<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, 1998
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 22, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $24.9 million based on the closing price on
the that date and a total of 1,478,062 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE> 2
TAPPAN ZEE FINANCIAL, INC.
<TABLE>
<CAPTION>
PART I
Page
----
<S> <C>
Item 1. Business 2
Item 2. Properties 26
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 27
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. 27
Item 6. Selected Financial Data. 28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 35
Item 8. Financial Statements and Supplementary Data. 37
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 61
PART III
Item 10. Directors and Executive Officers of the Registrant. 61
Item 11. Executive Compensation. 64
Item 12. Security Ownership of Certain Beneficial Owners and Management. 69
Item 13. Certain Relationships and Related Transactions. 72
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 72
Signatures 75
</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
<PAGE> 3
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"). 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"). In
March 1998, the Registrant established TPNZ Preferred Funding Corporation
("TZPFC"), as a wholly-owned subsidiary. The purpose of TZPFC is to acquire and
manage a portfolio of mortgage loans and mortgage-backed securities. TZPFC is
intended to qualify as a real estate investment trust for tax purposes.
Collectively, the Registrant, TZPFC and the Bank are referred to herein as the
"Company".
The Company's primary market area consists of the Village of Tarrytown and
its neighboring communities in Westchester County, New York 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
significant 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,
professional service fees, occupancy expenses, federal deposit insurance costs,
data processing service fees 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.
MERGER AGREEMENT
On March 6, 1998, the Registrant entered into a definitive agreement (the
"Merger Agreement") pursuant to which the Registrant will merge with and into
U.S.B. Holding Co., Inc. ("USB"), a registered bank holding company and parent
company of Union State Bank, a New York State chartered commercial bank. The
Bank will operate as a wholly-owned subsidiary of USB.
Under the terms of the Merger Agreement, each shareholder of the Registrant
will receive USB common stock that is anticipated to have a value of $22.00 per
share for each share of the Registrant. The exchange ratio will be fixed upon
receipt of all regulatory approvals. The minimum exchange ratio will be 0.88
shares of USB common stock for each share of Registrant common stock, if USB's
common stock has a value of $25.00 per share, or higher, and subject to the
exception below, the maximum exchange ratio will be 1.24 shares of USB common
stock for each share of Registrant common stock if USB's common stock has a
value of $17.75, or lower. If USB's common stock has a value of between $17.75
and $25.00 per share, the Exchange Ratio will be established to provide a value
to the Registrant's shareholders of $22.00 per share. If USB's common stock
falls below $15.00 per share, the Registrant will have the right to terminate
the transaction subject to USB's right to adjust the Exchange Ratio so as to
assure the Registrant's shareholders receive a value of $18.60 per Registrant
share.
The transaction is intended to be a tax free exchange of common shares and
will be accounted for as a pooling of interests. The transaction is subject to
receipt of regulatory approvals and the approval of the Registrant's
shareholders. The transaction will be presented for approval at a special
meeting of the Registrant's shareholders.
In connection with the Merger Agreement, the Registrant and USB also
entered into a Stock Option Agreement which, under certain defined
circumstances, would enable USB to purchase up to 294,134, or 19.9%, of the
Registrant's issued and outstanding common stock at a price of $18.50 per share.
2
<PAGE> 4
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. This downsizing has not had a material
adverse effect on the Company's operations. However, there can be no assurances
as to whether any further downsizing will occur and that any such event will not
have a material adverse effect on the Company's operations.
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 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, 1998, the Company had total net loans outstanding of $57.6 million
(gross loans of $58.8 million less the allowance for loan losses, unearned
discounts and net deferred loan fees). A total of $45.1 million, or 78.4% of net
loans, were one- to four-family, residential mortgage loans.
3
<PAGE> 5
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,
------------------------------------------------------------------------------------
1998 1997 1996 1995
------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family $45,146 78.35% $43,958 79.76% $38,762 75.75% $39,020 77.68%
Multi-family 1,994 3.46 2,289 4.15 3,287 6.42 3,443 6.85
Commercial 4,618 8.01 3,910 7.09 3,561 6.96 4,019 8.00
Construction,net 3,157 5.48 1,719 3.12 2,462 4.81 1,115 2.22
Net deferred loan fees (266) (0.46) (279) (0.51) (284) (0.55) (324) (0.64)
------- ------ ------- ------ ------- ------ ------- ------
Total mortgage loans 54,649 94.84 51,597 93.61 47,788 93.39 47,273 94.11
Commercial loans:
Commercial business loans, net 2,447 4.25 2,831 5.14 2,727 5.33 2,415 4.81
Net deferred loan fees -- -- (1) -- (1) -- (1) --
------- ------ ------- ------ ------- ------ ------- ------
Total commercial loans 2,447 4.25 2,830 5.14 2,726 5.33 2,414 4.81
Consumer loans:
Automobile loans 683 1.18 781 1.42 724 1.41 603 1.20
Other consumer loans 751 1.30 797 1.45 821 1.60 789 1.57
Unearned discounts (208) (0.36) (239) (0.43) (235) (0.46) (199) (0.40)
Net deferred loan costs 3 0.01 4 0.01 4 0.01 3 0.01
------- ------ ------- ------ ------- ------ ------- ------
Total consumer loans 1,229 2.13 1,343 2.45 1,314 2.56 1,196 2.38
Allowance for loan losses (702) (1.22) (660) (1.20) (654) (1.28) (650) (1.30)
------- ------ ------- ------ ------- ------ ------- ------
Total loans, net $57,623 100.00% $55,110 100.00% $51,174 100.00% $50,233 100.00%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
------------------
1994
------------------
PERCENT
AMOUNT OF TOTAL
------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage loans:
One-to four-family $36,011 79.98%
Multi-family 2,649 5.88
Commercial 2,965 6.59
Construction,net 824 1.83
Net deferred loan fees (278) (0.62)
------- ------
Total mortgage loans 42,171 93.66
Commercial loans:
Commercial business loans, net 2,211 4.91
Net deferred loan fees (1) --
------- ------
Total commercial loans 2,210 4.91
Consumer loans:
Automobile loans 415 0.92
Other consumer loans 1,003 2.23
Unearned discounts (236) (0.52)
Net deferred loan costs 3 --
------- ------
Total consumer loans 1,185 2.63
Allowance for loan losses (540) (1.20)
------- ------
Total loans, net $45,026 100.00%
======= ======
</TABLE>
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, 1998. The table reflects the entire unpaid
principal balance in the maturity period that includes the final loan payment
dates and, accordingly, does not give effect to periodic principal repayments or
possible prepayments. Principal repayments and prepayments totaled $10.3
million, $7.9 million and $8.2 million for the years ended March 31, 1998, 1997
and 1996, respectively.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
---------------------------------------------------------------------------------------------
ONE-TO FOUR- MULTI- COMMERCIAL COMMERCIAL
FAMILY FAMILY MORTGAGE CONSTRUCTION BUSINESS CONSUMER TOTAL
------------ ------ ---------- ------------ ---------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Contractual maturity:
One year or less $ 2,025 $ 687 $ 1,017 $ 3,157 $ 1,333 $ 74 $ 8,293
------- ------ ------- ------- ------- ------- -------
After one year:
More than 1 year to 5 years 1,867 892 3,026 -- 1,067 1,148 8,000
More than 5 years 41,254 415 575 -- 47 212 42,503
------- ------ ------- ------- ------- ------- -------
Total after one year 43,121 1,307 3,601 -- 1,114 1,360 50,503
------- ------ ------- ------- ------- ------- -------
Total amount due $45,146 $1,994 $ 4,618 $ 3,157 $ 2,447 $ 1,434 $58,796
======= ====== ======= ======= ======= ======= =======
</TABLE>
4
<PAGE> 6
The following table sets forth the dollar amounts in each loan category at
March 31, 1998 that are contractually due after March 31, 1999, and whether such
loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER MARCH 31, 1999
---------------------------------------
FIXED ADJUSTABLE TOTAL
------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans (1):
One-to four-family $32,156 $10,965 $43,121
Multi-family 1,122 185 1,307
Commercial 3,377 224 3,601
Commercial business loans 879 235 1,114
Consumer loans 1,360 -- 1,360
------- ------- -------
Total $38,894 $11,609 $50,503
======= ======= =======
</TABLE>
(1) There are no construction loans that are contractually due after
March 31, 1999.
Origination, Purchase, Sale and Servicing of Loans. 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, 1998, a substantial portion of the Company's
loan originations consisted of fixed-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.
5
<PAGE> 7
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,
----------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Unpaid principal balances at beginning of year $ 56,986 $ 53,102 $ 52,239
Loans originated:
Mortgage loans:
One-to four-family 5,893 6,740 4,125
Multi-family 97 -- 150
Commercial 800 1,085 --
Construction 3,112 1,475 2,580
Commercial business 2,121 1,799 1,471
Consumer 624 790 967
-------- -------- --------
Total loans originated 12,647 11,889 9,293
-------- -------- --------
Principal repayments (10,273) (7,942) (8,233)
Charge-offs -- (63) (86)
Transfer to real estate owned -- -- (111)
-------- -------- --------
Unpaid principal balances at end of year 59,360 56,986 53,102
Less:
Construction loans in process (549) (686) (738)
Unearned discounts (208) (239) (235)
Unused lines of credit (15) (15) (20)
Allowance for loan losses (702) (660) (654)
Net deferred loan fees (263) (276) (281)
-------- -------- --------
Net loans at end of year $ 57,623 $ 55,110 $ 51,174
-------- -------- --------
</TABLE>
One- to Four-Family Mortgage Lending. 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, 1998, $45.1 million, or 78.4% 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, 75.0%, or $33.9 million,
were fixed-rate loans and 25.0%, or $11.2 million, were adjustable-rate loans.
The interest rates for the majority of 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 has not offered and currently does not
offer products with a higher loan-to-value ratio in conjunction with private
mortgage
6
<PAGE> 8
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, 1998 was approximately $2.0 million, or 3.5% of net loans outstanding.
The Company's largest multi-family mortgage loan at March 31, 1998 had an
outstanding balance of $263,000 and is secured by a five-unit apartment house.
Mortgage loans secured by apartment buildings and other multi-family
residential properties are generally larger and involve a greater degree of risk
than one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to a greater extent to circumstances outside the borrower's control,
including adverse conditions in the real estate market or the economy. 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, 1998, the Company's
commercial real estate mortgage portfolio was $4.6 million, or 8.0% of net loans
outstanding. The largest commercial real estate loan in the Company's portfolio
at March 31, 1998 was $787,000, which is comprised of a first and second loan
secured by the same commercial warehouse building.
Mortgage loans secured by commercial real estate properties, like
multi-family mortgage loans, are generally larger and involve a greater degree
of risk than one- to four-family residential mortgage loans. This risk is
attributable to the uncertain realization of projected income-producing cash
flows which are affected by vacancy rates, the ability to maintain rent levels
against competitively-priced properties and the ability to collect rent from
tenants on a timely basis. Because payments on loans secured by commercial real
estate properties are often dependent on the successful operation or management
of the properties, repayment of such loans may be subject to a greater extent to
circumstances outside the borrower's control, including adverse conditions in
the real estate market or the economy. 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.
7
<PAGE> 9
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, 1998, the Company had $3.2 million (net of
undisbursed loan funds of $549,000) of construction loans which amounted to 5.5%
of the Company's net loans outstanding. The largest construction loan in the
Company's portfolio at March 31, 1998 was $500,000 (all of which had been
disbursed) and is secured by retail commercial property.
Construction lending generally involves additional risks to the lender as
compared with residential permanent mortgage lending. These risks are
attributable to the fact that loan funds are advanced upon the security of the
project under construction, predicated on the present value of the property and
the anticipated future value of the property upon completion of construction or
development. Moreover, because of the uncertainties inherent in delays resulting
from labor problems, materials shortages, weather conditions and other
contingencies, it is relatively difficult to evaluate the total funds required
to complete a project and to establish the loan-to-value ratio. If 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, 1998, the
Company's commercial business loan portfolio amounted to $2.4 million, or 4.3%
of net loans outstanding. The largest commercial business loan outstanding at
March 31, 1998 was a $325,000 loan secured by marketable securities.
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, 1998, the
Company's consumer loan portfolio totaled $1.2 million, or 2.1% 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 Board of Directors; and mortgage
loans above $350,000 and commercial business loans above $225,000 require Board
of
8
<PAGE> 10
Directors 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 of Directors 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.
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.
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.
9
<PAGE> 11
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 in Item 8 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,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
One-to four-family $ 1,202 $ 1,355 $ 856 $ 523 $ 419
Commercial property 238 123 126 -- --
Construction -- -- -- -- 326
Commercial business -- -- -- -- 30
------- ------- ------- ------- -------
Total 1,440 1,478 982 523 775
------- ------- ------- ------- -------
Number of non-accrual loans 6 9 6 2 5
Accruing loans past due ninety days or more:
Mortgage loans:
One-to four-family $ -- $ -- $ 342 $ 885 $ 760
Multi-family -- -- -- 761 171
Commercial property -- 72 266 331 180
Construction 108 100 -- -- --
Commercial business and consumer 11 8 42 144 17
------- ------- ------- ------- -------
Total 119 180 650 2,121 1,128
------- ------- ------- ------- -------
Number of accruing loans past due ninety days 3 4 7 21 11
or more
Total non-performing loans $ 1,559 $ 1,658 $ 1,632 $ 2,644 $ 1,903
======= ======= ======= ======= =======
Number of non-performing loans 9 13 13 23 16
Allowance for loan losses $ 702 $ 660 $ 654 $ 650 $ 540
======= ======= ======= ======= =======
Real estate owned, net $ -- $ 122 $ 402 $ 455 $ 367
======= ======= ======= ======= =======
Number of real estate owned properties -- 1 2 2 3
Ratios:
Non-accrual loans to total loans 2.47% 2.65% 1.89% 1.03% 1.70%
Non-performing loans to total loans 2.67 2.97 3.15 5.20 4.18
Non-performing loans and real estate owned
to total assets 1.21 1.46 1.77 3.40 2.63
Allowance for loan losses to:
Non-accrual loans 48.75 44.65 66.60 124.28 69.68
Non-performing loans 45.03 39.81 40.07 24.58 28.38
Total loans 1.20 1.18 1.26 1.28 1.19
Contractual interest income that would have
been recognized on non-accrual loans $ 133 $ 96 $ 93 $ 18 $ 81
Actual interest income recognized 142 74 58 -- 9
------- ------- ------- ------- -------
Interest income (recognized) not recognized
$ (9) $ 22 $ 35 $ 18 $ 72
======= ======= ======= ======= =======
</TABLE>
10
<PAGE> 12
Accrued interest receivable on accruing loans past due by 90 days or more
amounted to $0, $1,000, $8,000, $44,000, and $14,000 at March 31, 1998, 1997,
1996, 1995, and 1994, respectively. Accordingly, if the Company had placed all
such loans on non-accrual status at those dates, interest income for the fiscal
years ended March 31, 1998, 1997 and 1996 would have been increased by $1,000,
$7,000 and $36,000, respectively.
Real Estate Owned. Property acquired by 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 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. There was no
REO at March 31, 1998.
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 collectibility 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, 1998, all of the Bank's
classified assets were non-performing loans of which, $436,000 were classified
as Special Mention, $1.1 million were classified as Substandard, a $5,000 loan
was classified as Loss and no loans were classified as Doubtful. As of March 31,
1998, loans classified as Substandard included loans totaling $766,000 secured
by one- to four-family, owner-occupied residences. These loans are classified as
Substandard due to delinquencies or other identifiable weaknesses.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in 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. The
Company will continue to monitor and modify its allowance for loan losses as
conditions dictate. The OTS, as
11
<PAGE> 13
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.
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 COMMERCIAL
FOUR- MULTI- COM- CON- BUSINESS CONSUMER UN-
FAMILY FAMILY MERCIAL STRUCTION LOANS LOANS ALLOCATED TOTAL
------- ------ ------- --------- ---------- -------- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AT MARCH 31, 1998
Allowance amount $212 $ 8 $ 70 $ 42 $ 24 $ 21 $325 $702
Percent of:
Total allowance 30% 1% 10% 6% 3% 3% 47% 100%
Total loans 78% 3% 8% 5% 4% 2% --% 100%
AT MARCH 31, 1997
Allowance amount $211 $ 9 $ 49 $ 29 $ 28 $ 17 $317 $660
Percent of:
Total allowance 32% 1% 8% 4% 4% 3% 48% 100%
Total loans 78% 4% 7% 4% 5% 2% --% 100%
AT MARCH 31, 1996
Allowance amount $184 $ 13 $ 56 $ 32 $ 29 $ 15 $325 $654
Percent of:
Total allowance 28% 2% 9% 5% 4% 2% 50% 100%
Total loans 75% 6% 7% 5% 5% 2% --% 100%
AT MARCH 31, 1995
Allowance amount $204 $ 68 $ 66 $ 19 $ 24 $ 15 $254 $650
Percent of:
Total allowance 31% 11% 10% 3% 4% 2% 39% 100%
Total loans 76% 7% 8% 2% 5% 2% --% 100%
AT MARCH 31, 1994
Allowance amount $128 $ 12 $ 32 $173 $ 24 $ 14 $157 $540
Percent of:
Total allowance 24% 2% 6% 32% 4% 3% 29% 100%
Total loans 79% 6% 6% 2% 5% 2% --% 100%
</TABLE>
12
<PAGE> 14
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,
------------------------------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year $ 660 $ 654 $ 650 $ 540 $ 482
Provision for losses 42 69 90 171 151
Charge-offs:
Mortgage loans:
One- to four family -- (12) (48) -- (23)
Commercial -- -- -- -- --
Construction loans -- -- -- (30) --
Commercial business loans -- (40) (36) (31) (78)
Consumer loans -- (11) (2) (2) (4)
----- ----- ----- ----- -----
Total charge-offs -- (63) (86) (63) (105)
Recoveries -- -- -- 2 12
----- ----- ----- ----- -----
Balance at end of year $ 702 $ 660 $ 654 $ 650 $ 540
===== ===== ===== ===== =====
Ratio of net charge-offs to average loans outstanding --% 0.11% 0.17% 0.13% 0.20%
ALLOWANCE FOR LOSSES ON REAL ESTATE OWNED:
Balance at beginning of year $ -- $ 38 $ 60 $ 59 $ 89
Provision for losses -- 38 -- 141 64
Net realized losses -- (76) (22) (140) (94)
----- ----- ----- ----- -----
Balance at end of year $ -- $ -- $ 38 $ 60 $ 59
----- ----- ----- ----- -----
</TABLE>
INVESTMENT ACTIVITIES
Investment Policies. The investment policy of 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, 1998, the Company's
securities portfolio amounted to $58.3 million (amortized cost) with an
estimated weighted average remaining life of 5.0 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").
13
<PAGE> 15
Thrift Bulletin Number 52, the OTS Policy Statement on securities portfolio
policies and unsuitable investment practices ("TB-52"), requires that
institutions classify mortgage derivative products acquired, including certain
tranches of CMOs, as "high-risk mortgage securities" if such products exhibit
greater price volatility than a benchmark fixed-rate 30-year mortgage-backed
pass-through security. Institutions may only hold high-risk mortgage securities
to reduce interest-rate risk in accordance with safe and sound practices and
must also follow certain prudent safeguards in the purchase and retention of
such securities. At March 31, 1998, 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, 1998, the carrying
value of mortgage-backed securities totaled $53.1 million, or 41.0% of total
assets. The fair value of all mortgage-backed securities totaled $53.5 million
at March 31, 1998. Mortgage-backed securities held in 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, 1998, 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. At March 31, 1998, all of the Company's
mortgage-backed securities are fixed-rate with a weighted average yield of 7.17%
and an estimated weighted average remaining life of 5.33 years. The Company's
mortgage-backed securities portfolio includes CMOs with a fair value at March
31, 1998 of $778,000, a weighted average yield of 6.69% and a weighted average
estimated remaining life of 1.6 years.
Mortgage-backed securities generally yield less than the loans that
underlie such securities because of servicing fees and the cost of payment
guarantees or other credit enhancements that reduce credit risk. In addition,
mortgage-backed securities are more liquid than individual mortgage loans and
may be used to collateralize borrowings of 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 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. The Company typically purchases tranches of CMOs that are categorized
as "planned amortization classes," "targeted amortization classes" or "very
accurately defined maturities" and are intended to produce stable cash flows in
different interest rate environments.
14
<PAGE> 16
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,
---------------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Amortized cost at beginning of year $ 39,357 $ 31,559 $ 23,935
Purchases 38,569 22,648 14,137
Sales (19,960) (11,890) (3,709)
Principal repayments (4,980) (2,985) (2,812)
Premium and discount amortization, net (9) 25 8
-------- -------- --------
Amortized cost at end of year $ 52,977 $ 39,357 $ 31,559
======== ======== ========
</TABLE>
At March 31, 1998, 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.
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,
-------------------------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------------ ------------------------
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 $ 683 $ 690 $ 996 $ 994 $ 1,108 $ 1,113
Pass-through securities 32,450 32,851 14,078 13,881 5,129 5,249
-------- -------- -------- -------- -------- --------
33,133 33,541 15,074 14,875 6,237 6,362
Agency and other debt securities 2,398 2,430 3,049 3,014 3,199 3,234
-------- -------- -------- -------- -------- --------
Total 35,531 35,971 18,123 17,889 9,436 9,596
-------- -------- -------- -------- -------- --------
AVAILABLE-FOR-SALE
Mortgage-backed securities:
CMOs 85 88 8,329 8,116 17,651 17,555
Pass-through securities 19,759 19,901 15,954 15,799 7,671 7,622
-------- -------- -------- -------- -------- --------
19,844 19,989 24,283 23,915 25,322 25,177
U.S. Treasury -- -- -- -- 6,490 6,493
Agency and other debt securities 75 79 8,029 7,814 8,616 8,530
-------- -------- -------- -------- -------- --------
75 79 8,029 7,814 15,106 15,023
Mutual fund investments 2,800 2,800 4,655 4,655 1,344 1,344
Net unrealized gain (loss) 149 -- (583) -- (228) --
-------- -------- -------- -------- -------- --------
Total 22,868 22,868 36,384 36,384 41,544 41,544
-------- -------- -------- -------- -------- --------
Total securities, net $ 58,399 $ 58,839 $ 54,507 $ 54,273 $ 50,980 $ 51,140
-------- -------- -------- -------- -------- --------
</TABLE>
15
<PAGE> 17
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, 1998, by remaining period to contractual maturity. With respect to
mortgage-backed securities, the entire amount is reflected in the maturity
period that includes the final security payment date and, accordingly, no effect
has been given to periodic repayments or possible prepayments.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
----------------------------------------------------------------------------
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------------------ ------------------------------------
WEIGHTED WEIGHTED
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD
--------- ----- -------- --------- ----- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities due:
In one year or less $ -- $ -- --% $ 120 $ 121 7.34%
After one year through five years 699 694 5.94 391 391 6.00
After five years through ten years -- -- -- 754 780 7.71
After ten years 19,145 19,295 7.06 31,868 32,249 7.35
------- ------- ------- -------
Total $19,844 $19,989 7.02% $33,133 $33,541 7.34%
======= ======= ======= =======
Agency and other debt securities due:
In one year or less $ -- $ -- --% $ -- $ -- --%
After one year through five years 30 32 6.00 500 503 7.20
After five years through ten years -- -- -- 1,699 1,723 7.30
After ten years 45 47 5.50 199 204 5.75
------- ------- ------- -------
Total $ 75 $ 79 5.70% $ 2,398 $ 2,430 7.15%
======= ======= ======= =======
Total due:
In one year or less $ -- $ -- --% $ 120 $ 121 7.34%
After one year through five years 729 726 5.94 891 894 6.67
After five years through ten years -- -- -- 2,453 2,503 7.43
After ten years 19,190 19,342 7.06 32,067 32,453 7.34
------- ------- ------- -------
Total $19,919 $20,068 7.01% $35,531 $35,971 7.33%
======= ======= ======= =======
</TABLE>
SOURCES OF FUNDS
General. Deposits, loan and security repayments and prepayments, proceeds
from sales of available-for-sale securities and cash flows generated from
operations are the primary sources of 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, NOW 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, 1998, 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 32.3% of total deposits, compared to
36.1% a year earlier. The flow of deposits is influenced significantly by
general economic conditions, changes in money market rates, prevailing interest
rates and competition. The Company's deposits are obtained predominantly from
the Village of Tarrytown and its neighboring communities in Westchester County,
New York. 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 certificate accounts in excess of $100,000 or
use brokers to obtain deposits.
16
<PAGE> 18
The following table presents the deposit activity of the Company for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits $140,571 $151,962 $147,679
Withdrawals 138,612 147,624 143,571
-------- -------- --------
Net cash inflow 1,959 4,338 4,108
Interest credited 4,707 4,081 3,987
-------- -------- --------
Net increase in deposits $ 6,666 $ 8,419 $ 8,095
======== ======== ========
</TABLE>
At March 31, 1998, the Company had $9.7 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
AMOUNT AVERAGE RATE
------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Within three months $1,561 5.49%
After three but within six months 2,441 5.57
After six but within 12 months 2,518 5.58
After 12 months 3,153 5.89
------
Total $9,673 5.66%
------
</TABLE>
The following table sets forth the distribution of the Company's deposit
accounts and the related weighted average interest rates at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
---------------------------------------------------------------------------------------------
1998 1997
-------------------------------------------- --------------------------------------------
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 $ 2,310 2.20% $ 2,771 2.82%
NOW 3,853 3.67 2.00% 3,756 3.82 2.00%
Money market 2,687 2.56 2.75 3,157 3.21 2.75
Regular savings 14,554 13.86 2.75 15,008 15.26 2.75
Statement savings 10,533 10.03 2.92 10,757 10.94 2.92
Certificate accounts:
Less than one year to maturity 53,403 50.86 5.75 49,026 49.86 5.72
One to three years to maturity 17,653 16.82 6.12 13,852 14.09 5.98
-------- ------ ------- ------
Total certificate accounts 71,056 67.68 5.84 62,878 63.95 5.78
-------- ------ ------- ------
Total $104,993 100.00% 4.77% $98,327 100.00% 4.60%
======== ====== ======= ======
<CAPTION>
AT MARCH 31,
--------------------------------------------
1996
--------------------------------------------
PERCENT WEIGHTED
OF TOTAL AVERAGE
AMOUNT DEPOSITS RATE
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Checking $ 2,001 2.23%
NOW 4,164 4.63 2.00%
Money market 3,484 3.88 2.75
Regular savings 16,402 18.24 3.10
Statement savings 11,563 12.86 3.20
Certificate accounts:
Less than one year to maturity 40,448 44.99 5.68
One to three years to maturity 11,846 13.17 6.33
-------- ------
Total certificate accounts 52,294 58.16 5.83
-------- ------
Total $ 89,908 100.00% 4.57%
======== ======
</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, 1998, the maximum
amount of FHLB advances available to the Company was $18.9 million, based on the
Bank's current investment in FHLB stock; the Company's total FHLB borrowing
capacity (including advances), based on 25% of the Bank's assets, was $31.3
million. The Company did not borrow from the FHLB during fiscal 1998.
17
<PAGE> 19
SUBSIDIARY ACTIVITIES
The Registrant has two wholly-owned subsidiaries: the Bank and TZPFC, a
Delaware corporation established in March, 1998. TZPFC is intended to qualify as
a real estate investment trust for tax purposes. The Bank and TZPFC do not have
any subsidiaries. At March 31, 1998 TZPFC had assets of $1.1 million.
PERSONNEL
As of March 31, 1998, the Company had 14 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, 1998, 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) is 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 is 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 are 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.
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.
18
<PAGE> 20
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%. Taxable income is increased by certain preference items and is also
adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items. Only 90% of AMTI can be offset by net operating loss carryovers, of which
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, under
pending legislative proposals for taxable years beginning after December 31,
1997 and before January 1, 2009, an environmental tax of 0.12% of the excess of
AMTI (with certain modifications) over $2 million would be imposed on
corporations, including the Company, whether or not an AMT is paid.
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.
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 the Metropolitan Commuter
Transportation District Surcharge). 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 $0.6 million at March 31, 1998.
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.
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
19
<PAGE> 21
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, with the
amount of commercial loans in excess of 10% of assets being limited to small
business loans; (d) a limit of 35% of an association's assets on the aggregate
amount of consumer loans and acquisitions of certain debt securities; (e) a
limit of 5% of assets on non-conforming loans (loans in excess of the specific
limitations of HOLA); and (f) a limit of the greater of 5% of assets or an
association's capital on certain construction loans made for the purpose of
financing what is or is expected to become residential property.
Loans to One Borrower. Under HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. An additional amount may be
lent, equal to 10% of unimpaired capital and surplus, if such loan or extension
of credit is fully secured by readily-marketable collateral. Such collateral is
defined to include certain debt and equity securities and bullion, but generally
does not include real estate. At March 31, 1998, the Bank's limit on loans to
one borrower was $2.6 million. At March 31, 1998, the Bank's largest aggregate
amount of loans to one borrower was $787,000 and the second largest borrower had
an aggregate balance of $616,000.
QTL Test. HOLA requires a savings association to meet a qualified thrift
lender ("QTL") test. Under the QTL test, a savings association is required to
maintain at least 65% of its "portfolio assets" in certain "qualified thrift
investments" in at least 9 months of the most recent 12-month period. "Portfolio
assets" means, in general, an association's total assets less the sum of (a)
specified liquid assets up to 20% of total assets, (b) goodwill and other
intangible assets, and (c) the value of property used to conduct the
association's business. "Qualified thrift investments" includes various types of
loans made for residential and housing purposes, investments related to such
purposes, including certain mortgage-backed and related securities, and loans
for personal, family, household and certain other purposes up to a limit of 20%
of an association's portfolio assets. Recent legislation broadened the scope of
"qualified thrift investments" to include 100% of an institution's credit card
loans, education loans, and small business loans. A savings association may also
satisfy the QTL test by qualifying as a "domestic building and loan association"
as defined in the Internal Revenue Code of 1986. At March 31, 1998, the Bank
maintained 93.2% 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.
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
20
<PAGE> 22
has failed the QTL test may requalify under the QTL test and be free of such
limitations, but it may do so only once.
Capital Requirements. The OTS regulations require savings associations to
meet four minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations, a leverage ratio
requirement of 4% of Tier I (core) capital to such adjusted total assets,
risk-based capital ratio requirement of 4% of Tier I (core) capital to total
risk-weighted assets, and a risk-based capital ratio requirement of 8% of total
(core and supplementary) capital to total risk-weighted assets. The OTS and the
federal banking regulators have proposed amendments to their minimum capital
regulations to provide that the minimum leverage capital ratio for a depository
institution that has been assigned the highest composite rating of 1 under the
Uniform Financial Institutions Rating System will be 3% and that the minimum
leverage capital ratio for any other depository institution will be 4%, unless a
higher leverage capital ratio is warranted by the particular circumstances or
risk profile of the depository institution. In determining the amount of
risk-weighted assets for purposes of the risk-based capital requirement, a
savings association must compute its risk-based assets by multiplying its assets
and certain off-balance sheet items by risk-weights, which range from 0% for
cash and obligations issued by the United States Government or its agencies to
100% for consumer and commercial loans, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
Tangible capital is defined, generally, as common stockholder's equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related earnings, minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles other than certain mortgage
servicing rights and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
Supplementary capital currently includes cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, and the allowance for loan and lease losses.
The allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets, and the amount of
supplementary capital that may be included as total capital cannot exceed the
amount of core capital.
The OTS has adopted regulations to require a savings association to account
for interest rate risk when determining its compliance with the risk-based
capital requirement. A savings association with "above normal" interest rate
risk is required, by these regulations, to deduct a portion of its total capital
to account for any "above normal" interest rate risk. A savings association's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) resulting from a
hypothetical 2% increase or decrease in market rates of interest, divided by the
estimated economic value of the association's assets, as calculated in
accordance with guidelines set forth by the OTS. At the times when the 3-month
Treasury bond equivalent yield falls below 4%, an association may compute its
interest rate risk on the basis of a change equal to one-half of that Treasury
rate rather than on the basis of 2%. A savings association whose measured
interest rate risk exposure exceeds 2% would be considered to have "above
normal" risk. The interest rate risk component is an amount equal to one-half of
the difference between the association's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Any required deduction for
interest rate risk becomes effective on the last day of the third quarter
following the reporting date of the association's financial data on which the
interest rate risk was computed. The regulations do not require a savings
association with assets of less than $300 million and a risk-based capital ratio
in excess of 12% to comply with the standard reporting requirements for the
interest rate risk component, unless the OTS determines otherwise, and the
association may provide such selected information as the OTS determines.
Currently, the Bank qualifies for this exemption from the filing requirements.
The regulations also authorize the Director of the OTS to waive or defer an
association's interest rate risk component on a case-by-case basis. The OTS has
indefinitely deferred implementation of the interest rate component in the
computation of an institution's risk-based capital requirement. The OTS
continues to monitor the interest rate risk of individual institutions and
retains the right to impose additional capital requirements on individual
institutions.
See note 10 to consolidated financial statements in Item 8 for the Bank's
regulatory capital amounts and ratios as of March 31, 1998, compared to the OTS
requirements at that date.
Limitation on Capital Distributions. OTS regulations currently impose
limitations upon capital distributions by savings associations, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger, and other
distributions charged against capital. At least 30-days written notice must be
given to the OTS of a proposed capital distribution by a savings association,
and capital distributions in excess of specified earnings or by certain
institutions are subject to approval by the OTS. An association that has capital
in excess of all regulatory capital requirements before and after a proposed
capital distribution and that is not otherwise restricted in making capital
distributions, could, after prior notice but without the approval of the OTS,
make capital distributions during a
21
<PAGE> 23
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."
The OTS has proposed amendments of its capital distribution regulations to
reduce regulatory burdens on savings associations. If adopted as proposed,
certain savings associations will be permitted to pay capital distributions
within the amounts described above for Tier 1 institutions without notice to, or
the approval of, the OTS. However, a savings association subsidiary of a savings
and loan holding company, such as the Bank, will continue to file a notice
unless the specific capital distribution requires an application.
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, certain bankers' acceptances,
specified United States Government, state and federal agency obligations, shares
of certain mutual funds and certain corporate debt securities and commercial
paper) equal to a monthly average of not less than a specified percentage of its
net withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the savings flows of
member institutions, and is currently 4%. Monetary penalties may be imposed for
failure to meet the liquidity requirement. The Bank's average liquidity ratio
for the month ended March 31, 1998 was 58.5%, which exceeded the applicable
requirement. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirement.
Assessments. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
association's total assets, including consolidated subsidiaries, as reported in
the association's latest quarterly Thrift Financial Report. The assessments paid
by the Bank for the fiscal years ended March 31, 1998, 1997 and 1996 totaled
$38,000, $35,000 and $31,000, respectively.
Branching. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States. The authority to establish such a branch is
available (a) in states that expressly authorize branches of savings
associations located in another state and (b) to an association that qualifies
as a "domestic building and loan association" under the Code, which imposes
qualification requirements similar to those for a "qualified thrift lender"
under HOLA. See "-- QTL Test." The authority for a federal savings association
to establish an interstate branch 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
22
<PAGE> 24
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 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
23
<PAGE> 25
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
under the Uniform Financial Institutions Rating System). A savings association
that has a total risk-based capital of less than 8.0% or a leverage ratio or a
Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if the
association receives the highest rating under the Uniform Financial Institutions
Rating System) is considered to be "undercapitalized." A savings association
that has a total risk-based capital of less than 6.0% or a Tier 1 risk-based
capital ratio or a leverage ratio of less than 3.0% is considered to be
"significantly undercapitalized." A savings association that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The elements of an association's capital for purposes of the
prompt corrective action regulations are defined generally as they are under the
regulations for minimum capital requirements. See "-- Capital Requirements."
Generally, a capital restoration plan must be filed with the OTS within 45
days of the date an association receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." The OTS may
not accept a capital restoration plan without determining, among other things,
that the plan is based on realistic assumptions and is likely to succeed in
restoring the depository institution's capital. In addition, for a capital
restoration plan to be acceptable, the depository institution's parent holding
company must guarantee that the institution will comply with such capital
restoration plan. The aggregate liability of the parent holding company is
limited to the lesser of (i) an amount equal to the five percent of the
depository institution's total assets at the time it became "undercapitalized,"
and (ii) the amount which is necessary (or would have been necessary) to bring
the institution into compliance with all capital standards applicable with
respect to such institution as of the time it fails to comply with the plan. In
the event of a savings and loan holding company's bankruptcy, any commitment by
the savings and loan company to a federal bank regulatory agency to maintain the
capital of a subsidiary depository institution will be assumed by the bankruptcy
trustee and entitled to a priority of payment. If a depository institution fails
to submit an acceptable plan, it is treated as if it is "significantly
undercapitalized."
An undercapitalized association also becomes immediately subject to various
mandatory restrictions, including restrictions on growth of assets and other
forms of expansion. The OTS can also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors. "Significantly
undercapitalized" institutions are subject to more severe restrictions.
Generally, subject to a narrow exception, FDICIA requires the OTS to appoint a
receiver or conservator for a savings association that is critically
undercapitalized. As of March 31, 1998, the Bank was considered "well
capitalized" by the OTS.
Where appropriate, the OTS can impose corrective action by a savings and
loan holding company under the "prompt corrective action" provisions of FDICIA.
Insurance of Deposit Accounts. Pursuant to FDICIA, the FDIC established a
risk-based assessment system for determining the deposit insurance assessments
to be paid by insured depository institutions. Under the assessment system, the
FDIC assigns an institution to one of three capital categories based on the
institution's financial information as of the reporting period ending seven
months before the assessment period. The three capital categories consist of (a)
well capitalized, (b) adequately capitalized, or (c) undercapitalized. The FDIC
also assigns an institution to one of three supervisory subcategories within
each capital group. The supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. Under the regulation,
there are nine assessment risk classifications (i.e., combinations of capital
groups and supervisory subgroups) to which different assessment rates are
applied. Assessment rates currently range from 0.0% of deposits for an
institution in the highest category (i.e., well-capitalized and financially
sound, with no more than a few minor weaknesses) to 0.27% of deposits for an
institution in the lowest category (i.e., undercapitalized and substantial
supervisory concern). The Bank's assessment rate for deposit insurance was 0.0%
for 1998 and 1997. The FDIC is authorized to raise the assessment rates as
necessary to maintain the required reserve ratio of 1.25%; both the BIF and SAIF
currently satisfy the reserve ratio requirement.
The Deposit Insurance Funds Act of 1996 (the "Funds Act") provides that the
FDIC cannot assess regular insurance assessments for an insurance fund unless
required to maintain or to achieve the designated reserve ratio of 1.25%, except
on those of its member institutions that are not classified as "well
capitalized" or that have been found to have "moderately severe" or
"unsatisfactory" financial, operational or compliance weaknesses. The Bank has
not been so classified by the FDIC or the OTS.
In addition, the Funds Act expanded the assessment base for the payments on
the bonds ("FICO bonds") issued in the late
24
<PAGE> 26
1980s by the Financing Corporation to recapitalize the now defunct Federal
Savings and Loan Insurance Corporation. Beginning January 1, 1997, the deposits
of both BIF- and SAIF-insured institutions are assessed for the payments on the
FICO bonds. Until December 31, 1999, or such earlier date on which the last
savings association ceases to exist, the rate of assessment for BIF-assessable
deposits shall be one-fifth of the rate imposed on SAIF-assessable deposits. The
annual rate of assessment on SAIF-assessable deposits for the payments on the
FICO bonds for the semi-annual period beginning January 1, 1997 was 0.0648%, for
the semi-annual period beginning on July 1, 1997, the annual rate was 0.063%,
and currently the rate of assessment is 0.0622%.
The Funds Act also provides for the merger of the BIF and SAIF on January
1, 1999, with such merger being conditioned upon the prior elimination of the
thrift charter. The Funds Act required the Secretary of the Treasury to conduct
a study of relevant factors with respect to the development of a common charter
for all insured depository institutions and the abolition of separate charters
for banks and thrifts and to report the Secretary's conclusions and the findings
to the Congress. The Secretary of the Treasury has recommended that the separate
charter for thrifts be eliminated only if other legislation is adopted that
permits bank holding companies to engage in certain non-financial activities.
Absent legislation permitting such non-financial activity, the Secretary of the
Treasury recommended retention of the thrift charter. The Secretary of the
Treasury also recommended the merger of the BIF and the SAIF irrespective of
whether the thrift charter is eliminated. Other proposed legislation has been
introduced in Congress to eliminate the federal thrift charter, but the future
of such legislation is uncertain.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
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,
1998, of $943,000. Any advances from a FHLB must be secured by specified types
of collateral, and all long-term advances may be obtained only for the purpose
of providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. For the fiscal years ended March
31, 1998, 1997 and 1996, dividends from the FHLB of New York to the Bank
amounted to $49,000, $37,000 and $37,000, 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 $47.8 million. The amount of
aggregate transaction accounts in excess of $47.8 million are currently subject
to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 12%.
The FRB regulations currently exempt $4.7 million of otherwise reservable
balances from the reserve requirements, which exemption is adjusted by the FRB
at the end of each year. The 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.
25
<PAGE> 27
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 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 $444,000 as of March 31,
1998, 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.
26
<PAGE> 28
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
As of June 1, 1998, there were approximately 300 stockholders 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. 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 SALES PRICE
CASH ----------------------------------
DIVIDENDS END OF
QUARTER ENDED DECLARED HIGH LOW PERIOD
------------------ --------- ------- ------- -------
<S> <C> <C> <C> <C>
March 31, 1996 $0.05 $12.750 $11.375 $12.000
June 30, 1996 0.05 12.250 11.750 12.000
September 30, 1996 0.05 13.000 12.000 12.500
December 31, 1996 0.05 14.125 13.625 13.625
March 31, 1997 0.05 15.250 14.250 14.250
June 30, 1997 0.07 17.500 14.000 17.500
September 30, 1997 0.07 18.625 16.250 18.625
December 31, 1997 0.07 22.625 18.000 18.750
March 31, 1998 0.07 20.313 18.375 20.250
</TABLE>
THE REGISTRANT'S TRANSFER AGENT AND REGISTRAR CAN BE CONTACTED AT:
CHEMICAL MELLON SHAREHOLDER SERVICES
PO BOX 590
RIDGEFIELD PARK, NJ 07660
ATTN: SHAREHOLDER RELATIONS
(800) 851-9677
27
<PAGE> 29
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEAR ENDED MARCH 31
------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- -------- ----------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $ 129,345 $121,841 $ 114,790 $ 91,149 $ 86,388
Loans, net 57,623 55,110 51,174 50,233 45,026
Mortgage-backed securities 53,122 38,989 31,414 23,659 21,157
Other securities 5,277 15,518 19,566 6,722 9,637
Deposits 104,993 98,327 89,908 81,813 77,510
Shareholders' equity (1) 21,800 21,228 22,360 7,818 7,201
SELECTED OPERATING DATA:
Interest income $ 9,393 $ 8,591 $ 7,624 $ 6,547 $ 6,346
Interest expense 4,721 4,106 4,002 2,912 2,766
----------- -------- ----------- -------- --------
Net interest income 4,672 4,485 3,622 3,635 3,580
Provision for loan losses 42 69 90 171 151
----------- -------- ----------- -------- --------
Net interest income after provision for loan losses 4,630 4,416 3,532 3,464 3,429
Non-interest income 268 152 211 67 158
Non-interest expense (excluding SAIF special assessment) 3,010 2,849 2,297 2,087 1,832
SAIF special assessment (2) -- 538 -- -- --
----------- -------- ----------- -------- --------
Income before income tax expense and cumulative
effect of changes in accounting principles 1,888 1,181 1,446 1,444 1,755
Income tax expense (3) 791 326 609 610 741
----------- -------- ----------- -------- --------
Income before cumulative effect of changes in
accounting principles 1,097 855 837 834 1,014
Cumulative effect of changes in accounting principles:
Income taxes -- -- -- -- 100
Postretirement health care benefits, net -- -- -- -- (100)
----------- -------- ----------- -------- --------
Net income (4) $ 1,097 $ 855 $ 837 $ 834 $ 1,014
=========== ======== =========== ======== ========
SELECTED STATISTICAL DATA: (5)
Return on average assets (4) 0.88% 0.74% 0.81% 0.93% 1.18%
Return on average equity (4) 5.12 3.97 6.04 10.81 15.25
Net interest margin (6) 3.79 3.98 3.59 4.16 4.26
Average interest rate spread (7) 2.90 3.07 2.91 3.80 3.94
Equity to total assets at end of period 16.85 17.42 19.48 8.58 8.34
Average equity to average assets 17.10 18.57 13.34 8.65 7.74
Efficiency ratio (8) 62.16 72.11 60.75 50.80 47.51
Non-interest expense to average assets (4) 2.40 2.92 2.21 2.34 2.13
Non-performing loans to total loans 2.67 2.97 3.15 5.20 4.18
Allowance for loan losses to non-performing loans 45.03 39.81 40.07 24.58 28.38
Allowance for loan losses to total loans 1.20 1.18 1.26 1.28 1.19
Non-performing assets to total assets 1.21 1.46 1.77 3.40 2.63
Dividend payout ratio (9)(12) 35.73 34.04 17.23
Book value per share (10)(12) $ 14.75 $ 13.84 $ 13.80
Basic earnings per share (11)(12) $ 0.80 $ 0.60 $ 0.31
Diluted earnings per share (11)(12) $ 0.77 $ 0.59 $ 0.31
Cash dividends per share (12) $ 0.28 $ 0.20 $ 0.05
</TABLE>
(1) For 1998, 1997 and 1996, includes net proceeds of $14.9 million from the
sale of the Company's common stock in connection with the Bank's Conversion
(2) Represents the Bank's share of a special assessment imposed on all
financial institutions with deposits insured by the SAIF.
(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.
(4) If the after-tax SAIF charge and the state tax benefit described in notes
(2) and (3) above were excluded, the 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.
(5) With the exception of end-of-period ratios, all ratios are based on average
balances.
(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 (1,478,062 in 1998, 1,534,062 in 1997 and 1,620,062 in 1996).
(11) Reflects the adoption in 1998 of SFAS No. 128. Prior periods have been
restated. Earnings per share for fiscal 1996 is stated from the date of
Bank's Conversion. There were no common stock equivalents in fiscal 1996.
(12) Data for the periods prior to the Registrant's initial public offering in
1995 and 1994 are not applicable.
28
<PAGE> 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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.
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 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, 1998, 1997 and 1996, the Company's disbursements for loan
originations totaled $12.8 million, $11.9 million and $9.3 million,
respectively. Purchases of securities totaled $41.8 million, $29.7 million and
$33.8 million for the years ended March 31, 1998, 1997 and 1996, respectively.
Proceeds from the sales of available-for-sale securities totaled $27.0 million,
$13.9 million and $3.8 million for the years ended March 31, 1998, 1997 and
1996, respectively.
Financing activity cash flows are generated primarily from deposit
activity. For the fiscal years ended March 31, 1998, 1997 and 1996, the Company
experienced net increases in deposits (including the effect of interest
credited) of $6.7 million, $8.4 million and $8.1 million, respectively,
primarily relating to certificates of deposit. As a result of the flat yield
curve in recent years, deposit products such as shorter term certificate of
deposits have been a more attractive investment alternative for the Company's
customers than longer term securities.
The Company has other sources of liquidity if a need for additional funds
arises, including borrowing capacity from the FHLB of New York of up to 25% of
the Bank's assets, which amounts to $31.3 million at March 31, 1998. There were
no such borrowings outstanding at March 31, 1998. The utilization of particular
sources of funds depends on comparative costs and availability. While maturities
and scheduled amortization of loans and securities provide an indication of the
timing of the receipt of funds, changes in interest rates, economic conditions,
and competition strongly influence mortgage prepayment rates and deposit flows,
reducing the predictability of the timing of these cash flows.
At March 31, 1998, the Company had outstanding loan origination commitments
of $1.0 million, undisbursed construction loans in process of $549,000 and
unadvanced commercial lines of credit of $15,000. 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, 1998 totaled $53.4 million with a weighted average
rate of 5.75%. 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 source of liquidity for the Registrant is dividends from the Bank.
The Registrant may access capital markets through the issuance of stock or debt
for additional sources of funds. The main cash outflows are payments of
dividends to shareholders and repurchases of the Registrant's common stock.
Through March 31, 1998, the Registrant has repurchased for its treasury 142,000
shares of its common stock, or 8.8% of the shares issued in the Stock Offering
at an aggregate cost of $2.1 million. The Registrant'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 Registrant
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 Registrant (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.
As discussed in "Item 1--Business--Regulation--Regulation of Federal
Savings Associations--Capital Requirements", OTS regulations require minimum
capital standards for savings associations, such as the Bank. The Bank satisfied
these minimum capital standards at March 31, 1998 with tangible and Tier I
(core) capital ratios of 13.8%, Tier I risk-based capital ratio of 43.3% and
total risk-based capital ratio of 44.6%. These capital requirements, which are
applicable to the Bank only,
29
<PAGE> 31
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.
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 1998, 1997
and 1996. The yields and costs were derived by dividing interest income or
expense by the average balance of assets or liabilities, respectively, for the
periods shown. Substantially all average balances were computed based on
month-end balances, producing results which approximate average daily balances.
Interest income includes the effect of deferred fees and discounts which are
considered yield adjustments.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
------------------------------------------------------------------
1998 1997
-------------------------------- ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS: (DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans (1) $ 57,779 $5,004 8.66% $ 55,354 $4,721 8.53%
Mortgage-backed securities (2) 44,566 3,175 7.12 38,141 2,719 7.13
Other securities (2) 9,379 605 6.45 12,500 794 6.35
Federal funds sold 9,342 505 5.41 4,538 234 5.16
FHLB stock 715 49 6.85 579 37 6.39
Other 1,400 55 3.93 1,717 86 5.01
-------- ------ -------- ------
Total interest-earning assets 123,181 $9,393 7.63% 112,829 $8,591 7.61%
====== ======
Allowance for loan losses (681) (657)
Non-interest-earning assets 2,676 3,909
-------- --------
Total assets $125,176 $116,081
======== ========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW and money market $ 6,508 $ 150 2.30% $ 6,491 $ 160 2.46%
Savings accounts 25,153 716 2.85 26,662 800 3.00
Short term borrowings -- -- -- 204 12 5.61
Certificate accounts and other 68,102 3,855 5.66 57,136 3,134 5.49
-------- ------ -------- ------
Total interest-bearing liabilities 99,763 $4,721 4.73% 90,493 $4,106 4.54%
====== ======
Checking accounts 2,542 2,255
Other non-interest-bearing liabilities 1,464 1,778
-------- --------
Total liabilities 103,769 94,526
Equity 21,407 21,555
-------- --------
Total liabilities and equity $125,176 $116,081
======== ========
Net interest income $4,672 $4,485
====== ======
Average interest rate spread (3) 2.90% 3.07%
Net interest margin (4) 3.79 3.98
Ratio of interest-earning assets to
interest-bearing liabilities 123.47% 124.68%
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
------------------------------
1996
------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
-------- -------- -------
<S> <C> <C> <C>
ASSETS: (DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans (1) $ 51,621 $4,465 8.65%
Mortgage-backed securities (2) 25,660 1,811 7.06
Other securities (2) 10,338 576 5.57
Federal funds sold 10,846 639 5.89
FHLB stock 514 37 7.20
Other 1,963 96 4.89
-------- ------
Total interest-earning assets 100,942 $7,624 7.55%
======
Allowance for loan losses (645)
Non-interest-earning assets 3,579
--------
Total assets $103,876
========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
NOW and money market $ 8,798 $ 200 2.27%
Savings accounts 28,120 982 3.49
Short term borrowings -- -- --
Certificate accounts and other 49,288 2,820 5.72
-------- ------
Total interest-bearing liabilities 86,206 $4,002 4.64%
======
Checking accounts 2,069
Other non-interest-bearing liabilities 1,743
--------
Total liabilities 90,018
Equity 13,858
--------
Total liabilities and equity $103,876
========
Net interest income $3,622
======
Average interest rate spread (3) 2.91%
Net interest margin (4) 3.59
Ratio of interest-earning assets to
interest-bearing liabilities 117.09%
</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.
30
<PAGE> 32
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 1998 VS. 1997 FISCAL 1997 VS. 1996
---------------------------------- ----------------------------------
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 $ 210 $ 73 $ 283 $ 319 $ (63) $ 256
Mortgage-backed securities 460 (4) 456 889 19 908
Other securities (202) 13 (189) 131 87 218
Federal funds sold 259 12 271 (334) (71) (405)
FHLB stock 9 3 12 4 (4) --
Other (14) (17) (31) (12) 2 (10)
----- ----- ----- ----- ----- -----
Total 722 80 802 997 (30) 967
----- ----- ----- ----- ----- -----
Interest-bearing liabilities
NOW and money market accounts -- (10) (10) (55) 15 (40)
Savings accounts (45) (39) (84) (49) (133) (182)
Certificate accounts and other 621 100 721 432 (118) 314
Short term FHLB borrowings (12) -- (12) 12 -- 12
----- ----- ----- ----- ----- -----
Total 564 51 615 340 (236) 104
----- ----- ----- ----- ----- -----
Net change in net interest income $ 158 $ 29 $ 187 $ 657 $ 206 $ 863
===== ===== ===== ===== ===== =====
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND 1997
Total assets at March 31, 1998 increased $7.5 million, to $129.3 million
from $121.8 million at March 31, 1997, reflecting the Company's policy of
controlled growth. This increase in total assets reflects the securities
portfolio increase of $3.9 million to $58.4 million at March 31, 1998 from $54.5
million at March 31, 1997 in addition to an increase of $300,000 and $963,000 in
federal funds sold and interest-bearing deposits, respectively. Within the
securities portfolio, mortgage-backed securities totaled $53.1 million at March
31, 1998 compared to $38.9 million at March 31, 1997 reflecting a shift to these
securities from U.S. agency securities throughout the year. As a result of
management's intent to reinvest funds from deposit growth and the proceeds from
maturities of securities and sales of available-from-sale securities into
securities that will be held until their maturity, the available-for sale
securities portfolio decreased to $22.9 million at March 31, 1998, as compared
to $36.4 million at March 31, 1997. The held-to-maturity portfolio increased to
$35.5 million at March 31, 1998, from $18.1 million at March 31, 1997. The shift
in the securities portfolio was made principally in the third and fourth fiscal
quarters to higher credit quality mortgage-backed securities (principally GNMA
securities). In addition, loans, net, increased $2.5 million to $57.6 million at
March 31, 1998, compared to $55.1 million at March 31, 1997, primarily due to
the origination of one- to four-family mortgage loans. Deposits, which primarily
funded the securities and loan growth, amounted to $105.0 million at March 31,
1998, an increase of $6.7 million from $98.3 million at March 31, 1997. The
increase in deposits primarily reflects an increase of $8.2 million in
certificate accounts.
Shareholders' equity was $21.8 million at March 31, 1998, an increase of
$572,000 from $21.2 million at March 31, 1997. The increase primarily reflects
net earnings retained after dividends of $705,000, a $438,000 improvement in the
net unrealized gain (loss) on available-for-sale securities and an increase of
$419,000 relating to the employee stock ownership plan ("ESOP") and the
recognition and retention plans ("RRPs"), substantially offset by the repurchase
during the year of 56,000 common shares for the treasury, at a cost of $990,000.
The ratio of shareholders' equity to total assets at March 31, 1998 was 16.85%,
as compared with 17.42% at March 31, 1997. The Company's tangible book value per
share was $14.75 at March 31, 1998 compared to $13.84 at March 31, 1997.
31
<PAGE> 33
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MARCH 31, 1998 AND
1997
General. Net income for the fiscal year ended March 31, 1998 amounted to
$1,097,000 or $0.80 basic earnings per share ($0.77 diluted earnings per share),
as compared to $855,000 or $0.60 basic earnings per share ($0.59 diluted
earnings per share) for the fiscal year ended March 31, 1997. The results for
the 1997 fiscal year include a non-recurring charge of $538,000 ($329,000 net of
taxes) for a special assessment imposed to recapitalize the SAIF of the FDIC, in
addition to a tax benefit of $166,000 due to a change in New York State tax law.
Excluding the SAIF assessment and the change in New York State tax law, net
income for the 1997 fiscal year was $1,018,000 or $0.71 basic earnings per share
($0.70 diluted earnings per share).
Net Interest Income. Net interest income for fiscal 1998 totaled $4.7
million as compared to $4.5 million for fiscal 1997. The increase is primarily
due to an overall increase in interest-earning assets, the effects of which were
primarily offset by a decline in the average spread. The average interest rate
spread and net interest margin decreased to 2.90% and 3.79% for fiscal 1998,
compared to 3.07% and 3.98%, respectively, for fiscal 1997. The decreases in
spread and margin for the fiscal year are due primarily to the increase in
certificates of deposit which have higher average costs than the Company's other
interest-bearing liabilities. The decrease in spread and margin for the year was
partially offset by the increased volume and yield in the securities portfolio,
and the increased volume and yield associated with the loan portfolio.
Interest Income. Total interest income for fiscal 1998 amounted to $9.4
million, as compared to $8.6 million for fiscal 1997. This increase primarily
reflects an $10.4 million increase in average interest-earning assets funded
primarily by deposit growth. The overall increase in average interest-earning
assets primarily reflects increases of $2.4 million in the average loan
portfolio, $6.4 million in the average mortgage-backed securities portfolio, and
a $4.8 million increase in federal funds sold, partially offset by a decline of
$3.1 million in the average other securities portfolio. The average yield on
interest-earning assets was 7.63% for fiscal 1998, a slight increase from 7.61%
for fiscal 1997.
The increase in the average balance of loans reflects the Company's general
strategy of emphasizing loan originations. The increase in the average balance
of mortgage-backed securities reflects management's efforts during the latter
part of the 1998 fiscal year to invest proceeds from the payment of other
securities and increased deposit flow into higher yielding mortgage-backed
securities. Because this effort occurred during the latter part of fiscal 1998,
such increase was not fully reflected in the average yield of such securities
for the entire year, which declined slightly from the 1997 fiscal year. In
addition, while the average yield of loans increased 13 basis points from 8.53%
in fiscal 1997 to 8.66% in fiscal 1998, the impact of this increase on the
average yield of interest-earning assets was partly offset by the increase in
the average balance of lower yielding federal funds sold.
Interest Expense. Interest expense for the year ended March 31, 1998
totaled $4.7 million, an increase from $4.1 million for the 1997 fiscal year.
The increase is attributable to a $9.3 million increase in average
interest-bearing deposits coupled with the rise in the average cost of funds to
4.73%, from 4.54% for the prior year. The increases relate primarily to
certificate accounts and other interest-bearing liabilities which averaged $68.1
million at an average cost of 5.66% for the 1998 fiscal year, as compared to an
average balance of $57.1 million at an average cost of 5.49% for the 1997 fiscal
year. The growth in certificate accounts and other interest-bearing liabilities
was partially offset by a decline in savings accounts and NOW and money market
accounts, which have lower average costs than certificate accounts. The overall
deposit growth is consistent with management's strategy to increase retail
deposits.
Provision for Loan Losses. For fiscal years 1998 and 1997, the provision
for loan losses was $42,000 and $69,000, respectively. The provision reflects
management's evaluation of the adequacy of the allowance for loan losses, the
level and composition of non-performing loans and their collateral, and the
continued growth of the loan portfolio. The allowance for loan losses was
$702,000 at March 31, 1998, compared to $660,000 at March 31, 1997. There were
no charge-offs for fiscal 1998 compared to $63,000 in fiscal 1997.
Non-performing loans at March 31, 1998 were $1.6 million, compared to $1.7
million at March 31, 1997. The ratio of non-performing loans to total loans was
2.67% at March 31, 1998 compared to 2.97% at March 31, 1997. See "Item 1 --
Business -- Asset Quality."
Non-Interest Income. Non-interest income totaled $268,000 for the fiscal
year ended March 31, 1998 compared to $152,000 for the fiscal 1997, reflecting
increased gains on the sales of available-for-sale securities and an increase in
service charges and other fees.
Non-Interest Expense. Non-interest expense totaled $3.0 million and $3.4
million, respectively for fiscal years 1998 and 1997. The decrease in
non-interest expense in the current year is primarily attributable to the
$538,000 FDIC special assessment recognized in fiscal 1997, reductions in the
regular insurance premium assessed on deposits by the FDIC and a decrease in the
net cost of real estate owned, partially offset by increases in compensation and
benefits expense and professional services expenses. The increases in
compensation and benefits expense primarily reflect the increased
32
<PAGE> 34
recognition of expense associated with the ESOP due to the higher average stock
price of the Registrant in the current year as compared to the prior year, a
full years recognition of expense for the Company's RRP program in fiscal 1998
compared to nine months of expense after the program was approved by the
Company's shareholders in fiscal 1997 and performance-based increases for
certain staff members. Professional services expenses increased principally due
to fees relating to the identification and evaluation of strategic alternatives
leading to the execution of the Merger Agreement.
Income Tax Expense. Income tax expense for the fiscal years ended March 31,
1998 and 1997 was $791,000 and $326,000, respectively, reflecting higher income
in the current year and an effective tax rate of 41.9% and 27.6%, respectively.
Tax expense for the year ended March 31, 1997 reflects a benefit of $166,000 due
to the reduction of a deferred tax liability caused by an amendment to the New
York State tax law enacted during the year. The amendment changed the base-year
for tax bad debt reserves to December 31, 1995 and eliminated the need for a
deferred tax liability previously recognized for reserves in excess of the
base-year amount. Without this one-time benefit, the effective tax rate would
have been 41.7% for fiscal 1997.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MARCH 31, 1997 AND
1996
General. Net income for the fiscal year ended March 31, 1997 was $855,000,
or $0.60 basic earnings per share ($0.59 diluted earnings per share), as
compared to $837,000 for the fiscal year ended March 31, 1996. Basic and diluted
earnings per share were $0.31 for the six-month period from 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.
Net Interest Income. Net interest income for fiscal 1997 totaled $4.5
million as compared to $3.6 million for fiscal 1996, an increase of 23.8%. The
average interest rate spread and net interest margin increased to 3.07% and
3.98%, respectively, for fiscal 1997, compared to 2.91% and 3.59%, respectively,
for fiscal 1996. These increases reflect: (i) greater average interest-earning
assets in fiscal 1997 primarily attributable to the investment of Stock Offering
proceeds for the entire fiscal year, compared to the investment of such funds
for only six months in fiscal 1996; (ii) slightly higher yield on total
interest-earning assets resulting from the shift in overall asset mix from
federal funds and treasury securities into higher yielding mortgage-backed
securities; and (iii) enhanced earnings from the increased volume of mortgage
loans. Net income also benefited from additional net interest income realized on
deposit growth.
Interest Income. Total interest income for fiscal 1997 amounted to $8.6
million, as compared to $7.6 million for fiscal 1996. This increase primarily
reflects an $11.9 million increase in average interest-earning assets
principally due to the investment of funds from the Stock Offering for a full
year (compared to six months in fiscal 1996) and deposit growth. The overall
increase in average interest-earning assets reflects increases of $3.7 million
in the average loan portfolio and $14.6 million in the average securities
portfolios, partially offset by a $6.4 million decrease in other earning assets
(principally federal funds sold). The 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 the 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 "Item
1 -- Business -- Asset Quality."
33
<PAGE> 35
Non-Interest Income. Non-interest income for the year ended March 31, 1997
amounted to $152,000, a decrease of $59,000 from $211,000 for the 1996 fiscal
year. The decrease is primarily due to the decline in the net gain on sales of
available-for-sale securities to $23,000 for fiscal 1997, as compared to $88,000
for fiscal 1996.
Non-Interest Expense. For fiscal years 1997 and 1996, non-interest expense
totaled $3.4 million and $2.3 million, respectively. The $1.1 million increase
in non-interest expense in the current fiscal year is primarily attributable to
the $538,000 SAIF special assessment, as well as increases of $292,000 in
compensation and benefits expense, $167,000 in professional services expenses
and $122,000 in other non-interest expense. The increase in compensation and
benefits expense primarily reflects recognition of a full year of expense in
fiscal 1997 (compared to six months of expense in fiscal 1996) for the amended
deferred compensation plan for directors, the ESOP and the directors retirement
plan; recognition of expense in fiscal 1997 for a portion of the shares awarded
under the RRPs; and merit and performance-based increases for certain staff
members. Professional services expenses and other non-interest expense increased
principally due to increased professional fees, printing and other costs
associated with operations as a public company for a full year in fiscal 1997
compared to six months in fiscal 1996.
Income Tax Expense. Income tax expense for the fiscal years ended March 31,
1997 and 1996 was $326,000 and $609,000, respectively, reflecting an effective
tax rate of 27.6% and 42.1%, respectively. Tax expense for the year ended March
31, 1997 reflects a benefit of $166,000 due to the reduction of a deferred tax
liability caused by an amendment to the New York State tax law enacted during
the year. The amendment changed the base-year for tax bad debt reserves to
December 31, 1995 and eliminated the need for a deferred tax liability
previously recognized for reserves in excess of the base-year amount. Without
this one-time benefit, the effective tax rate would have been 41.7% for fiscal
1997.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and other financial information
included in this report have been prepared in conformity with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increased cost of 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.
YEAR 2000 COMPLIANCE
The Company, like all companies that utilize computer technology, is facing
significant challenges associated with the inability of computer systems to
recognize the year 2000 (the "Year 2000 Problem"). Many existing computer
programs and systems were originally programmed with six digit dates that
provided only two digits to identify the calendar year in the date field,
without considering the upcoming change in the century. With the impending
millennium, these programs and computers will recognize "00" as the year 1900
rather than the year 2000. Like most financial service providers, the Company
and its operations may be significantly affected by the Year 2000 Problem due to
the nature of financial information. Software, hardware, and equipment both
within and outside the Company's direct control and with whom the Company
electronically or operationally interfaces (e.g. third party vendors providing
data processing, information system management, maintenance of computer systems,
and credit bureau information) are likely to be affected. Furthermore, if
computer systems are not adequately changed to identify the Year 2000, many
computer applications could fail or create erroneous results. As a result, many
calculations which rely on the date field information, such as interest, payment
or due dates and other operating functions, will generate results which could be
significantly misstated, and the Company could experience a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. In addition, under certain circumstances, failure to adequately
address the Year 2000 Problem could adversely affect the viability of the
Company's suppliers and creditors and the creditworthiness of its borrowers.
Thus, if not adequately addressed, the Year 2000 Problem could result in a
significant adverse impact on the Company's products, services and competitive
condition.
The Company has initiated formal communications with all of its significant
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 Problem. The Company
presently believes that with modifications to existing software and conversions
to new software, the Year 2000 Problem will be mitigated without causing a
material adverse impact on the operations of the Company. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Problem could have an impact on the operations of the Company. At this
time, management does not believe that the impact and any resulting costs will
be material.
Monitoring and managing the year 2000 project will result in additional
direct and indirect costs to the Company. Direct costs include potential charges
by third party software vendors for product enhancements, costs involved in
testing software
34
<PAGE> 36
products for year 2000 compliance, and any resulting costs for developing and
implementing contingency plans for critical software products which are not
enhanced. Indirect costs will principally consist of the time devoted by
existing employees in monitoring software vendor progress, testing enhanced
software products and implementing any necessary contingency plans. The Company
does not believe that such costs will have a material effect on its results of
operations. Both direct and indirect costs of addressing the Year 2000 Problem
will be charged to earnings as incurred. Such costs have not been material to
date.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending, investing and deposit taking activities. The Company's
real estate loan portfolio, concentrated primarily in Westchester County, New
York, is subject to risks associated with the local economy.
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 exposure is an essential component of managing a savings
institution. The extent of the movement of interest rates, higher or lower, is
an uncertainty that could have a negative impact on the earnings of 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.
The Company has taken several actions, under various market conditions,
designed to manage its level of interest rate risk. These actions have included:
(i) purchasing adjustable and fixed rate mortgage-backed securities with varying
average lives; (ii) undertaking an effort to lengthen the maturities of its
certificates of deposit, the majority of which mature in less than one year; and
(iii) to a lesser extent, increasing the portfolio of adjustable-rate mortgage
loans through originations, as market conditions permit. 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 Company's net portfolio value ("NPV") arising from
movements in interest rates. This approach calculates the difference between the
present value of liabilities and the present value of expected cash flows from
assets and off-balance sheet items. The following table sets forth, at March 31,
1998, an analysis of the Company's interest rate risk as measured by the
estimated changes in NPV resulting from instantaneous and sustained parallel
shifts in the yield curve (+ or - 400 basis points, measured in 100 basis point
increments).
<TABLE>
<CAPTION>
ESTIMATED INCREASE
CHANGE IN ESTIMATED (DECREASE) IN NPV
INTEREST RATES NPV -----------------------
(BASIS POINTS) AMOUNT AMOUNT PERCENT
-------------- --------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
+400 $ 11,500 $ (13,928) (55)%
+300 14,877 (10,551) (41)
+200 18,457 (6,971) (27)
+100 22,113 (3,315) (13)
-- 25,428 -- --
-100 27,852 2,424 10
-200 29,068 3,640 14
-300 30,301 4,873 19
-400 32,124 6,696 26
</TABLE>
35
<PAGE> 37
Certain assumptions utilized by the OTS in assessing the interest rate risk
of thrift institutions were employed in preparing data included in the preceding
table. These assumptions relate to interest rates, loan prepayment rates,
deposit decay rates, and the market values of certain assets under the various
interest rate scenarios. It was also assumed that delinquency rates will not
change as a result of changes in interest rates although there can be no
assurance that this will be the case. Even if interest rates change in the
designated amounts, there can be no assurance that the Company'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.
36
<PAGE> 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Tappan Zee Financial, Inc.:
We have audited the accompanying consolidated balance sheets of Tappan Zee
Financial, Inc. and subsidiaries as of March 31, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended March 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tappan Zee
Financial, Inc. and subsidiaries as of March 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended March 31, 1998 in conformity with generally accepted accounting
principles.
Short Hills, New Jersey
April 28, 1998
37
<PAGE> 39
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1998 1997
--------- ---------
ASSETS
<S> <C> <C>
Cash and due from banks $ 783 $ 912
Interest-bearing deposits 2,401 1,438
Federal funds sold 6,200 5,900
Securities (note 2):
Available-for-sale, at fair value (amortized cost of $22,719 in 1998 and
$36,967 in 1997) 22,868 36,384
Held-to-maturity, at amortized cost (fair value of $35,971 in 1998 and
$17,889 in 1997) 35,531 18,123
--------- ---------
Total securities 58,399 54,507
Loans, net (note 3):
Mortgage loans 54,915 51,876
Other loans 3,673 4,170
Allowance for loan losses (702) (660)
Net deferred loan fees (263) (276)
--------- ---------
Total loans, net 57,623 55,110
Federal Home Loan Bank stock 943 674
Real estate owned, net -- 122
Other assets (note 4) 2,996 3,178
--------- ---------
Total assets $ 129,345 $ 121,841
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits (note 5) $ 104,993 $ 98,327
Other liabilities (note 4) 2,552 2,286
--------- ---------
Total liabilities 107,545 100,613
--------- ---------
Shareholders' equity (notes 9 and 10):
Preferred stock (par value $0.01 per share; 1,000,000
shares authorized; none issued or outstanding) -- --
Common stock (par value $0.01 per share; 5,000,000
shares authorized; 1,620,062 shares issued) 16 16
Additional paid-in capital 15,086 14,942
Common stock held by employee stock ownership plan ("ESOP") (904) (1,056)
Common stock awarded under recognition and retention plans ("RRPs") (401) (524)
Treasury stock, at cost (142,000 shares in 1998 and 86,000 shares in 1997) (2,060) (1,070)
Retained earnings, substantially restricted 9,974 9,269
Net unrealized gain (loss) on available-for-sale securities, net of taxes (note 2) 89 (349)
--------- ---------
Total shareholders' equity 21,800 21,228
--------- ---------
Total liabilities and shareholders' equity $ 129,345 $ 121,841
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 40
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Interest income:
Mortgage loans $4,609 $4,331 $4,098
Other loans 395 390 367
Securities 3,780 3,513 2,387
Other earning assets 609 357 772
------ ------ ------
Total interest income 9,393 8,591 7,624
------ ------ ------
Interest expense:
Deposits 4,721 4,094 4,002
Federal Home Loan Bank advances -- 12 --
------ ------ ------
Total interest expense 4,721 4,106 4,002
------ ------ ------
Net interest income 4,672 4,485 3,622
Provision for loan losses (note 3) 42 69 90
------ ------ ------
Net interest income after provision for loan losses 4,630 4,416 3,532
------ ------ ------
Non-interest income:
Service charges and other fees 140 119 109
Net gain on sales of available-for-sale securities (note 2) 109 23 88
Other 19 10 14
------ ------ ------
Total non-interest income 268 152 211
------ ------ ------
Non-interest expense:
Compensation and benefits (notes 8 and 9) 1,720 1,477 1,185
Professional services 371 316 149
Occupancy and equipment 181 192 220
Data processing service fees 176 159 151
Federal deposit insurance:
Regular premiums 62 155 202
Special assessment (note 5) -- 538 --
Net cost of real estate owned 7 60 22
Other 493 490 368
------ ------ ------
Total non-interest expense 3,010 3,387 2,297
------ ------ ------
Income before income tax expense 1,888 1,181 1,446
Income tax expense (note 7) 791 326 609
------ ------ ------
Net income $1,097 $ 855 $ 837
====== ====== ======
Basic earnings per share (note 11) $ 0.80 $ 0.60 $ 0.31
====== ====== ======
Diluted earnings per share (note 11) $ 0.77 $ 0.59 $ 0.31
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 41
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
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 GAIN (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, 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 RRP's -- -- -- (616) -- (98) -- (714)
Amortization of RRP 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
Net income -- -- -- -- -- 1,097 -- 1,097
Dividends paid ($0.28 per share) -- -- -- -- -- (392) -- (392)
Repurchase of 56,000 --
treasury shares -- -- -- -- (990) -- -- (990)
Amortization of RRP awards -- -- -- 123 -- -- -- 123
Tax benefit related to
RRP awards -- 22 -- -- -- -- -- 22
ESOP shares committed to be
released (15,225 shares) -- 122 152 -- -- -- -- 274
Decrease in net unrealized loss
on available-for sale
securities, net of taxes -- -- -- -- -- -- 438 438
--- ------- ------- ----- ------- ------- ----- --------
Balance at March 31, 1998 $16 $15,086 $ (904) $(401) $(2,060) $ 9,974 $ 89 $ 21,800
=== ======= ======= ===== ======= ======= ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 42
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,097 $ 855 $ 837
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 42 69 90
Provision for real estate owned losses -- 38 --
Depreciation expense 56 58 73
Accretion of net deferred loan fees (69) (44) (61)
Net decrease (increase) in accrued interest receivable 31 (80) (63)
Net gain on sales of securities (109) (23) (88)
Noncash ESOP and RRP expense 397 300 89
Other adjustments, net 97 (145) 113
-------- -------- --------
Net cash provided by operating activities 1,542 1,028 990
-------- -------- --------
Cash flows from investing activities:
Purchases of securities:
Available-for-sale (20,689) (19,596) (28,728)
Held-to-maturity (21,131) (10,069) (5,117)
Proceeds from principal payments, maturities and calls of securities:
Available-for-sale 8,005 10,562 8,304
Held-to-maturity 3,730 1,381 1,424
Proceeds from sale of available-for-sale securities 27,023 13,861 3,797
Disbursements for loan originations (12,759) (11,903) (9,314)
Principal collections on loans 10,273 7,942 8,233
Purchases of FHLB stock (269) (113) (57)
Proceeds from sales of real estate owned 124 249 225
Other investing cash flows, net (8) (49) (46)
-------- -------- --------
Net cash used in investing activities (5,701) (7,735) (21,279)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits 6,666 8,419 8,095
Net proceeds from sale of common stock -- -- 14,901
Common stock purchased by ESOP -- -- (1,296)
Purchase of common stock for awards under RRP -- (714) --
Purchase of treasury stock (990) (1,070) --
Dividends paid (392) (291) (81)
Net increase (decrease) in mortgage escrow funds 9 74 (344)
-------- -------- --------
Net cash provided by financing activities 5,293 6,418 21,275
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,134 (289) 986
Cash and cash equivalents at beginning of year 8,250 8,539 7,553
-------- -------- --------
Cash and cash equivalents at end of year $ 9,384 $ 8,250 $ 8,539
======== ======== ========
Supplemental disclosures:
Interest paid $ 4,721 $ 4,106 $ 4,002
Income taxes paid 742 646 531
Securities transferred from held-to-maturity to available-for-sale -- -- 11,320
Mortgage loans transferred to real estate owned -- -- 111
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 43
TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In June 1995, Tarrytown and North Tarrytown Savings and Loan Association
converted from a New York State chartered mutual savings and loan association to
a federally chartered mutual savings bank under the new name Tarrytowns Bank,
FSB (the "Bank"). Tappan Zee Financial, Inc. (the "Registrant") became the
holding company for the Bank on October 5, 1995 upon completion of the
conversion of the Bank from a mutual savings bank to a stock savings bank (the
"Conversion"). In March 1998, the Registrant established TPNZ Preferred Funding
Corporation ("TZPFC"), as a wholly owned subsidiary. The purpose of TZPFC is to
acquire and manage a portfolio of mortgage loans and mortgage-backed securities.
TZPFC is intended to qualify as a Real Estate Investment Trust for tax purposes.
Collectively, the Registrant, TZPFC and the Bank are referred to herein as the
"Company."
The Company's primary market area consists of the Village of Tarrytown and
its neighboring communities in Westchester County, New York. The Bank is a
community-oriented savings institution whose business primarily consists of
accepting deposits from customers within its market area and investing those
funds in mortgage loans secured by one- to four-family residences. To a
significantly lesser extent, funds are invested in multi-family, commercial real
estate, construction, commercial business and consumer loans. The Company also
invests in mortgage-backed and other securities. Deposits are insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation. The Company's primary regulator is the
Office of Thrift Supervision ("OTS").
The following is a summary of the significant accounting policies followed
by the Company in the preparation of the consolidated financial statements.
Basis of Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. These financial statements include the
accounts of the Registrant and its wholly-owned subsidiaries, the Bank and
TZPFC. All significant intercompany accounts and transactions have been
eliminated in the consolidated financial statements. Prior to the Conversion,
the Registrant had no operations other than those of an organizational nature.
All financial information included herein for periods prior to the Conversion
refers to the Bank.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Certain reclassifications have been made to prior year amounts to conform to
the current year presentation. For purposes of reporting cash flows, cash
equivalents consist of overnight federal funds sold.
Securities
The securities portfolio includes primarily debt securities. These debt
securities are principally mortgage-backed securities, consisting of
pass-through securities issued by United States government-sponsored entities
(Ginnie Mae, Fannie Mae and Freddie Mac) and collateralized mortgage obligations
("CMOs").
Individual securities are classified as held-to-maturity securities, trading
securities, or available-for-sale securities. The held-to-maturity category
represents debt securities for which the entity has the positive intent and
ability to hold to maturity. Trading securities are debt and equity securities
that are bought principally for the purpose of selling them in the near term.
All other debt and equity securities are classified as available-for-sale.
Held-to-maturity securities are carried at amortized cost.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses excluded from earnings and reported on a net-of-tax basis as a
separate component of shareholders' equity. The Company has no trading
securities. Federal Home Loan Bank ("FHLB") stock is a non-marketable security
held in accordance with certain regulatory requirements and, accordingly, is
carried at cost.
Premiums and discounts on debt securities are amortized to interest income
on a level-yield basis over the expected
42
<PAGE> 44
terms of the securities. Realized gains and losses on sales of securities are
determined based on the amortized cost of the specific securities sold.
Unrealized losses on held-to-maturity and available-for-sale securities are
charged to earnings when the decline in fair value of a security is judged to be
other than temporary.
Allowance for Loan Losses
Effective April 1, 1995, the Company prospectively adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118.
Under SFAS No. 114, a loan is considered to be impaired when, based on current
information and events, it is probable that the creditor will be unable to
collect all principal and interest contractually due. Creditors are permitted to
measure impaired loans based on (i) the present value of expected future cash
flows discounted at the loan's effective interest rate, (ii) the loan's
observable market price or (iii) the fair value of the collateral if the loan is
collateral dependent. If the approach used results in a measurement that is less
than an impaired loan's recorded investment, an impairment loss is recognized as
part of the allowance for loan losses. SFAS No. 118 allows creditors to continue
to use existing methods for recognizing interest income on impaired loans. The
Company's adoption of these statements did not affect its overall allowance for
loan losses or income recognition practices.
The allowance for loan losses is increased by provisions for losses charged
to operations. Losses on loans (including impaired loans) are charged to the
allowance for loan losses when all or a portion of a loan is deemed to be
uncollectible. Recoveries of loans previously charged-off are credited to the
allowance when realized. Management estimates the allowance for loan losses
based on an evaluation of the Company's past loan loss experience, known and
inherent risks in the portfolio, estimated value of underlying collateral, and
current economic conditions. In management's judgment, the allowance for loan
losses is adequate to absorb probable losses in the existing portfolio.
Establishing the allowance for loan losses involves significant management
judgments utilizing the best information available at the time of review. Those
judgments are subject to further review by various sources, including the
Company's regulators. Future adjustments to the allowance may be necessary based
on changes in economic and real estate market conditions, further information
obtained regarding known problem loans, the identification of additional problem
loans, and other factors.
Interest and Fees on Loans
Generally, a loan (including an impaired loan under SFAS No. 114) is placed
on non-accrual status when principal or interest payments become ninety days
past due, or earlier if the ability of the borrower to meet contractual payment
terms is in doubt. When loans are placed on non-accrual status, unpaid interest
is reversed against interest income of the current period. Thereafter, interest
payments received on non-accrual loans are either applied to reduce unpaid
principal balances or reported as interest income, depending on management's
judgment as to the likelihood of further collections. Loans are returned to
accrual status when collectibility is no longer considered doubtful.
Loan origination fees and certain direct loan origination costs are
deferred, and the net fee or cost is recognized as an adjustment to interest
income using the level-yield method over the contractual life of the related
loan. Net deferred fees and costs applicable to prepaid loans are recognized in
interest income at the time of prepayment. Discounts on consumer loans are
accreted using the level-yield method.
Real Estate Owned
Real estate owned consists of properties acquired through foreclosure or
deed in lieu of foreclosure. A property is initially recorded at fair value less
estimated sales costs, with any resulting writedown charged to the allowance for
loan losses. Thereafter, an allowance for losses on real estate owned is
established for any further declines in fair value less estimated sales costs.
Fair value estimates are based on recent appraisals and other available
information. Costs incurred to develop or improve properties are capitalized,
while holding costs are charged to expense.
Office Property and Equipment
Office property and equipment (included in other assets) is comprised of
land (carried at cost) and building, furniture, fixtures and equipment (carried
at cost less accumulated depreciation). Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
Costs incurred to improve or extend the life of existing assets are capitalized.
Repairs and maintenance, as well as renewals and replacements of a routine
nature are charged to expense.
43
<PAGE> 45
Income Taxes
Using the asset and liability method, deferred taxes are recognized for the
estimated future tax effects attributable to temporary differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. A deferred tax liability is recognized for all temporary
differences that will result in future taxable income. A deferred tax asset is
recognized for all temporary differences that will result in future tax
deductions, subject to reduction of the asset by a valuation allowance in
certain circumstances. This valuation allowance is recognized if, based on an
analysis of available evidence, management determines that it is more likely
than not that some portion or all of the deferred tax asset will not be
realized.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax laws or rates is recognized in income
tax expense in the period that includes the enactment date of the change.
Postretirement Benefit and Deferred Compensation Plans
The Company has a non-contributory defined benefit pension plan which
covers substantially all employees. Pension costs are funded on a current basis.
In addition, the Company provides for postretirement health care benefits for
employees and directors. Costs for these benefits, as well as the Company's
directors' retirement plan and directors' deferred compensation plan, are
accounted for on an accrual basis as such benefits are earned by active
employees.
Stock-Based Compensation Plans
Compensation expense is recognized in an amount equal to the fair value of
ESOP shares that have been committed to be released for allocation to
participant accounts. To the extent that the fair value of these shares differs
from the original cost, the difference is charged or credited to shareholders'
equity (additional paid-in capital). The cost of unallocated ESOP shares not yet
committed to be released is reflected as a reduction of shareholders' equity.
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, compensation expense is recognized
only if the exercise price of the option is less than the fair value of the
underlying stock at the grant date. SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages entities to recognize the fair value of all
stock-based awards on the date of grant as compensation expense over the vesting
period. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma disclosures of net income
and earnings per share as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosures required by SFAS No.
123.
The fair value of the RRP shares awarded by the Company, measured as of the
grant date, is recognized as unearned compensation (a deduction from
shareholders' equity) and amortized to compensation expense as the shares become
vested. An excess of the cost to fund purchases of RRP shares over the
grant-date fair value is charged to retained earnings.
Earnings Per Share
In fiscal 1998, the Company retroactively adopted SFAS No. 128, "Earnings
Per Share," which establishes new standards for computing and presenting
earnings per share ("EPS") by all entities with complex capital structures. SFAS
No. 128 requires the presentation of basic EPS and diluted EPS and the
restatement of all prior-period EPS data. Basic EPS excludes dilution and is
computed by dividing net income available to common shareholders by the weighted
average number of common shares outstanding for the period. Unallocated ESOP
shares that have not been committed to be released to participants are excluded
from outstanding shares in computing EPS. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
(such as the Company's stock options) were exercised or converted into common
stock or resulted in the issuance of common stock. Diluted EPS is computed by
dividing adjusted net income by the weighted average number of common shares
outstanding for the period plus common stock equivalents. EPS is reported for
periods following the Conversion. The weighted average number of shares used in
the computation of basic EPS and diluted EPS for the year ended March 31, 1998
were 1,372,051 and 1,423,299, respectively.
44
<PAGE> 46
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997.
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. However, certain FASB statements require
entities to report specific changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, as a separate
component of equity in the balance sheet. Such items, along with net income, are
components of comprehensive income. SFAS No. 130 requires that all items of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Additionally, SFAS No. 130
requires that the accumulated balance of other comprehensive income be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 establishes standards for the
way public business enterprises report information about operating segments in
annual and interim financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments. SFAS No. 131 also requires descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used by the
enterprise in its general-purpose financial statements, and changes in the
measurement of segment amounts from period to period.
In February 1998, the FASB also issued SFAS No. 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits," effective for fiscal years
beginning after December 15, 1997. SFAS No. 132 amends the disclosure
requirements of SFAS No. 87, "Employers' Accounting for Pensions", SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Retirement Benefits Other Than Pensions." SFAS No. 132
standardizes the disclosure requirements of SFAS Nos. 87 and 106 to the extent
practicable and recommends a parallel format for presenting information about
pensions and other retirement benefits.
The Company will adopt these disclosure requirements beginning in the first
quarter of fiscal 1999. Management does not anticipate that these standards will
have a material impact on the Company's financial statements.
(2) SECURITIES
The following is a summary of available-for-sale and held-to-maturity
securities at March 31, 1998:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
---------------------
Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Mortgage-backed securities:
CMOs $ 85 $ 3 $ -- $ 88
Pass-through securities 19,759 167 (25) 19,901
------- ------- ------- -------
Total 19,844 170 (25) 19,989
U.S. Agency and other debt securities 75 4 -- 79
Mutual fund investments 2,800 -- -- 2,800
------- ------- ------- -------
Total $22,719 $ 174 $ (25) $22,868
======= ======= ======= =======
HELD-TO-MATURITY SECURITIES
Mortgage-backed securities:
CMOs $ 683 $ 8 $ (1) $ 690
Pass-through securities 32,450 441 (40) 32,851
------- ------- ------- -------
Total 33,133 449 (41) 33,541
U.S. Agency and other debt securities 2,398 32 -- 2,430
------- ------- ------- -------
Total $35,531 $ 481 $ (41) $35,971
======= ======= ======= =======
</TABLE>
45
<PAGE> 47
The following is a summary of available-for-sale and held-to-maturity
securities at March 31, 1997:
<TABLE>
<CAPTION>
Amortized Gross Unrealized 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>
The net unrealized gain (loss) on available-for-sale securities was
$149,000 ($89,000 after taxes) at March 31, 1998 and ($583,000) (($349,000)
after taxes) at March 31, 1997. Changes in unrealized holding gains and losses
resulted in after-tax (decreases) increases in shareholders' equity of $438,000
in fiscal 1998, ($212,000) in fiscal 1997 and $92,000 in fiscal 1996. These
gains and losses will continue to fluctuate based on changes in the portfolio
and market conditions.
Sales of available-for-sale securities resulted in the following gross
realized gains and gross realized losses during the years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Gains $ 171 $ 89 $ 90
Losses (62) (66) (2)
----- ----- -----
Net $ 109 $ 23 $ 88
===== ===== =====
</TABLE>
The following is a summary of the amortized cost and fair value of debt
securities, other than mortgage-backed securities, by remaining term to
contractual maturity as of March 31, 1998. Actual maturities may differ from
these amounts because certain issuers have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
-------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
(In thousands)
<S> <C> <C> <C> <C>
One year or less $ -- $ -- $ -- $ --
More than one year to five years 30 32 500 503
More than five years to ten years -- -- 1,699 1,723
More than ten years 45 47 199 204
------ ------ ------ ------
Total $ 75 $ 79 $2,398 $2,430
====== ====== ====== ======
</TABLE>
46
<PAGE> 48
(3) LOANS
Loans are summarized as follows at March 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Mortgage loans:
Residential properties:
One- to four-family $ 45,146 $ 43,958
Multi-family 1,994 2,289
Commercial properties 4,618 3,910
Construction loans 3,706 2,405
Construction loans in process (549) (686)
-------- --------
54,915 51,876
-------- --------
Other loans:
Commercial business loans 2,462 2,846
Automobile loans 683 781
Other consumer loans 751 797
Unearned discounts (208) (239)
Unused commercial lines of credit (15) (15)
-------- --------
3,673 4,170
-------- --------
Total loans 58,588 56,046
Allowance for loan losses (702) (660)
Net deferred loan fees (263) (276)
-------- --------
Total loans, net $ 57,623 $ 55,110
======== ========
</TABLE>
The loan portfolio at March 31, 1998 consisted of fixed-rate loans of $46.1
million and adjustable-rate loans of $12.5 million with weighted average yields
of 8.50% and 8.36%, respectively. At March 31, 1997, fixed-rate loans were $42.4
million and adjustable-rate loans were $13.6 million.
The Company primarily originates mortgage loans secured by existing
single-family residential properties. The Company also originates multi-family
and commercial real estate loans, construction loans, commercial business loans
and consumer loans. A substantial portion of the loan portfolio is secured by
real estate properties located in Westchester County, New York. The ability of
the Company's borrowers to make principal and interest payments is dependent
upon, among other things, the level of overall economic activity and the real
estate market conditions prevailing within the Company's concentrated lending
area.
Loans to directors, executive officers and related parties at March 31, 1998
and 1997 amounted to $1.1 million. During fiscal 1998, there were new loans to
such persons of $11,000 and repayments of $19,000.
47
<PAGE> 49
The following is a summary of loans on non-accrual status and accruing
loans past ninety days or more at March 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
NON-ACCRUAL LOANS:
Mortgage loans:
One- to four-family $1,202 $1,355 $ 856
Commercial property 238 123 126
------ ------ ------
1,440 1,478 982
------ ------ ------
ACCRUING LOANS PAST DUE NINETY DAYS OR MORE:
Mortgage loans:
One- to four-family -- -- 342
Commercial property -- 72 266
Construction 108 100 --
Commercial business and consumer 11 8 42
------ ------ ------
Total 119 180 650
------ ------ ------
Total non-performing loans $1,559 $1,658 $1,632
====== ====== ======
</TABLE>
If interest payments on the foregoing non-accrual loans had been made
during the respective years in accordance with the loan agreements, interest
income would have (decreased) increased by ($9,000), $22,000 and $35,000 in
fiscal 1998, 1997 and 1996, respectively.
SFAS No. 114 applies to loans that are individually evaluated for
collectibility in accordance with the Company's normal loan review procedures
(principally loans in the multi-family, commercial mortgage and construction
loan categories). The standard does not apply to smaller-balance, homogeneous
loans such as the Company's one- to four-family residential mortgage loans. The
Company's total recorded investment in impaired loans (which related to
commercial mortgage loans on non-accrual status) amounted to $238,000 and
$123,000 at March 31, 1998 and 1997, respectively. An allowance for loan
impairment under SFAS No. 114 was not required for these loans due to the
adequacy of the collateral value. The Company's average recorded investment in
impaired loans was $126,000 and $125,000 for fiscal 1998 and 1997, respectively.
Interest collections and income recognized on impaired loans were insignificant
for both years.
Activity in the allowance for loan losses is summarized as follows for the
years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 660 $ 654 $ 650
Provision for losses 42 69 90
Charge-offs -- (63) (86)
Recoveries -- -- --
----- ----- -----
Balance at end of year $ 702 $ 660 $ 654
===== ===== =====
</TABLE>
48
<PAGE> 50
(4) OTHER ASSETS AND LIABILITIES
A summary of other assets and liabilities at March 31 follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(In thousands)
<S> <C> <C>
OTHER ASSETS:
Office property and equipment, net of accumulated depreciation
of $380 in 1998 and $365 in 1997 $ 496 $ 544
Accrued interest receivable 747 778
Deferred income taxes (note 7) 734 859
Intangible asset recognized for directors' deferred compensation plan (note 8) 360 510
Prepaid expenses and other 659 487
------ ------
Total $2,996 $3,178
====== ======
OTHER LIABILITIES:
Obligation for directors' deferred compensation plan (note 8) $1,035 $ 928
Mortgage escrow funds 793 784
Other 724 574
------ ------
Total $2,552 $2,286
====== ======
</TABLE>
(5) DEPOSITS
Deposit balances and weighted average stated interest rates at March 31 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Amount Rate Amount Rate
-------------- ------ ------------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Checking $ 2,310 $ 2,771
NOW 3,853 2.00% 3,756 2.00%
Money market 2,687 2.75 3,157 2.75
Regular savings 14,554 2.75 15,008 2.75
Statement savings 10,533 2.92 10,757 2.92
-------------- -------------
33,937 2.53 35,449 2.51
-------------- -------------
Savings certificates by remaining
period to maturity:
Under one year 53,403 5.75 49,026 5.72
One to three years 17,653 6.12 13,852 5.98
-------------- -------------
71,056 5.84 62,878 5.78
-------------- -------------
Total $ 104,993 4.77 $ 98,327 % 4.60%
============== =============
</TABLE>
Savings certificates issued in denominations of $100,000 or more totaled
$9.7 million and $9.4 million at March 31, 1998 and 1997, respectively.
The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted into
law on September 30, 1996. Among other things, the Funds Act required depository
institutions to pay a one-time special assessment of 65.7 basis points on their
SAIF-assessable deposits held on March 31, 1995, in order to recapitalize the
SAIF to the level required by law. The Bank's special assessment of $538,000 was
accrued as a charge to non-interest expense for the quarter ended September 30,
1996. The assessment was paid in November 1996.
49
<PAGE> 51
(6) FEDERAL HOME LOAN BANK ADVANCES
As a member of the FHLB of New York, the Bank has access to funds in the
form of FHLB advances. Based on the level of qualifying collateral available
to secure advances at March 31, 1998, the Bank's borrowing capacity was $31.3
million, none of which was used at that date. Advances are secured by the
Bank's investment in FHLB stock and by a blanket security agreement. This
agreement requires the Bank to maintain as collateral certain qualifying
assets (such as securities and single-family residential mortgage loans) with
a fair value, as defined, at least equal to 110% of the outstanding advances.
(7) INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended
March 31:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(In thousands)
<S> <C> <C> <C>
FEDERAL:
Current $ 776 $ 432 $ 465
Deferred (124) 47 (14)
----- ----- -----
652 479 451
----- ----- -----
NEW YORK STATE:
Current 184 94 94
Deferred (45) (247) 64
----- ----- -----
139 (153) 158
----- ----- -----
TOTAL:
Current 960 526 559
Deferred (169) (200) 50
----- ----- -----
$ 791 $ 326 $ 609
===== ===== =====
</TABLE>
Total income tax expense differs from the amounts computed by applying
the applicable statutory federal income tax rate of 34% to income before
income tax expense. A reconciliation of the tax at the statutory rate to the
Company's actual tax expense follows for the years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C>
Tax at federal statutory rate $ 642 $ 402 $ 492
State tax (benefit) expense, net of federal tax 92 (101) 104
effect
Other, net 57 25 13
----- ----- -----
Actual income tax expense $ 791 $ 326 $ 609
===== ===== =====
Effective income tax rate 41.9% 27.6% 42.1%
===== ===== =====
</TABLE>
50
<PAGE> 52
The tax effects of temporary differences that give rise to the Company's
deferred tax assets and liabilities at March 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
----- -----
(In thousands)
<S> <C> <C>
DEFERRED TAX ASSETS:
Allowance for loan losses $ 287 $ 270
Net unrealized loss on available-for-sale securities -- 234
Loan origination fees 108 113
Other 406 292
----- -----
Total deferred tax assets 801 909
----- -----
DEFERRED TAX LIABILITIES:
Net unrealized gain on available-for-sale securities (60) --
Other (7) (50)
----- -----
Total deferred tax liabilities (67) (50)
----- -----
Net deferred tax assets $ 734 $ 859
===== =====
</TABLE>
Based on the Company's historical and anticipated future pre-tax
earnings, management believes that it is more likely than not that the
Company's deferred tax assets will be realized.
As a thrift institution, the Bank is subject to special provisions in the
federal and New York state tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. These deductions historically have
been determined using methods based on loss experience or a percentage of
taxable income. Tax bad debt reserves represent the excess of allowable
deductions over actual bad debt losses and other reserve reductions. These
reserves consist of a defined base-year amount, plus additional amounts ("excess
reserves") accumulated after the base year. Deferred tax liabilities have been
recognized with respect to such excess reserves, as well as any portion of the
base-year amount which is expected to become taxable (or "recaptured") in the
foreseeable future.
Certain amendments to the federal and New York state tax laws regarding bad
debt deductions were enacted in 1996. The federal amendments include elimination
of the percentage-of-taxable-income method for tax years beginning after
December 31, 1995 and imposition of a requirement to recapture into taxable
income (over a six-year period) the bad debt reserves in excess of the base-year
amounts. This recapture requirement had no significant effect on the Bank since
its federal bad debt reserves approximated the base-year amounts. The New York
State amendments redesignate the Bank's state bad debt reserves at December 31,
1995 as the base-year amount and also provide for future additions to the
base-year reserve using the percentage-of-taxable-income method. This change
effectively eliminated the excess New York State reserves for which the Company
had recognized a deferred tax liability. Accordingly, the Company reduced its
deferred tax liability in the quarter ended September 30, 1996, by $166,000,
representing a state deferred tax benefit of $252,000 less related deferred
federal taxes of $86,000.
At March 31, 1998, the Bank's federal and state bad debt reserves were $1.2
million and $5.2 million, respectively, which equaled the base-year amounts.
Deferred tax liabilities have not been recognized with respect to these reserves
since the Company does not expect that such amounts will become taxable in the
foreseeable future. Under the tax laws as amended, events that would result in
taxation of these reserves include (i) redemptions of the Bank's stock or
certain excess distributions to the Registrant, and (ii) failure of the Bank to
maintain a specified qualifying assets ratio or meet other thrift definition
tests for New York State tax purposes. At March 31, 1998, the Bank's
unrecognized deferred tax liabilities with respect to the federal and state
base-year reserves were approximately $0.2 million and $0.6 million,
respectively.
(8) POSTRETIREMENT BENEFITS AND DEFERRED COMPENSATION PLANS
Pension Plans and Deferred Compensation Plan
All eligible employees are included in a non-contributory,
multiple-employer defined benefit pension plan (the "Pension Plan"). The
Company's annual contributions to the Pension Plan are based on actuarially
determined funding requirements. The Company has also established a
non-qualified deferred compensation plan for directors of the Bank or the
Registrant, which was adopted in its amended form upon Conversion (the "Deferred
Compensation Plan").
51
<PAGE> 53
The following is a reconciliation of the funded status of these plans and
the assets (liabilities) recognized in the consolidated balance sheets at March
31:
<TABLE>
<CAPTION>
Deferred
Pension Plan Compensation Plan
---------------------- ----------------------
1998 1997 1998 1997
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation - vested $(1,173) $(1,040) $(1,035) $ (928)
Accumulated benefit obligation - nonvested (1) -- -- --
------- ------- ------- -------
Total accumulated benefit obligation (1,174) (1,040) (1,035) (928)
Effect of projected future compensation levels (198) (234) -- --
------- ------- ------- -------
Projected benefit obligation for service rendered to date (1,372) (1,274) (1,035) (928)
Plan assets (insurance contract, at contract value) 1,166 1,050 -- --
------- ------- ------- -------
Projected benefit obligation in excess of plan assets (206) (224) (1,035) (928)
Unrecognized prior service cost -- -- 556 751
Unrecognized net loss (gain) from experience different
from that assumed and effect of changes in assumptions 128 113 (196) (241)
Unrecognized net transition obligation 82 90 -- --
Additional minimum liability recognized with a
corresponding intangible asset (note 4) -- -- (360) (510)
------- ------- ------- -------
Assets (Liabilities) recognized $ 4 $ (21) $(1,035) $ (928)
------- ------- ------- -------
</TABLE>
Plan expense consisted of the following components for the years ended March 31:
<TABLE>
<CAPTION>
Deferred
Pension Plan Compensation Plan
------------------------------- -----------------------------
1998 1997 1996 1998 1997 1996
----- ----- ----- ----- ----- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Service cost (benefits earned during the period) $ 31 $ 30 $ 28 $ 29 $ 39 $ 23
Interest cost on projected benefit obligation 91 87 81 72 59 43
Return on plan assets (102) (80) (80) -- -- --
Net amortization and deferral 18 13 9 166 158 98
----- ----- ----- ----- ----- -----
Net expense $ 38 $ 50 $ 38 $ 267 $ 256 $ 164
===== ===== ===== ===== ===== =====
</TABLE>
The actuarial present values of the projected benefit obligations at March
31,1998 were determined for the Pension Plan and the Deferred Compensation Plan
based on discount rates of 6.75% and 7.25%, respectively. The discount rate used
for both plans at March 31, 1997 was 7.00%. Actuarial amounts for the Pension
Plan were also based on rates of increase in future compensation levels of 4.50%
in 1998 and 5.5% in 1997, and expected long-term rates of return on plan assets
of 8.5% in both years.
Under the Deferred Compensation Plan, directors may defer all or part of
their compensation received for services to the Company (including compensation
paid to an officer-director for service as an officer). Deferred amounts are
applied to either the purchase of (i) a life insurance policy, in which case the
amount of deferred benefits payable is based on the value to the Company of
expected death benefit proceeds, or (ii) Company common stock and other
investments, in which case the amount of deferred benefits payable is based on
the investment performance of the investments made. Deferred benefits are paid
in installments over a ten-year period beginning upon termination of service as
a director. In the event of a change in control of the Registrant or the Bank,
the plan requires full funding of any previously-purchased life insurance
contracts. In connection with the Conversion, the Company established a trust
fund with an independent fiduciary for the purpose of accumulating funds to be
used to satisfy its obligations under the plan.
For financial reporting purposes the value of the life insurance contracts
are not considered plan assets but, instead, are included in the Company's
consolidated balance sheet. At March 31, 1998, the cash surrender values of
purchased life insurance policies were approximately $299,000. Compensation and
benefits expense for fiscal years 1998 and 1997 and for the six-month period
ended March 31, 1996 was reduced by $46,000, $91,000 and $60,000, respectively,
with respect to the recognition of additional cash surrender values on these
policies. The total death benefits payable under the insurance policies amounted
to approximately $916,000 at March 31, 1998. Although the Company may be
obligated for certain cash
52
<PAGE> 54
payments prior to the receipt of proceeds from the purchased life insurance
policies, the Company should ultimately be reimbursed in whole from such life
insurance proceeds.
The Company also has a retirement plan for directors, which is a
non-qualified plan that became effective upon the Conversion. Outside directors
are participants in this unfunded plan only if they have elected not to
participate in the Deferred Compensation Plan described above. Participants in
the directors' retirement plan who have attained age 65 and completed ten or
more years of service (including past service as a director of the Bank) will
receive an annual retirement benefit equal to the aggregate director
compensation received (excluding stock compensation) for the final year of board
service. Reduced benefits apply for shorter service periods and for early
retirement. Pension expense was $16,000 for the fiscal years 1998 and 1997 and
$8,000 for the six-month period ended March 31, 1996. The actuarial present
value of the accumulated and projected benefit obligations both were $78,000 at
March 31, 1998 and $65,000 at March 31, 1997.
Postretirement Health Care Benefits
Substantially all employees become eligible for postretirement health
care (medical and dental) benefits if they meet certain age and length of
service requirements. The cost of postretirement health care benefits is
recognized on an accrual basis as such benefits are earned by active
employees.
The following is a reconciliation of the actuarial liabilities for
postretirement health care benefits, none of which have been funded, and the
liabilities recognized in the consolidated balance sheets at March 31:
<TABLE>
<CAPTION>
1998 1997
----- -----
(In thousands)
<S> <C> <C>
Accumulated benefit obligation:
Retirees $(209) $ (62)
Fully-eligible employees (97) (74)
Other active participants (214) (57)
----- -----
Total accumulated benefit obligation (520) (193)
Unrecognized net actuarial loss (gain) 280 (9)
----- -----
Liabilities recognized $(240) $(202)
===== =====
</TABLE>
The net periodic postretirement benefit expense consisted of the following
components for the years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
--- --- ---
(In thousands)
<S> <C> <C> <C>
Service cost (benefits earned during the period) $12 $ 3 $ 3
Interest cost on accumulated benefit obligation 33 14 18
Net amortization and deferral 10 -- 4
--- --- ---
Net expense $55 $17 $25
=== === ===
</TABLE>
The accumulated postretirement benefit obligation was determined using the
projected unit credit cost method with a discount rate of 6.75% and 7.25% at
March 31, 1998 and 1997, respectively. The assumed rate of increase in future
health care costs was 7.0% for 1998, gradually decreasing to 5.0% in the year
2005 and remaining at that level thereafter. A one-percentage-point increase in
the assumed health care cost trend rate would increase the accumulated benefit
obligation by approximately $91,000 at March 31, 1998 with an insignificant
effect on expense recognized for the year then ended.
(9) STOCK-BASED COMPENSATION PLANS
Employee Stock Ownership Plan
In connection with the Conversion, the Company established an Employee Stock
Ownership Plan (the "ESOP") for eligible employees. The ESOP borrowed
approximately $1.3 million from the Registrant and used the funds to purchase
129,600 shares of the Registrant's common stock sold in the offering. The Bank
makes monthly contributions to the ESOP sufficient to fund the debt service
requirements over the ten-year term of the loan from the Registrant.
Shares purchased by the ESOP are held in a suspense account by the plan
trustee for allocation to participants as the loan is repaid. Shares released
from the suspense account are allocated to participants on the basis of their
relative compensation. Participants become vested in the shares allocated to
their respective accounts over a period not to exceed five years. Any forfeited
shares are allocated to other participants in the same proportion as
contributions. Shares allocated to participants
53
<PAGE> 55
or committed for release to participants totaled 15,225 in fiscal 1998, 15,893
in fiscal 1997 and 8,124 in the six-month period ended March 31, 1996. Expense
recognized with respect to such shares amounted to $274,000 in fiscal 1998,
$208,000 in fiscal 1997 and $89,000 in the six-month period ended March 31,
1996, based on the average fair value of the Registrant's common stock for each
period. The cost of the 90,358 shares which have not yet been committed to be
released to participant accounts at March 31, 1998 is reflected as a reduction
of shareholders' equity in the amount of $904,000. The fair value of these
shares was approximately $1.8 million at that date.
Stock Option Plans
On July 10, 1996, the Company's shareholders approved the Tappan Zee
Financial, Inc. 1996 Stock Option Plan for Officers and Employees ("Stock Option
Plan") and the Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside
Directors ("Directors' Stock Option Plan").
Under the Stock Option Plan, 113,400 shares of authorized but unissued
Registrant stock are reserved for issuance upon option exercises. Options under
this plan may be either non-qualified stock options or incentive stock options.
Each option entitles the holder to purchase one share of common stock at an
exercise price equal to the fair market value on the date of grant. Options
expire no later than ten years following the date of grant.
Under the Directors' Stock Option Plan, 48,600 shares of authorized but
unissued Registrant stock are reserved for issuance to outside directors upon
option exercises. Options granted under this plan are non-qualified options.
Other option terms and conditions are similar to those under the Stock Option
Plan.
Effective July 10, 1996, initial option grants were made under the Stock
Option Plan and the Directors' Stock Option Plan for 81,000 shares and 40,500
shares, respectively, at an exercise price of $11.625 per share. These options
have a ten-year term and vest ratably over five years from the date of grant.
Each option, however, becomes fully exercisable upon a change in control of the
Registrant or the Bank, or upon the death, disability or retirement of the
option holder. No options were granted during the year ended March 31, 1998. All
options granted in July 1996 were outstanding at March 31, 1998 with a remaining
life of 8.3 years; 24,300 options were exercisable at that date. At March 31,
1998, shares available for future grants totaled 32,400 for the Stock Option
Plan and 8,100 for the Directors' Stock Option Plan.
Options were granted at an exercise price equal to the fair value of the
common stock at the grant date. Therefore, in accordance with the provisions of
APB Opinion No. 25 related to fixed stock options, no compensation expense is
recognized with respect to options granted or exercised. Had the Company applied
the fair-value-based method of SFAS No. 123 to the options granted, using the
Black-Scholes option-pricing model, net income and earnings per share for the
years ended March 31, 1998 and 1997 would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
NET INCOME:
As reported $ 1,097 $ 855
Pro forma (1) $ 1,012 $ 795
BASIC EPS:
As reported $ 0.80 $ 0.60
Pro forma (1) $ 0.74 $ 0.56
DILUTED EPS:
As reported $ 0.77 $ 0.59
Pro forma (1) $ 0.71 $ 0.58
</TABLE>
(1) The estimated per-share fair value of options granted in July 1996 was
$4.06, using the following assumptions: dividend yield of 2.0%; expected
volatility of 25.3%; risk-free interest rate of 7.1%; and expected option life
of 7 years. There were no options granted in fiscal 1998.
54
<PAGE> 56
Recognition and Retention Plans
On July 10, 1996, the Company's shareholders approved the Tappan Zee
Financial, Inc. Recognition and Retention Plan for Officers and Employees
("Employees' Plan") and the Tappan Zee Financial, Inc. Recognition and Retention
Plan for Outside Directors ("Directors' Plan"). The purpose of these plans is to
provide officers and non-employee directors of the Company with a proprietary
interest in the Company in a manner designed to encourage their retention. Total
shares authorized are 45,360 for the Employees' Plan and 19,440 for the
Directors' Plan.
Effective July 10, 1996, initial stock awards were made under the Employees'
Plan and the Directors' Plan for 32,400 shares and 19,440 shares, respectively.
These awards vest ratably over five years from the date of grant; however,
immediate vesting occurs upon a change in control of the Registrant or the Bank,
or upon the death, disability or retirement of the participant. An additional
grant of 1,000 shares was made under the Employees' Plan later in fiscal 1997.
The fair value of the shares awarded under the plans, totaling $616,000 at the
grant dates, is being amortized to compensation expense on a straight-line basis
over the five-year vesting periods. Compensation expense of $123,000 and $92,000
was recognized in fiscal 1998 and 1997. Unearned compensation cost of $401,000
is reflected as a reduction of shareholders' equity at March 31, 1998.
(10) SHAREHOLDERS' EQUITY
Liquidation Account
In accordance with regulatory requirements, the Bank established a
liquidation account at the time of the Conversion in the amount of $7.8 million,
equal to its equity at March 31, 1995. The liquidation account is maintained for
the benefit of eligible account holders who continue to maintain their accounts
at the Bank after the Conversion. The liquidation account is reduced annually to
the extent that eligible account holders have reduced their qualifying deposits
as of each anniversary date. Subsequent increases do not restore an eligible
account holder's interest in the liquidation account. In the event of a complete
liquidation of the Bank, each eligible account holder and supplemental eligible
account holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held.
CAPITAL DISTRIBUTIONS
The Bank may not declare or pay cash dividends on or repurchase any of its
shares of common stock if the effect thereof would cause equity to be reduced
below applicable regulatory capital requirements or the amount required to be
maintained for the liquidation account. The OTS capital distribution regulations
applicable to savings institutions (such as the Bank) that meet their regulatory
capital requirements, generally limit dividend payments in any year to the
greater of (i) 100% of year-to-date net income plus an amount that would reduce
surplus capital by one-half or (ii) 75% of net income for the most recent four
quarters. Surplus capital is the excess of actual capital at the beginning of
the year over the institution's minimum regulatory capital requirement. The cash
dividends paid by the Bank to the Registrant in fiscal 1998, 1997 and 1996 were
not affected by this limitation.
Unlike the Bank, the Registrant is not subject to OTS regulatory
restrictions on the payment of dividends to its stockholders. The Registrant is
subject, however, to Delaware law which generally limits dividends to an amount
equal to the excess of the net assets of the Registrant (the amount by which
total assets exceed total liabilities) over its statutory capital, or if there
is no such excess, to its net profits for the current and/or immediately
preceding fiscal year.
To date, the Registrant has repurchased 142,000 shares of its common stock
(or approximately 8.8% of its common stock issued) for the treasury, in open
market transactions, at a total cost of $2.1 million or $14.51 per share.
Regulatory Capital Requirements
OTS regulations require savings institutions to maintain a minimum ratio of
tangible capital to total adjusted assets of 1.5%; a minimum ratio of Tier I
(core) capital to total adjusted assets of 4.0% (3.0% at March 31, 1997); a
minimum ratio of Tier I (core) capital to risk-weighted assets of 4.0% (no
requirement at March 31, 1997); and a minimum ratio of total (core and
supplementary) capital to risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of savings institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and
55
<PAGE> 57
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, 1998 and 1997, the Bank met all
capital adequacy requirements to which it is subject. Further, the most recent
OTS notification categorized the Bank as a well-capitalized institution under
the prompt corrective action regulations. There have been no conditions or
events since that notification that management believes have changed the Bank's
capital classification.
The following is a summary of the Bank's actual capital amounts and ratios
as of March 31, 1998 and 1997, compared to the OTS requirements for
classification as a well-capitalized institution and for minimum capital
adequacy:
<TABLE>
<CAPTION>
For Classification as Minimum Capital
Bank Actual Well Capitalized Adequacy
----------------------------- ----------------------------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
MARCH 31, 1998
Tangible capital $17,292 13.8% N/A N/A $1,878 1.5%
Tier I (core) capital 17,292 13.8 $6,259 5.0% $5,007 4.0
Risk-based capital:
Tier I 17,292 43.3 2,394 6.0 $1,596 4.0
Total 17,793 44.6 3,989 10.0 3,191 8.0
MARCH 31, 1997
Tangible capital $16,607 14.1% N/A N/A $1,763 1.5%
Tier I (core) capital 16,607 14.1 $5,876 5.0% $3,526 3.0
Risk-based capital:
Tier I 16,607 38.2 2,606 6.0 N/A N/A
Total 17,151 39.5 4,344 10.0 3,475 8.0
</TABLE>
56
<PAGE> 58
(11) EARNINGS PER SHARE
As discussed in note 1, the Company has adopted SFAS No. 128, "Earnings Per
Share" and restated its EPS data for all periods to present basic EPS and
diluted EPS in accordance with the new requirements. The following is an
analysis of the Company's EPS computations under SFAS No. 128 for the years
ended March 31, 1998 and 1997 and the period from October 5, 1995 (the
Conversion date) to March 31, 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
BASIC EPS:
Net income available to common shareholders $ 1,097 $ 855 $ 470
---------- ---------- ----------
Weighted average common shares outstanding 1,372,051 1,426,735 1,495,086
---------- ---------- ----------
Basic EPS $ 0.80 $ 0.60 $ 0.31
========== ========== ==========
DILUTED EPS:
Net income $ 1,097 $ 855 $ 470
---------- ---------- ----------
Weighted average common shares outstanding 1,372,051 1,426,735 1,495,086
Dilutive common stock equivalents:
Common stock equivalents due to the dilutive effect of
stock options under the treasury stock method 37,319 12,125 --
Common stock equivalents due to the dilutive effect of
RRP awards under the treasury stock method 13,929 10,540 --
---------- ---------- ----------
Total weighted average diluted shares 1,423,299 1,449,400 1,495,086
---------- ---------- ----------
Diluted EPS $ 0.77 $ 0.59 $ 0.31
========== ========== ==========
</TABLE>
(12) COMMITMENTS AND CONTINGENCIES
Off-Balance Sheet Financial Instruments
The Company's off-balance sheet financial instruments at March 31, 1998 and
1997 were limited to fixed-rate mortgage loan origination commitments with total
contractual amounts of $965,000 and $1.5 million, respectively, and weighted
average interest rates of 7.49% and 8.61%, respectively. These instruments
involve elements of credit risk and interest rate risk in addition to the
amounts recognized in the consolidated balance sheets. The contractual amounts
represent the Company's maximum potential exposure to credit loss, but do not
necessarily represent future cash requirements since certain commitments may
expire without being funded. Loan commitments generally have fixed expiration
dates or other termination clauses and may require the payment of a fee by the
customer. Commitments are subject to the credit approval process applied in the
Company's general lending activities, including a case-by-case evaluation of the
customer's creditworthiness and related collateral requirements.
Legal Proceedings
In the normal course of business, the Company is involved in various
outstanding legal proceedings. Management has discussed the nature of these
proceedings with legal counsel. In the opinion of management, the financial
position of the Company will not be materially affected as a result of the
outcome of such legal proceedings.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires the Company to disclose fair value information about
financial instruments for which it is practicable to estimate fair value,
whether or not such financial instruments are recognized on the balance sheet.
Fair value is the amount at which a financial instrument could be exchanged in a
current transaction between willing parties, other than in a forced sale or
liquidation.
Quoted market prices are used to estimate fair values when those prices are
available. However, active markets do not exist for many types of financial
instruments. Consequently, fair values for these instruments must be estimated
by management using techniques such as discounted cash flow analysis and
comparison to similar instruments. Estimates
57
<PAGE> 59
developed using these methods are highly subjective and require judgments
regarding significant matters, such as the amount and timing of future cash
flows and the selection of discount rates that appropriately reflect market and
credit risks. Changes in these judgments often have a material effect on the
fair value estimates. In addition, since these estimates are made as of a
specific point in time, they are susceptible to material near-term changes. Fair
values disclosed in accordance with SFAS No. 107 do not reflect any premium or
discount that could result from the sale of a large volume of a particular
financial instrument, nor do they reflect possible tax ramifications or
estimated transaction costs.
The following is a summary of the carrying values and estimated fair values
of the Company's financial assets and liabilities (none of which were held for
trading purposes) at March 31:
<TABLE>
<CAPTION>
March 31,
----------------------------------------------------
1998 1997
------------------------ -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----- ---------- ----- ----------
(In thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 783 $ 783 $ 912 $ 912
Interest-bearing deposits 2,401 2,401 1,438 1,438
Federal funds sold 6,200 6,200 5,900 5,900
Securities 58,399 58,839 54,507 54,273
Loans,net 57,623 58,812 55,110 54,909
FHLB stock 943 943 674 674
Accrued interest receivable 747 747 778 778
FINANCIAL LIABILITIES:
Savings certificate accounts 71,056 71,173 62,878 62,816
Other deposit accounts 33,937 33,937 35,449 35,449
</TABLE>
The following is a description of the principal valuation methods used by
the Company to estimate the fair values of its financial instruments:
Securities. Fair values were determined by published market prices or
securities dealers' estimated prices.
Loans. Fair values were estimated by portfolio, for loans with similar
financial characteristics. Loans were segregated by type, such as one-to four-
family residential, multi-family residential, commercial real estate, consumer
and commercial loans. Each loan category was further segmented into fixed and
adjustable-rate categories, and by performing and non-performing categories. The
pricing methodology for performing one- to four-family residential mortgage
loans was determined based on the zero-coupon yield curve plus the
option-adjusted spread for fixed-rate mortgages. The fair values for performing
loans in other portfolio categories were estimated by discounting the expected
cash flows using current market rates for loans with similar terms to borrowers
of similar credit quality. The fair values of non-performing loans were based on
management's analysis of estimated cash flows discounted at rates commensurate
with the credit risk involved.
Deposit Liabilities. The fair value of savings certificate accounts
represents contractual cash flows discounted using interest rates currently
offered on accounts with similar characteristics and remaining maturities. In
accordance with SFAS No. 107, the fair values of other deposit accounts (those
with no stated maturity such as savings accounts) are equal to the carrying
amounts payable on demand. In accordance with SFAS No. 107, these fair values do
not include the value of core deposit relationships which comprise a significant
portion of the Company's deposit base. Management believes that the Company's
core deposit relationships provide a relatively stable, low-cost funding source
which has a substantial unrecognized value separate from the deposit balances.
Other Financial Instruments. The other financial assets and liabilities
listed in the preceding table have fair values that approximate the respective
carrying values because the instruments are payable on demand or have short-term
maturities, and present relatively low credit risk and interest rate risk. Fair
values of the loan origination commitments described in note 12 were estimated
based on an analysis of the interest rates and fees currently charged to enter
into similar transactions, considering the remaining terms of the instruments
and the creditworthiness of the potential borrowers. At March 31, 1998 and 1997,
the fair values of these commitments approximated the related carrying values
which were not significant.
58
<PAGE> 60
(14) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Set forth below are the condensed balance sheets of Tappan Zee Financial,
Inc. as of March 31, 1998 and 1997, and its condensed statements of income and
cash flows for the years ended March 31, 1998 and 1997 and the period from
October 5, 1995 (the Conversion date) to March 31, 1996:
<TABLE>
<CAPTION>
March 31,
---------------------
CONDENSED BALANCE SHEETS 1998 1997
------- -------
<S> <C> <C>
Assets (In thousands)
Cash $ 238 $ 271
Securities and interest-bearing deposits 2,820 4,662
Investment in subsidiaries 18,520 16,298
Other assets 241 8
------- -------
Total assets $21,819 $21,239
======= =======
Liabilities and Shareholders' Equity
Accrued expenses $ 19 $ 11
Shareholders' equity 21,800 21,228
------- -------
Total liabilities and shareholders' equity $21,819 $21,239
======= =======
</TABLE>
<TABLE>
<CAPTION>
Period Ended March 31,
--------------------------------------
1998 1997 1996*
------- ------- -------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME (In thousands)
Dividends from subsidiaries $ 400 $ 360 $ 90
Interest income 203 255 78
Non-interest expense (182) (152) (22)
------- ------- -------
Income before income tax expense and equity in undistributed
earnings of subsidiaries 421 463 146
Income tax expense 8 38 33
------- ------- -------
Income before equity in undistributed earnings of subsidiaries 413 425 113
Equity in undistributed earnings of subsidiaries 684 430 357
------- ------- -------
Net income $ 1,097 $ 855 $ 470
======= ======= =======
</TABLE>
* From the date of Conversion, October 5, 1995
59
<PAGE> 61
<TABLE>
<CAPTION>
Period Ended March 31,
----------------------------------------
1998 1997 1996*
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income $ 1,097 $ 855 $ 470
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiaries (684) (430) (357)
Other adjustments, net 194 297 6
-------- -------- --------
Net cash provided by operating activities 607 722 119
-------- -------- --------
Cash flows from investing activities:
Purchase of common stock of subsidiaries (1,100) -- (7,357)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from sale of common stock, exclusive of ESOP shares -- -- 13,605
Purchase of common stock for awards under RRP -- (714) --
Purchase of treasury stock (990) (1,070) --
Dividends paid (392) (291) (81)
-------- -------- --------
Net cash provided by financing activities (1,382) (2,075) 13,524
(Decrease) increase in cash and cash equivalents (1,875) (1,353) 6,286
Cash and cash equivalents at beginning of period 4,933 6,286 --
-------- -------- --------
Cash and cash equivalents at end of period $ 3,058 $ 4,933 $ 6,286
======== ======== ========
</TABLE>
* From the date of Conversion, October 5, 1995
(15) MERGER AGREEMENT
On March 6, 1998, the Registrant entered into a definitive agreement
("Merger Agreement") pursuant to which the Registrant will merge with and into
U.S.B. Holding Co., Inc. ("USB"), a registered bank holding company and parent
company of Union State Bank, a New York State chartered commercial bank. The
Bank will operate as a wholly-owned subsidiary of USB.
Under the terms of the Merger Agreement, each shareholder of the Registrant
will receive USB common stock that is anticipated to have a value of $22.00 per
share for each share of the Registrant. The exchange ratio will be fixed upon
receipt of all regulatory approvals. The minimum exchange ratio will be 0.88
shares of USB common stock for each share of the Registrant's common stock, if
USB's common stock has a value of $25.00 per share, or higher, and subject to
the exception below, the maximum exchange ratio will be 1.24 shares of USB
common stock for each share of Registrant common stock if USB's common stock has
a value of $17.75, or lower. If USB's common stock has a value of between $17.75
and $25.00 per share, the Exchange Ratio will be established to provide a value
to the Registrant's shareholders of $22.00 per share. If USB's common stock
falls below $15.00 per share, the Registrant will have the right to terminate
the transaction subject to USB's right to adjust the Exchange Ratio so as to
assure the Registrant's shareholders receive a value of $18.60 per Registrant
share.
The transaction is intended to be a tax free exchange of common shares and
will be accounted for as a pooling of interests. The transaction is subject to
receipt of regulatory approvals and the approval of the Registrant's
shareholders. The transaction will be presented for approval at a special
meeting of the Registrant's shareholders.
In connection with the Merger Agreement, the Registrant and USB also entered
into a Stock Option Agreement which, under certain defined circumstances, would
enable USB to purchase up to 294,134, or 19.9%, of the Registrant's issued and
outstanding common stock at a price of $18.50 per share.
60
<PAGE> 62
(16) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for fiscal 1998 and 1997 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 1998
Interest income $ 2,265 $ 2,327 $ 2,348 $ 2,453
Interest expense 1,132 1,179 1,201 1,209
------- ------- ------- -------
Net interest income 1,133 1,148 1,147 1,244
Provision for loan losses 11 10 11 10
Non-interest income 50 48 79 91
Non-interest expense 714 766 778 752
------- ------- ------- -------
Income before income tax expense 458 420 437 573
Income tax expense 193 176 183 239
------- ------- ------- -------
Net income $ 265 $ 244 $ 254 $ 334
======= ======= ======= =======
Basic earnings per share $ 0.19 $ 0.18 $ 0.19 $ 0.24
======= ======= ======= =======
Diluted earnings per share $ 0.19 $ 0.17 $ 0.18 $ 0.23
======= ======= ======= =======
FISCAL 1997
Interest income $ 2,088 $ 2,155 $ 2,152 $ 2,196
Interest expense 1,004 1,018 1,022 1,062
------- ------- ------- -------
Net interest income 1,084 1,137 1,130 1,134
Provision for loan losses 6 20 20 23
Non-interest income 40 34 31 47
Non-interest expense (1) 677 1,306 708 696
------- ------- ------- -------
Income (loss) before income tax expense 441 (155) 433 462
Income tax expense (benefit) (1) 187 (229) 175 193
------- ------- ------- -------
Net income $ 254 $ 74 $ 258 $ 269
======= ======= ======= =======
Basic earnings per share $ 0.17 $ 0.05 $ 0.18 $ 0.19
======= ======= ======= =======
Diluted earnings per share $ 0.17 $ 0.05 $ 0.18 $ 0.19
======= ======= ======= =======
</TABLE>
(1) For the quarter ended September 30, non-interest expense includes the SAIF
special assessment of $538,000 and income tax benefit includes $166,000
attributable to a change in state tax law. See notes 5 and 7.
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 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.
61
<PAGE> 63
Information as to Directors. The following table sets forth certain
information with respect to each 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>
Directors Director Term Position(s) Held with the
Age(1) Since(2) Expires Company and the Bank
<S> <C> <C> <C> <C>
Stephen C. Byelick 73 1983 1998 President and Chief Executive
Officer and Director of the Company
and Tarrytowns
John T. Cooney 63 1982 1998 Director of the Company and Tarrytowns
Marvin Levy 72 1980 1999 Director and Chairman of the Company
and Tarrytowns
Kevin J. Plunkett 48 1990 1999 Director of the Company and Tarrytowns
Gerald L. Logan 60 1990 2000 Director of the Company and Tarrytowns
Harry G. Murphy 41 1989 2000 Vice President and Secretary and
Director of the Company and Tarrytowns
Paul R. Wheatley 67 1989 1999 Director of the Company and Tarrytowns
</TABLE>
(1) As of April 30, 1998.
(2) Includes service as a Director or Director Emeritus of Tarrytowns and
its predecessor, Tarrytown and North Tarrytown Saving and Loan
Association.
The principal occupation and business experience of each nominee for
election as director and each Continuing Director is set forth below.
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 Tarrytowns 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 Tarrytowns 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 Tarrytowns since 1980 and Director and Chairman
of the Board of Tarrytowns 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 Tarrytowns 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 Tarrytowns 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.
62
<PAGE> 64
Gerald L. Logan has served as a Director of the Company since its
formation in 1995 and has been a Director of Tarrytowns 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 retired from USF&G-AHM, an insurance company in 1997.
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
Tarrytowns since 1983, Vice President and Secretary of Tarrytowns since 1987 and
a Director of Tarrytowns since 1989. Mr. Murphy is also the Community
Reinvestment Officer of Tarrytowns. Prior to 1983, Mr. Murphy was an assistant
treasurer with The Bank of New York.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE COMPANY
The Company 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 twenty times during the fiscal year ended March
31, 1998. No director attended fewer than 75% of the total number of Board
meetings and committee meetings of which such director was a member except Mr.
Cooney who attended 70% of the Board meetings and was absent from the Examining
and Audit Committee meeting.
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 applicable 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 an Executive Committee meeting solely for these specific
functions during fiscal 1998 but instead dealt with these responsibilities at
Tarrytowns' Executive Committee meeting and at regular and special meetings of
the Company's Board of Directors. Tarrytowns' Executive Committee consists of
the same board members as the Company's Executive Committee meeting.
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 Tarrytowns. The committee
meets yearly and as requested by the Board of Directors. The Compensation
Committee of the Company met two times in fiscal 1998. In addition, the
Compensation Committee of Tarrytowns, which committee consists of the same board
members as the Company's Compensation Committee, met three times during fiscal
1998.
The Examining and Audit Committee consists of Messrs. Logan (Chairman),
Cooney and Wheatley. Tarrytowns' 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
Tarrytowns' 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 one time in fiscal 1998. In addition, the Examining and Audit
Committee of Tarrytowns, which consists of the same board members as the
Company's Examining and Audit Committee, met twelve times during fiscal 1998.
The Nominating Committee consists of Messrs. Levy (Chairman), Plunkett,
Wheatley, Logan and Murphy. The nominating committee nominates candidates for
the election of directors. The committee meets as called by the Committee
Chairman. This committee met one time during fiscal 1998, to select the nominees
for election as directors at the annual meeting of shareholders.
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
63
<PAGE> 65
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 Employment Agreements with its executive officers which sets forth the
terms of their employment.
Since the formation of the Company, none of the executive officers or other
employee personnel has received remuneration from the Company.
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 total
outstanding shares of the Company 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 filed with the SEC on Form 4 and
Form 5 for each officer and director, which were accurate in all respects, 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 during the 1998 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Fee Arrangements. Currently, each outside director of the Company receives
a fee of $700 per meeting attended and, in addition to such fee, the Chairman of
the Board receives a fee of $200 per month for Board service. All committee
members receive a fee of $300 for attendance at each committee meeting, with the
exception of members of the Examining and Audit Committee. The Chairman and
members of the Examining and Audit Committee receive a fee of $250 and $100,
respectively, for each committee meeting attended. When the Boards of Directors
of the Company and Tarrytowns meet on the same day, only one meeting fee is paid
to any director. In such a circumstance, the meeting fee is paid by Tarrytowns.
Directors' Retirement Plan. The Company maintains a non-qualified
retirement plan for eligible outside directors (the "Directors' Retirement
Plan"). This Plan provides benefits to each eligible outside director of the
Company commencing on his termination of Board service at or after age 65. Each
outside director who served or agreed to serve on the Board of Directors of the
Company or Tarrytowns subsequent to the completion of the Conversion
automatically became a participant in the Plan unless prior to, or, on or after
such date, the director irrevocably elected to participate in the Deferred
Compensation Plan (described below) and waived benefits under the Directors'
Retirement Plan. Currently, there are only two outside directors participating
in the Directors' Retirement Plan. An eligible outside director retiring at or
after age 65 will be paid an annual retirement benefit equal to the amount of
the aggregate compensation for services as a director (excluding stock
compensation) paid to him for the 12-month period immediately prior to his
termination of Board service, multiplied by a fraction, the numerator of which
is the number of his years of service as an outside director (including service
as a director or trustee of Tarrytowns 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.
64
<PAGE> 66
Deferred Compensation Plan for Directors. The Company also maintains a
non-qualified deferred compensation plan ("Deferred Compensation Plan") pursuant
to which directors may defer receipt of all or a portion of the compensation
received for their services to the Company or Tarrytowns 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 the Company Common Stock) for the account of
the director, in which case the amount of deferred benefits payable is based on
the investment performance of the investments made, or the compensation deferred
is used to pay annual premiums on life insurance policies owned by Tarrytowns
and covering the lives of the participants, in which case the amount of deferred
benefits payable is based on the value to Tarrytowns of expected death benefit
proceeds. Deferred benefits are paid in installments over a period of ten years
beginning upon termination of service as a director. In the event a director
dies prior to the complete distribution of his account in the Deferred
Compensation Plan, the remainder will be paid in a single sum payment to his
designated beneficiary. The Deferred Compensation Plan currently requires the
full funding of all premiums due under the four existing life insurance
contracts purchased for the Plan in the event a "change in control," such as the
Merger, were to occur. A separate trust fund has been established with an
independent fiduciary (the "Trustee") for the purpose of accumulating funds to
be used to satisfy the Company's obligations under the Deferred Compensation
Plan. The Trustee will vote any shares of The Company Common Stock purchased for
a participant's account in the Deferred Compensation Plan in accordance with the
directions given by such participant.
Outside Director Option Plan and Outside Director RRP. The Company has also
established, with the approval of its shareholders obtained at the 1996 annual
meeting ("1996 Annual Meeting") the Outside Director Option Plan and the Outside
Director RRP. In general, only non-employee directors of the Company may
participate and receive awards under these Plans. At the 1996 Annual Meeting,
when the Outside Director Option Plan and Outside Director RRP first became
effective, each outside director was granted a non-qualified stock option to
purchase 8,100 shares of the Company Common Stock and a restricted stock award
covering 3,240 shares of Common Stock. The options and restricted stock awards
vest at the rate of 20% per year, on each anniversary of the award grant date,
with full vesting to occur after a five consecutive year period. In addition,
the Outside Director Option Plan and Outside Director RRP provide for the
options granted to outside directors to become immediately exercisable and for
the shares of restrict stock granted to them to become fully distributable --
prior to the expiration of the five year period -- upon an outside director's
retirement, death, disability, or a "change in control," which, for this
purpose, would include shareholder approval of the Merger Agreement.
SUMMARY COMPENSATION TABLE
The following table sets forth the cash compensation paid by the Company
and Tarrytowns for services rendered in all capacities during the fiscal year
ended March 31, 1998 and for the two preceding fiscal years, to the Chief
Executive Officer and the executive officers of the Company and Tarrytowns whose
annual salary and bonus for such fiscal year was in excess of $100,000 ("Named
Executive Officers").
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------- ---------------------------- ---------
OPTIONS/
OTHER RESTRICTED STOCK ALL
ANNUAL COMPENSATION ANNUAL STOCK APPRECIATION LTIP OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS RIGHTS PAYOUT COMPENSATION
POSITIONS YEAR ($)(1) ($) ($)(2) ($)(3) ("SARS")(#)(4) ($) ($)(5)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen C. Byelick, 1998 $160,750 $23,338 --- --- --- --- $47,981
President and 1997 $154,500 $17,290 --- $188,325 40,500 --- $42,674
Chief Executive Officer 1996 $158,567 $18,083 --- --- --- --- $11,110
Harry G. Murphy, 1998 $99,000 $18,418 --- --- --- --- $47,981
Vice President 1997 $95,000 $12,220 --- $188,325 40,500 --- $30,656
and Secretary 1996 $97,900 $12,530 --- --- --- --- $7,687
</TABLE>
Footnotes follow on next page.
65
<PAGE> 67
(1) Includes compensation under the Deferred Compensation Plan and, for the
period prior to Tarrytowns' stock conversion in 1995, fees earned as a
director of Tarrytowns.
(2) For 1998, 1997, and 1996, 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 in fiscal 1997 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. The Employee RRP provides that, in the case
of termination of employment due to retirement, death, disability or a
"change in control," such as shareholder approval of the Merger
Agreement, all shares granted will become immediately vested. At March
31, 1998, the aggregate value of Mr. Byelick's and Mr. Murphy's
restricted share awards was $328,050, based on the final quoted sales
price of $20.25 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. As of March 31, 1998, 8,100 of
the options held by Mr. Byelick and Mr. Murphy under the Employee
Option Plan to purchase shares of the Company Common Stock at the
exercise price of $11.625 per share were exercisable. On July 11, 1998,
8,100 additional options granted to Mr. Byelick and Mr. Murphy will
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. Pursuant to the Employee Option Plan, in the
event of an option holder's termination of employment due to
retirement, death, disability or a "change in control," which would
include shareholder approval of the Merger Agreement, all options
granted become immediately exercisable.
(5) Includes shares of the Company Common Stock allocated to the accounts
of Messrs. Byelick and Murphy, pursuant to the ESOP. Mr. Byelick was
allocated 2,559 in fiscal 1998, 3,132 shares in fiscal 1997 and 880
shares in fiscal 1996. Mr. Murphy was allocated 2,559 in fiscal 1998,
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 $18.750, $13.375 and
$12.625 respectively, the final quoted sales price of the Company
Common Stock on the Nasdaq Stock Market on December 31, 1997, December
31, 1996 and December 31, 1995, the dates of allocation.
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.
EMPLOYMENT AGREEMENTS
The Company and Tarrytowns 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 ensure the ability of the
Company and Tarrytowns to maintain a stable and competent management. For
purposes of achieving comparable goals, the Merger Agreement provides for USB
and Tarrytowns to enter into new agreements with these Senior Executives that
will replace and supersede the Employment Agreements, currently in effect, which
are described below.
The existing Employment Agreements between Tarrytowns and the Senior
Executives provide for initial three year terms and further provide that,
commencing on the first anniversary date of the Agreement and continuing each
anniversary date thereafter, 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 Board of Directors of
Tarrytowns, with the consent of each Senior Executive, approved an extension to
each Agreement effective as of June 23, 1997. The Company's Employment
Agreements with the Senior Executive 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 and adjusted based on the Senior
Executive's job performance and the performance of the Company and Tarrytowns.
As of May 31, 1998, the base salaries for Messrs. Byelick and Murphy are
$164,500 and $102,000, 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 Tarrytowns or the
Company and the Senior Executive. The Employment Agreements provide for
termination by Tarrytowns or the Company at any time for cause as defined in the
Employment Agreements. In the event Tarrytowns or
66
<PAGE> 68
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 voluntary or
involuntary termination of employment following a "change in control" of the
Company or Tarrytowns, which would include the Merger, 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 Tarrytowns or the Company
during the remaining terms of the Employment Agreements. Tarrytowns and the
Company would also continue the Senior Executive's life, health and disability
insurance coverage for the remaining terms of the Employment Agreements.
It is not anticipated that any cash or benefits payable to the Senior
Executives following the Merger will constitute "excess parachute" payments"
under Section 280G of the Code that would result in the imposition of a 20%
excise tax on the recipient and the denial of the deduction for such excess
amounts to the Company, its successor USB, and Tarrytowns. However, in the event
that any such payments or benefits constitute "excess parachute payments"
triggering an excise tax, the new agreements to be entered into by and among
USB, Tarrytowns and the Senior Executives provide for full indemnification of
each Senior Executive with respect to any such excise tax liability.
EMPLOYEE RETENTION AGREEMENTS.
In order to further its goal of ensuring a stable management team during a
possible "change in control," the Company and Tarrytowns also entered into
employee retention agreements, dated as of June 23, 1997, with the following
executives: James D. Haralambie, Christina Vidal Clarke, Margaret Sampson and
Valerie Wilson (collectively, the "Employee Retention Agreements"). These
Agreements supersede and replace the prior employee retention agreements adopted
by the Company and Tarrytowns in connection with Tarrytowns' Conversion in 1995.
The Merger Agreement provides for USB to honor and assume the terms of these
Employee Retention Agreements, which are described below.
Effective upon a "change of control" of the Company or Tarrytowns (which
would include the Merger), each Employee Retention Agreement provides for an
"Assurance Period" of two years, in the case of Mr. Haralambie and Ms. Clarke,
and one year, in the case of Ms. Sampson or Ms. Wilson, that will commence
effective upon such event. Each Employee Retention Agreement provides that if,
at any time during the applicable "Assurance Period" or during the three month
period prior to the "change in control," the executive's employment is
terminated for any reason other than "for cause" (as defined in the Agreement)
death or disability, or if the executive voluntarily resigns his employment due
to: (i) a material diminution in the executive's functions, duties or
responsibilities; (ii) a reduction in the executive's compensation; (iii) a
material change in the employee benefit programs provided to the executive by
Tarrytowns, USB or any successor; or (iv) a relocation of the executive's
principal place of employment that would result in a one-way commuting time in
excess of the greater of: (A) 30 minutes or (B) the executive's commuting time
immediately before the change, the executive, or, in the event of his or her
death, the executive's beneficiary, would be entitled to receive a severance
payment equal to the remaining base salary, bonus payments and the additional
contributions or benefits that would have been earned by the executive under any
employee benefit plans of Tarrytowns or the Company during the remaining portion
of the executive's Assurance Period. The Employee Retention Agreements also
provide for the executive's life, health and disability insurance coverage to be
continued for the remaining Assurance Period.
BENEFITS
Retirement Plan. Tarrytowns 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
Retirement Plan provides for an annual annuity 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). The
Retirement Plan was amended, effective as of January 30, 1998, to permit a
participant to elect a lump sum distribution of his benefits under the Plan
under certain circumstances, including in-service distribution. A participant
will become fully vested in his or her benefit under the Retirement Plan after
five years of service. The Retirement Plan is funded by Tarrytowns on an
actuarial basis. The Plan is administered by the Pension Committee of
Tarrytowns' Board of Directors and operates on a calendar year basis. Tarrytowns
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 Company 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. As of March 31,
1998, the Retirement Plan has purchased 6,275 shares of the Company 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
the Company Common Stock held in the Retirement Plan Trust in accordance with
the directions given by
67
<PAGE> 69
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 45,000 (2) 60,000 75,000 90,000 90,000
$175,000 52,500 (2) 70,000 87,500 105,000 105,000
$200,000 60,000 (2) 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. See "Deferred Compensation Plan."
(2) For 1997, the average final compensation for computing benefits under the
Retirement Plan cannot exceed $160,000 (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, 1997, the end of the 1997 plan year, for
each of Stephen C. Byelick and Harry G. Murphy, the Named Executive Officers
listed in the Summary Compensation Table, were 15.0 years and $156,191 and 14.5
years and $107,750, respectively.
Employee Stock Ownership Plan and Trust. The Company has established, and
Tarrytowns has adopted, for the benefit of eligible employees, an ESOP and
related trust which became effective upon the Conversion. All employees of
Tarrytowns 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
Company Common Stock (129,600 shares) issued in the Conversion. Tarrytowns has
been making annual contributions to the ESOP on behalf of its participating
employees 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" which would include the Merger. 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
68
<PAGE> 70
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
retirement, death, disability or a "change in control" which would include
shareholder approval of the Merger Agreement. However,[as discussed in more
detail in the "Proposal [1]. The Merger -- Interests of Certain Persons in the
Merger" portion of this Proxy Statement-Prospectus,] Messrs. Byelick and Murphy
have each agreed, pursuant to their respective Letter Agreement with USB and
Tarrytowns, to waive the accelerated vesting that would otherwise apply to their
options and restricted stock awards upon the approval of the Merger Agreement by
the Company's shareholders. The terms of each executive's Letter Agreement
provides for all currently un-vested and outstanding stock options and
restricted stock awards to continue to vest in accordance with their original
vesting schedules.
During the 1998 fiscal year, no stock options were granted under the
Employee Option Plan to any eligible officer, executive or employee of the
Company or Tarrytowns.
The following table provides certain information with respect to the
number of shares of the Company Common Stock acquired through the exercise of,
or represented by outstanding, stock options held by the Named Executive
Officers on March 31, 1998. Also reported is the value for "in-the-money"
options, which represent the positive spread between the exercise price of
$11.625 applicable to the existing stock options shown in the table below and
the 1998 fiscal year-end price of $20.25 per share of the Company Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FISCAL OPTIONS/SARS AT FISCAL
YEAR-END (1) (2) YEAR-END
# ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE / UNEXERCISABLE
<S> <C> <C>
Stephen C. Byelick, 8,100 / 32,400 69,863 / 279,450
President and
Chief Executive Officer
Harry G. Murphy, 8,100 / 32,400 69,863 / 279,450
Vice President and Secretary
</TABLE>
(1) None of the Named Executive Officers exercised options during the fiscal
year ended March 31, 1998.
(2) 8,100 of the total of 40,500 outstanding stock options held by each Named
Executive Officer were exercisable as of March 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS OF THE COMPANY
The following table sets forth, as of March 31, 1998, certain information
as to the Company Common Stock beneficially owned by persons owning in excess of
5% of the outstanding shares of the Company Common Stock. Management knows of no
person, except as listed below, who beneficially owned more than 5% of the
outstanding shares of the Company Common Stock as of May 31, 1998. 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 the Company 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 March 31,
1998. As used herein, "voting power" is the power to vote or direct the voting
of shares and "investment power" is the power to dispose or direct the
disposition of such shares.
69
<PAGE> 71
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF COMMON
NAME AND ADDRESS BENEFICIAL OWNERSHIP STOCK OUTSTANDING
<S> <C> <C>
Compensation Committee of the Board of 171,872 shares(1) 11.63%
Directors of Tappan Zee Financial, Inc. in its
capacity as the administrator of the Employee
Stock Ownership and Recognition and Retention
Plans of Tappan Zee Financial, Inc.
75 North Broadway
Tarrytown, New York 10591
The Employee Stock Ownership Plan Trust of 129,600 shares(2) 8.77%
Tappan Zee Financial, Inc. and Certain Affiliates
250 Park Avenue
New York, NY 10177
BRT Realty Trust 119,950 shares(3) 8.11%
60 Cutter Mill Road Suite 303
Great Neck, NY 11201
</TABLE>
(1) The Compensation Committee administers the Employee Stock Ownership
Plan of Tappan Zee Financial, Inc. ("ESOP"), a tax-qualified employee
stock ownership plan covered by the provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
Individual accounts are maintained in the ESOP for the accrued benefits
of participating employees and their beneficiaries (see footnote #2
below). The Compensation Committee also administers the 1996
Recognition and Retention Plan for Officers and Employees of Tappan Zee
Financial, Inc. ("Employee RRP") and the 1996 Recognition and Retention
Plan for Outside Directors of Tappan Zee Financial, Inc. ("Outside
Director RRP"), two non-qualified plans (collectively, the "RRPs"). The
assets of the ESOP and the RRPs are held in separate trusts (the "ESOP
Trust" and "RRP Trust," respectively) by Marine Midland Bank which
serves as trustee (the "Trustee") of these Trusts. Since the
Compensation Committee has shared "investment power" defined to mean
the power to dispose (or to direct the disposition of) the assets of
the ESOP and RRP Trusts, consisting of 171,872 shares of Common Stock,
as of December 31, 1997, the Compensation Committee may be deemed to
have beneficial ownership of these shares. Any unawarded shares held in
the RRP Trust are generally required to be voted by the Trustee as
directed by the Compensation Committee to reflect the votes of
participating employees with respect to awarded shares. The Committee
has the power to direct the Trustee with respect to the disposition or
restriction of all shares held in the ESOP and RRP Trusts except in the
case of a tender or exchange offer and, in this case, the Compensation
Committee disclaims beneficial ownership of these shares. Each member
of the Compensation Committee disclaims beneficial ownership of such
shares.
(2) The ESOP Trust purchased the shares of Common Stock shown in the table
above 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 on an annual basis, on
the last day of each calendar year, following re-payment of the
principal and interest due on the ESOP's loan. As of December 31, 1997,
a total of 35,537 shares purchased by the ESOP Trust had been allocated
to participants' accounts and the balance, 94,063 shares, remained
unallocated and were held in the ESOP Trust's suspense account. The
terms of the ESOP provide that, subject to the ESOP Trustee's fiduciary
responsibilities under ERISA, the ESOP Trustee will vote, tender or
exchange shares of Common Stock held in the ESOP Trust and allocated to
participants in accordance with instructions received from such
participants. The ESOP Trustee will vote allocated shares as to which
no instructions are received and any shares that have not been
allocated to participants' accounts in the same proportion as it votes
the allocated shares with respect to which the ESOP Trustee receives
instructions. The ESOP Trustee will tender or exchange any shares in
the suspense account or that otherwise have not been allocated to
participants' accounts in the same proportion as the allocated shares
with respect to which the ESOP Trustee receives instructions are
tendered or exchanged. With respect to allocated shares as to which no
instructions are received, the ESOP Trustee will be deemed to have
received instructions not to tender or exchange such shares. Except as
described in footnote #1 above, the Compensation Committee investment
power, except in limited circumstances, but no voting power over all
the Company Common Stock held in the ESOP Trust.
(3) BRT Realty Trust ("BRT") filed with the SEC a Schedule 13D, dated as of
June 2, 1997 and amended as of July 18, 1997 and October 31, 1997.
Based on BRT's Schedule 13D, BRT has sole voting and investment power
over the 119,950 shares. BRT is a privately-owned Massachusetts
business trust, intended to qualify as a Real Estate Investment Trust.
70
<PAGE> 72
STOCK OWNED BY MANAGEMENT
The following table sets forth information as of March 31, 1998 with
respect to the shares of the Company 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 49,945 (8) 3.34 %
Officer and Director
Harry G. Murphy Vice President and Secretary 40,923 (9) 2.74 %
and Director
John T. Cooney Director 13,480 *
Marvin Levy Director and Chairman 10,832 (10) *
Gerald Logan Director 10,980 *
Kevin J. Plunkett Director 12,580 (11) *
Paul R. Wheatley Director 9,980 (12) *
All directors and executive officers as a group (7 persons) 249,058 16.31 %
</TABLE>
* Less than one percent
(1) Titles are for both the Company and Tarrytowns.
(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 12,960 shares of restricted stock awarded to each of Mr.
Byelick and Mr. Murphy under the Employee RRP, as to which each has
sole voting power but no investment power and 2,592 shares of
restricted stock awarded to each of Messrs. Cooney, Levy, Logan,
Plunkett and Wheatley under the Outside Director RRP, as to which each
has sole voting power but no investment power. See "Interests of
Certain Persons on the Merger" for details on the impact shareholder
approval of the Merger Agreement will have on the vesting of these
awards.
(4) Includes 16,200 shares subject to options granted to each of Mr.
Byelick and Mr. Murphy pursuant to the Employee Option Plan which may
be acquired within 60 days after May 31, 1998 and 3,240 shares subject
to options granted to each of Messrs. Cooney, Levy, Logan, Plunkett and
Wheatley under the Outside Director Option Plan which may be acquired
within 60 days from May 31, 1998. Does not include the 24,300 shares
subject to options granted to each of Mr. Byelick and Mr. Murphy
pursuant to the Employee Option Plan which are not currently
exercisable and will not become exercisable within the next 60 days.
Also does not include the 4,860 shares subject to options granted to
each of Messrs. Cooney, Levy, Logan, Plunkett and Wheatley which are
not currently exercisable and will not become exercisable in the next
60 days. See "Interests of Certain Persons in the Merger" for a
discussion of the impact that shareholder approval of the Merger
Agreement will have on the vesting and exercisability of the stock
options granted to these officers and outside directors.
(5) The figure shown include shares held in trust pursuant to the ESOP that
have been allocated as of May 31, 1998 to individual accounts as
follows: Mr. Byelick, 6,545 shares, Mr. Murphy 5,423 shares and all
directors and executive officers as a group, 11,968 shares. Such
persons have voting power (subject to the legal duties of the Trustee)
but no investment power, except in limited circumstances, as to such
shares. The figures shown for Messrs. Byelick and Murphy do not include
94,063 shares held in trust pursuant to the ESOP that have not been
allocated to any individual's account and as to which Messrs. Byelick
and Murphy share voting power with other ESOP participants. Also not
included are 6,275 shares purchased by Tarrytowns's tax-qualified
defined benefit pension plan ("Pension Plan"). The figures shown for
all directors and executive officers as a group includes such 94,063
shares as to which the members of 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 6,275
shares as to which the members of Tarrytowns'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, 1997 to individual accounts as follows: Mr. Murphy, 1,050
shares, Mr. Levy, 1,500 shares and all directors and executive officers
as a group, 2,550 shares. Such persons have sole voting and investment
power as to such shares.
(7) Percentages with respect to each person or group of persons have been
calculated on the basis of the number of shares of Common Stock
outstanding as of May 31, 1998 plus the number of shares of Common
Stock which such person or group has the right to acquire within 60
days after May 31, 1998 by the exercise of such options.
(8) Includes 4,000 shares as to which Mr. Byelick may be deemed to share
voting power, but has no investment power.
(9) Includes 550 shares as to which Mr. Murphy may be deemed to share
voting power, but has no investment power.
(10) Includes 1,000 shares as to which Mr. Levy may be deemed to share
voting power, but has no investment power.
(11) Includes 6,100 shares as to which Mr. Plunkett may be deemed to share
voting power, but has no investment power.
(12) Includes 3,000 shares as to which Mr. Wheatley shares voting and
investment power and 500 shares as to which Mr.Wheatley may be deemed
to share voting power, but has no investment power.
71
<PAGE> 73
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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
Tarrytowns not to make loans to executive officers and directors. As of the
Record Date, none of Tarrytowns' directors and executive officers had loans
outstanding to Tarrytowns. Tarrytowns, however, may make loans or extend credit
to certain persons related to executive officers and directors. All such loans
were made by Tarrytowns 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. Tarrytowns intends that any transactions in
the future between Tarrytowns and its executive officers, directors, holders of
10% or more of the shares of any class of its Company Common Stock and
affiliates thereof, will contain terms no less favorable to Tarrytowns 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
Tarrytowns not having any interest in the transaction.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:.
1. All financial statements are included on Item 8 of Part II of
this report.
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
2.1 Agreement and Plan of Merger, dated as of March 6, 1998, between
U.S.B. Holding Co, Inc. and Tappan Zee Financial, Inc.
(incorporated by reference to Exhibit 2.1 to the Company's Form
8-K filed on March 13, 1998)
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)
4.4 Stock Option Agreement, dated March 6, 1998, between U.S.B.
Holding Co., Inc. and Tappan Zee Financial, Inc. (incorporated by
reference to Exhibit 4.1 to the Company's Form 8-K filed on March
13, 1998)
10.1.0 Tappan Zee Financial, Inc. 1996 Stock Option Plan for Officers
and Employees ("Employee Option Plan") (incorporated by
72
<PAGE> 74
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 (incorporated by
reference to Exhibit 10.1.1 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended March 31, 1997 (the "1997
10-K".))
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 (incorporated
by reference to Exhibit 10.2.1 of the 1997 10-K)
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 (incorporated by reference to
Exhibit 10.3.1 of the 1997 10-K)
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 (incorporated by
reference to Exhibit 10.4.1 of the 1997 10-K)
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, 1997 (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
73
<PAGE> 75
(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)
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
(incorporated by reference to Exhibit 10.16 of the 1997 10-K)
10.17 Forms of Restricted Stock Award Notices to award recipients,
pursuant to the Employee RRP and the Outside Director RRP
(incorporated by reference to Exhibit 10.17 of the 1997 10-K)
10.18 Form of Consulting Agreement between Tarrytowns Bank, FSB and
Stephen C. Byelick
10.19 Form of Employment Agreement between Tarrytowns Bank, FSB and
Harry G. Murphy
21.1 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21.1 to the Registration Statement)
27 Financial Data Schedule (EDGAR filing only)
74
<PAGE> 76
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 29, 1998 By: /s/Stephen C. Byelick
-----------------------------
Stephen C. Byelick
President and Chief Executive Officer
Dated: June 29, 1998 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.
Signature Title Date
- --------- ----- ----
/s/Marvin Levy Chairman June 29, 1998
- ----------------------
Marvin Levy
/s/ Stephen C. Byelick Director June 29, 1998
- ----------------------
Stephen C. Byelick
/s/ John T. Cooney Director June 29, 1998
- ----------------------
John T. Cooney
/s/Gerald L. Logan Director June 29, 1998
- ----------------------
Gerald L. Logan
/s/Harry G. Murphy Director June 29, 1998
- ----------------------
Harry G. Murphy
/s/Kevin J. Plunkett Director June 29, 1998
- ----------------------
Kevin J. Plunkett
/s/Paul R. Wheatley Director June 29, 1998
- ----------------------
Paul R. Wheatley
75
<PAGE> 1
EXHIBIT 10.18
CONSULTING AGREEMENT
CONSULTING AGREEMENT, dated this ____ day of ___________ 1998, between
Tarrytowns Bank, FSB (the "Bank"), and Stephen C. Byelick (the "Consultant").
WITNESSETH
WHEREAS, the Consultant previously entered into an agreement with Tappan
Zee Financial, Inc. ("Tappan Zee") dated June 23, 1997 (the "1997 Tappan Zee
Agreement") and a separate agreement with the Bank dated June 23, 1997 (the
"1997 Bank Agreement") (collectively, the "1997 Agreements");
WHEREAS, as of the date of this Agreement, Tappan Zee has merged with and
into U.S.B. Holding Co., Inc. (the "Corporation") and the Bank has become a
wholly owned subsidiary of the Corporation;
WHEREAS, the Bank desires to be ensured of the Consultant's active
participation and support in the business of the Bank; and
WHEREAS, in order to induce the Consultant to serve as a consultant and a
director emeritus of the Bank and in consideration of the Consultant's agreeing
to serve as a consultant and a director emeritus, the Bank and the Consultant
desire to enter into this Agreement regarding, among other things, the
consulting services to be provided by the Consultant to the Bank and,
concurrently therewith, to terminate the 1997 Agreements, all as hereinafter set
forth.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings set
forth below for the purposes of this Agreement:
(a) CAUSE. Termination of the Consultant's services for "Cause" shall mean
termination because of dishonest conduct in connection with his performance of
services for the Bank resulting in his conviction of a felony, conviction of, or
plea of guilty or nolo contendere to, a felony or any crime involving moral
turpitude; willful failure or refusal to perform his duties under this Agreement
and failure to cure such breach within fifteen (15) days following written
notice thereof; breach of fiduciary duties to the Bank for personal profit; or
willful breach or violation of any law, rule or regulation (other than traffic
violations or similar offenses), or final cease and desist order in connection
with his performance of services for the Bank, in each case as measured against
standards generally prevailing at the relevant time in the savings and community
banking
<PAGE> 2
industry; provided, however, that the Consultant shall not be deemed to have
been discharged for cause unless and until he shall have received a written
notice of termination from the Board, accompanied by a resolution duly adopted
by affirmative vote of a majority of the entire Board at a meeting called and
held for such purpose (after reasonable notice to the Consultant and a
reasonable opportunity for the Consultant to make oral and written
presentations to the members of the Board, on his own behalf, or through a
representative, who may be his legal counsel, to refute the grounds for the
proposed determination) finding that in the good faith opinion of the Board
grounds exist for discharging the Consultant for cause. For purposes of this
paragraph, no act or failure to act on the Consultant's part shall be
considered "willful" unless done, or omitted to be done, by the Consultant not
in good faith and without reasonable belief that the Consultant's action or
omission was in the best interest of the Bank.
(b) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" shall mean a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), or any successor thereto, whether or not the Corporation is registered
under the Exchange Act; provided that, without limitation, such a change in
control shall be deemed to have occurred if (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act, but excluding persons who
are directors or officers of the Corporation as of the date of this Agreement)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Corporation
representing 25% or more of the combined voting power of the Corporation's then
outstanding securities; or (ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors of the Corporation cease for any reason to constitute at least a
majority thereof unless the election, or the nomination for election by
stockholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period.
(c) CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) CONSULTING FEE. "Consulting Fee" shall have the meaning set forth in
Section 3(a) hereof.
(e) DATE OF TERMINATION. "Date of Termination" shall mean the date
specified in the Notice of Termination.
(f) DISABILITY. Termination by the Bank of the Consultant's services based
on "Disability" shall mean termination because of any physical or mental
impairment which would qualify the Consultant for disability benefits under the
applicable long-term disability plan maintained by the Bank if he was an
employee or, if no such plan applies, which would qualify the Consultant for
disability benefits under the Federal Social Security System.
(g) GOOD REASON. Termination by the Consultant of the Consultant's
services for "Good Reason" shall mean termination by the Consultant following a
Change in Control of the Corporation based on:
<PAGE> 3
(i) Without the Consultant's express written consent, a reduction
by the Bank in the Consultant's Consulting Fee as the same may
be increased from time to time;
(ii) Any purported termination of the Consultant's services for
Cause, Disability or Retirement which is not effected pursuant
to a Notice of Termination satisfying the requirements of
paragraph (i) below; or
(iii) The failure by the Bank to obtain the assumption of and
agreement to perform this Agreement by any successor as
contemplated in Section 11 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) NOTICE OF TERMINATION. Any purported termination of the Consultant's
services by the Bank for any reason, including without limitation for Cause,
Disability or Retirement, or by the Consultant for any reason, including without
limitation for Good Reason, shall be communicated by written "Notice of
Termination" to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a dated notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Consultant's services under the provision so indicated, (iii)
specifies a Date of Termination, which shall be not less than twenty (20) nor
more than ninety (90) days after such Notice of Termination is given, except in
the case of the Bank's termination of the Consultant's services for Cause, which
shall be effective immediately; and (iv) is given in the manner specified in
Section 12 hereof.
(j) RETIREMENT. "Retirement" shall mean any voluntary termination by the
Consultant of his consulting services or his services as a director emeritus
following the one-year anniversary of the date of this Agreement that would
result in the Consultant being entitled to (i) accelerated vesting under his
Incentive Stock Option Agreement with Tappan Zee dated July 11, 1996, his
Restricted Stock Award Notice with Tappan Zee dated July 11, 1996, or any other
benefit plan of Tappan Zee or the Bank which is not a qualified plan under
Section 401(a) of the Code, or (ii) the payment of any benefits under any other
benefit plan of Tappan Zee or the Bank which is not a qualified plan under
Section 401(a) of the Code, in each case for purposes of clauses (i) and (ii) as
such plans have been assumed by the Corporation and/or the Bank as of the date
of this Agreement.
2. TERM OF CONSULTING SERVICES.
(a) The Bank hereby engages the Consultant, and the Consultant hereby
accepts said engagement, for the Consultant to serve as a director emeritus of
the Bank and to provide his personal advice and counsel to the Bank and its
affiliates in connection with the business of banking and financial services.
Specifically, the Consultant agrees to provide his advice and counsel to the
Bank in connection with the on-going operations of the Bank and its affiliates.
The Consultant further agrees to perform certain duties in respect to the
transition of the Bank becoming an affiliate of the Corporation. Such duties may
include, without limitation, counsel and
<PAGE> 4
advice in connection with business development and government relations in the
market areas served by the Bank. The term under this Agreement shall be for
three years, commencing on the date of this Agreement.
(b) During the term of this Agreement, the Consultant's services shall be
rendered at such times as shall be mutually agreeable to the Bank and the
Consultant, and as shall be reasonably convenient to both the Bank and the
Consultant. Such services shall be in the nature of customer and community
relations, business development, employee relations and general advice and
assistance relating to the business of the Bank and its employees. The
Consultant shall work a minimum of 10 hours per week, but shall not be required
to work in accordance with any fixed schedule.
(c) Subject to the reasonable requirements and convenience of the Bank, in
the performance of the services required of the Consultant hereunder, the
Consultant shall have exclusive control over the manner of the performance of
such services, including without limitation: (i) the selection of methods,
practices, procedures and strategies to be employed in the performance of such
services; and (ii) the determination of the places and dates at which such
services will be performed.
(d) The Consultant agrees not to elect Retirement during the first 12
months following the date of this Agreement.
3. COMPENSATION AND BENEFITS.
(a) The Bank shall compensate and pay the Consultant for his services
during the term of this Agreement at a minimum fee of $77,000 per year
("Consulting Fee"), which may be increased from time to time in such amounts as
may be determined by the Board of Directors of the Bank and may not be decreased
without the Consultant's express written consent.
(b) In consideration for the Consultant entering into this Agreement and
waiving all of his rights under the 1997 Agreements, which 1997 Agreements are
hereby superseded pursuant to Section 22 hereof, the Bank agrees to pay to the
Consultant a signing bonus in a lump sum cash amount equal to $472,000
concurrently with the election and delivery of this Agreement.
(c) The Consultant shall be entitled to participate in the Bank's
post-retirement health care and life insurance plans in accordance with the
terms of such plans.
4. TERMINATION.
(a) The Bank shall have the right, at any time upon prior Notice of
Termination, to terminate the Consultant's services hereunder for any reason,
including without limitation termination for Cause or Disability, and the
Consultant shall have the right, upon prior Notice of Termination, to terminate
his services hereunder for any reason.
(b) In the event that (i) the Consultant's services are terminated by the
Bank for Cause, or (ii) the Consultant terminates his services hereunder other
than for the reasons set forth in
<PAGE> 5
Section 4(c) below, the Consultant shall have no right pursuant to this
Agreement to consulting fees or other benefits for any period after the
applicable Date of Termination.
(c) In the event that the Consultant's services are terminated (i) by the
Bank for other than Cause, (ii) by the Consultant (a) due to a material breach
of this Agreement by the Bank, which breach has not been cured within twenty
(20) days after a written notice of non-compliance has been given by the
Consultant to the Bank, or (b) for Good Reason, or (iii) due to the Consultant's
Retirement, Disability or death, then the Bank shall, subject to the provisions
of Section 5 hereof, if applicable,
(A) pay to the Consultant (or, in the event of his death, to his
estate) cash severance amount equal to the Consultant's Consulting Fee for
the then remaining term of this Agreement, with such amount to be paid in
equal monthly installments over the remaining term of this Agreement,
commencing on the first business day of the first month following the Date
of Termination,
(B) with respect to stock options held by the Consultant as of the
date of this Agreement to purchase common stock of the Corporation and
which are outstanding and unvested as of the Date of Termination,
accelerate the vesting of such stock options as of the Date of Termination
so that they are exercisable in full for the period of time specified in
the option agreement with the Consultant, and
(C) with respect to restricted stock awards held by the Consultant
as of the date of this Agreement to acquire common stock of the
Corporation and which are outstanding and unvested as of the Date of
Termination, accelerate the vesting of such restricted awards so that they
are fully vested as of the Date of Termination.
5. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments and
benefits pursuant to Section 4 hereof, either alone or together with other
payments and benefits which the Consultant has the right to receive from the
Bank, the Corporation or any affiliate of either of them, would constitute a
"parachute payment" under Section 280G of the Code, then the payments and
benefits payable by the Bank pursuant to Section 4 hereof shall be reduced, in
the manner determined by the Consultant, by the amount, if any, which is the
minimum necessary to result in no portion of the payments and benefits payable
by the Bank under Section 4 being non-deductible to the Bank pursuant to Section
280G of the Code and subject to the excise tax imposed under Section 4999 of the
Code. The parties hereto agree that the payments and benefits payable by the
Bank pursuant to this Agreement to the Consultant upon termination shall be
limited to three times the Consultant's average annual compensation (based upon
the most recent five taxable years) in accordance with OTS Regulatory Bulletin
27a. The determination of any reduction in the payments and benefits to be made
pursuant to Section 4 shall be based upon the opinion of independent tax counsel
selected by the Bank (and reasonably acceptable to the Consultant) and paid by
the Bank. Such counsel shall promptly prepare the foregoing opinion, but in no
event later than thirty (30) days from the Date of Termination; and may use such
actuaries as such counsel deems necessary or advisable for the purpose. Nothing
contained herein shall result in a reduction of any payments or benefits to
which the Consultant may be entitled upon termination of his
<PAGE> 6
consulting services under any circumstances other than as specified in this
Section 5, or a reduction in the payments and benefits specified in Section 4
below zero.
6. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Consultant shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced by any compensation earned by the
Consultant from other services after the Date of Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Consultant upon a
termination of his services with the Bank pursuant to benefit plans of the Bank
or otherwise.
7. COVENANT NOT TO COMPETE. The Consultant hereby covenants and agrees
that, in the event of the termination of his services with the Bank prior to the
expiration of the term of this Agreement, then for a period equal to the greater
of (i) the then remaining unexpired term of this Agreement and (ii) two (2)
years following the Date of Termination of his services, he shall not, without
the written consent of the Bank, become an officer, employee, consultant,
director or trustee of any savings bank, savings and loan association, savings
and loan holding company, bank or bank holding company, or any direct or
indirect subsidiary or affiliate of any such entity, that entails working within
one hundred (100) miles of the headquarters of the Bank, the Corporation or any
affiliate of either of them on the Date of Termination; provided, however, that
this Section 7 shall not apply if the Consultant's services are terminated for
the reasons set forth in Section 4(c) (other than for Disability); and provided,
further, that if the Consultant's services shall be terminated on account of
Disability, this Section 7 shall not prevent the Consultant from accepting any
position or performing any services if (a) he first offers, by written notice,
to accept a similar position with, or perform similar services for, the Bank on
substantially the same terms and conditions and (b) the Bank declines to accept
such offer within ten (10) days after such notice is given.
8. CONFIDENTIALITY. Unless he obtains the prior written consent of the
Bank, the Consultant shall keep confidential and shall refrain from using for
the benefit of himself, or any person or entity other than the Bank, the
Corporation or any affiliate of either of them, any material document or
information obtained from the Bank, the Corporation or any affiliate of either
of them, in the course of his services with any of them concerning their
properties, operations or business (unless such document or information is
readily ascertainable from public or published information or trade sources or
has otherwise been made available to the public through no fault of his own)
until the same ceases to be material (or becomes so ascertainable or available);
provided, however, that nothing in this Section 8 shall prevent the Consultant,
with or without the Bank's consent, from participating in or disclosing
documents or information in connection with any judicial or administrative
investigation, inquiry or proceeding to the extent that such participation or
disclosure is required under applicable law.
9. SOLICITATION. The Consultant hereby covenants and agrees that, for a
period equal to the greater of (i) the then remaining unexpired term of this
Agreement and (ii) two (2) years
<PAGE> 7
following the termination of his services with the Bank, he shall not, without
the written consent of the Bank, either directly or indirectly:
(a) solicit, offer employment to, or take any other action intended, or
that a reasonable person acting in like circumstances would expect, to have the
effect of causing any officer or employee of the Bank, the Corporation or any
affiliate of either of them, as of the date of this Agreement, to terminate his
or her employment and accept employment or become affiliated with, or provide
services for compensation in any capacity whatsoever to, any savings bank,
savings and loan association, bank, bank holding company, savings and loan
holding company, or other institution engaged in the business of accepting
deposits and making loans, doing business with one hundred (100) miles of the
headquarters of the Bank, the Corporation or any affiliate of either of them;
(b) provide any information, advice or recommendation with respect to any
such officer or employee of any savings bank, savings and loan association,
bank, bank holding company, savings and loan holding company, or other
institution engaged in the business of accepting deposits and making loans,
doing business within one hundred (100) miles of the headquarters of the Bank,
the Corporation or any affiliate of either of them that is intended, or that a
reasonable person acting in like circumstances would expect, to have the effect
of causing any officer or employee of the Bank, the Corporation or any affiliate
of either of them to terminate his employment and accept employment or become
affiliated with, or provide services for compensation in any capacity whatsoever
to, any savings bank, savings and loan association, bank, bank holding company,
savings and loan holding company, or other institution engaged in the business
of accepting deposits and making loans, doing business within one hundred (100)
miles of the headquarters of the Bank, the Corporation or any affiliate of
either of them; or
(c) solicit, provide any information, advice or recommendation or take any
other action intended, or that a reasonable person acting in like circumstances
would expect, to have the effect of causing any customer of the Bank to
terminate an existing business or commercial relationship with the Bank.
10. WITHHOLDING. All payments required to be made by the Bank hereunder to
the Consultant shall be subject to the withholding of such amounts, if any,
relating to tax and other deductions as the Bank may reasonably determine should
be withheld pursuant to any applicable law or regulation.
11. ASSIGNABILITY. The Bank may assign this Agreement and its rights and
obligations hereunder in whole, but not in part, to any bank or other entity
with or into which the Bank may hereafter merge or consolidate or to which the
Bank may transfer all or substantially all of its assets, if in any such case
said bank or other entity shall by operation of law or expressly in writing
assume all obligations of the Bank hereunder as fully as if it had been
originally made a party hereto, but may not otherwise assign this Agreement or
its rights and obligations hereunder. The Consultant may not assign or transfer
this Agreement or any rights or obligations hereunder.
12. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given
<PAGE> 8
when delivered or mailed by certified or registered mail, return receipt
requested, postage prepaid, addressed to the respective addresses set forth
below:
To the Bank:
Chairman of the Board
Tarrytowns Bank, FSB
75 North Broadway
Tarrytown, New York 10591
To the Consultant:
Stephen C. Byelick
31 Crest Drive
Tarrytown, New York 10591
13. AMENDMENT; WAIVER. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Consultant and such officer or officers as may be
specifically designated by the Board of Directors of the Bank to sign on its
behalf. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
14. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of New York.
15. NATURE OF OBLIGATIONS. Nothing contained herein shall create or
require the Bank to create a trust of any kind to fund any benefits which may be
payable hereunder, and to the extent that the Consultant acquires a right to
receive benefits from the Bank hereunder, such right shall be no greater than
the right of any unsecured general creditor of the Bank.
16. HEADINGS. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
17. VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
18. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
19. REGULATORY ACTIONS. The following provisions shall be applicable to
the parties to the extent that they are required to be included in consulting
agreements between a savings institution and its consultants pursuant to Section
563.39(b) of the Regulations Applicable to all Savings Associations, 12 C.F.R.
Section 563.39(b), or any successor thereto, and shall be controlling
<PAGE> 9
in the event of a conflict with any other provision of this Agreement, including
without limitation Section 4 hereof.
(a) If the Consultant is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs pursuant to
notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit
Insurance Act ("FDIA")(12 U.S.C. Sections 1818(e)(3) and 1818(g)(1), the
Bank's obligations under this Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may, in its discretion: (i) pay the Consultant all or
part of the compensation withheld while its obligations under this Agreement
were suspended, and (ii) reinstate (in whole or in part) any of its obligations
which were suspended.
(b) If the Consultant is removed from office and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Sections 1818(e)(4)
and (g)(1)), all obligations of the Bank under this Agreement shall terminate as
of the effective date of the order, but vested rights of the Consultant and the
Bank as of the date of termination shall not be affected.
(c) If the Bank is in default, as defined in Section 3(x)(1) of the FDIA
(12 U.S.C. Section 1813(x)(1)), all obligations under this Agreement shall
terminate as of the date of default, but vested rights of the Consultant and the
Bank as of the date of termination shall not be affected.
(d) All obligations under this Agreement shall be terminated pursuant to
12 C.F.R. Section 563.39(b)(5) (except to the extent that it is determined that
continuation of the Agreement for the continued operation of the Bank is
necessary): (i) by the Director of the OTS, or his/her designee, at the time the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of the FDIA (12 U.S.C. Section 1823(c)); or (ii) by the Director
of the OTS, or his/her designee, at the time the Director or his/her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition, but vested rights of the Consultant and the Bank as
of the date of termination shall not be affected.
20. REGULATORY PROHIBITION. Notwithstanding any provision of this
Agreement to the contrary, any payments made to the Consultant pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and any regulations
promulgated thereunder.
21. GUARANTY AND PAYMENT OF ADDITIONAL BENEFITS BY THE CORPORATION UNDER
CERTAIN CIRCUMSTANCES.
(a) By signing and adopting this Agreement, the Corporation irrevocably
and unconditionally guarantees to the Consultant the full and timely performance
by the Bank of each and every obligation of the Bank contained in this
Agreement.
<PAGE> 10
(b) If at any time during or after the term of this Agreement the payments
and benefits payable by the Bank under this Agreement shall be reduced pursuant
to Section 5 hereof, then the Corporation shall pay to the Consultant an amount
equal to the sum of (i) the amount by which the payments and benefits that would
have otherwise been paid by the Bank to the Consultant are reduced by the
provisions of Section 5 hereof, plus (ii) an amount equal to X determined under
the following formula:
E x P
X = -----------------------------------------
1 - [(F x (1 - S)) + S + E + M]
where
E = the rate at which the excise tax is assessed under Section 4999 of
the Code;
P = the amount with respect to which such excise tax is assessed,
determined without regard to this Section 21;
F = the highest marginal rate of income tax applicable to the
Consultant under the Code for the taxable year in question;
S = the sum of the highest marginal rates of income tax
applicable to the Consultant under all applicable state and local
laws for the taxable year in question; and
M = the highest marginal rate of Medicare tax applicable to
the Consultant under the Code for the taxable year in question.
With respect to any payment in the nature of compensation that is made to (or
for the benefit of) the Consultant under the terms of this Agreement, or
otherwise, and on which an excise tax under Section 4999 of the Code will be
assessed, the payment determined under this Section 21(b) shall be made to the
Consultant on the earlier of (i) the date the Corporation, the Bank or any
direct or indirect subsidiary or affiliate of the Corporation or the Bank is
required to withhold such tax, or (ii) the date the tax is required to be paid
by the Consultant.
(c) Notwithstanding anything in this Section 21 to the contrary, in the
event that the Consultant's liability for the excise tax under Section 4999 of
the Code for a taxable year is subsequently determined to be different than the
amount determined by the formula (X + P) x E, where X, P and E have the meanings
provided in Section 21(b), then the Consultant or the Corporation, as the case
may be, shall pay to the other party at the time that the amount of such excise
tax is finally determined, an appropriate amount, plus interest, such that the
payment made under Section 21(b), when increased by the amount of the payment
made to the Consultant under this Section 21(c) by the Corporation, or when
reduced by the amount of the payment made to the Corporation under this Section
21(c) by the Consultant, equals the amount that should have properly been paid
to the Consultant under Section 21(b). The interest paid under this Section
21(c) shall be determined at the rate provided under Section 1274(b)(2)(B) of
the Code.
<PAGE> 11
To confirm that the proper amount, if any, was paid to the Consultant under this
Section 21, the Consultant shall furnish to the Corporation a copy of each tax
return which reflects a liability for an excise tax payment made by the
Corporation, at least 20 days before the earlier of the date on which such
return is required to be filed with the IRS or the actual filing date.
22. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between
the Bank and the Consultant with respect to the matters agreed to herein. All
prior agreements between the Bank and the Consultant and between Tappan Zee and
the Consultant with respect to the matters agreed to herein, including without
limitation the 1997 Agreements, are hereby superseded and shall have no force or
effect.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: TARRYTOWNS BANK, FSB
_______________________________ By:___________________________________
Secretary Chairman of the Board
CONSULTANT
By:___________________________________
Stephen C. Byelick
For purposes of Section 21 of the Agreement, the Corporation has executed
and adopted this Agreement as of the date first above written.
Attest: U.S.B. HOLDING CO., INC.
_______________________________ By:___________________________________
Michael H. Fury, Secretary Thomas E. Hales, President and
Chief Executive Officer
<PAGE> 1
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated this ____ day of ___________ 1998, between
Tarrytowns Bank, FSB (the "Bank" or "Employer"), and Harry G. Murphy (the
"Executive").
WITNESSETH
WHEREAS, the Executive previously entered into an agreement with Tappan
Zee Financial, Inc. ("Tappan Zee") dated June 23, 1997 (the "1997 Tappan Zee
Agreement") and a separate agreement with the Bank dated June 23, 1997 (the
"1997 Bank Agreement") (collectively, the "1997 Agreements");
WHEREAS, as of the date of this Agreement, Tappan Zee has merged with and
into U.S.B. Holding Co., Inc. (the "Corporation") and the Bank has become a
wholly owned subsidiary of the Corporation;
WHEREAS, the Bank desires to be ensured of the Executive's active
participation and support in the business of the Bank; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Bank and in consideration of the Executive's agreeing to remain in its employ,
the Bank and the Executive desire to enter into this Agreement regarding, among
other things, the employment of the Executive by the Bank and, concurrently
therewith, to terminate the 1997 Agreements, all as hereinafter set forth.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings set
forth below for the purposes of this Agreement:
(a) BASE SALARY. "Base Salary" shall have the meaning set forth in Section
3(a) hereof.
(b) CAUSE. Termination of the Executive's employment for "Cause" shall
mean termination because of dishonest conduct in connection with his performance
of services for the Bank resulting in his conviction of a felony, conviction of,
or plea of guilty or nolo contendere to, a felony or any crime involving moral
turpitude; willful failure or refusal to perform his duties under this Agreement
and failure to cure such breach within fifteen (15) days following written
notice thereof; breach of fiduciary duties to the Bank for personal profit; or
willful breach or violation of any law, rule or regulation (other than traffic
violations or similar offenses), or final
<PAGE> 2
cease and desist order in connection with his performance of services for the
Bank, in each case as measured against standards generally prevailing at the
relevant time in the savings and community banking industry; provided, however,
that the Executive shall not be deemed to have been discharged for cause unless
and until he shall have received a written notice of termination from the Board,
accompanied by a resolution duly adopted by affirmative vote of a majority of
the entire Board at a meeting called and held for such purpose (after reasonable
notice to the Executive and a reasonable opportunity for the Executive to make
oral and written presentations to the members of the Board, on his own behalf or
through a representative, who may be his legal counsel, to refute the grounds
for the proposed determination) finding that in the good faith opinion of the
Board grounds exist for discharging the Executive for cause. For purposes of
this paragraph, no act or failure to act on the Executive's part shall be
considered "willful" unless done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that the Executive's action or omission
was in the best interest of the Bank.
(c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" shall mean a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), or any successor thereto, whether or not the Corporation is registered
under the Exchange Act; provided that, without limitation, such a change in
control shall be deemed to have occurred if (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act, but excluding persons who
are directors or officers of the Corporation as of the date of this Agreement)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Corporation
representing 25% or more of the combined voting power of the Corporation's then
outstanding securities; or (ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors of the Corporation cease for any reason to constitute at least a
majority thereof unless the election, or the nomination for election by
stockholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) DATE OF TERMINATION. "Date of Termination" shall mean the date
specified in the Notice of Termination.
(f) DISABILITY. Termination by the Bank of the Executive's employment
based on "Disability" shall mean termination because of any physical or mental
impairment which qualifies the Executive for disability benefits under the
applicable long-term disability plan maintained by the Employer or, if no such
plan applies, which would qualify the Executive for disability benefits under
the Federal Social Security System.
(g) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive following a
Change in Control of the Corporation based on:
<PAGE> 3
(i) Without the Executive's express written consent, a reduction
by the Employer in the Executive's Base Salary as the same may
be increased from time to time or, except to the extent
permitted by Section 3(b) hereof, a reduction in the package
of fringe benefits provided to the Executive, taken as a
whole;
(ii) Any purported termination of the Executive's employment for
Cause, Disability or Retirement which is not effected pursuant
to a Notice of Termination satisfying the requirements of
paragraph (i) below; or
(iii) The failure by the Bank to obtain the assumption of and
agreement to perform this Agreement by any successor as
contemplated in Section 11 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) NOTICE OF TERMINATION. Any purported termination of the Executive's
employment by the Bank for any reason, including without limitation for Cause,
Disability or Retirement, or by the Executive for any reason, including without
limitation for Good Reason, shall be communicated by written "Notice of
Termination" to the other party hereto. For purposes of this Agreement, a
"Notice of Termination" shall mean a dated notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated,
(iii) specifies a Date of Termination, which shall be not less than twenty (20)
nor more than ninety (90) days after such Notice of Termination is given, except
in the case of the Bank's termination of the Executive's employment for Cause,
which shall be effective immediately; and (iv) is given in the manner specified
in Section 12 hereof.
2. TERM OF EMPLOYMENT.
(a) The Bank hereby employs the Executive as Executive Vice President and
Secretary and the Executive hereby accepts said employment and agrees to render
such services to the Bank on the terms and conditions set forth in this
Agreement. The term of employment under this Agreement shall be for three years,
commencing on the date of this Agreement.
(b) During the term of this Agreement, the Executive shall perform such
executive services for the Bank as may be consistent with his titles and from
time to time reasonably assigned to him by the Bank's Board of Directors,
consistent with his position.
3. COMPENSATION AND BENEFITS.
(a) The Employer shall compensate and pay the Executive for his services
during the term of this Agreement at a minimum base salary of $165,000 per year
("Base Salary"), which may be increased from time to time in such amounts as may
be determined by the Board of Directors of the Employer and may not be decreased
without the Executive's express written consent. In addition to his Base Salary,
the Executive shall be entitled to receive during the term
<PAGE> 4
of this Agreement such bonus payments as may be determined by the Board of
Directors of the Employer.
(b) During the term of this Agreement, the Executive shall be entitled to
participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing plan, stock option plan, employee stock ownership
plan, or other plans, benefits and privileges given to employees and executives
of the Employer, to the extent commensurate with his then duties and
responsibilities, as fixed by the Board of Directors of the Employer. The Bank
shall not make any changes in such plans, benefits or privileges which would
adversely affect the Executive's rights or benefits thereunder, unless such
change occurs pursuant to a program applicable to all executive officers of the
Bank and does not result in a proportionately greater adverse change in the
rights of or benefits to the Executive as compared with any other executive
officer of the Bank. Nothing paid to the Executive under any plan or arrangement
presently in effect or made available in the future shall be deemed to be in
lieu of the salary payable to the Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, the Executive shall be entitled to
paid annual vacation in accordance with the policies as established from time to
time by the Board of Directors of the Employer. The Executive shall not be
entitled to receive any additional compensation from the Employer for failure to
take a vacation, nor shall the Executive be able to accumulate unused vacation
time from one year to the next, except to the extent authorized by the Board of
Directors of the Employer.
(d) In consideration for the Executive entering into this Agreement and
waiving all of his rights under the 1997 Agreements, which 1997 Agreements are
hereby superseded pursuant to Section 22 hereof, the Employer agrees to pay to
the Executive a signing bonus in a lump sum cash amount equal to $336,000
concurrently with the execution and delivery of this Agreement.
4. TERMINATION.
(a) The Bank shall have the right, at any time upon prior Notice of
Termination, to terminate the Executive's employment hereunder for any reason,
including without limitation termination for Cause or Disability, and the
Executive shall have the right, upon prior Notice of Termination, to terminate
his employment hereunder for any reason.
(b) In the event that (i) the Executive's employment is terminated by the
Bank for Cause, or (ii) the Executive terminates his employment hereunder other
than for the reasons set forth in Section 4(c) below, the Executive shall have
no right pursuant to this Agreement to compensation or other benefits for any
period after the applicable Date of Termination.
(c) In the event that the Executive's employment is terminated (i) by the
Bank for other than Cause, (ii) by the Executive (a) due to a material breach of
this Agreement by the Bank, which breach has not been cured within twenty (20)
days after a written notice of non-compliance has been given by the Executive to
the Employer, or (b) for Good Reason, or (iii) due to the Executive's Disability
or death, then the Bank shall, subject to the provisions of Section 5 hereof, if
applicable,
<PAGE> 5
(A) pay to the Executive (or, in the event of his death, to his
estate) a cash severance amount equal to the Executive's Base Salary for
the then remaining term of this Agreement, with such amount to be paid in
equal monthly installments over the then remaining term of this Agreement,
commencing on the first business day of the first month following the Date
of Termination,
(B) with respect to stock options held by the Executive as of the
date of this Agreement to purchase common stock of the Corporation and
which are outstanding and unvested as of the Date of Termination,
accelerate the vesting of such stock options as of the Date of Termination
so that they are exercisable in full for the period of time specified in
the option agreement with the Executive, and
(C) with respect to restricted stock awards held by the Executive as
of the date of this Agreement to acquire common stock of the Corporation
and which are outstanding and unvested as of the Date of Termination,
accelerate the vesting of such restricted awards so that they are fully
vested as of the Date of Termination.
5. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments and
benefits pursuant to Section 4 hereof, either alone or together with other
payments and benefits which the Executive has the right to receive from the
Bank, the Corporation or any affiliate of either of them, would constitute a
"parachute payment" under Section 280G of the Code, then the payments and
benefits payable by the Bank pursuant to Section 4 hereof shall be reduced, in
the manner determined by the Executive, by the amount, if any, which is the
minimum necessary to result in no portion of the payments and benefits payable
by the Bank under Section 4 being non-deductible to the Bank pursuant to Section
280G of the Code and subject to the excise tax imposed under Section 4999 of the
Code. The parties hereto agree that the payments and benefits payable by the
Bank pursuant to this Agreement to the Executive upon termination shall be
limited to three times the Executive's average annual compensation (based upon
the most recent five taxable years) in accordance with OTS Regulatory Bulletin
27a. The determination of any reduction in the payments and benefits to be made
pursuant to Section 4 shall be based upon the opinion of independent tax counsel
selected by the Bank (and reasonably acceptable to the Executive) and paid by
the Bank. Such counsel shall promptly prepare the foregoing opinion, but in no
event later than thirty (30) days from the Date of Termination; and may use such
actuaries as such counsel deems necessary or advisable for the purpose. Nothing
contained herein shall result in a reduction of any payments or benefits to
which the Executive may be entitled upon termination of employment under any
circumstances other than as specified in this Section 5, or a reduction in the
payments and benefits specified in Section 4 below zero.
6. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced by any compensation earned by the
Executive as a result of employment by another employer after the Date of
Termination or otherwise.
<PAGE> 6
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employer pursuant to employee benefit plans
of the Employer or otherwise.
7. COVENANT NOT TO COMPETE. The Executive hereby covenants and agrees
that, in the event of his termination of employment with the Bank prior to the
expiration of the term of this Agreement, then for a period equal to the greater
of (i) the then remaining unexpired term of this Agreement and (ii) two (2)
years following the Date of Termination of employment, he shall not, without the
written consent of the Bank, become an officer, employee, consultant, director
or trustee of any savings bank, savings and loan association, savings and loan
holding company, bank or bank holding company, or any direct or indirect
subsidiary or affiliate of any such entity, that entails working within one
hundred (100) miles of the headquarters of the Bank, the Corporation or any
affiliate of either of them on the Date of Termination; provided, however, that
this Section 7 shall not apply if the Executive's employment is terminated for
the reasons set forth in Section 4(c) (other than for Disability); and provided,
further, that if the Executive's employment shall be terminated on account of
Disability, this Section 7 shall not prevent the Executive from accepting any
position or performing any services if (a) he first offers, by written notice,
to accept a similar position with, or perform similar services for, the Bank on
substantially the same terms and conditions and (b) the Bank declines to accept
such offer within ten (10) days after such notice is given.
8. CONFIDENTIALITY. Unless he obtains the prior written consent of the
Bank, the Executive shall keep confidential and shall refrain from using for the
benefit of himself, or any person or entity other than the Bank, the Corporation
or any affiliate of either of them, any material document or information
obtained from the Bank, the Corporation or any affiliate of either of them, in
the course of his employment with any of them concerning their properties,
operations or business (unless such document or information is readily
ascertainable from public or published information or trade sources or has
otherwise been made available to the public through no fault of his own) until
the same ceases to be material (or becomes so ascertainable or available);
provided, however, that nothing in this Section 8 shall prevent the Executive,
with or without the Bank's consent, from participating in or disclosing
documents or information in connection with any judicial or administrative
investigation, inquiry or proceeding to the extent that such participation or
disclosure is required under applicable law.
9. SOLICITATION. The Executive hereby covenants and agrees that, for a
period equal to the greater of (i) the remaining unexpired term of this
Agreement and (ii) two (2) years following his termination of employment with
the Bank, he shall not, without the written consent of the Bank, either directly
or indirectly:
(a) solicit, offer employment to, or take any other action intended, or
that a reasonable person acting in like circumstances would expect, to have the
effect of causing any officer or employee of the Bank, the Corporation or any
affiliate of either of them, as of the date of this Agreement, to terminate his
or her employment and accept employment or become affiliated with, or provide
services for compensation in any capacity whatsoever to, any savings bank,
savings and loan association, bank, bank holding company, savings and loan
holding company, or other institution engaged in the business of accepting
deposits and making loans, doing business with
<PAGE> 7
one hundred (100) miles of the headquarters of the Bank, the Corporation or any
affiliate of either of them;
(b) provide any information, advice or recommendation with respect to any
such officer or employee of any savings bank, savings and loan association,
bank, bank holding company, savings and loan holding company, or other
institution engaged in the business of accepting deposits and making loans,
doing business within one hundred (100) miles of the headquarters of the Bank,
the Corporation or any affiliate of either of them that is intended, or that a
reasonable person acting in like circumstances would expect, to have the effect
of causing any officer or employee of the Bank, the Corporation or any affiliate
of either of them to terminate his employment and accept employment or become
affiliated with, or provide services for compensation in any capacity whatsoever
to, any savings bank, savings and loan association, bank, bank holding company,
savings and loan holding company, or other institution engaged in the business
of accepting deposits and making loans, doing business within one hundred (100)
miles of the headquarters of the Bank, the Corporation or any affiliate of
either of them; or
(c) solicit, provide any information, advice or recommendation or take any
other action intended, or that a reasonable person acting in like circumstances
would expect, to have the effect of causing any customer of the Bank to
terminate an existing business or commercial relationship with the Bank.
10. WITHHOLDING. All payments required to be made by the Bank hereunder to
the Executive shall be subject to the withholding of such amounts, if any,
relating to tax and other payroll deductions as the Bank may reasonably
determine should be withheld pursuant to any applicable law or regulation.
11. ASSIGNABILITY. The Bank may assign this Agreement and its rights and
obligations hereunder in whole, but not in part, to any bank or other entity
with or into which the Bank may hereafter merge or consolidate or to which the
Bank may transfer all or substantially all of its assets, if in any such case
said bank or other entity shall by operation of law or expressly in writing
assume all obligations of the Bank hereunder as fully as if it had been
originally made a party hereto, but may not otherwise assign this Agreement or
its rights and obligations hereunder. The Executive may not assign or transfer
this Agreement or any rights or obligations hereunder.
12. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Bank:
Chairman of the Board
Tarrytowns Bank, FSB
75 North Broadway
Tarrytown, New York 10591
To the Executive:
<PAGE> 8
Harry G. Murphy
40 Summit Avenue
White Plains, New York 10606
13. AMENDMENT; WAIVER. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Bank to sign on its
behalf. No waiver by any party hereto at any time of any breach by any other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
14. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of New York.
15. NATURE OF OBLIGATIONS. Nothing contained herein shall create or
require the Bank to create a trust of any kind to fund any benefits which may be
payable hereunder, and to the extent that the Executive acquires a right to
receive benefits from the Bank hereunder, such right shall be no greater than
the right of any unsecured general creditor of the Bank.
16. HEADINGS. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
17. VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
18. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
19. REGULATORY ACTIONS. The following provisions shall be applicable to
the parties to the extent that they are required to be included in employment
agreements between a savings institution and its employees pursuant to Section
563.39(b) of the Regulations Applicable to all Savings Associations, 12 C.F.R.
Section 563.39(b), or any successor thereto, and shall be controlling in the
event of a conflict with any other provision of this Agreement, including
without limitation Section 4 hereof.
(a) If the Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs pursuant to
notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit
Insurance Act ("FDIA")(12 U.S.C. Sections 1818(e)(3) and 1818(g)(1), the
Bank's obligations under this Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may, in its discretion: (i) pay the Executive all or
part of the compensation withheld while
<PAGE> 9
its obligations under this Agreement were suspended, and (ii) reinstate (in
whole or in part) any of its obligations which were suspended.
(b) If the Executive is removed from office and/or permanently prohibited
from participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Sections 1818(e)(4)
and (g)(1)), all obligations of the Bank under this Agreement shall terminate as
of the effective date of the order, but vested rights of the Executive and the
Bank as of the date of termination shall not be affected.
(c) If the Bank is in default, as defined in Section 3(x)(1) of the FDIA
(12 U.S.C. Section 1813(x)(1)), all obligations under this Agreement shall
terminate as of the date of default, but vested rights of the Executive and the
Bank as of the date of termination shall not be affected.
(d) All obligations under this Agreement shall be terminated pursuant to
12 C.F.R. Section 563.39(b)(5) (except to the extent that it is determined that
continuation of the Agreement for the continued operation of the Employer is
necessary): (i) by the Director of the OTS, or his/her designee, at the time the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of the FDIA (12 U.S.C. Section 1823(c)); or (ii) by the Director
of the OTS, or his/her designee, at the time the Director or his/her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition, but vested rights of the Executive and the Bank as
of the date of termination shall not be affected.
20. REGULATORY PROHIBITION. Notwithstanding any provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and any regulations
promulgated thereunder.
21. GUARANTY AND PAYMENT OF ADDITIONAL BENEFITS BY THE CORPORATION UNDER
CERTAIN CIRCUMSTANCES.
(a) By signing and adopting this Agreement, the Corporation irrevocably
and unconditionally guarantees to the Executive the full and timely performance
by the Bank of each and every obligation of the Bank contained in this
Agreement.
(b) If at any time during or after the term of this Agreement the payments
and benefits payable by the Bank under this Agreement shall be reduced pursuant
to Section 5 hereof, then the Corporation shall pay to the Executive an amount
equal to the sum of (i) the amount by which the payments and benefits that would
have otherwise been paid by the Bank to the Executive are reduced by the
provisions of Section 5 hereof, plus (ii) an amount equal to X determined under
the following formula:
E x P
X = ----------------------------------------
1 - [(F x (1 - S)) + S + E + M]
<PAGE> 10
where
E = the rate at which the excise tax is assessed under Section 4999 of
the Code;
P = the amount with respect to which such excise tax is assessed,
determined without regard to this Section 21;
F = the highest marginal rate of income tax applicable to the
Executive under the Code for the taxable year in question;
S = the sum of the highest marginal rates of income tax applicable to
the Executive under all applicable state and local laws for the
taxable year in question; and
M = the highest marginal rate of Medicare tax applicable to the
Executive under the Code for the taxable year in question.
With respect to any payment in the nature of compensation that is made to (or
for the benefit of) the Executive under the terms of this Agreement, or
otherwise, and on which an excise tax under Section 4999 of the Code will be
assessed, the payment determined under this Section 21(b) shall be made to the
Executive on the earlier of (i) the date the Corporation, the Bank or any direct
or indirect subsidiary or affiliate of the Corporation or the Bank is required
to withhold such tax, or (ii) the date the tax is required to be paid by the
Executive.
(c) Notwithstanding anything in this Section 21 to the contrary, in the
event that the Executive's liability for the excise tax under Section 4999 of
the Code for a taxable year is subsequently determined to be different than the
amount determined by the formula (X + P) x E, where X, P and E have the meanings
provided in Section 21(b), then the Executive or the Corporation, as the case
may be, shall pay to the other party at the time that the amount of such excise
tax is finally determined, an appropriate amount, plus interest, such that the
payment made under Section 21(b), when increased by the amount of the payment
made to the Executive under this Section 21(c) by the Corporation, or when
reduced by the amount of the payment made to the Corporation under this Section
21(c) by the Executive, equals the amount that should have properly been paid to
the Executive under Section 21(b). The interest paid under this Section 21(c)
shall be determined at the rate provided under Section 1274(b)(2)(B) of the
Code. To confirm that the proper amount, if any, was paid to the Executive under
this Section 21, the Executive shall furnish to the Corporation a copy of each
tax return which reflects a liability for an excise tax payment made by the
Corporation, at least 20 days before the earlier of the date on which such
return is required to be filed with the IRS or the actual filing date.
22. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between
the Bank and the Executive with respect to the matters agreed to herein. All
prior agreements between the Bank and the Executive and between Tappan Zee and
the Executive with respect to the matters agreed to herein, including without
limitation the 1997 Agreements, are hereby superseded and shall have no force or
effect.
<PAGE> 11
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: TARRYTOWNS BANK, FSB
___________________________ By:_________________________________
Secretary Chairman of the Board
EXECUTIVE
By:________________________________
Harry G. Murphy
For purposes of Section 21 of the Agreement, the Corporation has executed
and adopted this Agreement as of the date first above written.
Attest: U.S.B. HOLDING CO., INC.
__________________________ By:__________________________________
Michael H. Fury, Secretary Thomas E. Hales, President and
Chief Executive Officer
<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, 1998 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 783
<INT-BEARING-DEPOSITS> 2,401
<FED-FUNDS-SOLD> 6,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,868
<INVESTMENTS-CARRYING> 35,531
<INVESTMENTS-MARKET> 35,971
<LOANS> 58,325
<ALLOWANCE> 702
<TOTAL-ASSETS> 129,345
<DEPOSITS> 104,993
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,552
<LONG-TERM> 0
0
0
<COMMON> 16
<OTHER-SE> 21,784
<TOTAL-LIABILITIES-AND-EQUITY> 129,345
<INTEREST-LOAN> 5,004
<INTEREST-INVEST> 3,780
<INTEREST-OTHER> 609
<INTEREST-TOTAL> 9,393
<INTEREST-DEPOSIT> 4,721
<INTEREST-EXPENSE> 4,721
<INTEREST-INCOME-NET> 4,672
<LOAN-LOSSES> 42
<SECURITIES-GAINS> 109
<EXPENSE-OTHER> 3,010
<INCOME-PRETAX> 1,888
<INCOME-PRE-EXTRAORDINARY> 1,888
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,097
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.77
<YIELD-ACTUAL> 3.79
<LOANS-NON> 1,440
<LOANS-PAST> 119
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 660
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 702
<ALLOWANCE-DOMESTIC> 702
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
