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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended Commission File No. 0-22058
December 31, 1998
MERCHANTS NEW YORK BANCORP, INC.
(Exact name of registrant as specified in charter)
Delaware 13-3650812
(State or other jurisdiction of (IRS employer
incorporation or organization) identification No.)
275 Madison Avenue, New York, N.Y. 10016
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (212) 973-6600
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class:
---------------
Common Shares, $.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K |_|.
As of February 1, 1999, the aggregate market value of the voting stock
held by non-affiliates was $249,993,942.
As of February 1, 1999, 9,741,330 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Specified portions of the 1998 Annual Report of Merchants New York
Bancorp, Inc. are incorporated by reference in Part I, Part II and Part
IV.
(2) Specified portions of the definitive Proxy Statement for the Annual
Meeting of Stockholders, dated March 19, 1999 of Merchants New York
Bancorp, Inc. are incorporated by reference in Part III.
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<PAGE>
MERCHANTS NEW YORK BANCORP, INC.
FORM 10-K
TABLE OF CONTENTS
Page
----
PART I 1
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 21
ITEM 3. LEGAL PROCEEDINGS 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
PART II 22
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 22
ITEM 6. SELECTED FINANCIAL DATA 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 23
PART III 23
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 23
ITEM 11. EXECUTIVE COMPENSATION 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 23
PART IV 24
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 24
SIGNATURES 25
<PAGE>
PART I
ITEM 1. BUSINESS
General
Merchants New York Bancorp, Inc. (the "Company") is a bank holding company
that was organized under the laws of the State of Delaware on February 27, 1992
for the purpose of acquiring all of the issued and outstanding capital stock of
The Merchants Bank of New York (the "Bank"), a banking corporation organized
under the laws of the State of New York. The sole subsidiary of the Company is
the Bank. The principal business of the Company is the operation of the Bank.
The Bank is a commercial bank, servicing the communities in which its
branches are located. It is authorized to receive both demand and time deposits,
to make loans of various types, to engage in trust services and other fiduciary
funds, to issue letters of credit, to accept and pay drafts, to rent safety
deposit boxes, and to engage in similar activities.
The Bank was founded in 1874 as Markel Brothers Private Bankers. A New
York City branch was established in 1881. In 1926, a charter was obtained from
the Banking Department of the State of New York. The name and style of the Bank
was changed to The Merchants Bank, and at the same time the Bank became publicly
held. The Bank's name was changed to The Merchants Bank of New York in 1937.
Cash dividends were commenced in 1932 and since then have been paid
consecutively every quarter for the ensuing 66 years.
The Bank operates seven branches, all in Manhattan, which are
strategically located to serve its middle market customers. The executive
offices of the Company are located at 275 Madison Avenue, New York, New York
10016. The telephone number is (212) 973-6600.
Banking Services
The Bank offers conventional banking services consisting of retail
banking, commercial banking, international banking and trust services to small
and medium size businesses and to individuals. The Bank's deposits are insured
by the Federal Deposit Insurance Corporation (the "FDIC").
The Bank provides a full range of retail banking services that include
Regular and Special Checking Accounts, NOW (Negotiable Orders of Withdrawal) and
Super NOW Accounts, Money Market Accounts, Savings Accounts plus Keogh and IRA
Accounts and Lease Security Accounts for landlords and Attorney Escrow Accounts.
The Bank issues VISA(R) and MASTERCARD(R) credit cards offered through an
intermediary affinity program with all credit risk assumed by the third party.
The complete process, including credit checks and eligibility, is being handled
by the third party. 24-hour automated teller machine (ATM) cards with access to
NYCE(R), The Exchange(R) and CIRRUS(R) systems are available for use on non-Bank
owned
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ATMs. The Bank does not have any ATMs at any of its branches and does not
anticipate installing any in the near future.
The Bank furnishes lending and depository services to small and medium
size commercial and industrial customers and to individuals. Loan facilities to
these customers include short term loans, revolving credit arrangements, term
loans, personal installment loans, and auto loans. Most of the Bank's business
loans are short term. Lending is limited to the New York metropolitan area which
includes the five boroughs, Westchester, Long Island, and Northern New Jersey.
No single borrower or group of related borrowers is indebted to the Bank in the
aggregate for an amount in excess of $13.0 million. The Bank's legal lending
limit was in excess of $15 million at December 31, 1998.
During 1998, the Bank created two new subsidiary corporations. The first,
Merchants New York Commercial Corp., a Delaware corporation, specializes in
asset-based lending, providing revolving loans to manufacturing, wholesale,
distribution and service companies with high working capital needs. The loans
are based on the level of a company's working capital assets, primarily accounts
receiveable and inventory. In addition, machinery and equipment loans for both
existing and new equipment may be provided. In all instances, the loans are
secured by the related assets which are closely monitored.
The second new subsidiary, MBNY Holdings Corp., also a Delaware
corporation, is a holding company that owns the common stock and a majority of
the preferred stock of Merchants Capital Corporation, a real estate investment
trust that owns the real estate related portion of the Bank's investment
portfolio.
The Bank's International Banking Department offers financial services to
its customers through its network of correspondent banks around the world. The
Bank provides Letters of Credit and foreign collection services to finance
import and export transactions. It also issues Standby Letters of Credit for
domestic use. The Bank maintains active correspondent relationships with leading
financial institutions, both domestic and world wide.
Competition
The Bank faces significant competition for both the loans it makes and the
deposits it accepts. The Bank's market area has a high density of financial
institutions, many of which are branches of significantly larger institutions
which have greater financial resources than the Company, and all of which are
competitors of the Bank to varying degrees. The Company and its competitors are
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
The Bank's competition for loans comes principally from other commercial
banks. The Bank competes successfully for loans primarily by emphasizing the
quality of its loan services and by charging loan fees and interest rates that
are generally competitive in its market area. Its most direct competition for
deposits has historically come from commercial banks, savings banks, credit
unions, and savings and loan associations. Additionally, the Bank faces
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competition for deposits from money market funds, stock and bond mutual funds,
brokerage companies and insurance companies. The Bank competes for deposits by
offering a variety of customer services and deposit accounts at generally
competitive interest rates.
Management considers the Bank's reputation for financial strength and
customer service as its major competitive advantage in attracting customers in
its market area. The Bank also believes it benefits from its community bank
orientation as well as its relatively high percentage of core deposits.
Potential Impact of Changes in Government Monetary Policies and Interest Rates
The earnings of the Company and the Bank are affected by legislative
changes and policies of various governmental authorities such as the New York
State Banking Department, the Board of Governors of the Federal Reserve System
(the "FRB") and the FDIC. The FRB controls interest rates, which in turn may
affect the cost of funds and the return on earning assets. The changing economic
conditions and changes in the money markets make it impossible to predict future
changes in interest rates, loan demand, or their effects on the Bank's business
and earnings.
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest on interest-earning assets, such as loans and
securities, and its interest expense on interest-bearing liabilities, such as
deposits. When the amount of interest-earning assets differs from the amount of
interest-bearing liabilities expected to mature or reprice in a given period, a
significant change in market rates of interest will affect net interest income.
The Bank manages its interest rate risk primarily by structuring its balance
sheet to emphasize holding adjustable rate loans in its portfolio, maintaining a
large portion of its investments in mortgage-backed securities which produce
monthly cash flow for reinvestment, and maintaining a large base of core
deposits.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. These laws and regulations are intended primarily to
protect depositors and not stockholders. To the extent that the following
information describes statutory and regulatory provisions, it is qualified in
its entirety by reference to the particular statutory and regulatory provisions.
Any change in the applicable law or regulation may have a material effect on the
business and prospects of the Company and the Bank.
The Company is a registered bank holding company subject to the regulation
and examination by the Federal Reserve Board under the Bank Holding Company Act
of 1956, as amended (the "Act"). The Company is required to file with the FRB
quarterly and annual reports and any additional information that may be required
under the Act. The Act also requires every bank holding company to obtain the
prior approval of the FRB before (i) acquiring all or substantially all of the
assets of or direct or indirect ownership or control of more than 5% of the
outstanding voting stock of any bank which is not already majority owned, or
(ii) acquiring, or merging or consolidating with, any other bank holding
company. The FRB will not approve any
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acquisition, merger, or consolidation that would have a substantially
anti-competitive effect, unless the anti-competitive impact of the proposed
transaction is clearly outweighed by a greater public interest in meeting the
convenience and needs of the community to be served. The FRB also considers
capital adequacy and other financial and managerial resources and future
prospects of the companies and the banks concerned, together with the
convenience and needs of the community to be served, when reviewing
acquisitions, mergers or consolidations.
The Riegle-Neal Act of 1994 permits an adequately capitalized and managed
bank holding company, with FRB approval, to acquire control of banks outside its
principal state of operations, without regard to whether such acquisitions are
permissible under state law (except that states may restrict out-of-state
acquisitions of newly formed banks by prescribing a minimum time that a bank
must have been in existence before it can be acquired by an out-of-state bank;
this cannot be greater than five years.) No bank holding company may make an
acquisition outside its principal state of operations which would result in it
controlling more than 10% of the total amount of deposits of all insured
depository institutions in the United States, or 30% or more of the total
deposits of insured depository institutions in any state (unless such limit is
waived, or a more restrictive or permissive limit is established, by a
particular state).
Riegle-Neal also allows banks to branch across state lines either by
merging with banks in other states or by establishing new branches in other
states. The provision relating to establishing new branches in another state
requires a state's specific approval. The banking laws of New York provide that
a New York bank chartered less than five years which is acquired by an
out-of-state bank holding company generally may not be merged with other banks
owned by that bank holding company, but that an out-of-state bank may branch
into the state by merging with, or by acquiring one or more branches of, an
existing New York bank. The banking laws of New York do not provide the specific
approval for out-of-state banks to establish new branches in New York. The
Company is unable to predict the ultimate impact of interstate banking on it or
its competition.
Additionally, Riegle-Neal prohibits a bank holding company, with certain
limited exceptions, from (i) acquiring or retaining direct or indirect ownership
or control of more than 5% of the outstanding voting stock of any company which
is not a bank or bank holding company, or (ii) engaging directly or indirectly
in activities other than those of banking, managing or controlling banks, or
performing services for its subsidiaries. Exceptions may be allowed in cases
where the non-banking business is determined by the FRB to be so closely related
to banking or managing or controlling banks as to be properly incident thereto.
In making such determinations, the FRB is required to weigh the expected
benefits to the public, such as greater convenience, increased competition or
gains in efficiency, against the possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices.
The FRB has adopted risk-based capital guidelines for bank holding
companies. The risk-based capital guidelines are designed to make regulatory
capital requirements more sensitive to differences in risk profile among banks
and bank holding companies, to account for off-balance sheet exposure and to
minimize disincentives for holding liquid assets. Under these
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guidelines, assets and off-balance sheet items are assigned to broad risk
categories each with appropriate weights. The resulting capital ratios represent
capital as a percentage of total risk-weighted assets and off-balance sheet
items. Failure to meet the capital guidelines could subject a banking
institution to a variety of enforcement remedies available to federal regulatory
authorities.
Bank holding companies currently are required to maintain a minimum ratio
of total capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) of 8%. 50% or more of the total
capital is required to be "Tier 1 capital," consisting of shareholder equity
plus retained earnings, less certain goodwill items and intangible assets. The
remainder ("Tier 2 capital") may consist of (a) an allowance for loan losses not
to exceed 1.25% of risk-weighted risk assets, (b) excess of qualifying perpetual
preferred stock, (c) hybrid capital instruments, (d) perpetual debt, (e)
mandatory convertible debt securities, and (f) subordinated debt and
intermediate-term preferred stock limited for this purpose to 50% of Tier 1
capital. Total capital is the sum of Tier 1 and Tier 2 capital less reciprocal
holdings of other banking organizations' capital instruments, investments in
unconsolidated subsidiaries and any other deductions as determined by the FRB
(determined on a case by case basis or as a matter of policy after formal
rule-making).
Bank holding company assets are given risk-weights of 0% (no risk), 20%,
50% and 100%. In addition, certain off-balance sheet items are given similar
credit conversion factors to convert them to asset equivalent amounts to which
an appropriate risk-weight will apply. These percentages represent the fraction
of an asset's value that must be considered when computing the ratio of total
capital to risk weighted assets. An asset with a zero risk weight need not be
considered in computing the ratio. If an asset has a 20% risk weight, 20% of its
value must be taken into account in computing the ratio. Half the value of a 50%
risk weighted asset, and the full value of a 100% risk weighted asset, must be
taken into account for this purpose.
Risk weighting is fixed according to the degree of risk each asset
represents. Most loans receive a risk weight of 100%, except for performing
first mortgage loans fully secured by certain residential property, which carry
a 50% risk rating. Most investment securities (including, primarily, general
obligation claims on states or other political subdivisions of the United
States) will be assigned to the 20% category, except for municipal or state
revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S.
Treasury or obligations backed by the full faith and credit of the U.S.
Government, which have a 0% risk-weight. In converting off-balance-sheet items,
direct credit substitutes including general guarantees and standby letters of
credit backing financial obligations, are given a 100% conversion factor with a
50% risk-weight. Transaction related contingencies such as bid bonds, standby
letters of credit backing non-financial obligations and commitments (including
commercial credit lines) with an initial maturity of more than one year have a
50% conversion factor. Short-term commercial letters of credit are converted at
20% and certain short-term or unconditionally cancelable commitments have a 0%
factor.
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The Company's management believes that the risk-weighting of assets under
these guidelines does not and will not have a material impact on the Company's
operations or on the operations of the Bank.
In addition to the risk-based capital guidelines, the FRB has adopted a
minimum Tier 1 capital leverage ratio, under which a bank holding company must
maintain a minimum ratio of Tier 1 capital to average total consolidated assets
of at least 3% in the case of a bank holding company that has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. The leverage capital ratio assists in the assessment of the capital
adequacy of bank holding companies. Its principal objective is to place a
constraint on the maximum degree to which a banking organization can leverage
its equity capital base, even if it invests primarily in assets with low
risk-weights.
At December 31, 1998, the capital ratios of the Company and the Bank
exceeded the FRB's minimum regulatory capital guidelines as follows:
Merchants New York Bancorp, Inc.
Risked-Based Capital
Leverage Capital(1) Tier 1 Total(2)
------------------ ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------------------ ---------------- ----------------
(Dollars in Thousands)
Actual $103,545 7.91% $103,545 16.94% $111,186 18.19%
Minimum
requirement 39,271 3.00 24,450 4.00 48,900 8.00
-------- ----- -------- ----- -------- -----
Excess $ 64,274 4.91% $ 79,095 12.94% $ 62,286 10.19%
======== ===== ======== ===== ======== =====
The Merchants Bank of New York
Risked-Based Capital
Leverage Capital(1) Tier 1 Total(2)
------------------ ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------------------ ---------------- ----------------
(Dollars in Thousands)
Actual $103,607 7.91% $103,607 16.95% $111,250 18.20%
Minimum
requirement 52,393 4.00 24,450 4.00 48,901 8.00
-------- ----- -------- ----- -------- -----
Excess $ 51,214 3.91% $ 79,157 12.95% $ 62,349 10.20%
======== ===== ======== ===== ======== =====
(1) The leverage capital requirement is generally between 3.0% and 5.0% for
all but the most highly-rated companies.
(2) The Company's Tier 1 capital includes stockholders' equity, net of
intangible assets, and gross of unrealized securities valuation accounts.
Total risk-based (Tier 2) capital includes Tier 1 capital plus the amount
of loan loss reserves or 1.25% of risk-weighted assets, whichever is less.
The capital adequacy guidelines also provide explicitly for consideration
of interest rate risk in the overall evaluation of a bank's capital adequacy in
order to ensure that banking institutions effectively measure and monitor their
interest rate risk, and that they maintain
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adequate capital for the risk. Banking institutions deemed by the Federal bank
regulatory agencies to have excessive interest rate risk may be required to
maintain additional capital.
The Bank is a state-chartered bank subject to supervision, regulation and
examination by the New York State Banking Department and by the FRB. Deposits,
reserves, investments, loans, consumer law compliance, issuance of securities,
payment of dividends, establishing and closing of branches, mergers and
consolidations, changes in control, electronic funds transfer, community
reinvestment, management practices and other aspects of operations are subject
to regulation by the appropriate Federal and state regulatory agencies. The Bank
is also subject to various regulatory requirements of the FRB including
disclosure requirements in connection with personal and mortgage loans, interest
on deposits and reserve requirements. In addition, the Bank is subject to
numerous federal, state and local laws and regulations which set forth specific
restrictions and procedural requirements with respect to the extension of
credit, credit practices, the disclosure of credit terms and discrimination in
credit transactions.
Federal regulatory agencies have broad powers to take prompt corrective
action to resolve problems at banking institutions, including (in certain cases)
the appointment of a conservator or receiver. The extent of these powers is
generally influenced by the level of capital at the institution. Management does
not anticipate that the Bank will become subject to these prompt corrective
action provisions.
Only a well capitalized depository institution may accept brokered
deposits without prior regulatory approval. Under FDIC regulations, an
institution is generally considered "well capitalized" if it has a total
risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of
at least 6%, and a Tier 1 capital (leverage) ratio of at least 5%. The Company
and the Bank meet the guidelines to be considered a "well capitalized"
institution. Federal law generally requires full-scope on-site annual
examinations of all insured depository institutions by the appropriate Federal
bank regulatory agency although the examination may occur at longer intervals
for small well-capitalized or state-chartered banks.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Act on any extension of credit to the bank holding
company or any of its subsidiaries, or investments in the stock or other
securities of the bank holding company or its subsidiaries, and in the taking of
such stock or securities as collateral for loans to any borrower. A bank holding
company and its subsidiaries are prohibited from engaging in certain "tie-in"
arrangements in connection with the extension of credit or provision of any
property or services.
Various restrictions limit the extent to which the Bank can supply funds
to the Company. The FRB limits the amount of dividends the Bank can pay the
Company. Without prior approval, the maximum dividend payable to the Company in
a single fiscal year is limited to the Bank's net profits for that year plus its
retained earnings for the preceding two calendar years, less any required
transfer to surplus. Further restrictions prevent the Company from borrowing
from a Bank subsidiary unless the loans are secured in specified amounts.
Without the prior approval of the FRB, secured loans, other transactions and
investments between the Company and any Bank subsidiary are generally limited in
amount to 10% of the Bank's capital and surplus. Federal law also requires that
transactions between a Bank subsidiary and the Company,
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including extension of credit, sales of securities or assets and the provision
of services, be conducted on terms at least as favorable to the Bank subsidiary
as those that apply or that would apply to comparable transactions with
unaffiliated parties.
As a consequence of the extensive regulation of the commercial banking
business in the United States, the business of the Company and the Bank are
particularly susceptible to changes in federal and state legislation and
regulations which may increase the cost of doing business.
Lending Activities and Credit Risk Management
The Bank's commercial and industrial loan portfolio represents
approximately 94% of total loans. Loans in this category are typically made to
small and medium sized businesses. Such loans typically range between $100,000
and $3 million, although larger loans are made on occasion, as the Bank's legal
lending limit is in excess of $15 million. Loan proceeds are generally used for
working capital and are seasonal in nature. In addition, the Bank supports the
financing of the importation of merchandise through letters of credit and direct
loans. The primary source of repayment is from the borrowers' conversion cycle
of inventory and accounts receivable as well as profits and cash flows.
The Bank's mortgage loan portfolio represents approximately 5% of gross
loans and is secured by mortgages on real property located in the New York
metropolitan area. Mortgage loans are made on an accommodation basis to current,
well established customers or are on occasion made to a business for property
which it is occupying. In the latter instance, full credit evaluation of the
borrowers' financial status is done and the Bank does not rely solely on the
collateral.
The Bank's lending is subject to its written underwriting standards and to
loan origination procedures prescribed by management. Detailed information is
obtained to assist in determining the borrower's ability to repay including
credit reports, financial statements and confirmations. The Bank's commercial
and industrial loans are underwritten based on the cash flow and financial
condition of the borrowing business and applicable collateral when appropriate.
Such loans may be secured in whole or in part by collateral such as liquid
assets, accounts receivable, inventory, equipment or real property. The majority
of the loans are personally guaranteed by the principals of the business and may
be further collateralized by the assets of those principals. The interest rates
on commercial and industrial loans are primarily variable rates that change with
market conditions and are priced in relation to the "prime rate."
Intrinsic to the lending process is the possibility of loss. In times of
economic slowdown, the risk inherent in the Bank's portfolio of loans is
increased. While management endeavors to minimize this risk, it recognizes that
loan losses will occur and that the amount of these losses will fluctuate
depending on the risk characteristics of the loan portfolio which in turn
depends on current and expected economic conditions, the financial conditions of
borrowers and the credit management process.
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As of December 31, 1998, the Bank's loans of $362 million, net of unearned
discounts, represented 28% of total assets. The Bank has no foreign loans
outstanding. The following table sets forth the composition of the Bank's loan
portfolio net of unearned discounts at the end of each of the most recent five
fiscal years:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Commercial and industrial . $ 339,982 $ 312,967 $ 283,341 $ 256,620 $ 254,098
Real estate - mortgage .... 19,307 15,723 10,941 11,276 11,205
Installment loans ......... 2,520 3,212 2,855 3,067 2,894
--------- --------- --------- --------- ---------
Gross loans ............... 361,809 331,902 297,137 270,963 268,197
Less: unearned discounts (46) (94) (56) (59) (80)
========= ========= ========= ========= =========
Total (net of unearned
discounts) .............. $ 361,763 $ 331,808 $ 297,081 $ 270,904 $ 268,117
========= ========= ========= ========= =========
</TABLE>
Approximately 45% of the current loan portfolio is outstanding to
companies in the diamond, jewelry, furs and apparel industries. This includes
loans to various types of companies such as wholesalers, retailers,
manufacturers and casters. The Bank's portfolio is sensitive to downturns in the
economy, since these items are purchased with disposable income. As of December
31, 1998, there are no categories of loans exceeding 10% of total loans except
as shown in the above table. Substantially all of the Bank's loans are to
borrowers in the New York metropolitan area.
The following table sets forth the maturities of selected loans in the
Bank's gross loan portfolio at December 31, 1998:
Due One Due One Due After
Year or Less to Five Years Five Years Total
------------ ------------- ---------- --------
(In Thousands)
Commercial and industrial ..... $308,882 $ 27,376 $ 3,678 $339,936
Real estate - mortgage ........ 3,059 12,759 3,489 19,307
-------- -------- -------- --------
Total ......................... $311,941 $ 40,135 $ 7,167 $359,243
======== ======== ======== ========
Loans included in the above
which are due after one year,
which have:
Fixed interest rates .......... $ 5,269 $ 2,169 $ 7,438
Adjustable interest rates ..... 34,866 4,998 39,864
-------- -------- --------
Total ......................... $ 40,135 $ 7,167 $ 47,302
======== ======== ========
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Asset and Liability Management
The Bank's net interest income is an important component of its operating
results. The stability of net interest income in changing interest rate
environments depends on the Bank's ability to manage effectively the interest
rate sensitivity and maturity of its assets and liabilities. The Bank's Asset
and Liability Management Committee develops and implements risk management
strategies, and uses various risk measurement tools to evaluate the impact of
changes in interest rates on the Bank's asset/liability structure and net
interest income.
The Bank's asset/liability management goal is to maintain an acceptable
level of interest rate risk to produce relatively stable net interest income in
changing interest rate environments. Management's plan has been (i) to maximize
the amount of loans having interest rates that move with prime rate changes
(approximately 93.4% of the loan portfolio is in this category) and (ii) to
invest a major portion of the investment portfolio in mortgage-backed securities
which have an average life of four years or less and a constant cash flow return
of principal which can be reinvested on a monthly basis (during 1998 this cash
flow averaged approximately $18 million per month). In addition, a substantial
portion of the investment portfolio has been classified in the
available-for-sale category to allow for sales to be made, when appropriate, to
take advantage of interest rate arbitrage to improve future interest returns. As
economic conditions change, management will modify the plan as necessary.
One measure of the Bank's interest rate sensitivity is its interest
sensitivity gap, or the difference between interest-earning assets and
interest-bearing liabilities scheduled to mature or reprice within a specified
time frame. Shorter gaps are a measure of exposure to changes in interest rates
for shorter intervals and longer gaps measure sensitivity over a longer
interval. At December 31, 1998, the Bank had a negative one-year gap of
approximately (36%) of total interest-earning assets; that is, it had more
interest-bearing liabilities than interest-earning assets maturing or repricing
within one year. A negative gap may enhance earnings in periods of declining
interest rates in that, during such periods, the interest expense paid on
liabilities may decrease more rapidly than the decrease in interest income
earned on assets. Conversely, in an increasing interest rate environment, a
negative gap may result in an increase in the interest expense paid on
liabilities that is more rapid than the increase in interest income earned on
assets. While a negative gap indicates the amount of interest-earning
liabilities which will mature before interest-bearing assets, it does not
indicate the extent to which they reprice. Therefore, at times, a negative gap
may not increase earnings in a declining interest rate environment.
10
<PAGE>
The following table summarizes the Bank's interest rate sensitive assets
and liabilities at December 31, 1998 according to the time periods in which they
are expected to reprice, and the resulting gap for each time period:
<TABLE>
<CAPTION>
Less than Three to One to
Three Twelve Five Over
Months Months Years Five Years Total
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold .................... $ 5,000 $ -- $ -- $ -- $ 5,000
U.S. government and
agency obligations ................ 59,905 179,724 393,722 121,555 754,906
Obligations of states and political
subdivisions ...................... 965 9,422 17,814 38,283 66,484
Other securities ...................... -- -- -- 22,347 22,347
Commercial and industrial loans:
Fixed rate ........................ 8,439 3,685 4,142 1,273 17,539
Adjustable rate ................... 322,397 -- -- -- 322,397
Real estate loans:
Fixed rate ........................ -- 1,674 1,126 895 3,695
Adjustable rate ................... 15,612 -- -- -- 15,612
Installment loans ..................... 388 1,017 1,115 -- 2,520
---------- ---------- ---------- ---------- ----------
Total interest-earning assets ..... $ 412,706 $ 195,522 $ 417,919 $ 184,353 $1,210,500
========== ========== ========== ========== ==========
Interest-bearing liabilities:
NOW accounts ........................ $ 46,445 $ -- $ -- $ -- $ 46,445
Savings accounts .................... 26,177 -- -- -- 26,177
Money market accounts ............... 162,789 -- -- -- 162,789
Time deposits ....................... 269,495 126,002 21,371 -- 416,868
Securities sold under repurchase
agreements ........................ 105,000 55,000 -- -- 160,000
Other short term borrowing ............ 4,282 45,000 -- -- 49,282
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 614,188 $ 226,002 $ 21,371 $ -- $ 861,561
========== ========== ========== ====== ==========
Net interest sensitivity gap .......... (201,482) (30,480) 396,548 184,353 348,939
Cumulative gap position ............... (201,482) (231,962) 164,586 348,939
Cumulative gap/total
interest-earning assets ........... (16.64%) (19.16%) 13.60% 28.83%
========== ========== ========== ==========
</TABLE>
Mortgage backed securities have been adjusted for weighted average
maturity dates and prepayments. All securities are disclosed at book values.
Prepayments and scheduled payments have been estimated for the loan portfolio
based on the Bank's historical experience. Non-accrual loans are included in the
table at their original contractual maturities. Savings account and NOW account
repricings are based on the Bank's historical repricing experience and
management's belief that these accounts are not highly sensitive to changes in
interest rates.
Asset Quality
Management continually reviews delinquent loans to adequately assess
problem situations and to quickly and efficiently remedy these problems whenever
possible. When a loan
11
<PAGE>
becomes past due (when it is past due 90 days) and doubt exists as to the
ultimate collection of principal or interest, the accrual of interest is
discontinued. Any accrued but unpaid interest on such loans is charged against
current earnings. Non-accrual loans at December 31, 1998 were $146,000 or 0.04%
of total loans, while at December 31, 1997 and 1996, they were $159,000 and $1.1
million, respectively. Loans which are current as of December 31, 1998 but for
which there are serious doubts as to the ability of the borrowers to comply with
the present loan repayment terms are not material in amount.
The following table sets forth the aggregate amount of domestic
non-accrual, past due and restructured loans at the end of each of the most
recent five fiscal years:
December 31,
------------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
(Dollars in Thousands)
Non-accrual loans ................ $ 146 159 1,109 2,169 1,311
Past due 90 days or more
(other than above) ............. 351 204 687 281 308
Restructured ..................... -- -- -- -- --
----- ----- ----- ----- -----
Total ............................ $ 497 363 1,796 2,450 1,619
Interest income that would
have been earned on
non-accrual and reduced
rate loans outstanding ......... 3 126 288 201 94
Interest income included in
net income for the above
loans .......................... -- 81 39 -- --
Non-accrual, past due and
restructured loans as a
percentage of total gross
loans .......................... .14% .11 .60 .90 .60
The provision for loan losses is a charge against income which increases
the allowance for loan losses. The adequacy of the allowance for loan losses is
evaluated periodically and is determined based on management's judgment
concerning the amount of risk and potential for loss inherent in the portfolio.
This judgment is based upon a number of factors including a review of
non-performing and other classified loans, the value of collateral for such
loans, historical loan loss experience, changes in the nature and volume of the
loan portfolio, and current and prospective economic conditions. While
management uses the best information available in establishing the allowance for
loan losses, future adjustments may be necessary based on changes in economic
conditions and in the credit risk inherent in the loan portfolio. As of December
31, 1998, there were no potential problem loans of which they were aware that in
management's opinion would materially impact financial results.
The Bank's allowance for loan losses at December 31, 1998 was $7.97
million or 2.2% of total loans compared to $6.17 million or 1.86% of total loans
at December 31, 1997. At December 31, 1996 the allowance was $5.62 million or
1.91% of total loans. Of the allowance
12
<PAGE>
for loan losses, non-accrual loans represented 1.8%, 2.6% and 19.74% at December
31, 1998, 1997 and 1996, respectively.
As in all banks, in addition to non-accrual loans, the Bank has other
sub-standard loans which reflect a higher degree of risk because of general
economic conditions or specific deterioration because of circumstances for a
particular borrower. These loans are reflected in the criticized and/or
classified categories by the Bank's loan review process. In establishing the
allowance for loan losses, the Bank must consider these categories, and
additions to the allowance are made with this in mind.
As a general rule, non-accrual loans (those on which interest is no longer
being accrued) are charged off at December 31 of each year. On average, $1
million of such loans have been charged off for each of the past five years.
Some sub-standard loans outside the non-accrual category are also charged off on
these occasions, resulting in the Bank's total charge-offs for the past five
years having averaged $2.2 million per year. In the same period, the average
annual provision for additions to the loan loss allowance was $1.6 million, with
1998 accounting for $1.4 million.
The following table sets forth certain information with respect to the
Bank's loan loss experience for each of the most recent five fiscal years:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
(Dollars in Thousands)
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses
balance at beginning of year ....... $ 6,167 5,617 6,484 6,188 6,960
Provision for loan losses .......... 1,425 1,700 2,580 2,080 1,850
Charge offs:
Commercial and industrial ....... (208) (1,460) (4,345) (2,315) (2,918)
Installment ..................... (24) (9) (60) (33) (--)
------- ------- ------- ------- -------
Total charge offs .................. (232) (1,469) (4,405) (2,348) (2,918)
Recoveries
Commercial and industrial ....... 589 314 952 563 294
Installment ..................... 16 5 6 1 2
------- ------- ------- ------- -------
Total recoveries ................... 605 319 958 564 296
Net charge offs .................... 373 (1,150) (3,447) (1,784) (2,622)
------- ------- ------- ------- -------
Balance at end of year ............. $ 7,965 6,167 5,617 6,484 6,188
======= ======= ======= ======= =======
Ratio of net charge offs to
average loans outstanding,
net of unearned discounts .......... (.11%) .35 1.23 .65 .96
</TABLE>
13
<PAGE>
The following table sets forth an approximate breakdown of the allowance
for loan losses by major categories of loans for each of the most recent five
fiscal years:(1)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- -------------- -------------- --------------
% of % of % of % of % of
Loans Loans Loans Loans Loans
in Ea. in Ea. in Ea. in Ea. in Ea.
Categ. Categ. Categ. Categ. Categ.
Loan to Loan to Loan to Loan to Loan to
Loss Total Loss Total Loss Total Loss Total Loss Total
Allow Loans Allow Loans Allow Loans Allow Loans Allow Loans
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial & industrial . $ 73 93.96 80 94.34 555 95.36 1,085 94.71 656 94.74
Real estate ............. -- 5.34 -- 4.70 -- 3.68 -- 4.16 -- 4.18
Installment ............. 20 0.70 22 96 24 96 23 1.13 20 1.08
Unallocated ............. 7,872 -- 6,065 -- 5,038 -- 5,376 -- 5,512 --
------ ----- ----- ----- -----
Total ................... $7,965 6,167 5,617 6,484 6,188
====== ===== ===== ===== =====
</TABLE>
Securities and Investment Policy Objectives
The Bank invests in U.S. Government obligations, U.S. Agency
mortgage-backed securities and high quality state and municipal securities, high
grade bonds and money market instruments. The Bank's investment portfolio
represents a significant share of its assets and exerts an important and
stabilizing influence upon the Bank's earnings.
The Bank's investment policy is designed to promote three objectives. The
primary objective is to provide liquidity necessary to meet day to day, cyclical
and long term changes in the mix of the Bank's assets and liabilities. The
second objective is to provide a stable flow of dependable earnings while
maintaining liquidity through absorbing funds when loan demand decreases due to
seasonal trends and to supply funds when loan demand increases toward its annual
peak. The third objective is to provide a balance of quality and diversification
to the Bank's assets. There is minimal exposure to trading losses, since the
Bank invests but does not trade. Only high grade short term instruments and top
rated bonds with an average life of four years or less are acquired with
staggered maturities for liquidity.
Current money and security market conditions are evaluated by the Bank's
Investment Committee on a monthly basis. The Investment Committee includes
Messrs. Witty, Hertz, Lawrence, Cardew and Gould. The Committee's strategy and
investment program for each month, developed in accordance with the Bank's
investment policy, is presented for approval at the previous month's Board
meeting.
- ----------
(1) The allocation of loan loss allowance is calculated on the basis of 50% of
the non-accruing commercial and industrial loans and a 5 year average of
losses on installment loans. Such allocation is not necessarily indicative
of the amounts in which future charge-offs may be taken or of future loss
trends.
14
<PAGE>
As of December 31, 1998, no single issuer's securities accounted for as
much as 10% of stockholders' equity, except for securities issued by the United
States and its political subdivisions and agencies.
The following table sets forth for the most recent three fiscal years the
book values and estimated market values of the Company's investment securities:
December 31
--------------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
Available for sale securities:
U.S. government and agency
obligations ............................. $484,293 $496,300 $518,908
Obligations of states and political
subdivisions ............................ 28,435 22,838 19,848
Other securities ........................... 132,846 8,194 9,107
-------- -------- --------
Total - available for sale (book value) .... $645,574 $527,332 $547,863
======== ======== ========
Estimated market value ..................... $660,026 $541,634 $561,601
======== ======== ========
Held to maturity securities:
U.S. government and agency
obligations ............................. $109,502 $159,690 $119,351
Obligations of states and political
subdivisions ............................ 59,813 55,154 47,219
Other securities ........................... 28,848 327 338
-------- -------- --------
Total - held to maturity (book value) ...... $198,163 $215,171 $166,908
======== ======== ========
Estimated market value ..................... $203,429 $219,902 $169,340
======== ======== ========
15
<PAGE>
The following tables set forth the book values, range of maturities and
average yields for each category at December 31, 1998.
<TABLE>
<CAPTION>
Securities Available for Sale (Market Value)
---------------------------------------------------------------
One to Five to Over Total Average
One Year Five Ten Ten Market Yield to
or Less Years Years Years Value Maturity
------- ----- ----- ----- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
Obligations(1)(2).. $134,646 $ 78,099 $ -- $ 1,118 $213,863 8.05%
U.S. agency
obligations ....... 88,789 285,209 18,454 2,000 394,452 7.41%
Obligation of state
and political
subdivisions(2) ... 1,214 5,080 5,267 17,785 29,346 5.27%
Other securities ... -- -- -- 22,365 22,365 7.21%
-------- -------- -------- -------- -------- ----
Total available
for sale .......... $224,650 $368,388 $ 23,721 $ 43,267 $660,026 7.52%
======== ======== ======== ======== ======== ====
Average yield
to maturity ....... 7.81% 7.50 6.33 6.24
</TABLE>
<TABLE>
<CAPTION>
Securities Held to Maturity (Book Value)
---------------------------------------------------------------
One to Five to Over Total Average
One Year Five Ten Ten Book Yield to
or Less Years Years Years Value Maturity
------- ----- ----- ----- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
Obligations (1)(2) ...... $ 5,731 $ 36,826 $ 332 $ -- $ 42,889 8.64%
U.S. agency obligations . 2,079 64,534 -- -- 66,613 7.97%
Obligations of New York
state (2) .............. $ 9,187 12,778 16,613 21,235 59,813 5.36%
Other securities ........ -- 28,745 100 3 28,848 7.20%
-------- -------- -------- -------- -------- ----
Total held to maturity .. $ 16,997 $142,883 $ 17,045 $ 21,238 $198,163 7.22%
======== ======== ======== ======== ======== ====
Average yield to maturity 7.05% 7.58 5.08 4.99
Total investments ....... $241,647 $511,270 $ 40,766 $ 64,506 $858,189 7.45%
======== ======== ======== ======== ======== ====
</TABLE>
- -----------
(1) Consisting mainly of Government guaranteed GNMA investments with an
average life of five years.
(2) Above yield is not computed on tax-equivalent basis. The average
tax-equivalent yield to maturity on obligations of states and political
subdivisions are as follows: securities available for sale - 8.00% and
securities held to maturity - 8.15%. The total tax equivalent yield on the
entire investment securities portfolio is 7.73%.
Deposits
Deposits are the Bank's principal source of funds. The Bank attracts
deposits from the general public and small businesses by offering a variety of
deposit accounts at competitive rates. The Bank's deposit accounts include
savings accounts, personal and commercial checking accounts, money market
accounts, NOW accounts, and certificates of deposit ("time deposits"). The Bank
also offers tax deferred retirement savings accounts (IRAs), savings and
certificates of deposit accounts of $100,000 or more ("jumbo certificates").
Management believes that a
16
<PAGE>
significant portion of maturing deposits will be retained by the Bank. There are
no material amounts of foreign deposits in domestic offices.
At December 31, 1998, the Bank had $310 million in jumbo certificates,
compared to $301.2 million at December 31, 1997 and $271.2 million at December
31, 1996. At December 31, 1998, the dollar amount of jumbo certificates by
remaining maturity dates and the weighted average interest rates were as
follows:
Weighted
Remaining Maturity Amount Average Rate
- ------------------ ------ ------------
(in Thousands)
3 months or less ............................... $229,581 5.11%
More than 3 through 6 months ................... 59,927 5.95
More than 6 months through 12 months ........... 15,217 5.29
More than 12 months ............................ 5,291 6.14
-------- ----
Total ...................................... $310,016 5.40%
======== ====
Deposit inflows and outflows are generally dependent on market conditions,
interest rates, the general economic environment in the Bank's market area and
other competitive factors. The variety of accounts offered by the Bank has
enabled it to be more competitive in obtaining funds and to respond with more
flexibility to changes in the interest rate environment. Management's policy is
to review deposit interest rates at least weekly and to adjust appropriately
based on the need for funds, competition and the effect on the net interest
margin. The Bank's interest costs on time and savings deposits may continue to
trend upward in a higher interest rate environment.
Fixed rate, fixed term certificates of deposit accounts ("CD's") are
generally a significant source of funds for the Company. At December 31, 1998,
CD's amounted to $416.9 million or 63.9% of total interest-bearing deposits,
compared to $419.1 million or 65.9% at December 31, 1997 and $406.6 million or
65.4% at December 31, 1996. CD's offered by the Company have maturities of seven
days or more, impose a minimum balance requirement of $2,000, and pay simple
interest.
At December 31, 1998, savings deposit accounts amounted to $26.2 million
or 4% of the Company's total interest-bearing deposits, compared to $24.7
million or 4% of the Company's total interest-bearing deposits at both December
31, 1997 and 1996. Savings deposits consist of passbook savings accounts and
statement savings accounts. The minimum initial deposit required is $100.
Savings accounts offered by the Bank pay interest compounded and credited on a
quarterly basis, to accounts with a minimum balance of $5 at the end of the
quarter.
The Bank offers NOW accounts with unlimited check writing privileges. The
minimum initial deposit required is $2,500. There is a service charge incurred
if the daily average balance for the month falls below $2,500. Interest is
compounded monthly. Interest is credited at the end of the month, at the current
rate determined by the Bank. NOW accounts amounted to $46.4 million, or 7.1% of
the Bank's total interest-bearing deposits at December 31, 1998, compared to
$47.3 million, or 7.4%, at December 31, 1997 and $44.4 million, or 7.1%, at
December 31, 1996.
17
<PAGE>
The Bank also offers a money market account with limited check writing
privileges. Such accounts have a minimum balance requirement of $2,000 and earn
interest at the Company's money market rate if the account maintains a minimum
average balance of $2,000 for the month. There is a service charge incurred if
the daily average balance falls below $2,000. Interest on all money market
accounts is compounded monthly and credited monthly. Money market accounts
amounted to $162.8 million, or 25% of the Bank's total interest-bearing
deposits, at December 31, 1998, compared to $145.3 million, or 22.8%, at
December 31, 1997 and $146.2 million, or 23.5%, at December 31, 1996.
The following table sets forth the average deposits and average rates paid
for each of the most recent three fiscal years for the classifications of
deposits listed:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 Rate(%) 1997 Rate(%) 1996 Rate(%)
---- ------- ---- ------- ---- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Deposits:
Demand.................... $255,239 -- $227,744 -- $209,828 --
NOW....................... 44,609 2.24 41,904 2.27 38,219 2.28
Savings................... 25,476 2.98 24,277 2.98 25,485 2.99
Money market.............. 145,660 3.38 141,671 3.37 131,974 3.37
Other time ............... 416,286 5.27 416,221 5.45 384,033 5.30
-------- -------- ---- -------- ----
Total.......................... $887,270 $851,817 $789,539
======== ======== ========
</TABLE>
Management believes the variety of deposit accounts offered by the Bank
allows it to compete for funds effectively. However, these sources of funds
generally are interest rate sensitive and therefore can be more costly in a high
interest rate environment. Although the Bank will continue to carefully monitor
deposit flows, the ability of the Bank to control deposit flows will continue to
be significantly affected by the general market rate environment and economic
conditions.
Additional sources of funds are interest and principal payments on loans
and securities, and positive cash flows generated from operations. Interest and
principal payments on loans are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general market
interest rates, economic conditions and competitive factors. In the event that
the Bank is not able to generate sufficient funds from these sources, it has
available $86 million of overnight federal funds lines of credit from other
financial institutions as well as the ability to obtain substantial funds
through repurchase agreements against its investment portfolio. The bulk of the
real estate related portion of the Bank's investment portfolio is held by a real
estate investment trust, Merchants Capital Corporation ("MCC"), which is a
subsidiary of the Bank's Delaware holding company subsidiary, MBNY Holdings
Corp, formed in 1998. MCC and the Bank are parties to an agreement under which
the portion of the investment portfolio held by MCC is available to support
repurchase agreements entered into by the Bank. During 1996, the Bank became a
member of the Federal Home Loan Bank of New York where it has availability of
$190 million of funds, of which $50 million may be used in overnight funds.
Furthermore, the Bank has access to the discount window of the Federal Reserve
Bank. There were no borrowings from the Federal Reserve Bank's discount window
under these arrangements in 1998, 1997 or 1996.
18
<PAGE>
Short Term Borrowings
The following table represents the Bank's material short term borrowings
for the fiscal years ending December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at year end........................................... $209,031 $191,772 $127,199
Weighted average interest rate on balances at end of year..... 5.34% 5.82% 5.41%
Maximum amount of borrowing at any month end.................. $259,841 $248,436 $170,000
Approximate average amounts outstanding during period......... $211,269 $182,285 $119,661
Approximate weighted average interest rate during period...... 5.65% 5.80% 5.51%
</TABLE>
Year 2000 Compliance
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
include those developed and used by the Company's third-party data processors
and packaged software purchased by the Company and used on in-house personal
computers and on its wide area network.
The Federal Financial Institutions Examination Council ("FFIEC") has
recommended a five-phase program to address the Year 2000 (Y2K) problem. The
phases are: awareness, assessment, renovation, validation and implementation.
This guidance from the FFIEC is intended to aid financial institutions in
identifying risks, developing a plan of action to address them, performing
adequate tests and finally certifying that systems are Y2K compliant. The
program includes upgrading system codes and programs and making any needed
hardware and software replacements.
Management of the Company has initiated a program to assess its computer
systems, software applications and third-party data processors for Y2K
readiness. To perform this function, the Company has formed a Y2K Committee
whose membership includes personnel from all operating areas. The committee has
reviewed the Company's operations to identify those systems and third-party
suppliers that may be affected, and has prepared a plan of implementation to
address issues related to transaction processing in the post-1999 period. The
Company estimates that as of December 31, 1998 its preparedness level in this
area was approximately 80%. It expects to reach the 100% preparedness level by
September 30, 1999.
The Company has requested from third-party suppliers, and has obtained,
written information as to the state of their preparedness for Y2K. Each supplier
whose products or services the Company considers to be material to its
operations has assured the Company either that it is already Y2K-compliant, or
that it will be so before the end of 1999. Nonetheless, the Company believes
there may be some residual risk of Y2K-related problems being experienced by
suppliers.
Also, borrowers from the Company's banking subsidiary may encounter
Y2K-related problems, which could in some cases lead to an increase in the
credit risk represented by loans to those borrowers. The Company is unable to
evaluate the extent of this risk.
19
<PAGE>
The Company is continuing to evaluate the costs associated with Y2K
remediation. Testing and other expanses totaling approximately $400,000 have
been identified to date. While additional costs are expected to be incurred, the
Company does not believe that the total will be material to its operations.
In addition to the previously discussed initiatives, the Company is
developing business resumption, remediation and event contingency plans to
prepare for potential systems failures at critical dates, failures of critical
third parties to effectively remediate and certify their systems, as well as any
other unanticipated events that could arise with the date change. The
development of these plans include the identification of core business
processes, critical to the Company's business and operations, and an assessment
of failure scenarios. The Company expects that its contingency planing for the
year 2000 issue will be substantiually complete by the end of June 1999.
Employees
At December 31, 1998, the Company and the Bank had 243 employees,
consisting of 81 officers and 162 supervisory and clerical employees. The Bank
considers its relations with its employees to be good.
20
<PAGE>
SELECTED STATISTICAL INFORMATION
In addition to the statistical information that is presented in this Form
10-K, the following information is included in the Company's 1998 Annual Report
to Shareholders (the "Annual Report") and is hereby incorporated herein by
reference:
Description of Statistical Information Annual Report Caption Page
- -------------------------------------- --------------------- ----
Average Balance Sheets Average Assets, Liabilities and
Stockholders' Equity 39
Analysis of Net Interest Earnings Analysis of Net Interest Earnings 9
Volume and Rate Variance Change in Interest Income and
Expense 10
Return on Equity and Assets Selected Financial Data 8
ITEM 2. PROPERTIES
The Bank owns the nine story office building at 434 Broadway, New York,
New York where one of its branch offices is located. The Bank occupies five of
the nine floors, the mezzanine and basement; four floors are presently rented to
others. In addition, the Bank owns the commercial condominium located at 62 West
47th Street, New York, New York, which houses the Bank's midtown branch office,
consisting of a main floor, mezzanine, and basement.
In addition to the above two offices, the Bank maintains five branch
offices at 93 Canal Street, 1040 Sixth Avenue, 295 Fifth Avenue, 145 Fifth
Avenue, and its corporate headquarters at 275 Madison Avenue, New York, New
York, where the Bank's main branch office is located.
ITEM 3. LEGAL PROCEEDINGS
Various actions and proceedings are presently pending to which the Company
or the Bank is a party. In the opinion of management, the aggregate liabilities,
if any, arising from such actions are not expected to have a material adverse
effect on the financial position of the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, there were no matters submitted to a
vote of the Company's stockholders.
21
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The market for the Company's common equity is not an exchange but is
established by the National Association of Securities Dealers' Automated
Quotation System. At December 31, 1998 the total number of holders of record of
the Company's common equity was 1,627. The information appearing on page 17 of
the Annual Report under the caption "Price Range of Common Stock" is
incorporated herein by reference.
Cash dividends have been declared in each quarter of 1998 and 1997
aggregating annually $7.8 million and $7.3 million, respectively, or $.80 per
share in 1998 and $.75 per share in 1997, after adjusting for the two-for-one
stock split which occurred during 1997.
As a depository institution whose deposits are insured by the FDIC, the
Bank may not pay dividends or distribute any of its capital assets while it
remains in default on any assessment due the FDIC. The Bank currently is not in
default under any of its obligations to the FDIC. The Company and the Bank, in
declaring and paying dividends, are also limited insofar as minimum capital
requirements of regulatory authorities must be maintained. The Company and the
Bank comply with such capital requirements.
Under the Federal Reserve Act, the approval of the FRB is required for
dividends declared by a state member bank which in any year exceed the net
profits of such bank for that year, as defined, combined with retained net
profits for the two preceding years. Additionally, under Federal law, a bank is
prohibited from paying dividends in amounts greater than undivided profits then
on hand, as defined, after deducting bad debts.
During 1986, the stockholders approved the Employee Stock Option Plan of
the Bank (the "Option Plan"). Due to the Bank's becoming the wholly-owned
subsidiary of the Company on July 1, 1993, the Company adopted a substantially
identical stock option plan as successor to the Option Plan and all stock
options have become options to purchase the Company's Common Stock rather than
shares of the Bank's stock. During 1998, options to purchase an aggregate of
18,250 shares were granted under the Option Plan. Also during 1998, outstanding
options to purchase a total of 161,085 shares of Common Stock were exercised.
All shares delivered upon these exercises were reissued from the Company's
treasury. The weighted average exercise price of such options was $9.94 per
share. Such transactions were exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.
ITEM 6. SELECTED FINANCIAL DATA
The information appearing on page 38 (Note 17) and page 8 respectively, of
the Annual Report under the captions "Selected Quarterly Financial Data" and
"Selected Financial Data" is incorporated herein by reference.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearing on pages 9 through 17 of the Annual Report under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information appearing on pages 12 and 13 of the Annual Report under
the caption "Market Risk Management" is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements, related notes and Independent
Auditors' Report which appear on pages 18 through 38 of the Annual Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information appearing on pages 5 through 7 of the Company's Proxy
Statement prepared in connection with the 1998 Annual Meeting of Stockholders
(the "Proxy Statement") under the caption "Election of Directors" is
incorporated herein by reference.
All executive officers are designated annually by the Board of Directors
and serve at the pleasure of the Board.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing on pages 10 and 11 of the Proxy Statement under
the caption "Executive Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing on pages 8 and 9 of the Proxy Statement under
the caption "Security Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing on page 13 of the Proxy Statement under the
caption "Compensation and Option Committee Report on Executive Officer
Compensation" and on page 16 thereof under the caption "Certain Relationships
and Related Transactions" is incorporated herein by reference.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements. The financial statements, related notes and the
Report of Independent Auditors, KPMG LLP, dated January 25, 1999 appear on
pages 18 through 38 of the Annual Report and are incorporated herein by
reference.
(a)2. Financial Statements Schedules.
(a)3. Exhibits (numbered in accordance with Item 601 of Regulation S-K):
Item Description
---- -----------
(11) Computation of Earnings Per Share
(13) 1998 Annual Report to Shareholders
(27) Financial Data Schedule
(b) Reports on Form 8-K. None.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MERCHANTS NEW YORK BANCORP, INC.
(Registrant)
By: /s/ Spencer B. Witty
--------------------------------------
Spencer B. Witty
Chairman of the Board
Dated March 16, 1999
By: /s/ James G. Lawrence
--------------------------------------
James G. Lawrence
President, Chief Executive Officer and
Director (Principal Executive Officer)
Dated March 16, 1999
By: /s/ William J. Cardew
--------------------------------------
William J. Cardew
Vice Chairman of the Board,
Chief Operating Officer and Director
(Principal Financial Officer)
Dated March 16, 1999
By: /s/ M. Nasette Espiritu
--------------------------------------
M. Nasette Espiritu
Vice President and Comptroller
(Principal Accounting Officer)
Dated March 16, 1999
25
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Charles J. Baum Director March 16, 1999
- ---------------------------
Charles J. Baum
/s/ William J. Cardew Vice Chairman of the Board, March 16, 1999
- --------------------------- Chief Operating Officer and
William J. Cardew Director
/s/ Eric W. Gould Senior Vice President, March 16, 1999
- --------------------------- Treasurer and Director
Eric W. Gould
/s/ Rudolf H. Hertz Vice Chairman of the Board March 16, 1999
- --------------------------- and Director
Rudolf H. Hertz
/s/ Isidore Karten Director March 16, 1999
- ---------------------------
Isidore Karten
/s/ James G. Lawrence President, Chief Executive March 16, 1999
- --------------------------- Officer and Director
James G. Lawrence
/s/ Robinson Markel Director March 16, 1999
- ---------------------------
Robinson Markel
/s/ Paul Meyrowitz Director March 16, 1999
- ---------------------------
Paul Meyrowitz
/s/ Alan Mirken Director March 16, 1999
- ---------------------------
Alan Mirken
/s/ Mitchell J. Nelson Director March 16, 1999
- ---------------------------
Mitchell J. Nelson
/s/ Leonard Schlussel Director March 16, 1999
- ---------------------------
Leonard Schlussel
/s/ Charles I. Silberman Vice Chairman of the Board March 16, 1999
- ---------------------------
Charles I. Silberman
/s/ Spencer B. Witty Chairman of the Board March 16, 1999
- --------------------------- and Director
Spencer B. Witty
26
Exhibit 11
Computation of Earnings Per Share
The computation of earnings per share for each period presented is as follows:
1998 1997 1996
----------- ----------- -----------
Net income ........................... $15,902,163 14,562,158 12,670,771
Less: Minority Interest .............. 7,425 0 0
---------------------------------------
Net Income Available to Common
Shareholders ..................... $15,894,738 $14,562,158 $12,670,771
Weighted average shares
outstanding* ..................... 9,711,531 9,793,913 9,961,538
Plus: Effect of Stock Options as
Dilutive Securities .............. 145,950 163,277 101,859
---------------------------------------
Adjusted Weighted Average Shares
Assuming Dilution ................ 9,857,481 9,957,190 10,063,397
Earnings per share, basic ............ $ 1.64 $ 1.49 $ 1.27
Earnings per share, diluted .......... $ 1.61 $ 1.46 $ 1.26
* Adjusted for the 2-for-1 split of the Common Stock that became effective
October 7, 1997.
[TO COME]
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<PERIOD-START> JAN-01-1998
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0
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