On Broadway a block north of Canal Street, amid textile outlets, Chinese shops of rampant variety, and sidewalks teeming with pedestrians, sits the staid marble headquarters of Merchants Bank of New York.

This is the office from which chairman Spencer B. Witty helps preserve the traditions of a bank that's seen it all.

Since opening for business in 1881, the Manhattan bank has severed ties with its offshore parent, survived the Great Depression. weathered transformations in its service area, and added a dimension demanded by regulators.

Through it all, $1 billion-asset Merchants has stubbornly remained a prudent middle-market bank. Its earnings, along with the businesses it serves, have taken hits. But the bank is fundamentally healthy and, having just turned itself into a holding company - Merchants New York Bancorp - has set the stage for an out-of-state expansion.

Pounding the Pavement

Not suprisingly, Mr. Witty says any takeover in Connecticut cut or New Jersey would have to be positioned where the bank already has a core of customers. Not an adventuresome strategy - but then, Mr. Witty never pursues business in unfamiliar territory.

Well, almost never.

In 1990, Federal Reserve examiners slapped the bank with a "needs to improve" rating for Community Reinvestment Act compliance.

The problem was that most of the area served by its offices on 93 Canal St. and 434 Broadway - once part of Manhattan's Little Italy - had been engulfed by Chinatown. Merchants had not industriously pursued business among the new neighbors, or at least not industriously enough to satisfy the Fed.

So Mr. Witty, 78, went out and knocked on doors.

"Every, lunch hour when I didn't have an appointment I'd stop in a few shops and talk to proprietors," he says. "I said I'd have a lending officer stop by if we could help.

But his Chinatown neighbors "were reluctant to talk," Mr. Witty says. "They're not used to seeing Occidentals in their shops. They thought I was IRS or FBI."

Mr. Witty was determined, however. "With a smile and a bit of encouragement, we got them out of their shells," he says. "Our percentage of loans in Chinatown is still very small, but it's growing."

The efforts have paid off with the Fed's latest CRA rating - "satisfactory." It was issued just last month.

But Merchants isn't just a Chinatown bank. It has five other offices in mild-Manhattan, where various blocks are known as the city's capitals of such wholesale and retail businesses as toys, handbags, and Oriental rugs.

These are the middle-market business - those with annual sales in the $3 million to $100 million range - that Merchants historically has sought for assets. Now it would like to see those assets picking up.

With its loan-to-deposit ratio at 33%, Merchants has $250 million available for that market. The ratio had been nearly 50% in last November, when the bank purchased the deposits and one branch of First New York Bank for Business, formerly First Women's Bank, from the Federal Deposit Insurance Corp.

Mr. Witty would like to bring the ratio up 40%, but that's not always easy for a bank that studies borrowers as closely as Merchants.

"We like to visit the facilities and lift a few boxes," says CEO and president James G. Lawrence, "just to make sure they're filled."

Moreover, when Merchants' loan committee meets there can be as many as 30 people at the table, Mr. Lawrence added. Junior lending officers as well as the borrower's accountant, attorney, and bookkeeper all are likely to be present.

"The bookkeeper's especially important," Mr. Lawrence says. "Many of your quality middlemarket businesses have bookkpeers who have been there a long time, and he or she probably has a significant say in the day-to-day operations of the business."

The businesses served by Merchants are varied, to say the least. "We try to do everything New York does," Mr. Witty says. That includes textile imports and exports, hardware and hardware imports, lingerie and lingerie exports, white goods, sportswear, jewelry, rug imports, handbags, shoe imports. publishing, printing, and specialty chemicals.

Nonperformers Low

Merchants' scrutiny of the borrowers in these industries has resulted in a note file whose nonperformers make up just one-third of 1% of the total.

"It's not the return on the money" that counts, Mr. Witty says, "it's the return of the money."

Slumps of varying degrees among Merchants' borrowers have hurt the bank's net income, which was $10.4 million in 1989, $8 million in 1990, and $6.5 million in 1991 and again last year.

The slumps, along with Merchants' effort to flush out with repricing about half of First New York's deposits, also have pressured Merchants' return on assets, which fell from 1.64% in 1989 to 1.25% in 1990, 1% in 1991, and 0.89% last year.

The numbers gaining ground so far this year, however. At the end of the second quarter, Merchants posted earnings of $2.3 million, 20% more than in the same period last year. Earnings for the six months ended June 30 totaled $4.6 million, an 18.2% rise.

Mr. Witty points out that, even after the First New York purchase, the bank's risk-based capital ratio was 17.82% - well in excess of the 8% federal minimum. The risk ratio, Mr. Witty says, helps explain why deposits have risen 5% this year - and why Merchants' stock is trading at $55, nearly twice its $30 book value.

Safety and Soundness

"We don't have ATMs, and we don't try to compete with the Citis and the Chemicals for retail accounts. But people like to put there money here, because we have a reputation for safety and soundness."

In fact, the bank once turned down a request by a major retailer for Merchants to handle its payroll account.

Merchants was founded back in 1881 as Markel Brothers Private Bankers, an offshoot of a German institution. At the outbreak of World War 1, the Canal Street office broke off from the German parent. The bank's service area at the time was mostly cotton warehouses.

The bank went public as Merchants in 1926. It paid its first dividend in 1933, and Mr. Witty points out that it has been paying them without a single reduction for 240 quarters in a row.

The warehouses and the rest of the garment industry moved north, to midtown, but Merchants never lost its commercial character. As of March 31, it had $300 million of assets in commercial loans and $6.1 million in commercial realty. The rest of its assets, about $4 million, are in residential mortgages.

The mortgages are issued as a courtesy to Merchants' top customers. Some of them are businessmen who "many years back got a loan for just a few thousand dollars," Mr. Witty says. "Now the have the run of the place."

Sympathetic Lenders

"We like to bring along and work with small businesses," says Mr. Lawrence, "and we let them down gently if we turn them down. We explain why, and we explain what they have to do to qualify with us.

"Eventually they're back, with stronger financials."

Mr. Witty notes that the minimum amount of a small-business loan is $25,000. He argues that a big bank would treat a loan that size, and probably up to $50,000, as an installment loan.

But at Merchants, which boasts that it's been lending to small businesses since the days of clipper ships, installments are out and character is in.

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