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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, 1998
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 1, 1999, the aggregate market value of the voting stock
held by non-affiliates was $249,993,942.
As of February 1, 1999, 9,741,330 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Specified portions of the 1998 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 19, 1999 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 1
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 21
ITEM 3. LEGAL PROCEEDINGS 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
PART II 22
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 22
ITEM 6. SELECTED FINANCIAL DATA 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 23
PART III 23
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 23
ITEM 11. EXECUTIVE COMPENSATION 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 23
PART IV 24
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 24
SIGNATURES 25
<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 66 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
NYCE(R), The Exchange(R) and CIRRUS(R) systems are available for use on non-Bank
owned
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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 $13.0 million. The Bank's legal lending
limit was in excess of $15 million at December 31, 1998.
During 1998, the Bank created two new subsidiary corporations. The first,
Merchants New York Commercial Corp., a Delaware corporation, specializes in
asset-based lending, providing revolving loans to manufacturing, wholesale,
distribution and service companies with high working capital needs. The loans
are based on the level of a company's working capital assets, primarily accounts
receiveable and inventory. In addition, machinery and equipment loans for both
existing and new equipment may be provided. In all instances, the loans are
secured by the related assets which are closely monitored.
The second new subsidiary, MBNY Holdings Corp., also a Delaware
corporation, is a holding company that owns the common stock and a majority of
the preferred stock of Merchants Capital Corporation, a real estate investment
trust that owns the real estate related portion of the Bank's investment
portfolio.
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
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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.
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
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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, 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
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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 shareholder equity
plus retained earnings, less certain goodwill items and 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 of 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.
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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 3% 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 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, 1998, the capital ratios of the Company and the Bank
exceeded the FRB's minimum regulatory capital guidelines as follows:
Merchants New York Bancorp, Inc.
Risked-Based Capital
Leverage Capital(1) Tier 1 Total(2)
------------------ ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------------------ ---------------- ----------------
(Dollars in Thousands)
Actual $103,545 7.91% $103,545 16.94% $111,186 18.19%
Minimum
requirement 39,271 3.00 24,450 4.00 48,900 8.00
-------- ----- -------- ----- -------- -----
Excess $ 64,274 4.91% $ 79,095 12.94% $ 62,286 10.19%
======== ===== ======== ===== ======== =====
The Merchants Bank of New York
Risked-Based Capital
Leverage Capital(1) Tier 1 Total(2)
------------------ ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------------------ ---------------- ----------------
(Dollars in Thousands)
Actual $103,607 7.91% $103,607 16.95% $111,250 18.20%
Minimum
requirement 52,393 4.00 24,450 4.00 48,901 8.00
-------- ----- -------- ----- -------- -----
Excess $ 51,214 3.91% $ 79,157 12.95% $ 62,349 10.20%
======== ===== ======== ===== ======== =====
(1) The leverage capital requirement is generally between 3.0% 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 amount
of loan loss reserves or 1.25% of risk-weighted assets, whichever is less.
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
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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 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,
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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.
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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As of December 31, 1998, the Bank's loans of $362 million, net of unearned
discounts, represented 28% 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>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Commercial and industrial . $ 339,982 $ 312,967 $ 283,341 $ 256,620 $ 254,098
Real estate - mortgage .... 19,307 15,723 10,941 11,276 11,205
Installment loans ......... 2,520 3,212 2,855 3,067 2,894
--------- --------- --------- --------- ---------
Gross loans ............... 361,809 331,902 297,137 270,963 268,197
Less: unearned discounts (46) (94) (56) (59) (80)
========= ========= ========= ========= =========
Total (net of unearned
discounts) .............. $ 361,763 $ 331,808 $ 297,081 $ 270,904 $ 268,117
========= ========= ========= ========= =========
</TABLE>
Approximately 45% 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, 1998, 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, 1998:
Due One Due One Due After
Year or Less to Five Years Five Years Total
------------ ------------- ---------- --------
(In Thousands)
Commercial and industrial ..... $308,882 $ 27,376 $ 3,678 $339,936
Real estate - mortgage ........ 3,059 12,759 3,489 19,307
-------- -------- -------- --------
Total ......................... $311,941 $ 40,135 $ 7,167 $359,243
======== ======== ======== ========
Loans included in the above
which are due after one year,
which have:
Fixed interest rates .......... $ 5,269 $ 2,169 $ 7,438
Adjustable interest rates ..... 34,866 4,998 39,864
-------- -------- --------
Total ......................... $ 40,135 $ 7,167 $ 47,302
======== ======== ========
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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 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 93.4% 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 an average life of four years or less and a constant cash flow return
of principal which can be reinvested on a monthly basis (during 1998 this cash
flow averaged approximately $18 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, 1998, the Bank had a negative one-year gap of
approximately (36%) 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.
10
<PAGE>
The following table summarizes the Bank's interest rate sensitive assets
and liabilities at December 31, 1998 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 .................... $ 5,000 $ -- $ -- $ -- $ 5,000
U.S. government and
agency obligations ................ 59,905 179,724 393,722 121,555 754,906
Obligations of states and political
subdivisions ...................... 965 9,422 17,814 38,283 66,484
Other securities ...................... -- -- -- 22,347 22,347
Commercial and industrial loans:
Fixed rate ........................ 8,439 3,685 4,142 1,273 17,539
Adjustable rate ................... 322,397 -- -- -- 322,397
Real estate loans:
Fixed rate ........................ -- 1,674 1,126 895 3,695
Adjustable rate ................... 15,612 -- -- -- 15,612
Installment loans ..................... 388 1,017 1,115 -- 2,520
---------- ---------- ---------- ---------- ----------
Total interest-earning assets ..... $ 412,706 $ 195,522 $ 417,919 $ 184,353 $1,210,500
========== ========== ========== ========== ==========
Interest-bearing liabilities:
NOW accounts ........................ $ 46,445 $ -- $ -- $ -- $ 46,445
Savings accounts .................... 26,177 -- -- -- 26,177
Money market accounts ............... 162,789 -- -- -- 162,789
Time deposits ....................... 269,495 126,002 21,371 -- 416,868
Securities sold under repurchase
agreements ........................ 105,000 55,000 -- -- 160,000
Other short term borrowing ............ 4,282 45,000 -- -- 49,282
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 614,188 $ 226,002 $ 21,371 $ -- $ 861,561
========== ========== ========== ====== ==========
Net interest sensitivity gap .......... (201,482) (30,480) 396,548 184,353 348,939
Cumulative gap position ............... (201,482) (231,962) 164,586 348,939
Cumulative gap/total
interest-earning assets ........... (16.64%) (19.16%) 13.60% 28.83%
========== ========== ========== ==========
</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.
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
11
<PAGE>
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, 1998 were $146,000 or 0.04%
of total loans, while at December 31, 1997 and 1996, they were $159,000 and $1.1
million, respectively. Loans which are current as of December 31, 1998 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,
------------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
(Dollars in Thousands)
Non-accrual loans ................ $ 146 159 1,109 2,169 1,311
Past due 90 days or more
(other than above) ............. 351 204 687 281 308
Restructured ..................... -- -- -- -- --
----- ----- ----- ----- -----
Total ............................ $ 497 363 1,796 2,450 1,619
Interest income that would
have been earned on
non-accrual and reduced
rate loans outstanding ......... 3 126 288 201 94
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 .......................... .14% .11 .60 .90 .60
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, 1998, there were no potential problem loans of which they were aware that in
management's opinion would materially impact financial results.
The Bank's allowance for loan losses at December 31, 1998 was $7.97
million or 2.2% of total loans compared to $6.17 million or 1.86% of total loans
at December 31, 1997. At December 31, 1996 the allowance was $5.62 million or
1.91% of total loans. Of the allowance
12
<PAGE>
for loan losses, non-accrual loans represented 1.8%, 2.6% and 19.74% at December
31, 1998, 1997 and 1996, 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
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 $2.2 million per year. In the same period, the average
annual provision for additions to the loan loss allowance was $1.6 million, with
1998 accounting for $1.4 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,
----------------------------------------------------
(Dollars in Thousands)
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses
balance at beginning of year ....... $ 6,167 5,617 6,484 6,188 6,960
Provision for loan losses .......... 1,425 1,700 2,580 2,080 1,850
Charge offs:
Commercial and industrial ....... (208) (1,460) (4,345) (2,315) (2,918)
Installment ..................... (24) (9) (60) (33) (--)
------- ------- ------- ------- -------
Total charge offs .................. (232) (1,469) (4,405) (2,348) (2,918)
Recoveries
Commercial and industrial ....... 589 314 952 563 294
Installment ..................... 16 5 6 1 2
------- ------- ------- ------- -------
Total recoveries ................... 605 319 958 564 296
Net charge offs .................... 373 (1,150) (3,447) (1,784) (2,622)
------- ------- ------- ------- -------
Balance at end of year ............. $ 7,965 6,167 5,617 6,484 6,188
======= ======= ======= ======= =======
Ratio of net charge offs to
average loans outstanding,
net of unearned discounts .......... (.11%) .35 1.23 .65 .96
</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,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
% of % of % of % of % of
Loans Loans Loans Loans Loans
in Ea. in Ea. in Ea. in 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 . $ 73 93.96 80 94.34 555 95.36 1,085 94.71 656 94.74
Real estate ............. -- 5.34 -- 4.70 -- 3.68 -- 4.16 -- 4.18
Installment ............. 20 0.70 22 96 24 96 23 1.13 20 1.08
Unallocated ............. 7,872 -- 6,065 -- 5,038 -- 5,376 -- 5,512 --
------ ----- ----- ----- -----
Total ................... $7,965 6,167 5,617 6,484 6,188
====== ===== ===== ===== =====
</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 four 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, 1998, 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
--------------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
Available for sale securities:
U.S. government and agency
obligations ............................. $484,293 $496,300 $518,908
Obligations of states and political
subdivisions ............................ 28,435 22,838 19,848
Other securities ........................... 132,846 8,194 9,107
-------- -------- --------
Total - available for sale (book value) .... $645,574 $527,332 $547,863
======== ======== ========
Estimated market value ..................... $660,026 $541,634 $561,601
======== ======== ========
Held to maturity securities:
U.S. government and agency
obligations ............................. $109,502 $159,690 $119,351
Obligations of states and political
subdivisions ............................ 59,813 55,154 47,219
Other securities ........................... 28,848 327 338
-------- -------- --------
Total - held to maturity (book value) ...... $198,163 $215,171 $166,908
======== ======== ========
Estimated market value ..................... $203,429 $219,902 $169,340
======== ======== ========
15
<PAGE>
The following tables set forth the book values, range of maturities and
average yields for each category at December 31, 1998.
<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)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
Obligations(1)(2).. $134,646 $ 78,099 $ -- $ 1,118 $213,863 8.05%
U.S. agency
obligations ....... 88,789 285,209 18,454 2,000 394,452 7.41%
Obligation of state
and political
subdivisions(2) ... 1,214 5,080 5,267 17,785 29,346 5.27%
Other securities ... -- -- -- 22,365 22,365 7.21%
-------- -------- -------- -------- -------- ----
Total available
for sale .......... $224,650 $368,388 $ 23,721 $ 43,267 $660,026 7.52%
======== ======== ======== ======== ======== ====
Average yield
to maturity ....... 7.81% 7.50 6.33 6.24
</TABLE>
<TABLE>
<CAPTION>
Securities Held to Maturity (Book Value)
---------------------------------------------------------------
One to Five to Over Total Average
One Year Five Ten Ten Book 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) ...... $ 5,731 $ 36,826 $ 332 $ -- $ 42,889 8.64%
U.S. agency obligations . 2,079 64,534 -- -- 66,613 7.97%
Obligations of New York
state (2) .............. $ 9,187 12,778 16,613 21,235 59,813 5.36%
Other securities ........ -- 28,745 100 3 28,848 7.20%
-------- -------- -------- -------- -------- ----
Total held to maturity .. $ 16,997 $142,883 $ 17,045 $ 21,238 $198,163 7.22%
======== ======== ======== ======== ======== ====
Average yield to maturity 7.05% 7.58 5.08 4.99
Total investments ....... $241,647 $511,270 $ 40,766 $ 64,506 $858,189 7.45%
======== ======== ======== ======== ======== ====
</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 - 8.00% and
securities held to maturity - 8.15%. The total tax equivalent yield on the
entire investment securities portfolio is 7.73%.
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 deposit accounts of $100,000 or more ("jumbo certificates").
Management believes that a
16
<PAGE>
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, 1998, the Bank had $310 million in jumbo certificates,
compared to $301.2 million at December 31, 1997 and $271.2 million at December
31, 1996. At December 31, 1998, 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
- ------------------ ------ ------------
(in Thousands)
3 months or less ............................... $229,581 5.11%
More than 3 through 6 months ................... 59,927 5.95
More than 6 months through 12 months ........... 15,217 5.29
More than 12 months ............................ 5,291 6.14
-------- ----
Total ...................................... $310,016 5.40%
======== ====
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, 1998,
CD's amounted to $416.9 million or 63.9% of total interest-bearing deposits,
compared to $419.1 million or 65.9% at December 31, 1997 and $406.6 million or
65.4% at December 31, 1996. 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.
At December 31, 1998, savings deposit accounts amounted to $26.2 million
or 4% of the Company's total interest-bearing deposits, compared to $24.7
million or 4% of the Company's total interest-bearing deposits at both December
31, 1997 and 1996. Savings deposits consist of passbook savings accounts and
statement savings accounts. The minimum initial deposit required is $100.
Savings accounts offered by the Bank pay interest compounded and credited on a
quarterly basis, to accounts with a minimum balance of $5 at the end of the
quarter.
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 $46.4 million, or 7.1% of
the Bank's total interest-bearing deposits at December 31, 1998, compared to
$47.3 million, or 7.4%, at December 31, 1997 and $44.4 million, or 7.1%, at
December 31, 1996.
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 $162.8 million, or 25% of the Bank's total interest-bearing
deposits, at December 31, 1998, compared to $145.3 million, or 22.8%, at
December 31, 1997 and $146.2 million, or 23.5%, at December 31, 1996.
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,
------------------------
1998 Rate(%) 1997 Rate(%) 1996 Rate(%)
---- ------- ---- ------- ---- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Deposits:
Demand.................... $255,239 -- $227,744 -- $209,828 --
NOW....................... 44,609 2.24 41,904 2.27 38,219 2.28
Savings................... 25,476 2.98 24,277 2.98 25,485 2.99
Money market.............. 145,660 3.38 141,671 3.37 131,974 3.37
Other time ............... 416,286 5.27 416,221 5.45 384,033 5.30
-------- -------- ---- -------- ----
Total.......................... $887,270 $851,817 $789,539
======== ======== ========
</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. The bulk of the
real estate related portion of the Bank's investment portfolio is held by a real
estate investment trust, Merchants Capital Corporation ("MCC"), which is a
subsidiary of the Bank's Delaware holding company subsidiary, MBNY Holdings
Corp, formed in 1998. 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
$190 million of funds, of which $50 million may be used in overnight funds.
Furthermore, the Bank has access to the discount window of the Federal Reserve
Bank. There were no borrowings from the Federal Reserve Bank's discount window
under these arrangements in 1998, 1997 or 1996.
18
<PAGE>
Short Term Borrowings
The following table represents the Bank's material short term borrowings
for the fiscal years ending December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at year end........................................... $209,031 $191,772 $127,199
Weighted average interest rate on balances at end of year..... 5.34% 5.82% 5.41%
Maximum amount of borrowing at any month end.................. $259,841 $248,436 $170,000
Approximate average amounts outstanding during period......... $211,269 $182,285 $119,661
Approximate weighted average interest rate during period...... 5.65% 5.80% 5.51%
</TABLE>
Year 2000 Compliance
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
include those developed and used by the Company's third-party data processors
and packaged software purchased by the Company and used on in-house personal
computers and on its wide area network.
The Federal Financial Institutions Examination Council ("FFIEC") has
recommended a five-phase program to address the Year 2000 (Y2K) problem. The
phases are: awareness, assessment, renovation, validation and implementation.
This guidance from the FFIEC is intended to aid financial institutions in
identifying risks, developing a plan of action to address them, performing
adequate tests and finally certifying that systems are Y2K compliant. The
program includes upgrading system codes and programs and making any needed
hardware and software replacements.
Management of the Company has initiated a program to assess its computer
systems, software applications and third-party data processors for Y2K
readiness. To perform this function, the Company has formed a Y2K Committee
whose membership includes personnel from all operating areas. The committee has
reviewed the Company's operations to identify those systems and third-party
suppliers that may be affected, and has prepared a plan of implementation to
address issues related to transaction processing in the post-1999 period. The
Company estimates that as of December 31, 1998 its preparedness level in this
area was approximately 80%. It expects to reach the 100% preparedness level by
September 30, 1999.
The Company has requested from third-party suppliers, and has obtained,
written information as to the state of their preparedness for Y2K. Each supplier
whose products or services the Company considers to be material to its
operations has assured the Company either that it is already Y2K-compliant, or
that it will be so before the end of 1999. Nonetheless, the Company believes
there may be some residual risk of Y2K-related problems being experienced by
suppliers.
Also, borrowers from the Company's banking subsidiary may encounter
Y2K-related problems, which could in some cases lead to an increase in the
credit risk represented by loans to those borrowers. The Company is unable to
evaluate the extent of this risk.
19
<PAGE>
The Company is continuing to evaluate the costs associated with Y2K
remediation. Testing and other expanses totaling approximately $400,000 have
been identified to date. While additional costs are expected to be incurred, the
Company does not believe that the total will be material to its operations.
In addition to the previously discussed initiatives, the Company is
developing business resumption, remediation and event contingency plans to
prepare for potential systems failures at critical dates, failures of critical
third parties to effectively remediate and certify their systems, as well as any
other unanticipated events that could arise with the date change. The
development of these plans include the identification of core business
processes, critical to the Company's business and operations, and an assessment
of failure scenarios. The Company expects that its contingency planing for the
year 2000 issue will be substantiually complete by the end of June 1999.
Employees
At December 31, 1998, the Company and the Bank had 243 employees,
consisting of 81 officers and 162 supervisory and clerical employees. The Bank
considers its relations with its employees to be good.
20
<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 1998 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 39
Analysis of Net Interest Earnings Analysis of Net Interest Earnings 9
Volume and Rate Variance Change in Interest Income and
Expense 10
Return on Equity and Assets Selected Financial Data 8
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 1998, there were no matters submitted to a
vote of the Company's stockholders.
21
<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, 1998 the total number of holders of record of
the Company's common equity was 1,627. The information appearing on page 17 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 1998 and 1997
aggregating annually $7.8 million and $7.3 million, respectively, or $.80 per
share in 1998 and $.75 per share in 1997, 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. During 1998, options to purchase an aggregate of
18,250 shares were granted under the Option Plan. Also during 1998, outstanding
options to purchase a total of 161,085 shares of Common Stock were exercised.
All shares delivered upon these exercises were reissued from the Company's
treasury. The weighted average exercise price of such options was $9.94 per
share. Such transactions were exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.
ITEM 6. SELECTED FINANCIAL DATA
The information appearing on page 38 (Note 17) and page 8 respectively, of
the Annual Report under the captions "Selected Quarterly Financial Data" and
"Selected Financial Data" is incorporated herein by reference.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearing on pages 9 through 17 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information appearing on pages 12 and 13 of the Annual Report under
the caption "Market Risk Management" 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 18 through 38 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 5 through 7 of the Company's Proxy
Statement prepared in connection with the 1998 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.
23
<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 LLP, dated January 25, 1999 appear on
pages 18 through 38 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
(13) 1998 Annual Report to Shareholders
(27) Financial Data Schedule
(b) Reports on Form 8-K. None.
24
<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 16, 1999
By: /s/ James G. Lawrence
--------------------------------------
James G. Lawrence
President, Chief Executive Officer and
Director (Principal Executive Officer)
Dated March 16, 1999
By: /s/ William J. Cardew
--------------------------------------
William J. Cardew
Vice Chairman of the Board,
Chief Operating Officer and Director
(Principal Financial Officer)
Dated March 16, 1999
By: /s/ M. Nasette Espiritu
--------------------------------------
M. Nasette Espiritu
Vice President and Comptroller
(Principal Accounting Officer)
Dated March 16, 1999
25
<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 16, 1999
- ---------------------------
Charles J. Baum
/s/ William J. Cardew Vice Chairman of the Board, March 16, 1999
- --------------------------- Chief Operating Officer and
William J. Cardew Director
/s/ Eric W. Gould Senior Vice President, March 16, 1999
- --------------------------- Treasurer and Director
Eric W. Gould
/s/ Rudolf H. Hertz Vice Chairman of the Board March 16, 1999
- --------------------------- and Director
Rudolf H. Hertz
/s/ Isidore Karten Director March 16, 1999
- ---------------------------
Isidore Karten
/s/ James G. Lawrence President, Chief Executive March 16, 1999
- --------------------------- Officer and Director
James G. Lawrence
/s/ Robinson Markel Director March 16, 1999
- ---------------------------
Robinson Markel
/s/ Paul Meyrowitz Director March 16, 1999
- ---------------------------
Paul Meyrowitz
/s/ Alan Mirken Director March 16, 1999
- ---------------------------
Alan Mirken
/s/ Mitchell J. Nelson Director March 16, 1999
- ---------------------------
Mitchell J. Nelson
/s/ Leonard Schlussel Director March 16, 1999
- ---------------------------
Leonard Schlussel
/s/ Charles I. Silberman Vice Chairman of the Board March 16, 1999
- ---------------------------
Charles I. Silberman
/s/ Spencer B. Witty Chairman of the Board March 16, 1999
- --------------------------- and Director
Spencer B. Witty
26
Exhibit 11
Computation of Earnings Per Share
The computation of earnings per share for each period presented is as follows:
1998 1997 1996
----------- ----------- -----------
Net income ........................... $15,902,163 14,562,158 12,670,771
Less: Minority Interest .............. 7,425 0 0
---------------------------------------
Net Income Available to Common
Shareholders ..................... $15,894,738 $14,562,158 $12,670,771
Weighted average shares
outstanding* ..................... 9,711,531 9,793,913 9,961,538
Plus: Effect of Stock Options as
Dilutive Securities .............. 145,950 163,277 101,859
---------------------------------------
Adjusted Weighted Average Shares
Assuming Dilution ................ 9,857,481 9,957,190 10,063,397
Earnings per share, basic ............ $ 1.64 $ 1.49 $ 1.27
Earnings per share, diluted .......... $ 1.61 $ 1.46 $ 1.26
* Adjusted for the 2-for-1 split of the Common Stock that became effective
October 7, 1997.
[LOGO]
MERCHANTS NEW YORK BANCORP
MERCHANTS NEW YORK BANCORP
1998
ANNUAL REPORT
<PAGE>
Table of Contents
1 Financial Highlights
2 To Our Stockholders
4 Middle Market Lending
6 Asset-Based Lending
7 Selected Financial Data
8 Management's Discussion and Analysis of
Financial Condition and Results of Operations
17 Consolidated Statements of Condition
18 Consolidated Statements of Income and Comprehensive Income
19 Consolidated Statements of Changes in Stockholders' Equity
20 Consolidated Statements of Cash Flows
21 Notes to Consolidated Financial Statements
37 Independent Auditors' Report
38 Average Assets, Liabilities and Stockholders' Equity
IBC Board of Directors
Counsel -- Paul Meyrowitz Transfer Agent -- American Stock
Simon, Meyrowitz & Transfer and
Meyrowitz Trust Co.
Attorney -- Mark W. Schlussel, Esq. Auditors -- KPMG LLP
Ziechner, Ellman & Krause
The Company's annual report, on Form 10-K, as filed with the Securities and
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
Years ended December 31, 1998 1997
- --------------------------------------------------------------------------------
Financial Condition Data
Total assets $1,289,570,980 $1,235,742,235
Total investment securities 858,189,656 756,804,988
Net loans 353,798,660 325,640,564
Total deposits 934,323,292 904,086,925
Total liabilities 1,176,592,775 1,129,547,838
Total stockholders' equity 112,978,205 106,194,397
Selected Operating Data
Total interest income 86,267,606 82,820,569
Total interest expense 40,872,912 40,253,456
Net interest income 45,394,694 42,567,113
Net interest income after provision
for loan losses 43,969,694 40,867,113
Income before income taxes 24,033,672 21,716,766
Income tax expense 8,131,509 7,154,608
Net income 15,902,163 14,562,158
Net income per average share:
Basic $ 1.64 $ 1.49
Diluted $ 1.61 $ 1.46
[The following information was depicted as a bar chart in the printed material]
Net Interest Income Net Income Stockholders' Equity
(In dollars) (In dollars) (In dollars)
'94 36,237,944 10,709,341 77,734,334
'95 37,662,203 11,465,430 100,154,603
'96 39,639,789 12,670,771 103,535,632
'97 42,567,113 14,562,158 106,194,397
'98 45,394,694 15,902,163 112,978,205
1
<PAGE>
TO OUR STOCKHOLDERS
AND FRIENDS:
With a deep sense of pride, we report to you that Merchants New York
Bancorp again had a record year of earnings. "The Good Old Bank" carried on its
tradition as a reliable profitmaking institution and again reinforced our
reputation as one of the nation's strongest and most stable commercial banks.
After-tax income climbed to a record $15,902,163, or $1.61 per diluted
share, up from $14,562,158, or $1.46 per diluted share. This record was achieved
despite global economic problems, including the collapse of the economies of
Asia and Russia, and the very indecisive and unstable market conditions in
Brazil and the rest of Latin America. Prudently, Merchants Bank has no exposure
to these problems.
Again our core business performed in an excellent fashion. Loans and
investments, which are the lifeblood of our Bank, continued their growth in our
prudent manner. This was accomplished by our steadfast concentration on lending
to middle market firms -- mid-size and small businesses, and careful investing.
As loans and investments increased, so did our demand deposits, which grew
to record new heights, while costs were kept in bounds by internal controls and
very diligent and attentive asset/liability management.
We are proud of our other achievements. During the year to increase
shareholder value, we have once again increased our stockholders' equity and
book value, as well as adding to our visibility in the financial press. Also we
reaffirmed the buy-back of our stock, as management feels that due to the
excellent earnings it is a very sound investment for our excess funds thereby
affording us an opportunity to invest in the Bank's future growth.
In December, "The Good Old Bank" paid its 262nd consecutive quarterly cash
dividend which has never been skipped nor cut since 1932 when cash dividends
were commenced. This is consistent with our tradition of sharing our growth with
our stockholders, a record that is both unmatched and unrivaled.
In the latter part of 1998, we established a new subsidiary, Merchants New
York Commercial Corp. which is dedicated to asset-based lending: making loans
against accounts receivable, inventory and equipment and owner-occupied real
estate. This unit is staffed by recognized experts in the field. It is off to a
good start and should be nicely profitable in its first year of operation. We
have confidence it will make a good contribution to our bottom line in the years
ahead.
Consolidation in the banking industry continues; the many mergers and
acquisitions have given our "eager to lend" bank opportunities. As the larger
banks get bigger, their middle market borrowers have become less important. We
are very much like a Country Bank in the middle of the Big Apple. We know our
clients well and treasure their relationship with us. A substantial number of
our customers are family businesses which we have served for many years and that
now have third and even fourth-generation owners.
[PHOTO OMITTED]
James G. Lawrence
President and Chief
Executive Officer
2
<PAGE>
Taking a look back, since the Bank's founding in 1874, our institution has
never had a losing year and our debt free Fortress Balance Sheet offers us
opportunities. Merchants Bank of New York is unique in many ways. The roots of
our Bank stem from international trade since sailing ship days. Our hand has
never lost its skill, since 1874. We enjoy an excellent reputation for expertise
in speedily handling letters of credit for importers and foreign collections for
exporters. We look forward to continued growth in these areas.
We are a licensed United States Small Business Administration lender for
loans that are majority guaranteed by the Federal Government. This is a niche
that is both profitable and fits our business philosophy of being the bank for
small and mid-sized businesses.
Our branches are strategically located to serve communities where there
are clusters of specialty firms in select industries, of the size we cater to,
which are importers or exporters and can be served quickly with letters of
credit or foreign collections by our very able International Department. We make
special efforts to support those communities, as well as marketing to the
Greater Metropolitan Area as a whole.
We continue to enhance our technological capabilities and offer MasterCard
and Visa credit cards and our own ATM worldwide access cards along with other
bank products. Most importantly, we concentrate on what we know best, remaining
focused on commercial banking and being a trustworthy partner for the
medium-sized merchants and manufacturers who are the proven engine for the
growth of the U.S. economy.
After 62 years of outstanding service to "The Good Old Bank," one of our
stalwarts, Vice Chairman Rudolf Hertz will enter semi-retirement. He will remain
a Director and Vice Chairman of our parent holding company and will be an
important consultant to the Bank. We wish him the good health and enjoyment of
life as he eases some of the burdens of his duties and is able to spend a little
more time with his family.
Our Bank relies on many individuals as we feel the "people" resource is of
prime importance to our success. 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, express appreciation to our
professional team of officers and fine staff who make it all possible.
We remain confident about the future and again renew our dedication to
keeping "The Good Old Bank" safe and strong. As always, our motto is, "The
Safety of the Depositors Comes First--Earnings Will Inevitably Follow."
/s/ James G. Lawrence /s/ Spencer B. Witty
- ------------------------------ -------------------------------------
James G. Lawrence Spencer B. Witty
President and Chief Executive Officer Chairman of the Board
[PHOTO OMITTED]
Spencer B. Witty
Chairman of the Board
3
<PAGE>
Corporate Lending Administration
[PHOTO OMITTED]
(standing, left to right): Andrew S. Baron, V.P.; Brian M. Cardew, V.P., James
K. Moore, V.P.; Kenneth J. Satchwill, V.P.; Lester Nadel, V.P.; (seated, left to
right): Janet L. Markel, Sr. V.P.; Stephen A. Barrow, Executive V.P.; Leonard S.
Levine, Sr. V.P.
Middle Market Lending
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 middle market
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.
A bank's earnings from its lending operations depends not only on
satisfied customers, but also 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, lending standards and
relationships continue to be 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.
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. Brand names are not built solely by
advertising and promotion and we believe we have a unique name in banking's
"Middle Market." Brand names are built by living up to your promises, by repeat
daily performance against a standard of excellence. We constantly think of how
the customer is using our product and position
Diamond and Jewelry
Industry Specialists,
Corporate Lending Division III
[PHOTO OMITTED]
(standing, left to right): Gerald H. Attanasio, V.P.; Rudolf H. Hertz, Vice
Chairman; Joseph Radice, A.V.P.; Joseph I. Edelman, V.P.; (seated left to
right): Michael D. Altman, Sr. V.P.; Elliot Reiner, V.P.
4
<PAGE>
Officers of Corporate Lending Divisions I & II
[PHOTO OMITTED]
(standing, left to right): John J. Cronin, A.V.P.; Donald F. Ritchie, V.P.;
Joseph J. Nicolosi, V.P.; Brian T. Schiffino, V.P.; Eugene Schreiner, Asst.
Cashier; Leonard Katcher, V.P.; Paul L. Hamner, Asst. Cashier; Salvatore J.
Chiarelli, V.P.; (left to right, seated): Pamela G. Patterson, Asst. Cashier;
John V. Buoniconti, Asst. Cashier; Patricia A. Miller, V.P.; Mitchell Kreiner,
V.P.; Noreen Suarez, Asst. Cashier
ourselves as a trusted advisor and lender of funds. Just as important, we have
the size and expertise to handle our larger customers' needs and we've also got
the same caring people with real names and faces to handle smaller needs, and we
value each of our relationships. 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.
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, and senior management of the Bank participates
in the lending process on a regular basis.
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 continue 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, real estate, business and professional services and
the diamond and jewelry business. In addition, we have added asset-based lending
which should serve to increase our growing loan portfolio.
International Department
[PHOTO OMITTED]
(standing, left to right): Joseph M. Cestone, Sr. V.P.; Babulal Kapadia, Asst.
Cashier; Harvey P. Zatkowsky; (seated, left to right): Tim Garces, Jr.; Esteban
A. Espiritu, Asst. Cashier; Mary Jane G. Lerias, Asst. V.P.; Bibi S. Ally
Middle Market encompasses many industries including textiles, apparel and furs,
home furnishings, real estate, business and professional services and the
diamond and jewelry business.
- --------------------------------------------------------------------------------
Spencer B. Witty, Chairman of the [PHOTO OMITTED]
Board and Chairman of the Investment
Committee, reviewing an investment
recommendation with Eric W. Gould,
Senior Vice President and Treasurer.
5
<PAGE>
[PHOTO OMITTED]
(left to right): Alexander Rodetis, Jr.,
Executive V.P.; Irwin Schwartz,
President & Chief Executive Officer
ASSET-BASED LENDING
In early October, we took a strategic step to broaden the scope of our
traditional commercial lending services to middle market companies with the
formation of Merchants New York Commercial Corp. This newly formed subsidiary
will concentrate on Asset-Based Lending, providing accounts receivable and
inventory financing and machinery and equipment loans, as well as letter of
credit facilities to new and existing corporate borrowers.
Typically, Asset-Based Lending provides revolving loans to manufacturing,
wholesale, distribution and service companies with high working capital
investment needs. These loans are based on the level of a company's working
capital assets, primarily accounts receivable and inventory. In addition,
machinery and equipment loans for both existing and new equipment may be
provided in conjunction with the working capital facility. In all instances the
loans are secured by the related assets which are closely monitored.
Asset-Based Lending has grown to be an important aspect of the loan
products offered by many banks today, particularly those who serve the "middle
market." It's estimated that asset-based loans represent approximately $150
billion in total loans outstanding for all lenders in the United States
providing asset secured facilities. This has grown from approximately $90
billion just five years ago. The national industry trade organization, the
Commercial Finance Association, of which we are a member, has over 300 members
providing this type of financial support to business.
Our wholly owned subsidiary meets an objective of Merchants long-term
business growth plan by offering this value-added service to our middle market
and smaller corporate borrowers, thereby expanding the Bank's loan portfolio and
earnings potential.
This new initiative will be spear headed by Mr. Irwin Schwartz, President
and Chief Executive Officer and Mr. Alexander Rodetis, Jr., Executive Vice
President, who will work closely with Mr. William J. Cardew the Bank's Vice
Chairman. Combined, this senior management team has many years of practical
experience in this field and will be actively involved with each client,
affording special attention and a rapid, decisive response to every proposal.
Merchants New York Commercial Corp. is located at 275 Madison Avenue, New
York, New York at the Bank's headquarters building.
[PHOTO OMITTED]
(left to right): Irwin Schwartz;
William J. Cardew;
Alexander Rodetis, Jr.
6
<PAGE>
STAFF DEPARTMENTS
Branch Operations and
Branch Administration
[PHOTO OMITTED]
(standing, left to right): Philip S. Cameron, Asst.
Cashier; Thomas J. Stackhouse, V.P.; (seated,
left to right): Rosemarie A. Calabro, Sr. V.P.;
Patricia A. Revell, Asst. V.P.; Eugene J. Venier,
Sr. V.P.; Inmaculada C. Marquez, Asst. Cashier;
Harry Woods, Asst. V.P.; Debra J. Lott, Asst.
Cashier; Kenneth Renga, Asst. V.P.
Comptrollers Department
[PHOTO OMITTED]
(standing, left to right): Richard A. Francia; Denise
A. Drakes; Perrie H. Mc Cloud, Asst. Comptroller;
Carol Sze; Salvatore F. Balsamo, Asst. Comptroller;
Stuart Peaceman; Nancy Lopez; Flora Donnelly;
(seated, left to right): M. Nasette Espiritu, V.P. &
Comptroller; Joanna Robinson, Asst. Comptroller
Human Resources Department
[PHOTO OMITTED]
(left to right): Ruth T. Aimetti, V.P.; Maria Winter
[PHOTO OMITTED]
William J. Cardew, Vice Chairman and Chief Operating
Officer and Karen L. Dietz, Corporate Secretary and Director
of Stockholder Relations
7
<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, 1998 1997 1996 1995 1994 1993(5) 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands,
except per share amounts)
Interest income $ 86,268 $ 82,820 $ 73,095 $ 69,569 $ 61,345 $ 60,301 $ 49,199 $ 53,279
Net interest income 45,395 42,567 39,640 37,662 36,238 35,280 31,044 29,089
Provision for loan losses 1,425 1,700 2,580 2,080 1,850 9,785 8,394 7,392
Net income 15,902 14,562 12,671 11,465 10,709 7,884 6,520 6,502
Earnings per share (1 and 4):
Basic 1.64 1.49 1.27 1.15 1.08 0.79 0.66 0.66
Diluted 1.61 1.46 1.26 1.14 1.07 0.78 0.65 0.65
Cash dividends declared
per share (1) 0.80 0.75 0.65 0.55 0.45 0.40 0.40 0.40
Total assets 1,289,571 1,235,742 1,137,799 1,027,191 1,001,386 1,006,348 1,085,955 713,606
Book value per share (1):
Without security valuation 10.66 10.06 9.67 9.07 8.47 7.84 7.44 7.19
With security valuation (2) 11.59 10.98 10.42 10.06 7.83 -- -- --
Financial Ratios:
Return on average assets 1.27% 1.23% 1.21% 1.19% 1.10% 0.78% 0.89% 1.00%
Return on average equity:
Average equity excluding
security valuation 15.67 14.91 13.45 13.01 13.22 10.36 8.91 9.17
Average equity including
security valuation(2) 14.34 13.82 12.53 12.59 13.30 10.36 8.91 9.17
Average equity to
average assets(2) 8.85 8.90 9.66 9.43 8.35 7.54 9.93 10.75
Dividend payout ratio 48.96 50.35 51.10 47.71 41.74 50.38 60.91 61.06
Net charge-offs to
average loans (0.11) 0.35 1.23 0.65 0.96 2.34 2.48 2.70
Loan loss reserves to
total loans 2.20 1.86 1.89 2.39 2.31 2.46 1.48 1.12
Non-performing loans to
loan loss reserves 1.83 2.58 19.74 33.45 21.19 26.39 42.40 55.50
Risk-Based Capital Ratio:(3)
Tier I 16.94 18.61 20.41 21.61 19.81 18.59 16.82 --
Total 18.19 19.80 21.62 22.86 21.06 19.84 17.82 --
</TABLE>
(1) 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.
(2) Per SFAS No. 115, effective in 1994, a valuation account for unrealized
gains (losses) on investments available for sale are included in equity.
(3) 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 3.0%. The ratios above were calculated using the
guidelines in effect at each reporting date.
(4) 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.
(5) Holding Corporation effective 7-1-93. All prior years are for the
Merchants Bank of New York only.
8
<PAGE>
Merchants New York Bancorp
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 1998 and 1997
Overview
1998 net income increased by over 9% to $15.9 million, compared with 1997's
earnings of $14.6 million. Net income per diluted share continued to increase,
up $0.15 to $1.61 per share versus $1.46 per share in 1997.
Interest Income
Total interest income generated in 1998 was $86.3 million, up 4% from the 1997
total of $82.8 million. The largest component of interest in 1998 was
contributed by the investment portfolio, with $53.6 million versus $52.5 million
in 1997. This was the result of an increased investment portfolio, which on
average grew by $40.3 million to $796.4 million from $756.1 million in 1997. The
additional funding to support this was achieved through increased deposits, and
other short-term borrowings. On average, approximately $18 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 to 6.73% from 6.95% in 1997, due to the
lower interest rate environment.
Loan interest income increased approximately $2 million to $31.8 million in 1998
versus $29.8 million in 1997. The average balance for loans increased to $350
million in 1998 from $325 million in 1997, causing the increase in interest
income. In maximizing cash management, the average Federal funds sold in 1998
increased to $16.2 million versus $8.4 million in 1997. This contributed
$843,000 to interest income, up $383,000 from the $460,000 earned in 1997.
Interest Expense
Total interest expense increased slightly to $40.9 million from $40.3 million in
1997. This was the result of an increase of $33 million in interest-bearing
liabilities, which increased to $849 million from $816 million in 1997. The
increase was offset by a decline in the average cost for interest-bearing
liabilities, down 11 basis points to 4.82% compared to 4.93% for 1997. The
highest contributor to interest expense was other short-term borrowings which is
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)
which showed an increase on average of $25 million to $50 million versus 1997's
average balance of $26 million. Interest on other short-term borrowings
increased $1.4 million to $2.8 million in 1998, versus $1.4 million in 1997.
Average certificates of deposit balances remained relatively the same at $416
million for both 1998 and 1997, with the average rate paid decreasing
approximately 18 basis points to 5.27% in 1998 from 5.45% in 1997.
ANALYSIS OF NET INTEREST EARNINGS
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-Earning Assets
Federal funds sold $ 16,184 $ 843 5.21% $ 8,373 $ 460 5.49% $ 6,128 $ 320 5.22%
Investment securities
(book value):
Taxable 712,214 48,911 6.87 684,916 48,226 7.04 603,188 43,15 7.15
Tax-exempt* 84,152 4,648 5.52 71,135 4,332 6.09 70,600 4,316 6.11
- ------------------------------------------------------------------------------------------------------------------------
Total 796,366 53,55 6.73 756,051 52,558 6.95 673,788 47,474 7.05
Loans (net of
unearned
discounts) 350,272 31,76 9.07 325,298 29,771 9.15 280,361 25,288 9.02
Other 1,548 99 6.40 531 31 5.84 268 13 4.85
- ------------------------------------------------------------------------------------------------------------------------
Total $1,164,370 $ 86,268 7.41% $1,090,253 $ 82,820 7.60% $960,545 $ 73,095 7.61%
- ------------------------------------------------------------------------------------------------------------------------
Interest-Bearing
Liabilities
NOW $ 44,609 $ 1,000 2.24% $ 41,904 $ 951 2.27% $ 38,219 $ 871 2.28%
Savings accounts 25,476 758 2.98 24,277 724 2.98 25,485 761 2.99
Money market
accounts 145,660 4,924 3.38 141,671 4,774 3.37 131,974 4,443 3.37
Time certificates
of deposit 416,286 21,928 5.27 416,221 22,687 5.45 384,033 20,36 5.30
Securities sold
under repurchase
agreements 166,315 9,424 5.67 166,294 9,680 5.82 115,601 6,381 5.52
Other short-term
borrowings 50,434 2,839 5.63 25,681 1,437 5.60 11,721 636 5.42
- ------------------------------------------------------------------------------------------------------------------------
Total $ 848,780 $ 40,873 4.82% $ 816,048 $ 40,253 4.93% $707,033 $ 33,455 4.73%
- ------------------------------------------------------------------------------------------------------------------------
Net interest-
earning assets 315,590 274,205 253,512
========================================================================================================================
Net yield on interest-
earning assets $1,164,370 $ 45,395 3.90% $1,090,253 $ 42,567 3.90% $960,545 $ 39,640 4.13%
========================================================================================================================
</TABLE>
Non accrual loans are included in Interest-Earning Assets.
* Yields are not computed on a tax equivalent basis.
9
<PAGE>
Merchants New York Bancorp
Net Interest Income
Net interest income increased to $45.4 million in 1998 from $42.6 million in
1997. 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 earnings 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 1998, 1997 and 1996 and indicates that the increases were
primarily due to higher volume on interest-earning assets than was paid on
interest-bearing liabilities over the same 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>
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Increase (Decrease)
- -----------------------------------------------------------------------------------------------
Volume Rate Change Volume Rate Change
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Interest Income
Loans (net of unearned
discounts) $ 2,267 $ (271) $ 1,996 $ 4,108 $ 362 $ 4,470
Investment securities
(book value):
Taxable 1,891 (1,206) 685 5,519 (451) 5,068
Tax-exempt 745 (429) 316 291 (275) 16
- -----------------------------------------------------------------------------------------------
Total investments 2,636 (1,635) 1,001 5,810 (726) 5,084
Other interest income 472 (22) 450 123 48 171
- -----------------------------------------------------------------------------------------------
Total interest income 5,375 (1,928) 3,447 10,041 (316) 9,725
- -----------------------------------------------------------------------------------------------
Interest Expense
Savings and time deposits:
NOW 61 (12) 49 84 (4) 80
Savings accounts 36 (2) 34 (36) (1) (37)
Money market accounts 149 1 150 327 4 331
Time certificates of deposit 4 (762) (758) 1,743 581 2,324
- -----------------------------------------------------------------------------------------------
Total 250 (775) (525) 2,118 580 2,698
- -----------------------------------------------------------------------------------------------
Borrowings:
Securities sold under
repurchase agreements 1 (257) (256) 2,934 365 3,299
Other short-term borrowings 1,381 19 1,400 777 24 801
- -----------------------------------------------------------------------------------------------
Total interest expense 1,632 (1,013) 619 5,829 969 6,798
- -----------------------------------------------------------------------------------------------
Net interest income $ 3,743 $ (915) $ 2,828 $ 4,212 $(1,285) $2,927
===============================================================================================
</TABLE>
Other Income, Other Expenses, Provision for Loan Losses and Taxes
Other income increased $265,000 to $5.4 million from $5.2 million, due
principally to an increase in International Department fees of $125,000 and
other fee income of $133,000.
Other expenses increased $1 million, or 4.32%, in 1998. There were normal
increases in salaries of $504,000, $175,000 in benefits, $121,000 in
professional fees and $126,000 in upgrading data processing systems.
The provision for loan losses decreased by $275,000 to $1,425,000 in 1998
compared to $1,700,000 in 1997. The decrease in the provision mainly reflects
management's actions in assessing the level of adequacy in the allowance for
loan losses totaling $7,965,000 and $6,167,000 for the years ended December 31,
1998 and 1997, respectively. The assessment is based on several factors in
addition to nonaccrual, doubtful and substandard loans, including: charged-off
loans totaling $232,000 and $1,469,000 in 1998 and 1997, respectively;
recoveries totaling $605,000 and $319,000 in 1998 and 1997, respectively;
changes in levels and characteristics
10
<PAGE>
Merchants New York Bancorp
of total outstanding loans of $362 million and $332 million in 1998 and 1997,
respectively. The amount of the allowance for loan losses is reviewed by
management quarterly, refer to Notes 1 and 5 to the Financial Statements for
further discussion of the allowance. The future level of the allowance for loan
losses will continue to be a function of management's evaluation of the Bank's
credit exposures.
The provision for income taxes increased by $977,000 in 1998 versus 1997,
primarily due to an increase in income before taxes of $2.3 million.
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, 1998 average cash and short-term investments
totaled $59 million, versus $58 million in 1997, accounting for 4.7% and 4.9% of
the Bank's total average assets, respectively. Through principal repayments and
redemptions, the investment portfolio generated $231.3 million in 1998 and
$156.5 million in 1997 for reinvestment and/or liquidity. Furthermore, $19
million in 1998 and $10 million in 1997 were the result of investment sales to
take advantage of interest rate arbitrage. Also, having 94% 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.
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
noninterest-bearing funds, with 29% in 1998 and 27% in 1997, or $255 million in
1998 and $228 million in 1997. The average balance of total deposits increased
to $887 million in 1998, from $852 million in 1997, of which $27 million came
from noninterest-bearing deposits. Interest-bearing liabilities are priced
competitively, with a slight premium paid for time certificates of deposit, 77%,
or $505 million, of which are in the 0 to 3 month maturity range and 19% or,
$126 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 $201 million would be
mitigated by $73 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 $811 million in 1998 and $769 million in 1997,
can be used as collateral for repurchase agreements, of which we used an average
of $166 million in 1998 and 1997.
INTEREST RATE SENSITIVITY GAP ANALYSIS
As of December 31, 1998
(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 $ 5,000 $ -- $ -- $ -- $ 5,000
Securities available for sale* 48,849 144,896 307,927 143,902 645,574
Securities held to maturity* 12,021 44,250 103,609 38,283 198,163
Loans 346,836 6,376 6,383 2,168 361,763
- ------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 412,706 $ 195,522 $417,919 $ 184,353 $1,210,500
======================================================================================================
Interest-Bearing Liabilities
Interest-bearing deposits $ 504,906 $ 126,002 $ 21,371 $ -- $ 652,279
Securities sold under
repurchase agreements 105,000 55,000 -- -- 160,000
Other short-term borrowings 4,282 45,000 -- -- 49,282
- ------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 614,188 $ 226,002 $ 21,371 $ -- $ 861,561
======================================================================================================
Net interest rate sensitivity gap (201,482) (30,480) 396,548 184,353 348,939
Cumulative gap position (201,482) (231,962) 164,586 348,939 --
Cumulative gap/total earning assets:
At December 31, 1998 (16.64)% (19.16)% 13.60% 28.83%
At December 31, 1997 (13.04)% (21.47)% 22.05% 27.39%
</TABLE>
* Adjusted for weighted average maturity dates and prepayments for mortgage
back securities. All securities are disclosed at book value.
11
<PAGE>
Merchants New York Bancorp
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 has 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 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 1998, the Bank continued to utilize
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 $362 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 $746 million, or 87%, of these securities having expected
weighted average maturities of approximately four 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 $255 million in
average demand deposits and $216 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, 1998, 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, 1997.
12
<PAGE>
Merchants New York Bancorp
NET PORTFOLIO VALUE ANALYSIS FOR INTEREST RATE RISK
<TABLE>
<CAPTION>
At December 31, 1998
------------------------------------------------------
Change in Interest Rates Estimated NPV Estimated Increase (Decrease) in NPV* Percent Increase
(Basis points) Amount ------------------------------------- (Decrease) in NPV at
Amount Percent December 31, 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
+200 $ 137,609 (40,218) (23)% (13)%
+100 161,310 (16,517) (9)% (5)%
- -- 177,827 -- -- --
(100) (180,666) 2,839 2% 1%
(200) (179,453) 1,626 1% 2%
</TABLE>
* Pretax
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 3%, with 7.91% and 8.03% for the years ended December
31, 1998 and 1997, respectively.
The primary source of capital growth is through retention of earnings. Retained
profits increased to $86.3 million at December 31, 1998 as compared to $80.0
million as of December 31, 1997, resulting from retention of $8.1 million of
earnings after paying cash dividends to shareholders of $7.8 million. The Bank's
Board of Directors declared and paid a dividend of $0.20 per share of common
stock for each of the four quarters in 1998. 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 262nd consecutive dividend payment
will continue into the future. There was an overall increase of $6.8 million in
stockholders' equity, of this change there was an increase in retained earnings
of $6.3 million, an increase in the change in market value of available for sale
securities (net of tax effect) of $132,000 and a net decrease of $364,000 in
Treasury stock transactions. 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.
December 31, December 31,
Required 1998 1997
- --------------------------------------------------------------------------------
Tier I Risk-Based Capital Ratio 4.00% 16.94% 18.61%
Total Risk-Based Capital Ratio 8.00 18.19 19.80
Leverage Ratio 3.00 7.91 8.03
The Year 2000 ("Y2K") Issue
This issue deals with the concerns regarding the inability of computers to
recognize the advent of the date 2000 and potential problems resulting
therefrom.
The Company utilizes and is dependent upon data processing systems, as well as
software, to conduct its business. The data processing systems and software
include those developed and maintained by the Company's third-party data
processor, which are operated on in-house personal computers and wide area
networks.
13
<PAGE>
Merchants New York Bancorp
The Federal Financial Institutions Examination Council, in connection with its
regulatory responsibility, recommended the following phases in its guidance;
awareness, assessment, renovation, validation and implementation. These phases
are intended to guide institutions in identifying risks, develop an action plan,
perform adequate testing and complete certification that its processing systems
will be Y2K ready. This includes upgrading system codes and programs, and
replacing software and hardware, if needed.
Management has initiated a program to assess the Company's computer systems,
applications and third-party vendors for year 2000 compliance. A year 2000
committee is active with members from all areas of the Company. The Committee
has conducted a review of its operations to identify systems and vendors or
customers that could be affected by the Y2K issue and developed an
implementation plan to rectify any issues related to transaction processing in
the year 2000 and beyond. Overall, as of December 31, 1998, the Company is 80%
ready and is expected to be 100% ready by September 30, 1999.
The Company has obtained documentation from its vendors regarding their Y2K
status. Vendors whose products or services are believed by management to be
material to the Company have either provided written assurance that they are Y2K
compliant or expect to be in compliance sometime in 1999. The Company, however,
continues to bear some risk related to the Y2K issue and could be adversely
affected if other entities (e.g. vendors) do not appropriately address their own
compliance issues. In addition, if any of the Bank's borrowers experience
significant problems due to Y2K issues, the credit risk inherent in loans to
such borrowers would increase. The Company is soliciting Y2K status information
from borrowers regarding their readiness.
The Company continues to evaluate the estimated costs associated with attaining
Y2K readiness. Costs totaling approximately $400,000 have been identified for
testing and other expenses associated with the project and are being expensed as
incurred. Additional costs are expected, but it is management's opinion that
such costs will not be material to the Bank's earnings.
In addition to the previously discussed initiatives, the Company is developing
business resumption, remediation and event contingency plans to prepare for
potential systems failures at critical dates, failures of critical third parties
to effectively remediate and certify their systems, as well as any other
unanticipated events that could arise with the date change. The development of
these plans includes the identification of core business processes critical to
the Company's business and operations, and an assessment of failure scenarios.
The Company expects that its contingency planning for the year 2000 issue will
be substantially complete by the end of June 1999.
Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
This report contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Such statements are not
historical facts and include expressions about our confidence and strategies and
our expectations about new and existing programs and products, relationships,
opportunities, technology and market conditions. These statements may be
identified by such forward-looking terminology as "except," "believe,"
"anticipate," or by expressions of confidence such as "continuing" or "strong,"
or similar statements or variations of such terms. Such forward-looking
statements involve certain risks and uncertainties. These include, but are not
limited to; expected cost, savings not being realized or not being realized
within the expected time frame; income or revenues being lower than expected or
operating costs higher; competitive pressures in the banking or financial
services industries increasing significantly; business disruption related to
program implementation or methodologies; weakening of general economic
conditions nationally or in New York; changes in legal and regulatory barriers
and structures; and unanticipated occurrences delaying planned programs or
initiatives or increasing their costs or decreasing their benefits. The Company
assumes no obligation for updating any such forward-looking statements at any
time.
Introduction of the Euro Dollar
On January 1, 1999, a majority of European countries joined in the consolidation
of currency to form what is now known as the Euro Dollar. The Company, in
recognition of this consolidation, has established an account with a financial
institution to facilitate all transactions relating to the Euro Dollar.
Management believes that the formation of the Euro Dollar will not have a
material impact on the Company's financial statements.
14
<PAGE>
Merchants New York Bancorp
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 diluted share continued to increase, up $0.20 to $1.46
per share versus $1.26 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.
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.
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.
15
<PAGE>
Merchants New York Bancorp
The provision for loan losses decreased by almost $900,000 to $1.7 million in
1997 as compared to $2.6 million in 1996, mainly caused by lower charge-offs of
$1.5 million in 1997, compared to $4.4 million in 1996. In addition, there was a
decrease in nonaccrual loans to $159,000, compared to $1,100,000 in 1997 and
1996, respectively. The provision mainly reflects management's actions in
assessing the level of adequacy in the allowance for loan losses account
totaling $6.2 million and $5.6 million for the years ended December 31, 1997 and
1996, respectively. The assessment is based on several factors in addition to
nonaccrual, doubtful and substandard loans, including: charge-off loans;
recoveries totaling $319,000 and $958,000 in 1997 and 1996, respectively;
changes in levels and characteristics of outstanding loans totaling $332 million
and $297 million in 1997 and 1996, respectively. The amount of the allowance for
loan losses is reviewed by management quarterly, refer to Notes 1 and 5 to the
Financial Statements for further discussion of the allowance. The future level
of the allowance for loan losses will continue to be a function of management's
evaluation of the Bank's credit exposures.
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.
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, 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.
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 8.03% 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
16
<PAGE>
Merchants New York Bancorp
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.
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
1998 1997
-------------------------------------------------------
HIGH LOW HIGH LOW
- --------------------------------------------------------------------------------
First Quarter $43 7/8 $31 $17 1/2 $15 3/4
Second Quarter 43 1/4 36 7/8 25 17 1/2
Third Quarter 37 7/8 31 28 5/8 21 7/8
Fourth Quarter 37 15/16 30 3/4 47 7/8 25
On February 1, 1999, the closing bid and asked prices reported for the common
stock were $34 and $341/2, respectively. These quotations reflect inter-dealer
prices without retail mark up, mark down or commission and may not represent
actual transactions.
17
<PAGE>
Merchants New York Bancorp
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1998 1997
- --------------------------------------------------------------------------------
Assets
Cash and due from banks (note 2) $ 38,435,946 $ 51,209,936
Federal funds sold 5,000,000 67,000,000
Investment securities (note 1):
Securities available for sale
at market value (note 3) 660,026,352 541,634,211
Investment securities (market value
$203,429,134 in 1998 and $219,902,000
in 1997) (note 4) 198,163,304 215,170,777
- --------------------------------------------------------------------------------
Total investment securities 858,189,656 756,804,988
- --------------------------------------------------------------------------------
Loans (net of unearned discounts
of $46,100 and $93,768 in 1998 and
1997, respectively) (note 5) 361,763,395 331,807,721
Less allowance for loan losses 7,964,735 6,167,157
- --------------------------------------------------------------------------------
Total loans, net 353,798,660 325,640,564
- --------------------------------------------------------------------------------
Bank premises and equipment (note 6) 6,708,796 6,937,748
Customers' liability on acceptances 13,241,093 14,374,602
Other assets 14,196,829 13,774,397
- --------------------------------------------------------------------------------
Total assets $1,289,570,980 $1,235,742,235
================================================================================
Liabilities and Stockholders' Equity
Liabilities
Deposits (note 7):
Demand (noninterest-bearing) $ 282,044,272 $ 267,561,571
NOW 46,444,839 47,295,963
Savings 26,177,229 24,736,235
Money market 162,788,408 145,336,114
Time 416,868,544 419,157,042
- --------------------------------------------------------------------------------
Total deposits 934,323,292 904,086,925
- --------------------------------------------------------------------------------
Securities sold under repurchase
agreements (notes 3, 4 and 8) 160,000,000 160,000,000
Acceptances outstanding 13,241,093 14,374,602
Other short-term borrowings (note 8) 49,282,319 32,179,723
Other liabilities 19,746,071 18,906,588
- --------------------------------------------------------------------------------
Total liabilities 1,176,592,775 1,129,547,838
================================================================================
Stockholders' Equity (notes 1, 3 and 11)
Capital stock -- $.001 par value;
40,000,000 and 10,000,000 authorized
shares in 1998 and 1997, respectively,
9,989,332 shares issued in 1998 and 1997 9,989 9,989
Surplus 23,889,352 23,889,352
Undivided profits 86,304,445 80,016,764
Less: Treasury stock at cost
(240,507 shares in 1998
and 317,549 shares in 1997) 6,301,081 6,665,520
Accumulated other comprehensive income,
net of tax (note 12):
Unrealized appreciation on securities
available for sale 9,075,500 8,943,812
Commitments and contingent liabilities
(note 13) -- --
- --------------------------------------------------------------------------------
Total stockholders' equity 112,978,205 106,194,397
- --------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $1,289,570,980 $1,235,742,235
================================================================================
See accompanying notes to consolidated financial statements.
18
<PAGE>
Merchants New York Bancorp
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Interest and dividend income:
Interest on loans $ 31,766,991 $ 29,771,225 $ 25,300,755
Interest and dividends on
investment securities:
U.S. Government obligations 44,874,158 47,631,337 43,022,459
Other investments 8,685,750 4,926,841 4,451,474
Other interest income 940,707 491,166 320,297
- --------------------------------------------------------------------------------
Total interest and
dividend income 86,267,606 82,820,569 73,094,985
- --------------------------------------------------------------------------------
Interest expense:
Interest on deposits
(note 7) 28,610,080 29,135,924 26,438,521
Interest on securities
sold under repurchase
agreements 9,424,498 9,680,285 6,380,930
Other interest expense 2,838,334 1,437,247 635,745
- --------------------------------------------------------------------------------
Total interest expense 40,872,912 40,253,456 33,455,196
- --------------------------------------------------------------------------------
Net interest income 45,394,694 42,567,113 39,639,789
Provision for loan losses (note 5) 1,425,000 1,700,000 2,580,000
- --------------------------------------------------------------------------------
Net interest income after
provision for loan losses 43,969,694 40,867,113 37,059,789
- --------------------------------------------------------------------------------
Other income:
Service fees 1,278,458 1,310,426 1,350,387
International department fees 2,845,865 2,721,033 2,429,711
Investment securities gains
on sales (note 3) 61,272 21,901 372,396
Other 1,261,905 1,129,255 1,133,659
- --------------------------------------------------------------------------------
Total other income 5,447,500 5,182,615 5,286,153
- --------------------------------------------------------------------------------
Other expenses:
Salaries 11,359,160 10,855,196 10,622,376
Employee benefits (note 10) 3,124,212 2,949,066 2,530,256
Occupancy (note 13) 2,603,722 2,589,996 2,520,459
Equipment and data processing 1,823,525 1,710,850 1,468,405
Other 6,472,903 6,227,854 5,123,151
- --------------------------------------------------------------------------------
Total other expenses 25,383,522 24,332,962 22,264,647
- --------------------------------------------------------------------------------
Income before income taxes 24,033,672 21,716,766 20,081,295
Income tax expense (note 9) 8,131,509 7,154,608 7,410,524
- --------------------------------------------------------------------------------
Net income $ 15,902,163 $ 14,562,158 $ 12,670,771
- --------------------------------------------------------------------------------
Earnings per share, basic
(note 1) $ 1.64 $ 1.49 $ 1.27
Earnings per share,
diluted (note 1) $ 1.61 $ 1.46 $ 1.26
================================================================================
Comprehensive income (note 12):
Net income $ 15,902,163 $ 14,562,158 $ 12,670,771
Other comprehensive
income, net of tax:
Unrealized appreciation
(depreciation)
on securities available
for sale during the period 131,688 1,525,576 (2,385,526)
Less: reclassification
adjustment for gains
included in net income (37,276) (11,590) (199,242)
- --------------------------------------------------------------------------------
Total comprehensive income $ 15,996,575 $ 16,076,144 $ 10,086,003
================================================================================
See accompanying notes to consolidated financial statements.
19
<PAGE>
Merchants New York Bancorp
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Capital stock:
Balance at beginning
of year $ 9,989 $ 4,988 $ 4,982
Adjustment due to stock
split (note 1) -- 4,994 --
Shares issued through
exercise of Employee Stock
Options: 14,210 and
12,446 shares in 1997
and 1996, respectively
(note 11) -- 7 6
- --------------------------------------------------------------------------------
Balance at end of year 9,989 9,989 4,988
================================================================================
Surplus:
Balance at beginning
of year 23,889,352 23,749,629 23,626,181
Adjustment due to stock
split (note 1) -- (4,994) --
Excess over par value on
shares issued through the
exercise of Employee Stock
Options (note 11) -- 144,717 123,448
- --------------------------------------------------------------------------------
Balance at end of year 23,889,352 23,889,352 23,749,629
================================================================================
Undivided profits:
Balance at beginning of year 80,016,764 72,915,689 66,719,678
Net income 15,902,163 14,562,158 12,670,771
Cash dividends paid
(note 11) (7,784,505) (7,332,066) (6,474,760)
Common stock issued
from treasury stock (1,829,977) (129,017) --
- --------------------------------------------------------------------------------
Balance at end of year 86,304,445 80,016,764 72,915,689
================================================================================
Treasury stock:
Balance at beginning
of year (6,665,520) (552,910) --
Repurchase of 84,043,
306,650 and 35,780 shares
of common stock in 1998,
1997 and 1996, respectively (3,066,508) (6,492,331) (552,910)
Issuance of 161,085 and
24,881 shares of common
stock in 1998 and 1997,
respectively 3,430,947 379,72 --
- --------------------------------------------------------------------------------
Balance at end of year (6,301,081) (6,665,520) (552,910)
================================================================================
Accumulated other comprehensive
income (note 12):
Net unrealized appreciation
on securities available
for sale, net of tax
effect (note 3):
Balance at beginning of year 8,943,812 7,418,236 9,803,762
Changes during the year 131,688 1,525,576 (2,385,526)
- --------------------------------------------------------------------------------
Balance at end of year 9,075,500 8,943,812 7,418,236
================================================================================
Stockholders' equity:
Balance at beginning of year 106,194,397 103,535,632 100,154,603
Changes during the year, net 6,783,808 2,658,765 3,381,029
- --------------------------------------------------------------------------------
Balance at end of year $112,978,205 $106,194,397 $103,535,632
================================================================================
See accompanying notes to consolidated financial statements.
20
<PAGE>
Merchants New York Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Cash flows from operating
activities:
Net income $ 15,902,163 $ 14,562,158 $ 12,670,771
- --------------------------------------------------------------------------------
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation 1,171,559 1,043,804 938,577
Amortization of premium,
net of discounts 7,571,911 6,009,043 4,584,407
Provision for loan losses 1,425,000 1,700,000 2,580,000
Gains on sales (61,272) (21,901) (372,396)
Discounted rental on leases (52,668) (52,668) (41,435)
(Decrease) increase
in unearned discounts (47,668) 37,737 (3,037)
Increase in other assets (536,718) (476,836) (723,767)
Increase in other
liabilities 873,505 2,356,474 655,175
- --------------------------------------------------------------------------------
Net cash provided by
operating activities 26,245,812 25,157,811 20,288,295
- --------------------------------------------------------------------------------
Cash flows from investing
activities:
Net decrease (increase) in
Federal funds sold 62,000,000 (41,000,000) 26,000,000
Proceeds from redemptions of
securities available
for sale 177,378,297 121,563,684 126,299,677
Proceeds from sales of
securities available
for sale 18,927,089 10,175,000 61,013,830
Purchase of securities
available for sale (350,346,260) (149,596,774) (189,230,745)
Proceeds from redemptions
of investment securities 53,949,290 34,826,437 22,961,868
Purchase of investment
securities (8,653,389) (50,687,265) (128,370,905)
Net increase in customer loans (29,535,428) (35,914,547) (29,620,410)
Net increase in bank premises
and equipment (828,321) (1,099,699) (946,315)
- --------------------------------------------------------------------------------
Net cash used in investing
activities (77,108,722) (111,733,164) (111,893,000)
- --------------------------------------------------------------------------------
Cash flows from financing
activities:
Net increase in demand
deposits, NOW, savings
and money market accounts 32,524,865 15,871,574 57,558,967
Net (decrease) increase in
certificates of deposit (2,288,498) 12,521,941 25,736,755
Net increase in securities
sold under repurchase
agreements -- 40,000,000 14,935,000
Net increase in other
short-term borrowings 17,102,596 24,980,684 7,199,039
Proceeds from issuance
of common stock 1,600,970 395,428 123,454
Purchase of treasury
stock (3,066,508) (6,492,331) (552,910)
Dividends paid (7,784,505) (7,332,066) (6,474,760)
- --------------------------------------------------------------------------------
Net cash provided by
financing activities 38,088,920 79,945,230 98,525,545
- --------------------------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents (12,773,990) (6,630,123) 6,920,840
Cash and cash equivalents at
beginning of the year 51,209,936 57,840,059 50,919,219
- --------------------------------------------------------------------------------
Cash and cash equivalents
at end of the year $ 38,435,946 $ 51,209,936 $ 57,840,059
================================================================================
Supplemental disclosure of cash
flow information:
Interest paid $ 41,071,132 $ 38,923,995 $ 32,784,709
Taxes paid 8,395,784 7,358,778 7,795,300
================================================================================
See accompanying notes to consolidated financial statements.
21
<PAGE>
Merchants New York Bancorp
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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"),
and the Bank's wholly-owned subsidiaries, MBNY Holdings Corporation and its
subsidiary, Merchants Capital Corporation and Merchants New York Commercial
Corporation. 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.
22
<PAGE>
Merchants New York Bancorp
Effective January 1, 1995, the Bank prospectively adopted Statement of Financial
Accounting Standards ("SFAS") No. 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.
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
Under SFAS No. 128, the Company is required to present both basic and diluted
earnings per share ("EPS"). Basic EPS 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.
The weighted average number of shares of common stock used in the computation of
basic earnings per share for the years ended December 31, 1998, 1997 and 1996
were 9,711,531 shares, 9,793,913 shares and 9,961,538 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, 1998, 1997 and 1996
were 9,857,481 shares, 9,957,190 shares and 10,063,397 shares, respectively.
The Company's Board of Directors declared a 2-for-1 stock split for all shares,
with an effective date of October 7, 1997. All shares and per share amounts in
prior years have been restated in these financial statements to reflect the
split.
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.
23
<PAGE>
Merchants New York Bancorp
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the 1998 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 $12.5 million and $20.4 million at December 31, 1998 and 1997,
respectively. Average required reserves during 1998 and 1997 were approximately
$12.4 million and $20.4 million, respectively. Average balances (in the form of
noninterest-bearing deposits with banks) of approximately $5.9 million and $5.8
million were maintained as compensating balances for services provided by
correspondent banks for the years ended December 31, 1998 and 1997,
respectively.
NOTE 3 -- SECURITIES AVAILABLE FOR SALE
The book values and estimated market values for investment securities available
for sale at December 31, 1998 and 1997 are as follows:
Gross Gross Estimated
Book Unrealized Unrealized Market
1998 Value Gains Losses Value
- --------------------------------------------------------------------------------
(In thousands)
U.S. Government
obligations(1) $205,802 $ 8,131 $ (70) $213,863
U.S. Agency
obligations(2) 278,491 5,561 (49) 284,003
Obligations of
State and Political
subdivisions 28,435 1,052 (141) 29,346
Other securities 132,846 29 (61) 132,814
- --------------------------------------------------------------------------------
Total $645,574 $ 14,773 $ (321) $660,026
================================================================================
Gross Gross Estimated
Book Unrealized Unrealized Market
1997 Value Gains Losses Value
- --------------------------------------------------------------------------------
(In thousands)
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
Other securities 8,194 7 -- 8,201
- --------------------------------------------------------------------------------
Total $527,332 $ 14,348 $ (46) $541,634
================================================================================
(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 were $18.9
million, $10.2 million and $61.0 million with gross gains of $61,000, $22,000
and $405,000 during 1998, 1997 and 1996, respectively.
The combined unrealized gains and losses before taxes on available-for-sale
securities was $14.5 million (with $5.4 million in taxes) at December 31, 1998
compared to $14.3 million (with $5.3 million in taxes) at December 31, 1997.
Changes in unrealized holding gains and losses resulted in an after-tax increase
(decrease) in stockholders' equity of $132,000, $1.5 million and ($2.4 million)
during fiscal 1998, 1997 and 1996, respectively. These gains and losses will
continue to fluctuate based on changes in the portfolio and market conditions.
24
<PAGE>
Merchants New York Bancorp
The amortized cost and estimated market value of the Bank's available-for-sale
investment securities at December 31, 1998 and 1997 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>
1998 1997
-----------------------------------------------------------
Estimated Average Estimated Average
Book Market Weighted Book Market Weighted
Value Value Yield* Value Value Yield*
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Due in one year
or less $215,751 $224,650 7.81% $152,825 $159,736 8.04%
Due after one
year through
five years 363,450 368,388 7.49 347,471 354,218 7.64
Due after five
years through
ten years 23,521 23,721 6.33 10,036 10,249 6.09
Due after ten
years 42,852 43,267 6.24 17,000 17,431 6.61
- -------------------------------------------------------------------------------------
Total $645,574 $660,026 7.52% $527,332 $541,634 7.94%
=====================================================================================
</TABLE>
*Average weighted yield not tax adjusted.
Available-for-sale investment securities with a market value of $175.3 million
at December 31, 1998 and $165.6 million at December 31, 1997 were pledged to
secure securities sold under repurchase agreements 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, 1998 and 1997 are listed below.
Gross Gross Estimated
Book Unrealized Unrealized Market
1998 Value Gains Losses Value
- --------------------------------------------------------------------------------
(In thousands)
U.S. Government
obligations (1) $ 42,889 $ 1,322 $ -- $ 44,211
U.S. Agency
obligations (2) 66,613 1,542 -- 68,155
Obligations of
State and Political
subdivisions 59,813 2,442 (11) 62,244
Other 28,848 -- (29) 28,819
- --------------------------------------------------------------------------------
Total $198,163 $ 5,306 $ (40) $203,429
================================================================================
Gross Gross Estimated
Book Unrealized Unrealized Market
1997 Value Gains Losses Value
- --------------------------------------------------------------------------------
(In thousands)
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
================================================================================
(1) U.S. Government obligations includes U.S. Treasury Notes and fixed rate
GNMA mortgage-backed securities.
(2) U.S. Agency obligations consists of fixed rate mortgage-backed securities,
including FNMA and FHLMC securities.
25
<PAGE>
Merchants New York Bancorp
The amortized cost and estimated market value of the Bank's investment
securities at December 31, 1998 and 1997 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>
1998 1997
----------------------------------------------------------------
Estimated Average Estimated Average
Book Market Weighted Book Market Weighted
Value Value Yield* Value Value Yield*
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Due in one year or less $ 16,997 $ 17,303 7.05% $ 23,362 $ 24,049 7.61%
Due after one year
through five years 142,883 146,136 7.58 161,754 164,514 7.64
Due after five years
through ten years 17,045 17,974 5.08 13,497 14,049 5.05
Due after ten years 21,238 22,016 4.99 16,558 17,290 5.21
- ------------------------------------------------------------------------------------------
Total $198,163 $203,429 7.22% $215,171 $219,902 7.26%
==========================================================================================
</TABLE>
*Average weighted yield not tax adjusted.
Held-to-maturity investment securities with a book value of $71.6 million and
$66.5 million at December 31, 1998 and 1997, respectively, were pledged to
secure securities sold under repurchase agreements and for other purposes
required or permitted by law.
NOTE 5 -- LOANS
Loans at December 31, 1998 and 1997 are comprised of the following:
1998 1997
- --------------------------------------------------------------------------------
(In thousands)
Commercial loans $ 339,982 $ 312,967
Mortgage loans 19,307 15,723
Installment loans 2,520 3,212
- --------------------------------------------------------------------------------
361,809 331,902
Unearned discounts (46) (94)
- --------------------------------------------------------------------------------
361,763 331,808
Allowance for loan losses (7,965) (6,167)
- --------------------------------------------------------------------------------
Total, net $ 353,798 $ 325,641
================================================================================
The changes in the allowance for loan losses for 1998, 1997 and 1996 are
summarized as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
(In thousands)
Balance at beginning of year $ 6,167 $ 5,617 $ 6,484
Provision for loan losses 1,425 1,700 2,580
Charge-offs (232) (1,469) (4,405)
Recoveries 605 319 958
- --------------------------------------------------------------------------------
Balance at end of year $ 7,965 $ 6,167 $ 5,617
================================================================================
26
<PAGE>
Merchants New York Bancorp
Information concerning impaired loans as defined by SFAS Nos. 114 and 118 is
presented below:
For the years ended December 31, 1998 1997
- --------------------------------------------------------------------------------
(In thousands)
Recorded investment in impaired loans at year end:
Non-accrual loans $146 $ 159
Restructured loans -- --
- --------------------------------------------------------------------------------
Total $146 $ 159
================================================================================
Average recorded investment in impaired loans $153 $1,035
================================================================================
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 $3,000 for 1998 and $126,000
for 1997. The impact on interest income relating to impaired loans for both
years is not material. The allowance 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, 1998,
the recorded investment in impaired loans totalled $146,000 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 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
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
Beginning Amounts End of
Borrower of Year Additions Collected Year
- --------------------------------------------------------------------------------
(In thousands)
1998 Directors (6) $14,785 $11,266 $13,718 $12,333
1997 Directors (8) $10,952 $14,307 $10,474 $14,785
1996 Directors (5) $14,975 $12,528 $16,551 $10,952
There were no charge-offs of loans made to officers and directors in any of the
years in the three-year period ended December 31, 1998. Loans at December 31,
1998 bear interest at rates of 7.75% to 8.00% and are partially secured. The
maturities applicable to outstanding loans at December 31, 1998 are $6.8 million
within 90 days, which included $1.2 million in letters of credit and $2.3
million in standby letters of credit, and mortgages of $5.0 million, $242,000
and $284,000 due in 1999, 2007 and 2008, respectively.
27
<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, 1998:
Wholesale jewelry 22%
Jewelry manufacturing 12
Apparel & furs 11
Non-durable goods 4
Miscellaneous manufacturing 8
Real Estate 8
Miscellaneous wholesalers 3
Business & professional services 4
Home furnishings 5
Textiles 5
Private households 3
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, 1998 and 1997 are comprised of the
following:
1998 1997
- --------------------------------------------------------------------------------
(In thousands)
Bank premises and leasehold improvements $ 9,418 $ 9,313
Equipment 5,730 5,007
- --------------------------------------------------------------------------------
15,148 14,320
Less accumulated depreciation (8,439) (7,382)
- --------------------------------------------------------------------------------
Total, net $ 6,709 $ 6,938
================================================================================
NOTE 7 -- DEPOSITS
The aggregate amount of certificate of deposits and other time deposits in
denominations of $100,000 or more amounted to $310 million at December 31, 1998
and $301.2 million at December 31, 1997. Interest expense related to certificate
of deposits and other time deposits in denominations of $100,000 or more was $16
million, $15.8 million and $12.4 million in 1998, 1997 and 1996, 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, 1998 Rate % 1997 Rate %
- --------------------------------------------------------------------------------
(Dollars in thousands)
Deposits:
Demand $255,239 -- $227,74 --
NOW 44,609 2.24% 41,904 2.27%
Savings 25,476 2.98 24,277 2.98
Money market 145,660 3.38 141,671 3.37
Other time 416,286 5.27 416,221 5.45
- --------------------------------------------------------------------------------
Total $887,270 $851,817
================================================================================
28
<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 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 1999. 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 one
year $160,000 $ 2,815 $181,567 5.35%
- --------------------------------------------------------------------------------
Total $160,000 $ 2,815 $181,567 5.35%
================================================================================
(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
$1.3 million. These securities consist of available-for-sale securities
and held-to-maturity securities with book values of $132.2 million and $47
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 $190 million at December 31, 1998, in a combination of term
advances and overnight funds. The Bank's unused FHLB borrowing capacity was
approximately $40 million at December 31, 1998. 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 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.
1998 1997
----------------------------------------------
Weighted Weighted
Amount Average Rate Amount Average Rate
- -------------------------------------------------------------------------------
(Dollars in thousands)
Federal Home Loan advances $45,000 5.44% $20,000 5.86%
U.S. Treasury demand notes 4,031 4.23% 11,772 5.19%
Other 251 -- 408 --
- --------------------------------------------------------------------------------
Total other short-term
borrowings $49,282 $32,180
================================================================================
NOTE 9 -- INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31,
1998, 1997 and 1996 are as follow:
1998 1997 1996
- --------------------------------------------------------------------------------
(In thousands)
Current:
Federal $ 7,540 $ 6,104 $ 4,054
State and local 630 1,148 3,421
- --------------------------------------------------------------------------------
Total current 8,170 7,252 7,475
- --------------------------------------------------------------------------------
Deferred:
Federal (104) (59) 19
State and local 66 (38) (83)
- --------------------------------------------------------------------------------
Total deferred (38) (97) (64)
- --------------------------------------------------------------------------------
Total tax expense $ 8,132 $ 7,155 $ 7,411
================================================================================
29
<PAGE>
Merchants New York Bancorp
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>
1998 1997 1996
- --------------------------------------------------------------------------------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal income tax computed
at statutory rate $ 8,412 35.0% $ 7,601 35.0% $ 7,029 35.0%
State and city income taxes, net
of Federal income tax benefit 452 1.9 721 3.3 2,169 10.8
Federal income tax benefit
resulting from interest
on tax-exempt obligations (1,510) (6.3) (1,416) (6.5) (1,433) (7.1)
Other adjustments
affecting income taxes 778 3.2 249 1.1 (354) (1.8)
- --------------------------------------------------------------------------------------------
Total tax/effective rate $ 8,132 33.8% $ 7,155 32.9% $ 7,411 36.9%
============================================================================================
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities are presented below:
1998 1997
- --------------------------------------------------------------------------------
(In thousands)
Deferred tax assets:
Allowance for possible loan losses $ 2,788 $ 2,159
Other 249 294
- --------------------------------------------------------------------------------
Total gross deferred tax assets 3,037 2,453
Less: valuation reserve (2,788) (2,159)
- --------------------------------------------------------------------------------
Net deferred tax asset 249 294
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (33) (98)
Unamortized bond premium (12) (30)
Unrealized gain on investments
available for sale (5,377) (5,358)
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities (5,422) (5,486)
Net deferred tax liabilities $(5,173) $(5,192)
================================================================================
Given the subjective nature of recoverability of the deferred tax asset, a 100%
valuation allowance for the deferred tax asset related to the allowance for loan
losses was established relative to this item in 1998 and 1997.
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.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The new statement revises the
required disclosures for employee benefit plans, but does not change the
measurement or recognition of such plans. SFAS No. 132 standardizes certain
disclosures, requires additional information about changes in the benefit
obligations and about changes in the fair value of plan assets to facilitate
analysis, and eliminates certain disclosures that were not deemed useful. SFAS
No. 132 supersedes the disclosure requirements in SFAS No. 87, "Employers'
Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"
and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions."
30
<PAGE>
Merchants New York Bancorp
The changes in benefit obligations for 1998 and 1997 are summarized as follows:
1998 1997
- --------------------------------------------------------------------------------
(In thousands)
Benefit obligation at beginning of year $(10,209) $ (9,815)
Service cost (451) (451)
Interest cost (752) (679)
Plan participants' contributions -- --
Amendments -- --
Actuarial (gain)/loss -- --
Benefits paid 364 345
- --------------------------------------------------------------------------------
Benefit obligations at end of year $(11,048) $(10,600)
================================================================================
The changes in fair value of plan assets for 1998 and 1997 are summarized as
follows:
1998 1997
- --------------------------------------------------------------------------------
(In thousands)
Fair value of plan assets at beginning of year $ 10,090 $ 8,516
Return of plan assets 298 1,448
Employer contribution 638 471
Plan participants' contributions -- --
Benefits paid (364) (345)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 10,662 $ 10,090
================================================================================
The following table sets forth the Plan's funded status and amounts recognized
at December 31, 1998 and 1997:
1998 1997
- --------------------------------------------------------------------------------
(In thousands)
Funded status $ (386) $ (577)
Unrecognized transition
obligation (1,187) (1,279)
Unrecognized prior service cost (24) (26)
Unrecognized net loss 2,041 2,082
- --------------------------------------------------------------------------------
Prepaid pension asset $ 444 $ 200
================================================================================
Net periodic Plan costs for the years ended December 31, 1998, 1997 and 1996 are
comprised of the following:
1998 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 451 $ 51 $ 478
Interest cost 752 679 613
Return of plan assets (299) (1,350) (185)
Amortization of transition asset (91) (91) (91)
Recognized loss 60 53 74
Recognized prior service cost (2) (2) (2)
Deferral of asset (loss) gain (477) 640 (557)
- --------------------------------------------------------------------------------
Net periodic pension cost $ 394 $ 380 $ 330
================================================================================
Weighted average actuarial assumptions:
Discount rate 7.50% 7.50% 7.00%
Salary increases 4.00% 4.00% 4.00%
Expected long-term rate of return 8.00% 8.00% 9.00%
31
<PAGE>
Merchants New York Bancorp
The Bank adopted a non-qualified Directors retirement plan, effective February
1997. The projected benefit obligation at December 31, 1998 and 1997 were
approximately $1.7 million and $1.3 million, computed with a 7% discount rate. A
total expense of $460,000 and $280,000 has been recognized for the Plan in the
years ended December 31, 1998 and 1997, respectively.
In addition, the Bank provides a supplemental retirement contract for key senior
executives, with a projected benefit obligation of about $5.4 million and $3.7
million as of December 31, 1998 and 1997, respectively. These benefits are
partially covered through insurance policies with current values of $2.3
million. An additional pension expense of $240,000, $180,000 and $120,000 were
recognized in the years ended December 31, 1998, 1997 and 1996, respectively.
These retirement benefits are in addition to those offered by the Plan and those
for Bank's Board of Directors members.
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 1998, an employee
may contribute up to 15% of their salary, or $10,000, whichever is larger. 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.
Stock Option Plan
The Employees Stock Option Plan of The Merchants Bank of New York (the "Option
Plan") is set up as an incentive for performance and to encourage the continued
employment of existing key employees. The Company reserves common stock for the
future exercise of the options granted. The options expire ten years after the
date of grant and are exercisable after one year.
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 shares granted in 1996 and 1997, and 18,250 shares were
granted in 1998. 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 Company implemented SFAS No. 123 during 1996. As discussed in Note 1, the
Company applies APB Opinion No. 25 and the related interpretations in accounting
for the Option Plan and, accordingly, no compensation cost has been recognized
for the Option Plan. The adoption of SFAS No. 123, did not have a material
impact on the Bank's financial condition or its results of operations in 1998,
1997 and 1996.
The following chart summarizes information concerning options outstanding and
exercisable at December 31, 1998:
Options Outstanding and Exercisable
-----------------------------------
Number of Shares Remaining Life
Exercise price Outstanding (in years)
- --------------------------------------------------------------------------------
$ 9.88 81,200 3
$10.88 53,250 3
$35.88 18,250 10
- --------------------------------------------------------------------------------
Total 152,700
================================================================================
32
<PAGE>
Merchants New York Bancorp
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, 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 --
Granted 18,250 $35.88
Exercised (161,085) $ 9.94
Forfeited -- --
- --------------------------------------------------------------------------------
Outstanding at December 31, 1998 152,700
================================================================================
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 3.0% 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, 1998, 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, 1998 and 1997, compared to the FDIC minimum capital adequacy
requirements and the FDIC requirements for classification as a well capitalized
institution:
FDIC Requirements
------------------------------------------------------
Minimum Capital For Classification
Actual Adequacy As Well Capitalized
------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
(Dollars in thousands)
December 31, 1998
Leverage Capital $103,545 7.9% $ 39,271 3.0% $ 65,452 5.0%
Risk-Based Capital:
Tier 1 103,545 16.9 24,450 4.0 36,675 6.0
Total 111,186 18.2 48,900 8.0 61,125 10.0
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
33
<PAGE>
Merchants New York Bancorp
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 84,043 shares during 1998, with 306,650 shares having been
purchased in 1997. There were 161,085 and 24,881 shares reissued from treasury
stock for shares purchased through the stock option plan in 1998 and 1997,
respectively.
Dividends
Dividends paid to common stockholders totaled $7.8 million, or $0.80 per share,
a 7% increase over 1997. This represented a 49% payout of net income for 1998.
NOTE 12 -- 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 of available-for-sale securities. Below are the
before tax and tax expense amounts applicable for the years December 31, 1998
and December 31, 1997.
Before Tax Tax Net-of-Tax
Amount Expense Amount
- --------------------------------------------------------------------------------
Other Comprehensive Income:
Unrealized appreciation, as of
December 31, 1998, changes
arising during the year $14,452,237 $ 5,376,737 $ 9,075,500
- --------------------------------------------------------------------------------
Unrealized appreciation, as of
December 31, 1997, changes
arising during the year $14,301,903 $ 5,358,091 $ 8,943,812
- --------------------------------------------------------------------------------
NOTE 13 -- 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 more, were approximately $11.4 million and $7.5
million at December 31, 1998 and 1997, 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.
34
<PAGE>
Merchants New York Bancorp
Outstanding letters of credit, standby letters of credit, letters of guarantee
and foreign exchange contracts and their balances at December 31, 1998 and 1997
are:
1998 1997
- --------------------------------------------------------------------------------
(In thousands)
Standby letters of credit $65,278 $17,610
Commercial letters of credit 38,279 36,066
Steamship and air guarantees 1,995 2,090
Foreign exchange:
Forward contracts purchased -- 1,950
Forward contracts sold -- 1,940
Spot transactions 332 632
As of December 31, 1998, the Bank was obligated under seven operating leases for
premises. During 1998, the Bank contracted an additional lease for a new lending
division at 275 Madison Avenue. The lease is effective for 5 years to the year
2004.
Rental expense under the seven leases aggregated $1.30 million for 1998, $1.35
million for 1997 and $1.25 million for 1996. The minimum annual rent under such
leases for each of the years ending December 31, 1999 through the year 2003 and
thereafter is as follows:
1999 $ 1,467
2000 1,528
2001 1,638
2002 1,757
2003 1,811
Thereafter 24,448
----------------------------------------
Total $32,649
========================================
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 14 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a summary of the carrying values and estimated fair value of
the Company's financial instruments:
1998 1997
--------------------------------------------
Carrying Estimated Carrying Estimated
As of December 31, Value Fair Value Value Fair Value
- --------------------------------------------------------------------------------
(In thousands)
Financial assets:
Cash and due from banks $ 38,436 $ 38,436 $ 51,210 $ 51,210
Federal funds sold 5,000 5,000 67,000 67,000
Securities available
for sale 660,026 660,026 541,634 541,634
Investment securities 198,163 203,429 215,171 219,902
Loans, net of allowance 353,799 353,799 325,641 325,641
Financial liabilities:
Demand, NOW, savings and
money market deposits 517,454 517,454 484,930 484,930
Time deposits 416,869 417,095 419,157 419,269
Repurchase agreements 160,000 160,000 160,000 160,000
Other short-term borrowings 49,282 49,282 32,180 32,180
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
35
<PAGE>
Merchants New York Bancorp
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.
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 15 -- RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments and Hedge Activities
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for derivatives and hedging activities. It requires that all
derivatives be included as assets or liabilities in the balance sheet and that
such instruments be carried at fair market value through adjustments to either
other comprehensive income or current earnings or both, as appropriate. SFAS No.
133 is effective for financial statements issued for all fiscal quarters of
fiscal years beginning after June 15, 1999. Management does not anticipate that
the adoption of this standard will have a material impact on the Company's
consolidated financial statement.
Accounting for the Disclosure about Segments of an Enterprise and Related
Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective as of December 31, 1998.
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 in annual and interim
financial statements. Management believes that the Bank operates under one
segment as defined by SFAS No. 131, and additional disclosure is not required.
36
<PAGE>
Merchants New York Bancorp
NOTE 16 -- PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED STATEMENTS OF CONDITION
December 31, 1998 1997
- --------------------------------------------------------------------------------
(In thousands)
Assets:
Cash $ 38 $ 203
Investment in
subsidiary 113,040 105,991
- --------------------------------------------------------------------------------
Total assets $113,078 $106,194
================================================================================
Liabilities:
Total liabilities $ 100 --
Stockholders' equity:
Total stockholders' equity 112,978 106,194
- --------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $113,078 $106,194
================================================================================
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1998 1997
- --------------------------------------------------------------------------------
(In thousands)
Income:
Dividends received
from subsidiary $ 8,984 $13,217
Equity in undistributed
net income of subsidiary 6,918 1,345
Management fees 508 593
- --------------------------------------------------------------------------------
Total income 16,410 15,155
================================================================================
Expenses:
Expenses 508 593
- --------------------------------------------------------------------------------
Net income $15,902 $14,562
================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998 1997
- --------------------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net income $ 15,902 $ 14,562
Adjustments to reconcile net
income to net cash provided
by operating activities:
Increase in other liabilities 100 --
Equity in undistributed net
income of subsidiary (6,918) (1,345)
- --------------------------------------------------------------------------------
Net cash provided by operating
activities 9,084 13,217
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,601 395
Purchases of treasury stock (3,066) (6,492)
Dividends paid (7,784) (7,332)
- --------------------------------------------------------------------------------
Net cash used in financing activities (9,249) (13,429)
- --------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (165) (212)
Cash and cash equivalents at
beginning of the year 203 415
- --------------------------------------------------------------------------------
Cash and cash equivalents at
end of the year $ 38 $ 203
================================================================================
37
<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 40,000,000 shares in 1998, and 10,000,000 shares in 1997 of
stock at a par value of $.001 per share. Of the authorized shares, 9,989,332
shares have been issued as of December 31, 1998 and 1997.
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 17 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data is presented below for the years ended
December 31, 1998 and 1997:
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter Total
- --------------------------------------------------------------------------------
(In thousands)
Interest income $20,578 $20,643 $22,327 $22,720 $86,268
Net interest income 11,078 10,815 11,506 11,996 45,395
Provision for loan losses 400 200 150 675 1,425
Income before income tax 5,730 6,319 7,175 4,810 24,034
Net income 3,687 4,226 4,748 3,241 15,902
Earnings per share, basic $ 0.38 $ 0.44 $ 0.49 $ 0.33 $ 1.64
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
INDEPENDENT AUDITORS' REPORT
The 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, 1998
and 1997, and the related statements of income and comprehensive income, changes
in stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. 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 and subsidiary as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
New York, New York
January 25, 1999
38
<PAGE>
MERCHANTS NEW YORK BANCORP
AVERAGE ASSETS, LIABILITIES AND
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Average Average Average
Balance % Balance % Balance %
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and due from banks $ 42,860 3.42% $ 49,587 4.19% $ 46,993 4.49%
Federal funds sold 16,184 1.29 8,373 0.71 6,128 0.59
Investment securities*:
Securities available for sale 602,383 48.11 590,342 49.88 553,343 52.85
Investment securities 209,079 16.70 178,830 15.11 133,239 12.73
- ---------------------------------------------------------------------------------------------------------------------------
Total 811,462 64.81 769,172 64.99 686,582 65.58
Loans (net of unearned discounts) 350,272 -- 325,298 -- 280,361 --
Less allowance for loan losses 6,954 -- 6,247 -- 6,454 --
- ---------------------------------------------------------------------------------------------------------------------------
Total loans, net 343,318 27.42 319,051 26.96 273,907 26.17
Bank premises and equipment 6,795 0.55 6,897 0.58 6,909 0.66
Customers' liability on acceptances 16,737 1.34 15,588 1.32 11,924 1.14
Other assets 14,638 1.17 14,812 1.25 14,340 1.37
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $1,251,994 100% $1,183,480 100% $1,046,783 100%
===========================================================================================================================
Liabilities and Stockholders' Equity
Deposits:
Demand $ 255,239 20.39% $ 227,744 19.24% $ 209,828 20.05%
NOW 44,609 3.56 41,904 3.54 38,219 3.65
Savings 25,476 2.03 24,277 2.05 25,485 2.43
Money market 145,660 11.63 141,671 11.97 131,974 12.61
Time 416,286 33.25 416,221 35.17 384,033 36.68
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 887,270 -- 851,817 -- 789,539 --
Securities sold under
repurchase agreements 166,315 13.28 166,294 14.05 115,601 11.04
Acceptances outstanding 16,737 1.34 15,588 1.32 11,924 1.14
Other short-term borrowings 50,446 4.03 25,681 2.17 11,721 1.12
Other liabilities 20,366 1.63 18,712 1.58 16,846 1.61
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,141,134 -- 1,078,092 -- 945,631 --
Stockholders' Equity
Capital stock 10 -- 6 -- 5 --
Surplus 23,897 1.91 23,829 2.01 23,674 2.26
Undivided profits 84,050 6.71 77,394 6.54 70,652 6.75
Less: Treasury stock 6,498 0.51 3,548 0.29 89 --
Net unrealized appreciation on
securities available for sale, net 9,401 0.75 7,707 0.65 6,910 0.66
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 110,860 -- 105,388 -- 101,152 --
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,251,994 100% $1,183,480 100% $1,046,783 100%
===========================================================================================================================
</TABLE>
* The averages for available-for-sale securities are disclosed at estimated
market value, with securities held to maturity at book value.
39
<PAGE>
THE MERCHANTS BANK OF NEW YORK
LENDING DIVISION TREASURER 295 FIFTH AVENUE
Chief Credit Officer Senior Vice President Vice President and
Stephen A. Barrow Eric W. Gould Branch Manager
Executive Vice President Simeon Kovacic
COMPTROLLER
Division Heads Vice President and Assistant Vice Presidents
Leonard S. Levine Department Head Barbara Green
Janet L. Markel M. Nasette Espiritu William A. Matos
Senior Vice Presidents
Assistant Comptrollers Assistant Cashier
Group Managers Salvatore F. Balsamo Hetty A. Johnson
Michael D. Altman Perrie H. Mc Cloud
Senior Vice President Joanna Robinson 145 FIFTH AVENUE
Vice President and
Brian M. Cardew AUDIT Branch Manager
James K. Moore Vice President and Michael S. Hassani
Lester Nadel Department Head
Kenneth J. Satchwill Mary J. Scarpelli Assistant Cashier
Vice Presidents Amelita L. Antonio
Assistant Auditors
Vice Presidents Allan W. Trowbridge, CISA 62 WEST 47TH STREET
Gerald H. Attanasio Rolando Tubungbanua Vice President and
Andrew S. Baron Branch Manager
Salvatore J. Chiarelli BANK OPERATIONS John U. Doekker
Joseph I. Edelman Senior Vice President and
Leonard Katcher Division Head Vice President
Mitchell Kreiner Rosemarie A. Calabro Ralph Salvaggio
Patricia A. Miller
Joseph J. Nicolosi Vice President Assistant Vice President
Elliot Reiner Thomas J. Stackhouse David S. Kaplan
Donald F. Ritchie
Brian T. Schiffino Assistant Vice Presidents Assistant Cashiers
Joseph J. Wynne Kenneth Renga, AAP Frances Nardella
Patricia A. Revell Emilie Llerena
Assistant Vice Presidents
John J. Cronin Assistant Cashiers 434 BROADWAY
Joseph Radice Philip S. Cameron Vice President and
Debra J. Lott Branch Manager
Assistant Cashiers Inmaculada C. Marquez Joseph R. Criscione
John V. Buoniconti
Paul L. Hamner REAL ESTATE & Assistant Vice Presidents
Pamela G. Patterson ADMINISTRATIVE SERVICES Ronald Mattioli
Eugene P. Schreiner Vice President Elaine P. Sacks
Noreen Suarez T. John Santoro
Assistant Cashiers
INTERNATIONAL DIVISION BRANCH DIVISION Fontaine Firenze
Senior Vice President and Senior Vice President and Charles E. Nigro
Division Head Division Head
Joseph M. Cestone Eugene J. Venier 1040 SIXTH AVENUE
Assistant Vice President
Assistant Vice President Assistant Vice President and Branch Manager
Mary Jane G. Lerias Harry Woods Raymond F. Tornabene
Assistant Cashiers 275 MADISON AVENUE Assistant Vice President
Esteban A. Espiritu Vice President and Javier R. Carrera
Babulal Kapadia Branch Manager
Dennis J. Sheridan 93 CANAL STREET
HUMAN RESOURCES Assistant Vice President
Vice President and Assistant Vice Presidents and Branch Manager
Department Head James T. Kung Lawrence I. Kohn
Ruth T. Aimetti M. Carolina Nolasco
Assistant Vice President
CORPORATE SECRETARY Assistant Cashier Orlando Acevedo
Karen L. Deitz Kenrick Clarke
40
<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
Senior Vice President and Treasurer
M. Nasette Espiritu
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 Senior 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 Salans,
Hertzfeld, Heilbrunn, 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
*Officer of Bancorp.
**Director of Bancorp.
SUBSIDIARIES
MBNY HOLDINGS MERCHANTS MERCHANTS NEW YORK
CAPITAL CORP. COMMERCIAL CORP.
Spencer B. Witty
Chairman Spencer B. Witty William J. Cardew
Chairman Chairman
William J. Cardew
President William J. Cardew Irwin Schwartz
Vice Chairman President and
Eric W. Gould Chief Executive Officer
Senior Vice President and Eric W. Gould
Treasurer President Alexander Rodetis, Jr.
Executive Vice President
M. Nasette Espiritu
Vice President and Comptroller
<PAGE>
[LOGO]
275 Madison Avenue
295 Fifth Avenue
145 Fifth Avenue
1040 Sixth Avenue
62 West 47th Street
434 Broadway
93 Canal Street
New York, New York
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 37,839,116
<INT-BEARING-DEPOSITS> 596,830
<FED-FUNDS-SOLD> 5,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 660,026,532
<INVESTMENTS-CARRYING> 198,163,304
<INVESTMENTS-MARKET> 203,429,134
<LOANS> 361,763,395
<ALLOWANCE> 7,964,735
<TOTAL-ASSETS> 1,289,570,980
<DEPOSITS> 934,323,292
<SHORT-TERM> 209,282,319
<LIABILITIES-OTHER> 32,987,164
<LONG-TERM> 0
0
0
<COMMON> 9,989
<OTHER-SE> 112,968,216
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<INTEREST-TOTAL> 86,267,606
<INTEREST-DEPOSIT> 28,610,080
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<INTEREST-INCOME-NET> 45,394,694
<LOAN-LOSSES> 1,425,000
<SECURITIES-GAINS> 61,272
<EXPENSE-OTHER> 25,383,522
<INCOME-PRETAX> 24,033,672
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<NET-INCOME> 15,902,163
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<LOANS-NON> 0
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