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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended Commission File No. 0-22058
December 31, 1997
MERCHANTS NEW YORK BANCORP, INC.
(Exact name of registrant as specified in charter)
Delaware 13-3650812
(State or other jurisdiction of (IRS employer
incorporation or organization) identification No.)
275 Madison Avenue, New York, N.Y. 10016
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (212) 973-6600
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class:
Common Shares, $.001 par value
Indicate by check mark whether the Registrant (1) has filed all 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 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 [ ].
As of February 27, 1998, the aggregate market value of the voting stock
held by non-affiliates was approximately $288,806,811.
As of February 27, 1998, 9,678,492 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Specified portions of the 1997 Annual Report of Merchants New York Bancorp,
Inc. are incorporated by reference in Part I, Part II and Part IV.
(2) Specified portions of the definitive Proxy Statement for the Annual Meeting
of Stockholders, dated March 25, 1998 of Merchants New York Bancorp, Inc.
are incorporated by reference in Part III.
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<PAGE>
MERCHANTS NEW YORK BANCORP, INC.
FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. BUSINESS............................................................ 1
ITEM 2. PROPERTIES.......................................................... 20
ITEM 3. LEGAL PROCEEDINGS................................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 20
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS......................................... 21
ITEM 6. SELECTED FINANCIAL DATA............................................. 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................. 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................... 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.............................. 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY..................... 22
ITEM 11. EXECUTIVE COMPENSATION.............................................. 22
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...................................................... 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K................................................. 23
SIGNATURES ........................................................ 24
<PAGE>
PART I
ITEM 1. BUSINESS
General
Merchants New York Bancorp, Inc. (the "Company") is a bank holding company
that was organized under the laws of the State of Delaware on February 27, 1992
for the purpose of acquiring all of the issued and outstanding capital stock of
The Merchants Bank of New York (the "Bank"), a banking corporation organized
under the laws of the State of New York. The sole subsidiary of the Company is
the Bank. The principal business of the Company is the operation of the Bank.
The Bank is a commercial bank, servicing the communities in which its
branches are located. It is authorized to receive both demand and time deposits,
to make loans of various types, to engage in trust services and other fiduciary
funds, to issue letters of credit, to accept and pay drafts, to rent safety
deposit boxes, and to engage in similar activities.
The Bank was founded in 1874 as Markel Brothers Private Bankers. A New York
City branch was established in 1881. In 1926, a charter was obtained from the
Banking Department of the State of New York. The name and style of the Bank was
changed to The Merchants Bank, and at the same time the Bank became publicly
held. The Bank's name was changed to The Merchants Bank of New York in 1937.
Cash dividends were commenced in 1932 and since then have been paid
consecutively every quarter for the ensuing 65 years.
The Bank operates seven branches, all in Manhattan, which are strategically
located to serve its middle market customers. The executive offices of the
Company are located at 275 Madison Avenue, New York, New York 10016. The
telephone number is (212) 973-6600.
Banking Services
The Bank offers conventional banking services consisting of retail banking,
commercial banking, international banking and trust services to small and medium
size businesses and to individuals. The Bank's deposits are insured by the
Federal Deposit Insurance Corporation (the "FDIC").
The Bank provides a full range of retail banking services that include
Regular and Special Checking Accounts, NOW (Negotiable Orders of Withdrawal) and
Super NOW Accounts, Money Market Accounts, Savings Accounts plus Keogh and IRA
Accounts and Lease Security Accounts for landlords and Attorney Escrow Accounts.
The Bank issues VISA(R) and MASTERCARD(R) credit cards offered through an
intermediary affinity program with all credit risk assumed by the third party.
The complete process, including credit checks and eligibility, is being handled
by the third party. 24-hour automated teller machine (ATM) cards with access to
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NYCE(R), The Exchange(R) and CIRRUS(R) systems are available for use on non-Bank
owned ATMs. The Bank does not have any ATMs at any of its branches and does not
anticipate installing any in the near future.
The Bank furnishes lending and depository services to small and medium size
commercial and industrial customers and to individuals. Loan facilities to these
customers include short term loans, revolving credit arrangements, term loans,
personal installment loans, and auto loans. Most of the Bank's business loans
are short term. Lending is limited to the New York metropolitan area which
includes the five boroughs, Westchester, Long Island, and Northern New Jersey.
No single borrower or group of related borrowers is indebted to the Bank in the
aggregate for an amount in excess of $10.4 million. The Bank's legal lending
limit was in excess of $15 million at December 31, 1997.
The Bank's International Banking Department offers financial services to
its customers through its network of correspondent banks around the world. The
Bank provides Letters of Credit and foreign collection services to finance
import and export transactions. It also issues Standby Letters of Credit for
domestic use. The Bank maintains active correspondent relationships with leading
financial institutions, both domestic and world wide.
Competition
The Bank faces significant competition for both the loans it makes and the
deposits it accepts. The Bank's market area has a high density of financial
institutions, many of which are branches of significantly larger institutions
which have greater financial resources than the Company, and all of which are
competitors of the Bank to varying degrees. The Company and its competitors are
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
The Bank's competition for loans comes principally from other commercial
banks. The Bank competes successfully for loans primarily by emphasizing the
quality of its loan services and by charging loan fees and interest rates that
are generally competitive in its market area. Its most direct competition for
deposits has historically come from commercial banks, savings banks, credit
unions, and savings and loan associations. Additionally, the Bank faces
competition for deposits from money market funds, stock and bond mutual funds,
brokerage companies and insurance companies. The Bank competes for deposits by
offering a variety of customer services and deposit accounts at generally
competitive interest rates.
Management considers the Bank's reputation for financial strength and
customer service as its major competitive advantage in attracting customers in
its market area. The Bank also believes it benefits from its community bank
orientation as well as its relatively high percentage of core deposits.
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Potential Impact of Changes in Government Monetary Policies and Interest Rates
The earnings of the Company and the Bank are affected by legislative
changes and policies of various governmental authorities such as the New York
State Banking Department, the Board of Governors of the Federal Reserve System
(the "FRB") and the FDIC. The FRB controls interest rates, which in turn may
affect the cost of funds and the return on earning assets. The changing economic
conditions and changes in the money markets make it impossible to predict future
changes in interest rates, loan demand, or their effects on the Bank's business
and earnings.
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest on interest-earning assets, such as loans and
securities, and its interest expense on interest-bearing liabilities, such as
deposits. When the amount of interest-earning assets differs from the amount of
interest-bearing liabilities expected to mature or reprice in a given period, a
significant change in market rates of interest will affect net interest income.
The Bank manages its interest rate risk primarily by structuring its balance
sheet to emphasize holding adjustable rate loans in its portfolio, maintaining a
large portion of its investments in mortgage-backed securities which produce
monthly cash flow for reinvestment, and maintaining a large base of core
deposits.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. These laws and regulations are intended primarily to
protect depositors and not stockholders. To the extent that the following
information describes statutory and regulatory provisions, it is qualified in
its entirety by reference to the particular statutory and regulatory provisions.
Any change in the applicable law or regulation may have a material effect on the
business and prospects of the Company and the Bank.
The Company is a registered bank holding company subject to the regulation
and examination by the Federal Reserve Board under the Bank Holding Company Act
of 1956, as amended (the "Act"). The Company is required to file with the FRB
quarterly and annual reports and any additional information that may be required
under the Act. The Act also requires every bank holding company to obtain the
prior approval of the FRB before (i) acquiring all or substantially all of the
assets of or direct or indirect ownership or control of more than 5% of the
outstanding voting stock of any bank which is not already majority owned, or
(ii) acquiring, or merging or consolidating with, any other bank holding
company. The FRB will not approve any acquisition, merger, or consolidation that
would have a substantially anti-competitive effect, unless the anti-competitive
impact of the proposed transaction is clearly outweighed by a greater public
interest in meeting the convenience and needs of the community to be served. The
FRB also considers capital adequacy and other financial and managerial resources
and future prospects of the companies and the banks concerned, together with the
convenience and needs of the community to be served, when reviewing
acquisitions, mergers or consolidations.
The Riegle-Neal Act of 1994 permits an adequately capitalized and managed
bank holding company, with FRB approval, to acquire control of banks outside its
principal state of operations,
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without regard to whether such acquisitions are permissible under state law
(except that states may restrict out-of-state acquisitions of newly formed banks
by prescribing a minimum time that a bank must have been in existence before it
can be acquired by an out-of-state bank; this cannot be greater than five
years.) No bank holding company may make an acquisition outside its principal
state of operations which would result in it controlling more than 10% of the
total amount of deposits of all insured depository institutions in the United
States, or 30% or more of the total deposits of insured depository institutions
in any state (unless such limit is waived, or a more restrictive or permissive
limit is established, by a particular state).
Riegle-Neal also allows banks to branch across state lines either by
merging with banks in other states or by establishing new branches in other
states. The provision relating to establishing new branches in another state
requires a state's specific approval. The banking laws of New York provide that
a New York bank chartered less than five years which is acquired by an
out-of-state bank holding company generally may not be merged with other banks
owned by that bank holding company, but that an out-of-state bank may branch
into the state by merging with, or by acquiring one or more branches of, an
existing New York bank. The banking laws of New York do not provide the specific
approval for out-of-state banks to establish new branches in New York. The
Company is unable to predict the ultimate impact of interstate banking on it or
its competition.
Additionally, Riegle-Neal prohibits a bank holding company, with certain
limited exceptions, from (i) acquiring or retaining direct or indirect ownership
or control of more than 5% of the outstanding voting stock of any company which
is not a bank or bank holding company, or (ii) engaging directly or indirectly
in activities other than those of banking, managing or controlling banks, or
performing services for its subsidiaries. Exceptions may be allowed in cases
where the non-banking business is determined by the FRB to be so closely related
to banking or managing or controlling banks as to be properly incident thereto.
In making such determinations, the FRB is required to weigh the expected
benefits to the public, such as greater convenience, increased competition or
gains in efficiency, against the possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices.
The FRB has adopted risk-based capital guidelines for bank holding
companies. The risk-based capital guidelines are designed to make regulatory
capital requirements more sensitive to differences in risk profile among banks
and bank holding companies, to account for off-balance sheet exposure and to
minimize disincentives for holding liquid assets. Under these guidelines, assets
and off-balance sheet items are assigned to broad risk categories each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. Failure to
meet the capital guidelines could subject a banking institution to a variety of
enforcement remedies available to federal regulatory authorities.
Bank holding companies currently are required to maintain a minimum ratio
of total capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) of 8%. 50% or more of the total
capital is required to be "Tier 1 capital," consisting of common shareholder
equity plus retained earnings, less certain goodwill items and
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<PAGE>
intangible assets. The remainder ("Tier 2 capital") may consist of (a) an
allowance for loan losses not to exceed 1.25% of risk-weighted risk assets, (b)
excess of qualifying perpetual preferred stock, (c) hybrid capital instruments,
(d) perpetual debt, (e) mandatory convertible debt securities, and (f)
subordinated debt and intermediate-term preferred stock limited for this purpose
to 50% of Tier 1 capital. Total capital is the sum of Tier 1 and Tier 2 capital
less reciprocal holdings of other banking organizations' capital instruments,
investments in unconsolidated subsidiaries and any other deductions as
determined by the FRB (determined on a case by case basis or as a matter of
policy after formal rule-making).
Bank holding company assets are given risk-weights of 0% (no risk), 20%,
50% and 100%. In addition, certain off-balance sheet items are given similar
credit conversion factors to convert them to asset equivalent amounts to which
an appropriate risk-weight will apply. These percentages represent the fraction
of an asset's value that must be considered when computing the ratio of total
capital to risk weighted assets. An asset with a zero risk weight need not be
considered in computing the ratio. If an asset has a 20% risk weight, 20% of its
value must be taken into account in computing the ratio. Half the value of a 50%
risk weighted asset, and the full value of a 100% risk weighted asset, must be
taken into account for this purpose.
Risk weighting is fixed according to the degree of risk each asset
represents. Most loans receive a risk weight of 100%, except for performing
first mortgage loans fully secured by certain residential property, which carry
a 50% risk rating. Most investment securities (including, primarily, general
obligation claims on states or other political subdivisions of the United
States) will be assigned to the 20% category, except for municipal or state
revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S.
Treasury or obligations backed by the full faith and credit of the U.S.
Government, which have a 0% risk-weight. In converting off-balance-sheet items,
direct credit substitutes including general guarantees and standby letters of
credit backing financial obligations, are given a 100% conversion factor with a
50% risk-weight. Transaction related contingencies such as bid bonds, standby
letters of credit backing non-financial obligations and commitments (including
commercial credit lines) with an initial maturity or more than one year have a
50% conversion factor. Short-term commercial letters of credit are converted at
20% and certain short-term or unconditionally cancelable commitments have a 0%
factor.
The Company's management believes that the risk-weighting of assets under
these guidelines does not and will not have a material impact on the Company's
operations or on the operations of the Bank.
In addition to the risk-based capital guidelines, the FRB has adopted a
minimum Tier 1 capital leverage ratio, under which a bank holding company must
maintain a minimum ratio of Tier 1 capital to average total consolidated assets
of at least 4% in the case of a bank holding company that has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. The leverage capital ratio assists in the assessment of the capital
adequacy of bank holding companies. Its principal objective is to place a
constraint on the maximum degree
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to which a banking organization can leverage its equity capital base, even if it
invests primarily in assets with low risk-weights.
At December 31, 1997, the capital ratios of the Company and the Bank
exceeded the FRB's minimum regulatory capital guidelines as follows:
Merchants New York Bancorp, Inc.
<TABLE>
<CAPTION>
Risked-Based Capital
Leverage Capital(1) Tier 1 Total(2)
---------------------------- ------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------- ---------------------------- ----------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Actual $96,679 8.03% $96,679 18.61% $102,846 19.80%
Minimum
requirement 48,159 4.00 20,780 4.00 41,554 8.00
========================== ========================== ===========================
Excess $48,520 4.03% $75,899 14.61% $61,292 11.80%
========================== ========================== ===========================
</TABLE>
The Merchants Bank of New York
<TABLE>
<CAPTION>
Leverage Capital(1) Tier 1 Total(2)
---------------------------- ------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------- ---------------------------- ----------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Actual $96,476 8.01% $96,476 18.57% $102,643 19.76%
Minimum
requirement 48,178 4.00 20,781 4.00 41,556 8.00
========================== =========================== ==========================
Excess $48,298 4.01% $75,695 14.57% $61,087 11.76%
========================== =========================== ==========================
</TABLE>
(1) The leverage capital requirement is generally between 4.0% and 5.0% for all
but the most highly-rated companies.
(2) The Company's Tier 1 capital includes stockholders' equity, net of
intangible assets, and gross of unrealized securities valuation accounts.
Total risk-based (Tier 2) capital includes Tier 1 capital plus the loan
loss reserves.
The capital adequacy guidelines also provide explicitly for consideration
of interest rate risk in the overall evaluation of a bank's capital adequacy in
order to ensure that banking institutions effectively measure and monitor their
interest rate risk, and that they maintain adequate capital for the risk.
Banking institutions deemed by the federal bank regulatory agencies to have
excessive interest rate risk may be required to maintain additional capital.
The Bank is a state-chartered bank subject to supervision, regulation and
examination by the New York State Banking Department and by the FRB. Deposits,
reserves, investments, loans, consumer law compliance, issuance of securities,
payment of dividends, establishing and closing of branches, mergers and
consolidations, changes in control, electronic funds transfer, community
reinvestment, management practices and other aspects of operations are subject
to regulation by the appropriate Federal and state regulatory agencies. The Bank
is also subject to
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various regulatory requirements of the FRB including disclosure requirements in
connection with personal and mortgage loans, interest on deposits and reserve
requirements. In addition, the Bank is subject to numerous federal, state and
local laws and regulations which set forth specific restrictions and procedural
requirements with respect to the extension of credit, credit practices, the
disclosure of credit terms and discrimination in credit transactions.
Federal regulatory agencies have broad powers to take prompt corrective
action to resolve problems at banking institutions, including (in certain cases)
the appointment of a conservator or receiver. The extent of these powers is
generally influenced by the level of capital at the institution. Management does
not anticipate that the Bank will become subject to these prompt corrective
action provisions.
Only a well capitalized depository institution may accept brokered deposits
without prior regulatory approval. Under FDIC regulations, an institution is
generally considered "well capitalized" if it has a total risk-based capital
ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%, and a
Tier 1 capital (leverage) ratio of at least 5%. The Company and the Bank meet
the guidelines to be considered a "well capitalized" institution. Federal law
generally requires full-scope on-site annual examinations of all insured
depository institutions by the appropriate federal bank regulatory agency
although the examination may occur at longer intervals for small
well-capitalized or state-chartered banks.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Act on any extension of credit to the bank holding
company or any of its subsidiaries, or investments in the stock or other
securities of the bank holding company or its subsidiaries, and in the taking of
such stock or securities as collateral for loans to any borrower. A bank holding
company and its subsidiaries are prohibited from engaging in certain "tie-in"
arrangements in connection with the extension of credit or provision of any
property or services.
Various restrictions limit the extent to which the Bank can supply funds to
the Company. The FRB limits the amount of dividends the Bank can pay the
Company. Without prior approval, the maximum dividend payable to the Company in
a single fiscal year is limited to the Bank's net profits for that year plus its
retained earnings for the preceding two calendar years, less any required
transfer to surplus. Further restrictions prevent the Company from borrowing
from a Bank subsidiary unless the loans are secured in specified amounts.
Without the prior approval of the FRB, secured loans, other transactions and
investments between the Company and any Bank subsidiary are generally limited in
amount to 10% of the Bank's capital and surplus. Federal law also requires that
transactions between a Bank subsidiary and the Company, including extension of
credit, sales of securities or assets and the provision of services, be
conducted on terms at least as favorable to the Bank subsidiary as those that
apply or that would apply to comparable transactions with unaffiliated parties.
As a consequence of the extensive regulation of the commercial banking
business in the United States, the business of the Company and the Bank are
particularly susceptible to changes in federal and state legislation and
regulations which may increase the cost of doing business.
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Lending Activities and Credit Risk Management
The Bank's commercial and industrial loan portfolio represents
approximately 94% of total loans. Loans in this category are typically made to
small and medium sized businesses. Such loans typically range between $100,000
and $3 million, although larger loans are made on occasion, as the Bank's legal
lending limit is in excess of $15 million. Loan proceeds are generally used for
working capital and are seasonal in nature. In addition, the Bank supports the
financing of the importation of merchandise through letters of credit and direct
loans. The primary source of repayment is from the borrowers' conversion cycle
of inventory and accounts receivable as well as profits and cash flows.
The Bank's mortgage loan portfolio represents approximately 5% of gross
loans and is secured by mortgages on real property located in the New York
metropolitan area. Mortgage loans are made on an accommodation basis to current,
well established customers or are on occasion made to a business for property
which it is occupying. In the latter instance, full credit evaluation of the
borrowers' financial status is done and the Bank does not rely solely on the
collateral.
The Bank's lending is subject to its written underwriting standards and to
loan origination procedures prescribed by management. Detailed information is
obtained to assist in determining the borrower's ability to repay including
credit reports, financial statements and confirmations. The Bank's commercial
and industrial loans are underwritten based on the cash flow and financial
condition of the borrowing business and applicable collateral when appropriate.
Such loans may be secured in whole or in part by collateral such as liquid
assets, accounts receivable, inventory, equipment or real property. The majority
of the loans are personally guaranteed by the principals of the business and may
be further collateralized by the assets of those principals. The interest rates
on commercial and industrial loans are primarily variable rates that change with
market conditions and are priced in relation to the "prime rate."
Intrinsic to the lending process is the possibility of loss. In times of
economic slowdown, the risk inherent in the Bank's portfolio of loans is
increased. While management endeavors to minimize this risk, it recognizes that
loan losses will occur and that the amount of these losses will fluctuate
depending on the risk characteristics of the loan portfolio which in turn
depends on current and expected economic conditions, the financial conditions of
borrowers and the credit management process.
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<PAGE>
As of December 31, 1997, the Bank's loans of $332 million, net of unearned
discounts, represented 27% of total assets. The Bank has no foreign loans
outstanding. The following table sets forth the composition of the Bank's loan
portfolio net of unearned discounts at the end of each of the most recent five
fiscal years:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Commercial and industrial........ $312,967 $283,341 $256,620 $254,098 $272,664
Real estate - mortgage........... 15,723 10,941 11,276 11,205 7,694
Installment loans................ 3,212 2,855 3,067 2,894 2,518
-------- -------- -------- -------- --------
Gross loans...................... 331,902 297,137 270,963 268,197 282,876
Less: unearned discounts...... (94) (56) (59) (80) (262)
-------- -------- -------- -------- --------
Total (net of unearned
discounts)..................... $331,808 $297,081 $270,904 $268,117 $282,614
======== ======== ======== ======== ========
</TABLE>
Approximately 46% of the current loan portfolio is outstanding to companies
in the diamond, jewelry, furs and apparel industries. This includes loans to
various types of companies such as wholesalers, retailers, manufacturers and
casters. The Bank's portfolio is sensitive to downturns in the economy, since
these items are purchased with disposable income. As of December 31, 1997, there
are no categories of loans exceeding 10% of total loans except as shown in the
above table. Substantially all of the Bank's loans are to borrowers in the New
York metropolitan area.
The following table sets forth the maturities of selected loans in the
Bank's gross loan portfolio at December 31, 1997:
Due One Due One Due After
Year or Less to Five Years Five Years Total
------------ ------------- ---------- -----
(In Thousands)
Commercial and industrial ... $286,468 $ 21,120 $ 5,379 $312,967
Real estate - mortgage ...... 1,495 10,963 3,265 15,723
======== ======== ======== ========
Total ....................... $287,963 $ 32,083 $ 8,644 $328,690
======== ======== ======== ========
Loans included in the above
which are due after one year,
which have:
Fixed interest rates ........ $ 4,971 $ 3,742 $ 8,713
Adjustable interest rates ... 27,112 4,903 32,015
======== ======== ========
Total ....................... $ 32,083 $ 8,645 $ 40,728
======== ======== ========
Asset and Liability Management
The Bank's net interest income is an important component of its operating
results. The stability of net interest income in changing interest rate
environments depends on the Bank's ability to manage effectively the interest
rate sensitivity and maturity of its assets and liabilities. The Bank's Asset
and Liability Management Committee develops and implements risk
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management strategies, and uses various risk measurement tools to evaluate the
impact of changes in interest rates on the Bank's asset/liability structure and
net interest income.
The Bank's asset/liability management goal is to maintain an acceptable
level of interest rate risk to produce relatively stable net interest income in
changing interest rate environments. Management's plan has been (i) to maximize
the amount of loans having interest rates that move with prime rate changes
(approximately 89% of the loan portfolio is in this category) and (ii) to invest
a major portion of the investment portfolio in mortgage-backed securities which
have a five to seven year average life and a constant cash flow return of
principal which can be reinvested on a monthly basis (during 1997 this cash flow
averaged $12 million per month). In addition, a substantial portion of the
investment portfolio has been classified in the available-for-sale category to
allow for sales to be made, when appropriate, to take advantage of interest rate
arbitrage to improve future interest returns. As economic conditions change,
management will modify the plan as necessary.
One measure of the Bank's interest rate sensitivity is its interest
sensitivity gap, or the difference between interest-earning assets and
interest-bearing liabilities scheduled to mature or reprice within a specified
time frame. Shorter gaps are a measure of exposure to changes in interest rates
for shorter intervals and longer gaps measure sensitivity over a longer
interval. At December 31, 1997, the Bank had a negative one-year gap of
approximately (35%) of total interest-earning assets; that is, it had more
interest-bearing liabilities than interest-earning assets maturing or repricing
within one year. A negative gap may enhance earnings in periods of declining
interest rates in that, during such periods, the interest expense paid on
liabilities may decrease more rapidly than the decrease in interest income
earned on assets. Conversely, in an increasing interest rate environment, a
negative gap may result in an increase in the interest expense paid on
liabilities that is more rapid than the increase in interest income earned on
assets. While a negative gap indicates the amount of interest-earning
liabilities which will mature before interest-bearing assets, it does not
indicate the extent to which they reprice. Therefore, at times, a negative gap
may not increase earnings in a declining interest rate environment.
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The following table summarizes the Bank's interest rate sensitive assets
and liabilities at December 31, 1997 according to the time periods in which they
are expected to reprice, and the resulting gap for each time period:
<TABLE>
<CAPTION>
Less than Three to One to
Three Twelve Five Over
Months Months Years Five Years Total
---------- --------- -------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold.................... $67,000 $-- $-- $-- $67,000
U.S. government and
agency obligations................ 42,839 126,521 481,229 5,426 656,015
Obligations of states and political
subdivisions...................... 1,332 5,495 27,871 43,296 77,994
Other securities...................... -- -- 125 8,369 8,494
Commercial and industrial loans:
Fixed rate........................ 20,184 3,634 2,680 3,099 29,597
Adjustable rate................... 283,276 -- -- -- 283,276
Real estate loans:
Fixed rate........................ 285 310 1,000 774 2,369
Adjustable rate................... 13,354 -- -- -- 13,354
Installment loans..................... 447 1,093 1,672 -- 3,212
-------- -------- -------- ------- ----------
Total interest-earning assets..... $428,717 $137,053 $514,577 $60,964 $1,141,311
-------- -------- -------- ------- ----------
Interest-bearing liabilities:
NOW accounts........................ 47,296 -- -- -- 47,296
Savings accounts.................... 24,736 -- -- -- 24,736
Money market accounts............... 145,336 -- -- -- 145,336
Time deposits....................... 222,985 178,305 17,867 -- 419,157
Securities sold under repurchase
agreements........................ 125,000 35,000 -- -- 160,000
Other short term borrowing............ 12,180 20,000 -- -- 32,180
-------- -------- -------- ------- ----------
Total interest-bearing liabilities. $577,533 $233,305 $17,867 $-- $828,705
-------- -------- -------- ------- ----------
Net interest sensitivity gap.......... (148,816) (96,252) 496,710 60,964 312,606
Cumulative gap position............... (148,816) (245,068) 251,642 312,606
Cumulative gap/total
interest-earning assets........... (13.04%) (21.47%) 22.05% 27.39%
========= ======== ======== =======
</TABLE>
Mortgage backed securities have been adjusted for weighted average maturity
dates and prepayments. All securities are disclosed at book values. Prepayments
and scheduled payments have been estimated for the loan portfolio based on the
Bank's historical experience. Non-accrual loans are included in the table at
their original contractual maturities. Savings account and NOW account
repricings are based on the Bank's historical repricing experience and
management's belief that these accounts are not highly sensitive to changes in
interest rates.
-11-
<PAGE>
Asset Quality
Management continually reviews delinquent loans to adequately assess
problem situations and to quickly and efficiently remedy these problems whenever
possible. When a loan becomes past due (when it is past due 90 days) and doubt
exists as to the ultimate collection of principal or interest, the accrual of
interest is discontinued. Any accrued but unpaid interest on such loans is
charged against current earnings. Non-accrual loans at December 31, 1997 were
$159,000 or 0.05% of total loans, while at December 31, 1996 and 1995, they were
$1.1 and $2.2 million, respectively. Loans which are current as of December 31,
1997 but for which there are serious doubts as to the ability of the borrowers
to comply with the present loan repayment terms are not material in amount.
The following table sets forth the aggregate amount of domestic
non-accrual, past due and restructured loans at the end of each of the most
recent five fiscal years:
December 31,
---------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accrual loans............... $159 1,109 2,169 1,311 1,837
Past due 90 days or more
(other than above)............ 204 687 281 308 308
Restructured.................... -- -- -- -- --
---- ----- ----- ----- -----
Total........................... $363 1,796 2,450 1,619 2,145
Interest income that would
have been earned on
non-accrual and reduced
rate loans outstanding........ 126 288 201 94 110
Interest income included in
net income for the above
loans......................... 81 39 -- -- --
Non-accrual, past due and
restructured loans as a
percentage of total gross
loans......................... .11% .60 .90 .60 .76
The provision for loan losses is a charge against income which increases
the allowance for loan losses. The adequacy of the allowance for loan losses is
evaluated periodically and is determined based on management's judgment
concerning the amount of risk and potential for loss inherent in the portfolio.
This judgment is based upon a number of factors including a review of
non-performing and other classified loans, the value of collateral for such
loans, historical loan loss experience, changes in the nature and volume of the
loan portfolio, and current and prospective economic conditions. While
management uses the best information available in establishing the allowance for
loan losses, future adjustments may be necessary based on changes in economic
conditions and in the credit risk inherent in the loan portfolio. As of December
31, 1997, there were no potential problem loans of which they were aware that in
management's opinion would materially impact financial results.
-12-
<PAGE>
The Bank's allowance for loan losses at December 31, 1997 was $6.17 million
or 1.86% of total loans compared to $5.62 million or 1.9% of total loans at
December 31, 1996. At December 31, 1995 the allowance was $6.5 million or 2.4%
of total loans. Of the allowance for loan losses, non-accrual loans represented
2.6%, 19.74% and 33.4% at December 31, 1997, 1996 and 1995, respectively.
As in all banks, in addition to non-accrual loans, the Bank has other
sub-standard loans which reflect a higher degree of risk because of general
economic conditions or specific deterioration because of circumstances for a
particular borrower. These loans are reflected in the criticized and/or
classified categories by the Bank's loan review process. In establishing the
allowance for loan losses, the Bank must consider these categories, and
additions to the allowance are made with this in mind.
As a general rule, non-accrual loans (those on which interest is no longer
being accrued) are charged off at December 31 of each year. On average, $1.3
million of such loans have been charged off for each of the past five years.
Some sub-standard loans outside the non-accrual category are also charged off on
these occasions, resulting in the Bank's total charge-offs for the past five
years having averaged $3.7 million per year. In the same period, the average
annual provision for additions to the loan loss allowance was $3.6 million, with
1997 accounting for $1.7 million.
The following table sets forth certain information with respect to the
Bank's loan loss experience for each of the most recent five fiscal years:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses balance at
beginning of year................... $5,617 6,484 6,188 6,960 4,359
Provision for loan losses........... 1,700 2,580 2,080 1,850 9,785
Charge offs:
Commercial and industrial........ (1,460) (4,345) (2,315) 2,918) (7,343)
Installment...................... (9) (60) (33) (--) (8)
------ ----- ----- ----- -----
Total charge offs................... (1,469) (4,405) (2,348) (2,918) (7,351)
Recoveries
Commercial and industrial........ 314 952 563 294 166
Installment......................
5 6 1 2 1
------ ----- ----- ----- -----
Total recoveries.................... 319 958 564 296 167
Net charge offs..................... (1,150) (3,447) (1,784) (2,622) (7,184)
------ ----- ----- ----- -----
Balance at end of year.............. $6,167 5,617 6,484 6,188 6,960
====== ===== ===== ===== =====
Ratio of net charge offs to average
loans outstanding, net of unearned
discounts........................... .35% 1.23 .65 .96 2.34
</TABLE>
-13-
<PAGE>
The following table sets forth an approximate breakdown of the allowance
for loan losses by major categories of loans for each of the most recent five
fiscal years:(1)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- ------------- ------------- -------------
% of % of % of
% of Loans Loans Loans % of
Loans in in in Loans
in Ea. Ea. Ea. Ea. in Ea.
Categ. Categ. Categ. Categ. Categ.
Loan to Loan to Loan to Loan to Loan to
Loss Total Loss Total Loss Total Loss Total Loss Total
Allow Loans Allow Loans Allow Loans Allow Loans Allow Loans
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial & industrial.. $ 80 94.34 555 95.36 1,085 94.71 656 94.74 919 96.39
Real estate.............. -- 4.70 -- 3.68 -- 4.16 -- 4.18 -- 2.72
Installment.............. 22 .96 24 .96 23 1.13 20 1.08 26 .89
Unallocated.............. 6,065 -- 5,038 -- 5,376 -- 5,512 -- 6,015 --
----- ----- ----- ----- -----
Total.................... $6,167 5,617 6,484 6,188 6,960
====== ===== ===== ===== =====
</TABLE>
Securities and Investment Policy Objectives
The Bank invests in U.S. Government obligations, U.S. Agency
mortgage-backed securities and high quality state and municipal securities, high
grade bonds and money market instruments. The Bank's investment portfolio
represents a significant share of its assets and exerts an important and
stabilizing influence upon the Bank's earnings.
The Bank's investment policy is designed to promote three objectives. The
primary objective is to provide liquidity necessary to meet day to day, cyclical
and long term changes in the mix of the Bank's assets and liabilities. The
second objective is to provide a stable flow of dependable earnings while
maintaining liquidity through absorbing funds when loan demand decreases due to
seasonal trends and to supply funds when loan demand increases toward its annual
peak. The third objective is to provide a balance of quality and diversification
to the Bank's assets. There is minimal exposure to trading losses, since the
Bank invests but does not trade. Only high grade short term instruments and top
rated bonds with an average life of approximately five years or less are
acquired with staggered maturities for liquidity.
Current money and security market conditions are evaluated by the Bank's
Investment Committee on a monthly basis. The Investment Committee includes
Messrs. Witty, Hertz, Lawrence, Cardew and Gould. The Committee's strategy and
investment program for each month, developed in accordance with the Bank's
investment policy, is presented for approval at the previous month's Board
meeting.
- ------------
(1) The allocation of loan loss allowance is calculated on the basis of 50% of
the non-accruing commercial and industrial loans and a 5 year average of losses
on installment loans. Such allocation is not necessarily indicative of the
amounts in which future charge-offs may be taken or of future loss trends.
-14-
<PAGE>
As of December 31, 1997, no single issuer's securities accounted for as
much as 10% of stockholders' equity, except for securities issued by the United
States and its political subdivisions and agencies.
The following table sets forth for the most recent three fiscal years the
book values and estimated market values of the Company's investment securities:
December 31
--------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Available for sale securities:
U.S. government and agency
obligations ............................. $496,300 $518,908 $540,024
Obligations of states and political
subdivisions ............................ 22,838 19,848 22,500
Other securities ........................... 8,194 9,107 3,698
-------- -------- --------
Total - available for sale (book value) .... $527,332 $547,863 $566,222
======== ======== ========
Estimated market value ..................... $541,634 $561,601 $584,378
======== ======== ========
Held to maturity securities:
U.S. government and agency
obligations ............................. 159,690 119,351 --
Obligations of states and political
subdivisions ............................ 55,154 47,219 44,929
Other securities ........................... 327 338 506
======== ======== ========
Total - held to maturity (book value) ...... $215,171 $166,908 $ 45,435
======== ======== ========
Estimated market value ..................... $219,902 $169,340 $ 47,759
======== ======== ========
-15-
<PAGE>
The following tables sets forth the book values, range of maturities
and average yields for each category at December 31, 1997.
<TABLE>
<CAPTION>
Securities Available for Sale (Market Value)
------------------------------------------------------------------------
One to Five to Over Total Average
One Year Five Ten Ten Market Yield to
or Less Years Years Years Value Maturity
------- ----- ----- ----- ----- --------
(Dollars in Thousands)
U.S. Government
<S> <C> <C> <C> <C> <C> <C>
Obligations(1)(2)............ $76,483 $108,580 $-- $-- $185,063 8.01%
U. S. agency obligations..... 81,103 237,898 5,377 -- 324,378 8.03%
Obligation of state and
political subdivisions(2).... 2,150 7,740 4,872 9,231 23,993 6.21%
Other securities............. -- -- -- 8,200 8,200 7.74%
-------- -------- ------- ------- -------- ----
Total available for sale..... $159,736 $354,218 $10,249 $17,431 $541,634 7.94%
======== ======== ======= ======= ======== ====
Average yield to maturity.... 8.04% 7.64 6.09 6.61
</TABLE>
<TABLE>
<CAPTION>
Securities Held to Maturity (Book Value)
------------------------------------------------------------------------
One to Five to Over Total Average
One Year Five Ten Ten Market Yield to
or Less Years Years Years Value Maturity
------- ----- ----- ----- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
Obligations (1)(2)........... $397 $59,942 $-- $-- $60,339 8.12%
U.S. agency obligations...... 18,263 81,088 -- -- 99,351 7.76%
Obligations of New York state
(2).......................... $ 4,702 20,599 13,322 16,531 55,154 5.41%
Other securities............. -- 125 175 27 327 6.96%
-------- -------- ------- ------- -------- ----
Total held to maturity....... $ 23,362 $161,754 $13,497 $16,558 $215,171 7.26%
======== ======== ======= ======= ======== ====
Average yield to maturity.... 7.61% 7.64 5.05 5.21
Total investments............ $183,098 $515,972 $23,746 $33,989 $756,805 7.75%
======== ======== ======= ======= ======== ====
</TABLE>
- -----------
(1) Consisting mainly of Government guaranteed GNMA investments with an average
life of five years.
(2) Above yield is not computed on tax-equivalent basis. The average
tax-equivalent yield to maturity on obligations of states and political
subdivisions are as follows: securities available for sale - 9.40% and
securities held to maturity - 8.20%. The total tax equivalent yield on the
entire investment securities portfolio is 8.05%.
Deposits
Deposits are the Bank's principal source of funds. The Bank attracts
deposits from the general public and small businesses by offering a variety of
deposit accounts at competitive rates. The Bank's deposit accounts include
savings accounts, personal and commercial checking accounts, money market
accounts, NOW accounts, and certificates of deposit ("time deposits"). The Bank
also offers tax deferred retirement savings accounts (IRAs), savings and
certificates of
-16-
<PAGE>
deposit accounts of $100,000 or more ("jumbo certificates"). Management believes
that a significant portion of maturing deposits will be retained by the Bank.
There are no material amounts of foreign deposits in domestic offices.
At December 31, 1997, the Bank had $301.2 million in jumbo certificates,
compared to $271.2 million at December 31, 1996 and $218.0 million at December
31, 1995. At December 31, 1997, the dollar amount of jumbo certificates by
remaining maturity dates and the weighted average interest rates were as
follows:
Weighted
Remaining Maturity Amount Average Rate
------------------ ------ ------------
(Dollars in Thousands)
3 months or less............................. $181,544 5.44%
More than 3 through 6 months................. 46,557 5.77
More than 6 months through 12 months......... 68,282 5.60
More than 12 months.......................... 4,857 6.18
======== =====
Total.................................... $301,240 5.75%
======== =====
Deposit inflows and outflows are generally dependent on market conditions,
interest rates, the general economic environment in the Bank's market area and
other competitive factors. The variety of accounts offered by the Bank has
enabled it to be more competitive in obtaining funds and to respond with more
flexibility to changes in the interest rate environment. Management's policy is
to review deposit interest rates at least weekly and to adjust appropriately
based on the need for funds, competition and the effect on the net interest
margin. The Bank's interest costs on time and savings deposits may continue to
trend upward in a higher interest rate environment.
Fixed rate, fixed term certificates of deposit accounts ("CD's") are
generally a significant source of funds for the Company. At December 31, 1997,
CD's amounted to $419.1 million or 65.9% of total interest-bearing deposits,
compared to $406.6 million or 65.4% at December 31, 1996 and $380.9 million or
67.5% at December 31, 1995. CD's offered by the Company have maturities of seven
days or more, impose a minimum balance requirement of $2,000, and pay simple
interest.
Savings deposit accounts remained constant at $24.7 million or 4% of the
Company's total interest-bearing deposits at December 31, 1997 and 1996,
compared to $27.2 million or 4.8% atDecember 31, 1995. Savings deposits consist
of passbook savings accounts and statement savings accounts. Savings accounts
offered by the Bank pay interest monthly, compounded and credited on a quarterly
basis, to accounts with a minimum average daily balance of $100.
The Bank offers NOW accounts with unlimited check writing privileges. The
minimum initial deposit required is $2,500. There is a service charge incurred
if the daily average balance for the month falls below $2,500. Interest is
compounded monthly. Interest is credited at the end of the month, at the current
rate determined by the Bank. NOW accounts amounted to $47.3 million, or 7.4% of
the Bank's total interest-bearing deposits at December 31, 1997, compared to
$44.4 million, or 7.1%, at December 31, 1996 and $39.5 million, or 7.0%, at
December 31, 1995.
-17-
<PAGE>
The Bank also offers a money market account with limited check writing
privileges. Such accounts have a minimum balance requirement of $2,000 and earn
interest at the Company's money market rate if the account maintains a minimum
average balance of $2,000 for the month. There is a service charge incurred if
the daily average balance falls below $2,000. Interest on all money market
accounts is compounded monthly and credited monthly. Money market accounts
amounted to $145.3 million, or 22.8% of the Bank's total interest-bearing
deposits, at December 31, 1997, compared to $146.2 million, or 23.5%, at
December 31, 1996 and $116.3 million, or 20.6%, at December 31, 1995.
The following table sets forth the average deposits and average rates paid
for each of the most recent three fiscal years for the classifications of
deposits listed:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1997 Rate(%) 1996 Rate(%) 1995 Rate(%)
---- ------- ---- ------- ---- -------
(Dollars in Thousands)
Deposits:
<S> <C> <C> <C> <C> <C> <C>
Demand.................... $227,744 -- $209,828 -- $194,571 --
NOW....................... 41,904 2.27 38,219 2.28 38,235 2.29
Savings................... 24,277 2.98 25,485 2.99 28,146 2.96
Money market.............. 141,671 3.37 131,974 3.37 116,179 3.30
Other time ............... 416,221 5.45 384,033 5.30 389,747 5.51
------- ---- -------- ---- -------- ----
Total.......................... $851,817 $789,539 $766,878
======== ======== ========
</TABLE>
Management believes the variety of deposit accounts offered by the Bank
allows it to compete for funds effectively. However, these sources of funds
generally are interest rate sensitive and therefore can be more costly in a high
interest rate environment. Although the Bank will continue to carefully monitor
deposit flows, the ability of the Bank to control deposit flows will continue to
be significantly affected by the general market rate environment and economic
conditions.
Additional sources of funds are interest and principal payments on loans
and securities, and positive cash flows generated from operations. Interest and
principal payments on loans are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general market
interest rates, economic conditions and competitive factors. In the event that
the Bank is not able to generate sufficient funds from these sources, it has
available $86 million of overnight federal funds lines of credit from other
financial institutions as well as the ability to obtain substantial funds
through repurchase agreements against its investment portfolio. During 1997, the
Bank's wholly-owned subsidiary Merchants Capital Corporation ("MCC") was
organized as a real estate investment trust, and the bulk of the real estate
related portion of the Bank's investment portfolio was transferred to it. MCC
and the Bank are parties to an agreement under which the portion of the
investment portfolio held by MCC is available to support repurchase agreements
entered into by the Bank. During 1996, the Bank became a member of the Federal
Home Loan Bank of New York where it has availability of $130 million of funds,
of which $50 million may be used in overnight funds. Furthermore, the Bank has
access to
-18-
<PAGE>
the discount window of the Federal Reserve Bank. There were no borrowings from
the Federal Reserve Bank's discount window under these arrangements in 1997,
1996 or 1995.
Short Term Borrowings
The following table represents the Bank's material short term borrowings
for the fiscal years ending December 31:
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
Balance at year end............................. $191,772 127,199 105,065
Weighted average interest rate on
balances at end of year..... ................. 5.82% 5.41% 5.81%
Maximum amount of borrowing at
any month end.................. .............. $248,436 170,000 110,731
Approximate average amounts outstanding
during period......... ....................... 182,285 119,661 67,991
Approximate weighted average interest
rate during period...... ..................... 5.80% 5.51% 5.97%
Year 2000 Compliance
The Company does not anticipate incurring any material cost resulting from
the widely publicized "Year 2000 problem." Over the past year, the Company has
been in the process of replacing its minicomputer hardware with an environment
of networked personal computers using new software that is almost completely
Year 2000 compliant.
Employees
At December 31, 1997, the Company and the Bank had 240 employees,
consisting of 72 officers and 168 supervisory and clerical employees. The Bank
considers its relations with its employees to be good.
-19-
<PAGE>
SELECTED STATISTICAL INFORMATION
In addition to the statistical information that is presented in this Form
10-K, the following information is included in the Company's 1997 Annual Report
to Shareholders (the "Annual Report") and is hereby incorporated herein by
reference:
Description of Statistical Information Annual Report Caption Page
- -------------------------------------- --------------------- ----
Average Balance Sheets Average Assets, Liabilities
AND Stockholders' Equity 35
Analysis of Net Interest Earnings Analysis of Net Interest Earnings 8
Volume and Rate Variance Change in Interest Income and
Expense 9
Return on Equity and Assets Selected Financial Data 7
ITEM 2. PROPERTIES
The Bank owns the nine story office building at 434 Broadway, New York, New
York where one of its branch offices is located. The Bank occupies five of the
nine floors, the mezzanine and basement; four floors are presently rented to
others. In addition, the Bank owns the commercial condominium located at 62 West
47th Street, New York, New York, which houses the Bank's midtown branch office,
consisting of a main floor, mezzanine, and basement.
In addition to the above two offices, the Bank maintains five branch
offices at 93 Canal Street, 1040 Sixth Avenue, 295 Fifth Avenue, 145 Fifth
Avenue, and its corporate headquarters at 275 Madison Avenue, New York, New
York, where the Bank's main branch office is located.
ITEM 3. LEGAL PROCEEDINGS
Various actions and proceedings are presently pending to which the Company
or the Bank is a party. In the opinion of management, the aggregate liabilities,
if any, arising from such actions are not expected to have a material adverse
effect on the financial position of the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, there were no matters submitted to a
vote of the Company's stockholders.
-20-
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The market for the Company's common equity is not an exchange but is
established by the National Association of Securities Dealers' Automated
Quotation System. At December 31, 1997 the total number of holders of record of
the Company's common equity was approximately 1,614. The information appearing
on page 13 of the Annual Report under the caption "Price Range of Common Stock"
is incorporated herein by reference.
Cash dividends have been declared in each quarter of 1997 and 1996
aggregating annually $7.3 million and $6.5 million, respectively, or $.75 per
share in 1997 and $.65 per share in 1996, after adjusting for the two-for-one
stock split which occurred during 1997.
As a depository institution whose deposits are insured by the FDIC, the
Bank may not pay dividends or distribute any of its capital assets while it
remains in default on any assessment due the FDIC. The Bank currently is not in
default under any of its obligations to the FDIC. The Company and the Bank, in
declaring and paying dividends, are also limited insofar as minimum capital
requirements of regulatory authorities must be maintained. The Company and the
Bank comply with such capital requirements.
Under the Federal Reserve Act, the approval of the FRB is required for
dividends declared by a state member bank which in any year exceed the net
profits of such bank for that year, as defined, combined with retained net
profits for the two preceding years. Additionally, under Federal law, a bank is
prohibited from paying dividends in amounts greater than undivided profits then
on hand, as defined, after deducting bad debts.
During 1986, the stockholders approved the Employee Stock Option Plan of
the Bank (the "Option Plan"). Due to the Bank's becoming the wholly-owned
subsidiary of the Company on July 1, 1993, the Company adopted a substantially
identical stock option plan as successor to the Option Plan and all stock
options have become options to purchase the Company's Common Stock rather than
shares of the Bank's stock. No stock options were granted under the Option Plan
during 1997. A total of 331,759 shares of Common Stock of the Company were
issued upon the exercise of options previously granted under the Option Plan. Of
these, 14,210 were newly issued shares and 317,549 were treasury shares. The
weighted average exercise price of such options was $10.11 per share. Such
transactions were exempt from the registration requirements of the Securities
Act of 1933, as amended, pursuant to Section 4(2) thereunder.
ITEM 6. SELECTED FINANCIAL DATA
The information appearing on page 34 (Note 16) and page 7 respectively, of
the Annual Report under the captions "Selected Quarterly Financial Data" and
"Selected Financial Data" is incorporated herein by reference.
-21-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information appearing on pages 8 through 13 of the Annual Report under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements, related notes and Independent Auditors'
Report which appear on pages 14 through 34 of the Annual Report are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information appearing on pages 4 through 7 of the Company's Proxy
Statement prepared in connection with the 1997 Annual Meeting of Stockholders
(the "Proxy Statement") under the caption "Election of Directors" is
incorporated herein by reference.
All executive officers are designated annually by the Board of Directors
and serve at the pleasure of the Board.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing on pages 10 and 11 of the Proxy Statement under
the caption "Executive Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing on pages 8 and 9 of the Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing on page 13 of the Proxy Statement under the
caption "Compensation and Option Committee Report on Executive Officer
Compensation" and on page 16 thereof under the caption "Certain Relationships
and Related Transactions" is incorporated herein by reference.
-22-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements. The financial statements, related notes and the
Report of Independent Auditors, KPMG Peat Marwick LLP, dated February 6, 1998
appear on pages 14 through 34 of the Annual Report and are incorporated herein
by reference.
(a)2. Financial Statements Schedules.
(a)3. Exhibits (numbered in accordance with Item 601 of Regulation S-K):
Item Description
---- -----------
(11) Computation of Earnings Per Share Earnings
(13) 1997 Annual Report to Shareholders
(b) Reports on Form 8-K. None.
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MERCHANTS NEW YORK BANCORP, INC.
(Registrant)
By: /s/ Spencer B. Witty
--------------------------------------
Spencer B. Witty
Chairman of the Board
Dated March 17, 1998
By: /s/ James G. Lawrence
--------------------------------------
James G. Lawrence
President, Chief Executive Officer and
Director (Principal Executive Officer)
Dated March 17, 1998
By: /s/ William J. Cardew
--------------------------------------
William J. Cardew
Vice Chairman of the Board,
Chief Operating Officer and Director
(Principal Financial Officer)
Dated March 17, 1998
By: /s/ Nancy J. Ostermann
--------------------------------------
Nancy J. Ostermann
Vice President and Comptroller
(Principal Accounting Officer)
Dated March 17, 1998
-24-
<PAGE>
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/ Charles J. Baum
- -------------------------------------- Director March 17, 1998
Charles J. Baum
/s/ William J. Cardew
- ------------------------------------- Vice Chairman of the March 17, 1998
William J. Cardew Board, Chief Operating
Officer and Director
/s/ Eric W. Gould
- -------------------------------------- Vice President, March 17, 1998
Eric W. Gould Treasurer and Director
/s/ Rudolf H. Hertz
- --------------------------------------- Vice Chairman of the March 17, 1998
Rudolf H. Hertz Board and Director
/s/ Isidore Karten
- --------------------------------------- Director March 17, 1998
Isidore Karten
/s/ James G. Lawrence
- --------------------------------------- President, Chief March 17, 1998
James G. Lawrence Executive Officer and
Director
/s/ Robinson Markel
- --------------------------------------- Director March 17, 1998
Robinson Markel
/s/ Paul Meyrowitz
- --------------------------------------- Director March 17, 1998
Paul Meyrowitz
/s/ Alan Mirken
- --------------------------------------- Director March 17, 1998
Alan Mirken
/s/ Mitchell J. Nelson
- --------------------------------------- Director March 17, 1998
Mitchell J. Nelson
/s/ Leonard Schlussel
- --------------------------------------- Director March 17, 1998
Leonard Schlussel
/s/ Charles I. Silberman
- --------------------------------------- Vice Chairman of March 17, 1998
Charles I. Silberman the Board
/s/ Spencer B. Witty
- --------------------------------------- Chairman of the March 17, 1998
Spencer B. Witty Board and Director
-25-
Exhibit 11
Computation of Per Share Earnings
The computation of earnings per share for each period presented is as follows:
1997 1996 1995
---- ---- ----
Net income................................ $14,562,158 12,670,771 11,465,430
Average weighted shares outstanding*...... 9,793,913 9,961,538 9,944,212
Earnings per share........................ $1.49 1.27 1.15
Earnings per share, diluted 1.46 1.26 1.14
* Adjusted for the 2-for-1 split of the Common Stock that became effective
October 7, 1997.
-26-
[GRAPHIC OMITTED]
MERCHANTS NEW YORK BANCORP
Merchants New York Bancorp
1997 Annual Report
<PAGE>
TABLE OF CONTENTS
1 Financial Highlights
2 To Our Stockholders
4 Middle Market Lending
6 Branch Banking
7 Selected Financial Data
8 Management's Discussion and Analysis of
Financial Condition and Results of Operations
14 Consolidated Statements of Condition
15 Consolidated Statements of Income
16 Consolidated Statements of Changes in Stockholders' Equity
17 Consolidated Statements of Cash Flows
18 Notes to Consolidated Financial Statements
34 Independent Auditors' Report
35 Average Assets, Liabilities and Stockholders' Equity
36 Board of Directors
The Company's annual report, on Form 10-K, as filed with the Securities &
Exchange Commission, will be made available to stockholders upon request in
writing, at no cost. If interested, please contact: Karen L. Deitz, Corporate
Secretary, Merchants New York Bancorp, 275 Madison Avenue, New York, NY
10016-1011
<PAGE>
Merchants New York Bancorp
FINANCIAL HIGHLIGHTS
Year ended December 31, 1997 1996
- -------------------------------------------------------------------------------
Financial Condition Data
Total assets $1,235,742,235 $1,137,798,701
Total investment securities 756,804,988 728,508,783
Net loans 325,640,564 291,463,754
Total deposits 904,086,925 875,693,410
Total liabilities 1,129,547,838 1,034,263,069
Total stockholders' equity 106,194,397 103,535,632
Selected Operating Data
Total interest income 82,820,569 73,094,985
Total interest expense 40,253,456 33,455,196
Net interest income 42,567,113 39,639,789
Net interest income after provision
for loan losses 40,867,113 37,059,789
Income before income taxes 21,716,766 20,081,295
Income tax expense 7,154,608 7,410,524
Net income 14,562,158 12,670,771
Net income per share, basic $1.49 $1.27
[The following table was depicted as a bar graph in the printed material]
Net Interest Income Net Income Stockholders' Equity
(In Dollars) (In Dollars) (In Dollars)
'93 35,280,429 '93 7,884,433 '93 77,794,712
'94 36,237,944 '94 10,709,341 '94 77,734,334
'95 37,662,203 '95 11,465,430 '95 100,154,603
'96 39,639,789 '96 12,670,771 '96 103,535,632
'97 42,567,113 '97 14,562,158 '97 106,194,397
1
<PAGE>
[GRAPHIC OMITTED]
TO OUR STOCKHOLDERS
AND FRIENDS:
Merchants New York Bancorp enjoyed another record year in 1997. This was the
fourth record year in a row and represents twenty-one consecutive quarters of
earnings gains, which distinguishes "The Good Old Bank" as a reliable profit
making institution and reinforces our reputation as one of nation's strongest
and most stable commercial banks.
After-tax income climbed to $14,562,158, or $1.49 per share, up from
$12,670,771, or $1.27 per share, in 1996.
Our core businesses, lending activities and investments, had excellent
performances and contributed the major portion of our bottom line gains. This
was accomplished by our steadfast focus on lending to middle market firms --
mid-size and small businesses -- which resulted in an average increase in the
loan portfolio of over 15% without deviating from our prudent standards. In
addition, our average investment portfolio increased, as did our demand
deposits, while costs were kept low by sophisticated internal controls and
diligent asset/liability management.
We point with pride to other achievements during the year that increased
shareholder value: the added visibility in the financial press, the results of
our advertising and the strategic position of our branches to serve middle
market businesses. During early fall of 1997, the Company announced a program to
buy back an additional 5% of our shares, plus another two-for-one stock split
and an increase in our regular quarterly dividend -the 45th increase in payout
since 1950. In December, "The Good Old Bank" paid its 258th consecutive
quarterly cash dividend which has not been skipped or cut since 1932 when
dividends were commenced. This was consistent with our tradition of sharing our
growth with our stockholders. We are proud of this record that is both unmatched
and unrivaled.
[PHOTO OMITTED]
Spencer B. Witty, Chairman of the Board,
(seated) and James G. Lawrence,
President and Chief Executive Officer
Since the Bank's founding in 1874, we have never had a losing year; as
previously stated, 1997 was another record year. We added to capital through
earnings, and increased the book value of our shares.
Our debt free balance sheet offers depositors and stockholders the highest
levels of safety and soundness. Our risk-based capital ratio at year end was
19.80%, which is almost two and one-half times regulatory requirements. This
ratio is among the highest of all commercial banks in the United States.
Our buy-back program, referred to earlier, represents an opportunity for us
to invest in the
2
<PAGE>
Bank's future growth, especially in view of the Bank's record performance.
Consolidation in the banking industry continues unabated. The many mergers and
acquisitions have afforded our "eager to lend" institution unprecedented
opportunities. As the bigger banks get bigger, their middle market borrowers
have become less important. We are like a Country Bank in the middle of the Big
Apple. We know our clients well and treasure their relationship with us. As a
result, in many cases, we have served family businesses for years and now have
third and even fourth generations as customers. Their recommendations of our
Bank to their friends and associates has been a great asset.
Merchants Bank is unique in many ways. The roots of our Bank stem from
international trade since sailing ship days. We enjoy an enviable reputation of
expertise in speedily handling letters of credit for importers, and foreign
collections for exporters. Since 1874, our hand has never lost its skill and we
look forward to continued growth in this area.
During 1997, our first full year of operating as a licensed United States
Small Business Administration lender for loans that are majority guaranteed by
the Federal Government, we have found a niche that has a profitable potential
and fits our business philosophy and acumen.
Our branches are strategically located in various communities where there are
clusters of specialty firms in select industries, particularly small and
mid-sized businesses. We support those communities, as well as marketing to the
Greater Metropolitan Area as a whole. In addition, we continually enhance our
technological capabilities where it makes sense or is necessary for competitive
purposes; i.e., we offer MasterCard and Visa credit cards and our own ATM
worldwide access cards and other bank products. Most important, we concentrate
on what we know best and remain focused on commercial banking -- serving the
middle market which has an important role in the growth of the U.S. economy.
Our bank relies on many individuals in a number of areas, as we feel the
"people" resource is of paramount importance. In this context, we sincerely wish
to thank our stockholders for their loyalty and support, our Board of Directors
for their wise counsel and valuable assistance, and very importantly, our
appreciation of our professional team of officers and fine staff who make it all
possible.
We remain confident about the future and renew our dedication to keeping "The
Good Old Bank" safe and strong. As always, our motto remains, "The Safety of the
Depositors Comes First -- Earnings Will Inevitably Follow."
/s/ Spencer B. Witty
- -------------------------------------
Spencer B. Witty
Chairman of the Board
/s/ James G. Lawrence
- -------------------------------------
James G. Lawrence
President and Chief Executive Officer
3
<PAGE>
MIDDLE MARKET LENDING
[GRAPHIC OMITTED]
Our core lending business personifies Merchants and the success the Bank has
enjoyed for generations. Growth has continued because we have kept to the policy
- -- proven over and over again on which we were founded: to be the bank for
medium-size and small business, with emphasis on traditional banking and
personal service. This includes our unique International Department for the
myriad of quality importers and exporters we service, and we are pleased that
our Letters of Credit are accepted around the world.
[PHOTO OMITTED]
Corporate Lending Administration, left to right: Leonard S. Levine, Sr. V.P. &
Division Head; Stephen A. Barrow, Executive V.P. & Chief Credit Officer; Janet
L. Markel, Sr. V.P. & Division Head
A bank's earnings from its lending operations depends primarily on interest
rates, and the "art" of forecasting the direction, magnitude, and timing of rate
changes. We try, and we usually succeed, to earn a favorable spread. Our
liquidity, risk-averse policy, lending standards and relationships are vital to
our financial well-being and sustained earnings power. We make what we believe
to be are prudent loans, and, we do not venture into the more speculative,
higher-risk areas where the promise of higher returns can sometimes cloud
fundamental judgment.
[PHOTO OMITTED]
Corporate Lending Division II, left to right: Paul L. Hamner, Assistant Cashier
(seated); Kenneth J. Satchwill, V.P. & Group Manager (standing); Leonard S.
Levine, Sr. V.P. & Division Head (seated); John J. Cronin, Assistant Cashier
(standing); Eugene P. Schreiner, Assistant Cashier (seated); Brian T. Schiffino,
Assistant V.P. (standing); Brian M. Cardew, V.P. & Group Manager (seated)
Our loans are to customers whose sales range from $1 million to $200 million
a year. We have been called a community bank because in a number of respects we
may be likened to a small-town bank. The fact that we are located in Manhattan,
in the city known as the world's financial capital, home to global megabanks,
makes this characterization all the more distinctive. As we know, there have
been many bank mergers and even more bank acquisitions in recent years. As a
consequence, many business owners, having dealt with small or medium-sized banks
for years, are confused about where to go for money or advice. Their longtime
lender has linked up with another institution many times the size, and the
familiar faces are no longer there to serve them, all of which gives our bank
additional opportunities. At Merchants, small business owners can go directly to
one lending officer to get counsel or information on an array of topics. They
are not shunted from one person to another, nor do they have to deal with
strangers or relatively inexperienced personnel. Our clientele include third-
and fourth-generation customers of businesses to whom we originally loaned
money.
[PHOTO OMITTED]
Corporate Lending Division I, left to right: Janet L. Markel, Sr. V.P. &
Division Head (seated); Salvatore J. Chiarelli, V.P. (standing); Andrew S.
Baron, V.P. & Group Manager(seated); Joseph J. Nicolosi, V.P. (standing);
Leonard Katcher, V.P. (seated); Joseph P. Martin, Assistant V.P. (standing);
Noreen Suarez, Officers' Assistant (standing); Lester Nadel, V.P. & Group
Manager (seated); John Buoniconti, Assistant Cashier (standing); missing from
photo: Joseph J. Wynne, V.P. & Group Manager
Our credo is: "The better you understand a client's business, the better the
banker you will be for them. The numbers are important, but it is the people
that pay you back." We respond quickly, and we have no bureaucracy with which to
burden our clients and prospects. The
4
<PAGE>
same officers treat customers, large and
small, with the care and service they deserve, and we value each of our
relationships.
Our business continues to come from referrals from satisfied customers,
accountants, attorneys and investment bankers. Our ambition is not to become the
largest bank, but rather to be the strongest and safest while we continue to
expand our valuable customer base. This includes a cross section of the "middle
market" and encompasses many industries, including textiles, apparel and furs,
home furnishings, business and professional services and, very importantly, the
diamond and jewelry business.
[PHOTO OMITTED]
Corporate Lending Division III, left to right:
Gerald H. Attanasio, V.P. (standing); Michael D. Altman, Sr. V.P. (seated);
Joseph Radice, Assistant Cashier (standing); Joseph I. Edelman, V.P. (standing);
Rudolf H. Hertz, Vice Chairman (seated); Elliot Reiner, V.P. (standing)
We have been bankers for this industry since our early days on Maiden Lane
and the Bowery when the Markel Brothers operated a private bank and
subsequently, after 1926, as the Merchants Bank of New York. In the 1950's,
after World War II, when the diamond dealers of Holland, Belgium, Germany and
Austria had moved the major part of the industry to 47th Street between Fifth
and Sixth Avenue, we established our Midtown Branch. Today, many of our
customers are the second or third generation of that industry. They include
sight holders, importers, exporters and manufacturers of rough and polished
diamonds, gold jewelry, semiprecious stones and watches. Many of our officers at
our West 47th Street Branch have been with us for many decades. Rudolf H. Hertz,
our Vice Chairman, has been known in the industry since the 1950's. He has
traveled to other important diamond centers such as Israel and Antwerp, and was
invited to Kimberly South Africa where DeBeers Consolidated mines began the
modern Diamond Industry in the early 1900's. Many banks have participated in the
industry over the years. However, we have been a steady part of it since the
beginning of the century and have watched it expand to the size and importance
it holds in New York City today. We intend to continue to support our fine
customers for many years to come.
Our 100-year service to the
Diamond and Jewelry Industry
- --------------------------------------------------------------------------------
Members of the Asset and Liability
Committee, chaired by W. J. Cardew, meeting
with Ms. Calabro to review a proposal for
enhancement to our E.D.P. technology.
Funding requirements must be covered
through adequate cash flow availability.
[PHOTO OMITTED]
Left to right: Nancy J. Ostermann, V.P. & Comptroller (seated);
Spencer B. Witty, Chairman of the Board (standing);
Eric W. Gould, V.P. & Treasurer (seated);
William J. Cardew, Vice Chairman & C.O.O. (seated);
Rosemarie A. Calabro, Sr. V.P. &
Division Head, Bank Operations(seated)
5
<PAGE>
BRANCH BANKING
The roots of our Bank go back to the Markel Brothers who, in the 1870's,
formed a partnership in Hamburg, Germany which arranged travel for European
passengers to the United States. Very quickly, money transfers were added which
caused the first banking-type relationships with America. By 1881, the Markels
were firmly established in lower Manhattan as Markel Brothers, Private Bankers.
In 1926, after successfully surviving several banking crises and panics in the
early 1900's, Jacob Markel bought out his brother and founded The Merchants Bank
of New York, a New York public corporation which also became a member of the
Federal Reserve System. The new bank promptly established itself as a bank for
small and mid-sized businesses, especially for jewelers then domiciled in the
Maiden Lane and lower east side area, opening a branch office on Canal Street.
In 1935, with slow recovery from the great depression, the Merchants Bank of
New York took over the branch of the Chatham Phoenix bank at Broadway and Howard
Street, which became our main office for the next sixty years. This area was
mainly dominated by a thriving textile industry -- a perfect vehicle for our
middle market business.
In 1953, came our first move to the Midtown area where we located a branch on
West 47th Street. This office enabled us to expand our business with the
diamond, jewelry and watch industry, which we had already been serving. Again it
was our connection with the people from Europe which made us a popular choice of
these middle market customers.
In 1973, we established our branch at Fifth Avenue and 30th Street where the
rug and carpet business was centered, along with many other small and
medium-sized businesses involved in import and export. It was at this time that
our International Department became know all over the world through its "Letters
of Credit" service.
A few years later, we moved into the apparel and fashion business by opening
a branch at Sixth Avenue and 39th Street; and then a few years later we found a
booming middle market environment in Chelsea through our branch at Fifth Avenue
at 21st Street.
[PHOTO OMITTED]
Branch Administration, left to right:
Joseph R. Criscione, V.P. & Branch Manager, 434
Broadway; Simeon Kovacic, V.P. & Branch Manager,
295 Fifth Ave.; Michael S. Hassani, V.P. & Branch
Manager, 145 Fifth Ave.; Dennis J. Sheridan, V.P. &
Branch Manager, 275 Madison Ave.; Eugene J. Venier,
Sr. V.P. & Branch Division Head; John U. Doekker,
V.P. & Branch Manager, 62 W. 47th St.;
Raymond F. Tornabene, Assistant V.P. &
Branch Manager, 1040 Sixth Ave.; Larry I. Kohn,
Assistant V.P. & Branch Manager, 93 Canal St.
In 1992, we took over the deposits of the First New York Bank for Business
(the former First Women's Bank) and their small branch on Park Avenue. This was
an excellent test of our ability to attract business in the Grand Central area
and led to the establishment of our flagship branch at Madison Avenue at 40th
Street, which immediately became very successful. In addition, after having been
located in the downtown area for sixty years, our corporate headquarters was
also moved to Madison Avenue, as were most of our commercial lending activities.
This move reflects the expanded image of the Bank in the market place we serve.
The growth of our Bank is demonstrated from having only $1 million in assets
in the 1920's, to total assets today of over $1.2 billion. Our capital, which at
the beginning was a mere $100 thousand, is now in excess of $100 million. It was
all accomplished by internal growth. Today, our seven branches in Manhattan
efficiently service a myriad of customers. They offer a variety of products,
including checking, savings and money market accounts, certificates of deposits,
installment loans, credit cards and ATM cards, with emphasis on products for the
business client.
6
<PAGE>
Merchants New York Bancorp
SELECTED FINANCIAL DATA
This consolidated selected financial information for the Company is not intended
to be complete and is qualified in its entirety by more detailed financial
information and the financial statements contained elsewhere herein.
<TABLE>
<CAPTION>
For the Years Ended December 31, 1997 1996 1995 1994 1993(1) 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 82,820 $ 73,095 $ 69,569 $ 61,345 $ 60,301 $ 49,199 $ 53,279
Net interest income 42,567 39,640 37,662 36,238 35,280 31,044 29,089
Provision for loan losses 1,700 2,580 2,080 1,850 9,785 8,394 7,392
Net income 14,562 12,671 11,465 10,709 7,884 6,520 6,502
Earnings per share, basic (2 and 5) 1.49 1.27 1.15 1.08 0.79 0.66 0.66
Earnings per share, diluted (2 and 5) 1.46 1.26 1.14 1.07 0.78 0.65 0.65
Cash dividends declared
per share (2) 0.75 0.65 0.55 0.45 0.40 0.40 0.40
Total assets 1,235,742 1,137,799 1,027,191 1,001,386 1,006,348 1,085,955 713,606
Book value per share (2)
Without security valuation 10.06 9.67 9.07 8.47 7.84 7.44 7.19
With security valuation (3) 10.98 10.42 10.06 7.83 -- -- --
Financial Ratios:
Return on average assets 1.23% 1.21% 1.19% 1.10% 0.78% 0.89% 1.00%
Return on average equity
Average equity excluding
security valuation 14.91 13.45 13.01 13.22 10.36 8.91 9.17
Average equity including
security valuation (3) 13.82 12.53 12.59 13.30 10.36 8.91 9.17
Average equity to average assets (3) 8.90 9.66 9.43 8.35 7.54 9.93 10.75
Dividend payout ratio 50.35 51.10 47.71 41.74 50.38 60.91 61.06
Net charge-offs to average loans 0.35 1.23 0.65 0.96 2.34 2.48 2.70
Loan loss reserves to total loans 1.86 1.89 2.39 2.31 2.46 1.48 1.12
Non-performing loans to
loan loss reserves 2.58 19.74 33.45 21.19 26.39 42.40 55.50
Risk-Based Capital Ratio: (4)
Tier I 18.61 20.41 21.61 19.81 18.59 16.82 --
Total 19.80 21.62 22.86 21.06 19.84 17.82 --
</TABLE>
(1) Holding Corporation effective 7-1-93. All prior years are for the Merchants
Bank of New York only.
(2) Based upon retroactive adjustments for 5-for-4 stock split paid July 20,
1988, 3-for-2 stock split paid May 30, 1990, and 2-for-1 stock splits paid
October 2, 1995 and October 7, 1997.
(3) Per SFAS No. 115, effective in 1994, a valuation account for unrealized
gains (losses) on investments available for sale are included in equity.
(4) The Federal Reserve Board capital guidelines for bank holding companies
require minimum risk-based ratios of Tier 1 and total capital to
risk-weighted assets to be 4.0% and 8%, respectively, and a minimum
leveraged-based ratio of Tier 1 capital to total average quarterly assets
generally of at least 4.0%. The ratios above were calculated using the
guidelines in effect at each reporting date.
(5) Per SFAS No. 128, effective in 1997, the earnings per share calculation and
disclosure have been revised. EPS on this schedule has been retroactively
revised to conform to this change.
7
<PAGE>
Merchants New York Bancorp
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 1997 and 1996
Overview
1997 net income increased by 15% to $14.6 million, over 1996's earnings of
$12.7 million. Net income per share continued to increase, up $0.22 to $1.49 per
share versus $1.27 per share in 1996.
Interest Income
Total interest income generated in 1997 was $82.8 million, up 13.3% from the
1996 total of $73.1 million. The largest component of interest in 1997 was
contributed by the investment portfolio, with $52.6 million versus $47.5 million
in 1996. This was the result of an increased investment portfolio, which on
average grew by $82.3 million to $756.1 million from $673.8 million in 1996. The
additional funding to support this was achieved through increased deposits,
repurchase agreements and other short-term borrowings. On average, approximately
$12 million per month of principal repayments received from mortgage-backed
securities were reinvested in both the investment and loan portfolios. The non
tax adjusted interest return for the investment portfolio decreased slightly to
6.95% from 7.05%.
Loan interest income increased $4.5 million to $29.8 million in 1997 versus
$25.3 million in 1996. The average balance for loans increased to $325.3 million
in 1997 from $280.4 million in 1996, causing the rise in the loan income.
In maximizing cash management, the average federal funds sold in 1997
increased to $8.4 million versus $6.1 million in 1996. This contributed $460,000
to interest income, up $140,000 from the $320,000 earned in 1996.
Interest Expense
Total interest expense increased 20%, or $6.8 million to $40.3 million from
$33.5 million in 1996. This is the result of the average cost of
interest-bearing liabilities increasing to 4.93% in 1997, from 4.73% in 1996, as
well as a $109 million increase in average total interest-bearing liabilities to
$816 million from $707 million in 1996. The highest contributor to this was
$50.7 million of securities sold under repurchase agreements which increased to
an average of $166.3 million versus $115.6 million. Average certificates of
deposit balances increased to $416.2 million in 1997 from $384 million in 1996,
with the average rate paid increasing approximately 15 basis points to 5.45% in
1997 from 5.30% in 1996.
Other short-term borrowings interest expense was $1.4 million in 1997, versus
$635,000 in 1996. Composed of Federal funds purchased, Federal Home Loan Bank
term advances and U.S. Treasury demand notes (excess funds which are acquired
from the Treasury), the average balances increased $14 million in 1997 from
1996.
ANALYSIS OF NET INTEREST EARNINGS
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Federal funds sold $ 8,373 $ 460 5.49% $ 6,128 $ 320 5.22% $ 3,115 $ 182 5.84%
Investment securities
(book value):
Taxable 684,916 48,226 7.04 603,188 43,158 7.15 537,976 38,154 7.09
Tax-exempt* 71,135 4,332 6.09 70,600 4,316 6.11 71,728 4,629 6.45
Total 756,051 52,558 6.95 673,788 47,474 7.05 609,704 42,783 7.02
Loans (net of
unearned discounts) 325,298 29,771 9.15 280,361 25,288 9.02 276,649 26,604 9.62
Other 531 31 5.84 268 13 4.85 -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total $1,090,253 $82,820 7.60% $960,545 $73,095 7.61% $889,468 $69,569 7.82%
- ------------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities
NOW $ 41,904 $ 951 2.27% $38,219 $ 871 2.28% $ 38,235 $ 876 2.29%
Savings accounts 24,277 724 2.98 25,485 761 2.99 28,146 833 2.96
Money market accounts 141,671 4,774 3.37 131,974 4,443 3.37 116,179 3,835 3.30
Time certificates
of deposit 416,221 22,687 5.45 384,033 20,363 5.30 389,747 21,489 5.51
Securities sold under
repurchase agreements 166,294 9,680 5.82 115,601 6,381 5.52 67,991 4,062 5.97
Other short-term borrowings 25,681 1,437 5.60 11,721 636 5.42 13,247 812 6.13
- ------------------------------------------------------------------------------------------------------------------
Total $ 816,048 $40,253 4.93% $707,033 $33,455 4.73% $653,545 $31,907 4.88%
- ------------------------------------------------------------------------------------------------------------------
Net interest-
earning assets 274,205 253,512 235,923
==================================================================================================================
Net yield on interest-
earning assets $1,090,253 $42,567 3.90% $960,545 $39,640 4.13% $889,468 $37,662 4.23%
==================================================================================================================
</TABLE>
Non accrual loans are included in Interest-Earning Assets.
*Yields are not computed on a tax equivalent basis.
8
<PAGE>
Merchants New York Bancorp
Net Interest Income
Net interest income increased to $42.6 million in 1997 from $39.6 million in
1996. This is the amount by which interest income on interest-earning assets
exceeds interest expense on interest-bearing liabilities and is the most
significant component of the Bank's earnings. Net interest income is a function
of several factors including changes in the volume, mix of earning assets,
funding sources and market interest rates. While management policies influence
these factors, they are also influenced by external forces including customer
needs and demands, competition, the economic policies of the Federal government
and monetary policies of the Federal Reserve Board.
The following table provides further analysis of the increase in net interest
income during 1997, 1996 and 1995 and indicates that the increases were
primarily due to higher amounts of interest earned on interest-earning assets
than was paid on interest-bearing liabilities over the same time period. The
changes in interest income and interest expense have been allocated to rate and
volume changes in proportion to the absolute dollar amounts of the change in
each.
CHANGES IN INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
Increase (Decrease) Increase (Decrease)
- ------------------------------------------------------------------------------------------------------------------
Volume Rate Change Volume Rate Change
- ------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans (net of unearned discounts) $ 4,108 $ 362 $4,470 $ 378 $(1,682) $(1,304)
Investment securities (book value):
Taxable 5,519 (451) 5,068 4,658 346 5,004
Tax-exempt 291 (275) 16 (73) (240) (313)
- ------------------------------------------------------------------------------------------------------------------
Total investments 5,810 (726) 5,084 4,585 106 4,691
Other interest income 123 48 171 159 (21) 138
- ------------------------------------------------------------------------------------------------------------------
Total interest income 10,041 (316) 9,725 5,122 (1,597) 3,525
- ------------------------------------------------------------------------------------------------------------------
Interest Expense
Savings and time deposits:
NOW 84 (4) 80 -- (5) (5)
Savings accounts (36) (1) (37) (79) 7 (72)
Money market accounts 327 4 331 530 78 608
Time certificates of deposit 1,743 581 2,324 (312) (813) (1,125)
- ------------------------------------------------------------------------------------------------------------------
Total 2,118 580 2,698 139 (733) (594)
- ------------------------------------------------------------------------------------------------------------------
Borrowings:
Securities sold under
repurchase agreements 2,934 365 3,299 2,649 (330) 2,319
Other short-term borrowings 777 24 801 (104) (73) (177)
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 5,829 969 6,798 2,684 (1,136) 1,548
- ------------------------------------------------------------------------------------------------------------------
Net interest income $ 4,212 $(1,285) $2,927 $2,438 $ (461) $ 1,977
==================================================================================================================
</TABLE>
Other Income, Other Expenses, Provision for Loan Losses and Taxes
Other income decreased $103,000, due principally to the drop in gains on
sales of securities in 1997 to $22,000 versus $372,000 in 1996. This was offset
by an increase of almost $300,000 to $2.7 million in International Department
fees in 1997, against $2.4 million in 1996.
Other expenses increased $2 million, or 9.3%, in 1997 versus 1996. There were
normal increases in salaries of $233,000, $419,000 in benefits due principally
to pensions, $568,000 in professional fees, including consulting services and
$242,000 in upgrading data processing systems, partially to address Year 2000
issues. Financial expenditures directly related to ensuring that the Bank's
computer systems are Year 2000 compliant will not be significant.
The provision for loan losses decreased by almost $900,000 in 1997 to $1.7
million, as opposed to $2.6 million in 1996, reflecting reflecting lower charge
offs and less nonaccrual loans in 1997.
The provision for income taxes decreased by $256,000 in 1997 versus 1996.
Although the Bank has increased their profitability, the taxes have been reduced
by tax planning considerations.
Liquidity
Liquidity measures the Bank's ability to satisfy current and future
obligations and commitments as they become due. Funds to meet liquidity needs
are raised through the sale or maturity of an asset or through increased
deposits or borrowing.
For the year ended December 31, 1997, average cash and short-term investments
totaled $58 million, versus $53.1 million in 1996, accounting for 4.9% and 5% of
the Bank's total average assets, respectively. Through principal repayments and
redemptions, the investment portfolio generated $156.5 million in 1997 and
$149.3 million in 1996 for reinvestment and/or liquidity. Furthermore, $10
million in 1997 and $61 million in 1996 were the result of investment sales to
take advantage of interest rate arbitrage. Also, having 89% of the loan
portfolio priced to float with the prime rate allows immediate adjustments upon
an interest rate change, which impacts the interest rate gap.
9
<PAGE>
Merchants New York Bancorp
On the liability side, the primary source of funds available to meet
liquidity needs is the Bank's core deposit base. The Bank continues to retain a
substantial proportion of its average deposits in the form of
non-interest-bearing funds, with 27% in both years, or $227.7 million in 1997
and $209.8 million in 1996. The average balance of total deposits increased to
$851.8 million in 1997, from $789.5 million in 1996. Interest-bearing
liabilities are priced competitively, with a slight premium paid for time
certificates of deposit, 35%, or $223 million of which are in the 0 to 3 month
maturity range and 28%, or $178.3 million, are in the 3 to 12 month range. While
we include savings accounts and NOW accounts in the 0 to 3 months category on
the Interest Rate Sensitivity Gap table, the actual repricing on these is at our
discretion. Taking this into consideration, the reflected liability sensitivity
of $149 million would be mitigated by $72 million of combined NOW and savings
accounts balances included there and which would not change at the same rate as
other interest-bearing deposits. As a balance between our assets and the deposit
liabilities, our average investment portfolio of $769.2 million in 1997 and
$686.6 million in 1996, can be used as collateral for repurchase agreements, of
which we used, an average of $166.3 million in 1997 and $116 million in 1996.
INTEREST RATE SENSITIVITY GAP ANALYSIS
As of December 31, 1997
(In Thousands)
<TABLE>
<CAPTION>
Less Than 3 to 12 1 to 5 Over
Interest-Earning Assets 3 Months Months Years 5 Years Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Federal funds sold $ 67,000 $ -- $ -- $ -- $ 67,000
Securities available for sale* 35,419 117,406 347,471 27,036 527,332
Securities held to maturity* 8,752 14,610 161,754 30,055 215,171
Loans 317,546 5,037 5,352 3,873 331,808
- --------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 428,717 $ 137,053 $ 514,577 $ 60,964 $1,141,311
========================================================================================================
Interest-Bearing Liabilities
Interest-bearing deposits 440,353 178,305 17,867 -- 636,525
Securities sold under
repurchase agreements 125,000 35,000 -- -- 160,000
Other short-term borrowings 12,180 20,000 -- -- 32,180
- --------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 577,533 $ 233,305 $ 17,867 $ -- $ 828,705
========================================================================================================
Net interest rate sensitivity gap (148,816) (96,252) 496,710 60,964 312,606
Cumulative gap position (148,816) (245,068) 251,642 312,606 --
Cumulative gap/total earning assets:
At December 31, 1997 (13.04) % (21.47)% 22.05% 27.39%
At December 31, 1996 (16.46) % (15.69)% 23.66% 27.84%
</TABLE>
*Adjusted for weighted average maturity dates and prepayments for mortgage back
securities. All securities are disclosed at book value.
Market Risk Management
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates/prices such as interest rates, foreign currency
exchange rates, commodity prices and equity prices. The Bank's primary market
risk exposure is interest rate risk, with foreign exchange, commodity and equity
price risk not arising in the ordinary course of business. The ongoing
monitoring and management of this risk is an important component of the Bank's
asset/liability process which is governed by policies, established by its Board
of Directors, that are reviewed and approved annually. The Board of Directors
delegates responsibility for carrying out the asset/liability management
policies to the Asset/Liability Committee (ALCO). In this capacity, ALCO
develops guidelines and strategies impacting the Banks asset/liability
management related activity based upon estimated market risk sensitivity, policy
limit and overall market interest rate levels/trends.
The objectives of the Bank's interest rate risk management activities are to
define an acceptable level of risk based on the Bank's business focus, capital
and liquidity requirements and to manage interest rate risk and maintain net
interest margins in changing rate environments. Management seeks to reduce the
vulnerability of the Bank's operating results to changes in interest rates and
to manage the ratio of interest rate sensitive assets to interest rate sensitive
liabilities within specified maturities or repricing periods. The Bank does not
currently engage in trading activities or use off balance sheet derivative
instruments to control interest rate risk. The Board of Directors have
authorized management to use derivatives if management deems it beneficial to
the Bank.
Even with the Bank's active role in managing interest rate risk, the
potential for changing interest rates is an uncertainty that could have an
adverse effect on the earnings of the Bank. When interest-bearing liabilities
mature or reprice more quickly than interest-earning assets in a given period, a
significant increase in market interest rates could adversely affect net
interest income. Conversely, in a falling interest rate environment, these same
interest-bearing liabilities reprice more quickly than earning assets, producing
a beneficial effect on our net interest income.
In managing the Bank's asset/liability position, management attempts to
minimize interest rate risk while enhancing net interest margins. Management
continues to believe that the increased net interest income resulting from a
mismatch in maturity of the Bank's asset and liability portfolio can, during
periods of declining or stable interest rates and periods
10
<PAGE>
Merchants New York Bancorp
in which there is a substantial positive difference between long- and short-term
interest rates, provide high enough returns to justify the increased exposure to
sudden and unexpected increases in interest rates. During 1997, the Bank
significantly increased utilization of short-term borrowings to fund the
purchase of longer-term mortgage-backed securities. As a result, the Bank's
results of operations and net portfolio values remain vulnerable to increases in
interest rates and to fluctuations in the difference between long- and
short-term interest rates.
Consistent with its asset/liability management philosophy, the Bank has taken
several steps to manage its interest rate risk. First, the Bank's loan portfolio
of $331.8 million consists of virtually all adjustable rate loans. Second, a
majority of the Bank's securities are U.S. Government and Agency mortgage-backed
securities, with $663.7 million, or 87.7%, of these securities having expected
weighted average maturities of approximately five years or less. Third, the Bank
has a significant amount of deposits which are non-interest bearing or are only
minimally sensitive to interest rate fluctuations, including $227.7 million in
average demand deposits and $207.8 million in average money market, NOW and
savings accounts.
One approach used by management to quantify interest rate risk is the net
portfolio value (NPV) analysis. In essence, this approach calculates the
difference between the present value of the liabilities and the present value of
expected cash flows from assets and off balance sheet contracts. The following
table sets forth, as of December 31, 1997, an analysis of the Bank's interest
rate risk as measured by the estimated changes in NPV resulting from
instantaneous and sustained parallel shifts in the yield curve (_+200 basis
points measured in 100 basis point increments). For comparative purposes, the
table also shows the estimated percentage increase (decrease) in NPV at December
31, 1996.
NET PORTFOLIO VALUE ANALYSIS FOR INTEREST RATE RISK
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------------------
Estimated Increase(Decrease)in NPV* Percent Increase
Change in Interest Rates Estimated NPV --------------------------------------- (Decrease) in NPV at
(Basis Points) Amount Amount Percent December 31, 1996
- --------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+200 151,894 (23,129) (13)% (15)%
+100 165,757 (9,266) (5)% (7)%
-- 175,023 -- -- --
- -100 177,007 1,984 1% 4%
- -200 178,937 3,914 2% 5%
</TABLE>
* Pre-tax
Certain assumptions are employed in preparing the preceding table. These
assumptions relate to interest rates, loan prepayment rates, deposit decay rate
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 the interest rates change in the designated
amounts, there can be no assurance that the Bank's assets and liabilities would
perform as set forth above. In addition, a change in U.S. Treasury rates in the
designated amounts accompanied by a change in the slope of the Treasury yield
curve would cause significantly different changes to the NPV than indicated in
the chart.
Capital
The capital base of a bank is a significant measure of the strength of a
financial institution. The Bank has seen a steady capital growth over the past
several years, with our risk-based ratios, as shown below, in excess of the
required "Well Capitalized" level of 10%. The Bank was also in excess of the
required leverage ratio of 4%, with 8.03% and 8.65% for the years ended December
31, 1997 and 1996, respectively.
The primary source of capital growth is through retention of earnings.
Retained profits increased to $80.0 million at December 31, 1997 as compared to
$72.9 million as of December 31, 1996, resulting from the retention of $7.2
million of earnings after paying cash dividends to shareholders of $7.3 million.
The Bank's Board of Directors declared a dividend of $0.18 for the first and
second quarters of 1997, with an increase to $0.20 for the third and fourth
quarters. We continue to believe that cash dividends are an important component
of shareholder value and that at its current level of performance, this
quarter's 258th consecutive dividend payment will continue into the future. The
overall increase of $2.7 million in stockholders' equity was impacted by an
upward change in the market value of the Investment portfolio on December 31,
1997 versus December 31, 1996 of $1.5 million, net of tax effect. The market
valuation of the securities reflects only one point in time and can only be
realized upon their sale. With our strong liquidity and excellent basic capital
strength, we only sell securities for strategic business reasons.
In August 1997, the Board of Directors approved for the second time in the
Bank's history, the purchase of Treasury stock, a buy back program of the
Company's common stock. 5% of the outstanding shares (or approximately 500,000
shares) was approved for each program, which is a combined total of about 1
million shares, or 10% of the outstanding shares. As of December 31, 1997,
342,430 shares have been repurchased, with 24,881 shares being reissued for
shares issued through the stock option plan. The net total cost of the shares is
$6.7 million, which was a reduction of shareholders' equity.
December 31, December 31,
Required 1997 1996
- --------------------------------------------------------------------------------
Tier I Risk-Based Capital Ratio 4.00% 18.61% 20.41%
Total Risk-Based Capital Ratio 8.00 19.80 21.62
Leverage Ratio 4.00 8.03 8.65
11
<PAGE>
Merchants New York Bancorp
Comparison of the Years Ended December 31, 1996 and 1995
Overview
1996 net income increased by more than 10% to $12.7 million, over 1995's
earnings of $11.5 million. Earnings per share continued to increase, up $0.12 to
$1.27 per share versus $1.15 per share in 1995.
Interest Income
Total interest income generated in 1996 was $73.1 million, up 5% from the
1995 total of $69.6 million. The largest component of interest in 1996 was
contributed by the investment portfolio, with $47.5 million versus $42.8 million
in 1995. This is principally the result of an increased investment portfolio,
which on average increased by $64.1 million to $673.8 million from $609.7
million in 1995. The additional funding to support this was achieved through
increased deposits and repurchase agreements. On average, approximately $10
million per month of principal repayments received from mortgage-backed
securities were reinvested. In addition, there was a slight increase in non tax
adjusted interest return to 7.05% from 7.02%.
Loan interest income decreased $1.3 million to $25.3 million in 1996 versus
$26.6 million in 1995. While the average balance for loans actually increased to
$280 million in 1996 from $276.6 million in 1995, the decrease was caused by the
lower average prime rate of 8.28% in 1996, down from 8.83% in 1995.
In maximizing cash management, the average federal funds sold in 1996
increased to $6 million versus $3 million in 1995. This contributed $320,000 to
interest income, up $138,000 from the $182,000 earned in 1995.
Interest Expense
Total interest expense increased 5%, or $1.6 million to $33.5 million from
$31.9 million in 1995. While the average cost of interest-bearing liabilities
declined to 4.73% in 1996, from 4.88% in 1995, there was a $54 million increase
in average total interest-bearing funds available to $707 million from $653
million in 1995. The principal contributor to this was $47 million greater use
of securities sold under repurchase agreements which increased to an average of
$115 million versus $68 million to support the higher volume in the investment
portfolio. Average interest-bearing deposits increased to $579.7 million in 1996
from $572.3 million in 1995, with the average rate paid declining approximately
15 basis points to 4.56% in 1996 from 4.71% in 1995.
Other interest expense was $636,000 in 1996, versus $812,000 in 1995.
Composed of federal funds purchased and demand notes to the U. S. Treasury
(excess funds which are acquired from the Treasury), the average balances
decreased $1.6 million in 1996 from 1995.
Net Interest Income
Net interest income increased to $39.6 million in 1996 from $37.7 million in
1995. This is the amount by which interest income on interest-earning assets
exceeds interest expense on interest-bearing liabilities and is the most
significant component of the Bank's earnings. Net interest income is a function
of several factors including changes in the volume and mix of earning assets and
funding sources and market interest rates. While management policies influence
these factors, they are also influenced by external forces including customer
needs and demands, competition, the economic policies of the federal government
and monetary policies of the Federal Reserve Board.
Other Income, Other Expenses, Provision for Loan Losses and Taxes
Other income increased $132,000, due principally to the increase in gains on
sales of securities in 1996 of $372,000 versus $128,000 in 1995. Additionally,
$97,000 was generated by other fee income, based on increased volume. These
increases were offset by a decrease due to lower volume, of $219,000 in
International Department fees between 1996 and 1995.
Other expenses decreased $467,000, or 2%, in 1996 versus 1995. This is a
direct result of a reduction of over $900,000 in our FDIC fees, due to the
change in the amount charged by the FDIC for Well Capitalized banks. There was
also a reduction of $200,000 in operations losses, due to a write down in 1995
for the impending sale of Other Real Estate Owned. The decreases were offset by
normal increases in salaries of $134,000, $114,000 in benefits, due to pensions,
and almost $200,000 in net occupancy costs due to the Madison Avenue branch and
corporate headquarters.
The provision for loan losses increased by $500,000 in 1996 to $2,580,000
versus $2,080,00 in 1995 reflecting the slightly higher average loans in 1996.
The provision for income taxes increased by $871,000 in 1996 versus 1995 due
to increased profitability.
Liquidity and Asset/Liability Management
Liquidity measures the Bank's ability to satisfy current and future
obligations and commitments as they become due. Funds to meet liquidity needs
are raised through the sale or maturity of an asset or through increased
deposits or borrowing.
Asset and liability management insures that the Bank has the ability to
satisfy current and future obligations, that commitments will be met at a
reasonable cost and that a net interest spread will be maintained to produce
earnings.
For the year ended December 31, 1996, average cash and short-term investments
totaled $53.1 million, and $46.6 million in 1995, accounting for 5% and 4.8% of
the Bank's total average assets, respectively. Through principal repayments and
redemptions, the investment portfolio generated $149.3 million in 1996 and $94.4
million in 1995 for reinvestment
12
<PAGE>
and/or liquidity. Furthermore, $61 million in 1996 and $48 million in 1995 was
the result of investment sales to take advantage of interest rate arbitrage.
Also, having 95% of the loan portfolio priced to float with prime allows
immediate adjustments upon an interest rate change, which impacts the interest
rate gap.
On the liability side, the primary source of funds available to meet
liquidity needs is the Bank's core deposit base. The Bank continues to retain a
substantial proportion of its average deposits in the form of
non-interest-bearing funds, with 27%, or $209.8 million, in 1996 and 25%, or
$195 million, in 1995. The average balance of total deposits increased to $789.5
million in 1996, from $766.9 million in 1995. Interest-bearing liabilities are
priced competitively, with a slight premium paid for time certificates of
deposit, 42%, or $169.5 million, of which are in the 0 to 3 month maturity range
and 53%, or $214 million, are in the 3 to 12 month range. While we include
savings accounts and NOW accounts in the 0 to 3 months category on the Interest
Rate Sensitivity Gap table, the actual repricing on these is at our discretion.
Taking this into consideration, the reflected liability sensitivity of $171
million would be mitigated by $69.2 million of combined NOW and savings accounts
balances included there and which would not change at the same rate as other
interest-bearing deposits. As a balance between our assets and the deposit
liabilities, our average investment portfolio of $687 million in 1996 and $615
million in 1995, can be used as collateral for repurchase agreements, of which
we used, an average of $116 million in 1996 and $68 million in 1995.
Capital
The capital base of a bank is a significant measure of the strength of a
financial institution. The Bank has seen a steady capital growth over the past
several years, with our risk-based ratios in excess of the required "Well
Capitalized" level of 10%. The Bank was also in excess of the required leverage
ratio of 4%, with 8.65% and 9.02% for the years ended December 31, 1996 and
1995, respectively.
The primary source of capital growth is through retention of earnings.
Retained profits increased to $72.9 million at December 31, 1996 as compared to
$66.7 million as of December 31, 1995, resulting from the retention of $6.2
million of earnings after paying dividends of $6.5 million. The Bank's Board of
Directors declared a dividend of $0.15 for the first and second quarters of
1996, with an increase to $0.18 for the third and fourth quarters. We continue
to believe that cash dividends are an important component of shareholder value
and that at its current level of performance, this quarter's 254th consecutive
dividend payment will continue into the future. The overall increase of $3.4
million in stockholders' equity was impacted by a change in the market value of
the investment portfolio on December 31, 1996 versus December 31, 1995 of $2.4
million, net of tax effect. The market valuation of the securities reflects only
one point in time and can only be realized upon their sale. With our strong
liquidity and excellent basic capital strength, we need only sell for strategic
business reasons.
In August 1996, the Board of Directors approved for the first time in the
Bank's history, a buy back program of the Company's common stock. Up to 5% of
the outstanding shares (or approximately 500,000 shares) have been approved for
this program. As of December 31, 1996, 35,780 shares have been repurchased, at a
cost of $553,000, which was a reduction of shareholders' equity.
PRICE RANGE OF THE COMPANY'S
COMMON STOCK
The Company's common stock is traded on the over-the-counter NASDAQ National
market. The Company's symbol is "MBNY." The high and low bid prices for each
quarterly period during the past two years were as follows:
PRICE RANGE OF COMMON STOCK
1997* 1996*
- -------------------------------------------------------------------------------
HIGH LOW HIGH LOW
- -------------------------------------------------------------------------------
First Quarter $17 1/2 $15 3/4 $15 1/2 $14 1/2
Second Quarter 25 17 1/2 14 3/4 14 1/2
Third Quarter 28 5/8 21 7/8 15 13
Fourth Quarter 47 7/8 25 16 1/4 15
*All quarters are restated to reflect the 2:1 stock split.
On February 27, 1998, the closing bid and asked prices reported for the
common stock were $38 3/4 and $39 1/2, respectively. These quotations reflect
inter-dealer prices without retail mark up, mark down or commission and may not
represent actual transactions.
13
<PAGE>
Merchants New York Bancorp
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks (note 2) $ 51,209,936 $ 57,840,059
Federal funds sold 67,000,000 26,000,000
Investment securities (note 1):
Securities available for sale at market value (note 3) 541,634,211 561,600,523
Investment securities (market value $219,902,000 in 1997
and $169,340,000 in 1996) (note 4) 215,170,777 166,908,260
- -----------------------------------------------------------------------------------------------------------------
Total investment securities 756,804,988 728,508,783
- -----------------------------------------------------------------------------------------------------------------
Loans (net of unearned discounts of $93,768
and $56,030 in 1997 and 1996, respectively) (note 5) 331,807,721 297,080,725
Less allowance for loan losses 6,167,157 5,616,971
- -----------------------------------------------------------------------------------------------------------------
Total loans, net 325,640,564 291,463,754
- -----------------------------------------------------------------------------------------------------------------
Bank premises and equipment (note 6) 6,937,748 6,767,568
Customers' liability on acceptances 14,374,602 13,806,691
Other assets 13,774,397 13,411,846
- -----------------------------------------------------------------------------------------------------------------
Total assets $1,235,742,235 $1,137,798,701
=================================================================================================================
Liabilities and Stockholders' Equity
Deposits (note 7):
Demand (non-interest-bearing) $ 267,561,571 $ 253,695,143
NOW 47,295,963 44,431,219
Savings 24,736,235 24,763,303
Money market 145,336,114 146,168,644
Time 419,157,042 406,635,101
- -----------------------------------------------------------------------------------------------------------------
Total deposits 904,086,925 875,693,410
- -----------------------------------------------------------------------------------------------------------------
Securities sold under repurchase agreements (notes 3, 4 and 8) 160,000,000 120,000,000
Acceptances outstanding 14,374,602 13,806,691
Other short-term borrowings (note 8) 32,179,723 7,199,039
Other liabilities 18,906,588 17,563,929
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 1,129,547,838 1,034,263,069
- -----------------------------------------------------------------------------------------------------------------
Stockholders' Equity (notes 1, 3 and 11)
Capital stock -- $.001 par value; 10,000,000 shares authorized;
9,989,332 and 4,987,561 shares issued and outstanding in
1997 and 1996, respectively (a) 9,989 4,988
Surplus 23,889,352 23,749,629
Undivided profits 80,016,764 72,915,689
Less: Treasury stock at cost (317,549 shares in 1997
and 35,780 shares in 1996) 6,665,520 552,910
Net unrealized appreciation on securities
available for sale, net of tax effect 8,943,812 7,418,236
Commitments and contingent liabilities (note 12) -- --
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 106,194,397 103,535,632
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,235,742,235 $1,137,798,701
=================================================================================================================
</TABLE>
(a) 1996 share amounts do not reflect the 2:1 stock split, effective on October
7, 1997.
See accompanying notes to consolidated financial statements.
14
<PAGE>
Merchants New York Bancorp
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Interest on loans $29,771,225 $25,300,755 $26,604,396
Interest and dividends on investment securities:
U.S. Government obligations 47,631,337 43,022,459 38,153,806
Other investments 4,926,841 4,451,474 4,628,811
Other interest income 491,166 320,297 182,593
- -----------------------------------------------------------------------------------------------------------------
Total interest and dividend income 82,820,569 73,094,985 69,569,606
- -----------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits (note 7) 29,135,924 26,438,521 27,032,507
Interest on securities sold under
repurchase agreements 9,680,285 6,380,930 4,062,368
Other interest expense 1,437,247 635,745 812,528
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 40,253,456 33,455,196 31,907,403
- -----------------------------------------------------------------------------------------------------------------
Net interest income 42,567,113 39,639,789 37,662,203
Provision for loan losses (note 5) 1,700,000 2,580,000 2,080,000
- -----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 40,867,113 37,059,789 35,582,203
- -----------------------------------------------------------------------------------------------------------------
Other income:
Service fees 1,310,426 1,350,387 1,341,407
International department fees 2,721,033 2,429,711 2,648,337
Investment securities gains on sales (note 3) 21,901 372,396 127,697
Other 1,129,255 1,133,659 1,036,520
- -----------------------------------------------------------------------------------------------------------------
Total other income 5,182,615 5,286,153 5,153,961
- -----------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries 10,855,196 10,622,376 10,488,017
Employee benefits (note 10) 2,949,066 2,530,256 2,416,369
Occupancy (note 12) 2,589,996 2,520,459 2,321,271
Equipment and data processing 1,710,850 1,468,405 1,247,313
Other 6,227,854 5,123,151 6,258,575
- -----------------------------------------------------------------------------------------------------------------
Total other expenses 24,332,962 22,264,647 22,731,545
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 21,716,766 20,081,295 18,004,619
Income tax expense (note 9) 7,154,608 7,410,524 6,539,189
- -----------------------------------------------------------------------------------------------------------------
Net income $14,562,158 $12,670,771 $11,465,430
=================================================================================================================
Earnings per share, basic (note 1) $1.49 $1.27 $1.15
Earnings per share, diluted $1.46 $1.26 $1.14
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
Merchants New York Bancorp
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital stock:
Balance at beginning of year $ 4,988 $ 4,982 $ 2,484
Adjustment due to stock split (note 1) 4,994 -- 2,484
Shares issued through exercise of Employee Stock
Options: 14,210 shares, 12,446 shares and 28,272
shares in 1997, 1996 and 1995, respectively (note 11) 7 6 14
- -----------------------------------------------------------------------------------------------------------------
Balance at end of year 9,989 4,988 4,982
=================================================================================================================
Surplus:
Balance at beginning of year 23,749,629 23,626,181 23,344,444
Adjustment due to stock split (note 1) (4,994) -- (2,484)
Excess over par value on shares issued through the
exercise of Employee Stock Options (note 11) 144,717 123,448 284,221
- -----------------------------------------------------------------------------------------------------------------
Balance at end of year 23,889,352 23,749,629 23,626,181
=================================================================================================================
Undivided profits:
Balance at beginning of year 72,915,689 66,719,678 60,724,767
Net income 14,562,158 12,670,771 11,465,430
Cash dividends paid (note 11) (7,332,066) (6,474,760) (5,470,519)
Common stock issued from treasury stock (129,017) -- --
- -----------------------------------------------------------------------------------------------------------------
Balance at end of year 80,016,764 72,915,689 66,719,678
=================================================================================================================
Treasury stock:
Balance at beginning of year (552,910) -- --
Repurchase of 306,650 and 35,780 shares of
common stock in 1997 and 1996, respectively (6,492,331) (552,910) --
Issuance of 24,881 shares in 1997
of common stock 379,721 -- --
- -----------------------------------------------------------------------------------------------------------------
Balance at end of year (6,665,520) (552,910) --
=================================================================================================================
Net unrealized appreciation (depreciation) on securities
available for sale, net of tax effect (note 3):
Balance at beginning of year 7,418,236 9,803,762 (6,337,361)
Changes during the year 1,525,576 (2,385,526) 16,141,123
- -----------------------------------------------------------------------------------------------------------------
Balance at end of year 8,943,812 7,418,236 9,803,762
=================================================================================================================
Stockholders' equity:
Balance at beginning of year 103,535,632 100,154,603 77,734,334
Changes during the year, net 2,658,765 3,381,029 22,420,269
- -----------------------------------------------------------------------------------------------------------------
Balance at end of year $106,194,397 $103,535,632 $100,154,603
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
Merchants New York Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 14,562,158 $ 12,670,771 $ 11,465,430
- -----------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 1,043,804 938,577 697,047
Amortization of premium, net of discounts 6,009,043 4,584,407 4,588,485
Provision for loan losses 1,700,000 2,580,000 2,080,000
Gains on sales of investments (21,901) (372,396) (127,697)
Loss on disposal of fixed assets -- -- 68,691
Discounted rental on leases (52,668) (41,435) (24,171)
Increase (decrease) in unearned discounts 37,737 (3,037) (20,829)
(Decrease) increase in taxes payable (204,170) (384,776) 926,443
Decrease (increase) in interest receivable 10,848 (239,615) 198,277
Increase in interest payable 1,329,460 670,487 1,379,426
Increase in accrued expenses 959,750 389,508 421,394
Increase in other assets (487,684) (484,152) (31,253)
Increase (decrease) in other liabilities 271,434 (20,044) (1,879,683)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 25,157,811 20,288,295 19,741,560
- -----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in Federal funds sold (41,000,000) 26,000,000 (5,000,000)
Proceeds from redemptions of
securities available for sale 121,563,684 126,299,677 93,027,263
Proceeds from sales of securities available for sale 10,175,000 61,013,830 47,559,688
Purchase of securities available for sale (149,596,774) (189,230,745) (134,424,407)
Proceeds from redemptions of investment securities 34,826,437 22,961,868 1,397,591
Purchase of investment securities (50,687,265) (128,370,905) (5,478,972)
Net increase in customer loans (35,914,547) (29,620,410) (4,550,367)
Net increase in bank premises and equipment (1,099,699) (946,315) (2,759,219)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (111,733,164) (111,893,000) (10,228,423)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits,
NOW, savings and money market accounts 15,871,574 57,558,967 (6,129,692)
Net increase (decrease) in certificates of deposit 12,521,941 25,736,755 (33,064,372)
Net increase in securities sold under
repurchase agreements 40,000,000 14,935,000 35,065,000
Net increase in other short-term borrowings 24,980,684 7,199,039 --
Proceeds from issuance of common stock 395,428 123,454 284,235
Purchase of Treasury stock (6,492,331) (552,910) --
Dividends paid (7,332,066) (6,474,760) (5,470,519)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 79,945,230 98,525,545 (9,315,348)
- -----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (6,630,123) 6,920,840 197,789
Cash and cash equivalents at beginning of the period 57,840,059 50,919,219 50,721,430
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 51,209,936 $ 57,840,059 $ 50,919,219
- -----------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 38,923,995 $ 32,784,709 $ 30,527,977
Taxes paid 7,358,778 7,795,300 5,823,086
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
Merchants New York Bancorp
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial reporting and accounting policies of Merchants New York Bancorp
(the "Company") conform to generally accepted accounting principles. The
following is a summary of the significant accounting policies.
Basis of Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and include the accounts of the Company
and its wholly-owned subsidiary, The Merchants Bank of New York (the "Bank").
The Company is a bank holding company, organized under the laws of the state of
Delaware. On July 1, 1993, the Company acquired all of the outstanding capital
stock of the Bank. All material intercompany accounts and transactions have been
eliminated in consolidation.
The Bank's principal business consists of attracting deposits from the general
public and employing these deposits by originating commercial loans. Together
with these funds and funds from ongoing operations and borrowings, the Bank also
invests in U.S. Government and agency obligations and other investment
securities. The Bank, which is the wholly-owned subsidiary of the Company,
operates as a commercial bank.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Investment Securities
Securities are classified as available for sale or held to maturity. The Bank
does not maintain a trading account classification. Securities for which the
Bank has the ability and intent to hold to maturity are so classified. All other
securities are classified as available for sale.
Securities classified as held to maturity are carried at cost adjusted for
amortization of premium or accretion of discount. Securities classified as
available for sale are reported at estimated current market prices with the
difference between market value and amortized cost reflected in the equity
section of the statement of condition as an unrealized gain or loss, net of
applicable taxes, until such time as they are sold. Premiums and discounts are
amortized or accreted to interest income on a level yield basis, over the
expected term of the debt security. Realized gains and losses on sales of
securities are determined based on the amortized cost of the specific securities
sold. Unrealized losses on securities would be charged to earnings if management
determines that the decline in the market value of a security was other than
temporary. Actual gains and losses from the sales of securities are computed on
a specific identified basis and are included in other income.
Allowance for Loan Losses
The allowance for loan losses is increased by provisions charged to operations
and decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's historical
loan loss experience, a review of non-performing loans and related collateral
values, an estimate of the possibility of loss in view of industry
concentrations and other portfolio risk characteristics, the present financial
condition of borrowers and current economic conditions. While management uses
the best information available to estimate loan losses, future adjustments to
the allowance may be necessary based on changes in economic conditions, further
information obtained regarding known problem loans, the identification of
additional problem loans and other factors. In management's judgement, the
allowance for loan losses is adequate to absorb probable losses in the existing
portfolio.
18
<PAGE>
Merchants New York Bancorp
Effective January 1, 1995, the Bank prospectively adopted SFASNo. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118
effective December 31, 1996. Under SFAS No. 114, a loan is considered impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect principal or interest due according to the contractual
terms of the loan. Impaired loans are measured and reported based on one of
three methods: the present value of the expected future cash flows discounted at
the loan's effective interest rate; the loan's observable market price; or the
fair value of the collateral if the loan is collateral dependent. If the measure
is less than the impaired loan's recorded investment, an impairment loss is
recognized as part of the allowance for loan losses. The adoption of SFAS Nos.
114 and 118 did not affect the Bank's overall allowance for loan losses or
income recognition practices.
Interest on Loans
Interest on loans is accrued to income monthly based on outstanding principal
balances. When management considers the collection of previously accrued but
unpaid interest to be doubtful, such interest is reversed by charging interest
income in the current period. Interest payments received on non-accrual loans
(including impaired loans under SFAS No. 114) are recognized as interest income
unless future collections are doubtful. 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.
Bank Premises and Equipment
Bank premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed on the straight-line method over the shorter of the
estimated useful lives of the related assets or the lease term. Maintenance and
repair costs are expensed as incurred.
Income Taxes
The Bank utilizes the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred income taxes are recognized for
the tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. The
realization of deferred tax assets are assessed and a valuation allowance
provided for the portion of the asset that is unlikely to be realized.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share," which requires presentation of both basic earnings per
share (EPS) and diluted EPS by all entities with a complex capital structure.
Basic EPS, which replaces primary EPS, excludes dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if contracts to issue common stock (such as the
Company's stock options) were exercised, which would result in the issuance of
common stock that then would share in the earnings of the Company. As required,
the Company adopted SFAS No. 128 as of December 31, 1997 and restated all prior
period EPS data at that time.
The weighted average number of shares of common stock used in the computation of
basic earnings per share for the years ended December 31, 1997, 1996 and 1995
were 9,793,913 shares, 9,961,538 and 9,944,212 shares, respectively. The
weighted average number of shares of common stock, used in the computation of
diluted earnings per share for the years ended December 31, 1997, 1996 and 1995
were 9,957,190 shares, 10,063,397 and 10,040,171 shares, respectively.
The Company's Board of Directors again declared a 2-for-1 stock split for all
shares, with an effective date of October 7, 1997. The Board had previously
declared a 2-for-1 stock split effective on October 2, 1995. All shares and per
share amounts in prior years have been restated in these financial statements to
reflect both splits.
19
<PAGE>
Merchants New York Bancorp
Stock Options
The Bank accounts for stock options 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 fair
value of the underlying stock at the grant date exceeds the exercise price of
the option. 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 an expense over the vesting period. Alternatively, SFAS No. 123 allows
entities to continue to apply the provisions of APB No. 25 and provide pro forma
disclosure of net income and net income per share as if the fair value based
method defined in SFAS No. 123 had been applied to employee stock options
granted in 1995 and later years. The Bank has elected to continue to apply
provisions of APB Opinion No. 25.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
NOTE 2 -- CASH AND DUE FROM BANKS
The Bank is required to maintain average reserves on deposit with the
Federal Reserve Bank of New York against outstanding domestic deposit
liabilities. The required reserves, which are reported in cash and due from
banks, were approximately $20.4 million and $18.3 million at December 31, 1997
and 1996, respectively. Average required reserves during 1997 and 1996 were
approximately $20.4 million and $18.2 million, respectively. Average balances
(in the form of non-interest-bearing deposits with banks) of approximately $5.8
million and $5.9 million were maintained as compensating balances for services
provided by correspondent banks for the years ended December 31, 1997 and 1996,
respectively.
NOTE 3 -- SECURITIES AVAILABLE FOR SALE
The book values and estimated market values for investment securities available
for sale at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Book Unrealized Unrealized Market
1997 Value Gains Losses Value
- ------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Government obligations(1) $178,353 $ 6,717 $ (8) $185,062
U.S. Agency obligations (2) 317,947 6,469 (38) 324,378
Obligations of State and
Political subdivisions 22,838 1,155 -- 23,993
Equity securities 8,194 7 -- 8,201
- ------------------------------------------------------------------------------------------------------
Total $527,332 $14,348 $(46) $541,634
======================================================================================================
<CAPTION>
Gross Gross Estimated
Book Unrealized Unrealized Market
1996 Value Gains Losses Value
- ------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Government obligations (1) $212,927 $ 7,507 $ (37) $220,397
U.S. Agency obligations (2) 305,981 5,340 (222) 311,099
Obligations of State and
Political subdivisions 19,848 1,132 (12) 20,968
Equity securities 9,107 30 -- 9,137
- ------------------------------------------------------------------------------------------------------
Total $547,863 $14,009 $(271) $561,601
======================================================================================================
</TABLE>
(1) U.S. Government obligations includes U.S. Treasury Notes and fixed rate
Government National Mortgage Association (GNMA) mortgage-backed securities.
(2) U.S. Agency obligations consists of fixed rate mortgage-backed securities,
including Federal National Mortgage Association (FNMA) and Federal Home Loan
Mortgage Corporation (FHLMC) securities.
Proceeds from sales of available-for-sale investment securities during 1997 were
$10.2 million with a gross gain of $22,000. 1996 sales proceeds were $61 million
with gross gains of $405,000 and gross losses of $33,000.
20
<PAGE>
Merchants New York Bancorp
The combined unrealized gains and losses before taxes on available-for-sale
securities was $14.3 million (with $5.3 million in taxes) at December 31, 1997
compared to $13.7 million (with$6.3 million in taxes) at December 31, 1996.
Changes in unrealized holding gains and losses resulted in an after-tax increase
(decrease) in stockholders' equity of $1.5 million, ($2.4 million) and $9.8
million during fiscal 1997, 1996 and 1995, respectively. These gains and losses
will continue to fluctuate based on changes in the portfolio and market
conditions.
The amortized cost and estimated market value of the Bank's available-for-sale
investment securities at December 31, 1997 and 1996 are presented in the
following table, based upon their maturity dates. The aging of mortgage-backed
U.S. Agency securities is based on their weighted average maturities. The
expected maturities can differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without penalties.
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------------
Estimated Average Estimated Average
Book Market Weighted Book Market Weighted
Value Value Yield* Value Value Yield*
- ----------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $152,825 $159,736 8.04% $223,972 $233,194 7.41%
Due after one year through five years 347,471 354,218 7.64 302,809 307,083 7.23
Due after five years through ten years 10,036 10,249 6.09 8,432 8,561 6.03
Due after ten years 17,000 17,431 6.61 12,650 12,763 6.45
- ----------------------------------------------------------------------------------------------------------------
Total $527,332 $541,634 7.94% $547,863 $561,601 7.32%
================================================================================================================
</TABLE>
*Average weighted yield not tax adjusted.
Available-for-sale investment securities with a market value of $165.6 million
at December 31, 1997 and $140.8 million at December 31, 1996 were pledged to
secure securities sold under agreements to repurchase and for other purposes
required or permitted by law.
NOTE 4 -- INVESTMENT SECURITIES HELD TO MATURITY
The book values and estimated market values of investment securities held to
maturity at December 31, 1997 and 1996 are listed below.
<TABLE>
<CAPTION>
Gross Gross Estimated
Book Unrealized Unrealized Market
1997 Value Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Government obligations (1) $ 60,339 $ 888 $ -- $ 61,227
U.S. Agency obligations (2) 99,351 1,679 (16) 101,014
Obligations of State and
Political subdivisions 55,154 2,198 (12) 57,340
Other 327 -- (6) 321
- ------------------------------------------------------------------------------------------------------------------
Total $215,171 $4,765 $(34) $219,902
==================================================================================================================
<CAPTION>
Gross Gross Estimated
Book Unrealized Unrealized Market
1996 Value Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Government obligations (1) $ 51,530 $ 235 $ (60) $ 51,705
U.S. Agency obligations (2) 67,821 509 (27) 68,303
Obligations of State and
Political subdivisions 47,219 1,810 (26) 49,003
Other 338 -- (9) 329
- ------------------------------------------------------------------------------------------------------------------
Total $166,908 $2,554 $(122) $169,340
==================================================================================================================
</TABLE>
(1) U.S. Government obligations includes U.S. Treasury Notes and fixed rate
Government National Mortgage Association (GNMA) mortgage-backed securities.
(2) U.S. Agency obligations consists of fixed rate mortgage-backed securities,
including Federal National Mortgage Association (FNMA) and Federal Home Loan
Mortgage Corporation (FHLMC) securities.
21
<PAGE>
Merchants New York Bancorp
The amortized cost and estimated market value of the Bank's investment
securities at December 31, 1997 and 1996 are presented in the following table
based upon their maturity dates. The aging of mortgage-backed U.S. Agency
securities is based on their weighted average maturities. The expected
maturities can differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without penalties.
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------------------------
Estimated Average Estimated Average
Book Market Weighted Book Market Weighted
Value Value Yield* Value Value Yield*
- ---------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 23,362 $ 24,049 7.61% $ 6,199 $ 6,286 5.85%
Due after one year through five years 161,754 164,514 7.64 142,473 144,138 6.93
Due after five years through ten years 13,497 14,049 5.05 6,102 6,433 5.70
Due after ten years 16,558 17,290 5.21 12,134 12,483 5.42
- ---------------------------------------------------------------------------------------------------------------
Total $215,171 $219,902 7.26% $166,908 $169,340 6.74%
===============================================================================================================
</TABLE>
*Average weighted yield not tax adjusted.
Held-to-maturity investment securities with a book value of $66.5 million and
$21.1 million at December 31, 1997 and 1996, respectively, were pledged to
secure securities sold under agreements to repurchase and for other purposes
required or permitted by law.
NOTE 5 -- LOANS
Loans at December 31, 1997 and 1996 are comprised of the following:
1997 1996
- --------------------------------------------------------------------------------
(In Thousands)
Commercial loans $312,967 $283,341
Mortgage loans 15,723 10,941
Installment loans 3,212 2,855
- --------------------------------------------------------------------------------
331,902 297,137
Unearned discounts (94) (56)
- --------------------------------------------------------------------------------
331,808 297,081
Allowance for loan losses (6,167) (5,617)
- --------------------------------------------------------------------------------
Total, net $325,641 $291,464
================================================================================
The changes in the allowance for loan losses for 1997, 1996 and 1995 are
summarized as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
(In Thousands)
Balance at beginning of year $ 5,617 $ 6,484 $ 6,188
Provision for loan losses 1,700 2,580 2,080
Charge-offs (1,469) (4,405) (2,349)
Recoveries 319 958 565
- --------------------------------------------------------------------------------
Balance at end of year $ 6,167 $ 5,617 $ 6,484
================================================================================
22
<PAGE>
Merchants New York Bancorp
As discussed in Note 1, the Bank adopted SFAS Nos. 114 in January 1995 and 118
during the year ended December 31, 1996. SFAS Nos. 114 and 118 apply to loans
that are individually evaluated for collectibility in accordance with the Bank's
ongoing loan review procedures. Upon adoption of these statements, the Bank did
not change its method of recognizing interest income on impaired loans.
Information concerning impaired loans as defined by SFAS Nos. 114 and 118 is
presented below:
For the years ended December 31, 1997 1996
- --------------------------------------------------------------------------------
(In Thousands)
Recorded investment in impaired loans at year end:
Non-accrual loans $ 159 $1,109
Restructured loans -- --
Other -- --
- --------------------------------------------------------------------------------
Total $ 159 $1,109
================================================================================
Average recorded investment in impaired loans $1,035 $2,706
================================================================================
The Bank's impaired loans are only those identified as in a nonaccrual status
for 90 days or more. Impaired is defined as "when, based on current information
and events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement." The amount of
interest income recognized on impaired loans was $126,000 for 1997 and $288,000
for 1996. The impact on interest income relating to impaired loans for both
years is not considered material. The reserve for loan losses contains an
additional amount deemed necessary to maintain it at levels considered adequate
by management. It is the Bank's policy to keep loans on nonaccrual status until
the principal and interest is current or they are charged off. At December 31,
1997, the recorded investment in impaired loans totalled $159,000 for which an
allowance for loan impairment was not required under SFAS Nos. 114 and 118. This
is substantially due to the nonaccrual loans being supported by collateral with
a current value of $166,000, which exceeds the nonaccrual loans.
Loans to officers and directors of the Bank or for the benefit of corporations
in which they have a beneficial interest are made in the ordinary course of the
Bank's business and on substantially the same terms as those prevailing at the
time for comparable transactions with members of the general public, including
interest rates and collateral. Such loans did not involve more than the normal
risk of collectibility or present other unfavorable features. The following
schedule sets forth information with respect to such loans:
Balance at Balance at
Name of Beginning Amounts End of
Borrower of Year* Additions Collected Year
- --------------------------------------------------------------------------------
(In Thousands)
1997 Directors (8) $10,952 $14,307 $10,474 $14,785
1996 Directors (5) $14,975 $12,528 $16,551 $10,952
1995 Directors (6) $10,652 $41,804 $37,481 $14,975
* In 1997, loan balances were restated to include letters of credit, standby
letters of credit and loans guaranteed by an officer or director, if
applicable. In 1996, the total increase in the balance was $6.2 million, with
$5.9 million in 1995.
There were no charge-offs of loans made to officers and directors in each of the
years in the three-year period ended December 31, 1997. Loans at December 31,
1997 bear interest at rates of 6.25% to 9.50% and are partially secured. The
maturities applicable to outstanding loans at December 31, 1997 are $9.9 million
within 90 days, which included $1.3 million in letters of credit and $2.6
million in standby letters of credit, $4.6 million in 1998 and $248,000 in 2007.
23
<PAGE>
Merchants New York Bancorp
The following is a summary of the major industry concentrations of the Bank's
commercial loan portfolio as of December 31, 1997:
Wholesale jewelry 22%
Jewelry manufacturing 12
Apparel & furs 12
Non-durable goods 4
Miscellaneous manufacturing 4
Real Estate 9
Miscellaneous wholesalers 4
Business & professional services 5
Home furnishings 5
Textiles 4
Private households 4
Non-depository institutions 3
All others 12
-------------------------------------------------
Total 100%
=================================================
Substantially all of the Bank's loans are to borrowers located in the New York
metropolitan area.
NOTE 6 -- BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1997 and 1996 are comprised of the
following:
1997 1996
- --------------------------------------------------------------------------------
(In Thousands)
Bank premises and leasehold improvements $ 9,313 $ 8,916
Equipment 5,007 4,434
- --------------------------------------------------------------------------------
14,320 13,350
Less accumulated depreciation (7,382) (6,582)
- --------------------------------------------------------------------------------
Total, net $ 6,938 $ 6,768
================================================================================
NOTE 7 -- DEPOSITS
The aggregate amount of certificates of deposit and other time deposits in
denominations of $100,000 or more amounted to $301.2 million at December 31,
1997 and $271.2 million at December 31, 1996. Interest expense related to
certificates of deposit and other time deposits in denominations of $100,000 or
more was $15.8 million, $12.4 million and $11.6 million in 1997, 1996 and 1995,
respectively.
The following table sets forth the average deposits and average rates paid for
each of the most recent two fiscal years for the classifications of deposits
listed:
Years Ended December 31, 1997 Rate % 1996 Rate %
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Deposits:
Demand $227,744 -- $209,828 --
NOW 41,904 2.27% 38,219 2.28%
Savings 24,277 2.98 25,485 2.99
Money market 141,671 3.37 131,974 3.37
Other time 416,221 5.45 384,033 5.30
- --------------------------------------------------------------------------------
Total $851,817 $789,539
================================================================================
24
<PAGE>
Merchants New York Bancorp
NOTE 8 -- SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND
OTHER SHORT-TERM BORROWINGS
The Bank enters into sales of U.S. Agency, GNMA and Treasury securities under
repurchase agreements. Repurchase agreements are treated as financing
arrangements and the obligations to repurchase securities sold are reflected as
a liability on the consolidated statements of condition. The carrying value of
the investment securities underlying the agreements remains in the asset
account. All of the repurchase agreements were agreements to repurchase
substantially identical securities. The investment securities underlying the
agreements were transferred to Federal Home Loan Bank and Merrill Lynch, the
dealers who arranged the transactions. The dealer may have sold, loaned or
otherwise disposed of such securities to other parties in the normal course of
its operations, and has agreed to resell to the Bank substantially identical
securities at the maturities of the agreements in early 1998. Information
concerning securities sold under agreements to repurchase is presented below:
Accrued Fair Value Weighted
Interest of Collateral Average
Amount Payable(1) Securities(2) Rate
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Securities Sold Under
Repurchase Agreements
maturing:
Within 30 Days $ 50,000 $1,335 $ 47,274 5.69%
Within 96 Days 110,000 1,432 124,663 6.06
- --------------------------------------------------------------------------------
Total $160,000 $2,767 $171,937 5.94%
================================================================================
(1) Included in Other liabilities in the Consolidated Statements of Condition.
(2) Represents the fair value of the mortgage-backed securities which were
transferred to the counterparty, including accrued interest receivable of
$1.5 million. These securities consist of available-for-sale securities and
held-to-maturity securities with book values of $131.0 million and $38.3
million, respectively.
Federal Home Loan Bank and U.S. Treasury Demand Notes
As a member of the Federal Home Loan Bank (FHLB), the Bank can have outstanding
FHLB advances of up to 20 times of the Bank's purchased FHLB stock or
approximately $130 million at December 31, 1997, in a combination of term
advances and overnight funds. The Bank's unused FHLB borrowing capacity was
approximately $35 million at December 31, 1997. Borrowings 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 qualifying assets (U.S.
Agency mortgage-backed securities) not otherwise pledged. The Bank satisfied
this collateral requirement at December 31, 1997.
The U.S. Treasury, from time-to-time, issues demand notes, which make funds
available on a short-term basis (generally less than 30 days) to qualifying
institutions, at interest rates slightly lower than Federal Funds rates. The
Bank must keep an equivalent amount of qualifying securities as collateral at
The Federal Reserve Bank, based on the Bank's approved borrowing limit.
1997 1996
----------------------------------------------
Weighted Weighted
Amount Average Rate Amount Average Rate
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Federal Home Loan Advances $20,000 5.86% -- --
U.S. Treasury Demand Notes 11,772 5.19% $7,199 5.12%
Other 408 -- -- --
- --------------------------------------------------------------------------------
Total Other Short-Term Borrowings $32,180 $7,199
================================================================================
25
<PAGE>
Merchants New York Bancorp
NOTE 9 -- INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31,
1997, 1996 and 1995 are as follow:
1997 1996 1995
- --------------------------------------------------------------------------------
(In Thousands)
Current:
Federal $6,104 $4,054 $3,710
State and local 1,148 3,421 3,124
- --------------------------------------------------------------------------------
Total current 7,252 7,475 6,834
- --------------------------------------------------------------------------------
Deferred:
Federal (59) 19 (232)
State and local (38) (83) (63)
- --------------------------------------------------------------------------------
Total deferred (97) (64) (295)
- --------------------------------------------------------------------------------
Total tax expense $7,155 $7,411 $6,539
================================================================================
The following is a reconciliation between the "expected" Federal income tax
computed at the statutory rate and actual tax expense reflected in the financial
statements.
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars In Thousands)
Federal income tax computed
at statutory rate $ 7,601 35.0% $ 7,029 35.0% $ 6,302 35.0%
State and city income taxes, net
of Federal income tax benefit 721 3.3 2,169 10.8 2,031 11.3
Federal income tax benefit
resulting from interest
on tax-exempt obligations (1,416) (6.5) (1,433) (7.1) (1,497) (8.3)
Other adjustments
affecting income taxes 249 1.1 (354) (1.8) (297) (1.7)
- -------------------------------------------------------------------------------------------------------------
Total tax/effective rate $ 7,155 32.9% $ 7,411 36.9% $ 6,539 36.3%
=============================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities are presented below:
1997 1996
- --------------------------------------------------------------------------------
(In Thousands)
Deferred tax assets:
Allowance for possible loan losses $ 2,159 $ 2,584
Other 294 248
- --------------------------------------------------------------------------------
Total gross deferred tax assets 2,453 2,832
Less: valuation reserve (2,159) (2,584)
- --------------------------------------------------------------------------------
Net deferred tax asset 294 248
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (98) (123)
Unamortized bond premium (30) (57)
Unrealized gain on investments available for sale (5,358) (6,319)
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities (5,486) (6,499)
- --------------------------------------------------------------------------------
Net deferred tax liabilities $(5,192) $(6,251)
================================================================================
26
<PAGE>
Merchants New York Bancorp
Given the subjective nature of recoverability of the deferred tax asset and the
Bank's conservative nature, a 100% valuation allowance for the deferred tax
asset related to the allowance for loan losses was established relative to this
item in 1997 and 1996.
NOTE 10 -- EMPLOYEE BENEFIT PLAN
Pension Plan
The Bank's retirement plan (the "Plan") covers all employees who have attained
the age of 21 and have completed one year of service with the Bank. The Bank
contributed $470,563, $454,400 and $477,845 to the Plan in 1997, 1996 and 1995,
respectively.
The following table sets forth the Plan's funded status and amounts recognized
at December 31, 1997 and 1996:
1997 1996
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Accumulated benefit obligation $ (9,545) $(8,337)
================================================================================
Projected benefit obligation (10,600) (9,215)
Market value of plan assets, primarily
in corporate notes and U.S. Agency bonds 10,023 8,387
- --------------------------------------------------------------------------------
Funded status (577) (828)
Unrecognized transition asset (1,279) (1,370)
Unrecognized prior service cost (26) (28)
Unrecognized net loss 2,082 2,336
- --------------------------------------------------------------------------------
Prepaid pension cost $ 200 $ 110
================================================================================
Actuarial Assumptions:
Discount Rate 7.00% 7.50%
Salary Increases 4.00% 4.00%
Net periodic Plan costs for the years ended December 31, 1997, 1996 and 1995 is
comprised of the following:
1997 1996 1995
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Service cost $ 451 $ 478 $ 350
Interest cost 679 613 583
Actual return on assets (1,350) (185) (877)
Amortization of transition asset (91) (91) (91)
Amortization of unrecognized net loss 53 74 22
Amortization of prior service cost (2) (2) (2)
Deferral of asset gain (loss) 640 (557) 224
- --------------------------------------------------------------------------------
Net periodic pension cost $ 380 $ 330 $ 209
================================================================================
Actuarial Assumptions:
Discount rate 7.50% 7.00% 8.25%
Salary increases 4.00% 4.00% 5.00%
Expected long-term rate of return 8.00% 9.00% 9.00%
The Bank has adopted a non-qualified Directors retirement plan, effective in
February 1997. The projected benefit obligation at December 31, 1997 was
approximately $1.3 million, computed with a 7% discount rate and is non-funded.
Pension expense of $280,000 was recognized for the period ended December 31,
1997.
In addition, the Bank provides a supplemental retirement contract for key senior
executives, with a projected benefit obligation of about $3.7 million as of
December 31, 1997. These benefits are partially covered through insurance
policies with current values of $2.2 million. Pension expense of $180,000 was
recognized as of December 31, 1997, with $120,000 for the same period in 1996.
These retirement benefits are in addition to those offered by the Plan and those
for Bank's Board of Directors members.
27
<PAGE>
Merchants New York Bancorp
401(k) Savings Plan
Effective January 1, 1997, the Bank implemented a defined contribution plan that
is intended to qualify under Section 401(k) of the Internal Revenue Code.
Contributions began on May 1, 1997. The 401(k) plan covers substantially all
employees, who have been employed six months by the Bank. In 1997, an employee
may have contributed up to 15% of their salary, or $9,500, whichever is larger.
The Bank has elected not to match the employees' contribution. Expenses charged
to income in 1997, the year of inception, were $7,767.
Stock Option Plan
During 1986, the stockholders approved the Employees Stock Option Plan of The
Merchants Bank of New York (the "Option Plan"). The purpose of the Option Plan
is to give an incentive for performance and to encourage the continued
employment of existing key employees. The Bank reserves common stock for the
future exercise of the options granted. The options expire ten years after the
date of grant and are immediately exercisable.
Due to the Bank's becoming the wholly-owned subsidiary of the Company on July 1,
1993, the Company adopted a substantially identical stock option plan as
successor to the Plan and all stock options have become options to purchase the
Company's stock rather than shares of the Bank's stock.
The shares of stock authorized for the Option Plan to be granted as stock
options were 90,000 shares in 1986, 375,000 shares in 1987 and 400,000 shares in
1993. There were no options authorized or granted in 1995, 1996 and 1997. The
basis used to establish the exercise price for the options granted under the
Option Plan was the price of the Company's stock on NASDAQ for the date of issue
of the options.
The Bank implemented SFAS No. 123 during 1996. As discussed in Note 1, the Bank
will retain its current accounting method for its stock-based employee
compensation plan. This statement will only result in additional disclosures for
the Bank when additional options are granted, and as such, its adoption did not,
nor is it expected to have, a material impact on the Bank's financial condition
or its results of operations.
Where applicable, all shares and prices in this footnote have been adjusted for
the following stock splits: 6:5 in 1987, 5:4 in 1988, 3:2 in 1990 and 2:1 in
1995 and 1997.
The following chart summarizes information concerning options outstanding and
exercisable at December 31, 1997:
Options Outstanding and Exercisable
-------------------------------------
Number of Shares Remaining Life
Exercise Price Outstanding (in years)
- --------------------------------------------------------------------------------
$ 9.88 232,835 4
$10.88 62,700 4
- --------------------------------------------------------------------------------
Total 295,535
================================================================================
The following table presents the total options granted and outstanding to be
exercised:
Shares Subject Weighted Average
To Option Exercise Price
- --------------------------------------------------------------------------------
Outstanding at December 31, 1994 388,000
Granted --
Exercised (28,272) $10.05
Forfeited -- --
- --------------------------------------------------------------------------------
Outstanding at December 31, 1995 359,728
Granted --
Exercised (12,446) $ 9.92
Forfeited (12,656) $10.45
- --------------------------------------------------------------------------------
Outstanding at December 31, 1996 334,626
Granted --
Exercised (39,091) $10.11
Forfeited -- --
- --------------------------------------------------------------------------------
Outstanding at December 31, 1997 295,535 --
================================================================================
28
<PAGE>
Merchants New York Bancorp
NOTE 11 -- STOCKHOLDERS' EQUITY
Regulatory Capital Requirements
FDIC regulations require banks to maintain a minimum leverage ratio of Tier 1
capital to total adjusted assets of 4.0% and minimum ratios of Tier 1 and total
capital to risk weighted assets of 4.0% and 8.0%, respectively.
The FDIC is required to take certain supervisory actions with respect to an
under capitalized bank. These actions could have a direct material effect on a
bank's financial statements. The regulations establish a framework for the
classification of banks into five categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. Generally, a bank is considered well capitalized if it has a
leverage capital ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at
least 6.0% and a total risk-based capital ratio of at least 10%.
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 judgements by the FDIC about capital components, risk
weightings and other factors.
Management believes that as of December 31, 1997, the Bank meets all capital
adequacy requirements to which it is subject. Furthermore, the most recent FDIC
notification categorized the Bank as a well capitalized institution. 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 capital amounts and ratios as of
December 31, 1997 and 1996, compared to the FDIC minimum capital adequacy
requirements and the FDIC requirements for classification as a well capitalized
institution:
<TABLE>
<CAPTION>
FDIC Requirements
-----------------------------------------------------------------------
Minimum Capital For Classification
Actual Adequacy As Well Capitalized
-----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Leverage Capital $ 96,679 8.0% $48,159 4.0% $60,199 5.0%
Risk-Based Capital:
Tier 1 96,679 18.6 20,780 4.0 31,170 6.0
Total 102,846 19.8 41,554 8.0 51,942 10.0
December 31, 1996
Leverage Capital $ 95,432 8.7% $44,130 4.0% $55,163 5.0%
Risk-Based Capital:
Tier 1 95,432 20.4 18,703 4.0 28,054 6.0
Total 101,049 21.6 37,391 8.0 47,739 10.0
</TABLE>
Treasury Stock
On August 19, 1997, the Board authorized the repurchase of up to an additional
5% of the Bank's common stock, or 500,000 shares. This is in addition to the
Board approving up to 5%, or approximately 500,000 shares in 1996. The Company
has purchased 306,650 shares during 1997, with 35,780 shares having been
purchased in 1996. In 1997, 24,881 shares were reissued from treasury stock for
shares purchased through the stock option plan. This action reflects the
Company's strong capital position and has allowed the Company to effectively
manage its overall capital position in the best interest of its shareholders.
Dividends
Dividends paid to common stockholders totaled $7.3 million, or $0.75 per share,
a 13% increase over 1996. This represented a 50% payout of net income for 1997.
29
<PAGE>
Merchants New York Bancorp
NOTE 12 -- COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are various commitments and contingent
liabilities, which are properly not recorded on the balance sheet. Management
does not anticipate that losses, if any, as a result of these commitments and
contingent transactions would materially affect the liquidity, operating results
or financial condition of the Bank.
Unused variable rate loan commitments, substantially all of which have an
original maturity of one year or less, were approximately $7.5 million and $10.3
million for the years ended 1997 and 1996, respectively. These commitments are
agreements to lend up to a certain amount to a customer as long as the
conditions established in the contract are met. Commitments generally have fixed
expiration dates or termination clauses and may require payment of a fee. The
total commitments do not necessarily represent future cash requirements because
some of the commitments are expected to expire without being drawn upon. The
Bank evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained if deemed necessary by the bank upon extension of
credit is based on management's risk evaluation of the borrower. Collateral
held, if any, may include cash, U.S. Treasury and other marketable securities,
accounts receivable, inventory and property, plant and equipment.
The Bank also issues conditional commitments to guarantee the performance of a
customer to a third party. The credit risk involved in issuing letters of credit
is essentially the same as that in extending loan facilities to customers. For
commercial letters of credit, approximately 95% expire in less than one year,
usually in 60 to 90 days. Standby letters of credit are approximately 80%
collateralized with cash, cash equivalents or marketable securities. 95% expire
within one year, with the balance generally within two years. About 45% are
automatically renewable for one year. The Bank also purchases and sells foreign
currency as an accommodation for customers. It is not traded for speculative
purposes. The Bank's credit risk for foreign currency would arise from the
possibility of a significant change in a country's currency and the failure of a
counter party to perform.
Outstanding letters of credit, standby letters of credit, letters of guarantee
and foreign exchange contracts and their balances for the years ended 1997 and
1996 are:
1997 1996
- --------------------------------------------------------------------------------
(In Thousands)
Standby letters of credit $17,610 $18,316
Commercial letters of credit 36,066 28,555
Steamship and air guarantees 2,090 2,582
Foreign exchange:
Forward contracts purchased 1,950 747
Forward contracts sold 1,940 746
Spot transactions 632 106
As of December 31, 1997, the Bank was obligated under six operating leases for
premises. During 1995, the Bank received regulatory approval to relocate a
branch along with corporate headquarters to 275 Madison Avenue. This lease,
which was effective in March 1995, is a twenty-year lease.
Rental expense under the six leases aggregated $1.35 million for 1997, $1.25
million for 1996 and $1 million for 1995. The minimum annual rent under such
leases for each of the years ending December 31, 1998 through the year 2002 and
thereafter is as follows:
1998 $ 1,359
1999 1,397
2000 1,069
2001 1,125
2002 1,235
Thereafter 24,080
----------------------------------------------
Total $30,265
==============================================
30
<PAGE>
Merchants New York Bancorp
There are various claims pending against the Bank. In the opinion of management,
after discussion with counsel, liabilities, if any, arising from such claims
will not have a material effect on the Bank's liquidity, operating results or
financial condition.
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a summary of the carrying values and estimated fair value of
the Company's financial instruments:
1997 1996
- --------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
As of December 31, Value Fair Value Value Fair Value
- --------------------------------------------------------------------------------
(In Thousands)
Financial assets:
Cash and due from banks $ 51,210 $ 51,210 $ 57,840 $ 57,840
Federal funds sold 67,000 67,000 26,000 26,000
Securities available for sale 527,332 541,634 547,863 561,601
Investment securities 215,171 219,902 166,908 169,340
Loans, net of allowance 325,641 325,641 291,464 291,464
Financial liabilities:
Demand, NOW, savings and
money market deposits 484,930 484,930 469,058 469,058
Time deposits 419,157 419,269 406,635 406,885
Repurchase agreements 160,000 160,000 120,000 120,000
Other short-term borrowings $ 32,180 $ 32,180 $ 7,199 $ 7,199
SFAS No. 107 requires disclosures about the fair values of financial instruments
for which it is practicable to estimate fair value. Fair value is defined in
SFAS No. 107 as the amount at which a financial instrument could be exchanged in
a current transaction between willing parties, other than in a forced or
liquidation sale. 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 value for these instruments must be
estimated by management using techniques such as discounted cash flow analysis
and comparison to similar instruments. These estimates are highly subjective and
require judgements 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 impact 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 cost.
The following is a description of the principal valuation methods used by the
Company to estimate the fair value of its financial instruments.
Securities Available for Sale and Investment Securities
The fair value of securities available for sale and investment securities are
based on quoted market prices.
Loans
Substantially all loans include: (i) variable rate loans, where the interest
rate changes are consistent with changes in the prime rate; and (ii) working
capital notes with maturities of less than six months. Accordingly, after
consideration of the allowance for loan loss, net loans are considered to have a
fair value equivalent to their carrying value.
31
<PAGE>
Merchants New York Bancorp
Deposit Liabilities
In accordance with SFAS No. 107, the fair value of deposit liabilities with no
stated maturity (demand, NOW, savings and money market accounts) are equal to
the carrying amounts payable on demand. The fair values of time deposits
represent contractual cash flows discounted using interest rates currently
offered on deposits with similar characteristics and remaining maturities.
As required by SFAS No. 107, these estimated fair values do not include the
intangible 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 intangible value separate from the deposit balances.
Other Financial Assets and Liabilities
Cash and due from banks, Federal funds sold, repurchase agreements and other
short-term borrowings have fair values which 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.
NOTE 14 -- RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for the Reporting of Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income (and its components) in financial statements. Comprehensive income
represents net income and certain amounts reported directly in equity, such as
the net unrealized gain or loss on available-for-sale securities. While SFAS No.
130 does not require a specific reporting format, it does require that an
enterprise display an amount representing total comprehensive income for the
period. SFAS No. 130 is effective for fiscal years beginning after December 15,
1997 and, accordingly, will be adopted by the Company in its fiscal year ending
December 31, 1998. Management does not anticipate that the adoption of this
standard will have a material impact on the Company's consolidated financial
statements.
Accounting for the Disclosures about Segments of an Enterprise and Related
Information
In June 1997, the FASB also issued SFAS No. 131,"Disclosures about Segments of
an Enterprise and Related Information." Among other things, SFAS No. 131
requires public companies to report (i) certain financial and descriptive
information about their reportable operating segments (as defined), and (ii)
certain enterprise-wide financial information about products and services,
geographic areas and major customers. The required segment financial disclosures
include a measure of profit or loss, certain specific revenue and expense items,
and total assets. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997 and, accordingly, will be adopted by the Company in its fiscal
year ending December 31, 1998. Management does not anticipate that the adoption
of this standard will have a material impact on the Company's consolidated
financial statements.
32
<PAGE>
Merchants New York Bancorp
NOTE 15 -- PARENT COMPANY ONLY FINANCIAL INFORMATION
Parent Company Only
CONDENSED STATEMENTS OF CONDITION
December 31, 1997 and 1996
1997 1996
- --------------------------------------------------------------------------------
Assets:
Cash $ 203,134 $ 415,038
Investment in subsidiary 105,991,263 103,120,594
- --------------------------------------------------------------------------------
Total assets 106,194,397 103,535,632
================================================================================
Liabilities:
Total liabilities -- --
- --------------------------------------------------------------------------------
Stockholders' equity:
Total stockholders' equity 106,194,397 103,535,632
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $106,194,397 $103,535,632
================================================================================
CONDENSED STATEMENTS OF INCOME
Years Ended December 31, 1997 and 1996
1997 1996
- --------------------------------------------------------------------------------
Income:
Dividends received from subsidiary $ 13,217,066 $ 6,474,760
Equity in undistributed net income of subsidiary 1,345,093 6,196,011
Management fees 593,199 509,527
- --------------------------------------------------------------------------------
Total income 15,155,358 13,180,298
- --------------------------------------------------------------------------------
Expenses:
Expenses 593,200 509,527
- --------------------------------------------------------------------------------
Net income $ 14,562,158 $ 12,670,771
================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 and 1996
1997 1996
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 14,562,158 $ 12,670,771
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of subsidiary (1,345,093) (6,196,011)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 13,217,065 6,474,760
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Net cash used in investing activities -- --
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 395,428 123,454
Purchases of treasury stock (6,492,331) (552,910)
Dividends paid (7,332,066) (6,474,760)
- --------------------------------------------------------------------------------
Net cash used in financing activities (13,428,969) (6,904,216)
- --------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (211,904) (429,456)
Cash and cash equivalents at beginning of
the period 415,038 844,494
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 203,134 $ 415,038
================================================================================
33
<PAGE>
Merchants New York Bancorp
The Merchants Bank of New York (the "Bank") became the wholly-owned subsidiary
of Merchants New York Bancorp Inc, (the "Company"), a Delaware holding company
on July 1, 1993. Each Bank stockholder became a stockholder of the Company,
which has authorized 10,000,000 shares of stock at a par value of $.001 per
share. Of the authorized shares, 9,989,332 shares have been issued and are
outstanding as of December 31, 1997, with 9,975,122 shares outstanding as of
December 31, 1996.
The earnings of the Bank are recognized by the Company using the equity method
of accounting. Accordingly, earnings of the Bank are recorded as increases in
the Company's investment in the Bank, with any dividends reducing this
investment.
NOTE 16 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data is presented below for the years ended
December 31, 1997 and 1996:
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter Total
- --------------------------------------------------------------------------------
(In Thousands)
Interest income $19,578 $20,416 $21,687 $21,139 $82,820
Net interest income 10,711 10,507 10,881 10,468 42,567
Provision for loan losses 250 250 500 700 1,700
Income before income tax 5,993 5,967 6,244 3,513 21,717
Net income 3,391 3,876 4,353 2,942 14,562
Earnings per share, basic $0.34 $0.39 $0.45 $0.31 $1.49
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter Total
- --------------------------------------------------------------------------------
(In Thousands)
Interest income $16,936 $17,520 $18,987 $19,652 $73,095
Net interest income 9,413 9,593 10,040 10,594 39,640
Provision for loan losses 100 100 400 1,980 2,580
Income before income tax 5,237 5,590 5,896 3,358 20,081
Net income 3,090 3,224 3,778 2,579 12,671
Earnings per share, basic $0.31 $0.32 $0.38 $0.26 $1.27
================================================================================
INDEPENDENT AUDITORS' REPORT
Board of Directors
Merchants New York Bancorp:
We have audited the accompanying consolidated statements of condition of
Merchants New York Bancorp and subsidiary (the "Bank") as of December 31, 1997
and 1996, and the related statements of income, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1997. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these 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 Merchants New York
Bancorp as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1997, in conformity with generally accepted accounting principles.
` /s/ KMPG Peat Marwick LLP
New York, New York
February 6, 1998
34
<PAGE>
Merchants New York Bancorp
AVERAGE ASSETS, LIABILITIES AND
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Average Average Average
Balance % Balance % Balance %
- ------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and due from banks $ 49,587 4.19% $ 46,993 4.49% $ 43,522 4.51%
Federal funds sold 8,373 0.71 6,128 0.59 3,115 0.32
Investment securities*:
Securities available for sale 590,342 49.88 553,343 52.85 585,047 60.63
Investment securities 178,830 15.11 133,239 12.73 30,116 3.12
- ------------------------------------------------------------------------------------------------------------------
Total 769,172 64.99 686,582 65.58 615,163 63.75
Loans (net of unearned discounts) 325,298 -- 280,361 -- 276,649 --
Less allowance for loan losses 6,247 -- 6,454 -- 6,601 --
- ------------------------------------------------------------------------------------------------------------------
Total loans, net 319,051 26.96 273,907 26.17 270,048 27.98
Bank premises and equipment 6,897 0.58 6,909 0.66 4,802 0.50
Customers' liability on acceptances 15,588 1.32 11,924 1.14 12,702 1.32
Other assets 14,812 1.25 14,340 1.37 15,667 1.62
- ------------------------------------------------------------------------------------------------------------------
Total assets $1,183,480 100% $1,046,783 100% $965,019 100%
==================================================================================================================
Liabilities and Stockholders' Equity
Deposits:
Demand $ 227,744 19.24% $ 209,828 20.05% $194,571 20.16%
NOW 41,904 3.54 38,219 3.65 38,235 3.96
Savings 24,277 2.05 25,485 2.43 28,146 2.92
Money market 141,671 11.97 131,974 12.61 116,179 12.04
Time 416,221 35.17 384,033 36.68 389,747 40.38
- ------------------------------------------------------------------------------------------------------------------
Total deposits 851,817 -- 789,539 -- 766,878 --
Securities sold under
repurchase agreements 166,294 14.05 115,601 11.04 67,991 7.05
Acceptances outstanding 15,588 1.32 11,924 1.14 12,702 1.32
Other short-term borrowings 25,681 2.17 11,721 1.12 13,247 1.37
Other liabilities 18,712 1.58 16,846 1.61 13,160 1.36
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 1,078,092 -- 945,631 -- 873,978 --
Stockholders' Equity
Capital stock 6 -- 5 -- 3 --
Surplus 23,829 2.01 23,674 2.26 23,430 2.43
Undivided profits 77,394 6.54 70,652 6.75 64,660 6.70
Less: Treasury stock 3,548 0.29 89 -- -- --
Net unrealized appreciation on
securities available for sale, net 7,707 0.65 6,910 0.66 2,948 0.31
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 105,388 -- 101,152 -- 91,041 --
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,183,480 100% $1,046,783 100% $965,019 100%
==================================================================================================================
</TABLE>
* The averages for available-for-sale securities are disclosed at estimated
market value, with securities held to maturity at book value.
35
<PAGE>
MERCHANTS NEW YORK BANCORP
AND
THE MERCHANTS BANK OF NEW YORK
Spencer B. Witty
Chairman of the Board
James G. Lawrence
President and Chief Executive Officer
Rudolf H. Hertz William J. Cardew Charles I. Silberman*
Vice Chairman Vice Chairman and Vice Chairman
Chief Operating Officer
Eric W. Gould
Vice President and Treasurer
Nancy J. Ostermann
Vice President and Comptroller
Karen L. Deitz
Corporate Secretary
BOARD OF DIRECTORS
Charles J. Baum President, Baum Bros. Imports, Inc.,
importers of porcelain dinnerware
William J. Cardew Vice Chairman and Chief Operating Officer
Eric W. Gould** Vice President and Treasurer
Rudolf H. Hertz Vice Chairman of the Board
Isidore Karten President, I. Karten, Inc., d/b/a Bermaha Textile Co.,
exporters of textiles
James G. Lawrence President and Chief Executive Officer
Robinson Markel Attorney--member of the law firm of Rosenman & Colin LLP
Paul Meyrowitz Attorney--senior member of the law firm of
Simon, Meyrowitz & Meyrowitz
Alan Mirken President--Aaron Publishing Group, Inc., book publishers
Mitchell J. Nelson Attorney--of counsel to the law firm of Christy & Viener;
President, Atlas Real Estate Funds
Leonard Schlussel President, Wellbilt Equipment Corp., builders of restaurants;
Partner, Keybro Enterprises, finance
Charles I. Silberman President and Chairman of the Board, S. Parker Hardware
Mfg. Corp., importer and manufacturer of builders'
hardware; Vice Chairman of the Holding Company
Spencer B. Witty Chairman of the Board of the Bank and Holding Company
Counsel -- Paul Meyrowitz Attorney -- Simon, Meyrowitz & Meyrowitz
Transfer Agent -- American Stock
Transfer and Trust Co. 40 Wall Street, New York, NY 10005
Auditors -- KPMG Peat Marwick LLP 345 Park Avenue, New York, NY 10154
*Officer of Bancorp.
**Director of Bancorp.
36
<PAGE>
THE MERCHANTS BANK OF NEW YORK
LENDING DIVISION
Executive Vice President and Chief Credit Officer
Stephen A. Barrow
Senior Vice Presidents and Division Heads
Leonard S. Levine
Janet L. Markel
Group Managers
Michael D. Altman
Senior Vice President
Brian M. Cardew
Vice President
Lester Nadel
Vice President
Kenneth J. Satchwill
Vice President
Joseph J. Wynne
Vice President
Vice Presidents
Gerald H. Attanasio
Andrew S. Baron
Salvatore J. Chiarelli
Joseph I. Edelman
Leonard Katcher
Joseph J. Nicolosi
Elliot Reiner
Donald F. Ritchie
Chad E. Stewart
Assistant Vice Presidents
Joseph P. Martin
Brian T. Schiffino
Assistant Cashiers
John V. Buoniconti
John J. Cronin
Paul L. Hamner
Joseph Radice
Eugene P. Schreiner
INTERNATIONAL DIVISION
Senior Vice President and Division Head
Joseph M. Cestone
Assistant Vice President
Mary Jane G. Lerias
Assistant Cashiers
Esteban A. Espiritu
Babulal Kapadia
BANK OPERATIONS
Senior Vice President
and Division Head
Rosemarie A. Calabro
Vice President
Thomas J. Stackhouse
Assistant Cashiers
Philip S. Cameron
Inmaculada Marquez
Kenneth Renga
Patricia A. Revell
BRANCH DIVISION
Senior Vice President and Division Head
Eugene J. Venier
Assistant Vice President
Harry Woods
275 MADISON AVENUE
Vice President and
Branch Manager
Dennis J. Sheridan
Assistant Vice President
James T. Kung
Assistant Cashier
M. Carolina Nolasco
295 FIFTH AVENUE
Vice President and
Branch Manager
Simeon Kovacic
Assistant Vice Presidents
Barbara Green
William A. Matos
145 FIFTH AVENUE
Vice President and
Branch Manager
Michael S. Hassani
Assistant Cashier
Amelita L. Antonio
1040 SIXTH AVENUE
Assistant Vice President
and Branch Manager
Raymond F. Tornabene
Assistant Vice President
Javier R. Carrera
<PAGE>
62 WEST 47TH STREET
Vice President and
Branch Manager
John U. Doekker
Vice President
Ralph Salvaggio
Assistant Vice President
David S. Kaplan
Assistant Cashier
Frances Nardella
434 BROADWAY
Vice President and
Branch Manager
Joseph R. Criscione
Assistant Vice President
Ronald Mattioli
Assistant Cashiers
Fontaine Firenze
Charles E. Nigro
Elaine P. Sacks
93 CANAL STREET
Assistant Vice President and
Branch Manager
Lawrence I. Kohn
Assistant Vice President
Orlando Acevedo
COMPTROLLER
Vice President and
Department Head
Nancy J. Ostermann
Assistant Vice President
M. Nasette Espiritu
Assistant Comptrollers
Salvatore Balsamo
Perrie H. McCloud
Joanna Robinson
TREASURER
Vice President
Eric W. Gould
AUDIT
Auditor and Department Head
Mary J. Scarpelli
Assistant Auditor
Allan W. Trowbridge, CISA
HUMAN RESOURCES
Vice President and Department Head
Ruth T. Aimetti
REAL ESTATE &
ADMINISTRATIVE SERVICES
Vice President
T. John Santoro
CORPORATE SECRETARY
Karen L. Deitz
<PAGE>
[GRAPHIC OMITTED]
Merchants New York Bancorp
275 Madison Avenue
434 Broadway
62 West 47th Street
1040 Sixth Avenue
295 Fifth Avenue
145 Fifth Avenue
93 Canal Street
New York, New York
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule is a compilation of information appearing in the financial
statements that are included in the Annual Report on Form 10-K of Merchants New
York Bancorp for the year ended December 31, 1997. It is qualified in its
entirety by reference to those financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 47,936,071 57,488,091
<INT-BEARING-DEPOSITS> 3,273,865 351,968
<FED-FUNDS-SOLD> 67,000,000 26,000,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 541,634,211 561,600,523
<INVESTMENTS-CARRYING> 215,170,777 166,908,260
<INVESTMENTS-MARKET> 219,902,000 169,340,000
<LOANS> 331,807,721 297,080,725
<ALLOWANCE> 6,167,157 5,616,971
<TOTAL-ASSETS> 1,235,742,235 1,137,798,701
<DEPOSITS> 904,086,925 875,693,410
<SHORT-TERM> 192,179,723 127,199,039
<LIABILITIES-OTHER> 33,281,190 31,370,620
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 9,989 9,976
<OTHER-SE> 106,184,408 103,525,656
<TOTAL-LIABILITIES-AND-EQUITY> 1,235,742,235 1,137,798,701
<INTEREST-LOAN> 29,771,225 25,300,755
<INTEREST-INVEST> 52,558,178 47,473,933
<INTEREST-OTHER> 491,166 320,297
<INTEREST-TOTAL> 82,820,569 73,094,985
<INTEREST-DEPOSIT> 29,135,924 26,438,521
<INTEREST-EXPENSE> 40,253,456 33,455,196
<INTEREST-INCOME-NET> 42,567,113 39,639,789
<LOAN-LOSSES> 1,700,000 2,580,000
<SECURITIES-GAINS> 21,901 372,396
<EXPENSE-OTHER> 24,332,962 22,264,647
<INCOME-PRETAX> 21,716,766 20,081,295
<INCOME-PRE-EXTRAORDINARY> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 14,562,158 12,670,771
<EPS-PRIMARY> 1.49 1.27
<EPS-DILUTED> 1.46 1.26
<YIELD-ACTUAL> 4.16 4.41
<LOANS-NON> 159,000 1,109,000
<LOANS-PAST> 204,000 687,000
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 5,617,000 6,484,000
<CHARGE-OFFS> 0 4,405,000
<RECOVERIES> 319,000 958,000
<ALLOWANCE-CLOSE> 6,167,000 5,617,000
<ALLOWANCE-DOMESTIC> 102,000 579,000
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 6,065,000 5,038,000
</TABLE>
