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
September 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 October 28, 1999, there were 19,230,604 shares of common stock
outstanding, the Registrant's only class of stock.
<PAGE>
Merchants New York Bancorp
Quarter Ended September 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 6. Exhibits and Reports on Form 8-K 17
Signatures 17
1
<PAGE>
Merchants New York Bancorp
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Part I - Item 1, Financial Statements
For the periods ended September 30, 1999 December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks............................................ $42,915,580 $38,435,946
Federal funds sold................................................. 6,000,000 5,000,000
Securities available for sale, at market value..................... 613,003,278 660,026,352
Investment securities (market value of $200,902,190 in 1999
and $203,429,134 in 1998)..................................... 200,481,279 198,163,304
----------------------------------------------
Total securities......................................... 813,484,557 858,189,656
----------------------------------------------
Loans, net of unearned discounts................................... 462,326,766 361,763,395
Less allowance for loan losses................................ 8,523,961 7,964,735
----------------------------------------------
Total loans, net......................................... 453,802,805 353,798,660
----------------------------------------------
Premises and equipment, net........................................ 6,189,944 6,708,796
Customers' liability on acceptances................................ 14,555,827 13,241,093
Other assets....................................................... 12,913,425 14,196,829
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets.................................................. $1,349,862,138 $1,289,570,980
===========================================================================================================================
Liabilities and Stockholders' Equity
Deposits:
Demand........................................................ $253,411,488 $282,044,272
NOW........................................................... 47,872,916 46,444,839
Savings....................................................... 28,398,587 26,177,229
Money market.................................................. 178,296,133 162,788,408
Time.......................................................... 390,049,105. 416,868,544
----------------------------------------------
Total deposits................................................ 898,028,229 934,323,292
Securities sold under repurchase agreements ....................... 170,000,000 160,000,000
FHLB term advances 130,000,000 45,000,000
Other short-term borrowings........................................ 14,491,893 4,282,319
Acceptances outstanding............................................ 14,555,827 13,241,093
Other liabilities.................................................. 13,699,266 19,746,071
----------------------------------------------
Total Liabilities............................................. 1,240,775,215 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.................................................. 93,090,902 86,304,445
Less: Treasury stock at cost: 362,980 and 240,507 shares
in 1999 and 1998, respectively*............................... (10,296,603) (6,301,081)
Accumulated other comprehensive income, net of tax:
Unrealized appreciation on securities available for sale...... 2,393,283 9,075,500
----------------------------------------------
Total Stockholders' Equity.................................... 109,086,923 112,978,205
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity........................... $1,349,862,138 $1,289,570,980
============================================================================================================================
</TABLE>
* Shares are not adjusted for 2-for-1 stock split, effective 10/1/99.
See accompanying notes to consolidated financial statements.
2
<PAGE>
Merchants New York Bancorp
Consolidated Statements of Income & Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Sept, 30, Nine Months Ended Sept. 30,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C>
Interest and Dividend Income
Loans........................................................... $9,316,063 $8,533,526 $24,399,759 $23,180,733
Investment securities:
Taxable....................................................... 12,607,254 12,543,187 37,563,150 36,324,080
Non-taxable................................................... 1,112,097 1,185,389 3,440,290 3,442,749
Other interest income........................................... 60,164 65,027 373,176 600,705
------------------------------ -----------------------------
Total interest and dividend income............................ 23,095,578 22,327,129 65,776,375 63,548,267
------------------------------ -----------------------------
Interest Expense
Deposits........................................................ 6,389,830 7,231,451 19,290,926 21,307,105
Securities sold under repurchase agreements..................... 2,416,667 2,621,489 6,481,630 6,767,426
FHLB term advances.............................................. 920,364 641,466 2,120,287 1,404,116
Other short-term borrowings..................................... 304,478 326,211 502,268 670,502
------------------------------ -----------------------------
Total interest expense........................................ 10,031,339 10,820,617 28,395,111 30,149,149
------------------------------ -----------------------------
Net Interest Income........................................... 13,064,239 11,506,512 37,381,264 33,399,118
Provision for loan losses....................................... 615,000 150,000 1,215,000 750,000
------------------------------ -----------------------------
Net interest income after provision for loan loss............. 12,449,239 11,356,512 36,166,264 32,649,118
------------------------------ -----------------------------
Non Interest Income
Service fees and other charges.................................. 363,433 309,952 993,281 940,697
International department services............................... 874,254 755,934 2,371,379 2,146,306
Fee income...................................................... 497,093 275,407 1,327,391 895,372
Securities gains, net........................................... 0 28,339 75,881 28,339
------------------------------ -----------------------------
Total non interest income..................................... 1,734,780 1,369,632 4,767,932 4,010,714
------------------------------ -----------------------------
Non Interest Expense
Salaries and employee benefits.................................. 3,495,703 3,232,413 11,036,371 9,996,314
Net occupancy................................................... 705,548 665,189 1,998,127 1,931,423
Equipment....................................................... 230,590 202,529 697,756 620,446
Other expenses.................................................. 1,788,077 1,450,573 5,351,232 4,887,199
------------------------------ -----------------------------
Total non interest expense.................................... 6,219,918 5,550,704 19,083,486 17,435,382
------------------------------ -----------------------------
Income before income taxes.......................................... 7,964,101 7,175,440 21,850,710 19,224,450
Provision for income taxes.......................................... 2,463,530 2,427,434 7,177,021 6,563,473
- -------------------------------------------------------------------------------------------------- -----------------------------
Net Income................................................... $5,500,571 $4,748,006 $14,673,689 $12,660,977
- -------------------------------------------------------------------------------------------------- -----------------------------
Earnings per share*:
Basic........................................................... $0.29 $0.24 $0.76 $0.65
Diluted......................................................... 0.29 0.24 0.76 0.64
================================================================================================== =============================
Comprehensive income
Net income.......................................................... $5,500,571 $4,748,006 $14,673,689 $12,660,977
Other comprehensive income, net of tax:
Unrealized appreciation/(depreciation) on securities available
for sale during the period................................. (1,061,538) 4,482,338 (6,682,217) 3,949,936
Less: reclassification for gains included in net income............ 0 (28,339) (75,881) (28,339)
================================================================================================== =============================
Comprehensive income............................................ $4,439,033 $9,202,005 $7,915,591 $16,582,574
================================================================================================== =============================
</TABLE>
* Adjusted for 2 for 1 stock split, effective 10/1/99.
See accompanying notes to consolidated financial statements.
3
<PAGE>
Merchants New York Bancorp
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
For the periods ended September 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 80,016,765
Net income............................................. 14,673,689 12,660,977
Cash dividends paid.................................... (6,278,808) (5,832,580)
Common stock issued from treasury stock................ (1,608,424) (1,196,377)
---------------------------------
Balance at end of period............................... 93,090,902 85,648,785
---------------------------------
Treasury stock:
Balance at beginning of year............................ (6,301,081) (6,665,520)
Repurchase of 182,600 and 54,043 shares of common stock
in 1999 and 1998, respectively*............. (6,222,650) (2,055,284)
Issuance of 60,127 and 114,676 shares of common stock
in 1999 and 1998, respectively*............. 2,227,128 2,332,826
---------------------------------
Balance at end of period................................ (10,296,603) (6,387,978)
---------------------------------
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................... (6,682,217) 3,949,936
---------------------------------
Balance at end of period................................ 2,393,283 12,893,748
---------------------------------
Total stockholders' equity
Balance at beginning of year............................ 112,978,205 106,194,398
Changes during the period, net.......................... (3,891,282) 9,859,498
--------------------------------
- --------------------------------------------------------------------------------------------------------
Total ending balance.................................... $109,086,923 $116,053,896
========================================================================================================
</TABLE>
* Shares are not adjusted for 2-for-1 stock split, effective 10/1/99.
See accompanying notes to consolidated financial statements.
4
<PAGE>
Merchants New York Bancorp
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the periods ended September 30, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................... $14,673,689 $12,660,977
--------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation.............................................................. .815,139 825,451
Amortization of premium, net of discounts................................. 3,616,870 5,992,745
Provision for loan losses................................................. 1,215,000 750,000
Gains on sales............................................................ (75,881 (28,339)
Increase (decrease) in unearned discounts................................. 14,271 (11,664)
Decrease (increase) in other assets....................................... 1,197,690 (1,503,819)
Decrease in other liabilities............................................. (1,975,561) (1,068,140)
--------------------------------
Net cash provided by operating activities............................. 19,481,217 17,617,211
--------------------------------
Cash flows from investing activities:
(Increase) decrease in federal funds sold................................. (1,000,000) 57,000,000
Proceeds from redemptions of securities available for sale................ 130,116,573 131,482,662
Proceeds from sales of securities available for sale...................... 15,015,000 6,844,407
Purchase of securities available for sale................................. (129,043,026) (252,256,745)
Proceeds from redemptions of investment securities........................ 40,923,423 40,822,734
Purchase of investment securities......................................... (26,601,323) (8,653,389)
Net increase in customer loans............................................ (101,233,415) (69,525,754)
Net increase in bank premises and equipment............................... (210,572) (450,285)
--------------------------------
Net cash used by investing activities.................................. (72,033,340) (94,736,370)
--------------------------------
Cash flows from financing activities:
Net decrease in demand deposits, NOW, savings
and money market accounts............................................... (9,475,624) (33,639,840)
(Decrease) increase in certificates of deposit............................ (26,819,439) 23,113,321
Net increase in securities sold under repurchase agreements............... 10,000,000 40,000,000
Net increase in FHLB term advances........................................ 85,000,000 25,000,000
Net increase in other short-term borrowings............................... 10,209,574 3,345,806
Proceeds from issuance of common stock.................................... 618,704 1,136,449
Purchases of treasury stock............................................... (6,222,650) (2,055,284)
Dividends paid............................................................ (6,278,808) (5,832,580)
--------------------------------
Net cash provided by financing activities.............................. 57,031,757 51,067,872
--------------------------------
Increase (decrease) in cash and cash equivalents................................ 4,479,634 (26,051,287)
Cash and cash equivalents at beginning of the period............................ 38,435,946 51,209,936
Cash and cash equivalents at end of the period.................................. 42,915,580 25,158,649
=======================================================================================================================
Supplemental disclosure of cash flow information:
Interest paid............................................................. 30,580,631 31,197,902
Taxes paid................................................................ 6,901,754 5,926,325
=======================================================================================================================
</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 September 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 September 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 September 30, 1999,
changes arising during period $ 3,698,775 $1,305,492 $ 2,393,283
Unrealized appreciation, as of December 31, 1998,
changes arising during period $14,452,237 $5,376,737 $ 9,075,500
</TABLE>
3. Bancorp's Board of Directors declared a 2 for 1 stock split on August 17,
1999, to shareholders of record as of September 21, 1999, with an effective date
of October 1, 1999. As a result, adjustments have been made to the capital
accounts at the effective date, while retroactive adjustments have been made to
the number of shares used for the earnings per share calculation.
6
<PAGE>
Item 2, Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison for the three months ended September 30, 1999 and September 30, 1998
- -------------------------------------------------------------------------------
Interest income on investments remained constant at $13.7 million for both
periods ended September 30, 1999 and 1998. A decrease of $328,000 from lower
volume was offset by an increase of $319,000 from higher interest rates. The
average balance for the investment portfolio for the period decreased to $799.0
million, down $19.8 million from $818.8 million for the same period in 1998.
Interest income on loans increased to $9.3 million, up $782,000 when compared to
$8.5 million for the same period in 1998. $1.3 million was from higher volume,
offset by a reduction of $480,000 from lower interest rates as the prime rate
averaged 8.10% versus an average of 8.50% for the same period in 1998. The
average loan balance for the quarter increased to $425.3 million, up $56.8
million from $368.5 million in 1998, a portion of which is the result of
establishing a new asset-based lending subsidiary.
Non interest income increased by $365,000 to $1.7 million in 1999 when compared
to $1.4 million for the same period in 1998. This was primarily the result of
increases in fee income and higher volume of processing letters of credits.
Interest expense on interest bearing deposits decreased $842,000 to $6.4
million, down from $7.2 million for the same period in 1998. The decrease was a
result of $243,000 from lower volume and $599,000 from lower interest rates .
Average interest bearing deposits decreased $5.8 million to $622.9 compared to
$628.7 for the same period in 1998.
Interest expense on repurchase agreements decreased to $2.4 million, a reduction
of $204,000, when compared to $2.6 million for the same period in 1998. The
decrease was primarily the result of a $220,000 decrease from lower interest
rates, offset by a slight increase from volume of $16,000. The average balance
for repurchase agreements increased $1.1 million to $183.2 million, up from
$182.1 million for the same period in 1998.
Interest expense on FHLB term advances increased to $920,000, up $279,000 from
$641,000 for the same period in 1998. The increase was a result of a higher
volume of $316,000, offset by a reduction of $37,000 in interest rates. The
average balance for the period increased to $68.4 million, up $23.4 million from
$45.0 million for the same period in 1998.
Other short term borrowings consisting of Federal funds purchased and US
Treasury demand notes were employed to fund the increase in the loan and
investment portfolios. At September 30, 1999, interest expense from other short
term borrowings decreased to $304,000, a reduction of $22,000 when compared to
$326,000 for the same period in 1998. The reduction was primarily the result of
lower interest rates, as the average balance for the period remained constant at
$22.2 million for both periods.
Non-interest expense increased to $6.2 million, up $669,000 from $5.5 million
for the same period in 1998. This stemmed principally from an increase of
$263,000 in salaries and benefits and a $406,000 increase in other operating
expenses. Some of these increases relate to the added expense of the new
asset-based lending subsidiary.
7
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Income tax expense was $2.4 million for both periods ending September 30, 1999
and 1998. Although the Bank had increased its profitability, taxes remained
constant due to tax planning considerations.
PROVISION FOR LOAN LOSSES
- -------------------------
An addition of $615,000 was made to the Provision for Loan Losses for the third
quarter in 1999, versus $150,000 in 1998. The loan loss provision is based on
maintaining a loan loss reserve to cover all non- accrual and high 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.
The following table sets forth certain information with respect to the loan loss
experience for the quarter ended September 30, 1999 and 1998.
9/30/99 9/30/98
-------------------------
(In thousands)
Balance at beginning of period $8,556 $7,084
Provision for loan losses.................... 615 150
Charge offs.................................. 688 0
Recoveries:
Commercial.......................... 40 202
Installment......................... 1 6
---------------------------
Total........................................ $8,524 $7,442
===========================
8
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Comparison for the nine months ended September 30, 1999 and September 30, 1998
- ------------------------------------------------------------------------------
Interest income on investments increased $1.2 million to $41.0 million as
compared to $39.8 million for the same period in 1998. The increase was a result
of $1.4 million from higher volume, offset by a decrease from lower interest
rates of $184,000. The average balance for the investment portfolio increased to
$815.5 million, up $28.3 million from $787.2 million in 1998.
Interest income on loans increased to $24.4 million, up $1.2 compared to $23.2
million for the same period in 1998. $2.9 million was from higher volume, offset
by a reduction of $1.7 million from lower interest rates as the prime rate
averaged 7.87% versus an average of 8.50% for the same period in 1998. The
average loan balance for the year increased to $381.7 million, up $44.4 million
from $337.3 million in 1998. A portion of this increase is attributable to the
new asset-based lending subsidiary.
Non interest income increased by $757,000 to $4.8 million in 1999 as compared to
$4.0 million for the same period in 1998. This was the result of an increase in
gains on investment sales of $48,000, increased volume in letters of credits
processing fees of $225,000 and an increase in fee income of $484,000.
Interest expense on interest bearing deposits decreased $2.0 million to $19.3
million, down from $21.3 million for the same period in 1998. The decrease was
primarily the result of a $1.9 million reduction from lower interest rates.
Average interest bearing deposits increased $8.4 million to $631.1 million in
1999, compared to $622.7 million in 1998.
Interest expense on repurchase agreements decreased $285,000 to $6.5 million,
down from $6.8 million for the same period last year. The decrease was the
result of $717,000 from a reduction in interest rates, offset by $432,000 from
higher volume. The average balance for repurchase agreements outstanding for the
period increased $10.5 million to $168.1 million, up from $157.6 million for the
same period in 1998.
Interest expense on FHLB term advances increased to $2.1 up $716,000 from $1.4
million for the same period in 1998. The increase was a result from higher
volume of $809,000, offset by a reduction of $93,000 from lower interest rates.
The average balance for the period increased to $52.9 million, up $20.1 million
from $32.8 million for the same period in 1998.
Other short term borrowings, Federal funds purchased and US Treasury demand
notes were employed to fund the increases in the loan and investment portfolios.
At September 30, 1999, interest expense from other short term borrowings
decreased $168,000 to $502,000 down from $671,000 for the same period last year.
The decrease was a result of $92,000 from lower volume and $76,000 from interest
rates. The average balance for the period decreased $2.6 million to $13.5
million from $16.1 million in 1998.
Non-interest expense increased to $19.1 million, up $1.7 million from the 1998
results of $17.4 million. This stemmed principally from an increase of $1.0
million in salaries and benefits and $608,000 in other operating expenses. Part
of these increases relate to the new asset-based lending subsidiary.
Income tax expense increased $614,000 to $7.2 million, compared to $6.6 million
in 1998. This was due principally to an increase in income before taxes of $2.6
million.
9
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
PROVISION FOR LOAN LOSSES
- -------------------------
An addition of $1,215,000 and $750,000, was made to the Provision for Loan
Losses for the nine months ended September 30, 1999 and 1998, respectively. At
September 30, 1999, the Bank's allowance for loan losses was 2.23 % of average
loans outstanding totaling $381.7 million, with 2.21% of $337.3 million of
average loans for the same period in 1998.
The following table sets forth certain information with respect to the loan loss
experience for the periods ending September 30, 1999 and 1998.
9/30/99 9/30/98
(In thousands)
Balance at beginning of period $7,965 $6,167
Provision for loan losses..................... 1,215 750
Charge offs..................................... 866 0
Recoveries:
Commercial........................... 204 512
Installment.......................... 6 13
-------- --------
Total............................................ $8,524 $7,442
======== ========
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>
9/30/99 12/31/99
-----------------------
(Dollars in thousands)
<S> <C> <C>
Non - accrual loans................................................. $567 $146
Loans past due more than 90 days,
still accruing............................................. 174 351
----------------------
Total...................................................... $741 $497
======================
Non - accrual loans as a % of reserve............................... 6.65% 1.83%
Non - accrual loans as a % of total average loans................... .15 .05
Interest income that would have been earned on non- accrual loans... $ 31 $ 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 $47.8 million at September 30,
1999 compared with $59 million at December 31, 1998, accounting for 3.7% and
4.7% of the Bank's total average assets, respectively. Management considers
overall liquidity at September 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 $171 million for nine months
of 1999, and a total of $231 million for the year ended December 31, 1998 for
reinvestment and/or liquidity. Furthermore, $15 million for the period ended
September 30, 1999 and a total of $19 million for the year ended December 31,
1998 were the result of investment sales.
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
$904 million as of September 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 30.2% at September 30, 1999
and 28.8% at December 31, 1998, or $273 million and $255 million, respectively.
CAPITAL
- -------
The primary source of capital growth is through retention of earnings. Undivided
profits increased to $93 million as of September 30, 1999 as compared to $86
million as of December 31, 1998. On August 17, 1999, the Bank's Board of
Directors declared its 265th consecutive quarterly dividend of $.125 after split
share of common stock payable to its shareholders, for the third quarter of
1999. This was an increase of 25% above the $.10 after split dividend for the
first and the second quarter of 1999. 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 9/30/99 12/31/99
-----------------------------------------
Tier I Capital Ratio........... 4.00% 16.00% 16.94%
Total Capital Ratio............ 8.00 17.25 18.19
Leverage Ratio................. 3.00 8.24 7.91
11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
There was an overall decrease of $3.9 million in capital from December 31, 1998
to September 30, 1999. Of this change, there was an increase in retained
earnings of $6.8 million, a decrease in the change in market value of available
for sale securities (net of tax effect) of $6.7 million and a net increase of
$4.0 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 softwares, to conduct its business. The data processing systems and
softwares, including third party data processors are operated on in-house
personal computers and wide area networks. These systems have been deemed to be
Y2K compatible. The Company has an extensive program in place to address its
exposure to the Year 2000 issue, handled by the Y2K committee. The committee has
been active with members from all areas of the Company as we enter this crucial
time in our preparation for the Year 2000.
ACHIEVEMENTS
- ------------
Having successfully completed remediation of critical business applications, the
Company has conducted, reviewed, and developed segregated test environments
where computer technicians and end users are able to simulate the change to year
2000 and after. Operating systems and hardware have been upgraded as needed.
Software applications have been undergoing replacement with modern, compliant
products over the past several years.
Testing has demonstrated that the Bank's computer systems are ready to operate
beyond the Year 2000. Testing of internal systems will continue for the
remainder of the year. The committee will continue 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 September 30, 1999,
the Company was 100% ready.
THIRD PARTY VENDORS/SERVICE PROVIDERS
- -------------------------------------
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 by the end of the 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.
CONTINGENCY PLAN
- ----------------
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
12
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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.
COSTS
- -----
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 have 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.
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
INTEREST RATE SENSITIVITY GAP ANALYSIS
- --------------------------------------
As of September 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Less Than 3 to 12 1 to 5 Over
3 Months Months Years 5 Years Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
nterest Earning Assets
Securities available for sale* $ 33,564 $101,843 $291,207 $182,691 $609,305
Securities held to maturity* 15,440 29,153 101,366 54,522 200,481
Loans 436,536 10,493 12,324 2,974 462,327
Other 8,458 ---- ---- ---- 8,458
- ------------------------------------------------------------------------------------------------------------
Total interest earning assets 493,998 141,489 404,897 240,187 1,280,571
============================================================================================================
Interest Bearing Liabilities
- ------------------------------------------------------------------------------------------------------------
Interest bearing deposits 494,520 133,768 16,239 90 644,617
Securities sold under
repurchase agreements 160,000 10,000 ---- ---- 170,000
Other short-term borrowing 119,492 25,000 ---- ---- 144,492
- ------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 774,012 168,768 16,239 90 959,109
============================================================================================================
Net interest rate sensitivity gap (280,014) (27,279) 388,658 240,097 321,462
Cumulative gap position (280,014) (307,293) 81,365 321,462
Cumulative gap/total earning assets:
At September 30, 1999 (21.87)% (24.00)% 6.35% 25.10%
At September 30, 1998 (11.71)% (21.31)% 17.06% 26.05%
</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 third 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 September 30, 1999, totaled $462.3 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 $688.9 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
15
<PAGE>
Quantitative and Qualitative Disclosure About Market Risk
rate fluctuations, including $273 million in average demand deposits and $246
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 September 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
September 30, 1998.
NET PORTFOLIO VALUE ANALYSIS FOR INTEREST RATE RISK
<TABLE>
<CAPTION>
September 30, 1999
------------------------------------------------------------
Change in Interest Rates Estimated NPV Estimated Increase (Decrease) in NPV* Percent Increase
-------------------------------------------- (Decrease) in NPV at
Basis Points Amount Amount Percent September 30, 1998
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
+200 110,805 (54,376) (32.92%) (15%)
+100 138,940 (26,241) (15.89%) ( 5%)
- ----- 165,181 -- -- --
- -100 183,599 18,418 11.15% (.52%)
- -200 184,984 19,803 12.00% (.88%)
* 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 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.
During the third quarter of 1999, the Company filed one Form
8-K, dated September 17, 1999, which contained information
pursuant to Item 5 of Form 8-K.
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: October 29, 1999 /s/ James G. Lawrence
-----------------------------------------
James G. Lawrence
President & Chief Executive Officer
Date: October 29, 1999 /s/ M. Nasette Aranda
-----------------------------------------
M. Nasette Aranda
Vice President & Comptroller
17
<PAGE>
Exhibit 11 - Computation of Earnings Per Share
Earnings Per Share (EPS), presented below is the calculation of basic and
diluted EPS for the Company for the nine months ended September 30, 1999 and
1998, adjusted for the 2 for 1 stock split.
1999 1998
-------------------------
Net Income $14,673,689 $12,660,978
Less: minority inter 5,569 5,569
----------- -----------
Net income available to common shareholders $14,668,120 $12,655,409
Weighted average shares outstanding 19,310,357 19,424,810
Plus: effect of stock options as dilutive securities 93,591 180,784
----------- -----------
Adjusted weighted average shares assuming dilution 19,403,948 19,605,594
EPS - Basic $ 0.76 $ .65
EPS - Diluted $ 0.76 $ .64
================================================================================
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Sep-30-1999
<PERIOD-START> Jul-1-1999
<PERIOD-END> Sep-30-1999
<CASH> $40,457,437
<INT-BEARING-DEPOSITS> 2,458,143
<FED-FUNDS-SOLD> 6,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 613,003,278
<INVESTMENTS-CARRYING> 200,481,279
<INVESTMENTS-MARKET> 200,902,190
<LOANS> 462,326,766
<ALLOWANCE> 8,523,961
<TOTAL-ASSETS> 1,349,862,138
<DEPOSITS> 898,028,229
<SHORT-TERM> 314,491,893
<LIABILITIES-OTHER> 28,255,093
<LONG-TERM> 0
0
0
<COMMON> 9,989
<OTHER-SE> 109,076,934
<TOTAL-LIABILITIES-AND-EQUITY> 1,349,862,138
<INTEREST-LOAN> 24,399,759
<INTEREST-INVEST> 41,003,440
<INTEREST-OTHER> 373,176
<INTEREST-TOTAL> 65,776,375
<INTEREST-DEPOSIT> 19,290,926
<INTEREST-EXPENSE> 28,395,111
<INTEREST-INCOME-NET> 37,381,264
<LOAN-LOSSES> 1,215,000
<SECURITIES-GAINS> 75,881
<EXPENSE-OTHER> 19,083,486
<INCOME-PRETAX> 21,850,710
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,673,689
<EPS-BASIC> 0.76
<EPS-DILUTED> 0.76
<YIELD-ACTUAL> 4.37
<LOANS-NON> 567,000
<LOANS-PAST> 174,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,965,000
<CHARGE-OFFS> 866,000
<RECOVERIES> 210,000
<ALLOWANCE-CLOSE> 8,523,961
<ALLOWANCE-DOMESTIC> 309,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 8,214,961
</TABLE>
