THE CONSEQUENCES OF THE EMPLOYEE RRP.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" APPROVAL OF THE AMENDMENT NO. 2 TO THE TAPPAN ZEE FINANCIAL, INC. 1996
RECOGNITION AND RETENTION PLAN FOR OFFICERS AND EMPLOYEES.
-----------------------------------
PROPOSAL 5
APPROVAL OF AMENDMENT NO. 2 TO THE
TAPPAN ZEE FINANCIAL, INC.
1996 RECOGNITION AND RETENTION PLAN
FOR OUTSIDE DIRECTORS
-----------------------------------
GENERAL PLAN INFORMATION
The Company's Board of Directors adopted the Tappan Zee Financial, Inc.
1996 Recognition and Retention Plan for Outside Directors ("Outside Director
RRP" or "Plan") on March 25, 1996, subject to approval by the shareholders, and
the shareholders approved the Plan on July 10, 1996 ("Effective Date"). Pursuant
to regulations of the OTS applicable to stock benefit plans established or
implemented within one year following the completion of a mutual-to-stock
conversion, the Outside Director RRP contained certain restrictions and
limitations, including among others: provisions requiring the vesting of awards
granted to occur no more rapidly than ratably over a five year period; the
resultant prohibition against accelerated vesting of restricted stock awards
upon retirement of the award recipient or the occurrence of a Change of Control
(as defined in the Outside Director RRP) of the Company; and a prohibition
against the distribution of cash dividends to a participant prior to the vesting
of the underlying stock award.
OTS ruling positions permit the elimination of the provisions of the
Outside Director RRP which reflect the restrictions and limitations described
above, provided that shareholder approval therefor is obtained more than one
year following the completion of the mutual-to-stock conversion. The Board of
Directors has adopted amendments to the Outside Director RRP, subject to
approval by shareholders of the Company, for the purpose of eliminating such
restrictions and limitations (these changes to the Outside Director RRP are
collectively referred to herein as "Amendment No. 2"). Amendment No. 2 does not
increase the number of shares available for distribution under the Plan, change
the Plan's eligibility requirements or alter the types of restricted stock
awards that may be made to participants in the Plan. In
29
<PAGE> 32
the event that Amendment No. 2 is not approved by shareholders at the Annual
Meeting, Amendment No.2 will not take effect, but the Outside Director RRP will
remain in effect. The principal provisions of the Outside Director RRP, as it
would be amended by Amendment No. 2, are described below. The full text of the
Amendment No. 2 is set forth as Appendix D to this Proxy Statement, to which
reference is made, and the summary of Amendment No. 2 provided below is
qualified in its entirety by such reference.
PURPOSE OF THE OUTSIDE DIRECTOR RRP
The purpose of the Outside Director RRP is to advance the interest of
the Company and its shareholders by providing outside directors of the Company
and its affiliates with an incentive to achieve corporate objectives through the
award of equity interests in the Company.
DESCRIPTION OF THE OUTSIDE DIRECTOR RRP
Administration. A Committee consisting of members of the Compensation
Committee of the Board (or any successor committee) or such other committee as
the Board may designate ("Committee") administers the Outside Director RRP. All
restricted stock awards ("Awards") granted under the Outside Director RRP are
determined by automatic formula grant, thus the Committee has no discretion over
such grants. However, subject to certain limitations and restrictions set forth
in the Outside Director RRP, the Committee has the authority to interpret the
Plan, to prescribe, amend and rescind rules and regulations, if any relating to
the Plan and to make all determinations necessary or advisable for the
administration of the Outside Director RRP. The costs and expenses of
administering the Outside Director RRP will be borne by the Company and are not
charged to any grant of an Award nor to any participating Director.
Stock Subject to the Outside Director RRP. The Company has established
a trust ("Trust") to which it contributes, from time to time, amounts of money
or property determined by the Board, in its discretion. Contributions by
participants are not permitted. The trustee will generally invest the assets of
the Trust in Shares and in such other investments including savings accounts,
time or other interest bearing deposits in or other interest bearing obligations
of the Company, in such proportions as shall be determined by the Committee.
However, in no event shall the assets of the Trust be used to purchase more than
19,440 Shares. As of May 31, 1997, the aggregate fair market value of the Shares
authorized for the Outside Director RRP was $335,340, based on the closing sales
prices per share of $17.25 on the Nasdaq Stock Market as of such date.
Eligibility. Members of the Board, or of the board of directors of the
Bank, who are not employees of the Company or the Bank are eligible to
participate in the Outside Director RRP as an "Eligible Director." Former
members of the Board continuing to serve the Company's Board in an advisory
capacity and who have not received an Award under the Outside Director RRP are
eligible to receive an Award as an "Eligible Director Emeritus." As of May 31,
1997, there were five Eligible Directors and three Eligible Directors Emeritus
participating in the Outside Director RRP.
Terms and Conditions of Awards. On the Effective Date of the Outside
Director RRP, each Eligible Director was granted an Award of 3,240 Shares and
each Eligible Director Emeritus was granted an Award of 1,080 Shares. A person
who becomes an Eligible Director after the Effective Date of the Plan will
receive an Award of 3,240 Shares which will be granted on the 15th day of the
month following the month in which the person became an Eligible Director. In
the event the number of Shares in the Outside Director RRP Trust is
insufficient, each Eligible Director will be granted an Award for a pro-rated
number of whole Shares based upon the number of available Shares. Eligible
Directors are permitted to exercise voting rights with respect to Shares subject
to an Award (whether or not vested) and the Committee will exercise voting
rights with respect to Shares held in the Outside Director RRP Trust that have
not been allocated as directed
30
<PAGE> 33
by the individuals eligible to participate in the Outside Director RRP, whether
or not such individuals have been granted as Award. Shares covered by an Award
will become vested in accordance with the terms of the Award and, as soon as
practicable following such vesting, the trustee will transfer the Shares to the
Award recipient.
Currently the Outside Director RRP provides that Shares covered by an
Award will vest at the rate of 20% each year, with full vesting to occur after
five years or upon the Director's death or disability. In addition, the Outside
Director RRP currently provides for dividends declared and paid with respect to
Shares subject to an outstanding Award to be retained in the RRP Trust until the
Shares underlying the Award have vested. As permitted by OTS ruling positions,
these restrictions on vesting and distribution of dividends may be removed
through shareholder approval of Amendment No. 2 to the Outside Director RRP.
Accordingly, under the Outside Director RRP, as amended, if an Award recipient
terminates service on the Board on account of his retirement or in the event a
Change of Control of the Company occurs, any Shares covered by an outstanding
Award made under the Outside Director RRP will become 100% vested as of the date
of the Award recipient's termination of service or the effective date of such
Change of Control in the same manner that such Shares would become vested in the
event of the Director's death or disability. In addition, pursuant to the
Outside Director RRP, as amended, the Committee may make immediate distributions
to the Award recipient of cash payments representing any dividends declared and
paid on the Shares covered by the Award.
TERMINATION OR AMENDMENT OF THE OUTSIDE DIRECTOR RRP
The Board may suspend or terminate the Outside Director RRP in whole or
in part at any time prior to the tenth anniversary of the Effective Date of the
Outside Director RRP, by giving written notice of such suspension or termination
to the Committee, but the Outside Director RRP may not be terminated while there
are outstanding Awards that may thereafter become vested. Upon the termination
of the Outside Director RRP, the trustee shall make distributions from the Trust
in such amounts and to such persons as the Committee may direct and shall return
the remaining assets of the Trust, if any, to the Company.
The Board may amend or revise the Outside Director RRP in whole or in
part at any time, but if the amendment or revision (i) materially increases the
benefits accruing under the Outside Director RRP, (ii) materially increases the
number of Shares which may be issued under the Outside Director RRP or (iii)
materially modifies the requirements as to eligibility for Awards under the
Outside Director RRP, such amendment or revision will be subject to approval by
the shareholders of the Company. Subject to the above provisions, the Board will
also have broad authority to amend the Outside Director RRP to take into account
changes in applicable financial securities and tax laws and accounting
standards, as well as other developments.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is intended only as a summary and does not
purport to be a comprehensive description of the federal tax laws, regulations
and policies affecting the Company and recipients of Awards that may be granted
under the Outside Director RRP. Any descriptions of the provisions of any law,
regulation or policy contained herein are qualified in their entirety by
reference to the particular law, regulation or policy. Any change in applicable
law or regulation or in the policies of various taxing authorities may have a
material effect on the discussion contained herein. The Outside Director RRP
does not constitute a qualified plan under Section 401(a) of the Code.
The grant of an Award of Shares under the Outside Director RRP does not
result in federal income tax consequences to either the Company or the Award
recipient. Upon the vesting of an Award and
31
<PAGE> 34
distribution of the vested Shares, the Award recipient will generally be
required to include in ordinary income, for the taxable year in which the
vesting date occur, an amount equal to the fair market value of the Shares on
the vesting date, and the Company will generally be allowed to claim a
deduction, for compensation expense, in a like amount. To the extent that
dividends are paid with respect to unvested Shares held under the Outside
Director RRP and distributed to the Award recipient, such dividend amounts will
likewise be includible in the ordinary income of the recipient and generally
allowable as a deduction, for compensation expense to the Company. Dividends
declared and paid with respect to vested Shares, as well as any gain or loss
realized upon an Award recipient's disposition of the Shares, will be treated as
dividend income and capital gain or loss, respectively, in the same manner for
other shareholders.
The foregoing statements are intended to summarize the general
principles of current federal income tax law applicable to Awards that may be
granted under the Outside Director RRP. State and local tax consequences may
also be significant. PARTICIPANTS ARE ADVISED TO CONSULT WITH THEIR TAX ADVISOR
AS TO THE CONSEQUENCES OF THE OUTSIDE DIRECTOR RRP.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" APPROVAL OF THE AMENDMENT NO. 2 TO THE TAPPAN ZEE FINANCIAL, INC. 1996
RECOGNITION AND RETENTION PLAN FOR OUTSIDE DIRECTORS.
32
<PAGE> 35
The following table sets forth the Options and Awards granted under the
Tappan Zee Financial, Inc. Stock Plans to the individuals and groups indicated
for the fiscal year ended March 31, 1997. Shareholder approval of Amendments No.
2 to these Plans, described in more detail above, affects primarily the vesting
of the Options and Awards granted pursuant to these Plans. The number of Options
and Awards which have been, and will be granted, under these Plans will be
unaffected by Amendments No. 2 to these Plans.
NEW PLAN BENEFITS
TAPPAN ZEE FINANCIAL, INC. STOCK PLANS
<TABLE>
<CAPTION>
=================================================================================================================================
Employee Outside Director Employee Outside Director
Name/Position Option Plan(1) Option Plan(2) RRP(3) RRP(4)
--------------------------------------------------------------------------------------
# $ Value # $ Value # $ Value # $ Value
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen C. Byelick 40,500 0 -- -- 16,200 188,325 -- --
President and CEO
- ---------------------------------------------------------------------------------------------------------------------------------
Harry G. Murphy 40,500 0 -- -- 16,200 188,325 -- --
Vice President and Secretary
- ---------------------------------------------------------------------------------------------------------------------------------
All Executive Officers as a Group 81,000 0 -- -- 32,400 376,650 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
All Outside Directors as a Group N/A N/A 40,500 0 N/A N/A 19,440 225,990
- ---------------------------------------------------------------------------------------------------------------------------------
All Non-Executive employees -- -- N/A N/A -- -- N/A N/A
as a group
=================================================================================================================================
</TABLE>
(1) The Exercise Price of the Options granted to Mr. Byelick and Mr. Murphy
was $11.625 per Share which was the Fair Market Value of a Share on
July 10, 1996, the date of grant. The dollar value of an Option on the
grant date was $0, and the future value, if any, will be dependent on
the price of a Share in the future. The Options granted to Mr. Byelick
and Mr. Murphy will become exercisable in 20% increments on each
anniversary of the grant date, with full vesting to occur on the fifth
consecutive anniversary of the grant date or upon the earlier death or
disability of the Option recipient. If approved by the Company's
shareholders, Amendment No. 2 to the Employee Option Plan would provide
for accelerated vesting to occur upon the "retirement" of the Option
holder or a "Change in Control" of the Company, as such terms are
defined in the Employee Option Plan.
(2) Each Eligible Outside Director received a non-qualified Option to
purchase 8,100 Shares at an Exercise Price of $11.625 per Share, the
Fair Market Value of a Share on July 10, 1996, the date all such
Options were granted to the Directors, as shown in the table above. The
dollar value of an Option on the grant date was $0, and the future
value, if any, will be dependent on the price of a Share in the future.
The Options granted to each Eligible Outside Director will become
exercisable in 20% increments on each anniversary of the grant date,
with full vesting to occur on the fifth consecutive anniversary of the
grant date or upon the earlier death or disability of the Option
recipient. If approved by the Company's shareholders, Amendment No. 2
to the Outside Director Option Plan would provide for accelerated
vesting to occur upon the "retirement" of the Option holder or a
"Change in Control" of the Company, as such terms are defined in the
Outside Director Option Plan.
(3) Mr. Byelick and Mr. Murphy each received the Awards shown in the above
table under the Employee RRP on July 10, 1996. The dollar value of
these Awards has been calculated on the basis of the Fair Market Value
of a Share on such date which was $11.625. Currently the Employee RRP
provides for these Awards to vest in 20% increments, with full vesting
to occur on the fifth consecutive anniversary of the date of grant or
upon the earlier death or disability of the Award recipient. If
approved by the shareholders, Amendment No. 2 to the Employee RRP would
provide for accelerated vesting of these Awards to occur upon the
"retirement" of the Award recipient or the date of a "Change in
Control" of the Company, as such terms are defined in the Employee RRP.
(4) On July 10, 1996, each Eligible Outside Director received an Award of
3,240 Shares under the Outside Director RRP and each Eligible Director
Emeritus received an Award of 1,080 Shares under this Plan. The dollar
value of such Awards, shown in the table above, was calculated on the
basis of $11.625 per Share, the Fair Market Value of a Share on the
date these Awards were granted. Currently the Outside Director RRP
provides for these Awards to vest in 20% increments, with full vesting
to occur on the fifth consecutive anniversary of the date of grant or
upon the earlier death or disability of the Award recipient. If
approved by the shareholders, Amendment No. 2 to the Outside Director
RRP would provide for accelerated vesting of these Awards to occur upon
the "retirement" of the Award recipient or the date of a "Change in
Control" of the Company, as such terms are defined in the Outside
Director RRP.
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<PAGE> 36
---------------------------------------------------
PROPOSAL 6
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
---------------------------------------------------
The Board of Directors has appointed the firm of KPMG Peat Marwick LLP
to act as independent auditors for the Company for the fiscal year ending March
31, 1998, subject to ratification of such appointment by the Company's
shareholders.
A representative of KPMG Peat Marwick LLP is expected to be present at
the Annual Meeting and will be given an opportunity to make a statement if he or
she desires to do so and will be available to respond to appropriate questions.
No determination has been made as to what action the Board of Directors would
take if the shareholders do not ratify the appointment.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" THE RATIFICATION OF APPOINTMENT OF THE INDEPENDENT AUDITORS.
-----------------------------------------------------------
PROPOSAL 7
AUTHORIZATION OF THE BOARD OF DIRECTORS, IN ITS DISCRETION,
TO DIRECT THE VOTE OF THE PROXIES UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING,
AND ANY ADJOURNMENT THEREOF, INCLUDING, WITHOUT
LIMITATION, A MOTION TO ADJOURN THE MEETING
-----------------------------------------------------------
The Board is not aware of any other business that may properly come
before the Annual Meeting. The Board seeks the authorization of the shareholders
of the Company, in the event such matters come before the meeting, including,
but not limited to, consideration of whether to postpone or adjourn the Annual
Meeting once called to order, to direct the manner in which those shares
represented at the Annual Meeting by proxies solicited pursuant to this Proxy
Statement shall be voted as to such other matters. As to all such matters, the
Board intends that it would direct the voting of such shares in the manner
determined by the Board, in its discretion, and in the exercise of it duties and
responsibilities, to be in the best interests of the Company and its
shareholders, taken as a whole.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" AUTHORIZATION OF THE BOARD OF DIRECTORS OF TAPPAN ZEE FINANCIAL, INC., IN
ITS DISCRETION, TO DIRECT THE VOTE OF THE PROXIES UPON SUCH OTHER BUSINESS AS
MAY PROPERLY COME BEFORE THE MEETING, AND ANY ADJOURNMENT THEREOF, INCLUDING,
WITHOUT LIMITATION, A MOTION TO ADJOURN THE MEETING.
34
<PAGE> 37
ADDITIONAL INFORMATION
DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
Any shareholder proposal intended for inclusion in the Company's proxy
statement and Proxy Card relating to the Company's 1998 Annual Meeting of
shareholders must be received by the Company by March 2, 1998, pursuant to the
proxy solicitation regulations of the SEC. Nothing in this paragraph shall be
deemed to require the Company to include in its proxy statement and proxy card
for such meeting any shareholder proposal which does not meet the requirements
of the SEC in effect at the time. Any such proposal will be subject to 17 C.F.R.
Section 240.14a-8 of the Rules and Regulations promulgated by the SEC under the
Exchange Act.
NOTICE OF BUSINESS TO BE CONDUCTED AT ANNUAL MEETING
The Bylaws of the Company provide an advance notice procedure for a
shareholder to properly bring business before an annual meeting or to nominate
any person for election to the Board of Directors. The shareholder must be a
shareholder of record and have given timely notice thereof in writing to the
Secretary of the Company. To be timely, a shareholder's notice must be delivered
to or received by the Secretary not later than the following dates: (i) with
respect to an annual meeting of shareholders, sixty (60) days in advance of such
meeting if such meeting is to be held on a day which is within thirty (30) days
preceding the anniversary of the previous year's annual meeting, or ninety (90)
days in advance of such meeting if such meeting is to be held on or after the
anniversary of the previous year's annual meeting; and (ii) with respect to an
annual meeting of shareholders held at a time other than within the time periods
set forth in the immediately preceding clause (i), the close of business on the
tenth (10th) day following the date on which notice of such meeting is first
given to shareholders. Notice shall be deemed to first be given to shareholders
when disclosure of such date of the meeting of shareholders is first made in a
press release reported to Dow Jones News Services, Associated Press or
comparable national news service, or in a document publicly filed by the Company
with the SEC pursuant to Section 13, 14 or 15(d) of the Exchange Act. A
shareholder's notice to the Secretary shall set forth as to the matter the
shareholder proposes to bring before the annual meeting (a) a brief description
of the proposal desired to be brought before the annual meeting or if a
nomination for election as a director, the name, age, business and residence
address and principal occupation or employment of such nominee, such nominee's
written consent to serve as director, if elected, and such other information
required by the proxy rules of the SEC; (b) the name and address of the
shareholder proposing such business; (c) the class and number of shares of the
Company which are owned of record by the shareholder and the dates upon which he
or she acquired such shares; (d) the identification of any person employed,
retained, or to be compensated by the shareholder submitting the proposal, or
any person acting on his or her behalf, to make solicitations or recommendations
to shareholders for the purpose of assisting in the passage of such proposal,
and a brief description of the terms of such employment, retainer or arrangement
for compensation; and (e) such other information regarding such proposal as
would be required to be included in a proxy statement filed pursuant to the
proxy rules of the SEC or required to be delivered to the Company pursuant to
the proxy rules of the Securities and Exchange Commission (whether or not the
Company is then subject to such rules). Nothing in this paragraph shall be
deemed to require the Company to include in its proxy statement and proxy card
relating to an annual meeting any shareholder proposal or nomination which does
not meet all of the requirements for inclusion established by the SEC in effect
at the time such proposal or nomination is received.
See "Date For Submission of Shareholder Proposals."
35
<PAGE> 38
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors of the
Company does not know of any other matters to be brought before the shareholders
at the 1997 Annual Meeting. See "Proposal 7."
A copy of the 1997 Annual Report to shareholders, including the
consolidated financial statements prepared in conformity with generally accepted
accounting principles for the fiscal year ended March 31, 1997, accompanies this
Proxy Statement. The consolidated financial statements have been audited by KPMG
Peat Marwick LLP whose report appears in the Annual Report. The Company is
required to file an Annual Report on Form 10-K with the SEC. Shareholders may
obtain, free of charge, a copy of the Form 10-K (without exhibits) by writing to
Harry G. Murphy, Vice President and Secretary, Tappan Zee Financial, Inc., 75
North Broadway, Tarrytown, New York 10591, or by calling (914) 631-0344.
BY ORDER OF THE BOARD OF DIRECTORS
[facsimile signature]
HARRY G. MURPHY
SECRETARY
Tarrytown, New York
June 30, 1997
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING
PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN
THE ACCOMPANYING PROXY CARD IN THE
POSTAGE-PAID ENVELOPE PROVIDED.
36
<PAGE> 39
APPENDIX A
TAPPAN ZEE FINANCIAL, INC. 1996
STOCK OPTION PLAN
FOR OFFICERS AND EMPLOYEES
(Adopted on March 25, 1996
Effective as of July 10, 1996)
AMENDMENT
-------------------------------------------
AMENDMENT NO. 2
DOCUMENT: (TPW) NY02/1116493.1
DRAFT DATE: 4/24/97
BOARD OF DIRECTORS
APPROVAL DATE: 4/28/97
-------------------------------------------
1. Article IV - Effective as of July 11, 1997, the proviso appearing at the end
of section 4.9(c) shall be amended and restated in its entirety to read as
follows:
provided, however, that such an Option shall become fully exercisable,
and all optioned Shares not previously purchased shall become available
for purchase, on the date of the Option holder's death, Disability or
Retirement or upon the date of a Change in Control of the Company; and
provided, further, that the Committee, in its discretion, may establish
a different vesting schedule in a particular case or as a matter of
policy;
2. Article V - Effective as of July 11, 1997, section 5.3(b) shall be amended by
changing the period at the end thereof to a semi-colon and then adding the
following proviso immediately thereafter to read as follows:
and provided, further, that prior to July 11, 1997, the payments
provided for under this section 5.3(b) shall only apply to outstanding
Options that have vested as of the effective date of such merger,
consolidation or other business reorganization of the Company.
A-1
<PAGE> 40
APPENDIX B
TAPPAN ZEE FINANCIAL, INC. 1996
STOCK OPTION PLAN
FOR OUTSIDE DIRECTORS
(Adopted on March 25, 1996
Effective as of July 10, 1996)
AMENDMENT
-------------------------------------------
AMENDMENT NO. 2
DOCUMENT: (TPW) NY02/1116492.1
DRAFT DATE: 4/24/97
BOARD OF DIRECTORS
APPROVAL DATE: 4/28/97
-------------------------------------------
1. Article IV - Effective as of July 11, 1997, the proviso appearing at the end
of section 4.4(b) shall be amended and restated in its entirety to read as
follows:
provided, however, that such an Option shall become fully exercisable,
and all optioned Shares not previously purchased shall become available
for purchase, on the date of the Option holder's death, Disability or
Retirement or upon the date of a Change in Control of the Company.
2. Article V - Effective as of July 11, 1997, section 5.3(b) shall be amended by
changing the period at the end thereof to a semi-colon and then adding the
following proviso immediately thereafter to read as follows:
and provided, further, that prior to July 11, 1997, the payments
provided for under this section 5.3(b) shall only apply to outstanding
Options that have vested as of the effective date of such merger,
consolidation or other business reorganization of the Company.
B-1
<PAGE> 41
APPENDIX C
RECOGNITION AND RETENTION PLAN
FOR OFFICERS AND EMPLOYEES OF
TAPPAN ZEE FINANCIAL, INC.
(Adopted on March 25, 1996
Effective as of July 10, 1996)
AMENDMENT
-------------------------------------------
AMENDMENT NO. 2
DOCUMENT: (TPW) NY02/1116496.1
DRAFT DATE: 4/24/97
BOARD OF DIRECTORS
APPROVAL DATE: 4/28/97
-------------------------------------------
1. Article II - Effective as of July 11, 1997, Article II shall be amended by
adding the following new section 2.18 "Retirement" immediately after section
2.17 appearing therein and redesignating all remaining sections of Article II
and all cross-references thereto accordingly. Section 2.18 shall read in its
entirety as follows:
SECTION 2.18 RETIREMENT means retirement at the normal or
early retirement date as set forth in any tax-qualified retirement plan
of the Bank.
2. Article V - Effective as of July 11, 1997, the first sentence of section
5.4(a) shall be amended by changing the period at the end thereof to a
semi-colon and then adding the following proviso immediately thereafter to read
as follows:
provided, however, effective as of July 11, 1997, any such dividends or
distributions declared and paid shall be promptly distributed to such
Eligible Employee.
3. Article V - Effective as of July 11, 1997, the proviso appearing at the end
of section 5.7(a)(iii) shall be amended and restated in its entirety to read as
follows:
provided, however, that such an Award shall become fully vested on the
date of the Award holder's death, Disability, or Retirement or upon the
date of a Change of Control of the Company; and provided, further, that
the Committee, in its discretion, may establish a different vesting
schedule in a particular case or as a matter or policy.
4. Article VI - Effective as of July 11, 1997, the proviso appearing at the end
of section 6.1 shall be amended and restated in its entirety to read as follows:
provided, however, that such an Award shall become fully vested on the
date of the Award holder's death, Disability, or Retirement or upon the
date of a Change of Control of the Company; and provided, further, that
the Committee, in its discretion, may establish a different vesting
schedule in a particular case or as a matter or policy.
C-1
<PAGE> 42
APPENDIX D
RECOGNITION AND RETENTION PLAN
FOR OUTSIDE DIRECTORS OF
TAPPAN ZEE FINANCIAL, INC.
(Adopted on March 25, 1996
Effective as of July 10, 1996)
AMENDMENT
-------------------------------------------
AMENDMENT NO. 2
DOCUMENT: (TPW) NY02/1116495.1
DRAFT DATE: 4/24/97
BOARD OF DIRECTORS
APPROVAL DATE: 4/28/97
-------------------------------------------
1. Article II - Effective as of July 11, 1997, Article II shall be amended by
adding the following new section 2.18 "Retirement" immediately after section
2.17 appearing therein and redesignating all remaining sections of Article II
and all cross-references thereto accordingly. Section 2.18 shall read in its
entirety as follows:
SECTION 2.18 RETIREMENT means retirement at the normal or
early retirement date as set forth in any tax-qualified retirement plan
of the Bank.
2. Article V - Effective as of July 11, 1997, the first sentence of section
5.3(a) shall be amended by changing the period at the end thereof to a
semi-colon and then adding the following proviso immediately thereafter to read
as follows:
provided, however, effective as of July 11, 1997, any such dividends or
distributions declared and paid shall be promptly distributed to such
Eligible Director.
3. Article V - Effective as of July 11, 1997, the proviso appearing at the end
of section 5.6(a)(ii) shall be amended and restated in its entirety to read as
follows:
provided, however, that such an Award shall become fully vested on the
date of the Award holder's death, Disability, or Retirement or upon the
date of a Change of Control of the Company.
4. Article VI - Effective as of July 11, 1997, the last proviso appearing at the
end of section 6.1 shall be amended and restated in its entirety to read as
follows:
and provided, further, an Award shall become 100% vested upon the
death, Disability, or Retirement of the Award recipient or upon the
date of a Change of Control of the Company.
D-1
