SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of
The Securities Exchanges Act of 1934
For the quarter ended Commission File No. 0-22058
June 30, 1999
MERCHANTS NEW YORK BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3650812
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
275 Madison Avenue, New York, N.Y. 10016-0001
(Address or principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212)973-6600
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____
As of August 6, 1999, there were 9,619,401 shares of common stock
outstanding, the Registrant's only class of stock.
<PAGE>
Merchants New York Bancorp
Quarter Ended June 30, 1999
Page
----
Table of Contents 1
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Income and
Comprehensive Income 3
Consolidated Statements of Changes in Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
1
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<TABLE>
<CAPTION>
Merchants New York Bancorp
Consolidated Balance Sheets
Part I - Item 1, Financial Statements
For the periods ended June 30, 1999 December 31, 1998
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks.............................................. $ 31,035,466 $ 38,435,946
Federal funds sold................................................... 4,000,000 5,000,000
Securities available for sale, at market value....................... 599,233,605 660,026,352
Investment securities (market value of $212,620,993 in 1999
and $203,429,134 in 1998) ..................................... 211,228,647 198,163,304
-------------- --------------
Total securities......................................... 810,462,252 858,189,656
-------------- --------------
Loans, net of unearned discounts..................................... 392,087,804 361,763,395
Less allowance for loan losses................................. 8,555,816 7,964,735
-------------- --------------
Total loans, net......................................... 383,531,988 353,798,660
-------------- --------------
Premises and equipment, net.......................................... 6,370,544 6,708,796
Customers' liability on acceptances.................................. 16,676,101 13,241,093
Other assets......................................................... 12,862,960 14,196,829
- ----------------------------------------------------------------------------------------------------------
Total Assets................................................... $1,264,939,311 $1,289,570,980
==========================================================================================================
Liabilities and Stockholders' Equity
Deposits:
Demand......................................................... $ 271,140,707 $ 282,044,272
NOW............................................................ 44,490,541 46,444,839
Savings........................................................ 27,539,557 26,177,229
Money market................................................... 164,570,094 162,788,408
Time........................................................... 372,129,893 416,868,544
-----------------------------------
Total deposits................................................. 879,870,792 934,323,292
Securities sold under repurchase agreements ......................... 185,000,000 160,000,000
Other short-term borrowings.......................................... 61,725,798 49,282,319
Acceptances outstanding.............................................. 16,676,101 13,241,093
Other liabilities.................................................... 13,570,004 19,746,071
-----------------------------------
Total Liabilities.............................................. 1,156,842,695 1,176,592,775
Stockholders' Equity
Capital stock: $.001 par value; 40,000,000 authorized shares;
9,989,332 shares issued in 1999 and 1998 ......................... 9,989 9,989
Surplus.............................................................. 23,889,352 23,889,352
Undivided profits.................................................... 90,290,904 86,304,445
Less: Treasury stock at cost: 341,739 and 240,507 shares
in 1999 and 1998, respectively............................ (9,548,450) (6,301,081)
Accumulated other comprehensive income, net of tax:
Unrealized appreciation on securities available for sale.. 3,454,821 9,075,500
Total Stockholders' Equity................................ 108,096,616 112,978,205
- ----------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity................ $1,264,939,311 $1,289,570,980
==========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
2
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<TABLE>
<CAPTION>
Merchants New York Bancorp
Consolidated Statements of Income & Comprehensive Income
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Interest and Dividend Income
Loans.................................................... $7,808,691 $7,505,463 $15,083,696 $14,647,208
Investment securities:
Taxable............................................... 12,600,269 11,833,412 24,955,896 23,780,893
Non-taxable........................................... 1,160,140 1,135,879 2,328,193 2,257,360
Other interest income.................................... 56,905 168,126 313,011 535,677
-------------------------- ------------------------------
Total interest and dividend income.................... 21,626,005 20,642,880 42,680,796 41,221,138
-------------------------- ------------------------------
Interest Expense
Deposits.................................................. 6,202,322 6,958,129 12,901,095 14,068,282
Securities sold under repurchase agreements............... 2,132,225 2,158,334 4,064,963 4,145,937
Other short-term borrowings............................... 707,442 711,412 1,397,713 1,114,313
-------------------------- ------------------------------
Total interest expense................................. 9,041,989 9,827,875 18,363,771 19,328,532
-------------------------- ------------------------------
Net Interest Income.................................... 12,584,016 10,815,005 24,317,025 21,892,606
Provision for possible loan losses........................ 400,000 200,000 600,000 600,000
-------------------------- ------------------------------
Net interest income after provision for loan loss...... 12,184,016 10,615,005 23,717,025 21,292,606
-------------------------- ------------------------------
Non Interest Income
Service fees and other charges............................ 326,615 327,627 629,848 630,746
International department services......................... 800,696 693,764 1,497,124 1,390,371
Fee income................................................ 431,330 356,418 830,299 619,965
Securities gains, net..................................... 0 0 75,881 0
-------------------------- ------------------------------
Total non interest income.............................. 1,558,641 1,377,809 3,033,152 2,641,082
-------------------------- ------------------------------
Non Interest Expense
Salaries and employee benefits............................ 3,680,651 3,173,947 7,540,668 6,763,901
Net occupancy............................................. 647,640 629,781 1,292,579 1,266,234
Equipment................................................. 237,901 211,125 467,165 417,917
Other expenses............................................ 1,689,845 1,659,084 3,563,156 3,436,625
-------------------------- ------------------------------
Total non interest expense............................. 6,256,037 5,673,937 12,863,568 11,884,677
-------------------------- ------------------------------
Income before income taxes.................................. 7,486,620 6,318,877 13,886,609 12,049,011
Provision for income taxes.................................. 2,523,061 2,093,358 4,713,491 4,136,039
- -------------------------------------------------------------------------------------------- ------------------------------
Net Income............................................. $4,963,559 $4,225,519 $ 9,173,118 $7,912,972
- -------------------------------------------------------------------------------------------- ------------------------------
Earnings per share:
Basic..................................................... $ 0.51 $ 0.43 $ 0.95 $ 0.81
Diluted................................................... 0.51 0.43 0.94 0.80
============================================================================================ ==============================
Comprehensive income
Net income.................................................. $4,963,559 $4,225,519 $ 9,173,118 $ 7,912,972
Other comprehensive income, net of tax:
Unrealized appreciation/(depreciation)
on securities available for sale during the period........ (4,106,295) 116,279 (5,620,679) (532,402)
Less: reclassification for gains included in net income ... 0 (0) (75,881) (0)
- -------------------------------------------------------------------------------------------- ------------------------------
Comprehensive income.......................................... $ 857,264 $4,341,798 $ 3,476,558 $ 7,380,570
============================================================================================ ==============================
</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
Merchants New York Bancorp
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
For the periods ended June 30, 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Capital stock:
------------------------------
Balance at beginning and end of period ................ $ 9,989 $ 9,989
------------------------------
Surplus:
------------------------------
Balance at beginning and end of period ................ 23,889,352 23,889,352
------------------------------
Undivided profits:
Balance at beginning of year .......................... 86,304,445 80,016,764
Net income ............................................ 9,173,118 7,912,972
Cash dividends paid ................................... (3,872,222) (3,885,857)
Common stock issued from treasury stock ............... (1,314,437) (1,150,688)
------------------------------
Balance at end of period .............................. 90,290,904 82,893,191
------------------------------
Treasury stock:
Balance at beginning of year .......................... (6,301,081) (6,665,520)
Repurchase of 148,000 and 30,900 shares of common stock
in 1999 and 1998, respectively .................... (5,042,725) (1,235,913)
Issuance of 46,768 and 111,126 shares of common stock
in 1999 and 1998, respectively .................... 1,795,356 2,252,064
------------------------------
Balance at end of period .............................. (9,548,450) (5,649,369)
------------------------------
Accumulated other comprehensive income:
Net unrealized appreciation on securities
available for sale, net of tax effect
Balance at beginning of year .......................... 9,075,500 8,943,812
Changes during the period, net of tax ................. (5,620,679) (532,402)
------------------------------
Balance at end of period .............................. 3,454,821 8,411,410
------------------------------
Total stockholders' equity
Balance at beginning of year .......................... 112,978,205 106,194,397
Changes during the period, net ........................ (4,881,589) 3,360,176
- ---------------------------------------------------------------------------------------------
Total ending balance .................................. $ 108,096,616 $ 109,554,573
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
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<TABLE>
<CAPTION>
Merchants New York Bancorp
Consolidated Statements of Cash Flows
(Unaudited)
For the periods ended June 30, 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................... $9,173,118 $7,912,972
---------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .............................................. 551,361 552,252
Amortization of premium, net of
discounts.................................................. 2,823,459 4,153,612
Provision for loan losses.................................. 600,000 600,000
Gains on sales............................................. (75,881) 0
Decrease in unearned discounts ............................ (4,967) (53,982)
Decrease (increase) in other assets........................ 1,276,726 (7,902)
Decrease in other liabilities ............................. (2,759,696) (179,572)
---------------------------
Net cash provided by operating activities ............... 11,584,120 12,977,380
---------------------------
Cash flows from investing activities:
Net decrease in federal funds sold ........................ 1,000,000 62,000,000
Proceeds from redemptions of securities available for sale 96,165,079 81,963,352
Proceeds from sales of securities available for sale ...... 15,015,000 0
Purchase of securities available for sale.................. (79,080,639) (179,054,759)
Proceeds from redemptions of investment securities ........ 29,188,828 27,575,023
Purchase of investment securities ......................... (25,345,490) (5,172,204)
Net increase in customer loans ............................ (30,328,361) (10,800,482)
Net increase in bank premises and equipment................ (155,966) (282,513)
---------------------------
Net cash provided/(used) by investing activities ........ 6,458,451 (23,771,583)
---------------------------
Cash flows from financing activities:
Net decrease in demand deposits, NOW, savings
and money market accounts................................ (9,713,849) (16,781,944)
Net decrease in certificates of deposit ................... (44,738,651) (16,357,970)
Net increase (decrease) in securities sold under repurchase
agreements ................................................ 25,000,000 (5,000,000)
Net increase in other short-term borrowings ............... 12,443,478 32,849,158
Proceeds from issuance of common stock .................... 480,918 1,101,375
Purchases of treasury stock ............................... (5,042,725) (1,235,913)
Dividends paid ............................................ (3,872,222) (3,885,857)
---------------------------
Net cash used by financing activities ................... (25,443,051) (9,311,151)
---------------------------
Net decrease in cash and cash equivalents ........................ (7,400,480) (20,105,354)
Cash and cash equivalents at beginning of the period ............. 38,435,946 51,209,936
Cash and cash equivalents at end of the period ................... 31,035,466 31,104,582
Supplemental disclosure of cash flow information:
Interest paid ............................................. 20,625,772 19,370,895
Taxes paid ................................................ 4,147,801 3,522,971
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Merchants New York Bancorp
Notes to Consolidated Financial Statements
1. The consolidated financial statements include the accounts of Merchants
New York Bancorp (Bancorp) and its wholly owned subsidiary, The Merchants Bank
of New York (the Bank). All material intercompany accounts and transactions have
been eliminated in consolidation. The consolidated financial statements as of
and for the interim periods ended June 30, 1999 and 1998 are unaudited. All
adjustments, which consist of normal accruals necessary for the fair
presentation of such periods have been made. Certain reclassifications have been
made to the 1998 financial statements to conform to the current presentation.
The interim financial statements should be read in conjunction with Bancorp's
Annual Report on Form 10 - K for the year ended December 31, 1998.
2. Accumulated Other Comprehensive Income- SFAS No. 130, "Reporting
Comprehensive Income," 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 appreciation or depreciation on available-for-sale
securities. Other Comprehensive Income is shown on the Balance Sheet net of tax.
Below are the before tax and tax expense amounts applicable for the periods
ended June 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
Before Tax Tax Net-of-Tax
Amount Expense Amount
----------- ---------- -----------
<S> <C> <C> <C>
Other Comprehensive Income:
Unrealized appreciation, as of June 30, 1999,
changes arising during period $ 5,415,189 $1,960,368 $ 3,454,821
----------- ---------- -----------
Unrealized appreciation, as of December 31, 1998,
changes arising during period $14,452,237 $5,376,737 $ 9,075,500
----------- ---------- -----------
</TABLE>
6
<PAGE>
Item 2, Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison for the three months ended June 30, 1999 and June 30, 1998
- ---------------------------------------------------------------------
Interest income on investments increased $791,000 to $13.8 million as compared
to $13.0 million for the same period in 1998. The increase was a result of
$487,000 from higher volume and $304,000 from increase in interest rates. The
average balance for the investment portfolio increased to $816.0 million, up
$29.6 million from $786.4 million in 1998.
Interest income on loans increased to $7.8 million, up $303,000 compared to $7.5
million for the same period in 1998. $898,000 was from higher volume, offset by
a reduction of $595,000 from lower interest rates as the prime rate averaged
7.75% versus an average of 8.50% for the same period in 1998. The average loan
balance for the quarter increased to $369.9 million, up $41.3 million from
$328.6 million in 1998.
Non interest income increased by $181,000 to $1.5 million in 1999 as compared to
$1.4 million for the same period in 1998. This was primarily the result of
increase in higher volume of processing fees of letters of credits and fee
income.
Interest expense on interest bearing deposits decreased $756,000 to $6.2
million, down from $6.9 million for the same period in 1998. The decrease was
primarily a result of $713,000 from lower interest rates . Average interest
bearing deposits increased slightly to $618.7 when compared to $611.2 for the
same period in 1998.
Interest expense on repurchase agreements remained constant at $2.2 million for
both periods ending June 30, 1999 and 1998. $245,000 was from higher volume,
offset by a reduction in interest rates of $271,000. The average balance for
repurchase agreements increased $18.4 million for the quarter to $170.5 million,
up from $152.1 million for the same period in 1998.
Other short term borrowings consisting of FHLB advances, Federal funds
purchased, and US Treasury demand notes were employed to fund the increase in
the loan and investment portfolios. At June 30, 1999, interest expense from
other short term borrowings remained relatively the same, just over $700,000 for
both periods ending June 1999 and 1998. Interest expense on FHLB term advances
for the second quarter increased $124,000 to $598,000 when compared to $474,000
for the same period in 1998. The increase was a result of a higher volume of
FHLB term advance, as the average balance for the period increased to $45
million, up $11.8 million from $33.2 million for the same period in 1998. The
increase in FHLB term advances interest expense was offset by a decrease in
Federal funds purchased and US Treasury demand notes interest expense of
$127,000.
Non-interest expense increased to $6.3 million, up $582,000 from 1998 of $5.7
million. This stemmed principally from increases of $507,000 in salaries and
benefits and $75,000 increase in other operating expenses.
Income tax expense increased $430,000 to $2.5 million, compared to $2.1 million
in 1998. This was due principally to an increase in income before taxes of $1.2
million.
7
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
PROVISION FOR POSSIBLE LOAN LOSSES
- -----------------------------------
An addition of $400,000 was made to the Provision for Possible Loan Losses for
the second quarter in 1999, versus $200,000 in 1998. The loan loss provision is
based on maintaining a loan loss reserve to cover all non-accrual and higher
risk loans. The Bank's level of reserve follows industry standards, with the
provision rising and falling to reflect the status of our loan portfolio risk.
The level of allowance for loan losses is evaluated by management quarterly and
is based on several factors in addition to nonaccrual loans, doubtful and
substandard loans including: charged-off loans, recoveries, changes in levels
and characteristics of outstanding loans, and loans classified by management as
higher than normal credit risk, but where a loss is not currently anticipated.
The following table sets forth certain information with respect to the loan loss
experience for the quarter ended June 30, 1999 and 1998.
6/30/99 6/30/98
----------------------
(In thousands)
Balance at beginning of period ................... $8,114 $6,817
Provision for loan losses ........................ 400 200
Charge offs ...................................... 0 0
Recoveries:
Commercial .............................. 40 62
Installment ............................. 2 4
---------------------
Total ............................................ $8,556 $7,083
=====================
8
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Comparison for the six months ended June 30, 1999 and June 30, 1998
- --------------------------------------------------------------------
Interest income on investments increased $1.3 million to $27.3 million as
compared to $26.0 million for the same period in 1998. The increase was a result
of $1.7 million from higher volume, offset by a decrease from lower interest
rates of $499,000. The average balance for the investment portfolio increased to
$823.9 million, up $52.7 million from $771.2 million in 1998.
Interest income on loans increased to $15.1 million, up $437,000 compared to
$14.6 million for the same period in 1998. $1.7 million was from higher volume,
offset by a reduction of $1.2 million from lower interest rates as the prime
rate averaged 7.75% versus an average of 8.50% for the same period in 1998. The
average loan balance for the year increased to $359.5 million, up $38.2 million
from $321.3 million in 1998.
Non interest income increased by $392,000 to $3.0 million in 1999 as compared to
$2.6 million for the same period in 1998. This was the result of gains on
investment sales of $76,000, increased volume in letters of credits processing
fees of $107,000 and an increase in fee income of $209,000.
Interest expense on interest bearing deposits decreased $1.1 million to $12.9
million, down from $14.0 million for the same period in 1998. The decrease was a
result of $1.3 million from lower interest rates, offset by $121,000 from higher
volume. Average interest bearing deposits increased $15.7 million to $635.3
million in 1999, compared to $619.6 million in 1998.
Interest expense on repurchase agreements remained relatively the same at $4.1
million for both periods ending June 30, 1999 and 1998. $412,000 was from higher
volume, offset by a reduction in interest rates of $493,000. The average balance
for repurchase agreements outstanding increased by $15.3 million for the year to
$160.4 million, up from $145.1 million for the same period in 1998.
Other short term borrowings, consisting of FHLB advances, Federal funds
purchased, and US Treasury demand notes were employed to fund the increases in
the loan and investment portfolios. At June 30, 1999, interest expense on FHLB
term advances increased $437,000, to $1.2 million, up from $763,000 for the same
period in 1998. The increase was a result of a higher volume of FHLB term
advances, as the average balance for the period increased to $45 million, up
$18.4 million when compared $26.6 million for the same period in 1998. The
increase in FHLB term advances interest expense was offset by a decrease in
interest expense on Federal funds purchased and US Treasury demand notes of
$153,000.
Non-interest expense increased to $12.9 million, up $1.0 million from the 1998
results of $11.9 million. This stemmed principally from an increase of $777,000
in salaries and benefits and $202,000 in other expenses.
Income tax expense increased $577,000 to $4.7 million, compared to $4.1 million
in 1998. This was due principally to an increase in income before taxes of $1.8
million.
9
<PAGE>
PROVISION FOR POSSIBLE LOAN LOSSES
- ----------------------------------
An addition of $600,000 was made to the Provision for Possible Loan Losses for
the six months ended June 30, 1999 and 1998. At June 30, 1999, the Bank's
allowance for loan losses was 2.38 % of average loans outstanding totaling
$359.5 million, with 2.20% of $321.3 million for the same period in 1998.
The following table sets forth certain information with respect to the loan loss
experience for the periods ending June 30, 1999 and 1998.
6/30/99 6/30/98
------- -------
(In thousands)
Balance at beginning of period ........................... $7,965 $6,167
Provision for loan losses................................. 600 600
Charge offs............................................... 178 0
Recoveries:
Commercial....................................... 164 310
Installment...................................... 5 6
---------------
Total..................................................... $8,556 $7,083
===============
PAST DUE LOANS AND NON PERFORMING ASSETS
Loans are generally placed on non-accrual status when principal or interest
becomes 90 days or more delinquent. Loans past due 90 days or more which are
still accruing, are either secured or are in the process of collection. Loans
remain on non-accrual status until principal and interest payments are current
or charged off. The following table sets forth the aggregate amount of
non-accrual and past due loans which are 90 days or more past due as to
principal or interest payments on the date indicated.
<TABLE>
<CAPTION>
6/30/99 12/31/98
-----------------------
(Dollars in thousands)
<S> <C> <C>
Non - accrual loans..................................................... $ 337 $ 146
Loans past due more than 90 days,
still accruing................................................. 594 351
----------------
Total.......................................................... $ 931 $ 497
================
Non - accrual loans as a % of reserve................................... 3.94% 1.83%
Non - accrual loans as a % of total average loans....................... .09 .05
Interest income that would have been earned on non-accrual loans $ 8 $ 3
</TABLE>
10
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
LIQUIDITY
- ---------
Liquidity measures the Bank's ability to satisfy current and future obligations
and commitments as they become due. Maintaining an adequate liquidity level
through proper asset/liability management insures that these needs will be met
at a reasonable cost. Funds to meet liquidity needs are raised through the
liquidation or maturity of an asset or through increased deposits or borrowing.
Average cash and short term investments totaled $51 million at June 30, 1999
compared with $59 million at December 31, 1998, accounting for 4.0% and 4.7% of
the Bank's total average assets, respectively. Management considers overall
liquidity at June 30, 1999 to be adequate to meet current obligations, to
support expectations for future changes in asset and liability levels and to
carry on normal operations.
Scheduled loan payments and payments of principal and interest from the
investment portfolio provided additional liquidity. Through principal repayments
and redemptions, the investment portfolio generated $125.3 million for the first
six months of 1999, and a total of $231.3 million for the year ended December
31, 1998 for reinvestment and/or liquidity. Furthermore, $15 million for the
period ended June 30, 1999 and a total of $19 million for the year ended
December 31, 1998 were the result of investment sales to take advantage of
interest rate arbitrage.
On the liability side, the primary source of funds available to meet liquidity
needs is the Bank's core deposit base. The average balance of total deposits was
$915 million as of June 30, 1999, compared to $887 million at December 31, 1998.
The Bank continues to retain a substantial portion of its average deposits in
the form of noninterest-bearing funds, which were 30.5% at June 30, 1999 and
28.8% at December 31, 1998, or $279 million and $255 million, respectively.
Capital
- -------
The primary source of capital growth is through retention of earnings. Undivided
profits increased to $90.3 million as of June 30, 1999 as compared to $86.3
million as of December 31, 1998. On June 23, 1999, the Bank's Board of Directors
declared its 264th consecutive quarterly dividend of $.20 per share of common
stock payable to its shareholders. The Board believes that cash dividends are an
important component of shareholder value and at the Company's current level of
performance, dividend payments will continue into the future.
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 the risk based ratios and leverage ratio, as shown below, in
excess of the required "Well Capitalized" level of 10% and 5%, respectively.
Required 6/30/99 12/31/98
--------------------------------------
Tier I Capital Ratio.......... 4.00% 17.25% 16.94%
Total Capital Ratio........... 8.00 18.50 18.19
Leverage Ratio................ 3.00 8.31 7.91
11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
There was an overall decrease of $4.9 million in capital from December 31, 1998
to June 30, 1999. Of this change, there was an increase in retained earnings of
$3.9 million, a decrease in the change in market value of available for sale
securities (net of tax effect) of $5.6 million and a net increase of $3.2
million in Treasury stock transactions.
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. The Company has an extensive program in place to address its exposure
to the Year 2000 issue, handled by the Y2K committee.
The committee is active with members from all areas of the Company. It has
conducted a review and has developed segregated test environments where computer
technicians and end users are able to simulate the change to year 2000 and
beyond. The committee is continuing to devote necessary resources to ensure that
the Company's operations will not be materially impacted or disrupted due to a
Y2K computer system malfunction. As of June 30, 1999, the Company was 96% ready
and is scheduled 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 this year. The Company could be
adversely affected if other entities do not appropriately address their own
compliance issues. The Company will continue to monitor its critical third
parties on Year 2000 issues; to assess their readiness and their potential
impact on the Company; and to develop the necessary contingency plans.
In addition to the previously discussed initiatives, the Company has developed
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 operations and an assessment of failure scenarios. There
can be no complete assurance that the Company will not be adversely affected by
unforseen problems in the Company's computer systems or in systems provided by
third parties and by other entities not associated with the Company which are
unsuccessful in properly addressing this issue.
In compliance with Year 2000 disclosure requirements, the committee has analyzed
the impact that compliance with the Year 2000 may have on earnings. The
Company's costs that has been incurred associated with attaining Y2K readiness,
totaled approximately $400,000. The Company has not incurred, and is not likely
to incur, additional costs that are material to any reporting period.
12
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
FORWARD-LOOKING STATEMENTS
- --------------------------
This report contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, which are based on
management's current expectations regarding economic, legislative and regulatory
issues that may impact the Company's earnings in future periods. Factors that
could cause future results to vary from current management's expectations
include, but are not limited to general economic conditions: changes in interest
rate, deposit flows, loan demand, real estate values and competition; changes in
accounting principles, policies or guidelines; changes in legislation and
regulation; changes in the ability of the Company, its vendors and customers to
respond effectively to the year 2000 issue; and other economic, competitive,
governmental, regulatory and technological factors affecting the Company's
operations, pricing, products and services.
13
<PAGE>
Item 3, Quantitative and Qualitative Disclosure About Market Risk
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 a changing rate environment. The Bank does not currently
engage in trading activities or use of off balance sheet derivative instruments
to control interest rate risk. The Board of Directors have authorized management
to use derivatives if management deems it beneficial to the Bank.
Even with the Bank's active role in managing interest rate risk, the potential
for changing interest rates is an uncertainty that could have an adverse affect
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 addition, 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 sensitive liabilities within
specified maturities or repricing periods, as set forth in the following
interest rate sensitivity gap analysis.
14
<PAGE>
Quantitative and Qualitative Disclosure About Market Risk
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY GAP ANALYSIS
- --------------------------------------
As of June 30, 1999
(Dollars in thousands)
Less Than 3 to 12 1 to 5 Over
3 Months Months Years 5 Years Total
- --------------------------------------------------------------------------------------------------------------------------------
Interest Earning Assets
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities available for sale* $ 42,042 $ 124,007 $ 263,443 $ 164,326 $ 593,818
Securities held to maturity* 14,238 40,676 115,842 40,473 211,229
Loans 379,283 5,087 5,883 1,835 392,088
Other 4,547 100 -- -- 4,647
- --------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 440,110 169,870 385,168 206,634 1,201,782
================================================================================================================================
Interest Bearing Liabilities
- --------------------------------------------------------------------------------------------------------------------------------
Interest bearing deposits 485,426 105,699 17,430 175 608,730
Securities sold under
repurchase agreements 95,000 90,000 -- -- 185,000
Other short-term borrowing 41,726 20,000 -- -- 61,726
- --------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 622,152 215,699 17,430 175 855,456
================================================================================================================================
Net interest rate sensitivity gap (182,042) (45,829) 367,738 206,459 346,326
Cumulative gap position (182,042) (227,871) 139,867 346,326
Cumulative gap/total earning assets:
At June 30, 1999 (15.15)% (18.96)% 11.64% 28.82%
At June 30, 1998 (19.71)% (19.06)% 21.58% 28.09%
</TABLE>
* Adjusted for weighted average maturity dates and prepayments for mortgage back
securities. All securities are disclosed at book value.
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 assets 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 the second quarter of 1999, the Bank
increased utilization of short-term borrowing to fund the increase in loans.
Consequently, 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, as of June 30, 1999, totaled $392.1 million, consisting of virtually
all adjustable rate loans. Second, a majority of the Bank's securities are U.S.
Government and Agency mortgaged-backed securities, with an ending book value of
$668.7 million, and an expected weighted average maturity 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,
15
<PAGE>
Quantitative and Qualitative Disclosure About Market Risk
including $279 million in average demand deposits and $244 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 June 30, 1999, 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 June 30, 1998.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE ANALYSIS FOR INTEREST RATE RISK
- ---------------------------------------------------
June 30, 1999
Percent Increase
Change in Interest Rates Estimated NPV Estimated Increase (Decrease) in NPV* (Decrease) in NPV at
Basis Points Amount Amount Percent June 30, 1998
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
+200 118,742 (52,005) (30.46%) (17%)
+100 145,785 (24,962) (14.62%) ( 7%)
-- 170,747 -- -- --
- -100 186,124 15,377 9.01% .97%
- -200 185,629 14,882 8.72% .70%
* Pre- Tax
</TABLE>
Certain assumptions are employed in preparing the preceding table. These
assumptions relate to interest rates, loan prepayment rates, deposit decay rates
and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates, although there can be no assurance that
this will be the case. Even if 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.
16
<PAGE>
Part II - Other Information
Item 4, Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Bancorp, was held on April 27, 1999 at
12:00 noon for the following purposes:
1. To elect twelve directors to serve until the next Annual Meeting of
Stockholders and/or until their successors are elected and qualified.
Charles J. Baum
William J. Cardew
Eric W. Gould
Rudolf H. Hertz
James G. Lawrence
Robinson Markel
Paul Meyrowitz
Alan Mirken
Mitchell J. Nelson
Leonard Schlussel
Charles I. Silberman
Spencer B. Witty
Total Votes For 7,900,348
Total Votes Opposed 91,273
Total Votes Withheld 1,757,204
2. To transact such other business as may properly come before the Meeting or
any adjournments or postponements thereof.
There were no other matters discussed.
17
<PAGE>
Item 6, Exhibits and Reports on Form 8 - K
(a) Exhibits:
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8 - K: None
SIGNATURES
----------
Pursuant to the requirements of the Securities and 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
Date: August 9, 1999 --------------------------------
James G. Lawrence
President & Chief Executive Officer
Date: August 9, 1999 --------------------------------
M. Nasette Aranda
Vice President & Comptroller
18
Exhibit 11 - Computation of Earnings Per Share
<TABLE>
<CAPTION>
Earnings Per Share (EPS), presented below is the calculation of basic and
diluted EPS for the Company for the Six months ended June 30, 1999 and 1998.
1999 1998
-----------------------------------
<S> <C> <C>
Net Income $9,173,118 $7,912,972
Less: minority interest 3,713 3,713
---------- ----------
Net income available to common shareholders $9,169,405 $7,909,259
Weighted average shares outstanding 9,666,653 9,721,453
Plus: effect of stock options as dilutive securities 79,132 151,744
---------- ----------
Adjusted weighted average shares assuming dilution 9,745,785 9,873,196
EPS - Basic $ 0.95 $ .81
EPS - Diluted $ 0.94 $ .80
================================================================================================
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
Exhibit (27)
Financial Data Schedule
As Of and For the Period Ended June 30, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Jun-30-1999
<CASH> $30,388,864
<INT-BEARING-DEPOSITS> 646,602
<FED-FUNDS-SOLD> 4,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 599,233,605
<INVESTMENTS-CARRYING> 211,228,647
<INVESTMENTS-MARKET> 212,620,993
<LOANS> 392,087,804
<ALLOWANCE> 8,555,816
<TOTAL-ASSETS> 1,264,939,311
<DEPOSITS> 879,870,792
<SHORT-TERM> 246,725,798
<LIABILITIES-OTHER> 30,246,105
<LONG-TERM> 0
0
0
<COMMON> 9,989
<OTHER-SE> 108,086,627
<TOTAL-LIABILITIES-AND-EQUITY> 1,264,939,311
<INTEREST-LOAN> 15,083,696
<INTEREST-INVEST> 27,284,089
<INTEREST-OTHER> 313,011
<INTEREST-TOTAL> 42,680,796
<INTEREST-DEPOSIT> 12,901,095
<INTEREST-EXPENSE> 18,363,771
<INTEREST-INCOME-NET> 24,317,025
<LOAN-LOSSES> 600,000
<SECURITIES-GAINS> 75,881
<EXPENSE-OTHER> 12,863,568
<INCOME-PRETAX> 13,886,609
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,173,118
<EPS-BASIC> 0.95
<EPS-DILUTED> 0.94
<YIELD-ACTUAL> 4.31
<LOANS-NON> 337,000
<LOANS-PAST> 594,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,964,735
<CHARGE-OFFS> 177,990
<RECOVERIES> 169,071
<ALLOWANCE-CLOSE> 8,555,816
<ALLOWANCE-DOMESTIC> 194,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 8,361,816
</TABLE>
