-----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, CstJaNCiU10CshD1JTsB9nDDc16013On9KBnqjFsCHVhp02vE+SSj4EqpZaQpOjh /dRD85rgq5UEdh2sTuHXNg== 0000950123-98-006325.txt : 19980630 0000950123-98-006325.hdr.sgml : 19980630 ACCESSION NUMBER: 0000950123-98-006325 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980629 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: SEC FILE NUMBER: 000-26466 FILM NUMBER: 98656280 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 TAPPAN ZEE FINANCIAL, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NUMBER 0-26466 TAPPAN ZEE FINANCIAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3840352 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 75 NORTH BROADWAY, TARRYTOWN, NEW YORK 10591-0187 (Address of principal executive offices) (Zip Code) (914) 631-0344 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: (Not applicable) Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all the reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of May 22, 1998, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $24.9 million based on the closing price on the that date and a total of 1,478,062 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None 2 TAPPAN ZEE FINANCIAL, INC.
PART I Page ---- Item 1. Business 2 Item 2. Properties 26 Item 3. Legal Proceedings 26 Item 4. Submission of Matters to a Vote of Security Holders 27 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. 27 Item 6. Selected Financial Data. 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 29 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 35 Item 8. Financial Statements and Supplementary Data. 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 61 PART III Item 10. Directors and Executive Officers of the Registrant. 61 Item 11. Executive Compensation. 64 Item 12. Security Ownership of Certain Beneficial Owners and Management. 69 Item 13. Certain Relationships and Related Transactions. 72 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 72 Signatures 75
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"). Concurrent with the Conversion, the Registrant sold 1,620,062 shares of its common stock in a subscription and community offering at a price of $10 per share, for net proceeds of $14.9 million (the "Stock Offering"). In March 1998, the Registrant established TPNZ Preferred Funding Corporation ("TZPFC"), as a wholly-owned subsidiary. The purpose of TZPFC is to acquire and manage a portfolio of mortgage loans and mortgage-backed securities. TZPFC is intended to qualify as a real estate investment trust for tax purposes. Collectively, the Registrant, TZPFC and the Bank are referred to herein as the "Company". The Company's primary market area consists of the Village of Tarrytown and its neighboring communities in Westchester County, New York with business conducted from one office located in Tarrytown, New York. The Bank is a community-oriented savings institution whose business primarily consists of accepting deposits from customers within its market area and investing those funds in mortgage loans secured by one- to four-family residences. To a significantly lesser extent, funds are invested in multi-family, commercial real estate, construction, commercial business and consumer loans. The Company also invests in mortgage-backed and other securities. The Registrant has no significant business activities other than its ownership of the Bank. The Company's results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on its interest-earning assets, such as loans and securities, and the interest expense on its interest-bearing liabilities, such as deposits. The Company also generates non-interest income such as service charges and other fees. The Company's non-interest expense consists of compensation and benefits, professional service fees, occupancy expenses, federal deposit insurance costs, data processing service fees and other operating expenses. The Company's results of operations are significantly affected by general economic and competitive conditions (particularly changes in market interest rates), government policies, changes in accounting standards and actions of regulatory agencies. MERGER AGREEMENT On March 6, 1998, the Registrant entered into a definitive agreement (the "Merger Agreement") pursuant to which the Registrant will merge with and into U.S.B. Holding Co., Inc. ("USB"), a registered bank holding company and parent company of Union State Bank, a New York State chartered commercial bank. The Bank will operate as a wholly-owned subsidiary of USB. Under the terms of the Merger Agreement, each shareholder of the Registrant will receive USB common stock that is anticipated to have a value of $22.00 per share for each share of the Registrant. The exchange ratio will be fixed upon receipt of all regulatory approvals. The minimum exchange ratio will be 0.88 shares of USB common stock for each share of Registrant common stock, if USB's common stock has a value of $25.00 per share, or higher, and subject to the exception below, the maximum exchange ratio will be 1.24 shares of USB common stock for each share of Registrant common stock if USB's common stock has a value of $17.75, or lower. If USB's common stock has a value of between $17.75 and $25.00 per share, the Exchange Ratio will be established to provide a value to the Registrant's shareholders of $22.00 per share. If USB's common stock falls below $15.00 per share, the Registrant will have the right to terminate the transaction subject to USB's right to adjust the Exchange Ratio so as to assure the Registrant's shareholders receive a value of $18.60 per Registrant share. The transaction is intended to be a tax free exchange of common shares and will be accounted for as a pooling of interests. The transaction is subject to receipt of regulatory approvals and the approval of the Registrant's shareholders. The transaction will be presented for approval at a special meeting of the Registrant's shareholders. In connection with the Merger Agreement, the Registrant and USB also entered into a Stock Option Agreement which, under certain defined circumstances, would enable USB to purchase up to 294,134, or 19.9%, of the Registrant's issued and outstanding common stock at a price of $18.50 per share. 2 4 MARKET AREA AND COMPETITION The Company's deposit gathering and lending markets are concentrated in the communities surrounding its office in the Village of Tarrytown located in Westchester County, New York, although the Company also lends to borrowers located in other areas of Westchester County. Westchester County borders New York City to the south, Connecticut to the east, northern New Jersey and the County of Rockland in New York to the west and the New York County of Putnam to the north. In addition to being a suburb of New York City, Westchester contains villages, towns and cities with shopping, office and industrial centers, as well as farms and rural areas. The population of Westchester County is approximately 885,000. The population of the Village of Tarrytown exceeds 10,000, with a median household income of approximately $45,000. Some of the nation's major corporations have Westchester operations, including IBM Corporation, Texaco Inc., AT&T, NYNEX, PepsiCo, Inc., Readers Digest, Inc., Tambrands, Inc., Kraft General Foods, Inc., Metro-North Commuter Railroad Company and Consolidated Edison of New York, Inc. Many other industrial, insurance, educational, financial and health service corporations employ significant numbers of local residents and also serve to meet the educational, cultural and social needs of the area. The labor force contains larger percentages of professional, technical and clerical workers than New York State as a whole. However, many companies have downsized their operations and staff sizes in the last few years. This downsizing has not had a material adverse effect on the Company's operations. However, there can be no assurances as to whether any further downsizing will occur and that any such event will not have a material adverse effect on the Company's operations. The Northeast region of the United States, which includes the Company's market area, was affected by the prolonged recession that occurred in the early 1990s, which resulted in a contraction of economic activity and a deterioration of the local real estate market. Since then, the local economy has shown signs of improvement. However, if another recession were to occur, and as a result the Company were to experience a significant increase in non-performing assets, it is likely that the Company's future operating results would be affected by (i) significant provisions for loan losses and reduced interest income, (ii) significant provisions for real estate owned losses, and (iii) significant costs incurred in connection with managing foreclosed properties and collection efforts on delinquent loans. The Company faces substantial competition for both the deposits it accepts and the loans it makes. Westchester County has a high density of financial institutions, including branch offices of major commercial banks, all of which compete with the Company to varying degrees. The Village of Tarrytown has full-service branch offices of the following commercial banks: First Union National Bank, Chase Bank, Fleet Bank, Bank of New York and Union State Bank. The Company also encounters significant competition for deposits from commercial banks, savings banks and savings and loan associations located in Westchester County, as well as short-term money market securities, money market mutual funds, and corporate and government securities. Due to the size of the Company relative to its competitors, the Company offers a more limited product line than many competitors, with an emphasis on product delivery and customer service rather than a very broad product line. The Company competes for deposits by offering a variety of customer services and deposit accounts at generally competitive interest rates. The Company's competition for loans comes principally from savings banks, savings and loan associations, commercial banks, mortgage bankers, brokers and other institutional lenders. The Company competes for loans primarily by emphasizing the quality of its loan services and by charging loan fees and interest rates that are generally competitive within its market area. Changes in the demand for loans relative to the availability of credit may affect the level of competition from financial institutions which may be more willing than the Company or its competitors to make credit available but which have not generally engaged in lending activities in the Company's market area in the past. Competition may also increase as a result of the lifting of restrictions on the interstate operations of financial institutions. LENDING ACTIVITIES Loan Portfolio Composition. The Company's loan portfolio consists primarily of conventional first mortgage loans secured by one- to four-family residences. At March 31, 1998, the Company had total net loans outstanding of $57.6 million (gross loans of $58.8 million less the allowance for loan losses, unearned discounts and net deferred loan fees). A total of $45.1 million, or 78.4% of net loans, were one- to four-family, residential mortgage loans. 3 5 The following table sets forth the composition of the Company's loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated:
AT MARCH 31, ------------------------------------------------------------------------------------ 1998 1997 1996 1995 ------------------ ------------------ ------------------ ------------------ PERCENT PERCENT PERCENT PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL ------ -------- ------ -------- ------ -------- ------ -------- (DOLLARS IN THOUSANDS) Mortgage loans: One-to four-family $45,146 78.35% $43,958 79.76% $38,762 75.75% $39,020 77.68% Multi-family 1,994 3.46 2,289 4.15 3,287 6.42 3,443 6.85 Commercial 4,618 8.01 3,910 7.09 3,561 6.96 4,019 8.00 Construction,net 3,157 5.48 1,719 3.12 2,462 4.81 1,115 2.22 Net deferred loan fees (266) (0.46) (279) (0.51) (284) (0.55) (324) (0.64) ------- ------ ------- ------ ------- ------ ------- ------ Total mortgage loans 54,649 94.84 51,597 93.61 47,788 93.39 47,273 94.11 Commercial loans: Commercial business loans, net 2,447 4.25 2,831 5.14 2,727 5.33 2,415 4.81 Net deferred loan fees -- -- (1) -- (1) -- (1) -- ------- ------ ------- ------ ------- ------ ------- ------ Total commercial loans 2,447 4.25 2,830 5.14 2,726 5.33 2,414 4.81 Consumer loans: Automobile loans 683 1.18 781 1.42 724 1.41 603 1.20 Other consumer loans 751 1.30 797 1.45 821 1.60 789 1.57 Unearned discounts (208) (0.36) (239) (0.43) (235) (0.46) (199) (0.40) Net deferred loan costs 3 0.01 4 0.01 4 0.01 3 0.01 ------- ------ ------- ------ ------- ------ ------- ------ Total consumer loans 1,229 2.13 1,343 2.45 1,314 2.56 1,196 2.38 Allowance for loan losses (702) (1.22) (660) (1.20) (654) (1.28) (650) (1.30) ------- ------ ------- ------ ------- ------ ------- ------ Total loans, net $57,623 100.00% $55,110 100.00% $51,174 100.00% $50,233 100.00% ======= ====== ======= ====== ======= ====== ======= ======
AT MARCH 31, ------------------ 1994 ------------------ PERCENT AMOUNT OF TOTAL ------ -------- (DOLLARS IN THOUSANDS) Mortgage loans: One-to four-family $36,011 79.98% Multi-family 2,649 5.88 Commercial 2,965 6.59 Construction,net 824 1.83 Net deferred loan fees (278) (0.62) ------- ------ Total mortgage loans 42,171 93.66 Commercial loans: Commercial business loans, net 2,211 4.91 Net deferred loan fees (1) -- ------- ------ Total commercial loans 2,210 4.91 Consumer loans: Automobile loans 415 0.92 Other consumer loans 1,003 2.23 Unearned discounts (236) (0.52) Net deferred loan costs 3 -- ------- ------ Total consumer loans 1,185 2.63 Allowance for loan losses (540) (1.20) ------- ------ Total loans, net $45,026 100.00% ======= ======
The types of loans that the Company may originate are subject to federal and state laws and regulations. Interest rates charged by the Company on loans are affected by the demand for such loans, the supply of money available for lending purposes and the rates offered by competitors. These factors are affected by, among other things, economic conditions, monetary policies of the federal government, including the Federal Reserve Board ("FRB"), and legislative tax policies. Loan Maturity. The following table shows the contractual maturity of the Company's gross loans at March 31, 1998. The table reflects the entire unpaid principal balance in the maturity period that includes the final loan payment dates and, accordingly, does not give effect to periodic principal repayments or possible prepayments. Principal repayments and prepayments totaled $10.3 million, $7.9 million and $8.2 million for the years ended March 31, 1998, 1997 and 1996, respectively.
AT MARCH 31, 1998 --------------------------------------------------------------------------------------------- ONE-TO FOUR- MULTI- COMMERCIAL COMMERCIAL FAMILY FAMILY MORTGAGE CONSTRUCTION BUSINESS CONSUMER TOTAL ------------ ------ ---------- ------------ ---------- -------- ------- (IN THOUSANDS) Contractual maturity: One year or less $ 2,025 $ 687 $ 1,017 $ 3,157 $ 1,333 $ 74 $ 8,293 ------- ------ ------- ------- ------- ------- ------- After one year: More than 1 year to 5 years 1,867 892 3,026 -- 1,067 1,148 8,000 More than 5 years 41,254 415 575 -- 47 212 42,503 ------- ------ ------- ------- ------- ------- ------- Total after one year 43,121 1,307 3,601 -- 1,114 1,360 50,503 ------- ------ ------- ------- ------- ------- ------- Total amount due $45,146 $1,994 $ 4,618 $ 3,157 $ 2,447 $ 1,434 $58,796 ======= ====== ======= ======= ======= ======= =======
4 6 The following table sets forth the dollar amounts in each loan category at March 31, 1998 that are contractually due after March 31, 1999, and whether such loans have fixed interest rates or adjustable interest rates.
DUE AFTER MARCH 31, 1999 --------------------------------------- FIXED ADJUSTABLE TOTAL ------- ---------- ------- (IN THOUSANDS) Mortgage loans (1): One-to four-family $32,156 $10,965 $43,121 Multi-family 1,122 185 1,307 Commercial 3,377 224 3,601 Commercial business loans 879 235 1,114 Consumer loans 1,360 -- 1,360 ------- ------- ------- Total $38,894 $11,609 $50,503 ======= ======= =======
(1) There are no construction loans that are contractually due after March 31, 1999. Origination, Purchase, Sale and Servicing of Loans. The Company's lending activities are conducted through its office. The Company originates both adjustable-rate mortgage loans and fixed-rate mortgage loans. Loan originations are generally obtained from existing or past customers and members of the local communities. The Company's ability to originate loans is dependent upon the relative customer demand for fixed-rate or adjustable-rate mortgage loans, which is affected by the current and expected future levels of interest rates. During the fiscal year ended March 31, 1998, a substantial portion of the Company's loan originations consisted of fixed-rate mortgage loans. The Company currently holds for its portfolio all loans it originates and, from time to time, may purchase participations in mortgage loans originated by other institutions. The determination to purchase participations in specific loans or pools of loans is based upon criteria substantially similar to the Company's underwriting policies, such as the financial condition of the borrower, the location of the underlying property and the appraised value of the property, among other factors. The Company has no current plans to sell loans it originates in the future, but continually reviews the merits of adopting such a program to increase liquidity or reduce interest rate risk. The Company does not service loans for others and has no current plans to begin such activities. 5 7 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, ---------------------------------------- 1998 1997 1996 -------- -------- -------- (IN THOUSANDS) Unpaid principal balances at beginning of year $ 56,986 $ 53,102 $ 52,239 Loans originated: Mortgage loans: One-to four-family 5,893 6,740 4,125 Multi-family 97 -- 150 Commercial 800 1,085 -- Construction 3,112 1,475 2,580 Commercial business 2,121 1,799 1,471 Consumer 624 790 967 -------- -------- -------- Total loans originated 12,647 11,889 9,293 -------- -------- -------- Principal repayments (10,273) (7,942) (8,233) Charge-offs -- (63) (86) Transfer to real estate owned -- -- (111) -------- -------- -------- Unpaid principal balances at end of year 59,360 56,986 53,102 Less: Construction loans in process (549) (686) (738) Unearned discounts (208) (239) (235) Unused lines of credit (15) (15) (20) Allowance for loan losses (702) (660) (654) Net deferred loan fees (263) (276) (281) -------- -------- -------- Net loans at end of year $ 57,623 $ 55,110 $ 51,174 -------- -------- --------
One- to Four-Family Mortgage Lending. The Company offers both fixed-rate and adjustable-rate mortgage loans, with maturities up to thirty years, which are secured by one- to four-family residences. Substantially all such loans are secured by owner-occupied properties located in Westchester County, New York. At March 31, 1998, $45.1 million, or 78.4% of the Company's net loans outstanding, were one- to four-family residential mortgage loans. Of the one- to four-family residential mortgage loans outstanding at that date, 75.0%, or $33.9 million, were fixed-rate loans and 25.0%, or $11.2 million, were adjustable-rate loans. The interest rates for the majority of the Company's adjustable-rate mortgage loans are indexed to the yield on one-year U.S. Treasury securities. The Company currently offers a number of adjustable-rate mortgage loan programs with interest rates which adjust either every one, three or five years. An adjustable-rate mortgage loan may carry an initial interest rate that is less than the fully-indexed rate for the loan. All adjustable-rate mortgage loans offered have lifetime interest rate caps or ceilings. Generally, adjustable-rate mortgage loans pose credit risks somewhat greater than the credit risk inherent in fixed-rate loans primarily because, as interest rates rise, the underlying payments of the borrowers rise, increasing the potential for default. It is the Company's policy to underwrite its adjustable-rate mortgage loans based on the fully-indexed rate. The Company currently has no mortgage loans that are subject to negative amortization. In view of its operating strategy, the Company adheres to its Board approved underwriting guidelines for loan origination, which, though prudent in approach to credit risk and evaluation of collateral, allow management flexibility with respect to documentation of certain matters and certain credit requirements. However, the Company generally originates loans using guidelines comparable to Federal National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC") underwriting guidelines. The Company's policy is to originate one- to four-family residential mortgage loans in amounts up to 80% of the lower of the appraised value or the selling price of the property securing the loan. The Company has not offered and currently does not offer products with a higher loan-to-value ratio in conjunction with private mortgage 6 8 insurance, and has no plans to do so in the future. Mortgage loans originated by the Company generally include due-on-sale clauses which provide the Company with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property without the Company's consent. Due-on-sale clauses are an important means of adjusting the rates on the Company's fixed-rate mortgage loan portfolio and the Company has generally exercised its rights under these clauses. Multi-Family Mortgage Lending. The Company originates multi-family mortgage loans generally secured by five- to ten-unit apartment buildings located in the Company's market area. In reaching its decision on whether to make a multi-family loan, the Company considers the qualifications of the borrower as well as the underlying property. Some of the factors considered are: the net operating income of the mortgaged premises before debt service and depreciation; the debt service ratio (the ratio of the property's net cash flow to debt service requirements); and the ratio of loan amount to appraised value. When evaluating the qualifications of the borrower for a multi-family mortgage loan, the Company considers the financial resources and income level of the borrower, the borrower's experience in owning or managing similar properties, and the Company's lending experience with the borrower. The Company requires that the borrower be able to demonstrate strong management skills and the ability to maintain the property from current rental income. The borrower is also required to provide evidence of the ability to repay the mortgage and a history of making mortgage payments on a timely basis. In making its assessment of the creditworthiness of the borrower, the Company generally reviews the financial statements, employment and credit history of the borrower, as well as other related documentation. Pursuant to the Company's underwriting policies, a multi-family mortgage loan may only be made in an amount up to the lesser of (i) 75% of the appraised value of the underlying property or (ii) the Company's current loans-to-one borrower limit. See "Regulation -- Regulation of Federal Savings Association -- Loans to One Borrower." Subsequent declines in the real estate values in the Company's primary market area have resulted in an increase in the loan-to-value ratios on certain multi-family mortgage loans. The Company's multi-family mortgage loans are generally fixed-rate loans and may be made with terms up to fifteen years, generally with a five-year balloon maturity and a fifteen-year amortization schedule. The Company's multi-family mortgage loan portfolio at March 31, 1998 was approximately $2.0 million, or 3.5% of net loans outstanding. The Company's largest multi-family mortgage loan at March 31, 1998 had an outstanding balance of $263,000 and is secured by a five-unit apartment house. Mortgage loans secured by apartment buildings and other multi-family residential properties are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by multi-family properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to a greater extent to circumstances outside the borrower's control, including adverse conditions in the real estate market or the economy. The Company seeks to minimize these risks through its underwriting policies, which require such loans to be qualified at origination on the basis of the property's income and debt service ratio. Commercial Real Estate Mortgage Lending. The Company originates commercial real estate mortgage loans that are generally secured by a combination of residential and retail facilities and, to a lesser extent, properties used for business purposes, such as small office buildings, located in the Company's market area. The Company's underwriting procedures provide that commercial real estate loans may be made in amounts up to the lesser of (i) 75% of the lesser of the appraised value or purchase price of the property or (ii) the Company's current loans-to-one borrower limit. These loans are generally fixed-rate loans and may be made with terms up to fifteen years, generally with a five-year balloon maturity and a fifteen-year amortization schedule. The Company's underwriting standards and procedures for these loans are similar to those applicable to its multi-family mortgage loans, whereby the Company considers factors such as the net operating income of the property and the borrower's expertise, credit history and profitability. At March 31, 1998, the Company's commercial real estate mortgage portfolio was $4.6 million, or 8.0% of net loans outstanding. The largest commercial real estate loan in the Company's portfolio at March 31, 1998 was $787,000, which is comprised of a first and second loan secured by the same commercial warehouse building. Mortgage loans secured by commercial real estate properties, like multi-family mortgage loans, are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. This risk is attributable to the uncertain realization of projected income-producing cash flows which are affected by vacancy rates, the ability to maintain rent levels against competitively-priced properties and the ability to collect rent from tenants on a timely basis. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to a greater extent to circumstances outside the borrower's control, including adverse conditions in the real estate market or the economy. The Company seeks to minimize these risks through its underwriting standards, which require such loans to be qualified at origination on the basis of the property's income and debt service ratio. 7 9 Construction Lending. The Company originates loans for the acquisition and development of property to contractors and individuals in its market area. The Company's construction loans primarily have been made to finance the construction of one- to four-family, owner-occupied residential properties, multi-family properties and other properties. These loans are all fixed-rate loans with maturities of one year or less. The Company's policies provide that construction loans may be made in amounts up to 80% of the appraised value of the property for construction of one- to four-family residences and multi-family properties, and up to 75% of the appraised value of other types of properties. All construction loans are subject to the Company's loans-to-one borrower limit. If the borrower is a corporation, the Company generally requires personal guarantees and a permanent loan commitment from another lender if the Company will not be making the permanent loan. Loan proceeds are disbursed in increments, subject to inspection by Company inspectors as construction progresses. Subject to the Company's limitation on loans-to-one borrower, during favorable economic conditions, the Company will consider making up to two residential construction loans to one borrower. If economic conditions are not favorable, the Company will not make construction loans, unless there is a confirmed permanent mortgage takeout or the Company has approved the borrower for permanent financing. At March 31, 1998, the Company had $3.2 million (net of undisbursed loan funds of $549,000) of construction loans which amounted to 5.5% of the Company's net loans outstanding. The largest construction loan in the Company's portfolio at March 31, 1998 was $500,000 (all of which had been disbursed) and is secured by retail commercial property. Construction lending generally involves additional risks to the lender as compared with residential permanent mortgage lending. These risks are attributable to the fact that loan funds are advanced upon the security of the project under construction, predicated on the present value of the property and the anticipated future value of the property upon completion of construction or development. Moreover, because of the uncertainties inherent in delays resulting from labor problems, materials shortages, weather conditions and other contingencies, it is relatively difficult to evaluate the total funds required to complete a project and to establish the loan-to-value ratio. If the Company's initial estimate of the property's value at completion is inaccurate, the Company may be confronted with a project, when completed, having an insufficient value to assure full repayment. Commercial Business Lending. The Company also offers limited types of short-term and medium-term commercial business loans on a secured and unsecured basis to borrowers located in the Company's market area. These loans include time and demand loans, term loans and lines of credit. At March 31, 1998, the Company's commercial business loan portfolio amounted to $2.4 million, or 4.3% of net loans outstanding. The largest commercial business loan outstanding at March 31, 1998 was a $325,000 loan secured by marketable securities. The Company's lines of credit are typically established for one year and are subject to renewal upon satisfactory review of the borrower's financial statements and credit history. Secured short-term commercial business loans are usually collateralized by real estate and are generally guaranteed by a principal of the borrower. Interest on these loans is usually payable monthly at rates that fluctuate based on a spread above the prime rate. The Company offers term loans with terms of up to ten years, although the majority of such loans have terms of five years or less. Typically, term loans have floating interest rates based on a spread above the prime rate. The Company also offers business loans on a revolving basis, whereby the borrower pays interest only. Interest on such loans fluctuates based on the prime rate. Normally these loans require periodic interest payments during the loan term, with full repayment of principal and interest at maturity. Similar to construction loans and commercial mortgage loans, commercial business loans generally carry greater credit risks than residential mortgage loans because their repayment is more dependent on (i) the underlying financial condition of the borrower, (ii) the value of any property or the cash flow from any property securing the loan or the business being financed, and (iii) general and local economic conditions. Consumer Lending. The Company offers various types of secured and unsecured consumer loans, including automobile loans, home improvement loans and personal loans. The Company's consumer loans have original maturities of not more than five years, with the exception that home improvement loans may have original maturities of up to ten years. Interest rates charged on such loans are set at competitive rates, taking into consideration the type and term of the loan. Consumer loan applications are reviewed and approved in conformance with standards approved by the Company's Board of Directors. At March 31, 1998, the Company's consumer loan portfolio totaled $1.2 million, or 2.1% of net loans outstanding. Loan Approval Procedures and Authority. The Board of Directors establishes the lending policies of the Company and reviews properties offered as security. The Board of Directors has established the following lending authority: the Vice President may approve mortgage loans in amounts up to $200,000 and commercial business loans in amounts up to $75,000; the President may approve mortgage loans up to $350,000 and commercial business loans up to $150,000; commercial business loans in excess of $150,000 and up to $225,000 must be approved by both the President and Vice President or by the Board of Directors; and mortgage loans above $350,000 and commercial business loans above $225,000 require Board of 8 10 Directors approval. The foregoing lending limits are reviewed annually and, as needed, revised by the Board of Directors. For all loans originated by the Company, upon receipt of a completed loan application from a prospective borrower, a credit report is ordered and certain other information is verified by an independent credit agency, and, if necessary, additional financial information is required to be submitted by the borrower. An appraisal of any real estate intended to secure the proposed loan is required, which appraisal currently is performed by an independent appraiser designated and approved by the Company. The Board of Directors annually approves the independent appraisers used by the Company and approves the Company's appraisal policy. It is the Company's policy to require title and hazard insurance on all real estate loans. In connection with a borrower's request for a renewal of a multi-family or commercial mortgage loan with a five-year balloon maturity, the Company evaluates both the borrower's ability to service the renewed loan applying an interest rate that reflects prevailing market conditions, as well as the value of the underlying collateral property. The evaluation of the property typically involves a letter update of the existing appraisal unless in the appraiser's opinion the original appraisal is no longer substantially relevant, in which case a full appraisal is obtained. ASSET QUALITY Non-Performing Loans. Loans are considered non-performing if they are in foreclosure or are 90 or more days delinquent. Management and the Board of Directors perform a monthly review of all delinquent loans. The actions taken by the Company with respect to delinquencies vary depending on the nature of the loan and period of delinquency. The Company's policies generally provide that delinquent mortgage loans be reviewed and that a written late charge notice be mailed no later than the 15th day of delinquency. The Company's policies provide that telephone contact be attempted to ascertain the reasons for delinquency and the prospects of repayment. When contact is made with the borrower at any time prior to foreclosure, the Company attempts to obtain full payment or work out a repayment schedule with the borrower to avoid foreclosure. It is the Company's general policy to stop the accrual of interest on all loans 90 days or more past due. Certain loans 90 days or more past due may continue to accrue interest based on management's evaluation of the loan, the underlying collateral and the credit worthiness of the borrower. When a loan is placed on non-accrual status, unpaid interest is reversed against interest income of the current period. Thereafter, interest payments received on non-accrual loans are recognized as income unless future collections are doubtful, in which case the payments received are applied as a reduction of principal. A loan remains on non-accrual status until the factors that indicated doubtful collectibility no longer exist or until a loan is determined to be uncollectible and is charged off against the allowance for loan losses. The classification of a loan as non-performing does not necessarily indicate that loan principal or interest will not be collected. Historical experience indicates that a portion of non-performing assets will eventually be recovered. When all collection efforts have been exhausted, and management determines that the borrower is unable to repay its obligation, the Company will commence foreclosure procedures. 9 11 The following table sets forth certain information regarding non-accrual loans, other past due loans and real estate owned. The Company's prospective adoption of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan", effective April 1, 1995, had no impact on the comparability of this information. See Note 3 to the Consolidated Financial Statements in Item 8 for information concerning the Company's impaired loans which are included in the non-accrual loans shown below.
AT OR FOR THE YEAR ENDED MARCH 31, ----------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in thousands) Non-accrual loans: Mortgage loans: One-to four-family $ 1,202 $ 1,355 $ 856 $ 523 $ 419 Commercial property 238 123 126 -- -- Construction -- -- -- -- 326 Commercial business -- -- -- -- 30 ------- ------- ------- ------- ------- Total 1,440 1,478 982 523 775 ------- ------- ------- ------- ------- Number of non-accrual loans 6 9 6 2 5 Accruing loans past due ninety days or more: Mortgage loans: One-to four-family $ -- $ -- $ 342 $ 885 $ 760 Multi-family -- -- -- 761 171 Commercial property -- 72 266 331 180 Construction 108 100 -- -- -- Commercial business and consumer 11 8 42 144 17 ------- ------- ------- ------- ------- Total 119 180 650 2,121 1,128 ------- ------- ------- ------- ------- Number of accruing loans past due ninety days 3 4 7 21 11 or more Total non-performing loans $ 1,559 $ 1,658 $ 1,632 $ 2,644 $ 1,903 ======= ======= ======= ======= ======= Number of non-performing loans 9 13 13 23 16 Allowance for loan losses $ 702 $ 660 $ 654 $ 650 $ 540 ======= ======= ======= ======= ======= Real estate owned, net $ -- $ 122 $ 402 $ 455 $ 367 ======= ======= ======= ======= ======= Number of real estate owned properties -- 1 2 2 3 Ratios: Non-accrual loans to total loans 2.47% 2.65% 1.89% 1.03% 1.70% Non-performing loans to total loans 2.67 2.97 3.15 5.20 4.18 Non-performing loans and real estate owned to total assets 1.21 1.46 1.77 3.40 2.63 Allowance for loan losses to: Non-accrual loans 48.75 44.65 66.60 124.28 69.68 Non-performing loans 45.03 39.81 40.07 24.58 28.38 Total loans 1.20 1.18 1.26 1.28 1.19 Contractual interest income that would have been recognized on non-accrual loans $ 133 $ 96 $ 93 $ 18 $ 81 Actual interest income recognized 142 74 58 -- 9 ------- ------- ------- ------- ------- Interest income (recognized) not recognized $ (9) $ 22 $ 35 $ 18 $ 72 ======= ======= ======= ======= =======
10 12 Accrued interest receivable on accruing loans past due by 90 days or more amounted to $0, $1,000, $8,000, $44,000, and $14,000 at March 31, 1998, 1997, 1996, 1995, and 1994, respectively. Accordingly, if the Company had placed all such loans on non-accrual status at those dates, interest income for the fiscal years ended March 31, 1998, 1997 and 1996 would have been increased by $1,000, $7,000 and $36,000, respectively. Real Estate Owned. Property acquired by the Company as a result of foreclosure on a mortgage loan is classified as real estate owned ("REO") and is initially recorded fair value, less estimated sales costs, with any resulting writedown charged to the allowance for loan losses. Thereafter, an allowance for losses on REO is established for any further declines in fair value less estimated sales costs. The Company obtains an appraisal on REO property as soon as practicable after it takes possession of the real property. The Company will generally reassess the value of REO at least annually thereafter. There was no REO at March 31, 1998. Classified Assets. Federal regulations require that the Bank utilize an internal asset classification system as a means of reporting problem and potential problem assets. The Bank has incorporated the Office of Thrift Supervision ("OTS") internal asset classifications as a part of its credit monitoring system. The Bank currently classifies problem and potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard" if it is inadequately protected by the current equity and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "Doubtful" have all of the weaknesses inherent in those classified "Substandard" with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "Loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated "Special Mention." When an insured institution classifies one or more assets, or portions thereof, as Substandard or Doubtful, it is required to establish a general valuation allowance for loan losses in an amount deemed prudent by management. General valuation allowances, which is a regulatory term, represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as "Loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge-off such amount. A savings institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS which can order the establishment of additional general or specific loss allowances. The OTS, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management has analyzed all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary. The Bank's Internal Auditor reviews and classifies the Bank's assets monthly and reports the results to the Examining and Audit Committee of the Board of Directors on a monthly basis. The Examining and Audit Committee then reviews the report of the Internal Auditor and reports the results of its review to the Board of Directors. Assets are classified in accordance with the management guidelines described above. At March 31, 1998, all of the Bank's classified assets were non-performing loans of which, $436,000 were classified as Special Mention, $1.1 million were classified as Substandard, a $5,000 loan was classified as Loss and no loans were classified as Doubtful. As of March 31, 1998, loans classified as Substandard included loans totaling $766,000 secured by one- to four-family, owner-occupied residences. These loans are classified as Substandard due to delinquencies or other identifiable weaknesses. Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risks inherent in the Company's loan portfolio. The allowance for loan losses is maintained at an amount management considers adequate to cover loan losses which are deemed probable and estimable. The allowance is based upon a number of factors, including asset classifications, economic trends, industry experience and trends, industry and geographic concentrations, estimated collateral values, historical loan loss experience, and the Company's underwriting policies. The Company will continue to monitor and modify its allowance for loan losses as conditions dictate. The OTS, as 11 13 an integral part of its examination process, periodically reviews the Company's allowance for loan losses. The OTS may require the Company to establish additional allowances, based on its judgments of the information available at the time of the examination. The following table sets forth the Company's allowance for loan losses allocated by loan category, the percent of the allocated allowances to the total allowance, and the percent of loans in each category to total loans at the dates indicated.
MORTGAGE LOANS -------------------------------------------- ONE- TO COMMERCIAL FOUR- MULTI- COM- CON- BUSINESS CONSUMER UN- FAMILY FAMILY MERCIAL STRUCTION LOANS LOANS ALLOCATED TOTAL ------- ------ ------- --------- ---------- -------- --------- ----- (DOLLARS IN THOUSANDS) AT MARCH 31, 1998 Allowance amount $212 $ 8 $ 70 $ 42 $ 24 $ 21 $325 $702 Percent of: Total allowance 30% 1% 10% 6% 3% 3% 47% 100% Total loans 78% 3% 8% 5% 4% 2% --% 100% AT MARCH 31, 1997 Allowance amount $211 $ 9 $ 49 $ 29 $ 28 $ 17 $317 $660 Percent of: Total allowance 32% 1% 8% 4% 4% 3% 48% 100% Total loans 78% 4% 7% 4% 5% 2% --% 100% AT MARCH 31, 1996 Allowance amount $184 $ 13 $ 56 $ 32 $ 29 $ 15 $325 $654 Percent of: Total allowance 28% 2% 9% 5% 4% 2% 50% 100% Total loans 75% 6% 7% 5% 5% 2% --% 100% AT MARCH 31, 1995 Allowance amount $204 $ 68 $ 66 $ 19 $ 24 $ 15 $254 $650 Percent of: Total allowance 31% 11% 10% 3% 4% 2% 39% 100% Total loans 76% 7% 8% 2% 5% 2% --% 100% AT MARCH 31, 1994 Allowance amount $128 $ 12 $ 32 $173 $ 24 $ 14 $157 $540 Percent of: Total allowance 24% 2% 6% 32% 4% 3% 29% 100% Total loans 79% 6% 6% 2% 5% 2% --% 100%
12 14 The following table sets forth activity in the Company's allowance for loan losses and the allowance for losses on real estate owned for the periods indicated.
FOR THE YEAR ENDED MARCH 31, ------------------------------------------------------------ 1998 1997 1996 1995 1994 ----- ----- ----- ----- ----- (DOLLARS IN THOUSANDS) ALLOWANCE FOR LOAN LOSSES: Balance at beginning of year $ 660 $ 654 $ 650 $ 540 $ 482 Provision for losses 42 69 90 171 151 Charge-offs: Mortgage loans: One- to four family -- (12) (48) -- (23) Commercial -- -- -- -- -- Construction loans -- -- -- (30) -- Commercial business loans -- (40) (36) (31) (78) Consumer loans -- (11) (2) (2) (4) ----- ----- ----- ----- ----- Total charge-offs -- (63) (86) (63) (105) Recoveries -- -- -- 2 12 ----- ----- ----- ----- ----- Balance at end of year $ 702 $ 660 $ 654 $ 650 $ 540 ===== ===== ===== ===== ===== Ratio of net charge-offs to average loans outstanding --% 0.11% 0.17% 0.13% 0.20% ALLOWANCE FOR LOSSES ON REAL ESTATE OWNED: Balance at beginning of year $ -- $ 38 $ 60 $ 59 $ 89 Provision for losses -- 38 -- 141 64 Net realized losses -- (76) (22) (140) (94) ----- ----- ----- ----- ----- Balance at end of year $ -- $ -- $ 38 $ 60 $ 59 ----- ----- ----- ----- -----
INVESTMENT ACTIVITIES Investment Policies. The investment policy of the Company, which is established by the Board of Directors, is based upon the Company's asset/liability management goals and emphasizes high credit quality and diversified investments while seeking to optimize net interest income within acceptable limits of safety and liquidity. The investment policy is designed to provide and maintain liquidity to meet day-to-day, cyclical and long-term changes in the Company's asset/liability structure. The Company's investment goal has been to invest available funds in highly liquid instruments that have adjustable and fixed rates and that generally, at the time of purchase, do not exceed an average life of eight years with respect to collateralized mortgage obligations ("CMOs") and eleven years with respect to other mortgage-backed securities, or that meet specific requirements of the Company's asset/liability goals. A CMO is a special type of debt security in which the stream of principal and interest payments on the underlying mortgages or mortgage-backed securities is used to create classes with different maturities and, in some cases, amortization schedules as well as a residual interest, with each class possessing different risk characteristics. At March 31, 1998, the Company's securities portfolio amounted to $58.3 million (amortized cost) with an estimated weighted average remaining life of 5.0 years. The Company's investment policy permits it to invest in U.S. government obligations; certain securities of various government-sponsored agencies, including mortgage-backed securities issued/guaranteed by FNMA, FHLMC and the Government National Mortgage Association ("GNMA"); certificates of deposit of insured banks and savings associations; federal funds; and investment grade corporate debt securities (typically issued by municipalities and utility companies) and commercial paper. The Company's investment policy prohibits investment in certain types of mortgage derivative securities that management considers to be high risk. The Company generally purchases only short- and medium-term classes of CMOs guaranteed by FNMA or FHLMC. A substantial portion of the Company's CMOs have consisted of real estate mortgage investment conduits ("REMICs"). 13 15 Thrift Bulletin Number 52, the OTS Policy Statement on securities portfolio policies and unsuitable investment practices ("TB-52"), requires that institutions classify mortgage derivative products acquired, including certain tranches of CMOs, as "high-risk mortgage securities" if such products exhibit greater price volatility than a benchmark fixed-rate 30-year mortgage-backed pass-through security. Institutions may only hold high-risk mortgage securities to reduce interest-rate risk in accordance with safe and sound practices and must also follow certain prudent safeguards in the purchase and retention of such securities. At March 31, 1998, the Company did not have any CMOs that were identified as "high-risk mortgage securities." The Company has never invested in CMO residual interests or in CMO tranches that met the definition of a high-risk mortgage security at the time of investment. Mortgage-Backed Securities. The Company invests in mortgage-backed securities to complement its mortgage lending activities and supplement such activities at times of low mortgage loan demand. At March 31, 1998, the carrying value of mortgage-backed securities totaled $53.1 million, or 41.0% of total assets. The fair value of all mortgage-backed securities totaled $53.5 million at March 31, 1998. Mortgage-backed securities held in the Company's available-for-sale portfolio are carried at fair value. Mortgage-backed securities held in the Company's held-to-maturity portfolio are carried at amortized cost. At March 31, 1998, all securities in the Company's mortgage-backed securities portfolio were directly insured or guaranteed by GNMA, FNMA or FHLMC, thereby providing the certificate holder a guarantee of timely payments of interest and scheduled principal payments, whether or not they have been collected. At March 31, 1998, all of the Company's mortgage-backed securities are fixed-rate with a weighted average yield of 7.17% and an estimated weighted average remaining life of 5.33 years. The Company's mortgage-backed securities portfolio includes CMOs with a fair value at March 31, 1998 of $778,000, a weighted average yield of 6.69% and a weighted average estimated remaining life of 1.6 years. Mortgage-backed securities generally yield less than the loans that underlie such securities because of servicing fees and the cost of payment guarantees or other credit enhancements that reduce credit risk. In addition, mortgage-backed securities are more liquid than individual mortgage loans and may be used to collateralize borrowings of the Company. In general, under OTS regulations mortgage-backed securities issued or guaranteed by GNMA, FNMA and FHLMC and certain AAA-rated mortgage-backed pass-through securities are weighted at no more than 20% for risk-based capital purposes, compared to the 50% risk weighting assigned to most non-securitized residential mortgage loans. See "Regulation -- Regulation of Federal Savings Association -- Capital Requirements." While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed, and value, of such securities. In contrast to mortgage-backed pass-through securities in which cash flow is received (and, hence, prepayment risk is shared) pro rata by all securities holders, the cash flows from the mortgages or mortgage-backed securities underlying CMOs are segmented and paid in accordance with a predetermined priority to investors holding various tranches of such securities or obligations. A particular tranche of a CMO may therefore carry prepayment risk that differs from that of both the underlying collateral and other tranches. The Company typically purchases tranches of CMOs that are categorized as "planned amortization classes," "targeted amortization classes" or "very accurately defined maturities" and are intended to produce stable cash flows in different interest rate environments. 14 16 The following table sets forth activity in the Company's mortgage-backed securities portfolio for the periods indicated.
FOR THE YEAR ENDED MARCH 31, --------------------------------------- 1998 1997 1996 -------- -------- -------- (IN THOUSANDS) Amortized cost at beginning of year $ 39,357 $ 31,559 $ 23,935 Purchases 38,569 22,648 14,137 Sales (19,960) (11,890) (3,709) Principal repayments (4,980) (2,985) (2,812) Premium and discount amortization, net (9) 25 8 -------- -------- -------- Amortized cost at end of year $ 52,977 $ 39,357 $ 31,559 ======== ======== ========
At March 31, 1998, the Company held no securities issued by any one entity with a total carrying value in excess of 10% of the Company's equity at that date, except for obligations of the U.S. government and government-sponsored agencies and certain mortgage-backed securities which are fully collateralized by mortgages held by single-purpose entities and guaranteed by government-sponsored agencies. The following table sets forth the amortized cost and fair value of the Company's securities, by accounting classification category and by type of security, at the dates indicated:
AT MARCH 31, ------------------------------------------------------------------------------------- 1998 1997 1996 ----------------------- ------------------------ ------------------------ AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE COST VALUE --------- -------- --------- -------- --------- -------- (IN THOUSANDS) HELD-TO-MATURITY Mortgage-backed securities: CMOs $ 683 $ 690 $ 996 $ 994 $ 1,108 $ 1,113 Pass-through securities 32,450 32,851 14,078 13,881 5,129 5,249 -------- -------- -------- -------- -------- -------- 33,133 33,541 15,074 14,875 6,237 6,362 Agency and other debt securities 2,398 2,430 3,049 3,014 3,199 3,234 -------- -------- -------- -------- -------- -------- Total 35,531 35,971 18,123 17,889 9,436 9,596 -------- -------- -------- -------- -------- -------- AVAILABLE-FOR-SALE Mortgage-backed securities: CMOs 85 88 8,329 8,116 17,651 17,555 Pass-through securities 19,759 19,901 15,954 15,799 7,671 7,622 -------- -------- -------- -------- -------- -------- 19,844 19,989 24,283 23,915 25,322 25,177 U.S. Treasury -- -- -- -- 6,490 6,493 Agency and other debt securities 75 79 8,029 7,814 8,616 8,530 -------- -------- -------- -------- -------- -------- 75 79 8,029 7,814 15,106 15,023 Mutual fund investments 2,800 2,800 4,655 4,655 1,344 1,344 Net unrealized gain (loss) 149 -- (583) -- (228) -- -------- -------- -------- -------- -------- -------- Total 22,868 22,868 36,384 36,384 41,544 41,544 -------- -------- -------- -------- -------- -------- Total securities, net $ 58,399 $ 58,839 $ 54,507 $ 54,273 $ 50,980 $ 51,140 -------- -------- -------- -------- -------- --------
15 17 The following table sets forth certain information regarding the amortized cost, fair value and weighted average yield of the Company's debt securities at March 31, 1998, by remaining period to contractual maturity. With respect to mortgage-backed securities, the entire amount is reflected in the maturity period that includes the final security payment date and, accordingly, no effect has been given to periodic repayments or possible prepayments.
AT MARCH 31, 1998 ---------------------------------------------------------------------------- AVAILABLE-FOR-SALE HELD-TO-MATURITY ------------------------------------ ------------------------------------ WEIGHTED WEIGHTED AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE COST VALUE YIELD COST VALUE YIELD --------- ----- -------- --------- ----- -------- (DOLLARS IN THOUSANDS) Mortgage-backed securities due: In one year or less $ -- $ -- --% $ 120 $ 121 7.34% After one year through five years 699 694 5.94 391 391 6.00 After five years through ten years -- -- -- 754 780 7.71 After ten years 19,145 19,295 7.06 31,868 32,249 7.35 ------- ------- ------- ------- Total $19,844 $19,989 7.02% $33,133 $33,541 7.34% ======= ======= ======= ======= Agency and other debt securities due: In one year or less $ -- $ -- --% $ -- $ -- --% After one year through five years 30 32 6.00 500 503 7.20 After five years through ten years -- -- -- 1,699 1,723 7.30 After ten years 45 47 5.50 199 204 5.75 ------- ------- ------- ------- Total $ 75 $ 79 5.70% $ 2,398 $ 2,430 7.15% ======= ======= ======= ======= Total due: In one year or less $ -- $ -- --% $ 120 $ 121 7.34% After one year through five years 729 726 5.94 891 894 6.67 After five years through ten years -- -- -- 2,453 2,503 7.43 After ten years 19,190 19,342 7.06 32,067 32,453 7.34 ------- ------- ------- ------- Total $19,919 $20,068 7.01% $35,531 $35,971 7.33% ======= ======= ======= =======
SOURCES OF FUNDS General. Deposits, loan and security repayments and prepayments, proceeds from sales of available-for-sale securities and cash flows generated from operations are the primary sources of the Company's funds for use in lending, investing and for other general purposes. Deposits. The Company offers a variety of deposit accounts with a range of interest rates and terms. The Company's deposits consist of regular (passbook) savings accounts, statement savings accounts, checking accounts, NOW accounts, money market accounts and certificates of deposit. In recent years, the Company has offered certificates of deposit with maturities of up to 30 months. At March 31, 1998, the Company's core deposits (which the Company considers to consist of checking accounts, NOW accounts, money market accounts, regular savings accounts and statement savings accounts) constituted 32.3% of total deposits, compared to 36.1% a year earlier. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. The Company's deposits are obtained predominantly from the Village of Tarrytown and its neighboring communities in Westchester County, New York. The Company relies primarily on customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions significantly affect the Company's ability to attract and retain deposits. The Company does not actively solicit certificate accounts in excess of $100,000 or use brokers to obtain deposits. 16 18 The following table presents the deposit activity of the Company for the periods indicated.
FOR THE YEAR ENDED MARCH 31, 1998 1997 1996 -------- -------- -------- (IN THOUSANDS) Deposits $140,571 $151,962 $147,679 Withdrawals 138,612 147,624 143,571 -------- -------- -------- Net cash inflow 1,959 4,338 4,108 Interest credited 4,707 4,081 3,987 -------- -------- -------- Net increase in deposits $ 6,666 $ 8,419 $ 8,095 ======== ======== ========
At March 31, 1998, the Company had $9.7 million in certificate accounts in amounts of $100,000 or more maturing as follows:
WEIGHTED AMOUNT AVERAGE RATE ------ ------------ (DOLLARS IN THOUSANDS) Within three months $1,561 5.49% After three but within six months 2,441 5.57 After six but within 12 months 2,518 5.58 After 12 months 3,153 5.89 ------ Total $9,673 5.66% ------
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, --------------------------------------------------------------------------------------------- 1998 1997 -------------------------------------------- -------------------------------------------- PERCENT WEIGHTED PERCENT WEIGHTED OF TOTAL AVERAGE OF TOTAL AVERAGE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE -------- -------- -------- ------- -------- -------- (DOLLARS IN THOUSANDS) Checking $ 2,310 2.20% $ 2,771 2.82% NOW 3,853 3.67 2.00% 3,756 3.82 2.00% Money market 2,687 2.56 2.75 3,157 3.21 2.75 Regular savings 14,554 13.86 2.75 15,008 15.26 2.75 Statement savings 10,533 10.03 2.92 10,757 10.94 2.92 Certificate accounts: Less than one year to maturity 53,403 50.86 5.75 49,026 49.86 5.72 One to three years to maturity 17,653 16.82 6.12 13,852 14.09 5.98 -------- ------ ------- ------ Total certificate accounts 71,056 67.68 5.84 62,878 63.95 5.78 -------- ------ ------- ------ Total $104,993 100.00% 4.77% $98,327 100.00% 4.60% ======== ====== ======= ====== AT MARCH 31, -------------------------------------------- 1996 -------------------------------------------- PERCENT WEIGHTED OF TOTAL AVERAGE AMOUNT DEPOSITS RATE -------- -------- -------- (DOLLARS IN THOUSANDS) Checking $ 2,001 2.23% NOW 4,164 4.63 2.00% Money market 3,484 3.88 2.75 Regular savings 16,402 18.24 3.10 Statement savings 11,563 12.86 3.20 Certificate accounts: Less than one year to maturity 40,448 44.99 5.68 One to three years to maturity 11,846 13.17 6.33 -------- ------ Total certificate accounts 52,294 58.16 5.83 -------- ------ Total $ 89,908 100.00% 4.57% ======== ======
Borrowings. As part of its operating strategy, the Company may obtain advances from the Federal Home Loan Bank ("FHLB") of New York as an alternative to retail deposit funds. FHLB advances may also be used to acquire certain other assets as may be deemed appropriate for investment purposes. These advances would be collateralized primarily by certain of the Company's mortgage loans and mortgage-backed securities and secondarily by the Company's investment in capital stock of the FHLB. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the FHLB will advance to member institutions, including the Bank, fluctuates from time to time in accordance with the policies of the OTS and the FHLB. As of March 31, 1998, the maximum amount of FHLB advances available to the Company was $18.9 million, based on the Bank's current investment in FHLB stock; the Company's total FHLB borrowing capacity (including advances), based on 25% of the Bank's assets, was $31.3 million. The Company did not borrow from the FHLB during fiscal 1998. 17 19 SUBSIDIARY ACTIVITIES The Registrant has two wholly-owned subsidiaries: the Bank and TZPFC, a Delaware corporation established in March, 1998. TZPFC is intended to qualify as a real estate investment trust for tax purposes. The Bank and TZPFC do not have any subsidiaries. At March 31, 1998 TZPFC had assets of $1.1 million. PERSONNEL As of March 31, 1998, the Company had 14 full-time employees and one part-time employee. The Company has experienced a very low turnover rate among its employees and, as of March 31, 1998, 11 of the Company's employees have been with the Company for more than five years. The employees are not represented by a collective bargaining unit and the Company considers its relationship with its employees to be good. FEDERAL AND STATE TAXATION FEDERAL TAXATION General. The Registrant and the Bank report their income for tax return purposes on a calendar-year basis using the accrual method of accounting and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's tax reserve for bad debts discussed below. The Registrant and the Bank currently file separate federal income tax returns on a calendar-year basis. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Registrant. The Bank was last audited by the IRS for its taxable year ended December 31, 1994. Recent Tax Legislation Regarding Tax Bad Debt Reserves. Prior to the enactment, on August 20, 1996, of the Small Business Job Protection Act of 1996 (the "Small Business Act"), for federal income tax purposes, thrift institutions such as the Bank, which met certain definitional tests primarily relating to their assets and the nature of their business, were permitted to establish tax reserves for bad debts and to make annual additions thereto, which additions could, within specified limitations, be deducted in arriving at their taxable income. The Bank's deduction with respect to "qualifying loans," which are generally loans secured by certain interests in real property, could be computed using an amount based on a six-year moving average of the Bank's actual loss experience (the "Experience Method"), or a percentage equal to 8.0% of the Bank's taxable income (the "PTI Method"), computed without regard to this deduction and with additional modifications and reduced by the amount of any permitted addition to the non-qualifying reserve. Under the Small Business Act, the PTI Method was repealed and the Bank, as a "small bank" (one with assets having an adjusted basis of $500 million or less) is required to use the Experience Method of computing additions to its bad debt reserve for taxable years beginning with the Bank's taxable year beginning January 1, 1996. In addition, the Bank is required to recapture (i.e., take into taxable income) over a six-year period, beginning with the Bank's taxable year beginning January 1, 1996, the excess of the balance of its bad debt reserves (other than the supplemental reserve) as of December 31, 1995 over the greater of (a) the balance of its "base year reserve," i.e., its reserves as of December 31, 1987 or (b) an amount that would have been the balance of such reserves as of December 31, 1995 had the Bank always computed the additions to its reserves using the Experience Method. However, under the Small Business Act such recapture requirements are suspended for each of the two successive taxable years beginning January 1, 1996 in which the Bank originates a minimum amount of certain residential loans during such years that is not less than the average of the principal amounts of such loans made by the Bank during its six taxable years preceding January 1, 1996. Distributions. To the extent that the Bank makes "nondividend distributions" to shareholders, such distributions will be considered to result in distributions from the Bank's base year reserve to the extent thereof and then from its supplemental reserve for losses on loans, and an amount based on the amount distributed will be included in the Bank's taxable income. Nondividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, distributions in redemption of stock and distributions in partial or complete liquidation. However, dividends paid out of the Bank's current or accumulated earnings and profits, as calculated for federal income tax purposes, will not constitute nondividend distributions and, therefore, will not be included in the Bank's income. The amount of additional taxable income created from an nondividend distribution is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, approximately one and one-half times the nondividend distribution would be includable in gross income for federal income tax purposes, assuming a 34% federal corporate income tax rate. 18 20 Corporate Alternative Minimum Tax. The Internal Revenue Code (the "Code") imposes a tax ("AMT") on alternative minimum taxable income ("AMTI") at a rate of 20%. Taxable income is increased by certain preference items and is also adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Only 90% of AMTI can be offset by net operating loss carryovers, of which the Company currently has none. AMTI is also adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Thus, the Company's AMTI is increased by an amount equal to 75% of the amount by which the Company's adjusted current earnings exceeds its AMTI (determined without regard to this adjustment and prior to reduction for net operating losses). In addition, under pending legislative proposals for taxable years beginning after December 31, 1997 and before January 1, 2009, an environmental tax of 0.12% of the excess of AMTI (with certain modifications) over $2 million would be imposed on corporations, including the Company, whether or not an AMT is paid. Dividends Received Deduction and Other Matters. In any taxable period for which the Registrant owns more than 80% of the Bank's voting stock, the Registrant may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Registrant and the Bank will not file a consolidated tax return, except that if the Registrant and the Bank own more than 20% of the stock of a corporation distributing a dividend then 80% of any dividends received may be deducted. STATE TAXATION New York. The Bank and the Registrant are subject to New York state franchise tax on net income or one of several alternative bases, whichever results in the highest tax. "Net income" means federal taxable income with adjustments. The New York state tax rate for the 1997 and 1996 calendar years was 10.53% and 10.755%, respectively (including the Metropolitan Commuter Transportation District Surcharge). In general, the Registrant will not be required to pay New York state tax on dividends and interest received from the Bank or on gains realized on the sale of Bank stock. In July 1996, New York state enacted legislation to preserve the use of the percentage of taxable income bad debt deduction for thrift institutions such as the Bank. In general, the legislation provides for a deduction equal to 32% of the Bank's New York state taxable income, which is comparable to the deductions permitted under the prior tax law. The legislation also provides for a floating base year, which will allow the Bank's to switch from the percentage of taxable income method to the experience method without recapture of any reserve. Previously, the Bank had established a deferred New York state tax liability for the excess of its New York state tax bad debt reserve over the amount of its base-year reserve. Since the new legislation effectively eliminated the excess state reserve for which a deferred tax liability had been recognized, the Company reduced its deferred tax liability by $166,000, representing a state tax benefit of $252,000 less related federal taxes of $86,000. Generally, New York state tax law has requirements similar to federal requirements regarding the recapture of base-year tax bad debt reserves. One notable exception is that, after the recent legislation, New York continues to require that the Bank maintain its thrift institution charter and hold at least 60% of its assets in specified assets (generally, loans secured by residential real estate or deposits, educational loans, cash and certain government obligations). The Bank expects to continue to meet these requirements and does not anticipate engaging in any transactions which would require recapture of its base-year reserve. Accordingly, it does not maintain a deferred tax liability with respect to such reserve. The Bank's unrecognized deferred state taxes (net of related federal taxes) were approximately $0.6 million at March 31, 1998. Delaware. As a Delaware holding company not earning income in Delaware, the Registrant is exempt from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. REGULATION GENERAL The Bank is subject to extensive regulation, examination and supervision by the OTS, as its chartering agency, and the Federal Deposit Insurance Corporation ("FDIC"), as its deposit insurer. The Bank's deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") of the FDIC, and it is a member of FHLB of New York. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, and it must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The OTS and the FDIC conduct periodic examinations to assess the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings association can engage and is intended primarily for the protection of the insurance fund and depositors. The 19 21 Registrant, as a savings association holding company, is also required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and of the Securities and Exchange Commission (the "SEC") under the federal securities laws. The OTS and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Registrant, the Bank and the operations of both. The following discussion is intended to be a summary of the material statutes and regulations applicable to savings associations, and it does not purport to be a comprehensive description of all such statutes and regulations. REGULATION OF FEDERAL SAVINGS ASSOCIATION Business Activities. The Bank derives its lending and investment powers from the Home Owner's Loan Act, as amended ("HOLA") and the regulations of the OTS thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. These investment powers are subject to various limitations, including (a) a prohibition against the acquisition of any corporate debt security that is not rated in one of the four highest rating categories; (b) a limit of 400% of an association's capital on the aggregate amount of loans secured by nonresidential real estate property; (c) a limit of 20% of an association's assets on commercial loans, with the amount of commercial loans in excess of 10% of assets being limited to small business loans; (d) a limit of 35% of an association's assets on the aggregate amount of consumer loans and acquisitions of certain debt securities; (e) a limit of 5% of assets on non-conforming loans (loans in excess of the specific limitations of HOLA); and (f) a limit of the greater of 5% of assets or an association's capital on certain construction loans made for the purpose of financing what is or is expected to become residential property. Loans to One Borrower. Under HOLA, savings associations are generally subject to the same limits on loans to one borrower as are imposed on national banks. Generally, under these limits, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the association's unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan or extension of credit is fully secured by readily-marketable collateral. Such collateral is defined to include certain debt and equity securities and bullion, but generally does not include real estate. At March 31, 1998, the Bank's limit on loans to one borrower was $2.6 million. At March 31, 1998, the Bank's largest aggregate amount of loans to one borrower was $787,000 and the second largest borrower had an aggregate balance of $616,000. QTL Test. HOLA requires a savings association to meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" in certain "qualified thrift investments" in at least 9 months of the most recent 12-month period. "Portfolio assets" means, in general, an association's total assets less the sum of (a) specified liquid assets up to 20% of total assets, (b) goodwill and other intangible assets, and (c) the value of property used to conduct the association's business. "Qualified thrift investments" includes various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and loans for personal, family, household and certain other purposes up to a limit of 20% of an association's portfolio assets. Recent legislation broadened the scope of "qualified thrift investments" to include 100% of an institution's credit card loans, education loans, and small business loans. A savings association may also satisfy the QTL test by qualifying as a "domestic building and loan association" as defined in the Internal Revenue Code of 1986. At March 31, 1998, the Bank maintained 93.2% of its portfolio assets in qualified thrift investments. The Bank had also met the QTL test in each of the prior 12 months and, therefore, was a qualified thrift lender. A savings association that fails the QTL test must either operate under certain restrictions on its activities or convert to a bank charter. The initial restrictions include prohibitions against (a) engaging in any new activity not permissible for a national bank, (b) paying dividends not permissible under national bank regulations, (c) obtaining new advances from any FHLB, and (d) establishing any new branch office in a location not permissible for a national bank in the association's home state. In addition, within one year of the date a savings association ceases to meet the QTL test, any company controlling the association would have to register under, and become subject to the requirements of, the Bank Holding Company Act of 1956, as amended. If the savings association does not requalify under the QTL test within the three-year period after it failed the QTL test, it would be required to terminate any activity and to dispose of any investment not permissible for a national bank and would have to repay as promptly as possible any outstanding advances from an FHLB. A savings association that 20 22 has failed the QTL test may requalify under the QTL test and be free of such limitations, but it may do so only once. Capital Requirements. The OTS regulations require savings associations to meet four minimum capital standards: a tangible capital ratio requirement of 1.5% of total assets as adjusted under the OTS regulations, a leverage ratio requirement of 4% of Tier I (core) capital to such adjusted total assets, risk-based capital ratio requirement of 4% of Tier I (core) capital to total risk-weighted assets, and a risk-based capital ratio requirement of 8% of total (core and supplementary) capital to total risk-weighted assets. The OTS and the federal banking regulators have proposed amendments to their minimum capital regulations to provide that the minimum leverage capital ratio for a depository institution that has been assigned the highest composite rating of 1 under the Uniform Financial Institutions Rating System will be 3% and that the minimum leverage capital ratio for any other depository institution will be 4%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution. In determining the amount of risk-weighted assets for purposes of the risk-based capital requirement, a savings association must compute its risk-based assets by multiplying its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the United States Government or its agencies to 100% for consumer and commercial loans, as assigned by the OTS capital regulation based on the risks OTS believes are inherent in the type of asset. Tangible capital is defined, generally, as common stockholder's equity (including retained earnings), certain noncumulative perpetual preferred stock and related earnings, minority interests in equity accounts of fully consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and investments in and loans to subsidiaries engaged in activities not permissible for a national bank. Core capital is defined similarly to tangible capital, but core capital also includes certain qualifying supervisory goodwill and certain purchased credit card relationships. Supplementary capital currently includes cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, and the allowance for loan and lease losses. The allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets, and the amount of supplementary capital that may be included as total capital cannot exceed the amount of core capital. The OTS has adopted regulations to require a savings association to account for interest rate risk when determining its compliance with the risk-based capital requirement. A savings association with "above normal" interest rate risk is required, by these regulations, to deduct a portion of its total capital to account for any "above normal" interest rate risk. A savings association's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) resulting from a hypothetical 2% increase or decrease in market rates of interest, divided by the estimated economic value of the association's assets, as calculated in accordance with guidelines set forth by the OTS. At the times when the 3-month Treasury bond equivalent yield falls below 4%, an association may compute its interest rate risk on the basis of a change equal to one-half of that Treasury rate rather than on the basis of 2%. A savings association whose measured interest rate risk exposure exceeds 2% would be considered to have "above normal" risk. The interest rate risk component is an amount equal to one-half of the difference between the association's measured interest rate risk and 2%, multiplied by the estimated economic value of the association's assets. That dollar amount is deducted from an association's total capital in calculating compliance with its risk-based capital requirement. Any required deduction for interest rate risk becomes effective on the last day of the third quarter following the reporting date of the association's financial data on which the interest rate risk was computed. The regulations do not require a savings association with assets of less than $300 million and a risk-based capital ratio in excess of 12% to comply with the standard reporting requirements for the interest rate risk component, unless the OTS determines otherwise, and the association may provide such selected information as the OTS determines. Currently, the Bank qualifies for this exemption from the filing requirements. The regulations also authorize the Director of the OTS to waive or defer an association's interest rate risk component on a case-by-case basis. The OTS has indefinitely deferred implementation of the interest rate component in the computation of an institution's risk-based capital requirement. The OTS continues to monitor the interest rate risk of individual institutions and retains the right to impose additional capital requirements on individual institutions. See note 10 to consolidated financial statements in Item 8 for the Bank's regulatory capital amounts and ratios as of March 31, 1998, compared to the OTS requirements at that date. Limitation on Capital Distributions. OTS regulations currently impose limitations upon capital distributions by savings associations, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger, and other distributions charged against capital. At least 30-days written notice must be given to the OTS of a proposed capital distribution by a savings association, and capital distributions in excess of specified earnings or by certain institutions are subject to approval by the OTS. An association that has capital in excess of all regulatory capital requirements before and after a proposed capital distribution and that is not otherwise restricted in making capital distributions, could, after prior notice but without the approval of the OTS, make capital distributions during a 21 23 calendar year equal to the greater of (a) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year, or (b) 75% of its net earnings for the previous four quarters. Any additional capital distributions would require prior OTS approval. In addition, the OTS can prohibit a proposed capital distribution, otherwise permissible under the regulation, if the OTS has determined that the association is in need of more than normal supervision or if it determines that a proposed distribution by an association would constitute an unsafe or unsound practice. Furthermore, under the OTS prompt corrective action regulations, the Bank would be prohibited from making any capital distribution if, after the distribution, the Bank failed to meet its minimum capital requirements, as described above. See "-- Prompt Corrective Regulatory Action." The OTS has proposed amendments of its capital distribution regulations to reduce regulatory burdens on savings associations. If adopted as proposed, certain savings associations will be permitted to pay capital distributions within the amounts described above for Tier 1 institutions without notice to, or the approval of, the OTS. However, a savings association subsidiary of a savings and loan holding company, such as the Bank, will continue to file a notice unless the specific capital distribution requires an application. Liquidity. The Bank is required to maintain an average daily balance of liquid assets (cash, certain time deposits, certain bankers' acceptances, specified United States Government, state and federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions, and is currently 4%. Monetary penalties may be imposed for failure to meet the liquidity requirement. The Bank's average liquidity ratio for the month ended March 31, 1998 was 58.5%, which exceeded the applicable requirement. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirement. Assessments. Savings associations are required by OTS regulation to pay assessments to the OTS to fund the operations of the OTS. The general assessment, paid on a semi-annual basis, is computed upon the savings association's total assets, including consolidated subsidiaries, as reported in the association's latest quarterly Thrift Financial Report. The assessments paid by the Bank for the fiscal years ended March 31, 1998, 1997 and 1996 totaled $38,000, $35,000 and $31,000, respectively. Branching. Subject to certain limitations, HOLA and the OTS regulations permit federally chartered savings associations to establish branches in any state of the United States. The authority to establish such a branch is available (a) in states that expressly authorize branches of savings associations located in another state and (b) to an association that qualifies as a "domestic building and loan association" under the Code, which imposes qualification requirements similar to those for a "qualified thrift lender" under HOLA. See "-- QTL Test." The authority for a federal savings association to establish an interstate branch network would facilitate a geographic diversification of the association's activities. This authority under HOLA and the OTS regulations preempts any state law purporting to regulate branching by federal savings associations. Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as implemented by OTS regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings association, to assess the association's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating in its most recent examination. The OTS's CRA regulations establish an assessment system that bases an association's rating on its actual performance in meeting community needs. In particular, the assessment system focuses on three tests: (a) a lending test, to evaluate the institution's record of making loans in its service areas; (b) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and (c) a service test, to evaluate the institution's delivery of services through its branches, ATMs, and other offices. Small savings associations would be assessed pursuant to a streamlined approach focusing on a lesser range of information and performance standards. The term "small savings association" is defined as including associations with less than $250 million in assets or an affiliate of a holding company with banking and thrift assets of less than $1 billion, which would include the Bank. Transactions with Related Parties. The Bank's authority to engage in transactions with its "affiliates" is limited by the OTS regulations and by Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an affiliate of the Bank is any company that controls the Bank or any other company that is controlled by a company that controls the Bank, excluding any 22 24 Bank subsidiary other than those that are insured depository institutions. The OTS regulations prohibit a savings association (a) from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act ("BHC Act") and (b) from purchasing the securities of any affiliate other than a subsidiary. Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the savings association and also limits the aggregate amount of transactions with all affiliates to 20% of the savings association's capital and surplus. Extensions of credit to affiliates are required to be secured by collateral in an amount and of a type described in Section 23A, and the purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the association as those prevailing at the time for comparable transactions with nonaffiliated companies. In the absence of comparable transactions, such transactions may only occur under terms and circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies. The Bank's authority to extend credit to its directors, executive officers, and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the FRB thereunder. Among other things, these provisions require that extensions of credit to insiders (a) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the association's capital. In addition, extensions of credit in excess of certain limits must be approved by the association's board of directors. Enforcement. Under the Federal Deposit Insurance Act ("FDI Act"), the OTS has primary enforcement responsibility over savings associations and has the authority to bring enforcement action against all "institution-affiliated parties," including any controlling stockholder or any shareholder, attorney, appraiser and accountant who knowingly or recklessly participates in any violation of applicable law or regulation or breach of fiduciary duty or certain other wrongful actions that causes or is likely to cause more than a minimal loss or other significant adverse effect on an insured savings association. Civil penalties cover a wide range of violations and actions and range from $5,000 for each day during which violations of law, regulations, orders, and certain written agreements and conditions continue, up to $1,000,000 per day for such violations if the person obtained a substantial pecuniary gain as a result of such violation or knowingly or recklessly caused a substantial loss to the institution. Criminal penalties for certain financial institution crimes include fines of up to $1 million and imprisonment for up to 30 years. In addition, regulators have substantial discretion to take enforcement action against an institution that fails to comply with its regulatory requirements, particularly with respect to its capital requirements. Possible enforcement actions range from the types of action that may be taken under the "prompt corrective actions," discussed below under "-- Prompt Corrective Regulatory Action" to the termination of deposit insurance. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS that enforcement action be taken with respect to a particular savings association. If action is not taken by the Director of the OTS, the FDIC has authority to take such action under certain circumstances. Standards for Safety and Soundness. Pursuant to the FDI Act, as amended by Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the Riegle Community Development and Regulatory Improvement Act of 1994 ("Community Development Act"), the OTS and the other federal bank regulatory agencies have adopted guidelines prescribing safety and soundness standards. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the OTS regulations authorize, but do not require, the OTS to order an institution that has been given notice by the OTS that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the "prompt corrective action" provisions of FDICIA. If an institution fails to comply with such an order, the OTS may seek to enforce such order in judicial proceedings and to impose civil money penalties. Prompt Corrective Regulatory Action. FDICIA established a system of prompt corrective action to resolve the problems of undercapitalized depository institutions. Under this system, the federal banking regulators are required to take certain supervisory actions against undercapitalized institutions, the severity of which depends on the institution's degree of capitalization. For this purpose, a savings association would be placed in one of five categories based on the association's 23 25 capital. Generally, a savings association is treated as "well capitalized" if its ratio of total capital to risk-weighted assets is at least 10.0%, its ratio of core capital to risk-weighted assets is at least 6.0%, its ratio of core capital to total assets is at least 5.0%, and it is not subject to any order or directive by the OTS to meet a specific capital level. A savings association will be treated as "adequately capitalized" if its ratio of total capital to risk-weighted assets is at least 8.0%, its ratio of core capital to risk-weighted assets is at least 4.0%, and its ratio of core capital to total assets is at least 4.0% (3.0% if the association receives the highest rating under the Uniform Financial Institutions Rating System). A savings association that has a total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if the association receives the highest rating under the Uniform Financial Institutions Rating System) is considered to be "undercapitalized." A savings association that has a total risk-based capital of less than 6.0% or a Tier 1 risk-based capital ratio or a leverage ratio of less than 3.0% is considered to be "significantly undercapitalized." A savings association that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." The elements of an association's capital for purposes of the prompt corrective action regulations are defined generally as they are under the regulations for minimum capital requirements. See "-- Capital Requirements." Generally, a capital restoration plan must be filed with the OTS within 45 days of the date an association receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." The OTS may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to the five percent of the depository institution's total assets at the time it became "undercapitalized," and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. In the event of a savings and loan holding company's bankruptcy, any commitment by the savings and loan company to a federal bank regulatory agency to maintain the capital of a subsidiary depository institution will be assumed by the bankruptcy trustee and entitled to a priority of payment. If a depository institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." An undercapitalized association also becomes immediately subject to various mandatory restrictions, including restrictions on growth of assets and other forms of expansion. The OTS can also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. "Significantly undercapitalized" institutions are subject to more severe restrictions. Generally, subject to a narrow exception, FDICIA requires the OTS to appoint a receiver or conservator for a savings association that is critically undercapitalized. As of March 31, 1998, the Bank was considered "well capitalized" by the OTS. Where appropriate, the OTS can impose corrective action by a savings and loan holding company under the "prompt corrective action" provisions of FDICIA. Insurance of Deposit Accounts. Pursuant to FDICIA, the FDIC established a risk-based assessment system for determining the deposit insurance assessments to be paid by insured depository institutions. Under the assessment system, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of the reporting period ending seven months before the assessment period. The three capital categories consist of (a) well capitalized, (b) adequately capitalized, or (c) undercapitalized. The FDIC also assigns an institution to one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under the regulation, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied. Assessment rates currently range from 0.0% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.27% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concern). The Bank's assessment rate for deposit insurance was 0.0% for 1998 and 1997. The FDIC is authorized to raise the assessment rates as necessary to maintain the required reserve ratio of 1.25%; both the BIF and SAIF currently satisfy the reserve ratio requirement. The Deposit Insurance Funds Act of 1996 (the "Funds Act") provides that the FDIC cannot assess regular insurance assessments for an insurance fund unless required to maintain or to achieve the designated reserve ratio of 1.25%, except on those of its member institutions that are not classified as "well capitalized" or that have been found to have "moderately severe" or "unsatisfactory" financial, operational or compliance weaknesses. The Bank has not been so classified by the FDIC or the OTS. In addition, the Funds Act expanded the assessment base for the payments on the bonds ("FICO bonds") issued in the late 24 26 1980s by the Financing Corporation to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. Beginning January 1, 1997, the deposits of both BIF- and SAIF-insured institutions are assessed for the payments on the FICO bonds. Until December 31, 1999, or such earlier date on which the last savings association ceases to exist, the rate of assessment for BIF-assessable deposits shall be one-fifth of the rate imposed on SAIF-assessable deposits. The annual rate of assessment on SAIF-assessable deposits for the payments on the FICO bonds for the semi-annual period beginning January 1, 1997 was 0.0648%, for the semi-annual period beginning on July 1, 1997, the annual rate was 0.063%, and currently the rate of assessment is 0.0622%. The Funds Act also provides for the merger of the BIF and SAIF on January 1, 1999, with such merger being conditioned upon the prior elimination of the thrift charter. The Funds Act required the Secretary of the Treasury to conduct a study of relevant factors with respect to the development of a common charter for all insured depository institutions and the abolition of separate charters for banks and thrifts and to report the Secretary's conclusions and the findings to the Congress. The Secretary of the Treasury has recommended that the separate charter for thrifts be eliminated only if other legislation is adopted that permits bank holding companies to engage in certain non-financial activities. Absent legislation permitting such non-financial activity, the Secretary of the Treasury recommended retention of the thrift charter. The Secretary of the Treasury also recommended the merger of the BIF and the SAIF irrespective of whether the thrift charter is eliminated. Other proposed legislation has been introduced in Congress to eliminate the federal thrift charter, but the future of such legislation is uncertain. Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. Federal Home Loan Bank System. The Bank is a member of the FHLB of New York, which is one of the regional FHLBs composing the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. The Bank, as a member of the FHLB of New York, is required to acquire and hold shares of capital stock in the FHLB of New York in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year or 1/20 of its advances (borrowings) from the FHLB of New York. The Bank was in compliance with this requirement with an investment in FHLB of New York stock at March 31, 1998, of $943,000. Any advances from a FHLB must be secured by specified types of collateral, and all long-term advances may be obtained only for the purpose of providing funds for residential housing finance. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of earnings that the FHLBs can pay as dividends to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. For the fiscal years ended March 31, 1998, 1997 and 1996, dividends from the FHLB of New York to the Bank amounted to $49,000, $37,000 and $37,000, respectively. If dividends were reduced, or interest on future FHLB advances increased, the Bank's net interest income would likely also be reduced. Federal Reserve System. The Bank is subject to provisions of the FRA and the FRB's regulations pursuant to which depository institutions may be required to maintain non-interest-earning reserves against their deposit accounts and certain other liabilities. Currently, reserves must be maintained against transaction accounts (primarily NOW and regular checking accounts). The FRB regulations generally require that reserves be maintained in the amount of 3% of the aggregate of transaction accounts up to $47.8 million. The amount of aggregate transaction accounts in excess of $47.8 million are currently subject to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 12%. The FRB regulations currently exempt $4.7 million of otherwise reservable balances from the reserve requirements, which exemption is adjusted by the FRB at the end of each year. The Bank is in compliance with the foregoing reserve requirements. Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a FRB, or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OTS. FHLB System members are also authorized to borrow from the Federal Reserve "discount window," but FRB regulations require such institutions to exhaust all FHLB sources before borrowing from a FRB. HOLDING COMPANY REGULATION General. The Registrant is a unitary bank holding company within the meaning of the HOLA. As such, the Registrant is required to register with the OTS and is subject to OTS examination, regulation and reporting requirements. The OTS has enforcement authority over the Registrant. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the Bank. 25 27 The Registrant is required to obtain the prior approval of the OTS to acquire all, or substantially all, of the assets of another savings institution or holding company thereof. Prior OTS approval is required for the Registrant to acquire direct or indirect ownership or control of any voting securities of a non-subsidiary savings institution, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA, if, after giving effect to such acquisition, the Registrant would, directly or indirectly, own or control more than 5% of any class of voting shares of such institution or company. Interstate Banking. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. Under New York law, reciprocal interstate acquisitions are authorized for savings and loan holding companies and savings institutions. Certain states do not authorize interstate acquisitions under any circumstances; however, federal law authorizing acquisitions in supervisory cases preempts such state law. Acquisition of the Holding Company. Federal law generally provides that no person (including a company), or group acting in concert, directly or indirectly, may acquire 10% or more of a class of the outstanding voting securities of a savings association holding company without giving at least 60 days written notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition. Such acquisitions of control may be disapproved if it is determined, among other things, that (i) the acquisition would substantially lessen competition; (ii) the financial condition of the acquiring person might jeopardize the financial stability of the savings institution or prejudice the interests of its depositors; or (iii) the competency, experience or integrity of the acquiring person or the proposed management personnel indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person. In addition, federal regulations governing conversions of mutual savings institutions to the stock form of organization prohibit the direct or indirect acquisition without OTS approval of more than 10% of any equity security of a savings institution within three years of the savings institution's conversion to stock form. This limitation applies to acquisitions of the stock of the Registrant. Such acquisition may be disapproved if it is found, among other things, that the proposed acquisition (i) would frustrate the purposes of the provisions of the regulations regarding conversions, (ii) would be manipulative or deceptive, (iii) would subvert the fairness of the conversion, (iv) would be likely to result in injury to the savings institution, (v) would not be consistent with economical home financing, (vi) would otherwise violate law or regulation, or (vii) would not contribute to the prudent deployment of the savings institution's conversion proceeds. Federal Securities Laws. The Registrant's common stock is registered with the SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended ("Exchange Act"). The Registrant is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Exchange Act. ITEM 2. PROPERTIES The Company conducts its business through its office located in Tarrytown, New York. The property, which had a net book value of $444,000 as of March 31, 1998, was acquired in 1973. Management believes that the Company's current facilities are adequate to meet the present and immediately foreseeable needs of the Company. ITEM 3. LEGAL PROCEEDINGS The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings in the aggregate are believed by management to be immaterial to the Company's financial condition and results of operations. 26 28 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of June 1, 1998, there were approximately 300 stockholders of record. This does not reflect the number of persons or entities who hold their common stock in nominee or "street" name through various brokerage firms. The shares of common stock are quoted on The NASDAQ Stock Market under the symbol "TPNZ." The table below sets forth the dividends declared and the high and low closing sale price per common share for the quarters indicated.
CLOSING SALES PRICE CASH ---------------------------------- DIVIDENDS END OF QUARTER ENDED DECLARED HIGH LOW PERIOD ------------------ --------- ------- ------- ------- March 31, 1996 $0.05 $12.750 $11.375 $12.000 June 30, 1996 0.05 12.250 11.750 12.000 September 30, 1996 0.05 13.000 12.000 12.500 December 31, 1996 0.05 14.125 13.625 13.625 March 31, 1997 0.05 15.250 14.250 14.250 June 30, 1997 0.07 17.500 14.000 17.500 September 30, 1997 0.07 18.625 16.250 18.625 December 31, 1997 0.07 22.625 18.000 18.750 March 31, 1998 0.07 20.313 18.375 20.250
THE REGISTRANT'S TRANSFER AGENT AND REGISTRAR CAN BE CONTACTED AT: CHEMICAL MELLON SHAREHOLDER SERVICES PO BOX 590 RIDGEFIELD PARK, NJ 07660 ATTN: SHAREHOLDER RELATIONS (800) 851-9677 27 29 ITEM 6. SELECTED FINANCIAL DATA
AT OR FOR THE FISCAL YEAR ENDED MARCH 31 ------------------------------------------------------------------ 1998 1997 1996 1995 1994 ----------- -------- ----------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SELECTED FINANCIAL CONDITION DATA: Total assets $ 129,345 $121,841 $ 114,790 $ 91,149 $ 86,388 Loans, net 57,623 55,110 51,174 50,233 45,026 Mortgage-backed securities 53,122 38,989 31,414 23,659 21,157 Other securities 5,277 15,518 19,566 6,722 9,637 Deposits 104,993 98,327 89,908 81,813 77,510 Shareholders' equity (1) 21,800 21,228 22,360 7,818 7,201 SELECTED OPERATING DATA: Interest income $ 9,393 $ 8,591 $ 7,624 $ 6,547 $ 6,346 Interest expense 4,721 4,106 4,002 2,912 2,766 ----------- -------- ----------- -------- -------- Net interest income 4,672 4,485 3,622 3,635 3,580 Provision for loan losses 42 69 90 171 151 ----------- -------- ----------- -------- -------- Net interest income after provision for loan losses 4,630 4,416 3,532 3,464 3,429 Non-interest income 268 152 211 67 158 Non-interest expense (excluding SAIF special assessment) 3,010 2,849 2,297 2,087 1,832 SAIF special assessment (2) -- 538 -- -- -- ----------- -------- ----------- -------- -------- Income before income tax expense and cumulative effect of changes in accounting principles 1,888 1,181 1,446 1,444 1,755 Income tax expense (3) 791 326 609 610 741 ----------- -------- ----------- -------- -------- Income before cumulative effect of changes in accounting principles 1,097 855 837 834 1,014 Cumulative effect of changes in accounting principles: Income taxes -- -- -- -- 100 Postretirement health care benefits, net -- -- -- -- (100) ----------- -------- ----------- -------- -------- Net income (4) $ 1,097 $ 855 $ 837 $ 834 $ 1,014 =========== ======== =========== ======== ======== SELECTED STATISTICAL DATA: (5) Return on average assets (4) 0.88% 0.74% 0.81% 0.93% 1.18% Return on average equity (4) 5.12 3.97 6.04 10.81 15.25 Net interest margin (6) 3.79 3.98 3.59 4.16 4.26 Average interest rate spread (7) 2.90 3.07 2.91 3.80 3.94 Equity to total assets at end of period 16.85 17.42 19.48 8.58 8.34 Average equity to average assets 17.10 18.57 13.34 8.65 7.74 Efficiency ratio (8) 62.16 72.11 60.75 50.80 47.51 Non-interest expense to average assets (4) 2.40 2.92 2.21 2.34 2.13 Non-performing loans to total loans 2.67 2.97 3.15 5.20 4.18 Allowance for loan losses to non-performing loans 45.03 39.81 40.07 24.58 28.38 Allowance for loan losses to total loans 1.20 1.18 1.26 1.28 1.19 Non-performing assets to total assets 1.21 1.46 1.77 3.40 2.63 Dividend payout ratio (9)(12) 35.73 34.04 17.23 Book value per share (10)(12) $ 14.75 $ 13.84 $ 13.80 Basic earnings per share (11)(12) $ 0.80 $ 0.60 $ 0.31 Diluted earnings per share (11)(12) $ 0.77 $ 0.59 $ 0.31 Cash dividends per share (12) $ 0.28 $ 0.20 $ 0.05
(1) For 1998, 1997 and 1996, includes net proceeds of $14.9 million from the sale of the Company's common stock in connection with the Bank's Conversion (2) Represents the Bank's share of a special assessment imposed on all financial institutions with deposits insured by the SAIF. (3) Income tax expense for fiscal 1997 has been reduced by a tax benefit of $166,000 resulting from a change in New York State tax law. (4) If the after-tax SAIF charge and the state tax benefit described in notes (2) and (3) above were excluded, the net income for fiscal 1997 would have been $1,018,000, resulting in a return on average assets of 0.88% and a return on average equity of 4.72%. The ratio of non-interest expense to average assets would have been 2.45% without the SAIF charge. (5) With the exception of end-of-period ratios, all ratios are based on average balances. (6) Net interest income divided by average interest-earning assets. (7) The difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities (8) Non-interest expense, excluding real estate owned expenses, divided by net interest income plus non-interest income, excluding securities gains/losses. Excluding also the SAIF special assessment the efficiency ratio for fiscal 1997 would have been 60.45% (9) Dividends paid as a percentage of net income. Ratio for fiscal 1996 is based on dividends paid in the fourth quarter ended March 31, 1996 as a percentage of net income for the six-month period following the Bank's Conversion. If based on net income for the fourth quarter, the ratio would have been 32.93%. (10) Shareholders' equity divided by total shares of common stock outstanding at March 31 (1,478,062 in 1998, 1,534,062 in 1997 and 1,620,062 in 1996). (11) Reflects the adoption in 1998 of SFAS No. 128. Prior periods have been restated. Earnings per share for fiscal 1996 is stated from the date of Bank's Conversion. There were no common stock equivalents in fiscal 1996. (12) Data for the periods prior to the Registrant's initial public offering in 1995 and 1994 are not applicable. 28 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on its interest-earning assets, such as loans and securities, and the interest expense on its interest-bearing liabilities, such as deposits. The Company also generates non-interest income such as service charges and other fees. The Company's non-interest expense consists of compensation and benefits, occupancy expenses, federal deposit insurance costs, data processing service fees, net costs of real estate owned and other operating expenses. The Company's results of operations are significantly affected by general economic and competitive conditions (particularly changes in market interest rates), government policies, changes in accounting standards and actions of regulatory agencies. LIQUIDITY AND CAPITAL RESOURCES Liquidity is the ability of the Company to generate sufficient cash flow to meet funding needs, depositor withdrawals and operating expenses. The Company's cash flows are derived from operating activities, investing activities and financing activities. Cash flows from operating activities consist primarily of interest income received and interest expense paid. Net cash flows from investing activities consist primarily of loan originations and payments (including amortization of principal and prepayments) and the purchase, maturity and sale of securities, including mortgage-backed securities. During the years ended March 31, 1998, 1997 and 1996, the Company's disbursements for loan originations totaled $12.8 million, $11.9 million and $9.3 million, respectively. Purchases of securities totaled $41.8 million, $29.7 million and $33.8 million for the years ended March 31, 1998, 1997 and 1996, respectively. Proceeds from the sales of available-for-sale securities totaled $27.0 million, $13.9 million and $3.8 million for the years ended March 31, 1998, 1997 and 1996, respectively. Financing activity cash flows are generated primarily from deposit activity. For the fiscal years ended March 31, 1998, 1997 and 1996, the Company experienced net increases in deposits (including the effect of interest credited) of $6.7 million, $8.4 million and $8.1 million, respectively, primarily relating to certificates of deposit. As a result of the flat yield curve in recent years, deposit products such as shorter term certificate of deposits have been a more attractive investment alternative for the Company's customers than longer term securities. The Company has other sources of liquidity if a need for additional funds arises, including borrowing capacity from the FHLB of New York of up to 25% of the Bank's assets, which amounts to $31.3 million at March 31, 1998. There were no such borrowings outstanding at March 31, 1998. The utilization of particular sources of funds depends on comparative costs and availability. While maturities and scheduled amortization of loans and securities provide an indication of the timing of the receipt of funds, changes in interest rates, economic conditions, and competition strongly influence mortgage prepayment rates and deposit flows, reducing the predictability of the timing of these cash flows. At March 31, 1998, the Company had outstanding loan origination commitments of $1.0 million, undisbursed construction loans in process of $549,000 and unadvanced commercial lines of credit of $15,000. The Company anticipates that it will have sufficient funds available to meet its current origination and other lending commitments. Certificates of deposit scheduled to mature in one year or less from March 31, 1998 totaled $53.4 million with a weighted average rate of 5.75%. Based upon the Company's most recent experience and pricing strategy, management believes that a significant portion of such deposits will remain with the Bank. The main source of liquidity for the Registrant is dividends from the Bank. The Registrant may access capital markets through the issuance of stock or debt for additional sources of funds. The main cash outflows are payments of dividends to shareholders and repurchases of the Registrant's common stock. Through March 31, 1998, the Registrant has repurchased for its treasury 142,000 shares of its common stock, or 8.8% of the shares issued in the Stock Offering at an aggregate cost of $2.1 million. The Registrant's ability to pay dividends to shareholders depends substantially on dividends received from the Bank. The Bank may not declare or pay cash dividends on its common stock if the effect thereof would cause equity to be reduced below applicable regulatory capital requirements or the amount required to be maintained for the liquidation account established in connection with the Conversion. Unlike the Bank, the Registrant is not subject to OTS regulatory restrictions on the payment of dividends to its shareholders, however, it is subject to the requirements of Delaware law. Delaware law generally limits dividends to an amount equal to the excess of the net assets of the Registrant (the amount by which total assets exceed total liabilities) over its statutory capital, or if there is no such excess, to its profits for the current and/or immediately preceding fiscal year. As discussed in "Item 1--Business--Regulation--Regulation of Federal Savings Associations--Capital Requirements", OTS regulations require minimum capital standards for savings associations, such as the Bank. The Bank satisfied these minimum capital standards at March 31, 1998 with tangible and Tier I (core) capital ratios of 13.8%, Tier I risk-based capital ratio of 43.3% and total risk-based capital ratio of 44.6%. These capital requirements, which are applicable to the Bank only, 29 31 do not consider additional capital held at the holding company level, and require certain adjustments to the Bank's total equity to arrive at the various regulatory capital amounts. ANALYSIS OF NET INTEREST INCOME The following table sets forth the Company's average balance sheets, average yields and costs, and certain other information for fiscal 1998, 1997 and 1996. The yields and costs were derived by dividing interest income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Substantially all average balances were computed based on month-end balances, producing results which approximate average daily balances. Interest income includes the effect of deferred fees and discounts which are considered yield adjustments.
FOR THE YEAR ENDED MARCH 31, ------------------------------------------------------------------ 1998 1997 -------------------------------- ------------------------------ AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE -------- -------- ------- -------- -------- ------- ASSETS: (DOLLARS IN THOUSANDS) Interest-earning assets: Loans (1) $ 57,779 $5,004 8.66% $ 55,354 $4,721 8.53% Mortgage-backed securities (2) 44,566 3,175 7.12 38,141 2,719 7.13 Other securities (2) 9,379 605 6.45 12,500 794 6.35 Federal funds sold 9,342 505 5.41 4,538 234 5.16 FHLB stock 715 49 6.85 579 37 6.39 Other 1,400 55 3.93 1,717 86 5.01 -------- ------ -------- ------ Total interest-earning assets 123,181 $9,393 7.63% 112,829 $8,591 7.61% ====== ====== Allowance for loan losses (681) (657) Non-interest-earning assets 2,676 3,909 -------- -------- Total assets $125,176 $116,081 ======== ======== LIABILITIES AND EQUITY: Interest-bearing liabilities: NOW and money market $ 6,508 $ 150 2.30% $ 6,491 $ 160 2.46% Savings accounts 25,153 716 2.85 26,662 800 3.00 Short term borrowings -- -- -- 204 12 5.61 Certificate accounts and other 68,102 3,855 5.66 57,136 3,134 5.49 -------- ------ -------- ------ Total interest-bearing liabilities 99,763 $4,721 4.73% 90,493 $4,106 4.54% ====== ====== Checking accounts 2,542 2,255 Other non-interest-bearing liabilities 1,464 1,778 -------- -------- Total liabilities 103,769 94,526 Equity 21,407 21,555 -------- -------- Total liabilities and equity $125,176 $116,081 ======== ======== Net interest income $4,672 $4,485 ====== ====== Average interest rate spread (3) 2.90% 3.07% Net interest margin (4) 3.79 3.98 Ratio of interest-earning assets to interest-bearing liabilities 123.47% 124.68%
FOR THE YEAR ENDED MARCH 31, ------------------------------ 1996 ------------------------------ AVERAGE AVERAGE BALANCE INTEREST RATE -------- -------- ------- ASSETS: (DOLLARS IN THOUSANDS) Interest-earning assets: Loans (1) $ 51,621 $4,465 8.65% Mortgage-backed securities (2) 25,660 1,811 7.06 Other securities (2) 10,338 576 5.57 Federal funds sold 10,846 639 5.89 FHLB stock 514 37 7.20 Other 1,963 96 4.89 -------- ------ Total interest-earning assets 100,942 $7,624 7.55% ====== Allowance for loan losses (645) Non-interest-earning assets 3,579 -------- Total assets $103,876 ======== LIABILITIES AND EQUITY: Interest-bearing liabilities: NOW and money market $ 8,798 $ 200 2.27% Savings accounts 28,120 982 3.49 Short term borrowings -- -- -- Certificate accounts and other 49,288 2,820 5.72 -------- ------ Total interest-bearing liabilities 86,206 $4,002 4.64% ====== Checking accounts 2,069 Other non-interest-bearing liabilities 1,743 -------- Total liabilities 90,018 Equity 13,858 -------- Total liabilities and equity $103,876 ======== Net interest income $3,622 ====== Average interest rate spread (3) 2.91% Net interest margin (4) 3.59 Ratio of interest-earning assets to interest-bearing liabilities 117.09%
(1) Balances are net of deferred loan fees, loan discounts and premiums, and loans in process. Non-accrual loans are included in the balances. (2) Balances represent amortized cost. (3) Average interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average total interest-earning assets. 30 32 The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
FISCAL 1998 VS. 1997 FISCAL 1997 VS. 1996 ---------------------------------- ---------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO DUE TO ------------------- NET ------------------- NET VOLUME RATE CHANGE VOLUME RATE CHANGE ------ ---- ------ ------ ---- ------ (IN THOUSANDS) Interest-earning assets: Loans $ 210 $ 73 $ 283 $ 319 $ (63) $ 256 Mortgage-backed securities 460 (4) 456 889 19 908 Other securities (202) 13 (189) 131 87 218 Federal funds sold 259 12 271 (334) (71) (405) FHLB stock 9 3 12 4 (4) -- Other (14) (17) (31) (12) 2 (10) ----- ----- ----- ----- ----- ----- Total 722 80 802 997 (30) 967 ----- ----- ----- ----- ----- ----- Interest-bearing liabilities NOW and money market accounts -- (10) (10) (55) 15 (40) Savings accounts (45) (39) (84) (49) (133) (182) Certificate accounts and other 621 100 721 432 (118) 314 Short term FHLB borrowings (12) -- (12) 12 -- 12 ----- ----- ----- ----- ----- ----- Total 564 51 615 340 (236) 104 ----- ----- ----- ----- ----- ----- Net change in net interest income $ 158 $ 29 $ 187 $ 657 $ 206 $ 863 ===== ===== ===== ===== ===== =====
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND 1997 Total assets at March 31, 1998 increased $7.5 million, to $129.3 million from $121.8 million at March 31, 1997, reflecting the Company's policy of controlled growth. This increase in total assets reflects the securities portfolio increase of $3.9 million to $58.4 million at March 31, 1998 from $54.5 million at March 31, 1997 in addition to an increase of $300,000 and $963,000 in federal funds sold and interest-bearing deposits, respectively. Within the securities portfolio, mortgage-backed securities totaled $53.1 million at March 31, 1998 compared to $38.9 million at March 31, 1997 reflecting a shift to these securities from U.S. agency securities throughout the year. As a result of management's intent to reinvest funds from deposit growth and the proceeds from maturities of securities and sales of available-from-sale securities into securities that will be held until their maturity, the available-for sale securities portfolio decreased to $22.9 million at March 31, 1998, as compared to $36.4 million at March 31, 1997. The held-to-maturity portfolio increased to $35.5 million at March 31, 1998, from $18.1 million at March 31, 1997. The shift in the securities portfolio was made principally in the third and fourth fiscal quarters to higher credit quality mortgage-backed securities (principally GNMA securities). In addition, loans, net, increased $2.5 million to $57.6 million at March 31, 1998, compared to $55.1 million at March 31, 1997, primarily due to the origination of one- to four-family mortgage loans. Deposits, which primarily funded the securities and loan growth, amounted to $105.0 million at March 31, 1998, an increase of $6.7 million from $98.3 million at March 31, 1997. The increase in deposits primarily reflects an increase of $8.2 million in certificate accounts. Shareholders' equity was $21.8 million at March 31, 1998, an increase of $572,000 from $21.2 million at March 31, 1997. The increase primarily reflects net earnings retained after dividends of $705,000, a $438,000 improvement in the net unrealized gain (loss) on available-for-sale securities and an increase of $419,000 relating to the employee stock ownership plan ("ESOP") and the recognition and retention plans ("RRPs"), substantially offset by the repurchase during the year of 56,000 common shares for the treasury, at a cost of $990,000. The ratio of shareholders' equity to total assets at March 31, 1998 was 16.85%, as compared with 17.42% at March 31, 1997. The Company's tangible book value per share was $14.75 at March 31, 1998 compared to $13.84 at March 31, 1997. 31 33 COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MARCH 31, 1998 AND 1997 General. Net income for the fiscal year ended March 31, 1998 amounted to $1,097,000 or $0.80 basic earnings per share ($0.77 diluted earnings per share), as compared to $855,000 or $0.60 basic earnings per share ($0.59 diluted earnings per share) for the fiscal year ended March 31, 1997. The results for the 1997 fiscal year include a non-recurring charge of $538,000 ($329,000 net of taxes) for a special assessment imposed to recapitalize the SAIF of the FDIC, in addition to a tax benefit of $166,000 due to a change in New York State tax law. Excluding the SAIF assessment and the change in New York State tax law, net income for the 1997 fiscal year was $1,018,000 or $0.71 basic earnings per share ($0.70 diluted earnings per share). Net Interest Income. Net interest income for fiscal 1998 totaled $4.7 million as compared to $4.5 million for fiscal 1997. The increase is primarily due to an overall increase in interest-earning assets, the effects of which were primarily offset by a decline in the average spread. The average interest rate spread and net interest margin decreased to 2.90% and 3.79% for fiscal 1998, compared to 3.07% and 3.98%, respectively, for fiscal 1997. The decreases in spread and margin for the fiscal year are due primarily to the increase in certificates of deposit which have higher average costs than the Company's other interest-bearing liabilities. The decrease in spread and margin for the year was partially offset by the increased volume and yield in the securities portfolio, and the increased volume and yield associated with the loan portfolio. Interest Income. Total interest income for fiscal 1998 amounted to $9.4 million, as compared to $8.6 million for fiscal 1997. This increase primarily reflects an $10.4 million increase in average interest-earning assets funded primarily by deposit growth. The overall increase in average interest-earning assets primarily reflects increases of $2.4 million in the average loan portfolio, $6.4 million in the average mortgage-backed securities portfolio, and a $4.8 million increase in federal funds sold, partially offset by a decline of $3.1 million in the average other securities portfolio. The average yield on interest-earning assets was 7.63% for fiscal 1998, a slight increase from 7.61% for fiscal 1997. The increase in the average balance of loans reflects the Company's general strategy of emphasizing loan originations. The increase in the average balance of mortgage-backed securities reflects management's efforts during the latter part of the 1998 fiscal year to invest proceeds from the payment of other securities and increased deposit flow into higher yielding mortgage-backed securities. Because this effort occurred during the latter part of fiscal 1998, such increase was not fully reflected in the average yield of such securities for the entire year, which declined slightly from the 1997 fiscal year. In addition, while the average yield of loans increased 13 basis points from 8.53% in fiscal 1997 to 8.66% in fiscal 1998, the impact of this increase on the average yield of interest-earning assets was partly offset by the increase in the average balance of lower yielding federal funds sold. Interest Expense. Interest expense for the year ended March 31, 1998 totaled $4.7 million, an increase from $4.1 million for the 1997 fiscal year. The increase is attributable to a $9.3 million increase in average interest-bearing deposits coupled with the rise in the average cost of funds to 4.73%, from 4.54% for the prior year. The increases relate primarily to certificate accounts and other interest-bearing liabilities which averaged $68.1 million at an average cost of 5.66% for the 1998 fiscal year, as compared to an average balance of $57.1 million at an average cost of 5.49% for the 1997 fiscal year. The growth in certificate accounts and other interest-bearing liabilities was partially offset by a decline in savings accounts and NOW and money market accounts, which have lower average costs than certificate accounts. The overall deposit growth is consistent with management's strategy to increase retail deposits. Provision for Loan Losses. For fiscal years 1998 and 1997, the provision for loan losses was $42,000 and $69,000, respectively. The provision reflects management's evaluation of the adequacy of the allowance for loan losses, the level and composition of non-performing loans and their collateral, and the continued growth of the loan portfolio. The allowance for loan losses was $702,000 at March 31, 1998, compared to $660,000 at March 31, 1997. There were no charge-offs for fiscal 1998 compared to $63,000 in fiscal 1997. Non-performing loans at March 31, 1998 were $1.6 million, compared to $1.7 million at March 31, 1997. The ratio of non-performing loans to total loans was 2.67% at March 31, 1998 compared to 2.97% at March 31, 1997. See "Item 1 -- Business -- Asset Quality." Non-Interest Income. Non-interest income totaled $268,000 for the fiscal year ended March 31, 1998 compared to $152,000 for the fiscal 1997, reflecting increased gains on the sales of available-for-sale securities and an increase in service charges and other fees. Non-Interest Expense. Non-interest expense totaled $3.0 million and $3.4 million, respectively for fiscal years 1998 and 1997. The decrease in non-interest expense in the current year is primarily attributable to the $538,000 FDIC special assessment recognized in fiscal 1997, reductions in the regular insurance premium assessed on deposits by the FDIC and a decrease in the net cost of real estate owned, partially offset by increases in compensation and benefits expense and professional services expenses. The increases in compensation and benefits expense primarily reflect the increased 32 34 recognition of expense associated with the ESOP due to the higher average stock price of the Registrant in the current year as compared to the prior year, a full years recognition of expense for the Company's RRP program in fiscal 1998 compared to nine months of expense after the program was approved by the Company's shareholders in fiscal 1997 and performance-based increases for certain staff members. Professional services expenses increased principally due to fees relating to the identification and evaluation of strategic alternatives leading to the execution of the Merger Agreement. Income Tax Expense. Income tax expense for the fiscal years ended March 31, 1998 and 1997 was $791,000 and $326,000, respectively, reflecting higher income in the current year and an effective tax rate of 41.9% and 27.6%, respectively. Tax expense for the year ended March 31, 1997 reflects a benefit of $166,000 due to the reduction of a deferred tax liability caused by an amendment to the New York State tax law enacted during the year. The amendment changed the base-year for tax bad debt reserves to December 31, 1995 and eliminated the need for a deferred tax liability previously recognized for reserves in excess of the base-year amount. Without this one-time benefit, the effective tax rate would have been 41.7% for fiscal 1997. COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED MARCH 31, 1997 AND 1996 General. Net income for the fiscal year ended March 31, 1997 was $855,000, or $0.60 basic earnings per share ($0.59 diluted earnings per share), as compared to $837,000 for the fiscal year ended March 31, 1996. Basic and diluted earnings per share were $0.31 for the six-month period from the Company's initial public offering to March 31, 1996. The results for fiscal 1997 reflect a non-recurring charge of $538,000 ($329,000 net of taxes) for the special assessment to recapitalize the SAIF. Also included in net income for fiscal 1997 was a tax benefit of $166,000 due to a change in New York State tax law. Net Interest Income. Net interest income for fiscal 1997 totaled $4.5 million as compared to $3.6 million for fiscal 1996, an increase of 23.8%. The average interest rate spread and net interest margin increased to 3.07% and 3.98%, respectively, for fiscal 1997, compared to 2.91% and 3.59%, respectively, for fiscal 1996. These increases reflect: (i) greater average interest-earning assets in fiscal 1997 primarily attributable to the investment of Stock Offering proceeds for the entire fiscal year, compared to the investment of such funds for only six months in fiscal 1996; (ii) slightly higher yield on total interest-earning assets resulting from the shift in overall asset mix from federal funds and treasury securities into higher yielding mortgage-backed securities; and (iii) enhanced earnings from the increased volume of mortgage loans. Net income also benefited from additional net interest income realized on deposit growth. Interest Income. Total interest income for fiscal 1997 amounted to $8.6 million, as compared to $7.6 million for fiscal 1996. This increase primarily reflects an $11.9 million increase in average interest-earning assets principally due to the investment of funds from the Stock Offering for a full year (compared to six months in fiscal 1996) and deposit growth. The overall increase in average interest-earning assets reflects increases of $3.7 million in the average loan portfolio and $14.6 million in the average securities portfolios, partially offset by a $6.4 million decrease in other earning assets (principally federal funds sold). The increase in interest income for fiscal 1997 was also attributable to a slight increase in the average yield on interest-earning assets, to 7.61% from 7.55% for the fiscal 1996, reflecting the shift from investments in short-term federal funds and treasury securities into higher yielding mortgage-backed securities. Interest Expense. Interest expense for the year ended March 31, 1997 totaled $4.1 million, slightly higher than $4.0 million for the 1996 fiscal year. The increase is attributable to a $4.1 million increase in average interest-bearing deposits, primarily certificate accounts and other interest-bearing liabilities which averaged $57.1 million at an average cost of 5.49% for the 1997 fiscal year, as compared to an average balance of $49.3 million at an average cost of 5.72% for the 1996 fiscal year. The growth in certificate accounts and other interest-bearing liabilities was partially offset by a decline in savings accounts and NOW and money market accounts, which have lower average costs than certificate accounts. The overall deposit growth is consistent with management's strategy to increase retail deposits. The effect of deposit growth on interest expense was somewhat offset by the decline in the average cost of funds to 4.54% in fiscal 1997, compared to 4.64% for the previous year. The decrease in the cost of funds reflects the general decline in market interest rates at the beginning of fiscal 1997. Provision for Loan Losses. For fiscal years 1997 and 1996, the provisions for loan losses were $69,000 and $90,000, respectively. The provision in each period reflects management's evaluation of the adequacy of the allowance for loan losses, the level and composition of non-performing loans and their collateral, and the continued growth of the loan portfolio. The allowance for loan losses was $660,000 at March 31, 1997, compared to $654,000 at March 31, 1996. Net charge-offs for fiscal 1997 amounted to $63,000 compared to $86,000 in fiscal 1996. Non-performing loans at March 31, 1997 were $1.66 million, compared to $1.63 million at March 31, 1996. The ratio of non-performing loans to total loans was 2.97% at March 31, 1997 compared to 3.15% at March 31, 1996. See "Item 1 -- Business -- Asset Quality." 33 35 Non-Interest Income. Non-interest income for the year ended March 31, 1997 amounted to $152,000, a decrease of $59,000 from $211,000 for the 1996 fiscal year. The decrease is primarily due to the decline in the net gain on sales of available-for-sale securities to $23,000 for fiscal 1997, as compared to $88,000 for fiscal 1996. Non-Interest Expense. For fiscal years 1997 and 1996, non-interest expense totaled $3.4 million and $2.3 million, respectively. The $1.1 million increase in non-interest expense in the current fiscal year is primarily attributable to the $538,000 SAIF special assessment, as well as increases of $292,000 in compensation and benefits expense, $167,000 in professional services expenses and $122,000 in other non-interest expense. The increase in compensation and benefits expense primarily reflects recognition of a full year of expense in fiscal 1997 (compared to six months of expense in fiscal 1996) for the amended deferred compensation plan for directors, the ESOP and the directors retirement plan; recognition of expense in fiscal 1997 for a portion of the shares awarded under the RRPs; and merit and performance-based increases for certain staff members. Professional services expenses and other non-interest expense increased principally due to increased professional fees, printing and other costs associated with operations as a public company for a full year in fiscal 1997 compared to six months in fiscal 1996. Income Tax Expense. Income tax expense for the fiscal years ended March 31, 1997 and 1996 was $326,000 and $609,000, respectively, reflecting an effective tax rate of 27.6% and 42.1%, respectively. Tax expense for the year ended March 31, 1997 reflects a benefit of $166,000 due to the reduction of a deferred tax liability caused by an amendment to the New York State tax law enacted during the year. The amendment changed the base-year for tax bad debt reserves to December 31, 1995 and eliminated the need for a deferred tax liability previously recognized for reserves in excess of the base-year amount. Without this one-time benefit, the effective tax rate would have been 41.7% for fiscal 1997. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and other financial information included in this report have been prepared in conformity with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. YEAR 2000 COMPLIANCE The Company, like all companies that utilize computer technology, is facing significant challenges associated with the inability of computer systems to recognize the year 2000 (the "Year 2000 Problem"). Many existing computer programs and systems were originally programmed with six digit dates that provided only two digits to identify the calendar year in the date field, without considering the upcoming change in the century. With the impending millennium, these programs and computers will recognize "00" as the year 1900 rather than the year 2000. Like most financial service providers, the Company and its operations may be significantly affected by the Year 2000 Problem due to the nature of financial information. Software, hardware, and equipment both within and outside the Company's direct control and with whom the Company electronically or operationally interfaces (e.g. third party vendors providing data processing, information system management, maintenance of computer systems, and credit bureau information) are likely to be affected. Furthermore, if computer systems are not adequately changed to identify the Year 2000, many computer applications could fail or create erroneous results. As a result, many calculations which rely on the date field information, such as interest, payment or due dates and other operating functions, will generate results which could be significantly misstated, and the Company could experience a temporary inability to process transactions, send invoices or engage in similar normal business activities. In addition, under certain circumstances, failure to adequately address the Year 2000 Problem could adversely affect the viability of the Company's suppliers and creditors and the creditworthiness of its borrowers. Thus, if not adequately addressed, the Year 2000 Problem could result in a significant adverse impact on the Company's products, services and competitive condition. The Company has initiated formal communications with all of its significant suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 Problem. The Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 Problem will be mitigated without causing a material adverse impact on the operations of the Company. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Problem could have an impact on the operations of the Company. At this time, management does not believe that the impact and any resulting costs will be material. Monitoring and managing the year 2000 project will result in additional direct and indirect costs to the Company. Direct costs include potential charges by third party software vendors for product enhancements, costs involved in testing software 34 36 products for year 2000 compliance, and any resulting costs for developing and implementing contingency plans for critical software products which are not enhanced. Indirect costs will principally consist of the time devoted by existing employees in monitoring software vendor progress, testing enhanced software products and implementing any necessary contingency plans. The Company does not believe that such costs will have a material effect on its results of operations. Both direct and indirect costs of addressing the Year 2000 Problem will be charged to earnings as incurred. Such costs have not been material to date. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the potential loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its lending, investing and deposit taking activities. The Company's real estate loan portfolio, concentrated primarily in Westchester County, New York, is subject to risks associated with the local economy. The Company's net income is dependent to a substantial extent on its net interest income. Net interest income is derived from the "spread" between the yield on interest-earning assets and interest-bearing liabilities. The net interest income of savings institutions is significantly affected by many factors including: interest rate fluctuations; general economic conditions; product pricing; the relative mix and maturity of interest-earning assets and interest-bearing liabilities; non-interest-bearing sources of funds; and asset quality. Net interest income volatility arises because, as rates fluctuate, interest income and interest expense do not change equally. The management of interest rate risk exposure is an essential component of managing a savings institution. The extent of the movement of interest rates, higher or lower, is an uncertainty that could have a negative impact on the earnings of the Company. Successful management of interest rate risk requires an awareness of changes and trends in the financial marketplace and the ability to identify and assess the sources of performance variability in an institution's operations. The principal objectives of the Company's interest rate risk management activities are to (i) evaluate the interest rate risk included in certain balance sheet and off-balance sheet accounts, (ii) determine the level of risk appropriate given the Company's business focus, operating environment, capital and liquidity requirements, and performance objectives, (iii) establish prudent asset concentration guidelines and (iv) manage the risk within prudent levels approved by the Board of Directors. The Company has taken several actions, under various market conditions, designed to manage its level of interest rate risk. These actions have included: (i) purchasing adjustable and fixed rate mortgage-backed securities with varying average lives; (ii) undertaking an effort to lengthen the maturities of its certificates of deposit, the majority of which mature in less than one year; and (iii) to a lesser extent, increasing the portfolio of adjustable-rate mortgage loans through originations, as market conditions permit. The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the Board of Directors, the Company does not intend to engage in such activities in the immediate future. One approach used by management to quantify interest rate risk is the analysis of the change in the Company's net portfolio value ("NPV") arising from movements in interest rates. This approach calculates the difference between the present value of liabilities and the present value of expected cash flows from assets and off-balance sheet items. The following table sets forth, at March 31, 1998, an analysis of the Company's interest rate risk as measured by the estimated changes in NPV resulting from instantaneous and sustained parallel shifts in the yield curve (+ or - 400 basis points, measured in 100 basis point increments).
ESTIMATED INCREASE CHANGE IN ESTIMATED (DECREASE) IN NPV INTEREST RATES NPV ----------------------- (BASIS POINTS) AMOUNT AMOUNT PERCENT -------------- --------- ---------- ------- (DOLLARS IN THOUSANDS) +400 $ 11,500 $ (13,928) (55)% +300 14,877 (10,551) (41) +200 18,457 (6,971) (27) +100 22,113 (3,315) (13) -- 25,428 -- -- -100 27,852 2,424 10 -200 29,068 3,640 14 -300 30,301 4,873 19 -400 32,124 6,696 26
35 37 Certain assumptions utilized by the OTS in assessing the interest rate risk of thrift institutions were employed in preparing data included in the preceding table. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under the various interest rate scenarios. It was also assumed that delinquency rates will not change as a result of changes in interest rates although there can be no assurance that this will be the case. Even if interest rates change in the designated amounts, there can be no assurance that the Company's assets and liabilities would perform as set forth above. In addition, a change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause significantly different changes to the NPV than indicated above. 36 38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Tappan Zee Financial, Inc.: We have audited the accompanying consolidated balance sheets of Tappan Zee Financial, Inc. and subsidiaries as of March 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tappan Zee Financial, Inc. and subsidiaries as of March 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1998 in conformity with generally accepted accounting principles. Short Hills, New Jersey April 28, 1998 37 39 TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, -------------------------- 1998 1997 --------- --------- ASSETS Cash and due from banks $ 783 $ 912 Interest-bearing deposits 2,401 1,438 Federal funds sold 6,200 5,900 Securities (note 2): Available-for-sale, at fair value (amortized cost of $22,719 in 1998 and $36,967 in 1997) 22,868 36,384 Held-to-maturity, at amortized cost (fair value of $35,971 in 1998 and $17,889 in 1997) 35,531 18,123 --------- --------- Total securities 58,399 54,507 Loans, net (note 3): Mortgage loans 54,915 51,876 Other loans 3,673 4,170 Allowance for loan losses (702) (660) Net deferred loan fees (263) (276) --------- --------- Total loans, net 57,623 55,110 Federal Home Loan Bank stock 943 674 Real estate owned, net -- 122 Other assets (note 4) 2,996 3,178 --------- --------- Total assets $ 129,345 $ 121,841 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits (note 5) $ 104,993 $ 98,327 Other liabilities (note 4) 2,552 2,286 --------- --------- Total liabilities 107,545 100,613 --------- --------- Shareholders' equity (notes 9 and 10): Preferred stock (par value $0.01 per share; 1,000,000 shares authorized; none issued or outstanding) -- -- Common stock (par value $0.01 per share; 5,000,000 shares authorized; 1,620,062 shares issued) 16 16 Additional paid-in capital 15,086 14,942 Common stock held by employee stock ownership plan ("ESOP") (904) (1,056) Common stock awarded under recognition and retention plans ("RRPs") (401) (524) Treasury stock, at cost (142,000 shares in 1998 and 86,000 shares in 1997) (2,060) (1,070) Retained earnings, substantially restricted 9,974 9,269 Net unrealized gain (loss) on available-for-sale securities, net of taxes (note 2) 89 (349) --------- --------- Total shareholders' equity 21,800 21,228 --------- --------- Total liabilities and shareholders' equity $ 129,345 $ 121,841 ========= =========
See accompanying notes to consolidated financial statements. 38 40 TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31, -------------------------------- 1998 1997 1996 ------ ------ ------ Interest income: Mortgage loans $4,609 $4,331 $4,098 Other loans 395 390 367 Securities 3,780 3,513 2,387 Other earning assets 609 357 772 ------ ------ ------ Total interest income 9,393 8,591 7,624 ------ ------ ------ Interest expense: Deposits 4,721 4,094 4,002 Federal Home Loan Bank advances -- 12 -- ------ ------ ------ Total interest expense 4,721 4,106 4,002 ------ ------ ------ Net interest income 4,672 4,485 3,622 Provision for loan losses (note 3) 42 69 90 ------ ------ ------ Net interest income after provision for loan losses 4,630 4,416 3,532 ------ ------ ------ Non-interest income: Service charges and other fees 140 119 109 Net gain on sales of available-for-sale securities (note 2) 109 23 88 Other 19 10 14 ------ ------ ------ Total non-interest income 268 152 211 ------ ------ ------ Non-interest expense: Compensation and benefits (notes 8 and 9) 1,720 1,477 1,185 Professional services 371 316 149 Occupancy and equipment 181 192 220 Data processing service fees 176 159 151 Federal deposit insurance: Regular premiums 62 155 202 Special assessment (note 5) -- 538 -- Net cost of real estate owned 7 60 22 Other 493 490 368 ------ ------ ------ Total non-interest expense 3,010 3,387 2,297 ------ ------ ------ Income before income tax expense 1,888 1,181 1,446 Income tax expense (note 7) 791 326 609 ------ ------ ------ Net income $1,097 $ 855 $ 837 ====== ====== ====== Basic earnings per share (note 11) $ 0.80 $ 0.60 $ 0.31 ====== ====== ====== Diluted earnings per share (note 11) $ 0.77 $ 0.59 $ 0.31 ====== ====== ======
See accompanying notes to consolidated financial statements. 39 41 TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES 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 GAIN (LOSS)ON SHAREHOLDERS' STOCK CAPITAL BY ESOP UNDER RRPS STOCK EARNINGS SECURITIES EQUITY Balance at March 31, 1995 $-- $ -- $ -- $-- $ -- $ 8,047 $(229) $ 7,818 Net income -- -- -- -- -- 837 -- 837 Dividends paid ($0.05 per share) -- -- -- -- -- (81) -- (81) Issuance of 1,620,062 common shares 16 14,885 -- -- -- -- -- 14,901 Shares purchased by ESOP (129,600 shares) -- -- (1,296) -- -- -- -- (1,296) ESOP shares committed to be released (8,124 shares) -- 8 81 -- -- -- -- 89 Decrease in net unrealized loss on available-for sale securities, net of taxes -- -- -- -- -- -- 92 92 --- ------- ------- ----- ------- ------- ----- -------- Balance at March 31, 1996 16 14,893 (1,215) -- -- 8,803 (137) 22,360 Net income -- -- -- -- -- 855 -- 855 Dividends paid ($0.20 per share) -- -- -- -- -- (291) -- (291) Repurchase of 86,000 treasury shares -- -- -- -- (1,070) -- -- (1,070) Purchase of 52,840 shares to fund awards under the RRP's -- -- -- (616) -- (98) -- (714) Amortization of RRP awards -- -- -- 92 -- -- -- 92 ESOP shares committed to be released (15,893 shares) -- 49 159 -- -- -- -- 208 Increase in net unrealized loss on available-for sale securities, net of taxes -- -- -- -- -- -- (212) (212) --- ------- ------- ----- ------- ------- ----- -------- Balance at March 31, 1997 16 14,942 (1,056) (524) (1,070) 9,269 (349) 21,228 Net income -- -- -- -- -- 1,097 -- 1,097 Dividends paid ($0.28 per share) -- -- -- -- -- (392) -- (392) Repurchase of 56,000 -- treasury shares -- -- -- -- (990) -- -- (990) Amortization of RRP awards -- -- -- 123 -- -- -- 123 Tax benefit related to RRP awards -- 22 -- -- -- -- -- 22 ESOP shares committed to be released (15,225 shares) -- 122 152 -- -- -- -- 274 Decrease in net unrealized loss on available-for sale securities, net of taxes -- -- -- -- -- -- 438 438 --- ------- ------- ----- ------- ------- ----- -------- Balance at March 31, 1998 $16 $15,086 $ (904) $(401) $(2,060) $ 9,974 $ 89 $ 21,800 === ======= ======= ===== ======= ======= ===== ========
See accompanying notes to consolidated financial statements. 40 42 TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED MARCH 31, ---------------------------------------- 1998 1997 1996 -------- -------- -------- Cash flows from operating activities: Net income $ 1,097 $ 855 $ 837 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 42 69 90 Provision for real estate owned losses -- 38 -- Depreciation expense 56 58 73 Accretion of net deferred loan fees (69) (44) (61) Net decrease (increase) in accrued interest receivable 31 (80) (63) Net gain on sales of securities (109) (23) (88) Noncash ESOP and RRP expense 397 300 89 Other adjustments, net 97 (145) 113 -------- -------- -------- Net cash provided by operating activities 1,542 1,028 990 -------- -------- -------- Cash flows from investing activities: Purchases of securities: Available-for-sale (20,689) (19,596) (28,728) Held-to-maturity (21,131) (10,069) (5,117) Proceeds from principal payments, maturities and calls of securities: Available-for-sale 8,005 10,562 8,304 Held-to-maturity 3,730 1,381 1,424 Proceeds from sale of available-for-sale securities 27,023 13,861 3,797 Disbursements for loan originations (12,759) (11,903) (9,314) Principal collections on loans 10,273 7,942 8,233 Purchases of FHLB stock (269) (113) (57) Proceeds from sales of real estate owned 124 249 225 Other investing cash flows, net (8) (49) (46) -------- -------- -------- Net cash used in investing activities (5,701) (7,735) (21,279) -------- -------- -------- Cash flows from financing activities: Net increase in deposits 6,666 8,419 8,095 Net proceeds from sale of common stock -- -- 14,901 Common stock purchased by ESOP -- -- (1,296) Purchase of common stock for awards under RRP -- (714) -- Purchase of treasury stock (990) (1,070) -- Dividends paid (392) (291) (81) Net increase (decrease) in mortgage escrow funds 9 74 (344) -------- -------- -------- Net cash provided by financing activities 5,293 6,418 21,275 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 1,134 (289) 986 Cash and cash equivalents at beginning of year 8,250 8,539 7,553 -------- -------- -------- Cash and cash equivalents at end of year $ 9,384 $ 8,250 $ 8,539 ======== ======== ======== Supplemental disclosures: Interest paid $ 4,721 $ 4,106 $ 4,002 Income taxes paid 742 646 531 Securities transferred from held-to-maturity to available-for-sale -- -- 11,320 Mortgage loans transferred to real estate owned -- -- 111 ======== ======== ========
See accompanying notes to consolidated financial statements. 41 43 TAPPAN ZEE FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES In June 1995, Tarrytown and North Tarrytown Savings and Loan Association converted from a New York State chartered mutual savings and loan association to a federally chartered mutual savings bank under the new name Tarrytowns Bank, FSB (the "Bank"). Tappan Zee Financial, Inc. (the "Registrant") became the holding company for the Bank on October 5, 1995 upon completion of the conversion of the Bank from a mutual savings bank to a stock savings bank (the "Conversion"). In March 1998, the Registrant established TPNZ Preferred Funding Corporation ("TZPFC"), as a wholly owned subsidiary. The purpose of TZPFC is to acquire and manage a portfolio of mortgage loans and mortgage-backed securities. TZPFC is intended to qualify as a Real Estate Investment Trust for tax purposes. Collectively, the Registrant, TZPFC and the Bank are referred to herein as the "Company." The Company's primary market area consists of the Village of Tarrytown and its neighboring communities in Westchester County, New York. The Bank is a community-oriented savings institution whose business primarily consists of accepting deposits from customers within its market area and investing those funds in mortgage loans secured by one- to four-family residences. To a significantly lesser extent, funds are invested in multi-family, commercial real estate, construction, commercial business and consumer loans. The Company also invests in mortgage-backed and other securities. Deposits are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation. The Company's primary regulator is the Office of Thrift Supervision ("OTS"). The following is a summary of the significant accounting policies followed by the Company in the preparation of the consolidated financial statements. Basis of Presentation The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. These financial statements include the accounts of the Registrant and its wholly-owned subsidiaries, the Bank and TZPFC. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Prior to the Conversion, the Registrant had no operations other than those of an organizational nature. All financial information included herein for periods prior to the Conversion refers to the Bank. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. For purposes of reporting cash flows, cash equivalents consist of overnight federal funds sold. Securities The securities portfolio includes primarily debt securities. These debt securities are principally mortgage-backed securities, consisting of pass-through securities issued by United States government-sponsored entities (Ginnie Mae, Fannie Mae and Freddie Mac) and collateralized mortgage obligations ("CMOs"). Individual securities are classified as held-to-maturity securities, trading securities, or available-for-sale securities. The held-to-maturity category represents debt securities for which the entity has the positive intent and ability to hold to maturity. Trading securities are debt and equity securities that are bought principally for the purpose of selling them in the near term. All other debt and equity securities are classified as available-for-sale. Held-to-maturity securities are carried at amortized cost. Available-for-sale securities are carried at fair value, with unrealized gains and losses excluded from earnings and reported on a net-of-tax basis as a separate component of shareholders' equity. The Company has no trading securities. Federal Home Loan Bank ("FHLB") stock is a non-marketable security held in accordance with certain regulatory requirements and, accordingly, is carried at cost. Premiums and discounts on debt securities are amortized to interest income on a level-yield basis over the expected 42 44 terms of the securities. Realized gains and losses on sales of securities are determined based on the amortized cost of the specific securities sold. Unrealized losses on held-to-maturity and available-for-sale securities are charged to earnings when the decline in fair value of a security is judged to be other than temporary. Allowance for Loan Losses Effective April 1, 1995, the Company prospectively adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118. Under SFAS No. 114, a loan is considered to be impaired when, based on current information and events, it is probable that the creditor will be unable to collect all principal and interest contractually due. Creditors are permitted to measure impaired loans based on (i) the present value of expected future cash flows discounted at the loan's effective interest rate, (ii) the loan's observable market price or (iii) the fair value of the collateral if the loan is collateral dependent. If the approach used results in a measurement that is less than an impaired loan's recorded investment, an impairment loss is recognized as part of the allowance for loan losses. SFAS No. 118 allows creditors to continue to use existing methods for recognizing interest income on impaired loans. The Company's adoption of these statements did not affect its overall allowance for loan losses or income recognition practices. The allowance for loan losses is increased by provisions for losses charged to operations. Losses on loans (including impaired loans) are charged to the allowance for loan losses when all or a portion of a loan is deemed to be uncollectible. Recoveries of loans previously charged-off are credited to the allowance when realized. Management estimates the allowance for loan losses based on an evaluation of the Company's past loan loss experience, known and inherent risks in the portfolio, estimated value of underlying collateral, and current economic conditions. In management's judgment, the allowance for loan losses is adequate to absorb probable losses in the existing portfolio. Establishing the allowance for loan losses involves significant management judgments utilizing the best information available at the time of review. Those judgments are subject to further review by various sources, including the Company's regulators. Future adjustments to the allowance may be necessary based on changes in economic and real estate market conditions, further information obtained regarding known problem loans, the identification of additional problem loans, and other factors. Interest and Fees on Loans Generally, a loan (including an impaired loan under SFAS No. 114) is placed on non-accrual status when principal or interest payments become ninety days past due, or earlier if the ability of the borrower to meet contractual payment terms is in doubt. When loans are placed on non-accrual status, unpaid interest is reversed against interest income of the current period. Thereafter, interest payments received on non-accrual loans are either applied to reduce unpaid principal balances or reported as interest income, depending on management's judgment as to the likelihood of further collections. Loans are returned to accrual status when collectibility is no longer considered doubtful. Loan origination fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the level-yield method over the contractual life of the related loan. Net deferred fees and costs applicable to prepaid loans are recognized in interest income at the time of prepayment. Discounts on consumer loans are accreted using the level-yield method. Real Estate Owned Real estate owned consists of properties acquired through foreclosure or deed in lieu of foreclosure. A property is initially recorded at fair value less estimated sales costs, with any resulting writedown charged to the allowance for loan losses. Thereafter, an allowance for losses on real estate owned is established for any further declines in fair value less estimated sales costs. Fair value estimates are based on recent appraisals and other available information. Costs incurred to develop or improve properties are capitalized, while holding costs are charged to expense. Office Property and Equipment Office property and equipment (included in other assets) is comprised of land (carried at cost) and building, furniture, fixtures and equipment (carried at cost less accumulated depreciation). Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Costs incurred to improve or extend the life of existing assets are capitalized. Repairs and maintenance, as well as renewals and replacements of a routine nature are charged to expense. 43 45 Income Taxes Using the asset and liability method, deferred taxes are recognized for the estimated future tax effects attributable to temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. A deferred tax liability is recognized for all temporary differences that will result in future taxable income. A deferred tax asset is recognized for all temporary differences that will result in future tax deductions, subject to reduction of the asset by a valuation allowance in certain circumstances. This valuation allowance is recognized if, based on an analysis of available evidence, management determines that it is more likely than not that some portion or all of the deferred tax asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in income tax expense in the period that includes the enactment date of the change. Postretirement Benefit and Deferred Compensation Plans The Company has a non-contributory defined benefit pension plan which covers substantially all employees. Pension costs are funded on a current basis. In addition, the Company provides for postretirement health care benefits for employees and directors. Costs for these benefits, as well as the Company's directors' retirement plan and directors' deferred compensation plan, are accounted for on an accrual basis as such benefits are earned by active employees. Stock-Based Compensation Plans Compensation expense is recognized in an amount equal to the fair value of ESOP shares that have been committed to be released for allocation to participant accounts. To the extent that the fair value of these shares differs from the original cost, the difference is charged or credited to shareholders' equity (additional paid-in capital). The cost of unallocated ESOP shares not yet committed to be released is reflected as a reduction of shareholders' equity. The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation expense is recognized only if the exercise price of the option is less than the fair value of the underlying stock at the grant date. SFAS No. 123, "Accounting for Stock-Based Compensation," encourages entities to recognize the fair value of all stock-based awards on the date of grant as compensation expense over the vesting period. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma disclosures of net income and earnings per share as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures required by SFAS No. 123. The fair value of the RRP shares awarded by the Company, measured as of the grant date, is recognized as unearned compensation (a deduction from shareholders' equity) and amortized to compensation expense as the shares become vested. An excess of the cost to fund purchases of RRP shares over the grant-date fair value is charged to retained earnings. Earnings Per Share In fiscal 1998, the Company retroactively adopted SFAS No. 128, "Earnings Per Share," which establishes new standards for computing and presenting earnings per share ("EPS") by all entities with complex capital structures. SFAS No. 128 requires the presentation of basic EPS and diluted EPS and the restatement of all prior-period EPS data. Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Unallocated ESOP shares that have not been committed to be released to participants are excluded from outstanding shares in computing EPS. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as the Company's stock options) were exercised or converted into common stock or resulted in the issuance of common stock. Diluted EPS is computed by dividing adjusted net income by the weighted average number of common shares outstanding for the period plus common stock equivalents. EPS is reported for periods following the Conversion. The weighted average number of shares used in the computation of basic EPS and diluted EPS for the year ended March 31, 1998 were 1,372,051 and 1,423,299, respectively. 44 46 Recent Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997. Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. However, certain FASB statements require entities to report specific changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, as a separate component of equity in the balance sheet. Such items, along with net income, are components of comprehensive income. SFAS No. 130 requires that all items of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Additionally, SFAS No. 130 requires that the accumulated balance of other comprehensive income be displayed separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. SFAS No. 131 also requires descriptive information about the way that the operating segments were determined, the products and services provided by the operating segments, differences between the measurements used in reporting segment information and those used by the enterprise in its general-purpose financial statements, and changes in the measurement of segment amounts from period to period. In February 1998, the FASB also issued SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits," effective for fiscal years beginning after December 15, 1997. SFAS No. 132 amends the disclosure requirements of SFAS No. 87, "Employers' Accounting for Pensions", SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers' Accounting for Retirement Benefits Other Than Pensions." SFAS No. 132 standardizes the disclosure requirements of SFAS Nos. 87 and 106 to the extent practicable and recommends a parallel format for presenting information about pensions and other retirement benefits. The Company will adopt these disclosure requirements beginning in the first quarter of fiscal 1999. Management does not anticipate that these standards will have a material impact on the Company's financial statements. (2) SECURITIES The following is a summary of available-for-sale and held-to-maturity securities at March 31, 1998:
Amortized Gross Unrealized Fair --------------------- Cost Gains Losses Value (In thousands) AVAILABLE-FOR-SALE SECURITIES Mortgage-backed securities: CMOs $ 85 $ 3 $ -- $ 88 Pass-through securities 19,759 167 (25) 19,901 ------- ------- ------- ------- Total 19,844 170 (25) 19,989 U.S. Agency and other debt securities 75 4 -- 79 Mutual fund investments 2,800 -- -- 2,800 ------- ------- ------- ------- Total $22,719 $ 174 $ (25) $22,868 ======= ======= ======= ======= HELD-TO-MATURITY SECURITIES Mortgage-backed securities: CMOs $ 683 $ 8 $ (1) $ 690 Pass-through securities 32,450 441 (40) 32,851 ------- ------- ------- ------- Total 33,133 449 (41) 33,541 U.S. Agency and other debt securities 2,398 32 -- 2,430 ------- ------- ------- ------- Total $35,531 $ 481 $ (41) $35,971 ======= ======= ======= =======
45 47 The following is a summary of available-for-sale and held-to-maturity securities at March 31, 1997:
Amortized Gross Unrealized 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 ======= ======= ======= =======
The net unrealized gain (loss) on available-for-sale securities was $149,000 ($89,000 after taxes) at March 31, 1998 and ($583,000) (($349,000) after taxes) at March 31, 1997. Changes in unrealized holding gains and losses resulted in after-tax (decreases) increases in shareholders' equity of $438,000 in fiscal 1998, ($212,000) in fiscal 1997 and $92,000 in fiscal 1996. These gains and losses will continue to fluctuate based on changes in the portfolio and market conditions. Sales of available-for-sale securities resulted in the following gross realized gains and gross realized losses during the years ended March 31:
1998 1997 1996 ----- ----- ----- (In thousands) Gains $ 171 $ 89 $ 90 Losses (62) (66) (2) ----- ----- ----- Net $ 109 $ 23 $ 88 ===== ===== =====
The following is a summary of the amortized cost and fair value of debt securities, other than mortgage-backed securities, by remaining term to contractual maturity as of March 31, 1998. Actual maturities may differ from these amounts because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.
Available-for-Sale Held-to-Maturity -------------------- -------------------- Amortized Fair Amortized Fair Cost Value Cost Value (In thousands) One year or less $ -- $ -- $ -- $ -- More than one year to five years 30 32 500 503 More than five years to ten years -- -- 1,699 1,723 More than ten years 45 47 199 204 ------ ------ ------ ------ Total $ 75 $ 79 $2,398 $2,430 ====== ====== ====== ======
46 48 (3) LOANS Loans are summarized as follows at March 31:
1998 1997 ---- ---- (In thousands) Mortgage loans: Residential properties: One- to four-family $ 45,146 $ 43,958 Multi-family 1,994 2,289 Commercial properties 4,618 3,910 Construction loans 3,706 2,405 Construction loans in process (549) (686) -------- -------- 54,915 51,876 -------- -------- Other loans: Commercial business loans 2,462 2,846 Automobile loans 683 781 Other consumer loans 751 797 Unearned discounts (208) (239) Unused commercial lines of credit (15) (15) -------- -------- 3,673 4,170 -------- -------- Total loans 58,588 56,046 Allowance for loan losses (702) (660) Net deferred loan fees (263) (276) -------- -------- Total loans, net $ 57,623 $ 55,110 ======== ========
The loan portfolio at March 31, 1998 consisted of fixed-rate loans of $46.1 million and adjustable-rate loans of $12.5 million with weighted average yields of 8.50% and 8.36%, respectively. At March 31, 1997, fixed-rate loans were $42.4 million and adjustable-rate loans were $13.6 million. The Company primarily originates mortgage loans secured by existing single-family residential properties. The Company also originates multi-family and commercial real estate loans, construction loans, commercial business loans and consumer loans. A substantial portion of the loan portfolio is secured by real estate properties located in Westchester County, New York. The ability of the Company's borrowers to make principal and interest payments is dependent upon, among other things, the level of overall economic activity and the real estate market conditions prevailing within the Company's concentrated lending area. Loans to directors, executive officers and related parties at March 31, 1998 and 1997 amounted to $1.1 million. During fiscal 1998, there were new loans to such persons of $11,000 and repayments of $19,000. 47 49 The following is a summary of loans on non-accrual status and accruing loans past ninety days or more at March 31:
1998 1997 1996 ---- ---- ---- (In thousands) NON-ACCRUAL LOANS: Mortgage loans: One- to four-family $1,202 $1,355 $ 856 Commercial property 238 123 126 ------ ------ ------ 1,440 1,478 982 ------ ------ ------ ACCRUING LOANS PAST DUE NINETY DAYS OR MORE: Mortgage loans: One- to four-family -- -- 342 Commercial property -- 72 266 Construction 108 100 -- Commercial business and consumer 11 8 42 ------ ------ ------ Total 119 180 650 ------ ------ ------ Total non-performing loans $1,559 $1,658 $1,632 ====== ====== ======
If interest payments on the foregoing non-accrual loans had been made during the respective years in accordance with the loan agreements, interest income would have (decreased) increased by ($9,000), $22,000 and $35,000 in fiscal 1998, 1997 and 1996, respectively. SFAS No. 114 applies to loans that are individually evaluated for collectibility in accordance with the Company's normal loan review procedures (principally loans in the multi-family, commercial mortgage and construction loan categories). The standard does not apply to smaller-balance, homogeneous loans such as the Company's one- to four-family residential mortgage loans. The Company's total recorded investment in impaired loans (which related to commercial mortgage loans on non-accrual status) amounted to $238,000 and $123,000 at March 31, 1998 and 1997, respectively. An allowance for loan impairment under SFAS No. 114 was not required for these loans due to the adequacy of the collateral value. The Company's average recorded investment in impaired loans was $126,000 and $125,000 for fiscal 1998 and 1997, respectively. Interest collections and income recognized on impaired loans were insignificant for both years. Activity in the allowance for loan losses is summarized as follows for the years ended March 31:
1998 1997 1996 ----- ----- ----- (In thousands) Balance at beginning of year $ 660 $ 654 $ 650 Provision for losses 42 69 90 Charge-offs -- (63) (86) Recoveries -- -- -- ----- ----- ----- Balance at end of year $ 702 $ 660 $ 654 ===== ===== =====
48 50 (4) OTHER ASSETS AND LIABILITIES A summary of other assets and liabilities at March 31 follows:
1998 1997 ------ ------ (In thousands) OTHER ASSETS: Office property and equipment, net of accumulated depreciation of $380 in 1998 and $365 in 1997 $ 496 $ 544 Accrued interest receivable 747 778 Deferred income taxes (note 7) 734 859 Intangible asset recognized for directors' deferred compensation plan (note 8) 360 510 Prepaid expenses and other 659 487 ------ ------ Total $2,996 $3,178 ====== ====== OTHER LIABILITIES: Obligation for directors' deferred compensation plan (note 8) $1,035 $ 928 Mortgage escrow funds 793 784 Other 724 574 ------ ------ Total $2,552 $2,286 ====== ======
(5) DEPOSITS Deposit balances and weighted average stated interest rates at March 31 are summarized as follows:
1998 1997 ----------------------- ----------------------- Amount Rate Amount Rate -------------- ------ ------------- ------ (Dollars in thousands) Checking $ 2,310 $ 2,771 NOW 3,853 2.00% 3,756 2.00% Money market 2,687 2.75 3,157 2.75 Regular savings 14,554 2.75 15,008 2.75 Statement savings 10,533 2.92 10,757 2.92 -------------- ------------- 33,937 2.53 35,449 2.51 -------------- ------------- Savings certificates by remaining period to maturity: Under one year 53,403 5.75 49,026 5.72 One to three years 17,653 6.12 13,852 5.98 -------------- ------------- 71,056 5.84 62,878 5.78 -------------- ------------- Total $ 104,993 4.77 $ 98,327 % 4.60% ============== =============
Savings certificates issued in denominations of $100,000 or more totaled $9.7 million and $9.4 million at March 31, 1998 and 1997, respectively. The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted into law on September 30, 1996. Among other things, the Funds Act required depository institutions to pay a one-time special assessment of 65.7 basis points on their SAIF-assessable deposits held on March 31, 1995, in order to recapitalize the SAIF to the level required by law. The Bank's special assessment of $538,000 was accrued as a charge to non-interest expense for the quarter ended September 30, 1996. The assessment was paid in November 1996. 49 51 (6) FEDERAL HOME LOAN BANK ADVANCES As a member of the FHLB of New York, the Bank has access to funds in the form of FHLB advances. Based on the level of qualifying collateral available to secure advances at March 31, 1998, the Bank's borrowing capacity was $31.3 million, none of which was used at that date. Advances are secured by the Bank's investment in FHLB stock and by a blanket security agreement. This agreement requires the Bank to maintain as collateral certain qualifying assets (such as securities and single-family residential mortgage loans) with a fair value, as defined, at least equal to 110% of the outstanding advances. (7) INCOME TAXES Income tax expense (benefit) consists of the following for the years ended March 31:
1998 1997 1996 ----- ----- ----- (In thousands) FEDERAL: Current $ 776 $ 432 $ 465 Deferred (124) 47 (14) ----- ----- ----- 652 479 451 ----- ----- ----- NEW YORK STATE: Current 184 94 94 Deferred (45) (247) 64 ----- ----- ----- 139 (153) 158 ----- ----- ----- TOTAL: Current 960 526 559 Deferred (169) (200) 50 ----- ----- ----- $ 791 $ 326 $ 609 ===== ===== =====
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:
1998 1997 1996 ----- ----- ----- (Dollars in thousands) Tax at federal statutory rate $ 642 $ 402 $ 492 State tax (benefit) expense, net of federal tax 92 (101) 104 effect Other, net 57 25 13 ----- ----- ----- Actual income tax expense $ 791 $ 326 $ 609 ===== ===== ===== Effective income tax rate 41.9% 27.6% 42.1% ===== ===== =====
50 52 The tax effects of temporary differences that give rise to the Company's deferred tax assets and liabilities at March 31 are as follows:
1998 1997 ----- ----- (In thousands) DEFERRED TAX ASSETS: Allowance for loan losses $ 287 $ 270 Net unrealized loss on available-for-sale securities -- 234 Loan origination fees 108 113 Other 406 292 ----- ----- Total deferred tax assets 801 909 ----- ----- DEFERRED TAX LIABILITIES: Net unrealized gain on available-for-sale securities (60) -- Other (7) (50) ----- ----- Total deferred tax liabilities (67) (50) ----- ----- Net deferred tax assets $ 734 $ 859 ===== =====
Based on the Company's historical and anticipated future pre-tax earnings, management believes that it is more likely than not that the Company's deferred tax assets will be realized. As a thrift institution, the Bank is subject to special provisions in the federal and New York state tax laws regarding its allowable tax bad debt deductions and related tax bad debt reserves. These deductions historically have been determined using methods based on loss experience or a percentage of taxable income. Tax bad debt reserves represent the excess of allowable deductions over actual bad debt losses and other reserve reductions. These reserves consist of a defined base-year amount, plus additional amounts ("excess reserves") accumulated after the base year. Deferred tax liabilities have been recognized with respect to such excess reserves, as well as any portion of the base-year amount which is expected to become taxable (or "recaptured") in the foreseeable future. Certain amendments to the federal and New York state tax laws regarding bad debt deductions were enacted in 1996. The federal amendments include elimination of the percentage-of-taxable-income method for tax years beginning after December 31, 1995 and imposition of a requirement to recapture into taxable income (over a six-year period) the bad debt reserves in excess of the base-year amounts. This recapture requirement had no significant effect on the Bank since its federal bad debt reserves approximated the base-year amounts. The New York State amendments redesignate the Bank's state bad debt reserves at December 31, 1995 as the base-year amount and also provide for future additions to the base-year reserve using the percentage-of-taxable-income method. This change effectively eliminated the excess New York State reserves for which the Company had recognized a deferred tax liability. Accordingly, the Company reduced its deferred tax liability in the quarter ended September 30, 1996, by $166,000, representing a state deferred tax benefit of $252,000 less related deferred federal taxes of $86,000. At March 31, 1998, the Bank's federal and state bad debt reserves were $1.2 million and $5.2 million, respectively, which equaled the base-year amounts. Deferred tax liabilities have not been recognized with respect to these reserves since the Company does not expect that such amounts will become taxable in the foreseeable future. Under the tax laws as amended, events that would result in taxation of these reserves include (i) redemptions of the Bank's stock or certain excess distributions to the Registrant, and (ii) failure of the Bank to maintain a specified qualifying assets ratio or meet other thrift definition tests for New York State tax purposes. At March 31, 1998, the Bank's unrecognized deferred tax liabilities with respect to the federal and state base-year reserves were approximately $0.2 million and $0.6 million, respectively. (8) POSTRETIREMENT BENEFITS AND DEFERRED COMPENSATION PLANS Pension Plans and Deferred Compensation Plan All eligible employees are included in a non-contributory, multiple-employer defined benefit pension plan (the "Pension Plan"). The Company's annual contributions to the Pension Plan are based on actuarially determined funding requirements. The Company has also established a non-qualified deferred compensation plan for directors of the Bank or the Registrant, which was adopted in its amended form upon Conversion (the "Deferred Compensation Plan"). 51 53 The following is a reconciliation of the funded status of these plans and the assets (liabilities) recognized in the consolidated balance sheets at March 31:
Deferred Pension Plan Compensation Plan ---------------------- ---------------------- 1998 1997 1998 1997 ------- ------- ------- ------- (In thousands) Actuarial present value of benefit obligations: Accumulated benefit obligation - vested $(1,173) $(1,040) $(1,035) $ (928) Accumulated benefit obligation - nonvested (1) -- -- -- ------- ------- ------- ------- Total accumulated benefit obligation (1,174) (1,040) (1,035) (928) Effect of projected future compensation levels (198) (234) -- -- ------- ------- ------- ------- Projected benefit obligation for service rendered to date (1,372) (1,274) (1,035) (928) Plan assets (insurance contract, at contract value) 1,166 1,050 -- -- ------- ------- ------- ------- Projected benefit obligation in excess of plan assets (206) (224) (1,035) (928) Unrecognized prior service cost -- -- 556 751 Unrecognized net loss (gain) from experience different from that assumed and effect of changes in assumptions 128 113 (196) (241) Unrecognized net transition obligation 82 90 -- -- Additional minimum liability recognized with a corresponding intangible asset (note 4) -- -- (360) (510) ------- ------- ------- ------- Assets (Liabilities) recognized $ 4 $ (21) $(1,035) $ (928) ------- ------- ------- -------
Plan expense consisted of the following components for the years ended March 31:
Deferred Pension Plan Compensation Plan ------------------------------- ----------------------------- 1998 1997 1996 1998 1997 1996 ----- ----- ----- ----- ----- ----- (In thousands) Service cost (benefits earned during the period) $ 31 $ 30 $ 28 $ 29 $ 39 $ 23 Interest cost on projected benefit obligation 91 87 81 72 59 43 Return on plan assets (102) (80) (80) -- -- -- Net amortization and deferral 18 13 9 166 158 98 ----- ----- ----- ----- ----- ----- Net expense $ 38 $ 50 $ 38 $ 267 $ 256 $ 164 ===== ===== ===== ===== ===== =====
The actuarial present values of the projected benefit obligations at March 31,1998 were determined for the Pension Plan and the Deferred Compensation Plan based on discount rates of 6.75% and 7.25%, respectively. The discount rate used for both plans at March 31, 1997 was 7.00%. Actuarial amounts for the Pension Plan were also based on rates of increase in future compensation levels of 4.50% in 1998 and 5.5% in 1997, and expected long-term rates of return on plan assets of 8.5% in both years. Under the Deferred Compensation Plan, directors may defer all or part of their compensation received for services to the Company (including compensation paid to an officer-director for service as an officer). Deferred amounts are applied to either the purchase of (i) a life insurance policy, in which case the amount of deferred benefits payable is based on the value to the Company of expected death benefit proceeds, or (ii) Company common stock and other investments, in which case the amount of deferred benefits payable is based on the investment performance of the investments made. Deferred benefits are paid in installments over a ten-year period beginning upon termination of service as a director. In the event of a change in control of the Registrant or the Bank, the plan requires full funding of any previously-purchased life insurance contracts. In connection with the Conversion, the Company established a trust fund with an independent fiduciary for the purpose of accumulating funds to be used to satisfy its obligations under the plan. For financial reporting purposes the value of the life insurance contracts are not considered plan assets but, instead, are included in the Company's consolidated balance sheet. At March 31, 1998, the cash surrender values of purchased life insurance policies were approximately $299,000. Compensation and benefits expense for fiscal years 1998 and 1997 and for the six-month period ended March 31, 1996 was reduced by $46,000, $91,000 and $60,000, respectively, with respect to the recognition of additional cash surrender values on these policies. The total death benefits payable under the insurance policies amounted to approximately $916,000 at March 31, 1998. Although the Company may be obligated for certain cash 52 54 payments prior to the receipt of proceeds from the purchased life insurance policies, the Company should ultimately be reimbursed in whole from such life insurance proceeds. The Company also has a retirement plan for directors, which is a non-qualified plan that became effective upon the Conversion. Outside directors are participants in this unfunded plan only if they have elected not to participate in the Deferred Compensation Plan described above. Participants in the directors' retirement plan who have attained age 65 and completed ten or more years of service (including past service as a director of the Bank) will receive an annual retirement benefit equal to the aggregate director compensation received (excluding stock compensation) for the final year of board service. Reduced benefits apply for shorter service periods and for early retirement. Pension expense was $16,000 for the fiscal years 1998 and 1997 and $8,000 for the six-month period ended March 31, 1996. The actuarial present value of the accumulated and projected benefit obligations both were $78,000 at March 31, 1998 and $65,000 at March 31, 1997. Postretirement Health Care Benefits Substantially all employees become eligible for postretirement health care (medical and dental) benefits if they meet certain age and length of service requirements. The cost of postretirement health care benefits is recognized on an accrual basis as such benefits are earned by active employees. The following is a reconciliation of the actuarial liabilities for postretirement health care benefits, none of which have been funded, and the liabilities recognized in the consolidated balance sheets at March 31:
1998 1997 ----- ----- (In thousands) Accumulated benefit obligation: Retirees $(209) $ (62) Fully-eligible employees (97) (74) Other active participants (214) (57) ----- ----- Total accumulated benefit obligation (520) (193) Unrecognized net actuarial loss (gain) 280 (9) ----- ----- Liabilities recognized $(240) $(202) ===== =====
The net periodic postretirement benefit expense consisted of the following components for the years ended March 31:
1998 1997 1996 --- --- --- (In thousands) Service cost (benefits earned during the period) $12 $ 3 $ 3 Interest cost on accumulated benefit obligation 33 14 18 Net amortization and deferral 10 -- 4 --- --- --- Net expense $55 $17 $25 === === ===
The accumulated postretirement benefit obligation was determined using the projected unit credit cost method with a discount rate of 6.75% and 7.25% at March 31, 1998 and 1997, respectively. The assumed rate of increase in future health care costs was 7.0% for 1998, gradually decreasing to 5.0% in the year 2005 and remaining at that level thereafter. A one-percentage-point increase in the assumed health care cost trend rate would increase the accumulated benefit obligation by approximately $91,000 at March 31, 1998 with an insignificant effect on expense recognized for the year then ended. (9) STOCK-BASED COMPENSATION PLANS Employee Stock Ownership Plan In connection with the Conversion, the Company established an Employee Stock Ownership Plan (the "ESOP") for eligible employees. The ESOP borrowed approximately $1.3 million from the Registrant and used the funds to purchase 129,600 shares of the Registrant's common stock sold in the offering. The Bank makes monthly contributions to the ESOP sufficient to fund the debt service requirements over the ten-year term of the loan from the Registrant. Shares purchased by the ESOP are held in a suspense account by the plan trustee for allocation to participants as the loan is repaid. Shares released from the suspense account are allocated to participants on the basis of their relative compensation. Participants become vested in the shares allocated to their respective accounts over a period not to exceed five years. Any forfeited shares are allocated to other participants in the same proportion as contributions. Shares allocated to participants 53 55 or committed for release to participants totaled 15,225 in fiscal 1998, 15,893 in fiscal 1997 and 8,124 in the six-month period ended March 31, 1996. Expense recognized with respect to such shares amounted to $274,000 in fiscal 1998, $208,000 in fiscal 1997 and $89,000 in the six-month period ended March 31, 1996, based on the average fair value of the Registrant's common stock for each period. The cost of the 90,358 shares which have not yet been committed to be released to participant accounts at March 31, 1998 is reflected as a reduction of shareholders' equity in the amount of $904,000. The fair value of these shares was approximately $1.8 million at that date. Stock Option Plans On July 10, 1996, the Company's shareholders approved the Tappan Zee Financial, Inc. 1996 Stock Option Plan for Officers and Employees ("Stock Option Plan") and the Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside Directors ("Directors' Stock Option Plan"). Under the Stock Option Plan, 113,400 shares of authorized but unissued Registrant stock are reserved for issuance upon option exercises. Options under this plan may be either non-qualified stock options or incentive stock options. Each option entitles the holder to purchase one share of common stock at an exercise price equal to the fair market value on the date of grant. Options expire no later than ten years following the date of grant. Under the Directors' Stock Option Plan, 48,600 shares of authorized but unissued Registrant stock are reserved for issuance to outside directors upon option exercises. Options granted under this plan are non-qualified options. Other option terms and conditions are similar to those under the Stock Option Plan. Effective July 10, 1996, initial option grants were made under the Stock Option Plan and the Directors' Stock Option Plan for 81,000 shares and 40,500 shares, respectively, at an exercise price of $11.625 per share. These options have a ten-year term and vest ratably over five years from the date of grant. Each option, however, becomes fully exercisable upon a change in control of the Registrant or the Bank, or upon the death, disability or retirement of the option holder. No options were granted during the year ended March 31, 1998. All options granted in July 1996 were outstanding at March 31, 1998 with a remaining life of 8.3 years; 24,300 options were exercisable at that date. At March 31, 1998, shares available for future grants totaled 32,400 for the Stock Option Plan and 8,100 for the Directors' Stock Option Plan. Options were granted at an exercise price equal to the fair value of the common stock at the grant date. Therefore, in accordance with the provisions of APB Opinion No. 25 related to fixed stock options, no compensation expense is recognized with respect to options granted or exercised. Had the Company applied the fair-value-based method of SFAS No. 123 to the options granted, using the Black-Scholes option-pricing model, net income and earnings per share for the years ended March 31, 1998 and 1997 would have been reduced to the pro forma amounts indicated below:
1998 1997 ---- ---- (Dollars in thousands) NET INCOME: As reported $ 1,097 $ 855 Pro forma (1) $ 1,012 $ 795 BASIC EPS: As reported $ 0.80 $ 0.60 Pro forma (1) $ 0.74 $ 0.56 DILUTED EPS: As reported $ 0.77 $ 0.59 Pro forma (1) $ 0.71 $ 0.58
(1) The estimated per-share fair value of options granted in July 1996 was $4.06, using the following assumptions: dividend yield of 2.0%; expected volatility of 25.3%; risk-free interest rate of 7.1%; and expected option life of 7 years. There were no options granted in fiscal 1998. 54 56 Recognition and Retention Plans On July 10, 1996, the Company's shareholders approved the Tappan Zee Financial, Inc. Recognition and Retention Plan for Officers and Employees ("Employees' Plan") and the Tappan Zee Financial, Inc. Recognition and Retention Plan for Outside Directors ("Directors' Plan"). The purpose of these plans is to provide officers and non-employee directors of the Company with a proprietary interest in the Company in a manner designed to encourage their retention. Total shares authorized are 45,360 for the Employees' Plan and 19,440 for the Directors' Plan. Effective July 10, 1996, initial stock awards were made under the Employees' Plan and the Directors' Plan for 32,400 shares and 19,440 shares, respectively. These awards vest ratably over five years from the date of grant; however, immediate vesting occurs upon a change in control of the Registrant or the Bank, or upon the death, disability or retirement of the participant. An additional grant of 1,000 shares was made under the Employees' Plan later in fiscal 1997. The fair value of the shares awarded under the plans, totaling $616,000 at the grant dates, is being amortized to compensation expense on a straight-line basis over the five-year vesting periods. Compensation expense of $123,000 and $92,000 was recognized in fiscal 1998 and 1997. Unearned compensation cost of $401,000 is reflected as a reduction of shareholders' equity at March 31, 1998. (10) SHAREHOLDERS' EQUITY Liquidation Account In accordance with regulatory requirements, the Bank established a liquidation account at the time of the Conversion in the amount of $7.8 million, equal to its equity at March 31, 1995. The liquidation account is maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after the Conversion. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases do not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation of the Bank, each eligible account holder and supplemental eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. CAPITAL DISTRIBUTIONS The Bank may not declare or pay cash dividends on or repurchase any of its shares of common stock if the effect thereof would cause equity to be reduced below applicable regulatory capital requirements or the amount required to be maintained for the liquidation account. The OTS capital distribution regulations applicable to savings institutions (such as the Bank) that meet their regulatory capital requirements, generally limit dividend payments in any year to the greater of (i) 100% of year-to-date net income plus an amount that would reduce surplus capital by one-half or (ii) 75% of net income for the most recent four quarters. Surplus capital is the excess of actual capital at the beginning of the year over the institution's minimum regulatory capital requirement. The cash dividends paid by the Bank to the Registrant in fiscal 1998, 1997 and 1996 were not affected by this limitation. Unlike the Bank, the Registrant is not subject to OTS regulatory restrictions on the payment of dividends to its stockholders. The Registrant is subject, however, to Delaware law which generally limits dividends to an amount equal to the excess of the net assets of the Registrant (the amount by which total assets exceed total liabilities) over its statutory capital, or if there is no such excess, to its net profits for the current and/or immediately preceding fiscal year. To date, the Registrant has repurchased 142,000 shares of its common stock (or approximately 8.8% of its common stock issued) for the treasury, in open market transactions, at a total cost of $2.1 million or $14.51 per share. Regulatory Capital Requirements OTS regulations require savings institutions to maintain a minimum ratio of tangible capital to total adjusted assets of 1.5%; a minimum ratio of Tier I (core) capital to total adjusted assets of 4.0% (3.0% at March 31, 1997); a minimum ratio of Tier I (core) capital to risk-weighted assets of 4.0% (no requirement at March 31, 1997); and a minimum ratio of total (core and supplementary) capital to risk-weighted assets of 8.0%. Under its prompt corrective action regulations, the OTS is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on the institution's financial statements. The regulations establish a framework for the classification of savings institutions into five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and 55 57 critically undercapitalized. Generally, an institution is considered well capitalized if it has a Tier I (core) capital ratio of at least 5.0%; a Tier I risk-based capital ratio of at least 6.0%; and a total risk-based capital ratio of at least 10.0%. The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the OTS about capital components, risk weightings and other factors. These capital requirements, which are applicable to the Bank only, do not consider additional capital at the holding company level. Management believes that, as of March 31, 1998 and 1997, the Bank met all capital adequacy requirements to which it is subject. Further, the most recent OTS notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank's capital classification. The following is a summary of the Bank's actual capital amounts and ratios as of March 31, 1998 and 1997, compared to the OTS requirements for classification as a well-capitalized institution and for minimum capital adequacy:
For Classification as Minimum Capital Bank Actual Well Capitalized Adequacy ----------------------------- ----------------------------- ----------------------------- Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) MARCH 31, 1998 Tangible capital $17,292 13.8% N/A N/A $1,878 1.5% Tier I (core) capital 17,292 13.8 $6,259 5.0% $5,007 4.0 Risk-based capital: Tier I 17,292 43.3 2,394 6.0 $1,596 4.0 Total 17,793 44.6 3,989 10.0 3,191 8.0 MARCH 31, 1997 Tangible capital $16,607 14.1% N/A N/A $1,763 1.5% Tier I (core) capital 16,607 14.1 $5,876 5.0% $3,526 3.0 Risk-based capital: Tier I 16,607 38.2 2,606 6.0 N/A N/A Total 17,151 39.5 4,344 10.0 3,475 8.0
56 58 (11) EARNINGS PER SHARE As discussed in note 1, the Company has adopted SFAS No. 128, "Earnings Per Share" and restated its EPS data for all periods to present basic EPS and diluted EPS in accordance with the new requirements. The following is an analysis of the Company's EPS computations under SFAS No. 128 for the years ended March 31, 1998 and 1997 and the period from October 5, 1995 (the Conversion date) to March 31, 1996:
1998 1997 1996 ---- ---- ---- (Dollars in thousands, except per share data) BASIC EPS: Net income available to common shareholders $ 1,097 $ 855 $ 470 ---------- ---------- ---------- Weighted average common shares outstanding 1,372,051 1,426,735 1,495,086 ---------- ---------- ---------- Basic EPS $ 0.80 $ 0.60 $ 0.31 ========== ========== ========== DILUTED EPS: Net income $ 1,097 $ 855 $ 470 ---------- ---------- ---------- Weighted average common shares outstanding 1,372,051 1,426,735 1,495,086 Dilutive common stock equivalents: Common stock equivalents due to the dilutive effect of stock options under the treasury stock method 37,319 12,125 -- Common stock equivalents due to the dilutive effect of RRP awards under the treasury stock method 13,929 10,540 -- ---------- ---------- ---------- Total weighted average diluted shares 1,423,299 1,449,400 1,495,086 ---------- ---------- ---------- Diluted EPS $ 0.77 $ 0.59 $ 0.31 ========== ========== ==========
(12) COMMITMENTS AND CONTINGENCIES Off-Balance Sheet Financial Instruments The Company's off-balance sheet financial instruments at March 31, 1998 and 1997 were limited to fixed-rate mortgage loan origination commitments with total contractual amounts of $965,000 and $1.5 million, respectively, and weighted average interest rates of 7.49% and 8.61%, respectively. These instruments involve elements of credit risk and interest rate risk in addition to the amounts recognized in the consolidated balance sheets. The contractual amounts represent the Company's maximum potential exposure to credit loss, but do not necessarily represent future cash requirements since certain commitments may expire without being funded. Loan commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee by the customer. Commitments are subject to the credit approval process applied in the Company's general lending activities, including a case-by-case evaluation of the customer's creditworthiness and related collateral requirements. Legal Proceedings In the normal course of business, the Company is involved in various outstanding legal proceedings. Management has discussed the nature of these proceedings with legal counsel. In the opinion of management, the financial position of the Company will not be materially affected as a result of the outcome of such legal proceedings. (13) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107 requires the Company to disclose fair value information about financial instruments for which it is practicable to estimate fair value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Quoted market prices are used to estimate fair values when those prices are available. However, active markets do not exist for many types of financial instruments. Consequently, fair values for these instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. Estimates 57 59 developed using these methods are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. In addition, since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed in accordance with SFAS No. 107 do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect possible tax ramifications or estimated transaction costs. The following is a summary of the carrying values and estimated fair values of the Company's financial assets and liabilities (none of which were held for trading purposes) at March 31:
March 31, ---------------------------------------------------- 1998 1997 ------------------------ ----------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ----- ---------- ----- ---------- (In thousands) FINANCIAL ASSETS: Cash and due from banks $ 783 $ 783 $ 912 $ 912 Interest-bearing deposits 2,401 2,401 1,438 1,438 Federal funds sold 6,200 6,200 5,900 5,900 Securities 58,399 58,839 54,507 54,273 Loans,net 57,623 58,812 55,110 54,909 FHLB stock 943 943 674 674 Accrued interest receivable 747 747 778 778 FINANCIAL LIABILITIES: Savings certificate accounts 71,056 71,173 62,878 62,816 Other deposit accounts 33,937 33,937 35,449 35,449
The following is a description of the principal valuation methods used by the Company to estimate the fair values of its financial instruments: Securities. Fair values were determined by published market prices or securities dealers' estimated prices. Loans. Fair values were estimated by portfolio, for loans with similar financial characteristics. Loans were segregated by type, such as one-to four- family residential, multi-family residential, commercial real estate, consumer and commercial loans. Each loan category was further segmented into fixed and adjustable-rate categories, and by performing and non-performing categories. The pricing methodology for performing one- to four-family residential mortgage loans was determined based on the zero-coupon yield curve plus the option-adjusted spread for fixed-rate mortgages. The fair values for performing loans in other portfolio categories were estimated by discounting the expected cash flows using current market rates for loans with similar terms to borrowers of similar credit quality. The fair values of non-performing loans were based on management's analysis of estimated cash flows discounted at rates commensurate with the credit risk involved. Deposit Liabilities. The fair value of savings certificate accounts represents contractual cash flows discounted using interest rates currently offered on accounts with similar characteristics and remaining maturities. In accordance with SFAS No. 107, the fair values of other deposit accounts (those with no stated maturity such as savings accounts) are equal to the carrying amounts payable on demand. In accordance with SFAS No. 107, these fair values do not include the value of core deposit relationships which comprise a significant portion of the Company's deposit base. Management believes that the Company's core deposit relationships provide a relatively stable, low-cost funding source which has a substantial unrecognized value separate from the deposit balances. Other Financial Instruments. The other financial assets and liabilities listed in the preceding table have fair values that approximate the respective carrying values because the instruments are payable on demand or have short-term maturities, and present relatively low credit risk and interest rate risk. Fair values of the loan origination commitments described in note 12 were estimated based on an analysis of the interest rates and fees currently charged to enter into similar transactions, considering the remaining terms of the instruments and the creditworthiness of the potential borrowers. At March 31, 1998 and 1997, the fair values of these commitments approximated the related carrying values which were not significant. 58 60 (14) PARENT COMPANY CONDENSED FINANCIAL INFORMATION Set forth below are the condensed balance sheets of Tappan Zee Financial, Inc. as of March 31, 1998 and 1997, and its condensed statements of income and cash flows for the years ended March 31, 1998 and 1997 and the period from October 5, 1995 (the Conversion date) to March 31, 1996:
March 31, --------------------- CONDENSED BALANCE SHEETS 1998 1997 ------- ------- Assets (In thousands) Cash $ 238 $ 271 Securities and interest-bearing deposits 2,820 4,662 Investment in subsidiaries 18,520 16,298 Other assets 241 8 ------- ------- Total assets $21,819 $21,239 ======= ======= Liabilities and Shareholders' Equity Accrued expenses $ 19 $ 11 Shareholders' equity 21,800 21,228 ------- ------- Total liabilities and shareholders' equity $21,819 $21,239 ======= =======
Period Ended March 31, -------------------------------------- 1998 1997 1996* ------- ------- ------- CONDENSED STATEMENTS OF INCOME (In thousands) Dividends from subsidiaries $ 400 $ 360 $ 90 Interest income 203 255 78 Non-interest expense (182) (152) (22) ------- ------- ------- Income before income tax expense and equity in undistributed earnings of subsidiaries 421 463 146 Income tax expense 8 38 33 ------- ------- ------- Income before equity in undistributed earnings of subsidiaries 413 425 113 Equity in undistributed earnings of subsidiaries 684 430 357 ------- ------- ------- Net income $ 1,097 $ 855 $ 470 ======= ======= =======
* From the date of Conversion, October 5, 1995 59 61
Period Ended March 31, ---------------------------------------- 1998 1997 1996* -------- -------- -------- (In thousands) CONDENSED STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net income $ 1,097 $ 855 $ 470 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (684) (430) (357) Other adjustments, net 194 297 6 -------- -------- -------- Net cash provided by operating activities 607 722 119 -------- -------- -------- Cash flows from investing activities: Purchase of common stock of subsidiaries (1,100) -- (7,357) -------- -------- -------- Cash flows from financing activities: Net proceeds from sale of common stock, exclusive of ESOP shares -- -- 13,605 Purchase of common stock for awards under RRP -- (714) -- Purchase of treasury stock (990) (1,070) -- Dividends paid (392) (291) (81) -------- -------- -------- Net cash provided by financing activities (1,382) (2,075) 13,524 (Decrease) increase in cash and cash equivalents (1,875) (1,353) 6,286 Cash and cash equivalents at beginning of period 4,933 6,286 -- -------- -------- -------- Cash and cash equivalents at end of period $ 3,058 $ 4,933 $ 6,286 ======== ======== ========
* From the date of Conversion, October 5, 1995 (15) MERGER AGREEMENT On March 6, 1998, the Registrant entered into a definitive agreement ("Merger Agreement") pursuant to which the Registrant will merge with and into U.S.B. Holding Co., Inc. ("USB"), a registered bank holding company and parent company of Union State Bank, a New York State chartered commercial bank. The Bank will operate as a wholly-owned subsidiary of USB. Under the terms of the Merger Agreement, each shareholder of the Registrant will receive USB common stock that is anticipated to have a value of $22.00 per share for each share of the Registrant. The exchange ratio will be fixed upon receipt of all regulatory approvals. The minimum exchange ratio will be 0.88 shares of USB common stock for each share of the Registrant's common stock, if USB's common stock has a value of $25.00 per share, or higher, and subject to the exception below, the maximum exchange ratio will be 1.24 shares of USB common stock for each share of Registrant common stock if USB's common stock has a value of $17.75, or lower. If USB's common stock has a value of between $17.75 and $25.00 per share, the Exchange Ratio will be established to provide a value to the Registrant's shareholders of $22.00 per share. If USB's common stock falls below $15.00 per share, the Registrant will have the right to terminate the transaction subject to USB's right to adjust the Exchange Ratio so as to assure the Registrant's shareholders receive a value of $18.60 per Registrant share. The transaction is intended to be a tax free exchange of common shares and will be accounted for as a pooling of interests. The transaction is subject to receipt of regulatory approvals and the approval of the Registrant's shareholders. The transaction will be presented for approval at a special meeting of the Registrant's shareholders. In connection with the Merger Agreement, the Registrant and USB also entered into a Stock Option Agreement which, under certain defined circumstances, would enable USB to purchase up to 294,134, or 19.9%, of the Registrant's issued and outstanding common stock at a price of $18.50 per share. 60 62 (16) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for fiscal 1998 and 1997 is shown below:
Three Months Ended ---------------------------------------------------- June 30 September 30 December 31 March 31 ------- ------------ ----------- -------- (In thousands, except per share data) FISCAL 1998 Interest income $ 2,265 $ 2,327 $ 2,348 $ 2,453 Interest expense 1,132 1,179 1,201 1,209 ------- ------- ------- ------- Net interest income 1,133 1,148 1,147 1,244 Provision for loan losses 11 10 11 10 Non-interest income 50 48 79 91 Non-interest expense 714 766 778 752 ------- ------- ------- ------- Income before income tax expense 458 420 437 573 Income tax expense 193 176 183 239 ------- ------- ------- ------- Net income $ 265 $ 244 $ 254 $ 334 ======= ======= ======= ======= Basic earnings per share $ 0.19 $ 0.18 $ 0.19 $ 0.24 ======= ======= ======= ======= Diluted earnings per share $ 0.19 $ 0.17 $ 0.18 $ 0.23 ======= ======= ======= ======= FISCAL 1997 Interest income $ 2,088 $ 2,155 $ 2,152 $ 2,196 Interest expense 1,004 1,018 1,022 1,062 ------- ------- ------- ------- Net interest income 1,084 1,137 1,130 1,134 Provision for loan losses 6 20 20 23 Non-interest income 40 34 31 47 Non-interest expense (1) 677 1,306 708 696 ------- ------- ------- ------- Income (loss) before income tax expense 441 (155) 433 462 Income tax expense (benefit) (1) 187 (229) 175 193 ------- ------- ------- ------- Net income $ 254 $ 74 $ 258 $ 269 ======= ======= ======= ======= Basic earnings per share $ 0.17 $ 0.05 $ 0.18 $ 0.19 ======= ======= ======= ======= Diluted earnings per share $ 0.17 $ 0.05 $ 0.18 $ 0.19 ======= ======= ======= =======
(1) For the quarter ended September 30, non-interest expense includes the SAIF special assessment of $538,000 and income tax benefit includes $166,000 attributable to a change in state tax law. See notes 5 and 7. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT The Certificate of Incorporation and Bylaws of the Company provide for the election of directors by the shareholders. For this purpose, the Board of Directors of the Company is divided into three classes, as nearly equal in number as possible. The terms of office of the members of one class expire, and a successor class is to be elected, at each annual meeting of shareholders. There are currently seven directors of the Company. 61 63 Information as to Directors. The following table sets forth certain information with respect to each director. There are no arrangements or understandings between the Company and any director or nominee pursuant to which such person was elected or nominated to be a director of the Company. For information with respect to the security ownership of directors, see "Stock Owned by Management."
Directors Director Term Position(s) Held with the Age(1) Since(2) Expires Company and the Bank Stephen C. Byelick 73 1983 1998 President and Chief Executive Officer and Director of the Company and Tarrytowns John T. Cooney 63 1982 1998 Director of the Company and Tarrytowns Marvin Levy 72 1980 1999 Director and Chairman of the Company and Tarrytowns Kevin J. Plunkett 48 1990 1999 Director of the Company and Tarrytowns Gerald L. Logan 60 1990 2000 Director of the Company and Tarrytowns Harry G. Murphy 41 1989 2000 Vice President and Secretary and Director of the Company and Tarrytowns Paul R. Wheatley 67 1989 1999 Director of the Company and Tarrytowns
(1) As of April 30, 1998. (2) Includes service as a Director or Director Emeritus of Tarrytowns and its predecessor, Tarrytown and North Tarrytown Saving and Loan Association. The principal occupation and business experience of each nominee for election as director and each Continuing Director is set forth below. DIRECTORS Stephen C. Byelick has served as President and Chief Executive Officer of the Company since its formation in 1995 and has been a Director or Director Emeritus of Tarrytowns and its Chief Executive Officer since 1983. Prior to 1983, Mr. Byelick was a vice president with The Bank of New York, serving in a variety of functions including branch management, lending and marketing. John T. Cooney has served as a Director of the Company since its formation in 1995 and has been a Director of Tarrytowns since 1982. Mr. Cooney is a Vice President of County Asphalt Inc., a manufacturer of asphalt paving materials, and has been with this company for more than 25 years. Mr. Cooney is also a Vice President of Westchester Industries, Inc., a real estate and holding corporation, and a partner in Cooney Realty Co., a real estate partnership, and has been with such entities for greater than 25 years. Marvin Levy has served as a Director and Chairman of the Company since its formation in 1995, a Director of Tarrytowns since 1980 and Director and Chairman of the Board of Tarrytowns since 1990. Mr. Levy is a C.P.A. and has been the President of Greller and Company P.C., a professional corporation of certified public accountants, for in excess of 25 years. Kevin J. Plunkett has served as a Director of the Company since its formation in 1995 and has been a Director of Tarrytowns since 1990. Mr. Plunkett has been a practicing attorney since 1975. Mr. Plunkett was an Assistant District Attorney, Felony Trial Division, of Westchester County from 1975 to 1979 and was an Acting Village Justice for the Village of Tarrytown from 1985 to 1987. He is the Village Attorney for the Village of Irvington, N.Y. and the Village of Dobbs Ferry, N.Y. Mr. Plunkett is currently a member in the law firm of Plunkett & Jaffe, P.C., with offices in White Plains, New York City and Albany. He is a member of the Board of Trustees of Iona College, New Rochelle, New York. Paul R. Wheatley has served as a Director of the Company since its formation in 1995 and has been a Director of Tarrytowns since 1989. Mr. Wheatley was President of Beck & Wheatley Inc., an insurance agency and real estate brokerage concern, from 1970 until his retirement in 1993. 62 64 Gerald L. Logan has served as a Director of the Company since its formation in 1995 and has been a Director of Tarrytowns since 1990. Since 1995, Mr. Logan has been a registered representative of The Windmill Group, Inc., a financial planning firm. Mr. Logan was employed as a vice president of Axe-Houghton Management, an investment management firm from 1954 to 1992. Mr. Logan has been a member of the National Association of Securities Dealers, Inc. since 1958. Mr. Logan retired from USF&G-AHM, an insurance company in 1997. Harry G. Murphy has served as Vice President and Secretary and Director of the Company since its formation in 1995. Mr. Murphy has been a Vice President of Tarrytowns since 1983, Vice President and Secretary of Tarrytowns since 1987 and a Director of Tarrytowns since 1989. Mr. Murphy is also the Community Reinvestment Officer of Tarrytowns. Prior to 1983, Mr. Murphy was an assistant treasurer with The Bank of New York. COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE COMPANY The Company Board of Directors meets on a monthly basis and may have additional special meetings upon the request of the Chairman of the Board. The Company's Board of Directors met twenty times during the fiscal year ended March 31, 1998. No director attended fewer than 75% of the total number of Board meetings and committee meetings of which such director was a member except Mr. Cooney who attended 70% of the Board meetings and was absent from the Examining and Audit Committee meeting. The Board of Directors of the Company has established the following committees: The Executive Committee consists of all members of the Board of Directors. The purpose of this committee is to monitor and manage the Company's interest rate risk against applicable board and regulatory standards and coordinate such interest rate risk management with the Company's operating plan. This committee, from time to time, also reviews regulatory issues and reports of regulatory examinations. This committee meets as requested by the Board of Directors. The Company did not call an Executive Committee meeting solely for these specific functions during fiscal 1998 but instead dealt with these responsibilities at Tarrytowns' Executive Committee meeting and at regular and special meetings of the Company's Board of Directors. Tarrytowns' Executive Committee consists of the same board members as the Company's Executive Committee meeting. The Compensation Committee consists of Messrs. Plunkett (Chairman), Logan and Wheatley. This committee establishes the compensation of the Chief Executive Officer, approves the compensation of other officers, and determines compensation and benefits to be paid to employees of Tarrytowns. The committee meets yearly and as requested by the Board of Directors. The Compensation Committee of the Company met two times in fiscal 1998. In addition, the Compensation Committee of Tarrytowns, which committee consists of the same board members as the Company's Compensation Committee, met three times during fiscal 1998. The Examining and Audit Committee consists of Messrs. Logan (Chairman), Cooney and Wheatley. Tarrytowns' Internal Auditor reports to this committee. The purpose of this committee is to provide assurance that the Company's internal controls are adequate and that financial disclosures made by management portray Tarrytowns' financial condition and results of operations. The committee is responsible for the classification of assets and the establishment of adequate valuation allowances. The committee also maintains a liaison with the outside auditors and reviews the adequacy of internal controls. The committee meets at least annually or as called by the Committee Chairman. The Examining and Audit Committee met one time in fiscal 1998. In addition, the Examining and Audit Committee of Tarrytowns, which consists of the same board members as the Company's Examining and Audit Committee, met twelve times during fiscal 1998. The Nominating Committee consists of Messrs. Levy (Chairman), Plunkett, Wheatley, Logan and Murphy. The nominating committee nominates candidates for the election of directors. The committee meets as called by the Committee Chairman. This committee met one time during fiscal 1998, to select the nominees for election as directors at the annual meeting of shareholders. EXECUTIVE OFFICERS The following individuals are executive officers of the Company and hold the offices set forth below opposite their names. There are no executive officers of the Company who are not also directors. NAME POSITIONS HELD WITH THE COMPANY Stephen C. Byelick President and Chief Executive Officer Harry G. Murphy Vice President and Secretary 63 65 The executive officers of the Company are elected annually and hold office until their respective successors have been elected and qualified or until death, resignation or removal by the Board of Directors. The Company has entered into Employment Agreements with its executive officers which sets forth the terms of their employment. Since the formation of the Company, none of the executive officers or other employee personnel has received remuneration from the Company. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's executive officers and directors, and persons who own more than 10% of the total outstanding shares of the Company Common Stock to file with the SEC reports of ownership and changes of ownership. Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Other than the annual statements of changes in beneficial ownership of securities filed with the SEC on Form 4 and Form 5 for each officer and director, which were accurate in all respects, based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons, the Company believes that all filing requirements applicable to its executive officers, directors and greater than 10% beneficial owners were complied with during the 1998 fiscal year. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS Fee Arrangements. Currently, each outside director of the Company receives a fee of $700 per meeting attended and, in addition to such fee, the Chairman of the Board receives a fee of $200 per month for Board service. All committee members receive a fee of $300 for attendance at each committee meeting, with the exception of members of the Examining and Audit Committee. The Chairman and members of the Examining and Audit Committee receive a fee of $250 and $100, respectively, for each committee meeting attended. When the Boards of Directors of the Company and Tarrytowns meet on the same day, only one meeting fee is paid to any director. In such a circumstance, the meeting fee is paid by Tarrytowns. Directors' Retirement Plan. The Company maintains a non-qualified retirement plan for eligible outside directors (the "Directors' Retirement Plan"). This Plan provides benefits to each eligible outside director of the Company commencing on his termination of Board service at or after age 65. Each outside director who served or agreed to serve on the Board of Directors of the Company or Tarrytowns subsequent to the completion of the Conversion automatically became a participant in the Plan unless prior to, or, on or after such date, the director irrevocably elected to participate in the Deferred Compensation Plan (described below) and waived benefits under the Directors' Retirement Plan. Currently, there are only two outside directors participating in the Directors' Retirement Plan. An eligible outside director retiring at or after age 65 will be paid an annual retirement benefit equal to the amount of the aggregate compensation for services as a director (excluding stock compensation) paid to him for the 12-month period immediately prior to his termination of Board service, multiplied by a fraction, the numerator of which is the number of his years of service as an outside director (including service as a director or trustee of Tarrytowns or any predecessor) and the denominator of which is 10. An individual who terminates Board service after having served as an outside director for 10 years may elect to begin collecting benefits under the Directors' Retirement Plan at or after attainment of age 50, but the annual retirement benefits payable to him will be reduced pursuant to the Plan's early retirement reduction formula to reflect the commencement of benefit payments prior to age 65. An outside director may elect to have his benefits distributed in any one of the following forms: (i) a single life annuity; (ii) a 50% or 100% joint and survivor annuity; or (iii) a single life annuity with a 5, 10, or 15 year guaranteed term. In the event an outside director dies prior to the commencement of benefit payments under the Directors' Retirement Plan, a 50% survivor annuity will automatically be paid to his surviving spouse. 64 66 Deferred Compensation Plan for Directors. The Company also maintains a non-qualified deferred compensation plan ("Deferred Compensation Plan") pursuant to which directors may defer receipt of all or a portion of the compensation received for their services to the Company or Tarrytowns and its affiliated companies (including compensation paid to an officer-director for service as an officer). Any director who elects to participate in the Deferred Compensation Plan will be deemed to have irrevocably waived his benefits under the Directors' Retirement Plan. Compensation deferred is applied to either the purchase of investments (including shares of the Company Common Stock) for the account of the director, in which case the amount of deferred benefits payable is based on the investment performance of the investments made, or the compensation deferred is used to pay annual premiums on life insurance policies owned by Tarrytowns and covering the lives of the participants, in which case the amount of deferred benefits payable is based on the value to Tarrytowns of expected death benefit proceeds. Deferred benefits are paid in installments over a period of ten years beginning upon termination of service as a director. In the event a director dies prior to the complete distribution of his account in the Deferred Compensation Plan, the remainder will be paid in a single sum payment to his designated beneficiary. The Deferred Compensation Plan currently requires the full funding of all premiums due under the four existing life insurance contracts purchased for the Plan in the event a "change in control," such as the Merger, were to occur. A separate trust fund has been established with an independent fiduciary (the "Trustee") for the purpose of accumulating funds to be used to satisfy the Company's obligations under the Deferred Compensation Plan. The Trustee will vote any shares of The Company Common Stock purchased for a participant's account in the Deferred Compensation Plan in accordance with the directions given by such participant. Outside Director Option Plan and Outside Director RRP. The Company has also established, with the approval of its shareholders obtained at the 1996 annual meeting ("1996 Annual Meeting") the Outside Director Option Plan and the Outside Director RRP. In general, only non-employee directors of the Company may participate and receive awards under these Plans. At the 1996 Annual Meeting, when the Outside Director Option Plan and Outside Director RRP first became effective, each outside director was granted a non-qualified stock option to purchase 8,100 shares of the Company Common Stock and a restricted stock award covering 3,240 shares of Common Stock. The options and restricted stock awards vest at the rate of 20% per year, on each anniversary of the award grant date, with full vesting to occur after a five consecutive year period. In addition, the Outside Director Option Plan and Outside Director RRP provide for the options granted to outside directors to become immediately exercisable and for the shares of restrict stock granted to them to become fully distributable -- prior to the expiration of the five year period -- upon an outside director's retirement, death, disability, or a "change in control," which, for this purpose, would include shareholder approval of the Merger Agreement. SUMMARY COMPENSATION TABLE The following table sets forth the cash compensation paid by the Company and Tarrytowns for services rendered in all capacities during the fiscal year ended March 31, 1998 and for the two preceding fiscal years, to the Chief Executive Officer and the executive officers of the Company and Tarrytowns whose annual salary and bonus for such fiscal year was in excess of $100,000 ("Named Executive Officers").
LONG TERM COMPENSATION --------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ---------------------------------------- ---------------------------- --------- OPTIONS/ OTHER RESTRICTED STOCK ALL ANNUAL COMPENSATION ANNUAL STOCK APPRECIATION LTIP OTHER NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS RIGHTS PAYOUT COMPENSATION POSITIONS YEAR ($)(1) ($) ($)(2) ($)(3) ("SARS")(#)(4) ($) ($)(5) - --------------------------------------------------------------------------------------------------------------------------- Stephen C. Byelick, 1998 $160,750 $23,338 --- --- --- --- $47,981 President and 1997 $154,500 $17,290 --- $188,325 40,500 --- $42,674 Chief Executive Officer 1996 $158,567 $18,083 --- --- --- --- $11,110 Harry G. Murphy, 1998 $99,000 $18,418 --- --- --- --- $47,981 Vice President 1997 $95,000 $12,220 --- $188,325 40,500 --- $30,656 and Secretary 1996 $97,900 $12,530 --- --- --- --- $7,687
Footnotes follow on next page. 65 67 (1) Includes compensation under the Deferred Compensation Plan and, for the period prior to Tarrytowns' stock conversion in 1995, fees earned as a director of Tarrytowns. (2) For 1998, 1997, and 1996, there were no (a) perquisites over the lesser of $50,000 or 10% of the individual's total salary and bonus for the year; (b) payments of above-market preferential earnings on deferred compensation; (c) payments of earnings with respect to long-term incentive plans prior to settlement or maturation; (d) tax payment reimbursements; or (e) preferential discounts on stock. (3) Includes 16,200 shares granted in fiscal 1997 to each of Mr. Byelick and Mr. Murphy pursuant to the Employee RRP approved by shareholders at the 1996 Annual Meeting. The value of the 16,200 share award as shown in the table above is based on a per share price of $11.625, the final quoted sales price of a share on the date of the award. Stock awards vest in five equal installments on the first, second, third, fourth and fifth anniversaries of the grant date, subject to earlier vesting upon termination of employment. The Employee RRP provides that, in the case of termination of employment due to retirement, death, disability or a "change in control," such as shareholder approval of the Merger Agreement, all shares granted will become immediately vested. At March 31, 1998, the aggregate value of Mr. Byelick's and Mr. Murphy's restricted share awards was $328,050, based on the final quoted sales price of $20.25 per share as of such date. (4) Includes 40,500 shares subject to options granted to each of Mr. Byelick and Mr. Murphy pursuant to the Employee Option Plan approved by shareholders at the 1996 Annual Meeting. As of March 31, 1998, 8,100 of the options held by Mr. Byelick and Mr. Murphy under the Employee Option Plan to purchase shares of the Company Common Stock at the exercise price of $11.625 per share were exercisable. On July 11, 1998, 8,100 additional options granted to Mr. Byelick and Mr. Murphy will become exercisable. The options granted under the Employee Option Plan are intended to qualify as "incentive stock options" under Section 422 of the Internal Revenue Code of 1986, as amended ("Code") to the maximum extent possible and any options that do not so qualify will constitute non-qualified stock options. The Employee Option Plan provides for options to become exercisable in five equal installments on the first, second, third, fourth and fifth anniversaries of the grant date and to generally remain exercisable until the tenth anniversary of the grant date, subject to earlier expiration upon termination of employment. Pursuant to the Employee Option Plan, in the event of an option holder's termination of employment due to retirement, death, disability or a "change in control," which would include shareholder approval of the Merger Agreement, all options granted become immediately exercisable. (5) Includes shares of the Company Common Stock allocated to the accounts of Messrs. Byelick and Murphy, pursuant to the ESOP. Mr. Byelick was allocated 2,559 in fiscal 1998, 3,132 shares in fiscal 1997 and 880 shares in fiscal 1996. Mr. Murphy was allocated 2,559 in fiscal 1998, 2,250 shares in fiscal 1997 and 609 shares in fiscal 1996. The value of the shares were based on a price per share of $18.750, $13.375 and $12.625 respectively, the final quoted sales price of the Company Common Stock on the Nasdaq Stock Market on December 31, 1997, December 31, 1996 and December 31, 1995, the dates of allocation. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION There are no other interlocks, as defined under the rules and regulations of the SEC, between the Compensation Committee and corporate affiliates of members of the Compensation Committee or otherwise. The Compensation Committee consists of Messrs. Plunkett (Chairman), Logan and Wheatley. EMPLOYMENT AGREEMENTS The Company and Tarrytowns have entered into employment agreements (collectively, the "Employment Agreements") with Messrs. Byelick and Murphy (the "Senior Executive(s)"). These Employment Agreements establish the respective duties and compensation of the Senior Executives and ensure the ability of the Company and Tarrytowns to maintain a stable and competent management. For purposes of achieving comparable goals, the Merger Agreement provides for USB and Tarrytowns to enter into new agreements with these Senior Executives that will replace and supersede the Employment Agreements, currently in effect, which are described below. The existing Employment Agreements between Tarrytowns and the Senior Executives provide for initial three year terms and further provide that, commencing on the first anniversary date of the Agreement and continuing each anniversary date thereafter, the Board of Directors may, with the Senior Executive's concurrence, extend its Employment Agreements for an additional year, so that the remaining terms shall be three years, after conducting a performance evaluation of the Senior Executive. The Board of Directors of Tarrytowns, with the consent of each Senior Executive, approved an extension to each Agreement effective as of June 23, 1997. The Company's Employment Agreements with the Senior Executive provide for automatic daily extensions such that the remaining terms of the Employment Agreements shall be three years unless written notice of non-renewal is given by the Board of Directors or the Senior Executive. The Employment Agreements provide that the Senior Executive's base salary will be reviewed annually and adjusted based on the Senior Executive's job performance and the performance of the Company and Tarrytowns. As of May 31, 1998, the base salaries for Messrs. Byelick and Murphy are $164,500 and $102,000, respectively. In addition to base salaries, the Employment Agreements provide for, among other things, entitlement to participation in stock, retirement and welfare benefit plans and eligibility for fringe benefits applicable to executive personnel such as a company car and fees for club and organization memberships deemed appropriate by Tarrytowns or the Company and the Senior Executive. The Employment Agreements provide for termination by Tarrytowns or the Company at any time for cause as defined in the Employment Agreements. In the event Tarrytowns or 66 68 the Company chooses to terminate the Senior Executive's employment for reasons other than for cause, or in the event of the Senior Executive's voluntary or involuntary termination of employment following a "change in control" of the Company or Tarrytowns, which would include the Merger, the Senior Executive or, in the event of death, his beneficiary would be entitled to a lump sum cash payment in an amount equal to the remaining base salary and bonus payments due to the Senior Executive and the additional contributions or benefits that would have been earned under any employee benefit plans of Tarrytowns or the Company during the remaining terms of the Employment Agreements. Tarrytowns and the Company would also continue the Senior Executive's life, health and disability insurance coverage for the remaining terms of the Employment Agreements. It is not anticipated that any cash or benefits payable to the Senior Executives following the Merger will constitute "excess parachute" payments" under Section 280G of the Code that would result in the imposition of a 20% excise tax on the recipient and the denial of the deduction for such excess amounts to the Company, its successor USB, and Tarrytowns. However, in the event that any such payments or benefits constitute "excess parachute payments" triggering an excise tax, the new agreements to be entered into by and among USB, Tarrytowns and the Senior Executives provide for full indemnification of each Senior Executive with respect to any such excise tax liability. EMPLOYEE RETENTION AGREEMENTS. In order to further its goal of ensuring a stable management team during a possible "change in control," the Company and Tarrytowns also entered into employee retention agreements, dated as of June 23, 1997, with the following executives: James D. Haralambie, Christina Vidal Clarke, Margaret Sampson and Valerie Wilson (collectively, the "Employee Retention Agreements"). These Agreements supersede and replace the prior employee retention agreements adopted by the Company and Tarrytowns in connection with Tarrytowns' Conversion in 1995. The Merger Agreement provides for USB to honor and assume the terms of these Employee Retention Agreements, which are described below. Effective upon a "change of control" of the Company or Tarrytowns (which would include the Merger), each Employee Retention Agreement provides for an "Assurance Period" of two years, in the case of Mr. Haralambie and Ms. Clarke, and one year, in the case of Ms. Sampson or Ms. Wilson, that will commence effective upon such event. Each Employee Retention Agreement provides that if, at any time during the applicable "Assurance Period" or during the three month period prior to the "change in control," the executive's employment is terminated for any reason other than "for cause" (as defined in the Agreement) death or disability, or if the executive voluntarily resigns his employment due to: (i) a material diminution in the executive's functions, duties or responsibilities; (ii) a reduction in the executive's compensation; (iii) a material change in the employee benefit programs provided to the executive by Tarrytowns, USB or any successor; or (iv) a relocation of the executive's principal place of employment that would result in a one-way commuting time in excess of the greater of: (A) 30 minutes or (B) the executive's commuting time immediately before the change, the executive, or, in the event of his or her death, the executive's beneficiary, would be entitled to receive a severance payment equal to the remaining base salary, bonus payments and the additional contributions or benefits that would have been earned by the executive under any employee benefit plans of Tarrytowns or the Company during the remaining portion of the executive's Assurance Period. The Employee Retention Agreements also provide for the executive's life, health and disability insurance coverage to be continued for the remaining Assurance Period. BENEFITS Retirement Plan. Tarrytowns has maintained a non-contributory, tax-qualified defined benefit pension plan (the "Retirement Plan") for eligible employees, since 1957. All employees at least age 21 who have completed at least one year of service are eligible to participate in the Retirement Plan. The Retirement Plan provides for an annual annuity benefit for each participant, including executive officers named in the Summary Compensation Table above, equal to 2% of the participant's average annual earnings (average W-2 compensation during the highest 36 consecutive months of the participant's final 120 months of employment) multiplied by the participant's years (and any fraction thereof) of eligible employment (up to a maximum of 30 years). The Retirement Plan was amended, effective as of January 30, 1998, to permit a participant to elect a lump sum distribution of his benefits under the Plan under certain circumstances, including in-service distribution. A participant will become fully vested in his or her benefit under the Retirement Plan after five years of service. The Retirement Plan is funded by Tarrytowns on an actuarial basis. The Plan is administered by the Pension Committee of Tarrytowns' Board of Directors and operates on a calendar year basis. Tarrytowns has established a trust for the Retirement Plan ("Retirement Plan Trust") and has appointed an unrelated trustee ("Trustee") to administer the Trust. Up to 10% of the Retirement Plan's assets may be invested by the Trustee in shares of the Company Common Stock, in such amounts and upon such terms and conditions as the Pension Committee may determine to be in the best interests of the Plan participants and beneficiaries. These shares may be acquired through open market purchases, if permitted, or from authorized but unissued shares. As of March 31, 1998, the Retirement Plan has purchased 6,275 shares of the Company Common Stock. These shares are held unallocated to any participants in the Retirement Plan Trust. The Trustee, subject to its fiduciary duty, will vote the shares of the Company Common Stock held in the Retirement Plan Trust in accordance with the directions given by 67 69 the Pension Committee. The following table illustrates the annual benefit payable upon normal retirement at age 65 (in single life annuity amounts with no offset for Social Security benefits) at various levels of compensation and years of service:
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 45,000 (2) 60,000 75,000 90,000 90,000 $175,000 52,500 (2) 70,000 87,500 105,000 105,000 $200,000 60,000 (2) 80,000 100,000 120,000 (3) 120,000 (3)
(1) The annual retirement benefits shown in the table do not reflect a deduction for Social Security benefits and there are no other offsets to benefits. The amounts shown in the table include salary and bonus as reported in the Summary Compensation Table but do not include additional benefits payable to Messrs. Byelick and Murphy under the Deferred Compensation Plan. See "Deferred Compensation Plan." (2) For 1997, the average final compensation for computing benefits under the Retirement Plan cannot exceed $160,000 (as adjusted for subsequent years pursuant to the Code). (3) Under current law, the maximum annual benefit payable under the Retirement Plan cannot exceed $120,000 (as adjusted for subsequent years pursuant to the Code). (4) The maximum years of service credited for benefit purposes is 30 years. The years of credited service and the average annual earnings (as defined above) determined as of December 31, 1997, the end of the 1997 plan year, for each of Stephen C. Byelick and Harry G. Murphy, the Named Executive Officers listed in the Summary Compensation Table, were 15.0 years and $156,191 and 14.5 years and $107,750, respectively. Employee Stock Ownership Plan and Trust. The Company has established, and Tarrytowns has adopted, for the benefit of eligible employees, an ESOP and related trust which became effective upon the Conversion. All employees of Tarrytowns or the Company are eligible to become participants in the ESOP. The ESOP purchased, with funds borrowed from the Company, eight percent (8%) of the Company Common Stock (129,600 shares) issued in the Conversion. Tarrytowns has been making annual contributions to the ESOP on behalf of its participating employees in an aggregate amount at least equal to the principal and interest requirement on the debt. The term of the ESOP loan is 10 years, with an interest rate of 8% per annum. Shares purchased by the ESOP are initially pledged as collateral for the loan, and are held in a suspense account until released for allocation among participants in the ESOP when the loan is repaid. The pledged shares are released annually from the suspense account in an amount proportional to the repayment of the ESOP loan for each plan year. The released shares are allocated among the accounts of participants on the basis of the participant's compensation for the year of allocation. Benefits generally become vested at the rate of 20% per year with 100% vesting after five years of service. Participants also become immediately vested upon termination of employment due to death, retirement at age 65, permanent disability or upon the occurrence of a "change in control" which would include the Merger. Forfeitures are reallocated among remaining participating employees, in the same proportion as contributions. Vested benefits may be paid in a single sum or installment payments and are payable upon death, retirement at age 65, disability or separation from service. In connection with the establishment of the ESOP, the ESOP Committee of the Company's Board of Directors was appointed to administer the ESOP. Marine Midland Bank has been appointed the corporate trustee for the ESOP. The ESOP Committee may instruct the trustee regarding investment of funds contributed to the ESOP. The ESOP Trustee, subject to its fiduciary duty, must vote all allocated shares held in the ESOP in accordance with the instructions of the participating employees. Under the ESOP, unallocated shares will be voted in a manner calculated to most accurately reflect the instructions it has received from participants regarding the allocated stock as long as such vote is in accordance with the provisions of ERISA. Employee Option Plan and Employee RRP. The Employee Option Plan and Employee RRP were adopted by the Board of Directors of the Company and approved by the shareholders of the Company at the 1996 Annual Meeting. The purpose of the Plans is to promote the growth of the Company and its affiliates by linking the incentive compensation of officers and key executives with the profitability of the Company. Options are granted to eligible officers and executives in such amounts and on such terms as may be determined by the Committee appointed to administer the Employee Option Plan. Restricted stock awards are awarded under the Employee RRP on a discretionary basis to eligible officers and executives. Option 68 70 grants and restricted stock awards generally vest at the rate of 20% per year over a five-year period, with accelerated vesting to occur upon the grantee's retirement, death, disability or a "change in control" which would include shareholder approval of the Merger Agreement. However,[as discussed in more detail in the "Proposal [1]. The Merger -- Interests of Certain Persons in the Merger" portion of this Proxy Statement-Prospectus,] Messrs. Byelick and Murphy have each agreed, pursuant to their respective Letter Agreement with USB and Tarrytowns, to waive the accelerated vesting that would otherwise apply to their options and restricted stock awards upon the approval of the Merger Agreement by the Company's shareholders. The terms of each executive's Letter Agreement provides for all currently un-vested and outstanding stock options and restricted stock awards to continue to vest in accordance with their original vesting schedules. During the 1998 fiscal year, no stock options were granted under the Employee Option Plan to any eligible officer, executive or employee of the Company or Tarrytowns. The following table provides certain information with respect to the number of shares of the Company Common Stock acquired through the exercise of, or represented by outstanding, stock options held by the Named Executive Officers on March 31, 1998. Also reported is the value for "in-the-money" options, which represent the positive spread between the exercise price of $11.625 applicable to the existing stock options shown in the table below and the 1998 fiscal year-end price of $20.25 per share of the Company Common Stock.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT FISCAL OPTIONS/SARS AT FISCAL YEAR-END (1) (2) YEAR-END # ($) NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE / UNEXERCISABLE Stephen C. Byelick, 8,100 / 32,400 69,863 / 279,450 President and Chief Executive Officer Harry G. Murphy, 8,100 / 32,400 69,863 / 279,450 Vice President and Secretary
(1) None of the Named Executive Officers exercised options during the fiscal year ended March 31, 1998. (2) 8,100 of the total of 40,500 outstanding stock options held by each Named Executive Officer were exercisable as of March 31, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL SHAREHOLDERS OF THE COMPANY The following table sets forth, as of March 31, 1998, certain information as to the Company Common Stock beneficially owned by persons owning in excess of 5% of the outstanding shares of the Company Common Stock. Management knows of no person, except as listed below, who beneficially owned more than 5% of the outstanding shares of the Company Common Stock as of May 31, 1998. Except as otherwise indicated, the information provided in the following table was obtained from filings with the Securities and Exchange Commission ("SEC") and with The Company pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Addresses provided are those listed in such filings as the address of the person authorized to receive notices and communications. Unless otherwise noted, each beneficial owner has sole voting and sole investment power over the shares beneficially owned. For purposes of the table below and the table set forth under "Stock Owned by Management," in accordance with Rule 13d-3 promulgated under the Exchange Act, a person is deemed to be the beneficial owner of any shares of the Company Common Stock (1) over which he has or shares, directly or indirectly, voting or investment power, or (2) of which he has the right to acquire beneficial ownership at any time within 60 days after March 31, 1998. As used herein, "voting power" is the power to vote or direct the voting of shares and "investment power" is the power to dispose or direct the disposition of such shares. 69 71
AMOUNT AND NATURE OF PERCENT OF COMMON NAME AND ADDRESS BENEFICIAL OWNERSHIP STOCK OUTSTANDING Compensation Committee of the Board of 171,872 shares(1) 11.63% Directors of Tappan Zee Financial, Inc. in its capacity as the administrator of the Employee Stock Ownership and Recognition and Retention Plans of Tappan Zee Financial, Inc. 75 North Broadway Tarrytown, New York 10591 The Employee Stock Ownership Plan Trust of 129,600 shares(2) 8.77% Tappan Zee Financial, Inc. and Certain Affiliates 250 Park Avenue New York, NY 10177 BRT Realty Trust 119,950 shares(3) 8.11% 60 Cutter Mill Road Suite 303 Great Neck, NY 11201
(1) The Compensation Committee administers the Employee Stock Ownership Plan of Tappan Zee Financial, Inc. ("ESOP"), a tax-qualified employee stock ownership plan covered by the provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Individual accounts are maintained in the ESOP for the accrued benefits of participating employees and their beneficiaries (see footnote #2 below). The Compensation Committee also administers the 1996 Recognition and Retention Plan for Officers and Employees of Tappan Zee Financial, Inc. ("Employee RRP") and the 1996 Recognition and Retention Plan for Outside Directors of Tappan Zee Financial, Inc. ("Outside Director RRP"), two non-qualified plans (collectively, the "RRPs"). The assets of the ESOP and the RRPs are held in separate trusts (the "ESOP Trust" and "RRP Trust," respectively) by Marine Midland Bank which serves as trustee (the "Trustee") of these Trusts. Since the Compensation Committee has shared "investment power" defined to mean the power to dispose (or to direct the disposition of) the assets of the ESOP and RRP Trusts, consisting of 171,872 shares of Common Stock, as of December 31, 1997, the Compensation Committee may be deemed to have beneficial ownership of these shares. Any unawarded shares held in the RRP Trust are generally required to be voted by the Trustee as directed by the Compensation Committee to reflect the votes of participating employees with respect to awarded shares. The Committee has the power to direct the Trustee with respect to the disposition or restriction of all shares held in the ESOP and RRP Trusts except in the case of a tender or exchange offer and, in this case, the Compensation Committee disclaims beneficial ownership of these shares. Each member of the Compensation Committee disclaims beneficial ownership of such shares. (2) The ESOP Trust purchased the shares of Common Stock shown in the table above with funds borrowed from the Company in the Conversion. The shares purchased by the ESOP Trust are held in a suspense account for release and allocation to participants' accounts on an annual basis, on the last day of each calendar year, following re-payment of the principal and interest due on the ESOP's loan. As of December 31, 1997, a total of 35,537 shares purchased by the ESOP Trust had been allocated to participants' accounts and the balance, 94,063 shares, remained unallocated and were held in the ESOP Trust's suspense account. The terms of the ESOP provide that, subject to the ESOP Trustee's fiduciary responsibilities under ERISA, the ESOP Trustee will vote, tender or exchange shares of Common Stock held in the ESOP Trust and allocated to participants in accordance with instructions received from such participants. The ESOP Trustee will vote allocated shares as to which no instructions are received and any shares that have not been allocated to participants' accounts in the same proportion as it votes the allocated shares with respect to which the ESOP Trustee receives instructions. The ESOP Trustee will tender or exchange any shares in the suspense account or that otherwise have not been allocated to participants' accounts in the same proportion as the allocated shares with respect to which the ESOP Trustee receives instructions are tendered or exchanged. With respect to allocated shares as to which no instructions are received, the ESOP Trustee will be deemed to have received instructions not to tender or exchange such shares. Except as described in footnote #1 above, the Compensation Committee investment power, except in limited circumstances, but no voting power over all the Company Common Stock held in the ESOP Trust. (3) BRT Realty Trust ("BRT") filed with the SEC a Schedule 13D, dated as of June 2, 1997 and amended as of July 18, 1997 and October 31, 1997. Based on BRT's Schedule 13D, BRT has sole voting and investment power over the 119,950 shares. BRT is a privately-owned Massachusetts business trust, intended to qualify as a Real Estate Investment Trust. 70 72 STOCK OWNED BY MANAGEMENT The following table sets forth information as of March 31, 1998 with respect to the shares of the Company Common Stock beneficially owned by each director of the Company, each Named Executive Officer identified in the Summary Compensation Table, included elsewhere herein, and by all directors and executive officers as a group.
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 49,945 (8) 3.34 % Officer and Director Harry G. Murphy Vice President and Secretary 40,923 (9) 2.74 % and Director John T. Cooney Director 13,480 * Marvin Levy Director and Chairman 10,832 (10) * Gerald Logan Director 10,980 * Kevin J. Plunkett Director 12,580 (11) * Paul R. Wheatley Director 9,980 (12) * All directors and executive officers as a group (7 persons) 249,058 16.31 %
* Less than one percent (1) Titles are for both the Company and Tarrytowns. (2) See "Principal Shareholders of the Company" for a definition of "beneficial ownership." All persons shown in the above table have sole voting and investment power, except as otherwise indicated. (3) Includes 12,960 shares of restricted stock awarded to each of Mr. Byelick and Mr. Murphy under the Employee RRP, as to which each has sole voting power but no investment power and 2,592 shares of restricted stock awarded to each of Messrs. Cooney, Levy, Logan, Plunkett and Wheatley under the Outside Director RRP, as to which each has sole voting power but no investment power. See "Interests of Certain Persons on the Merger" for details on the impact shareholder approval of the Merger Agreement will have on the vesting of these awards. (4) Includes 16,200 shares subject to options granted to each of Mr. Byelick and Mr. Murphy pursuant to the Employee Option Plan which may be acquired within 60 days after May 31, 1998 and 3,240 shares subject to options granted to each of Messrs. Cooney, Levy, Logan, Plunkett and Wheatley under the Outside Director Option Plan which may be acquired within 60 days from May 31, 1998. Does not include the 24,300 shares subject to options granted to each of Mr. Byelick and Mr. Murphy pursuant to the Employee Option Plan which are not currently exercisable and will not become exercisable within the next 60 days. Also does not include the 4,860 shares subject to options granted to each of Messrs. Cooney, Levy, Logan, Plunkett and Wheatley which are not currently exercisable and will not become exercisable in the next 60 days. See "Interests of Certain Persons in the Merger" for a discussion of the impact that shareholder approval of the Merger Agreement will have on the vesting and exercisability of the stock options granted to these officers and outside directors. (5) The figure shown include shares held in trust pursuant to the ESOP that have been allocated as of May 31, 1998 to individual accounts as follows: Mr. Byelick, 6,545 shares, Mr. Murphy 5,423 shares and all directors and executive officers as a group, 11,968 shares. Such persons have voting power (subject to the legal duties of the Trustee) but no investment power, except in limited circumstances, as to such shares. The figures shown for Messrs. Byelick and Murphy do not include 94,063 shares held in trust pursuant to the ESOP that have not been allocated to any individual's account and as to which Messrs. Byelick and Murphy share voting power with other ESOP participants. Also not included are 6,275 shares purchased by Tarrytowns's tax-qualified defined benefit pension plan ("Pension Plan"). The figures shown for all directors and executive officers as a group includes such 94,063 shares as to which the members of The Company's ESOP Committee (consisting of Messrs. Plunkett, Logan and Wheatley) may be deemed to have sole investment power, except in limited circumstances, thereby causing each such committee member to be deemed a beneficial owner of such shares. Each of the members of the ESOP Committee disclaims beneficial ownership of such shares. The figures shown for all directors and executive officers as a group also includes the 6,275 shares as to which the members of Tarrytowns's Pension Committee (composed of Messrs. Byelick, Murphy, Plunkett and Wheatley) may be deemed to have sole investment power except in limited circumstances, thereby causing each committee member to be deemed a beneficial owner of such shares. Each member of the Pension Committee disclaims beneficial ownership of such shares. (6) The figures shown include shares held under the Tarrytowns Bank, FSB Directors' Deferred Compensation Plan that have been allocated as of December 31, 1997 to individual accounts as follows: Mr. Murphy, 1,050 shares, Mr. Levy, 1,500 shares and all directors and executive officers as a group, 2,550 shares. Such persons have sole voting and investment power as to such shares. (7) Percentages with respect to each person or group of persons have been calculated on the basis of the number of shares of Common Stock outstanding as of May 31, 1998 plus the number of shares of Common Stock which such person or group has the right to acquire within 60 days after May 31, 1998 by the exercise of such options. (8) Includes 4,000 shares as to which Mr. Byelick may be deemed to share voting power, but has no investment power. (9) Includes 550 shares as to which Mr. Murphy may be deemed to share voting power, but has no investment power. (10) Includes 1,000 shares as to which Mr. Levy may be deemed to share voting power, but has no investment power. (11) Includes 6,100 shares as to which Mr. Plunkett may be deemed to share voting power, but has no investment power. (12) Includes 3,000 shares as to which Mr. Wheatley shares voting and investment power and 500 shares as to which Mr.Wheatley may be deemed to share voting power, but has no investment power. 71 73 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH CERTAIN RELATED PERSONS The Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended, ("FIRREA") requires that all loans or extensions of credit to executive officers and directors must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with the general public and must not involve more than the normal risk of repayment or present other unfavorable features. It is the policy of Tarrytowns not to make loans to executive officers and directors. As of the Record Date, none of Tarrytowns' directors and executive officers had loans outstanding to Tarrytowns. Tarrytowns, however, may make loans or extend credit to certain persons related to executive officers and directors. All such loans were made by Tarrytowns in the ordinary course of business and were not made with more favorable terms or involved more than the normal risk of collectible or presented unfavorable features. Tarrytowns intends that any transactions in the future between Tarrytowns and its executive officers, directors, holders of 10% or more of the shares of any class of its Company Common Stock and affiliates thereof, will contain terms no less favorable to Tarrytowns than could have been obtained by it in arm's-length negotiations with unaffiliated persons and will be approved by a majority of independent outside directors of Tarrytowns not having any interest in the transaction. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report:. 1. All financial statements are included on Item 8 of Part II of this report. 2. All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. 3. Exhibits (a) The following exhibits are filed as part of this report, except as otherwise indicated. DESIGNATION DESCRIPTION 2.1 Agreement and Plan of Merger, dated as of March 6, 1998, between U.S.B. Holding Co, Inc. and Tappan Zee Financial, Inc. (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K filed on March 13, 1998) 3.1 Certificate of Incorporation of Tappan Zee Financial, Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1, No. 33-94128, filed on June 30, 1995, as amended (the "Registration Statement")) 3.2 Bylaws of Tappan Zee Financial, Inc. (incorporated by reference to Exhibit 3.2 to the Registration Statement) 4.1 Certificate of Incorporation of Tappan Zee Financial, Inc. (see Exhibit 3.1 hereto) 4.2 Bylaws of Tappan Zee Financial, Inc. (see Exhibit 3.2 hereto) 4.3 Specimen Stock Certificate (incorporated by reference to Exhibit 4.3 to the Registration Statement) 4.4 Stock Option Agreement, dated March 6, 1998, between U.S.B. Holding Co., Inc. and Tappan Zee Financial, Inc. (incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed on March 13, 1998) 10.1.0 Tappan Zee Financial, Inc. 1996 Stock Option Plan for Officers and Employees ("Employee Option Plan") (incorporated by 72 74 reference to Exhibit A to the Registrant's Proxy Statement for use in connection with its 1996 Annual Meeting of Shareholders (the "1996 Proxy Statement"), previously filed with the Commission 10.1.1 Amendment No. 1 to the Employee Option Plan (incorporated by reference to Exhibit 10.1.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997 (the "1997 10-K".)) 10.1.2 Amendment No. 2 to the Employee Option Plan (incorporated by reference to Exhibit A to the 1997 Proxy Statement) 10.2.0 Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside Directors ("Outside Director Option Plan") (incorporated by reference to Exhibit B to the 1996 Proxy Statement) 10.2.1 Amendment No. 1 to the Outside Director Option Plan (incorporated by reference to Exhibit 10.2.1 of the 1997 10-K) 10.2.2 Amendment No. 2 to the Outside Director Option Plan (incorporated by reference to Exhibit B to the 1997 Proxy Statement) 10.3.0 Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for Officers and Employees ("Employee RRP") (incorporated by reference to Exhibit C to the 1996 Proxy Statement) 10.3.1 Amendment No. 1 to the Employee RRP (incorporated by reference to Exhibit 10.3.1 of the 1997 10-K) 10.3.2 Amendment No. 2 to the Employee RRP (incorporated by reference to Exhibit C to the 1997 Proxy Statement) 10.4.0 Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for Outside Directors ("Outside Director RRP") (incorporated by reference to Exhibit D to the 1996 Proxy Statement) 10.4.1 Amendment No. 1 to the Outside Director RRP (incorporated by reference to Exhibit 10.4.1 of the 1997 10-K) 10.4.2 Amendment No. 2 to the Outside Director RRP (incorporated by reference to Exhibit D to the 1997 Proxy Statement) 10.5 Employee Stock Ownership Plan of Tappan Zee Financial, Inc. and Certain Affiliates, as amended (incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997 (the "1996 10-K")) 10.6 Loan Agreement to the Employee Stock Ownership Plan Trust of Tappan Zee Financial, Inc. and Certain Affiliates (incorporated by reference to Exhibit 10.7 to the 1996 10-K) 10.7 Tarrytowns Bank Deferred Compensation Plan for Directors of Tarrytowns Bank, FSB (incorporated by reference to Exhibit 10.7 to the Registration Statement) 10.8 Retirement Plan for Board Members of Tappan Zee Financial, Inc. and Certain Affiliates, adopted effective as of October 5, 1995 (incorporated by reference to Exhibit 10.9 to the 1996 10-K) 10.09 Employment Agreement by and between Tappan Zee Financial, Inc. and Stephen C. Byelick, adopted effective as of October 5, 1995 73 75 (incorporated by reference to Exhibit 10.10 to the 1996 10-K) 10.10 Employment Agreement by and between Tappan Zee Financial, Inc. and Harry G. Murphy, adopted effective as of October 5, 1995 (incorporated by reference to Exhibit 10.11 to the 1996 10-K) 10.11 Employment Agreement by and between Tarrytowns Bank, FSB and Stephen C. Byelick, effective as of October 5, 1995 (incorporated by reference to Exhibit 10.12 to the 1996 10-K) 10.12 Employment Agreement by and between Tarrytowns Bank, FSB and Harry G. Murphy, effective as of October 5, 1995 (incorporated by reference to Exhibit 10.13 to the 1996 10-K) 10.13 Employee Retention Agreement by and among Tappan Zee Financial, Inc., Tarrytowns Bank, FSB and Christina Vidal, effective as of October 5, 1995 (incorporated by reference to Exhibit 10.15 to the 1996 10-K) 10.14 R Employee Retention Agreement by and among Tappan Zee Fi Financial, Inc., Tarrytowns Bank, FSB and Margaret E. Sampson, effective as of October 5, 1995 (incorporated by reference to Exhibit 10.16 to the 1996 10-K) 10.15 Employee Retention Agreement by and among Tappan Zee Financial, Inc., Tarrytowns Bank, FSB and Valerie Wilson, effective as of October 5, 1995 (incorporated by reference to Exhibit 10.17 to the 1996 10-K) 10.16 Forms of Stock Option Agreement by and between Tappan Zee Financial, Inc. and recipients of stock options granted pursuant to the Employee Option Plan and the Outside Director Option Plan (incorporated by reference to Exhibit 10.16 of the 1997 10-K) 10.17 Forms of Restricted Stock Award Notices to award recipients, pursuant to the Employee RRP and the Outside Director RRP (incorporated by reference to Exhibit 10.17 of the 1997 10-K) 10.18 Form of Consulting Agreement between Tarrytowns Bank, FSB and Stephen C. Byelick 10.19 Form of Employment Agreement between Tarrytowns Bank, FSB and Harry G. Murphy 21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the Registration Statement) 27 Financial Data Schedule (EDGAR filing only) 74 76 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Tappan Zee Financial, Inc. Dated: June 29, 1998 By: /s/Stephen C. Byelick ----------------------------- Stephen C. Byelick President and Chief Executive Officer Dated: June 29, 1998 By: /s/Harry G. Murphy ----------------------------- Harry G. Murphy Vice President and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/Marvin Levy Chairman June 29, 1998 - ---------------------- Marvin Levy /s/ Stephen C. Byelick Director June 29, 1998 - ---------------------- Stephen C. Byelick /s/ John T. Cooney Director June 29, 1998 - ---------------------- John T. Cooney /s/Gerald L. Logan Director June 29, 1998 - ---------------------- Gerald L. Logan /s/Harry G. Murphy Director June 29, 1998 - ---------------------- Harry G. Murphy /s/Kevin J. Plunkett Director June 29, 1998 - ---------------------- Kevin J. Plunkett /s/Paul R. Wheatley Director June 29, 1998 - ---------------------- Paul R. Wheatley 75 EX-10.18 2 FORM OF CONSULTING AGREEMENT 1 EXHIBIT 10.18 CONSULTING AGREEMENT CONSULTING AGREEMENT, dated this ____ day of ___________ 1998, between Tarrytowns Bank, FSB (the "Bank"), and Stephen C. Byelick (the "Consultant"). WITNESSETH WHEREAS, the Consultant previously entered into an agreement with Tappan Zee Financial, Inc. ("Tappan Zee") dated June 23, 1997 (the "1997 Tappan Zee Agreement") and a separate agreement with the Bank dated June 23, 1997 (the "1997 Bank Agreement") (collectively, the "1997 Agreements"); WHEREAS, as of the date of this Agreement, Tappan Zee has merged with and into U.S.B. Holding Co., Inc. (the "Corporation") and the Bank has become a wholly owned subsidiary of the Corporation; WHEREAS, the Bank desires to be ensured of the Consultant's active participation and support in the business of the Bank; and WHEREAS, in order to induce the Consultant to serve as a consultant and a director emeritus of the Bank and in consideration of the Consultant's agreeing to serve as a consultant and a director emeritus, the Bank and the Consultant desire to enter into this Agreement regarding, among other things, the consulting services to be provided by the Consultant to the Bank and, concurrently therewith, to terminate the 1997 Agreements, all as hereinafter set forth. NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereby agree as follows: 1. DEFINITIONS. The following words and terms shall have the meanings set forth below for the purposes of this Agreement: (a) CAUSE. Termination of the Consultant's services for "Cause" shall mean termination because of dishonest conduct in connection with his performance of services for the Bank resulting in his conviction of a felony, conviction of, or plea of guilty or nolo contendere to, a felony or any crime involving moral turpitude; willful failure or refusal to perform his duties under this Agreement and failure to cure such breach within fifteen (15) days following written notice thereof; breach of fiduciary duties to the Bank for personal profit; or willful breach or violation of any law, rule or regulation (other than traffic violations or similar offenses), or final cease and desist order in connection with his performance of services for the Bank, in each case as measured against standards generally prevailing at the relevant time in the savings and community banking 2 industry; provided, however, that the Consultant shall not be deemed to have been discharged for cause unless and until he shall have received a written notice of termination from the Board, accompanied by a resolution duly adopted by affirmative vote of a majority of the entire Board at a meeting called and held for such purpose (after reasonable notice to the Consultant and a reasonable opportunity for the Consultant to make oral and written presentations to the members of the Board, on his own behalf, or through a representative, who may be his legal counsel, to refute the grounds for the proposed determination) finding that in the good faith opinion of the Board grounds exist for discharging the Consultant for cause. For purposes of this paragraph, no act or failure to act on the Consultant's part shall be considered "willful" unless done, or omitted to be done, by the Consultant not in good faith and without reasonable belief that the Consultant's action or omission was in the best interest of the Bank. (b) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the Corporation" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any successor thereto, whether or not the Corporation is registered under the Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, but excluding persons who are directors or officers of the Corporation as of the date of this Agreement) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (c) CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended. (d) CONSULTING FEE. "Consulting Fee" shall have the meaning set forth in Section 3(a) hereof. (e) DATE OF TERMINATION. "Date of Termination" shall mean the date specified in the Notice of Termination. (f) DISABILITY. Termination by the Bank of the Consultant's services based on "Disability" shall mean termination because of any physical or mental impairment which would qualify the Consultant for disability benefits under the applicable long-term disability plan maintained by the Bank if he was an employee or, if no such plan applies, which would qualify the Consultant for disability benefits under the Federal Social Security System. (g) GOOD REASON. Termination by the Consultant of the Consultant's services for "Good Reason" shall mean termination by the Consultant following a Change in Control of the Corporation based on: 3 (i) Without the Consultant's express written consent, a reduction by the Bank in the Consultant's Consulting Fee as the same may be increased from time to time; (ii) Any purported termination of the Consultant's services for Cause, Disability or Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (i) below; or (iii) The failure by the Bank to obtain the assumption of and agreement to perform this Agreement by any successor as contemplated in Section 11 hereof. (h) IRS. IRS shall mean the Internal Revenue Service. (i) NOTICE OF TERMINATION. Any purported termination of the Consultant's services by the Bank for any reason, including without limitation for Cause, Disability or Retirement, or by the Consultant for any reason, including without limitation for Good Reason, shall be communicated by written "Notice of Termination" to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a dated notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Consultant's services under the provision so indicated, (iii) specifies a Date of Termination, which shall be not less than twenty (20) nor more than ninety (90) days after such Notice of Termination is given, except in the case of the Bank's termination of the Consultant's services for Cause, which shall be effective immediately; and (iv) is given in the manner specified in Section 12 hereof. (j) RETIREMENT. "Retirement" shall mean any voluntary termination by the Consultant of his consulting services or his services as a director emeritus following the one-year anniversary of the date of this Agreement that would result in the Consultant being entitled to (i) accelerated vesting under his Incentive Stock Option Agreement with Tappan Zee dated July 11, 1996, his Restricted Stock Award Notice with Tappan Zee dated July 11, 1996, or any other benefit plan of Tappan Zee or the Bank which is not a qualified plan under Section 401(a) of the Code, or (ii) the payment of any benefits under any other benefit plan of Tappan Zee or the Bank which is not a qualified plan under Section 401(a) of the Code, in each case for purposes of clauses (i) and (ii) as such plans have been assumed by the Corporation and/or the Bank as of the date of this Agreement. 2. TERM OF CONSULTING SERVICES. (a) The Bank hereby engages the Consultant, and the Consultant hereby accepts said engagement, for the Consultant to serve as a director emeritus of the Bank and to provide his personal advice and counsel to the Bank and its affiliates in connection with the business of banking and financial services. Specifically, the Consultant agrees to provide his advice and counsel to the Bank in connection with the on-going operations of the Bank and its affiliates. The Consultant further agrees to perform certain duties in respect to the transition of the Bank becoming an affiliate of the Corporation. Such duties may include, without limitation, counsel and 4 advice in connection with business development and government relations in the market areas served by the Bank. The term under this Agreement shall be for three years, commencing on the date of this Agreement. (b) During the term of this Agreement, the Consultant's services shall be rendered at such times as shall be mutually agreeable to the Bank and the Consultant, and as shall be reasonably convenient to both the Bank and the Consultant. Such services shall be in the nature of customer and community relations, business development, employee relations and general advice and assistance relating to the business of the Bank and its employees. The Consultant shall work a minimum of 10 hours per week, but shall not be required to work in accordance with any fixed schedule. (c) Subject to the reasonable requirements and convenience of the Bank, in the performance of the services required of the Consultant hereunder, the Consultant shall have exclusive control over the manner of the performance of such services, including without limitation: (i) the selection of methods, practices, procedures and strategies to be employed in the performance of such services; and (ii) the determination of the places and dates at which such services will be performed. (d) The Consultant agrees not to elect Retirement during the first 12 months following the date of this Agreement. 3. COMPENSATION AND BENEFITS. (a) The Bank shall compensate and pay the Consultant for his services during the term of this Agreement at a minimum fee of $77,000 per year ("Consulting Fee"), which may be increased from time to time in such amounts as may be determined by the Board of Directors of the Bank and may not be decreased without the Consultant's express written consent. (b) In consideration for the Consultant entering into this Agreement and waiving all of his rights under the 1997 Agreements, which 1997 Agreements are hereby superseded pursuant to Section 22 hereof, the Bank agrees to pay to the Consultant a signing bonus in a lump sum cash amount equal to $472,000 concurrently with the election and delivery of this Agreement. (c) The Consultant shall be entitled to participate in the Bank's post-retirement health care and life insurance plans in accordance with the terms of such plans. 4. TERMINATION. (a) The Bank shall have the right, at any time upon prior Notice of Termination, to terminate the Consultant's services hereunder for any reason, including without limitation termination for Cause or Disability, and the Consultant shall have the right, upon prior Notice of Termination, to terminate his services hereunder for any reason. (b) In the event that (i) the Consultant's services are terminated by the Bank for Cause, or (ii) the Consultant terminates his services hereunder other than for the reasons set forth in 5 Section 4(c) below, the Consultant shall have no right pursuant to this Agreement to consulting fees or other benefits for any period after the applicable Date of Termination. (c) In the event that the Consultant's services are terminated (i) by the Bank for other than Cause, (ii) by the Consultant (a) due to a material breach of this Agreement by the Bank, which breach has not been cured within twenty (20) days after a written notice of non-compliance has been given by the Consultant to the Bank, or (b) for Good Reason, or (iii) due to the Consultant's Retirement, Disability or death, then the Bank shall, subject to the provisions of Section 5 hereof, if applicable, (A) pay to the Consultant (or, in the event of his death, to his estate) cash severance amount equal to the Consultant's Consulting Fee for the then remaining term of this Agreement, with such amount to be paid in equal monthly installments over the remaining term of this Agreement, commencing on the first business day of the first month following the Date of Termination, (B) with respect to stock options held by the Consultant as of the date of this Agreement to purchase common stock of the Corporation and which are outstanding and unvested as of the Date of Termination, accelerate the vesting of such stock options as of the Date of Termination so that they are exercisable in full for the period of time specified in the option agreement with the Consultant, and (C) with respect to restricted stock awards held by the Consultant as of the date of this Agreement to acquire common stock of the Corporation and which are outstanding and unvested as of the Date of Termination, accelerate the vesting of such restricted awards so that they are fully vested as of the Date of Termination. 5. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments and benefits pursuant to Section 4 hereof, either alone or together with other payments and benefits which the Consultant has the right to receive from the Bank, the Corporation or any affiliate of either of them, would constitute a "parachute payment" under Section 280G of the Code, then the payments and benefits payable by the Bank pursuant to Section 4 hereof shall be reduced, in the manner determined by the Consultant, by the amount, if any, which is the minimum necessary to result in no portion of the payments and benefits payable by the Bank under Section 4 being non-deductible to the Bank pursuant to Section 280G of the Code and subject to the excise tax imposed under Section 4999 of the Code. The parties hereto agree that the payments and benefits payable by the Bank pursuant to this Agreement to the Consultant upon termination shall be limited to three times the Consultant's average annual compensation (based upon the most recent five taxable years) in accordance with OTS Regulatory Bulletin 27a. The determination of any reduction in the payments and benefits to be made pursuant to Section 4 shall be based upon the opinion of independent tax counsel selected by the Bank (and reasonably acceptable to the Consultant) and paid by the Bank. Such counsel shall promptly prepare the foregoing opinion, but in no event later than thirty (30) days from the Date of Termination; and may use such actuaries as such counsel deems necessary or advisable for the purpose. Nothing contained herein shall result in a reduction of any payments or benefits to which the Consultant may be entitled upon termination of his 6 consulting services under any circumstances other than as specified in this Section 5, or a reduction in the payments and benefits specified in Section 4 below zero. 6. MITIGATION; EXCLUSIVITY OF BENEFITS. (a) The Consultant shall not be required to mitigate the amount of any benefits hereunder by seeking other employment or otherwise, nor shall the amount of any such benefits be reduced by any compensation earned by the Consultant from other services after the Date of Termination or otherwise. (b) The specific arrangements referred to herein are not intended to exclude any other benefits which may be available to the Consultant upon a termination of his services with the Bank pursuant to benefit plans of the Bank or otherwise. 7. COVENANT NOT TO COMPETE. The Consultant hereby covenants and agrees that, in the event of the termination of his services with the Bank prior to the expiration of the term of this Agreement, then for a period equal to the greater of (i) the then remaining unexpired term of this Agreement and (ii) two (2) years following the Date of Termination of his services, he shall not, without the written consent of the Bank, become an officer, employee, consultant, director or trustee of any savings bank, savings and loan association, savings and loan holding company, bank or bank holding company, or any direct or indirect subsidiary or affiliate of any such entity, that entails working within one hundred (100) miles of the headquarters of the Bank, the Corporation or any affiliate of either of them on the Date of Termination; provided, however, that this Section 7 shall not apply if the Consultant's services are terminated for the reasons set forth in Section 4(c) (other than for Disability); and provided, further, that if the Consultant's services shall be terminated on account of Disability, this Section 7 shall not prevent the Consultant from accepting any position or performing any services if (a) he first offers, by written notice, to accept a similar position with, or perform similar services for, the Bank on substantially the same terms and conditions and (b) the Bank declines to accept such offer within ten (10) days after such notice is given. 8. CONFIDENTIALITY. Unless he obtains the prior written consent of the Bank, the Consultant shall keep confidential and shall refrain from using for the benefit of himself, or any person or entity other than the Bank, the Corporation or any affiliate of either of them, any material document or information obtained from the Bank, the Corporation or any affiliate of either of them, in the course of his services with any of them concerning their properties, operations or business (unless such document or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to the public through no fault of his own) until the same ceases to be material (or becomes so ascertainable or available); provided, however, that nothing in this Section 8 shall prevent the Consultant, with or without the Bank's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or proceeding to the extent that such participation or disclosure is required under applicable law. 9. SOLICITATION. The Consultant hereby covenants and agrees that, for a period equal to the greater of (i) the then remaining unexpired term of this Agreement and (ii) two (2) years 7 following the termination of his services with the Bank, he shall not, without the written consent of the Bank, either directly or indirectly: (a) solicit, offer employment to, or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Bank, the Corporation or any affiliate of either of them, as of the date of this Agreement, to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits and making loans, doing business with one hundred (100) miles of the headquarters of the Bank, the Corporation or any affiliate of either of them; (b) provide any information, advice or recommendation with respect to any such officer or employee of any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits and making loans, doing business within one hundred (100) miles of the headquarters of the Bank, the Corporation or any affiliate of either of them that is intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Bank, the Corporation or any affiliate of either of them to terminate his employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits and making loans, doing business within one hundred (100) miles of the headquarters of the Bank, the Corporation or any affiliate of either of them; or (c) solicit, provide any information, advice or recommendation or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any customer of the Bank to terminate an existing business or commercial relationship with the Bank. 10. WITHHOLDING. All payments required to be made by the Bank hereunder to the Consultant shall be subject to the withholding of such amounts, if any, relating to tax and other deductions as the Bank may reasonably determine should be withheld pursuant to any applicable law or regulation. 11. ASSIGNABILITY. The Bank may assign this Agreement and its rights and obligations hereunder in whole, but not in part, to any bank or other entity with or into which the Bank may hereafter merge or consolidate or to which the Bank may transfer all or substantially all of its assets, if in any such case said bank or other entity shall by operation of law or expressly in writing assume all obligations of the Bank hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this Agreement or its rights and obligations hereunder. The Consultant may not assign or transfer this Agreement or any rights or obligations hereunder. 12. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given 8 when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below: To the Bank: Chairman of the Board Tarrytowns Bank, FSB 75 North Broadway Tarrytown, New York 10591 To the Consultant: Stephen C. Byelick 31 Crest Drive Tarrytown, New York 10591 13. AMENDMENT; WAIVER. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Consultant and such officer or officers as may be specifically designated by the Board of Directors of the Bank to sign on its behalf. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 14. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the United States where applicable and otherwise by the substantive laws of the State of New York. 15. NATURE OF OBLIGATIONS. Nothing contained herein shall create or require the Bank to create a trust of any kind to fund any benefits which may be payable hereunder, and to the extent that the Consultant acquires a right to receive benefits from the Bank hereunder, such right shall be no greater than the right of any unsecured general creditor of the Bank. 16. HEADINGS. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 17. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 18. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 19. REGULATORY ACTIONS. The following provisions shall be applicable to the parties to the extent that they are required to be included in consulting agreements between a savings institution and its consultants pursuant to Section 563.39(b) of the Regulations Applicable to all Savings Associations, 12 C.F.R. Section 563.39(b), or any successor thereto, and shall be controlling 9 in the event of a conflict with any other provision of this Agreement, including without limitation Section 4 hereof. (a) If the Consultant is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs pursuant to notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")(12 U.S.C. Sections 1818(e)(3) and 1818(g)(1), the Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may, in its discretion: (i) pay the Consultant all or part of the compensation withheld while its obligations under this Agreement were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (b) If the Consultant is removed from office and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Sections 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the Consultant and the Bank as of the date of termination shall not be affected. (c) If the Bank is in default, as defined in Section 3(x)(1) of the FDIA (12 U.S.C. Section 1813(x)(1)), all obligations under this Agreement shall terminate as of the date of default, but vested rights of the Consultant and the Bank as of the date of termination shall not be affected. (d) All obligations under this Agreement shall be terminated pursuant to 12 C.F.R. Section 563.39(b)(5) (except to the extent that it is determined that continuation of the Agreement for the continued operation of the Bank is necessary): (i) by the Director of the OTS, or his/her designee, at the time the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the FDIA (12 U.S.C. Section 1823(c)); or (ii) by the Director of the OTS, or his/her designee, at the time the Director or his/her designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director of the OTS to be in an unsafe or unsound condition, but vested rights of the Consultant and the Bank as of the date of termination shall not be affected. 20. REGULATORY PROHIBITION. Notwithstanding any provision of this Agreement to the contrary, any payments made to the Consultant pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and any regulations promulgated thereunder. 21. GUARANTY AND PAYMENT OF ADDITIONAL BENEFITS BY THE CORPORATION UNDER CERTAIN CIRCUMSTANCES. (a) By signing and adopting this Agreement, the Corporation irrevocably and unconditionally guarantees to the Consultant the full and timely performance by the Bank of each and every obligation of the Bank contained in this Agreement. 10 (b) If at any time during or after the term of this Agreement the payments and benefits payable by the Bank under this Agreement shall be reduced pursuant to Section 5 hereof, then the Corporation shall pay to the Consultant an amount equal to the sum of (i) the amount by which the payments and benefits that would have otherwise been paid by the Bank to the Consultant are reduced by the provisions of Section 5 hereof, plus (ii) an amount equal to X determined under the following formula: E x P X = ----------------------------------------- 1 - [(F x (1 - S)) + S + E + M] where E = the rate at which the excise tax is assessed under Section 4999 of the Code; P = the amount with respect to which such excise tax is assessed, determined without regard to this Section 21; F = the highest marginal rate of income tax applicable to the Consultant under the Code for the taxable year in question; S = the sum of the highest marginal rates of income tax applicable to the Consultant under all applicable state and local laws for the taxable year in question; and M = the highest marginal rate of Medicare tax applicable to the Consultant under the Code for the taxable year in question. With respect to any payment in the nature of compensation that is made to (or for the benefit of) the Consultant under the terms of this Agreement, or otherwise, and on which an excise tax under Section 4999 of the Code will be assessed, the payment determined under this Section 21(b) shall be made to the Consultant on the earlier of (i) the date the Corporation, the Bank or any direct or indirect subsidiary or affiliate of the Corporation or the Bank is required to withhold such tax, or (ii) the date the tax is required to be paid by the Consultant. (c) Notwithstanding anything in this Section 21 to the contrary, in the event that the Consultant's liability for the excise tax under Section 4999 of the Code for a taxable year is subsequently determined to be different than the amount determined by the formula (X + P) x E, where X, P and E have the meanings provided in Section 21(b), then the Consultant or the Corporation, as the case may be, shall pay to the other party at the time that the amount of such excise tax is finally determined, an appropriate amount, plus interest, such that the payment made under Section 21(b), when increased by the amount of the payment made to the Consultant under this Section 21(c) by the Corporation, or when reduced by the amount of the payment made to the Corporation under this Section 21(c) by the Consultant, equals the amount that should have properly been paid to the Consultant under Section 21(b). The interest paid under this Section 21(c) shall be determined at the rate provided under Section 1274(b)(2)(B) of the Code. 11 To confirm that the proper amount, if any, was paid to the Consultant under this Section 21, the Consultant shall furnish to the Corporation a copy of each tax return which reflects a liability for an excise tax payment made by the Corporation, at least 20 days before the earlier of the date on which such return is required to be filed with the IRS or the actual filing date. 22. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between the Bank and the Consultant with respect to the matters agreed to herein. All prior agreements between the Bank and the Consultant and between Tappan Zee and the Consultant with respect to the matters agreed to herein, including without limitation the 1997 Agreements, are hereby superseded and shall have no force or effect. IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. Attest: TARRYTOWNS BANK, FSB _______________________________ By:___________________________________ Secretary Chairman of the Board CONSULTANT By:___________________________________ Stephen C. Byelick For purposes of Section 21 of the Agreement, the Corporation has executed and adopted this Agreement as of the date first above written. Attest: U.S.B. HOLDING CO., INC. _______________________________ By:___________________________________ Michael H. Fury, Secretary Thomas E. Hales, President and Chief Executive Officer EX-10.19 3 FORM OF EMPLOYMENT AGREEMENT 1 EXHIBIT 10.19 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated this ____ day of ___________ 1998, between Tarrytowns Bank, FSB (the "Bank" or "Employer"), and Harry G. Murphy (the "Executive"). WITNESSETH WHEREAS, the Executive previously entered into an agreement with Tappan Zee Financial, Inc. ("Tappan Zee") dated June 23, 1997 (the "1997 Tappan Zee Agreement") and a separate agreement with the Bank dated June 23, 1997 (the "1997 Bank Agreement") (collectively, the "1997 Agreements"); WHEREAS, as of the date of this Agreement, Tappan Zee has merged with and into U.S.B. Holding Co., Inc. (the "Corporation") and the Bank has become a wholly owned subsidiary of the Corporation; WHEREAS, the Bank desires to be ensured of the Executive's active participation and support in the business of the Bank; and WHEREAS, in order to induce the Executive to remain in the employ of the Bank and in consideration of the Executive's agreeing to remain in its employ, the Bank and the Executive desire to enter into this Agreement regarding, among other things, the employment of the Executive by the Bank and, concurrently therewith, to terminate the 1997 Agreements, all as hereinafter set forth. NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereby agree as follows: 1. DEFINITIONS. The following words and terms shall have the meanings set forth below for the purposes of this Agreement: (a) BASE SALARY. "Base Salary" shall have the meaning set forth in Section 3(a) hereof. (b) CAUSE. Termination of the Executive's employment for "Cause" shall mean termination because of dishonest conduct in connection with his performance of services for the Bank resulting in his conviction of a felony, conviction of, or plea of guilty or nolo contendere to, a felony or any crime involving moral turpitude; willful failure or refusal to perform his duties under this Agreement and failure to cure such breach within fifteen (15) days following written notice thereof; breach of fiduciary duties to the Bank for personal profit; or willful breach or violation of any law, rule or regulation (other than traffic violations or similar offenses), or final 2 cease and desist order in connection with his performance of services for the Bank, in each case as measured against standards generally prevailing at the relevant time in the savings and community banking industry; provided, however, that the Executive shall not be deemed to have been discharged for cause unless and until he shall have received a written notice of termination from the Board, accompanied by a resolution duly adopted by affirmative vote of a majority of the entire Board at a meeting called and held for such purpose (after reasonable notice to the Executive and a reasonable opportunity for the Executive to make oral and written presentations to the members of the Board, on his own behalf or through a representative, who may be his legal counsel, to refute the grounds for the proposed determination) finding that in the good faith opinion of the Board grounds exist for discharging the Executive for cause. For purposes of this paragraph, no act or failure to act on the Executive's part shall be considered "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Bank. (c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the Corporation" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any successor thereto, whether or not the Corporation is registered under the Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, but excluding persons who are directors or officers of the Corporation as of the date of this Agreement) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended. (e) DATE OF TERMINATION. "Date of Termination" shall mean the date specified in the Notice of Termination. (f) DISABILITY. Termination by the Bank of the Executive's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies the Executive for disability benefits under the applicable long-term disability plan maintained by the Employer or, if no such plan applies, which would qualify the Executive for disability benefits under the Federal Social Security System. (g) GOOD REASON. Termination by the Executive of the Executive's employment for "Good Reason" shall mean termination by the Executive following a Change in Control of the Corporation based on: 3 (i) Without the Executive's express written consent, a reduction by the Employer in the Executive's Base Salary as the same may be increased from time to time or, except to the extent permitted by Section 3(b) hereof, a reduction in the package of fringe benefits provided to the Executive, taken as a whole; (ii) Any purported termination of the Executive's employment for Cause, Disability or Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (i) below; or (iii) The failure by the Bank to obtain the assumption of and agreement to perform this Agreement by any successor as contemplated in Section 11 hereof. (h) IRS. IRS shall mean the Internal Revenue Service. (i) NOTICE OF TERMINATION. Any purported termination of the Executive's employment by the Bank for any reason, including without limitation for Cause, Disability or Retirement, or by the Executive for any reason, including without limitation for Good Reason, shall be communicated by written "Notice of Termination" to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a dated notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, (iii) specifies a Date of Termination, which shall be not less than twenty (20) nor more than ninety (90) days after such Notice of Termination is given, except in the case of the Bank's termination of the Executive's employment for Cause, which shall be effective immediately; and (iv) is given in the manner specified in Section 12 hereof. 2. TERM OF EMPLOYMENT. (a) The Bank hereby employs the Executive as Executive Vice President and Secretary and the Executive hereby accepts said employment and agrees to render such services to the Bank on the terms and conditions set forth in this Agreement. The term of employment under this Agreement shall be for three years, commencing on the date of this Agreement. (b) During the term of this Agreement, the Executive shall perform such executive services for the Bank as may be consistent with his titles and from time to time reasonably assigned to him by the Bank's Board of Directors, consistent with his position. 3. COMPENSATION AND BENEFITS. (a) The Employer shall compensate and pay the Executive for his services during the term of this Agreement at a minimum base salary of $165,000 per year ("Base Salary"), which may be increased from time to time in such amounts as may be determined by the Board of Directors of the Employer and may not be decreased without the Executive's express written consent. In addition to his Base Salary, the Executive shall be entitled to receive during the term 4 of this Agreement such bonus payments as may be determined by the Board of Directors of the Employer. (b) During the term of this Agreement, the Executive shall be entitled to participate in and receive the benefits of any pension or other retirement benefit plan, profit sharing plan, stock option plan, employee stock ownership plan, or other plans, benefits and privileges given to employees and executives of the Employer, to the extent commensurate with his then duties and responsibilities, as fixed by the Board of Directors of the Employer. The Bank shall not make any changes in such plans, benefits or privileges which would adversely affect the Executive's rights or benefits thereunder, unless such change occurs pursuant to a program applicable to all executive officers of the Bank and does not result in a proportionately greater adverse change in the rights of or benefits to the Executive as compared with any other executive officer of the Bank. Nothing paid to the Executive under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the salary payable to the Executive pursuant to Section 3(a) hereof. (c) During the term of this Agreement, the Executive shall be entitled to paid annual vacation in accordance with the policies as established from time to time by the Board of Directors of the Employer. The Executive shall not be entitled to receive any additional compensation from the Employer for failure to take a vacation, nor shall the Executive be able to accumulate unused vacation time from one year to the next, except to the extent authorized by the Board of Directors of the Employer. (d) In consideration for the Executive entering into this Agreement and waiving all of his rights under the 1997 Agreements, which 1997 Agreements are hereby superseded pursuant to Section 22 hereof, the Employer agrees to pay to the Executive a signing bonus in a lump sum cash amount equal to $336,000 concurrently with the execution and delivery of this Agreement. 4. TERMINATION. (a) The Bank shall have the right, at any time upon prior Notice of Termination, to terminate the Executive's employment hereunder for any reason, including without limitation termination for Cause or Disability, and the Executive shall have the right, upon prior Notice of Termination, to terminate his employment hereunder for any reason. (b) In the event that (i) the Executive's employment is terminated by the Bank for Cause, or (ii) the Executive terminates his employment hereunder other than for the reasons set forth in Section 4(c) below, the Executive shall have no right pursuant to this Agreement to compensation or other benefits for any period after the applicable Date of Termination. (c) In the event that the Executive's employment is terminated (i) by the Bank for other than Cause, (ii) by the Executive (a) due to a material breach of this Agreement by the Bank, which breach has not been cured within twenty (20) days after a written notice of non-compliance has been given by the Executive to the Employer, or (b) for Good Reason, or (iii) due to the Executive's Disability or death, then the Bank shall, subject to the provisions of Section 5 hereof, if applicable, 5 (A) pay to the Executive (or, in the event of his death, to his estate) a cash severance amount equal to the Executive's Base Salary for the then remaining term of this Agreement, with such amount to be paid in equal monthly installments over the then remaining term of this Agreement, commencing on the first business day of the first month following the Date of Termination, (B) with respect to stock options held by the Executive as of the date of this Agreement to purchase common stock of the Corporation and which are outstanding and unvested as of the Date of Termination, accelerate the vesting of such stock options as of the Date of Termination so that they are exercisable in full for the period of time specified in the option agreement with the Executive, and (C) with respect to restricted stock awards held by the Executive as of the date of this Agreement to acquire common stock of the Corporation and which are outstanding and unvested as of the Date of Termination, accelerate the vesting of such restricted awards so that they are fully vested as of the Date of Termination. 5. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments and benefits pursuant to Section 4 hereof, either alone or together with other payments and benefits which the Executive has the right to receive from the Bank, the Corporation or any affiliate of either of them, would constitute a "parachute payment" under Section 280G of the Code, then the payments and benefits payable by the Bank pursuant to Section 4 hereof shall be reduced, in the manner determined by the Executive, by the amount, if any, which is the minimum necessary to result in no portion of the payments and benefits payable by the Bank under Section 4 being non-deductible to the Bank pursuant to Section 280G of the Code and subject to the excise tax imposed under Section 4999 of the Code. The parties hereto agree that the payments and benefits payable by the Bank pursuant to this Agreement to the Executive upon termination shall be limited to three times the Executive's average annual compensation (based upon the most recent five taxable years) in accordance with OTS Regulatory Bulletin 27a. The determination of any reduction in the payments and benefits to be made pursuant to Section 4 shall be based upon the opinion of independent tax counsel selected by the Bank (and reasonably acceptable to the Executive) and paid by the Bank. Such counsel shall promptly prepare the foregoing opinion, but in no event later than thirty (30) days from the Date of Termination; and may use such actuaries as such counsel deems necessary or advisable for the purpose. Nothing contained herein shall result in a reduction of any payments or benefits to which the Executive may be entitled upon termination of employment under any circumstances other than as specified in this Section 5, or a reduction in the payments and benefits specified in Section 4 below zero. 6. MITIGATION; EXCLUSIVITY OF BENEFITS. (a) The Executive shall not be required to mitigate the amount of any benefits hereunder by seeking other employment or otherwise, nor shall the amount of any such benefits be reduced by any compensation earned by the Executive as a result of employment by another employer after the Date of Termination or otherwise. 6 (b) The specific arrangements referred to herein are not intended to exclude any other benefits which may be available to the Executive upon a termination of employment with the Employer pursuant to employee benefit plans of the Employer or otherwise. 7. COVENANT NOT TO COMPETE. The Executive hereby covenants and agrees that, in the event of his termination of employment with the Bank prior to the expiration of the term of this Agreement, then for a period equal to the greater of (i) the then remaining unexpired term of this Agreement and (ii) two (2) years following the Date of Termination of employment, he shall not, without the written consent of the Bank, become an officer, employee, consultant, director or trustee of any savings bank, savings and loan association, savings and loan holding company, bank or bank holding company, or any direct or indirect subsidiary or affiliate of any such entity, that entails working within one hundred (100) miles of the headquarters of the Bank, the Corporation or any affiliate of either of them on the Date of Termination; provided, however, that this Section 7 shall not apply if the Executive's employment is terminated for the reasons set forth in Section 4(c) (other than for Disability); and provided, further, that if the Executive's employment shall be terminated on account of Disability, this Section 7 shall not prevent the Executive from accepting any position or performing any services if (a) he first offers, by written notice, to accept a similar position with, or perform similar services for, the Bank on substantially the same terms and conditions and (b) the Bank declines to accept such offer within ten (10) days after such notice is given. 8. CONFIDENTIALITY. Unless he obtains the prior written consent of the Bank, the Executive shall keep confidential and shall refrain from using for the benefit of himself, or any person or entity other than the Bank, the Corporation or any affiliate of either of them, any material document or information obtained from the Bank, the Corporation or any affiliate of either of them, in the course of his employment with any of them concerning their properties, operations or business (unless such document or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to the public through no fault of his own) until the same ceases to be material (or becomes so ascertainable or available); provided, however, that nothing in this Section 8 shall prevent the Executive, with or without the Bank's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or proceeding to the extent that such participation or disclosure is required under applicable law. 9. SOLICITATION. The Executive hereby covenants and agrees that, for a period equal to the greater of (i) the remaining unexpired term of this Agreement and (ii) two (2) years following his termination of employment with the Bank, he shall not, without the written consent of the Bank, either directly or indirectly: (a) solicit, offer employment to, or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Bank, the Corporation or any affiliate of either of them, as of the date of this Agreement, to terminate his or her employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits and making loans, doing business with 7 one hundred (100) miles of the headquarters of the Bank, the Corporation or any affiliate of either of them; (b) provide any information, advice or recommendation with respect to any such officer or employee of any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits and making loans, doing business within one hundred (100) miles of the headquarters of the Bank, the Corporation or any affiliate of either of them that is intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Bank, the Corporation or any affiliate of either of them to terminate his employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits and making loans, doing business within one hundred (100) miles of the headquarters of the Bank, the Corporation or any affiliate of either of them; or (c) solicit, provide any information, advice or recommendation or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any customer of the Bank to terminate an existing business or commercial relationship with the Bank. 10. WITHHOLDING. All payments required to be made by the Bank hereunder to the Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Bank may reasonably determine should be withheld pursuant to any applicable law or regulation. 11. ASSIGNABILITY. The Bank may assign this Agreement and its rights and obligations hereunder in whole, but not in part, to any bank or other entity with or into which the Bank may hereafter merge or consolidate or to which the Bank may transfer all or substantially all of its assets, if in any such case said bank or other entity shall by operation of law or expressly in writing assume all obligations of the Bank hereunder as fully as if it had been originally made a party hereto, but may not otherwise assign this Agreement or its rights and obligations hereunder. The Executive may not assign or transfer this Agreement or any rights or obligations hereunder. 12. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below: To the Bank: Chairman of the Board Tarrytowns Bank, FSB 75 North Broadway Tarrytown, New York 10591 To the Executive: 8 Harry G. Murphy 40 Summit Avenue White Plains, New York 10606 13. AMENDMENT; WAIVER. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer or officers as may be specifically designated by the Board of Directors of the Bank to sign on its behalf. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 14. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the United States where applicable and otherwise by the substantive laws of the State of New York. 15. NATURE OF OBLIGATIONS. Nothing contained herein shall create or require the Bank to create a trust of any kind to fund any benefits which may be payable hereunder, and to the extent that the Executive acquires a right to receive benefits from the Bank hereunder, such right shall be no greater than the right of any unsecured general creditor of the Bank. 16. HEADINGS. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 17. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 18. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 19. REGULATORY ACTIONS. The following provisions shall be applicable to the parties to the extent that they are required to be included in employment agreements between a savings institution and its employees pursuant to Section 563.39(b) of the Regulations Applicable to all Savings Associations, 12 C.F.R. Section 563.39(b), or any successor thereto, and shall be controlling in the event of a conflict with any other provision of this Agreement, including without limitation Section 4 hereof. (a) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs pursuant to notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")(12 U.S.C. Sections 1818(e)(3) and 1818(g)(1), the Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may, in its discretion: (i) pay the Executive all or part of the compensation withheld while 9 its obligations under this Agreement were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. (b) If the Executive is removed from office and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Sections 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the Executive and the Bank as of the date of termination shall not be affected. (c) If the Bank is in default, as defined in Section 3(x)(1) of the FDIA (12 U.S.C. Section 1813(x)(1)), all obligations under this Agreement shall terminate as of the date of default, but vested rights of the Executive and the Bank as of the date of termination shall not be affected. (d) All obligations under this Agreement shall be terminated pursuant to 12 C.F.R. Section 563.39(b)(5) (except to the extent that it is determined that continuation of the Agreement for the continued operation of the Employer is necessary): (i) by the Director of the OTS, or his/her designee, at the time the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the FDIA (12 U.S.C. Section 1823(c)); or (ii) by the Director of the OTS, or his/her designee, at the time the Director or his/her designee approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director of the OTS to be in an unsafe or unsound condition, but vested rights of the Executive and the Bank as of the date of termination shall not be affected. 20. REGULATORY PROHIBITION. Notwithstanding any provision of this Agreement to the contrary, any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the FDIA (12 U.S.C. Section 1828(k)) and any regulations promulgated thereunder. 21. GUARANTY AND PAYMENT OF ADDITIONAL BENEFITS BY THE CORPORATION UNDER CERTAIN CIRCUMSTANCES. (a) By signing and adopting this Agreement, the Corporation irrevocably and unconditionally guarantees to the Executive the full and timely performance by the Bank of each and every obligation of the Bank contained in this Agreement. (b) If at any time during or after the term of this Agreement the payments and benefits payable by the Bank under this Agreement shall be reduced pursuant to Section 5 hereof, then the Corporation shall pay to the Executive an amount equal to the sum of (i) the amount by which the payments and benefits that would have otherwise been paid by the Bank to the Executive are reduced by the provisions of Section 5 hereof, plus (ii) an amount equal to X determined under the following formula: E x P X = ---------------------------------------- 1 - [(F x (1 - S)) + S + E + M] 10 where E = the rate at which the excise tax is assessed under Section 4999 of the Code; P = the amount with respect to which such excise tax is assessed, determined without regard to this Section 21; F = the highest marginal rate of income tax applicable to the Executive under the Code for the taxable year in question; S = the sum of the highest marginal rates of income tax applicable to the Executive under all applicable state and local laws for the taxable year in question; and M = the highest marginal rate of Medicare tax applicable to the Executive under the Code for the taxable year in question. With respect to any payment in the nature of compensation that is made to (or for the benefit of) the Executive under the terms of this Agreement, or otherwise, and on which an excise tax under Section 4999 of the Code will be assessed, the payment determined under this Section 21(b) shall be made to the Executive on the earlier of (i) the date the Corporation, the Bank or any direct or indirect subsidiary or affiliate of the Corporation or the Bank is required to withhold such tax, or (ii) the date the tax is required to be paid by the Executive. (c) Notwithstanding anything in this Section 21 to the contrary, in the event that the Executive's liability for the excise tax under Section 4999 of the Code for a taxable year is subsequently determined to be different than the amount determined by the formula (X + P) x E, where X, P and E have the meanings provided in Section 21(b), then the Executive or the Corporation, as the case may be, shall pay to the other party at the time that the amount of such excise tax is finally determined, an appropriate amount, plus interest, such that the payment made under Section 21(b), when increased by the amount of the payment made to the Executive under this Section 21(c) by the Corporation, or when reduced by the amount of the payment made to the Corporation under this Section 21(c) by the Executive, equals the amount that should have properly been paid to the Executive under Section 21(b). The interest paid under this Section 21(c) shall be determined at the rate provided under Section 1274(b)(2)(B) of the Code. To confirm that the proper amount, if any, was paid to the Executive under this Section 21, the Executive shall furnish to the Corporation a copy of each tax return which reflects a liability for an excise tax payment made by the Corporation, at least 20 days before the earlier of the date on which such return is required to be filed with the IRS or the actual filing date. 22. ENTIRE AGREEMENT. This Agreement embodies the entire agreement between the Bank and the Executive with respect to the matters agreed to herein. All prior agreements between the Bank and the Executive and between Tappan Zee and the Executive with respect to the matters agreed to herein, including without limitation the 1997 Agreements, are hereby superseded and shall have no force or effect. 11 IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written. Attest: TARRYTOWNS BANK, FSB ___________________________ By:_________________________________ Secretary Chairman of the Board EXECUTIVE By:________________________________ Harry G. Murphy For purposes of Section 21 of the Agreement, the Corporation has executed and adopted this Agreement as of the date first above written. Attest: U.S.B. HOLDING CO., INC. __________________________ By:__________________________________ Michael H. Fury, Secretary Thomas E. Hales, President and Chief Executive Officer EX-27 4 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the annual report on Form 10-K for the fiscal year ended March 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR MAR-31-1998 MAR-31-1998 783 2,401 6,200 0 22,868 35,531 35,971 58,325 702 129,345 104,993 0 2,552 0 0 0 16 21,784 129,345 5,004 3,780 609 9,393 4,721 4,721 4,672 42 109 3,010 1,888 1,888 0 0 1,097 0.80 0.77 3.79 1,440 119 0 0 660 0 0 702 702 0 0
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