-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Uqm+CrAfznF7jPoO/7FB+kJ+oFbQHjyMBuAkOyNBzcYevplO/rMNp2YqIVJ7L171 mnM03FkqROaJbf6iyxtqmg== 0000950123-97-005411.txt : 19970630 0000950123-97-005411.hdr.sgml : 19970630 ACCESSION NUMBER: 0000950123-97-005411 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970627 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TAPPAN ZEE FINANCIAL INC CENTRAL INDEX KEY: 0000947460 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 133840352 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26466 FILM NUMBER: 97631079 BUSINESS ADDRESS: STREET 1: 75 NORTH BROADWAY STREET 2: C/O TARRYTOWNS BANK CITY: TARRYTOWN STATE: NY ZIP: 10591 BUSINESS PHONE: 9146310344 MAIL ADDRESS: STREET 1: 75 NORTH BROADWAY STREET 2: C/O TARRYTOWNS BANK CITY: TARRYTOWN STATE: NY ZIP: 10591 10-K 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NUMBER 0-26466 TAPPAN ZEE FINANCIAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3840352 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 75 NORTH BROADWAY, TARRYTOWN, NEW YORK 10591-0187 (Address of principal executive offices) (Zip Code) (914) 631-0344 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: (Not applicable) Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all the reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of May 31, 1997, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $18,524,000 based on the closing price on the that date and a total of 1,534,062 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Registrant's Annual Report to Shareholders for fiscal 1997 are incorporated herein by reference into Item 1 of Part I and Items 5,6,7 and 8 of Part II. (2) Portions of the definitive Proxy Statement for the Registrant's 1997 Annual Meeting of Shareholders are incorporated herein by reference into Items 10, 11, 12 and 13 of Part III. 2 TAPPAN ZEE FINANCIAL, INC. PART I
Page ---- Item 1. Business 2 Item 2. Properties 25 Item 3. Legal Proceedings 25 Item 4. Submission of Matters to a Vote of Security Holders 25 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 25 Item 6. Selected Financial Data 25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Item 8. Financial Statements and Supplementary Data 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 26 PART III Item 10. Directors and Executive Officers of the Registrant 26 Item 11. Executive Compensation 26 Item 12. Security Ownership of Certain Beneficial Owners and Management 26 Item 13. Certain Relationships and Related Transactions 26 26 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 27 Signatures 30
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 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"). Collectively, the Registrant and the Bank are referred to herein as the "Company." Concurrent with the Conversion, the Registrant sold 1,620,062 shares of its common stock in a subscription and community offering at a price of $10 per share, for net proceeds of $14.9 million (the "Stock Offering"). The Company's primary market area consists of the Village of Tarrytown and its neighboring communities in Westchester County, New York with business conducted from one office located in Tarrytown, New York. The Bank is a community-oriented savings institution whose business primarily consists of accepting deposits from customers within its market area and investing those funds in mortgage loans secured by one- to four-family residences. To a significantly lesser extent, funds are invested in multi-family, commercial real estate, construction, commercial business and consumer loans. The Company also invests in mortgage-backed and other securities. The Registrant has no business activities other than its ownership of the Bank. The Company's results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on its interest-earning assets, such as loans and securities, and the interest expense on its interest-bearing liabilities, such as deposits. The Company also generates non-interest income such as service charges and other fees. The Company's non-interest expense consists of compensation and benefits, occupancy expenses, federal deposit insurance costs, data processing service fees, net costs of real estate owned and other operating expenses. The Company's results of operations are significantly affected by general economic and competitive conditions (particularly changes in market interest rates), government policies, changes in accounting standards and actions of regulatory agencies. MARKET AREA AND COMPETITION The Company's deposit gathering and lending markets are concentrated in the communities surrounding its office in the Village of Tarrytown located in Westchester County, New York, although the Company also lends to borrowers located in other areas of Westchester County. Westchester County borders New York City to the south, Connecticut to the east, northern New Jersey and the County of Rockland in New York to the west and the New York County of Putnam to the north. In addition to being a suburb of New York City, Westchester contains villages, towns and cities with shopping, office and industrial centers, as well as farms and rural areas. The population of Westchester County is approximately 885,000. The population of the Village of Tarrytown exceeds 10,000, with a median household income of approximately $45,000. Some of the nation's major corporations have Westchester operations, including IBM Corporation, Texaco Inc., AT&T, NYNEX, PepsiCo, Inc., Readers Digest, Inc., Tambrands, Inc., Kraft General Foods, Inc., Metro-North Commuter Railroad Company and Consolidated Edison of New York, Inc. Many other industrial, insurance, educational, financial and health service corporations employ significant numbers of local residents and also serve to meet the educational, cultural and social needs of the area. The labor force contains larger percentages of professional, technical and clerical workers than New York State as a whole. However, many companies have downsized their operations and staff sizes in the last few years. For example, in June 1996 General Motors closed its plant located in the Village of North Tarrytown, which employed approximately 2,100 people. Many of the employees who worked at the plant did not live in Tarrytown or its neighboring communities, therefore, the plant closing has not had a material adverse effect on the Company's operations. However, it is the Company's understanding that a substantial portion of North Tarrytown's tax base is attributable to the General Motors plant. It is possible that the commercial businesses and homeowners in North Tarrytown and Tarrytown (which comprise a single school district) will face higher property tax assessments due to the plant closing. This could adversely affect the ability of those commercial businesses and homeowners who are borrowers of the Company to continue to repay their outstanding loans in a timely fashion. The Company, however, is unable to determine at this time the ultimate impact of any such event. The Northeast region of the United States, which includes the Company's market area, was affected by the prolonged recession that occurred in the early 1990s, which resulted in a contraction of economic activity and a deterioration of the local real estate market. Since then, the local economy has shown signs of improvement. However, if another recession were to occur, and as a result the Company were to experience a significant increase in non-performing assets, it is likely that the 2 4 Company's future operating results would be affected by (i) significant provisions for loan losses and reduced interest income, (ii) significant provisions for real estate owned losses, and (iii) significant costs incurred in connection with managing foreclosed properties and collection efforts on delinquent loans. The Company faces substantial competition for both the deposits it accepts and the loans it makes. Westchester County has a high density of financial institutions, including branch offices of major commercial banks, all of which compete with the Company to varying degrees. The Village of Tarrytown has full-service branch offices of the following commercial banks: First Union National Bank, Chase Bank, Fleet Bank, Bank of New York and Union State Bank. The Company also encounters significant competition for deposits from commercial banks, savings banks and savings and loan associations located in Westchester County, as well as short-term money market securities, money market mutual funds, and corporate and government securities. Due to the size of the Company relative to its competitors, the Company offers a more limited product line than many competitors, with an emphasis on product delivery and customer service rather than a very broad product line. The Company competes for deposits by offering a variety of customer services and deposit accounts at generally competitive interest rates. The Company's competition for loans comes principally from savings banks, savings and loan associations, commercial banks, mortgage bankers, brokers and other institutional lenders. The Company competes for loans primarily by emphasizing the quality of its loan services and by charging loan fees and interest rates that are generally competitive within its market area. Changes in the demand for loans relative to the availability of credit may affect the level of competition from financial institutions which may be more willing than the Company or its competitors to make credit available but which have not generally engaged in lending activities in the Company's market area in the past. Competition may also increase as a result of the lifting of restrictions on the interstate operations of financial institutions. LENDING ACTIVITIES Loan Portfolio Composition. The Company's loan portfolio consists primarily of conventional first mortgage loans secured by one- to four-family residences. At March 31, 1997, the Company had total net loans outstanding of $55.1 million (gross loans of $56.3 million less the allowance for loan losses, unearned discounts and net deferred loan fees). A total of $44.0 million, or 79.8% of net loans, were one- to four-family, residential mortgage loans. The following table sets forth the composition of the Company's loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated:
AT MARCH 31, ------------------------------------------------------------- 1997 1996 ---------------------------- --------------------------- PERCENT PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL ------ -------- ------ -------- Mortgage loans: One- to four-family $ 43,958 79.76% $ 38,762 75.75% Multi-family 2,289 4.15 3,287 6.42 Commercial 3,910 7.09 3,561 6.96 Construction,net 1,719 3.12 2,462 4.81 Net deferred loan fees (279) (0.51) (284) (0.55) -------- ----- -------- ----- Total mortgage loans 51,597 93.61 47,788 93.39 Commercial loans: Commercial business loans, net 2,831 5.14 2,727 5.33 Net deferred loan fees (1) -- (1) -- -------- ----- -------- ----- Total commercial loans 2,830 5.14 2,726 5.33 Consumer loans: Automobile loans 781 1.42 724 1.41 Other consumer loans 797 1.45 821 1.60 Unearned discounts (239) (0.43) (235) (0.46) Net deferred loan costs 4 0.01 4 0.01 -------- ----- -------- ----- Total consumer loans 1,343 2.45 1,314 2.56 Allowance for loan losses (660) (1.20) (654) (1.28) -------- ----- -------- ----- Total loans, net $ 55,110 100.00% $ 51,174 100.00% ======== ===== ======== =====
AT MARCH 31, -------------------------------------------------------------------------------- 1995 1994 1993 -------------------------- -------------------------- ----------------------- PERCENT PERCENT PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL ------ -------- ------ -------- ------ -------- (DOLLARS IN THOUSANDS) Mortgage loans: One- to four-family $ 39,020 77.68% $ 36,011 79.98% $ 35,634 77.11% Multi-family 3,443 6.85 2,649 5.88 2,757 5.97 Commercial 4,019 8.00 2,965 6.59 2,958 6.40 Construction,net 1,115 2.22 824 1.83 1,462 3.16 Net deferred loan fees (324) (0.64) (278) (0.62) (237) (0.51) -------- ----- -------- ----- -------- ----- Total mortgage loans 47,273 94.11 42,171 93.66 42,574 92.13 Commercial loans: Commercial business loans, net 2,415 4.81 2,211 4.91 2,878 6.23 Net deferred loan fees (1) -- (1) -- -- -- -------- ----- -------- ----- -------- ----- Total commercial loans 2,414 4.81 2,210 4.91 2,878 6.23 Consumer loans: Automobile loans 603 1.20 415 0.92 501 1.08 Other consumer loans 789 1.57 1,003 2.23 994 2.15 Unearned discounts (199) (0.40) (236) (0.52) (258) (0.56) Net deferred loan costs 3 0.01 3 -- 4 0.01 -------- ----- -------- ----- -------- ----- Total consumer loans 1,196 2.38 1,185 2.63 1,241 2.68 Allowance for loan losses (650) (1.30) (540) (1.20) (482) (1.04) -------- ----- -------- ----- -------- ----- Total loans, net $ 50,233 100.00% $ 45,026 100.00% $ 46,211 100.00% ======== ===== ======== ===== ======== =====
3 5 The types of loans that the Company may originate are subject to federal and state laws and regulations. Interest rates charged by the Company on loans are affected by the demand for such loans, the supply of money available for lending purposes and the rates offered by competitors. These factors are affected by, among other things, economic conditions, monetary policies of the federal government, including the Federal Reserve Board ("FRB"), and legislative tax policies. Loan Maturity. The following table shows the contractual maturity of the Company's gross loans at March 31, 1997. The table reflects the entire unpaid principal balance in the maturity period that includes the final loan payment dates and, accordingly, does not give effect to periodic principal repayments or possible prepayments. Principal repayments and prepayments totaled $7.9 million, $8.2 million and $9.5 million for the years ended March 31, 1997, 1996 and 1995, respectively.
AT MARCH 31, 1997 ---------------------------------------------------------------- ONE-TO FOUR- MULTI- COMMERCIAL FAMILY FAMILY MORTGAGE CONSTRUCTION ------ ------ -------- ------------ (IN THOUSANDS) Contractual maturity: One year or less $ 1,058 $ 485 $ 441 $1,719 ------- ------ ------ ------ After one year: More than 1 year to 5 years 2,085 1,334 2,644 -- More than 5 years 40,815 470 825 -- ------- ------ ------ ------ Total after one year 42,900 1,804 3,469 -- ------- ------ ------ ------ Total amount due $43,958 $2,289 $3,910 $1,719 ======= ====== ====== ======
AT MARCH 31, 1997 ------------------------------------------ COMMERCIAL BUSINESS CONSUMER TOTAL -------- -------- ----- (IN THOUSANDS) Contractual maturity: One year or less $1,571 $ 81 $ 5,355 ------ ------ ------- After one year: More than 1 year to 5 years 1,100 1,280 8,443 More than 5 years 160 217 42,487 ------ ------ ------- Total after one year 1,260 1,497 50,930 ------ ------ ------- Total amount due $2,831 $1,578 $56,285 ====== ====== =======
The following table sets forth the dollar amounts in each loan category at March 31, 1997 that are contractually due after March 31, 1998, and whether such loans have fixed interest rates or adjustable interest rates.
DUE AFTER MARCH 31, 1998 ----------------------------------------------------------- FIXED ADJUSTABLE TOTAL ---------------- --------------------- ---------------- (IN THOUSANDS) Mortgage loans (1): One-to four-family $30,541 $ 12,359 $42,900 Multi-family 1,601 203 1,804 Commercial 3,227 242 3,469 Commercial business loans 935 325 1,260 Consumer loans 1,497 -- 1,497 -------- ---------- -------- Total $37,801 $ 13,129 $50,930 ======== ========== ========
(1) There are no construction loans that are contractually due after March 31, 1998. Origination, Purchase, Sale and Servicing of Loans. The Company's lending activities are conducted through its office. The Company originates both adjustable-rate mortgage loans and fixed-rate mortgage loans. Loan originations are generally obtained from existing or past customers and members of the local communities. The Company's ability to originate loans is dependent upon the relative customer demand for fixed-rate or adjustable-rate mortgage loans, which is affected by the current and expected future levels of interest rates. During the fiscal year ended March 31, 1997, the Company experienced an increase in fixed-rate mortgage loan originations, as compared to originations of adjustable-rate mortgage loans. The Company currently holds for its portfolio all loans it originates and, from time to time, may purchase participations in mortgage loans originated by other institutions. The determination to purchase participations in specific loans or pools of loans is based upon criteria substantially similar to the Company's underwriting policies, such as the financial condition of the borrower, the location of the underlying property and the appraised value of the property, among other factors. The Company has no current plans to sell loans it originates in the future, but continually reviews the merits of adopting such a program to increase liquidity or reduce interest rate risk. The Company does not service loans for others and has no current plans to begin such activities. 4 6 The following table sets forth the Company's loan originations, repayments and other portfolio activity for the periods indicated.
FOR THE YEAR ENDED MARCH 31, --------------------------------------------------------- 1997 1996 1995 ---- ---- ---- (IN THOUSANDS) Unpaid principal balances at beginning of year $ 53,102 $ 52,239 $ 46,160 Loans originated: Mortgage loans: One- to four-family 6,740 4,125 8,201 Multi-family -- 150 1,399 Commercial 1,085 -- 1,257 Construction 1,475 2,580 2,280 Commercial business 1,799 1,471 2,289 Consumer 790 967 732 -------- -------- -------- Total loans originated 11,889 9,293 16,158 -------- -------- -------- Principal repayments (7,942) (8,233) (9,462) Charge-offs (63) (86) (63) Transfers to real estate owned -- (111) (554) -------- -------- -------- Unpaid principal balances at end of year 56,986 53,102 52,239 Less: Construction loans in process (686) (738) (815) Unearned discounts (239) (235) (199) Unused lines of credit (15) (20) (20) Allowance for loan losses (660) (654) (650) Net deferred loan fees (276) (281) (322) -------- -------- -------- Net loans at end of year $ 55,110 $ 51,174 $ 50,233 ======== ======== ========
One- to Four-Family Mortgage Lending. The Company offers both fixed-rate and adjustable-rate mortgage loans, with maturities up to thirty years, which are secured by one- to four-family residences. Substantially all such loans are secured by owner-occupied properties located in Westchester County, New York. At March 31, 1997, $44.0 million, or 79.8% of the Company's net loans outstanding, were one- to four-family residential mortgage loans. Of the one- to four-family residential mortgage loans outstanding at that date, 71.8%, or $31.6 million, were fixed-rate loans and 28.2%, or $12.4 million, were adjustable-rate loans. The interest rates for the majority of the Company's adjustable-rate mortgage loans are indexed to the yield on one-year U.S. Treasury securities. The Company currently offers a number of adjustable-rate mortgage loan programs with interest rates which adjust either every one, three or five years. An adjustable-rate mortgage loan may carry an initial interest rate that is less than the fully-indexed rate for the loan. All adjustable-rate mortgage loans offered have lifetime interest rate caps or ceilings. Generally, adjustable-rate mortgage loans pose credit risks somewhat greater than the credit risk inherent in fixed-rate loans primarily because, as interest rates rise, the underlying payments of the borrowers rise, increasing the potential for default. It is the Company's policy to underwrite its adjustable-rate mortgage loans based on the fully-indexed rate. The Company currently has no mortgage loans that are subject to negative amortization. In view of its operating strategy, the Company adheres to its Board approved underwriting guidelines for loan origination, which, though prudent in approach to credit risk and evaluation of collateral, allow management flexibility with respect to documentation of certain matters and certain credit requirements. However, the Company generally originates loans using guidelines comparable to Federal National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC") underwriting guidelines. The Company's policy is to originate one- to four-family residential mortgage loans in amounts up to 80% of the lower of the appraised value or the selling price of the property securing the loan. The Company 5 7 has not offered and currently does not offer products with a higher loan-to-value ratio in conjunction with private mortgage insurance, and has no plans to do so in the future. Mortgage loans originated by the Company generally include due-on-sale clauses which provide the Company with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property without the Company's consent. Due-on-sale clauses are an important means of adjusting the rates on the Company's fixed-rate mortgage loan portfolio and the Company has generally exercised its rights under these clauses. Multi-Family Mortgage Lending. The Company originates multi-family mortgage loans generally secured by five- to ten-unit apartment buildings located in the Company's market area. In reaching its decision on whether to make a multi-family loan, the Company considers the qualifications of the borrower as well as the underlying property. Some of the factors considered are: the net operating income of the mortgaged premises before debt service and depreciation; the debt service ratio (the ratio of the property's net cash flow to debt service requirements); and the ratio of loan amount to appraised value. When evaluating the qualifications of the borrower for a multi-family mortgage loan, the Company considers the financial resources and income level of the borrower, the borrower's experience in owning or managing similar properties, and the Company's lending experience with the borrower. The Company requires that the borrower be able to demonstrate strong management skills and the ability to maintain the property from current rental income. The borrower is also required to provide evidence of the ability to repay the mortgage and a history of making mortgage payments on a timely basis. In making its assessment of the creditworthiness of the borrower, the Company generally reviews the financial statements, employment and credit history of the borrower, as well as other related documentation. Pursuant to the Company's underwriting policies, a multi-family mortgage loan may only be made in an amount up to the lesser of (i) 75% of the appraised value of the underlying property or (ii) the Company's current loans-to-one borrower limit. See "Regulation -- Regulation of Federal Savings Association -- Loans to One Borrower." Subsequent declines in the real estate values in the Company's primary market area have resulted in an increase in the loan-to-value ratios on certain multi-family mortgage loans. The Company's multi-family mortgage loans are generally fixed-rate loans and may be made with terms up to fifteen years, generally with a five-year balloon maturity and a fifteen-year amortization schedule. The Company's multi-family mortgage loan portfolio at March 31, 1997 was approximately $2.3 million, or 4.2% of net loans outstanding. The Company's largest multi-family mortgage loan at March 31, 1997 had an outstanding balance of $267,000 and is secured by a five-unit apartment house. Mortgage loans secured by apartment buildings and other multi-family residential properties are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by multi-family properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to a greater extent to circumstances outside the borrower's control, including adverse conditions in the real estate market or the economy. The Company seeks to minimize these risks through its underwriting policies, which require such loans to be qualified at origination on the basis of the property's income and debt service ratio. Commercial Real Estate Mortgage Lending. The Company originates commercial real estate mortgage loans that are generally secured by a combination of residential and retail facilities and, to a lesser extent, properties used for business purposes, such as small office buildings, located in the Company's market area. The Company's underwriting procedures provide that commercial real estate loans may be made in amounts up to the lesser of (i) 75% of the lesser of the appraised value or purchase price of the property or (ii) the Company's current loans-to-one borrower limit. These loans are generally fixed-rate loans and may be made with terms up to fifteen years, generally with a five-year balloon maturity and a fifteen-year amortization schedule. The Company's underwriting standards and procedures for these loans are similar to those applicable to its multi-family mortgage loans, whereby the Company considers factors such as the net operating income of the property and the borrower's expertise, credit history and profitability. At March 31, 1997, the Company's commercial real estate mortgage portfolio was $3.9 million, or 7.1% of net loans outstanding. The largest commercial real estate loan in the Company's portfolio at March 31, 1997 was $559,000 and is secured by a light industrial office and warehouse. Mortgage loans secured by commercial real estate properties, like multi-family mortgage loans, are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. This risk is attributable to the uncertain realization of projected income-producing cash flows which are affected by vacancy rates, the ability to maintain rent levels against competitively-priced properties and the ability to collect rent from tenants on a timely basis. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to a greater extent to circumstances outside the borrower's control, including adverse conditions in the real estate market or the economy. The Company seeks to minimize these risks through its underwriting standards, which require such loans to be qualified at origination on the basis of the property's income and debt service ratio. 6 8 Construction Lending. The Company originates loans for the acquisition and development of property to contractors and individuals in its market area. The Company's construction loans primarily have been made to finance the construction of one- to four-family, owner-occupied residential properties, multi-family properties and other properties. These loans are all fixed-rate loans with maturities of one year or less. The Company's policies provide that construction loans may be made in amounts up to 80% of the appraised value of the property for construction of one- to four-family residences and multi-family properties, and up to 75% of the appraised value of other types of properties. All construction loans are subject to the Company's loans-to-one borrower limit. If the borrower is a corporation, the Company generally requires personal guarantees and a permanent loan commitment from another lender if the Company will not be making the permanent loan. Loan proceeds are disbursed in increments, subject to inspection by Company inspectors as construction progresses. Subject to the Company's limitation on loans-to-one borrower, during favorable economic conditions, the Company will consider making up to two residential construction loans to one borrower. If economic conditions are not favorable, the Company will not make construction loans, unless there is a confirmed permanent mortgage takeout or the Company has approved the borrower for permanent financing. At March 31, 1997, the Company had $1.7 million (net of undisbursed loan funds of $686,000) of construction loans which amounted to 3.1% of the Company's net loans outstanding. The largest construction loan in the Company's portfolio at March 31, 1997 was $500,000 (all of which had been disbursed) and is secured by retail commercial property. Construction lending generally involves additional risks to the lender as compared with residential permanent mortgage lending. These risks are attributable to the fact that loan funds are advanced upon the security of the project under construction, predicated on the present value of the property and the anticipated future value of the property upon completion of construction or development. Moreover, because of the uncertainties inherent in delays resulting from labor problems, materials shortages, weather conditions and other contingencies, it is relatively difficult to evaluate the total funds required to complete a project and to establish the loan-to-value ratio. If the Company's initial estimate of the property's value at completion is inaccurate, the Company may be confronted with a project, when completed, having an insufficient value to assure full repayment. Commercial Business Lending. The Company also offers limited types of short-term and medium-term commercial business loans on a secured and unsecured basis to borrowers located in the Company's market area. These loans include time and demand loans, term loans and lines of credit. At March 31, 1997, the Company's commercial business loan portfolio amounted to $2.8 million, or 5.1% of net loans outstanding. The largest commercial business loan outstanding at March 31, 1997 was a $325,000 loan secured by marketable securities. The Company's lines of credit are typically established for one year and are subject to renewal upon satisfactory review of the borrower's financial statements and credit history. Secured short-term commercial business loans are usually collateralized by real estate and are generally guaranteed by a principal of the borrower. Interest on these loans is usually payable monthly at rates that fluctuate based on a spread above the prime rate. The Company offers term loans with terms of up to ten years, although the majority of such loans have terms of five years or less. Typically, term loans have floating interest rates based on a spread above the prime rate. The Company also offers business loans on a revolving basis, whereby the borrower pays interest only. Interest on such loans fluctuates based on the prime rate. Normally these loans require periodic interest payments during the loan term, with full repayment of principal and interest at maturity. Similar to construction loans and commercial mortgage loans, commercial business loans generally carry greater credit risks than residential mortgage loans because their repayment is more dependent on (i) the underlying financial condition of the borrower, (ii) the value of any property or the cash flow from any property securing the loan or the business being financed, and (iii) general and local economic conditions. Consumer Lending. The Company offers various types of secured and unsecured consumer loans, including automobile loans, home improvement loans and personal loans. The Company's consumer loans have original maturities of not more than five years, with the exception that home improvement loans may have original maturities of up to ten years. Interest rates charged on such loans are set at competitive rates, taking into consideration the type and term of the loan. Consumer loan applications are reviewed and approved in conformance with standards approved by the Company's Board of Directors. At March 31, 1997, the Company's consumer loan portfolio totaled $1.3 million, or 2.5% of net loans outstanding. Loan Approval Procedures and Authority. The Board of Directors establishes the lending policies of the Company and reviews properties offered as security. The Board of Directors has established the following lending authority: the Vice President may approve mortgage loans in amounts up to $200,000 and commercial business loans in amounts up to $75,000; the President may approve mortgage loans up to $350,000 and commercial business loans up to $150,000; commercial business loans in excess of $150,000 and up to $225,000 must be approved by both the President and Vice President or by the 7 9 Board; and mortgage loans above $350,000 and commercial business loans above $225,000 require Board approval. The foregoing lending limits are reviewed annually and, as needed, revised by the Board of Directors. For all loans originated by the Company, upon receipt of a completed loan application from a prospective borrower, a credit report is ordered and certain other information is verified by an independent credit agency, and, if necessary, additional financial information is required to be submitted by the borrower. An appraisal of any real estate intended to secure the proposed loan is required, which appraisal currently is performed by an independent appraiser designated and approved by the Company. The Board annually approves the independent appraisers used by the Company and approves the Company's appraisal policy. It is the Company's policy to require title and hazard insurance on all real estate loans. In connection with a borrower's request for a renewal of a multi-family or commercial mortgage loan with a five-year balloon maturity, the Company evaluates both the borrower's ability to service the renewed loan applying an interest rate that reflects prevailing market conditions, as well as the value of the underlying collateral property. The evaluation of the property typically involves a letter update of the existing appraisal unless in the appraiser's opinion the original appraisal is no longer substantially relevant, in which case a full appraisal is obtained. ASSET QUALITY Non-Performing Loans. Loans are considered non-performing if they are in foreclosure or are 90 or more days delinquent. Management and the Board of Directors perform a monthly review of all delinquent loans. The actions taken by the Company with respect to delinquencies vary depending on the nature of the loan and period of delinquency. The Company's policies generally provide that delinquent mortgage loans be reviewed and that a written late charge notice be mailed no later than the 15th day of delinquency. The Company's policies provide that telephone contact be attempted to ascertain the reasons for delinquency and the prospects of repayment. When contact is made with the borrower at any time prior to foreclosure, the Company attempts to obtain full payment or work out a repayment schedule with the borrower to avoid foreclosure. Non-performing loans amounted to $1.66 million at March 31, 1997, as compared to $1.63 million at March 31, 1996, representing 13 loans at both dates. The following table sets forth delinquencies in the Company's loan portfolio at the dates indicated:
MARCH 31, 1997 -------------------------------------------------------------- 60-89 DAYS 90 DAYS OR MORE ---------------------------- ------------------------- NUMBER PRINCIPAL NUMBER PRINCIPAL OF LOANS BALANCE OF LOANS BALANCE -------- ------- -------- ------- (Dollars in thousands) Mortgage loans: One- to four-family 5 $ 890 8 $1,355 Multi-family 1 143 -- -- Commercial - -- 2 195 Construction 1 500 1 100 Commercial business loans - -- -- -- Consumer loans - -- 2 8 = ====== == ====== Total 7 $1,533 13 $1,658 = ====== == ====== 0.98% 2.75% 1.83% 2.97% ==== ====== ==== ======
MARCH 31, 1996 ------------------------------------------------------ 60-89 DAYS 90 DAYS OR MORE ------------------------- ---------------------- NUMBER PRINCIPAL NUMBER PRINCIPAL OF LOANS BALANCE OF LOANS BALANCE -------- ------- -------- ------- (Dollars in thousands) Mortgage loans: One- to four-family 2 $286 8 $1,198 Multi-family 1 266 -- -- Commercial 1 144 2 392 Construction - -- -- -- Commercial business loans - -- 1 40 Consumer loans 1 4 2 2 = ==== == ====== Total 5 $700 13 $1,632 = ==== == ====== 0.71% 1.35% 1.84% 3.15% ==== ==== ==== ======
It is the Company's general policy to stop the accrual of interest on all loans 90 days or more past due. Certain loans 90 days or more past due may continue to accrue interest based on management's evaluation of the loan, and the underlying collateral and the credit worthiness of the borrower. When a loan is placed on non-accrual status, unpaid interest is reversed against interest income of the current period. Thereafter, interest payments received on non-accrual loans are recognized as income unless future collections are doubtful, in which case the payments received are applied as a reduction of principal. A loan remains on non-accrual status until the factors that indicated doubtful collectibility no longer exist or until a loan is determined to be uncollectible and is charged-off against the allowance for loan losses. The classification of a loan as non-performing does not necessarily indicate that loan principal or interest will not be collected. Historical experience indicates that a portion of non-performing assets will eventually be recovered. When all collection efforts have been exhausted, and management determines that the borrower is unable to repay its obligation, the Company will commence foreclosure procedures. 8 10 Real Estate Owned. Property acquired by the Company as a result of foreclosure on a mortgage loan is classified as real estate owned ("REO") and is initially recorded fair value, less estimated sales costs, with any resulting writedown charged to the allowance for loan losses. Thereafter, an allowance for losses on REO is established for any further declines in fair value less estimated sales costs. The Company obtains an appraisal on a REO property as soon as practicable after it takes possession of the real property. The Company will generally reassess the value of REO at least annually thereafter. At March 31, 1997, REO amounted to $122,000 and related to one single-family residence. See page 10 of the 1997 Annual Report to Shareholders (the "1997 Annual Report") herein incorporated by reference, for further information regarding non-accrual loans, other past due loans and real estate owned. Classified Assets. Federal regulations require that the Bank utilize an internal asset classification system as a means of reporting problem and potential problem assets. The Bank has incorporated the Office of Thrift Supervision ("OTS") internal asset classifications as a part of its credit monitoring system. The Bank currently classifies problem and potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard" if it is inadequately protected by the current equity and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "Doubtful" have all of the weaknesses inherent in those classified "Substandard" with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "Loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated "Special Mention." When an insured institution classifies one or more assets, or portions thereof, as Substandard or Doubtful, it is required to establish a general valuation allowance for loan losses in an amount deemed prudent by management. General valuation allowances, which is a regulatory term, represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as "Loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge-off such amount. A savings institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS which can order the establishment of additional general or specific loss allowances. The OTS, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management has analyzed all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary. The Bank's Internal Auditor reviews and classifies the Bank's assets monthly and reports the results to the Examining and Audit Committee of the Board of Directors on a monthly basis. The Examining and Audit Committee then reviews the report of the Internal Auditor and reports the results of its review to the Board of Directors. Assets are classified in accordance with the management guidelines described above. At March 31, 1997, the Bank had $1.8 million of assets classified as Substandard ($1.7 million of non-performing loans and $122,000 of REO) and no assets classified as Special Mention, Doubtful or Loss. As of March 31, 1997, loans classified as Substandard included six loans totaling $1.0 million secured by one- to four-family, owner-occupied residences. These loans are classified as Substandard due to delinquencies or other identifiable weaknesses. Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risks inherent in the Company's loan portfolio. The allowance for loan losses is maintained at an amount management considers adequate to cover loan losses which are deemed probable and estimable. The allowance is based upon a number of factors, including asset classifications, economic trends, industry experience and trends, industry and geographic concentrations, estimated collateral values, historical loan loss experience, and the Company's underwriting policies. At March 31, 1997, the Company's allowance for loan losses was $660,000, or 1.2% of total loans and 39.8% of non-performing loans, as compared to $654,000, or 1.3% of total loans and 40.1% of non-performing loans, at March 31, 9 11 1996. The Company will continue to monitor and modify its allowance for loan losses as conditions dictate. The OTS, as an integral part of its examination process, periodically reviews the Company's allowance for loan losses. The OTS may require the Company to establish additional allowances, based on its judgments of the information available at the time of the examination. See page 11 of the 1997 Annual Report for the activity in the Company's allowance for loan losses. The following table sets forth the Company's allowance for loan losses allocated by loan category, the percent of the allocated allowances to the total allowance, and the percent of loans in each category to total loans at the dates indicated.
MORTGAGE LOANS --------------------------------------------------------------- ONE- TO FOUR- MULTI- COM- CON- FAMILY FAMILY MERCIAL STRUCTION ------ ------ ------- --------- (DOLLARS IN THOUSANDS) AT MARCH 31, 1997 Allowance amount $211 $ 9 $49 $ 29 Percent of allowance to total allowance 32% 1% 8% 4% Percent of loans in each category to total loans 78% 4% 7% 4% AT MARCH 31, 1996 Allowance amount $184 $13 $56 $ 32 Percent of allowance to total allowance 28% 2% 9% 5% Percent of loans in each category to total loans 75% 6% 7% 5% AT MARCH 31, 1995 Allowance amount $204 $68 $66 $ 19 Percent of allowance to total allowance 31% 11% 10% 3% Percent of loans in each category to total loans 76% 7% 8% 2% AT MARCH 31, 1994 Allowance amount $128 $12 $32 $173 Percent of allowance to total allowance 24% 2% 6% 32% Percent of loans in each category to total loans 79% 6% 6% 2% AT MARCH 31, 1993 Allowance amount $112 $27 $30 $ 85 Percent of allowance to total allowance 23% 6% 6% 18% Percent of loans in each category to total loans 76% 6% 6% 3%
COMMERCIAL BUSINESS CONSUMER UN- LOANS LOANS ALLOCATED TOTAL ----- ----- --------- ----- (DOLLARS IN THOUSANDS) AT MARCH 31, 1997 Allowance amount $28 $17 $317 $660 Percent of allowance to total allowance 4% 3% 48% 100% Percent of loans in each category to total loans 5% 2% - % 100% AT MARCH 31, 1996 Allowance amount $29 $15 $325 $654 Percent of allowance to total allowance 4% 2% 50% 100% Percent of loans in each category to total loans 5% 2% - % 100% AT MARCH 31, 1995 Allowance amount $24 $15 $254 $650 Percent of allowance to total allowance 4% 2% 39% 100% Percent of loans in each category to total loans 5% 2% - % 100% AT MARCH 31, 1994 Allowance amount $24 $14 $157 $540 Percent of allowance to total allowance 4% 3% 29% 100% Percent of loans in each category to total loans 5% 2% - % 100% AT MARCH 31, 1993 Allowance amount $54 $16 $158 $482 Percent of allowance to total allowance 11% 3% 33% 100% Percent of loans in each category to total loans 6% 3% - % 100%
10 12 INVESTMENT ACTIVITIES Investment Policies. The investment policy of the Company, which is established by the Board of Directors, is based upon the Company's asset/liability management goals and emphasizes high credit quality and diversified investments while seeking to optimize net interest income within acceptable limits of safety and liquidity. The investment policy is designed to provide and maintain liquidity to meet day-to-day, cyclical and long-term changes in the Company's asset/liability structure. The Company's investment goal has been to invest available funds in highly liquid instruments that have adjustable and fixed rates and that generally, at the time of purchase, do not exceed an average life of eight years with respect to collateralized mortgage obligations ("CMOs") and eleven years with respect to other mortgage-backed securities, or that meet specific requirements of the Company's asset/liability goals. A CMO is a special type of debt security in which the stream of principal and interest payments on the underlying mortgages or mortgage-backed securities is used to create classes with different maturities and, in some cases, amortization schedules as well as a residual interest, with each class possessing different risk characteristics. At March 31, 1997, the Company's securities portfolio amounted to $55.1 million (amortized cost) with an estimated weighted average remaining life of 4.0 years. The Company's investment policy permits it to invest in U.S. government obligations; certain securities of various government-sponsored agencies, including mortgage-backed securities issued/guaranteed by FNMA, FHLMC and the Government National Mortgage Association ("GNMA"); certificates of deposit of insured banks and savings associations; federal funds; and investment grade corporate debt securities (typically issued by municipalities and utility companies) and commercial paper. The Company's investment policy prohibits investment in certain types of mortgage derivative securities that management considers to be high risk. The Company generally purchases only short-and medium-term classes of CMOs guaranteed by FNMA or FHLMC. A substantial portion of the Company's CMOs have consisted of real estate mortgage investment conduits ("REMICs"). Thrift Bulletin Number 52, the OTS Policy Statement on securities portfolio policies and unsuitable investment practices ("TB-52"), requires that institutions classify mortgage derivative products acquired, including certain tranches of CMOs, as "high-risk mortgage securities" if such products exhibit greater price volatility than a benchmark fixed-rate 30-year mortgage-backed pass-through security. Institutions may only hold high-risk mortgage securities to reduce interest-rate risk in accordance with safe and sound practices and must also follow certain prudent safeguards in the purchase and retention of such securities. At March 31, 1997, the Company did not have any CMOs that were identified as "high-risk mortgage securities." The Company has never invested in CMO residual interests or in CMO tranches that met the definition of a high-risk mortgage security at the time of investment. Mortgage-Backed Securities. The Company invests in mortgage-backed securities to complement its mortgage lending activities and supplement such activities at times of low mortgage loan demand. At March 31, 1997, the carrying value of mortgage-backed securities totaled $39.4 million, or 32.3% of total assets. The fair value of all mortgage-backed securities totaled $38.8 million at March 31, 1997. Mortgage-backed securities held in the Company's available-for-sale portfolio are carried at fair value. Mortgage-backed securities held in the Company's held-to-maturity portfolio are carried at amortized cost. At March 31, 1997, $37.4 million of the Company's mortgage-backed securities are fixed-rate with a weighted average yield of 7.35% and an estimated weighted average remaining life of 4.82 years. The Company's adjustable-rate mortgage-backed securities at March 31, 1997 totaled $2.0 million with a weighted average yield of 7.00% and an estimated weighted average remaining life of 1.82 years. The Company's mortgage-backed securities portfolio includes CMOs with a fair value at March 31, 1997 of $9.1 million, a weighted average yield of 6.54% and a weighted average estimated remaining life of 2.91 years. At March 31, 1997, all securities in the Company's mortgage-backed securities portfolio were directly insured or guaranteed by GNMA, FNMA or FHLMC, thereby providing the certificate holder a guarantee of timely payments of interest and scheduled principal payments, whether or not they have been collected. The Company's mortgage-backed securities portfolio had a weighted average yield of 7.33% at March 31, 1997. Mortgage-backed securities generally yield less than the loans that underlie such securities because of servicing fees and the cost of payment guarantees or credit enhancements that reduce credit risk. In addition, mortgage-backed securities are more liquid than individual mortgage loans and may be used to collateralize borrowings of the Company. In general, under OTS regulations mortgage-backed securities issued or guaranteed by GNMA, FNMA and FHLMC and certain AAA-rated mortgage-backed pass-through securities are weighted at no more than 20% for risk-based capital purposes, compared to the 50% risk weighting assigned to most non-securitized residential mortgage loans. See "Regulation--Regulation of Federal 11 13 Savings Association--Capital Requirements." While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed, and value, of such securities. In contrast to mortgage-backed pass-through securities in which cash flow is received (and, hence, prepayment risk is shared) pro rata by all securities holders, the cash flows from the mortgages or mortgage-backed securities underlying CMOs are segmented and paid in accordance with a predetermined priority to investors holding various tranches of such securities or obligations. A particular tranche of a CMO may therefore carry prepayment risk that differs from that of both the underlying collateral and other tranches. It is the Company's strategy to purchase tranches of CMOs that are categorized as "planned amortization classes," "targeted amortization classes" or "very accurately defined maturities" and are intended to produce stable cash flows in different interest rate environments. The following table sets forth activity in the Company's mortgage-backed securities portfolio for the periods indicated.
FOR THE YEAR ENDED MARCH 31, ------------------------------------------------------ 1997 1996 1995 ---------------- ---------------- ----------------- (IN THOUSANDS) Amortized cost at beginning of year $31,559 $23,935 $21,157 Purchases 22,648 14,137 5,510 Sales (11,890) (3,709) -- Principal repayments (2,985) (2,812) (2,733) Premium and discount amortization, net 25 8 1 ---------------- ---------------- ----------------- Amortized cost at end of year $39,357 $31,559 $23,935 ================ ================ =================
At March 31, 1997, the Company held no securities issued by any one entity with a total carrying value in excess of 10% of the Company's equity at that date, except for obligations of the U.S. government and government-sponsored agencies and certain mortgage-backed securities which are fully collateralized by mortgages held by single-purpose entities and guaranteed by government-sponsored agencies. 12 14 The following table sets forth the amortized cost and fair value of the Company's securities, by accounting classification category and by type of security, at the dates indicated:
AT MARCH 31, ------------------------------------------------------------------------------------------------ 1997 1996 1995 ------------------------------------------------------------------------------------------------ AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE COST VALUE ------------------------------------------------------------------------------------------------ (IN THOUSANDS) HELD-TO-MATURITY Mortgage-backed securities: CMOs $ 996 $ 994 $ 1,108 $ 1,113 $ 6,177 $ 5,968 Pass-through securities 14,078 13,881 5,129 5,249 7,688 7,648 ------------- -------------- ------------- ------------- -------------- ------------ 15,074 14,875 6,237 6,362 13,865 13,616 Agency and other debt securities 3,049 3,014 3,199 3,234 3,199 3,031 ------------- -------------- ------------- ------------- -------------- ------------ Total 18,123 17,889 9,436 9,596 17,064 16,647 ------------- -------------- ------------- ------------- -------------- ------------ AVAILABLE-FOR-SALE Mortgage-backed securities: CMOs 8,329 8,116 17,651 17,555 7,773 7,487 Pass-through securities 15,954 15,799 7,671 7,622 2,297 2,307 ------------- -------------- ------------- ------------- -------------- ------------ 24,283 23,915 25,322 25,177 10,070 9,794 Other debt securities: U.S. Treasury -- -- 6,490 6,493 1,008 983 Agency and other 8,029 7,814 8,616 8,530 2,610 2,517 ------------- -------------- ------------- ------------- -------------- ------------ 8,029 7,814 15,106 15,023 3,618 3,500 Equity securities 4,655 4,655 1,344 1,344 23 23 Net unrealized loss (583) -- (228) -- (394) -- ------------- -------------- ------------- ------------- -------------- ------------ Total 36,384 36,384 41,544 41,544 13,317 13,317 ------------- -------------- ------------- ------------- -------------- ------------ Total securities, net $ 54,507 $54,273 $ 50,980 $51,140 $ 30,381 $29,964 ============= ============== ============= ============= ============== ============
13 15 The following table sets forth certain information regarding the amortized cost, fair value and weighted average yield of the Company's debt securities at March 31, 1997, by remaining period to contractual maturity. With respect to mortgage-backed securities, the entire amount is reflected in the maturity period that includes the final security payment date and, accordingly, no effect has been given to periodic repayments or possible prepayments.
AT MARCH 31, 1997 ---------------------------------------------------- AVAILABLE-FOR-SALE ---------------------------------------------------- WEIGHTED AMORTIZED FAIR AVERAGE COST VALUE YIELD ------------------- ----------------- ---------- (DOLLARS IN THOUSANDS) Mortgage-backed securities due: After one year through five years $ 1,359 $ 1,325 6.50% After five years through ten years 953 947 7.48 After ten years 21,971 21,643 7.28 -------- ------- Total $ 24,283 $23,915 7.25% ======== ======= Agency and other debt securities due: In one year or less $ -- $ -- -- % After one year through five years 3,454 3,397 5.89 After five years through ten years 4,530 4,372 6.75 After ten years 45 45 5.50 -------- ------- Total $ 8,029 $ 7,814 6.37% ======== ======= Total due: In one year or less $ -- $ -- -- % After one year through five years 4,813 4,722 6.06 After five years through ten years 5,483 5,319 6.87 After ten years 22,016 21,688 7.28 -------- ------- Total $ 32,312 $31,729 7.03% ======== =======
AT MARCH 31, 1997 ------------------------------------------------- HELD-TO-MATURITY ------------------------------------------------- WEIGHTED AMORTIZED FAIR AVERAGE COST VALUE YIELD ------------------- ---------------- --------- (DOLLARS IN THOUSANDS) Mortgage-backed securities due: After one year through five years $ 671 $ 661 6.46% After five years through ten years 864 873 7.84 After ten years 13,539 13,341 7.37 -------- ------- Total $ 15,074 $14,875 7.35% ======== ======= Agency and other debt securities due: In one year or less $ 50 $ 50 7.13% After one year through five years 100 100 7.25 After five years through ten years 2,700 2,660 7.19 After ten years 199 204 5.75 -------- -------- Total $ 3,049 $ 3,014 7.10% ======== ======== Total due: In one year or less $ 50 $ 50 7.13% After one year through five years 771 761 6.56 After five years through ten years 3,564 3,533 7.35 After ten years 13,738 13,545 7.34 -------- ------- Total $ 18,123 $17,889 7.31% ======== =======
SOURCES OF FUNDS General. Deposits, loan and security repayments and prepayments, proceeds from sales of available-for-sale securities and cash flows generated from operations are the primary sources of the Company's funds for use in lending, investing and for other general purposes. Deposits. The Company offers a variety of deposit accounts with a range of interest rates and terms. The Company's deposits consist of regular (passbook) savings accounts, statement savings accounts, checking accounts, money market accounts and certificates of deposit. In recent years, the Company has offered certificates of deposit with maturities of up to 30 months. At March 31, 1997, the Company's core deposits (which the Company considers to consist of checking accounts, NOW accounts, money market accounts, regular savings accounts and statement savings accounts) constituted 36.1% of total deposits, compared to 41.8% a year earlier. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. The Company's deposits are obtained predominantly from the areas nearby its office location. The Company relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions significantly affect the Company's ability to attract and retain deposits. The Company does not actively solicit 14 16 certificate accounts in excess of $100,000 or use brokers to obtain deposits. The following table presents the deposit activity of the Company for the periods indicated.
FOR THE YEAR ENDED MARCH 31, --------------------------------------------------------------- 1997 1996 1995 ---- ---- ---- (IN THOUSANDS) Deposits $151,962 $147,679 $107,186 Withdrawals 147,624 143,571 105,777 -------- -------- -------- Net cash inflow 4,338 4,108 1,409 Interest credited 4,081 3,987 2,894 -------- -------- -------- Net increase in deposits $ 8,419 $ 8,095 $ 4,303 ======== ======== ========
At March 31, 1997, the Company had $9.4 million in certificate accounts in amounts of $100,000 or more maturing as follows:
WEIGHTED AMOUNT AVERAGE RATE ------ ------------ (DOLLAR IN THOUSANDS) Within three months $ 1,655 5.33 % After three but within six months 2,182 5.64 After six but within 12 months 2,470 5.63 After 12 months 3,139 5.65 ----- Total $ 9,446 5.58 % =======
The following table sets forth the distribution of the Company's deposit accounts and the related weighted average interest rates at the dates indicated.
AT MARCH 31, ------------------------------------------------------------------------------------ 1997 1996 --------------------------------------- -------------------------------------- PERCENT WEIGHTED PERCENT WEIGHTED OF TOTAL AVERAGE OF TOTAL AVERAGE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE ------- --------- --------- ------- --------- --------- (DOLLARS IN THOUSANDS) Checking $ 2,771 2.82% $ 2,001 2.23% NOW 3,756 3.82 2.00% 4,164 4.63 2.00% Money market 3,157 3.21 2.75 3,484 3.88 2.75 Regular savings 15,008 15.26 2.75 16,402 18.24 3.10 Statement savings 10,757 10.94 2.92 11,563 12.86 3.20 Certificate accounts: Less than one year to maturity 49,026 49.86 5.72 40,448 44.99 5.68 One to three years to maturity 13,852 14.09 5.98 11,846 13.17 6.33 ------- --------- --------- ------- --------- --------- Total certificate accounts 62,878 63.95 5.78 52,294 58.16 5.83 ------- --------- --------- ------- --------- --------- Total $98,327 100.00% 4.60% $89,908 100.00% 4.57% ======= ========= ========= ======= ========= =========
AT MARCH 31, --------------------------------------- 1995 --------------------------------------- PERCENT WEIGHTED OF TOTAL AVERAGE AMOUNT DEPOSITS RATE ------- --------- --------- (DOLLARS IN THOUSANDS) Checking $ 1,554 1.90% NOW 4,423 5.41 2.00% Money market 3,865 4.72 3.00 Regular savings 17,940 21.93 3.25 Statement savings 11,070 13.53 3.88 Certificate accounts: Less than one year to maturity 34,753 42.48 5.33 One to three years to maturity 8,208 10.03 6.01 ------- --------- --------- Total certificate accounts 42,961 52.51 5.46 ------- --------- --------- Total $81,813 100.00% 4.35% ======= ========= =========
Borrowings. As part of its operating strategy, the Company may obtain advances from the Federal Home Loan Bank ("FHLB") of New York as an alternative to retail deposit funds. FHLB advances may also be used to acquire certain other assets as may be deemed appropriate for investment purposes. These advances would be collateralized primarily by certain of the Company's mortgage loans and mortgage-backed securities and secondarily by the Company's investment in capital stock of the FHLB. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions, including the Bank, fluctuates from time to time in accordance with the policies of the OTS and the FHLB. As of March 31, 1997, the maximum amount of FHLB advances available to the Company was $13.5 million, based on the Bank's current investment in FHLB 15 17 stock; the Company's total FHLB borrowing capacity (including advances), based on 25% of the Bank's assets, was $29.3 million. Although the Company historically had not used borrowings as a source of funds, during the fiscal 1997 the Company utilized short-term advances from the FHLB, the balance of which averaged $204,000 for the year. No such borrowings were outstanding at March 31, 1997. SUBSIDIARY ACTIVITIES The sole subsidiary of the Registrant is the Bank. The Bank does not have any subsidiaries. PERSONNEL As of March 31, 1997, the Company had 12 full-time employees and one part-time employee. The Company has experienced a very low turnover rate among its employees and, as of March 31, 1997, 11 of the Company's employees have been with the Company for more than five years. The employees are not represented by a collective bargaining unit and the Company considers its relationship with its employees to be good. FEDERAL AND STATE TAXATION FEDERAL TAXATION General. The Registrant and the Bank report their income for tax return purposes on a calendar-year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's tax reserve for bad debts discussed below. The Registrant and the Bank currently file separate federal income tax returns on a calendar-year basis. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Registrant. The Bank was last audited by the IRS for its taxable year ended December 31, 1994. Recent Tax Legislation Regarding Tax Bad Debt Reserves. Prior to the enactment, on August 20, 1996, of the Small Business Job Protection Act of 1996 (the "Small Business Act"), for federal income tax purposes, thrift institutions such as the Bank, which met certain definitional tests primarily relating to their assets and the nature of their business, were permitted to establish tax reserves for bad debts and to make annual additions thereto, which additions could, within specified limitations, be deducted in arriving at their taxable income. The Bank's deduction with respect to "qualifying loans," which are generally loans secured by certain interests in real property, could be computed using an amount based on a six-year moving average of the Bank's actual loss experience (the "Experience Method"), or a percentage equal to 8.0% of the Bank's taxable income (the "PTI Method"), computed without regard to this deduction and with additional modifications and reduced by the amount of any permitted addition to the non-qualifying reserve. Under the Small Business Act, the PTI Method was repealed and the Bank, as a "small bank" (one with assets having an adjusted basis of $500 million or less) will be required to use the Experience Method of computing additions to its bad debt reserve for taxable years beginning with the Bank's taxable year beginning January 1, 1996. In addition, the Bank will be required to recapture (i.e., take into taxable income) over a six-year period, beginning with the Bank's taxable year beginning January 1, 1996, the excess of the balance of its bad debt reserves (other than the supplemental reserve) as of December 31, 1995 over the greater of (a) the balance of its "base year reserve," i.e., its reserves as of December 31, 1987 or (b) an amount that would have been the balance of such reserves as of December 31, 1995 had the Bank always computed the additions to its reserves using the Experience Method. However, under the Small Business Act such recapture requirements will be suspended for each of the two successive taxable years beginning January 1, 1996 in which the Bank originates a minimum amount of certain residential loans during such years that is not less than the average of the principal amounts of such loans made by the Bank during its six taxable years preceding January 1, 1996. Distributions. To the extent that the Bank makes "nondividend distributions" to shareholders, such distributions will be considered to result in distributions from the Bank's base year reserve to the extent thereof and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in the Bank's taxable income. Nondividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not constitute nondividend distributions and, therefore, will not be included in the Bank's income. 16 18 The amount of additional taxable income created from an nondividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately one and one-half times the nondividend distribution would be includable in gross income for federal income tax purposes, assuming a 34% federal corporate income tax rate. Corporate Alternative Minimum Tax. The Internal Revenue Code (the "Code") imposes a tax ("AMT") on alternative minimum taxable income ("AMTI") at a rate of 20%. AMTI is increased by certain preference items. Only 90% of AMTI can be offset by net operating loss carryovers, of which the Company currently has none. AMTI is also adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Thus, the Company's AMTI is increased by an amount equal to 75% of the amount by which the Company's adjusted current earnings exceeds its AMTI (determined without regard to this adjustment and prior to reduction for net operating losses). In addition, for taxable years beginning after December 31, 1986, and before January 1, 1996, an environmental tax of .12% of the excess of AMTI (with certain modifications) over $2.0 million is imposed on corporations, including the Bank, whether or not an Alternative Maximum Tax ("AMT") is paid. Under President Clinton's fiscal year 1998 budget proposal, as submitted to Congress on February 6, 1997 ("President Clinton's Proposal"), the corporate environmental income tax would be reinstated for taxable years beginning after December 31, 1996 and before January 1, 2008. Under Congressional legislative proposals, the AMT would be repealed for "small corporations," effective for taxable years beginning after December 31, 1997. The Company does not expect to be subject to the AMT or the environmental tax liability. Dividends Received Deduction and Other Matters. In any taxable period for which the Registrant owns more than 80% of the Bank's voting stock, the Registrant may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Registrant and the Bank will not file a consolidated tax return, except that if the Registrant and the Bank own more than 20% of the stock of a corporation distributing a dividend then 80% of any dividends received may be deducted. Under President Clinton's proposal, the 70% dividends received deduction would be reduced to 50%. STATE TAXATION New York. The Bank and the Registrant are subject to New York state franchise tax on net income or one of several alternative bases, whichever results in the highest tax. "Net income" means federal taxable income with adjustments. The New York state tax rate for the 1997 and 1996 calendar years was 10.53% and 10.755%, respectively (including commuter transportation and other surcharges). In general, the Registrant will not be required to pay New York state tax on dividends and interest received from the Bank or on gains realized on the sale of Bank stock. In July 1996, New York state enacted legislation to preserve the use of the percentage of taxable income bad debt deduction for thrift institutions such as the Bank. In general, the legislation provides for a deduction equal to 32% of the Bank's New York state taxable income, which is comparable to the deductions permitted under the prior tax law. The legislation also provides for a floating base year, which will allow the Bank's to switch from the percentage of taxable income method to the experience method without recapture of any reserve. Previously, the Bank had established a deferred New York state tax liability for the excess of its New York state tax bad debt reserve over the amount of its base-year reserve. Since the new legislation effectively eliminated the excess state reserve for which a deferred tax liability had been recognized, the Company reduced its deferred tax liability by $166,000, representing a state tax benefit of $252,000 less related federal taxes of $86,000. Generally, New York state tax law has requirements similar to federal requirements regarding the recapture of base-year tax bad debt reserves. One notable exception is that, after the recent legislation, New York continues to require that the Bank maintain its thrift institution charter and hold at least 60% of its assets in specified assets (generally, loans secured by residential real estate or deposits, educational loans, cash and certain government obligations). The Bank expects to continue to meet these requirements and does not anticipate engaging in any transactions which would require recapture of its base-year reserve. Accordingly, it does not maintain a deferred tax liability with respect to such reserve. The Bank's unrecognized deferred state taxes (net of related federal taxes) were approximately $0.3 million at March 31, 1997. Delaware. As a Delaware holding company not earning income in Delaware, the Registrant is exempt from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. 17 19 REGULATION GENERAL The Bank is subject to extensive regulation, examination and supervision by the OTS, as its chartering agency, and the Federal Deposit Insurance Corporation ("FDIC'), as its deposit insurer. The Bank's deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF') of the FDIC, and it is a member of FHLB of New York. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, and it must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The OTS and the FDIC conduct periodic examinations to assess the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings association can engage and is intended primarily for the protection of the insurance fund and depositors. The Registrant, as a savings association holding company, is also required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and of the Securities and Exchange Commission (the "SEC") under the federal securities laws. The OTS and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Registrant, the Bank and the operations of both. The following discussion is intended to be a summary of the material statutes and regulations applicable to savings associations, and it does not purport to be a comprehensive description of all such statutes and regulations. REGULATION OF FEDERAL SAVINGS ASSOCIATION Business Activities. The Bank derives its lending and investment powers from the Home Owner's Loan Act, as amended ("HOLA") and the regulations of the OTS thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. These investment powers are subject to various limitations, including (a) a prohibition against the acquisition of any corporate debt security that is not rated in one of the four highest rating categories; (b) a limit of 400% of an association's capital on the aggregate amount of loans secured by nonresidential real estate property; (c) a limit of 20% of an association's assets on commercial loans; (d) a limit of 35% of an association's assets on the aggregate amount of consumer loans and acquisitions of certain debt securities; (e) a limit of 5% of assets on non-conforming loans (loans in excess of the specific limitations of HOLA); and (f) a limit of the greater of 5% of assets or an association's capital on certain construction loans made for the purpose of financing what is or is expected to become residential property. Loans to One Borrower. Under HOLA, savings associations are generally subject to the same limits on loans to one borrower as are imposed on national banks. Generally, under these limits, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the association's unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan or extension of credit is fully secured by readily-marketable collateral. Such collateral is defined to include certain debt and equity securities and bullion, but generally does not include real estate. At March 31, 1997, the Bank's limit on loans to one borrower was $2.4 million. At March 31, 1997, the Bank's largest aggregate amount of loans to one borrower was $626,000 and the second largest borrower had an aggregate balance of $625,000. QTL Test. HOLA requires a savings association to meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" in at least 9 months of the most recent 12-month period. "Portfolio assets" means, in general, an association's total assets less the sum of (a) specified liquid assets up to 20% of total assets, (b) certain intangibles, including goodwill and credit card servicing rights, and (c) the value of property used to conduct the association's business. "Qualified thrift investments" includes various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and consumer loans. At March 31, 1997, the Bank maintained 85.3% of its portfolio assets in qualified thrift investments. The Bank had also met the QTL test in each of the prior 12 months and, therefore, was a qualified thrift lender. 18 20 A savings association that fails the QTL test must either operate under certain restrictions on its activities or convert to a bank charter. The initial restrictions include prohibitions against (a) engaging in any new activity not permissible for a national bank, (b) paying dividends not permissible under national bank regulations, (c) obtaining new advances from any FHLB, and (d) establishing any new branch office in a location not permissible for a national bank in the association's home state. In addition, within one year of the date a savings association ceases to meet the QTL test, any company controlling the association would have to register under, and become subject to the requirements of, the Bank Holding Company Act of 1956, as amended. If the savings association does not requalify under the QTL test within the three-year period after it failed the QTL test, it would be required to terminate any activity and to dispose of any investment not permissible for a national bank and would have to repay as promptly as possible any outstanding advances from an FHLB. A savings association that has failed the QTL test may requalify under the QTL test and be free of such limitations, but it may do so only once. Capital Requirements. The OTS regulations require savings associations to meet three minimum capital standards: a tangible capital ratio requirement of 1.5% of total assets as adjusted under the OTS regulations, a leverage ratio requirement of 3% of core capital to such adjusted total assets, and a risk-based capital ratio requirement of 8% of core and supplementary capital to total risk-based assets. In determining the amount of risk-weighted assets for purposes of the risk-based capital requirement, a savings association must compute its risk-based assets by multiplying its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the United States Government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulation based on the risks OTS believes are inherent in the type of asset. Tangible capital is defined, generally, as common stockholder's equity (including retained earnings), certain noncumulative perpetual preferred stock and related earnings, minority interests in equity accounts of fully consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital is defined similarly to tangible capital, but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital currently includes cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, and the allowance for loan and lease losses. The allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets, and the amount of supplementary capital that may be included as total capital cannot exceed the amount of core capital. The OTS has adopted regulations to require a savings association to account for interest rate risk when determining its compliance with the risk-based capital requirement. A savings association with "above normal" interest rate risk is required, by these regulations, to deduct a portion of its total capital to account for any "above normal" interest rate risk. A savings association's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) resulting from a hypothetical 2% increase or decrease in market rates of interest, divided by the estimated economic value of the association's assets, as calculated in accordance with guidelines set forth by the OTS. At the times when the 3-month Treasury bond equivalent yield falls below 4%, an association may compute its interest rate risk on the basis of a change equal to one-half of that Treasury rate rather than on the basis of 2%. A savings association whose measured interest rate risk exposure exceeds 2% would be considered to have "above normal" risk. The interest rate risk component is an amount equal to one-half of the difference between the association's measured interest rate risk and 2%, multiplied by the estimated economic value of the association's assets. That dollar amount is deducted from an association's total capital in calculating compliance with its risk-based capital requirement. Any required deduction for interest rate risk becomes effective on the last day of the third quarter following the reporting date of the association's financial data on which the interest rate risk was computed. The regulations do not require a savings association with assets of less than $300 million and a risk-based capital ratio in excess of 12% to comply with the standard reporting requirements for the interest rate risk component, unless the OTS determines otherwise, and the association may provide such selected information as the OTS determines. Currently, the Bank qualifies for this exemption from the filing requirements. The regulations also authorize the Director of the OTS to waive or defer an association's interest rate risk component on a case-by-case basis. The OTS has indefinitely deferred implementation of the interest rate component in the computation of an institution's risk-based capital requirement. 19 21 At March 31, 1997, the Bank met each of its capital requirements. The table below presents the Bank's regulatory capital amounts and ratios as of March 31, 1997, compared to the OTS requirements at that date.
AMOUNT ASSETS(1) ------- --------- (DOLLARS IN THOUSANDS) GAAP capital $16,298 13.9% ======= ========= Tangible capital: Capital level (2) $16,607 14.1% Requirement 1,763 1.5 ------- --------- Excess $14,844 12.6% ======= ========= Core capital: Capital level (2) $16,607 14.1% Requirement 3,526 3.0 ------- --------- Excess $13,081 11.1% ======= ========= Total risk-based capital: Capital level (2) $17,151 39.5% Requirement 3,475 8.0 ------- --------- Excess $13,676 31.5% ======= =========
(1) Tangible capital levels are shown as a percentage of tangible assets. Core capital levels are shown as a percentage of adjusted assets. Risk-based capital levels are shown as a percentage of risk-weighted assets. (2) The difference between capital under generally accepted accounting principles ("GAAP") and regulatory tangible and core capital is an adjustment to increase regulatory capital by the amount of the net unrealized loss on available-for-sale securities recognized for GAAP purposes. Regulatory risk-based capital reflects this adjustment and the inclusion of a portion of the general allowance for loan losses. Limitation on Capital Distributions. OTS regulations currently impose limitations upon capital distributions by savings associations, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger, and other distributions charged against capital. At least 30-days written notice must be given to the OTS of a proposed capital distribution by a savings association, and capital distributions in excess of specified earnings or by certain institutions are subject to approval by the OTS. An association that has capital in excess of all regulatory capital requirements before and after a proposed capital distribution and that is not otherwise restricted in making capital distributions, could, after prior notice but without the approval of the OTS, make capital distributions during a calendar year equal to the greater of (a) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year, or (b) 75% of its net earnings for the previous four quarters. Any additional capital distributions would require prior OTS approval. In addition, the OTS can prohibit a proposed capital distribution, otherwise permissible under the regulation, if the OTS has determined that the association is in need of more than normal supervision or if it determines that a proposed distribution by an association would constitute an unsafe or unsound practice. Furthermore, under the OTS prompt corrective action regulations, the Bank would be prohibited from making any capital distribution if, after the distribution, the Bank failed to meet its minimum capital requirements, as described above. See "-- Prompt Corrective Regulatory Action." Liquidity. The Bank is required to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, specified United States Government, state or federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions, and is currently 5%. OTS regulations also require each savings association to maintain an average daily balance of short-term liquid assets at a specified percentage (currently 1%) of the total of its net withdrawable deposit accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Bank's average liquidity ratio for the month ended March 31, 1997 was 13.5%, which exceeded the applicable requirements. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirements. Assessments. Savings associations are required by OTS regulation to pay assessments to the OTS to fund the operations of the OTS. The general assessment, paid on a semi-annual basis, is computed upon the savings association's total assets, including consolidated subsidiaries, as reported in the association's latest quarterly Thrift Financial Report. The assessments 20 22 paid by the Bank for the fiscal years ended March 31, 1997, 1996 and 1995 totaled $35,000, $31,000 and $29,000, respectively. Branching. Subject to certain limitations, HOLA and the OTS regulations permit federally chartered savings associations to establish branches in any state of the United States. The authority to establish such a branch is available (a) in states that expressly authorize branches of savings associations located in another state and (b) to an association that qualifies as a "domestic building and loan association" under the Code, which imposes qualification requirements similar to those for a "qualified thrift lender" under HOLA. See "-- QTL Test." The authority for a federal savings association to establish an interstate branch network would facilitate a geographic diversification of the association's activities. This authority under HOLA and the OTS regulations preempts any state law purporting to regulate branching by federal savings associations. Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as implemented by OTS regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings association, to assess the association's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating in its most recent examination. The OTS's CRA regulations establish an assessment system that bases an association's rating on its actual performance in meeting community needs. In particular, the assessment system focuses on three tests: (a) a lending test, to evaluate the institution's record of making loans in its service areas; (b) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and (c) a service test, to evaluate the institution's delivery of services through its branches, ATMs, and other offices. Small savings associations would be assessed pursuant to a streamlined approach focusing on a lesser range of information and performance standards. The term "small savings association" is defined as including associations with less than $250 million in assets or an affiliate of a holding company with banking and thrift assets of less than $1 billion, which would include the Bank. Transactions with Related Parties. The Bank's authority to engage in transactions with its "affiliates" is limited by the OTS regulations and by Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an affiliate of the Bank is any company that controls the Bank or any other company that is controlled by a company that controls the Bank, excluding any Bank subsidiary other than those that are insured depository institutions. The OTS regulations prohibit a savings association (a) from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act ("BHC Act") and (b) from purchasing the securities of any affiliate other than a subsidiary. Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the savings association and also limits the aggregate amount of transactions with all affiliates to 20% of the savings association's capital and surplus. Extensions of credit to affiliates are required to be secured by collateral in an amount and of a type described in Section 23A, and the purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the association as those prevailing at the time for comparable transactions with nonaffiliated companies. In the absence of comparable transactions, such transactions may only occur under terms and circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies. The Bank's authority to extend credit to its directors, executive officers, and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the FRB thereunder. Among other things, these provisions require that extensions of credit to insiders (a) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the association's capital. In addition, extensions of credit in excess of certain limits must be approved by the association's board of directors. Enforcement. Under the Federal Deposit Insurance Act ("FDI Act"), the OTS has primary enforcement responsibility over savings associations and has the authority to bring enforcement action against all "institution-affiliated parties," including any controlling stockholder or any shareholder, attorney, appraiser and accountant who knowingly or recklessly participates in 23 any violation of applicable law or regulation or breach of fiduciary duty or certain other wrongful actions that causes or is likely to cause more than a minimal loss or other significant adverse effect on an insured savings association. Civil penalties cover a wide range of violations and actions and range from $5,000 for each day during which violations of law, regulations, orders, and certain written agreements and conditions continue, up to $1,000,000 per day for such violations if the person obtained a substantial pecuniary gain as a result of such violation or knowingly or recklessly caused a substantial loss to the institution. Criminal penalties for certain financial institution crimes include fines of up to $1 million and imprisonment for up to 30 years. In addition, regulators have substantial discretion to take enforcement action against an institution that fails to comply with its regulatory requirements, particularly with respect to its capital requirements. Possible enforcement actions range from the types of action that may be taken under the "prompt corrective actions," discussed below under "---Prompt Corrective Regulatory Action" to the termination of deposit insurance. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS that enforcement action be taken with respect to a particular savings association. If action is not taken by the Director of the OTS, the FDIC has authority to take such action under certain circumstances. Standards for Safety and Soundness. Pursuant to the FDI Act, as amended by Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the Riegle Community Development and Regulatory Improvement Act of 1994 ("Community Development Act"), the OTS and the other federal bank regulatory agencies have adopted guidelines prescribing safety and soundness standards. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the OTS regulations authorize, but do not require, the OTS to order an institution that has been given notice by the OTS that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the "prompt corrective action" provisions of FDICIA. If an institution fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties. Prompt Corrective Regulatory Action. FDICIA established a system of prompt corrective action to resolve the problems of undercapitalized depository institutions. Under this system, the federal banking regulators are required to take certain supervisory actions against undercapitalized institutions, the severity of which depends on the institution's degree of capitalization. For this purpose, a savings association would be placed in one of five categories based on the association's capital. Generally, a savings association is treated as "well capitalized" if its ratio of total capital to risk-weighted assets is at least 10.0%, its ratio of core capital to risk-weighted assets is at least 6.0%, its ratio of core capital to total assets is at least 5.0%, and it is not subject to any order or directive by the OTS to meet a specific capital level. A savings association will be treated as "adequately capitalized" if its ratio of total capital to risk-weighted assets is at least 8.0%, its ratio of core capital to risk-weighted assets is at least 4.0%, and its ratio of core capital to total assets is at least 4.0% (3.0% if the association receives the highest rating on the CAMEL financial institutions rating system). A savings association that has a total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if the association receives the highest rating on the CAMEL financial institutions rating system) is considered to be "undercapitalized." A savings association that has a total risk-based capital of less than 6.0% or a Tier 1 risk-based capital ratio or a leverage ratio of less than 3.0% is considered to be "significantly undercapitalized." A savings association that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." The elements of an association's capital for purposes of the prompt corrective action regulations are defined generally as they are under the regulations for minimum capital requirements. See "-- Capital Requirements." Generally, a capital restoration plan must be filed with the OTS within 45 days of the date an association receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." The OTS may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to the five percent of the depository institution's total assets at the time it became "undercapitalized," and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. In the event of a savings and loan holding company's bankruptcy, any commitment by the savings and loan company to a federal bank regulatory agency to maintain the capital of a subsidiary 24 depository institution will be assumed by the bankruptcy trustee and entitled to a priority of payment. If a depository institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." An undercapitalized association also becomes immediately subject to various mandatory restrictions, including restrictions on growth of assets and other forms of expansion. The OTS can also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. "Significantly undercapitalized" institutions are subject to more severe restrictions. Generally, subject to a narrow exception, FDICIA requires the OTS to appoint a receiver or conservator for a savings association that is critically undercapitalized. As of March 31, 1997, the Bank was considered "well capitalized" by the OTS. Where appropriate, the OTS can impose corrective action by a savings and loan holding company under the "prompt corrective action" provisions of FDICIA. Insurance of Deposit Accounts. Pursuant to FDICIA, the FDIC established a risk-based assessment system for determining the deposit insurance assessments to be paid by insured depository institutions. Under the assessment system, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of the reporting period ending seven months before the assessment period. The three capital categories consist of (a) well capitalized, (b) adequately capitalized, or (c) undercapitalized. The FDIC also assigns an institution to one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under the regulation, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. For the first three quarters of 1996, assessment rates for SAIF-insured institutions ranged from 0.23% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses), such as the Bank, to 0.31% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concern). In contrast, the least risky institutions insured under the Bank Insurance Fund ("BIF") paid deposit insurance assessments at the annual minimum of $2,000, and the other BIF-insured institutions paid assessments at rates that ranged from 0.03% to 0.27% of deposits. On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted into law to address, among other things, the disparity in the deposit insurance assessment rates imposed on BIF-insured and on SAIF-insured institutions. The Funds Act amended the FDIA in several ways to recapitalize the SAIF and to reduce the disparity in the assessment rates for the BIF and the SAIF. To recapitalize the SAIF, the Funds Act authorized the FDIC to impose a special assessment on all institutions with SAIF-assessable deposits in the amount necessary to recapitalize the SAIF. As implemented by the FDIC, the special assessment was fixed, subject to adjustment, at 0.657% of an institution's SAIF-assessable deposits, and the special assessment was paid on November 27, 1996. The special assessment was based on the amount of SAIF-assessable deposits held at March 31, 1995, as adjusted under the Funds Act. For the Bank, the special assessment on the deposits held on March 31, 1995, was $538,000 ($329,000 net of taxes). The Funds Act also provides that the FDIC cannot assess regular insurance assessments for an insurance fund unless required to maintain or to achieve the designated reserve ratio of 1.25%, except on those of its member institutions that are not classified as "well capitalized" or that have been found to have "moderately severe" or "unsatisfactory" financial, operational or compliance weaknesses. The Bank has not been so classified by the FDIC or the OTS. In view of the recapitalization of the SAIF, the FDIC reduced the annual assessment rates for SAIF-assessable deposits for periods beginning on October 1, 1996. For the last quarter of 1996, the reduced annual assessment rates ranged from 0.18% to 0.27% of deposits. Beginning with January 1, 1997, the annual assessment rates are the same for both BIF-insured and SAIF-insured institutions, with the annual assessment rates ranging from 0.0% to 0.27% of deposits. The Bank's assessment rate for deposit insurance is 0.0% of deposits for calendar 1997. In addition, the Funds Act expanded the assessment base for the payments on the bonds ("FICO bonds") issued in the late 1980s by the Financing Corporation to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. Beginning January 1, 1997, the deposits of both BIF- and SAIF-insured institutions are assessed for the payments on the FICO bonds. Until December 31, 1999, or such earlier date on which the last savings association ceases to exist, the rate of assessment for BIF-assessable deposits shall be one-fifth of the rate imposed on SAIF-assessable deposits. The rate of assessments for the payments on the FICO bonds is currently 0.013% for BIF-assessable deposits and 0.0648% for SAIF-assessable deposits. 23 25 The Funds Act also provides for the merger of the BIF and SAIF on January 1, 1999, with such merger being conditioned upon the prior elimination of the thrift charter. The Funds Act required the Secretary of the Treasury to conduct a study of relevant factors with respect to the development of a common charter for all insured depository institutions and the abolition of separate charters for banks and thrifts and to report the Secretary's conclusions and the findings to the Congress. The Secretary of the Treasury has recommended that the separate charter for thrifts be eliminated only if other legislation is adopted that permits bank holding companies to engage in certain non-financial activities. Absent legislation permitting such non-financial activity, the Secretary of the Treasury recommended retention of the thrift charter. The Secretary of the Treasury also recommended the merger of the BIF and the SAIF irrespective of whether the thrift charter is eliminated. Other proposed legislation has been introduced in Congress that would require thrift institutions to convert to bank charters. Federal Home Loan Bank System. The Bank is a member of the FHLB of New York, which is one of the regional FHLBs composing the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. The Bank, as a member of the FHLB of New York, is required to acquire and hold shares of capital stock in the FHLB of New York in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year or 1/20 of its advances (borrowings) from the FHLB of New York. The Bank was in compliance with this requirement with an investment in FHLB of New York stock at March 31, 1997, of $674,000. Any advances from a FHLB must be secured by specified types of collateral, and all long-term advances may be obtained only for the purpose of providing funds for residential housing finance. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the FHLBs can pay as dividends to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. For the fiscal years ended March 31, 1997, 1996 and 1995, dividends from the FHLB of New York to the Bank amounted to $37,000, $37,000 and $36,000, respectively. If dividends were reduced, or interest on future FHLB advances increased, the Bank's net interest income would likely also be reduced. Federal Reserve System. The Bank is subject to provisions of the FRA and the FRB's regulations pursuant to which depository institutions may be required to maintain non-interest-earning reserves against their deposit accounts and certain other liabilities. Currently, reserves must be maintained against transaction accounts (primarily NOW and regular checking accounts). The FRB regulations generally require that reserves be maintained in the amount of 3% of the aggregate of transaction accounts up to $49.3 million. The amount of aggregate transaction accounts in excess of $49.3 million are currently subject to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 12%. The FRB regulations currently exempt $4.4 million of otherwise reservable balances from the reserve requirements, which exemption is adjusted by the FRB at the end of each year. The Bank is in compliance with the foregoing reserve requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a FRB, or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OTS. FHLB System members are also authorized to borrow from the Federal Reserve "discount window," but FRB regulations require such institutions to exhaust all FHLB sources before borrowing from a FRB. HOLDING COMPANY REGULATION General. The Registrant is a unitary bank holding company within the meaning of the HOLA. As such, the Registrant is required to register with the OTS and is subject to OTS examination, regulation and reporting requirements. The OTS has enforcement authority over the Registrant. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the Bank. The Registrant is required to obtain the prior approval of the OTS to acquire all, or substantially all, of the assets of another savings institution or holding company thereof. Prior OTS approval is required for the Registrant to acquire direct or indirect ownership or control of any voting securities of a non-subsidiary savings institution, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA, if, after giving effect to such acquisition, the Registrant would, directly or indirectly, own or control more than 5% of any class of voting shares of such institution or company. Interstate Banking. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in 24 26 another state if the laws of the state of the target savings institution specifically permit such acquisitions. Under New York law, reciprocal interstate acquisitions are authorized for savings and loan holding companies and savings institutions. Certain states do not authorize interstate acquisitions under any circumstances; however, federal law authorizing acquisitions in supervisory cases preempts such state law. Acquisition of the Holding Company. Federal law generally provides that no person (including a company), or group acting in concert, directly or indirectly, may acquire 10% or more of a class of the outstanding voting securities of a savings association holding company without giving at least 60 days written notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition. Such acquisitions of control may be disapproved if it is determined, among other things, that (i) the acquisition would substantially lessen competition; (ii) the financial condition of the acquiring person might jeopardize the financial stability of the savings institution or prejudice the interests of its depositors; or (iii) the competency, experience or integrity of the acquiring person or the proposed management personnel indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person. In addition, federal regulations governing conversions of mutual savings institutions to the stock form of organization prohibit the direct or indirect acquisition without OTS approval of more than 10% of any equity security of a savings institution within three years of the savings institution's conversion to stock form. This limitation applies to acquisitions of the stock of the Registrant. Such acquisition may be disapproved if it is found, among other things, that the proposed acquisition (i) would frustrate the purposes of the provisions of the regulations regarding conversions, (ii) would be manipulative or deceptive, (iii) would subvert the fairness of the conversion, (iv) would be likely to result in injury to the savings institution, (v) would not be consistent with economical home financing, (vi) would otherwise violate law or regulation, or (vii) would not contribute to the prudent deployment of the savings institution's conversion proceeds. Federal Securities Laws. The Registrant's common stock is registered with the SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended ("Exchange Act"). The Registrant is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Exchange Act. ITEM 2. PROPERTIES The Company conducts its business through its office located in Tarrytown, New York. The property, which had a net book value of $466,000 as of March 31, 1997, was acquired in 1973. Management believes that the Company's current facilities are adequate to meet the present and immediately foreseeable needs of the Company. ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings in the aggregate are believed by management to be immaterial to the Company's financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS None. ITEM 6. SELECTED FINANCIAL DATA The information required by this item appears on page 1 of the 1997 Annual Report incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item appears on pages 3 through 11 of the 1997 Annual Report incorporated herein by reference. 25 27 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item appears on pages 12 through 34 of the 1997 Annual Report incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT The information required by this item appears under the captions "Election of Directors," "Nominees for Election as Director," "Continuing Directors," "Committees and Meetings of the Board of Directors of the Company" and "Executive Officers" on pages 6 through 10 and "Section 16 (a) Beneficial Ownership Reporting Compliance" on page 19 of the Registrant's Proxy Statement, previously filed with the Commission, for its Annual Meeting of Shareholders to be held on August 6, 1997 (the "1997 Proxy Statement") incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item appears under the captions "Compensation of Directors" on pages 8 through 10 and "Summary Compensation Table," "Employment Agreements," and "Benefits" on pages 11 through 18 of the 1997 Proxy Statement incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item appears under the captions "Principal Shareholders of the Company" on page 3 and 4, and "Stock Owned by Management" on page 5 of the 1997 Proxy Statement incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item appears under the caption "Transactions with Certain Related Persons" on page 19 of the 1997 Proxy Statement incorporated herein by reference. 26 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following consolidated financial statements of the Registrant, its bank subsidiary, and the independent auditors' report thereon, are included on pages 12 through 34 of the 1997 Annual Report incorporated herein by reference. 1. Consolidated Financial Statements: Balance Sheets at March 31, 1997 and 1996; Statements of Income for the years ended March 31, 1997, 1996 and 1995; Statements of Changes in Shareholders' Equity for the years ended March 31, 1997, 1996 and 1995; Statements of Cash Flows for the years ended March 31, 1997, 1996 and 1995; and Notes to Consolidated Financial Statements. 2. All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. 3. Exhibits (a) The following exhibits are filed as part of this report, except as otherwise indicated. DESIGNATION DESCRIPTION - ----------- ----------- 3.1 Certificate of Incorporation of Tappan Zee Financial, Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1, No. 33-94128, filed on June 30, 1995, as amended (the "Registration Statement")) 3.2 Bylaws of Tappan Zee Financial, Inc. (incorporated by reference to Exhibit 3.2 to the Registration Statement) 4.1 Certificate of Incorporation of Tappan Zee Financial, Inc. (see Exhibit 3.1 hereto) 4.2 Bylaws of Tappan Zee Financial, Inc. (see Exhibit 3.2 hereto) 4.3 Specimen Stock Certificate (incorporated by reference to Exhibit 4.3 to the Registration Statement) 10.1.0 Tappan Zee Financial, Inc. 1996 Stock Option Plan for Officers and Employees ("Employee Option Plan") (incorporated by reference to Exhibit A to the Registrant's Proxy Statement for use in connection with its 1996 Annual Meeting of Shareholders (the "1996 Proxy Statement"), previously filed with the Commission 10.1.1 Amendment No. 1 to the Employee Option Plan 10.1.2 Amendment No. 2 to the Employee Option Plan (incorporated by reference to Exhibit A to the 1997 Proxy Statement) 10.2.0 Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside Directors ("Outside Director Option Plan") (incorporated by 27 29 reference to Exhibit B to the 1996 Proxy Statement) 10.2.1 Amendment No. 1 to the Outside Director Option Plan 10.2.2 Amendment No. 2 to the Outside Director Option Plan (incorporated by reference to Exhibit B to the 1997 Proxy Statement) 10.3.0 Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for Officers and Employees ("Employee RRP") (incorporated by reference to Exhibit C to the 1996 Proxy Statement) 10.3.1 Amendment No. 1 to the Employee RRP 10.3.2 Amendment No. 2 to the Employee RRP (incorporated by reference to Exhibit C to the 1997 Proxy Statement) 10.4.0 Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for Outside Directors ("Outside Director RRP") (incorporated by reference to Exhibit D to the 1996 Proxy Statement) 10.4.1 Amendment No. 1 to the Outside Director RRP 10.4.2 Amendment No. 2 to the Outside Director RRP (incorporated by reference to Exhibit D to the 1997 Proxy Statement) 10.5 Employee Stock Ownership Plan of Tappan Zee Financial, Inc. and Certain Affiliates, as amended (incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1996 (the "1996 10-K")) 10.6 Loan Agreement to the Employee Stock Ownership Plan Trust of Tappan Zee Financial, Inc. and Certain Affiliates (incorporated by reference to Exhibit 10.7 to the 1996 10-K) 10.7 Tarrytowns Bank Deferred Compensation Plan for Directors of Tarrytowns Bank, FSB (Incorporated by reference to Exhibit 10.7 to the Registration Statement) 10.8 Retirement Plan for Board Members of Tappan Zee Financial, Inc. and Certain Affiliates, adopted effective as of October 5, 1995 (incorporated by reference to Exhibit 10.9 to the 1996 10-K) 10.09 Employment Agreement by and between Tappan Zee Financial, Inc. and Stephen C. Byelick, adopted effective as of October 5, 1995 (incorporated by reference to Exhibit 10.10 to the 1996 10-K) 10.10 Employment Agreement by and between Tappan Zee Financial, Inc. and Harry G. Murphy, adopted effective as of October 5, 1995 (incorporated by reference to Exhibit 10.11 to the 1996 10-K) 10.11 Employment Agreement by and between Tarrytowns Bank, FSB and Stephen C. Byelick, effective as of October 5, 1995 (incorporated by reference to Exhibit 10.12 to the 1996 10-K) 10.12 Employment Agreement by and between Tarrytowns Bank, FSB and Harry G. Murphy, effective as of October 5, 1995 (incorporated by reference to Exhibit 10.13 to the 1996 10-K) 28 30 10.13 Employee Retention Agreement by and among Tappan Zee Financial, Inc., Tarrytowns Bank, FSB and Christina Vidal, effective as of October 5, 1995 (incorporated by reference to Exhibit 10.15 to the 1996 10-K) 10.14 R Employee Retention Agreement by and among Tappan Zee Fi Financial, Inc., Tarrytowns Bank, FSB and Margaret E. Sampson, effective as of October 5, 1995 (incorporated by reference to Exhibit 10.16 to the 1996 10-K) 10.15 Employee Retention Agreement by and among Tappan Zee Financial, Inc., Tarrytowns Bank, FSB and Valerie Wilson, effective as of October 5, 1995 (incorporated by reference to Exhibit 10.17 to the 1996 10-K) 10.16 Forms of Stock Option Agreement by and between Tappan Zee Financial, Inc. and recipients of stock options granted pursuant to the Employee Option Plan and the Outside Director Option Plan 10.17 Forms of Restricted Stock Award Notices to award recipients, pursuant to the Employee RRP and the Outside Director RRP 10.18 Agency Agreement, by and among Tappan Zee Financial, Inc., Tarrytowns Bank FSB, and Sandler O'Neill & Partners, L.P., dated August 14, 1995 (incorporated by reference to Exhibit 1.2 to the Registration Statement. 11 Statement re: Computation of Earnings Per Share 13.1 1997 Annual Report to Shareholders 21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the Registration Statement) 27 Financial Data Schedule (EDGAR filing only) 99.1 Proxy Statement for 1997 Annual Meeting of Shareholders 29 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Tappan Zee Financial, Inc. Dated: June 23, 1997 By: /s/Stephen C. Byelick ---------------------- Stephen C. Byelick President and Chief Executive Officer Dated: June 23, 1997 By: /s/Harry G. Murphy ------------------- Harry G. Murphy Vice President and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/Marvin Levy Chairman June 23, 1997 - ------------------------- Marvin Levy /s/ Stephen C. Byelick Director June 23, 1997 - ------------------------- Stephen C. Byelick /s/ John T. Cooney Director June 23, 1997 - ------------------------- John T. Cooney /s/Gerald L. Logan Director June 23, 1997 - ------------------------- Gerald L. Logan /s/Harry G. Murphy Director June 23, 1997 - ------------------------- Harry G. Murphy /s/Kevin J. Plunkett Director June 23, 1997 - ------------------------- Kevin J. Plunkett /s/Paul R. Wheatley Director June 23, 1997 - ------------------------- Paul R. Wheatley
30 32
DESIGNATION DESCRIPTION PAGE - ----------- ----------- ---- 3.1 Certificate of Incorporation of Tappan Zee Financial, Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1, No. 33-94128, filed on June 30, 1995, as amended (the "Registration Statement")) 3.2 Bylaws of Tappan Zee Financial, Inc. (incorporated by reference to Exhibit 3.2 to the Registration Statement) 4.1 Certificate of Incorporation of Tappan Zee Financial, Inc. (see Exhibit 3.1 hereto) 4.2 Bylaws of Tappan Zee Financial, Inc. (see Exhibit 3.2 hereto) 4.3 Specimen Stock Certificate (incorporated by reference to Exhibit 4.3 to the Registration Statement) 10.1.0 Tappan Zee Financial Inc. 1996 Stock Option Plan for Officers and Employees ("Employee Option Plan") (incorporated by reference to Exhibit A to the Registrant's Proxy Statement for use in connection with its 1996 Annual Meeting of Shareholders (the "1996 Proxy Statement"), previously filed with the Commission 10.1.1 Amendment No. 1 to the Employee Option Plan ........................... 10.1.2 Amendment No. 2 to the Employee Option Plan (incorporated by reference to Exhibit A to the 1997 Proxy Statement) 10.2.0 Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside Directors ("Outside Director Option Plan") (incorporated by reference to Exhibit B to the 1996 Proxy Statement) 10.2.1 Amendment No. 1 to the Outside Director Option Plan ................... 10.2.2 Amendment No. 2 to the Outside Director Option Plan (incorporated by reference to Exhibit B to the 1997 Proxy Statement) 10.3.0 Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for Officers and Employees ("Employee RRP") (incorporated by reference to Exhibit C to the 1996 Proxy Statement) 10.3.1 Amendment No. 1 to the Employee RRP ...................................
33 - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- EXHIBITS to FORM 10-K SEC File No. 0-26466 ---------------- TAPPAN ZEE FINANCIAL, INC. Tarrytown, New York - ------------------------------------------------------------------------------- 34
DESIGNATION DESCRIPTION PAGE - ----------- ----------- ---- 10.3.2 Amendment No. 2 to the Employee RRP (incorporated by reference to Exhibit C to the 1997 Proxy Statement) 10.4.0 Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for Outside Directors ("Outside Director RRP") (incorporated by reference to Exhibit D to the 1996 Proxy Statement) 10.4.1 Amendment No. 1 to the Outside Director RRP........................... 10.4.2 Amendment No. 2 to the Outside Director RRP (incorporated by reference to Exhibit D to the 1997 Proxy Statement) 10.5 Employee Stock Ownership Plan of Tappan Zee Financial, Inc. and Certain Affiliates, as amended (incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1996 ("the 1996 10-K")) 10.6 Loan Agreement to the Employee Stock Ownership Plan Trust of Tappan Zee Financial, Inc. and Certain Affiliates (incorporated by reference to Exhibit 10.7 to the 1996 10-K) 10.7 Tarrytowns Bank Deferred Compensation Plan for Directors of Tarrytowns Bank, FSB (incorporated by reference to Exhibit 10.7 to the Registration Statement) 10.8 Retirement Plan for Board Members of Tappan Zee Financial, Inc. and Certain Affiliates, adopted effective as of October 5, 1995 (incorporated by reference to Exhibit 10.9 to the 1996 10-K) 10.9 Employment Agreement by and between Tappan Zee Financial, Inc. and Stephen C. Byelick, adopted effective as of October 5, 1995 (incorporated by reference to Exhibit 10.10 to the 1996 10-K) 10.10 Employment Agreement by and between Tappan Zee Financial, Inc. and Harry G. Murphy, adopted effective as of October 5, 1995 (incorporated by reference to Exhibit 10.11 to the 1996 10-K) 10.11 Employment Agreement by and between Tarrytowns Bank, FSB and Stephen C. Byelick, adopted effective as of October 5, 1995 (incorporated by reference to Exhibit 10.12 to the 1996 10-K)
35
DESIGNATION DESCRIPTION PAGE - ----------- ----------- ---- 10.12 Employment Agreement by and between Tarrytowns Bank, FSB and Harry G. Murphy, effective as of October 5, 1995 (incorporated by reference to Exhibit 10.13 to the 1996 10-K) 10.13 Employee Retention Agreement by and among Tappan Zee Financial, Inc., Tarrytowns Bank, FSB and Christine Vidal, effective as of October 5, 1995 (incorporated by reference to Exhibit 10.15 to the 1996 10-K) 10.14 Employee Retention Agreement by and among Tappan Zee Financial, Inc., Tarrytowns Bank, FSB and Margaret E. Sampson, effective as of October 5, 1995 (incorporated by reference to Exhibit 10.16 to the 1996 10-K) 10.15 Employee Retention Agreement by and among Tappan Zee Financial, Inc., Tarrytowns Bank, FSB and Valerie Wilson, effective as of October 5, 1995 (incorporated by reference to Exhibit 10.17 to the 1996 10-K) 10.16 Forms of Stock Option Agreement by and between Tappan Zee Financial, Inc. and recipients of stock options granted pursuant to the Employee Option Plan and the Outside Director Option Plan.................................................................. 10.17 Forms of Restricted Stock Award Notices to award recipients, pursuant to the Employee RRP and the Outside Director RRP..................... 10.18 Agency Agreement, by and among Tappan Zee Financial, Inc., Tarrytowns Bank, FSB and Sandler O'Neill & Partners, L.P., dated August 14, 1995 (incorporated by reference to Exhibit 1.2 to the Registration Statement) 11 Statement re: Computation of Earnings Per Share...................... 13.1 1997 Annual Report to Shareholders................................... 21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the Registration Statement) 27 Financial Data Schedule (EDGAR Filing only).......................... 99.1 Proxy Statement for 1997 Annual Meeting of Shareholders..............
EX-10.1.1 2 AMENDMENT TO THE EMPLOYEE OPTION PLAN 1 EXHIBIT 10.1.1 TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN FOR OFFICERS AND EMPLOYEES (Adopted on March 25, 1996 Effective as of July 11, 1996) AMENDMENT 1. Article II - Effective as of July 11, 1996, section 2.3(e) shall be amended by replacing the word "FInancial" with the word "Financial" where the latter word appears therein. 2. Article II - Effective as of July 11, 1996, Article II shall be amended by deleting section 2.15 therefrom and redesignating all remaining sections of Article II and all cross-references thereto accordingly. 3. Article II - Effective as of July 11, 1996, section 2.23 shall be amended by by replacing the word "Suprevision" with the word "Supervision" each time the latter word appears therein. 4. Article IV - Effective as of July 11, 1996, Article IV shall be amended by deleting section 4.9 therefrom and redesignating the remaining section of Article IV and all cross-references thereto accordingly. 5. Article IV - Effective as of July 11, 1996, section 4.9, as redesignated, shall be amended as follows: first, the phrase "at any time prior to October 5, 1996," shall be deleted from subsection (b) and second, the first clause in subsection (c) shall be amended and restated to read: (c) each Option granted under the Plan shall become exercisable as follows: 6. Article IV - Effective as of July 11, 1996, section 5.3 shall be amended and restated in its entirety to read as follows: Page 1 of 3 2 SECTION 5.3 ADJUSTMENTS IN THE EVENT OF A BUSINESS REORGANIZATION. (a) In the event of any merger, consolidation, or other business reorganization in which the Company is the surviving entity, and in the event of any stock split, stock dividend or other event generally affecting the number of Shares held by each Person who is then a holder of record of Shares, the number of Shares covered by each outstanding Option and the number of Shares available pursuant to section 4.2 shall be adjusted to account for such event. Such adjust ment shall be effected by multiplying such number of Shares by an amount equal to the number of Shares that would be owned after such event by a Person who, immediately prior to such event, was the holder of record of one Share, and the Exercise Price of the Options shall be adjusted by dividing the Exercise Price by such number of Shares; provided, however, that the Committee may, in its discretion, establish another appropriate method of adjustment. (b) In the event of any merger, consolidation, or other business reorganization in which the Company is not the surviving entity, any exercisable Options granted under the Plan which remain outstanding may be cancelled as of the effective date of such merger, consolidation, business reorganization, liquidation or sale by the Board upon 30 days' written notice to the Option holder; provided, however, that on or as soon as practicable following the date of cancellation, each Option holder shall receive a monetary payment in such amount, or other property of such kind and value, as the Board determines in good faith to be equivalent in value to the Options that have been cancelled. (c) In the event that the Company shall declare and pay any dividend with respect to Shares (other than a dividend payable in Shares) which results in a nontaxable return of capital to the holders of Shares for federal income tax purposes or otherwise than by dividend makes distribution of property to the holders of its Shares, the Company shall, in the discretion of the Committee, either: (i) make an equivalent payment to each Person holding an outstanding Option as of the record date for such dividend. Such payment shall be made at substantially the same time, in substantially the same form and in substantially the same amount per optioned Share as the dividend or other distribution paid with respect to outstanding Shares; provided, however, that if any dividend or distribution on outstanding Shares is paid in property other than cash, the Company, in the Committee's discretion, may make such payment in a cash amount per optioned Share equal in fair market value to the fair market value of the non-cash dividend or distribution; or (ii) adjust the Exercise Price of each outstanding Option in such manner as the Committee may determine to be appropriate to equitably reflect the payment of the dividend; or Page 2 of 3 3 (iii) take the action described in section 5.3(c)(i) with respect to certain outstanding Options and the action described in section 5.3(c)(ii) with respect to the remaining outstanding Options; provided, however, that no such action shall be taken without the approval of the Office of Thrift Supervision until the stockholders of the Company have voted to approve the provisions of this section 5.3(c) in a vote taken after October 5, 1996. 7. Article VI - Effective as of July 11, 1996, section 6.8 shall be amended as follows: first, the first sentence in such section shall be amended by deleting therefrom the words "and Limited Stock Appreciation Rights" and second, the second sentence of section 6.8 shall be amended by deleting therefrom the words "or Limited Stock Appreciation Rights" each time such words appear therein. Page 3 of 3 EX-10.2.1 3 AMENDMENT TO THE OUTSIDE DIRECTOR OPTION PLAN 1 EXHIBIT 10.2.1 TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS (Adopted on March 25, 1996 Effective as of July 11, 1996) AMENDMENT 1. Article II - Effective as of July 11, 1996, Article II shall be amended by deleting section 2.13 therefrom and redesignating all remaining sections of Article II and all cross-references thereto accordingly. 2. Article IV - Effective as of July 11, 1996, section 4.2(b) shall be amended by substituting the date "July 11, 1997" for the date "October 5, 1996" therein. 3. Article IV - Effective as of July 11, 1996, Article IV shall be amended by deleting section 4.7 therefrom. 4. Article V - Effective as of July 11, 1996, section 5.3 shall be amended and restated in its entirety to read as follows: SECTION 5.3 ADJUSTMENTS IN THE EVENT OF A BUSINESS REORGANIZATION. (a) In the event of any merger, consolidation, or other business reorganization in which the Company is the surviving entity, and in the event of any stock split, stock dividend or other event generally affecting the number of Shares held by each Person who is then a holder of record of Shares, the number of Shares covered by each outstanding Option and the number of Shares available pursuant to section 4.1 shall be adjusted to account for such event. Such adjust ment shall be effected by multiplying such number of Shares by an amount equal to the number of Shares that would be owned after such event by a Person who, immediately prior to such event, was the holder of record of one Share, and the Exercise Price of the Options shall be adjusted by dividing the Exercise Price by such number of Shares; provided, however, that the Committee may, in its discretion, establish another appropriate method of adjustment. (b) In the event of any merger, consolidation, or other business reorganization in which the Company is not the surviving entity, any exercisable Page 1 of 2 2 Options granted under the Plan which remain outstanding may be cancelled as of the effective date of such merger, consolidation, business reorganization, liquidation or sale by the Board upon 30 days' written notice to the Option holder; provided, however, that on or as soon as practicable following the date of cancellation, each Option holder shall receive a monetary payment in such amount, or other property of such kind and value, as the Board determines in good faith to be equivalent in value to the Options that have been cancelled. (c) In the event that the Company shall declare and pay any dividend with respect to Shares (other than a dividend payable in Shares) which results in a nontaxable return of capital to the holders of Shares for federal income tax purposes or otherwise than by dividend makes distribution of property to the holders of its Shares, the Company shall, in the discretion of the Committee, either: (i) make an equivalent payment to each Person holding an outstanding Option as of the record date for such dividend. Such payment shall be made at substantially the same time, in substantially the same form and in substantially the same amount per optioned Share as the dividend or other distribution paid with respect to outstanding Shares; provided, however, that if any dividend or distribution on outstanding Shares is paid in property other than cash, the Company, in the Committee's discretion, may make such payment in a cash amount per optioned Share equal in fair market value to the fair market value of the non-cash dividend or distribution; or (ii) adjust the Exercise Price of each outstanding Option in such manner as the Committee may determine to be appropriate to equitably reflect the payment of the dividend; or (iii) take the action described in section 5.3(c)(i) with respect to certain outstanding Options and the action described in section 5.3(c)(ii) with respect to the remaining outstanding Options; provided, however, that no such action shall be taken without the approval of the Office of Thrift Supervision until the stockholders of the Company have voted to approve the provisions of this section 5.3(c) in a vote taken after October 5, 1996. 5. Article VI - Effective as of July 11, 1996, section 6.8 shall be amended as follows: first, the first sentence in such section shall be amended by deleting therefrom the words "and Limited Stock Appreciation Rights" and second, the second sentence of section 6.8 shall be amended by deleting therefrom the words "or Limited Stock Appreciation Rights" each time such words appear therein. Page 2 of 2 EX-10.3.1 4 AMENDMENT TO THE EMPLOYEE RRP 1 EXHIBIT 10.3.1 RECOGNITION AND RETENTION PLAN FOR OFFICERS AND EMPLOYEES OF TAPPAN ZEE FINANCIAL, INC. (Adopted on March 25, 1996 Effective as of July 11, 1996) AMENDMENT 1. Article V - Effective as of July 11, 1996, the first sentence of section 5.4(a) shall be amended and restated to read in its entirety as follows: Any cash dividends or distributions declared and paid with respect to Shares in the Trust Fund that are, as of the record date for such dividend, allocated to an Eligible Employee in connection with an Award shall be held in the Trust Fund and distributed to such Eligible Employee (with any earnings attributable thereto) at the same time as the related Shares. 2. Article V - Effective as of July 11, 1996, sections 5.7(a)(ii) and (iii) shall be amended to read as follows: (ii) no individual may be granted Awards under the Plan covering in excess of Sixteen Thousand Two Hundred (16,200) Shares; (iii) each Award granted under the Plan shall become vested and distributable as follows: 3 Article VII - Effective as of July 11, 1996, section 7.3 shall be amended by adding the following new subsection "(c)" which shall read in its entirety as follows: (c) Nothing in this section 7.3 shall be deemed to change the otherwise applicable vesting schedule for any Eligible Employee. Page 1 of 1 EX-10.4.1 5 AMENDMENT TO THE OUTSIDE DIRECTOR RRP 1 EXHIBIT 10.4.1 RECOGNITION AND RETENTION PLAN FOR OUTSIDE DIRECTORS OF TAPPAN ZEE FINANCIAL, INC. (Adopted on March 25, 1996 Effective as of July 11, 1996) AMENDMENT 1. Article V - Effective as of July 11, 1996, the first sentence of section 5.3(a) shall be amended and restated to read in its entirety as follows: Any cash dividends or distributions declared and paid with respect to Shares in the Trust Fund that are, as of the record date for such dividend, allocated to an Eligible Director in connection with an Award shall be held in the Trust Fund and distributed to such Eligible Director (with any earnings attributable thereto) at the same time as the related Shares. 2. Article VI - Effective as of July 11, 1996, the first clause of section 5.6(a)(ii) shall be amended by replacing the words "prior to October 5, 1996" with the words "under the Plan." 3. Article VII - Effective as of July 11, 1996, section 7.3 shall be amended by adding the following new subsection "(c)" which shall read in its entirety as follows: (c) Nothing in this section 7.3 shall be deemed to change the otherwise applicable vesting schedule for any Eligible Director. Page 1 of 1 EX-10.16 6 FORMS OF STOCK OPTION AGREEMENT 1 EXHIBIT 10.16 TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN FOR OFFICERS AND EMPLOYEES INCENTIVE STOCK OPTION AGREEMENT - - - ----------------------------------------- ------ -------- ------ Name of Optionee Social Security Number - -------------------------------------------------------------------------------- Street Address - -------------------------- -------------------- ---------------------------- City State ZIP Code This Incentive Stock Option Agreement is intended to set forth the terms and conditions on which an Incentive Stock Option has been granted under the Tappan Zee Financial, Inc. 1996 Stock Option Plan for Officers and Employees. Set forth below are the specific terms and conditions applicable to this Incentive Stock Option. Attached as Exhibit A are its general terms and conditions. The Agreement set forth herein shall be effective as of July 11, 1996 and shall amend and supersede, in its entirety, any other Incentive Stock Option Agreement issued to the Optionee as of such date.
======================================================================================================================= Option Grant (A) (B) (C) (D) (E) ======================================================================================================================= Grant Date: - ----------------------------------------------------------------------------------------------------------------------- Class of Optioned Shares* Common Common Common Common Common - ----------------------------------------------------------------------------------------------------------------------- No. of Optioned Shares* - ----------------------------------------------------------------------------------------------------------------------- Exercise Price Per Share* - ----------------------------------------------------------------------------------------------------------------------- VESTING - ----------------------------------------------------------------------------------------------------------------------- Earliest Exercise Date* - ----------------------------------------------------------------------------------------------------------------------- Option Expiration Date* =======================================================================================================================
*Subject to adjustment as provided in the Plan and the General Terms and Conditions. By signing where indicated below, Tappan Zee Financial, Inc. (the "Company") grants this Incentive Stock Option upon the specified terms and conditions, and the Optionee acknowledges receipt of this Incentive Stock Option Agreement, including Exhibit A, and agrees to observe and be bound by the terms and conditions set forth herein. TAPPAN ZEE FINANCIAL, INC. OPTIONEE By ------------------------------- ---------------------------- Name: Title: - -------------------------------------------------------------------------------- INSTRUCTIONS: This page should be completed by or on behalf of the Compensation Committee. Any blank space intentionally left blank should be crossed out. An option grant consists of a number of optioned shares with uniform terms and conditions. Where options are granted on the same date with varying terms and conditions (for example, varying exercise prices or earliest exercise dates), the options should be recorded as a series of grants each with its own uniform terms and conditions. 2 EXHIBIT A TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN FOR OFFICERS AND EMPLOYEES INCENTIVE STOCK OPTION AGREEMENT GENERAL TERMS AND CONDITIONS SECTION 1. INCENTIVE STOCK OPTION. The Company intends the Option evidenced hereby to be an "incentive stock option" within the meaning of section 422 of the Internal Revenue Code of 1986. SECTION 2. OPTION PERIOD. (a) Subject to section 2(b), the Optionee shall have the right to purchase all or any portion of the optioned Common Stock at any time during the period ("Option Period") commencing on the Earliest Exercise Date and ending on the earliest to occur of the following dates: (i) removal for cause in accordance with the Company's bylaws; or (ii) the last day of the ten-year period commencing on the date on which the Option was granted. (b) Upon the termination of the Optionee's Service with the Company, any Option granted hereunder whose Earliest Exercise Date has not occurred is deemed forfeited. For this purpose, an Optionee's Service shall be deemed to continue for so long as the Optionee is serving as an officer, employee, outside director, advisory director, emeritus director or consultant to the Company or is subject to and is observing the terms of a written agreement restricting his ability to compete or imposing other restrictive covenants. In the event of the Optionee's death or disability (as defined in the Plan) while in Service, the date of death or disability shall be the Earliest Exercise Date of any Options that are not currently exercisable. To the extent authorized pursuant to a Plan provision that is approved by the Company's shareholders after October 5, 1996, in the event of the Optionee's retirement (as defined in the Plan) or a change of control (as defined in the Plan), the date of such retirement or change of control shall be the Earliest Exercise Date of any Options that are not already exercisable. SECTION 3. EXERCISE PRICE. During the Option Period, and after the applicable Earliest Exercise Date, the Optionee shall have the right to purchase all or any portion of the Optioned Common Stock at the Exercise Price per Share. SECTION 4. METHOD OF EXERCISE. The Optionee may, at any time during the Option Period provided by section 2, exercise his right to purchase all or any part of the optioned Common Stock then available for purchase; provided, however, that the minimum number of shares of optioned Common Stock which may be purchased shall be one hundred (100) or, if less, the total number of shares of optioned Common Stock then available for pur chase. The Optionee shall exercise such right by: (a) giving written notice to the Committee, in the form attached hereto as Appendix A; and (b) delivering to the Committee full payment of the Exercise Price for the Optioned Shares to be purchased. The date of exercise shall be the earliest date practicable following the date the requirements of this section 4 have been satisfied, but in no event more than three (3) days after such date. Payment shall be made (i) in United States dollars by certified check, money order or bank draft made payable to the order of Tappan Zee Financial, Inc., (ii) in Shares duly endorsed for transfer and with all necessary stock transfer tax stamps attached, already owned by the Optionee and having a fair market value equal to the Exercise Price, such fair market value to be determined in such manner as may be provided by the Committee or as may be required in order to comply with or conform to the requirements of any applicable laws or regulations, or (iii) in a combination of (i) and (ii). SECTION 5. DELIVERY AND REGISTRATION OF OPTIONED SHARES. As soon as is practicable following the date on which the Optionee has satisfied the requirements of section 4, the Committee shall take such action as is necessary to cause the Company to issue a stock certificate evidencing the Optionee's ownership of the optioned Common Stock that has been purchased. The Optionee shall have no right to vote or to receive dividends, nor have -2- 3 any other rights with respect to optioned Common Stock, prior to the date as of which such optioned Common Stock is transferred to the Optionee on the stock transfer records of the Company, and no adjustments shall be made for any dividends or other rights for which the record date is prior to the date as of which such transfer is effected. The obligation of the Company to deliver Common Stock under this Agreement shall, if the Committee so requests, be conditioned upon the receipt of a representation as to the investment intention of the person to whom such Common Stock is to be delivered, in such form as the Committee shall determine to be necessary or advisable to comply with the provisions of applicable federal, state or local law. It may be provided that any such representation shall become inoperative upon a registration of the Common Stock or upon the occurrence of any other event eliminating the necessity of such representation. The Company shall not be required to deliver any Common Stock under this Agreement prior to (a) the admission of such Common Stock to listing on any stock exchange on which Common Stock may then be listed, or (b) the completion of such registration or other qualification under any state or federal law, rule or regulations as the Committee shall determine to be necessary or advisable. SECTION 6. ADJUSTMENTS IN THE EVENT OF REORGANIZATION. In the event of any merger, consolidation, or other business reorganization in which the Company is the surviving entity, and in the event of any stock split, stock dividend or other event generally affecting the number of shares of Common Stock held by each per son who is then a shareholder of record, the number of shares of Common Stock subject to the option granted hereunder and the Exercise Price per share of such option shall be adjusted in accordance with section 5.3 of the Plan to account for such event. In the event of any merger, consolidation, or other business reorganization in which the Company is not the surviving entity, the option granted hereunder shall be cancelled or adjusted in accordance with the Plan. In the event that the Company shall declare and pay any dividend with respect to Shares (other than a dividend payable in Shares or a regular quarterly cash dividend), including a dividend which results in a nontaxable return of capital to the holders of Shares for federal income tax purposes, or otherwise than by dividend makes distribution of property to the holders of its Shares, the Company shall, in the discretion of the Committee, (a) make an equivalent payment to each Person holding an outstanding Option as of the record date for such dividend in accordance with section 5.3(c)(i) of the Plan or (b) adjust the Exercise Price per Share of outstanding Options in such a manner as the Committee may determine to be appropriate to equitably reflect the payment of the dividend or (c) take the action described in this section 6(a) with respect to certain outstanding Options and the action described in section 6(b) with respect to the remaining outstanding Options provided, however, that no such action shall be taken without the approval of the Office of Thrift Supervision until the stockholders of the Company have voted to approve the provisions of section 5.3(c) of the Plan in a vote taken after October 5, 1996. SECTION 7. NO RIGHT TO CONTINUED SERVICE. Nothing in this Agreement nor any action of the Board or Committee with respect to this Agreement shall be held or construed to confer upon the Optionee any right to a continuation of service by the Company. The Optionee may be dismissed or otherwise dealt with as though this Agreement had not been entered into. SECTION 8. TAXES. Where any person is entitled to receive shares pursuant to the exercise of the Option granted hereunder, the Company shall have the right to require such person to pay to the Company the amount of any tax which the Company is required to withhold with respect to such shares, or, in lieu thereof, to retain, or to sell without notice, a sufficient number of shares to cover the amount required to be withheld. SECTION 9. NOTICES. Any communication required or permitted to be given under the Plan, including any notice, direction, designation, comment, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below, or at such other address as one such party may by written notice specify to the other party: (a) If to the Committee: Tappan Zee Financial, Inc. 75 Broadway Tarrytown, New York 10591 Attention: Compensation Committee -3- 4 (b) If to the Optionee, to the Optionee's address as shown in the Company's personnel records. SECTION 10. RESTRICTIONS ON TRANSFER. The option granted hereunder shall not be subject in any manner to anticipation, alienation or assignment, nor shall such option be liable for or subject to debts, contracts, liabilities, engagements or torts, nor shall it be transferable by the Optionee other than by will or by the laws of descent and distribution or as otherwise permitted by the Plan. SECTION 11. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and shall be binding upon the Company and the Optionee and their respective heirs, successors and assigns. SECTION 12. CONSTRUCTION OF LANGUAGE. Whenever appropriate in the Agreement, words used in the singular may be read in the plural, words used in the plural may be read in the singular, and words importing the masculine gender may be read as referring equally to the feminine or the neuter. Any reference to a section shall be a reference to a section of this Agreement, unless the context clearly indicates otherwise. Capitalized terms not specifically defined herein shall have the meanings assigned to them under the Plan. SECTION 13. GOVERNING LAW. This Agreement shall be construed, administered and enforced according to the laws of the State of New York without giving effect to the conflict of laws principles thereof, except to the extent that such laws are preempted by the federal law. SECTION 14. AMENDMENT. This Agreement may be amended, in whole or in part and in any manner not inconsistent with the provisions of the Plan, at any time and from time to time, by written agreement between the Company and the Optionee. SECTION 15. PLAN PROVISIONS CONTROL. This Agreement and the rights and obligations created hereunder shall be subject to all of the terms and conditions of the Plan. In the event of any conflict between the provisions of the Plan and the provisions of this Agreement, the terms of the Plan, which are incorporated herein by reference, shall control. By signing this Agreement, the Optionee acknowledges receipt of a copy of the Plan. SECTION 16. CHANGE IN CONTROL. A "change in control" shall be as defined in the Plan. -4- 5 APPENDIX A TO INCENTIVE STOCK OPTION AGREEMENT Tappan Zee Financial, Inc. 1996 Stock Option Plan for Officers and Employees NOTICE OF EXERCISE OF INCENTIVE STOCK OPTION 1. INSTRUCTIONS. Use this Notice to inform the Committee administering the Tappan Zee Financial, Inc. 1996 Stock Option Plan for Officers and Employees ("Plan") that you are exercising your right to purchase shares of common stock ("Shares") of Tappan Zee Financial, Inc. ("Tappan Zee") pursuant to a non-qualified stock option ("Option") granted under the Plan. If you are not the person to whom the Option was granted ("Option Recipient"), you must attach to this Notice proof of your right to exercise the Option granted under the Incentive Stock Option Agreement entered into between Tappan Zee and the Option Recipient ("Agreement"). This Notice should be personally delivered or mailed by certified mail, return receipt requested to: Tappan Zee Financial, Inc., 75 Broadway, Tarrytown, New York 10591, Attention: Compensation Committee. The effective date of the exercise of the Option shall be the earliest date practicable following the date this Notice is received by the Committee, but in no event more than three days after such date ("Effective Date"). Except as specifically provided to the contrary herein, capitalized terms shall have the meanings assigned to them under the Plan. This Notice is subject to all of the terms and conditions of the Plan and the Agreement. 2. PURCHASE OF SHARES. Pursuant to the Agreement made and entered into as of _____________________, 19 ___ [enter date of Agreement] by and between Tappan Zee and [enter the name of the Option Recipient], I hereby exercise my right to purchase __________ Shares at an Exercise Price per Share of $_________, for a Total Exercise Price of $_____________ [enter the product of the number of Shares multiplied by the Exercise Price per Share]. As a payment for such Shares, I [check and complete one or more; the sum of the amounts shown in (a), (b) and (c), must equal the Total Exercise Price shown above: (A) [ ] enclose a certified check, money order, or bank draft $__________ payable to the order of Tappan Zee Financial, Inc. in the amount of (B) [ ] enclose Shares duly endorsed for transfer to Tappan Zee $__________ with all necessary stock transfer stamps attached and having a fair market value of Total Exercise Price $__________
3. ISSUANCE OF CERTIFICATES. I hereby direct that the stock certificates representing the Shares purchased pursuant to section 2 above be issued to the following person(s) in the amount specified below:
Name and Address Social Security No. No of Shares ---------------- ------------------- ------------ - ------------------------------------------- - - - ------------------------------------------- ------ ------ -------- --------------- - ------------------------------------------- - - - ------------------------------------------- ------ ------ -------- ---------------
4. WITHHOLDING ELECTIONS. [For Employee Option Recipients only. Beneficiaries and Outside Directors should not complete.] I understand that I am responsible for the amount of federal, state and local taxes required to be withheld with respect to the Shares to be issued to me pursuant to this Notice, but that I may request Tappan Zee to retain or sell a sufficient number of such Shares to cover the amount to be withheld. I hereby request that any taxes required to be withheld be paid in the following manner [check one]: (A) [ ] With a certified or bank check that I will deliver to the Administrator on the day after the Effective Date of my Option exercise. (B) [ ] With the proceeds from a sale of Shares that would otherwise be distributed to me. I understand that the withholding elections I have made on this form are not binding on the Committee, and that the Committee will decide the amount to be withheld and the method of withholding and advise me of its decision prior to the Effective Date. I further understand that the Committee may request additional information or assurances regarding the manner and time at which I will report the income attributable to the distribution to be made to me. I further understand that if I have elected to have Shares sold to satisfy tax withholding, I may be asked to pay a minimal amount of such taxes in cash in order to avoid the sale of more Shares than are necessary. 5. COMPLIANCE WITH TAX AND SECURITIES LAWS. I understand that I must rely on, and consult with, my own tax and legal counsel (and not Tappan Zee Financial, Inc.) regarding the application of all laws -- particularly tax and securities laws -- to the transactions to be effected pursuant to my Option and this Notice. I understand that I will be responsible for paying any federal, state and local taxes that may become due upon the sale (including a sale pursuant to a "cashless exercise") or other disposition of Shares issued pursuant to this Notice and that I must consult with my own tax advisor regarding how and when such income will be reportable. - ---------------------------------- ------------------------- Signature Date - -------------------------------------------------------------------------------- Address * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * COMPENSATION COMMITTEE Received [check one]: [ ] By Hand [ ] By Mail Post Marked ------------------ Date of Post Mark By ---------------------------------------- ------------------ Authorized Signature Date of Receipt 6 TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS NON-QUALIFIED STOCK OPTION AGREEMENT - - - ----------------------------------------- ------ -------- ------ Name of Optionee Social Security Number - -------------------------------------------------------------------------------- Street Address - -------------------------- -------------------- ---------------------------- City State ZIP Code This Non-Qualified Stock Option Agreement is intended to set forth the terms and conditions on which a Non-Qualified Stock Option has been granted under the Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside Directors. Set forth below are the specific terms and conditions applicable to this Non-Qualified Stock Option. Attached as Exhibit A are its general terms and conditions. The Agreement set forth herein shall be effective as of July 11, 1996 and shall amend and supersede, in its entirety, any other Non-Qualified Stock Option Agreement issued to the Optionee as of such date.
======================================================================================================================== Option Grant (A) (B) (C) (D) (E) ======================================================================================================================== Grant Date: - ------------------------------------------------------------------------------------------------------------------------ Class of Optioned Shares* Common Common Common Common Common - ------------------------------------------------------------------------------------------------------------------------ No. of Optioned Shares* - ------------------------------------------------------------------------------------------------------------------------ Exercise Price Per Share* - ------------------------------------------------------------------------------------------------------------------------ VESTING - ------------------------------------------------------------------------------------------------------------------------ Earliest Exercise Date* - ------------------------------------------------------------------------------------------------------------------------ Option Expiration Date* ========================================================================================================================
*Subject to adjustment as provided in the Plan and the General Terms and Conditions. By signing where indicated below, Tappan Zee Financial, Inc. (the "Company") grants this Non-Qualified Stock Option upon the specified terms and conditions, and the Optionee acknowledges receipt of this Non-Qualified Stock Option Agreement, including Exhibit A, and agrees to observe and be bound by the terms and conditions set forth herein. TAPPAN ZEE FINANCIAL, INC. OPTIONEE By ------------------------------- ---------------------------- Name: Title: - -------------------------------------------------------------------------------- INSTRUCTIONS: This page should be completed by or on behalf of the Compensation Committee. Any blank space intentionally left blank should be crossed out. An option grant consists of a number of optioned shares with uniform terms and conditions. Where options are granted on the same date with varying terms and conditions (for example, varying exercise prices or earliest exercise dates), the options should be recorded as a series of grants each with its own uniform terms and conditions. 7 EXHIBIT A TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS NON-QUALIFIED STOCK OPTION AGREEMENT GENERAL TERMS AND CONDITIONS SECTION 1. NON-QUALIFIED STOCK OPTION. The Company intends the Option evidenced hereby not to be an "incentive stock option" within the meaning of section 422 of the Internal Revenue Code of 1986. SECTION 2. OPTION PERIOD. (a) Subject to section 2(b), the Optionee shall have the right to purchase all or any portion of the optioned Common Stock at any time during the period ("Option Period") commencing on the Earliest Exercise Date and ending on the earliest to occur of the following dates: (i) removal for cause in accordance with the Company's bylaws; or (ii) the last day of the ten-year period commencing on the date on which the Option was granted. (b) Upon the termination of the Optionee's Service with the Company, any Option granted hereunder whose Earliest Exercise Date has not occurred is deemed forfeited. For this purpose, an Optionee's Service shall be deemed to continue for so long as the Optionee is serving as an officer, employee, outside director, advisory director, emeritus director or consultant to the Company or is subject to and is observing the terms of a written agreement restricting his ability to compete or imposing other restrictive covenants. In the event of the Optionee's death or disability (as defined in the Plan) while in Service, the date of death or disability shall be the Earliest Exercise Date of any Options that are not currently exercisable. To the extent authorized pursuant to a Plan provision that is approved by the Company's shareholders after October 5, 1996, in the event of the Optionee's retirement (as defined in the Plan) or a change of control (as defined in the Plan), the date of such retirement or change of control shall be the Earliest Exercise Date of any Options that are not already exercisable. SECTION 3. EXERCISE PRICE. During the Option Period, and after the applicable Earliest Exercise Date, the Optionee shall have the right to purchase all or any portion of the Optioned Common Stock at the Exercise Price per Share. SECTION 4. METHOD OF EXERCISE. The Optionee may, at any time during the Option Period provided by section 2, exercise his right to purchase all or any part of the optioned Common Stock then available for purchase; provided, however, that the minimum number of shares of optioned Common Stock which may be purchased shall be one hundred (100) or, if less, the total number of shares of optioned Common Stock then available for pur chase. The Optionee shall exercise such right by: (a) giving written notice to the Committee, in the form attached hereto as Appendix A; and (b) delivering to the Committee full payment of the Exercise Price for the Optioned Shares to be purchased. The date of exercise shall be the earliest date practicable following the date the requirements of this section 4 have been satisfied, but in no event more than three (3) days after such date. Payment shall be made (i) in United States dollars by certified check, money order or bank draft made payable to the order of Tappan Zee Financial, Inc., (ii) in Shares duly endorsed for transfer and with all necessary stock transfer tax stamps attached, already owned by the Optionee and having a fair market value equal to the Exercise Price, such fair market value to be determined in such manner as may be provided by the Committee or as may be required in order to comply with or conform to the requirements of any applicable laws or regulations, or (iii) in a combination of (i) and (ii). SECTION 5. DELIVERY AND REGISTRATION OF OPTIONED SHARES. As soon as is practicable following the date on which the Optionee has satisfied the requirements of section 4, the Committee shall take such action as is necessary to cause the Company to issue a stock certificate evidencing the Optionee's ownership of the optioned Common Stock that has been purchased. The Optionee shall have no right to vote or to receive dividends, nor have -2- 8 any other rights with respect to optioned Common Stock, prior to the date as of which such optioned Common Stock is transferred to the Optionee on the stock transfer records of the Company, and no adjustments shall be made for any dividends or other rights for which the record date is prior to the date as of which such transfer is effected. The obligation of the Company to deliver Common Stock under this Agreement shall, if the Committee so requests, be conditioned upon the receipt of a representation as to the investment intention of the person to whom such Common Stock is to be delivered, in such form as the Committee shall determine to be necessary or advisable to comply with the provisions of applicable federal, state or local law. It may be provided that any such representation shall become inoperative upon a registration of the Common Stock or upon the occurrence of any other event eliminating the necessity of such representation. The Company shall not be required to deliver any Common Stock under this Agreement prior to (a) the admission of such Common Stock to listing on any stock exchange on which Common Stock may then be listed, or (b) the completion of such registration or other qualification under any state or federal law, rule or regulations as the Committee shall determine to be necessary or advisable. SECTION 6. ADJUSTMENTS IN THE EVENT OF REORGANIZATION. In the event of any merger, consolidation, or other business reorganization in which the Company is the surviving entity, and in the event of any stock split, stock dividend or other event generally affecting the number of shares of Common Stock held by each per son who is then a shareholder of record, the number of shares of Common Stock subject to the option granted hereunder and the Exercise Price per share of such option shall be adjusted in accordance with section 5.3 of the Plan to account for such event. In the event of any merger, consolidation, or other business reorganization in which the Company is not the surviving entity, the option granted hereunder shall be cancelled or adjusted in accordance with the Plan. In the event that the Company shall declare and pay any dividend with respect to Shares (other than a dividend payable in Shares or a regular quarterly cash dividend), including a dividend which results in a nontaxable return of capital to the holders of Shares for federal income tax purposes, or otherwise than by dividend makes distribution of property to the holders of its Shares, the Company shall, in the discretion of the Committee, (a) make an equivalent payment to each Person holding an outstanding Option as of the record date for such dividend in accordance with section 5.3(c)(i) of the Plan or (b) adjust the Exercise Price per Share of outstanding Options in such a manner as the Committee may determine to be appropriate to equitably reflect the payment of the dividend or (c) take the action described in this section 6(a) with respect to certain outstanding Options and the action described in section 6(b) with respect to the remaining outstanding Options provided, however, that no such action shall be taken without the approval of the Office of Thrift Supervision until the stockholders of the Company have voted to approve the provisions of section 5.3(c) of the Plan in a vote taken after October 5, 1996. SECTION 7. NO RIGHT TO CONTINUED SERVICE. Nothing in this Agreement nor any action of the Board or Committee with respect to this Agreement shall be held or construed to confer upon the Optionee any right to a continuation of service by the Company. The Optionee may be dismissed or otherwise dealt with as though this Agreement had not been entered into. SECTION 8. TAXES. Where any person is entitled to receive shares pursuant to the exercise of the Option granted hereunder, the Company shall have the right to require such person to pay to the Company the amount of any tax which the Company is required to withhold with respect to such shares, or, in lieu thereof, to retain, or to sell without notice, a sufficient number of shares to cover the amount required to be withheld. SECTION 9. NOTICES. Any communication required or permitted to be given under the Plan, including any notice, direction, designation, comment, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below, or at such other address as one such party may by written notice specify to the other party: (a) If to the Committee: Tappan Zee Financial, Inc. 75 Broadway Tarrytown, New York 10591 Attention: Compensation Committee -3- 9 (b) If to the Optionee, to the Optionee's address as shown in the Company's personnel records. SECTION 10. RESTRICTIONS ON TRANSFER. The option granted hereunder shall not be subject in any manner to anticipation, alienation or assignment, nor shall such option be liable for or subject to debts, contracts, liabilities, engagements or torts, nor shall it be transferable by the Optionee other than by will or by the laws of descent and distribution or as otherwise permitted by the Plan. SECTION 11. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and shall be binding upon the Company and the Optionee and their respective heirs, successors and assigns. SECTION 12. CONSTRUCTION OF LANGUAGE. Whenever appropriate in the Agreement, words used in the singular may be read in the plural, words used in the plural may be read in the singular, and words importing the masculine gender may be read as referring equally to the feminine or the neuter. Any reference to a section shall be a reference to a section of this Agreement, unless the context clearly indicates otherwise. Capitalized terms not specifically defined herein shall have the meanings assigned to them under the Plan. SECTION 13. GOVERNING LAW. This Agreement shall be construed, administered and enforced according to the laws of the State of New York without giving effect to the conflict of laws principles thereof, except to the extent that such laws are preempted by the federal law. SECTION 14. AMENDMENT. This Agreement may be amended, in whole or in part and in any manner not inconsistent with the provisions of the Plan, at any time and from time to time, by written agreement between the Company and the Optionee. SECTION 15. PLAN PROVISIONS CONTROL. This Agreement and the rights and obligations created hereunder shall be subject to all of the terms and conditions of the Plan. In the event of any conflict between the provisions of the Plan and the provisions of this Agreement, the terms of the Plan, which are incorporated herein by reference, shall control. By signing this Agreement, the Optionee acknowledges receipt of a copy of the Plan. SECTION 16. CHANGE IN CONTROL. A "change in control" shall be as defined in the Plan. -4- 10 APPENDIX A TO NON-QUALIFIED STOCK OPTION AGREEMENT Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside Directors NOTICE OF EXERCISE OF NON-QUALIFIED STOCK OPTION 1. INSTRUCTIONS. Use this Notice to inform the Committee administering the Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside Directors ("Plan") that you are exercising your right to purchase shares of common stock ("Shares") of Tappan Zee Financial, Inc. ("Tappan Zee") pursuant to a non-qualified stock option ("Option") granted under the Plan. If you are not the person to whom the Option was granted ("Option Recipient"), you must attach to this Notice proof of your right to exercise the Option granted under the Non-Qualified Stock Option Agreement entered into between Tappan Zee and the Option Recipient ("Agreement"). This Notice should be personally delivered or mailed by certified mail, return receipt requested to: Tappan Zee Financial, Inc., 75 Broadway, Tarrytown, New York 10591, Attention: Compensation Committee. The effective date of the exercise of the Option shall be the earliest date practicable following the date this Notice is received by the Committee, but in no event more than three days after such date ("Effective Date"). Except as specifically provided to the contrary herein, capitalized terms shall have the meanings assigned to them under the Plan. This Notice is subject to all of the terms and conditions of the Plan and the Agreement. 2. PURCHASE OF SHARES. Pursuant to the Agreement made and entered into as of _____________________, 19 ___ [enter date of Agreement] by and between Tappan Zee and [enter the name of the Option Recipient], I hereby exercise my right to purchase __________ Shares at an Exercise Price per Share of $_________, for a Total Exercise Price of $_____________ [enter the product of the number of Shares multiplied by the Exercise Price per Share]. As a payment for such Shares, I [check and complete one or more; the sum of the amounts shown in (a), (b) and (c), must equal the Total Exercise Price shown above: (A) [ ] enclose a certified check, money order, or bank draft $__________ payable to the order of Tappan Zee Financial, Inc. in the amount of (B) [ ] enclose Shares duly endorsed for transfer to Tappan Zee $__________ with all necessary stock transfer stamps attached and having a fair market value of Total Exercise Price $__________
3. ISSUANCE OF CERTIFICATES. I hereby direct that the stock certificates representing the Shares purchased pursuant to section 2 above be issued to the following person(s) in the amount specified below:
Name and Address Social Security No. No of Shares ---------------- ------------------- ------------ - ------------------------------------------- - - - ------------------------------------------- ------ ------ -------- --------------- - ------------------------------------------- - - - ------------------------------------------- ------ ------ -------- ---------------
4. WITHHOLDING ELECTIONS. [For Employee Option Recipients only. Beneficiaries and Outside Directors should not complete.] I understand that I am responsible for the amount of federal, state and local taxes required to be withheld with respect to the Shares to be issued to me pursuant to this Notice, but that I may request Tappan Zee to retain or sell a sufficient number of such Shares to cover the amount to be withheld. I hereby request that any taxes required to be withheld be paid in the following manner [check one]: (A) [ ] With a certified or bank check that I will deliver to the Administrator on the day after the Effective Date of my Option exercise. (B) [ ] With the proceeds from a sale of Shares that would otherwise be distributed to me. I understand that the withholding elections I have made on this form are not binding on the Committee, and that the Committee will decide the amount to be withheld and the method of withholding and advise me of its decision prior to the Effective Date. I further understand that the Committee may request additional information or assurances regarding the manner and time at which I will report the income attributable to the distribution to be made to me. I further understand that if I have elected to have Shares sold to satisfy tax withholding, I may be asked to pay a minimal amount of such taxes in cash in order to avoid the sale of more Shares than are necessary. 5. COMPLIANCE WITH TAX AND SECURITIES LAWS. I understand that I must rely on, and consult with, my own tax and legal counsel (and not Tappan Zee Financial, Inc.) regarding the application of all laws -- particularly tax and securities laws -- to the transactions to be effected pursuant to my Option and this Notice. I understand that I will be responsible for paying any federal, state and local taxes that may become due upon the sale (including a sale pursuant to a "cashless exercise") or other disposition of Shares issued pursuant to this Notice and that I must consult with my own tax advisor regarding how and when such income will be reportable. - ---------------------------------- ------------------------- Signature Date - ------------------------------------------------------------------------------- Address * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * COMPENSATION COMMITTEE Received [check one]: [ ] By Hand [ ] By Mail Post Marked ------------------ Date of Post Mark By ---------------------------------------- ------------------ Authorized Signature Date of Receipt EX-10.17 7 FORMS OF RESTRICTED STOCK AWARD NOTICES 1 EXHIBIT 10.17 TAPPAN ZEE FINANCIAL, INC. RECOGNITION AND RETENTION PLAN FOR OFFICERS AND EMPLOYEES RESTRICTED STOCK AWARD NOTICE - - - ----------------------------------------- ------ -------- ------ Name of Award Recipient Social Security Number - -------------------------------------------------------------------------------- Street Address - -------------------------- -------------------- ---------------------------- City State ZIP Code This Restricted Stock Award Notice is intended to set forth the terms and conditions on which a Restricted Stock Award has been granted under the Tappan Zee Financial, Inc. Recognition and Retention Plan for Officers and Employees. Set forth below are the specific terms and conditions applicable to this Restricted Stock Award. Attached as Exhibit A are its general terms and conditions. This Restricted Stock Award Notice shall be effective as of July 11, 1996 and shall amend and supersede, in its entirety, any other Restricted Stock Award issued to the Award Recipient as of such date.
============================================================================================================================ Restricted Stock Award (A) (B) (C) (D) (E) ============================================================================================================================ Effective Date - ---------------------------------------------------------------------------------------------------------------------------- Class of Shares* - ---------------------------------------------------------------------------------------------------------------------------- No. of Awarded Shares* - ---------------------------------------------------------------------------------------------------------------------------- Vesting Date* ============================================================================================================================
*Subject to adjustment as provided in the Plan and the General Terms and Conditions. By signing where indicated below, Tappan Zee Financial, Inc. (the "Company") grants this Restricted Stock Award upon the specified terms and conditions, and the Award Recipient acknowledges receipt of this Restricted Stock Award Notice, including Exhibit A, and agrees to observe and be bound by the terms and conditions set forth herein. TAPPAN ZEE FINANCIAL, INC. AWARD RECIPIENT By ----------------------------------- ------------------------ Name: Title: INSTRUCTIONS: This page should be completed by or on behalf of the Compensation Committee. Any blank space intentionally left blank should be crossed out. A Restricted Stock Award consists of a number of Awarded Shares with uniform terms and conditions. Where Awarded Shares are awarded on the same date with varying terms and conditions (for example, varying vesting dates), the awards should be recorded as a series of grants each with its own uniform terms and conditions. 2 EXHIBIT A TAPPAN ZEE FINANCIAL, INC. RECOGNITION AND RETENTION PLAN FOR OFFICERS AND EMPLOYEES RESTRICTED STOCK AWARD GENERAL TERMS AND CONDITIONS Section 1. Ownership of Shares. The shares of Common Stock, par value $.01 per share, of Tappan Zee Financial Inc. ("Shares") covered by this Award ("Awarded Shares") are held in trust by Marine Midland Bank, N.A., the Trustee of the Plan, for your benefit until such time as they are distributed to you or, if earlier, until you forfeit your rights to the Awarded Shares. Section 2. Vesting. In general the Awarded Shares shall become vested and available for distribution to you at the dates set forth in the Restricted Stock Award Notice. In the event that your service with the Company terminates on account of your death or Disability, then any Awarded Shares not theretofore forfeited shall become immediately vested. In addition, to the extent authorized pursuant to a Plan provision that is approved by the Company's shareholders after October 5, 1996, in the event your service terminates due to retirement (as defined in the Plan) or in the event a change of control (as defined in the Plan) occurs, then any Awarded Shares not theretofore forfeited shall become immediately vested. Section 3. Forfeitures. In the event that your service with the Company terminates before all of the Awarded Shares become vested, any Awarded Shares that have not yet become vested pursuant to section 2 of this Award Notice shall be forfeited. Following such a forfeiture, you will have no rights whatsoever with respect to the Awarded Shares forfeited. For purposes of determining any forfeitures, you will not be deemed to have terminated service with the Company for so long as you provide services to the Company or any subsidiary or affiliate of the Company as an employee, officer, director, advisory director, director emeritus, or consultant or for so long as you are bound by and are observing the terms of any contract which imposes restrictions on your right to perform services for a competitor of the Company or any of its subsidiaries or affiliates or provides other restrictive covenants. Section 4. Dividends. Any cash dividends or distributions declared and paid with respect to Awarded Shares not forfeited shall be held in the Trust Fund in accordance with the terms of the Plan and distributed to you (with any earnings attributable thereto) at the same time as the related Awarded Shares. Any stock dividends declared and paid with respect to Awarded Shares not forfeited shall be allocated to you, and such stock dividends shall be held in the Trust Fund and shall be subject to such restrictions and shall become vested under the same terms and conditions as the Awarded Shares to which they pertain. Section 5. Voting Rights. You shall have the exclusive right to direct the manner in which all voting rights appurtenant to Awarded Shares not forfeited will be exercised while such Awarded Shares are held in the Trust Fund. Such a direction shall be given by completing and filing a written direction, in the form and manner prescribed by the Committee, with such person as the Committee shall designate, at least 10 days prior to the date of the meeting of holders of Shares at which such voting rights will be exercised. Section 6. Distribution Upon Vesting. As soon as practicable following the date any Awarded Shares become vested pursuant to the Award Notice, the Company will issue to you, or your Beneficiary entitled to such Awarded Shares, a stock certificate evidencing ownership of the Shares. Any additional Shares attributable to stock dividends paid with respect to the Awarded Shares then being distributed pursuant to this section 6 shall also be distributed and shall be evidenced by such stock certificate. Section 7. Registration of Shares. The Company's obligation to deliver Shares pursuant to this Award Notice shall, if the Committee so requests, be conditioned upon the receipt of a representation as to the investment intention of you or your Beneficiary to whom such Shares are to be delivered, in such form as the Committee shall determine to be necessary or advisable to comply with the provisions of applicable federal, state or local law. It may be provided that any such representation shall become inoperative upon a registration of the Shares or upon the occurrence of any other event eliminating the necessity of such representation. The Company shall not be required to deliver any Shares under the Plan prior to (a) the admission of such Shares to listing on any stock exchange on which Shares may then be listed, or (b) the completion of such registration or other qualification under any state or federal law, rule or regulation as the Committee shall determine to be necessary or advisable. 3 Section 8. No Right to Continued Employment. Nothing in this Award Notice nor any action of the Board or the Committee with respect to this Award Notice shall be held or construed to confer upon you any right to a continuation of service with the Company or any of its affiliates which employ you. You may be dismissed or otherwise dealt with to the same extent as though this Award had not been made. Section 9. Taxes. The Company, the Committee or the Trustee shall have the right to require you to pay the amount of any tax which is required to be withheld with respect to the Awarded Shares, or, in lieu thereof, to retain, or to sell without notice, a sufficient number of Awarded Shares to cover the amount required to be withheld. Section 10. Notices. Any communication required or permitted to be given under the Plan, including any notice, direction, designation, comment, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is personally delivered or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below, or at such other address as one such party may by written notice specify to the other: (a) If to the Committee: Tappan Zee Financial, Inc. 75 Broadway Tarrytown, New York 10591 Attention: Compensation Committee (b) If to you, to your address as shown in the Company's personnel records. Section 11. No Assignment. The Awarded Shares shall not be transferable by you other than by will or by the laws of descent and distribution, and the Awarded Shares shall be distributable only to you during your lifetime. Section 12. Successors and Assigns. This Award Notice shall inure to the benefit of and shall be binding upon you and the Company and your respective heirs, successors and assigns. Section 13. Construction of Language. Whenever appropriate in this Award Notice, words used in the singular may be read in the plural, words used in the plural may be read in the singular, and words importing the masculine gender may be read as referring equally to the feminine or the neuter. Any reference to a section shall be a reference to a section of this Award Notice, unless the context clearly indicates otherwise. Capitalized terms not specifically defined herein shall have the meanings assigned to them under the Plan. Section 14. Governing Law. This Award Notice shall be construed and enforced in accordance with the laws of the State of New York without giving effect to the conflict of laws principles thereof, except to the extent that such laws are preempted by the federal laws of the United States of America. Section 15. Amendment. This Award Notice may be amended, in whole or in part and in any manner not inconsistent with the provisions of the Plan, at any time and from time to time, by written agreement between you and the Company. Section 16. Plan Provisions Control. This Award Notice, and the rights and obligations created hereunder, shall be subject to all of the terms and conditions of the Plan. In the event of any conflict between the provisions of the Plan and the provisions of this Award Notice, the terms of the Plan, which are incorporated herein by reference, shall control. By signing this Award Notice, you acknowledge receipt of a copy of the Plan. 4 TAPPAN ZEE FINANCIAL, INC. RECOGNITION AND RETENTION PLAN FOR OUTSIDE DIRECTORS RESTRICTED STOCK AWARD NOTICE - - - ----------------------------------------- ------ -------- ------ Name of Award Recipient Social Security Number - -------------------------------------------------------------------------------- Street Address - -------------------------- -------------------- ---------------------------- City State ZIP Code This Restricted Stock Award Notice is intended to set forth the terms and conditions on which a Restricted Stock Award has been granted under the Tappan Zee Financial, Inc. Recognition and Retention Plan for Outside Directors. Set forth below are the specific terms and conditions applicable to this Restricted Stock Award. Attached as Exhibit A are its general terms and conditions. This Restricted Stock Award Notice shall be effective as of July 11, 1996 and shall amend and supersede, in its entirety, any other Restricted Stock Award issued to the Award Recipient as of such date.
=========================================================================================================================== Restricted Stock Award (A) (B) (C) (D) (E) =========================================================================================================================== Effective Date - --------------------------------------------------------------------------------------------------------------------------- Class of Shares* Common Common Common Common Common - --------------------------------------------------------------------------------------------------------------------------- No. of Awarded Shares* - --------------------------------------------------------------------------------------------------------------------------- Vesting Date* ===========================================================================================================================
*Subject to adjustment as provided in the Plan and the General Terms and Conditions. By signing where indicated below, Tappan Zee Financial, Inc. (the "Company") grants this Restricted Stock Award upon the specified terms and conditions, and the Award Recipient acknowledges receipt of this Restricted Stock Award Notice, including Exhibit A, and agrees to observe and be bound by the terms and conditions set forth herein. TAPPAN ZEE FINANCIAL, INC. AWARD RECIPIENT By ------------------------------- ------------------------- Name: Title: - -------------------------------------------------------------------------------- INSTRUCTIONS: This page should be completed by or on behalf of the Compensation Committee. Any blank space intentionally left blank should be crossed out. A Restricted Stock Award consists of a number of Awarded Shares with uniform terms and conditions. Where Awarded Shares are awarded on the same date with varying terms and conditions (for example, varying vesting dates), the awards should be recorded as a series of grants each with its own uniform terms and conditions. 5 EXHIBIT A TAPPAN ZEE FINANCIAL, INC. RECOGNITION AND RETENTION PLAN FOR OUTSIDE DIRECTORS RESTRICTED STOCK AWARD GENERAL TERMS AND CONDITIONS Section 1. Ownership of Shares. The shares of Common Stock, par value $.01 per share, of Tappan Zee Financial Inc. ("Shares") covered by this Award ("Awarded Shares") are held in trust by Marine Midland Bank, N.A., the Trustee of the Plan, for your benefit until such time as they are distributed to you or, if earlier, until you forfeit your rights to the Awarded Shares. Section 2. Vesting. In general the Awarded Shares shall become vested and available for distribution to you at the dates set forth in the Restricted Stock Award Notice. In the event that your service with the Company terminates on account of your death or Disability, then any Awarded Shares not theretofore forfeited shall become immediately vested. In addition, to the extent authorized pursuant to a Plan provision that is approved by the Company's shareholders after October 5, 1996, in the event your service terminates due to retirement (as defined in the Plan) or in the event a change of control (as defined in the Plan) occurs, then any Awarded Shares not theretofore forfeited shall become immediately vested. Section 3. Forfeitures. In the event that your service with the Company terminates before all of the Awarded Shares become vested, any Awarded Shares that have not yet become vested pursuant to section 2 of this Award Notice shall be forfeited. Following such a forfeiture, you will have no rights whatsoever with respect to the Awarded Shares forfeited. For purposes of determining any forfeitures, you will not be deemed to have terminated service with the Company for so long as you provide services to the Company or any subsidiary or affiliate of the Company as an employee, officer, director, advisory director, director emeritus, or consultant or for so long as you are bound by and are observing the terms of any contract which imposes restrictions on your right to perform services for a competitor of the Company or any of its subsidiaries or affiliates or provides other restrictive covenants. Section 4. Dividends. Any cash dividends or distributions declared and paid with respect to Awarded Shares not forfeited shall be held in the Trust Fund in accordance with the terms of the Plan and distributed to you (with any earnings attributable thereto) at the same time as the related Awarded Shares. Any stock dividends declared and paid with respect to Awarded Shares not forfeited shall be allocated to you, and such stock dividends shall be held in the Trust Fund and shall be subject to such restrictions and shall become vested under the same terms and conditions as the Awarded Shares to which they pertain. Section 5. Voting Rights. You shall have the exclusive right to direct the manner in which all voting rights appurtenant to Awarded Shares not forfeited will be exercised while such Awarded Shares are held in the Trust Fund. Such a direction shall be given by completing and filing a written direction, in the form and manner prescribed by the Committee, with such person as the Committee shall designate, at least 10 days prior to the date of the meeting of holders of Shares at which such voting rights will be exercised. Section 6. Distribution Upon Vesting. As soon as practicable following the date any Awarded Shares become vested pursuant to the Award Notice, the Company will issue to you, or your Beneficiary entitled to such Awarded Shares, a stock certificate evidencing ownership of the Shares. Any additional Shares attributable to stock dividends paid with respect to the Awarded Shares then being distributed pursuant to this section 6 shall also be distributed and shall be evidenced by such stock certificate. Section 7. Registration of Shares. The Company's obligation to deliver Shares pursuant to this Award Notice shall, if the Committee so requests, be conditioned upon the receipt of a representation as to the investment intention of you or your Beneficiary to whom such Shares are to be delivered, in such form as the Committee shall determine to be necessary or advisable to comply with the provisions of applicable federal, state or local law. It may be provided that any such representation shall become inoperative upon a registration of the Shares or upon the occurrence of any other event eliminating the necessity of such representation. The Company shall not be required to deliver any Shares under the Plan prior to (a) the admission of such Shares to listing on any stock exchange on which Shares may then be listed, or (b) the completion of such registration or other qualification under any state or federal law, rule or regulation as the Committee shall determine to be necessary or advisable. 6 Section 8. No Right to Continued Employment. Nothing in this Award Notice nor any action of the Board or the Committee with respect to this Award Notice shall be held or construed to confer upon you any right to a continuation of service with the Company or any of its affiliates which employ you. You may be dismissed or otherwise dealt with to the same extent as though this Award had not been made. Section 9. Taxes. The Company, the Committee or the Trustee shall have the right to require you to pay the amount of any tax which is required to be withheld with respect to the Awarded Shares, or, in lieu thereof, to retain, or to sell without notice, a sufficient number of Awarded Shares to cover the amount required to be withheld. Section 10. Notices. Any communication required or permitted to be given under the Plan, including any notice, direction, designation, comment, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is personally delivered or five (5) days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below, or at such other address as one such party may by written notice specify to the other: (a) If to the Committee: Tappan Zee Financial, Inc. 75 Broadway Tarrytown, New York 10591 Attention: Compensation Committee (b) If to you, to your address as shown in the Company's personnel records. Section 11. No Assignment. The Awarded Shares shall not be transferable by you other than by will or by the laws of descent and distribution, and the Awarded Shares shall be distributable only to you during your lifetime. Section 12. Successors and Assigns. This Award Notice shall inure to the benefit of and shall be binding upon you and the Company and your respective heirs, successors and assigns. Section 13. Construction of Language. Whenever appropriate in this Award Notice, words used in the singular may be read in the plural, words used in the plural may be read in the singular, and words importing the masculine gender may be read as referring equally to the feminine or the neuter. Any reference to a section shall be a reference to a section of this Award Notice, unless the context clearly indicates otherwise. Capitalized terms not specifically defined herein shall have the meanings assigned to them under the Plan. Section 14. Governing Law. This Award Notice shall be construed and enforced in accordance with the laws of the State of New York without giving effect to the conflict of laws principles thereof, except to the extent that such laws are preempted by the federal laws of the United States of America. Section 15. Amendment. This Award Notice may be amended, in whole or in part and in any manner not inconsistent with the provisions of the Plan, at any time and from time to time, by written agreement between you and the Company. Section 16. Plan Provisions Control. This Award Notice, and the rights and obligations created hereunder, shall be subject to all of the terms and conditions of the Plan. In the event of any conflict between the provisions of the Plan and the provisions of this Award Notice, the terms of the Plan, which are incorporated herein by reference, shall control. By signing this Award Notice, you acknowledge receipt of a copy of the Plan. EX-11 8 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
FOR THE PERIOD ENDED MARCH 31, -------------------------------- 1997 1996* ---- ----- Net income (in thousands) $ 855 $ 470 ========== ========== Weighted average shares outstanding (1) ** 1,438,348 1,495,086 Common stock equivalents due to the dilutive effect of stock options under the treasury stock method 14,041 -- ---------- ---------- Weighted average shares outstanding and common stock equivalents 1,452,389 1,495,086 Primary earnings per share $ 0.59 $ 0.31 ========== ========== Weighted average shares outstanding and common stock equivalents (above) 1,452,389 1,495,086 Additional dilutive common stock equivalents using period end market value versus average market value for the period 8,341 -- ---------- ---------- Fully diluted weighted average shares and common stock equivalents 1,460,730 1,495,086 Fully diluted earnings per share $ 0.59 $ 0.31 ========== ==========
* Six-month period following the Bank's conversion to stock form. ** Includes only the portion of ESOP shares committed to be released to participants. EX-13.1 9 1997 ANNUAL REPORT TO SHAREHOLDERS 1 TAPPAN ZEE FINANCIAL, INC. [TAPPAN ZEE FINANCIAL, INC. LOGO] 1997 ANNUAL REPORT 2 DESCRIPTION OF BUSINESS: On October 5, 1995, Tappan Zee Financial, Inc. (the "Company") became the holding company for Tarrytowns Bank, FSB upon completion of the conversion of the Bank from a mutual savings bank to a stock savings bank. Tarrytowns Bank, FSB was originally founded in 1891 as Tarrytown and North Tarrytown Building and Loan Association. In 1995, the Bank became a federally chartered mutual savings bank and assumed its current name. The Bank offers traditional financial products with personal service from its office in Tarrytown, New York. Explanatory Note: This report contains certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include changes in general, economic and market, and legislative and regulatory conditions, and the development of an interest rate environment that adversely affects the interest rate spread or other income anticipated from the Company's operations and investments. 3 SELECTED CONSOLIDATED FINANCIAL DATA At or for the Fiscal Year Ended March 31 (Dollars in thousands, except per share data)
1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- SELECTED FINANCIAL CONDITION DATA: Total assets $121,841 $114,790 $91,149 $86,388 $84,636 Loans, net 55,110 51,174 50,233 45,026 46,211 Mortgage-backed securities 38,989 31,414 23,659 21,157 21,915 Other securities 15,518 19,566 6,722 9,637 7,668 Deposits 98,327 89,908 81,813 77,510 77,042 Shareholders' equity (1) 21,228 22,360 7,818 7,201 6,199 SELECTED OPERATING DATA: Interest income $ 8,591 $ 7,624 $ 6,547 $ 6,346 $ 6,724 Interest expense 4,106 4,002 2,912 2,766 3,356 -------- -------- ------- ------- ------- Net interest income 4,485 3,622 3,635 3,580 3,368 Provision for loan losses 69 90 171 151 315 -------- -------- ------- ------- ------- Net interest income after provision for loan losses 4,416 3,532 3,464 3,429 3,053 Non-interest income 152 211 67 158 32 Non-interest expense (excluding special assessment) 2,849 2,297 2,087 1,832 1,609 SAIF special assessment (2) 538 -- -- -- -- -------- -------- ------- ------- ------- Income before income tax expense and cumulative effect of changes in accounting principles 1,181 1,446 1,444 1,755 1,476 Income tax expense (3) 326 609 610 741 704 -------- -------- ------- ------- ------- Income before cumulative effect of changes in accounting principles 855 837 834 1,014 772 Cumulative effect of changes in accounting principles: Income taxes -- -- -- 100) -- Postretirement health care benefits, net -- -- -- (100) -- -------- -------- ------- ------- ------- Net income $ 855 $ 837 $ 834 $ 1,014 $ 772 ======== ======== ======= ======= ======= SELECTED STATISTICAL DATA: (4) Return on average assets (5) 0.74% 0.81% 0.93% 1.18% 0.94% Return on average equity (5) 3.97 6.04 10.81 15.25 13.66 Net interest margin (6) 3.98 3.59 4.16 4.26 4.23 Average interest rate spread (7) 3.07 2.91 3.80 3.94 3.90 Equity to total assets at end of period 17.42 19.48 8.58 8.34 7.32 Average equity to average assets 18.57 13.34 8.65 7.74 6.90 Efficiency ratio (8) 72.11 60.75 50.80 47.51 46.17 Non-interest expense to average assets(5) 2.92 2.21 2.34 2.13 1.97 Non-performing loans to total loans 2.97 3.15 5.20 4.18 5.31 Allowance for loan losses to non-performing loans 39.81 40.07 24.58 28.38 19.44 Allowance for loan losses to total loans 1.18 1.26 1.28 1.19 1.03 Non-performing assets to total assets 1.46 1.77 3.40 2.63 3.46 Dividend payout ratio (9) 34.04 17.23 Book value per share (10) $ 13.84 $ 13.80 Earnings per share (11) $ 0.59 $ 0.31 Cash dividends per share $ 0.20 $ 0.05
(1) For 1997 and 1996, reflects net proceeds of $14.9 million from the sale of the Company's common stock in connection with the Bank's conversion to stock form on October 5, 1995. (2) Represents the Bank's share of a special assessment imposed on all financial institutions with deposits insured by the Savings Association Insurance Fund ("SAIF"). After taxes, this charge reduced net income by approximately $329,000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Impact of Recent Legislation -- SAIF Recapitalization." (3) Income tax expense for fiscal 1997 has been reduced by a tax benefit of $166,000 resulting from a change in New York state tax law. See Note 8 to the Consolidated Financial Statements. (4) With the exception of end-of-period ratios, all ratios are based on average balances. (5) If the after-tax SAIF charge and the state tax benefit described in notes (2) and (3) above were excluded, net income for fiscal 1997 would have been $1,018,000, resulting in a return on average assets of 0.88% and a return on average equity of 4.72%. The ratio of non-interest expense to average assets would have been 2.45% without the SAIF charge. (6) Net interest income divided by average interest-earning assets. (7) The difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (8) Non-interest expense, excluding real estate owned expenses, divided by net interest income plus non-interest income, excluding securities gains/losses. Excluding also the SAIF special assessment, the efficiency ratio for fiscal 1997 would have been 60.45%. (9) Dividends paid as a percentage of net income. Ratio for fiscal 1996 is based on dividends paid in the fourth quarter ended March 31, 1996 as a percentage of net income for the six-month period following the Bank's conversion. If based on net income for the fourth quarter, the ratio would have been 32.93%. (10) Shareholders' equity divided by total shares of common stock outstanding at March 31 (1,534,062 in 1997 and 1,620,062 in 1996). (11) Earnings per share for fiscal 1996 is stated from the date of the Bank's conversion. 1 4 TO OUR SHAREHOLDERS: In the 18 months following our initial public offering, our Company has met the challenges of doing business as a public company and succeeded in providing value to our shareholders. At the same time, we have continued our 106 year tradition of providing quality banking services to our customers and being actively involved in our community. It is with pleasure that I present our second Annual Report as a public company for the fiscal year ended March 31, 1997. In fiscal 1997, Congress finally passed legislation to reduce the disparity between the cost of deposit insurance for the Company's subsidiary, Tarrytowns Bank, FSB, and the cost incurred by our commercial bank competitors. The legislation required the Bank to pay a one-time special assessment of $538,000, before taxes, for the recapitalization of the Savings Association Insurance Fund ("SAIF") of the FDIC. The Bank's total deposit insurance costs, including the special assessment, were $693,000 in fiscal 1997. With the recapitalization of the SAIF now complete, the Bank's deposit insurance costs are expected to be approximately $60,000 for fiscal 1998, a significant savings, but still more than our commercial bank competitors. Despite the numerous challenges of our competitive and multi-regulated environment, our Company remains profitable and financially sound. Our capital ratios are strong and we continue to enjoy a sound market share in our target market. This success is largely due to our community bank strategy and our dedicated staff who provide modern banking services with personal service. Net income for the fiscal year ended March 31, 1997 was $855,000, a slight increase from $837,000 for the prior year. On a per share basis, net earnings were $0.59 for fiscal 1997 and $0.31 for the six-month period following our initial public offering in fiscal 1996. Had it not been for the special SAIF assessment and a one-time benefit due to a change in state tax law, the Company's net income would have been $1,018,000, or $0.70 per share for fiscal 1997. Net interest income, the primary contributor to our earnings, was $4.5 million in fiscal 1997, compared to $3.6 million in fiscal 1996. Non-performing loans were $1.66 million as compared to $1.63 million a year ago. Total assets at March 31, 1997 amounted to $121.8 million, an increase of $7.0 million from $114.8 million a year earlier. Our asset growth reflects an expansion in interest-earning assets funded by an increase in our deposit base, which grew $8.4 million to $98.3 million at March 31, 1997 from $89.9 million at March 31, 1996. Shareholders' equity decreased from $22.4 million to $21.2 million during fiscal 1997, while tangible book value per share increased from $13.80 at March 31, 1996 to $13.84 at March 31, 1997. This was due to the positive effect of treasury share repurchases and earnings retained for the year. Shareholders who entrusted us with their investment capital have been rewarded with increased value in their shares. The closing market value of the Company's stock increased by 18.75% or $2.25 per share to $14.25 at March 31, 1997 from $12.00 a year earlier. The Company also paid four quarterly dividends of $0.05 per share in fiscal 1997. In April, the Board of Directors declared the Company's sixth consecutive quarterly dividend to shareholders of record on May 8, 1997. The dividend, which was paid on May 28, 1997, was increased to $0.07 per share from $0.05. The Company's ratio of shareholders' equity to total assets was 17.42% at March 31, 1997 compared with 19.48% at March 31, 1996. We remain committed to enhancing the value of our shareholders investment by prudently deploying our capital and depositors' funds in our local community. On behalf of the Board of Directors, I wish to thank our customers, staff and shareholders for their continued loyalty and confidence. Sincerely, /s/Stephen C. Byelick - --------------------- Stephen C. Byelick President and Chief Executive Officer 2 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Tappan Zee Financial, Inc. (the "Holding Company") is the unitary savings bank holding company for Tarrytowns Bank, FSB (the "Bank"), a federally chartered savings bank and wholly-owned subsidiary of the Holding Company. On October 5, 1995, the Bank converted from a mutual savings bank to a stock savings bank (the "Conversion"). Collectively, the Holding Company and the Bank are referred to herein as the "Company." Concurrent with the Conversion, the Holding Company sold 1,620,062 shares of its common stock in a subscription and community offering at a price of $10 per share, for net proceeds of $14.9 million (the "Stock Offering"). The Company's primary market area consists of the Village of Tarrytown and its neighboring communities in Westchester County, New York with business conducted from one office located in Tarrytown, New York. The Bank is a community-oriented savings institution whose business primarily consists of accepting deposits from customers within its market area and investing those funds in mortgage loans secured by one- to four-family residences. To a significantly lesser extent, funds are invested in multi-family, commercial real estate, construction, commercial business and consumer loans. The Company also invests in mortgage-backed and other securities. The Holding Company has no business activities other than its ownership of the Bank. The Company's results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on its interest-earning assets, such as loans and securities, and the interest expense on its interest-bearing liabilities, such as deposits. The Company also generates non-interest income such as service charges and other fees. The Company's non-interest expense consists of compensation and benefits, occupancy expenses, federal deposit insurance costs, data processing service fees, net costs of real estate owned and other operating expenses. The Company's results of operations are significantly affected by general economic and competitive conditions (particularly changes in market interest rates), government policies, changes in accounting standards and actions of regulatory agencies. IMPACT OF RECENT LEGISLATION SAIF Recapitalization. For the period from January 1 through September 30, 1996, there existed a disparity of 23 cents per $100 of deposits in the minimum deposit insurance assessment rates applicable to deposits insured by the Bank Insurance Fund ("BIF") and the higher assessment rates applicable to deposits insured by the Savings Association Insurance Fund ("SAIF"). In response to this disparity, on September 30, 1996 the Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted into law. The Funds Act authorized the Federal Deposit Insurance Corporation ("FDIC") to impose a special assessment on all financial institutions with SAIF-assessable deposits in the amount necessary to recapitalize the SAIF. Pursuant to such authority, the FDIC imposed a special assessment of 65.7 basis points per $100 of an institution's SAIF-assessable deposits held on March 31, 1995. The Company's special SAIF assessment of $538,000 before taxes ($329,000 net of taxes) was charged to expense in September 1996 and paid in November 1996. In view of the recapitalization of the SAIF, the FDIC reduced the assessment rates for SAIF-assessable deposits. For the calendar year 1997, the SAIF assessment rates range from 0 to 27 basis points, which is the same range of rates applicable to the BIF. Prior to the SAIF recapitalization, all SAIF-insured institutions were subject to a minimum assessment of 23 basis points. The Funds Act also expanded the assessment base to include BIF-insured, as well as SAIF-insured, institutions to fund payments on the bonds issued by the Financing Corporation ("FICO bonds") to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. In order to fund such interest payments, a separate assessment of 1.3 basis points for BIF-assessable deposits and 6.48 basis points for SAIF-assessable deposits became effective on January 1, 1997. The Funds Act requires that, until December 31, 1999 or such earlier date on which the last savings association ceases to exist, the rates of assessment for FICO bond payments imposed on BIF-assessable deposits will be one-fifth of the rate imposed on SAIF-assessable deposits. As a result of the lower overall assessment rates, the Bank's non-interest expense for the three months ended March 31, 1997 was reduced by $45,000 compared to the same period in 1996. The Funds Act also provides for the merger of the BIF and SAIF on January 1, 1999, with such merger being conditioned upon the prior elimination of the thrift charter. The Funds Act required the Secretary of Treasury to conduct a study of relevant factors with respect to the development of a common charter for all insured depository institutions and the abolition of separate charters for banks and thrifts and to report the Secretary's conclusions and the findings to Congress. The Secretary of the Treasury has recommended that the separate charter for thrifts be eliminated only if other legislation is adopted that permits bank holding companies to engage in certain non-financial activities. Absent legislation permitting such non-financial activity, the Secretary of the Treasury recommended retention of the thrift charter. Other proposed legislation has been introduced in Congress that would require thrift institutions to convert to bank charters. The Secretary of the Treasury also recommended that the BIF and the SAIF be merged irrespective of the elimination of the thrift charter. Tax Bad Debt Reserves. Federal tax law changes were enacted in August 1996 to eliminate the "thrift bad debt" method of calculating bad debt deductions for tax years after 1995 and to require thrifts to recapture into taxable income (over a six-year period) all bad debt reserves accumulated after 1987. Since the Bank's federal bad debt reserves approximated the 1987 base-year amounts, this recapture requirement had no significant impact. The tax law changes also provide that taxes associated with the recapture of pre-1988 bad debt reserves would become payable under more limited circumstances than 3 6 under prior law. For example, such taxes would no longer be payable in the event that the thrift charter is eliminated and the Bank is required to convert to a bank charter. Amendments to the New York state tax law redesignate the Bank's state bad debt reserve at December 31, 1995 as the base-year amount and also provide for future additions to the base-year reserve using the percentage-of-taxable-income method. This change eliminated the excess New York state reserve for which the Company had recognized a deferred tax liability. Accordingly, the Company reduced its deferred tax liability in the quarter ended September 30, 1996, by $166,000, representing a state deferred tax benefit of $252,000 less related deferred federal taxes of $86,000. Taxes associated with the recapture of the state base-year reserve would still become payable under various circumstances, including conversion to a bank charter or failure to meet various thrift definition tests. See Note 8 to the Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES Liquidity is the ability of the Company to generate sufficient cash flow to meet funding needs, depositor withdrawals and operating expenses. The Bank is required to maintain an average daily balance of liquid assets as a percentage of net withdrawable deposit accounts plus short-term borrowings as defined by the regulations of the Office of Thrift Supervision ("OTS"). The minimum required liquidity ratio is currently 5.0%. At March 31, 1997, the Bank's liquidity ratio of 13.5% was in compliance with the OTS liquidity regulations. The Company's cash flows are derived from operating activities, investing activities and financing activities. Cash flows from operating activities consist primarily of interest income received and interest expense paid. Net cash flows from investing activities consist primarily of loan originations and payments (including amortization of principal and prepayments) and the purchase, maturity and sale of securities, including mortgage-backed securities. During the years ended March 31, 1997, 1996 and 1995, the Company's disbursements for loan originations totaled $11.9 million, $9.3 million and $15.5 million, respectively. Purchases of securities totaled $29.7 million, $33.8 million and $5.5 million for the years ended March 31, 1997, 1996 and 1995, respectively. Financing activity cash flows are generated primarily from deposit activity. For the fiscal years ended March 31, 1997, 1996 and 1995, the Company experienced net increases in deposits (including the effect of interest credited) of $8.4 million, $8.1 million and $4.3 million, respectively. The increases reflect the generally higher market interest rates, particularly in the past two fiscal years, which made deposit products such as shorter term certificates of deposit a more attractive investment alternative for the Company's customers. The Company has other sources of liquidity if a need for additional funds arises, including borrowing capacity from the Federal Home Loan Bank ("FHLB") of New York of up to 25% of the Bank's assets, which amounts to $29.3 million at March 31, 1997. There were no such borrowings outstanding at March 31, 1997. The utilization of particular sources of funds depends on comparative costs and availability. While maturities and scheduled amortization of loans and securities provide an indication of the timing of the receipt of funds, changes in interest rates, economic conditions, and competition strongly influence mortgage prepayment rates and deposit flows, reducing the predictability of the timing of these cash flows. At March 31, 1997, the Company had outstanding loan origination commitments of $1.5 million, undisbursed construction loans in process of $686,000 and unadvanced commercial lines of credit of $15,000. The Company anticipates that it will have sufficient funds available to meet its current origination and other lending commitments. Certificates of deposit scheduled to mature in one year or less from March 31, 1997 totaled $49.0 million. Based upon the Company's most recent experience and pricing strategy, management believes that a significant portion of such deposits will remain with the Bank. The main sources of liquidity for the Holding Company are net proceeds from the sale of stock and dividends from the Bank. The main cash outflows are payments of dividends to shareholders and repurchases of the Holding Company's common stock. Through March 31, 1997, the Holding Company has repurchased for its treasury 86,000 shares of its common stock, or 5.3% of the shares issued in the Stock Offering at an aggregate cost of $1.1 million. At that date, the Holding Company had OTS authorization to repurchase up to an additional 71,950 shares (approximately 4.7% of outstanding shares) prior to November 1997. Also during fiscal 1997, 52,840 common shares were purchased to fund awards under the management and directors' recognition and retention plans ("RRPs"). The Holding Company's ability to pay dividends to shareholders depends substantially on dividends received from the Bank. The Bank may not declare or pay cash dividends on its common stock if the effect thereof would cause equity to be reduced below applicable regulatory capital requirements or the amount required to be maintained for the liquidation account established in connection with the Conversion. Unlike the Bank, the Holding Company is not subject to OTS regulatory restrictions on the payment of dividends to its shareholders, however, it is subject to the requirements of Delaware law. Delaware law generally limits dividends to an amount equal to the excess of the net assets of the Holding Company (the amount by which total assets exceed total liabilities) over its statutory capital, or if there is no such excess, to its profits for the current and/or immediately preceding fiscal year. OTS regulations require savings associations, such as the Bank, to meet three minimum capital standards: a tangible capital ratio of 1.5% of total assets as adjusted under the OTS regulations; a leverage ratio of 3% of core capital to such adjusted total assets; and a risk-based capital ratio of 8% of core and supplementary capital to total risk-weighted assets. The Bank satisfied these minimum capital standards at March 31, 1997 with tangible and leverage capital ratios of 14.1% and a total risk-based capital ratio of 39.5%. In determining the amount of risk-weighted assets for purposes of the risk-based capital requirement, a savings association multiplies its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the United States Government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulations. These capital requirements, which are applicable to the Bank 4 7 only, do not consider additional capital held at the Holding Company level, and require certain adjustments to the Bank's total equity to arrive at the various regulatory capital amounts. At the time of the Conversion, the Bank was required to establish a liquidation account equal to its capital as of March 31, 1995. This liquidation account is reduced to the extent that eligible account holders have reduced their qualifying deposits. In the unlikely event of a complete liquidation of the Bank, each eligible account holder will be entitled to receive a distribution from the liquidation account. The Bank is not permitted to declare or pay dividends on its capital stock, or repurchase any of its outstanding stock, if the effect thereof would cause its shareholder's equity to be reduced below the amount required for the liquidation account or applicable regulatory capital requirements. INTEREST RATE RISK MANAGEMENT The Company's net income is dependent to a substantial extent on its net interest income. Net interest income is derived from the "spread" between the yield on interest-earning assets and interest-bearing liabilities. The net interest income of savings institutions is significantly affected by many factors including: interest rate fluctuations; general economic conditions; product pricing; the relative mix and maturity of interest-earning assets and interest-bearing liabilities; non-interest-bearing sources of funds; and asset quality. Net interest income volatility arises because, as rates fluctuate, interest income and interest expense do not change equally. The management of interest rate risk is an essential component of managing a savings institution. The extent of the movement of interest rates, higher or lower, is an uncertainty that could have a negative impact on the earnings of the Company. Successful management of interest rate risk requires an awareness of changes and trends in the financial marketplace and the ability to identify and assess the sources of performance variability in an institution's operations. The principal objectives of the Company's interest rate risk management activities are to (i) evaluate the interest rate risk included in certain balance sheet and off-balance sheet accounts, (ii) determine the level of risk appropriate given the Company's business focus, operating environment, capital and liquidity requirements, and performance objectives, (iii) establish prudent asset concentration guidelines and (iv) manage the risk within prudent levels approved by the Board of Directors. One aspect of the Company's interest-rate risk position, is that as of March 31, 1997, approximately 25.1% of the Company's interest-earning assets are invested in fixed-rate loans, with remaining maturities greater than five years. In addition, approximately 49.9% of the Company's deposits are certificates of deposit maturing in one year or less. The Company seeks to minimize any resultant interest-rate risk through the management of its available-for-sale securities portfolio which is comprised mainly of mortgage-backed securities guaranteed by government agencies and represents 30.6% of interest-earning assets. The Company has taken several other actions, under various market conditions, designed to manage its level of interest rate risk. These actions have included: (i) purchasing adjustable and fixed rate mortgage-backed securities with varying average lives; (ii) undertaking an effort to lengthen the maturities of its certificates of deposit, the majority of which mature in less than one year; and (iii) to a lesser extent, increasing the portfolio of adjustable-rate mortgage loans through originations, as market conditions permit. The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the Board of Directors, the Company does not intend to engage in such activities in the immediate future. One approach used by management to quantify interest rate risk is the analysis of the change in the Bank's net portfolio value ("NPV") arising from movements in interest rates. This approach calculates the difference between the present value of liabilities and the present value of expected cash flows from assets and off-balance sheet items. The following table sets forth, at March 31, 1997, an analysis of the Bank's interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve (+ or - 400 basis points, measured in 100 basis point increments).
Estimated Increase Change in (Decrease) in NPV Interest Rates Estimated NPV --------------------- (Basis Points) Amount Amount Percent -------------- ------ ------ ------- (Dollars in thousands) +400 $ 7,518 $(11,552) (61)% +300 10,226 (8,844) (46) +200 13,117 (5,953) (31) +100 16,118 (2,952) (15) -- 19,070 -- -- -100 21,596 2,526 13 -200 23,174 4,104 22 -300 24,521 5,451 29 -400 26,109 7,039 37
Certain assumptions utilized by the OTS in assessing the interest rate risk of thrift institutions were employed in preparing data for the Bank included in the preceding table. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under the various interest rate scenarios. It was also assumed that delinquency rates will not change as a result of changes in interest rates although there can be no assurance that this will be the case. Even if interest rates change in the designated amounts, there can be no assurance that the Bank's assets and liabilities would perform as set forth above. In addition, a change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause significantly different changes to the NPV than indicated above. The Holding Company's assets (excluding its investment in the Bank), which are excluded from the NPV analysis set forth above, consist primarily of money market funds. On a consolidated basis, the Company's NPV based on current interest rates is $23.7 million; an instantaneous 200 basis point increase in interest rates would decrease that amount by $6.0 million, or 25%. 5 8 ANALYSIS OF NET INTEREST INCOME The following table sets forth the Company's average balance sheets, average yields and costs, and certain other information for fiscal 1997, 1996 and 1995. The yields and costs were derived by dividing interest income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Substantially all average balances were computed based on month-end balances, producing results which approximate average daily balances. Interest income includes the effect of deferred fees and discounts which are considered yield adjustments.
For the Year Ended March 31, ----------------------------------------------------------------------------- 1997 1996 -------------------------------------- ---------------------------------- Average Average Average Average Average Balance Interest Rate Balance Interest Rate --------- --------- -------- -------- -------- --------- (Dollars in thousands) ASSETS: Interest-earning assets: Loans (1) $ 55,354 $4,721 8.53% $ 51,621 $4,465 8.65% Mortgage-backed securities (2) 38,141 2,719 7.13 25,660 1,811 7.06 Other securities (2) 12,500 794 6.35 10,338 576 5.57 Federal funds sold 4,538 234 5.16 10,846 639 5.89 FHLB stock 579 37 6.39 514 37 7.20 Other 1,717 86 5.01 1,963 96 4.89 -------- ------ -------- ------ Total interest-earning assets 112,829 $8,591 7.61% 100,942 $7,624 7.55% ======== ====== ====== Allowance for loan losses (657) (645) Non-interest-earning assets 3,909 3,579 -------- -------- Total assets $116,081 $103,876 ======== ======== LIABILITIES AND EQUITY: Interest-bearing liabilities: NOW and money market $ 6,491 $160 2.46% $ 8,798 $ 200 2.27% Savings accounts 26,662 800 3.00 28,120 982 3.49 Short term FHLB borrowings 204 12 5.61 -- -- -- Certificate accounts and other 57,136 3,134 5.49 49,288 2,820 5.72 -------- ------ -------- ------ Total interest-bearing liabilities 90,493 $4,106 4.54% 86,206 $4,002 4.64% ====== ====== Checking accounts 2,255 2,069 Other non-interest-bearing liabilities 1,778 1,743 -------- -------- Total liabilities 94,526 90,018 Equity 21,555 13,858 -------- -------- Total liabilities and equity $116,081 $103,876 ======== ======== Net interest income $4,485 $3,622 ====== ====== Average interest rate spread (3) 3.07% 2.91% Net interest margin (4) 3.98 3.59 Ratio of interest-earning assets to interest-bearing liabilities 124.68% 117.09%
For the Year Ended March 31, ----------------------------------- 1995 ---------------------------------- Average Average Balance Interest Rate --------- --------- ---------- (Dollars in thousands) ASSETS: Interest-earning assets: Loans (1) $47,275 $4,078 8.63% Mortgage-backed securities (2) 23,001 1,661 7.22 Other securities (2) 7,620 406 5.33 Federal funds sold 6,685 313 4.68 FHLB stock 466 36 7.73 Other 2,251 53 2.35 ------- ------ Total interest-earning assets 87,298 $6,547 7.50% ====== Allowance for loan losses (569) Non-interest-earning assets 2,475 ------- Total assets $89,204 ======= LIABILITIES AND EQUITY: Interest-bearing liabilities: NOW and money market $ 8,536 $ 195 2.28% Savings accounts 32,826 1,038 3.16 Short term FHLB borrowings -- -- -- Certificate accounts and other 37,377 1,679 4.49 ------- ------ Total interest-bearing liabilities 78,739 $2,912 3.70% ====== Checking accounts 1,456 Other non-interest-bearing liabilities 1,291 ------- Total liabilities 81,486 Equity 7,718 ------- Total liabilities and equity $89,204 ======= Net interest income $3,635 ====== Average interest rate spread (3) 3.80% Net interest margin (4) 4.16 Ratio of interest-earning assets to interest-bearing liabilities 110.87%
(1) Balances are net of deferred loan fees, loan discounts and premiums, and loans in process. Non-accrual loans are included in the balances. (2) Balances represent amortized cost. (3) Average interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average total interest-earning assets. 6 9 The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Fiscal 1997 vs. 1996 Fiscal 1996 vs. 1995 ------------------------------------- ------------------------------------ Increase (Decrease) Increase (Decrease) Due to Due to -------------------- Net --------------------- Net Volume Rate Change Volume Rate Change ------- ----- ------- ------- ----- ------- (In thousands) Interest-earning assets: Loans $ 319 $ (63) $ 256 $ 377 $ 10 $ 387 Mortgage-backed securities 889 19 908 188 (38) 150 Other securities 131 87 218 153 17 170 Federal funds sold (334) (71) (405) 249 77 326 FHLB stock 4 (4) -- 4 (3) 1 Other (12) 2 (10) (7) 50 43 ----- ----- ----- ----- ----- ------ Total 997 (30) 967 964 113 1,077 ----- ----- ----- ----- ----- ------ Interest-bearing liabilities: NOW and money market accounts (55) 15 (40) 6 (1) 5 Savings accounts (49) (133) (182) (149) 93 (56) Certificate accounts and other 432 (118) 314 574 567 1,141 Short term FHLB borrowings 12 -- 12 -- -- -- ----- ----- ----- ----- ----- ------ Total 340 (236) 104 431 659 1,090 ----- ----- ----- ----- ----- ------ Net change in net interest income $ 657 $ 206 $ 863 $ 533 $(546) $ (13) ===== ===== ===== ===== ===== ======
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND 1996 Total assets increased $7.0 million to $121.8 million at March 31, 1997 from $114.8 million at March 31, 1996, reflecting management's strategy of controlled growth, particularly with respect to retail deposits. Deposits, the primary source of funds for the asset growth, increased $8.4 million to $98.3 million at March 31, 1997 from $89.9 million at March 31, 1996. Asset growth was primarily in the securities and loan portfolios. The securities portfolio increased $3.5 million to $54.5 million at March 31, 1997 from $51.0 million at March 31, 1996. Within the securities portfolio, mortgage-backed securities increased $7.6 million and other securities decreased $4.1 million, reflecting a shift from treasury securities into higher yielding mortgage-backed securities. Net loans increased $3.9 million to $55.1 million at March 31, 1997, compared to $51.2 million at March 31, 1996, primarily due to the origination of one- to four-family mortgage loans. Shareholders' equity was $21.2 million at March 31, 1997, a decrease of $1.2 million from $22.4 million at March 31, 1996. The decrease primarily reflects common share repurchases for the treasury and purchases to fund the RRPs, partially offset by net earnings retained for the year. A total of 86,000 shares were repurchased for the Company's treasury at a cost of $1.1 million. Also, 52,840 shares were purchased at a cost of $714,000 to fund awards under the RRPs. The ratio of shareholders' equity to total assets at March 31, 1997 was 17.42%, as compared to 19.48% at March 31, 1996. The Company's tangible book value per share was $13.84 at March 31, 1997 compared to $13.80 at March 31, 1996. COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MARCH 31, 1997 AND 1996 General. Net income for the fiscal year ended March 31, 1997 was $855,000, or $0.59 per share, as compared to $837,000 for the fiscal year ended March 31, 1996. Earnings per share was $0.31 for the six-month period from the Company's initial public offering to March 31, 1996. The results for fiscal 1997 reflect a non-recurring charge of $538,000 ($329,000 net of taxes) for the special assessment to recapitalize the SAIF. Also included in net income for fiscal 1997 was a tax benefit of $166,000 due to a change in New York State tax law. See "Impact of Recent Legislation -- Tax Bad Debt Reserves." Net Interest Income. Net interest income for fiscal 1997 totaled $4.5 million as compared to $3.6 million for fiscal 1996, an increase of 23.8%. The average interest rate spread and net interest margin increased to 3.07% and 3.98%, respectively, for fiscal 1997, compared to 2.91% and 3.59%, respectively, for fiscal 1996. These increases reflect: (i) greater average interest-earning assets in fiscal 1997 primarily attributable to the investment of Stock Offering proceeds for the entire fiscal year, compared to the investment of such funds for only six months in fiscal 1996; (ii) slightly higher yield on total interest-earning assets resulting from the shift in overall asset mix from federal funds and treasury securities into higher yielding mortgage-backed securities; and (iii) enhanced earnings from the increased volume of mortgage loans. Net income also benefited from additional net interest income realized on deposit growth. 7 10 Interest Income. Total interest income for fiscal 1997 amounted to $8.6 million, as compared to $7.6 million for fiscal 1996. This increase primarily reflects an $11.9 million increase in average interest-earning assets principally due to the investment of funds from the Stock Offering for a full year (compared to six months in fiscal 1996) and deposit growth. The overall increase in average interest-earning assets reflects increases of $3.7 million in the average loan portfolio and $14.6 million in the average securities portfolios, partially offset by a $6.4 million decrease in other earning assets (principally federal funds sold). The increase in interest income for fiscal 1997 was also attributable to a slight increase in the average yield on interest-earning assets, to 7.61% from 7.55% for fiscal 1996, reflecting the shift from investments in short-term federal funds and treasury securities into higher yielding mortgage-backed securities. Interest Expense. Interest expense for the year ended March 31, 1997 totaled $4.1 million, slightly higher than $4.0 million for the 1996 fiscal year. The increase is attributable to a $4.1 million increase in average interest-bearing deposits, primarily certificate accounts and other interest-bearing liabilities which averaged $57.1 million at an average cost of 5.49% for the 1997 fiscal year, as compared to an average balance of $49.3 million at an average cost of 5.72% for the 1996 fiscal year. The growth in certificate accounts and other interest-bearing liabilities was partially offset by a decline in savings accounts and NOW and money market accounts, which have lower average costs than certificate accounts. The overall deposit growth is consistent with management's strategy to increase retail deposits. The effect of deposit growth on interest expense was somewhat offset by the decline in the average cost of funds to 4.54% in fiscal 1997, compared to 4.64% for the previous year. The decrease in the cost of funds reflects the general decline in market interest rates at the beginning of fiscal 1997. Provision for Loan Losses. For fiscal years 1997 and 1996, the provisions for loan losses were $69,000 and $90,000, respectively. The provision in each period reflects management's evaluation of the adequacy of the allowance for loan losses, the level and composition of non-performing loans and their collateral, and the continued growth of the loan portfolio. The allowance for loan losses was $660,000 at March 31, 1997, compared to $654,000 at March 31, 1996. Net charge-offs for fiscal 1997 amounted to $63,000 compared to $86,000 in fiscal 1996. Non-performing loans at March 31, 1997 were $1.66 million, compared to $1.63 million at March 31, 1996. The ratio of non-performing loans to total loans was 2.97% at March 31, 1997 compared to 3.15% at March 31, 1996. See "Asset Quality." Non-Interest Income. Non-interest income for the year ended March 31, 1997 amounted to $152,000, a decrease of $59,000 from $211,000 for the 1996 fiscal year. The decrease is primarily due to the decline in the net gain on sales of available-for-sale securities to $23,000 for fiscal 1997, as compared to $88,000 for fiscal 1996. Non-Interest Expense. For fiscal years 1997 and 1996, non-interest expense totaled $3.4 million and $2.3 million, respectively. The $1.1 million increase in non-interest expense in the current fiscal year is primarily attributable to the $538,000 SAIF special assessment, as well as increases of $292,000 in compensation and benefits expense and $289,000 in other non-interest expense. See "Impact of Recent Legislation -- SAIF Recapitalization." The increase in compensation and benefits expense primarily reflects recognition of a full year of expense in fiscal 1997 (compared to six months of expense in fiscal 1996) for the amended deferred compensation plan for directors, the Company's employee stock ownership plan ("ESOP") and the directors retirement plan; recognition of expense in fiscal 1997 for a portion of the shares awarded under the RRPs; and merit and performance-based increases for certain staff members. Other non-interest expense increased principally due to increased professional fees, printing and other costs associated with operations as a public company for a full year in fiscal 1997 compared to six months in fiscal 1996. Income Tax Expense. Income tax expense for the fiscal years ended March 31, 1997 and 1996 was $326,000 and $609,000, respectively, reflecting an effective tax rate of 27.6% and 42.1%, respectively. Tax expense for the year ended March 31, 1997 reflects a benefit of $166,000 due to the reduction of a deferred tax liability caused by an amendment to the New York State tax law enacted during the year. The amendment changed the base-year for tax bad debt reserves to December 31, 1995 and eliminated the need for a deferred tax liability previously recognized for reserves in excess of the base-year amount. Without this one-time benefit, the effective tax rate would have been 41.7% for fiscal 1997. See "Impact of Recent Legislation -- Tax Bad Debt Reserves." COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MARCH 31, 1996 AND 1995 General. For the year ended March 31, 1996, the Company reported net income of $837,000, a slight increase from $834,000 for the prior year. The increase in interest income resulting from the deployment of Stock Offering proceeds and deposit growth was offset primarily by the increase in interest paid on certificate accounts. Decreases in the provision for loan losses and the provision for losses on real estate owned, and an increase in the net gain on sales of available-for-sale securities in the 1996 fiscal year were substantially offset by the increase in non-interest expense relating to additional benefit plans which became effective upon the Conversion, and increased costs associated with operating as a public company. Net Interest Income. Net interest income for the year ended March 31, 1996 remained relatively stable at $3.6 million. The average interest rate spread and the net interest margin for the 1996 fiscal year dropped to 2.91% and 3.59%, respectively, as compared to 3.80% and 4.16%, respectively, for the prior year. These declines reflect the continued shifting of funds from savings accounts to higher costing certificate accounts and the initial investment of the Stock Offering proceeds in shorter- 8 11 term, lower yielding investments. In addition, the higher rates paid on certificates of deposits as a result of an increase in short-term market interest rates had a negative impact on the Company's average interest rate spread and net interest margin. The flat yield curve and the continuing uncertainty about the federal budget and its effect on the future direction of interest rates were factors considered by the Company in delaying the reinvestment of the Stock Offering proceeds in longer term investments. At March 31, 1996, the Company had over 12.5% of its assets invested in federal funds, and treasury and other securities with an expected maturity of one year or less. Interest Income. Total interest income for the 1996 fiscal year amounted to $7.6 million, a 16.5% increase from last year. This increase relates to a $13.6 million increase in average interest-earning assets which is primarily due to the investment of funds from the Stock Offering and deposit growth. Of the increase in average interest-earning assets, $4.3 million was attributable to the loan portfolio, $5.4 million related to the securities portfolios, and $3.9 million related to other earning assets (principally federal funds sold). The increase in interest income for the year ended March 31, 1996, was also attributable to a slight increase in the average yield on interest-earning assets to 7.55%, from 7.50% for the 1995 fiscal year. This slight increase reflects the disparate impact that market interest rates had on the Company's interest-earning assets, which is attributable to the flat yield curve experienced during the year. Interest Expense. Interest expense on deposits for the year ended March 31, 1996 totaled $4.0 million, a 37.4% increase from $2.9 million for the 1995 fiscal year. The increase is attributable to a $7.5 million increase in average interest-bearing deposits, in addition to the rise in the average rate paid on deposits to 4.64%, from 3.70% for the prior year. The deposit growth is consistent with management's strategy to increase retail deposits. The average rate paid on deposits increased due to the general rise in interest rates and the shift from savings accounts to higher yielding certificates of deposit. Certificate accounts and other interest-bearing liabilities averaged $49.3 million at an average cost of 5.72% for the 1996 fiscal year as compared to an average balance of $37.4 million at an average cost of 4.49% for the 1995 fiscal year. The average balance of savings accounts decreased to $28.1 million for the year ended March 31, 1996 from $32.8 million for the prior year, while the average rate paid on savings accounts for the 1996 fiscal year increased to 3.49% from 3.16% for the 1995 fiscal year. Provision for Loan Losses. The provision for loan losses for the year ended March 31, 1996 decreased to $90,000, from $171,000 in the prior year. The $81,000 decrease is primarily attributable to a $1.0 million reduction in non-performing loans which totaled $1.6 million at March 31, 1996. The decline in non-performing loans is a result of a combination of factors including collections, charge-offs and the emergence of fewer new problem loans. The ratio of the allowance for loan losses to non-performing loans was 40.07% at March 31, 1996, as compared to 24.58% a year earlier. See "Asset Quality." Non-Interest Income. Non-interest income for the year ended March 31, 1996 amounted to $211,000, an increase from $67,000 for the 1995 fiscal year. The increase primarily reflects a net gain on the sale of available-for-sale securities of $88,000, as compared to a net loss of $44,000 reported in the 1995 fiscal year. Non-Interest Expense. Non-interest expense increased 10.1% to $2.3 million for the year ended March 31, 1996 from $2.1 million for the year ended March 31, 1995. This increase was primarily attributable to higher compensation and benefits expense and costs associated with operations as a public company, partially offset by a decline in real estate owned costs. The compensation and benefits expense increase primarily reflects the recognition of costs associated with the ESOP ($89,000) and the directors retirement plan ($8,000) which became effective upon Conversion; increased expense recognized for the deferred compensation plan for the directors ($104,000), as adopted in its amended form upon Conversion; and performance-based salary increases. The net cost of real estate owned decreased to $22,000 in the 1996 fiscal year, from $184,000 for the prior year due to the lower provision for losses on the sale of real estate owned. Real estate owned costs in the prior year reflected the costs associated with the rehabilitation of real estate owned properties prior to their sale. Despite the increase in expenses, the Company's ratio of non-interest expenses to average assets decreased to 2.21% in the 1996 fiscal year from 2.34% in the 1995 fiscal year, reflecting the Company's asset growth. Income Tax Expense. Income tax expense for the years ended March 31, 1996 and 1995 was $609,000 and $610,000, respectively, reflecting an effective tax rate of 42.1% and 42.2%, respectively. ASSET QUALITY Loans are classified as non-performing when they became 90 days past due as to interest or principal payments, or earlier if the ability of the borrower to meet the contractual payment terms is in doubt. Management and the Board of Directors perform a monthly review of all delinquent loans. The actions taken by the Company with respect to delinquencies vary depending on the nature of the loan and period of delinquency. It is the Company's general policy to stop the accrual of interest on all loans 90 days or more past due. Certain loans 90 days or more past due may continue to accrue interest based on management's evaluation of the loan, the underlying collateral and the credit worthiness of the borrower. When a loan is placed on non-accrual status, unpaid interest is reversed against interest income of the current period. Thereafter, interest payments received on non-accrual loans are recognized as income unless future collections are doubtful, in which case the payments received are applied as a reduction of principal. A loan remains on non-accrual status until the factors that indicated doubtful collectibility no longer exist or until a loan is determined to be uncollectible and is charged off against the allowance for loan losses. 9 12 The classification of a loan as non-performing does not necessarily indicate that loan principal or interest will not be collected. Historical experience indicates that a portion of non-performing assets will eventually be recovered. When all collection efforts have been exhausted, and management determines that the borrower is unable to repay its obligation, the Company will commence foreclosure procedures. The following table sets forth certain information regarding non-accrual loans, other past due loans and real estate owned. The Company's prospective adoption of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," effective April 1, 1995, had no impact on the comparability of this information. See Note 3 to the Consolidated Financial Statements for information concerning the Company's impaired loans which are included in the non-accrual loans shown below.
At or for the Year Ended March 31, -------------------------------------------------------------- 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ (Dollars in thousands) NON-ACCRUAL LOANS: Mortgage loans: One- to four-family $1,355 $ 856 $ 523 $ 419 $ 245 Commercial property 123 126 -- -- -- Construction -- -- -- 326 326 Commercial business -- -- -- 30 -- ------ ------ ------ ------ ------ Total 1,478 982 523 775 571 ------ ------ ------ ------ ------ Number of non-accrual loans 9 6 2 5 2 ACCRUING LOANS PAST DUE NINETY DAYS OR MORE: Mortgage loans: One- to four-family $ -- $ 342 $ 885 $ 760 $ 631 Multi-family -- -- 761 171 378 Commercial property 72 266 331 180 -- Construction 100 -- -- -- 542 Commercial business and consumer 8 42 144 17 357 ------ ------ ------ ------ ------ Total 180 650 2,121 1,128 1,908 ------ ------ ------ ------ ------ Number of accruing loans past due ninety days or more 4 7 21 11 18 Total non-performing loans $1,658 $1,632 $2,644 $1,903 $2,479 ====== ====== ====== ====== ====== Number of non-performing loans 13 13 23 16 20 Allowance for loan losses $ 660 $ 654 $ 650 $ 540 $ 482 ====== ====== ====== ====== ====== Real estate owned, net $ 122 $ 402 $ 455 $ 367 $ 449 ====== ====== ====== ====== ====== Number of real estate owned properties 1 2 2 3 3 RATIOS: Non-accrual loans to total loans 2.65% 1.89% 1.03% 1.70% 1.22% Non-performing loans to total loans 2.97 3.15 5.20 4.18 5.31 Non-performing loans and real estate owned to 1.46 1.77 3.40 2.63 3.46 total assets Allowance for loan losses to: Non-accrual loans 44.65 66.60 124.28 69.68 84.41 Non-performing loans 39.81 40.07 24.58 28.38 19.44 Total loans 1.18 1.26 1.28 1.19 1.03 Contractual interest income that would have been recognized on non-accrual loans $ 96 $ 93 $ 18 $ 81 $ 61 Actual interest income recognized 74 58 -- 9 27 ------ ------ ------ ------ ------ Interest income not recognized $ 22 $ 35 $ 18 $ 72 $ 34 ====== ====== ====== ====== ======
Accrued interest receivable on accruing loans past due by 90 days or more amounted to $1,000, $8,000, $44,000, $14,000 and $62,000 at March 31, 1997, 1996, 1995, 1994 and 1993, respectively. Accordingly, if the Company had placed all such loans on non-accrual status at those dates, interest income for the fiscal years ended March 31, 1997, 1996 and 1995 would have been increased (decreased) by $7,000, $36,000 and ($30,000), respectively. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risks inherent in the Company's loan portfolio and the general economy. The allowance for loan losses is maintained at an amount management considers adequate to cover loan losses which are deemed probable and estimable. The allowance is based upon a number of factors, including asset classifications, economic trends, industry experience and trends, industry and geographic concentrations, estimated collateral values, management's assessment of the credit risk 10 13 inherent in the portfolio, historical loan loss experience, and the Company's underwriting policies. The Company will continue to monitor and modify its allowance for loan losses as conditions dictate. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. These agencies may require the Company to establish additional allowances, based on their judgments of the information available at the time of the examination. The following table sets forth activity in the Company's allowance for loan losses and the allowance for losses on real estate owned for the periods indicated.
For the Year Ended March 31, -------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Dollars in thousands) ALLOWANCE FOR LOAN LOSSES: Balance at beginning of year $ 654 $ 650 $ 540 $ 482 $ 303 Provision for losses 69 90 171 151 315 Charge-offs: Mortgage loans: One- to four-family (12) (48) -- (23) (35) Commercial property -- -- -- -- (50) Construction loans -- -- (30) -- -- Commercial business loans (40) (36) (31) (78) (22) Consumer loans (11) (2) (2) (4) (29) ----- ----- ----- ----- ----- Total charge-offs (63) (86) (63) (105) (136) Recoveries -- -- 2 12 -- ----- ----- ----- ----- ----- Balance at end of year $ 660 $ 654 $ 650 $ 540 $ 482 ===== ===== ===== ===== ===== Ratio of net charge-offs to average loans outstanding 0.11% 0.17% 0.13% 0.20% 0.29% ALLOWANCE FOR LOSSES ON REAL ESTATE OWNED: Balance at beginning of year $ 38 $ 60 $ 59 $ 89 $ 89 Provision for losses 38 -- 141 64 -- Net realized losses (76) (22) (140) (94) -- ----- ----- ----- ----- ----- Balance at end of year $ -- $ 38 $ 60 $ 59 $ 89 ===== ===== ===== ===== =====
IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and other financial information included in this report have been prepared in conformity with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. 11 14 MANAGEMENT'S REPORT Management is responsible for the preparation and integrity of the consolidated financial statements and other information presented in this annual report. The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and reflect management's judgments and estimates with respect to certain events and transactions. Management is responsible for establishing and maintaining effective internal controls to provide reasonable assurance that transactions are recorded in accordance with management's authorization, assets are safeguarded against loss or unauthorized use, and underlying financial records support the preparation of financial statements. Internal controls include the communication of written policies and procedures, selection of qualified personnel, appropriate segregation of responsibilities, and the ongoing internal audit function. The Board of Directors meets periodically with Company management, the internal auditor, and the independent auditors, KPMG Peat Marwick LLP, to review matters relative to the quality of financial reporting, internal controls, and the nature, extent and result of the audit efforts. The independent auditors conduct an annual audit to enable them to express an opinion on the Company's consolidated financial statements. In connection with the audit, the independent auditors consider internal controls in order to determine the nature, timing and extent of their auditing procedures. /s/Stephen C. Byelick /s/Harry G. Murphy - --------------------- ------------------ Stephen C. Byelick Harry G. Murphy President and Chief Executive Officer Vice President and Secretary INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Tappan Zee Financial, Inc.: We have audited the accompanying consolidated balance sheets of Tappan Zee Financial, Inc. and subsidiary as of March 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tappan Zee Financial, Inc. and subsidiary as of March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1997 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Stamford, Connecticut April 29, 1997 12 15 CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
March 31, -------------------------- 1997 1996 --------- --------- ASSETS Cash and due from banks $ 912 $ 581 Interest-bearing deposits 1,438 2,458 Federal funds sold 5,900 5,500 Securities (note 2): Available-for-sale, at fair value (amortized cost of $36,967 in 1997 and $41,772 in 1996) 36,384 41,544 Held-to-maturity, at amortized cost (fair value of $17,889 in 1997 and $9,596 in 1996) 18,123 9,436 -------- -------- Total securities 54,507 50,980 Loans, net (note 3): Mortgage loans 51,876 48,072 Other loans 4,170 4,037 Allowance for loan losses (660) (654) Net deferred loan fees (276) (281) -------- -------- Total loans, net 55,110 51,174 Federal Home Loan Bank stock 674 561 Real estate owned, net (note 4) 122 402 Other assets (note 5) 3,178 3,134 -------- -------- Total assets $121,841 $114,790 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposits (note 6) $ 98,327 $ 89,908 Other liabilities (note 5) 2,286 2,522 -------- -------- Total liabilities 100,613 92,430 -------- -------- SHAREHOLDERS' EQUITY (notes 11 and 12): Preferred stock (par value $0.01 per share; 1,000,000 shares authorized; none issued or outstanding) -- -- Common stock (par value $0.01 per share; 5,000,000 shares authorized; 1,620,062 shares issued) 16 16 Additional paid-in capital 14,942 14,893 Common stock held by employee stock ownership plan ("ESOP") (1,056) (1,215) Common stock awarded under recognition and retention plans ("RRPs") (524) -- Treasury stock, at cost (86,000 shares) (1,070) -- Retained earnings, substantially restricted 9,269 8,803 Net unrealized loss on available-for-sale securities, net of taxes (note 2) (349) (137) -------- -------- Total shareholders' equity 21,228 22,360 -------- -------- Total liabilities and shareholders' equity $121,841 $114,790 ======== ========
See accompanying notes to consolidated financial statements. 13 16 CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
Year Ended March 31, ----------------------------------- 1997 1996 1995 ------- ------- ------- INTEREST INCOME: Mortgage loans $ 4,331 $ 4,098 $ 3,767 Other loans 390 367 311 Securities 3,513 2,387 2,067 Other earning assets 357 772 402 ------- ------- ------- Total interest income 8,591 7,624 6,547 ------- ------- ------- INTEREST EXPENSE: Deposits 4,094 4,002 2,912 Federal Home Loan Bank advances 12 -- -- ------- ------- ------- Total interest expense 4,106 4,002 2,912 ------- ------- ------- Net interest income 4,485 3,622 3,635 Provision for loan losses (note 3) 69 90 171 ------- ------- ------- Net interest income after provision for loan losses 4,416 3,532 3,464 ------- ------- ------- NON-INTEREST INCOME: Service charges and other fees 119 109 103 Net gain (loss) on sales of available-for-sale 23 88 (44) securities (note 2) Other 10 14 8 ------- ------- ------- Total non-interest income 152 211 67 ------- ------- ------- NON-INTEREST EXPENSE: Compensation and benefits (notes 10 and 11) 1,477 1,185 969 Occupancy and equipment 192 220 229 Federal deposit insurance: Regular premiums 155 202 182 Special assessment (note 6) 538 -- -- Data processing service fees 159 151 132 Net cost of real estate owned (note 4) 60 22 184 Other (note 9) 806 517 391 ------- ------- ------- Total non-interest expense 3,387 2,297 2,087 ------- ------- ------- Income before income tax expense 1,181 1,446 1,444 Income tax expense (note 8) 326 609 610 ------- ------- ------- Net income $ 855 $ 837 $ 834 ======= ======= ======= Earnings per share, from date of conversion (note 12) $ 0.59 $ 0.31 ======= =======
See accompanying notes to consolidated financial statements. 14 17 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in thousands, except per share data)
Common Common Net Additional Stock Stock Unrealized Total Common Paid-in Held Awarded Treasury Retained Loss on Shareholders' Stock Capital by ESOP Under RRPs Stock Earnings Securities Equity -------- -------- -------- -------- -------- -------- ---------- -------- BALANCE AT MARCH 31, 1994 $-- $ -- $ -- $ -- $ -- $7,213 $ (12) $ 7,201 Net income -- -- -- -- -- 834 -- 834 Reversal of net unrealized loss on equity securities -- -- -- -- -- -- 12 12 Net unrealized loss on available-for-sale securities, net of taxes: As of April 1, 1994 -- -- -- -- -- -- (99) (99) Net increase during the year -- -- -- -- -- -- (130) (130) --- ------- ------- ----- ------- ------ ----- ------- BALANCE AT MARCH 31, 1995 -- -- -- -- -- 8,047 (229) 7,818 Net income -- -- -- -- -- 837 -- 837 Dividends paid ($0.05 per share) -- -- -- -- -- (81) -- (81) Issuance of 1,620,062 common shares 16 14,885 -- -- -- -- -- 14,901 Shares purchased by ESOP (129,600 shares) -- -- (1,296) -- -- -- -- (1,296) ESOP shares committed to be released (8,124 shares) -- 8 81 -- -- -- -- 89 Decrease in net unrealized loss on available-for-sale securities, net of taxes -- -- -- -- -- -- 92 92 --- ------- ------- ----- ------- ------ ----- ------- BALANCE AT MARCH 31, 1996 16 14,893 (1,215) -- -- 8,803 (137) 22,360 Net income -- -- -- -- -- 855 -- 855 Dividends paid ($0.20 per share) -- -- -- -- -- (291) -- (291) Repurchase of 86,000 treasury shares -- -- -- -- (1,070) -- -- (1,070) Purchase of 52,840 shares to fund awards under the RRPs -- -- -- (616) -- (98) -- (714) Amortization of awards -- -- -- 92 -- -- -- 92 ESOP shares committed to be released (15,893 shares) -- 49 159 -- -- -- -- 208 Increase in net unrealized loss on available-for-sale securities, net of taxes -- -- -- -- -- -- (212) (212) --- ------- ------- ----- ------- ------ ----- ------- BALANCE AT MARCH 31, 1997 $16 $14,942 $(1,056) $(524) $(1,070) $9,269 $(349) $21,228 === ======= ======= ===== ======= ====== ===== =======
See accompanying notes to consolidated financial statements. 15 18 CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended March 31, --------------------------------- 1997 1996 1995 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 855 $ 837 $ 834 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 69 90 171 Provision for real estate owned losses 38 -- 141 Depreciation expense 58 73 93 Accretion of net deferred loan fees (44) (61) (47) Net increase in accrued interest receivable (80) (63) (65) Net (gain) loss on sales of available-for-sale securities (23) (88) 44 Other adjustments, net 155 202 (301) -------- -------- -------- Net cash provided by operating activities 1,028 990 870 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities: Available-for-sale (19,596) (28,728) (526) Held-to-maturity (10,069) (5,117) (4,984) Proceeds from principal payments, maturities and calls of securities: Available-for-sale 10,562 8,304 3,070 Held-to-maturity 1,381 1,424 762 Proceeds from sales of available-for-sale securities 13,861 3,797 1,664 Disbursements for loan originations (11,903) (9,314) (15,498) Principal collections on loans 7,942 8,233 9,462 Proceeds from sales of real estate owned 249 225 345 Other investing cash flows, net (162) (103) 31 -------- -------- -------- Net cash used in investing activities (7,735) (21,279) (5,674) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 8,419 8,095 4,303 Net proceeds from sale of common stock -- 14,901 -- Common stock purchased by ESOP -- (1,296) -- Purchase of common stock to fund awards under RRPs (714) -- -- Repurchase of treasury stock (1,070) -- -- Dividends paid (291) (81) -- Net increase (decrease) in mortgage escrow funds 74 (344) 54 -------- -------- -------- Net cash provided by financing activities 6,418 21,275 4,357 -------- -------- -------- Net (decrease) increase in cash and cash equivalents (289) 986 (447) Cash and cash equivalents at beginning of year 8,539 7,553 8,000 -------- -------- -------- Cash and cash equivalents at end of year $ 8,250 $ 8,539 $ 7,553 ======== ======== ======== SUPPLEMENTAL INFORMATION: Interest paid $ 4,106 $ 4,002 $ 2,912 Income taxes paid 646 531 750 Securities transferred from held-to-maturity to available-for-sale -- 11,320 -- Mortgage loans transferred to real estate owned -- 111 554 ======== ======== ========
See accompanying notes to consolidated financial statements. 16 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES In June 1995, Tarrytown and North Tarrytown Savings and Loan Association converted from a New York State chartered mutual savings and loan association to a federally chartered mutual savings bank under the new name Tarrytowns Bank, FSB (the "Bank"). As discussed in note 12, Tappan Zee Financial, Inc. (the "Holding Company") became the holding company for the Bank on October 5, 1995 upon completion of the conversion of the Bank from a mutual savings bank to a stock savings bank (the "Conversion"). Collectively, the Holding Company and the Bank are referred to herein as the "Company". The Company's primary market area consists of the Village of Tarrytown and its neighboring communities in Westchester County, New York. The Bank is a community-oriented savings institution whose business primarily consists of accepting deposits from customers within its market area and investing those funds in mortgage loans secured by one- to four-family residences. To a significantly lesser extent, funds are invested in multi-family, commercial real estate, construction, commercial business and consumer loans. The Company also invests in mortgage-backed and other securities. Deposits are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation. The Company's primary regulator is the Office of Thrift Supervision ("OTS"). The following is a summary of the significant accounting policies followed by the Company in the preparation of the consolidated financial statements. Basis of Presentation The consolidated financial statements include the accounts of the Holding Company and its wholly-owned subsidiary, the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. Prior to the Conversion, the Holding Company had no operations other than those of an organizational nature. Subsequent thereto, the Holding Company's only business activity is the ownership of the Bank. All financial information included herein for periods prior to the Conversion refers to the Bank. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense. A material estimate that is particularly susceptible to near-term change is the allowance for loan losses, which is discussed below. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. For purposes of reporting cash flows, cash equivalents consist of overnight federal funds sold. Securities The securities portfolio includes debt securities and, to a much lesser extent, equity securities. Debt securities are principally mortgage-backed securities, consisting of collateralized mortgage obligations ("CMOs") and pass-through securities issued by United States government-sponsored entities (Ginnie Mae, Fannie Mae and Freddie Mac). The Company accounts for securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Individual securities are classified as held-to-maturity securities, trading securities, or available-for-sale securities. SFAS No. 115 limits the held-to-maturity category to debt securities for which the entity has the positive intent and ability to hold to maturity. Trading securities are debt and equity securities that are bought principally for the purpose of selling them in the near term. All other debt and equity securities are classified as available-for-sale. Held-to-maturity securities are carried at amortized cost. Available-for-sale securities are carried at fair value, with unrealized gains and losses excluded from earnings and reported on a net-of-tax basis as a separate component of shareholders' equity. The Company has no trading securities. Federal Home Loan Bank ("FHLB") stock is a non-marketable security held in accordance with certain regulatory requirements and, accordingly, is carried at cost. Premiums and discounts on debt securities are amortized to interest income on a level-yield basis over the expected terms of the securities. Realized gains and losses on sales of securities are determined based on the amortized cost of the specific securities sold. Unrealized losses on held-to-maturity and available-for-sale securities are charged to earnings when the decline in fair value of a security is judged to be other than temporary. Allowance for Loan Losses Effective April 1, 1995, the Company prospectively adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118. Under SFAS No. 114, a loan is considered to be impaired when, based on current information and events, it is probable that the creditor will be unable to collect all principal and interest contractually due. Creditors are permitted to measure impaired loans based on (i) the present value of expected future cash flows discounted at the loan's effective interest rate, (ii) the loan's observable market price or (iii) the fair value of the collateral if the loan is collateral dependent. If the approach used results in a mea- 17 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) surement that is less than an impaired loan's recorded investment, an impairment loss is recognized as part of the allowance for loan losses. SFAS No. 118 allows creditors to continue to use existing methods for recognizing interest income on impaired loans. The Company's adoption of these statements did not affect its overall allowance for loan losses or income recognition practices. The allowance for loan losses is increased by provisions for losses charged to operations. Losses on loans (including impaired loans) are charged to the allowance for loan losses when all or a portion of a loan is deemed to be uncollectible. Recoveries of loans previously charged-off are credited to the allowance when realized. Management estimates the allowance for loan losses based on an evaluation of the Company's past loan loss experience, known and inherent risks in the portfolio, estimated value of underlying collateral, and current economic conditions. In management's judgment, the allowance for loan losses is adequate to absorb probable losses in the existing portfolio. Establishing the allowance for loan losses involves significant management judgments utilizing the best information available at the time of review. Those judgments are subject to further review by various sources, including the Company's regulators. Future adjustments to the allowance may be necessary based on changes in economic and real estate market conditions, further information obtained regarding known problem loans, the identification of additional problem loans, and other factors. Interest and Fees on Loans Generally, a loan (including an impaired loan under SFAS No. 114) is placed on non-accrual status when principal or interest payments become ninety days past due, or earlier if the ability of the borrower to meet contractual payment terms is in doubt. When loans are placed on non-accrual status, unpaid interest is reversed against interest income of the current period. Thereafter, interest payments received on non-accrual loans are either applied to reduce unpaid principal balances or reported as interest income, depending on management's judgment as to the likelihood of further collections. Loans are returned to accrual status when collectibility is no longer considered doubtful. Loan origination fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the level-yield method over the contractual life of the related loan. Net deferred fees and costs applicable to prepaid loans are recognized in interest income at the time of prepayment. Discounts on consumer loans are accreted using the level-yield method. Real Estate Owned Real estate owned consists of properties acquired through foreclosure or deed in lieu of foreclosure. A property is initially recorded at fair value less estimated sales costs, with any resulting writedown charged to the allowance for loan losses. Thereafter, an allowance for losses on real estate owned is established for any further declines in fair value less estimated sales costs. Fair value estimates are based on recent appraisals and other available information. Costs incurred to develop or improve properties are capitalized, while holding costs are charged to expense. Office Property and Equipment Office property and equipment is comprised of land (carried at cost) and building, furniture, fixtures and equipment (carried at cost less accumulated depreciation). Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Costs incurred to improve or extend the life of existing assets are capitalized. Repairs and maintenance, as well as renewals and replacements of a routine nature, are charged to expense. Income Taxes In accordance with the asset and liability method required by SFAS No. 109, "Accounting for Income Taxes," deferred taxes are recognized for the estimated future tax effects attributable to temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. A deferred tax liability is recognized for all temporary differences that will result in future taxable income. A deferred tax asset is recognized for all temporary differences that will result in future tax deductions, subject to reduction of the asset by a valuation allowance in certain circumstances. This valuation allowance is recognized if, based on an analysis of available evidence, management determines that it is more likely than not that a portion or all of the deferred tax asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in income tax expense in the period that includes the enactment date of the change. Postretirement Benefit and Deferred Compensation Plans The Company has a non-contributory defined benefit pension plan which covers substantially all employees. Pension costs are funded on a current basis. Costs for this plan, as well as the Company's directors' retirement plan and directors' deferred compensation plan, are accounted for in accordance with SFAS No. 87, "Employers' Accounting for Pensions." 18 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) The cost of postretirement health care benefits is recognized on an accrual basis as such benefits are earned by active employees in accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Stock-Based Compensation Plans Compensation expense is recognized in an amount equal to the fair value of ESOP shares that have been committed to be released for allocation to participant accounts. To the extent that the fair value of these shares differs from the original cost, the difference is charged or credited to shareholders' equity (additional paid-in capital). The cost of unallocated ESOP shares not yet committed to be released is reflected as a reduction of shareholders' equity. The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation expense is recognized only if the exercise price of the option is less than the fair value of the underlying stock at the grant date. SFAS No. 123, "Accounting for Stock-Based Compensation," encourages entities to recognize the fair value of all stock-based awards on the date of grant as compensation expense over the vesting period. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma disclosures of net income and earnings per share as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures required by SFAS No. 123. The Company's RRPs are also accounted for in accordance with APB Opinion No. 25. The fair value of the shares awarded, measured as of the grant date, is recognized as unearned compensation (a deduction from shareholders' equity) and amortized to compensation expense as the shares become vested. An excess of the cost to fund purchases of RRP shares over the grant-date fair value is charged to retained earnings. Earnings per Share Earnings per share is reported for periods following the Conversion based on net income divided by the weighted average number of common shares outstanding and common stock equivalents. Unallocated ESOP shares that have not been committed to be released to participants are excluded from outstanding shares in computing earnings per share. (2)SECURITIES The following is a summary of available-for-sale and held-to-maturity securities at March 31, 1996:
Gross Unrealized Amortized --------------------- Fair Cost Gains Losses Value ------- ------- ------- ------- (In thousands) 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 ======= ======= ======= =======
19 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED) The following is a summary of available-for-sale and held-to-maturity securities at March 31, 1996:
Gross Unrealized Amortized --------------------- Fair Cost Gains Losses Value ------- ------- ------- ------- (In thousands) AVAILABLE-FOR-SALE SECURITIES Mortgage-backed securities: CMOs $17,651 $ 93 $(189) $17,555 Pass-through securities 7,671 18 (67) 7,622 ------- ------- ------- ------- Total 25,322 111 (256) 25,177 Other debt securities: U.S. Treasury 6,490 3 -- 6,493 U.S. Agency and other 8,616 10 (96) 8,530 Mutual fund investments 1,344 -- -- 1,344 ------- ------- ------- ------- Total $41,772 $124 $(352) $41,544 ======= ======= ======= ======= HELD-TO-MATURITY SECURITIES Mortgage-backed securities: CMOs $ 1,108 $ 5 $ -- $ 1,113 Pass-through securities 5,129 141 (21) 5,249 ------- ------- ------- ------- Total 6,237 146 (21) 6,362 U.S. Agency and other debt securities 3,199 35 -- 3,234 ------- ------- ------- ------- Total $ 9,436 $181 $ (21) $ 9,596 ======= ======= ======= =======
The net unrealized loss on available-for-sale securities was $583,000 ($349,000 after taxes) at March 31, 1997 and $228,000 ($137,000 after taxes) at March 31, 1996. Changes in unrealized holding gains and losses resulted in after-tax (decreases) increases in shareholders' equity of ($212,000) in fiscal 1997, $92,000 in fiscal 1996 and ($130,000) in fiscal 1995. These gains and losses will continue to fluctuate based on changes in the portfolio and market conditions. Sales of available-for-sale securities resulted in the following gross realized gains and gross realized losses during the years ended March 31:
1997 1996 1995 ---- ---- ---- (In thousands) Gains $ 89 $ 90 $ 1 Losses (66) (2) (45) ---- ---- ---- Net $ 23 $ 88 $(44) ==== ==== ====
In November 1995, the Financial Accounting Standards Board ("FASB") issued a special report on SFAS No. 115 which provided a one-time opportunity to reclassify securities from the held-to-maturity category to the available-for-sale category prior to December 31, 1995, without calling into question the intent to hold other securities to maturity. In December 1995, the Company reclassified securities with an amortized cost and a fair value of $11.3 million and $11.5 million, respectively, from the held-to-maturity category to the available-for-sale category. 20 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following is a summary of the amortized cost and fair value of debt securities, other than mortgage-backed securities, by remaining term to contractual maturity as of March 31, 1997. Actual maturities may differ from these amounts because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.
AVAILABLE-FOR-SALE HELD-TO-MATURITY --------------------- -------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ------ ------ ------ ------ (IN THOUSANDS) One year or less $ -- $ -- $ 50 $ 50 More than one year to five years 3,454 3,397 100 100 More than five years to ten years 4,530 4,372 2,700 2,660 More than ten years 45 45 199 204 ------ ------ ------ ------ Total $8,029 $7,814 $3,049 $3,014 ====== ====== ====== ======
(3) LOANS Loans are summarized as follows at March 31:
1997 1996 -------- -------- (In thousands) Mortgage loans: Residential properties: One- to four-family $43,958 $38,762 Multi-family 2,289 3,287 Commercial properties 3,910 3,561 Construction loans 2,405 3,200 Construction loans in process (686) (738) -------- -------- 51,876 48,072 -------- -------- Other loans: Commercial business loans 2,846 2,747 Automobile loans 781 724 Other consumer loans 797 821 Unearned discounts (239) (235) Unused commercial lines of credit (15) (20) -------- -------- 4,170 4,037 -------- -------- Total loans 56,046 52,109 Allowance for loan losses (660) (654) Net deferred loan fees (276) (281) -------- -------- Total loans, net $55,110 $51,174 ======== ========
The loan portfolio at March 31, 1997 consisted of fixed-rate loans of $42.4 million and adjustable-rate loans of $13.6 million with weighted average yields of 8.48% and 8.43%, respectively. At March 31, 1996, fixed-rate loans were $37.0 million and adjustable-rate loans were $15.1 million. The Company primarily originates mortgage loans secured by existing single-family residential properties. The Company also originates multi-family and commercial real estate loans, construction loans, commercial business loans and consumer loans. A substantial portion of the loan portfolio is secured by real estate properties located in Westchester County, New York. The ability of the Company's borrowers to make principal and interest payments is dependent upon, among other things, the level of overall economic activity and the real estate market conditions prevailing within the Company's concentrated lending area. 21 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following is a summary of loans on non-accrual status and accruing loans past due ninety days or more at March 31:
1997 1996 1995 ------ ------ ------ (In thousands) NON-ACCRUAL LOANS: Mortgage loans: One- to four-family $1,355 $ 856 $ 523 Commercial property 123 126 -- ------ ------ ------ Total 1,478 982 523 ------ ------ ------ ACCRUING LOANS PAST DUE NINETY DAYS OR MORE: Mortgage loans: One- to four-family -- 342 885 Multi-family -- -- 761 Commercial property 72 266 331 Construction 100 -- -- Commercial business and consumer 8 42 144 ------ ------ ------ Total 180 650 2,121 ------ ------ ------ Total non-performing loans $1,658 $1,632 $2,644 ====== ====== ======
If interest payments on the foregoing non-accrual loans had been made during the respective years in accordance with the loan agreements, additional interest income of $22,000, $35,000 and $18,000 would have been recognized in fiscal 1997, 1996 and 1995, respectively. SFAS No. 114 applies to loans that are individually evaluated for collectibility in accordance with the Company's normal loan review procedures (principally loans in the multi-family, commercial mortgage and construction loan categories). The standard does not apply to smaller-balance, homogeneous loans such as the Company's one- to four-family residential mortgage loans. The Company had one impaired loan (a commercial mortgage loan on non-accrual status) with a recorded investment of $123,000 and $126,000 at March 31, 1997 and 1996, respectively. An allowance for loan impairment under SFAS No. 114 was not required for this loan due to the adequacy of the collateral value. The Company's average recorded investment in impaired loans was $125,000 and $128,000 for fiscal 1997 and 1996, respectively. Interest collections and income recognized on impaired loans were insignificant for both years. Activity in the allowance for loan losses is summarized as follows for the years ended March 31:
1997 1996 1995 ----- ----- ----- (In thousands) Balance at beginning of year $654 $650 $540 Provision for losses 69 90 171 Charge-offs (63) (86) (63) Recoveries -- -- 2 ----- ----- ----- Balance at end of year $660 $654 $650 ===== ===== =====
22 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) REAL ESTATE OWNED Real estate owned properties at March 31, 1997 and 1996 consisted of single-family residences. Activity in the allowance for losses on real estate owned is summarized as follows for the years ended March 31:
1997 1996 1995 ----- ----- ----- (In thousands) Balance at beginning of year $ 38 $ 60 $ 59 Provision for losses 38 -- 141 Net realized losses (76) (22) (140) ----- ----- ----- Balance at end of year $ -- $ 38 $ 60 ===== ===== =====
In addition to the provision for losses, the net cost of real estate owned reported in the consolidated statements of income includes operating expenses of $22,000, $22,000 and $43,000 in fiscal 1997, 1996 and 1995, respectively. (5) OTHER ASSETS AND LIABILITIES A summary of other assets and liabilities at March 31 follows:
1997 1996 ------ ------ (In thousands) OTHER ASSETS: Office property and equipment, net of accumulated depreciation of $365 in 1997 and $364 in 1996 $ 544 $ 560 Accrued interest receivable 778 698 Deferred income taxes (note 8) 859 516 Intangible asset recognized for directors' deferred compensation plan (note 10) 510 946 Prepaid expenses and other 487 414 ------ ------ Total $3,178 $3,134 ====== ====== OTHER LIABILITIES: Obligation for directors' deferred compensation plan (note 10) $ 928 $1,110 Mortgage escrow funds 784 710 Accrued expenses and other 574 702 ------ ------ Total $2,286 $2,522 ====== ======
(6) DEPOSITS Deposit balances and weighted average stated interest rates at March 31 are summarized as follows:
1997 1996 -------------------------- -------------------------- Amount Rate Amount Rate ------ ---- ------ ---- (Dollars in thousands) Checking $ 2,771 $ 2,001 NOW 3,756 2.00% 4,164 2.00% Money market 3,157 2.75 3,484 2.75 Regular savings 15,008 2.75 16,402 3.10 Statement savings 10,757 2.92 11,563 3.20 ------- -------- 35,449 2.51 37,614 2.81 ------- -------- Savings certificates by remaining period to maturity: Under one year 49,026 5.72 40,448 5.68 One to three years 13,852 5.98 11,846 6.33 ------- -------- 62,878 5.78 52,294 5.83 ------- -------- Total $98,327 4.60% $89,908 4.57% ======= ==== ======== ====
23 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Savings certificates issued in denominations of $100,000 or more totaled $9.4 million and $7.6 million at March 31, 1997 and 1996, respectively. The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted into law on September 30, 1996. Among other things, the Funds Act required depository institutions to pay a one-time special assessment of 65.7 basis points on their SAIF-assessable deposits held on March 31, 1995, in order to recapitalize the SAIF to the level required by law. The Bank's special assessment of $538,000 was accrued as a charge to non-interest expense for the quarter ended September 30, 1996. The assessment was paid in November 1996. (7) FEDERAL HOME LOAN BANK ADVANCES As a member of the FHLB of New York, the Bank has access to funds in the form of FHLB advances. Based on the level of qualifying collateral available to secure advances at March 31, 1997, the Bank's borrowing capacity was $29.3 million, none of which was used at that date. Advances are secured by the Bank's investment in FHLB stock and by a blanket security agreement. This agreement requires the Bank to maintain as collateral certain qualifying assets (such as securities and single-family residential mortgage loans) with a fair value, as defined, at least equal to 115% of the outstanding advances. (8) INCOME TAXES Income tax expense (benefit) consists of the following for the years ended March 31:
1997 1996 1995 ----- ----- ----- (In thousands) FEDERAL: Current $ 432 $465 $520 Deferred 47 (14) (90) ----- ----- ---- 479 451 430 ----- ----- ---- NEW YORK STATE: Current 94 94 146 Deferred (247) 64 34 ----- ----- ---- (153) 158 180 ----- ----- ---- TOTAL: Current 526 559 666 Deferred (200) 50 (56) ----- ----- ---- $ 326 $609 $610 ===== ==== ====
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:
1997 1996 1995 ----- ----- ----- (Dollars in thousands) Tax at federal statutory rate $ 402 $ 492 $ 491 State tax (benefit) expense, net of federal tax effect (101) 104 119 Other, net 25 13 -- ----- ----- ----- Actual income tax expense $ 326 $ 609 $ 610 ===== ===== ===== Effective income tax rate 27.6% 42.1% 42.2% ===== ===== =====
24 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The tax effects of temporary differences that give rise to the Company's deferred tax assets and liabilities at March 31 are as follows:
1997 1996 ---- ---- (In thousands) DEFERRED TAX ASSETS: Allowance for loan losses $270 $285 Net unrealized loss on available-for-sale securities 234 91 Loan origination fees 113 116 Other 292 193 ---- ---- Total deferred tax assets 909 685 ---- ---- DEFERRED TAX LIABILITIES: New York State bad debt reserve in excess of base-year amount -- (161) Other (50) (8) ---- ---- Total deferred tax liabilities (50) (169) ---- ---- Net deferred tax assets $859 $516 ==== ====
Based on the Company's historical and anticipated future pre-tax earnings, management believes that it is more likely than not that the Company's deferred tax assets will be realized. As a thrift institution, the Bank is subject to special provisions in the federal and New York state tax laws regarding its allowable tax bad debt deductions and related tax bad debt reserves. These deductions historically have been determined using methods based on loss experience or a percentage of taxable income. Tax bad debt reserves represent the excess of allowable deductions over actual bad debt losses and other reserve reductions. These reserves consist of a defined base-year amount, plus additional amounts ("excess reserves") accumulated after the base year. SFAS No. 109 requires recognition of deferred tax liabilities with respect to such excess reserves, as well as any portion of the base-year amount which is expected to become taxable (or "recaptured") in the foreseeable future. Certain amendments to the federal and New York state tax laws regarding bad debt deductions were enacted in July and August 1996. The federal amendments include elimination of the percentage-of-taxable-income method for tax years beginning after December 31, 1995 and imposition of a requirement to recapture into taxable income (over a six-year period) the bad debt reserves in excess of the base-year amounts. This recapture requirement did not have a significant effect on the Bank since its federal bad debt reserves approximated the base-year amounts. The New York amendments redesignate the Bank's state bad debt reserve at December 31, 1995 as the base-year amount and also provide for future additions to the base-year reserve using the percentage-of-taxable-income method. This change effectively eliminated the excess New York state reserve for which the Company had recognized a deferred tax liability. Accordingly, the Company reduced its deferred tax liability in the quarter ended September 30, 1996, by $166,000, representing a state deferred tax benefit of $252,000 less related deferred federal taxes of $86,000. At March 31, 1997, the Bank's federal and state bad debt reserves were $1.5 million and $3.9 million, respectively, which equaled the base-year amounts. In accordance with SFAS No. 109, deferred tax liabilities have not been recognized with respect to these reserves since the Company does not expect that such amounts will become taxable in the foreseeable future. Under the tax laws as amended, events that would result in taxation of certain of these reserves include (i) redemptions of the Bank's stock or certain excess distributions to the Holding Company, and (ii) failure of the Bank to maintain a specified qualifying assets ratio or meet other thrift definition tests for New York state tax purposes. At March 31, 1997, the Bank's unrecognized deferred tax liabilities with respect to the federal and state base-year reserves were approximately $0.5 million and $0.3 million, respectively. 25 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (9) OTHER NON-INTEREST EXPENSE The components of other non-interest expense are as follows for the years ended March 31:
1997 1996 1995 ---- ---- ---- (In thousands) Professional services $316 $149 $ 73 Advertising 73 51 49 Stationery, printing and supplies 52 35 23 Supervisory exams and assessments 35 33 32 Insurance and surety bond premiums 54 52 46 Other 276 197 168 ---- ---- ---- Total $806 $517 $391 ==== ==== ====
(10) POSTRETIREMENT BENEFITS AND DEFERRED COMPENSATION PLANS Pension Plans and Deferred Compensation Plan All eligible employees are included in a non-contributory, multiple-employer defined benefit pension plan (the "Pension Plan"). The Company's annual contributions to the Pension Plan are based on actuarially determined funding requirements. The Company has also established a non-qualified deferred compensation plan for directors of the Bank or the Holding Company, which was adopted in its amended form upon Conversion (the "Deferred Compensation Plan"). The following is a reconciliation of the funded status of these plans and the liabilities recognized in the consolidated balance sheets at March 31:
Deferred Pension Plan Compensation Plan ---------------------- ---------------------- 1997 1996 1997 1996 ------- ------- ------- ------- (In Thousands) Actuarial present value of benefit obligations: Accumulated benefit obligation -- vested $(1,040) $ (978) $ (928) $(1,110) Accumulated benefit obligation -- nonvested -- (11) -- -- ------- ------- ------- ------- Total accumulated benefit obligation (1,040) (989) (928) (1,110) Effect of projected future compensation levels (234) (209) -- -- ------- ------- ------- ------- Projected benefit obligation for service rendered to date (1,274) (1,198) (928) (1,110) Plan assets (insurance contract, at contract value) 1,050 970 -- -- ------- ------- ------- ------- Projected benefit obligation in excess of plan assets (224) (228) (928) (1,110) Unrecognized prior service cost -- -- 751 946 Unrecognized net loss (gain) from experience different from that assumed and effect of changes in assumptions 113 127 (241) -- Unrecognized net transition obligation 90 98 -- -- Additional minimum liability recognized with a corresponding intangible asset (note 5) -- -- (510) (946) ------- ------- ------- ------- Liabilities recognized $ (21) $ (3) $ (928) $(1,110) ======= ======= ======= =======
26 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Plan expense consisted of the following components for the years ended March 31:
Deferred Pension Plan Compensation Plan ------------------------------ ----------------- 1997 1996 1995 1997 1996 ---- ---- ---- ---- ---- (In Thousands) Service costs (benefits earned during the period) $ 30 $ 28 $ 32 $ 39 $ 23 Interest costs on projected benefit obligations 87 81 89 59 43 Return on plan assets (80) (80) (79) -- -- Net amortization and deferral 13 9 9 158 98 ---- ---- ---- ---- ---- Net expense $ 50 $ 38 $ 51 $256 $164 ==== ==== ==== ==== ====
For both plans, the actuarial present values of the projected benefit obligations at March 31, 1997 and 1996 were determined based on discount rates of 7.5% and 7.0%, respectively. Actuarial amounts for the Pension Plan were also based on rates of increase in future compensation levels of 5.5% in 1997 and 5.0% in 1996, and expected long-term rates of return on plan assets of 8.5% in both years. Under the Deferred Compensation Plan, directors may defer all or part of their compensation received for services to the Company (including compensation paid to an officer-director for service as an officer). Deferred amounts are applied principally to the purchase of life insurance policies naming the Company as beneficiary. The plan provides for benefit payments by the Company in installments over a ten-year period beginning upon termination of a participant's service as a director. In the event of a change in control of the Holding Company or the Bank, the plan requires full funding of any previously-purchased life insurance contracts. In connection with the Conversion, the Company established a trust fund with an independent fiduciary for the purpose of accumulating funds to be used to satisfy its obligations under the Deferred Compensation Plan. For financial reporting purposes, the life insurance contracts are not considered plan assets but, instead, are included in the Company's consolidated balance sheet at their cash surrender values ($267,000 at March 31, 1997). Compensation and benefits expense for fiscal year 1997 and for the six-month period ended March 31, 1996 was reduced by $91,000 and $60,000, respectively, with respect to the recognition of cash surrender values. The total death benefits payable to the Company under the insurance policies amounted to approximately $919,000 at March 31, 1997. Although the Company may be obligated for certain cash payments to participants prior to the receipt of proceeds from the purchased life insurance policies, the Company expects that it will ultimately be reimbursed in whole from such life insurance proceeds. The Company also has a retirement plan for directors, which is a non-qualified plan that became effective upon the Conversion. Outside directors are participants in this unfunded plan only if they have elected not to participate in the Deferred Compensation Plan described above. Participants in the directors' retirement plan who have attained age 65 and completed ten or more years of service (including past service as a director of the Bank) will receive an annual retirement benefit equal to the aggregate director compensation received (excluding stock compensation) for the final year of board service. Reduced benefits apply for shorter service periods and for early retirement. Pension expense was $16,000 for the fiscal year 1997 and $8,000 for the six-month period ended March 31, 1996. The actuarial present value of the accumulated and projected benefit obligations both were $65,000 at March 31, 1997 and $50,000 at March 31, 1996. Postretirement Health Care Benefits Substantially all employees become eligible for postretirement health care (medical and dental) benefits if they meet certain age and length of service requirements. In accordance with SFAS No. 106, the cost of postretirement health care benefits is recognized on an accrual basis as such benefits are earned by active employees. 27 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following is a reconciliation of the actuarial liabilities for postretirement health care benefits, none of which have been funded, and the liabilities recognized in the consolidated balance sheets at March 31:
1997 1996 ----- ----- (In thousands) Accumulated benefit obligation: Retirees $ (62) $ (87) Fully-eligible employees (74) (120) Other active participants (57) (60) ----- ----- Total accumulated benefit obligation (193) (267) Unrecognized (gain) loss (9) 70 ----- ----- Liabilities recognized $(202) $(197) ===== =====
Plan expense consisted of the following components for the years ended March 31:
1997 1996 1995 ---- ---- ---- (In thousands) Service cost (benefits earned during the period) $ 3 $ 3 $ 1 Interest cost on accumulated benefit obligation 14 18 14 Net amortization and deferral -- 4 -- --- --- --- Net expense $17 $25 $15 === === ===
The accumulated postretirement benefit obligation was determined using the projected unit credit cost method, as required by SFAS No. 106, and discount rates of 7.25% and 7.0% at March 31, 1997 and 1996, respectively. At March 31, 1997, the assumed rate of increase in future health care costs was 9.5% for 1997, gradually decreasing to 5.5% in the year 2005 and remaining at that level thereafter. A one-percentage-point increase in the assumed health care cost trend rate would increase the accumulated benefit obligation by approximately $22,000 at March 31, 1997 with an insignificant effect on expense recognized for the year then ended. (11) STOCK-BASED COMPENSATION PLANS Employee Stock Ownership Plan In connection with the Conversion, the Company established an ESOP for eligible employees. The ESOP borrowed approximately $1.3 million from the Holding Company and used the funds to purchase 129,600 shares of the Holding Company's common stock sold in the offering. The Bank makes monthly contributions to the ESOP sufficient to fund the debt service requirements over the ten-year term of the loan from the Holding Company. Shares purchased by the ESOP are held in a suspense account by the plan trustee for allocation to participants as the loan is repaid. Shares released from the suspense account are allocated to participants on the basis of their relative compensation. Participants become vested in the shares allocated to their respective accounts over a period not to exceed five years. Any forfeited shares are allocated to other participants in the same proportion as contributions. Shares allocated to participants or committed for release to participants totaled 15,893 in fiscal 1997 and 8,124 in the six-month period ended March 31, 1996. Expense recognized with respect to such shares amounted to $208,000 in fiscal 1997 and $89,000 in the six-month period ended March 31, 1996, based on the average fair value of the Holding Company's common stock for each period. The cost of the 105,583 shares which have not yet been committed to be released to participant accounts at March 31, 1997 is reflected as a reduction of shareholders' equity in the amount of $1.1 million. The fair value of these shares was approximately $1.5 million at that date. Stock Option Plans On July 10, 1996, the Company's shareholders approved the Tappan Zee Financial, Inc. 1996 Stock Option Plan for Officers and Employees ("Employee Option Plan") and the Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside Directors ("Outside Director Option Plan"). Under the Employee Option Plan, 113,400 shares of authorized but unissued Holding Company stock are reserved for issuance upon option exercises. Options under this plan may be either non-qualified stock options or incentive stock options. Each option entitles the holder to purchase one share of common stock at an exercise price equal to the fair market value on the date of grant. Options expire no later than ten years following the date of grant. 28 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Under the Outside Director Option Plan, 48,600 shares of authorized but unissued Holding Company stock are reserved for issuance to outside directors upon option exercises. Options granted under this plan are non-qualified options. Other option terms and conditions are similar to those under the Employee Option Plan. Effective July 10, 1996, initial option grants were made under the Employee Option Plan and the Outside Director Option Plan for 81,000 shares and 40,500 shares, respectively, at an exercise price of $11.625 per share. These options have a ten-year term and vest ratably over five years from the date of grant. Each option, however, becomes fully exercisable upon a change in control of the Holding Company or the Bank, or upon the death, disability or retirement of the option holder. All options granted in July 1996 were outstanding at March 31, 1997 with a remaining life of 9.3 years, although no options were exercisable at that date. At March 31, 1997, shares available for future grants totaled 32,400 for the Employee Option Plan and 8,100 for the Outside Director Option Plan. Options were granted at an exercise price equal to the fair value of the common stock at the grant date. Therefore, in accordance with the provisions of APB Opinion No. 25 related to fixed stock options, no compensation expense is recognized with respect to options granted or exercised. Under the alternative fair-value-based method defined in SFAS No. 123, the fair value of all fixed stock options on the grant date would be recognized as expense over the vesting period. The estimated per-share fair value of options granted in July 1996 was $4.06, estimated using the Black-Scholes option-pricing model with assumptions approximately as follows: dividend yield of 2.0%; expected volatility rate of 25.3%; risk-free interest rate of 7.1%; and expected option life of 7 years. Had the Company applied the fair-value-based method of accounting to the options granted, net income and earnings per share for fiscal 1997 would have been $795,000 and $0.55, respectively, compared to the reported amounts of $855,000 and $0.59, respectively. Recognition and Retention Plans On July 10, 1996, the Company's shareholders approved the Tappan Zee Financial, Inc. Recognition and Retention Plan for Officers and Employees ("Employee RRP") and the Tappan Zee Financial, Inc. Recognition and Retention Plan for Outside Directors ("Outside Director RRP"). The purpose of these plans is to provide officers and non-employee directors of the Company with a proprietary interest in the Company in a manner designed to encourage their retention. Total shares authorized are 45,360 for the Employee RRP and 19,440 for the Outside Director RRP. Effective July 10, 1996, initial stock awards were made under the Employee RRP and the Outside Director RRP for 32,400 shares and 19,440 shares, respectively. These awards vest ratably over five years from the date of grant; however, immediate vesting occurs upon a change in control of the Holding Company or the Bank, or upon the death, disability or retirement of the participant. An additional grant of 1,000 shares was made under the Employee RRP later in fiscal 1997. The fair value of the shares awarded under the plans, totaling $616,000 at the grant dates, is being amortized to compensation expense on a straight-line basis over the five-year vesting periods. Compensation expense of $92,000 was recognized in fiscal 1997. Unearned compensation cost of $524,000 is reflected as a reduction of shareholders' equity at March 31, 1997. (12) SHAREHOLDERS' EQUITY Stock Conversion Concurrent with the Conversion, the Holding Company sold 1,620,062 shares of its common stock on October 5, 1995 in a subscription and community offering at a price of $10 per share, for net proceeds of $14.9 million, after deducting conversion costs of $1.3 million. The Holding Company used $7.4 million of the net proceeds to acquire all of the common stock issued by the Bank in the Conversion. In accordance with regulatory requirements, the Bank established a liquidation account at the time of the Conversion in the amount of $7.8 million, equal to its equity at March 31, 1995. The liquidation account is maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after the Conversion. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases will not restore an eligible account holder's interest in the liquidation account. In the unlikely event of a complete liquidation of the Bank, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. Earnings per Share Earnings per share ("EPS") of $0.59 for fiscal 1997 and $0.31 for the six-month period ended March 31, 1996 were based on weighted-average common and common equivalent shares of 1,452,389 and 1,495,086, respectively. EPS data has not been presented for periods prior to the Conversion. In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which requires presentation of both basic EPS and diluted EPS by all entities with complex capital structures. Basic EPS excludes dilution and is computed by 29 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as the Company's stock options) were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. As required, the Company will adopt SFAS No. 128 in its fiscal quarter ending December 31, 1997 and will restate all prior-period EPS data at that time. Capital Distributions The Bank may not declare or pay cash dividends on or repurchase any of its shares of common stock if the effect thereof would cause equity to be reduced below applicable regulatory capital requirements or the amount required to be maintained for the liquidation account. The OTS capital distribution regulations applicable to savings institutions (such as the Bank) that meet their regulatory capital requirements, generally limit dividend payments in any year to the greater of (i) 100% of year-to-date net income plus an amount that would reduce surplus capital by one-half or (ii) 75% of net income for the most recent four quarters. Surplus capital is the excess of actual capital at the beginning of the year over the institution's minimum regulatory capital requirement. The cash dividends paid by the Bank to the Holding Company in fiscal 1997 and 1996 were not affected by this limitation. Unlike the Bank, the Holding Company is not subject to OTS regulatory restrictions on the payment of dividends to its shareholders. The Holding Company is subject, however, to Delaware law which generally limits dividends to an amount equal to the excess of the net assets of the Holding Company (the amount by which total assets exceed total liabilities) over its statutory capital, or if there is no such excess, to its net profits for the current and/or immediately preceding fiscal year. In April and November 1996, the Holding Company received approvals from the OTS to repurchase in each case up to 5% of its outstanding common stock. During fiscal 1997, the Holding Company repurchased 86,000 shares (or approximately 5.3%) of its common stock for its treasury, in open market transactions, at a total cost of $1,070,000 or $12.44 per share. At March 31, 1997, an additional 71,950 shares (or approximately 4.7% of outstanding shares) were authorized for repurchase prior to November 1997. Regulatory Capital Requirements OTS regulations require savings institutions to maintain a minimum ratio of tangible capital to total adjusted assets of 1.5%; a minimum ratio of Tier I (core) capital to total adjusted assets of 3.0%; and a minimum ratio of total (core and supplementary) capital to risk-weighted assets of 8.0%. Under its prompt corrective action regulations, the OTS is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on the institution's financial statements. The regulations establish a framework for the classification of savings institutions into five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Generally, an institution is considered well capitalized if it has a Tier I (core) capital ratio of at least 5.0%; a Tier I risk-based capital ratio of at least 6.0%; and a total risk-based capital ratio of at least 10.0%. The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off- balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the OTS about capital components, risk weightings and other factors. These capital requirements, which are applicable to the Bank only, do not consider additional capital at the Holding Company level. Management believes that, as of March 31, 1997 and 1996, the Bank met all capital adequacy requirements to which it is subject. Further, the most recent OTS notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank's capital classification. 30 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following is a summary of the Bank's actual capital amounts and ratios as of March 31, 1997 and 1996, compared to the OTS requirements for classification as a well-capitalized institution and for minimum capital adequacy:
For Classifications as Minimum Capital Bank Actual Well Capitalized Adequacy --------------------- ---------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollars in thousands) March 31, 1997 - -------------- Tangible capital $16,607 14.1% N/A N/A $1,763 1.5% Tier I (core) capital 16,607 14.1 $5,876 5.0% 3,526 3.0 Risk-based capital: Tier I 16,607 38.2 2,606 6.0 N/A N/A Total 17,151 39.5 4,344 10.0 3,475 8.0 March 31, 1996 - -------------- Tangible capital $16,220 14.9% N/A N/A $1,637 1.5% Tier I (core) capital 16,220 14.9 $5,458 5.0% 3,275 3.0 Risk-based capital: Tier I 16,220 36.8 2,645 6.0 N/A N/A Total 16,772 38.0 4,409 10.0 3,527 8.0
(13) COMMITMENTS AND CONTINGENCIES The Company's off-balance sheet financial instruments at March 31, 1997 and 1996 were limited to fixed-rate mortgage loan origination commitments with total contractual amounts of $1.5 million and $1.1 million, respectively, and weighted average interest rates of 8.61% and 7.73%, respectively. These instruments involve elements of credit risk and interest rate risk in addition to the amounts recognized in the consolidated balance sheets. The contractual amounts represent the Company's maximum potential exposure to credit loss, but do not necessarily represent future cash requirements since certain commitments may expire without being funded. Loan commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee by the customer. Commitments are subject to the credit approval process applied in the Company's general lending activities, including a case-by-case evaluation of the customer's creditworthiness and related collateral requirements. In the normal course of business, the Company is involved in various outstanding legal proceedings. Management has discussed the nature of these proceedings with legal counsel. In the opinion of management, the financial position of the Company will not be materially affected as a result of the outcome of such legal proceedings. (14) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107 requires the Company to disclose fair value information about financial instruments for which it is practicable to estimate fair value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Quoted market prices are used to estimate fair values when those prices are available. However, active markets do not exist for many types of financial instruments. Consequently, fair values for these instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. Estimates developed using these methods are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. In addition, since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed in accordance with SFAS No. 107 do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect possible tax ramifications or estimated transaction costs. 31 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following is a summary of the carrying values and estimated fair values of the Company's financial assets and liabilities (none of which were held for trading purposes) at March 31:
1997 1996 -------------------------- -------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value -------- ---------- -------- ---------- (In thousands) Financial assets: Cash and due from banks $ 912 $ 912 $ 581 $ 581 Interest-bearing deposits 1,438 1,438 2,458 2,458 Federal funds sold 5,900 5,900 5,500 5,500 Securities 54,507 54,273 50,980 51,140 Loans, net 55,110 54,909 51,174 51,701 FHLB stock 674 674 561 561 Accrued interest receivable 778 778 698 698 Financial liabilities: Savings certificate accounts 62,878 62,816 52,294 52,556 Other deposit accounts 35,449 35,449 37,614 37,614
The following is a description of the principal valuation methods used by the Company to estimate the fair values of its financial instruments: Securities. Fair values were determined by published market prices or securities dealers' estimated prices. Loans. Fair values were estimated by portfolio, for loans with similar financial characteristics. Loans were segregated by type, such as one- to four-family residential, multi-family residential, commercial real estate, consumer and commercial loans. Each loan category was further segmented into fixed and adjustable-rate categories, and by performing and non-performing categories. The pricing methodology for performing one- to four-family residential mortgage loans was determined based on the zero-coupon yield curve plus the option-adjusted spread for fixed-rate mortgages. The fair values for performing loans in other portfolio categories were estimated by discounting the expected cash flows using current market rates for loans with similar terms to borrowers of similar credit quality. The fair values of non-performing loans were based on management's analysis of estimated cash flows discounted at rates commensurate with the credit risk involved. Deposit Liabilities. The fair value of savings certificate accounts represents contractual cash flows discounted using interest rates currently offered on accounts with similar characteristics and remaining maturities. In accordance with SFAS No. 107, the fair values of other deposit accounts (those with no stated maturity such as savings accounts) are equal to the carrying amounts payable on demand. In accordance with SFAS No. 107, these fair values do not include the value of core deposit relationships which comprise a significant portion of the Company's deposit base. Management believes that the Company's core deposit relationships provide a relatively stable, low-cost funding source which has a substantial unrecognized value separate from the deposit balances. Other Financial Instruments. The other financial assets and liabilities listed in the preceding table have fair values that approximate the respective carrying values because the instruments are payable on demand or have short-term maturities, and present relatively low credit risk and interest rate risk. Fair values of the loan origination commitments described in note 13 were estimated based on an analysis of the interest rates and fees currently charged to enter into similar transactions, considering the remaining terms of the instruments and the creditworthiness of the potential borrowers. At March 31, 1997 and 1996, the fair values of these commitments approximated the related carrying values which were not significant. 32 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (15) PARENT COMPANY CONDENSED FINANCIAL INFORMATION Set forth below are the condensed balance sheets of Tappan Zee Financial, Inc. as of March 31, 1997 and 1996, and its condensed statements of income and cash flows for the year ended March 31, 1997 and the period from October 5, 1995 (the Conversion date) to March 31, 1996:
March 31, --------------------- 1997 1996 ------- ------- (In thousands) CONDENSED BALANCE SHEETS Assets: Cash $ 271 $ 481 Securities and interest-bearing deposits 4,662 5,805 Investment in subsidiary 16,298 16,080 Other assets 8 -- ------- ------- Total assets $21,239 $22,366 ======= ======= Liabilities and Shareholders' Equity: Accrued expenses $ 11 $ 6 Shareholders' equity 21,228 22,360 ------- ------- Total liabilities and shareholders' equity $21,239 $22,366 ======= =======
Period Ended March 31, ------------------------- 1997 1996* -------- -------- (In thousands) CONDENSED STATEMENTS OF INCOME Dividends from subsidiary $ 360 $ 90 Interest income 255 78 Non-interest expense (152) (22) ------- ------- Income before income tax expense and equity in undistributed earnings of subsidiary 463 146 Income tax expense 38 33 ------- ------- Income before equity in undistributed earnings of subsidiary 425 113 Equity in undistributed earnings of subsidiary 430 357 ------- ------- Net income $ 855 $ 470 ======= ======= CONDENSED STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net income $ 855 $ 470 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary (430) (357) Other adjustments, net 297 6 ------- ------- Net cash provided by operating activities 722 119 ------- ------- Cash flows from investing activities: Purchase of subsidiary's common stock -- (7,357) ------- ------- Cash flows from financing activities: Net proceeds from sale of common stock, exclusive of ESOP shares -- 13,605 Purchase of common stock to fund awards under RRPs (714) -- Repurchase of treasury stock (1,070) -- Dividends paid (291) (81) ------- ------- Net cash (used in) provided by financing activities (2,075) 13,524 ------- ------- Net (decrease) increase in cash and cash equivalents (1,353) 6,286 Cash and cash equivalents at beginning of period 6,286 -- ------- ------- Cash and cash equivalents at end of period $ 4,933 $ 6,286 ======= =======
*From the date of Conversion, October 5, 1995 33 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (16) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for fiscal 1997 and 1996 is shown below:
Three Months Ended -------------------------------------------------- June 30 September 30 December 31 March 31 ------- ------------ ----------- -------- (In thousands, except per share data) FISCAL 1997 Interest income $2,088 $2,155 $2,152 $2,196 Interest expense 1,004 1,018 1,022 1,062 ------ ------ ------ ------ Net interest income 1,084 1,137 1,130 1,134 Provision for loan losses 6 20 20 23 Non-interest income 40 34 31 47 Non-interest expense(1) 677 1,306 708 696 ------ ------ ------ ------ Income (loss) before income taxes 441 (155) 433 462 Income tax expense (benefit)(1) 187 (229) 175 193 ------ ------ ------ ------ Net income $ 254 $ 74 $ 258 $ 269 ====== ====== ====== ====== Earnings per share $ 0.17 $ 0.05 $ 0.18 $ 0.19 ====== ====== ====== ====== FISCAL 1996 Interest income $1,767 $1,823 $2,017 $2,017 Interest expense 939 1,040 1,023 1,000 ------ ------ ------ ------ Net interest income 828 783 994 1,017 Provision for loan losses 30 25 25 10 Non-interest income 33 31 32 115 Non-interest expense 480 513 625 679 ------ ------ ------ ------ Income before income taxes 351 276 376 443 Income tax expense 150 110 152 197 ------ ------ ------ ------ Net income $ 201 $ 166 $ 224 $ 246 ====== ====== ====== ====== Earnings per share $ 0.15 $ 0.16 ====== ======
(1) For the quarter ended September 30, non-interest expense includes the SAIF special assessment of $538,000 and income tax benefit includes $166,000 attributable to a change in state tax law. See Notes 6 and 8. 34 37 NOTES 35 38 CORPORATE INFORMATION BOARD OF DIRECTORS Marvin Levy , Chairman of the Board, President of Greller and Company P.C. Stephen C. Byelick John T. Cooney, Vice President of County Asphalt, Inc. Gerald L. Logan, Registered representative of The Windmill Group Harry G. Murphy Kevin J. Plunkett, Attorney, Plunkett & Jaffe, P.C. Paul R. Wheatley, Retired President of Beck & Wheatley Inc. OFFICERS Stephen C. Byelick, President and Chief Executive Officer Harry G. Murphy, Vice President and Secretary OFFICE LOCATION 75 North Broadway, Tarrytown, NY 10591 (914) 631-0344 SHAREHOLDERS' INFORMATION ANNUAL MEETING The annual meeting of shareholders will be held on August 6, 1997 at 5:15 p.m. at the office of Tarrytowns Bank, 75 North Broadway, Tarrytown, NY. TRANSFER AGENT AND REGISTRAR: GENERAL INQUIRIES: ChaseMellon Shareholder Services Tappan Zee Financial, Inc. PO Box 590 c/o Tarrytowns Bank, FSB Ridgefield Park, NJ 07660 75 North Broadway Attn: Shareholder Relations Tarrytown, NY 10591 (800) 851-9677 (914) 631-0344
ANNUAL REPORT ON FORM 10-K OUR ANNUAL REPORT ON FORM 10-K (EXCLUDING EXHIBITS), FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, MAY BE OBTAINED, WITHOUT CHARGE, BY WRITING TO HARRY G. MURPHY, VICE PRESIDENT, AT THE ABOVE ADDRESS. STOCK MARKET DATA The shares of common stock are quoted on the Nasdaq Stock Market under the symbol "TPNZ." The table below sets forth the dividends declared and the high and low closing sale price per common share for the quarters indicated.
Closing Sale Price Cash ------------------------------------ Dividends Quarter Ended Declared High Low End of Period -------- ------- ------- ------------- December 31, 1995 -- $13 1/8 $10 $12 5/8 March 31, 1996 $0.05 12 3/4 11 3/8 12 June 30, 1996 0.05 12 1/4 11 3/4 12 September 30, 1996 0.05 13 12 12 1/2 December 31, 1996 0.05 14 1/8 13 5/8 13 5/8 March 31, 1997 0.05 15 1/4 14 1/4 14 1/4
As of June 20, 1997, there were approximately 340 shareholders of record. This does not reflect the number of persons or entities who hold their common stock in nominee or "street" name through various brokerage firms. 36 39 CORPORATE INFORMATION BOARD OF DIRECTORS Marvin Levy, Chairman of the Board Stephen C. Byelick John T. Cooney Gerald L. Logan Harry G. Murphy Kevin J. Plunkett Paul R. Wheatley OFFICERS Stephen C. Byelick, President and Chief Executive Officer Harry G. Murphy, Vice President and Secretary OFFICE LOCATION 75 North Broadway, Tarrytown, NY 10591 (914) 631-0344 SHAREHOLDERS' INFORMATION Annual Meeting The annual meeting of shareholders will be held on July 10, 1996 at 5:00 p.m. at the Tarrytown Hilton, Tarrytown, NY. Transfer Agent and Registrar: General Inquiries: Chemical Mellon Shareholder Services Tappan Zee Financial, Inc. PO Box 590 c/o Tarrytowns Bank, FSB Ridgefield Park, NJ 07660 75 North Broadway Att: Shareholder Relations Tarrytown, NY 10591 (800) 851-9677 (914) 631-0344
Form 10K Our annual report on Form 10K, filed with the Securities and Exchange Commission, may be obtained by writing to Harry G. Murphy, Vice President and Secretary, at the above address. STOCK MARKET DATA The shares of common stock are quoted on The Nasdaq Stock Market under the symbol "TPNZ." The table below sets forth the dividends declared and the high and low closing sale price per common share for the quarters indicated.
CLOSING SALE PRICE CASH ---------------------------------- DIVIDENDS DECLARED HIGH LOW END OF PERIOD -------- ------- --- -------------- QUARTER ENDED ------------ December 31, 1995 $ -- $13 1/8 $10 $12 5/8 March 31, 1996 $0.05 12 3/4 11 3/8 12
As of May 17, 1996 there were approximately 340 shareholders of record. This does not reflect the number of persons or entities who hold their common stock in nominee or "street" name through various brokerage firms. 40 [LOGO]TAPPAN ZEE FINANCIAL, INC. 75 North Broadway P.O. Box 187 Tarrytown, NY 10591 (914) 631-0344 EX-27 10 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR MAR-31-1997 MAR-31-1997 1,000 912 1,438 5,900 0 36,384 18,123 17,889 55,770 660 121,841 98,327 0 2,286 0 0 0 16 21,212 121,841 4,721 3,513 357 8,591 4,094 4,106 4,485 69 23 3,387 1,181 1,181 0 0 855 0.59 0.59 3.98 1,478 180 0 0 654 63 0 660 660 0 0
EX-99.1 11 PROXY STATEMENT FOR 1997 ANNUAL MEETING 1 TAPPAN ZEE FINANCIAL, INC. 75 NORTH BROADWAY TARRYTOWN, NY 10591 June 30, 1997 Dear Shareholder: You are cordially invited to attend the 1997 Annual Meeting of Shareholders (the "Annual Meeting") of Tappan Zee Financial, Inc. ("Tappan Zee Financial" or the "Company"), the holding company for Tarrytowns Bank, FSB, Tarrytown, New York, which will be held on August 6, 1997, at 5:15 p.m., at the office of Tarrytowns Bank FSB, 75 North Broadway, Tarrytown, New York 10591. The attached Notice of Annual Meeting of Shareholders and Proxy Statement describe the formal business to be transacted at the Annual Meeting. Directors and officers of Tappan Zee Financial, as well as a representative of KPMG Peat Marwick LLP, the accounting firm appointed by the Board of Directors to be the Company's independent auditors for the fiscal year ending March 31, 1998, will be present at the Annual Meeting to respond to appropriate questions that our shareholders may have. The Board of Directors of Tappan Zee Financial has determined that an affirmative vote on each matter to be considered at the Annual Meeting is in the best interests of the Company and its shareholders and unanimously recommends a vote "FOR" each of these matters. Please complete, sign and return the enclosed proxy card promptly whether or not you plan to attend the Meeting. YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. VOTING BY PROXY WILL NOT PREVENT YOU FROM VOTING IN PERSON AT THE ANNUAL MEETING, BUT WILL ASSURE THAT YOUR VOTE IS COUNTED IF YOU ARE UNABLE TO ATTEND. IF YOU ARE A SHAREHOLDER WHOSE SHARES ARE NOT REGISTERED IN YOUR OWN NAME, YOU WILL NEED ADDITIONAL DOCUMENTATION FROM YOUR RECORD HOLDER TO ATTEND AND TO VOTE PERSONALLY AT THE ANNUAL MEETING. EXAMPLES OF SUCH DOCUMENTATION INCLUDE A BROKER'S STATEMENT, LETTER OR OTHER DOCUMENT CONFIRMING YOUR OWNERSHIP OF SHARES OF THE COMPANY. On behalf of the Board of Directors and the employees of Tappan Zee Financial and Tarrytowns Bank, FSB, we thank you for your continued support and appreciate your interest. Sincerely yours, [facsimile signature] Stephen C. Byelick President and Chief Executive Officer 2 TAPPAN ZEE FINANCIAL, INC. 75 NORTH BROADWAY TARRYTOWN, NEW YORK 10591 (914) 631-0344 NOTICE OF 1997 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON AUGUST 6, 1997 NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of Shareholders (the "Annual Meeting") of Tappan Zee Financial, Inc. (the "Company") will be held at the office of Tarrytowns Bank, FSB, 75 North Broadway, Tarrytown, New York 10591 on August 6, 1997 at 5:15 p.m., local time, to consider and vote upon: 1. The election of two directors for terms of three years each. 2. The approval of Amendment No. 2 to the Tappan Zee Financial, Inc. 1996 Stock Option Plan for Officers and Employees. 3. The approval of Amendment No. 2 to the Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside Directors. 4. The approval of Amendment No. 2 to the Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for Officers and Employees. 5. The approval of Amendment No. 2 to the Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for Outside Directors. 6. The ratification of the appointment of KPMG Peat Marwick LLP as independent auditors for the fiscal year ending March 31, 1998; and 7. The authorization of the Board of Directors, in its discretion, to direct the vote of the proxies upon such other business as may properly come before the meeting, and any adjournment thereof, including, without limitation, a motion to adjourn the meeting. Management is not aware of any such business. The Board of Directors has fixed June 20, 1997 as the record date for the determination of shareholders entitled to notice of and to vote at the Annual Meeting and any adjournment or postponement thereof. Only shareholders of record at the close of business on that date will be entitled to notice of and to vote at the Annual Meeting and any adjournment or postponement thereof. A list of shareholders entitled to vote at the Annual Meeting will be available at Tappan Zee Financial, Inc., 75 North Broadway, Tarrytown, New York 10591 for a period of at least ten days prior to the Annual Meeting and will also be available at the Annual Meeting itself. By Order of the Board of Directors [facsimile signature] Harry G. Murphy Vice President and Secretary Tarrytown, New York June 30, 1997 YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU OWN. THE BOARD OF DIRECTORS URGES YOU TO MARK, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. RETURNING THE PROXY CARD WILL NOT PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND THE ANNUAL MEETING. 3 TAPPAN ZEE FINANCIAL, INC. PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON AUGUST 6, 1997 GENERAL INFORMATION GENERAL This Proxy Statement and accompanying proxy card (the "Proxy Card") are being furnished to the shareholders of Tappan Zee Financial, Inc. (the "Company") in connection with the solicitation of proxies by the Board of Directors of the Company from holders of the shares of the Company's issued and outstanding common stock, par value $.01 per share (the "Common Stock"), as of the close of business on June 20, 1997 (the "Record Date"), for the use at the 1997 Annual Meeting of Shareholders of the Company to be held on August 6, 1997 at the office of Tarrytowns Bank, FSB, 75 North Broadway, Tarrytown, New York 10591, at 5:15 p.m., local time, and at any adjournment or postponement thereof (the "Annual Meeting"). This Proxy Statement, together with the enclosed Proxy Card, is first being mailed to shareholders on or about June 30, 1997. On October 5, 1995, the Company became the holding company for Tarrytowns Bank, FSB (the "Bank") upon completion of the conversion of the Bank from a mutual savings bank to a stock savings bank (the "Conversion"). The Company, a Delaware corporation, operates as a savings bank holding company for its wholly-owned subsidiary, the Bank. RECORD DATE AND VOTING RIGHTS The Board of Directors of the Company has fixed the close of business on June 20, 1997 as the record date for the determination of the Company's shareholders entitled to notice of and to vote at the Annual Meeting. Accordingly, only holders of record of shares of Common Stock at the close of business on such date will be entitled to vote at the Annual Meeting. On the Record Date, there were 1,497,062 shares of Common Stock issued and outstanding. Each holder of shares of Common Stock outstanding on the Record Date will be entitled to one vote for each share held of record upon each matter properly submitted at the Annual Meeting and at any adjournment or postponement thereof. The presence, in person or by proxy, of the holders of at least a majority of the total number of outstanding shares of Common Stock entitled to vote at the Annual Meeting is necessary to constitute a quorum. The Company's Certificate of Incorporation requires that no person (as defined therein, other than the Company or any compensation plan maintained by the Company) may directly or indirectly hold beneficial ownership of more than 10% of the issued and outstanding Common Stock (the "Limit"). As provided in the Company's Certificate of Incorporation, record holders of Common Stock who beneficially own in excess of the Limit shall be entitled to one hundredth (1/100) of one vote per share for each share in excess of the Limit. A person or entity is deemed to beneficially own shares owned by an affiliate as well as persons acting in concert with such person or entity. The Company's Certificate of Incorporation authorizes the Board of Directors (i) to make all determinations necessary to implement and apply the Limit, including determining whether persons or entities are acting in concert, and (ii) to demand that any 1 4 person who is reasonably believed to beneficially own Common Stock in excess of the Limit supply information to the Company to enable the Board of Directors to implement and apply the Limit. All properly executed proxies received by the Company will be voted in accordance with the instructions indicated thereon. IF NO INSTRUCTIONS ARE GIVEN, EXECUTED PROXIES WILL BE VOTED FOR THE ELECTION OF THE TWO NOMINEES FOR DIRECTOR, AND FOR EACH OTHER PROPOSAL IDENTIFIED IN THE NOTICE OF ANNUAL MEETING. Management is not aware of any matters other than those set forth in the Notice of Annual Meeting that may be brought before the Annual Meeting. If any other matters properly come before the Annual Meeting, the persons named in the accompanying Proxy Card will vote the shares represented by all properly executed proxies on such matters in such manner as shall be determined by a majority of the Board of Directors of the Company. IF YOU ARE A SHAREHOLDER WHOSE SHARES ARE NOT REGISTERED IN YOUR OWN NAME, YOU WILL NEED APPROPRIATE DOCUMENTATION FROM YOUR RECORD HOLDER TO ATTEND AND TO VOTE PERSONALLY AT THE ANNUAL MEETING. Examples of such documentation include a broker's statement, letter or other document confirming your ownership of shares of the Company. VOTE REQUIRED Directors are elected by a plurality of the votes cast in person or by proxy at the Annual Meeting. The holders of Common Stock may not vote their shares cumulatively for the election of directors. Proposals 2, 3, 4, 5, 6 and 7 each requires the affirmative vote of the holders of a majority of the outstanding shares of Common Stock represented, in person or by proxy, and entitled to vote thereon. Shares as to which the "ABSTAIN" box has been selected on the Proxy Card with respect to all matters except the election of directors will be counted as present and entitled to vote and will have the effect of a vote against that proposal. In contrast, shares underlying broker non-votes will not be counted as present and entitled to vote and will have no effect on the vote on such matters presented. REVOCABILITY OF PROXIES A proxy may be revoked at any time before it is voted by filing a written revocation of the proxy with the Secretary of the Company or by submitting a duly executed proxy bearing a later date. A proxy also may be revoked by attending and voting at the Annual Meeting, only if a written revocation is filed with the Secretary of the Annual Meeting prior to the voting of such proxy. SOLICITATION OF PROXIES The Company will bear the costs of soliciting proxies from its shareholders. In addition to the use of mail, proxies may be solicited by officers, directors or employees of the Company and the Bank, by telephone or through other forms of communication. The Company will also request persons, firms and corporations holding shares in their names or in the name of their nominees, which are beneficially owned by others, to send proxy materials to and obtain proxies from such beneficial owners, and will reimburse such holders for reasonable expenses incurred in connection therewith. In addition, the Company has retained Morrow & Co. to assist in the solicitation of proxies. The estimated cost of such solicitation is $3,500 plus expenses. 2 5 INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON Certain terms of the stock options and restricted stock awards granted to directors, officers and employees of the Company and the Bank will be modified if shareholders approve the proposed Amendment No. 2 to each of the Tappan Zee Financial, Inc. 1996 Stock Option Plan for Officers and Employees (the "Employee Option Plan"), the Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside Directors (the "Outside Director Option Plan"), the Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for Officers and Employees (the "Employee RRP"), and the Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for Outside Directors (the "Outside Director RRP"). For complete descriptions of these Plans and Amendments No. 2, see "Proposal 2," "Proposal 3," "Proposal 4" and "Proposal 5." PRINCIPAL SHAREHOLDERS OF THE COMPANY The following table sets forth, as of May 31, 1997, certain information as to the Common Stock beneficially owned by persons owning in excess of 5% of the outstanding shares of Common Stock. Management knows of no person, except as listed below, who beneficially owned more than 5% of the Company's outstanding shares of Common Stock as of May 31, 1997. Except as otherwise indicated, the information provided in the following table was obtained from filings with the Securities and Exchange Commission ("SEC") and with the Company pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Addresses provided are those listed in such filings as the address of the person authorized to receive notices and communications. Unless otherwise noted, each beneficial owner has sole voting and sole investment power over the shares beneficially owned. For purposes of the table below and the table set forth under "Stock Owned by Management," in accordance with Rule 13d-3 promulgated under the Exchange Act, a person is deemed to be the beneficial owner of any shares of Common Stock (1) over which he has or shares, directly or indirectly, voting or investment power, or (2) of which he has the right to acquire beneficial ownership at any time within 60 days after May 31, 1997. As used herein, "voting power" is the power to vote or direct the voting of shares and "investment power" is the power to dispose or direct the disposition of such shares. 3 6
Amount and Nature of Percent of Common Name and Address Beneficial Ownership Stock Outstanding ---------------- -------------------- ----------------- The Employee Stock Ownership Plan Trust of 129,600 shares(1) 8.45% Tappan Zee Financial, Inc. and Certain Affiliates 250 Park Avenue New York, NY 10177 Endeavour Capital Partners, L.P. 126,000 shares(2) 8.21% 555 Madison Avenue New York, NY 10022 BRT Realty Trust 106,950 shares(3) 6.97% 60 Cutter Mill Road Suite 303 Great Neck, NY 11201 John Hancock Advisors, Inc. 87,500 shares(4) 5.70% P.O. Box 111 Boston, Mass 02117
- --------------------- (1) The Company's Employee Stock Ownership Plan ("ESOP") is administered by a committee of the Company's Board of Directors. The ESOP's assets are held in a trust (the "ESOP Trust"), for which Marine Midland Bank serves as trustee (the "ESOP Trustee"). The ESOP Trust purchased these shares with funds borrowed from the Company in the Conversion. The shares purchased by the ESOP Trust are held in a suspense account for release and allocation to participants' accounts in annual installments. As of March 31, 1997, 20,184 shares held by the ESOP Trust have been allocated. The terms of the ESOP provide that, subject to the ESOP Trustee's fiduciary responsibilities under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the ESOP Trustee will vote, tender or exchange shares of Common Stock held in the ESOP Trust and allocated to participants in accordance with instructions received from such participants. The ESOP Trustee will vote allocated shares as to which no instructions are received and any shares that have not been allocated to participants' accounts in the same proportion as it votes the allocated shares with respect to which the ESOP Trustee receives instructions. The ESOP Trustee will tender or exchange any shares in the suspense account or that otherwise have not been allocated to participants' accounts in the same proportion as the allocated shares with respect to which the ESOP Trustee receives instructions are tendered or exchanged. With respect to allocated shares as to which no instructions are received, the ESOP Trustee will be deemed to have received instructions not to tender or exchange such shares. Except as described above, the ESOP committee of the Company's Board of Directors (the "ESOP Committee") has sole investment power, except in limited circumstances, but no voting power over all Common Stock held in the ESOP Trust. (2) Endeavor Capital Partners L.P. ("Endeavor") filed with the SEC a Schedule 13D, dated as of October 17, 1995. Based on Endeavor's Schedule 13D, it has shared voting and investment power over the 126,000 shares with Michael J. Katz and Laurence M. Austin, the general partners of Endeavour. Endeavor is a privately-owned investment partnership. (3) BRT Realty Trust ("BRT") filed with the SEC a Schedule 13D, dated as of June 2, 1997. Based on BRT's Schedule 13D, BRT has sole voting and investment power over the 106,950 shares. BRT is a privately-owned Massachusetts business trust, intended to qualify as a Real Estate Investment Trust. (4) John Hancock Advisors, Inc ("JHA") filed with the SEC a Schedule 13G, dated as of January 28, 1997. Based on JHA's Schedule 13G, JHA is the investment advisor for The John Hancock Bank and Thrift Opportunity Fund, a closed-end diversified management company that holds 30,000 of the shares indicated, and the John Hancock Regional Bank Fund, an open-end diversified management company that holds the remaining 57,500 shares. As investment advisor, JHA has sole voting and investment power over the 87,500 shares. 4 7 STOCK OWNED BY MANAGEMENT The following table sets forth information as of May 31, 1997 with respect to the shares of Common Stock beneficially owned by each director of the Company, each Named Executive Officer identified in the Summary Compensation Table, included elsewhere herein, and by all directors and executive officers as a group.
Amount and Nature Percent of Position with of Beneficial Common Stock Name the Company (1) Ownership(2)(3)(4)(5)(6) Outstanding (7) ---- --------------- ------------------------ --------------- Stephen C. Byelick President and Chief Executive 39,286 (8) 2.55% Officer and Director Harry G. Murphy Vice President and Secretary 30,264 (9) 1.96% and Director John T. Cooney Director 11,860 * Marvin Levy Director and Chairman 9,860 (10) * Gerald L. Logan Director 9,360 * Kevin J. Plunkett Director 10,960 (11) * Paul R. Wheatley Director 8,360 (12) * All directors and executive officers as a group (7 persons) 234,141 15.02%
- ------------------ * Less than one percent (1) Titles are for both the Company and the Bank. (2) See "Principal Shareholders of the Company" for a definition of "beneficial ownership." All persons shown in the above table have sole voting and investment power, except as otherwise indicated. (3) Includes 16,200 shares of restricted stock awarded to each of Mr. Byelick and Mr. Murphy under the Employee RRP, as to which each has sole voting power but no investment power and 3,240 shares of restricted stock awarded to each of Messrs. Cooney, Levy, Logan, Plunkett and Wheatley under the Outside Director RRP, as to which each has sole voting power but no investment power. (4) Includes 8,100 shares subject to options granted to each of Mr. Byelick and Mr. Murphy pursuant to the Employee Option Plan which may be acquired within 60 days after May 31, 1997 and 1,620 shares subject to options granted to each of Messrs. Cooney, Levy, Logan, Plunkett and Wheatley under the Outside Director Option Plan which may be acquired within 60 days from May 31, 1997. Does not include the 32,400 shares subject to options granted to each of Mr. Byelick and Mr. Murphy pursuant to the Employee Option Plan which are not currently exercisable and will not become exercisable within the next 60 days. Also does not include the 6,480 shares subject to options granted to each of Messrs. Cooney, Levy, Logan, Plunkett and Wheatley which are not currently exercisable and will not become exercisable in the next 60 days. (5) The figures shown include shares held in trust pursuant to the ESOP that have been allocated as of May 31, 1997 to individual accounts as follows: Mr. Byelick, 3,986 shares, Mr. Murphy 2,864 shares and all directors and executive officers as a group, 6,850 shares. Such persons have voting power (subject to the legal duties of the trustee) but no investment power, except in limited circumstances, as to such shares. The figures shown for Messrs. Byelick and Murphy do not include 109,416 shares held in trust pursuant to the ESOP that have not been allocated to any individual's account and as to which Messrs. Byelick and Murphy share voting power with other ESOP participants. Also not included are 4,775 shares purchased by the Bank's tax-qualified defined benefit pension plan ("Pension Plan"). The figures shown for all directors and executive officers as a group includes such 109,416 shares as to which the members of the Company's ESOP Committee (consisting of Messrs. Plunkett, Logan and Wheatley) may be deemed to have sole investment power, except in limited circumstances, thereby causing each such committee member to be deemed a beneficial owner of such shares. Each of the members of the ESOP Committee disclaims beneficial ownership of such shares. The figures shown for all directors and executive officers as a group also includes the 4,775 shares as to which the members of the Bank's Pension Committee (composed of Messrs. Byelick, Murphy, Plunkett and Wheatley) may be deemed to have sole investment power except in limited circumstances, thereby causing each committee member to be deemed a beneficial owner of such shares. Each member of the Pension Committee disclaims beneficial ownership of such shares. (6) The figures shown include shares held under the Tarrytowns Bank, FSB Directors' Deferred Compensation Plan that have been allocated as of December 31, 1996 to individual accounts as follows: Mr. Murphy, 1,050 shares, Mr. Levy, 1,500 shares and all directors and executive officers as a group, 2,550 shares. Such persons have sole voting and investment power as to such shares. (7) Percentages with respect to each person or group of persons have been calculated on the basis of 1,534,062 shares of Common Stock, the number of shares of Common Stock outstanding as of May 31, 1997, plus the number of shares of Common Stock which such person or group has the right to acquire within 60 days after May 31, 1997 by the exercise of such options. (8) Includes 4,000 shares as to which Mr. Byelick may be deemed to share voting power, but has no investment power. (9) Includes 550 shares as to which Mr. Murphy may be deemed to share voting power, but has no investment power. (10) Includes 1,000 shares as to which Mr. Levy may be deemed to share voting power, but has no investment power. (11) Includes 6,100 shares as to which Mr. Plunkett may be deemed to share voting power, but has no investment power. (12) Includes 3,000 shares as to which Mr. Wheatley shares voting and investment power and 500 shares as to which Mr.Wheatley may be deemed to share voting power, but has no investment power. 5 8 -------------------------------------- PROPOSAL 1 ELECTION OF DIRECTORS -------------------------------------- ELECTION OF DIRECTORS The Certificate of Incorporation and Bylaws of the Company provide for the election of directors by the shareholders. For this purpose, the Board of Directors of the Company is divided into three classes, as nearly equal in number as possible. The terms of office of the members of one class expire, and a successor class is to be elected, at each annual meeting of shareholders. There are currently seven directors of the Company. The terms of two directors expire at the Annual Meeting. Each of the two incumbent directors, Gerald L. Logan and Harry G. Murphy, has been nominated by the Nominating Committee to be re-elected at the Annual Meeting for a three-year term expiring at the annual meeting of shareholders in 2000. The terms of the remaining two classes of directors expire at the Company's annual meetings of shareholders to be held in 1998 and 1999, respectively, or when their successors are otherwise duly elected. Each nominee has consented to being named in this Proxy Statement and to serve if elected. In the event that any nominee for election as a director at the Annual Meeting is unable or declines to serve, which the Board of Directors has no reason to expect, the persons named as proxies in the Proxy Card will vote for a substitute nominee designated by the present Board of Directors. Information as to Nominees and Continuing Directors. The following table sets forth certain information with respect to each nominee for election as a director and each director whose term does not expire at the Annual Meeting ("Continuing Director"). There are no arrangements or understandings between the Company and any director or nominee pursuant to which such person was elected or nominated to be a director of the Company. For information with respect to the security ownership of directors, see "Stock Owned by Management."
DIRECTOR TERM POSITION(S) HELD WITH THE NOMINEES AGE(1) SINCE(2) EXPIRES COMPANY AND THE BANK - -------- ------ -------- ------- -------------------- Gerald L. Logan 59 1990 1997 Director of the Company and the Bank Harry G. Murphy 40 1989 1997 Vice President and Secretary and Director of the Company and the Bank CONTINUING DIRECTORS - ---------- Stephen C. Byelick 72 1983 1998 President and Chief Executive Officer and Director of the Company and Bank John T. Cooney 62 1982 1998 Director of the Company and the Bank Marvin Levy 71 1980 1999 Director and Chairman of the Company and the Bank Kevin J. Plunkett 47 1990 1999 Director of the Company and the Bank Paul R. Wheatley 66 1989 1999 Director of the Company and the Bank
- --------------------- (1) As of April 30, 1997. (2) Includes service as a Director or Director Emeritus of Tarrytowns Bank, FSB and its predecessor, Tarrytown and North Tarrytown Saving and Loan Association. 6 9 The principal occupation and business experience of each nominee for election as director and each Continuing Director is set forth below. NOMINEES FOR ELECTION AS DIRECTOR Gerald L. Logan has served as a Director of the Company since its formation in 1995 and has been a Director of the Bank since 1990. Since 1995, Mr. Logan has been a registered representative of The Windmill Group, Inc., a financial planning firm. Mr. Logan was employed as a vice president of Axe-Houghton Management, an investment management firm from 1954 to 1992. Mr. Logan has been a member of the National Association of Securities Dealers, Inc. since 1958. Mr. Logan is also associated with USF&G-AHM, an insurance company, as a consultant. Harry G. Murphy has served as Vice President and Secretary and Director of the Company since its formation in 1995. Mr. Murphy has been a Vice President of the Bank since 1983, Vice President and Secretary of the Bank since 1987 and a Director of the Bank since 1989. Mr. Murphy is also the Community Reinvestment Officer of the Bank. Prior to 1983, Mr. Murphy was an assistant treasurer with The Bank of New York. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE NOMINEES FOR ELECTION AS DIRECTORS CONTINUING DIRECTORS Stephen C. Byelick has served as President and Chief Executive Officer of the Company since its formation in 1995 and has been a Director or Director Emeritus of the Bank and its Chief Executive Officer since 1983. Prior to 1983, Mr. Byelick was a vice president with The Bank of New York, serving in a variety of functions including branch management, lending and marketing. John T. Cooney has served as a Director of the Company since its formation in 1995 and has been a Director of the Bank since 1982. Mr. Cooney is a Vice President of County Asphalt Inc., a manufacturer of asphalt paving materials, and has been with this company for more than 25 years. Mr. Cooney is also a Vice President of Westchester Industries, Inc., a real estate and holding corporation, and a partner in Cooney Realty Co., a real estate partnership, and has been with such entities for greater than 25 years. Marvin Levy has served as a Director and Chairman of the Company since its formation in 1995, a Director of the Bank since 1980 and Director and Chairman of the Board of the Bank since 1990. Mr. Levy is a C.P.A. and has been the President of Greller and Company P.C., a professional corporation of certified public accountants, for in excess of 25 years. Kevin J. Plunkett has served as a Director of the Company since its formation in 1995 and has been a Director of the Bank since 1990. Mr. Plunkett has been a practicing attorney since 1975. Mr. Plunkett was an Assistant District Attorney, Felony Trial Division, of Westchester County from 1975 to 1979 and was an Acting Village Justice for the Village of Tarrytown from 1985 to 1987. He is the Village Attorney for the Village of Irvington, N.Y. and the Village of Dobbs Ferry, N.Y. Mr. Plunkett is currently a member in the law firm of Plunkett & Jaffe, P.C., with offices in White Plains, New York City and Albany. He is a member of the Board of Trustees of Iona College, New Rochelle, New York. Paul R. Wheatley has served as a Director of the Company since its formation in 1995 and has been a Director of the Bank since 1989. Mr. Wheatley was President of Beck & Wheatley Inc., an insurance agency and real estate brokerage concern, from 1970 until his retirement in 1993. 7 10 COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE COMPANY The Board of Directors meets on a monthly basis and may have additional special meetings upon the request of the Chairman of the Board. The Company's Board of Directors met 17 times during the fiscal year ended March 31, 1997. No director attended fewer than 75% of the total number of Board meetings and committee meetings of which such director was a member. The Board of Directors of the Company has established the following committees: The Executive Committee consists of all members of the Board of Directors. The purpose of this committee is to monitor and manage the Company's interest rate risk against Board and regulatory standards and coordinate such interest rate risk management with the Company's operating plan. This committee, from time to time, also reviews regulatory issues and reports of regulatory examinations. This committee meets as requested by the Board of Directors. The Company did not call Executive Committee meetings solely for these specific functions during fiscal 1997 but instead dealt with these responsibilities at regular and special meetings of the Company's and the Bank's board of directors. The Compensation Committee consists of Messrs. Plunkett (Chairman), Logan and Wheatley. This committee establishes the compensation of the Chief Executive Officer, approves the compensation of other officers, and determines compensation and benefits to be paid to employees of the Bank. The committee meets yearly and as requested by the Board of Directors. The Compensation Committee of the Company met once in fiscal 1997. In addition, the Compensation Committee of the Bank, which committee consists of the same board members as the Company's Compensation Committee, met five times during fiscal 1997. The Examining and Audit Committee consists of Messrs. Logan (Chairman), Cooney and Wheatley. The Bank's Internal Auditor reports to this committee. The purpose of this committee is to provide assurance that the Company's internal controls are adequate and that financial disclosures made by management portray the Bank's financial condition and results of operations. The committee is responsible for the classification of assets and the establishment of adequate valuation allowances. The committee also maintains a liaison with the outside auditors and reviews the adequacy of internal controls. The committee meets at least annually or as called by the Committee Chairman. The Examining and Audit Committee met once in fiscal 1997. In addition, the Examining and Audit Committee of the Bank met twelve times during fiscal 1997. The Nominating Committee consists of Messrs. Cooney (Chairman), Byelick, Plunkett and Wheatley. The nominating committee nominates candidates for the election of directors. The committee meets as called by the Committee Chairman. This committee met once during fiscal 1997 and on April 28, 1997, to select the nominees for election as directors at the Annual Meeting. In accordance with the Company's Bylaws, no nominations for election as director, except those made by the Nominating Committee, shall be voted upon at the Annual Meeting unless properly made by a shareholder in accordance with the procedures set forth below under "Additional Information -- Notice of Business to be Conducted at Annual Meeting." COMPENSATION OF DIRECTORS Fee Arrangements. Currently, each outside director of the Company receives a fee of $500 per meeting attended. All committee members receive a fee of $200 for attendance at each committee meeting, with the exception of members of the Examining and Audit Committee. The Chairman and members of the Examining and Audit Committee receive a fee of $100 and $50, respectively, for each committee 8 11 meeting attended. When the Company's Board and the Bank's Board meet on the same day, only one meeting fee is paid to any director. In such a circumstance, the meeting fee is paid by the Bank. Directors' Retirement Plan. The Company has adopted a non-qualified Retirement Plan for Outside Directors of the Company and the Bank (the "Directors' Retirement Plan"), which will provide benefits to each eligible Outside Director commencing on his termination of Board service at or after age 65. Each Outside Director who served or agreed to serve as an Outside Director subsequent to the completion of the Conversion automatically became a participant in the Plan unless prior to, on or after such date, the Outside Director elected to participate in the Deferred Compensation Plan described below. In such case, the Outside Director will be deemed to have irrevocably waived his benefits under the Directors' Retirement Plan. An eligible Outside Director retiring at or after age 65 will be paid an annual retirement benefit equal to the amount of the aggregate compensation for services as a director (excluding stock compensation) paid to him for the 12-month period immediately prior to his termination of Board service, multiplied by a fraction, the numerator of which is the number of his years of service as an Outside Director (including service as a director or trustee of the Bank or any predecessor) and the denominator of which is 10. An individual who terminates Board service after having served as an Outside Director for 10 years may elect to begin collecting benefits under the Directors' Retirement Plan at or after attainment of age 50, but the annual retirement benefits payable to him will be reduced pursuant to the Plan's early retirement reduction formula to reflect the commencement of benefit payments prior to age 65. An Outside Director may elect to have his benefits distributed in any one of the following forms: (i) a single life annuity; (ii) a 50% or 100% joint and survivor annuity; or (iii) a single life annuity with a 5, 10, or 15 year guaranteed term. In the event an Outside Director dies prior to the commencement of benefit payments under the Directors' Retirement Plan, a 50% survivor annuity will automatically be paid to his surviving spouse. Deferred Compensation Plan for Directors. The Company has established a non-qualified Deferred Compensation Plan for directors of the Bank or the Company pursuant to which directors may defer all or part of the compensation received for their services to the Company or the Bank and its affiliated companies (including compensation paid to an officer-director for service as an officer). Any director who elects to participate in the Deferred Compensation Plan will be deemed to have irrevocably waived his benefits under the Directors' Retirement Plan. Compensation deferred is applied to either the purchase of investments (including shares of Common Stock of the Company) for the account of the director, in which case the amount of deferred benefits payable is based on the investment performance of the investments made, or the compensation deferred is used to purchase a life insurance policy, in which case the amount of deferred benefits payable is based on the value to the Bank of expected death benefit proceeds. Deferred benefits are paid in installments over a period of ten years beginning upon termination of service as a director. In the event a director dies prior to the complete distribution of his account in the Deferred Compensation Plan, the remainder will be paid in a single sum payment to his designated beneficiary. In the event of a change in control, the Plan requires full funding of any life insurance contracts previously purchased. The Bank has established a trust fund with an independent fiduciary (the "Trustee") for the purpose of accumulating funds to be used to satisfy its obligations under the Deferred Compensation Plan. The Trustee will vote any shares of Common Stock purchased for a participant's account in the Deferred Compensation Plan in accordance with the directions given by such participant. Outside Directors' Option Plan and Outside Directors' RRP. The Outside Director Option Plan and Outside Director RRP were adopted by the Board of Directors of the Company and subsequently approved by the Company's shareholders at the last annual meeting (the "1996 Annual Meeting.") In general, only non-employee directors of the Company and the Bank are eligible to participate and receive awards under these Plans. On the effective date of the Outside Director Option Plan, each Eligible Director was granted 9 12 a non-qualified stock option to purchase 8,100 shares of Common Stock. These options are scheduled to vest at the rate of 20% per year, over a five-year period and will become immediately exercisable upon a Director's death or disability. Pursuant to the proposed Amendment No. 2 to the Outside Director Option Plan, these options will also become immediately exercisable upon the "retirement" of an Eligible Director or a "change in control" of the Company, as such terms are defined in the Outside Director Option Plan. Similarly, on the effective date of the Outside Director RRP, restricted stock awards were granted to each Eligible Director with respect to 3,240 shares of Common Stock. These awards are also scheduled to vest in 20% increments over a five-year period, with accelerated vesting to occur in the event of the Director's death or disability. Pursuant to the proposed Amendment No. 2 to the Outside Director RRP, awards made under this Plan will also become automatically vested upon the "retirement" of the Eligible Director or a "change in control" of the Company as such terms are defined in the Plan. For complete descriptions of the Outside Director Option Plan and the Outside Director RRP and the proposed Amendments to these Plans, see "Proposal 3" and "Proposal 5." EXECUTIVE OFFICERS The following individuals are executive officers of the Company and hold the offices set forth below opposite their names. There are no executive officers of the Company who are not also directors. NAME POSITIONS HELD WITH THE COMPANY Stephen C. Byelick President and Chief Executive Officer Harry G. Murphy Vice President and Secretary The executive officers of the Company are elected annually and hold office until their respective successors have been elected and qualified or until death, resignation or removal by the Board of Directors. The Company has entered into an Employment Agreement with its executive officers which sets forth the terms of their employment. See "-- Employment Agreements." Since the formation of the Company, none of the executive officers or other employee personnel has received remuneration from the Company. 10 13 SUMMARY COMPENSATION TABLE The following table sets forth the cash compensation paid by the Company and the Bank for services rendered in all capacities during the fiscal year ended March 31, 1997 and for the two preceding fiscal years, to the Chief Executive Officer and the executive officers of the Company and the Bank whose annual salary and bonus for such fiscal year was in excess of $100,000 ("Named Executive Officers").
LONG TERM COMPENSATION ------------------------------------ ANNUAL COMPENSATION AWARDS PAYOUTS -------------------------------- -------------------------- ------- OPTIONS/ OTHER RESTRICTED STOCK ANNUAL STOCK APPRECIATION LTIP ALL OTHER NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS RIGHTS PAYOUTS COMPENSATION POSITIONS YEAR ($)(1) ($) ($)(2) ($) (3) ("SARs")(#)(4) ($) ($)(5) - ------------------ ---- ------ ----- ------------ ---------- -------------- ------- ------------ Stephen C. Byelick, 1997 $154,500 $17,290 -- $188,325 40,500 -- $42,674 President and 1996 $158,567 $18,083 -- -- -- -- $11,110 Chief Executive 1995 $144,300 $17,100 -- -- -- -- -- Officer Harry G. Murphy, 1997 $ 95,000 $12,220 -- $188,325 40,500 -- $30,656 Vice President 1996 $ 97,900 $12,530 -- -- -- -- $ 7,687 and Secretary 1995 $ 97,400 $11,700 -- -- -- -- --
- --------------------- (1) Includes compensation under the Deferred Compensation Plan for Directors and, for the period prior to the Company's stock conversion in 1996 and in 1995, fees earned as a director of the Bank. (2) For 1997, 1996 and 1995, there were no (a) perquisites over the lesser of $50,000 or 10% of the individual's total salary and bonus for the year; (b) payments of above-market preferential earnings on deferred compensation; (c) payments of earnings with respect to long-term incentive plans prior to settlement or maturation; (d) tax payment reimbursements; or (e) preferential discounts on stock. (3) Includes 16,200 shares granted to each of Mr. Byelick and Mr. Murphy pursuant to the Employee RRP approved by shareholders at the 1996 Annual Meeting. The value of the 16,200 share award as shown in the table above is based on a per share price of $11.625, the final quoted sales price of a share on the date of the award. Stock awards vest in five equal installments on the first, second, third, fourth and fifth anniversaries of the grant date, subject to earlier vesting upon termination of employment. In the case of termination of employment due to death or disability, all shares granted become immediately vested. At March 31, 1997, the aggregate value of Mr. Byelick's and Mr. Murphy's restricted share awards was $230,850, based on the final quoted sales price of $14.25 per share as of such date. (4) Includes 40,500 shares subject to options granted to each of Mr. Byelick and Mr. Murphy pursuant to the Employee Option Plan approved by shareholders at the 1996 Annual Meeting. At March 31, 1997, none of the options held by Mr. Byelick and Mr. Murphy under the Employee Option Plan to purchase shares of Common Stock at the exercise price of $11.625 per share were exercisable. On July 11, 1997, 8,100 of the options granted to Mr. Byelick and Mr. Murphy will first become exercisable. The options granted under the Employee Option Plan are intended to qualify as "incentive stock options" under Section 422 of the Internal Revenue Code of 1986, as amended ("Code") to the maximum extent possible and any options that do not so qualify will constitute non-qualified stock options. The Employee Option Plan provides for options to become exercisable in five equal installments on the first, second, third, fourth and fifth anniversaries of the grant date and to generally remain exercisable until the tenth anniversary of the grant date, subject to earlier expiration upon termination of employment. In the case of death or disability, all options granted become immediately exercisable. (5) Includes shares of Common Stock allocated to the accounts of Messrs. Byelick and Murphy, pursuant to the ESOP. Mr. Byelick was allocated 3,132 shares in fiscal 1997 and 880 shares in fiscal 1996. Mr. Murphy was allocated 2,250 shares in fiscal 1997 and 609 shares in fiscal 1996. The value of the shares were based on a price per share of $13.375 and $12.625 respectively, the final quoted sales price of the Common Stock on the Nasdaq Stock Market on December 31, 1996 and December 31, 1995, the dates of allocation. 11 14 REPORT OF COMPENSATION COMMITTEE The following Report of the Company's Compensation Committee is provided in accordance with the rules and regulations of the SEC. Pursuant to such rules and regulations, this Report shall not be deemed "soliciting material" filed with the SEC subject to Regulation 14A or 14C of the SEC or subject to the liabilities of Section 18 of the Exchange Act. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION Tappan Zee Financial, Inc. (the "Company") was formed in 1995 for the purpose of becoming the holding company for Tarrytowns Bank, FSB (the "Bank") in a stock conversion that took effect in October 1995. For the fiscal year ended March 31, 1997, substantially all of the business of the Company was conducted through the Bank. During such fiscal year, the Company's Chief Executive Officer and other executive officers also served as the Chief Executive Officer and executive officers, respectively, of the Bank and performed substantially all of their services in connection with the management and operation of the Bank. As a result, all compensation of the Chief Executive Officer and all other executive officers for such period was paid by the Bank and determined by the Board of Directors of the Bank on the recommendation of its Compensation Committee (the "Bank Compensation Committee"). The Board of Directors of the Bank accepted without modification all of the Bank Compensation Committee's recommendations on executive compensation for the fiscal year ended March 31, 1997. The composition of the Bank Compensation Committee is the same as that of the Company's Compensation Committee. It is the Company's policy to compensate its executive officers, either directly or through its affiliates, using a combination of cash compensation (consisting of base salary and discretionary cash bonuses) and fringe benefit plans. These elements are intended to provide an overall compensation package that is commensurate with the Company's financial resources, that is appropriate to assure the retention of experienced management personnel and to align their financial interests with those of the Company's shareholders, and that is responsive to the immediate and long-term needs of executive officers and their families. The compensation practices of other savings and community banks in the New York City metropolitan area are considered in establishing the overall level of compensation and the components of the compensation package; however, it has not been a goal or policy to set compensation at levels designed to achieve a predetermined percentile ranking among an identified group of peer institutions. For the fiscal year ended March 31, 1997, base salaries of all executive officers were set at levels determined, in the subjective judgment of the Bank Compensation Committee, to be commensurate with the executive officers' customary respective duties and responsibilities and to enable them to maintain appropriate standards of living within their communities. The Compensation Committee recognizes the significant additional efforts required of the Chief Executive Officer and other executive officers of the Bank and the Company in bringing about the Bank's successful stock conversion and the Company's initial public offering. It also recognizes that successfully managing and operating a public company entails additional ongoing duties and responsibilities for each executive officer. No additional cash compensation was awarded on this basis. It is the Compensation Committee's judgment that such compensation will take the form of stock-based compensation under the long-term stock benefit plans approved by the shareholders at the 1996 Annual Meeting. In this connection, during fiscal 1997, the Bank discontinued its prior practice of granting lump sum salary supplements during each fiscal year. The discontinuation of this practice resulted in a reduction in the regular base salaries of the Named Executed Officers. 12 15 After shareholder approval of the Company's stock-based incentive compensation plans at the 1996 Annual Meeting, certain recurring base salary adjustments were eliminated that decreased base salary amounts for executives by approximately 2.5% when compared to the prior year's levels. Discretionary bonuses for the fiscal year ended March 31, 1997 were determined, in the subjective judgment of the Bank Compensation Committee, with the intention of rewarding effort, performance and results at levels above and beyond those assumed in establishing base salary rates. Fringe benefit plans, consisting of a pension plan and group insurance coverage, are designed to provide for the health and welfare of the executives and their families and as well as for their long-term financial needs. In addition, all executive officers participated in the Company's ESOP for the calendar plan year ended December 31, 1996. Each executive officer has an individual account within the ESOP Trust which is invested primarily if not exclusively in employer securities, with the result that a portion of each executive officer's long-term retirement savings is tied to the performance of the Bank and the Company. The determination of the Chief Executive Officer's compensation for the fiscal year ended March 31, 1997 was based on the same general principles applied to other executive officers and resulted in a similar adjustment in base salary due to the implementation of the stock-based incentive compensation plans approved by the Company's shareholders at the 1996 Annual Meeting. COMPENSATION COMMITTEE OF TAPPAN ZEE FINANCIAL, INC. Kevin J. Plunkett, Chairman Gerald L. Logan, Member Paul R. Wheatley, Member COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION There are no other interlocks, as defined under the rules and regulations of the SEC, between the Compensation Committee and corporate affiliates of members of the Compensation Committee or otherwise. The Compensation Committee consists of Messrs. Plunkett (Chairman), Logan and Wheatley. 13 16 PERFORMANCE GRAPH Pursuant to the regulations of the SEC, the graph below compares the performance of the Company with that of the Center for Research for Securities Prices of the University of Chicago ("CRSP") Total Return Index for the Nasdaq Stock Market, United States and the CRSP Financial Stock Total Return Index for the Nasdaq Stock Market from October 5, 1995, the date of the Conversion, through March 31, 1997. On October 5, 1995, the Bank completed the Conversion and the Company offered 1,620,062 of shares of its Common Stock at a subscription price of $10.00 per share. Immediately thereafter, the Common Stock began trading on the Nasdaq Stock Market. The graph assumes the reinvestment of dividends in additional shares of the same class of equity securities as those listed below.
Performance Graph 10/05/95 10/31/95 12/31/95 3/31/96 06/30/96 09/30/96 12/31/96 03/31/97 - ----------------- -------- -------- -------- ------- -------- -------- -------- -------- Total Return Nasdaq Stock Market (U.S.)...... 99.830 99.427 101.220 105.948 114.792 119.356 122.992 111.231 Nasdaq Financial Stocks.... 100.164 100.443 107.279 111.610 114.082 123.297 128.171 128.532 Tappan Zee Financial, Inc. "Total Return"........... 100.000 120.000 126.250 120.500 121.000 126.500 138.250 145.000
THERE CAN BE NO ASSURANCE THAT STOCK PERFORMANCE WILL CONTINUE INTO THE FUTURE WITH THE SAME OR SIMILAR TRENDS TO THOSE DEPICTED IN THE GRAPH ABOVE. EMPLOYMENT AGREEMENTS The Company and the Bank have entered into employment agreements (collectively, the "Employment Agreements") with Messrs. Byelick and Murphy (the "Senior Executive(s)"). These Employment Agreements establish the respective duties and compensation of the Senior Executives and are intended to ensure that the Bank and the Company will be able to maintain a stable and competent management. The continued success of the Bank and the Company depends to a significant degree on the skills and competence of the Senior Executives. The Employment Agreements provide for three-year terms. The Bank's Employment Agreements provide that, commencing on the first anniversary date and continuing each anniversary date thereafter, 14 17 the Board of Directors may, with the Senior Executive's concurrence, extend its Employment Agreements for an additional year, so that the remaining terms shall be three years, after conducting a performance evaluation of the Senior Executive. The Company's Employment Agreements provide for automatic daily extensions such that the remaining terms of the Employment Agreements shall be three years unless written notice of non-renewal is given by the Board of Directors or the Senior Executive. The Employment Agreements provide that the Senior Executive's base salary will be reviewed annually. It is anticipated that this review will be performed by the Compensation Committee of the Board and the Senior Executive's base salary may be increased on the basis of his job performance and the overall performance of the Company and the Bank. As of May 31, 1997, the base salaries for Messrs. Byelick and Murphy are $159,000 and $98,000, respectively. In addition to base salaries, the Employment Agreements provide for, among other things, entitlement to participation in stock, retirement and welfare benefit plans and eligibility for fringe benefits applicable to executive personnel such as a company car and fees for club and organization memberships deemed appropriate by the Bank or Company and the Senior Executive. The Employment Agreements provide for termination by the Bank or the Company at any time for cause as defined in the Employment Agreements. In the event the Bank or the Company chooses to terminate the Senior Executive's employment for reasons other than for cause, or in the event of the Senior Executive's resignation from the Bank and the Company upon: (i) failure to re-appoint, elect or re-elect the Senior Executive to his current offices; (ii) a material adverse change in the Senior Executive's functions, duties or responsibilities; (iii) a relocation of the Senior Executive's principal place of employment outside Westchester County without the Senior Executive's consent; (iv) a liquidation or dissolution of the Bank or the Company; (v) a change of control (as defined in the Employment Agreements); or (vi) a breach of the Employment Agreement by the Bank or the Company, the Senior Executive or, in the event of death, his beneficiary would be entitled to a lump sum cash payment in an amount equal to the remaining base salary and bonus payments due to the Senior Executive and the additional contributions or benefits that would have been earned under any employee benefit plans of the Bank or the Company during the remaining terms of the Employment Agreements. The Bank and the Company would also continue the Senior Executive's life, health and disability insurance coverage for the remaining terms of the Employment Agreements. Payments to the Senior Executives under the Bank's Employment Agreements will be guaranteed by the Company in the event that payments or benefits are not paid by the Bank. To the extent that payments under the Company's Employment Agreements and the Bank's Employment Agreements are duplicative, payments due under the Company's Employment Agreements would be offset by amounts actually paid by the Bank. Senior Executives would be entitled to reimbursement of certain costs incurred in negotiating, interpreting or enforcing the Employment Agreements. Each Employment Agreement also provides for the Bank and the Company to indemnify the Senior Executive to the fullest extent allowable under federal and Delaware law, respectively. Cash and benefits paid to a Senior Executive under the Employment Agreements together with payments under other benefit plans following a "change in control" of the Bank or the Company may constitute an "excess parachute" payment under Section 280G of the Code, resulting in the imposition of a 20% excise tax on the recipient and the denial of the deduction for such excess amounts to the Company and the Bank. The Company's Employment Agreements each include a provision indemnifying each Senior Executive on an after-tax basis for any "golden parachute" excise taxes. BENEFITS Retirement Plan. The Bank has maintained a non-contributory, tax-qualified defined benefit pension plan (the "Retirement Plan") for eligible employees, since 1957. All employees at least age 21 who have completed at least one year of service are eligible to participate in the Retirement Plan. The 15 18 Retirement Plan provides for a benefit for each participant, including executive officers named in the Summary Compensation Table above, equal to 2% of the participant's average annual earnings (average W-2 compensation during the highest 36 consecutive months of the participant's final 120 months of employment) multiplied by the participant's years (and any fraction thereof) of eligible employment (up to a maximum of 30 years). A participant is fully vested in his or her benefit under the Retirement Plan after five years of service. The Retirement Plan is funded by the Bank on an actuarial basis. The Plan is administered by the Pension Committee of the Bank's Board of Directors and operates on a calendar year basis. The Bank has established a trust for the Retirement Plan ("Retirement Plan Trust") and has appointed an unrelated trustee ("Trustee") to administer the Trust. Up to 10% of the Retirement Plan's assets may be invested by the Trustee in shares of the Common Stock, in such amounts and upon such terms and conditions as the Pension Committee may determine to be in the best interests of the Plan participants and beneficiaries. These shares may be acquired through open market purchases, if permitted, or from authorized but unissued shares. To date, the Retirement Plan has purchased 4,775 shares of Common Stock. These shares are held unallocated to any participants in the Retirement Plan Trust. The Trustee, subject to its fiduciary duty, will vote the shares of Common Stock held in the Retirement Plan Trust in accordance with the directions given by the Pension Committee. The following table illustrates the annual benefit payable upon normal retirement at age 65 (in single life annuity amounts with no offset for Social Security benefits) at various levels of compensation and years of service:
YEARS OF SERVICE ---------------- Remuneration(1) 15 20 25 30 35(4) --------------- ------- ------- -------- -------- -------- $125,000 $37,500 $50,000 $ 62,500 $ 75,000 $ 75,000 150,000(2) 45,000 60,000 75,000 90,000 90,000 175,000(2) 52,500 70,000 87,500 105,000 105,000 200,000(2) 60,000 80,000 100,000 120,000(3) 120,000(3)
- --------------------- (1) The annual retirement benefits shown in the table do not reflect a deduction for Social Security benefits and there are no other offsets to benefits. The amounts shown in the table include salary and bonus as reported in the Summary Compensation Table but do not include additional benefits payable to Messrs. Byelick and Murphy under the Deferred Compensation Plan for Directors. See "Deferred Compensation Plan for Directors." (2) For 1996, the average final compensation for computing benefits under the Retirement Plan cannot exceed $150,000 (as adjusted for subsequent years pursuant to the Code). (3) Under current law, the maximum annual benefit payable under the Retirement Plan cannot exceed $120,000 (as adjusted for subsequent years pursuant to the Code). (4) The maximum years of service credited for benefit purposes is 30 years. The years of credited service and the average annual earnings (as defined above) determined as of December 31, 1996, the end of the 1996 plan year, for each of Stephen C. Byelick and Harry G. Murphy, the Named Executive Officers listed in the Summary Compensation Table, were 14.0 years and $148,243 and 13.5 years and $101,041, respectively. Employee Stock Ownership Plan and Trust. The Company has established, and the Bank has adopted, for the benefit of eligible employees, an ESOP and related trust which became effective upon the Conversion. All employees of the Bank or the Company are eligible to become participants in the ESOP. The ESOP purchased, with funds borrowed from the Company, eight percent (8%) of the Common Stock 16 19 (129,600 shares) issued in the Conversion. The Company or the Bank intends to make annual contributions to the ESOP in an aggregate amount at least equal to the principal and interest requirement on the debt. The term of the ESOP loan is 10 years, with an interest rate of 8% per annum. Shares purchased by the ESOP are initially pledged as collateral for the loan, and are held in a suspense account until released for allocation among participants in the ESOP when the loan is repaid. The pledged shares are released annually from the suspense account in an amount proportional to the repayment of the ESOP loan for each plan year. The released shares are allocated among the accounts of participants on the basis of the participant's compensation for the year of allocation. Benefits generally become vested at the rate of 20% per year with 100% vesting after five years of service. Participants also become immediately vested upon termination of employment due to death, retirement at age 65, permanent disability or upon the occurrence of a change in control. Forfeitures are reallocated among remaining participating employees, in the same proportion as contributions. Vested benefits may be paid in a single sum or installment payments and are payable upon death, retirement at age 65, disability or separation from service. In connection with the establishment of the ESOP, the ESOP Committee of the Company's Board of Directors was appointed to administer the ESOP. Marine Midland Bank has been appointed the corporate trustee for the ESOP. The ESOP Committee may instruct the trustee regarding investment of funds contributed to the ESOP. The ESOP Trustee, subject to its fiduciary duty, must vote all allocated shares held in the ESOP in accordance with the instructions of the participating employees. Under the ESOP, unallocated shares will be voted in a manner calculated to most accurately reflect the instructions it has received from participants regarding the allocated stock as long as such vote is in accordance with the provisions of ERISA. Employee Option Plan and Employee RRP. The Employee Option Plan and Employee RRP were adopted by the Board of Directors of the Company and approved by the shareholders of the Company at the 1996 Annual Meeting. The purpose of the Plans is to promote the growth of the Company and its affiliates by linking the incentive compensation of officers and key executives with the profitability of the Company. Options are granted to eligible officers and executives in such amounts and on such terms as may be determined by the Committee appointed to administer the Employee Option Plan. Restricted stock awards are awarded under the Employee RRP on a discretionary basis to eligible officers and executives. Option grants and restricted stock awards generally vest at the rate of 20% per year over a five-year period, with accelerated vesting to occur upon the grantee's death or disability. Under proposed Amendments No. 2 to the Employee Option Plan and Employee RRP, vesting will also be accelerated upon the "retirement" of an option holder or award recipient or upon the "change in control" of the Company, as such terms are defined in the Plans. For complete descriptions of the Employee Option Plan and the Employee RRP and the proposed Amendments to these Plans, see "Proposal 2" and "Proposal 4." 17 20 The following table summarizes the grants that were made to the Named Executive Officers during fiscal 1997. OPTION / SAR GRANTS IN FISCAL YEAR 1997
INDIVIDUAL GRANTS -------------------------------------------------------------- POTENTIAL REALIZABLE PERCENT OF VALUE AT ASSUMED TOTAL ANNUAL RATE OF NUMBER OF OPTIONS/ STOCK PRICE SECURITIES SARs APPRECIATION FOR UNDERLYING GRANTED TO OPTION TERM OPTIONS/SARs EMPLOYEES IN EXERCISE OR GRANTED FISCAL YEAR BASE PRICE EXPIRATION 5% 10% NAME (#) (%) ($ PER SHARE) DATE ($) ($) - ------------------------- ------------- ------------ ------------- ---------- ------- -------- STEPHEN C. BYELICK, 40,500 50% $11.625 7/9/2006 296,091 750,354 PRESIDENT AND CHIEF EXECUTIVE OFFICER HARRY G. MURPHY, 40,500 50% $11.625 7/9/2006 296,091 750,354 VICE PRESIDENT AND SECRETARY
- --------------------- (1) All options granted are qualified options which become exercisable in five equal installments on the first, second, third, fourth, and fifth anniversaries of the grant date and generally remain exercisable until the tenth anniversary of the grant date, subject to earlier expiration upon termination of employment. In the case of death or disability, all Options granted become immediately exercisable. If Amendment No. 2 to the Employee Option Plan is approved by shareholders, these options will also become immediately exercisable upon an option holder's "retirement" or a "Change in Control" of the Company, as such terms are defined in the Employee Option Plan. See "-- Employee Option Plan." The following table provides certain information with respect to the number of shares of Common Stock acquired through the exercise of, or represented by outstanding, stock options held by the Named Executive Officers on March 31, 1997. Also reported is the value for "in-the-money" options, which represent the positive spread between the exercise price of any such existing stock options and the fiscal year-end Common Stock price of $14.25 per share.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARs AT FISCAL OPTIONS/SARs AT FISCAL YEAR-END (1) (2) YEAR-END # ($) NAME EXERCISABLE / UNEXERCISABLE EXERCISABLE / UNEXERCISABLE - ------------------------- --------------------------- --------------------------- Stephen C. Byelick, -- / 40,500 -- / 106,313 President and Chief Executive Officer Harry G. Murphy, -- / 40,500 -- / 106,313 Vice President and Secretary
- --------------------- (1) None of the Named Executive Officers exercised options during the fiscal year ended March 31, 1997. (2) None of the outstanding stock options held by the Named Executive Officers were exercisable as of March 31, 1997. 18 21 TRANSACTIONS WITH CERTAIN RELATED PERSONS The Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended, ("FIRREA") requires that all loans or extensions of credit to executive officers and directors must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with the general public and must not involve more than the normal risk of repayment or present other unfavorable features. It is the policy of the Bank not to make loans to executive officers and directors. As of the Record Date, none of the Bank's directors and executive officers had loans outstanding to the Bank. The Bank, however, may make loans or extend credit to certain persons related to executive officers and directors. All such loans were made by the Bank in the ordinary course of business and were not made with more favorable terms or involved more than the normal risk of collectible or presented unfavorable features. The Bank intends that any transactions in the future between the Bank and its executive officers, directors, holders of 10% or more of the shares of any class of its common stock and affiliates thereof, will contain terms no less favorable to the Bank than could have been obtained by it in arm's-length negotiations with unaffiliated persons and will be approved by a majority of independent outside directors of the Bank not having any interest in the transaction. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's executive officers and directors, and persons who own more than 10% of the Company's common stock to file with the SEC reports of ownership and changes of ownership. Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Other than the annual statements of changes in beneficial ownership of securities on Form 5 for each officer and director, which were accurate in all respects but filed on May 16, 1997, based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons, the Company believes that all filing requirements applicable to its executive officers, directors and greater than 10% beneficial owners were complied with. ------------------------------------------------- PROPOSAL 2 APPROVAL OF AMENDMENT NO. 2 TO THE TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN FOR OFFICERS AND EMPLOYEES ------------------------------------------------- GENERAL PLAN INFORMATION The Company's Board of Directors adopted the Tappan Zee Financial, Inc. 1996 Stock Option Plan For Officers and Employees ("Employee Option Plan") on March 25, 1996, subject to approval by the shareholders, and the shareholders approved the Plan on July 10, 1996 ("Effective Date"). Pursuant to regulations of the Office of the Thrift Supervision (the "OTS") applicable to stock option plans established or implemented within one year following the completion of a mutual-to-stock conversion, the Employee Option Plan contained certain restrictions and limitations, including among others: provisions requiring the vesting of options granted to occur no more rapidly than ratably over a five year period; and the resultant prohibition against accelerated vesting of option grants upon retirement of the optionee or the 19 22 occurrence of a Change in Control (as defined in the Employee Option Plan) of the Company. In addition, OTS ruling positions may restrict the Company's ability to implement anti-dilutive provisions contained in the Employee Option Plan that would apply in the event that an extraordinary dividend, including a non-taxable return of capital, is to be paid to shareholders. OTS ruling positions permit the elimination of the provisions of the Employee Option Plan which reflect the restrictions and limitations described above, provided that shareholder approval therefor is obtained more than one year following the completion of the mutual-to-stock conversion. The Board of Directors has adopted amendments to the Employee Option Plan, subject to approval by shareholders of the Company, for the purpose of eliminating such restrictions and limitations (these changes to the Employee Option Plan are collectively referred to herein as "Amendment No. 2"). Amendment No. 2 does not increase the number of shares reserved for issuance under the Plan, decrease the price per share at which Options may be granted under the Plan or alter the classes of individuals eligible to participate in the Plan. In the event that Amendment No. 2 is not approved by shareholders at the Annual Meeting, Amendment No. 2 will not take effect, but the Employee Option Plan will remain in effect. The principal provisions of the Employee Option Plan, as it would be amended by Amendment No. 2, are described below. The full text of the Amendment No. 2 is set forth as Appendix A to this Proxy Statement, to which reference is made, and the summary of Amendment No. 2 provided below is qualified in its entirety by such reference. PURPOSE OF THE EMPLOYEE OPTION PLAN The purpose of the Employee Option Plan is to promote the growth and profitability of the Company, to provide certain key officers and employees of the Company and its affiliates with an incentive to achieve corporate objectives, to attract and retain individuals of outstanding competence and to provide such individuals with an equity interest in the Company. The Employee Option Plan provides for the grant of options to purchase common stock of the Company ("Options") to certain officers and employees of the Company. DESCRIPTION OF THE EMPLOYEE OPTION PLAN Administration. A Committee consisting of members of the Compensation Committee of the Board (or any successor committee) or such other committee as the Board may designate ("Committee") administers the Employee Option Plan. Such Committee is comprised of at least two directors of the Company, and all directors on the Committee are "disinterested directors" (as that term is defined under Section 162(m) of the Code) who are not currently and have not at any time during the immediately preceding one-year period been an employee of the Company, the Bank or any affiliate. The Committee will determine, within the limitations of the Employee Option Plan, the officers and employees to whom Options will be granted, the number of shares subject to each Option, the terms of such Options (including provisions regarding exercisability and acceleration of exercisability) and the procedures by which the Options may be exercised. Subject to certain specific limitations and restrictions set forth in the Employee Option Plan, the Committee has full and final authority to interpret the Employee Option Plan, to prescribe, amend and rescind rules and regulations, if any, relating to the Employee Option Plan and to make all determinations necessary or advisable for the administration of the Employee Option Plan. The costs and expenses of administering the Employee Option Plan will be borne by the Company. Stock Subject to the Employee Option Plan. The Company has reserved 113,400 shares of the Common Stock (the "Shares") for issuance upon exercise of Options. Such Shares may be authorized and unissued shares or shares previously issued and reacquired by the Company. Any Shares subject to grants under the Employee Option Plan which expire or are terminated, forfeited or canceled without having been 20 23 exercised or vested in full, shall again be available for purposes of the Employee Option Plan. As of May 31, 1997, the aggregate fair market value of the Shares reserved for issuance was $1,956,150, based on the closing sales price per share of Common Stock of $17.25 on The Nasdaq Stock Market as of such date. Eligibility. Any employee of the Company (or a participating affiliate) who is selected by the Committee is eligible to participate in the Employee Option Plan as an "Eligible Individual." As of May 31, 1997, there were two Eligible Individuals. Members of the Board or of the board of directors of the Bank who are not employees or officers of the Company or Bank are not eligible to participate in the Plan. Terms and Conditions of Options Granted to Officers and Employees. The Employee Option Plan provides for the grant of Options which qualify for favorable federal income tax treatment as "incentive stock options" ("ISOs") and non-qualified stock options which do not so qualify ("NQSOs"). Unless otherwise designated by the Committee, Options granted under the Employee Option Plan will be ISOs, that will be exercisable at a price per Share equal to the fair market value of a Share on the date of the Option grant. In general, ISOs will be exercisable for a period of ten years after the date of grant, (or for a shorter period ending three months after the option holder's termination of employment for reasons other than death, disability or retirement or discharge for cause); one year after termination of employment due to death, disability or retirement; or immediately upon termination for cause. In no event may an Option be granted with an exercise price per Share that is less than the fair market value of a Share when the Option is granted, or for a term exceeding ten years from the date of grant. Upon the exercise of an Option, the Exercise Price must be paid in full. Payment may be made in cash or in such other consideration as the Committee deems appropriate, including, but not limited to, Shares already owned by the option holder or Shares to be acquired by the option holder upon exercise of the Option, provided that the delivery of Shares concurrently with the exercise of an Option does not violate Section 16(b) of the Exchange Act, or any rules or regulations promulgated thereunder. Currently, the Employee Option Plan requires that Options granted to Eligible Individuals become exercisable no more rapidly than ratably over a five-year period (with acceleration only upon death or disability) and would prohibit the accelerated vesting of Options upon retirement or a Change in Control (as such terms are defined in the Plan). As permitted by OTS ruling positions, Amendment No. 2 would eliminate these requirements, both with respect to outstanding Options and any Options that may be granted in the future. Pursuant to the Employee Option Plan, as amended by Amendment No. 2, upon a Change in Control or retirement of an Eligible Individual, all Options granted to such Individual that are outstanding as of the date of such Individual's retirement or a Change in Control will automatically become fully vested and exercisable. The amended Employee Option Plan also permits the Committee to establish a vesting schedule that is either more or less favorable than the five year vesting schedule to be applicable to an Option granted to an Eligible Individual under the Plan. Adjustments for Extraordinary Dividends. Under OTS ruling positions applicable to stock benefit plans established or implemented within one year after a mutual-to-stock conversion, any adjustment in the exercise price of outstanding Options to reflect the payment of any extraordinary dividend requires the prior approval of the OTS, and the OTS will not permit a cash payment in lieu of a price adjustment, unless plan provisions authorizing these actions are approved by shareholders at least one year after the mutual-to-stock conversion. Under applicable tax regulations, the adjustment of the exercise price of outstanding Options granted to certain executive officers of the Company may, in certain circumstances, cause the Company to lose the federal income tax deduction that would otherwise be available to it upon exercise of the Option. However, the making of a cash payment would not affect the availability of the deduction. Accordingly, the Employee Option Plan has been amended to permit the Committee, on a case-by-case, to authorize either a price adjustment or a cash payment to an option holder to reflect the payment of an extraordinary 21 24 dividend. This provision provides the Committee with necessary flexibility to maximize the tax benefits available to the Company with respect to the Employee Option Plan. TERMINATION OR AMENDMENT OF THE EMPLOYEE OPTION PLAN Unless sooner terminated, the Employee Option Plan will terminate automatically on the day preceding the tenth anniversary of the Effective Date of the Plan. The Board may suspend or terminate the Employee Option Plan in whole or in part at any time prior to the tenth anniversary of the Effective Date by giving written notice of such suspension or termination to the Committee. In the event of any suspension or termination of the Employee Option Plan, all Options theretofore granted under the Employee Option Plan that are outstanding on the date of such suspension or termination of the Employee Option Plan will remain outstanding under the terms of the agreements granting such Options. The Board may amend or revise the Employee Option Plan in whole or in part at any time, but if the amendment or revision (i) materially increases the benefits accruing under the Employee Option Plan, (ii) materially increases the number of Shares which may be issued under the Employee Option Plan or (iii) materially modifies the requirements as to eligibility for Options under the Employee Option Plan, such amendment or revision will be subject to approval by the shareholders of the Company. Subject to the above provisions, the Board will also have broad authority to amend the Employee Option Plan to take into account changes in applicable financial institution, securities and tax laws and accounting standards, as well as other developments. FEDERAL INCOME TAX CONSEQUENCES The following discussion is intended only as a summary and does not purport to be a comprehensive description of the federal tax laws, regulations and policies affecting the Company and recipients of ISOs and NQSOs that may be granted under the Employee Option Plan and any descriptions of the provisions of any law, regulation or policy. Any change in applicable law or regulation or in the policies of various taxing authorities may have a material effect on the discussion contained herein. There are no federal income tax consequences for the Company or the option holder at the time an ISO is granted or for the Company upon the exercise of an ISO. Upon the exercise of an ISO, the option holder does not recognize income for tax purposes but the difference between the fair market value of the Shares acquired upon exercise and the exercise price is an item of tax preference that may affect the option holder's liability for alternative minimum tax. If there is no sale or other disposition of the Shares acquired upon the exercise of an ISO within two years after the date the ISO was granted, or within one year after the exercise of the ISO, then at no time will any amount be deductible by the Company with respect to the ISO. If the option holder exercises an ISO and sells or otherwise disposes of the Shares so acquired after satisfying the foregoing holding period requirements, then he will realize a capital gain or loss on the sale or disposition. If the option holder exercises his ISO and sells or disposes of his Shares prior to satisfying the foregoing holding period requirements, then an amount equal to the difference between the amount realized upon the sale or other disposition of such Shares and the price paid for such Shares upon the exercise of the ISO will be includible in the ordinary income of such person, and such amount will ordinarily be deductible by the Company at the time it is includible in such person's income. With respect to the grant of NQSOs, there are no federal income tax consequences for the Company or the option holder at the date of the grant. Upon the exercise of a NQSO, an amount equal to the difference between the fair market value of the Shares to be purchased on the date of exercise and the aggregate purchase price of such Shares is generally includible in the ordinary income of the person exercising such NQSO, although such inclusion may be at a later date in the case of an option holder whose 22 25 disposition of such Shares could result in liability under Section 16(b) of the Exchange Act. The Company will ordinarily be entitled to a deduction for federal income tax purposes at the time the option holder is taxed on the exercise of the NQSO equal to the amount which the option holder is required to include as ordinary income. The foregoing statements are intended to summarize the general principles of current federal income tax law applicable to Options that may be granted under the Employee Option Plan. State and local tax consequences may also be significant. PARTICIPANTS ARE ADVISED TO CONSULT WITH THEIR TAX ADVISOR AS TO THE TAX CONSEQUENCES OF THE EMPLOYEE OPTION PLAN. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF AMENDMENT NO. 2 TO THE TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN FOR OFFICERS AND EMPLOYEES. ------------------------------------------------- PROPOSAL 3 APPROVAL OF AMENDMENT NO. 2 TO THE TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS ------------------------------------------------- GENERAL PLAN INFORMATION The Company's Board of Directors adopted the Tappan Zee Financial, Inc. 1996 Stock Option Plan For Outside Directors ("Outside Director Option Plan") on March 25, 1996, subject to approval by the shareholders, and the shareholders approved the Plan on July 10, 1996 ("Effective Date"). Pursuant to regulations of the OTS applicable to stock option plans established or implemented within one year following the completion of a mutual-to-stock conversion, the Outside Director Option Plan contained certain restrictions and limitations, including among others: provisions requiring the vesting of options granted to occur no more rapidly than ratably over a five year period; and the resultant prohibition against accelerated vesting of option grants upon retirement of the optionee or the occurrence of a Change in Control (as defined in the Outside Director Option Plan) of the Company. In addition, OTS ruling positions may restrict the Company's ability to implement anti-dilutive provisions contained in the Outside Director Option Plan that would apply in the event that an extraordinary dividend, including a non-taxable return of capital, were to be paid to shareholders. OTS ruling positions permit the elimination of the provisions of the Outside Director Option Plan which reflect the restrictions and limitations described above, provided that shareholder approval therefor is obtained more than one year following the completion of the mutual-to-stock conversion. The Board of Directors has adopted amendments to the Outside Director Option Plan, subject to approval by shareholders of the Company, for the purpose of eliminating such restrictions and limitations (these changes to the Outside Director Option Plan are collectively referred to herein as "Amendment No. 2"). Amendment No. 2 does not increase the number of Shares reserved for issuance under the Plan, decrease the price per Share at which Options may be granted under the Outside Director Option Plan or alter the classes of individuals eligible to participate in the Outside Director Option Plan. In the event that Amendment No. 2 is not approved by shareholders at the Annual Meeting, Amendment No. 2 will not take effect, but the Outside 23 26 Director Option Plan will remain in effect. The principal provisions of the Outside Director Option Plan, as it would be amended by Amendment No. 2, are described below. The full text of the Amendment No. 2 is set forth as Appendix B to this Proxy Statement, to which reference is made, and the summary of Amendment No. 2 provided below is qualified in its entirety by such reference. PURPOSE OF THE OUTSIDE DIRECTOR OPTION PLAN The purpose of the Outside Director Option Plan is to advance the interests of the Company and its shareholders by providing outside directors of the Company and its affiliates with an incentive to achieve corporate objectives and by attracting and retaining individuals of outstanding competence through the award of equity interests in the Company. DESCRIPTION OF THE OUTSIDE DIRECTOR OPTION PLAN Administration. A Committee consisting of members of the Compensation Committee of the Board (or any successor committee) or such other committee as the Board may designate ("Committee") administers the Outside Director Option Plan. All stock options ("Options") granted under the Outside Director Option Plan are determined by automatic formula grant, thus the Committee has no discretion over such grants. However, subject to certain limitations and restrictions set forth in the Outside Director Option Plan, the Committee has the authority to interpret the Plan, to prescribe, amend and rescind rules and regulations, if any relating to the Plan and to make all determinations necessary or advisable for the administration of the Option Plan. The costs and expenses of the Outside Director Option Plan are paid for by the Company and are not charged to the grant of any Option or to a director participating in the Plan. Stock Subject to the Outside Director Option Plan. The Company has reserved 48,600 Shares for issuance upon exercise of Options. Such Shares may be authorized and unissued shares or shares previously issued and reacquired by the Company. Any Shares subject to grants under the Outside Director Option Plan which expire or are terminated, forfeited or canceled without having been exercised or vested in full, shall again be available for purposes of the Outside Director Option Plan. As of May 31, 1997, the aggregate fair market value of the Shares reserved for issuance was $838,350, based on the closing sales price per share of Common Stock of $17.25 on the Nasdaq Stock Market as of such date. Eligibility. Members of the Board, or of the board of directors of the Bank, who are not employees of the Company or the Bank are eligible to participate in the Outside Director Option Plan as an "Eligible Director." As of May 31, 1997, there were five Eligible Directors participating in the Plan. Terms and Conditions of Options Granted to Outside Directors. On the effective date of the Outside Director Option Plan, each Eligible Director was granted a NQSO to purchase 8,100 Shares. These Options have an exercise price of $11.625 which equals the fair market value of a Share on the date the Options were granted. On the first anniversary of the grant date and continuing for each consecutive anniversary date occurring thereafter, each of the outstanding Options will become exercisable for 20% of the total number of Shares subject to the Option. All optioned Shares not previously purchased or available for purchase will become available for purchase, on the date of the optionee's death, disability, retirement or a Change in Control. The Outside Director Option Plan also provides for each newly elected Eligible Director to receive an Option to purchase 500 Shares upon joining the Board plus an additional 500 Shares each January thereafter, subject to the availability of the reserved Shares. All Options granted under the Outside Director Option Plan will be NQSOs. The Outside Director Option Plan requires the purchase price to be paid in full upon exercise of the Option. Payment may be made in cash or in such other consideration as the Committee deemed appropriate, including but not limited 24 27 to, Shares already owned by the optionee or Shares to be acquired by the optionee upon the exercise of the Options, provided that the delivery of such Shares will not violate Section 16(b) of the Exchange Act or any rules or regulations promulgated thereunder. Currently, the Outside Director Option Plan requires that Options granted to Eligible Directors become exercisable no more rapidly than ratably over a five-year period (with accelerated vesting triggered only upon a Director's death or disability) and would prohibit the accelerated vesting of Options upon retirement or a Change in Control (as such terms are defined in the Plan). As permitted by OTS ruling positions, Amendment No. 2 would eliminate these requirements, both with respect to outstanding Options and any Options that may be granted in the future. Pursuant to the Outside Director Option Plan, as amended by Amendment No. 2, upon a Change in Control or retirement of an Eligible Director, all Options granted to such Director that are outstanding as of the date of such Director's retirement or a Change in Control will automatically become fully vested and exercisable. Adjustments for Extraordinary Dividends. Under OTS ruling positions applicable to stock benefit plans established or implemented within one year after a mutual-to-stock conversion, any adjustment in the exercise price of outstanding options to reflect the payment of any extraordinary dividend requires the prior approval of the OTS, and the OTS will not permit a cash payment in lieu of a price adjustment, unless plan provisions authorizing these actions are approved by shareholders at least one year after the mutual-to-stock conversion. Accordingly, the Outside Director Option Plan has been amended to permit the Committee, on a case-by-case, to authorize either a price adjustment or a cash payment to an option holder to reflect the payment of an extraordinary dividend. TERMINATION OR AMENDMENT OF THE OUTSIDE DIRECTOR OPTION PLAN Unless sooner terminated, the Outside Director Option Plan will terminate automatically on the day preceding the tenth anniversary of the Effective Date of the Plan. The Board may suspend or terminate the Outside Director Option Plan in whole or in part at any time prior to the tenth anniversary of the Effective Date by giving written notice of such suspension or termination to the Committee. In the event of any suspension or termination of the Outside Director Option Plan, all Options theretofore granted that are outstanding on the date of such suspension or termination of the Plan will remain outstanding under the terms of the agreements granting such Options. The Board may amend or revise the Outside Director Option Plan in whole or in part at any time, but if the amendment or revision (i) materially increases the benefits accruing under the Outside Director Option Plan, (ii) materially increases the number of Shares which may be issued under the Outside Director Option Plan or (iii) materially modifies the requirements as to eligibility for Options under the Outside Director Option Plan, such amendment or revision will be subject to approval by the shareholders of the Company. Subject to the above provisions, the Board will also have broad authority to amend the Outside Director Option Plan to take into account changes in applicable financial institution, securities and tax laws and accounting standards, as well as other developments. FEDERAL INCOME TAX CONSEQUENCES The following discussion is intended only as a summary and does not purport to be a comprehensive description of the federal tax laws, regulations and policies affecting the Company and recipients of NQSOs granted under the Outside Director Option Plan and any descriptions of the provisions of any law, regulation or policy. Any change in applicable law or regulation or in the policies of various taxing authorities may have a material effect on the discussion contained herein. 25 28 There are no federal income tax consequences for the Company or the option holder at the date of the grant of NQSOs. Upon the exercise of a NQSO, an amount equal to the difference between the fair market value of the Shares to be purchased on the date of exercise and the aggregate purchase price of such Shares is generally includible in the ordinary income of the person exercising such NQSO, although such inclusion may be at a later date in the case of an option holder whose disposition of such Shares could result in liability under Section 16(b) of the Exchange Act. The Company will ordinarily be entitled to a deduction for federal income tax purposes at the time the option holder is taxed on the exercise of the NQSO equal to the amount which the option holder is required to include as ordinary income. The foregoing statements are intended to summarize the general principles of current federal income tax law applicable to Options granted under the Outside Director Option Plan. State and local tax consequences may also be significant. PARTICIPANTS ARE ADVISED TO CONSULT WITH THEIR TAX ADVISOR AS TO THE TAX CONSEQUENCES OF THE OUTSIDE DIRECTOR OPTION PLAN. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF AMENDMENT NO. 2 TO THE TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS. ----------------------------------- PROPOSAL 4 APPROVAL OF AMENDMENT NO. 2 TO THE TAPPAN ZEE FINANCIAL, INC. 1996 RECOGNITION AND RETENTION PLAN FOR OFFICERS AND EMPLOYEES ----------------------------------- GENERAL PLAN INFORMATION The Company's Board of Directors adopted the Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for Officers and Employees ("Employee RRP" or "Plan") on March 25, 1996, subject to approval by the shareholders, and the shareholders approved the Plan on July 10, 1996 ("Effective Date"). Pursuant to regulations of the OTS applicable to stock benefit plans established or implemented within one year following the completion of a mutual-to-stock conversion, the Employee RRP contained certain restrictions and limitations, including among others: provisions requiring the vesting of restricted stock awards to occur no more rapidly than ratably over a five year period; the resultant prohibition against accelerated vesting of restricted stock awards upon retirement of the award recipient or the occurrence of a Change of Control (as defined in the Employee RRP) of the Company; and a prohibition against the distribution of cash dividends to a participant prior to the vesting of the underlying stock award. OTS ruling positions permit the elimination of the provisions of the Employee RRP which reflect the restrictions and limitations described above, provided that shareholder approval therefor is obtained more than one year following the completion of the mutual-to-stock conversion. The Board of Directors has adopted amendments to the Employee RRP, subject to approval by shareholders of the Company, for the purpose of eliminating such restrictions and limitations (these changes to the Employee RRP are collectively referred to herein as "Amendment No. 2"). Amendment No. 2 does not increase the number of shares available for distribution under the Plan, change the Plan's eligibility requirements, or alter the 26 29 types of restricted stock awards that may be made to participants in the Employee RRP. In the event that Amendment No. 2 is not approved by shareholders at the Annual Meeting, Amendment No. 2 will not take effect, but the Employee RRP will remain in effect. The principal provisions of the Employee RRP, as it would be amended by Amendment No. 2, are described below. The full text of the Amendment No. 2 is set forth as Appendix C to this Proxy Statement, to which reference is made, and the summary of Amendment No. 2 provided below is qualified in its entirety by such reference. PURPOSE OF THE EMPLOYEE RRP The purpose of the Employee RRP is to advance the interest of the Company and its shareholders by providing current officers and employees of the Company and its affiliates with an incentive to achieve corporate objectives and by attracting and retaining officers and employees of outstanding competence through the award of equity interests in the Company. DESCRIPTION OF THE EMPLOYEE RRP Administration. A Committee comprised of at least three directors of the Company, all qualifying as "disinterested directors" (as that term is defined under Section 16(b) of the Exchange Act and the rules and regulations promulgated thereunder), who are not currently and have not at any time during the immediately preceding one-year period been an employee of the Company, the Bank or any affiliates administers the Employee RRP. The Committee determines, subject to the terms and conditions of the Employee RRP, described below, the officers and employees to whom restricted stock awards ("Awards") will be granted, the number of Shares subject to Awards, and all other terms of such Awards. Subject to certain specific limitations and restrictions set forth in the Employee RRP, the Committee has full and final authority to interpret the Employee RRP, to prescribe, amend and rescind rules and regulations, if any, relating to the Employee RRP and to make all determinations necessary or advisable for the administration of the Employee RRP. The costs and expenses of administering the Employee RRP will be borne by the Company and are not charged to any grant of an Award nor to any participating officer or employee. Stock Subject to the Employee RRP. The Company has established a trust ("Trust") to which it contributes, from time to time, amounts of money or property determined by the Board, in its discretion. Contributions by participants are not permitted. The trustee will generally invest the assets of the Trust in Shares and in such other investments including savings accounts, time or other interest bearing deposits in or other interest bearing obligations of the Company, in such proportions as shall be determined by the Committee. However, in no event shall the assets of the Trust be used to purchase more than 45,360 Shares. As of May 31, 1997, the aggregate fair market value of the Shares authorized for the Employee RRP was $782,460, based on the closing sales prices per share of $17.25 on the Nasdaq Stock Market as of such date. Eligibility. Any employee of the Company (or a participating affiliate) who is selected by the Committee is eligible to participate in the Employee RRP as an "Eligible Individual." As of May 31, 1997, there were two Eligible Individuals participating in the Employee RRP. Terms and Conditions of Awards. The Committee may, in its discretion, grant Awards of restricted stock to Eligible Individuals. The Committee will determine at the time of the grant the number of Shares subject to an Award and the vesting schedule applicable to the Award and may, in its discretion, establish other terms and conditions applicable to the Award. Pursuant to the terms of the Employee RRP, Shares subject to Awards are held in the RRP Trust until vested. An individual to whom an Award is granted will be entitled to exercise voting rights. The Committee will exercise voting rights with respect to Shares in the Employee RRP Trust that have not been allocated as directed by the individuals eligible to participate 27 30 in the Employee RRP, whether or not such individuals have been granted as Award. Shares covered by an Award will become vested in accordance with the terms of the Award and, as soon as practicable following such vesting, the trustee will transfer the Shares to the Award recipient. Currently the Employee RRP provides that unless the Committee determines to impose a less favorable vesting schedule, Shares covered by an Award will vest at the rate of 20% each year, with full vesting to occur after five years or upon the disability or death of the option holder. In addition, the Employee RRP currently provides for dividends declared and paid with respect to Shares subject to an outstanding Award to be retained in the RRP Trust until the Shares underlying the Award have vested. As permitted by OTS ruling positions, these restrictions on vesting and distribution of dividends may be removed through shareholder approval of Amendment No. 2 to the Employee RRP. Accordingly, pursuant to the Employee RRP, as amended by Amendment No. 2, all Shares covered by an outstanding Award will become 100% vested upon the death, disability or retirement of an Award recipient or a Change of Control of the Company. The amended Employee RRP also permits the Committee to establish a vesting schedule that is either more or less favorable than the five year vesting schedule to be applicable to an Award made to an Eligible Individual under the Plan. In addition, pursuant to the Employee RRP, as amended, the Committee may distribute cash payments representing dividends declared and paid on Shares, whether or not vested, covered by an Award held by a recipient under the Employee RRP. TERMINATION OR AMENDMENT OF THE EMPLOYEE RRP The Board may suspend or terminate the Employee RRP in whole or in part at any time prior to the tenth anniversary of the Effective Date of the Employee RRP, by giving written notice of such suspension or termination to the Committee, but the Employee RRP may not be terminated while there are outstanding Awards that may thereafter become vested. Upon the termination of the Employee RRP, the trustee shall make distributions from the Trust in such amounts and to such persons as the Committee may direct and shall return the remaining assets of the Trust, if any, to the Company. The Board may amend or revise the Employee RRP in whole or in part at any time, but if the amendment or revision (i) materially increases the benefits accruing under the Employee RRP, (ii) materially increases the number of Shares which may be issued under the Employee RRP or (iii) materially modifies the requirements as to eligibility for Awards under the Employee RRP, such amendment or revision will be subject to approval by the shareholders of the Company. Subject to the above provisions, the Board will also have broad authority to amend the Employee RRP to take into account changes in applicable securities and tax laws and accounting rules, as well as other developments. FEDERAL INCOME TAX CONSEQUENCES The following discussion is intended only as a summary and does not purport to be a comprehensive description of the federal tax laws, regulations and policies affecting the company and recipients of Awards that may be granted under the Employee RRP. Any descriptions of the provisions of any law, regulation or policy contained herein are qualified in their entirety by reference to the particular law, regulation or policy. Any change in applicable law or regulation or in the policies of various taxing authorities may have a material effect on the discussion contained herein. The Employee RRP does not constitute a qualified plan under Section 401(a) of the Code. The grant of an Award of Shares under the Employee RRP does not result in federal income tax consequences to either the Company or the Award recipient. Upon the vesting of an Award and distribution of the vested Shares, the Award recipient will generally be required to include in ordinary income, for the taxable year in which the vesting date occurs, an amount equal to the fair market value of the Shares on the 28 31 vesting date, and the Company will generally be allowed to claim a deduction, for compensation expense, in a like amount. To the extent that dividends are paid with respect to unvested Shares held under the Employee RRP and distributed to the Award recipient, such dividend amounts will likewise be includible in the ordinary income of the recipient and generally allowable as a deduction, for compensation expense to the Company. Dividends declared and paid with respect to vested Shares, as well as any gain or loss realized upon an Award recipient's disposition of the Shares, will be treated as dividend income and capital gain or loss, respectively, in the same manner for other shareholders. The foregoing statements are intended to summarize the general principles of current federal income tax law applicable to Awards that may be granted under the Employee RRP. State and local tax consequences may also be significant. PARTICIPANTS ARE ADVISED TO CONSULT WITH THEIR TAX ADVISOR AS TO THE CONSEQUENCES OF THE EMPLOYEE RRP. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE AMENDMENT NO. 2 TO THE TAPPAN ZEE FINANCIAL, INC. 1996 RECOGNITION AND RETENTION PLAN FOR OFFICERS AND EMPLOYEES. ----------------------------------- PROPOSAL 5 APPROVAL OF AMENDMENT NO. 2 TO THE TAPPAN ZEE FINANCIAL, INC. 1996 RECOGNITION AND RETENTION PLAN FOR OUTSIDE DIRECTORS ----------------------------------- GENERAL PLAN INFORMATION The Company's Board of Directors adopted the Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for Outside Directors ("Outside Director RRP" or "Plan") on March 25, 1996, subject to approval by the shareholders, and the shareholders approved the Plan on July 10, 1996 ("Effective Date"). Pursuant to regulations of the OTS applicable to stock benefit plans established or implemented within one year following the completion of a mutual-to-stock conversion, the Outside Director RRP contained certain restrictions and limitations, including among others: provisions requiring the vesting of awards granted to occur no more rapidly than ratably over a five year period; the resultant prohibition against accelerated vesting of restricted stock awards upon retirement of the award recipient or the occurrence of a Change of Control (as defined in the Outside Director RRP) of the Company; and a prohibition against the distribution of cash dividends to a participant prior to the vesting of the underlying stock award. OTS ruling positions permit the elimination of the provisions of the Outside Director RRP which reflect the restrictions and limitations described above, provided that shareholder approval therefor is obtained more than one year following the completion of the mutual-to-stock conversion. The Board of Directors has adopted amendments to the Outside Director RRP, subject to approval by shareholders of the Company, for the purpose of eliminating such restrictions and limitations (these changes to the Outside Director RRP are collectively referred to herein as "Amendment No. 2"). Amendment No. 2 does not increase the number of shares available for distribution under the Plan, change the Plan's eligibility requirements or alter the types of restricted stock awards that may be made to participants in the Plan. In 29 32 the event that Amendment No. 2 is not approved by shareholders at the Annual Meeting, Amendment No.2 will not take effect, but the Outside Director RRP will remain in effect. The principal provisions of the Outside Director RRP, as it would be amended by Amendment No. 2, are described below. The full text of the Amendment No. 2 is set forth as Appendix D to this Proxy Statement, to which reference is made, and the summary of Amendment No. 2 provided below is qualified in its entirety by such reference. PURPOSE OF THE OUTSIDE DIRECTOR RRP The purpose of the Outside Director RRP is to advance the interest of the Company and its shareholders by providing outside directors of the Company and its affiliates with an incentive to achieve corporate objectives through the award of equity interests in the Company. DESCRIPTION OF THE OUTSIDE DIRECTOR RRP Administration. A Committee consisting of members of the Compensation Committee of the Board (or any successor committee) or such other committee as the Board may designate ("Committee") administers the Outside Director RRP. All restricted stock awards ("Awards") granted under the Outside Director RRP are determined by automatic formula grant, thus the Committee has no discretion over such grants. However, subject to certain limitations and restrictions set forth in the Outside Director RRP, the Committee has the authority to interpret the Plan, to prescribe, amend and rescind rules and regulations, if any relating to the Plan and to make all determinations necessary or advisable for the administration of the Outside Director RRP. The costs and expenses of administering the Outside Director RRP will be borne by the Company and are not charged to any grant of an Award nor to any participating Director. Stock Subject to the Outside Director RRP. The Company has established a trust ("Trust") to which it contributes, from time to time, amounts of money or property determined by the Board, in its discretion. Contributions by participants are not permitted. The trustee will generally invest the assets of the Trust in Shares and in such other investments including savings accounts, time or other interest bearing deposits in or other interest bearing obligations of the Company, in such proportions as shall be determined by the Committee. However, in no event shall the assets of the Trust be used to purchase more than 19,440 Shares. As of May 31, 1997, the aggregate fair market value of the Shares authorized for the Outside Director RRP was $335,340, based on the closing sales prices per share of $17.25 on the Nasdaq Stock Market as of such date. Eligibility. Members of the Board, or of the board of directors of the Bank, who are not employees of the Company or the Bank are eligible to participate in the Outside Director RRP as an "Eligible Director." Former members of the Board continuing to serve the Company's Board in an advisory capacity and who have not received an Award under the Outside Director RRP are eligible to receive an Award as an "Eligible Director Emeritus." As of May 31, 1997, there were five Eligible Directors and three Eligible Directors Emeritus participating in the Outside Director RRP. Terms and Conditions of Awards. On the Effective Date of the Outside Director RRP, each Eligible Director was granted an Award of 3,240 Shares and each Eligible Director Emeritus was granted an Award of 1,080 Shares. A person who becomes an Eligible Director after the Effective Date of the Plan will receive an Award of 3,240 Shares which will be granted on the 15th day of the month following the month in which the person became an Eligible Director. In the event the number of Shares in the Outside Director RRP Trust is insufficient, each Eligible Director will be granted an Award for a pro-rated number of whole Shares based upon the number of available Shares. Eligible Directors are permitted to exercise voting rights with respect to Shares subject to an Award (whether or not vested) and the Committee will exercise voting rights with respect to Shares held in the Outside Director RRP Trust that have not been allocated as directed 30 33 by the individuals eligible to participate in the Outside Director RRP, whether or not such individuals have been granted as Award. Shares covered by an Award will become vested in accordance with the terms of the Award and, as soon as practicable following such vesting, the trustee will transfer the Shares to the Award recipient. Currently the Outside Director RRP provides that Shares covered by an Award will vest at the rate of 20% each year, with full vesting to occur after five years or upon the Director's death or disability. In addition, the Outside Director RRP currently provides for dividends declared and paid with respect to Shares subject to an outstanding Award to be retained in the RRP Trust until the Shares underlying the Award have vested. As permitted by OTS ruling positions, these restrictions on vesting and distribution of dividends may be removed through shareholder approval of Amendment No. 2 to the Outside Director RRP. Accordingly, under the Outside Director RRP, as amended, if an Award recipient terminates service on the Board on account of his retirement or in the event a Change of Control of the Company occurs, any Shares covered by an outstanding Award made under the Outside Director RRP will become 100% vested as of the date of the Award recipient's termination of service or the effective date of such Change of Control in the same manner that such Shares would become vested in the event of the Director's death or disability. In addition, pursuant to the Outside Director RRP, as amended, the Committee may make immediate distributions to the Award recipient of cash payments representing any dividends declared and paid on the Shares covered by the Award. TERMINATION OR AMENDMENT OF THE OUTSIDE DIRECTOR RRP The Board may suspend or terminate the Outside Director RRP in whole or in part at any time prior to the tenth anniversary of the Effective Date of the Outside Director RRP, by giving written notice of such suspension or termination to the Committee, but the Outside Director RRP may not be terminated while there are outstanding Awards that may thereafter become vested. Upon the termination of the Outside Director RRP, the trustee shall make distributions from the Trust in such amounts and to such persons as the Committee may direct and shall return the remaining assets of the Trust, if any, to the Company. The Board may amend or revise the Outside Director RRP in whole or in part at any time, but if the amendment or revision (i) materially increases the benefits accruing under the Outside Director RRP, (ii) materially increases the number of Shares which may be issued under the Outside Director RRP or (iii) materially modifies the requirements as to eligibility for Awards under the Outside Director RRP, such amendment or revision will be subject to approval by the shareholders of the Company. Subject to the above provisions, the Board will also have broad authority to amend the Outside Director RRP to take into account changes in applicable financial securities and tax laws and accounting standards, as well as other developments. FEDERAL INCOME TAX CONSEQUENCES The following discussion is intended only as a summary and does not purport to be a comprehensive description of the federal tax laws, regulations and policies affecting the Company and recipients of Awards that may be granted under the Outside Director RRP. Any descriptions of the provisions of any law, regulation or policy contained herein are qualified in their entirety by reference to the particular law, regulation or policy. Any change in applicable law or regulation or in the policies of various taxing authorities may have a material effect on the discussion contained herein. The Outside Director RRP does not constitute a qualified plan under Section 401(a) of the Code. The grant of an Award of Shares under the Outside Director RRP does not result in federal income tax consequences to either the Company or the Award recipient. Upon the vesting of an Award and 31 34 distribution of the vested Shares, the Award recipient will generally be required to include in ordinary income, for the taxable year in which the vesting date occur, an amount equal to the fair market value of the Shares on the vesting date, and the Company will generally be allowed to claim a deduction, for compensation expense, in a like amount. To the extent that dividends are paid with respect to unvested Shares held under the Outside Director RRP and distributed to the Award recipient, such dividend amounts will likewise be includible in the ordinary income of the recipient and generally allowable as a deduction, for compensation expense to the Company. Dividends declared and paid with respect to vested Shares, as well as any gain or loss realized upon an Award recipient's disposition of the Shares, will be treated as dividend income and capital gain or loss, respectively, in the same manner for other shareholders. The foregoing statements are intended to summarize the general principles of current federal income tax law applicable to Awards that may be granted under the Outside Director RRP. State and local tax consequences may also be significant. PARTICIPANTS ARE ADVISED TO CONSULT WITH THEIR TAX ADVISOR AS TO THE CONSEQUENCES OF THE OUTSIDE DIRECTOR RRP. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF THE AMENDMENT NO. 2 TO THE TAPPAN ZEE FINANCIAL, INC. 1996 RECOGNITION AND RETENTION PLAN FOR OUTSIDE DIRECTORS. 32 35 The following table sets forth the Options and Awards granted under the Tappan Zee Financial, Inc. Stock Plans to the individuals and groups indicated for the fiscal year ended March 31, 1997. Shareholder approval of Amendments No. 2 to these Plans, described in more detail above, affects primarily the vesting of the Options and Awards granted pursuant to these Plans. The number of Options and Awards which have been, and will be granted, under these Plans will be unaffected by Amendments No. 2 to these Plans. NEW PLAN BENEFITS TAPPAN ZEE FINANCIAL, INC. STOCK PLANS
================================================================================================================================= Employee Outside Director Employee Outside Director Name/Position Option Plan(1) Option Plan(2) RRP(3) RRP(4) -------------------------------------------------------------------------------------- # $ Value # $ Value # $ Value # $ Value ================================================================================================================================= Stephen C. Byelick 40,500 0 -- -- 16,200 188,325 -- -- President and CEO - --------------------------------------------------------------------------------------------------------------------------------- Harry G. Murphy 40,500 0 -- -- 16,200 188,325 -- -- Vice President and Secretary - --------------------------------------------------------------------------------------------------------------------------------- All Executive Officers as a Group 81,000 0 -- -- 32,400 376,650 -- -- - --------------------------------------------------------------------------------------------------------------------------------- All Outside Directors as a Group N/A N/A 40,500 0 N/A N/A 19,440 225,990 - --------------------------------------------------------------------------------------------------------------------------------- All Non-Executive employees -- -- N/A N/A -- -- N/A N/A as a group =================================================================================================================================
(1) The Exercise Price of the Options granted to Mr. Byelick and Mr. Murphy was $11.625 per Share which was the Fair Market Value of a Share on July 10, 1996, the date of grant. The dollar value of an Option on the grant date was $0, and the future value, if any, will be dependent on the price of a Share in the future. The Options granted to Mr. Byelick and Mr. Murphy will become exercisable in 20% increments on each anniversary of the grant date, with full vesting to occur on the fifth consecutive anniversary of the grant date or upon the earlier death or disability of the Option recipient. If approved by the Company's shareholders, Amendment No. 2 to the Employee Option Plan would provide for accelerated vesting to occur upon the "retirement" of the Option holder or a "Change in Control" of the Company, as such terms are defined in the Employee Option Plan. (2) Each Eligible Outside Director received a non-qualified Option to purchase 8,100 Shares at an Exercise Price of $11.625 per Share, the Fair Market Value of a Share on July 10, 1996, the date all such Options were granted to the Directors, as shown in the table above. The dollar value of an Option on the grant date was $0, and the future value, if any, will be dependent on the price of a Share in the future. The Options granted to each Eligible Outside Director will become exercisable in 20% increments on each anniversary of the grant date, with full vesting to occur on the fifth consecutive anniversary of the grant date or upon the earlier death or disability of the Option recipient. If approved by the Company's shareholders, Amendment No. 2 to the Outside Director Option Plan would provide for accelerated vesting to occur upon the "retirement" of the Option holder or a "Change in Control" of the Company, as such terms are defined in the Outside Director Option Plan. (3) Mr. Byelick and Mr. Murphy each received the Awards shown in the above table under the Employee RRP on July 10, 1996. The dollar value of these Awards has been calculated on the basis of the Fair Market Value of a Share on such date which was $11.625. Currently the Employee RRP provides for these Awards to vest in 20% increments, with full vesting to occur on the fifth consecutive anniversary of the date of grant or upon the earlier death or disability of the Award recipient. If approved by the shareholders, Amendment No. 2 to the Employee RRP would provide for accelerated vesting of these Awards to occur upon the "retirement" of the Award recipient or the date of a "Change in Control" of the Company, as such terms are defined in the Employee RRP. (4) On July 10, 1996, each Eligible Outside Director received an Award of 3,240 Shares under the Outside Director RRP and each Eligible Director Emeritus received an Award of 1,080 Shares under this Plan. The dollar value of such Awards, shown in the table above, was calculated on the basis of $11.625 per Share, the Fair Market Value of a Share on the date these Awards were granted. Currently the Outside Director RRP provides for these Awards to vest in 20% increments, with full vesting to occur on the fifth consecutive anniversary of the date of grant or upon the earlier death or disability of the Award recipient. If approved by the shareholders, Amendment No. 2 to the Outside Director RRP would provide for accelerated vesting of these Awards to occur upon the "retirement" of the Award recipient or the date of a "Change in Control" of the Company, as such terms are defined in the Outside Director RRP. 33 36 --------------------------------------------------- PROPOSAL 6 RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS --------------------------------------------------- The Board of Directors has appointed the firm of KPMG Peat Marwick LLP to act as independent auditors for the Company for the fiscal year ending March 31, 1998, subject to ratification of such appointment by the Company's shareholders. A representative of KPMG Peat Marwick LLP is expected to be present at the Annual Meeting and will be given an opportunity to make a statement if he or she desires to do so and will be available to respond to appropriate questions. No determination has been made as to what action the Board of Directors would take if the shareholders do not ratify the appointment. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE RATIFICATION OF APPOINTMENT OF THE INDEPENDENT AUDITORS. ----------------------------------------------------------- PROPOSAL 7 AUTHORIZATION OF THE BOARD OF DIRECTORS, IN ITS DISCRETION, TO DIRECT THE VOTE OF THE PROXIES UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING, AND ANY ADJOURNMENT THEREOF, INCLUDING, WITHOUT LIMITATION, A MOTION TO ADJOURN THE MEETING ----------------------------------------------------------- The Board is not aware of any other business that may properly come before the Annual Meeting. The Board seeks the authorization of the shareholders of the Company, in the event such matters come before the meeting, including, but not limited to, consideration of whether to postpone or adjourn the Annual Meeting once called to order, to direct the manner in which those shares represented at the Annual Meeting by proxies solicited pursuant to this Proxy Statement shall be voted as to such other matters. As to all such matters, the Board intends that it would direct the voting of such shares in the manner determined by the Board, in its discretion, and in the exercise of it duties and responsibilities, to be in the best interests of the Company and its shareholders, taken as a whole. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" AUTHORIZATION OF THE BOARD OF DIRECTORS OF TAPPAN ZEE FINANCIAL, INC., IN ITS DISCRETION, TO DIRECT THE VOTE OF THE PROXIES UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING, AND ANY ADJOURNMENT THEREOF, INCLUDING, WITHOUT LIMITATION, A MOTION TO ADJOURN THE MEETING. 34 37 ADDITIONAL INFORMATION DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS Any shareholder proposal intended for inclusion in the Company's proxy statement and Proxy Card relating to the Company's 1998 Annual Meeting of shareholders must be received by the Company by March 2, 1998, pursuant to the proxy solicitation regulations of the SEC. Nothing in this paragraph shall be deemed to require the Company to include in its proxy statement and proxy card for such meeting any shareholder proposal which does not meet the requirements of the SEC in effect at the time. Any such proposal will be subject to 17 C.F.R. Section 240.14a-8 of the Rules and Regulations promulgated by the SEC under the Exchange Act. NOTICE OF BUSINESS TO BE CONDUCTED AT ANNUAL MEETING The Bylaws of the Company provide an advance notice procedure for a shareholder to properly bring business before an annual meeting or to nominate any person for election to the Board of Directors. The shareholder must be a shareholder of record and have given timely notice thereof in writing to the Secretary of the Company. To be timely, a shareholder's notice must be delivered to or received by the Secretary not later than the following dates: (i) with respect to an annual meeting of shareholders, sixty (60) days in advance of such meeting if such meeting is to be held on a day which is within thirty (30) days preceding the anniversary of the previous year's annual meeting, or ninety (90) days in advance of such meeting if such meeting is to be held on or after the anniversary of the previous year's annual meeting; and (ii) with respect to an annual meeting of shareholders held at a time other than within the time periods set forth in the immediately preceding clause (i), the close of business on the tenth (10th) day following the date on which notice of such meeting is first given to shareholders. Notice shall be deemed to first be given to shareholders when disclosure of such date of the meeting of shareholders is first made in a press release reported to Dow Jones News Services, Associated Press or comparable national news service, or in a document publicly filed by the Company with the SEC pursuant to Section 13, 14 or 15(d) of the Exchange Act. A shareholder's notice to the Secretary shall set forth as to the matter the shareholder proposes to bring before the annual meeting (a) a brief description of the proposal desired to be brought before the annual meeting or if a nomination for election as a director, the name, age, business and residence address and principal occupation or employment of such nominee, such nominee's written consent to serve as director, if elected, and such other information required by the proxy rules of the SEC; (b) the name and address of the shareholder proposing such business; (c) the class and number of shares of the Company which are owned of record by the shareholder and the dates upon which he or she acquired such shares; (d) the identification of any person employed, retained, or to be compensated by the shareholder submitting the proposal, or any person acting on his or her behalf, to make solicitations or recommendations to shareholders for the purpose of assisting in the passage of such proposal, and a brief description of the terms of such employment, retainer or arrangement for compensation; and (e) such other information regarding such proposal as would be required to be included in a proxy statement filed pursuant to the proxy rules of the SEC or required to be delivered to the Company pursuant to the proxy rules of the Securities and Exchange Commission (whether or not the Company is then subject to such rules). Nothing in this paragraph shall be deemed to require the Company to include in its proxy statement and proxy card relating to an annual meeting any shareholder proposal or nomination which does not meet all of the requirements for inclusion established by the SEC in effect at the time such proposal or nomination is received. See "Date For Submission of Shareholder Proposals." 35 38 OTHER MATTERS As of the date of this Proxy Statement, the Board of Directors of the Company does not know of any other matters to be brought before the shareholders at the 1997 Annual Meeting. See "Proposal 7." A copy of the 1997 Annual Report to shareholders, including the consolidated financial statements prepared in conformity with generally accepted accounting principles for the fiscal year ended March 31, 1997, accompanies this Proxy Statement. The consolidated financial statements have been audited by KPMG Peat Marwick LLP whose report appears in the Annual Report. The Company is required to file an Annual Report on Form 10-K with the SEC. Shareholders may obtain, free of charge, a copy of the Form 10-K (without exhibits) by writing to Harry G. Murphy, Vice President and Secretary, Tappan Zee Financial, Inc., 75 North Broadway, Tarrytown, New York 10591, or by calling (914) 631-0344. BY ORDER OF THE BOARD OF DIRECTORS [facsimile signature] HARRY G. MURPHY SECRETARY Tarrytown, New York June 30, 1997 TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY CARD IN THE POSTAGE-PAID ENVELOPE PROVIDED. 36 39 APPENDIX A TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN FOR OFFICERS AND EMPLOYEES (Adopted on March 25, 1996 Effective as of July 10, 1996) AMENDMENT ------------------------------------------- AMENDMENT NO. 2 DOCUMENT: (TPW) NY02/1116493.1 DRAFT DATE: 4/24/97 BOARD OF DIRECTORS APPROVAL DATE: 4/28/97 ------------------------------------------- 1. Article IV - Effective as of July 11, 1997, the proviso appearing at the end of section 4.9(c) shall be amended and restated in its entirety to read as follows: provided, however, that such an Option shall become fully exercisable, and all optioned Shares not previously purchased shall become available for purchase, on the date of the Option holder's death, Disability or Retirement or upon the date of a Change in Control of the Company; and provided, further, that the Committee, in its discretion, may establish a different vesting schedule in a particular case or as a matter of policy; 2. Article V - Effective as of July 11, 1997, section 5.3(b) shall be amended by changing the period at the end thereof to a semi-colon and then adding the following proviso immediately thereafter to read as follows: and provided, further, that prior to July 11, 1997, the payments provided for under this section 5.3(b) shall only apply to outstanding Options that have vested as of the effective date of such merger, consolidation or other business reorganization of the Company. A-1 40 APPENDIX B TAPPAN ZEE FINANCIAL, INC. 1996 STOCK OPTION PLAN FOR OUTSIDE DIRECTORS (Adopted on March 25, 1996 Effective as of July 10, 1996) AMENDMENT ------------------------------------------- AMENDMENT NO. 2 DOCUMENT: (TPW) NY02/1116492.1 DRAFT DATE: 4/24/97 BOARD OF DIRECTORS APPROVAL DATE: 4/28/97 ------------------------------------------- 1. Article IV - Effective as of July 11, 1997, the proviso appearing at the end of section 4.4(b) shall be amended and restated in its entirety to read as follows: provided, however, that such an Option shall become fully exercisable, and all optioned Shares not previously purchased shall become available for purchase, on the date of the Option holder's death, Disability or Retirement or upon the date of a Change in Control of the Company. 2. Article V - Effective as of July 11, 1997, section 5.3(b) shall be amended by changing the period at the end thereof to a semi-colon and then adding the following proviso immediately thereafter to read as follows: and provided, further, that prior to July 11, 1997, the payments provided for under this section 5.3(b) shall only apply to outstanding Options that have vested as of the effective date of such merger, consolidation or other business reorganization of the Company. B-1 41 APPENDIX C RECOGNITION AND RETENTION PLAN FOR OFFICERS AND EMPLOYEES OF TAPPAN ZEE FINANCIAL, INC. (Adopted on March 25, 1996 Effective as of July 10, 1996) AMENDMENT ------------------------------------------- AMENDMENT NO. 2 DOCUMENT: (TPW) NY02/1116496.1 DRAFT DATE: 4/24/97 BOARD OF DIRECTORS APPROVAL DATE: 4/28/97 ------------------------------------------- 1. Article II - Effective as of July 11, 1997, Article II shall be amended by adding the following new section 2.18 "Retirement" immediately after section 2.17 appearing therein and redesignating all remaining sections of Article II and all cross-references thereto accordingly. Section 2.18 shall read in its entirety as follows: SECTION 2.18 RETIREMENT means retirement at the normal or early retirement date as set forth in any tax-qualified retirement plan of the Bank. 2. Article V - Effective as of July 11, 1997, the first sentence of section 5.4(a) shall be amended by changing the period at the end thereof to a semi-colon and then adding the following proviso immediately thereafter to read as follows: provided, however, effective as of July 11, 1997, any such dividends or distributions declared and paid shall be promptly distributed to such Eligible Employee. 3. Article V - Effective as of July 11, 1997, the proviso appearing at the end of section 5.7(a)(iii) shall be amended and restated in its entirety to read as follows: provided, however, that such an Award shall become fully vested on the date of the Award holder's death, Disability, or Retirement or upon the date of a Change of Control of the Company; and provided, further, that the Committee, in its discretion, may establish a different vesting schedule in a particular case or as a matter or policy. 4. Article VI - Effective as of July 11, 1997, the proviso appearing at the end of section 6.1 shall be amended and restated in its entirety to read as follows: provided, however, that such an Award shall become fully vested on the date of the Award holder's death, Disability, or Retirement or upon the date of a Change of Control of the Company; and provided, further, that the Committee, in its discretion, may establish a different vesting schedule in a particular case or as a matter or policy. C-1 42 APPENDIX D RECOGNITION AND RETENTION PLAN FOR OUTSIDE DIRECTORS OF TAPPAN ZEE FINANCIAL, INC. (Adopted on March 25, 1996 Effective as of July 10, 1996) AMENDMENT ------------------------------------------- AMENDMENT NO. 2 DOCUMENT: (TPW) NY02/1116495.1 DRAFT DATE: 4/24/97 BOARD OF DIRECTORS APPROVAL DATE: 4/28/97 ------------------------------------------- 1. Article II - Effective as of July 11, 1997, Article II shall be amended by adding the following new section 2.18 "Retirement" immediately after section 2.17 appearing therein and redesignating all remaining sections of Article II and all cross-references thereto accordingly. Section 2.18 shall read in its entirety as follows: SECTION 2.18 RETIREMENT means retirement at the normal or early retirement date as set forth in any tax-qualified retirement plan of the Bank. 2. Article V - Effective as of July 11, 1997, the first sentence of section 5.3(a) shall be amended by changing the period at the end thereof to a semi-colon and then adding the following proviso immediately thereafter to read as follows: provided, however, effective as of July 11, 1997, any such dividends or distributions declared and paid shall be promptly distributed to such Eligible Director. 3. Article V - Effective as of July 11, 1997, the proviso appearing at the end of section 5.6(a)(ii) shall be amended and restated in its entirety to read as follows: provided, however, that such an Award shall become fully vested on the date of the Award holder's death, Disability, or Retirement or upon the date of a Change of Control of the Company. 4. Article VI - Effective as of July 11, 1997, the last proviso appearing at the end of section 6.1 shall be amended and restated in its entirety to read as follows: and provided, further, an Award shall become 100% vested upon the death, Disability, or Retirement of the Award recipient or upon the date of a Change of Control of the Company. D-1 -----END PRIVACY-ENHANCED MESSAGE-----