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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] For the fiscal year ended December 31, 1995
or
[ ] For the transition period from ...........to...........
Commission File number 2-26080
CAPITAL BANCORP
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(Exact name of registrant as specified in its charter)
Florida 59-2160717
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1221 Brickell Avenue, Miami, Florida 33131
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 536-1500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class: which registered:
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
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(Title of class)
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, 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 not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 25, 1996, the aggregate market value of the shares of the
Registrant's Common Stock held by non-affiliates of the Registrant was
$169,210,325. (This number is based on reported beneficial ownership by all
directors and executive officers of the Registrant and holders of 5% or more of
the Registrant's Common Stock. This determination does not, however,
constitute an admission of affiliate status for any of these individual
shareholders).
As of March 25, 1996, the Registrant had outstanding 7,461,279 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
HISTORY
Capital Bancorp (the "Company") is a bank holding company registered pursuant
to the provisions of the Bank Holding Company Act of 1956, as amended (the
"Bank Holding Company Act"), and conducts its operations primarily through its
wholly owned banking subsidiary, Capital Bank (also referred to herein as the
"Bank"), and commercial factoring subsidiary, Capital Factors Holding, Inc.
("Factors Holding"). The Company, which was organized under the laws of the
State of Florida in April 1981, may engage, either directly or through its
subsidiary corporations, in activities which are permitted under the Bank
Holding Company Act.
The Company owns all of the outstanding Common Stock of Capital Bank, a Florida
banking corporation, which was organized in 1974 as a commercial bank chartered
under the laws of the State of Florida. Capital Bank operates from a main
office located at 1221 Brickell Avenue, Miami, Florida, and at 28 branch
offices located in Dade, Broward and Palm Beach, Florida counties.
In May 1988, Capital Bank acquired approximately 70% of the outstanding common
stock of Peoples First National Bancshares, Inc. ("Peoples Bancshares") in
connection with defaulted loans. Capital Bank's ownership was increased to
approximately 90.5% as of December 31, 1989. Peoples Bancshares was a one-bank
holding company based in North Miami Beach, Florida that engaged in commercial
bank services conducted principally through its 99.8% owned subsidiary bank,
Peoples First National Bank ("Peoples Bank"). After several unsuccessful
attempts to sell its investment in Peoples Bancshares, Capital Bank obtained
regulatory approval during 1991 to merge with Peoples Bank. Effective July 31,
1991, Peoples Bank was merged into Capital Bank. Peoples Bancshares has been
dissolved.
In January 1990, Capital Bank assumed certain deposit and other liabilities,
and acquired certain assets of Creditbank, a failed commercial bank, pursuant
to an agreement with the Federal Deposit Insurance Corporation (the "FDIC").
In connection with this transaction, Capital Bank acquired three new branch
locations in geographic areas where Capital Bank was not previously
represented. In February 1992, Capital Bank purchased certain assets and
assumed certain deposit liabilities of a branch of another commercial bank in
Deerfield Beach, Florida. The Bank now operates this branch as the Deerfield
Beach branch of Capital Bank.
In May 1985, Capital Bank acquired 100% of the common stock of Capital Factors,
Inc. (formerly known as Intercontinental Financial Services Corp.)
("Capital Factors"). In June 1994, Capital Factors completed a
reorganization in which Factors Holding was formed as a holding company for
Capital Factors. The Bank exchanged 100% of its Capital Factors stock for 100%
of Factors Holding stock. Capital Factors is based in Ft. Lauderdale, Florida
and operates regional offices in Los Angeles, California, New York, New York
and Charlotte, North Carolina, which were opened in 1989, 1990 and 1995,
respectively.
BUSINESS
As of December 31, 1995, the Company had a total of 8 employees, all of whom
are also employees of Capital Bank and or Capital Factors. Management of the
Company believes its relationship with its employees to be satisfactory.
Through its subsidiaries, the Company operates in two distinct lines of
business, commercial banking and factoring. The commercial banking activities
include domestic and foreign activities. Generally, the Bank originates loans
for its own account. From time to time the Bank may purchase loans from other
lenders, subject to the Bank's normal underwriting standards. Also, from time
to time the Bank may sell loans to other lenders to mitigate risk
concentrations or manage liquidity. Generally, loans purchased or sold are
without recourse. The following discussion describes the nature of activities
conducted in each of the Company's major lines of business. See Table 8 in
Item 8 hereof for a summary of operating results and identifiable assets.
In its domestic banking activities, Capital Bank offers checking and other
deposit services, makes commercial, installment and real estate loans,
transmits funds, rents safe deposit boxes, offers brokerage and investment
services, conducts certain trust services and performs such other banking
services as are usual and customary for banks
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of similar size and nature in the South Florida area.
In addition to its main office in the Miami financial district, Capital Bank
has twenty-seven branch offices in Dade, Broward and Palm Beach counties. The
branch offices are primarily engaged in the delivery of retail banking products
and services to customers and, to a lesser extent, commercial and real estate
lending activities.
The Bank's domestic lending activities primarily involve small and middle
market commercial borrowers, builders of residential real estate, owners of
commercial or income-producing real estate, and consumers. The bank generally
does not provide long-term permanent financing for 1-4 family residential real
estate. Following is a discussion of each of the Bank's significant areas of
domestic lending activity.
Commercial and Financial. Commercial loans are made to borrowers in
manufacturing and service industries. Generally, these loans are secured by
business assets, such as inventory, accounts receivable or equipment. Other
forms of collateral acceptable to the Bank may also be obtained. Loans are
generally limited to 50-80% of collateral value, but may be as high as 100% of
collateral value if the collateral is cash or near-cash and controlled by the
Bank. Unsecured loans may be made if the creditworthiness of the borrower
supports it. Commercial loans are susceptible to negative business conditions
of the borrower, and are thus continuously monitored by collateral inspection,
current financial reporting by the borrowers and other measures.
Real estate construction. Construction loans are made to developers or
owner/users of specific projects operating in the Bank's business market.
Projects financed include single or multi-family residential properties,
commercial rental property, or owner-occupied industrial properties. First
mortgages are generally obtained and maximum loan to value ratios may range
from 50% for land acquisition to 75% for active developments, subject to other
underwriting considerations such as pre-sales. Construction loans are
typically 3 years or less in term.
Real estate mortgage. Permanent mortgage financing is provided for residential
and commercial properties. Owner occupied residential loans are limited to
5-year balloon terms, thus very few are made. First mortgages on multi-family
residential, income producing commercial and owner/user industrial properties
may be granted for 5-10 year terms, with balloon payments at maturity.
Projected cash flows are a significant consideration in underwriting these
loans. Furthermore, maximum loan to value ratios are 75-80%.
Consumer. The Bank makes installment loans, secured and unsecured consumer
credit lines and issues credit cards. Installment loans, primarily to purchase
automobiles, represent approximately 75% of total consumer loans, credit lines
approximately 20% and credit cards less than 5%. Installment loans are
primarily originated indirectly through the Bank's arrangements with local
automobile dealers and may also be originated directly. In either case
underwriting and approval is done centrally. Borrower's maximum debt to income
ratio is generally limited to 50% and may be lower depending on credit history.
Secured credit lines are generally related to first or second mortgages on
owner-occupied residential properties. Credit lines are generally open-ended,
requiring 2% monthly payments.
The Company's commercial, real estate and consumer loans are susceptible to
negative business conditions of the borrower and thus are continually monitored
by collateral inspection, current financial reporting by the borrowers and
other measures. Commercial loans are generally made for shorter terms and at
higher interest rates, but are subject to the risk of borrower default and the
risk that the collateral may be more difficult to liquidate and more likely to
decline in value. Loans secured by commercial properties are generally larger
and, because payments are often dependent on the successful operation or
management of the properties, repayment for such loans may be subject to
adverse conditions in the real estate market or the economy. If the cash flow
from the project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be impaired. In
addition, adjustable-rate commercial real estate loans are subject to
increased risk of delinquency or default as interest rates increase. The
Company has attempted to minimize these risks through its underwriting
standards.
Construction loans to borrowers other than the owner-occupants also involve
many of the same risks discussed above regarding commercial real estate loans
and tend to be more sensitive to general economic conditions than many other
types of loans. Because of the uncertainties inherent in estimating
construction costs and the market for the project upon completion, it is
relatively difficult to evaluate accurately the total loan funds that would be
required to complete a project, the related loan-to-value ratios, and the
likelihood of ultimate success of a project. Also, the funding of the loan
fees and interest during the construction phase makes monitoring of the
progress of the project particularly important, as customary early warning
signals of project difficulties may not be present.
The Company's consumer lending activities primarily involve indirect automobile
financing, which represents consumer installment debt generally of 24 to 60
month terms, secured by new or used automobiles. Initial applications for these
loans are taken from potential car buyers by automobile dealers, subject to the
Company's underwriting standards. The Company maintains final approval
authority over all applications for these loans. Indirect automobile financing
presents risks typical of consumer automobile financing, including competitive
pressures that may influence the interest rates charged by the Company as well
as the ability to record new loans, and potential losses due to non-payment or
collateral deficiencies. These risks are influenced most heavily by
underwriting standards as well as general economic trends.
The International Division is engaged primarily in financing the exportation of
United States goods principally to, and the importation into the United States
of foreign goods principally from, countries in Latin America and, to a lesser
extent, countries in Europe and the Far East. The International Division is
also engaged in the refinancing of trade-related credits for foreign banks and
lends primarily to banks and other financial institutions located in foreign
countries. Such loans arise typically from short-term trade finance
transactions and are unsecured, however, offsetting cash deposit balances may
be obtained when warranted. Financial statements of foreign borrowers are
subjected to financial analysis and review annually, and interim period
financial information is obtained whenever possible. Additionally, studies
are made of borrowers' home countries, including economic and political
trends, quality and scope of local regulation and supervision, and other
matters. Loans may also be made to non-financial borrowers, subject to cash
collateral.
Currently, most of the Company's international lending activities are with
Latin American counties. As with international activities generally, risks
arise from the sometimes volatile and extreme economic uncertainty and
political environments of the borrower's home country (for example, the recent
devaluation of the Mexican peso and declining confidence in local banking
systems). However, industry-wide credit losses associated with trade-related
foreign lending have traditionally been low, resulting in lenders charging
lower rates than non-trade foreign lending and some forms of domestic lending.
Notwithstanding this history, however, unforeseen circumstances may arise,
resulting in losses in excess of historical experiences. Management attempts to
mitigate the risks associated with its international activities through
frequent personal visits, overall borrower and country lending limits and
other actions.
Through its Capital Factors' offices in New York, Los Angeles, Ft. Lauderdale
and Charlotte, the Company provides factoring and other specialized commercial
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financial services to small and medium size companies. Capital Factors
purchases accounts receivable from its clients pursuant to factoring agreements
executed with each client. Capital Factors' clients primarily include
manufacturers, importers, wholesalers and distributors in apparel and textile-
related industries and, to a lesser extent, clients in consumer goods-related
industries. More recently, Capital Factors has provided services to companies
in the healthcare industry. Accounts receivable purchased are due from
clients' customers geographically located throughout the United States,
principally retailers, manufacturers and distributors.
Accounts receivable are generally purchased on a non-recourse (to the client)
basis. Capital Factors guarantees the collection of each client's pre-approved
receivables or receivables from each client's customers with pre-approved
credit lines. Payment for most receivables is made to the client after
collection from the client's customer. If the receivable is not paid based
solely on the customer's financial inability to pay, payment is made to the
client within 120 days after the due date of the receivable. Capital Factors
is not obligated to pay the client if the customer fails to pay for any reason
other than its financial inability, such as a dispute regarding defective
merchandise. Pursuant to the factoring agreements, Capital Factors is
typically appointed the client's sole factor for all accounts receivable, and
customers are notified to remit all payments to Capital Factors.
Many factoring agreements provide that Capital Factors may make advances to the
client prior to the contractual payment date and satisfy such advances from
receivables collections. Such advances bear interest at prime plus 1% to 4%
(in addition to any factoring fee) and are payable on demand. Advances are
generally limited to 75% to 90% of outstanding accounts receivable purchased
from the client. Advances may sometimes be made to some clients in excess of
such client's receivables. These overadvances may be secured by one or more
of a client's inventory, other assets or personal guarantees or unsecured.
Advances are generally satisfied from receivables collections.
The quality of the accounts receivable purchased represents Capital Factors
primary safeguard against credit losses. Accordingly, Capital Factors conducts
an extensive financial and business analysis on a client prior to entering into
a factoring arrangement, and on a client's customers prior to extending credit
lines for a customer. The analysis focuses on such items as the age of
receivables, the diversity of the client's customer base and the quality and
character of management and owners. Additionally, Capital Factors conducts
field examinations prior to signing the client as well as periodically during
the term of the factoring agreement. Account officers are assigned to each
client to monitor the quality of receivables, the prospects of the client and
other matters in order to further mitigate credit risk.
Capital Factors began to expand its asset-based lending in late 1994. At
December 31, 1995, such loans ranged from $100,000 to $9.9 million and are
primarily secured by accounts receivable and, to some extent, inventory.
Unlike most of Capital Factors' factoring activities, ownership of the
receivable remains with the client and Capital Factors does not guarantee
collection. In underwriting these loans, Capital Factors focuses on the
borrowers' financial stability and creditworthiness. Capital Factors also
conducts periodic field examinations of these clients' records.
The financial failure of clients or their customers may adversely affect
Capital Factors' ability to fully recover amounts due under either the accounts
receivable purchased or advances made to clients under factoring arrangements.
There is additional risk in purchasing fraudulent receivables and in the
dilution of receivables. Dilution of receivables occurs when such receivables
are not fully collectable for reasons other than the client's financial
inability to pay (such as disagreements as to the quality of goods shipped).
The risks associated with asset-based lending are similar to those involved in
Capital Factors traditional factoring activities and primarily involve the
credit quality of the receivables accepted as collateral.
Capital Factors, as well as the factoring industry in general, has historically
experienced and expects to continue to experience seasonal fluctuations in its
factored sales volume and factoring fees, which generally have been higher
during the period from August through November. A principal reason for the
fluctuation is the seasonality in the sales of certain of Capital Factors'
clients, especially those in the apparel industry who typically ship more goods
during such four-month period in order to fill increased customer orders in
anticipation of the "back-to-school" and the ensuing holiday season.
Historical experience indicates that Capital Factors' factored sales volume is
at its lowest during the period from December through February. Although
currently a large percentage of its clients are in the apparel industry,
Capital Factors is attempting to mitigate the effect of seasonal fluctuations
through the introduction of its healthcare financing services.
The Company owns approximately 3.9% of the common stock of Capital Bank, N.A.,
a commercial bank located in Washington, D.C. For additional information, see
Certain Relationships and Related Transactions in Item 13 hereof. At December
31, 1995 and 1994, Capital Bank, N.A. had total assets of approximately $105.6
million and $84.8 million, respectively, and total deposits of approximately
$85.1 million and $70.8 million, respectively. Stockholders' equity
aggregated $8.4 million and $5.7 million at December 31, 1995 and 1994,
respectively.
At December 31, 1995, the Company and its subsidiaries employed approximately
803 full time employees, including 486 in domestic banking, 41 in the
International Division, 218 at Capital Factors and 58 in general corporate and
other areas. The Company, Capital Bank and Capital Factors each believe that
its relationship with employees is satisfactory.
PRIMARY MARKET AREAS
The Company's primary market areas include the three-county area of South
Florida for domestic banking, Central and South America for international
banking and the entire U.S. for factoring.
The Bank operates 28 branch offices in Dade (19), Broward (six) and Palm Beach
(three) counties in Florida. These counties have a combined population in
excess of 4,000,000 people and include Miami, Ft. Lauderdale and West Palm
Beach as the leading cities. Each of these counties share some common economic
characteristics, primarily driven by population growth. During 1995, this
growth slowed, with Dade, Broward and Palm Beach experiencing employment growth
of approximately 1%, 3% and 1.5%, respectively. In part due to slower
population growth, housing starts in the three county area decreased 10% in
1995 compared to 1994, following a 31% increase in 1994 compared to 1993. New
home values, however, continued to increase, rising 16% in Broward and 9% in
Dade since January 1994. The counties also have some unique characteristics
influencing economic trends. Dade has a relatively mature economy; however, it
is a major center for international trade and tourism. Palm Beach is a center of
wealth, offset by a concentration of agricultural jobs. Broward, at the
geographic center of the three county area, benefits from this central
location, as reflected in its more rapid population growth. Unemployment rates
in Dade, Broward and Palm Beach at September 30, 1995 were approximately 6.6%,
5.3% and 6.7%, respectively, down from 8.2%, 6.5% and 8.1%, respectively, at
year end 1994.
Due to its geographic location, Miami is considered a gateway to Latin America.
The Company's international trade finance activity is primarily conducted with
banks and other financial institutions in Latin America and is thus influenced
by the economic trends in that region. Economic growth in Latin America was
estimated at 0.6% in 1995, compared to an average of 3.6% for 1991 through
1994. The economies of Mexico and Argentina experienced declines in gross
domestic product in 1995 due to high levels of unemployment caused by
recessionary environments. These declines were offset by an estimated growth in
gross domestic product of 5% in Brazil, the region's largest economy.
Capital Factors conducts business with clients located in several of the
country's leading factoring centers, including, New York, Los Angeles and
Charlotte. Customers of those clients, who are responsible for the payment of
receivables that Capital Factors purchases, are located geographically
throughout the United States. A substantial number of these customers are
retailers, thus Capital Factors' operations can be influenced by trends in the
overall national economy, especially retail sales.
COMPETITION
Banking in Florida, as elsewhere, is a highly competitive industry. Capital
Bank competes with other banks in service areas in obtaining new deposits,
making loans, establishing rates of interest on loans, savings and time
deposits and providing other financial services. Competition also exists with
non-bank institutions engaged in the business of making loans or accepting
deposits or investments, such as mutual funds, savings and loan associations,
insurance companies,
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small loan companies, credit unions, finance companies, factors and certain
governmental agencies.
In the South Florida area serviced by Capital Bank, commercial banking is
carried on by a relatively large number of small to medium-sized local banks
and thrifts, by a few large multistate banks, and by a relatively large number
of foreign banks and Edge Act corporations. The ability of local banks to
effectively compete in the South Florida market is restricted due to the fact
that bank regulations restrict loan amounts to a percentage of each bank's
adjusted capital and surplus. While the financial industry consolidation has
reduced the number of banks and savings and loans competing in the South
Florida market, the ability of local banks to compete has been affected by
increased competition from out-of-state financial institutions acquiring the
assets and deposits of local financial institutions. At this time, the Company
does not believe this consolidation trend has had a significant effect on its
ability to conduct business operations. However, the Company cannot predict
the future effect of this trend.
Capital Factors competes with numerous banks, financial institutions,
commercial finance companies and other factoring companies with greater
financial and other resources than Capital Factors. The four largest factors
in the United States control approximately 62% of the factored sales volume in
the United States. Capital Factors also competes with other regional factoring
companies that target similar clients as Capital Factors and that have operated
in the markets serviced by Capital Factors for a longer period of time than
Capital Factors. Certain factors compete with Capital Factors for certain
types of accounts. For example, one factor may provide services only to
textile mills, while another may provide services only to furniture
manufacturers. Capital Factors competes primarily on the basis of service, not
price. Future competition is expected to be based primarily on the quality and
level of service provided and the ability to respond to the changing credit
environment and demands of many factoring clients.
SUPERVISION AND REGULATION
The following discussion summarizes the statutes and regulations that
materially affect the Company, Capital Bank, their subsidiaries, including
Capital Factors, and their operations. The descriptions of such statutes and
regulations and the effects thereof set forth below and elsewhere in this Form
10-K do not purport to be complete descriptions of such statutes and
regulations and their effects. This discussion also does not purport to
identify every statute and regulation that may apply to the Company, Capital
Bank and their subsidiaries, including Capital Factors.
Recent Legislative and Regulatory Developments
Legislative and Regulatory Proposals. In recent years, measures have been
taken to reform the banking industry and, more recently, further proposals have
been announced by the Clinton administration, members of U.S. Congress,
industry trade groups and the federal bank regulators that, if adopted, would
have additional significant effects on the banking industry. These recent
proposals and the recently enacted banking legislation are described briefly
below.
Various proposals to further reform the banking industry are currently under
discussion and review. If adopted, these proposals would, among other things,
(i) expand the powers of bank holding companies to undertake securities,
insurance and other business activities through the repeal or reform of the
Glass-Steagall Act; (ii) restructure the federal regulatory agencies
responsible for overseeing federally chartered savings institutions and
national banks by consolidating the Office of Thrift Supervision and the Office
of the Comptroller of the Currency into a single agency; and (iii) modify the
powers of savings and loan holding companies. Because these proposals are in
their formative stages, it is not possible at this time to assess the
likelihood of their adoption, or if adopted, to assess their expected impact on
the Company and Capital Bank.
Deposit Insurance Reform. Under current law, the FDIC is required to increase
and maintain the reserves of both the Bank Insurance Fund ("BIF") and the
Savings Association Insurance Fund ("SAIF") to 1.25% of insured deposits. The
BIF, which insures the Company's deposits, recently reached the required
reserve level. In November 1995, the FDIC formally announced the elimination
of deposit insurance premiums for most members of the BIF, including the
Company. Accordingly, the Company now pays a minimum assessment fee of $2,000
per year as compared to approximately $1.5 to $2.0 million it was required to
pay annually prior to such announcement. Members of the SAIF, which are
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primarily thrifts, must continue to pay insurance premiums ranging from 23
cents to 31 cents for each $100 of insured deposits. This differential has
created a competitive advantage for BIF members.
A number of legislative proposals have been presented to eliminate the
disparity between the two funds. In July 1995, federal banking regulators
announced a proposal to levy a one-time assessment of 75 to 90 cents for every
$100 in deposits against all SAIF-insured institutions in order to immediately
increase the SAIF reserve levels. Under this proposal, the BIF and SAIF would
be merged. Other proposals contemplate elimination of the separate thrift
charter and merger of the thrift and commercial banking industries. No final
action has been taken and no reliable prediction can be made as to how these
matters may ultimately be resolved or as to the impact that any such resolution
will have on the Company or Capital Bank.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (The
"Riegle-Neal Act"). The Riegle-Neal Act has introduced a process that will
enable nationwide interstate banking through bank subsidiaries and interstate
bank mergers. Separately the Riegle-Neal Act will also permit bank subsidiaries
to act as agents for each other across state lines. Effective September 29,
1995, the bill allows adequately capitalized and managed bank holding
companies to acquire control of a bank in any state. Any acquisitions will be
subject to concentration limits. Beginning June 1, 1997, banks will be
permitted to merge with one another across state lines. A state could
authorize such mergers earlier than June 1, 1997. In contrast, a state also
could choose to opt-out of interstate branching by enacting legislation before
June 1, 1997. The legislation preserves state laws which require that a bank
must be in existence for a minimum period of time before being acquired as
long as the requirement is five years or less. This legislation has immediate
relevance for the banking industry due to increased competitive forces from
institutions which may consolidate through mergers and those which may move
into new markets through enhanced opportunities to branch across state lines.
Florida Interstate Banking Acts. In 1994, the State of Florida amended the
Regional Reciprocal Banking Act of 1984 and the Florida Reciprocal Banking Act
(the "Florida Acts"), which regulate the acquisition of Florida banks and bank
holding companies. Under prior law, only bank holding companies from certain
enumerated southeastern states were allowed to acquire Florida banks and bank
holding companies. However, pursuant to the 1994 amendments, a bank holding
company that is located in any state in the United States that affords
reciprocity to Florida bank holding companies, and meets certain other
criteria, may acquire Florida banks or Florida bank holding companies.
The Federal Deposit Insurance Corporation Improvement Act of 1991. In 1991, a
comprehensive deposit insurance and banking reform plan, the Federal Deposit
Insurance Corporation Improvement Act of 1991 (the "FDICIA"), became law.
Although the FDICIA's primary purpose was to recapitalize the BIF, it also
affected the supervision and regulation of the banking industry. The FDICIA
authorizes regulators to take prompt corrective action to solve the problems of
critically undercapitalized institutions. As a result, banking regulators are
required to take certain supervisory actions against undercapitalized
institutions, the severity of which increases as an institution's level of
capitalization decreases. Pursuant to the FDICIA, the federal banking agencies
have established levels at which an insured institution is considered to be
"well capitalized," "adequately capitalized," "undercapitalized" or "critically
undercapitalized." See "Commercial Bank Regulations -- Prompt Corrective
Action" below for additional discussion.
The FDICIA required the federal banking agencies to revise their risk-based
capital requirements to include components for interest rate risk,
concentration of credit risk and the risk of non-traditional activities. See
"Commercial Bank Regulations--Regulatory Capital Requirements" below for a
further description of the final rule adopted by the FDIC that incorporated an
interest rate risk component in the risk-based capital requirement.
In addition, the FDICIA requires each federal banking agency to establish
standards relating to internal controls, information systems, and internal
audit systems that are designed to assess the financial condition and
management of the institution; loan documentation; credit underwriting;
interest rate exposure; asset growth; and compensation, fees and benefits. The
FDICIA also provided for the risk-based deposit insurance assessment system for
FDIC-insured depository institutions (see "Commercial Bank Regulations--
Insurance of Accounts" below). The FDICIA further requires annual on- site full
examinations of depository institutions, with certain exceptions, and annual
reports on the institution's financial and management controls.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (the
"FIRREA"), which was
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enacted in response to concerns regarding the soundness of the thrift industry,
brought about substantial changes in the federal deposit insurance system and
the regulatory environment in which depository institutions operate. The
FIRREA brought about a significant regulatory restructuring, limited depository
institutions' business activities, and increased depository institutions'
regulatory capital requirements.
The FIRREA also authorizes the FDIC to hold an FDIC-insured depository
institution liable for any loss incurred by, or reasonably expected to be
incurred by, the FDIC in connection with (i) the default of a commonly
controlled FDIC-insured depository institution or (ii) any assistance provided
by the FDIC to a commonly controlled FDIC-insured depository institution in
danger of default.
The FIRREA also terminated a judicially sanctioned practice whereby the banking
subsidiary of a bank holding company could insulate itself from the failure of
another banking subsidiary of the same bank holding company. Pursuant to the
provisions of FIRREA, a financial institution insured by the FDIC sharing
common ownership with a failed institution can be required to indemnify the
FDIC for its losses resulting from the insolvency of the failed institution,
even if such indemnification causes the affiliated institution also to become
insolvent.
Bank Holding Company Regulation
The Company is a bank holding company under the Bank Holding Company Act (the
"BHCA") and is subject to the regulations, examination, supervision and
reporting requirements of the Board of Governors of the Federal Reserve System
(the "Federal Reserve"). The Federal Reserve may impose restrictions on a
holding company when it determines that there is reasonable cause to believe
that the continuation of any particular activity constitutes a serious risk for
the financial safety, soundness or stability of the holding company's
subsidiary bank.
Regulatory Capital Requirements. The Federal Reserve has adopted guidelines
for the implementation of risk-based capital requirements for bank holding
companies. The guidelines revised the definition of capital and established
minimum capital standards in relation to assets and off-balance sheet exposures
as adjusted for credit and other risks. Total capital is divided into two
tiers. Tier one capital is composed of common stockholders equity, certain
perpetual preferred stock and minority interest in the equity accounts of
consolidated subsidiaries. Goodwill and certain intangible assets are deducted
from tier one capital. Tier two capital generally includes the Company's
allowance for loan losses. For purposes of meeting the capital tests, tier two
capital cannot exceed 100% of tier one capital. In addition, the amount of the
allowance for loan losses includable in tier two capital is limited to 1.25% of
total risk- weighted assets, as defined. The risk-based capital guidelines
require that the Company meet minimum ratios of capital to risk-weighted assets
of 4% and 8% for tier one capital and total risk-based capital (tier one and
tier two), respectively.
The Federal Reserve has also adopted leverage ratio capital guidelines to
complement the risk-based capital ratio requirement. Under the guidelines, the
Company is required to maintain a minimum ratio of capital, defined to equal the
tier one capital described above, to average quarterly assets of 3% or such
higher level as may be required by the Federal Reserve. The Company has not
been directed to maintain a leverage ratio higher than the minimum level.
However, the Federal Reserve has publicly stated its expectation that most bank
holding companies should maintain a leverage ratio of 1% to 2% above the
minimum requirement.
At December 31, 1995, the Company's tier one capital to risk-weighted assets
was 11.23%, its total capital to aggregate risk-weighted assets was 12.48% and
its leveraged capital-to-assets ratio was 7.97%. The Company historically has
not included certain assets of Capital Factors in its capital ratio
calculations. In 1995, banking regulators issued new instructions for the
reporting of total assets in the Consolidated Report of Condition (the "Call
Report"), effective March 31, 1997. As a result of a review of the new
instructions, management believes that the Company may be required to include
the Capital Factors assets for capital calculation purposes. Management is
seeking clarification as to the applicability of the new instructions to the
Company. If these assets were included, at December 31, 1995 the Company's
tier one risked-based ratio would have been 9.94%, its total risk-based
ratio would have been 11.19% and its leverage ratio would have been 7.25%.
These capital ratios would have been in compliance with all regulatory
requirements and expectations at December 31, 1995.
Payment of Dividends. The Company's ability to pay dividends is governed by
Florida corporate law and its compliance with the above-discussed capital
ratios. Pursuant to the applicable statute, the Company may pay dividends in
any amount unless, after giving
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<PAGE> 8
effect to the payment of the dividend, the Company would be unable to pay its
debts as they become due in the usual course of business or the Company's
assets would be less than its liabilities.
The payment of dividends by a Florida-chartered bank is governed by the Florida
Financial Institutions Codes. In general, a Florida-chartered bank may pay
quarterly, semiannual or annual dividends of so much of the aggregate net
profits of that period, combined with the retained net profits for the
preceding two years, as the bank's directors deem expedient. Prior to
declaring any such dividend, however, at least 20% of the net profits for such
preceding period covered by the dividend must be carried to surplus until
surplus equals or exceeds the aggregate of common and preferred equity.
Activities Limitations. The BHCA generally limits the business in which a bank
holding company may engage to banking, managing or controlling banks, and
non-banking activities that the Federal Reserve has determined, by regulation
or order, to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.
Commercial Bank Regulation
Capital Bank, as a Florida-chartered commercial bank, is subject to supervision
by the Department of Banking and Finance of the State of Florida. Such
supervision includes periodic examinations, periodic reporting requirements,
limitations on investment and other powers and regulation of the establishment
and operation of branches. Deposits are insured by the BIF of the FDIC.
Insurance of Accounts. Capital Bank's deposits are insured by the BIF up to
$100,000 for each insured account holder, the maximum currently permitted by
law. Pursuant to the FDICIA, the FDIC adopted risked-based insurance premiums
effective January 1, 1993. Under such premiums, institutions are divided into
three groups -- well capitalized, adequately capitalized and undercapitalized
- -- based on criteria consistent with those established to the prompt corrective
action provisions of the FDICIA. Each of these groups is further divided into
three subgroups, based on a subjective evaluation of supervisory risk to the
insurance fund posed by the institution.
Regulatory Capital Requirements. The FDIC has adopted regulatory capital
requirements for assessing bank capital adequacy that are substantially
identical to those required for the Company by the Federal Reserve. Banks must
maintain a minimum leverage ratio of at least 4% and a capital to risk-weighted
assets ratio of at least 8%. At December 31, 1995, Capital Bank's tier one
capital to risk-weighted assets was 10.77%, its total capital to aggregate
risk-weighted assets was 12.03% and its leveraged capital-to-assets ratio was
7.66%. Pursuant to applicable regulations, Capital Bank would be deemed "well
capitalized."
Prompt Corrective Action. The FDIC and other federal regulators have
established capital levels of institutions to implement the "prompt corrective
action" provisions of the FDICIA. Capital levels have been established for
which an insured institution will be categorized as well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized. The FDICIA requires federal banking regulators,
including the FDIC, to take prompt corrective action to resolve the problems of
those institutions that fail to satisfy their applicable minimum capital
requirements. The level of regulatory scrutiny and restrictions imposed become
increasingly severe as an institution's capital level falls.
A "well capitalized" institution must have risk-based capital of 10% or more,
leverage capital of 5% or more and Tier 1 risk-based capital of 6% or more and
may not be subject to any written agreement, order, capital directive or prompt
corrective action directive. Capital Bank is a well capitalized institution
under the definitions as adopted. An institution will be categorized as
"adequately capitalized" if it has total risk-based capital of 8% or more,
leverage capital of 4% or more and Tier 1 risked-based capital of 4% or more;
"undercapitalized" if it has total risk-based capital of less than 8% or
leverage capital of less than 4% and Tier 1 risked-based capital of less than
4%; "significantly undercapitalized" if it has total risk-based capital of less
than 6% or leverage capital of less than 3% or Tier 1 risked-based capital of
less than 3%; and "critically undercapitalized" if it has a ratio of tangible
equity to total assets equal to or less than 2%.
In the case of an institution that is categorized as "undercapitalized," such
an institution must submit a capital restoration plan to the appropriate
agency. An undercapitalized depository institution generally will not be able
to acquire other banks or thrifts, establish additional branches or engage in
any new lines of business unless consistent with its capital plan. A
"significantly undercapitalized" institution will
- 8 -
<PAGE> 9
be subject to additional restrictions on its affiliate transactions, the
interest rates paid by the institution on its deposits, asset growth, senior
executive officers' compensation and activities deemed to pose excessive risk
to the institution. Regulators may also order a significantly undercapitalized
institution to hold a new election of directors, terminate any director or
senior executive officer employed for more than 180 days prior to the time the
institution became significantly undercapitalized, or hire qualified senior
executive officers approved by the regulators.
The FDICIA provides that an institution that is "critically undercapitalized"
must be placed in conservatorship or receivership within 90 days of being
categorized as such unless the institution's regulator and the FDIC jointly
determine that some other course of action would result in a lower resolution
cost to the institution's insurance fund. Thereafter, the institution's
regulator must periodically reassess its determination to permit a particular
critically undercapitalized institution to operate and must appoint a
conservator or receiver for the institution at the end of an approximately
one-year period following the institution's initial classification as
critically undercapitalized, unless a number of stringent conditions are met,
including a determination by the regulator and the FDIC that the institution
has positive net worth and a certification by such agencies that the
institution is viable and is not expected to fail.
In addition to the foregoing prompt corrective action provisions, the FDICIA
also sets forth requirements that the federal banking agencies, including the
FDIC, review their capital standards every two years to ensure that their
standards require sufficient capital to facilitate prompt corrective action and
to minimize loss to the SAIF and BIF.
Transactions with Affiliates. Capital Bank is subject in its dealings with
companies that are affiliates (but not subsidiaries) of Capital Bank to certain
provisions of the Federal Reserve Act and Regulation O. Under Section 23A of
the Federal Reserve Act, an "affiliate" of a depository institution is defined
generally as (i) any company that controls the institution and any other
company that is controlled by the company that controls the institution,
(ii) any company that is controlled by the shareholders who control the
institution or any company that controls the institution, or (iii) any company
that is determined by regulation or order to have a relationship with the
institution (or any subsidiary or affiliate of the institution) such that
"covered transactions" with the company may be affected by the relationship to
the detriment of the institution. "Control" is determined to exist if a
percentage stock ownership test is met or if there is control over the
election of directors or the management or policies of the company or
institution. "Covered transactions" generally include loans or extensions of
credit to an affiliate, purchases of securities issued by an affiliate,
purchases of assets from an affiliate (except as may be exempted by order or
regulation) and certain other transactions. The Federal Reserve Act requires
that covered transactions and certain other transactions with affiliates be
on terms and conditions consistent with safe and sound banking practices or
on terms comparable to similar transactions with non-affiliated parties, and
imposes qualitative restrictions on the amount of and collateralization
requirements on covered transactions.
Sections 22(g) and 22(h) of the Federal Reserve Act impose limitations on loans
and extensions of credit from an institution to its executive officers,
directors and principal stockholders and each of their related interests.
Florida Regulation. Capital Bank, as a Florida-chartered bank, is subject to
the supervision and control of, and is regularly examined by, the Florida
Department of Banking and Finance (the "FDBF"). Capital Bank is also affected
by various requirements to maintain collateral to secure public funds deposits,
restrictions on interest rates that may be charged on loans and limitations on
the type of investments which may be made. In connection with examinations
performed in the conduct of their normal regulation and supervision, the FDBF
may impose a variety of remedies if a supervised bank is found to be operating
in an unsafe and unsound manner. Such remedies include, but are not limited
to, restrictions on dividend payments, maintenance of capital ratios higher
than the minimum requirements, growth limits and other operating restrictions
or requirements.
Community Reinvestment Act. Under the Community Reinvestment Act (the "CRA"),
as implemented by the FDIC, a bank has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
the communities served by the bank's offices, including low- and
moderate-income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop types of products and services that it
believes are best suited to its particular community. The CRA requires the
FDIC to assess, as part of its examination of a financial institution, the
institution's performance in meeting the credit needs of its community and to
take such assessments
- 9 -
<PAGE> 10
into consideration in reviewing certain applications. The FIRREA amended the
CRA to require public disclosure of an institution's CRA performance using the
ratings of "outstanding," "satisfactory," "needs to improve," or "substantial
noncompliance." Based upon an FDIC examination conducted as of May 22, 1995,
Capital Bank's CRA rating is outstanding.
CAPITAL FACTORS REGULATION
Capital Factors, as a subsidiary of Capital Bank which is in turn owned by the
Company, is subject to periodic examination by representatives of the Florida
Banking Department, the FDIC and the Federal Reserve. Capital Factors is also
limited in its business activities to those activities that are authorized for
direct or indirect subsidiaries of bank holding companies by the BHCA and
Regulation Y promulgated thereunder. In addition, FIRREA limits state
chartered institutions and their subsidiaries to engaging only in those
activities that are authorized for national banks and their subsidiaries.
Factoring, as well as the other businesses in which Capital Factors currently
engages, is an authorized activity of a national bank and pursuant to the BHCA.
- 10 -
<PAGE> 11
ITEM 2. PROPERTIES
The principal properties of the Company include branch and administrative
offices used by the Bank and Capital Factors. The principal office of the
Company and Capital Bank is located at 1221 Brickell Avenue, Miami, Florida,
where the Company occupies approximately 64,300 square feet of office space.
The lease for such property expires in 1997, and has renewal options through
2007. The Bank operates 28 branch offices in Dade, Broward and Palm Beach
counties, Florida, 11 of which are fully owned, 13 of which are fully leased,
and 4 of which include buildings owned by the Bank which are located on land
subject to long-term leases. Additionally, various administrative and other
non-branch departments occupy office space generally contiguous with a branch
office. Capital Factors owns its main office property in Ft. Lauderdale
(Broward County), Florida and leases space for its offices in New York, Los
Angeles and Charlotte. Management believes its properties to be satisfactory
for the operations conducted at each.
- 11 -
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to or involved in the following legal and administrative
proceedings:
Nathan J. Esformes, Stanley I. Worton, M.D., and Leonard Wein, as individual
shareholders and on behalf of all other shareholders of Capital Bancorp v. Abel
Holtz, Fana Holtz, Daniel M. Holtz, Javier J. Holtz, Capital Bank and Capital
Bancorp, Circuit Court for the 11th Judicial District in and for Dade County,
Florida (Case No. 95-02515).
On February 8, 1995, certain shareholders of the Company commenced a derivative
action against the Company, Daniel M. Holtz, the Chairman of the Board,
President and Chief Executive Officer of the Company, Fana Holtz, the Vice
Chairman of the Board, Javier Holtz, a director of Capital Bank, and Abel
Holtz, the former Chairman of the Board, President and Chief Executive Officer
of the Company (the "Derivative Action"). The Derivative Action was
subsequently amended to add, among other things, the remaining members of the
Board of Directors as defendants. Through the Derivative Action, the
plaintiffs alleged that certain defendants engaged in a series of illegal
activities causing harm to the Company and Capital Bank, including (i) the
settlement of a sexual harassment claim, (ii) the payment of excessive
compensation and separation payments, (iii) the appointment of unqualified
family members as officers, (iv) the withholding of information and (v) the
misappropriation of Capital Bank funds for personal uses. The plaintiffs also
alleged that such individuals engaged in a series of activities designed to
improperly increase or maintain their interest in, and control of, the Company,
including (i) the unlawful use of proxies, (ii) the prevention of
investigations and shareholder meetings, (iii) the unlawful alteration of the
composition of the Company's Board of Directors and (iv) the failure to obtain
approval for a change in control.
The Board of Directors of the Company established an independent committee to
investigate the allegations contained in the Derivative Action and to hire
independent legal counsel. Thereafter, the plaintiffs alleged that the
independent committee was not independent because members were invalidly
elected by the Board and because such members knew or should have known about
the alleged illegal proxy solicitation and alleged fraudulent actions by the
other defendants. Upon motion of the defendants, the complaint was dismissed
without prejudice in November 1995 for containing legal argument, which the
court ruled to be improper. The Court allowed for the filing of an amended
complaint, but stayed the proceedings and any required response to an amended
complaint until the independent committee has a reasonable period of time to
complete its review.
An amended complaint was filed in December 1995 containing substantially the
same allegations. A new director and former director of the Company were added
as defendants, while another former director of the Company was removed as a
defendant. The plaintiffs are seeking, on behalf of the Company, unspecified
monetary damages, including treble damages, reasonable costs and attorneys'
fees, and injunctive relief (i) precluding Fana Holtz from voting shares for
which she has proxies, (ii) setting aside a February 27, 1995 shareholders'
meeting, (iii) reinstating two former directors, (iv) precluding the current
Board from taking any action and (v) returning certain shares to the Company.
No motions seeking such relief have been filed. No monetary relief is sought
from the Company and no count specifically seeks relief from the Company.
Stanley I. Worton, M.D., Nathan J. Esformes, et al., v. Abel Holtz, Fana Holtz,
Daniel Holtz, Alex Halberstein and Capital Bancorp, Circuit Court for the 11th
Judicial District in and for Dade County, Florida (Case No. 95-02520).
Also on February 8, 1995, a shareholder of the Company commenced an individual
action against the Company, Daniel Holtz, Fana Holtz and Abel Holtz. Such
action alleged that the defendants, other than the Company, breached fiduciary
duties owed to the plaintiff by, among other things, improperly using proxies
to vote shares of the Company owned by the plaintiff and another shareholder to
engage in improper activity and to promote their personal interest to the
detriment of the plaintiff. In support of the complaint, the plaintiff
asserted many of the same allegations contained in the Derivative Action.
Thereafter, the plaintiff filed an amended complaint pursuant to which an
additional plaintiff was added (both plaintiffs are named plaintiffs in the
Derivative Action) and all the existing and certain former directors of the
Company were added as defendants. The amended complaint alleged that certain
of the defendants unlawfully solicited proxies for a shareholders' meeting and
that the actions taken at this meeting, including the reduction in the size of
the Board, were invalid. The amended complaint also sought a court order
directing the Company to hold a shareholders' meeting on or before May 28, 1995
to elect a board of directors (although the required papers to have a hearing
on the matter have not been filed).
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<PAGE> 13
Upon motion of the defendants, the amended complaint was dismissed without
prejudice for containing legal argument, which the court ruled to be improper.
The Court dismissed with prejudice the plaintiff's request to terminate the
proxies granted by the non-plaintiff shareholder. The Court allowed for the
filing of an amended complaint, but stayed the proceedings as to certain claims
until the independent committee has a reasonable period of time to complete its
review. The Court also indicated that certain counts of the complaint did not
properly plead the elements for injunctive relief. An amended complaint was
filed in December 1995 containing substantially the same allegations. The
plaintiffs seek unspecified monetary damages and costs and, in addition to the
injunctive relief requested in the Derivative Action, plaintiffs seek (i) a
termination of the proxy granted by one of the plaintiffs, (ii) to prevent
Daniel Holtz from voting proxies, (iii) a constructive trust for shares and
options obtained as a result of an alleged breach of fiduciary duty, (iv) an
order returning to one of the plaintiffs his percentage of any shares obtained
by members of the Holtz family because of the control group created by the
proxies, (v) a meeting of shareholders and (vi) reinstatement of one of the
plaintiffs to the Board of Directors and invalidation of the actions of the
current Board (although the required papers to hold a hearing on the matter
have not been filed). Plaintiffs also seek declaratory relief invalidating the
proxies and former actions with respect to which the proxies were voted. The
plaintiffs have not indicated that they are seeking any monetary relief from
the Company other than costs. The Company has filed a motion to dismiss the
two counts of the complaint in the individual action in which it is named and
has moved to stay certain other counts of the complaint on the grounds that
those claims are derivative. The Company does not believe that the outcome of
the foregoing litigation matters will have a material adverse effect on the
Company's financial condition, results of operation or liquidity.
The Company has not determined whether, if asked, it would indemnify directors
and former directors named in this action if the plaintiffs are successful,
although it is currently advancing the legal expenses of the outside directors
who were named as defendants. Such defendants have agreed to repay the Company
for all or any portion of such advances which they are ultimately found not to
be entitled to pursuant to applicable law. Based on the information currently
available to the Company, management does not believe that the indemnification
of the directors named as defendants in the above litigation will have a
material adverse effect on the financial condition, results of operations or
liquidity of the Company. However, the actual effects of such indemnification
on the Company cannot be finally determined until the amount of such
indemnification, if any, is fixed. For more information regarding
indemnification of directors and officers of the Company, see "Certain
Relationships and Related Transactions" in Item 13 hereof.
Other Litigation
Various other legal actions and proceedings are pending or threatened against
the Company, Capital Bank and Capital Factors, certain of which seek relief or
damages in amounts that are substantial. Unlike the aforementioned matters,
however, these actions or proceedings arose in the ordinary course of business.
Due to the complex nature of these matters, it may be years before they are
ultimately resolved. After consultation with legal counsel, management
believes that such matters, will not have a material adverse effect on the
Company's consolidated financial condition, results of operations or liquidity.
Regulatory Matters
As of February 14, 1996, Daniel Holtz, Chairman of the Board, President and
Chief Executive Officer of the Company, Fana Holtz, the Vice-Chairman of the
Board, and Javier Holtz, a director of Capital Bank, owned and/or had the power
to vote, approximately 7%, 40% and 4% (51% in the aggregate), respectively, of
the Company's Common Stock (including shares of Common Stock subject to options
exercisable by such individuals within 60 days), none of which shares are being
offered for sale hereunder. Fana Holtz, Daniel Holtz, and Javier Holtz have
advised the Company that they had discussions with the FDBF as to whether one
or more of them was required under Florida law to file an application to
acquire and/or maintain a controlling interest in Capital Bank through their
ownership and control of the Company. As a result of those discussions, Fana
Holtz, Daniel Holtz and Javier Holtz have advised the Company that they, both
individually and as a group, have voluntarily filed an application to acquire
and/or maintain a controlling interest in the Company, although they do not
believe such an application is legally required. Fana Holtz, Daniel Holtz and
Javier Holtz are also having discussions with the Federal Reserve as to whether
a control filing is required under federal law. The plaintiffs and another
shareholder in the above-described litigations have filed a Notice of Intent to
Appear and Petition for a Formal Administrative Hearing with the FDBF in
connection with the disposition of the Florida application. A hearing date has
been set for August 1996. It cannot be presently determined what effect, if
any, the discussions with Federal
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<PAGE> 14
Reserve and the FDBF's action on the application will have on the Company,
although if control applications ultimately were determined to be required and
such applications were denied, regulatory authorities could take various
actions, including requiring that one or more members of the Holtz family
divest sufficient shares of the Company so as not to have legal control of the
Company as defined by regulatory authorities.
Abel Holtz, the former Chairman of the Board, President and Chief Executive
Officer of the Company and currently a shareholder of the Company is subject to
the restrictions of Section 19 of the Federal Deposit Insurance Act which
preclude him from controlling or otherwise participating in the affairs of the
Company or Capital Bank. Abel Holtz has advised the Company that he has orally
agreed with the FDIC not to vote his shares of the Company at the present time.
Federal bank regulatory authorities are also examining and investigating
whether Abel Holtz and some or all of the persons discussed in the paragraph
above, including the Company and its subsidiaries, and possibly other persons,
are in compliance with applicable change in control laws and Section 19. To
date, the Company is unaware of any conclusions which may have resulted from
these inquiries.
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<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 1995.
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<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Trading Market
Effective July 27, 1995, the Company's Common Stock was listed for trading on
the Nasdaq National Market under the trading symbol "CBCP." Prior to that
date, there was no established public trading market for the Common Stock. The
high and low sales prices of the Company's Common Stock since the commencement
of public trading are set forth below, for the periods indicated:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
September 30, 1995 December 31, 1995
------------------ -----------------
<S> <C> <C>
High $31 $37 1/2
Low 24 25 1/2
Close 26 34 3/4
</TABLE>
Stockholders
As of March 25, 1996, there were approximately 524 holders of record of the
Company's common stock and the closing price as quoted on the Nasdaq National
Market was $29.75.
Dividends
The following table reflects the annual dividends per share of the Company's
Common Stock that have been declared during 1995 and 1994. Dividends were paid
in equal quarterly amounts.
<TABLE>
<CAPTION>
Year Amount Per Share
- ---- ----------------
<S> <C>
1995 $.33 1/3 (1)
1994 $.33 1/3 (1)
</TABLE>
- --------------
(1) Adjusted to reflect the 3-for-2 stock split in the form of a 50% stock
dividend which was effective on June 22, 1995.
The Company anticipates that it will continue payment of regular dividends to
its shareholders; however, there can be no assurance as to payment of such
future dividends. The Company's ability to pay dividends to its shareholders
is primarily dependent on the ability of the Bank and its subsidiaries to pay
dividends to the Company. Such payment is dependent on the Bank's earnings and
financial condition, its needs for future capital and other factors. The Bank
is also limited by Florida law as to the amount of dividends it can pay. See
"Supervision and Regulation" under Item 1 hereof. Factors Holding does not
currently pay dividends to the Bank.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The following table presents the historical summary of selected consolidated
financial data of Capital Bancorp and Subsidiaries for the years ended December
31, 1991 through 1995.
This data should be read in conjunction with the consolidated financial
statements of Capital Bancorp and Subsidiaries contained in Item 8 herein.
SELECTED CONSOLIDATED FINANCIAL DATA
(In Thousands except per share data and ratios)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income $ 109,331 $ 84,563 $ 77,270 $ 77,124 $ 91,592
Interest expense 41,752 25,114 20,474 28,430 48,334
Net Interest income 67,579 59,449 56,796 48,694 43,258
Provision for loan losses 3,600 3,525 9,500 8,900 13,215
Provision for doubtful
accounts - factoring subsidiary 2,235 2,235 2,645 3,150 2,550
Other income (1) 46,106 41,948 40,199 35,111 35,371
Other expenses 80,288 74,459 67,713 60,934 56,026
Net income 17,101 13,204 11,769 8,190 5,490
Return on average assets 1.20% 1.04% 0.96% 0.69% 0.48%
Return on average equity 16.71% 15.10% 14.70% 11.57% 8.44%
Net interest margin, taxable
equivalent 5.91% 5.99% 6.03% 5.52% 4.88%
PER SHARE DATA (2):
Net income (3) $ 2.20 $ 1.80 $ 1.61 $ 1.16 $ 0.81
Cash dividends declared 0.33 0.33 0.33 0.27 0.27
Stockholders' equity
(at year end) 15.26 12.85 12.25 10.63 9.79
Dividend payout ratio 15.00% 18.52% 20.66% 22.99% 33.06%
Average common equivalent
shares - fully diluted 7,769,992 7,346,747 7,297,522 7,047,935 6,793,961
BALANCE SHEET DATA:
Total assets $1,593,119 $1,319,862 $1,206,041 $1,272,207 $1,170,311
Loans, net 714,254 636,637 547,076 552,390 592,631
Factored accounts receivable,
net 319,910 248,142 220,794 177,568 153,073
Deposits 1,038,755 876,793 915,848 934,356 876,702
Other borrowings 86,133 87,236 59,566 116,595 103,518
Long-term debt 176,650 126,980 2,605 3,855 5,355
Stockholders' equity 113,725 91,363 84,673 74,549 66,503
CAPITAL RATIOS:
Average equity to average assets 7.16% 6.86% 6.51% 5.96% 5.66%
Tier 1 Leverage Ratio 7.97%(4) 7.58% 7.30% 6.18% 5.85%
Tier 1 Risk-Based Ratio 11.23%(4) 9.68% 9.23% 8.21% 7.45%
Total Risk-Based Ratio 12.48%(4) 10.82% 10.48% 9.46% 8.18%
</TABLE>
- -------------------------------
(1) Includes securities gains of $12, $1,213, $632, $106 and $4,063 for the
years ended 1995, 1994, 1993, 1992 and 1991, respectively.
(2) Adjusted for the 3-for-2 stock split effected in the form of a 50% stock
dividend in June 1995.
(3) Calculated based of fully diluted common and common equivalent shares
outstanding.
(4) The Company historically has not included certain assets of
Capital Factors in its capital ratio calculations. In 1995, banking
regulators issued new instructions for the reporting of total assets in
the Consolidated Report of Condition (the "Call Report"), effective
March 31, 1997. As a result of a review of the new instructions,
management believes that the Company may be required to include the
Capital Factors assets for capital calculation purposes.
- 17 -
<PAGE> 18
Management is seeking clarification as to the applicability of the new
instructions to the Company. If these assets were included, at December 31,
1995 the Company's leverage ratio would have been 7.25%, its Tier one
risked-based ratio would have been 9.94% and its total risk-based ratio
would have been 11.19%. These capital ratios would have been in compliance
with all regulatory requirements and expectations at December 31, 1995.
- 18 -
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Capital Bancorp ("Bancorp") is a bank holding company which conducts operations
principally through Capital Bank (the "Bank"), a wholly-owned subsidiary, and
Capital Factors Holding, Inc., a wholly-owned subsidiary of the Bank. The Bank
operates a commercial banking franchise through 28 offices located in the South
Florida area. Capital Factors Holding, Inc. and its subsidiaries ("Capital
Factors") provides accounts receivable factoring and asset based lending
services through offices located in Ft. Lauderdale, Florida, New York, New
York, Los Angeles, California and Charlotte, North Carolina.
Throughout this discussion, Bancorp and its subsidiaries are collectively
referred to as the "Company."
FINANCIAL CONDITION
Overview
During 1995, total consolidated assets increased $273.3 million, or 21%, to
$1.6 billion. This increase included increases of $192.8 million in interest
earning assets and $80.5 million in non-interest earning assets. The increase
in total consolidated assets was comprised primarily of increases of $107.2
million in cash and cash equivalents, $77.6 million in net loans, $71.8 million
in net accounts receivable - factoring subsidiary and $19.5 million in total
securities offset by a decrease of $7.9 million in other real estate.
The increase in total consolidated assets was funded primarily by deposits,
borrowings by Capital Factors and retained earnings. Total deposits increased
$162.0 million, or 18%. In July 1995, Capital Factors caused the issuance of
$50.0 million of senior certificates, bringing the total outstanding to $175.0
million at December 31, 1995. Total consolidated liabilities increased $250.9
million to $1.5 billion. The growth in liabilities included $170.9 million in
interest bearing balances and $80.0 million in non-interest bearing balances.
Total equity increased $22.4 million, to $113.7 million, primarily as a result
of earnings in excess of dividends paid.
See Table 8 below for a distribution of identifiable assets and liabilities
associated with the Company's major lines of business.
Securities
The increase in total securities primarily consisted of purchases of $83.1
million in U.S. Agency securities and $6.1 million in U.S. Government
obligations and a reduction in the unrealized loss on securities available for
sale of $5.9 million offset by maturities, calls and paydowns of $35.0 million
in U.S. Government obligations, $34.8 million in U.S. Agency securities and
$5.0 million in other securities.
The Company's securities holdings are segregated into three separate
portfolios: held to maturity, available for sale and trading. At December 31,
1995 and 1994, the Company held no trading securities. Securities classified
as held to maturity are reported at historical cost, adjusted for amortization
of premiums and accretion of discounts. Securities classified as available for
sale are reported at market value. Any unrealized gain or loss, net of
applicable income taxes, is reported as a separate addition to or reduction
from stockholders' equity.
Securities held to maturity includes securities purchased with the ability and
positive intent to hold until maturity. Such securities are purchased for
yield purposes. Securities available for sale are also acquired for yield, and
are also used in the management of overall liquidity and interest rate risk.
In December 1995, certain provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," were temporarily suspended. Among other things, SFAS
No. 115 governs the transfer of securities between the held to maturity and
available for sale portfolios. During this time period, management
re-evaluated the distribution of securities holdings, and, in order to achieve
enhanced flexibility to manage liquidity and interest rate risk, transferred
holdings with an aggregate book value of approximately $53 million from the
held to maturity portfolio to the available
- 19 -
<PAGE> 20
for sale portfolio. The securities transferred had aggregate unrealized gains
of approximately $900,000 at the time of transfer. As a result, as of December
31, 1995, approximately 90% of all securities held are classified as available
for sale. Table 1 presents the book value of securities held as of the dates
indicated.
Table 2 presents the maturity distribution and weighted average yields of
securities held as of December 31, 1995. See Note 3 to the consolidated
financial statements for additional information on securities.
Included in other securities available for sale are debt securities issued by
foreign governments with aggregate market values of $3.1 million, $2.5 million
and $5.0 million at December 31, 1995, 1994 and 1993, respectively. The
amortized cost of these securities was $5.1 million for the respective dates.
These foreign debt securities were received in exchange for non-performing
loans in connection with Brady plan restructurings by Argentina and Mexico.
These securities mature in 2019 to 2023 and are collateralized, as to
principal, by U.S. Treasury zero-coupon securities which will accrete to the
face value of the foreign security at their maturity. At the current time,
management has no intention of disposing of these foreign securities.
- 20 -
<PAGE> 21
TABLE 1
COMPOSITION OF INVESTMENT SECURITIES
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
SECURITIES HELD TO MATURITY,
at amortized cost:
U.S. Government agency
obligations $ 16,016 $ 82,649 $ 37,879
State and Municipal
obligations 3,090 3,771 5,131
Other securities 4,390 4,611 5,802
-------- -------- ---------
Total securities held
to maturity $ 23,496 $ 91,031 $ 48,812
======== ======== =========
Aggregate market value $ 24,173 $ 89,122 $ 49,752
======== ======== =========
Gross unrealized gains $ 677 $ 373 $ 959
======== ======== =========
Gross unrealized losses $ -- $ 2,282 $ 19
======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE,
at market value:
U.S. Treasury and Government
agency obligations $212,854 $121,415 $118,848
Other securities 4,154 8,603 12,153
-------- -------- --------
Total securities
available for sale $217,008 $130,018 $131,001
======== ======== ========
Aggregate amortized cost $217,005 $135,871 $127,762
======== ======== ========
Gross unrealized gains $ 2,129 $ 151 $ 4,551
======== ======== ========
Gross unrealized losses $ 2,126 $ 6,004 $ 1,312
======== ======== ========
</TABLE>
- 21 -
<PAGE> 22
TABLE 2
MATURITY AND YIELD OF INVESTMENT SECURITIES
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Weighted
Average Yield
as of
TYPE AND MATURITY GROUPING December 31, 1995 December 31, 1995
----------------- -----------------
<S> <C> <C>
Securities Held to Maturity:
U.S. Government agency
obligations (1):
Within one year $ -- --
After one year, but within five years 14,016 6.92%
After five years, but within ten years 2,000 7.16%
After ten years -- --
-------- -----
Total 16,016 6.95%
-------- =====
State and Municipal
obligations (2):
Within one year 250 13.49%
After one year, but within five years 559 14.86%
After five years, but within ten years 2,281 10.72%
After ten years -- --
-------- -----
Total 3,090 11.69%
-------- =====
Other securities:
Within one year -- --
After one year, but within five years 840 10.53%
After five years, but within ten years 3,500 7.93%
After ten years (3) 50 --
-------- -----
Total 4,390 8.34%
-------- =====
Total securities held to maturity $ 23,496 7.83%
======== =====
</TABLE>
- ------------------------------
(1) Mortgage-backed securities are included based upon the projected final
maturity.
(2) Yields of tax-exempt securities are stated on a tax-equivalent basis,
using a Federal tax rate of 35%.
(3) Includes equity securities with no fixed maturity.
- 22 -
<PAGE> 23
TABLE 2 (Continued)
MATURITY AND YIELD OF INVESTMENT SECURITIES
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Weighted
Average Yield
as of
TYPE AND MATURITY GROUPING December 31, 1995 December 31, 1995 (2)
----------------- ---------------------
<S> <C> <C>
Securities Available for Sale:
U.S. Treasury and
Government agency
obligations (1):
Within one year $ 67,540 5.65%
After one year, but within
five years 104,189 6.23%
After five years, but within
ten years 17,529 6.78%
After ten years 23,596 7.10%
---------- ----
Total 212,854 6.19%
---------- ====
Other securities:
Within one year 1,017 8.88%
After one year, but within
five years -- --
After five years, but within
ten years -- --
After ten years 3,137 5.68%
---------- ----
Total 4,154 6.46%
---------- ====
Total securities available
for sale $ 217,008 6.20%
========== ====
</TABLE>
- ------------------------
(1) Mortgage-backed securities are included based upon the projected final
maturity.
(2) Weighted average yield is computed based on amortized cost.
- 23 -
<PAGE> 24
Loans
During 1995, total loans increased $80.1 million, or 12%, with increases in all
major categories. Table 3 provides a five-year summary of the Company's loan
portfolio. Table 4 presents the maturity distribution of loans.
Commercial loans increased $43.5 million, or 27%, reflecting primarily customer
demand. Asset-based loans made by Capital Factors represented $27.8 million of
this increase. At year end 1995, Capital Factors' asset-based loans aggregated
$38.3 million.
Foreign loans increased $12.3 million, or 11%, reflecting the results of
marketing efforts in the international trade finance area. Loans to foreign
banks are derived primarily from the Company's short-term trade finance
activities in Central and South America.
Substantially all of the Company's real estate lending is commercial in nature,
including construction financing and short-term (5-7 years) first mortgages on
income producing properties. Real estate construction loans increased $14.4
million, or 20%, during 1995 as a result of new home demand in the Company's
South Florida market area.
Consumer loans include installment loans, home equity and other consumer credit
lines, and credit cards. Installment financing, primarily of automobiles,
represent the largest portion of these loans, amounting to approximately $123
million and $115 million of total consumer loans at December 31, 1995 and 1994,
respectively. The increase in installment loans is primarily attributable to
automobile loans originated indirectly by dealers.
See Business in Item 1 hereof and Asset Quality Review below for additional
discussion of lending activities, including certain risk elements.
- 24 -
<PAGE> 25
TABLE 3
COMPOSITION OF LOAN PORTFOLIO
(In Thousands of Dollars)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and financial $207,357 $163,893 $157,340 $149,879 $195,274
Foreign
Banks 109,997 89,500 49,701 92,680 83,261
Commercial and
industrial 17,626 25,816 34,462 44,555 29,975
-------- -------- -------- -------- --------
Total foreign 127,623 115,316 84,163 137,235 113,236
Real estate construction 84,402 70,049 70,253 82,951 94,346
Real estate mortgage 147,082 145,119 136,823 112,364 135,845
Consumer 159,461 150,682 113,373 86,014 70,902
Other 2,754 3,559 6,224 2,200 3,284
-------- -------- -------- -------- --------
$728,679 $648,618 $568,176 $570,643 $612,887
======== ======== ======== ======== ========
</TABLE>
TABLE 4
CONTRACTUAL MATURITY OF
LOAN BALANCES (1)
(In Thousands of Dollars)
<TABLE>
<CAPTION>
ONE YEAR AFTER
ONE YEAR THROUGH FIVE
OR LESS 5 YEARS (2) YEARS (2) TOTAL
-------- ----------- ----------- -----
<S> <C> <C> <C> <C>
Commercial and
financial $161,250 $ 38,810 $ 6,133 $206,193
Foreign:
Banks 107,170 -- 755 107,925
Commercial and
industrial 17,626 -- -- 17,626
-------- -------- -------- --------
Total foreign 124,796 -- 755 125,551
Real estate
construction 36,170 36,939 11,293 84,402
Real estate mortgage 26,017 99,858 19,543 145,418
Consumer 35,964 114,104 7,403 157,471
Other 2,754 -- -- 2,754
-------- -------- -------- --------
$386,951 $289,711 $ 45,127 $721,789
======== ======== ======== ========
</TABLE>
- -----------------
(1) Excludes non-accrual loans aggregating $6,890.
(2) The total amount of loans due after one year which have predetermined
interest rates is $273,892. The total amount of loans with
floating or adjustable interest rates due after one year is $60,946.
- 25 -
<PAGE> 26
Accounts Receivable
Accounts receivable - factoring subsidiary, net increased $71.8 million over
year end 1994 levels to $319.9 million as a result of an overall increase in
factoring volume. During 1995, Capital Factors opened a fourth office in
Charlotte, North Carolina. Capital Factors also operates factoring offices in
New York, New York, Los Angeles, California and Fort Lauderdale, Florida.
Capital Factors purchases receivables from its clients and records a liability
payable to the clients at the time of such purchase. From time to time, the
liability is reduced by advance payments by Capital Factors to the clients,
prior to the contractual payment date for the receivables purchased. Such
advance payments are interest earning balances of Capital Factors. Interest
earning advances, net of client interest bearing credit balances, amounted to
$194.3 million at December 31, 1995 compared to $159.2 million at December 31,
1994. Balances due to factoring clients for receivables purchased amounted
to $128.6 million and $90.7 million at December 31, 1995 and 1994,
respectively.
Cash and Cash Equivalents
The increase in cash and cash equivalents was composed of increases of $60.0
million in federal funds sold and securities purchased under agreements to
resell and $47.2 million in cash and due from banks. The increase in federal
funds sold and securities purchased under agreements to resell resulted
primarily from net inflows of deposits. The increase in cash and due from
banks resulted primarily from funds raised by Capital Factors in the sale of
$50.0 million of senior certificates to outside investors in the second half of
1995.
Other Real Estate
Other real estate amounted to $6.8 million and $14.7 million at December 31,
1995 and December 31, 1994, respectively. The decrease in other real estate
was due primarily to the sale of several properties totaling $8.7 million
offset by new properties acquired, including development costs, totaling
approximately $2.0 million.
Deposits
Total deposits amounted to $1,038.8 million and $876.8 million at December 31,
1995 and 1994, respectively. The increase in total deposits included increases
of $153.8 million in time deposits and $39.6 million in non-interest bearing
deposits offset by a decrease of $31.4 million in savings and money market
deposits. The increase in time deposits reflects the combined effect of
internal marketing efforts to increase overall deposits and increased customer
demand for time deposits due to higher rates offered. Management believes the
decrease in savings and money market deposits reflects an industry-wide trend
whereby customers have chosen alternative investment and savings products over
low yielding deposit products. Included in total deposits at December 31, 1995
was approximately $21 million in U.S. Treasury demand deposits and $15 million
in brokered time deposits which were repaid in January 1996. Such deposits
were received and repaid in the normal course of business and this activity is
not indicative of any known trends. See Table 5 below for the maturity
distribution of time deposits of $100,000 or more. See Table 9 below
for the average balances and rates paid on deposit categories for 1995, 1994
and 1993.
The Company does not operate any foreign offices; however, as a result of the
activities of the International Division of the Company, foreign customers
maintain deposit accounts with the Bank. Deposits by foreign customers
amounted to $170.2 million, $135.5 million and $163.8 million at December 31,
1995, 1994 and 1993, respectively, representing 16%, 15% and 18% of total
deposits, respectively. The level of these deposits is, in part, related to
the level of trade finance activity conducted by the Company, and is also
affected by economic trends in foreign countries. Deposits from foreign
customers decreased in 1994 compared to 1993 due primarily to the decrease in
the Company's trade finance activity during that period. These deposits
increased during 1995 as a result of increased trade finance activity, as well
as capital flight out of some countries in reaction to economic uncertainties.
Deposit liabilities represented 70% and 71% of total liabilities at December
31, 1995 and December 31, 1994, respectively. For the same dates, interest
bearing non-deposit balances represented 18% and 17% of total liabilities. For
the year ended December 31, 1993, average deposit and interest bearing
non-deposit liabilities represented 78% and 10%, respectively, of average total
liabilities. Management believes that deposit
- 26 -
<PAGE> 27
funding sources will continue to represent a lesser percentage of total
liabilities when compared to historical levels for the foreseeable future.
Short-Term Borrowings
The Company's short-term borrowings primarily represent securities sold under
agreements to repurchase on an overnight basis involving retail customers.
From time to time, the Company may also access wholesale repurchase sources for
7 to 90 day periods for short-term liquidity management purposes. Retail
repurchase agreements represent an important supplemental source of funds for
the Company and have been relatively stable over 1995 and 1994.
During 1994, the Company experienced a significant increase in retail
repurchase agreements due to marketing success of this product. Furthermore,
in 1993, the Company converted funds purchased from foreign banks to short-term
time deposits.
Table 6 below presents the year end balances, weighted average interest
rates and maximum outstanding balances of short-term borrowings for 1995, 1994
and 1993.
Other Borrowings
In July, 1995, Capital Factors, Inc., through its wholly-owned subsidiary C.F.
Funding Corp., issued $50 million of Variable Rate Asset Backed Certificates
("senior certificates") with a maturity date of January 2001, bringing the
total of such certificates to $175 million at year end ($100 million and $25
million with maturity dates of December 1999 and June 2000, respectively).
The senior certificates bear an interest rate of LIBOR plus 1.25% before
transaction costs (approximately 7.19% at December 31, 1995, excluding
transaction costs of 0.37%) and are collateralized by advances to clients by
Capital Factors. The senior certificates represent a significant alternative
funding source for the Company's factoring activities and have enabled better
management of interest rate risk as well as liquidity.
- 27 -
<PAGE> 28
TABLE 5
MATURITY DISTRIBUTION OF TIME DEPOSITS
GREATER THAN $100,000
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Time Remaining until Maturity Amount
----------------------------- ------
<S> <C>
3 months or less $ 76,838
Over 3 through 6 months 36,216
Over 6 through 12 months 34,048
Over 12 months 20,423
--------
Total at December 31, 1995 $167,525
========
</TABLE>
TABLE 6
FEDERAL FUNDS PURCHASED AND
SHORT-TERM BORROWINGS
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
WEIGHTED MAXIMUM
AVERAGE OUTSTANDING
BALANCE AT INTEREST RATE DURING
YEAR END (1) AT YEAR END (1) THE PERIOD (2)
------------ --------------- --------------
<S> <C> <C> <C>
December 31, 1995
Short-term borrowings
- Retail $ 86,133 4.40% $ 88,889
- Wholesale -- N/A 15,000
--------
$ 86,133
========
December 31, 1994
Domestic banks $ -- N/A $ 100
Short term borrowings
- Retail 87,236 5.08% 104,910
- Wholesale -- N/A 20,000
--------
$ 87,236
========
December 31, 1993
Domestic banks $ 100 2.56% $ 200
Foreign banks -- N/A 76,444
Short-term borrowings
- Retail 44,466 2.44% 50,709
- Wholesale -- -- --
--------
$ 44,566
========
</TABLE>
- ------------------
(1) See the Yields Earned Rates Paid table for presentation of the average
amounts of short-term borrowings outstanding during the periods and the
applicable weighted average interest rates during the periods.
(2) Amount represents the maximum outstanding at any month end during the
period.
- 28 -
<PAGE> 29
CAPITAL RESOURCES
Stockholders' equity increased by $22.4 million as a result of net income of
$17.1 million, proceeds from the sale of treasury stock of $2.1 million,
proceeds from the exercise of stock options of $1.9 million and a reduction in
the unrealized loss on securities available for sale of $3.7 million (net of
tax) offset by dividends declared of $2.4 million.
The Comptroller of the State of Florida ("Comptroller"), the Federal Deposit
Insurance Corporation ("FDIC") and the Board of Governors of the Federal
Reserve System ("Federal Reserve") utilize guidelines in assessing the adequacy
of capital of financial institutions under their supervision. These
guidelines, which include required minimum leverage, Tier One risk-based and
Total risk-based capital ratios, are considered in regulators' examinations and
are reviewed periodically for potential adjustments based upon changes in the
economy, financial markets and banking practices. Regulators can take a
variety of actions if capital guidelines are not met. Bancorp is supervised by
the Federal Reserve. Capital Bank is supervised by the FDIC and the
Comptroller.
At December 31, 1995 and 1994, the regulatory capital ratios of the Company and
the Bank were as follows:
<TABLE>
<CAPTION>
Company Bank
------------- -------------- Minimum
1995 1994 1995 1994 Requirement
---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C>
Leverage Ratio 7.97% 7.58% 7.66% 7.58% 3%*
Tier One ratio 11.23 9.68 10.77 9.66 4
Total ratio 12.48 10.82 12.03 10.80 8
</TABLE>
* Banking regulators expect institutions to maintain an excess
of 1 to 2% above the minimum.
The Company historically has not included certain assets of Capital Factors
in its capital ratio calculations. In 1995, banking regulators issued new
instructions for the reporting of total assets in the Consolidated Report of
Condition (the "Call Report"), effective March 31, 1997. As a result of a
review of the new instructions, management believes that the Company may be
required to include the Capital Factors assets for capital calculation
purposes. Management is seeking clarification as to the applicability of the new
instructions to the Company. If these assets were included, at December 31,
1995 the Company's leverage ratio would have been 7.25%, its Tier one
risked-based ratio would have been 9.94% and its total risk-based ratio would
have been 11.19%. These capital ratios would have been in compliance with all
regulatory requirements and expectations at December 31, 1995.
In the opinion of management, these ratios are sufficient to protect depositors
and facilitate future growth. The Company's management continually reviews
capital adequacy. The various alternatives for generating equity from internal
and external sources are constantly under review to ascertain the most
effective approach for the Company. The Company has traditionally provided
most of its capital through retained earnings. For 1995 and 1994,
respectively, the Company's internal capital generation rate was 16.1% and
12.8%, respectively.
Bancorp currently pays stockholder dividends of 8.33 cents per share per
quarter. (This quarterly rate has been restated for the 3-for-2 stock split in
the form of a 50% stock dividend which was effective June 22, 1995.) This
dividend policy is dependent upon the Bank's ability to continue the payment of
dividends to Bancorp. Unforeseen changes in the financial condition of the
Company or Capital Bank, or actions by regulatory authorities, could result in
changes in the dividend policy.
- 29 -
<PAGE> 30
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
Liquidity
Liquidity represents the Company's ability to meet customers' borrowing needs,
take advantage of investment opportunities, fund deposit withdrawals and
maintain reserve requirements. On the asset side, the primary sources of
liquidity are cash and due from banks, interest bearing deposits with banks,
Federal funds sold and other short-term investments, scheduled maturities and
paydowns of securities held to maturity, securities available for sale and
scheduled repayments on outstanding loans and receivables. The liquidity
available from any of the foregoing sources is reduced to the extent they are
pledged against any liabilities or otherwise restricted. On the liability
side, the principal source of liquidity is growth in deposits and other
borrowings. These primary sources of liquidity are supplemented by cash flows
from the Company's operating activities.
The liquidity position is monitored daily by management to maintain a level of
liquidity conducive to efficient operations and is continuously evaluated as
part of the asset/liability management process (as discussed further in the
next section) to maintain liquidity levels conducive to efficient operations.
Considerations in managing the Company's liquidity position include scheduled
cash flows from existing assets and liabilities, as well as projected
liquidity needs arising from commitments to lend.
During 1995, the Company generated net cash flows of $212 million from it
financing activities, including $162 million from deposit growth and $50
million from long-term borrowings by Capital Factors. The deposit growth
included $53 million in time deposits over $100,000, with the remainder
generated internally through business development and marketing efforts.
Deposits are expected to remain a primary source of liquidity, however, no
assurance exists regarding the Company's ability to attract future deposits at
rates comparable to that achieved during 1995.
Supplementing deposit growth, Capital Factors in 1994 initiated a process of
utilizing its accounts receivable and advances as a source of funding. In
1995, Capital Factors raised $50 million from variable rate certificates backed
by accounts receivable and advances with a maturity date of January 2001,
bringing the total of such certificates to $175 million at year end 1995 ($100
million and $25 million with maturity dates of December 1999 and June 2000,
respectively). This relatively new source of liquidity for the Company is
expected to continue to serve an important role, subject to the availability of
qualifying assets and the need for funds. The Company is also exploring other
alternatives for increasing liquidity, including debt and equity funding, with
Capital Factors. In March 1996, Capital Factors entered into a revolving credit
facility with an unaffiliated bank for $40 million, the funding of which is
subject to certain conditions which have not yet been fulfilled.
The Company's investing activities utilized $130 million of the liquidity
generated from operating and financing activities. Net new loans amounts to
$82 million, and net new advances by Capital Factors amounted to $36 million.
Additionally, securities purchases in excess of maturities utilized $13 million
of liquidity.
In the normal course of business, the Company utilizes various financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These off-balance sheet activities include commitments to extend
credit, commercial letters of credit and standby letters of credit. The
liquidity, credit and market risks associated with these financial instruments
are generally managed in conjunction with the Company's balance sheet
activities and are subject to normal credit policies, financial controls and
risk limiting and monitoring procedures. At December 31, 1995, the Company had
outstanding commitments to extend credit, commercial letters of credit and
standby letters of credit amounting to $146.1 million, $79.0 million and $13.8
million, respectively. In the normal course of business, some of these
commitments may expire without being drawn upon. The Company expects to meet
funding requirements resulting from these commitments by using its traditional
sources of liquidity.
Liquidity is also necessary at the Bancorp level. The ability of Bancorp to
meet debt service requirements, pay dividends to stockholders and satisfy other
liquidity needs is primarily dependent on Capital Bank's ability to continue
the payment of dividends. The ability of the Bank to pay dividends is
generally restricted by Florida statutes. At periodic intervals, State or
Federal regulatory agencies routinely examine Bancorp and the Bank as part of
their legally prescribed oversight of the banking industry and may further
restrict the payment of dividends or other activities by regulatory action. At
December 31, 1995 the Bank was not subject to any restrictions other than
statutory. At year-end, approximately $23.5 million of the Bank's retained
earnings were available for dividend payments to the Parent company without
regulatory approval.
For 1996, Bancorp's estimated debt service and stockholder dividend
requirements total approximately $2.9 million. At December 31, 1995, Bancorp
had available cash balances of $6.3 million. Management believes liquidity at
December 31, 1995 was satisfactory.
- 30 -
<PAGE> 31
Asset/Liability Management and Interest Rate Risk
The Company's exposure to interest rate changes is managed by a review of the
maturity and repricing characteristics of assets and liabilities, as well as
the composition of these items. Attention is directed primarily to assets and
liabilities that mature or can be repriced within a period of 30 to 365 days.
The Company matches the maturities of a significant portion of its assets and
liabilities to minimize variability in net interest income within a 12 to 18
month period. This practice serves to minimize both liquidity and interest
rate risks. Prudent risks are taken, however, by leaving certain assets and
liabilities unmatched in an effort to benefit from the interest rate
sensitivity created. The Company currently does not use off balance sheet
derivative instruments to manage interest rate risk.
Maintenance of satisfactory funding levels allows the Company to position
itself so that the risks of interest rate fluctuations are decreased. This,
together with a high percentage of variable rate assets, provides a more
consistent margin between interest earning assets and interest bearing
liabilities. For 1995, the average rate paid on interest bearing deposit
liabilities was 4.04%, while the average rate paid for other interest bearing
liabilities was 6.83%. To the extent that non-deposit liabilities grow faster
than deposits, the Company's overall cost of funds will likely rise. At this
time, management does not believe these factors will have a significant adverse
impact on net interest income.
Table 7 presents a summary analysis of maturity and repricing characteristics
of the Company's interest earning assets and interest bearing liabilities at
December 31, 1995. For purposes of this analysis, regular passbook savings and
NOW and money market accounts are included as repricing in 90 days or less.
The difference between the maturities and repricing intervals applicable to
interest earning assets and interest bearing liabilities is commonly referred
to as the "gap."
Interest rates earned and paid on interest bearing assets and liabilities are
influenced by both factors outside the control of management, such as current
market interest rates (e.g., prime, LIBOR) and factors controlled by management
(e.g., rates paid on deposits). Management can further influence net interest
income by adjusting the mix of assets and liabilities between fixed and
floating rate instruments, or adjusting the duration of these items. To an
extent, management's ability to control these factors are contingent upon
customer demand or acceptance of the products offered by the Company. At
December 31, 1995, the Company's cumulative one-year gap (the difference
between interest bearing assets and interest bearing liabilities) was negative
$11.1 million, or less than 1% of total earning assets. Management does not
believe the Company's operating results will be significantly impacted by
changes in interest rates over the next year.
- 31 -
<PAGE> 32
TABLE 7
INTEREST RATE SENSITIVITY BY MATURITY
OR REPRICING DATES
(In Millions of Dollars)
<TABLE>
<CAPTION>
90 days 91-180 181-365 Over
or less days days one year Total
------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Securities $ 46.5 $ 30.3 $ 46.5 $ 117.2 $ 240.5
Loans(1) 380.8 62.7 36.8 241.5 721.8
Other earning
assets(2) 291.5 -- -- -- 291.5
------ ------ ------ ------- -------
Total interest
earning assets 718.8 93.0 83.3 358.7 1,253.8
------ ------ ------ ------- -------
Interest bearing liabilities:
Interest bearing
deposits 460.4 98.5 84.5 59.1 702.5
Short-term borrowings 86.1 -- -- -- 86.1
Long-term debt 176.7 -- -- -- 176.7
------ ------ ------- ------- -------
Total interest
bearing liabilities 723.2 98.5 84.5 59.1 965.3
------ ------ ------- ------- -------
Gap (4.4) (5.5) (1.2) 299.6 $ 288.5
----- ------ ------- ------ =======
Cumulative Gap $ (4.4) $ (9.9) $(11.1) $288.5
====== ====== ====== ======
</TABLE>
- ----------------
(1) Excludes non-accrual loans of $6.9 million
(2) Excludes non-accrual advances of $2.2 million
- 32 -
<PAGE> 33
RESULTS OF OPERATIONS
General
The Company recorded net income of $17.1 million in 1995 compared to $13.2
million in 1994 and $11.8 million in 1993. Primary earnings per share was
$2.25 in 1995 compared to $1.83 in 1994 (adjusted for the stock 3-for-2 split
in the form of a 50% stock dividend in June 1995) and $1.64 in 1993 (includes
effect of stock split). On a fully diluted basis, earnings per share was $2.20
in 1995 compared to $1.80 in 1994 and $1.61 in 1993 (adjusted for the 3-for-2
stock split). In 1995, the Company's annualized return on average assets was
1.20% compared to 1.04% and .96% in 1994 and 1993, respectively. The
annualized return on average stockholders' equity was 16.71% in 1995 compared
to 15.10% in 1994 and 14.70% in 1993. The increase in income in 1995 compared
to 1994, as well as 1994 compared to 1993, was primarily a result of improved
net interest margin after provisions for credit losses and higher factoring
revenue offset by higher other operating expenses and salaries and employee
benefits. Lower letter of credit fees in 1994 compared to 1993 also offset the
increase in other revenue categories during that period.
Lines of Business
Set forth on Table 8 is a summary of operating results for the Company's
domestic and international banking activities, as well as its factoring
activities. Revenues and expenses relating to factoring activities are
generally segregated and are easily identifiable. Non-interest revenues and
expenses associated with banking activities include allocations of certain
items based on management's assumptions, some of which are subjective in
nature. Furthermore, interest income and expense of banking activities reflect
funds transfer pricing which, while based on the Bank's actual external costs,
may not reflect actual results which may be achieved on a stand-alone basis.
Interest income derived from domestic banking activities amounted to $76.1
million, $67.0 million and $62.8 million in 1995, 1994 and 1993, respectively.
Net interest income amounted to $51.3 million, $48.8 million and $46.1 million
in the respective periods. The increases in net interest income in 1995
compared to 1994 was due primarily to higher levels of average earning assets
while the net interest margin remained relatively stable. Non-interest income
from domestic banking activities amounted to $18.9 million, $16.7 million and
$15.7 million in 1995, 1994 and 1993, respectively. The increase in
non-interest income in 1995 compared to 1994 was due to various factors,
including non- recurring income of approximately $1.2 million received in
connection with the early termination of a computer servicing contract.
Increases in revenues were offset by higher operating expenses, particularly
overdraft losses in 1995. Additionally, based on management's assessment of
the allowance for loan losses, provisions for domestic loan losses decreased to
$3.4 million in 1995 from $5.9 million and $7.1 million in 1994 and 1993,
respectively. This decrease is due primarily to improved credit quality of the
portfolio.
The Company does not operate any foreign offices. Foreign banking operations
principally arise from the Company's trade finance lending to and issuance of
letters of credit on behalf of banks and financial institutions located in
Central and South America. Interest income from foreign banking activities
amounted to $10.3 million, $6.4 million and $8.0 million in 1995, 1994 and
1993, respectively. Net interest income amounted to $4.5 million, $3.5 million
and $5.3 million in 1995, 1994 and 1993, respectively. Net interest income
reflects a decrease in average loans outstanding in 1994 compared to 1993, and
an increase in 1995 compared to 1994. During 1993 and 1994, average loans
decreased as management sought to refocus its marketing strategies and reduce
aggregate exposure in certain countries. This process was substantially
completed in late 1994 and average loans began to increase. Non-interest
income from foreign banking activities primarily represents letter of credit
fees and amounted to $4.1 million, $5.3 million and $7.0 million in 1995, 1994
and 1993, respectively. Decreases from 1993 to 1994 reflect lower levels of
letter of credit issuance activity. This activity increased in 1995, however,
competitive pressures resulted in lower pricing. Also, other income in 1994
included securities gains of $1.1 million. Operating results from foreign
banking activities were also affected by provisions for loan losses, which
amounted to $211,000, ($2.3) million and $2.4 million in 1995, 1994 and 1993,
respectively. Provisions in 1993 included additions to the allowance for loans
which were ultimately charged off in 1994. In 1994, certain of these charged
off loans were partially recovered, and the status of other potential problem
foreign loans improved, resulting in a credit to the allowance. The 1995
provision reflects approximately $1.8 million for certain exposures, offset by
$1.6 million additional recoveries of the 1994 charge offs.
- 33 -
<PAGE> 34
The Company's factoring activities continued to grow significantly in 1995, due
primarily to the signing of new clients. Non-interest income, which primarily
represents factoring commissions, amounted to $23.3 million, $20.0 million and
$17.6 million in 1995, 1994 and 1993, respectively, reflecting increased
factored accounts receivable from $1.3 billion in 1993 to $2.0 billion in 1995.
Interest income was $27.6 million, $17.3 million and $13.3 million, while net
interest income was $11.8 million, $7.4 million and $5.7 million in 1995, 1994
and 1993, respectively. Growth in average interest earning assets, primarily
advances, in all periods due to business development gave rise to these
increases.
General corporate expenses in 1994 included one-time charges of approximately
$1.7 million relating to deferred compensation and other benefits paid to the
Company's former chairman upon his retirement.
Net Interest Income
Tables 9 and 10 set forth information on yields earned and rates paid by the
Company as well as changes in the composition of net interest income for each
of the years in the three year period ended December 31, 1995. Yield and
interest on tax-exempt loans and securities have been adjusted to reflect
tax-equivalent basis using the Federal tax rate of 35%. Loans and accounts
receivable on non-accrual status have been included in average balances for
purposes of computing average yield or rate. Yields on securities available
for sale have been computed based on amortized cost. Yield and interest on
loans to U.S. borrowers for 1995 exclude $975,000 in interest income relating
to the payoff of a loan which was previously on non-accrual status. For the
years ended December 31, 1995, 1994 and 1993, average foreign assets
represented 9%, 8% and 11% of total average assets, respectively. Average
foreign liabilities represented 13%, 16% and 20% of total average liabilities.
Average foreign deposits included in average interest bearing deposits and
average non-interest bearing deposits amounted to $144.4 million, $159.7
million and $129.0 million for 1995, 1994 and 1993, respectively.
Net interest income is the difference between interest, fees and dividends
earned on loans and investments and interest paid on deposits and other sources
of funds. Net interest income totaled $67.6 million, $59.4 million and $56.8
million in 1995, 1994 and 1993, respectively. Loan fees included in net
interest income amounted to $1.6 million, $1.8 million and $1.9 million in
1995, 1994 and 1993, respectively. Net interest income also included dividends
earned on equity securities of $2,000 and $147,000 in 1994 and 1993,
respectively. Net interest income on a fully tax-equivalent basis, including
loan fees, totaled $68.8 million in 1995 compared to $61.1 million and $58.7
million in 1994 and 1993, respectively.
Net interest income can be viewed as the product of average earning assets and
the net interest margin. Net interest income in 1995 increased $8.1 million
over 1994, comprised of an increase of $24.8 million in interest income offset
by an increase of $16.6 million in interest expense. The increase in net
interest income was due to an increase in average interest earning assets to
$1.147 billion in 1995 from $1.029 billion in 1994, combined with a shift in
mix to higher yielding loans and advances. The net interest margin declined
slightly to 5.91% in 1995 (excluding non-recurring interest collections of
$975,000) from 5.94% in 1994. The yield on average interest earning assets
increased from 8.38% in 1994 to 9.55% in 1995 due to higher yields on all
categories of interest earning assets. Average interest bearing liabilities
increased to $875.0 million in 1995 from $770.8 million 1994, while the
average rate paid on these liabilities increased to 4.77% from 3.26%. The
increase in average interest bearing liabilities occurred primarily in
long-term borrowings and time deposits. Capital Factors' average long-term
borrowings were $140.6 million in 1995 compared to $45.4 million in 1994.
There were no such borrowings in 1993.
The increase in net interest income in 1994 as compared to 1993 was due to an
increase in average interest earning assets to $1.029 billion in 1994 from
$974.5 million in 1993. The net interest margin declined slightly to 5.94% in
1994 from 6.02% in 1993. The yield on average interest earning assets increased
from 8.12% in 1993 to 8.38% in 1994 due to higher yields on accounts receivable
advances and foreign loans offset by lower average yields on securities.
Average interest bearing liabilities increased to $770.8 million in 1994 from
$736.5 million in 1993, while the average rate paid on these liabilities
increased to 3.26% from 2.78%. The increase in average interest bearing
liabilities occurred primarily in short and long-term borrowings, while average
interest bearing deposits were relatively stable, increasing by approximately
1%. During 1994, the Company's non-deposit liabilities were influenced by
increased market interest rates and the change in mix resulted in the overall
increase in the average rates paid on liabilities.
See Asset/Liability Management and Interest Rate Risk above for a discussion
of factors that may affect net interest income.
- 34 -
<PAGE> 35
TABLE 8
BUSINESS SEGMENT DATA
(In Thousands of Dollars)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net interest income and
non-interest income:
Domestic banking activities $ 95,023 $ 83,634 $ 78,462
Foreign banking activities 14,396 11,692 15,031
---------- ---------- ----------
Total banking activities 109,419 95,326 93,493
Factoring activities 50,894 37,253 30,967
Intercompany (4,876)(1) (6,068)(1) (6,991)(1)
---------- ---------- ----------
Total $ 155,437 $ 126,511 $ 117,469
========== ========== ==========
Income before income taxes:
Domestic banking activities $ 20,329 $ 20,084 $ 18,094
Foreign banking activities 4,240 4,799 5,135
---------- ---------- ----------
Total banking activities 24,569 24,883 23,229
Factoring activities 14,227 10,855 7,538
Corporate and other (6,358)(2) (8,492)(2) (6,639)(2)
Intercompany (4,876)(1) (6,068)(1) (6,991)(1)
---------- ---------- ----------
Total $ 27,562 $ 21,178 $ 17,137
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Average Balance for the Year Ended December 31
----------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Identifiable assets:
Domestic banking $1,008,845 $1,009,378 $ 993,409
Foreign banking 132,704 101,438 141,268
---------- ---------- ----------
Total Banking 1,141,549 1,110,816 1,134,677
Factoring 337,118 250,147 206,328
Intercompany (49,524)(1) (86,030)(1) (110,188)(1)
---------- ---------- ----------
Total assets $1,429,143 $1,274,933 $1,230,817
========== ========== ==========
</TABLE>
- ----------
(1) Intercompany assets primarily represents loan balances payable by Capital
Factors to Capital Bank. Intercompany operating results primarily
reflects the related interest income.
(2) Corporate and other includes costs associated with various activities and
functions, including the operations of Capital Bancorp (parent only),
certain senior management of the Bank and other administrative costs.
- 35 -
<PAGE> 36
TABLE 9
YIELDS EARNED AND RATES PAID
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1995 1994 1993
----------------------------- --------------------------- ---------------------------
Average Average Average
Average Yield Average Yield Average Yield
Balance Interest Or Rate Balance Interest Or Rate Balance Interest Or Rate
---------- -------- ------- ------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans, net of unearned income:
U.S. Borrowers $ 536,897 $ 55,118 10.27% $ 472,239 $ 43,611 9.23% $ 422,799 $ 39,476 9.34%
Foreign Borrowers 125,785 10,205 8.11 93,906 6,275 6.68 133,620 7,631 5.71
Tax Exempt 19,570 3,173 16.21 26,226 4,227 16.12 27,325 4,269 15.62
---------- --------- ----- ---------- -------- ----- ---------- -------- -----
Total loans 682,252 68,496 10.04 592,371 54,113 9.13 583,744 51,376 8.80
Accounts receivable
advances - factoring
subsidiary 185,795 23,803 12.81 148,787 16,747 11.26 129,874 13,332 10.27
Securities:
Taxable -- -- -- -- -- -- 162,850 10,541 6.47
Tax-exempt -- -- -- -- -- -- 9,711 1,106 11.39
Securities held to maturity:
Taxable 74,223 4,735 6.38 64,464 3,784 5.87 -- -- --
Tax-exempt 3,360 357 10.62 4,254 452 10.62 -- -- --
Securities available for sale:
Taxable 139,388 8,360 6.00 139,950 7,903 5.65 -- -- --
Federal funds sold
and other interest earning
assets 62,396 3,841 6.16 78,847 3,201 4.06 88,350 2,796 3.16
---------- --------- ----- ---------- -------- ----- ---------- -------- -----
Total interest earning
assets 1,147,414 109,592 9.55 1,028,673 86,200 8.38 974,529 79,151 8.12
--------- -------- --------
Less allowance for loan losses
and doubtful accounts (13,549) (15,076) (18,062)
Cash and due from banks 91,549 68,650 74,315
Due from customers on
acceptances 28,827 30,340 44,018
Other real estate 10,911 13,436 28,268
Other assets 163,991 148,910 127,749
---------- ---------- ----------
Total $1,429,143 $1,274,933 $1,230,817
========== ========== ==========
</TABLE>
- 36 -
<PAGE> 37
TABLE 9 (Continued)
YIELDS EARNED AND RATES PAID
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1995 1994 1993
----------------------------- --------------------------- ---------------------------
Average Average Average
Average Yield Average Yield Average Yield
Balance Interest Or Rate Balance Interest Or Rate Balance Interest Or Rate
---------- -------- ------- ------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Deposits:
Savings and Money Market $ 295,212 $ 7,046 2.39% $ 350,889 $ 6,845 1.95% $ 355,603 $ 7,433 2.09%
Time 350,161 19,026 5.43 278,028 10,656 3.83 266,016 9,560 3.59
---------- --------- ----- --------- -------- ---- ---------- -------- -----
Total interest bearing
deposits 645,373 26,072 4.04 628,917 17,501 2.78 621,619 16,993 2.73
---------- --------- ----- ---------- -------- ----- ---------- -------- -----
Federal funds purchased and
short-term borrowings:
Domestic banks -- -- -- 65 2 3.02 198 5 2.53
Foreign banks -- -- -- -- -- -- 55,477 1,361 2.45
Short-term borrowings 87,243 4,504 5.16 94,322 3,973 4.21 56,115 1,831 3.26
---------- --------- ----- ---------- -------- ----- ---------- -------- -----
87,243 4,504 5.16 94,387 3,975 4.21 111,790 3,197 2.86
---------- --------- ----- ---------- -------- ----- ---------- -------- -----
Long-term borrowings 142,427 11,176 7.85 47,486 3,638 7.66 3,134 284 9.06
---------- --------- ----- ---------- -------- ----- ---------- -------- -----
Total interest bearing
liabilities 875,043 41,752 4.77 770,790 25,114 3.26 736,543 20,474 2.78
---------- --------- ----- ---------- -------- ----- ---------- -------- -----
Non-interest bearing
deposits 292,625 276,000 274,675
Bank acceptances outstanding 28,827 30,340 44,018
Other liabilities 130,330 110,370 95,499
Stockholders' equity 102,318 87,433 80,082
---------- ---------- ----------
Total liabilities and
stockholders' equity $1,429,143 $1,274,933 $1,230,817
========== ========== ==========
Net interest earnings/
yield $ 67,840 5.91% $ 61,086 5.94% $ 58,677 6.02%
========= ==== ======== ==== ======== ====
Net interest spread 4.78% 5.12% 5.34%
==== ==== ====
Utilization rate 80.29% 80.68% 79.18%
===== ===== =====
</TABLE>
- 37 -
<PAGE> 38
TABLE 10
RATE VOLUME ANALYSIS(1)
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1995 Compared to 1994 1994 Compared to 1993
-------------------------------------- ------------------------------------
Change Change Net Change Change Net
Due to Due to Increase Due to Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Changes in Income and Expense
Interest on interest earning assets:
Loans
U.S. Borrowers $ 6,304 $ 5,203 $ 11,507 $ 4,609 $ (474) $ 4,135
Foreign Borrowers 2,358 1,572 3,930 (2,460) 1,104 (1,356)
Tax Exempt (1,076) 22 (1,054) (175) 133 (42)
Accounts receivable advances -
factoring subsidiary 4,453 2,603 7,056 2,035 1,380 3,415
Securities:
Taxable -- -- -- 2,528 (1,382) 1,146
Tax-exempt -- -- -- (601) (53) (654)
Securities held to maturity:
Taxable 597 354 951 -- -- --
Tax-exempt (95) -- (95) -- -- --
Securities available for sale
Taxable (33) 490 457 -- -- --
Federal funds sold and other
interest earning assets (840) 1,480 640 (345) 750 405
------- -------- -------- -------- --------- --------
Total $11,668 $ 11,724 $ 23,392 $ 5,591 $ 1,458 $ 7,049
======= ======== ======== ======== ========= ========
Interest on interest bearing liabilities:
Savings and Money Market
deposits $(1,208) $ 1,409 $ 201 $ (95) $ (493) $ (588)
Time deposits 3,342 5,028 8,370 446 650 1,096
Federal funds purchased and
short-term borrowings (335) 864 529 (615) 1,393 778
Long-term debt 7,362 176 7,538 3,709 (355) 3,354
------- -------- -------- -------- --------- --------
total $ 9,161 $ 7,477 $ 16,638 $ 3,445 $ 1,195 $ 4,640
======= ======== ======== ======== ========= ========
</TABLE>
- ---------------
(1) Because of the numerous and simultaneous balance and rate changes during the
periods, it is not possible to allocate the change in net interest income
precisely between balances and rates. For purposes of this table, changes
that are not solely attributable to balance changes or rate changes have
been allocated equally to the Volume and Rate changes above.
- 38 -
<PAGE> 39
Provision for Loan Losses
The allowance for loan losses is maintained at a level deemed adequate by
management to absorb potential loan losses in the portfolio after evaluating
the loan portfolio, the financial condition of borrowers, current economic
conditions, changes in the nature and volume of the portfolio, past loan loss
experience and other pertinent factors. Many of these factors involve a
significant degree of estimation and are subject to rapid changes which could
be unforeseen by management. As a consequence, the possibility exists that
management's evaluation of the adequacy of the allowance could change, and such
change could be a material amount, as additional information becomes known.
While the Company considers the allowance for loan losses to be adequate at
December 31, 1995, management is unable to predict the amount, if any, of
future provisions to the allowance. For additional information, see Allowance
for Loan Losses below.
The provision for loan losses was $3.6 million in 1995 compared to $3.5 million
in 1994 and $9.5 million in 1993. The lower provisions in 1995 and 1994
reflect a general improvement in credit quality as well as recoveries of $1.6
million and $1.5 million in 1995 and 1994, respectively, relating to certain
foreign loans which had previously been charged off.
Provision for Credit Losses - Factoring Subsidiary
The allowance for doubtful accounts for Capital Factors is maintained at a
level deemed adequate to absorb potential losses. The adequacy of the
provision for credit losses recorded by Capital Factors is assessed by
management based in part on the level of net charge offs relative to accounts
receivable purchased. These statistics are believed to be significant
indicators of inherent losses since the receivables portfolio turns over
approximately seven times each year. Accounts receivable which are past due
are charged off unless, in the opinion of management, collection is likely from
the customer, client or collateral realization, if any. In making this
determination, management considers the quality of the collateral, the
creditworthiness of the customer and client, economic conditions and other
factors which may be relevant. This statistical assessment is supplemented by
a review of the recorded allowance for credit losses at each month end
relative to total accounts receivable at month end, taking into consideration
specific potential problem accounts, accounts purchased with recourse where
payment has not been made by Capital Factors to its client, and other factors
which may be relevant. The provision for doubtful accounts amounted to $2.2
million, $2.2 million and $2.7 million for 1995, 1994 and 1993, respectively.
For the years ended December 31, 1995, 1994 and 1993, net charge offs as a
percentage of accounts receivable purchased was .05%, .17% and .20%,
respectively. For the same periods, the percentage of provisions for credit
losses to accounts receivable purchased was .11%, .15% and .20%, respectively.
Based on these relationships, and a review of the recorded allowance and
accounts receivable at each period end, management believes the provisions
and allowance to be adequate to absorb known and inherent losses in the
accounts receivable portfolio. Because the assessment of the adequacy of the
allowance and provisions for credit losses involve a significant degree of
estimation, and are subject to change, future provisions for credit losses
may be greater or less than actual charge offs.
Other Income
Other income totaled $46.1 million, $41.9 million and $40.2 million in 1995,
1994 and 1993, respectively.
Factoring commissions amounted to $23.1 million or 50% of total other income in
1995 compared to $20.0 million or 48% of total other income in 1994 and $17.6
million or 44% of total other income in 1993. The growth in factoring
commissions is attributable to overall expansion of factoring activities.
During 1995, Capital Factors opened a fourth office in Charlotte, North
Carolina, in addition to its office in Ft. Lauderdale, Florida, Los Angeles,
California and New York, New York. Although Capital Factors experienced
increased commission income as a result of increased factored accounts
receivable, commission income as a percentage of factored accounts receivable
declined slightly, from 1.16% in 1993 to 1.13% in 1994 and 1.03% in 1995. This
decline was primarily the result of lower factoring fees charged to high volume
clients in the New York market and a lower fee structure, partly because of
high volume clients, in the Charlotte market. Capital Factors typically
receives lower factoring fees from high volume customers because, among other
reasons, high volume clients do not have the same servicing needs as smaller
clients, requiring less labor intensive services to be performed by Capital
Factors, and because there is increased competition for such client's business.
Service charges on deposits amounted to $12.6 million or 27% of total other
income in 1995 compared to $11.8 million or 28% of total other income in 1994
and $9.4 million or 23% in 1993. The increase in service charge income is
primarily due to the adjustment
- 39 -
<PAGE> 40
to the pricing of some services during 1994.
Letter of credit fees totaled $4.2 million in 1995 compared to $4.0 million in
1994 and $6.4 million in 1993. These fees represented 9%, 9% and 16% of
non-interest income in 1995, 1994 and 1993, respectively. The Company conducts
its international operations with customers located primarily in Central and
South America. By issuing and confirming letters of credit for its clients,
the Company has traditionally generated substantial fee income. Due to the
economic and political environments of some of these nations, as well as
competitive factors, the demand for the issuance or confirmation of letters of
credit may fluctuate. Fee levels in 1995 compared to 1994 reflect higher
letter of credit issuance volume offset by lower pricing due to increased
competition. The decrease in letter of credit fees in 1994 as compared to 1993
resulted from pricing pressure derived from increased competition, as well as
lower letter of credit issuance volume.
Net securities gains amounted to $12,000 in 1995 compared to $1,213,000 in 1994
and $632,000 in 1993. Included in securities gains in 1994 are realized gains
of $1.1 million on the sale of certain floating rate Argentine bonds, received
in connection with a prior Brady Plan restructuring. Included in securities
gains in 1993 are realized gains of $447,000 on the sale of limited life and
perpetual life equity securities and $185,000 on the early call of certain
municipal securities. During 1993, the Company liquidated substantially all of
its equity holdings primarily due to the greater capital requirements of these
securities, as well as to take advantage of certain income tax benefits. Since
the adoption of SFAS No. 115, the Company has not sold any securities
classified as held to maturity.
Other Expenses
Other expense totaled $80.3 million, $74.5 million and $67.7 million for the
years ended December 31, 1995, 1994 and 1993, respectively.
Salaries and employee benefits amounted to $38.0 million in 1995 compared to
$36.6 million in 1994 and $31.7 million in 1993, respectively. Salaries and
employee benefits increased $1.3 million in 1995, $4.9 million in 1994 and $4.3
million in 1993, primarily due to merit increases, workforce growth and
increased benefit costs. In addition, salaries and employee benefits in 1994
included $1.7 million for deferred compensation and other benefits related to
the retirement of the Company's former Chairman.
Other operating expenses amounted to $34.9 million, $30.3 million and $28.9
million in 1995, 1994 and 1993, respectively. During 1995, these expenses
increased $4.6 million primarily due to a $2.7 million provision to fully
reserve for potential losses resulting from overdrafts related to one customer
(see further discussion below) and increases in provisions for legal
settlements and advertising expenses offset by a decrease in insurance expense
resulting from reduction in the FDIC assessment rate for the second half of
1995. During 1994, other operating expenses increased $1.4 million primarily
due to increases in overdraft charge offs, consulting fees, communications,
data processing and advertising offset by lower other losses, legal fees,
operating costs of other real estate and insurance.
Total overdraft losses amounted to $3.5 million, $996,000 and $167,000 for the
years ended December 31, 1995, 1994 and 1993, respectively. During the first
quarter of 1995, through several related accounts, one customer created net
overdrafts of approximately $2.7 million in connection with transactions
occurring over a period of approximately two weeks. The overdrafts resulted
when checks drawn on another institution were returned to the Bank for
insufficient funds, after the customer had made withdrawals from Capital Bank.
The customer was placed in involuntary bankruptcy as a result of claims
asserted by the Bank and other creditors, and the entire overdraft was charged
to expense. The Bank has a judgement against the customer, which it has been
unable to collect, and a criminal investigation against the customer is
ongoing. To mitigate the risk that similar losses may occur in the future,
internal review and approval procedures were strengthened by management. At
December 31, 1995 and 1994, total overdraft balances were $3.2 million and $3.9
million, respectively, and are included in loans in the consolidated statements
of condition. Management does not anticipate any material losses associated
with overdraft balances at December 31, 1995.
Expenses relating to the writedown and maintenance of other real estate totaled
$2.9 million, $2.9 million and $3.2 million in 1995, 1994 and 1993,
respectively, and are included in other operating expenses discussed above.
These expenses are net of gains of $46,000, $41,000 and $1.7 million in 1995,
1994 and 1993, respectively. Other real estate amounted to $6.8 million at
December 31, 1995 compared to $14.7 million at
- 40 -
<PAGE> 41
December 31, 1994 and $18.2 million at December 31, 1993. The Company is
aggressively pursuing disposal of these properties.
Provision (Benefit) for Income Taxes
The Company's effective tax rate varies with changes primarily in the
derivation of pre-tax income by state, in the proportion of tax exempt income
and in corporate tax rates. The provision for income taxes for 1995 aggregated
38% of pre-tax income compared with 38% in 1994 and 31% in 1993. The higher
effective tax rates in 1995 and 1994 as compared to 1993 resulted primarily
from a greater percentage of pre-tax income being derived from Capital Factors
which operates in two other state jurisdictions (New York and California) which
have higher tax rates than Florida and from a lesser percentage of pre-tax
income being derived from tax-exempt income.
Impact of Inflation and Changing Prices
The impact of inflation on the Company is reflected primarily in the increased
costs of operations. These increased costs are generally passed on to
customers in the form of increased service fees. Since the primary assets and
liabilities of the Company are monetary in nature, the impact of inflation on
interest rates has, and is expected to continue to have, an effect on net
income.
In structuring fees, negotiating loan margins and developing customer
relationships, management concentrates its efforts on maximizing earnings
capacity while attempting to contain increases in operating expenses. In
addition, management continually reviews the feasibility of new and additional
fee-generating services to offset the effects of inflation and changing prices
with an objective of increased earnings.
New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure," as of January 1, 1995. This Statement requires that impairment of
loans be measured by comparing the recorded amount of the loan to the present
value of expected future cash flows discounted at the loan's effective interest
rate, or at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. Small balance, homogenous
loans, comprised primarily of the Company's consumer loans, are collectively
evaluated for impairment. In determining when a loan is impaired, management
primarily considers current events and conditions, including the borrower's or
guarantor's (if applicable) operating performance and capacity to repay the
loan and realizable collateral values. The determination of impairment is done
on a loan by loan basis and involves significant judgement and estimation, and
final outcomes may differ from such estimates. Impaired loans may be accruing
or nonaccruing based on current and projected performance in relation to the
specific terms of the loan. Adoption of SFAS No. 114, as amended by SFAS No.
118, did not affect the Company's policies on non-accrual loans or income
recognition, charge offs or recoveries, and did not impact the level of the
overall allowance.
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of," which is effective for fiscal years that begin after
December 15, 1995. This Statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. This Statement requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The unrecoverable amount should be recognized as an impairment
loss. This Statement also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. Adoption of this Statement is not
expected to have a significant impact on the Company's consolidated financial
position or results of operations, based on management's current intentions
regarding long-lived assets held at December 31, 1995.
In October 1995 the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." This statement requires certain disclosures about stock-based
employee compensation arrangements regardless of the method used to account for
them, defines a fair value based method of accounting for an employee stock
option or similar equity instrument and encourages all entities to adopt that
method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
stock based compensation plans using the intrinsic value method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Entities electing to remain with the
accounting in APB Opinion No. 25 must make pro forma disclosures of net income
and, if presented, earnings per share as if the fair value method of accounting
defined in SFAS No. 123 had been applied. Under the fair value method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
Under the intrinsic value based method, compensation cost is the excess, if
any, of the quoted market price of the stock at grant date or other measurement
date over the amount an employee must pay to acquire the stock. The disclosure
requirements of SFAS No. 123 are effective for financial statements for fiscal
years beginning after December 15, 1995. Pro forma disclosures required for
entities that elect to continue to measure compensation cost using APB No. 25
must include the effects of all awards granted in fiscal years that begin after
December 15, 1994. Management is in the process of evaluating the impact of
SFAS No. 123.
- 41 -
<PAGE> 42
ASSET QUALITY REVIEW
General
The Bank and Capital Factors manage the risk characteristics of their lending
activities in several ways. Together with credit evaluations of borrowers,
risk is monitored and controlled by procedures which include periodic reviews
by management and industry specialists, industry diversification, geographic
diversification and established lending limits on certain segments of the
portfolio. Risk is further minimized by established lending procedures such as
retaining collateral deemed adequate at the time of the loan and
requiring guarantees and commitments of principal parties along with the
maintenance of compensating balances. Management attempts to adhere to these
procedures to minimize the adverse impact from any one event or set of
conditions. Notwithstanding the procedures established to manage risk
characteristics of the portfolios, in certain instances, loans and receivables
are charged off as uncollectible. Management maintains the allowances for loan
and receivable losses at levels it believes to be sufficient to meet the
present and potential risk characteristics inherent in the loan and receivables
portfolios, based on information currently available.
Risk Elements - Non-accruing and Past Due Loans and Advances
Past due and non-accruing loans are reviewed regularly in connection with
management's review of the allowance for loan losses as it relates to the
evaluation of collateral and the prospects for repayment of principal and
interest. Loans are placed on non-accrual status when management deems that
collectibility of interest is doubtful. Generally, loans that are 90 days or
more past due are placed on non-accrual status unless they are well secured and
in the process of collection. When a loan is placed on non-accrual status, any
uncollected interest is reversed and charged against current income. Interest
subsequently collected on loans which have been placed on non-accrual status is
generally applied against principal but may be recognized as income on the cash
basis if full collection of principal is reasonably assured based on the value
of underlying collateral or other factors. Charge offs to the allowance are
made when a loss is deemed probable. See Table 11 below for a
five-year summary of non-accrual, past due and other potential problem loans.
Domestic non-accrual loans aggregated $4.8 million at December 31, 1995,
compared to $6.0 million at year end 1994. Domestic non-accrual loans
aggregated .8% and 1.1% of total domestic loans at December 31, 1995 and 1994,
respectively. The decrease in domestic non-accrual loans during 1995 resulted
primarily from collection of a $1.5 million commercial loan, offset by net new
additions of approximately $300,000. Charge offs and additions since December
31, 1994 do not reflect any discernible trends.
Foreign non-accrual loans aggregated $2.1 million and $334,000 at December 31,
1995 and 1994, respectively. Foreign non-accrual loans represented 1.6% and
.3% of total foreign loans at December 31, 1995 and 1994, respectively. The
increase in foreign non-accrual loans is due primarily to the placement on
non-accrual status during 1995 of several loans to two Argentine banks
aggregating $2.7 million. In the fourth quarter of 1995, $695,000 of these
loans, representing the entire balance owed by one of these banks, was charged
off, resulting in a net addition to non-accrual loans of $2.0 million for the
year. Following the devaluation of the Mexican peso in 1994, some banks in
Argentina, as well as other Central and South American countries, experienced
liquidity problems due to a shift in deposits out of the country and from
smaller banks to larger banks within the country. As a result, these two banks
ceased operations in 1995. One bank has been liquidated, leading to the
$695,000 charge off referred to above. Management is continuing discussions
with the Central Bank of Argentina and third parties regarding collection of
the remaining $2.0 million of foreign non-accrual loans. The Company has
significant additional foreign loans to Argentina as well as other Latin
American countries (see Foreign Outstandings below). These loans are primarily
short-term trade-related credits and are in compliance with terms at December
31, 1995. It is possible, however, that further liquidity pressures or other
deterioration in borrowers' ability to repay may result in additional foreign
non-accrual loans and charge offs in amounts not currently estimable. See
also Allowance for Loan Losses for additional discussion.
Domestic loans 90 days or more past due at December 31, 1995 and still accruing
interest aggregated $1.1 million or approximately .2% of domestic loans
outstanding, compared with $410,000 or .1% of domestic loans outstanding in
1994. Included in domestic loans 90 days or more past due were real estate,
commercial and consumer loans of $689,000, $281,000 and $162,000, respectively,
at December 31, 1995, as compared to $279,000 and $131,000 for commercial and
consumer loans, respectively, at December 31, 1994.
- 42 -
<PAGE> 43
There were no foreign loans 90 days or more past due and still accruing
interest at December 31, 1995. Foreign loans 90 days or more past due at
December 31, 1994 and still accruing interest aggregated $1.5 million and
related to one loan. This loan was collected in full in 1995.
Advances made by Capital Factors are placed on non-accrual status when the loan
balance, including interest, is considered impaired and exceeds the estimated
value of the underlying receivables or collateral. Non-accrual advances
amounted to $2.2 million at December 31, 1995, compared to $739,000 at December
31, 1994. Non-accrual advances are considered in the assessment of the
allowance for doubtful accounts, for adequacy (see Provision for Credit Losses
- - Factoring Subsidiary above and Allowance for Credit Losses - Capital
Factors above. The increase at year end 1995 is due primarily to
advances aggregating approximately $1.4 million from one customer which were
placed on non-accrual status in December 1995. These advances were
substantially repaid in early 1996 from collections of underlying accounts
receivable.
Risk Elements - Restructured Loans and Restructured Assets
See Table 11 for a five year history of restructured loans and restructured
assets at each year end.
Restructured loans at December 31, 1995 represent two real estate loans which
were restructured, as to interest rates, in 1991 and 1992. At December 31,
1995, these loans were in compliance with terms.
Restructured assets at December 31, 1995 represent Mexican and Argentine debt
securities received in exchange for loans in connection with restructurings in
1989 and 1993. These securities are included in the available for sale
portfolio (at market value) and were in compliance with terms at December 31,
1995. The face amount of these securities aggregate $5.1 million.
Risk Elements - Other Potential Problem Loans
In addition to non-accruing loans and loans 90 days or more past due,
management has identified other potential problem loans where known information
about possible credit problems causes management to have doubts as to the
ability of borrowers to comply with present loan repayment terms. In placing
loans in this category, management considers the current status of the loan and
previous payment history, the nature and quality of collateral, current
economic conditions which may affect the borrower, and other information deemed
pertinent in the circumstances. At December 31, 1995, other potential problem
loans to domestic borrowers aggregated $6.5 million and included one real
estate loan of $4.2 million, commercial loans of $2.1 million and consumer
loans of $209,000. Other potential problem loans to domestic borrowers at
December 31, 1994 amounted to $2.0 million. The increase during 1995 was
primarily due to one non-recourse real estate mortgage loan where the property
temporarily did not generate adequate cash flow to service the loan. At year
end 1995, this loan was in compliance with its terms.
Potential problem loans to foreign borrowers amounted to $1.2 million at
December 31, 1995, representing trade-related loans to a Panamanian bank. The
loans were in compliance with terms at December 31, 1995, however, in early
1996, supervision of the borrower was taken over by the Panamanian government.
Management is closely monitoring this matter and, at the current time, is
unable to predict losses, if any, which may result from this matter.
- 43 -
<PAGE> 44
TABLE 11
NON-ACCRUAL, PAST DUE, OTHER POTENTIAL
PROBLEM LOANS AND RESTRUCTURED LOANS
AND RESTRUCTURED ASSETS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accrual
loans:
Domestic $ 4,818(1) $6,025 $ 4,989 $17,445 $29,624
Foreign 2,072(1) 334 7,312 8,134 8,297
90 days past due
or more:
Domestic 1,132 410 477 2,984 5,839
Foreign -- 1,500 -- -- --
------- ------ ------- ------- -------
Sub Total 8,022 8,269 12,778 28,563 $43,760
Non-accrual advances 2,184 739 385 1,082 965
------- ------ ------- ------- -------
Total $10,206 $9,008 $13,163 $29,645 $44,725
======= ====== ======= ======= =======
Other Potential
Problem loans $ 7,697 $2,006 $15,100 $11,100 $ 8,000
======= ====== ======= ======= =======
Restructured
loans (2) $ 8,433 $8,559 $ 8,663 $15,301 $ 3,871
======= ====== ======= ======= =======
Restructured
assets (3) $ 3,137 $2,544 $ 4,985 $ 1,975 $ 1,975
======= ====== ======= ======= =======
</TABLE>
- -------------------------
(1) During 1995, interest income of $299 and $73 on domestic and foreign
loans, respectively, would have been recorded if these loans had been current
in accordance with their original terms and had been outstanding throughout the
period or since origination, if held for part of the period. Interest income
that was recorded on these loans during 1995, was $230 and $18 on domestic and
foreign loans, respectively.
(2) Represent troubled debt restructurings as defined by Statement of
Financial Accounting Standards No. 15. These loans were in compliance with
terms at December 31, 1995.
(3) Represents securities available for sale (at market value) received in
connection with restructured foreign loans. See Foreign Outstandings below for
discussion on foreign debt securities.
- 44 -
<PAGE> 45
FOREIGN OUTSTANDINGS
Set forth on Table 12 is a summary of foreign outstandings by type and
geographic distribution.
Performing trade credits consist primarily of refinanced letters of credit,
acceptances purchased and pre-export financings principally to banks that are
located in foreign countries. Cash collateral maintained at Capital Bank as
offsets to outstanding foreign loans totaled $19.2 million at December 31, 1995
compared to $14.6 million and $19.1 million at December 31, 1994 and 1993,
respectively.
Foreign debt securities include $3.1 million, $2.5 million and $5.0 million at
December 31, 1995, 1994 and 1993, respectively, of securities available for
sale (at market value) received in connection with loan restructurings in
1993 and 1989. Foreign debt securities also include $4.0 million at the three
respective dates in securities held to maturity which were acquired for
investment purposes. All foreign debt securities were in compliance with terms
at December 31, 1995.
Customers liability on acceptances represent drafts accepted under trade
finance letters of credit issued primarily on behalf of foreign banks. Cash
collateral maintained at Capital Bank as offsets to acceptances aggregated $4.3
million, $2.2 million and $4.9 million at December 31, 1995, 1994 and 1993,
respectively.
Set forth on Table 13 is a list of cross border outstandings at December 31,
1995, 1994 and 1993 of those countries for which the total amount of
outstandings (loans, acceptances, acceptances purchased, pre-export financings
and other interest earning assets), net of (a) any written guarantees of
principal or interest by domestic or other non-local third parties (other than
the foreign government) and (b) the value of any tangible liquid collateral
which may be netted against the outstandings, exceeds 1% of consolidated total
assets. See Table 14 for analyses of 1995 activity for those countries where
total net outstandings exceeded 1% of consolidated total assets at December 31,
1995.
At December 31, 1995, net cross border outstandings to Ecuador and El Salvador,
aggregating $14.4 million and $13.6 million, respectively, exceeded .75% but
were less than 1% of consolidated total assets. At December 31, 1994, the
cross border outstandings to Peru, Ecuador and Bolivia, aggregating $13.2
million, $12.9 million and $11.0 million, respectively, exceeded .75% but were
less than 1% of consolidated total assets. At December 31, 1993, the cross
border outstandings to Brazil, aggregating $11.1 million, exceeded .75% but
were less than 1% of consolidated total assets.
In December 1994, the Mexican government devalued the peso, resulting in
substantial economic uncertainty and volatility which continued into 1995. The
Company's outstandings to Mexico-domiciled parties at December 31, 1995 include
$12.2 million in short-term trade credits and $1.8 million in securities
available for sale all of which are denominated in U.S. dollars and were in
compliance with terms. Management of the Company believes these assets will
continue to perform in accordance with terms, however no assurance can be
provided that the current economic environment will not deteriorate further and
adversely affect the Company's outstandings to Mexican borrowers.
The devaluation of the Mexican peso also created or added to economic
uncertainties in other Latin American countries. Declining confidence in local
banking systems led to a shift in deposits out of some of these countries and
from smaller banks to larger banks within these countries. The impact was
especially significant in Argentina, where total bank deposits declined during
the first half of 1995, leading to the cessation of operations by some banks.
These events have affected banks which were or continue to be customers of the
Bank, resulting in an increase in charge offs and non-accrual loans related to
Argentine borrowers. Further deterioration in the repayment capacity of
Argentine borrowers or borrowers located in other Latin American countries
could result in additional non-accrual loans, charge offs or additions to the
allowance for loan losses in amounts not determinable at this time. See
Allowance for Loan Losses below for additional discussion regarding the
adequacy of the allowance.
Restructured Foreign Assets
In the first quarter of 1995, in exchange for loans which had an aggregate face
amount of $3.9 million ($3.5 million of which was charged off in 1994) plus
several years accrued interest, the Company received bonds issued by the
government of Ecuador in connection with a restructuring of that country's
foreign debt. The bonds had a face
- 45 -
<PAGE> 46
value amount of $6.6 million, mature in 30 years and had below market interest
rates. In the first and second quarters of 1995, these bonds were sold for net
proceeds aggregating $1.8 million, representing the then current market price.
Proceeds in excess of the remaining book balance of the loans were recorded as
loan recoveries at the time of receipt. See Allowance for Loan Losses
below.
The Company did not enter into any restructuring arrangements involving foreign
loans in 1995, except as discussed above. At December 31, 1995, the Company
was not involved in any discussions regarding the restructuring of foreign
loans and had no commitments to extend additional credit under restructuring
arrangements completed in prior years. See Table 11 for the remaining balance
of restructured assets.
Allocated Transfer Risk Reserve (ATRR)
The Comptroller of the Currency, Board of Governors of the Federal Reserve
System and Federal Deposit Insurance Corporation have jointly issued rules
requiring banking institutions to establish special reserves (the Allocated
Transfer Risk Reserves, or "ATRR") against the risks presented in certain
international assets when the Federal banking agencies determine that such
reserves are necessary. The rules provide that, for regulatory purposes, the
ATRR is to be accounted for separately from the general allowances for loan
losses and shall not be included in the banking institution's capital or
surplus. The rules also provide that no ATRR provisions are required if the
banking institution writes down the assets to the requisite amount, or if there
exists tangible, liquid collateral located outside of the debtor country. At
December 31, 1995 the Company had no asset which required ATRR.
Notwithstanding regulatory requirements to record ATRR, management assesses the
ultimate collectibility of foreign assets and, when deemed appropriately, may
record additional reserves or charge off assets in excess of ATRR requirements.
- 46 -
<PAGE> 47
TABLE 12
FOREIGN OUTSTANDINGS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
December 31,
----------------------------------------
By type: 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Performing trade credits $124,501 $111,150 $ 70,328
Other performing loans 1,050 3,832 6,524
Non-accrual loans 2,072 334 7,311
-------- -------- --------
Total Loans 127,623 115,316 84,163
Debt securities 7,162 6,569 9,010
Customers liability on
acceptances 29,643 28,082 30,170
Other assets 1,991 1,677 875
-------- -------- --------
Total(3) $166,419 $151,644 $124,218
======== ======== ========
Geographic distribution:
Latin America and
Caribbean $160,717 $146,767 $120,083
Middle East 4,152 4,164 4,041
Other regions 1,550 713 94
-------- -------- --------
Total(3) $166,419 $151,644 $124,218
======== ======== ========
</TABLE>
- ----------
(1) All amounts are prior to any reduction for written guarantees by domestic
or non-local third parties, or tangible liquid collateral which may be netted
against the outstandings.
(2) All foreign outstandings are denominated in U.S. dollars, except for
certain other assets amounting to $92.7 million, $92.1 million and $87.3
million at December 31, 1995, 1994 and 1993, respectively.
(3) Amounts exclude $1.4 million, $300,000 and $8.0 million of allowance for
foreign loan losses.
- 47 -
<PAGE> 48
TABLE 13
FOREIGN OUTSTANDINGS IN EXCESS OF 1% OF ASSETS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Debt Aggregate Cash Net
Loans(1) Securities Acceptances(1) Other Outstandings Collateral Outstandings
--------- ------------- -------------- -------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1995:
Argentina $11,762 $1,866 $ 3,192 $201 $17,021 $ (671) $16,350
Brazil 17,422 -- 5,860 276 23,558 (371) 23,187
Guatemala 18,827 -- 2,211 251 21,289 (3,175) 18,114
Peru 18,242 -- 1,474 82 19,798 (1,288) 18,510
At December 31, 1994:
Argentina 10,301 1,477 5,243 147 17,168 (1,039) 16,129
Brazil 16,910 -- 2,312 205 19,427 (628) 18,799
Mexico 12,865 1,067 950 143 15,025 (883) 14,142
At December 31, 1993:
Argentina 8,100 3,358 10,888 99 22,445 (1,719) 20,726
Ecuador 13,949 -- 4,582 81 18,612 (6,161) 12,451
Mexico 12,154 1,627 1,561 55 15,397 (713) 14,684
</TABLE>
- ----------
(1) Loans and Acceptances are primarily composed of short-term trade related
balances outstanding to banks and other financial institutions.
- 48 -
<PAGE> 49
TABLE 14
CHANGES IN OUTSTANDINGS OF SELECTED
FOREIGN COUNTRIES
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Argentina Brazil Guatemala Peru
--------- ------ --------- ----
<S> <C> <C> <C> <C>
Aggregate outstandings,
January 1, 1995 $17,168 $19,427 $10,051 $16,429
Net change in short-term
outstandings (557) 4,131 11,238 5,102
Changes in other outstandings:
Additional outstandings 20 -- -- 26
Interest income accrued 1 -- -- 44
Collections of principal -- -- -- (1,639)
Collections of interest -- -- -- (164)
Other changes 389 -- -- --
------- ------- ------- -------
Aggregate outstandings,
December 31, 1995 $17,021 $23,558 $21,289 $19,798
======= ======= ======= =======
Short-term outstandings,
December 31, 1995 $15,135 $23,558 $21,289 $19,532
======= ======= ======= =======
</TABLE>
- 49 -
<PAGE> 50
ALLOWANCE FOR LOAN LOSSES
Management assesses the adequacy of the allowance for loan losses not less
frequently than quarterly and causes appropriate action to maintain the
allowance at a level deemed adequate to absorb potential loan losses in the
portfolio. In completing its assessment, management considers a variety of
factors, including specific assessment of certain identified problem loans,
loss history of classified (as to credit risk) loans, loss history of loans not
classified (by portfolio type), economic trends and other factors which may be
relevant. The Company maintains a loan review staff, independent of the credit
granting function, which conducts continuous reviews of the various loan
portfolios to arrive at credit risk classifications. Loans are charged off
when a loss is deemed probable. Additions to the allowance are made by
provisions charged against current operations. Recoveries of loans previously
charged off are also added to the allowance.
Set forth on Table 15 is a five year history of activity in the allowance for
loan losses. Also set forth on Table 16 is a five year history of activity of
the portion of the allowance allocated for foreign loan exposure. Table 17
presents a five year summary of management's allocation of the allowance at
each year end. Except for specific reserves which may be required from time to
time by banking regulations (the Company had no such requirement at December
31, 1995), management views the entire allowance for loan losses as being
available to absorb losses inherent in any component of the portfolio. The
allocation of the allowance is completed by management for analytical purposes
and is not necessarily indicative of future charge offs.
During 1995, domestic loan charge offs generally decreased compared to 1994 as
a result of overall improvement in the credit quality of borrowers. To a
lesser extent, recoveries of previously charged off domestic loans increased
for similar reasons. The $3.5 million in real estate-mortgage loan charge offs
in 1994 was primarily related to a single loan which was subsequently
foreclosed and transferred to other real estate.
During the first quarter of 1994, the Company charged off approximately $6.3
million in non-trade loans to several borrowers located in Ecuador and Peru.
These loans were on non-accrual status and fully reserved for as of December
31, 1993 and certain of them had been previously restructured. At the time of
charge off, they were on non-accrual status. In the third quarter of 1994, the
Company sold its interest in a $2.5 million loan to a Peruvian borrower,
included in the charge offs above, for net proceeds of $1.5 million. These
proceeds were recorded as loan recoveries at the time of receipt. In the first
quarter of 1995, the Company received bonds issued by the government of Ecuador
in connection with a restructuring of that country's foreign debt. These bonds
had a face amount of $6.6 million and were received in exchange for $3.9
million in loans (plus several years past due interest), $3.5 million of which
was included in the charge offs referred to above. In the first and second
quarters of 1995, these bonds were sold for net proceeds aggregating $1.8
million representing the then current market price. Proceeds in excess of the
remaining loan balance, aggregating $1.6 million, were recorded as loan
recoveries at the time of receipt. The Company has not conducted non- trade
foreign lending of the type which gave rise to these loans since the 1980s and
currently has no plans to do so. At December 31, 1995, the Company had no
restructured or non-performing non-trade foreign loans. Due to the foreign
charge offs and recoveries in 1994 and 1995, the ratio of net charge offs to
average loans is significantly impacted. Excluding this foreign loan activity,
this ratio would have been .4% in 1995 and 1.3% in 1994.
The allowance for loan losses totaled $11.8 million and $9.2 million at
December 31, 1995 and 1994, respectively, representing 1.7% and 1.4% of
outstanding loans at the respective dates. The ratio of the allowance for loan
losses to non-accrual loans was 176% at December 31, 1995 compared to 145% at
December 31, 1994. The ratio of the allowance to total non-performing loans
(non-accrual loans and loans past due 90 days or more) was 151% and 111% at
December 31, 1995 and 1994, respectively. The increase in these ratios
reflects higher allowance balances allocated for foreign loans as well as
potential problem domestic loans. At December 31, 1995 the total allowance
included $1.4 million allocated for foreign loans, $9.9 million allocated for
domestic exposure and $489,000 unallocated. At December 31, 1994 the foreign
allocation was $300,000, domestic was $7.9 million and $1.0 million was
unallocated.
The allowance allocated for foreign loans at December 31, 1995 includes $1.0
million for the estimated loss exposure relating to $1.9 million in non-accrual
loans to one Argentine bank and approximately $400,000 for other foreign
exposure. These Argentine bank loans arose from trade-related transactions, as
does substantially all of the Company's foreign loans. Following the
devaluation of the Mexican peso in 1994, some banks in Argentina (as well as in
other Central and South American countries) experienced
- 50 -
<PAGE> 51
liquidity problems due to a shift in deposits out of the country and from
smaller banks to larger banks. As a result, two banks which had loans from the
Company ceased operations in 1995 and have been or are in the process of
liquidation. During the fourth quarter of 1995, loans to one of these banks,
aggregating $695,000, were charged off. In addition to these two banks, at
December 31, 1995 the Company had loans outstanding to Argentine borrowers
aggregating $8.5 million, all of which was trade-related and performing.
Through the five years ended December 31, 1994, losses associated with the
Company's trade-related lending averaged less than one-half of 1% of foreign
loans outstanding. Based on an assessment of all information currently
available, including discussions with the Central Bank of Argentina,
discussions with third parties regarding the purchase of the Company's interest
in the non-accrual loans, overall loss history and cash collateral held by the
Company, management believes the allowance allocated for foreign loans at
December 31, 1995 to be adequate. It is possible, however, that future
deterioration in the repayment capacity of Argentine or other foreign borrowers
could result in additional non-performing loans and additions to the allowance
for losses in amounts not determinable at this time.
The allowance allocated for domestic loans increased as a result of
management's evaluation of the higher level of potential problem loans in the
commercial and real estate mortgage portfolio at December 31, 1995. Management
does not believe these circumstances represent deteriorating trends, but are
isolated to specific borrowers.
Based on information currently available, management believes the allowance for
loan losses to be adequate to absorb losses, if any, which might occur on these
loans or are otherwise inherent in the loan portfolio. Factors involved in
determining the level of the allowance are subject to estimates and assumptions
regarding future events. At this time, management is unable to predict the
amount of future adjustments to the allowance for loan losses if its estimates
and assumptions are determined to be incorrect.
- 51 -
<PAGE> 52
TABLE 15
SUMMARY OF LOAN LOSS EXPERIENCE
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Allowance for loan
losses at beginning
of period $ 9,210 $ 18,423 $ 15,243 $ 17,239 $ 17,306
--------- -------- -------- -------- --------
Loans charged off:
Real estate - construction -- -- (796) (4,571) (4,093)
Real estate - mortgage (17) (3,470) (439) (272) --
Commercial and financial (1,227) (2,949) (2,938) (4,839) (8,339)
Consumer (2,177) (2,135) (1,673) (1,801) (870)
Foreign (743) (6,893) (1,389) -- (451)
--------- -------- -------- -------- --------
Total loans charged off (4,164) (15,447) (7,235) (11,483) (13,753)
--------- -------- -------- -------- --------
Recoveries on loans
previously charged off:
Real estate - mortgage 27 138 6 33 4
Commercial and financial 1,081 334 669 426 322
Consumer 403 714 212 126 108
Foreign 1,632 1,523 28 2 37
--------- -------- -------- -------- --------
Total recoveries 3,143 2,709 915 587 471
--------- -------- -------- -------- --------
Net loans charged off (1,021) (12,738) (6,320) (10,896) (13,282)
--------- -------- -------- -------- --------
Additions to allowance
charged to operating
expense 3,600 3,525 9,500 8,900 13,215
--------- -------- -------- -------- --------
Allowance for loan
losses at end of period $ 11,789 $ 9,210 $ 18,423 $ 15,243 $ 17,239
========= ======== ======== ======== ========
Average amount of
loans outstanding
for the year $ 682,252 $592,371 $583,744 $570,950 $616,094
========= ======== ======== ======== ========
Ratio of net loans
charged off to average
loans outstanding for
the period (1) .15% 2.15% 1.08% 1.91% 2.16%
========= ======== ======== ======== ========
</TABLE>
- ----------
(1) Before deduction of allowance for loan losses.
- 52 -
<PAGE> 53
TABLE 16
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
ALLOCATED TO FOREIGN LOANS
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance, beginning
of year $ 300 $ 8,000 $ 7,000 $ 6,300 $ 7,500
Provision (credit)
for loan losses 211 (2,330) 2,361 700 (786)
Charge offs (743) (6,893) (1,389) -- (451)
Recoveries 1,632 1,523 28 -- 37
------- ------- ------- ------- -------
Balance, end of year $ 1,400 $ 300 $ 8,000 $ 7,000 $ 6,300
======= ======= ======= ======= =======
</TABLE>
- 53 -
<PAGE> 54
TABLE 17
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Amount Percentage of loans to total loans
December 31, December 31,
----------------------------------------- ---------------------------------
1995 1994 1993 1992 1991 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Applicable to:
Domestic:
Commercial and
industrial $ 4,700 $3,500 $ 5,700 $ 2,700 $ 4,400 28% 25% 28% 26% 32%
Real estate
construction 400 300 400 2,600 3,100 12% 11% 12% 15% 15%
Real estate mortgage 2,100 1,500 1,600 1,500 1,700 20% 22% 24% 20% 22%
Consumer 2,700 2,600 1,900 1,060 700 22% 24% 21% 15% 12%
Foreign 1,400 300 8,000 7,000 6,300 18% 18% 15% 24% 19%
Unallocated 489 1,010 823 383 1,039 N/A N/A N/A N/A N/A
------- ------ ------- ------- ----- --- --- --- --- ---
$11,789 $9,210 $18,423 $15,243 17,239 100% 100% 100% 100% 100%
======= ====== ======= ======= ====== === === === === ===
</TABLE>
- 54 -
<PAGE> 55
ALLOWANCE FOR CREDIT LOSSES - CAPITAL FACTORS
The allowance for credit losses at Capital Factors is maintained at a level
deemed adequate by management to absorb losses in the portfolio after
evaluating the portfolio, current economic conditions, changes in the nature
and volume of the portfolio, past loss experience and other pertinent factors.
Many of these factors involve a significant degree of estimation and are
subject to rapid change which may be unforeseen by management. Changes in
these factors could result in material adjustments to the allowance in the near
term.
The nature and composition of the accounts receivable portfolio lends itself to
statistical analysis by management in assessing the adequacy of the allowance
and provision for credit losses. Such statistical analysis is supplemented by
specific assessment of identified problem or potential problem risks and
consideration of known trends which may affect collectibility of receivables.
The accounts receivable portfolio turns over approximately seven times each
year. Due to stringent charge off policies, and the frequency of this
turnover, actual losses are believed to bear a direct relationship to accounts
receivable purchased volume.
Set forth on Table 18 is a five year summary of key statistics used by
management in evaluating the adequacy of the allowance and provision for credit
losses. Set forth on Table 19 is a five year history of activity in the
allowance for credit losses.
- 55 -
<PAGE> 56
TABLE 18
SUMMARY OF SELECTED ASSET QUALITY
STATISTICS OF CAPITAL FACTORS
(Dollar Amounts in Thousands, except as indicated)
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Accounts receivable past due
more than 60 days 4.85% 4.69% 4.85% 6.08% 6.72%
Accounts receivable turnover
in days 53 53 52 55 56
Provision for credit
losses $ 2,235 $ 2,235 $ 2,645 $ 3,150 $ 2,550
Charge offs $ 1,625 $ 3,148 $ 3,385 $ 3,476 $ 1,515
Allowance as a % of
accounts receivable .92% .71% .97% 1.21% 1.81%
Accounts receivable purchased
(for the year ended in
millions of dollars) $ 2,001 $ 1,537 $ 1,327 $ 1,058 $ 825
Charge offs as a % of accounts
receivable purchased 0.09% 0.21% 0.26% 0.33% 0.18%
Provision for credit losses as
a % of accounts receivable
purchased 0.12% 0.15% 0.20% 0.30% 0.31%
</TABLE>
TABLE 19
ANALYSIS OF ALLOWANCE FOR CREDIT
LOSSES - CAPITAL FACTORS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Beginning balance $ 1,774 $ 2,157 $ 2,175 $ 2,189 $ 987
Provision for credit losses 2,235 2,235 2,645 3,150 2,550
Charge offs (1,625) (3,148) (3,385) (3,476) (1,515)
Recoveries 597 530 722 312 167
-------- -------- -------- -------- --------
Ending balance $ 2,981 $ 1,774 $ 2,157 $ 2,175 $ 2,189
======== ======== ======== ======== ========
</TABLE>
- 56 -
<PAGE> 57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1994
------------------------------
(In Thousands of Dollars)
<S> <C> <C>
Assets:
Cash and due from banks $ 138,903 $ 91,712
Federal funds sold 75,000 15,000
------------ ------------
Cash and cash equivalents 213,903 106,712
------------ ------------
Securities held to maturity
(Market value 1995 - $24,173
1994 - $89,122; 23,496 91,031
Securities available for sale, at market value 217,008 130,018
------------ ------------
Total securities 240,504 221,049
------------ ------------
Loans 728,679 648,618
Allowance for loan losses (11,789) (9,210)
Deferred fees and unearned income (2,636) (2,771)
------------ ------------
Loans, net 714,254 636,637
------------ ------------
Accounts receivable-factoring subsidiary, net 319,910 248,142
Premises and equipment, net 33,558 32,358
Due from customers on acceptances 32,413 30,575
Other real estate 6,837 14,710
Accrued interest and other assets 31,740 29,679
------------ ------------
Total assets $ 1,593,119 $ 1,319,862
============ ============
Liabilities and stockholders' equity:
Deposits:
Non-interest bearing deposits $ 336,202 $ 296,599
Savings and money market deposits 283,893 315,323
Time deposits 418,660 264,871
------------ ------------
Total deposits 1,038,755 876,793
------------ ------------
Funds purchased and securities
sold under agreements to repurchase 86,133 87,236
Bank acceptances outstanding 32,413 30,575
Due to clients-factoring subsidiary 128,578 90,706
Long-term debt 176,650 126,980
Other liabilities 16,865 16,209
------------ ------------
Total liabilities 1,479,394 1,228,499
------------ ------------
Stockholders' equity:
Common stock, $1 par value
Authorized - 20,000,000 shares
Issued - 7,453,080 in 1995;
4,821,475 in 1994 7,453 4,821
Capital surplus 8,151 8,216
Retained earnings 98,119 83,445
Treasury stock - 80,000 shares -- (1,440)
Unrealized gain (loss) on
securities available for sale 2 (3,679)
------------ ------------
Total stockholders' equity 113,725 91,363
------------ ------------
Total liabilities and
stockholders' equity $ 1,593,119 $ 1,319,862
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
- 57 -
<PAGE> 58
Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1994 1993
-----------------------------------
(In Thousands of Dollars Except
Per Share Data)
<S> <C> <C> <C>
Interest income:
Loans $ 68,360 $ 52,634 $ 49,882
Advances-factoring clients 23,803 16,747 13,332
Taxable securities 13,095 11,687 10,541
Tax-exempt securities 232 293 719
Federal funds sold and other
short-term investments 2,924 3,046 2,653
Dividends and other 917 156 143
-------- -------- --------
Total interest income 109,331 84,563 77,270
-------- -------- --------
Interest expense:
Savings and money market deposits 7,046 6,845 7,433
Time deposits 19,026 10,656 9,560
Short-term borrowings 4,504 3,980 3,198
Long-term debt 11,176 3,633 283
-------- -------- --------
Total interest expense 41,752 25,114 20,474
-------- -------- --------
Net interest income 67,579 59,449 56,796
Provision for loan losses 3,600 3,525 9,500
Provision for doubtful
accounts-factoring subsidiary 2,235 2,235 2,645
-------- -------- --------
Net interest income after
provisions 61,744 53,689 44,651
-------- -------- --------
Other income:
Factoring revenues 23,114 19,977 17,635
Service charges on deposits 12,609 11,757 9,436
Fees on letters of credit 4,237 3,961 6,420
Securities gains, net 12 1,213 632
Other operating income 6,134 5,040 6,076
-------- -------- --------
Total other income 46,106 41,948 40,199
-------- -------- --------
Other expenses:
Salaries and employee benefits 37,964 36,641 31,709
Occupancy expense, net 7,424 7,548 7,059
Other operating expenses, net 34,900 30,270 28,945
-------- -------- --------
Total other expenses 80,288 74,459 67,713
-------- -------- --------
Income before income taxes 27,562 21,178 17,137
Provision for income taxes 10,461 7,974 5,368
-------- -------- --------
Net Income $ 17,101 $ 13,204 $ 11,769
======== ======== ========
Earnings per common and common
equivalent share:
Primary $ 2.25 $ 1.83 $ 1.64
======== ======== ========
Fully diluted $ 2.20 $ 1.80 $ 1.61
======== ======== ========
Cash dividends declared
per share of common stock $ .33 $ .33 $ .33
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
- 58 -
<PAGE> 59
Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Securities
Common Capital Retained Treasury Available for
Stock Surplus Earnings Stock Sale
------------------------------------------------------------
(In Thousands of Dollars)
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance,
January 1, 1993 $ 4,677 $ 6,729 $ 63,143 $ -- $ --
Net income -- -- 11,769 -- --
Cash dividends declared
($.33 per share) -- -- (2,340) -- --
Proceeds from exercise of
common stock options 10 89 -- -- --
Acquisition of treasury stock -- -- -- (1,440) --
Unrealized gain on securities
available for sale -- -- -- -- 2,036
------------------------------------------------------------
Balance,
December 31, 1993 4,687 6,818 72,572 (1,440) 2,036
Net income -- -- 13,204 -- --
Cash dividends
declared ($.33 per share) -- -- (2,331) -- --
Proceeds from exercise of
common stock options 134 1,398 -- -- --
Decrease in market value
of securities available
for sale -- -- -- -- (5,715)
------------------------------------------------------------
Balance,
December 31, 1994 4,821 8,216 83,445 (1,440) (3,679)
Net income -- -- 17,101 -- --
Cash dividends declared
($.33 per share) -- -- (2,427) -- --
Effect of 3 for 2 stock
split 2,429 (2,429) -- -- --
Redemption of fractional
shares -- (2) -- -- --
Proceeds from exercise
of common stock options 203 1,694 -- -- --
Proceeds for sale of
treasury stock -- 672 -- 1,440 --
Increase in market value of
securities available for sale -- -- -- -- 3,681
------------------------------------------------------------
Balance, December 31, 1995 $ 7,453 $ 8,151 $ 98,119 $ -- $ 2
======= ======= ======== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
- 59 -
<PAGE> 60
Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1995 1994 1993
----------------------------------------
(In Thousands of Dollars)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 17,101 $ 13,204 $ 11,769
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 3,600 3,525 9,500
Provision for doubtful
accounts-factoring subsidiary 2,235 2,235 2,645
Net losses on other real estate 2,046 1,848 162
Securities gains (12) (1,213) (632)
Depreciation and amortization 4,173 3,756 4,583
(Gain) Loss on sale of premises and
equipment, net (66) 123 1,266
(Increase) decrease in accrued
interest and other assets (4,236) (6,296) 3,868
Increase (decrease) in other
liabilities 629 2,451 (3,205)
---------- ---------- ---------
Net cash provided by operating
activities 25,470 19,633 29,956
---------- ---------- ---------
Cash flows from investing activities:
Proceeds from maturities of securities -- -- 46,006
Proceeds from sales of securities -- -- 5,966
Purchase of securities -- -- (49,374)
Proceeds from maturities of securities
held to maturity 28,127 38,355 --
Purchase of securities held to maturity (13,074) (79,834) --
Proceeds from maturities of securities
available for sale 47,577 19,687 --
Proceeds from sale of securities
available for sale -- 6,159 --
Purchase of securities available
for sale (76,083) (33,140) --
Net increase in loans (81,725) (95,929) (364)
Increase in accounts receivable-
factoring subsidiary (net of
due to clients) (36,131) (27,137) (30,916)
Proceeds from sales of premises
and equipment 171 48 2,613
Purchase of premises and equipment (5,612) (12,068) (3,281)
Proceeds from sales of other
real estate 7,334 4,957 24,684
Improvements to other real estate (999) (451) (8,114)
---------- ---------- ---------
Net cash used in
investing activities (130,415) (179,353) (12,780)
---------- ---------- ---------
</TABLE>
(Continued)
- 60 -
<PAGE> 61
Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1995 1994 1993
----------------------------------------
(In Thousands of Dollars)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $ 161,962 $ (39,055) $ (18,508)
Net increase (decrease) in
funds purchased and securities
sold under agreements to
repurchase (1,103) 42,670 (57,029)
Repayment of debt-factoring
subsidiary -- (15,000) --
Proceeds from issuance of
long-term debt 50,000 122,434 --
Repayment of long-term debt (330) (625) (1,250)
Cash dividends (2,400) (2,313) (2,222)
Proceeds from stock
options exercised 1,897 1,532 99
Proceeds from sale of
treasury stock 2,112 -- --
Redemption of fractional shares (2) -- --
---------- --------- ---------
Net cash provided by (used in)
financing activities 212,136 109,643 (78,910)
---------- --------- ---------
Net increase (decrease) in cash
and cash equivalents 107,191 (50,077) (61,734)
Cash and cash equivalents at
beginning of year 106,712 156,789 218,523
---------- --------- ---------
Cash and cash equivalents
at end of year $ 213,903 $ 106,712 $ 156,789
========== ========= =========
Supplemental disclosures:
Cash paid during the year for:
Interest $ 40,584 $ 24,798 $ 20,921
========== ========= =========
Income taxes $ 10,821 $ 11,000 $ 1,726
========== ========= =========
Non-cash activities:
Securities transferred
from held to maturity to available
for sale $ 52,841 $ -- $ --
========== ========= =========
Increase (decrease) in market
value of securities available
for sale, net of applicable
taxes (credit) in 1995 -
$2,175, 1994 - ($3,377),
1993 - $1,203 $ 3,681 $ (5,715) $ 2,036
========== ========= =========
Loans transferred to other
asset categories $ 1,104 $ 3,040 $ 8,856
========== ========= =========
Loans recorded in connection
with sales of other assets $ 596 $ 197 $ 19,452
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
- 61 -
<PAGE> 62
Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Significant Accounting Policies:
Capital Bancorp (the "Parent Company") is a bank holding company which conducts
operations principally through Capital Bank (the "Bank"), a wholly-owned
subsidiary, and Capital Factors Holding, Inc., a wholly-owned subsidiary of the
Bank. The Bank operates a commercial banking franchise through 28 offices
located in the South Florida area. Capital Factors Holding, Inc. and its
subsidiaries ("Capital Factors") provides accounts receivable factoring and
asset based lending services through offices located in Ft. Lauderdale,
Florida, New York, New York, Los Angeles, California and Charlotte, North
Carolina.
The consolidated financial statements of Capital Bancorp and subsidiaries (the
"Company") are prepared in conformity with generally accepted accounting
principles and prevailing practices within the banking industry. The following
is a summary of the significant accounting and reporting policies used in
preparing the financial statements:
Principles of Consolidation:
The consolidated financial statements include the accounts of the Parent
Company, the Bank and its subsidiaries, Capital Factors and Capital Factors
Financing Trust, a special purpose trust. All significant intercompany
transactions and balances have been eliminated in consolidation.
Investment Securities:
The Company's securities holdings are segregated into three separate
portfolios; held to maturity, available for sale and trading. At December 31,
1995 and 1994, the Company held no trading securities.
Securities held to maturity include securities purchased with the ability and
positive intent to hold to maturity. These securities are stated at historical
cost adjusted for amortization of premiums and accretion of discounts. Any
investment security for which there has been a value impairment deemed by
management to be other than temporary is written down to its estimated market
value with a charge to current operations. Gains and losses on sales of
securities held to maturity are recognized using the specific identification
method.
Securities which are neither classified as held to maturity nor trading
securities are included in securities available for sale and are reported at
market value. Any unrealized gain or loss, net of applicable income taxes, is
reported as a separate addition to or reduction from stockholders' equity.
Gains and losses arising from the sale of securities available for sale are
recognized based on the specific identification method and included in results
of operations.
Loans:
Interest on loans is generally recognized based upon the principal amount
outstanding. Loans are placed on non-accrual status when management deems that
collectibility of interest is doubtful. Generally, loans that are more than 90
days past due are placed on non-accrual status unless they are well secured and
in the process of collection. Interest subsequently collected on loans which
have been placed on non-accrual status is generally applied against principal.
Loans are charged off when a loss is deemed probable.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure," as of January 1, 1995. This Statement requires that impairment of
loans be measured by comparing the recorded amount of the loan to the present
value of expected future cash flows discounted at the loan's effective interest
rate, or at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. Small balance, homogenous
loans, comprised primarily of the Company's consumer loans, are collectively
evaluated for impairment. In determining when a loan is impaired, management
primarily considers current events and conditions, including the borrower's or
guarantor's (if applicable) operating performance and capacity to repay the
loan and realizable collateral values. The determination of impairment is done
on a loan by loan basis and involves significant judgement and estimation, and
final outcomes may differ from such estimates. Impaired loans may be accruing
or nonaccruing based on current and
- 62 -
<PAGE> 63
projected performance in relation to the specific terms of the loan. Adoption
of SFAS No. 114, as amended by SFAS No. 118, did not affect the Company's
policies on non-accrual loans or income recognition.
Allowance for Loan Losses:
The allowance for loan losses is maintained at a level deemed adequate by
management to absorb potential loan losses in the portfolio after evaluating
the loan portfolio, current economic conditions, changes in the nature and the
volume of the portfolio, past loan loss experience and other pertinent factors.
Many of these factors involve a significant degree of estimation and are
subject to rapid change which may be unforeseen by management. Changes in
these factors could result in material adjustments to the allowance.
The allowance is increased by provisions charged to current operations and
recoveries of amounts previously charged off, and is reduced by current charge
offs. Included in the allowance are amounts for impaired loans required by
SFAS No. 114 as discussed above. The adoption of SFAS No. 114 as of January
1, 1995 did not impact the level of the overall allowance or the Company's
policies regarding charge offs or recoveries.
Accounts Receivable-Factoring Subsidiary:
The allowance for doubtful accounts is maintained at a level deemed adequate by
management to absorb losses on receivables and advances after evaluating the
portfolio, current economic conditions, changes in the nature and volume of the
portfolio, past loss experience and other pertinent factors. Many of these
factors involve a significant degree of estimation and are subject to rapid
change which may be unforeseen by management. Changes in these factors could
result in material changes to the allowance in the near term. Accounts
receivable which are past due are charged off unless, in the opinion of
management, collection is likely from the customer, client or collateral
realization, if any.
Interest income on advances to factoring clients is generally recorded as
earned in accordance with the related agreements with clients. Advances are
placed on non-accrual status when the advance balance and interest receivable
exceed the estimated value of the underlying collateral or receivables.
Factoring fees are recognized generally at the time of purchase of accounts
receivable due to the nature of the relationship with the factoring client and
the relatively short term nature of accounts receivable purchased.
Premises and Equipment:
Premises and equipment are carried at cost less accumulated depreciation and
amortization computed generally on a straight-line basis over the estimated
useful lives of the assets or lease terms.
Other Real Estate:
Other real estate owned is carried at the lower of cost or fair value less
estimated costs to sell the asset and includes property acquired through
foreclosure. Any writedowns deemed necessary to adjust the asset to fair value
less estimated costs to sell the asset are charged to the allowance for loan
losses at the date of acquisition. Expenses incurred in connection with the
maintenance and operation of such assets, writedowns subsequent to acquisition
and gains and losses upon sale are included in current operations as a
component of other operating expenses. Costs incurred for major improvements
or costs which increase the value of these assets are capitalized.
Determination of fair value of other real estate involves a significant degree
of estimation and is subject to changes that may be unforeseen by management.
Retirement Plans and Other Postemployment Benefits:
Costs of the retirement plans are actually determined by the projected unit
credit cost method. The plans provide for no past service credits.
The Company has no material postemployment obligations.
Income Taxes:
There are two components of income tax provision, current and deferred.
Current income tax provisions approximate taxes to be paid or refunded for the
applicable period.
- 63 -
<PAGE> 64
Balance sheet amounts of deferred taxes are recognized on the temporary
differences between the bases of assets and liabilities as measured by tax laws
and their bases as reported in the financial statements. Deferred tax expense
or benefit is then recognized for the change in deferred tax liabilities or
assets between periods.
Recognition of deferred tax balance sheet amounts is based on management's
belief that it is more likely than not that the tax benefit associated with
certain temporary differences, tax operating loss carryforwards, and tax
credits will be realized. A valuation allowance is recorded for those deferred
tax items for which it is more likely than not that realization will not occur.
The Company files consolidated income tax returns. The subsidiaries provide
for income taxes on a separate return basis and remit to the Parent Company
amounts determined to be currently payable.
Per Share Data:
Primary per share amounts are computed based upon the average number of common
and common equivalent shares outstanding, assuming proceeds from the assumed
exercise of options were used to purchase common shares outstanding at the
average market value during each period, unless such exercise is anti-dilutive.
Fully diluted earnings per share assumes that the proceeds were used to
purchase common shares outstanding at the higher of market value per share as
of the end of each period or the average market value during each period,
unless such exercise is anti-dilutive. Prior to the listing of the Company's
common stock on the Nasdaq National Market in July 1995, market value was
estimated based on factors including the Company's financial condition and
operating results, and price/earnings and price to book value multiples of
selected publicly traded banking companies. Per share and average share
information for prior periods have been retroactively restated for the 3-for-2
stock split in the form of a 50% stock dividend which was effective June 22,
1995.
Statements of Cash Flows:
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, interest bearing deposits with banks, Federal
funds sold and other short-term investments with maturities of 90 days or less.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassification:
Certain amounts in prior periods have been reclassified to conform with 1995
presentations.
New Accounting Pronouncements:
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of," which is effective for fiscal years that begin after
December 15, 1995. This Statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. This Statement requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The unrecoverable amount should be recognized as an impairment
loss. This Statement also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. Adoption of this Statement is not
expected to have a significant impact on the Company's consolidated financial
position or results of operations.
In October 1995 the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." This statement requires certain disclosures about stock-based
employee compensation arrangements regardless of the method used to account for
them, defines a fair value based method of accounting for an employee stock
option or similar equity instrument and
- 64 -
<PAGE> 65
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for stock based compensation plans using
the intrinsic value method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and, if presented, earnings per share as if
the fair value method of accounting defined in SFAS No. 123 had been applied.
Under the fair value method, compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period,
which is usually the vesting period. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of the
stock at grant date or other measurement date over the amount an employee must
pay to acquire the stock. The disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after December
15, 1995. Pro forma disclosures required for entities that elect to continue
to measure compensation cost using APB No. 25 must include the effects of all
awards granted in fiscal years that begin after December 15, 1994. Management
is in the process of evaluating the impact of SFAS No. 123.
(2) Restrictions on Cash and Due from Bank Accounts:
The Bank is required to maintain average balances in the form of vault cash or
deposits with the Federal Reserve Bank of Atlanta pursuant to Federal Reserve
Bank regulations. The average amount of these reserves for the years ended
December 31, 1995 and December 31, 1994 was $37.7 million and $34.1 million,
respectively.
CF Funding Corp., a wholly-owned subsidiary of Capital Factors, is required to
maintain cash collateral accounts at Bankers Trust Company, the trustee,
pursuant to the terms of certain debt instruments. Such cash collateral
amounted to $16.2 million and $4.7 million at December 31, 1995 and December
31, 1994. See Note 10.
(3) Securities:
On October 18, 1995, the Financial Accounting Standards Board announced that it
was suspending the transfer provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," during the period of November 15,
1995 through December 31, 1995. During this period companies were allowed to
redesignate their Held to Maturity or Available for Sale securities without
tainting the other holdings in the portfolio. On December 29, 1995 $52.8
million of securities held to maturity with aggregate unrealized gains of
$906,000 were transferred to securities available for sale.
- 65 -
<PAGE> 66
The following tables present the amortized cost, gross unrealized gains, gross
unrealized losses and estimated market value for each category of securities
(000s omitted) in the held to maturity and available for sale portfolios:
Securities Held to Maturity:
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Treasury and
government
agency securities $ 16,016 $ 223 $ -- $ 16,239
Securities of states
and political
subdivisions 3,090 454 -- 3,544
Obligations of foreign
government 4,025 -- -- 4,025
Other debt securities 315 -- -- 315
-------- ------- ------- --------
Total debt securities 23,446 677 -- 24,123
Equity securities 50 -- -- 50
-------- ------- ------- --------
Total securities
- held to
maturity $ 23,496 $ 677 $ -- $ 24,173
======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Treasury and
government
agency securities $ 82,649 $ 58 $ 2,270 $ 80,437
Securities of states
and political
subdivisions 3,771 315 12 4,074
Obligations of foreign
government 4,025 -- -- 4,025
Other debt securities 536 -- -- 536
-------- ------- ------- --------
Total debt securities 90,981 373 2,282 89,072
Equity securities 50 -- -- 50
-------- ------- ------- --------
Total securities
- held to
maturity $ 91,031 $ 373 $ 2,282 $ 89,122
======== ======= ======= ========
</TABLE>
- 66 -
<PAGE> 67
Securities Available for Sale:
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Treasury and
government
agency securities $210,887 $ 2,095 $ 128 $ 212,854
Obligations of U.S.
corporations 1,000 17 -- 1,017
Obligations of
foreign
governments 5,118 17 1,998 3,137
-------- -------- -------- ---------
Total securities -
available
for sale $217,005 $ 2,129 $ 2,126 $ 217,008
======== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Treasury and
government
agency securities $124,753 $ 79 $ 3,417 $ 121,415
Obligations of U.S.
corporations 6,000 59 -- 6,059
Obligations of
foreign
governments 5,118 13 2,587 2,544
-------- ------- -------- ---------
Total securities -
available
for sale $135,871 $ 151 $ 6,004 $ 130,018
======== ======= ======== =========
</TABLE>
The following table presents the amortized cost and market value for debt
securities in each maturity category (000's omitted) in the held to maturity
and available for sale portfolios. For purposes of this disclosure, debt
securities which do not have a single maturity date have been included
according to their final maturity date.
<TABLE>
<CAPTION>
December 31, 1995
----------------------------
Amortized Cost Market Value
-------------- ------------
<S> <C> <C>
Debt securities held to maturity:
One year or less $ 250 $ 259
One to five years 15,415 15,663
Five to ten years 7,781 8,201
-------- --------
Total debt securities
held to maturity $ 23,446 $ 24,123
======== ========
</TABLE>
- 67 -
<PAGE> 68
<TABLE>
<CAPTION>
December 31, 1995
----------------------------
Amortized Cost Market Value
-------------- ------------
<S> <C> <C>
Debt securities available
for sale:
One year or less $ 68,313 $ 68,558
One to five years 102,995 104,189
Five to ten years 17,327 17,529
More than ten years 28,370 26,732
-------- --------
Total debt securities
available for sale $217,005 $217,008
======== ========
</TABLE>
Sales of debt securities resulted in proceeds, gross realized gains and gross
realized losses as follows (000's omitted):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Proceeds from sales
of debt securities $ -- $6,159 $2,580
====== ====== ======
Gross realized gains $ -- $1,213 $ 51
====== ====== ======
Gross realized losses $ -- $ -- $ --
====== ====== ======
</TABLE>
The Company did not own investment securities of any issuer, except U.S.
Treasury and government agency obligations, for which the aggregate book value
exceeded 10% of stockholders' equity at December 31, 1995 or 1994. Securities
pledged to secure public funds on deposit or sold under agreements to
repurchase amounted to approximately $134.7 million and $127.1 million at
December 31, 1995 and 1994, respectively.
- 68 -
<PAGE> 69
4) Loans:
Major classifications of loans are as follows (000s omitted):
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
-----------------------
<S> <C> <C>
Commercial and industrial $207,357 $163,893
Foreign 127,623 115,316
Consumer 159,461 150,682
Real estate:
Construction 84,402 70,049
Mortgage 147,082 145,119
Other 2,754 3,559
-------- --------
Total $728,679 $648,618
======== ========
</TABLE>
At December 31, 1995 and 1994 there were approximately $6.9 million and $6.4
million, respectively, in loans categorized as non-accrual. Interest income
that would have been recorded under the original terms of these loans had they
not been on non-accrual status was $372,000 and $454,000 for 1995 and 1994,
respectively. Interest income that was recorded on these loans during 1995 and
1994 amounted to $248,000 and $453,000, respectively.
At December 31, 1995, the recorded investment in loans that was considered
impaired under SFAS No. 114 was $7.8 million. Measurement for impairment of
$6.8 million of these loans was based on the present value of projected cash
flows, and the remainder was measured based on the estimated value of
collateral. These loans required a SFAS No. 114 reserve for possible credit
losses of $1.8 million which is included within the overall allowance for loan
losses. The average recorded investment in impaired loans during the year
ended December 31, 1995 was $5.8 million. For the year ended December 31,
1995, the Company recognized interest income on these loans of $523,000, all of
which related to accrual basis loans.
Included in real estate construction loans at December 31, 1995 and 1994 are
$17.4 million and $20.4 million, respectively, of tax-exempt loans, which are
also considered industrial development bonds and are subject to the provisions
of SFAS No. 115. Based upon the guidelines of SFAS No. 115 and management's
analysis, these loans are classified as held to maturity and reported at
historical cost. Included in interest income on loans are amounts exempt from
Federal income taxes totaling, $2,062,000, $2,747,000 and $2,806,000 for years
ended December 31, 1995, 1994 and 1993, respectively.
The majority of the Bank's domestic lending activities are conducted with
customers located in the South Florida region. Commercial loans are primarily
extended to small and mid-sized corporate borrowers in service and
manufacturing related industries. Mortgage loans are primarily non-residential
and are generally made for terms not exceeding five to seven years. In
addition to the real estate construction and mortgage loans above, the Bank had
outstanding consumer loans secured by real estate amounting to $9.3 million at
December 31, 1995 and 1994.
(5) Allowance for Loan Losses:
Changes in the allowance for loan losses are as follows (000's omitted):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 9,210 $18,423 $15,243
Provision for loan losses 3,600 3,525 9,500
Loans charged off (4,164) (15,447) (7,235)
Recoveries 3,143 2,709 915
------- ------- -------
Balance, end of year $11,789 $ 9,210 $18,423
======= ======= =======
</TABLE>
- 69 -
<PAGE> 70
(6) Accounts Receivable-Factoring Subsidiary:
Accounts receivable-factoring subsidiary are summarized as follows (000s
omitted):
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1994
-----------------------------
<S> <C> <C>
Accounts receivable $322,891 $249,916
Allowance for doubtful accounts (2,981) (1,774)
-------- --------
Accounts receivable, net $319,910 $248,142
======== ========
</TABLE>
Capital Factors purchases receivables primarily from clients which include
manufacturers, importers, wholesalers and distributors in apparel and
textile-related industries and, to a lesser extent, clients in consumer
goods-related industries such as plastics, video game cartridges, paper and
services. Receivables purchased are due from clients' customers geographically
located throughout the United States, principally retailers, manufacturers and
distributors.
Included in accounts receivable at December 31, 1995 and 1994, respectively,
were $69.6 million and $37.8 million purchased with recourse to the clients.
Advances made to clients prior to the contractual payment date for accounts
receivable purchased, net of client interest bearing credit balances,
amounted to $194.3 million and $159.2 million at December 31, 1995 and 1994,
respectively. Advances categorized as non-accrual amounted to $2.2 million
at December 31, 1995 and $739,000 at December 31, 1994.
Changes in the allowance for doubtful accounts relating to accounts
receivable-factoring subsidiary are as follows (000s omitted):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 1,774 $ 2,157 $ 2,175
Provision for doubtful accounts 2,235 2,235 2,645
Accounts receivable charged off (1,625) (3,148) (3,385)
Recoveries 597 530 722
------- ------- -------
Balance, end of year $ 2,981 $ 1,774 $ 2,157
======= ======= =======
</TABLE>
(7) Premises and Equipment:
Premises and equipment are as follows (000s omitted):
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994
----------------------------
<S> <C> <C>
Land and buildings $24,675 $24,461
Furniture and equipment 24,123 22,590
Leasehold improvements 11,982 11,163
------- -------
60,780 58,214
Less accumulated depreciation
and amortization (27,222) (25,856)
------- -------
Premises and equipment, net $33,558 $32,358
======= =======
</TABLE>
(8) Deposits:
Time certificates of deposit in denominations of $100,000 or more totaled
approximately $168 million or 16% of total deposits at December 31, 1995
compared to $114 million or 13% of total deposits at December 31, 1994.
- 70 -
<PAGE> 71
(9) Income Taxes:
The components of income tax expense are as follows (000s omitted):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 10,929 $ 5,420 $ 5,654
State and foreign 1,525 1,759 1,584
------- ------- -------
Total current 12,454 7,179 7,238
------- ------- -------
Deferred expense (credit):
Federal (1,751) 697 (1,597)
State (242) 98 (273)
------- ------- -------
Total deferred (1,993) 795 (1,870)
------- ------- -------
Total income tax expense $10,461 $ 7,974 $ 5,368
======= ======= =======
</TABLE>
The tax effects of temporary differences that result in deferred tax assets and
deferred tax liabilities, which are included in accrued interest and other
assets in the Company's consolidated statement of condition, are as follows
(000s omitted):
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
-----------------------------
<S> <C> <C>
Deferred tax assets:
Excess of book allowance
for loan losses over tax $ 5,697 $ 4,237
Unrealized loss on sale of securities
available for sale -- 2,174
Other real estate loss provisions 1,710 1,954
Depreciation 991 992
Loan fee income 866 807
Capital losses 339 598
Pension costs 233 203
Other 823 480
------- -------
Gross deferred tax assets 10,659 11,445
------- -------
Deferred tax liabilities:
Accretion of municipal securities 70 128
Other 199 486
------- ------
Gross deferred tax liabilities 269 614
------- -------
Valuation allowance 1,286 1,545
------- -------
Net deferred tax assets $ 9,104 $ 9,286
======= =======
</TABLE>
The valuation allowance decreased by $259,000 primarily due to the utilization
of capital loss carry forwards.
- 71 -
<PAGE> 72
The following is a reconciliation of the expected tax rate (statutory) to the
actual tax rate (000s omitted):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1995 1994 1993
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tax at statutory rate $ 9,647 35.0% $7,412 35.0% $5,998 35.0%
State taxes 868 3.2 1,206 5.7 766 4.5
Tax exempt interest (761) (2.8) (1,021) (4.8) (1,163) (6.8)
Other 707 2.6 377 1.8 (233) (1.4)
--------------------------------------------------
Total $10,461 38.0% $7,974 37.7% $5,368 31.3%
==================================================
</TABLE>
Income tax returns filed by the Company or its subsidiaries are subject to
review by federal or state tax authorities, as applicable. Currently, the
Internal Revenue service is reviewing the consolidated federal income tax
returns for the years 1989 through 1992. Although such reviews may result in
increases in the Company's income tax provisions and related liabilities,
management does not believe the results of these reviews will have a material
impact on the consolidated financial statements.
(10) Long-Term Debt:
Components of long-term debt are as follows (000s omitted):
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
---- ----
<S> <C> <C>
Variable Rate Asset Backed
Certificates Series 1994-1 $100,000 $100,000
Variable Rate Asset Backed
Certificates Series 1994-2 25,000 25,000
Variable Rate Asset Backed
Certificate Series 1995 50,000 --
Other long-term debt 1,650 1,980
-------- --------
$176,650 $126,980
======== ========
</TABLE>
In June, 1994, December, 1994 and July, 1995, Capital Factors Financing Trust
issued $100,000,000, $25,000,000 and $50,000,000, respectively, of Variable
Rate Asset Backed Certificates ("senior certificates") with maturity dates of
December 1999, June 2000 and January 2001. The senior certificates bear an
interest rate of LIBOR plus 1.25% before transaction costs (approximately 7.19%
at December 31, 1995, excluding transaction costs of 0.37%). The interest
rate on December 31, 1995 was 7.1875%. Interest is payable monthly. The
senior certificates are secured by interest earning advances which totaled
$199.0 million at December 31, 1995. Capital Factors services and administers
these advances and related receivables under an agreement entered into by and
among Bankers Trust Company as Trustee, CF Funding Corp. and Capital Factors.
The senior certificates may not be redeemed prior to maturity, and are subject
to acceleration if certain collateral requirements are not maintained.
Deferred issuance costs of $2.6 million are being amortized over the terms of
the related series. In addition, in March 1996, Capital Factors entered into a
revolving credit facility with an unaffiliated bank for $40 million, the
funding of which is subject to certain conditions which have not yet been
fulfilled.
Other long-term debt includes an unsecured term loan amounting to $1,650,000
and $1,980,000 at December 31, 1995 and 1994, payable to an affiliate of a
principal shareholder.
- 72 -
<PAGE> 73
(11) Stock Option Plan:
In 1992, the Company adopted a stock option plan to replace the previous plan
which was adopted in 1982. No additional shares may be granted under the 1982
plan. Under the 1992 plan, options for the purchase of a maximum of 1,469,002
shares, as adjusted for stock splits, may be granted to certain key employees
and directors at not less than the fair market value of such shares on the date
of grant. Options granted are immediately exercisable and generally terminate
five years from date of grant. The plan also provides for the granting of
stock appreciation rights, none of which is outstanding.
Stock option activity (adjusted for stock split) in the plans is summarized as
follows:
<TABLE>
<CAPTION>
Stock Options
- -----------------------------------------------------------------------------------
Available Option Price
For Grant Outstanding Per Share
--------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 2,071,128 747,123 $ 6.17 - $ 9.72
Granted (652,125) 652,125 9.67 - 13.20
Exercised -- (15,333) 6.17 - 7.17
Cancelled 37,200 (139,708) 6.17 - 9.67
- --------------------------------------------------------------
Balance, December 31, 1993 1,456,203 1,244,207 $ 6.17 - $13.20
Granted (486,225) 486,225 14.67 - 16.13
Exercised -- (201,285) 6.17 - 12.00
Cancelled -- (77,378) 6.17 - 12.00
- -------------------------------------------------------------
Balance, December 31, 1994 969,978 1,451,769 $ 6.17 - $16.13
Granted (7,500) 7,500 14.67
Exercised -- (220,976) 6.17 - 14.67
Cancelled 119,704 (139,093) 6.17 - 16.13
- -------------------------------------------------------------
Balance, December 31, 1995 1,082,182 1,099,200 $ 6.40 - $16.13
</TABLE>
=============================================================
(12) Retirement Plans:
The Company sponsors a non-contributory defined benefit pension plan (the
"Plan") covering all employees meeting certain eligibility requirements. The
benefits are based on years of service and the employee's compensation for the
five consecutive years during the last ten years of service that produce the
highest average salary. The Plan provides for accumulation of full benefits
equal to 1.2% of eligible compensation for each year of service up to 25 years.
Full vesting will occur after completion of seven years of service. The
Company's funding policy is to contribute annually the maximum amount that can
be deducted for Federal income tax purposes.
The following items are components of the net periodic pension cost:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1995 1994 1993
-------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned
during the year $ 700,348 $704,851 $554,156
Interest cost-projected benefit
obligation 525,785 370,261 307,955
Actual return on plan assets (1,403,127) (102,875) (390,959)
Net amortization and deferral 1,384,221 (300,215) 91
---------- -------- --------
Net periodic pension cost $1,207,227 $672,022 $471,243
========== ======== ========
</TABLE>
- 73 -
<PAGE> 74
The funded status of the plan is shown in the table below:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1994
-----------------------------
<S> <C> <C>
Plan assets at fair value $7,176,298 $5,464,072
Projected benefit obligation for
services rendered (8,635,263) (6,271,120)
---------- ----------
Plan assets less than projected
benefit obligation (1,458,965) (807,048)
Unrecognized prior service cost 407,424 112,193
Unrecognized net loss 336,923 642,231
Adjustment to recognize minimum
required liability -- (522,530)
---------- ----------
Accrued pension cost $ (714,618) $ (575,154)
========== ==========
</TABLE>
At December 31, 1995 and 1994, the Plan's assets consisted primarily of
corporate obligations, equity securities, mutual funds, U.S. Government
securities and other cash equivalents.
The accumulated benefit obligation at December 31, 1995 and 1994 was
approximately $7,097,000 and $6,039,000, respectively. Included in these
amounts were vested benefits of approximately $6,454,000 and $5,422,000 at
December 31, 1995 and 1994, respectively.
The assumed weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.00% in 1995 and 1994.
The assumed expected long-term rate of return on assets was 8.50% in 1995 and
1994. The assumed rate of salary progression was 5.50% in 1995 and 1994.
The Company sponsored a supplemental retirement plan ("supplemental plan") for
key executive officers from 1985 until 1994. The supplemental plan covered
three participants, including the former chairman and chief executive officer
and two individuals who were also executive officers and directors. In 1993,
one participant resigned from the Company and received a lump sum payout of
approximately $106,000. In 1994, the remaining two participants, including the
former chairman and chief executive officer, resigned from the Company and
received lump sum payouts of approximately $2,066,000 and $259,000,
respectively. The net periodic cost associated with the supplemental plan
amounted to $1.4 million and $140,000 in 1994 and 1993, respectively, and is
included in salaries and employee benefits in the accompanying statements of
income.
- 74 -
<PAGE> 75
(13) Related Party Transactions:
The Bank has granted loans to executive officers and directors of the Parent
Company, the Bank and their affiliated entities. Related party loans are made
on substantially the same terms as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal
risk of collectibility. The aggregate dollar amount of these loans was
$8,951,000 and $4,221,000 at December 31, 1995 and 1994, respectively. During
1995, $14,021,000 of new loans were made and repayments totaled $9,291,000.
Included in long-term debt is a term loan with an aggregate outstanding
principal balance of $1,650,000 and $1,980,000 at December 31, 1995 and 1994,
respectively, payable to a lender affiliated with a stockholder of the Company.
The Bank leases real estate for several of its branches from the Chairman of
the Board, members of his immediate family or lessors affiliated with these
individuals. Rentals paid on these leases aggregated approximately $199,000,
$406,000 and $722,000 for 1995, 1994 and 1993, respectively.
During 1994, the Bank purchased the building housing its operations center, a
branch and other Bank offices from the former chairman and chief executive
officer of the Company and a business associate. The purchase price of $4.5
million approximated the appraised value of the building.
(14) Lines of Business:
The Company conducts commercial banking and factoring activities through its
subsidiaries. See Table 8 in Item 7 hereof for certain information regarding
these business segments. Also, set forth below is certain information
regarding the Company's domestic and foreign activities.
The Company provides banking services in various parts of the world through the
International Division of the Bank. The Company considers assets and revenues
as associated with foreign banking operations on the basis of the country of
domicile of the customer.
The Company treats foreign activities as separate lending and deposit placement
activities to which most revenues, costs and expenses can be directly
attributed. Rates used to determine charges or credits for funds used or
generated by domestic and foreign operations are based on actual external costs
during the period for selected interest bearing sources of funds. Indirect
expenses are allocated through the use of internal estimates, certain direct
costs and other pertinent factors.
A summary of the Company's domestic and foreign assets and liabilities at
December 31, 1995 and 1994, and selected income data for the last three years
follows (000s omitted):
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
------------------------
<S> <C> <C>
Domestic assets $1,428,100 $1,168,518
Foreign assets 165,019 151,344
---------- ----------
Total $1,593,119 $1,319,862
========== ==========
Domestic liabilities $1,279,518 $1,064,966
Foreign liabilities 199,876 163,533
---------- ----------
Total $1,479,394 $1,228,499
========== ==========
</TABLE>
- 75 -
<PAGE> 76
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1995 1994 1993
-----------------------------------
<S> <C> <C> <C>
Total foreign operating income $14,396 $11,692 $15,031
======= ======= =======
Foreign income before income taxes $ 4,303 $ 4,852 $ 5,187
======= ======= =======
Net foreign income $ 2,709 $ 3,105 $ 3,320
======= ======= =======
</TABLE>
The Company's foreign activities primarily involve customers throughout Central
and South America but do not include any individual country or geographic area
that is significant in relation to consolidated activities.
- 76 -
<PAGE> 77
(15) Restrictions on Subsidiary Dividends, Loans or Advances:
Certain restrictions exist regarding the ability of the Bank to transfer funds
to the Parent Company in the form of cash dividends. Restrictions on the
payment of dividends are established by Florida statutes. At periodic
intervals, State or Federal regulatory agencies routinely examine the Parent
Company and the Bank as part of their legally prescribed oversight of the
banking industry and may establish dividend restrictions at levels more
stringent than statutory guidelines. At December 31, 1995, approximately $23.5
million of the Bank's retained earnings (included in consolidated retained
earnings) were available for payment of dividends to the Parent Company without
prior regulatory approval.
Restrictions also exist regarding the ability of the Bank to transfer funds to
the Parent Company in the form of loans or advances. At December 31, 1995 the
maximum amount available for loans from the Bank to the Parent Company
approximated 10% of consolidated stockholders' equity. The Bank did not have
any loans outstanding to the Parent Company as of December 31, 1995.
(16) Lease Commitments:
The Company leases certain land, premises and other equipment under
non-cancelable operating leases that expire at various dates through 2076.
Certain of these leases are renewable and contain provisions for periodic
increases in rent.
Rental expense was approximately $3,972,000, $3,935,000 and $4,209,000, for
1995, 1994 and 1993, respectively. Future minimum lease payments under these
leases are as follows (000s omitted):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1996 $ 4,440
1997 3,777
1998 2,149
1999 1,840
2000 1,249
Thereafter 8,989
-------
Total $22,444
=======
</TABLE>
(17) Legal Matters:
The Company and certain of its present and former directors and executive
officers are defendants in two lawsuits, one of which is a derivative suit.
Such suits allege that certain of the defendants engaged in a number of
allegedly improper and illegal activities. No monetary relief is sought from
the Company other than costs in the derivative action. The Company does not
believe that the outcome of the foregoing litigation will have a material
adverse impact on the consolidated financial condition, results of operations
or liquidity of the Company.
Various other legal actions and proceedings are pending or are threatened
against the Company and its subsidiaries, some of which seek relief or damages
in amounts that are substantial. Unlike the aforementioned matters, however,
these actions or proceedings arose in the ordinary course of business. Due to
the complex nature of some of these matters, it may be a number of years before
they are ultimately resolved. After consultation with legal counsel,
management believes the aggregate liability, if any, resulting from such
pending or threatened actions and proceedings will not have a material adverse
effect on the Company's consolidated financial condition, results of operations
or liquidity.
- 77 -
<PAGE> 78
(18) Off-Balance Sheet Risk:
In the normal course of business, the Company utilizes various financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These off-balance sheet activities include commitments to extend
credit, commercial letters of credit and standby letters of credit. The credit
and market risks associated with these financial instruments are generally
managed in conjunction with the Company's balance sheet activities and are
subject to normal credit policies, financial controls and risk limiting and
monitoring procedures. The maximum risk may exceed the amounts recognized in
the consolidated statements of condition because these amounts vary depending
on the nature of the underlying instrument and the related accounting policy.
Credit losses may be incurred when one of the parties fails to perform in
accordance with the terms of the contract. The Company's exposure to credit
loss is represented by the contractual amount of the commitments to extend
credit, commercial letters of credit and standby letters of credit. This is
the maximum potential loss of principal in the event the commitment is drawn
upon and the counterparty defaults. In addition, the measurement of the risks
associated with these financial instruments is meaningful only when all related
and offsetting transactions are considered.
Commitments to extend credit are legally binding agreements to lend money at
predetermined interest rates for a specific period of time. The exposure to
loss is minimized by maintaining specific credit standards and by requiring the
borrower to comply with certain terms and conditions prior to the disbursement
of funds. Collateral is obtained when deemed necessary and may include, but is
not limited to cash, accounts receivable, inventory, equipment, real estate, or
other property. Since commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent the total amount of
future outlays. The Company had commitments to fund loans of approximately
$146.1 million at December 31, 1995.
Commercial letters of credit are issued to facilitate certain trade
transactions. The risks associated with these transactions are reduced since
the contracts are generally for a short commitment period. Collateral is
obtained when deemed necessary and may include, but is not limited to, cash,
merchandise or other property. The Company had outstanding commercial letters
of credit of $79.0 million at December 31, 1995.
Standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. The Company issues standby letters
of credit to ensure contract performance or assure payment by its customers.
The risk involved in issuing standby letters of credit is the same as the
credit risk involved in extending loan facilities to customers and they are
subject to the same credit approvals and monitoring procedures. Collateral is
obtained when deemed necessary and generally consists of time deposits with the
Bank. The Company had $13.8 million of outstanding standby letters of credit
at December 31, 1995.
- 78 -
<PAGE> 79
(19) Supplemental Information - Consolidated Statements of Operations:
Included in other operating income for each of the three years ended December
31, 1995 were the following components, which individually amounted to more
than 1% of gross revenues (000s omitted) during any one of the respective
years:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Real estate participations $ 549 $1,159 $2,577
Other-less than 1% of
gross revenues 5,585 3,881 3,499
------ ------ ------
Total other operating income $6,134 $5,040 $6,076
====== ====== ======
</TABLE>
Included in net other operating expenses for each of the three years ended
December 31, 1995 were the following components, which individually amounted to
more than 1% of gross revenues (000s omitted) during any one of the respective
years:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1995 1994 1993
------------------------------
<S> <C> <C> <C>
Furniture and equipment expense $3,712 $3,486 $3,361
Overdraft charge offs 3,480 996 167
Data processing 3,132 3,352 2,996
Legal expense 2,980 2,622 3,019
Operating costs and writedowns of
other real estate, net 2,929 2,954 3,208
Advertising and marketing 2,306 1,496 1,191
Other losses 2,021 1,201 1,816
Insurance 1,665 2,789 2,977
Stationery and supplies 1,590 1,162 1,117
Telecommunications 1,510 1,406 975
Other-less than 1% of gross revenues 9,575 8,806 8,118
------- ------- -------
Total other operating expenses, net $34,900 $30,270 $28,945
======= ======= =======
</TABLE>
- 79 -
<PAGE> 80
(20) Parent Company Financial Information:
Condensed financial information for Capital Bancorp (Parent Company only) is as
follows (000s omitted):
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1994
-------------------------------
<S> <C> <C>
Assets:
Cash and short-term investments $ 6,285 $ 3,669
Investment in Capital Bank 109,520 90,148
Other assets 498 277
-------- --------
Total assets $116,303 $ 94,094
======== ========
Liabilities and Stockholders' equity:
Long-term debt $ 1,650 $ 1,980
Other liabilities 928 751
-------- --------
Total liabilities 2,578 2,731
Stockholders' equity 113,725 91,363
-------- --------
Total liabilities and
stockholders' equity $116,303 $ 94,094
======== ========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1995 1994 1993
----------------------------------
<S> <C> <C> <C>
Income:
Dividends from Bank subsidiary $ 4,400 $ 4,400 $ 3,200
Management fees from Bank
subsidiary 266 456 456
Other 216 61 30
-------- -------- --------
Total income 4,882 4,917 3,686
-------- -------- --------
Expenses:
Salaries and employee benefits 166 420 405
Interest expense 159 194 284
Other expenses 1,518 533 786
-------- -------- --------
Total expenses 1,843 1,147 1,475
-------- -------- --------
Income before income taxes and
equity in undistributed income
of subsidiary 3,039 3,770 2,211
Credit for income taxes 493 228 205
-------- -------- --------
Income before equity in
undistributed income
of subsidiary 3,532 3,998 2,416
Equity in undistributed income of
subsidiary Bank: 13,569 9,206 9,353
-------- -------- --------
Net income $ 17,101 $ 13,204 $ 11,769
======== ======== ========
</TABLE>
- 80 -
<PAGE> 81
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1994 1993
-----------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $17,101 $13,204 $11,769
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 9 9 9
Undistributed income of subsidiary (13,569) (9,206) (9,353)
(Increase) decrease in other assets (220) (43) 219
Increase (decrease) in other
liabilities 159 (184) 125
------- ------- -------
Net cash provided by operating
activities 3,480 3,780 2,769
------- ------- -------
Cash flows from financing activities:
Cash dividends paid (2,429) (2,313) (2,340)
Repayment of long-term debt (330) (625) (1,250)
Proceeds from stock options exercised 1,897 1,532 99
Redemption of fractional shares (2) -- --
------- ------- -------
Net cash used in financing
activities (864) (1,406) (3,491)
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 2,616 2,374 (722)
Cash and cash equivalents at beginning
of year 3,669 1,295 2,017
------- ------- -------
Cash and cash equivalents at end
of year $ 6,285 3,669 $ 1,295
======= ======= =======
Supplemental Disclosure:
Interest paid during the period $ 158 $ 223 $ 300
======= ======= =======
</TABLE>
NOTES TO PARENT COMPANY INFORMATION
Long-term debt at December 31, 1995, includes a term loan payable to an
affiliate of a principal stockholder with an outstanding principal balance of
$1,650,000. Interest is charged at the prime rate, payable monthly. Principal
payments in the amount of $330,000 are due annually until May 31, 2000.
- 81 -
<PAGE> 82
(21) Fair Value of Financial Instruments:
The following disclosures of estimated fair value amounts of financial
instruments have been determined by the Company using available market
information and other valuation methodologies. Considerable judgment is
necessarily required to interpret market data and develop the estimates of fair
value. The estimated fair value amounts presented are not necessarily
indicative of amounts the Company could realize in a current market exchange.
The use of different assumptions and/or valuation methodologies could have a
material effect on the estimated fair value amounts.
The information presented herein is based on pertinent information available to
the Company as of December 31, 1995. The estimated fair value amounts have not
been comprehensively revalued since that time, and the current estimated fair
value of these financial instruments may have changed significantly since that
point in time.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
Cash, short-term investments, funds purchased and other short-term borrowings,
and due to clients:
For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.
Securities:
For securities held to maturity or available for sale, fair values are primarily
based on quoted market prices or dealer quotes. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar
securities.
Loans:
The fair value of loans generally is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Accounts receivable - factoring subsidiary:
Accounts receivable held by Capital Factors turn over quickly. Interest
earning advances made to clients against such receivables carry variable
interest rates based upon the prime rate and reprice as the prime rate changes.
The carrying amount is believed to be a reasonable approximation of fair value.
Acceptances:
Amounts due from customers on acceptances and payable for acceptances
outstanding are non-interest bearing items which turn over quickly. The
carrying amount is believed to be a reasonable approximation of fair value.
Deposit Liabilities:
The fair value of demand deposits, savings accounts and money market deposits
is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using estimated current
rates for deposits of similar remaining maturities.
Long-term debt:
All long-term debt is subject to variable rates of interest based upon either
the prime rate or the London interbank offering rate. The carrying amount is
believed to be a reasonable approximation of fair values.
- 82 -
<PAGE> 83
Commitments to extend credit, standby letters of credit and commercial letters
of credit:
The fair value of loan commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
value of letters of credit is based on fees currently charged for similar
agreements.
The estimated fair values of the Company's financial instruments are as follows
(000s omitted):
<TABLE>
<CAPTION>
1995 1994
----------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- -------- --------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term
investments $ 213,903 $ 213,903 $106,712 $106,712
Securities 240,504 241,181 221,049 219,140
Loans, net 714,254 727,401 636,637 627,527
Accounts receivable -
factoring subsidiary, net 319,910 319,910 248,142 248,142
Due from customers
on acceptances 32,413 32,413 30,575 30,575
Financial liabilities:
Deposits 1,038,755 1,041,050 876,793 871,792
Funds purchased and other
short-term borrowings 86,133 86,133 87,236 87,236
Long-term debt 176,650 176,650 126,980 126,980
Due to clients 128,578 128,578 90,706 90,706
Acceptances outstanding 32,413 32,413 30,575 30,575
Unrecognized financial
instruments:*
Commitments to extend
credit 313 313 418 418
Standby letters of credit 121 121 144 144
Commercial letters of credit -- -- 2 2
</TABLE>
*The amounts shown under "carrying amount" represent accruals of deferred
income (fees) arising from those unrecognized financial instruments.
(22) Treasury Stock:
During 1993, the Bank commenced foreclosure action on certain loans aggregating
approximately $1.7 million secured by common stock of the Company and other
property. Subsequent to December 31, 1993, the Bank entered into an agreement
with the borrowers whereby the Bank received 120,000 shares (reflects 3-for-2
stock split in the form of a 50% stock dividend) of the Company's common stock
and other property in full repayment of the subject loans. Based upon price
ranges of actively traded shares of other financial institutions, as well as
other factors, the Bank assigned a fair value of $12.00 per share (restated for
stock split) to the stock received, for an aggregate of $1,440,000. The excess
of the loan over the assigned fair value of all property received was charged
off, and the stock of the Company received was reported as treasury shares in
the consolidated statement of condition as of December 31, 1994. During 1995
and prior to trading on the Nasdaq National Market, all of the shares of
treasury stock were sold by the Bank for $2.1 million.
- 83 -
<PAGE> 84
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Capital Bancorp and Subsidiaries
We have audited the accompanying consolidated statements of condition of
Capital Bancorp and subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the management of Capital
Bancorp and subsidiaries. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Capital Bancorp and subsidiaries
at December 31, 1995 and 1994, the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Miami, Florida
February 23, 1996
- 84 -
<PAGE> 85
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
- 85 -
<PAGE> 86
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following discussion contains information regarding the directors and
executive officers of the Company and Capital Bank.
Daniel M. Holtz, age 36, has been a Director of the Company since June 1988.
Mr. Holtz was appointed President and Chief Operating Officer of the Company in
February 1994 and subsequently was elected Chairman of the Board, President and
Chief Executive Officer in October 1994. Additionally, in October 1994, Mr.
Holtz was elected Chairman of the Board, President and Chief Executive Officer
of Capital Bank. Mr. Holtz has also served as a Director of Capital Factors
from 1985 to 1987 and from 1993 to the present. Mr. Holtz was first elected an
officer of Capital Bank in 1983 and was elected President and Chief Operating
Officer in October 1991. Mr. Holtz was President and Chief Executive Officer
of Capital Bank of California from September 1987 to November 1991 and Director
from July 1985 until June 1993 when the bank was declared insolvent and closed
by the California Superintendent of Banks. Mr. Holtz is the son of Fana Holtz
and brother of Javier J. Holtz.
Fana Holtz, age 61, is a private investor and has been Vice Chairman of the
Board of Directors of the Company since its formation in 1981. She received a
Degree in Pharmacology in 1956. Additionally, she is Vice President of the
Mount Sinai Hospital Foundation and serves as Vice President of Temple
Emanu-el, as well as a member of its Board of Directors. Fana Holtz is the
mother of Daniel M. Holtz and Javier J. Holtz.
Hugh F. Culverhouse, Jr., age 47, has been a Director of the Company since July
1995. He is an attorney and certified public accountant and has practiced with
the Securities and Exchange Commission and the United States Attorney's office.
Mr. Culverhouse has had his own law firm since 1987 and also serves as a
director of Del Webb Corporation, a real estate development corporation.
Russell W. Galbut, age 43, has been a Director of the Company since October
1992. Mr. Galbut has been President and Managing Director of U.S. Builders and
Developers Corporation since 1976 and the Managing Director of the Crescent
Heights Companies, local real estate development companies, since 1989. He has
also been President of the Galbut Family of Companies, Inc. since 1976. Mr.
Galbut is a certified public accountant and an attorney.
Craig L. Platt, age 41, has been a Director of the Company and Capital Bank
since April 1993. Currently he is a Senior Vice President with Oppenheimer &
Co., Inc. From 1990 through 1994, he was a Senior Vice President/Investments
at Kidder, Peabody & Co., Inc., New York. Prior to 1990, he was an Associate
with Morgan Stanley & Co., Inc., New York.
Jeffrey H. Porter, age 35, has been a Director of the Company since May 1993.
Since April 1992, he has been a Partner and Head Securities Trader of Porter
Capital Management Company, an investment advisory company registered in the
State of California. Prior to April 1992, he was a partner of J. Porter & Co.,
California.
Leon J. Simkins, age 68, served as Director of Capital Bank prior to joining
the Company's Board of Directors in 1985. Mr. Simkins has been Chairman and
President of Simkins Industries, a manufacturer of cardboard products, since
1963.
Javier J. Holtz, age 35, has been a Senior Vice President of the Company since
January 1990 and was appointed Executive Vice President of Capital Bank in
September 1994, where he formerly served as Senior Vice President. Mr. Holtz
has been a Director of Capital Bank since 1988. Additionally, Mr. Holtz has
been a director of Capital Factors since August 1987 and was elected Chairman
of the Board in October 1994 and Executive Vice President in November 1994. In
October 1994, Mr. Holtz was elected Chairman of the Board of Capital Bank,
N.A., located in Washington D.C. Mr. Holtz is the son of Fana Holtz and
brother of Daniel M. Holtz.
Simon S. Ferro, age 43, has served as a Director of Capital Bank since March
1993. Mr. Ferro joined the law firm of Adorno & Zeder, P.A. as a partner in
August 1995. During the previous four years, he practiced as a senior
associate at the firm of Becker & Poliakoff, P.A. Mr. Ferro also currently
serves as a director of the Overseas Private Investment Corp., a federal
corporation that provides services to American companies interested in
investing overseas, Fabulous Diamonds, an arts and crafts retail store, and the
non-profit organization, Battered Women's Clemency Project.
- 86 -
<PAGE> 87
Ronald S. Chase, age 52, has served as a Director of Capital Bank since July
1993. Mr. Chase is the President and owner of Chase Holdings and Advisory
Service, Inc., which provides financial advisory services to corporations and
litigation attorneys. He also serves as President and is the owner of RSC
Development, Inc., a residential developer, and CFAT H20, Inc., a water
treatment facility, both of which are located in Ocala, Florida. Mr. Chase is a
certified public accountant who served as Managing Partner for several offices
of Deloitte & Touche, LLP for 14 of his 25 years with the firm. He also serves
as a director of Capital Factors, Inc. and the Greater Miami Neighborhood,
Inc., a not-for-profit affordable housing developer.
Dr. John O. Brown, age 74, has served as a Director of Capital Bank since
February 1978. Dr. Brown is a practicing opthamologist and has had his own
practice for 40 years. He is also the President of GCS Travel, Inc., a travel
company.
Charles Boyce, age 36, is an Executive Vice President and Chief Administrative
Officer of Capital Bank, with responsibilities including various operations and
administrative functions. Mr. Boyce joined Capital Bank in December 1993.
Prior to joining the Bank in his current position, Mr. Boyce was Senior Vice
President and Chief Financial Officer of Capital Bank of California from 1989
to 1993, when the bank was declared insolvent and closed by the California
Superintendent of Banks.
Thomas J. Flood, age 58, is a Senior Vice President of the Company and
Executive Vice President and Chief Retail Banking Officer of Capital Bank.
From 1978 to 1992, Mr. Flood was Senior Vice President of Capital Bank, with
responsibilities including operations and branch administration. In 1992, Mr.
Flood was elected Executive Vice President of Capital Bank and is responsible
for all retail banking activities.
Timothy E. Kish, age 56, has been Corporate Secretary of the Company since
January 1994 and Senior Vice President of the Company since October 1995. Mr.
Kish has also been General Counsel of the Bank since September 1992, and was
appointed Corporate Secretary in January 1994 and Executive Vice President of
the Bank in September 1994. Mr. Kish is also Corporate Secretary and General
Counsel of Capital Factors, Inc. Mr. Kish also served as Director, Vice
President and General Counsel of the Company from October 1992 to May 1995.
Prior to joining the Company in 1992, Mr. Kish was a shareholder in the law
firm Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. from 1980 to
1992.
Lucious T. Harris, age 39, is Senior Vice President and Treasurer of the
Company and Executive Vice President and Chief Financial Officer of Capital
Bank. Mr. Harris joined Capital Bank in 1987 as Manager of the Internal Audit
department. In 1989, he was elected Controller and Principal Accounting
Officer of Capital Bank and Assistant Treasurer of the Company. In 1992, Mr.
Harris was elected as Treasurer of the Company and Executive Vice President and
Chief Financial Officer of Capital Bank. Mr. Harris was appointed Senior Vice
President of the Company in October 1995. Prior to 1987, Mr. Harris held
various positions at Arthur Andersen & Co.
John W. Kiefer, age 48, is a Senior Vice President of the Company and a
Director of Capital Bank since October 1992. Mr. Kiefer is President, Chief
Executive Officer and Director of Capital Factors, Inc. From 1984 to 1986, Mr.
Kiefer was Senior Vice President/Regional Manager at Barclays
American/Commercial, Inc. and served as Vice President from 1981 to 1984. In
1987, Mr. Kiefer joined the Company and Capital Factors at his present
positions.
David Konfino, age 48, is an Executive Vice President and Chief International
Officer of Capital Bank responsible for the International Division. Prior to
joining Capital Bank, Mr. Konfino was an officer of C&S National Bank, which
was since acquired by NationsBank, from 1971 to 1993, where he held various
positions in the domestic and international divisions, including president and
manager of the international division. Mr. Konfino joined Capital Bank in
October 1993.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934. Section
16(a) of the Securities Exchange Act of 1934 requires that the Company's
executive officers, directors and persons who own at least 10% of the Common
Stock of the Company to file reports of ownership and changes in ownership with
the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc. Executive officers, directors and 10% shareholders
are required by regulation to furnish the Company with all such Section 16(a)
filings made. Based solely upon a review of the filings furnished to the
Company during the fiscal year ended December 31, 1995, management believes
that such filings were filed on a timely basis.
- 87 -
<PAGE> 88
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation for services in all
capacities to the Company and its subsidiaries rendered during the years ended
December 31, 1995, 1994 and 1993 for the Chief Executive Officer and the four
most highly compensated executive officers of the Company and its subsidiaries,
other than the Chief Executive Officer, whose aggregate remuneration exceeded
$100,000 (the "Named Executive Officers"):
- --------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE (1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
- ------------------------------------------------------ ------------
Name Other Securities
and Annual Underlying All Other
Principal Compen- Options/ Compen-
Position Year Salary Bonus sation(2) SARs(3) sation
($) ($) ($) # ($)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Daniel M. Holtz 1995 335,307 275,000 14,250(4) 18,000(6) --
Chairman, 1994 330,307 250,000 15,000(4) 45,000(5) --
President & 1993 312,375 300,000 8,500(4) 93,750(5) --
CEO, Company
and Capital
Bank
John W. Kiefer 1995 275,000 300,000 14,850(4) 12,500(6) 300,000(8)
Senior Vice 1994 231,000 200,000 15,300(4) 30,000(5) --
President, 1993 210,000 180,000 14,750(4) 7,500(5) 1,750(7)
Company;
President &
CEO, Capital
Factors, Inc.
Javier J. Holtz 1995 218,845 62,500 14,500(4) 6,000(6) --
Senior Vice 1994 199,904 45,000 14,750(4) 22,500(5)
President, 1993 183,125 30,000 14,750(4) 56,250(5)
Company;
Executive Vice
President,
Capital Bank;
Chairman and
Executive Vice
President,
Capital Factors,
Inc.
Thomas J. Flood 1995 166,780 35,000 -- 6,000(6) 1,500(7)
Senior Vice 1994 163,525 33,500 -- 22,500(5) 1,500(7)
President, 1993 155,000 32,500 -- 45,000(5) 1,292(7)
Company;
Executive Vice
President,
Capital Bank
Timothy E. Kish 1995 153,314 30,000 -- 5,000(6) 1,533(7)
Senior Vice 1994 148,129 22,000 -- 15,000(5) 617(7)
President & 1993 141,810 20,000 -- 7,500(5) 118(7)
General Counsel,
Company;
Executive Vice
President
& General
Counsel,
Capital Bank
</TABLE>
- 88 -
<PAGE> 89
# -- Number of options granted.
$ -- Dollar amounts.
(1) The Company did not grant restricted stock awards, pay any long term
compensation or pay any other compensation required to be set forth in
this table to the Named Executive Officers during any year, except as
identified in this table.
(2) The Company or its subsidiaries provides automobiles and certain other
benefits for each officer listed hereon. After reasonable inquiry,
management has determined that the fair value of the use of the
automobiles and other benefits does not exceed the lesser of 10% of annual
salary and bonus, or $50,000 for each officer.
(3) There were no SARs (Stock Appreciation Rights) granted or outstanding
during any period.
(4) Amount represents directors fees paid to the Named Executive Officer.
(5) Restated to reflect 3-for-2 stock split effected in the form of a 50%
stock dividend paid during 1995.
(6) This option was granted on February 22, 1996.
(7) Amount represents contributions to the Named Executive Officer's 401K
retirement account by the Company.
(8) Represents a cash bonus which was paid to Mr. Kiefer upon the expiration
of his employment agreement pursuant to the terms thereof, which
terminated on December 31, 1995, and not with respect to any particular
year.
- 89 -
<PAGE> 90
1995 STOCK OPTION GRANTS. The following table sets forth certain information
with respect to options to purchase shares of Common Stock of the Company
granted under the Company's 1992 Stock Option Plan to the Named Executive
Officers for the 1995 fiscal year and represents all options granted by the
Company to such executive officers for the period. All such options are
exercisable immediately and are granted for terms of five years. In accordance
with SEC rules, the table also describes the hypothetical gains that would
exist for the respective options based on assumed rates of annual compound
stock appreciation of 5% and 10% from the date of grant to the end of the
option term. These hypothetical gains are based on assumed rates of
appreciation and, therefore, the actual gains, if any, on stock option
exercises are dependent on the future performance of the Common Stock, overall
stock market conditions, and the executive officer's continued employment with
the Company. As a result, the amounts reflected in this table may not
necessarily be achieved.
Option/SAR Grants in Last Fiscal Year(1)
<TABLE>
<CAPTION>
Potential Realizable Value at Assumed
Annual Rates of Stock Price
Appreciation for
Individual Grants Option Term (4)
- ---------------------------------------------------------------------------- ------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees Exercise or Base
Granted in Fiscal Price Expiration
Name (#) Year ($/Sh) (2) Date 5% ($) 10% ($)
- ----------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel M. Holtz 3,225(3) 1.6% $ 34.10 February 2001 $ 17,609 $ 51,052
14,775(3) 7.2 31.00 February 2001 126,474 279,691
John W. Kiefer 12,500(3) 6.1 31.00 February 2001 107,000 236,625
Javier J. Holtz 3,225(3) 1.6 34.10 February 2001 17,609 51,052
2,775(3) 1.3 31.00 February 2001 23,754 52,531
Thomas J. Flood 6,000(3) 2.9 31.00 February 2001 51,360 113,580
Timothy E. Kish 5,000(3) 2.4 31.00 February 2001 42,800 94,650
</TABLE>
- -----------------------
# -- Number of options granted.
$ -- Dollar amounts.
(1) There were no SARs (Stock Appreciation Rights) granted during 1995.
(2) Exercise price is based on the Nasdaq National Market closing price of
Company's Common Stock on the day immediately prior to the date of grant.
For stockholders who own more than 10% of the outstanding voting stock of
Company, the exercise price for options with aggregate fair value up to
$100,000 is 110% of the fair market value of the stock or $34.10.
(3) This option was granted in February 1996 for service rendered during the
1995 fiscal year.
(4) Potential Realizable Value assumes that any shares acquired by the
exercise of options are held until the end of the five-year option term.
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<PAGE> 91
OPTION EXERCISES. The following table shows stock option exercises during 1995
by the Named Executive Officers, including the value realized upon exercise.
In addition, this table describes the number of unexercised options and the
value of unexercised in-the-money options at the end of the 1995 fiscal year.
Aggregated Option/SAR Exercises in Last Fiscal Year,
and December 31, 1995 Option/SAR Values(1)
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
December 31, 1995(#) December 31, 1995($)(2)
Shares Value
Acquired Realized Exercisable/ Exercisable/
Name on Exercise ($) Unexercisable(3) Unexercisable(4)
(#) (2)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Daniel M. Holtz $ 0 $ 0 168,001/0(4) $3,433,940/0
John W. Kiefer 4,500(3) 124,125 59,001/0(4) 1,010,597/0
Javier J. Holtz 0 0 96,001/0(4) 2,093,937/0
Thomas J. Flood 4,500(3) 124,125 78,002/0(4) 1,655,748/0
Timothy E. Kish 0 0 30,501/0(4) 547,146/0
</TABLE>
- --------------------
# -- Number of options granted.
$ -- Dollar amounts.
(1) There were no SARs (Stock Appreciation Rights) granted, outstanding
or exercised during any period.
(2) Value Realized and Value of Unexercised In-the-Money Options
are computed based upon the Nasdaq National Market closing price of the
Company's Common Stock on December 29, 1995.
(3) Includes effect of 3-for-2 stock split effected in the form of a 50% stock
dividend paid in 1995.
(4) This number includes options which were granted in February 1996 for
services rendered during the 1995 fiscal year. It is assumed that such
options have no current value because they were granted at the fair market
value of the Common Stock on the date of grant.
- 91 -
<PAGE> 92
Pension Plan Table
Annual amounts of normal retirement pension payable under the Capital Bancorp
Employees Pension Plan (the "Pension Plan") are illustrated in the following
table. The illustration assumes retirement as of December 31, 1995 at the
normal retirement age of 65.
<TABLE>
<CAPTION>
Years of Service
--------------------------------------------
Remuneration 10 15 20 25
- ------------ --------------------------------------------
<S> <C> <C> <C> <C>
$ 125,000 $ 20,880 $ 31,320 $ 41,760 $ 52,200
150,000 25,380 38,070 50,760 63,450
175,000 25,380 38,070 50,760 63,450
200,000 25,380 38,070 50,760 63,450
225,000 25,380 38,070 50,760 63,450
250,000 25,380 38,070 50,760 63,450
275,000 25,380 38,070 50,760 63,450
300,000 25,380 38,070 50,760 63,450
325,000 25,380 38,070 50,760 63,450
350,000 25,380 38,070 50,760 63,450
</TABLE>
The Pension Plan was established on January 1, 1983 and provides for a defined
benefit pension, which covers substantially all employees that have completed
one year of service and have attained age 21. Officers of the Company and its
subsidiaries participate in the Pension Plan on the same basis as all other
eligible employees. Each subsidiary funds the Pension Plan for its
proportionate share, based on their respective employees. The normal
retirement age under the Pension Plan is the later of age 65 or the age of the
participant on the 5th anniversary of plan participation. The monthly pension
benefit for normal retirement is 1.2% of average monthly compensation for the
five consecutive years during the last ten years of service that produce the
highest average salary, plus an additional .6% of the portion of the average
monthly compensation during these same five years in excess of the monthly
Social Security integration level. The entire monthly pension benefit for
normal retirement will be multiplied by each year of service at normal
retirement age, not to exceed 25 years. The terms of the Pension Plan provide
that the amount of monthly compensation taken into consideration for
determination of benefits may not exceed the Internal Revenue Service limit,
which in 1995 was $12,500 ($150,000 annually). Consequently, salary and other
compensation for the Named Executive Officers, as shown on the Summary
Compensation Table above, in excess of the Internal Revenue Service
limit, are not considered in the determination of pension benefits. The
Pension Plan provides for early retirement at age 55 with 10 years continuous
employment as well as full vesting of benefits upon termination of employment
before retirement age and after completion of 7 years continuous employment.
In the event of the death of an active participant, the total value of the
decedents' accrued pension benefit will be paid to the designated beneficiary
by the method selected by the beneficiary and approved by the Pension Plan
administrator. The benefit will be based upon the years of service and number
of years before normal retirement age. The Pension Plan does not provide for
disability benefits. As of December 31, 1995, Messrs. Daniel Holtz, John
Kiefer, Javier Holtz, Thomas Flood and Timothy Kish had credited service (to
the nearest whole year) under the Pension Plan of 13, 9, 13, 18 and 3 years,
respectively.
The Tax Equity and Fiscal Responsibility Act of 1982 ("1982 Tax Act") limits
the maximum annual retirement benefits payable to an individual under a pension
plan. For 1995, the maximum annual benefits payable was $120,000. Such
limitation may be increased from time to time.
Consulting and Employment Agreements
In May 1993, Capital Bank entered into a consulting agreement with Alex
Halberstein (the "Halberstein Agreement"), former director and executive
officer of the Company and Capital Bank. The Halberstein Agreement provides
that during the term of the agreement Mr. Halberstein assist the Company in the
renegotiation of payment of foreign non-trade related indebtedness and shall
make himself available for consultation with the officers and other
representatives of the Company as requested by the Company from time to time
and shall undertake and perform on a timely basis duties and assignments on
behalf of the Company as are requested of him by the Company. The Halberstein
Agreement provides for
- 92 -
<PAGE> 93
the payment of fees aggregating $1.3 million over a five year period commencing
in June 1993 and ending in May 1998, such fees to be allocated between
consulting services and certain non-competition covenants contained in the
Halberstein Agreement. Fees paid to Mr. Halberstein pursuant to this agreement
amounted to $261,000 during 1995.
On October 7, 1994, Capital Bank entered into a consulting agreement with Abel
Holtz (the "Holtz Agreement"), former Chairman of the Board, President and
Chief Executive Officer of the Company and Capital Bank. The Holtz Agreement
provides that during the term of the agreement Mr. Holtz assist the Company in
business development generally, with particular emphasis on international and
private banking matters, community involvement, capital formation and
shareholder relations. The Holtz Agreement provides for the payment of fees
aggregating $1.85 million over a five year period commencing October 7, 1994
and ending October 7, 1999. On October 21, 1994, Abel Holtz entered a guilty
plea to one count of giving misleading testimony in 1991 to a Federal Grand
Jury. On October 25, 1994, Capital Bank suspended the Holtz Agreement until
such time that Mr. Holtz could fulfill his obligations under this agreement.
Reinstatement of the Holtz Agreement requires FDIC approval. Fees paid to Mr.
Holtz prior to suspension of the agreement amounted to $18,462.
Each of the above consulting agreements were entered into upon the resignation
of the named individual as an officer and employee of the Company and all
subsidiaries.
Capital Factors entered into an employment agreement (the "Kiefer Agreement")
with John W. Kiefer, its President and Chief Executive Officer, for the period
from January 1, 1993 through December 31, 1995. The Kiefer Agreement provided
that, in consideration of his duties as President and Chief Executive Officer
of Capital Factors, Mr. Kiefer received (i) a base salary of $210,000 in 1993,
with subsequent annual increases of not less than 8% over the prior year's base
salary, (ii) a signing bonus of $50,000, (iii) incentive compensation equal to
the annual increase in Capital Factors' income before taxes multiplied by 4%
for 1993, plus $20,000 for 1993, 5% for 1994 and 7% for 1995, which incentive
compensation will not exceed two times base salary for the applicable year,
(iv) an additional cash bonus of $300,000 on December 31, 1995, (v) additional
bonuses at the sole discretion of Capital Factors' Board of Directors, and (vi)
other benefits generally consistent with those provided other executive
officers of the Company.
The Kiefer Agreement also provided for the grant of options to purchase shares
of Capital Factors in the event of a public offering of such stock, as well as
certain payments in the event of death, disability or a change of control, as
defined, or termination without cause. During the term of the Kiefer
Agreement, Mr. Kiefer was subject to certain noncompete, nonsolicitation and
nondisclosure provisions.
Capital Factors is currently negotiating a new employment contract with John W.
Kiefer, its President and Chief Executive Officer. The terms of such contract
have not yet been finalized, but are expected to provide for an annual base
salary, in addition to an annual bonus and deferred compensation based on the
performance of Capital Factors.
Directors' Compensation
Non-officer directors of the Company and Capital Bank receive compensation
aggregating $1,000 per Board of Directors meeting attended, and $300 for each
Board committee meeting attended. All directors of Capital Factors receive a
monthly retainer of $1,000 and $250 for each meeting attended. Non-officer
Directors of the Company, Capital Bank and Capital Factors also receive options
for their service on the respective boards of directors. For the 1995 fiscal
year, each outside director received an option to acquire a total of 5,000
shares.
Change of Control Arrangement
The Company's 1982 and 1992 Employee Stock Option Plans (the "Plans") provide
that, in the event of any change in control, any and all incentive stock
options, non-incentive stock options and/or stock appreciation rights
outstanding pursuant to the Plans shall automatically become immediately
exercisable. In addition, upon a change in control the Company's right to
repurchase any shares acquired upon the exercise of options granted under the
1982 Stock Option Plan also terminates. This right is normally exercisable by
the Company for five years after the options are granted. All options
outstanding under the Plans are currently exercisable regardless. A change in
control is defined to be the acquisition of twenty-five percent or more of the
combined voting power of all classes of the Company's outstanding securities
by any person, entity or group who or which, as of the effective date of the
- 93 -
<PAGE> 94
Plans or acquisition, is not an affiliate of the Company or any of the
Company's present affiliates.
Compensation Committee Interlocks and Insider Participation
The Company and the Bank have a combined Compensation Committee composed of the
following members from the Company's or the Bank's Board of Directors:
<TABLE>
<CAPTION>
NAME DIRECTOR OF
---- -----------
<S> <C>
Russell W. Galbut, Chairman Company
John O. Brown, M.D. Bank
Simon S. Ferro, Esq. Bank
Craig L. Platt Company and Bank
Ronald S. Chase Bank
</TABLE>
The Compensation Committee is responsible for making recommendations for the
annual compensation paid to the executive officers, including the chief
executive officer. No member of the Compensation Committee is serving or has
served as an officer or employee of the Company or any of its subsidiaries.
The Bank's Board of Directors has the final approval authority for such
compensation. The following are members of the Bank's Board of Directors who
do not serve on the Compensation Committee:
Daniel M. Holtz
Javier J. Holtz
John W. Kiefer
Daniel Holtz is the Chairman of the Board, Chief Executive Officer and
President of the Company and the Bank. Javier Holtz is a Senior Vice President
of the Company, an Executive Vice President of the Bank and Chairman of the
Board and an Executive Vice President of Capital Factors. John Kiefer is a
Senior Vice President of the Company, and a director, Chief Executive Officer
and President of Capital Factors.
Capital Bank from time to time makes loans and extends credit to certain of its
officers and directors and their affiliates. In the opinion of management of
the Company, all of these loans and extensions of credit were made in the
ordinary course of business, on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and did not involve more than normal risks of
collectibility or present other unfavorable features.
Capital Bank leases the space for its Miami Beach and Civic Center branch
offices from Daniel and Javier Holtz. Daniel Holtz is Chairman of the Board
and Chief Executive Officer of the Company and of Capital Bank. Javier Holtz
is Senior Vice President of the Company and Executive Vice President and
Director of Capital Bank. During 1995, payments to these individuals pursuant
to these leases totaled approximately $44,000. Capital Bank believes the terms
of such transaction to be fair, reasonable, and similar to those available from
unaffiliated parties.
The Company holds approximately 3.9% of the common stock of Capital Bank, N.A.,
a commercial bank whose offices are located in Washington, D.C. An aggregate
of approximately 6.5% of the common stock outstanding of Capital Bank, N.A.
is held by Fana Holtz, Daniel Holtz and Javier Holtz. Abel Holtz, who is the
former Chairman of the Board, Chief Executive Officer and President of the
Company and the husband of Fana Holtz, also owns approximately 12.5% of the
outstanding shares. Javier Holtz, who is a director of the Bank and Capital
Factors and is an executive officer of the Company, the Bank and Capital
Factors, is also Chairman of the Board of Directors of Capital Bank, N.A.,
Stephen Ashman, who is a director, President and Chief Executive Officer of
Capital Bank, N.A., is a Director of Capital Factors. Mr. Ashman participates
in the determination of salaries of executive officers of Capital Bank, N.A.
and holds approximately 7.7% of the outstanding common stock of Capital Bank,
N.A.
Capital Bank has an agreement with Capital Bank, N.A. pursuant to which Capital
Bank provides certain consulting and related services to Capital Bank, N.A.
Such services include (i) advice concerning establishment and operation of an
international banking department, (ii) advice concerning establishment and
operation of a real estate loan department (iii) consultation and advice with
respect to the formulation of long range growth and planning objectives, and
(iv) such other advisory and consultory services agreed upon by the Board of
Directors of Capital Bank and Capital Bank, N.A. In consideration for such
services, Capital Bank, N.A. offers to Capital Bank a right of
- 94 -
<PAGE> 95
first refusal to participate, if and to the extent that Capital Bank wishes to
do so, in any loan to be made by Capital Bank, N.A. which exceeds the legal
lending limit of that institution. No value has been established on the books
of the Company or its subsidiaries for this right of first refusal. Capital
Bank from time to time sells Federal funds to and participates in certain loans
with Capital Bank, N.A.
On August 1, 1995, Capital Bank, N.A. granted a loan in the form of overnight
Federal funds sold to Capital Bank of approximately $900,000. The purpose of
the loan was to assist Capital Factors in handling funding for their California
clients as a result of a hurricane that was expected to hit Miami on that same
date. The following day, the loan was repaid to Capital Bank, N.A. along with
fees for handling the funding (wire transfer fees). Due to an inadvertent
error on the part of Capital Bank, N.A., no interest was charged at the time
the loan was paid. Interest in the amount of $135.01 was charged on
November 15th after discovery of the error.
Craig Platt is currently a Senior Vice President of Oppenheimer & Co., Inc.
("Oppenheimer"), which company performed certain financial advisory services
for the Company during 1995. In July 1995, Oppenheimer provided brokerage
services to the Company in connection with the sale of 120,000 shares of its
Common Stock. In 1995, Oppenheimer received fees of approximately $54,000 in
connection with these transactions.
- 95 -
<PAGE> 96
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 1, 1996
concerning (i) the directors of the Company and Capital Bank; (ii) the Named
Executive Officers (see Item 11); (iii) all directors and executive officers of
the Company and Capital Bank as a group; and (iv) any person who is known to be
the beneficial owner, as such term is defined in Rule 13d-3 of the Securities
and Exchange Commission under the Securities Exchange Act of 1934, of more than
5% of the outstanding shares of the Company's Common Stock, according to
filings by such persons with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Amount Percent
Common Stock Common Stock
Name and Address Beneficially Owned (1) Outstanding
------------------ ---------------------- ------------
<S> <C> <C>
DIRECTORS:
Daniel M. Holtz 546,166(2) 7.3%
Fana Holtz 2,963,682(3) 39.7%
Javier J. Holtz 285,778(4) 3.8%
Russell W. Galbut 23,000(5) *
Craig L. Platt 23,750(6) *
Jeffrey H. Porter 46,686(7) *
Leon J. Simkins 712,399(8) 9.6%
Hugh F. Culverhouse, Jr. 5,000(5) *
John W. Kiefer 68,001(9) *
Simon S. Ferro 20,000(5) *
Ronald S. Chase 23,750(5) *
Dr. John O. Brown 36,598(10) *
OTHER NAMED EXECUTIVE OFFICERS:
Thomas J. Flood 120,102(11) 1.6%
Timothy E. Kish 30,501(5) *
All current directors and executive
officers of the Company and
Capital Bank as a group
(17 persons) (12) 5,021,907 67.3%
OTHER 5% OWNERS:
Abel Holtz
169 E. Flagler Street
Suite 1627
Miami, Florida 33131 677,077(13) 9.1%
Alex Halberstein
1221 Brickell Avenue
Suite 1050
Miami, Florida 33131 734,692(14) 10.0%
</TABLE>
- --------------------------------
*Less than 1%
(1) The nature of the reported beneficial ownership is unshared voting and
investment power unless otherwise indicated. Beneficial ownership of Common
Stock reflects shares that would be received upon the exercise of options.
(2) Includes 211,500 shares held individually, 166,665 shares held by a
partnership, of which Daniel Holtz is a general partner, and 168,001 shares
that he has the right to acquire pursuant to currently exercisable options.
Mr. Holtz, individually, and together with his mother, Fana Holtz, and his
brother, Javier Holtz, filed an application with the Florida Department of
Banking and Finance (the "FDBF") to acquire and/or maintain control of the
Company, although they do not believe that such an application is required.
For more information, see "Legal Proceedings" in Item 3 hereof.
(3) Includes 1,527,565 shares held individually, 1,413,117 shares over which
Mrs. Holtz claims voting power and 23,000 shares that she has the right to
acquire pursuant to currently exercisable options. Does not include 665,893
shares, nor presently exercisable options to purchase a total of 11,184 shares,
held by her husband, Abel Holtz, as to which shares Mrs. Holtz disclaims
beneficial ownership and voting power. Mrs. Holtz, individually, and together
with her sons, Daniel Holtz and Javier Holtz, filed an application with the
FDBF to acquire and/or maintain control of the Company, although they do not
believe that such an application is required. For more information, see "Legal
Proceedings" in Item 3 hereof.
- 96 -
<PAGE> 97
(4) Includes 162,919 shares held individually, 3,937 shares held jointly with
his wife, 22,500 shares held by his wife individually and 421 shares over which
he claims voting power. Also includes 96,001 shares that he has the right to
acquire pursuant to currently exercisable options. Mr. Holtz, individually,
and together with his mother, Fana Holtz, and his brother, Daniel Holtz, filed
an application with the FDBF to acquire and/or maintain control of the Company,
although they do not believe that such an application is required. For more
information, see "Legal Proceedings" in Item 3 hereof.
(5) Represents shares that the individual has the right to acquire pursuant
to currently exercisable options.
(6) Represents shares that Mr. Platt has the right to acquire pursuant to
currently exercisable options. Mr. Platt is also a 40% limited partner in a
partnership which owns 166,665 shares of Common Stock; however, he has no
voting or investment control over such shares.
(7) Includes 26,686 shares held individually and 20,000 shares that Mr. Porter
has the right to acquire pursuant to currently exercisable options.
(8) Includes 516,277 shares held individually, 13 shares held as custodian for
Mr. Simkins' son under the Florida Gifts to Minors Act, 170,109 shares held by
a trust for the benefit of Mr. Simkins and 26,000 shares he has the right to
acquire pursuant to currently exercisable options.
(9) Includes 9,000 shares held individually and 59,001 shares that Mr. Kiefer
has the right to acquire pursuant to currently exercisable options.
(10) Includes 10,598 shares held individually and 26,000 shares that Dr. Brown
has the right to acquire pursuant to currently exercisable options.
(11) Includes 42,100 share held jointly by Mr. Flood and his wife and 78,002
shares that he has the right to acquire pursuant to currently exercisable
options.
(12) The total reflects (i) shares held by directors and executive officers of
the Company and Capital Bank and (ii) shares under option to such directors and
executive officers.
(13) This information was obtained from a Schedule 13G filed with the
Securities and Exchange Commission on February 13, 1996 and includes presently
exercisable options held by Abel Holtz to acquire 11,184 shares. Mr. Holtz has
advised the Company that he has orally agreed not to vote his shares at the
present time. In addition, he disclaims beneficial ownership as to any shares
held by his wife, Fana Holtz, or his sons, Daniel Holtz and Javier Holtz.
(14) This information was obtained from a Schedule 13G filed with the
Securities and Exchange Commission on February 14, 1996.
- 97 -
<PAGE> 98
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Capital Bank has entered into consulting agreements with Abel Holtz and Alex
Halberstein, each of whom is a former director and officer of the Company
and/or Bank. See "Consulting Agreements," within Item 11, Executive
Compensation.
Pursuant to its Bylaws, the Company is authorized to indemnify, to the extent
permitted by the laws of the State of Florida, any person who is made a party
to any lawsuit or action by reason of the fact that he or she is or was a
director or officer of the Company. By virtue of this provision, the Company
is currently advancing the legal expenses of its outside directors who were
named as defendants in the shareholder actions and outside directors and
certain non-executive officers who incurred expenses in connection with the
other matters set forth in Item 3 hereof, which aggregated approximately
$56,000 during 1995. Those directors have agreed in writing to repay the
Company for all or any portion of those advances which they are ultimately
found not to have been entitled to pursuant to applicable Florida law. The
Company may in the future also pay the legal expenses of its other directors
who are also named defendants in the litigation.
Under Florida law, the Company will not be required to indemnify any such
director unless the following criteria are met: (i) he or she is a party to
the litigation because of his or her status as a director of officer of the
Company and (ii) he or she is successful in his or her defense of the
litigation. At the other extreme, no indemnification can be made to a director
if a judgment or final adjudication establishes that actions or non-actions of
that director were material to the cause of action and constituted (i) a
violation of criminal law (unless the director had a reasonable cause to
believe that his conduct was lawful or had no reasonable cause to believe that
his conduct was unlawful); (ii) willful misconduct or a conscious disregard for
the best interests of the Company; or (iii) a transaction in which the director
received an improper personal benefit. In circumstances, where a director
seeking indemnification has not been successful in his or her defense in the
litigation but the factual circumstances prohibiting indemnification have not
been adjudicated to exist, indemnification by the Company will not be required,
but may be permitted under Florida law. At this time, it is impossible to
determine whether the circumstances at the conclusion of the litigation will
permit, prohibit or require indemnification by the Company of any or all of its
directors or what factors will be considered in such determination, other than
those factors set forth above.
During April 1994, Capital Bank purchased the premises housing its North Bay
Village branch office and its operations center from a partnership composed of
Abel Holtz, who was the Chairman of the Board and Chief Executive Officer of
Capital Bank and the Company at the time of the purchase, and a business
associate. The purchase price of $4.5 million approximated the appraised value
determined by an appraiser. Prior to the purchase, Capital Bank leased the
space from the same partnership.
Capital Bank leases property for its North Miami Beach branch office from a
partnership composed of Messrs. Abel Holtz, Leonard Wien and Nathan Esformes,
all of whom are former Directors of the Company, Stanley Worton and Raymond
Clark, former Directors of Capital Bank, Simon Portnoy, a former Director and
officer of the Company and Capital Bank, and David Promoff, an officer of
Capital Bank. Abel Holtz serves as Trustee for the Partnership. During 1995,
payments to Mr. Holtz as Trustee for the Partnership pursuant to this lease
totaled approximately $155,000.
Both Capital Bank and the Company believe the terms of all transactions
discussed above to be fair, reasonable, and similar to those available from
unaffiliated parties.
In addition to the above, Capital Bank from time to time makes loans and
extends credit to certain of its officers and directors and their affiliates.
In the opinion of management of the Company, all of these loans and extensions
of credit were made in the ordinary course of business, on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons, and did not involve more
than normal risks of collectibility or present other unfavorable features.
See Compensation Committee Interlocks and Insider Participation in Item 11
hereof for additional information regarding transactions with Daniel Holtz,
Javier Holtz and Craig Platt.
- 98 -
<PAGE> 99
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(A) The following documents are filed as part of this report:
(1) Financial statements.
The following financial statements of the Company and its
subsidiaries and the independent certified public accountant's report
thereon appear in Item 8 hereof.
Report of Independent Certified Public Accountants
Statements of Consolidated Financial Condition as of December 31, 1995
and 1994
Statements of Consolidated Income for the years ended December 31,
1995, 1994 and 1993
Statements of Consolidated Cash Flows for the years ended December 31,
1995, 1994 and 1993
Statements of Consolidated Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
Schedules are omitted because the conditions requiring their filing
are not applicable or because the required information is provided
in the Consolidated Financial Statement, including the Notes thereto.
(3) Exhibits.*
(3.1) Articles of Incorporation of the Company, as amended (Exhibit
3.1 to the Company's Registration Statement [Registration No. 0-26080] on Form
8-A as filed with the Securities and Exchange Commission on July 17, 1995).
(3.2) Amended and Restated Bylaws of the Company (Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1990.
(3.3) Amendment to the Bylaws.
(9.1) Shareholders Agreement dated March 5, 1980 by and between
Stanley Worton and Abel Holtz (Exhibit 9.15 to the Company's Registration
Statement on Form S-14 [Registration No. 2-77167] as filed with the Securities
and Exchange Commission on June 21, 1982 (the "Form S-14").
(9.2) Shareholders Agreement dated August 8, 1980 by and between
Irving Pollack and Abel Holtz (Exhibit 9.16 to the Form S-14).
(9.3) Shareholders Agreement dated March 5, 1980 by and between
Kenneth Keusch and Abel Holtz (Exhibit 9.17 to the Form S-14).
(9.4) Shareholders Agreement dated March 5, 1990 by and between
Equipa Lux. C.A. and Abel Holtz (Exhibit 9.18 to the Form S-14).
(9.5) Shareholders Agreement dated May 9, 1980 by and between Alex
Halberstein and Abel Holtz (Exhibit 9.19 to the Form S-14).
- 99 -
<PAGE> 100
(10.1) 1982 Employee Stock Option Plan (Exhibit 10.2(c)(1) to the Form
S-14).**
(10.2) Amendment to the 1982 Employee Stock Option Plan (Exhibit 10.21
to the Company's Annual Report on Form 10-K for the year ended December 31,
1987).**
(10.3) 1992 Stock Option Plan (Exhibit 10.27 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992).**
(10.4) Amendment to the 1992 Stock Option Plan.**
(10.5) Capital Bancorp Employees' Pension Plan, as amended (Exhibit 28
to the Company's Annual Report on Form 10-K for the year ended December 31,
1994).**
(10.6) Capital Bancorp Employees' Pension Trust Agreement, as amended
(Exhibit 28.2 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994).**
(10.7) Capital Bancorp and Subsidiaries 401(k) Retirement Savings Plan
(Exhibit 28.4 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993).**
(10.8) Consulting Agreement dated May 26, 1993 by and between Alex
Halberstein and Capital Bank (Exhibit 19.3 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).**
(10.9) Employment Agreement dated January 1, 1993 by and between John
W. Kiefer and Capital Factors, Inc. (Exhibit 19.4 to the Company's Form 10-K
for the year ended December 31, 1994).**
(10.10) Consulting Agreement dated October 7, 1994 by and between Abel
Holtz and Capital Bank (Exhibit 28.6 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994).**
(10.11) License and Service Agreement dated September 30, 1994 by and
between FiServ, Inc. and Capital Bank (Exhibit 10.29 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994).
(10.12) Tax Sharing Agreement (Exhibit 28 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1983).
(10.13) Agreement and Plan of Merger between Capital Bank and Peoples
First National Bank (Exhibit 28.3 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1991).
(10.14) Purchase and Assumption Agreement dated January 26, 1990 by
and between Capital Bank and the Federal Deposit Insurance Corporation re:
Creditbank (Exhibit 10.22 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1990).
(11.1) Statement re: computation of per share earnings.
(21.1) Subsidiaries of the Registrant.
(23.1) Consent of Deloitte & Touche, LLP.
(27.1) Financial Data Schedule***
- ------------
* Exhibits followed by a parenthetical reference are incorporated
herein by reference from the document described therein.
** Exhibits 10.1 to 10.10 are management contracts or compensatory plans
or arrangements.
*** Filed electronically only.
- 100 -
<PAGE> 101
(B) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter of 1995.
- 101 -
<PAGE> 102
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.
CAPITAL BANCORP
DATE: March 28, 1996 BY: /s/LUCIOUS T. HARRIS
---------------------------
LUCIOUS T. HARRIS, Treasurer
(Principal Financial and
Accounting Officer)
- 102 -
<PAGE> 103
SIGNATURES
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.
<TABLE>
<S> <C> <C>
/s/Daniel M. Holtz Chairman of the Board of March 28, 1996
- ------------------------- Directors. President and
Daniel M. Holtz Principal Executive Officer
/s/Fana Holtz Vice Chairman of the March 28, 1996
- ------------------------- Board of Directors
Fana Holtz
/s/Hugh F. Culverhouse, Jr. Director March 28, 1996
- -------------------------
Hugh F. Culverhouse, Jr.
/s/Russell Galbut Director March 28, 1996
- -------------------------
Russell Galbut
/s/Craig L. Platt Director March 28, 1996
- -------------------------
Craig L. Platt
/s/Jeffrey H. Porter Director March 28, 1996
- -------------------------
Jeffrey H. Porter
/s/Leon J. Simkins Director March 28, 1996
- -------------------------
Leon J. Simkins
</TABLE>
- 103 -
<PAGE> 104
CAPITAL BANCORP
FORM 10-K
Index to Exhibits*
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Page
- ---------- -------------
<S> <C>
3.3 Amendment to the Bylaws
10.4 Amendment to the 1992 Stock Option Plan.
11.1 Statement re: computation of per share earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche, LLP.
27.1 Financial Data Schedule.**
</TABLE>
- -------------
* All other exhibits listed under Item 14 of Part IV of the Form 10-K are
incorporated by reference to documents previously filed, as indicated therein.
** Filed electronically only.
- 104 -
<PAGE> 1
EXHIBIT 3.3
CAPITAL BANCORP
AMENDMENT TO BYLAWS
RESOLVED, that Section 7.8 of the Company's Bylaws is hereby amended to read in
its entirety as follows:
Section 7.8 - Voting of Shares in Subsidiaries or Other Entities: The
Chairman of the Board or the President of the Corporation, or any person or
entity designated in writing by the Chairman or the President, shall be
authorized to vote all shares of stock that the Corporation owns in any
subsidiary or other entity at the meeting of the shareholders of such
subsidiary or other entity, or in connection with any corporate action by
written consent in lieu of such meeting; provided, however, that any shares
that the Corporation owns in Capital Bank, N.A. shall be voted only as directed
by the Board of Directors of the Corporation.
- 105 -
<PAGE> 1
EXHIBIT 10.4
AMENDMENT TO 1992 STOCK OPTION PLAN
This amendment to the Capital Bancorp 1992 Stock Option Plan is made
effective this 25th day of January, 1996.
W I T N E S S E T H:
WHEREAS, effective as of May 27, 1992, Capital Bancorp (the"Company") adopted
the Capital Bancorp 1992 Stock Option Plan (the "Plan"); and
WHEREAS, the Board of Directors of the Company has adopted resolutions at its
meetings of November 30, 1995 and January 25, 1996 which amend the Plan,
pursuant to Section 19, to bring it in to compliance with Rule 16b-3 of the
Securities Exchange Act of 1934.
NOW, THEREFORE, the Plan is hereby amended as follows:
1. Section 2(b) of the Plan is hereby amended by deleting the definition of
the term "Committee" and substituting in lieu thereof the following:
(b) "Committee" shall mean a committee of at least two members of the
Board who are disinterested as such term is defined in Rule 16b-3 of the
Securities Exchange Act of 1934, as amended, and Section 162(m) of the Internal
Revenue Code of 1986, as amended.
2. Section 5 of the Plan is hereby amended by adding the following section:
(d) No Optionee shall be eligible to receive options to purchase an
aggregate of more than 562,500 Shares during the term of the Plan.
3. Section 5 of the Plan is hereby amended by adding the following section:
(e) Members of the Committee shall only be granted options under the Plan
pursuant to the following formula:
Each member of the Committee shall be granted, on an annual basis,
options to purchase 4,000 Shares, plus an additional 1,000 shares if the
Company makes or exceeds 75% of its financial plan.
4. Except as otherwise specifically amended hereunder, all other terms and
conditions of the Plan shall remain in full force and effect. Unless otherwise
expressly stated herein to the contrary, all capitalized terms used herein
shall have the meanings ascribed to them in the Plan.
- 106 -
<PAGE> 1
Exhibit 11.1
CAPITAL BANCORP AND SUBSIDIARIES
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Primary:
Average number of common
shares outstanding 7,194,216 6,955,506 7,018,768
Dilutive effect of stock
options 415,523 254,952 170,810
----------- ----------- -----------
Total common and common
equivalent shares 7,609,739 7,210,458 7,189,578
=========== =========== ===========
Fully-diluted:
Average number of common
shares outstanding 7,194,216 6,955,506 7,018,768
Dilutive effect of stock
options 575,776 391,240 278,754
----------- ----------- -----------
Total common and common
equivalent shares 7,769,992 7,346,746 7,297,522
=========== =========== ===========
Net income $17,101,000 $13,204,000 $11,769,000
=========== =========== ===========
Primary:
Income from continuing
operations $ 2.25 $ 1.83 $ 1.64
=========== ========== ===========
Fully Diluted:
Income from continuing
operations $ 2.20 $ 1.80 $ 1.61
=========== ========== ===========
</TABLE>
Earnings per share amounts were computed based upon the average number of
common and common equivalent shares outstanding assuming proceeds from the
assumed exercise of options were used to purchase common shares outstanding,
unless such exercise is antidilutive.
- 107 -
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
1. Capital Bank, incorporated in the State of Florida, doing business under
the name of Capital Bank.
2. Capital Factors Holding, Inc. (subsidiary of Capital Bank), incorporated in
the State of Florida, doing business under the name of Capital Factors Holding,
Inc.
3. Capital Factors, Inc. (subsidiary of Capital Factors Holding, Inc.),
incorporated in the State of Florida, doing business under the name of Capital
Factors, Inc. (Florida), and CB Factors, Inc. (California), and Capital Factors
Northeast, Inc. (New York).
4. CF One, Inc. (subsidiary of Capital Factors Holding, Inc.), incorporated in
the State of Delaware, doing business under the name of Capital Factors One,
Inc.
5. CF Funding Corp. (subsidiary of Capital Factors, Inc.), incorporated in the
State of Delaware, doing business under the name of Capital Factors Funding
Corp.
6. Bay Estates, Inc. (subsidiary of Capital Bank), incorporated in the State
of Florida, doing business under the name of Bay Estates, Inc.
7. Cap Realty, Inc. (subsidiary of Capital Bank), incorporated in the State of
Florida, doing business under the name of Cap Realty, Inc.
8. Cap Personalty, Inc. (subsidiary of Capital Bank), incorporated in the
State of Florida, doing business under the name of Cap Personalty, Inc.
9. Cap Plaza, Inc. (subsidiary of Capital Bank), incorporated in the State of
Florida, doing business under the name of Cap Plaza, Inc.
10. Cap Properties, Inc. (subsidiary of Capital Bank), incorporated in the
State of Texas, doing business under the name of Cap Properties, Inc.
11. Capital Foreclosed Property, Inc. (subsidiary of Capital Bank),
incorporated in the State of Florida, doing business under the name of Capital
Foreclosed Property, Inc.
12. Cap Holdings, Inc. (subsidiary of Capital Bank), incorporated in the State
of Florida, doing business under the name of Cap Holdings, Inc.
13. Cap Harbor, Inc. (subsidiary of Capital Bank), incorporated in the State of
Florida, doing business under the name of Cap Harbor, Inc.
14. Cap Temp, Inc. (subsidiary of Capital Bank), incorporated in the State of
Florida, doing business under the name of Cap Temp, Inc.
15. Villages at Imperial Lakes, Inc. (subsidiary of Capital Bank), incorporated
in the State of Florida, doing business under the name of Villages of Imperial
Lakes, Inc.
16. Marina Real, Inc. (subsidiary of Villages at Imperial Lakes, Inc.),
incorporated in the State of Florida, doing business under the name of Marina
Real, Inc.
17. DJM Holding, Inc. (subsidiary of Capital Bank), incorporated in the State of
Florida, doing business under the name of DJM Holdings, Inc.
18. Pointe Park, Inc. (subsidiary of Capital Bank), incorporated in the State of
Florida, doing business under the name of Pointe Park, Inc.
19. Capital Trade Development Corp. (subsidiary of Capital Bank), incorporated
in the State of Florida, doing business under the name of Capital Trade
Development Corp.
20. Cap Coral, Inc. (subsidiary of Capital Bank), incorporated in the State of
Florida, doing business under the name of Cap Coral, Inc.
21. Capital Trading Group, Inc. (subsidiary of Capital Bancorp), incorporated in
the State of Florida, doing business as Capital Trading Group, Inc.
- 108 -
<PAGE> 1
EXHIBIT 23.1
Independent Auditors' Consent
We consent to the incorporation by reference in the Registration Statement
No. 33-91792 of Capital Bancorp on Form S-8 of our report dated February 23,
1996 appearing in this Annual Report on Form 10-K for the year ended
December 31, 1995.
Deloitte & Touche LLP
Miami, Florida
March 28, 1996
- 109 -
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 138,903
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 75,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 217,008
<INVESTMENTS-CARRYING> 23,496
<INVESTMENTS-MARKET> 24,173
<LOANS> 726,043
<ALLOWANCE> 11,789
<TOTAL-ASSETS> 1,593,119
<DEPOSITS> 1,038,755
<SHORT-TERM> 86,133
<LIABILITIES-OTHER> 16,865
<LONG-TERM> 176,650
0
0
<COMMON> 7,453
<OTHER-SE> 106,272
<TOTAL-LIABILITIES-AND-EQUITY> 1,593,119
<INTEREST-LOAN> 68,360
<INTEREST-INVEST> 13,327
<INTEREST-OTHER> 27,644
<INTEREST-TOTAL> 109,331
<INTEREST-DEPOSIT> 26,072
<INTEREST-EXPENSE> 41,752
<INTEREST-INCOME-NET> 67,579
<LOAN-LOSSES> 5,835
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 80,288
<INCOME-PRETAX> 27,562
<INCOME-PRE-EXTRAORDINARY> 27,562
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,101
<EPS-PRIMARY> 2.25
<EPS-DILUTED> 2.20
<YIELD-ACTUAL> 5.91
<LOANS-NON> 6,890
<LOANS-PAST> 1,132
<LOANS-TROUBLED> 8,433
<LOANS-PROBLEM> 7,697
<ALLOWANCE-OPEN> 9,210
<CHARGE-OFFS> 4,164
<RECOVERIES> 3,143
<ALLOWANCE-CLOSE> 11,789
<ALLOWANCE-DOMESTIC> 9,900
<ALLOWANCE-FOREIGN> 1,400
<ALLOWANCE-UNALLOCATED> 489
</TABLE>
