<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarterly Period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ----------------------
Commission file no. 2-26080
CAPITAL BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
FLORIDA 59-2160717
- ------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1221 Brickell Avenue, Miami, Florida 33131
- -----------------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(305) 536-1500
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(Registrant's telephone number, including area code)
-----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
- ------ ------
As of November 7, 1996, there were 7,502,945 shares of the registrant's Common
Stock outstanding.
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<PAGE> 2
ITEM 1. PART I. FINANCIAL INFORMATION
CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(In Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------- ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 124,821 $ 138,903
Federal funds sold and securities purchased
under agreement to resell 45,000 75,000
---------- ----------
Cash and cash equivalents 169,821 213,903
---------- ----------
Securities held to maturity (market value 9/30/96 -
$32,418, 12/31/95 - $ 24,173) 32,349 23,496
Securities available for sale (at market value) 198,451 217,008
---------- ----------
Total securities 230,800 240,504
---------- ----------
Loans 794,550 728,679
Less allowance for loan losses (9,112) (11,789)
Less unearned income (3,107) (2,636)
---------- ----------
Loans, net 782,331 714,254
---------- ----------
Accounts receivable - factoring subsidiary, net 443,958 316,506
Premises and equipment, net 32,462 33,558
Due from customers on acceptances 36,476 32,413
Other real estate 4,211 6,837
Accrued interest and other assets 31,637 31,740
---------- ----------
Total assets $1,731,696 $1,589,715
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing deposits $ 292,197 $ 336,202
Savings and money market deposits 292,760 283,893
Time deposits 459,265 418,660
---------- ----------
Total deposits 1,044,222 1,038,755
---------- ----------
Funds purchased and securities
sold under agreements to repurchase 94,345 86,133
Bank acceptances outstanding 36,476 32,413
Due to clients - factoring subsidiary 181,946 128,578
Long-term debt 215,320 176,650
Other liabilities 18,577 13,461
---------- ----------
Total liabilities 1,590,886 1,475,990
---------- ----------
Minority interest in consolidated subsidiary 10,971 --
---------- ----------
Stockholders' equity:
Common stock, $1.00 par value
Authorized - 20,000,000 shares
Issued and outstanding - 7,491,439 shares - 9/30/96,
7,453,080 shares - 12/31/95 7,491 7,453
Capital surplus 12,946 8,151
Retained earnings 110,937 98,119
Unrealized (loss) gain on securities available
for sale, net of applicable taxes (1,535) 2
---------- ----------
Total stockholders' equity 129,839 113,725
---------- ----------
Total liabilities and stockholders' equity $1,731,696 $1,589,715
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
- 2 -
<PAGE> 3
CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $16,782 $18,424 $51,679 $50,690
Advances-factoring clients 7,908 6,526 20,800 17,920
Taxable securities 3,687 3,132 10,977 9,497
Tax-exempt securities 54 57 161 178
Federal funds sold and other short-term
investments 1,387 1,113 3,826 1,945
------- ------- ------- -------
Total interest income 29,818 29,252 87,443 80,230
------- ------- ------- -------
INTEREST EXPENSE:
Savings and money market deposits 1,781 1,723 5,243 5,133
Time deposits 6,291 5,394 17,887 13,223
Short-term borrowings 1,057 1,062 2,895 3,526
Long-term debt 3,956 2,962 10,701 7,907
------- ------- ------- -------
Total interest expense 13,085 11,141 36,726 29,789
------- ------- ------- -------
Net interest income 16,733 18,111 50,717 50,441
Provision for loan losses 875 1,700 3,175 2,450
Provision for doubtful accounts-
factoring subsidiary 700 700 2,800 1,650
------- ------- ------- -------
Net interest income after provisions 15,158 15,711 44,742 46,341
------- ------- ------- -------
OTHER INCOME:
Factoring revenues 7,908 6,390 21,672 17,114
Service charges on deposits 3,459 3,043 9,587 9,603
Fees on letters of credit 1,022 1,065 3,202 3,075
Securities gains 4 -- 4 12
Other operating income 1,234 1,854 4,393 4,565
------- ------- ------- -------
Total other income 13,627 12,352 38,858 34,369
------- ------- ------- -------
OTHER EXPENSES:
Salaries and employee benefits 10,595 9,645 30,624 28,446
Occupancy expense, net 1,810 1,968 5,899 5,658
Other operating expenses, net 6,864 8,318 21,878 26,221
------- ------- ------- -------
Total other expenses 19,269 19,931 58,401 60,325
------- ------- ------- -------
Minority interest in net income of
consolidated subsidiary 513 -- 513 --
------- ------- ------- -------
Income before income taxes 9,003 8,132 24,686 20,385
Provision for income taxes 3,884 3,108 10,000 7,700
------- ------- ------- -------
Net income $ 5,119 $ 5,024 $14,686 $12,685
======= ======= ======= =======
Earnings per common and common
equivalent share:
Primary $ .64 $ .66 $ 1.81 $ 1.67
======= ======= ======= =======
Fully diluted $ .63 $ .65 $ 1.81 $ 1.61
======= ======= ======= =======
Cash dividends declared per share of
common stock $ .0833 $ .0833 $ .2499 $ .2499
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,686 $ 12,685
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 3,175 2,450
Provision for doubtful accounts-factoring subsidiary 2,800 1,650
Depreciation and amortization 3,637 3,033
Net (gains) losses on other real estate (570) 1,731
Securities gains (4) (12)
Loss (gain) on disposal of premises and equipment 12 (32)
Minority interest in net income of consolidated subsidiary 513 --
Increase in accrued interest and other assets (1,647) (5,143)
Increase in other liabilities 5,112 6,740
-------- --------
Net cash provided by operating activities 27,714 23,102
-------- --------
Cash flows from investing activities:
Proceeds from maturities of securities
held to maturity 6,106 27,834
Purchase of securities held to maturity (15,000) --
Proceeds from sale of securities available for sale 3,846 --
Proceeds from maturities of securities
available for sale 70,742 16,651
Purchase of securities available for sale (58,475) (33,074)
Net increase in loans (72,190) (48,985)
Proceeds from sale of premises and equipment 120 81
Purchase of premises and equipment (2,630) (4,656)
Proceeds from sale of other real estate 4,798 6,039
Improvements to other real estate (576) (781)
Increase in accounts receivable-factoring
subsidiary (net of due to clients) (76,972) (50,282)
-------- --------
Net cash used in investing activities (140,231) (87,173)
-------- --------
Cash flows from financing activities:
Net increase in deposits 5,467 88,683
Net increase (decrease) in Federal funds purchased and
securities sold under agreements to repurchase 8,212 (13,224)
Proceeds from issuance of long-term debt 39,000 50,000
Repayment of long-term debt (330) (330)
Cash dividends paid (1,864) (1,787)
Proceeds from exercise of stock options 341 892
Redemption of fractional shares after
3-for-2 stock split -- (2)
Repurchase of Common Stock (37) --
Net proceeds from public offering of subsidiary 17,646 --
Proceeds from sale of treasury stock -- 2,112
-------- --------
Net cash provided by financing activities 68,435 126,344
-------- --------
Net (decrease) increase in cash and cash equivalents (44,082) 62,273
Cash and cash equivalents at beginning of period 213,903 106,712
-------- --------
Cash and cash equivalents at end of period $169,821 $168,985
======== ========
</TABLE>
(Continued)
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<PAGE> 5
CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Supplemental Disclosures
Cash paid during the period for:
Interest $ 36,817 $ 29,040
======== ========
Income taxes $ 7,822 $ 8,692
======== ========
Non-cash activities:
(Increase) decrease in the unrealized loss on
securities available for sale, net of applicable
taxes (benefits) in 1996 - ($908) and in 1995 - $1,416 $ (1,537) $ 2,396
======== ========
Loans and advances transferred to
other real estate $ 1,026 $ 1,104
======== ========
Loans recorded in connection with sales of other assets $ -- $ 596
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
- 5 -
<PAGE> 6
CAPITAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 1: Basis of Presentation
The Consolidated Statements of Condition for Capital Bancorp and Subsidiaries
(the "Company") as of September 30, 1996 and December 31, 1995, the
Consolidated Statements of Income for the three- and nine-month periods ended
September 30, 1996 and 1995 and the Consolidated Statements of Cash Flows for
the nine-month periods ended September 30, 1996 and 1995 included in this Form
10-Q have been prepared by the Company in conformity with the instructions to
Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The statements are unaudited
except for the Consolidated Statement of Condition as of December 31, 1995.
Certain amounts in the December 31, 1995 Consolidated Statement of Condition
have been reclassified to conform with the September 30, 1996 consolidated
financial statement presentation.
Except for the Company's revised definition of "impaired" loans, which is
discussed below in Note 2 - Impaired Loans, the accounting policies followed
for interim financial reporting are consistent with the accounting policies
set forth in Note 1 to the Consolidated Financial Statements appearing in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995 as
filed with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of Capital Bancorp
("Bancorp"), Capital Bank (the "Bank") and its subsidiaries, and Capital
Factors Holding, Inc. and its subsidiaries ("Capital Factors"). All
significant intercompany transactions and balances have been eliminated in
consolidation. In the opinion of management, the interim consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of the information
contained therein. The interim results of operations are not necessarily
indicative of the results which may be expected for the full year.
On July 16, 1996, Capital Factors Holding, Inc. completed an initial public
offering of 2,000,000 shares of its Common Stock at a public offering price of
$8.50 per share. Prior to this offering, all of the Common Stock was owned by
the Bank. On August 2, 1996, the underwriting syndicate exercised its option
to acquire an additional 300,000 shares of Common Stock. As a result of the
offering, the Bank's ownership of Capital Factors Holding, Inc. has been
reduced to approximately 81% of the outstanding Common Stock.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation." This statement requires certain disclosures about stock-based
employee compensation regardless of the method used to account for it, 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 method
set forth 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 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. The Company has decided to continue to measure compensation
cost for stock-based compensation as prescribed by APB No. 25.
NOTE 2: Risk Elements - Loans and Advances
Foreign Outstandings
Foreign outstandings included in the loan portfolio consisted of the following
(in thousands of dollars):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
Performing trade credits $119,740 $124,501
Other performing loans 5,791 1,050
Non-accrual loans 123 2,072
-------- --------
$125,654 $127,623
======== ========
</TABLE>
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<PAGE> 7
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 the Bank as
offsets to outstanding foreign loans totaled $21.3 million at September 30,
1996 compared to $19.2 million at year end 1995. In addition to the
outstanding foreign loans, at September 30, 1996 and December 31, 1995 there
were $16.5 million and $29.6 million, respectively, due primarily from foreign
customers on acceptances, offset by $2.1 million and $4.3 million,
respectively, of cash collateral maintained at the Bank.
Cross border outstandings include loans, acceptances, acceptances purchased,
pre-export financings and other interest bearing assets. The following is a
list of cross border outstandings at September 30, 1996 and December 31, 1995
for those countries for which the total amount of outstandings, 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 that may be netted against the outstandings,
exceeded 1% of consolidated total assets (in thousands of dollars):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------- -----------
<S> <C> <C> <C>
Brazil $27,432 Brazil $23,187
Peru 23,791 Peru 18,510
Guatemala 17,681 Guatemala 18,114
Argentina 16,350
------- -------
$68,904 $76,161
======= =======
</TABLE>
At September 30, 1996, the Bank had cross border outstandings to Ecuador
aggregating $13.1 million, which exceeded .75%, but were less than 1% of
consolidated total assets. At December 31, 1995, the Bank had cross border
outstandings to Ecuador and El Salvador aggregating $14.4 million and $13.6
million, respectively, which exceeded .75%, but were less than 1% of
consolidated total assets.
At September 30, 1996 and December 31, 1995, the Bank held other interest
earning assets totaling $7.4 million and $7.2 million, respectively, issued by
debtors located in foreign countries.
Impaired Loans
Effective June 30, 1996, the Company revised its definition of "impaired" loans
to include all loans that are on non-accrual status (excluding consumer loans,
which are collectively evaluated). In addition, one loan for $4.6 million
previously categorized as impaired, but which was not on non-accrual status,
was removed from the impaired category. Prior period information has been
revised to conform with the current definition. This revision did not have an
impact on the provision for loan losses although a reclassification of the
allocation of the allowance for impaired loans was required.
At September 30, 1996 and December 31, 1995, the recorded investment in loans
that were considered impaired under SFAS No. 114 was $5.3 million and $5.9
million, respectively. Measurement for impairment of $476,000 and $2.4 million
at September 30, 1996 and December 31, 1995, respectively, 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 $2.1 million and $2.2
million, which is included within the overall allowance for loan losses at
September 30, 1996 and December 31, 1995, respectively. The average recorded
investment in impaired loans during the nine months ended September 30, 1996
and 1995 was $6.8 million and $5.5 million, respectively. For the nine months
ended September 30, 1996 and 1995, the Company recognized interest income on
these loans of $50,000 and $59,000, respectively.
At September 30, 1996 and December 31, 1995, the recorded investment in client
advances that were considered impaired under SFAS No. 114 was $701,000 and
$2,184,000, respectively, all of which were on non-accrual status at the
respective dates. Measurement for impairment was based on the estimated value
of collateral. These advances required a SFAS No. 114 reserve for possible
credit losses of $31,000 and $134,000 at September 30, 1996 and December 31,
1995, respectively, which is included within the overall allowance for doubtful
accounts.
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<PAGE> 8
Non-accrual and Past Due Loans and Advances
Management evaluates past due and non-accrual loans and advances regularly in
connection with estimating the provisions and the allowances for loan losses
and doubtful accounts, taking into consideration the value of collateral and
the prospects for repayment of principal and collectibility of interest. Loans
and advances are classified on a non-accrual basis when management deems that
collectibility of interest is doubtful, which is after 90 days of past due
status, or at an earlier date if full collectability is doubtful unless the
loan or advance is well secured and in the process of collection. Charge offs
to the allowances are made when a loss is deemed probable.
At September 30, 1996 there were $774,000 of loans that were over 90 days past
due and still accruing interest, as compared to $1.1 million at December 31,
1995. Included in loans 90 days past due and still accruing interest were real
estate, commercial and consumer loans of $361,000, $359,000 and $54,000,
respectively, at September 30, 1996 as compared to real estate, commercial and
consumer loans of $689,000, $281,000 and $162,000, respectively, at December
31, 1995. Loans which are over 90 days past due and still accruing interest
are in the process of collection and are deemed to be well secured.
Following is a summary of non-accrual loans and advances (in thousands of
dollars):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Commercial loans $ 3,027 $ 1,164
Foreign loans 123 2,072
Real estate loans 2,166 1,664
Consumer loans 1,786 1,990
------- -------
Total 7,102 6,890
Advances 701 2,184
------- -------
Total non-accrual loans and advances $ 7,803 $ 9,074
======= =======
</TABLE>
Non-accrual loans increased slightly to $7.1 million, reflecting increases in
commercial and real estate non-accrual loans, while foreign non-accrual loans
decreased. The increase in commercial non-accrual loans is primarily the
result of loans totaling $1.6 million with two borrowers that were transferred
to non-accrual status in 1996. The increase in real estate non-accrual loans
primarily reflects the transfer of three loans totaling $1.6 million to
non-accrual status and was offset by the foreclosure of three loans in 1996
totaling $1.1 million. The decrease in foreign non-accrual loans is primarily
the result of the charge off of $1.9 million in foreign loans with an Argentine
bank. Also charged off in the second quarter were several loans totaling $1.4
million with a Panamanian bank that had been transferred to non-accrual status
in the first quarter of 1996. The decrease in non-accrual advances is the
result of the repayment of $1.2 million of advances that were on non-accrual
status at year end. Management has instituted collection procedures in
connection with non-accrual loans and advances and has established allowances
for loan losses and doubtful accounts deemed adequate to absorb potential
losses, based on information currently available. Many of the factors
considered in management's determination as to the adequacy of the allowances
involve a significant degree of estimation and are subject to rapid changes
that may be unforeseen by management. Changes to these factors could result in
future adjustments to the allowance for loan losses.
NOTE 3: Litigation
The Company and certain of its present and former directors and officers are
defendants in two lawsuits, one of which is a shareholder 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 effect on the consolidated financial condition, results of operations
or liquidity of the Company.
In addition to these lawsuits, various legal actions and proceedings are
pending or are threatened against the Company, the Bank and Capital Factors,
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, to the Company, the Bank and/or Capital Factors 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.
- 8 -
<PAGE> 9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL BANCORP AND SUBSIDIARIES
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 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")
are principally engaged in providing receivables-based commercial financing and
related fee-based credit, collection and management information services
through offices located in Ft. Lauderdale, Florida; New York, New York; Los
Angeles, California and Charlotte, North Carolina.
On July 16, 1996, Capital Factors Holding, Inc. completed an initial public
offering of 2,000,000 shares of its Common Stock at a public offering price of
$8.50 per share. Prior to this offering, all of the Common Stock was owned by
the Bank. On August 2, 1996, the underwriting syndicate exercised its option
to acquire an additional 300,000 shares of Common Stock. The net proceeds from
the offering, which totaled approximately $17.7 million, were used to reduce
Capital Factors Holding, Inc.'s indebtedness to the Bank under an outstanding
line of credit. As a result of the offering, the Bank's ownership of Capital
Factors Holding, Inc. has been reduced to approximately 81% of the outstanding
Common Stock. The Common Stock is listed for trading on the Nasdaq National
Market under the symbol "CAPF."
On August 9, 1996, Capital Factors completed the acquisition of substantially
all of the assets of TempFunds America, Inc. and its affiliate, TempFunds
America Funding Corporation of South Carolina, Inc., which are specialized
financial service companies that provide receivables-based commercial financing
and related fee-based credit, collection and management information services to
temporary employment and home healthcare agencies. The purchase price paid by
Capital Factors was approximately $5.9 million, subject to certain post-closing
adjustments. An additional $900,000 is payable by Capital Factors over a three
year period if certain contingencies are met.
Throughout this discussion, Bancorp and its subsidiaries are collectively
referred to as the "Company."
FINANCIAL CONDITION - SEPTEMBER 30, 1996 VS. DECEMBER 31, 1995
Overview
Total consolidated assets increased $142.0 million, or 9%, during the first
nine months of 1996, which included increases of $86.2 million in interest
earning assets and $55.8 million in non-interest earning assets. The increase
in total consolidated assets was comprised primarily of increases of $127.5
million in net accounts receivable - factoring subsidiary and $68.1 million in
net loans and was offset by decreases of $44.1 million in cash and cash
equivalents and $9.7 million in total securities. The increases in accounts
receivable and loans were primarily funded by additional borrowings of Capital
Factors and the use of cash and cash equivalents. Total consolidated
liabilities increased $114.9 million and included increases of $96.4 million in
interest bearing balances and $18.5 million in non-interest bearing balances.
The public offering of shares of Common Stock by Capital Factors Holding, Inc.
resulted in a minority interest in consolidated subsidiary of $11.0 million at
September 30, 1996. Total stockholders' equity increased $16.1 million, to
$129.8 million, primarily as a result of earnings in excess of dividends
declared and the gain from the public offering of subsidiary's Common Stock.
Securities
The decrease in total securities consisted primarily of maturities, sales and
paydowns during the first nine months of 1996 totaling $80.7 million and an
increase in the unrealized loss on securities available for sale of $2.4
million. Proceeds from these maturities and paydowns were primarily used to
purchase $73.5 million of securities.
Loans
During the first nine months of 1996, total loans increased $65.9 million, or
9%, with increases primarily in consumer, real estate and commercial loans.
- 9 -
<PAGE> 10
Consumer loans include installment loans, home equity and other consumer credit
lines and credit cards. Installment financing, primarily of automobiles, which
totaled $150.8 million and $124.1 million at September 30, 1996 and December
31, 1995, respectively, represented the largest portion of these loans. The
increase in installment loans is primarily attributable to automobile loans
originated indirectly by dealers and reflects the increase in consumer demand
for the 1997 automobile models. Consumer loans totaled $184.4 million and
$159.5 million at September 30, 1996 and December 31, 1995, respectively.
Substantially all of the Company's real estate lending is commercial in nature,
including construction financing for new residential developments and
short-term (5 to 7 years) first mortgages on income producing properties. Real
estate construction loans increased $28.3 million, or 34%, during the first
nine months of 1996 as a result of new home demand in the Company's South
Florida market area. Real estate construction loans totaled $112.7 million and
$84.4 million at September 30, 1996 and December 31, 1995, respectively, while
real estate mortgage loans aggregated $140.4 million and $147.1 million at
September 30, 1996 and December 31, 1995, respectively.
At September 30, 1996, commercial loans totaled $226.1 million, $52.2 million
of which were asset-based loans at Capital Factors. Commercial loans increased
$18.8 million, or 9%, reflecting primarily an increase of $13.8 million in
asset-based loans. During the third quarter, Capital Factors acquired the
assets of TempFunds America, Inc., of which $5.8 million were asset-based
loans. Asset-based loans are collateralized primarily by receivables owned by
the borrowers. 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.
The experience in monitoring receivables that Capital Factors has gained
through its traditional factoring activities is beneficial in managing this
activity.
Accounts Receivable - Factoring Subsidiary
Accounts receivable - factoring subsidiary, net increased $127.5 million, or
40%, to $444.0 million as a result of an overall increase in factoring volume.
Capital Factors, as well as the factoring industry, has historically
experienced and expects to continue to experience seasonal fluctuations in its
factored sales volume and factoring fees, which have generally been highest
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, which typically ship more
goods during such 4-month period in order to fill increased customer orders in
anticipation of "back-to-school" and the ensuing holiday season. 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 $268.1 million at
September 30, 1996, compared to $194.3 million at December 31, 1995. Balances
due to factoring clients for receivables purchased were $181.9 million and
$128.6 million at September 30, 1996 and December 31, 1995, respectively.
Non-accrual advances were $701,000 and $2.2 million at September 30, 1996 and
December 31, 1995, respectively, and are considered in the assessment of the
allowance for doubtful accounts for adequacy (see "Provision for Doubtful
Accounts - Factoring Subsidiary" below).
Cash and Cash Equivalents
The decrease in cash and cash equivalents was composed of decreases of $30.0
million in federal funds sold and securities purchased under agreements to
resell and $14.1 million in cash and due from banks. Cash and cash equivalents
were used to invest in loans and accounts receivable.
Deposits
Total deposits were $1,044.2 million at September 30, 1996 and $1,038.8 million
at December 31, 1995. Total deposits remained relatively the same, however,
the mix of deposits shifted from non-interest bearing to interest bearing,
reflecting an increase of $49.5 million in interest bearing deposits and a
decrease of $44.0 million in non-interest bearing deposits. The increase in
interest bearing deposits reflects the combined effects of internal marketing
efforts to increase overall deposits and increased customer demand for interest
bearing deposits due to higher rates offered. Domestic deposits decreased by
$23.4 million primarily as a result of the repayment of $21.0 million in U.S.
Treasury demand deposits and $15.0 million in brokered time deposits 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. The remaining
decrease in non- interest bearing deposits is the result of deposit outflows in
the normal course of business.
- 10 -
<PAGE> 11
The Company does not operate any foreign offices; however, as a result of the
activities of the Bank's International Division, foreign customers maintain
deposit accounts with the Bank. Deposits by foreign customers amounted to
$199.0 million at September 30, 1996 and $170.2 million at December 31, 1995,
representing 19% and 16% 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.
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
seven to 90 day periods for short-term liquidity management purposes. Retail
repurchase agreements increased $8.2 million to $94.3 million during the first
nine months of 1996.
Long-Term Debt
During the second quarter of 1996, Capital Factors established a $40 million
revolving credit facility with an unaffiliated lender. Borrowings under this
facility bear interest at LIBOR plus 2.15% and mature in March 1999. At
September 30, 1996, $29.0 million was outstanding under this line. Also during
the second quarter, Capital Factors privately placed a $10 million subordinated
note with an unaffiliated lender. The note bears interest at a fixed rate of
7.95% and matures in July 2001.
Capital Factors also has outstanding three series of Variable Rate Asset Back
Certificates aggregating $175.0 million. Such certificates bear interest at
LIBOR plus 1.25% before transaction costs and are scheduled to mature in
December 1999 ($100.0 million), June 2000 ($25.0 million) and January 2001
($50.0 million).
- 11 -
<PAGE> 12
CAPITAL RESOURCES
Stockholders' equity increased $16.1 million during the first nine months of
1996 as a result of net income of $14.7 million and a gain of $4.5 million from
the public offering of Capital Factors Holding, Inc.'s Common Stock and was
offset by dividends declared of $1.9 million and an increase in the unrealized
loss on securities available for sale of $1.5 million (net of tax).
The Florida Department of Banking and Finance (the "FDBF"), the Federal Deposit
Insurance Corporation (the "FDIC") and the Board of Governors of the Federal
Reserve System (the "Federal Reserve") use 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. The Bank is supervised by the FDIC and the FDBF.
At September 30, 1996 and December 31, 1995, the regulatory capital ratios of
the Company and the Bank were as follows:
<TABLE>
<CAPTION>
Minimum
Company Bank Requirement of
---------------------- ---------------------- --------------
9/30/96 12/31/95 9/30/96 12/31/95
------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Leverage ratio 8.25% 7.25% 7.93% 6.97% 3%*
Tier One ratio 10.50% 9.99% 10.08% 9.58% 4%
Total ratio 11.40% 11.24% 10.99% 10.83% 8%
</TABLE>
- --------------------
*Banking regulators expect institutions to maintain an excess of 1 to 2%
above the minimum.
In the opinion of management, these ratios are sufficient to protect depositors
and facilitate future growth. The Company's management continuously 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 the first nine months of
1996 and 1995, the Company's annualized internal capital generation ratio was
15.06% and 15.92%, respectively.
Bancorp currently pays stockholder dividends of 8.33 cents per share per
quarter. This dividend policy is dependent upon the ability of the Bank and
its subsidiaries to continue the payment of dividends to Bancorp. Unforeseen
changes in the financial condition of the Bank and its subsidiaries, or actions
by regulatory authorities, could result in changes in the dividend policy.
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.
- 12 -
<PAGE> 13
Cash and cash equivalents totaled $169.8 million and $213.9 million at
September 30, 1996 and December 31, 1995, respectively. During the first nine
months of 1996, the Company used $140.2 million in investing activities while
generating $68.4 million and $27.7 million from financing and operating
activities, respectively.
During the first nine months of 1996, net new advances by Capital Factors
amounted to $77.0 million, and net new loans amounted to $72.2 million.
Maturities and paydowns of securities in excess of purchases generated $7.2
million of liquidity. The Company generated net cash flows of $68.4 million
from its financing activities, including $39.0 million from borrowings by
Capital Factors, $17.6 million from Capital Factors Holding, Inc.'s issuance of
its Common Stock, an increase of $8.2 million in Federal funds purchased and
securities sold under agreements to repurchase and $5.5 in net deposit inflows.
Capital Factors entered into a revolving credit facility with an unaffiliated
lender which provides for maximum borrowings of $40.0 million ($29.0 million of
which was outstanding at September 30, 1996) and issued a subordinated note in
the amount of $10.0 million to another unaffiliated lender. While deposits
provided only $5.5 million in cash flows, they are expected to remain a primary
source 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 September 30, 1996, the Company
had outstanding commitments to extend credit, commercial letters of credit and
standby letters of credit amounting to $204.5 million, $98.0 million and $15.8
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.
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, reduced by
the value of any associated collateral obtained. This is the maximum potential
loss of principal in the event the commitment is drawn upon and the
counter-party defaults. In addition, the measurement of the risks associated
with these financial instruments is meaningful only when all related and
offsetting transactions are considered.
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 the Bank's ability to continue the
payment of dividends. The ability of the Bank to pay dividends is governed 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 September 30, 1996, the
Bank was not subject to any restrictions on the payment of dividends other than
statutory.
For the remainder of 1996, Bancorp's estimated debt service and stockholder
dividend requirements total approximately $652,000. At September 30, 1996,
Bancorp had available cash balances of $6.5 million and management believes
liquidity at September 30, 1996 was satisfactory.
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.
- 13 -
<PAGE> 14
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 the first nine months of 1996, the average yield on interest
earning assets was 9.09%. For the first nine months of 1996, the average rate
paid on interest bearing deposit liabilities was 4.28%, while the average rate
paid for other interest bearing liabilities was 6.65%. To the extent that
non-deposit liabilities grow faster than deposits, the Company's overall cost
of funds will likely rise, contributing to a decrease in net interest income.
At this time, management does not believe these factors will have a significant
adverse impact on net interest income.
The following table provides a summary analysis of maturity and repricing
characteristics of the Company's interest earning assets and interest bearing
liabilities at September 30, 1996. 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 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 $ 32.9 $ 15.7 $ 20.2 $ 162.0 $ 230.8
Loans(1) 422.9 60.2 42.6 261.7 787.4
Other earning
assets(2) 322.0 -- -- -- 322.0
------ ------ ------ ------- -------
Total interest
earning assets 777.8 75.9 62.8 423.7 1,340.2
------ ------ ------ ------- -------
Interest bearing liabilities:
Interest bearing
deposits 465.8 112.4 110.3 63.5 752.0
Short-term borrowings 94.3 -- -- -- 94.3
Long-term debt 205.3 -- -- 10.0 215.3
------ ------ ------ ------- -------
Total interest
bearing liabilities 765.4 112.4 110.3 73.5 1,061.6
------ ------ ------ ------- -------
Gap 12.4 (36.5) (47.5) 350.2 $ 278.6
------ ------ ------ ------- =======
Cumulative Gap $ 12.4 $(24.1) $(71.6) $ 278.6
====== ====== ====== =======
</TABLE>
- -------------------------
(1) Excludes non-accrual loans of $7.1 million.
(2) Excludes non-accrual advances of $701,000.
Interest rates earned and paid on interest earning assets and interest bearing
liabilities are influenced both by 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 is contingent upon customer demand or acceptance of the products
offered by the Company. At September 30, 1996, the Company's cumulative
one-year gap was negative $71.6 million, or approximately 5% 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.
- 14 -
<PAGE> 15
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
General
The Company recorded net income of $14.7 million for the nine months ended
September 30, 1996, compared to $12.7 million for the nine months ended
September 30, 1995. The increase was primarily a result of higher factoring
revenue and lower operating expenses (primarily at the Bank) offset by higher
provisions for income taxes and provisions for credit losses. Both primary and
fully diluted earnings per share were $1.81 for the nine months ended September
30, 1996 compared to $1.67 and $1.61, respectively, for the same period in
1995. For the nine months ended September 30, 1996 and 1995, the Company's
annualized returns on average assets were 1.21%. The annualized return on
average stockholders' equity was 16.31% in 1996 compared to 17.05% in 1995.
Lines of Business
Set forth below 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.
BUSINESS SEGMENT DATA
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Interest income and
non-interest income:
Domestic banking activities $ 72,728 $ 70,238
Foreign banking activities 10,499 11,171
---------- ----------
Total banking activities 83,227 81,409
Factoring activities 46,811 36,843
Inter-company (3,737)(1) (3,653)(1)
---------- ----------
Total $ 126,301 114,599
========== ==========
Income before income taxes:
Domestic banking activities $ 15,985 $ 10,319
Foreign banking activities 1,109 4,172
---------- ----------
Total banking activities 17,094 14,491
Factoring activities 13,029 10,578
Corporate, minority interest and other (5,437)(2) (4,684)(2)
---------- ----------
Total $ 24,686 $ 20,385
========== ==========
</TABLE>
- -------------------------
(1) Inter-company revenues primarily reflects the related interest income on
loan balances payable by Capital Factors to the Bank.
(2) Includes costs associated with various activities and functions, including
the operations of Bancorp (parent only), certain senior management of the
Bank and other administrative costs, as well as minority interest in net
income of consolidated subsidiary totaling $513,000 in the 1996 period.
There was no minority interest in the 1995 period.
- 15 -
<PAGE> 16
Interest income derived from domestic banking activities totaled $59.0 million
and $56.3 million for the nine months ended September 30, 1996 and 1995,
respectively. Net interest income totaled $35.7 million and $37.3 million in
the respective periods. Interest income, as well as net interest income,
were reduced by $1.2 million in the third quarter of 1996 for the correction of
an error in a system generated interest accrual on certain installment loans.
The 1995 amount includes $975,000 of non-recurring income relating to the
collection of a loan previously on non-accrual status. See "Net Interest
Income" below for further discussion relating to these adjustments. Adjusting
for these items, net interest income would have remained relatively the same,
and reflects a decline in the net interest margin due to lower rates earned on
loans and higher rates paid on deposits offset by higher levels of average
interest earning assets. Non-interest income from domestic banking activities
amounted to $13.7 million and $14.0 million in 1996 and 1995, respectively.
Operating results from domestic activities were higher primarily as a result
of lower non-interest expenses and lower provisions for domestic loan losses
partially offset by lower net interest income. Non-interest expenses were
lower primarily as a result of higher overdraft losses in 1995 relating to the
$2.7 million provision for potential losses associated with one customer.
Additionally, based on management's assessment of the allowance for loan
losses, the provision for domestic loan losses decreased $1.8 million, from
$2.2 million for the nine months ended September 30, 1995 to $370,000 for the
comparable period of 1996.
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
totaled $7.1 million and $7.8 million in 1996 and 1995, respectively. Net
interest income totaled $4.2 million and $4.8 million in 1996 and 1995,
respectively. Net interest income decreased in 1996 compared to 1995 primarily
as a result of a decrease in the net interest margin due to higher funding
costs. Non-interest income from foreign banking activities primarily
represents letter of credit fees and remained at $3.4 million in both periods.
Operating results from foreign banking activities were also affected by
provisions for loan losses, which amounted to $2.8 million in 1996 and $288,000
in 1995. The 1996 provision reflects approximately $1.4 million for certain
exposures in connection with several loans to a Panamanian bank for which the
Panamanian government suspended operations during the first quarter, and $1.0
million for certain exposures in connection with several loans to an Argentine
bank. These loans were charged off in June 1996. The 1995 provision reflects
approximately $1.6 million in recoveries of 1994 charge offs and the
improvement of other potential problem foreign loans.
The Company's factoring activities continued to grow in 1996, due primarily to
the acquisition of new clients. Total revenue, which includes interest income
and non-interest income, increased 27% over the first nine months in 1995 to
$46.8 million for the nine months ended September 30, 1996, while operating
profits increased 23% to $13.0 million. Non-interest income, which primarily
represents factoring commissions, totaled $21.9 million and $17.1 million in
1996 and 1995, respectively, reflecting increased factored accounts receivable
from $1.5 billion in 1995 to $1.9 billion in 1996. Interest income was $24.9
million and $19.7 million, while net interest income was $10.7 million and $8.4
million in 1996 and 1995, respectively. Growth in average interest earning
assets, primarily in advances, due to business development gave rise to these
increases. The increases in net interest income and non-interest income were
offset by increases in non-interest expenses and provisions for doubtful
accounts. The increase in non-interest expenses was primarily the result of
the expansion of factoring activities. The increase in the provision in 1996
was the result of greater charge offs resulting partially from growth in
factoring activities.
Net Interest Income
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 $50.7 million and $50.4 million for the
nine months ended September 30, 1996 and 1995, respectively. Loan fees
included in net interest income amounted to $1.3 million and $1.2 million in
1996 and 1995, respectively. Net interest income on a fully tax-equivalent
basis, including loan fees, totaled $51.4 million in 1996 and 1995.
- 16 -
<PAGE> 17
Net interest income in the first nine months of 1996 increased $276,000 over
the same period in 1995 and was comprised of an increase of $7.2 million in
interest income offset by an increase of $6.9 million in interest expense.
During the third quarter of 1996 the Company discovered an error in a system
calculated interest accrual on certain installment loans, which began in the
third quarter of 1995. The correction of this error reduced interest income by
$1.2 million in 1996, of which $676,000 related to the first six months of 1996
and $563,000 related to 1995, of which $225,000 related to the first nine
months of 1995. Interest income in 1995 includes the one-time collection of
interest, totaling $975,000, relating to the payoff of a loan previously on
non-accrual status. Adjusting for the above mentioned items, interest income
and net interest income would have increased by $9.0 million and $2.1 million,
respectively, for the nine months ended September 30, 1996 as compared to the
same period in 1995. The increase in net interest income was due to an
increase in average interest earning assets to $1.304 billion in 1996 from
$1.126 billion in 1995, offset by a decline in the net interest margin to
5.33% in 1996 from 5.96% in 1995 (both ratios reflect the corrected interest
income due to the calculation error, as well as excluding the 1995
non-recurring collection). While average interest earning assets and average
interest bearing liabilities increased 16%, the net interest margin declined
primarily as the result of a decrease in interest rates earned on loans and
accounts receivable-advances, along with an increase in interest rates paid on
deposits. Average interest bearing liabilities increased to $994.1 million in
1996 from $857.9 million in 1995. The increase in average interest bearing
liabilities occurred primarily in time deposits and long-term borrowings.
Approximately 69% of the increase in interest expense was attributable to
interest expense on deposits and is primarily the result of an increase in
average time deposits, and to a lesser extent in the average rates paid on
such deposits. Average time deposits increased $104.0 million, or 31% for the
first nine months of 1996 to $436.9 million and represented 61% of average
total interest bearing deposits in 1996 compared to 53% in 1995.
See Asset/Liability Management and Interest Rate Risk above for a discussion of
factors that may affect net interest income.
The following table sets forth information on yields earned and rates paid by
the Company for the nine month periods ended September 30, 1996 and 1995, and
should be reviewed when reading the following net interest income analysis.
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-advances 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.
Yields and interest on loans to U.S. borrowers for 1996 and 1995 reflect the
correction of the system generated error on the calculation of interest income
totaling $989,000 and $235,000, respectively. Yield and interest on loans to
U.S. borrowers for 1995 also excludes $975,000 in interest income relating to
the payoff of a loan which was previously on non-accrual status.
- 17 -
<PAGE> 18
YIELDS EARNED AND RATES PAID
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
1996 1995
----------------------------- -------------------------------
Average Average
Average Yield Average Yield
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 $ 600,764 $ 43,957 9.77% $ 529,127 $ 40,254 10.17%
Foreign Borrowers 126,914 7,070 7.44 124,055 7,626 8.22
Tax Exempt 15,500 1,869 16.11 20,198 2,463 16.31
---------- --------- ----- ---------- -------- -----
Total loans 743,178 52,896 9.51 673,380 50,343 10.00
Accounts receivable
advances - factoring
subsidiary 229,885 20,800 12.09 181,361 17,308 12.76
Securities:
Securities held to maturity:
Taxable 25,943 1,567 8.07 75,122 3,548 6.32
Tax-exempt 3,095 247 10.65 3,451 274 10.62
Securities available for sale:
Taxable 205,251 9,410 6.12 133,739 5,949 5.95
Federal funds sold
and other interest earning
assets 96,950 3,826 5.27 59,067 2,557 5.79
---------- --------- ----- ---------- -------- -----
Total interest earning
assets 1,304,302 88,746 9.09 1,126,120 79,979 9.50
--------- --------
Less allowance for loan losses
and doubtful accounts (13,633) (12,912)
Cash and due from banks 91,332 84,054
Due from customers on
acceptances 30,208 27,915
Other real estate 5,296 11,856
Other assets 202,470 150,438
---------- ----------
Total $1,619,975 $1,387,471
========== ==========
</TABLE>
- 18 -
<PAGE> 19
YIELDS EARNED AND RATES PAID
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
1996 1995
----------------------------- -------------------------------
Average Average
Average Yield Average Yield
Balance Interest Or Rate Balance Interest Or Rate
---------- -------- ------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Deposits:
Savings and Money Market $ 284,277 $ 5,243 2.46% $ 296,193 $ 5,133 2.32%
Time 436,935 17,887 5.47 332,937 13,223 5.31
---------- --------- ----- ---------- -------- -----
Total interest bearing
deposits 721,212 23,130 4.28 629,130 18,356 3.90
Short-term borrowings 85,031 2,895 4.55 90,189 3,526 5.23
Long-term borrowings 187,902 10,701 7.61 138,570 7,907 7.63
---------- --------- ----- ---------- -------- -----
Total interest bearing
liabilities 994,145 36,726 4.93 857,889 29,789 4.64
---------- --------- ----- ---------- -------- -----
Non-interest bearing
deposits 304,796 289,431
Bank acceptances outstanding 30,208 27,915
Other liabilities 168,176 112,752
Minority interest in
consolidated subsidiary 2,370 --
Stockholders' equity 120,280 99,484
---------- ----------
Total liabilities and
stockholders' equity $1,619,975 $1,387,471
========== ==========
Net interest earnings/
yield $ 52,020 5.33% $ 50,190 5.96%
========= ===== ======== =====
Net interest spread 4.16% 4.86%
===== =====
Utilization rate 80.51% 81.16%
===== =====
</TABLE>
- 19 -
<PAGE> 20
Provision for Loan Losses
For the first nine months of 1996, the provision for loan losses increased
$725,000 to $3.2 million as compared to $2.5 million during the same period in
1995. The assessment of the adequacy of the provision involves a significant
degree of estimation and is subject to change. See "Allowance for Loan Losses"
for additional discussion.
Provision for Doubtful Accounts - Factoring Subsidiary
For the first nine months in 1996, the provision for doubtful accounts amounted
to $2.8 million compared to $1.7 million for the same period in 1995. This
increase is primarily due to greater charge offs resulting partially from
growth in factoring activities. See "Allowance for Doubtful Accounts -
Factoring Subsidiary" for additional discussion. For the nine months ended
September 30, 1996 and 1995, net charge offs as a percentage of accounts
receivable purchased was .15% and .05%, respectively. For the same periods,
the percentage of provision for doubtful accounts to accounts receivable
purchased was .15% and .11%, 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
involves a significant degree of estimation and is subject to change, future
provisions for credit losses may be greater or less than actual charge offs.
Other Income
Other income increased $4.5 million, or 13% for the nine months ended September
30, 1996 compared to the same period in 1995. The increase in other income
consisted primarily of an increase of $4.6 million in factoring revenues. The
Company, through Capital Factors, operates factoring offices in Fort
Lauderdale, Florida, Los Angeles, California, New York, New York and Charlotte,
North Carolina. Capital Factors is a specialized financial services company
principally engaged in providing receivables-based commercial financing and
related fee-based credit, collection and management information services.
Capital Factors' clients are primarily small to medium size companies in
various industries, including textile, apparel and furniture manufacturing and,
recently, entities involved in the health care industry.
Total accounts receivable factored totaled $1.888 billion and $1.463 million
for the first nine months of 1996 and 1995, respectively, representing an
increase of 29%. Factoring commissions increased 28% for the same period and
totaled $18.5 million or 48% of total other income for the nine months ended
September 30, 1996 compared to $14.4 million or 42% of total other income for
the same period in 1995. Commission income as a percentage of factored
accounts receivable was .98% for both periods. The growth in factoring
commissions is attributable to overall expansion of factoring activities.
Other Expenses
Other expenses decreased $1.9 million, or 3%, consisting primarily of a
decrease of $4.3 million in other operating expenses offset by an increase of
$2.2 million in salaries and employee benefits. The decrease in other
operating expenses primarily reflects $2.7 million in provisions to reserve for
potential losses resulting from overdrafts related to one customer in 1995 (see
further discussion below). In addition, during 1996, other real estate
expenses decreased $2.2 million compared to the same period in 1995 primarily
due to lower provisions for losses. The increase in salaries and employee
benefits primarily reflects increases at Capital Factors due to expansion of
factoring activities.
For the first nine months of 1996, provisions for losses on overdrafts totaled
$362,000, compared to $3.2 million for the comparable period of 1995. The
increased provision for the nine months of 1995 primarily resulted from one
customer who created net overdrafts of approximately $2.7 million in connection
with transactions occurring over a period of approximately two weeks. To
mitigate the risk that similar losses may occur in the future, internal review
and approval procedures were strengthened by management. At September 30, 1996
and December 31, 1995, total overdraft balances amounted to $8.0 million and
$3.2 million, respectively, and were included in loans in the consolidated
balance sheet. Overdrafts at September 30, 1996 included $2.8 million of
international overdrafts, which were repaid subsequent to September 30, 1996.
Management does not anticipate any material losses associated with overdraft
balances at September 30, 1996.
- 20 -
<PAGE> 21
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 aggregated 41% and
38% of pre-tax income for the nine months ended September 30, 1996 and 1995,
respectively.
- 21 -
<PAGE> 22
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
General
The Company recorded net income of $5.1 million for the three months ended
September 30, 1996, compared to $5.0 million for the same period in 1995.
Primary earnings per share was $.64 and $.66 at September 30, 1996 and 1995,
respectively. Fully diluted earnings per share was $.63 and $.65 at the
respective dates. The annualized return on average assets was 1.19% for the
three months ended September 30, 1996, compared to 1.36% for the three months
ended September 30, 1995. The annualized return on average stockholders'
equity was 16.15% for the three months ended September 30, 1996 compared to
19.01% for the same period in 1995. The increase in income was primarily a
result of higher factoring revenues, lower provision for loan losses and lower
other expenses offset by a decrease in net interest income and higher provision
for income taxes.
Lines of Business
Set forth below 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.
BUSINESS SEGMENT DATA
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
1996 1995
---------- ----------
<S> <C>
Interest income and
non-interest income:
Domestic banking activities $ 23,837 $ 25,418
Foreign banking activities 3,456 3,786
---------- ----------
Total banking activities 27,293 29,204
Factoring activities 17,395 13,715
Inter-company (1,243)(1) (1,315)(1)
---------- ----------
Total $ 43,445 $ 41,604
========== ==========
Income (loss) before income taxes:
Domestic banking activities $ 4,060 $ 5,940
Foreign banking activities 1,232 (303)
---------- ----------
Total banking activities 5,292 5,637
Factoring activities 5,686 4,162
General corporate, minority interest
and other expenses (1,975)(2) (1,667)(2)
---------- ----------
Total $ 9,003 $ 8,132
========== ==========
</TABLE>
- ------------------------------------
(1) Inter-company revenues primarily reflects the related interest income on
loan balances payable by Capital Factors to the Bank.
(2) Corporate and other includes costs associated with various activities and
functions, including the operations of Bancorp (parent only), certain
senior management of the Bank and other administrative costs.
- 22 -
<PAGE> 23
Interest income derived from domestic banking activities decreased $1.4 million
from $20.6 million for the three months ended September 30, 1995 to $19.2
million for same period in 1996. Net interest income from domestic banking
activities decreased $2.5 million to $11.0 million from $13.4 million,
primarily due to the correction in the third quarter of 1996 of an error and
the 1995 collection of past due interest income. See additional discussion in
"Lines of Business" and "Net Interest Income" for the nine months ended
September 30, 1996 and 1995. Non-interest income decreased $212,000 to $4.6
million from $4.8 million. Operating results were lower due to lower net
interest income and higher provision for loan losses offset by lower operating
expenses. The provision for domestic loan losses increased $913,000 to
$773,000 for the third quarter of 1996 compared to a credit of $140,000 for the
third quarter of 1995 due to management's assessment of the allowance at the
respective period ends. Non-interest expense decreased by approximately $1.7
million to $10.7 million from $12.5 million due primarily to higher provisions
in 1995 for potential losses on other real estate.
The increase in operating results for the Bank's foreign activities was the
result of lower provision for foreign loan losses which amounted to $102,000,
compared to $1.8 million for the same period of 1995. During the third quarter
of 1995, higher provisions were recorded to the allowance for loan losses on
certain Argentine loans. See "Allowance for Loan Losses" below for additional
discussion.
The increase in operating results from factoring activities results from higher
net interest income and non-interest income partially offset by higher
non-interest expenses. Net interest income derived from factoring activities
increased primarily due to higher levels of average earning assets. Factoring
commissions, which amounted to $7.9 million and $6.4 million for the third
quarter of 1996 and 1995, respectively, also contributed to higher factoring
revenues.
Net Interest Income
Net interest income for the three months ended September 30, 1996 decreased
$1.4 million over the comparable period in 1995, and consisted of an increase
of $1.9 million in interest expense (primarily in long-term borrowings and time
deposits) offset by an increase of $566,000 in interest income. Net interest
income in the third quarter of 1996 includes the error correction, which
reduced interest and fees on loans by $1.2 million and net interest income in
the third quarter of 1995 includes $975,000 in non-recurring interest related
to the collection of a loan previously on non- accrual status. See additional
discussion in "Net Interest Income" for the nine months ended September 30,
1996 and 1995. Adjusting for the above mentioned items, interest income and
net interest income would have increased $3.0 million and $1.1 million,
respectively, for the three months ended September 30, 1996 compared to the
same period in 1995. Interest expense was higher primarily due to higher
average interest bearing liabilities partially offset by lower average rates
paid. The increase in average interest bearing liabilities occurred primarily
in time deposits and borrowings at Capital Factors. The increase in interest
income consisted of increases of $1.4 million in interest on advances to
factoring clients and $555,000 in taxable interest on securities offset by a
decrease of $1.6 million in interest and fees on loans. The decrease in
interest and fees on loans was also effected by lower yields offset by higher
average interest earning assets. The net interest margin for the three months
ended September 30, 1996 decreased to 5.32% from 5.73% for the three months
ended September 30, 1995 (both ratios reflect the corrected interest income, as
well as excluding the 1995 non-recurring collection).
Provisions for Credit Losses
For the three months ended September 30, 1996, the provision for loan losses
decreased $825,000 to $875,000. The provision for doubtful accounts -
factoring subsidiary remained unchanged compared to the same period in 1995.
Provisions for loan losses in the third quarter of 1995 related to certain
Argentine loans which were charged off in the second quarter of 1996. The
provisions reflect management's judgment as to the amount deemed adequate to
absorb potential loan and receivable losses in the respective portfolios after
evaluating the portfolios, current economic conditions, changes in the nature
and volume of the portfolios, past loss experience and other pertinent factors.
Other Income and Expense
Other income increased $1.3 million, or 10% for the three months ended
September 30, 1996 compared to the same period in 1995. The increase in other
income primarily consisted of increases of $1.5 million in factoring revenues
and $416,000 in service charges on deposits offset by a decrease of $620,000 in
other operating income. Factoring revenues increased due to expansion of
factoring activities. Operating income was lower primarily as a result of
contract termination payments of $732,000 received from a third party in 1995
upon data processing conversion.
- 23 -
<PAGE> 24
Other expenses decreased $662,000, or 3%, consisting primarily of a decrease of
$1.5 million in other operating expenses offset by an increase of $950,000 in
salaries and employee benefits. The decrease in other operating expenses
primarily reflects lower provisions for other real estate losses. The increase
in salaries and employee benefits primarily reflects increases at Capital
Factors due to expansion of factoring activities.
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
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation." This statement requires certain disclosures about stock-based
employee compensation regardless of the method used to account for it, 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 method
set forth 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 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. The Company has decided to continue to measure compensation
cost for stock-based compensation as prescribed by APB No. 25.
- 24 -
<PAGE> 25
ASSET QUALITY REVIEW
The following table summarizes the Company's non-accrual loans and advances,
past due loans, other potential problem loans and restructured loans and assets
as of the dates indicated (in thousands of dollars):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Non-accrual
loans:
Domestic $ 6,979 $ 4,818
Foreign 123 2,072
90 days past due
or more:
Domestic 774 1,132
Foreign -- --
-------- --------
Sub total 7,876 8,022
Non-accrual advances 701 2,184
-------- --------
Total $ 8,577 $ 10,206
======== ========
Other potential
problem loans $ 4,880 $ 7,697
======== ========
Restructured
loans (1) $ 8,333 $ 8,433
======== ========
Restructured
assets (2) $ 3,372 $ 3,137
======== ========
</TABLE>
- -------------------------
(1) Represents troubled debt restructurings as defined by Statement of
Financial Accounting Standards No. 15. These loans were in compliance with
terms at September 30, 1996.
(2) Represents securities available for sale (at market value) received in
connection with restructured foreign loans. These bonds were in compliance
with terms at September 30, 1996.
Domestic non-accrual loans aggregated $7.0 million at September 30, 1996,
compared to $4.8 million at year end 1995. Domestic non-accrual loans
aggregated 1.0% and .8% of total domestic loans at September 30, 1996 and
December 31, 1995, respectively. The increase in domestic non-accrual loans
resulted primarily from the transfer of three real estate mortgage loans and
three commercial loans from accrual status to non-accrual status offset by
three real estate mortgage loans that were foreclosed upon and transferred to
other real estate and charge offs of consumer loans in excess of new consumer
loans transferred to non-accrual status.
Foreign non-accrual loans aggregated $123,000 and $2.1 million at September 30,
1996 and December 31, 1995, respectively. Foreign non-accrual loans
represented .1% and 1.6% of total foreign loans at September 30, 1996 and
December 31, 1995, respectively. The decrease in foreign non-accrual loans is
primarily the result of the charge off in the second quarter of $2.0 million
and $1.4 million of loans with an Argentine and a Panamanian bank,
respectively. The loans with the Panamanian bank were transferred from accrual
status to non-accrual status in the first quarter of 1996. See "Allowance for
Loan Losses" below for additional discussion.
Impaired loans aggregated $5.3 million and $5.9 million at September 30, 1996
and December 31, 1995, respectively. All impaired loans at September 30, 1996
were on non-accrual status. Included in impaired loans at December 31, 1995
were $4.9 million of non-accrual loans and one loan of $956,000 which was still
accruing interest. See "Allowance for Loan Losses" for additional discussion.
- 25 -
<PAGE> 26
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 $701,000 at September 30, 1996, compared to $2.2 million at
December 31, 1995. The decrease at September 30, 1996 is primarily the result
of the repayment in early 1996 of $1.2 million of advances that were on
non-accrual at year end. See "Provision for Doubtful Accounts - Factoring
Subsidiary" above and "Allowance for Doubtful Accounts - Factoring Subsidiary"
below for additional information.
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, 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 material, as additional information becomes known. While the
Company considers the allowance for loan losses to be adequate at September 30,
1996, management is unable to predict the amount, if any, of future provisions
to the allowance.
The following table summarizes the activity in the allowance for loan losses
for the periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1996 1995
-------- --------
<S> <C> <C>
Allowance for loan
losses at January (1) $ 11,789 $ 9,210
Loans charged off:
Commercial and financial (672) (722)
Foreign (3,391) (20)
Real estate - mortgage -- (17)
Consumer (2,487) (1,274)
-------- --------
Total loans charged off (6,550) (2,033)
-------- --------
Recoveries on loans
previously charged off:
Commercial and financial 237 1,010
Foreign -- 1,632
Real estate - mortgage 40 22
Consumer 421 299
-------- --------
Total recoveries 698 2,963
-------- --------
Net loans (charged off)
recovered (5,852) 930
-------- --------
Additions to allowance
charged to operating
expense 3,175 2,450
-------- --------
Allowance for loan
losses at September 30 $ 9,112 $ 12,590
======== ========
Average amount of
loans outstanding
for the year $743,178 $673,380
======== ========
Ratio of net loans
charged off (recovered) to average
loans outstanding for
the period (1) (2) .79% (.18)%
======== ========
</TABLE>
- ---------------------
(1) Before deduction of allowance for loan losses.
(2) Annualized.
- 26 -
<PAGE> 27
During the first nine months of 1996, domestic loan charge offs generally
increased compared to the same period in 1995 as a result of increases in
consumer loan charge offs. The Company's consumer lending activities primarily
involve installment loans and lines of credit. The increase in consumer loan
charge offs is generally reflective of the increase in the consumer loan
portfolio and a nationwide increase in defaults on consumer debt. To a lesser
extent, recoveries of previously charged off domestic loans decreased.
In the second quarter of 1996, the Company charged off $2.0 million and $1.4
million of loans to an Argentine and a Panamanian bank, respectively. Both
banks have ceased normal operations. The allowance allocated for these loans
at the time of charge off was $3.4 million. These Argentine and Panamanian
bank loans arose from trade-related transactions, as do substantially all of
the Company's foreign loans. 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 previously charged
off. All of these bonds were sold during the first and second quarters of
1995. Proceeds in excess of the remaining loan balance 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 September 30, 1996, the Company had no
restructured or non-performing non-trade foreign loans.
The allowance for loan losses totaled $9.1 million and $11.8 million at
September 30, 1996 and December 31, 1995, respectively, representing 1.2% and
1.6% of outstanding loans at September 30, 1996 and December 31, 1995,
respectively. The ratio of the allowance for loan losses to non-accrual loans
was 128% at September 30, 1996 compared to 171% at December 31, 1995. The
ratio of the allowance to total non-performing loans (non-accrual loans and
loans past due 90 days or more) was 116% and 147% at September 30, 1996 and
December 31, 1995, respectively. The decrease in these ratios reflects the
charge off of foreign loans in the second quarter, as well as increases in
non-accrual loans. While the above mentioned ratios have declined, the
Company considers the allowance for loan losses to be adequate to absorb
potential losses in the portfolio. At September 30, 1996 the total allowance
included $600,000 allocated for foreign loans, $8.2 million allocated for
domestic exposure and $312,000 unallocated. At December 31, 1995, the foreign
allocation was $1.4 million, domestic was $9.9 million and $489,000 was
unallocated.
The allowance allocated for foreign loans decreased as a result of the charge
offs in the second quarter. Based on an assessment of the information
currently available, management believes the allowance allocated for foreign
loans at September 30, 1996 to be adequate. It is possible, however, that
future deterioration in the repayment capacity of foreign borrowers could
result in additional non-performing loans and additions to the allowance for
loan losses in amounts not determinable at this time.
The allowance allocated for domestic loans decreased as a result of
management's evaluation of potential problem loans in the commercial and real
estate mortgage portfolio at September 30, 1996. Management does not believe
the composition of domestic potential problem loans represents deteriorating
trends, except for the higher level of consumer loan charge offs, but are
isolated to specific borrowers.
Allowance for Doubtful Accounts - Factoring Subsidiary
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 following table summarizes the activity in the allowance for doubtful
accounts for the periods indicated (in thousands of dollars).
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1996 1995
--------- ---------
<S> <C> <C>
Allowance for doubtful accounts
at January 1 $ 2,981 $ 1,774
Allowance related to acquisition 100 --
Provision for credit losses 2,800 1,650
Charge offs (3,382) (1,256)
Recoveries 478 463
--------- --------
Allowance for doubtful accounts
at September 30 $ 2,977 $ 2,631
========= ========
</TABLE>
- 27 -
<PAGE> 28
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 because the receivables portfolio
turns over approximately seven times each year. Accounts receivable which are
past due are charged off when, in the opinion of management, collection from
the customer, client or collateral realization, if any, is unlikely. 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.
Charge offs, as well as the provision, increased in the first nine months of
1996 as compared to the same period in 1995 primarily as a result of increased
volume and the bankruptcy of a customer of a factoring client, which resulted
in a $600,000 charge off for the period. See "Provision for Doubtful Accounts
- - Factoring Subsidiary" above for additional discussion.
- 28 -
<PAGE> 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Nathan J. Esformes, Stanley I. Worton, M.D., and Leonard Wien, 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.
Bancorp filed a motion to lift the stay in this action, which was held in
abeyance at the plaintiffs' request by the court at a hearing held
on October 7, 1996. As a result, the report issued by the Independent Committee
(which concluded that, based on its investigation and the investigation of its
counsel and accounting firm, that no legal basis for pursuing the derivative
action exists and that the derivative action is not in the best interest of
Bancorp or the Bank, and as such, should be dismissed) has not yet been filed
with the court. However, in early November, the plaintiffs filed a motion to
lift the stay and to schedule an evidentiary hearing on the independence of
the Independent Committee and the reasonableness of its investigation. A
hearing on this motion has not yet been set.
Other Litigation
In addition to the matter set forth above, various legal actions and
proceedings are pending or are threatened against Bancorp, the Bank and Capital
Factors, 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, to Bancorp, the Bank and/or Capital Factors 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.
Regulatory Matter
The administrative hearing regarding the application by Daniel Holtz, Chairman
of the Board, Chief Executive Officer and President of Bancorp, Fana Holtz, the
Vice-Chairman of the Board, and Javier Holtz, an executive officer of Bancorp,
to acquire and/or maintain a controlling interest in the Bank through their
ownership and control of Bancorp, commenced in August 1996 and ended in early
November. An order has not yet been made on the application and is not
anticipated prior to the first quarter of 1997.
- 29 -
<PAGE> 30
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Calculation of Earnings Per Share
Exhibit 27 - Financial Data Schedule - This exhibit is incorporated
by reference to Exhibit 27 set forth in the June 30,
1996 Form 10-Q electronically filed on November 14,
1996.
(b) No Current Reports on Form 8-K were filed by the Company during the
quarter ended September 30, 1996.
- 30 -
<PAGE> 31
SIGNATURES
Pursuant to the requirements 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.
Date: November 14, 1996 By: /s/ Lucious T. Harris
-------------------------
LUCIOUS T. HARRIS
Senior Vice President and
Treasurer
(Principal Financial and Accounting
Officer)
- 31 -
<PAGE> 1
EXHIBIT 11
CAPITAL BANCORP AND SUBSIDIARIES
CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1996 1995
----------- ----------
<S> <C> <C>
Primary
- -------
Weighted average number of
common shares outstanding 7,467,107 7,167,449
Common equivalent shares
outstanding - options 633,795 426,692
----------- -----------
Total common and common
equivalent shares outstanding 8,100,902 7,594,141
=========== ===========
Net income $14,686,000 $12,685,000
=========== ===========
Primary earnings per share $ 1.81 $ 1.67
=========== ===========
Fully diluted
- -------------
Weighted average number of
common shares outstanding 7,467,107 7,167,449
Common equivalent shares
outstanding - options 633,795 715,202
----------- -----------
Total common and common
equivalent shares outstanding 8,100,902 7,882,651
=========== ===========
Net income $14,686,000 $12,685,000
=========== ===========
Fully diluted earnings per share $ 1.81 $ 1.61
=========== ===========
<CAPTION>
Three Months Ended
September 30,
-------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Primary
- -------
Weighted average number of
common shares outstanding 7,477,754 7,186,217
Common equivalent shares
outstanding - options 577,828 449,941
----------- -----------
Total common and common
equivalent shares outstanding 8,055,582 7,636,158
=========== ===========
Net income $ 5,119,000 $ 5,024,000
=========== ===========
Primary earnings per share $ .64 $ .66
=========== ===========
Fully diluted
- -------------
Weighted average number of
common shares outstanding 7,477,754 7,186,217
Common equivalent shares
outstanding - options 597,436 496,749
----------- -----------
Total common and common
equivalent shares outstanding 8,075,190 7,682,966
=========== ===========
Net income $ 5,119,000 $ 5,024,000
=========== ===========
Fully diluted earnings per share $ .63 $ .65
=========== ===========
</TABLE>
- 32 -
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 124,821
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 45,000
<TRADING-ASSETS> 0
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<INVESTMENTS-CARRYING> 32,349
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<LOANS> 791,443
<ALLOWANCE> 9,112
<TOTAL-ASSETS> 1,731,696
<DEPOSITS> 1,044,222
<SHORT-TERM> 94,345
<LIABILITIES-OTHER> 18,577
<LONG-TERM> 215,320
0
0
<COMMON> 7,491
<OTHER-SE> 122,348
<TOTAL-LIABILITIES-AND-EQUITY> 1,731,696
<INTEREST-LOAN> 51,679
<INTEREST-INVEST> 11,138
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<INTEREST-TOTAL> 87,443
<INTEREST-DEPOSIT> 23,130
<INTEREST-EXPENSE> 36,726
<INTEREST-INCOME-NET> 50,717
<LOAN-LOSSES> 3,175
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 58,401
<INCOME-PRETAX> 24,686
<INCOME-PRE-EXTRAORDINARY> 24,686
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,686
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 1.81
<YIELD-ACTUAL> 5.33
<LOANS-NON> 7,102
<LOANS-PAST> 744
<LOANS-TROUBLED> 8,333
<LOANS-PROBLEM> 4,880
<ALLOWANCE-OPEN> 11,789
<CHARGE-OFFS> 6,550
<RECOVERIES> 698
<ALLOWANCE-CLOSE> 9,112
<ALLOWANCE-DOMESTIC> 8,200
<ALLOWANCE-FOREIGN> 600
<ALLOWANCE-UNALLOCATED> 312
</TABLE>
