<PAGE> 1
FORM 10-K/A
Amendment No. 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] For the fiscal year ended December 31, 1995
or
[ ] For the transition period from ...........to...........
Commission File number 2-26080
CAPITAL BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2160717
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1221 Brickell Avenue, Miami, Florida 33131
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 536-1500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class: which registered:
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
-----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K/A or any
amendment to this Form 10-K/A. [ ]
As of March 25, 1996, the aggregate market value of the shares of the
Registrant's Common Stock held by non-affiliates of the Registrant was
$169,210,325. (This number is based on reported beneficial ownership by all
directors and executive officers of the Registrant and holders of 5% or more of
the Registrant's Common Stock. This determination does not, however,
constitute an admission of affiliate status for any of these individual
shareholders).
As of March 25, 1996, the Registrant had outstanding 7,461,279 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE> 2
The following items of the Registrant's Form 10-K for the year ended December
31, 1995 are hereby amended to read in their entirety as follows:
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Capital Bancorp ("Bancorp") is a bank holding company which conducts operations
principally through Capital Bank (the "Bank"), a wholly-owned subsidiary, and
Capital Factors Holding, Inc., a wholly-owned subsidiary of the Bank. The Bank
operates a commercial banking franchise through 28 offices located in the South
Florida area. Capital Factors Holding, Inc. and its subsidiaries ("Capital
Factors") provides accounts receivable factoring and asset based lending
services through offices located in Ft. Lauderdale, Florida, New York, New
York, Los Angeles, California and Charlotte, North Carolina.
Throughout this discussion, Bancorp and its subsidiaries are collectively
referred to as the "Company."
FINANCIAL CONDITION
Overview
During 1995, total consolidated assets increased $273.3 million, or 21%, to
$1.6 billion. This increase included increases of $192.8 million in interest
earning assets and $80.5 million in non-interest earning assets. The increase
in total consolidated assets was comprised primarily of increases of $107.2
million in cash and cash equivalents, $77.6 million in net loans, $71.8 million
in net accounts receivable - factoring subsidiary and $19.5 million in total
securities offset by a decrease of $7.9 million in other real estate.
The increase in total consolidated assets was funded primarily by deposits,
borrowings by Capital Factors and retained earnings. Total deposits increased
$162.0 million, or 18%. In July 1995, Capital Factors caused the issuance of
$50.0 million of senior certificates, bringing the total outstanding to $175.0
million at December 31, 1995. Total consolidated liabilities increased $250.9
million to $1.5 billion. The growth in liabilities included $170.9 million in
interest bearing balances and $80.0 million in non-interest bearing balances.
Total equity increased $22.4 million, to $113.7 million, primarily as a result
of earnings in excess of dividends paid.
See Table 8 below for a distribution of identifiable assets and liabilities
associated with the Company's major lines of business.
Securities
The increase in total securities primarily consisted of purchases of $83.1
million in U.S. Agency securities and $6.1 million in U.S. Government
obligations and a reduction in the unrealized loss on securities available for
sale of $5.9 million offset by maturities, calls and paydowns of $35.0 million
in U.S. Government obligations, $34.8 million in U.S. Agency securities and
$5.0 million in other securities.
The Company's securities holdings are segregated into three separate
portfolios: held to maturity, available for sale and trading. At December 31,
1995 and 1994, the Company held no trading securities. Securities classified
as held to maturity are reported at historical cost, adjusted for amortization
of premiums and accretion of discounts. Securities classified as available for
sale are reported at market value. Any unrealized gain or loss, net of
applicable income taxes, is reported as a separate addition to or reduction
from stockholders' equity.
Securities held to maturity includes securities purchased with the ability and
positive intent to hold until maturity. Such securities are purchased for
yield purposes. Securities available for sale are also acquired for yield, and
are also used in the management of overall liquidity and interest rate risk.
In December 1995, certain provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," were temporarily suspended. Among other things, SFAS
No. 115 governs the transfer of securities between the held to maturity and
available for sale portfolios. During this time period, management
re-evaluated the distribution of securities holdings, and, in order to achieve
enhanced flexibility to manage liquidity and interest rate risk, transferred
holdings with an aggregate book value of approximately $53 million from the
held to maturity portfolio to the available
2
<PAGE> 3
for sale portfolio. The securities transferred had aggregate unrealized gains
of approximately $900,000 at the time of transfer. As a result, as of December
31, 1995, approximately 90% of all securities held are classified as available
for sale. Table 1 presents the book value of securities held as of the dates
indicated.
Table 2 presents the maturity distribution and weighted average yields of
securities held as of December 31, 1995. See Note 3 to the consolidated
financial statements for additional information on securities.
Included in other securities available for sale are debt securities issued by
foreign governments with aggregate market values of $3.1 million, $2.5 million
and $5.0 million at December 31, 1995, 1994 and 1993, respectively. The
amortized cost of these securities was $5.1 million for the respective dates.
These foreign debt securities were received in exchange for non-performing
loans in connection with Brady plan restructurings by Argentina and Mexico.
These securities mature in 2019 to 2023 and are collateralized, as to
principal, by U.S. Treasury zero-coupon securities which will accrete to the
face value of the foreign security at their maturity. At the current time,
management has no intention of disposing of these foreign securities.
3
<PAGE> 4
TABLE 1
COMPOSITION OF INVESTMENT SECURITIES
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
SECURITIES HELD TO MATURITY,
at amortized cost:
U.S. Government agency
obligations $ 16,016 $ 82,649 $ 37,879
State and Municipal
obligations 3,090 3,771 5,131
Other securities 4,390 4,611 5,802
-------- -------- ---------
Total securities held
to maturity $ 23,496 $ 91,031 $ 48,812
======== ======== =========
Aggregate market value $ 24,173 $ 89,122 $ 49,752
======== ======== =========
Gross unrealized gains $ 677 $ 373 $ 959
======== ======== =========
Gross unrealized losses $ -- $ 2,282 $ 19
======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE,
at market value:
U.S. Treasury and Government
agency obligations $212,854 $121,415 $118,848
Other securities 4,154 8,603 12,153
-------- -------- --------
Total securities
available for sale $217,008 $130,018 $131,001
======== ======== ========
Aggregate amortized cost $217,005 $135,871 $127,762
======== ======== ========
Gross unrealized gains $ 2,129 $ 151 $ 4,551
======== ======== ========
Gross unrealized losses $ 2,126 $ 6,004 $ 1,312
======== ======== ========
</TABLE>
4
<PAGE> 5
TABLE 2
MATURITY AND YIELD OF INVESTMENT SECURITIES
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Weighted
Average Yield
as of
TYPE AND MATURITY GROUPING December 31, 1995 December 31, 1995
----------------- -----------------
<S> <C> <C>
Securities Held to Maturity:
U.S. Government agency
obligations (1):
Within one year $ -- --
After one year, but within five years 14,016 6.92%
After five years, but within ten years 2,000 7.16%
After ten years -- --
-------- -----
Total 16,016 6.95%
-------- =====
State and Municipal
obligations (2):
Within one year 250 13.49%
After one year, but within five years 559 14.86%
After five years, but within ten years 2,281 10.72%
After ten years -- --
-------- -----
Total 3,090 11.69%
-------- =====
Other securities:
Within one year -- --
After one year, but within five years 840 10.53%
After five years, but within ten years 3,500 7.93%
After ten years (3) 50 --
-------- -----
Total 4,390 8.34%
-------- =====
Total securities held to maturity $ 23,496 7.83%
======== =====
</TABLE>
- ------------------------------
(1) Mortgage-backed securities are included based upon the projected final
maturity.
(2) Yields of tax-exempt securities are stated on a tax-equivalent basis,
using a Federal tax rate of 35%.
(3) Includes equity securities with no fixed maturity.
5
<PAGE> 6
TABLE 2 (Continued)
MATURITY AND YIELD OF INVESTMENT SECURITIES
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Weighted
Average Yield
as of
TYPE AND MATURITY GROUPING December 31, 1995 December 31, 1995 (2)
----------------- ---------------------
<S> <C> <C>
Securities Available for Sale:
U.S. Treasury and
Government agency
obligations (1):
Within one year $ 67,540 5.65%
After one year, but within
five years 104,189 6.23%
After five years, but within
ten years 17,529 6.78%
After ten years 23,596 7.10%
---------- ----
Total 212,854 6.19%
---------- ====
Other securities:
Within one year 1,017 8.88%
After one year, but within
five years -- --
After five years, but within
ten years -- --
After ten years 3,137 5.68%
---------- ----
Total 4,154 6.46%
---------- ====
Total securities available
for sale $ 217,008 6.20%
========== ====
</TABLE>
- ------------------------
(1) Mortgage-backed securities are included based upon the projected final
maturity.
(2) Weighted average yield is computed based on amortized cost.
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<PAGE> 7
Loans
During 1995, total loans increased $80.1 million, or 12%, with increases in all
major categories. Table 3 provides a five-year summary of the Company's loan
portfolio. Table 4 presents the maturity distribution of loans.
Commercial loans increased $43.5 million, or 27%, reflecting primarily customer
demand. Asset-based loans made by Capital Factors represented $27.8 million of
this increase. At year end 1995, Capital Factors' asset-based loans aggregated
$38.3 million.
Foreign loans increased $12.3 million, or 11%, reflecting the results of
marketing efforts in the international trade finance area. Loans to foreign
banks are derived primarily from the Company's short-term trade finance
activities in Central and South America.
Substantially all of the Company's real estate lending is commercial in nature,
including construction financing and short-term (5-7 years) first mortgages on
income producing properties. Real estate construction loans increased $14.4
million, or 20%, during 1995 as a result of new home demand in the Company's
South Florida market area.
Consumer loans include installment loans, home equity and other consumer credit
lines, and credit cards. Installment financing, primarily of automobiles,
represent the largest portion of these loans, amounting to approximately $123
million and $115 million of total consumer loans at December 31, 1995 and 1994,
respectively. The increase in installment loans is primarily attributable to
automobile loans originated indirectly by dealers.
See Business in Item 1 hereof and Asset Quality Review below for additional
discussion of lending activities, including certain risk elements.
7
<PAGE> 8
TABLE 3
COMPOSITION OF LOAN PORTFOLIO
(In Thousands of Dollars)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and financial $207,357 $163,893 $157,340 $149,879 $195,274
Foreign
Banks 109,997 89,500 49,701 92,680 83,261
Commercial and
industrial 17,626 25,816 34,462 44,555 29,975
-------- -------- -------- -------- --------
Total foreign 127,623 115,316 84,163 137,235 113,236
Real estate construction 84,402 70,049 70,253 82,951 94,346
Real estate mortgage 147,082 145,119 136,823 112,364 135,845
Consumer 159,461 150,682 113,373 86,014 70,902
Other 2,754 3,559 6,224 2,200 3,284
-------- -------- -------- -------- --------
$728,679 $648,618 $568,176 $570,643 $612,887
======== ======== ======== ======== ========
</TABLE>
TABLE 4
CONTRACTUAL MATURITY OF
LOAN BALANCES (1)
(In Thousands of Dollars)
<TABLE>
<CAPTION>
ONE YEAR AFTER
ONE YEAR THROUGH FIVE
OR LESS 5 YEARS (2) YEARS (2) TOTAL
-------- ----------- ----------- -----
<S> <C> <C> <C> <C>
Commercial and
financial $161,250 $ 38,810 $ 6,133 $206,193
Foreign:
Banks 107,170 -- 755 107,925
Commercial and
industrial 17,626 -- -- 17,626
-------- -------- -------- --------
Total foreign 124,796 -- 755 125,551
Real estate
construction 36,170 36,939 11,293 84,402
Real estate mortgage 26,017 99,858 19,543 145,418
Consumer 35,964 114,104 7,403 157,471
Other 2,754 -- -- 2,754
-------- -------- -------- --------
$386,951 $289,711 $ 45,127 $721,789
======== ======== ======== ========
</TABLE>
- -----------------
(1) Excludes non-accrual loans aggregating $6,890.
(2) The total amount of loans due after one year which have predetermined
interest rates is $273,892. The total amount of loans with
floating or adjustable interest rates due after one year is $60,946.
8
<PAGE> 9
Accounts Receivable
Accounts receivable - factoring subsidiary, net increased $71.8 million over
year end 1994 levels to $319.9 million as a result of an overall increase in
factoring volume. During 1995, Capital Factors opened a fourth office in
Charlotte, North Carolina. Capital Factors also operates factoring offices in
New York, New York, Los Angeles, California and Fort Lauderdale, Florida.
Capital Factors purchases receivables from its clients and records a liability
payable to the clients at the time of such purchase. From time to time, the
liability is reduced by advance payments by Capital Factors to the clients,
prior to the contractual payment date for the receivables purchased. Such
advance payments are interest earning balances of Capital Factors. Interest
earning advances, net of client interest bearing credit balances, amounted to
$194.3 million at December 31, 1995 compared to $159.2 million at December 31,
1994. Balances due to factoring clients for receivables purchased amounted
to $128.6 million and $90.7 million at December 31, 1995 and 1994,
respectively.
Cash and Cash Equivalents
The increase in cash and cash equivalents was composed of increases of $60.0
million in federal funds sold and securities purchased under agreements to
resell and $47.2 million in cash and due from banks. The increase in federal
funds sold and securities purchased under agreements to resell resulted
primarily from net inflows of deposits. The increase in cash and due from
banks resulted primarily from funds raised by Capital Factors in the sale of
$50.0 million of senior certificates to outside investors in the second half of
1995.
Other Real Estate
Other real estate amounted to $6.8 million and $14.7 million at December 31,
1995 and December 31, 1994, respectively. The decrease in other real estate
was due primarily to the sale of several properties totaling $8.7 million
offset by new properties acquired, including development costs, totaling
approximately $2.0 million.
Deposits
Total deposits amounted to $1,038.8 million and $876.8 million at December 31,
1995 and 1994, respectively. The increase in total deposits included increases
of $153.8 million in time deposits and $39.6 million in non-interest bearing
deposits offset by a decrease of $31.4 million in savings and money market
deposits. The increase in time deposits reflects the combined effect of
internal marketing efforts to increase overall deposits and increased customer
demand for time deposits due to higher rates offered. Management believes the
decrease in savings and money market deposits reflects an industry-wide trend
whereby customers have chosen alternative investment and savings products over
low yielding deposit products. Included in total deposits at December 31, 1995
was approximately $21 million in U.S. Treasury demand deposits and $15 million
in brokered time deposits which were repaid in January 1996. Such deposits
were received and repaid in the normal course of business and this activity is
not indicative of any known trends. See Table 5 below for the maturity
distribution of time deposits of $100,000 or more. See Table 9 below
for the average balances and rates paid on deposit categories for 1995, 1994
and 1993.
The Company does not operate any foreign offices; however, as a result of the
activities of the International Division of the Company, foreign customers
maintain deposit accounts with the Bank. Deposits by foreign customers
amounted to $170.2 million, $135.5 million and $163.8 million at December 31,
1995, 1994 and 1993, respectively, representing 16%, 15% and 18% of total
deposits, respectively. The level of these deposits is, in part, related to
the level of trade finance activity conducted by the Company, and is also
affected by economic trends in foreign countries. Deposits from foreign
customers decreased in 1994 compared to 1993 due primarily to the decrease in
the Company's trade finance activity during that period. These deposits
increased during 1995 as a result of increased trade finance activity, as well
as capital flight out of some countries in reaction to economic uncertainties.
Deposit liabilities represented 70% and 71% of total liabilities at December
31, 1995 and December 31, 1994, respectively. For the same dates, interest
bearing non-deposit balances represented 18% and 17% of total liabilities. For
the year ended December 31, 1993, average deposit and interest bearing
non-deposit liabilities represented 78% and 10%, respectively, of average total
liabilities. Management believes that deposit
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<PAGE> 10
funding sources will continue to represent a lesser percentage of total
liabilities when compared to historical levels for the foreseeable future.
Short-Term Borrowings
The Company's short-term borrowings primarily represent securities sold under
agreements to repurchase on an overnight basis involving retail customers.
From time to time, the Company may also access wholesale repurchase sources for
7 to 90 day periods for short-term liquidity management purposes. Retail
repurchase agreements represent an important supplemental source of funds for
the Company and have been relatively stable over 1995 and 1994.
During 1994, the Company experienced a significant increase in retail
repurchase agreements due to marketing success of this product. Furthermore,
in 1993, the Company converted funds purchased from foreign banks to short-term
time deposits.
Table 6 below presents the year end balances, weighted average interest
rates and maximum outstanding balances of short-term borrowings for 1995, 1994
and 1993.
Other Borrowings
In July, 1995, Capital Factors, Inc., through its wholly-owned subsidiary C.F.
Funding Corp., issued $50 million of Variable Rate Asset Backed Certificates
("senior certificates") with a maturity date of January 2001, bringing the
total of such certificates to $175 million at year end ($100 million and $25
million with maturity dates of December 1999 and June 2000, respectively).
The senior certificates bear an interest rate of LIBOR plus 1.25% before
transaction costs (approximately 7.19% at December 31, 1995, excluding
transaction costs of 0.37%) and are collateralized by advances to clients by
Capital Factors. The senior certificates represent a significant alternative
funding source for the Company's factoring activities and have enabled better
management of interest rate risk as well as liquidity.
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TABLE 5
MATURITY DISTRIBUTION OF TIME DEPOSITS
GREATER THAN $100,000
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Time Remaining until Maturity Amount
----------------------------- ------
<S> <C>
3 months or less $ 76,838
Over 3 through 6 months 36,216
Over 6 through 12 months 34,048
Over 12 months 20,423
--------
Total at December 31, 1995 $167,525
========
</TABLE>
TABLE 6
FEDERAL FUNDS PURCHASED AND
SHORT-TERM BORROWINGS
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
WEIGHTED MAXIMUM
AVERAGE OUTSTANDING
BALANCE AT INTEREST RATE DURING
YEAR END (1) AT YEAR END (1) THE PERIOD (2)
------------ --------------- --------------
<S> <C> <C> <C>
December 31, 1995
Short-term borrowings
- Retail $ 86,133 4.40% $ 88,889
- Wholesale -- N/A 15,000
--------
$ 86,133
========
December 31, 1994
Domestic banks $ -- N/A $ 100
Short term borrowings
- Retail 87,236 5.08% 104,910
- Wholesale -- N/A 20,000
--------
$ 87,236
========
December 31, 1993
Domestic banks $ 100 2.56% $ 200
Foreign banks -- N/A 76,444
Short-term borrowings
- Retail 44,466 2.44% 50,709
- Wholesale -- -- --
--------
$ 44,566
========
</TABLE>
- ------------------
(1) See the Yields Earned Rates Paid table for presentation of the average
amounts of short-term borrowings outstanding during the periods and the
applicable weighted average interest rates during the periods.
(2) Amount represents the maximum outstanding at any month end during the
period.
11
<PAGE> 12
CAPITAL RESOURCES
Stockholders' equity increased by $22.4 million as a result of net income of
$17.1 million, proceeds from the sale of treasury stock of $2.1 million,
proceeds from the exercise of stock options of $1.9 million and a reduction in
the unrealized loss on securities available for sale of $3.7 million (net of
tax) offset by dividends declared of $2.4 million.
The Comptroller of the State of Florida ("Comptroller"), the Federal Deposit
Insurance Corporation ("FDIC") and the Board of Governors of the Federal
Reserve System ("Federal Reserve") utilize guidelines in assessing the adequacy
of capital of financial institutions under their supervision. These
guidelines, which include required minimum leverage, Tier One risk-based and
Total risk-based capital ratios, are considered in regulators' examinations and
are reviewed periodically for potential adjustments based upon changes in the
economy, financial markets and banking practices. Regulators can take a
variety of actions if capital guidelines are not met. Bancorp is supervised by
the Federal Reserve. Capital Bank is supervised by the FDIC and the
Comptroller.
At December 31, 1995 and 1994, the regulatory capital ratios of the Company and
the Bank were as follows:
<TABLE>
<CAPTION>
Company Bank
------------- -------------- Minimum
1995 1994 1995 1994 Requirement
---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C>
Leverage Ratio 7.97% 7.58% 7.66% 7.58% 3%*
Tier One ratio 11.23 9.68 10.77 9.66 4
Total ratio 12.48 10.82 12.03 10.80 8
</TABLE>
* Banking regulators expect institutions to maintain an excess
of 1 to 2% above the minimum.
The Company historically has not included certain assets of Capital Factors
in its capital ratio calculations. In 1995, banking regulators issued new
instructions for the reporting of total assets in the Consolidated Report of
Condition (the "Call Report"), effective March 31, 1997. As a result of a
review of the new instructions, management believes that the Company may be
required to include the Capital Factors assets for capital calculation
purposes. Management is seeking clarification as to the applicability of the new
instructions to the Company. If these assets were included, at December 31,
1995 the Company's leverage ratio would have been 7.25%, its Tier one
risked-based ratio would have been 9.94% and its total risk-based ratio would
have been 11.19%. These capital ratios would have been in compliance with all
regulatory requirements and expectations at December 31, 1995.
In the opinion of management, these ratios are sufficient to protect depositors
and facilitate future growth. The Company's management continually reviews
capital adequacy. The various alternatives for generating equity from internal
and external sources are constantly under review to ascertain the most
effective approach for the Company. The Company has traditionally provided
most of its capital through retained earnings. For 1995 and 1994,
respectively, the Company's internal capital generation rate was 16.1% and
12.8%, respectively.
Bancorp currently pays stockholder dividends of 8.33 cents per share per
quarter. (This quarterly rate has been restated for the 3-for-2 stock split in
the form of a 50% stock dividend which was effective June 22, 1995.) This
dividend policy is dependent upon the Bank's ability to continue the payment of
dividends to Bancorp. Unforeseen changes in the financial condition of the
Company or Capital Bank, or actions by regulatory authorities, could result in
changes in the dividend policy.
12
<PAGE> 13
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
Liquidity
Liquidity represents the Company's ability to meet customers' borrowing needs,
take advantage of investment opportunities, fund deposit withdrawals and
maintain reserve requirements. On the asset side, the primary sources of
liquidity are cash and due from banks, interest bearing deposits with banks,
Federal funds sold and other short-term investments, scheduled maturities and
paydowns of securities held to maturity, securities available for sale and
scheduled repayments on outstanding loans and receivables. The liquidity
available from any of the foregoing sources is reduced to the extent they are
pledged against any liabilities or otherwise restricted. On the liability
side, the principal source of liquidity is growth in deposits and other
borrowings. These primary sources of liquidity are supplemented by cash flows
from the Company's operating activities.
The liquidity position is monitored daily by management to maintain a level of
liquidity conducive to efficient operations and is continuously evaluated as
part of the asset/liability management process (as discussed further in the
next section) to maintain liquidity levels conducive to efficient operations.
Considerations in managing the Company's liquidity position include scheduled
cash flows from existing assets and liabilities, as well as projected
liquidity needs arising from commitments to lend.
During 1995, the Company generated net cash flows of $212 million from it
financing activities, including $162 million from deposit growth and $50
million from long-term borrowings by Capital Factors. The deposit growth
included $53 million in time deposits over $100,000, with the remainder
generated internally through business development and marketing efforts.
Deposits are expected to remain a primary source of liquidity, however, no
assurance exists regarding the Company's ability to attract future deposits at
rates comparable to that achieved during 1995.
Supplementing deposit growth, Capital Factors in 1994 initiated a process of
utilizing its accounts receivable and advances as a source of funding. In
1995, Capital Factors raised $50 million from variable rate certificates backed
by accounts receivable and advances with a maturity date of January 2001,
bringing the total of such certificates to $175 million at year end 1995 ($100
million and $25 million with maturity dates of December 1999 and June 2000,
respectively). This relatively new source of liquidity for the Company is
expected to continue to serve an important role, subject to the availability of
qualifying assets and the need for funds. The Company is also exploring other
alternatives for increasing liquidity, including debt and equity funding, with
Capital Factors. In March 1996, Capital Factors entered into a revolving credit
facility with an unaffiliated bank for $40 million, the funding of which is
subject to certain conditions which have not yet been fulfilled.
The Company's investing activities utilized $130 million of the liquidity
generated from operating and financing activities. Net new loans amounts to
$82 million, and net new advances by Capital Factors amounted to $36 million.
Additionally, securities purchases in excess of maturities utilized $13 million
of liquidity.
In the normal course of business, the Company utilizes various financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These off-balance sheet activities include commitments to extend
credit, commercial letters of credit and standby letters of credit. The
liquidity, credit and market risks associated with these financial instruments
are generally managed in conjunction with the Company's balance sheet
activities and are subject to normal credit policies, financial controls and
risk limiting and monitoring procedures. At December 31, 1995, the Company had
outstanding commitments to extend credit, commercial letters of credit and
standby letters of credit amounting to $146.1 million, $79.0 million and $13.8
million, respectively. In the normal course of business, some of these
commitments may expire without being drawn upon. The Company expects to meet
funding requirements resulting from these commitments by using its traditional
sources of liquidity.
Liquidity is also necessary at the Bancorp level. The ability of Bancorp to
meet debt service requirements, pay dividends to stockholders and satisfy other
liquidity needs is primarily dependent on Capital Bank's ability to continue
the payment of dividends. The ability of the Bank to pay dividends is
generally restricted by Florida statutes. At periodic intervals, State or
Federal regulatory agencies routinely examine Bancorp and the Bank as part of
their legally prescribed oversight of the banking industry and may further
restrict the payment of dividends or other activities by regulatory action. At
December 31, 1995 the Bank was not subject to any restrictions other than
statutory. At year-end, approximately $23.5 million of the Bank's retained
earnings were available for dividend payments to the Parent company without
regulatory approval.
For 1996, Bancorp's estimated debt service and stockholder dividend
requirements total approximately $2.9 million. At December 31, 1995, Bancorp
had available cash balances of $6.3 million. Management believes liquidity at
December 31, 1995 was satisfactory.
13
<PAGE> 14
Asset/Liability Management and Interest Rate Risk
The Company's exposure to interest rate changes is managed by a review of the
maturity and repricing characteristics of assets and liabilities, as well as
the composition of these items. Attention is directed primarily to assets and
liabilities that mature or can be repriced within a period of 30 to 365 days.
The Company matches the maturities of a significant portion of its assets and
liabilities to minimize variability in net interest income within a 12 to 18
month period. This practice serves to minimize both liquidity and interest
rate risks. Prudent risks are taken, however, by leaving certain assets and
liabilities unmatched in an effort to benefit from the interest rate
sensitivity created. The Company currently does not use off balance sheet
derivative instruments to manage interest rate risk.
Maintenance of satisfactory funding levels allows the Company to position
itself so that the risks of interest rate fluctuations are decreased. This,
together with a high percentage of variable rate assets, provides a more
consistent margin between interest earning assets and interest bearing
liabilities. For 1995, the average rate paid on interest bearing deposit
liabilities was 4.04%, while the average rate paid for other interest bearing
liabilities was 6.83%. To the extent that non-deposit liabilities grow faster
than deposits, the Company's overall cost of funds will likely rise. At this
time, management does not believe these factors will have a significant adverse
impact on net interest income.
Table 7 presents a summary analysis of maturity and repricing characteristics
of the Company's interest earning assets and interest bearing liabilities at
December 31, 1995. For purposes of this analysis, regular passbook savings and
NOW and money market accounts are included as repricing in 90 days or less.
The difference between the maturities and repricing intervals applicable to
interest earning assets and interest bearing liabilities is commonly referred
to as the "gap."
Interest rates earned and paid on interest bearing assets and liabilities are
influenced by both factors outside the control of management, such as current
market interest rates (e.g., prime, LIBOR) and factors controlled by management
(e.g., rates paid on deposits). Management can further influence net interest
income by adjusting the mix of assets and liabilities between fixed and
floating rate instruments, or adjusting the duration of these items. To an
extent, management's ability to control these factors are contingent upon
customer demand or acceptance of the products offered by the Company. At
December 31, 1995, the Company's cumulative one-year gap (the difference
between interest bearing assets and interest bearing liabilities) was negative
$11.1 million, or less than 1% of total earning assets. Management does not
believe the Company's operating results will be significantly impacted by
changes in interest rates over the next year.
14
<PAGE> 15
TABLE 7
INTEREST RATE SENSITIVITY BY MATURITY
OR REPRICING DATES
(In Millions of Dollars)
<TABLE>
<CAPTION>
90 days 91-180 181-365 Over
or less days days one year Total
------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Securities $ 46.5 $ 30.3 $ 46.5 $ 117.2 $ 240.5
Loans(1) 380.8 62.7 36.8 241.5 721.8
Other earning
assets(2) 291.5 -- -- -- 291.5
------ ------ ------ ------- -------
Total interest
earning assets 718.8 93.0 83.3 358.7 1,253.8
------ ------ ------ ------- -------
Interest bearing liabilities:
Interest bearing
deposits 460.4 98.5 84.5 59.1 702.5
Short-term borrowings 86.1 -- -- -- 86.1
Long-term debt 176.7 -- -- -- 176.7
------ ------ ------- ------- -------
Total interest
bearing liabilities 723.2 98.5 84.5 59.1 965.3
------ ------ ------- ------- -------
Gap (4.4) (5.5) (1.2) 299.6 $ 288.5
----- ------ ------- ------ =======
Cumulative Gap $ (4.4) $ (9.9) $(11.1) $288.5
====== ====== ====== ======
</TABLE>
- ----------------
(1) Excludes non-accrual loans of $6.9 million
(2) Excludes non-accrual advances of $2.2 million
15
<PAGE> 16
RESULTS OF OPERATIONS
General
The Company recorded net income of $17.1 million in 1995 compared to $13.2
million in 1994 and $11.8 million in 1993. Primary earnings per share was
$2.25 in 1995 compared to $1.83 in 1994 (adjusted for the stock 3-for-2 split
in the form of a 50% stock dividend in June 1995) and $1.64 in 1993 (includes
effect of stock split). On a fully diluted basis, earnings per share was $2.20
in 1995 compared to $1.80 in 1994 and $1.61 in 1993 (adjusted for the 3-for-2
stock split). In 1995, the Company's annualized return on average assets was
1.20% compared to 1.04% and .96% in 1994 and 1993, respectively. The
annualized return on average stockholders' equity was 16.71% in 1995 compared
to 15.10% in 1994 and 14.70% in 1993. The increase in income in 1995 compared
to 1994, as well as 1994 compared to 1993, was primarily a result of improved
net interest margin after provisions for credit losses and higher factoring
revenue offset by higher other operating expenses and salaries and employee
benefits. Lower letter of credit fees in 1994 compared to 1993 also offset the
increase in other revenue categories during that period.
Lines of Business
Set forth on Table 8 is a summary of operating results for the Company's
domestic and international banking activities, as well as its factoring
activities. Revenues and expenses relating to factoring activities are
generally segregated and are easily identifiable. Non-interest revenues and
expenses associated with banking activities include allocations of certain
items based on management's assumptions, some of which are subjective in
nature. Furthermore, interest income and expense of banking activities reflect
funds transfer pricing which, while based on the Bank's actual external costs,
may not reflect actual results which may be achieved on a stand-alone basis.
Interest income derived from domestic banking activities amounted to $76.1
million, $67.0 million and $62.8 million in 1995, 1994 and 1993, respectively.
Net interest income amounted to $51.3 million, $48.8 million and $46.1 million
in the respective periods. The increases in net interest income in 1995
compared to 1994 was due primarily to higher levels of average earning assets
while the net interest margin remained relatively stable. Non-interest income
from domestic banking activities amounted to $18.9 million, $16.7 million and
$15.7 million in 1995, 1994 and 1993, respectively. The increase in
non-interest income in 1995 compared to 1994 was due to various factors,
including non- recurring income of approximately $1.2 million received in
connection with the early termination of a computer servicing contract.
Increases in revenues were offset by higher operating expenses, particularly
overdraft losses in 1995. Additionally, based on management's assessment of
the allowance for loan losses, provisions for domestic loan losses decreased to
$3.4 million in 1995 from $5.9 million and $7.1 million in 1994 and 1993,
respectively. This decrease is due primarily to improved credit quality of the
portfolio.
The Company does not operate any foreign offices. Foreign banking operations
principally arise from the Company's trade finance lending to and issuance of
letters of credit on behalf of banks and financial institutions located in
Central and South America. Interest income from foreign banking activities
amounted to $10.3 million, $6.4 million and $8.0 million in 1995, 1994 and
1993, respectively. Net interest income amounted to $4.5 million, $3.5 million
and $5.3 million in 1995, 1994 and 1993, respectively. Net interest income
reflects a decrease in average loans outstanding in 1994 compared to 1993, and
an increase in 1995 compared to 1994. During 1993 and 1994, average loans
decreased as management sought to refocus its marketing strategies and reduce
aggregate exposure in certain countries. This process was substantially
completed in late 1994 and average loans began to increase. Non-interest
income from foreign banking activities primarily represents letter of credit
fees and amounted to $4.1 million, $5.3 million and $7.0 million in 1995, 1994
and 1993, respectively. Decreases from 1993 to 1994 reflect lower levels of
letter of credit issuance activity. This activity increased in 1995, however,
competitive pressures resulted in lower pricing. Also, other income in 1994
included securities gains of $1.1 million. Operating results from foreign
banking activities were also affected by provisions for loan losses, which
amounted to $211,000, ($2.3) million and $2.4 million in 1995, 1994 and 1993,
respectively. Provisions in 1993 included additions to the allowance for loans
which were ultimately charged off in 1994. In 1994, certain of these charged
off loans were partially recovered, and the status of other potential problem
foreign loans improved, resulting in a credit to the allowance. The 1995
provision reflects approximately $1.8 million for certain exposures, offset by
$1.6 million additional recoveries of the 1994 charge offs.
16
<PAGE> 17
The Company's factoring activities continued to grow significantly in 1995, due
primarily to the signing of new clients. Non-interest income, which primarily
represents factoring commissions, amounted to $23.3 million, $20.0 million and
$17.6 million in 1995, 1994 and 1993, respectively, reflecting increased
factored accounts receivable from $1.3 billion in 1993 to $2.0 billion in 1995.
Interest income was $27.6 million, $17.3 million and $13.3 million, while net
interest income was $11.8 million, $7.4 million and $5.7 million in 1995, 1994
and 1993, respectively. Growth in average interest earning assets, primarily
advances, in all periods due to business development gave rise to these
increases.
General corporate expenses in 1994 included one-time charges of approximately
$1.7 million relating to deferred compensation and other benefits paid to the
Company's former chairman upon his retirement.
Net Interest Income
Tables 9 and 10 set forth information on yields earned and rates paid by the
Company as well as changes in the composition of net interest income for each
of the years in the three year period ended December 31, 1995. Yield and
interest on tax-exempt loans and securities have been adjusted to reflect
tax-equivalent basis using the Federal tax rate of 35%. Loans and accounts
receivable on non-accrual status have been included in average balances for
purposes of computing average yield or rate. Yields on securities available
for sale have been computed based on amortized cost. Yield and interest on
loans to U.S. borrowers for 1995 exclude $975,000 in interest income relating
to the payoff of a loan which was previously on non-accrual status. For the
years ended December 31, 1995, 1994 and 1993, average foreign assets
represented 9%, 8% and 11% of total average assets, respectively. Average
foreign liabilities represented 13%, 16% and 20% of total average liabilities.
Average foreign deposits included in average interest bearing deposits and
average non-interest bearing deposits amounted to $144.4 million, $159.7
million and $129.0 million for 1995, 1994 and 1993, respectively.
Net interest income is the difference between interest, fees and dividends
earned on loans and investments and interest paid on deposits and other sources
of funds. Net interest income totaled $67.6 million, $59.4 million and $56.8
million in 1995, 1994 and 1993, respectively. Loan fees included in net
interest income amounted to $1.6 million, $1.8 million and $1.9 million in
1995, 1994 and 1993, respectively. Net interest income also included dividends
earned on equity securities of $2,000 and $147,000 in 1994 and 1993,
respectively. Net interest income on a fully tax-equivalent basis, including
loan fees, totaled $68.8 million in 1995 compared to $61.1 million and $58.7
million in 1994 and 1993, respectively.
Net interest income can be viewed as the product of average earning assets and
the net interest margin. Net interest income in 1995 increased $8.1 million
over 1994, comprised of an increase of $24.8 million in interest income offset
by an increase of $16.6 million in interest expense. The increase in net
interest income was due to an increase in average interest earning assets to
$1.147 billion in 1995 from $1.029 billion in 1994, combined with a shift in
mix to higher yielding loans and advances. The net interest margin declined
slightly to 5.91% in 1995 (excluding non-recurring interest collections of
$975,000) from 5.94% in 1994. The yield on average interest earning assets
increased from 8.38% in 1994 to 9.55% in 1995 due to higher yields on all
categories of interest earning assets. Average interest bearing liabilities
increased to $875.0 million in 1995 from $770.8 million 1994, while the
average rate paid on these liabilities increased to 4.77% from 3.26%. The
increase in average interest bearing liabilities occurred primarily in
long-term borrowings and time deposits. Capital Factors' average long-term
borrowings were $140.6 million in 1995 compared to $45.4 million in 1994.
There were no such borrowings in 1993.
The increase in net interest income in 1994 as compared to 1993 was due to an
increase in average interest earning assets to $1.029 billion in 1994 from
$974.5 million in 1993. The net interest margin declined slightly to 5.94% in
1994 from 6.02% in 1993. The yield on average interest earning assets increased
from 8.12% in 1993 to 8.38% in 1994 due to higher yields on accounts receivable
advances and foreign loans offset by lower average yields on securities.
Average interest bearing liabilities increased to $770.8 million in 1994 from
$736.5 million in 1993, while the average rate paid on these liabilities
increased to 3.26% from 2.78%. The increase in average interest bearing
liabilities occurred primarily in short and long-term borrowings, while average
interest bearing deposits were relatively stable, increasing by approximately
1%. During 1994, the Company's non-deposit liabilities were influenced by
increased market interest rates and the change in mix resulted in the overall
increase in the average rates paid on liabilities.
See Asset/Liability Management and Interest Rate Risk above for a discussion
of factors that may affect net interest income.
17
<PAGE> 18
TABLE 8
BUSINESS SEGMENT DATA
(In Thousands of Dollars)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income and
non-interest income:
Domestic banking activities $ 95,023 $ 83,634 $ 78,462
Foreign banking activities 14,396 11,692 15,031
---------- ---------- ----------
Total banking activities 109,419 95,326 93,493
Factoring activities 50,894 37,253 30,967
Intercompany (4,876)(1) (6,068)(1) (6,991)(1)
---------- ---------- ----------
Total $ 155,437 $ 126,511 $ 117,469
========== ========== ==========
Income before income taxes:
Domestic banking activities $ 15,450 $ 14,016 $ 11,101
Foreign banking activities 4,240 4,799 5,135
---------- ---------- ----------
Total banking activities 19,690 18,815 16,236
Factoring activities 14,227 10,855 7,538
Corporate and other (6,355)(2) (8,492)(2) (6,637)(2)
---------- ---------- ----------
Total $ 27,562 $ 21,178 $ 17,137
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Average Balance for the Year Ended December 31
----------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Identifiable assets:
Domestic banking $1,008,845 $1,009,378 $ 993,409
Foreign banking 132,704 101,438 141,268
---------- ---------- ----------
Total Banking 1,141,549 1,110,816 1,134,677
Factoring 337,118 250,147 206,328
Intercompany (49,524)(1) (86,030)(1) (110,188)(1)
---------- ---------- ----------
Total assets $1,429,143 $1,274,933 $1,230,817
========== ========== ==========
</TABLE>
- ----------
(1) Intercompany assets primarily represents loan balances payable by Capital
Factors to Capital Bank. Intercompany operating results primarily
reflects the related interest income.
(2) Corporate and other includes costs associated with various activities and
functions, including the operations of Capital Bancorp (parent only),
certain senior management of the Bank and other administrative costs.
18
<PAGE> 19
TABLE 9
YIELDS EARNED AND RATES PAID
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1995 1994 1993
----------------------------- --------------------------- ---------------------------
Average Average Average
Average Yield Average Yield Average Yield
Balance Interest Or Rate Balance Interest Or Rate Balance Interest Or Rate
---------- -------- ------- ------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans, net of unearned income:
U.S. Borrowers $ 536,897 $ 55,118 10.27% $ 472,239 $ 43,611 9.23% $ 422,799 $ 39,476 9.34%
Foreign Borrowers 125,785 10,205 8.11 93,906 6,275 6.68 133,620 7,631 5.71
Tax Exempt 19,570 3,173 16.21 26,226 4,227 16.12 27,325 4,269 15.62
---------- --------- ----- ---------- -------- ----- ---------- -------- -----
Total loans 682,252 68,496 10.04 592,371 54,113 9.13 583,744 51,376 8.80
Accounts receivable
advances - factoring
subsidiary 185,795 23,803 12.81 148,787 16,747 11.26 129,874 13,332 10.27
Securities:
Taxable -- -- -- -- -- -- 162,850 10,541 6.47
Tax-exempt -- -- -- -- -- -- 9,711 1,106 11.39
Securities held to maturity:
Taxable 74,223 4,735 6.38 64,464 3,784 5.87 -- -- --
Tax-exempt 3,360 357 10.62 4,254 452 10.62 -- -- --
Securities available for sale:
Taxable 139,388 8,360 6.00 139,950 7,903 5.65 -- -- --
Federal funds sold
and other interest earning
assets 62,396 3,841 6.16 78,847 3,201 4.06 88,350 2,796 3.16
---------- --------- ----- ---------- -------- ----- ---------- -------- -----
Total interest earning
assets 1,147,414 109,592 9.55 1,028,673 86,200 8.38 974,529 79,151 8.12
--------- -------- --------
Less allowance for loan losses
and doubtful accounts (13,549) (15,076) (18,062)
Cash and due from banks 91,549 68,650 74,315
Due from customers on
acceptances 28,827 30,340 44,018
Other real estate 10,911 13,436 28,268
Other assets 163,991 148,910 127,749
---------- ---------- ----------
Total $1,429,143 $1,274,933 $1,230,817
========== ========== ==========
</TABLE>
19
<PAGE> 20
TABLE 9 (Continued)
YIELDS EARNED AND RATES PAID
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1995 1994 1993
----------------------------- --------------------------- ---------------------------
Average Average Average
Average Yield Average Yield Average Yield
Balance Interest Or Rate Balance Interest Or Rate Balance Interest Or Rate
---------- -------- ------- ------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Deposits:
Savings and Money Market $ 295,212 $ 7,046 2.39% $ 350,889 $ 6,845 1.95% $ 355,603 $ 7,433 2.09%
Time 350,161 19,026 5.43 278,028 10,656 3.83 266,016 9,560 3.59
---------- --------- ----- --------- -------- ---- ---------- -------- -----
Total interest bearing
deposits 645,373 26,072 4.04 628,917 17,501 2.78 621,619 16,993 2.73
---------- --------- ----- ---------- -------- ----- ---------- -------- -----
Federal funds purchased and
short-term borrowings:
Domestic banks -- -- -- 65 2 3.02 198 5 2.53
Foreign banks -- -- -- -- -- -- 55,477 1,361 2.45
Short-term borrowings 87,243 4,504 5.16 94,322 3,973 4.21 56,115 1,831 3.26
---------- --------- ----- ---------- -------- ----- ---------- -------- -----
87,243 4,504 5.16 94,387 3,975 4.21 111,790 3,197 2.86
---------- --------- ----- ---------- -------- ----- ---------- -------- -----
Long-term borrowings 142,427 11,176 7.85 47,486 3,638 7.66 3,134 284 9.06
---------- --------- ----- ---------- -------- ----- ---------- -------- -----
Total interest bearing
liabilities 875,043 41,752 4.77 770,790 25,114 3.26 736,543 20,474 2.78
---------- --------- ----- ---------- -------- ----- ---------- -------- -----
Non-interest bearing
deposits 292,625 276,000 274,675
Bank acceptances outstanding 28,827 30,340 44,018
Other liabilities 130,330 110,370 95,499
Stockholders' equity 102,318 87,433 80,082
---------- ---------- ----------
Total liabilities and
stockholders' equity $1,429,143 $1,274,933 $1,230,817
========== ========== ==========
Net interest earnings/
yield $ 67,840 5.91% $ 61,086 5.94% $ 58,677 6.02%
========= ==== ======== ==== ======== ====
Net interest spread 4.78% 5.12% 5.34%
==== ==== ====
Utilization rate 80.29% 80.68% 79.18%
===== ===== =====
</TABLE>
20
<PAGE> 21
TABLE 10
RATE VOLUME ANALYSIS(1)
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1995 Compared to 1994 1994 Compared to 1993
-------------------------------------- ------------------------------------
Change Change Net Change Change Net
Due to Due to Increase Due to Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Changes in Income and Expense
Interest on interest earning assets:
Loans
U.S. Borrowers $ 6,304 $ 5,203 $ 11,507 $ 4,609 $ (474) $ 4,135
Foreign Borrowers 2,358 1,572 3,930 (2,460) 1,104 (1,356)
Tax Exempt (1,076) 22 (1,054) (175) 133 (42)
Accounts receivable advances -
factoring subsidiary 4,453 2,603 7,056 2,035 1,380 3,415
Securities:
Taxable -- -- -- 2,528 (1,382) 1,146
Tax-exempt -- -- -- (601) (53) (654)
Securities held to maturity:
Taxable 597 354 951 -- -- --
Tax-exempt (95) -- (95) -- -- --
Securities available for sale
Taxable (33) 490 457 -- -- --
Federal funds sold and other
interest earning assets (840) 1,480 640 (345) 750 405
------- -------- -------- -------- --------- --------
Total $11,668 $ 11,724 $ 23,392 $ 5,591 $ 1,458 $ 7,049
======= ======== ======== ======== ========= ========
Interest on interest bearing liabilities:
Savings and Money Market
deposits $(1,208) $ 1,409 $ 201 $ (95) $ (493) $ (588)
Time deposits 3,342 5,028 8,370 446 650 1,096
Federal funds purchased and
short-term borrowings (335) 864 529 (615) 1,393 778
Long-term debt 7,362 176 7,538 3,709 (355) 3,354
------- -------- -------- -------- --------- --------
total $ 9,161 $ 7,477 $ 16,638 $ 3,445 $ 1,195 $ 4,640
======= ======== ======== ======== ========= ========
</TABLE>
- ---------------
(1) Because of the numerous and simultaneous balance and rate changes during the
periods, it is not possible to allocate the change in net interest income
precisely between balances and rates. For purposes of this table, changes
that are not solely attributable to balance changes or rate changes have
been allocated equally to the Volume and Rate changes above.
21
<PAGE> 22
Provision for Loan Losses
The allowance for loan losses is maintained at a level deemed adequate by
management to absorb potential loan losses in the portfolio after evaluating
the loan portfolio, the financial condition of borrowers, current economic
conditions, changes in the nature and volume of the portfolio, past loan loss
experience and other pertinent factors. Many of these factors involve a
significant degree of estimation and are subject to rapid changes which could
be unforeseen by management. As a consequence, the possibility exists that
management's evaluation of the adequacy of the allowance could change, and such
change could be a material amount, as additional information becomes known.
While the Company considers the allowance for loan losses to be adequate at
December 31, 1995, management is unable to predict the amount, if any, of
future provisions to the allowance. For additional information, see Allowance
for Loan Losses below.
The provision for loan losses was $3.6 million in 1995 compared to $3.5 million
in 1994 and $9.5 million in 1993. The lower provisions in 1995 and 1994
reflect a general improvement in credit quality as well as recoveries of $1.6
million and $1.5 million in 1995 and 1994, respectively, relating to certain
foreign loans which had previously been charged off.
Provision for Credit Losses - Factoring Subsidiary
The allowance for doubtful accounts for Capital Factors is maintained at a
level deemed adequate to absorb potential losses. The adequacy of the
provision for credit losses recorded by Capital Factors is assessed by
management based in part on the level of net charge offs relative to accounts
receivable purchased. These statistics are believed to be significant
indicators of inherent losses since the receivables portfolio turns over
approximately seven times each year. Accounts receivable which are past due
are charged off unless, in the opinion of management, collection is likely from
the customer, client or collateral realization, if any. In making this
determination, management considers the quality of the collateral, the
creditworthiness of the customer and client, economic conditions and other
factors which may be relevant. This statistical assessment is supplemented by
a review of the recorded allowance for credit losses at each month end
relative to total accounts receivable at month end, taking into consideration
specific potential problem accounts, accounts purchased with recourse where
payment has not been made by Capital Factors to its client, and other factors
which may be relevant. The provision for doubtful accounts amounted to $2.2
million, $2.2 million and $2.7 million for 1995, 1994 and 1993, respectively.
For the years ended December 31, 1995, 1994 and 1993, net charge offs as a
percentage of accounts receivable purchased was .05%, .17% and .20%,
respectively. For the same periods, the percentage of provisions for credit
losses to accounts receivable purchased was .11%, .15% and .20%, respectively.
Based on these relationships, and a review of the recorded allowance and
accounts receivable at each period end, management believes the provisions
and allowance to be adequate to absorb known and inherent losses in the
accounts receivable portfolio. Because the assessment of the adequacy of the
allowance and provisions for credit losses involve a significant degree of
estimation, and are subject to change, future provisions for credit losses
may be greater or less than actual charge offs.
Other Income
Other income totaled $46.1 million, $41.9 million and $40.2 million in 1995,
1994 and 1993, respectively.
Factoring commissions amounted to $23.1 million or 50% of total other income in
1995 compared to $20.0 million or 48% of total other income in 1994 and $17.6
million or 44% of total other income in 1993. The growth in factoring
commissions is attributable to overall expansion of factoring activities.
During 1995, Capital Factors opened a fourth office in Charlotte, North
Carolina, in addition to its office in Ft. Lauderdale, Florida, Los Angeles,
California and New York, New York. Although Capital Factors experienced
increased commission income as a result of increased factored accounts
receivable, commission income as a percentage of factored accounts receivable
declined slightly, from 1.16% in 1993 to 1.13% in 1994 and 1.03% in 1995. This
decline was primarily the result of lower factoring fees charged to high volume
clients in the New York market and a lower fee structure, partly because of
high volume clients, in the Charlotte market. Capital Factors typically
receives lower factoring fees from high volume customers because, among other
reasons, high volume clients do not have the same servicing needs as smaller
clients, requiring less labor intensive services to be performed by Capital
Factors, and because there is increased competition for such client's business.
Service charges on deposits amounted to $12.6 million or 27% of total other
income in 1995 compared to $11.8 million or 28% of total other income in 1994
and $9.4 million or 23% in 1993. The increase in service charge income is
primarily due to the adjustment
22
<PAGE> 23
to the pricing of some services during 1994.
Letter of credit fees totaled $4.2 million in 1995 compared to $4.0 million in
1994 and $6.4 million in 1993. These fees represented 9%, 9% and 16% of
non-interest income in 1995, 1994 and 1993, respectively. The Company conducts
its international operations with customers located primarily in Central and
South America. By issuing and confirming letters of credit for its clients,
the Company has traditionally generated substantial fee income. Due to the
economic and political environments of some of these nations, as well as
competitive factors, the demand for the issuance or confirmation of letters of
credit may fluctuate. Fee levels in 1995 compared to 1994 reflect higher
letter of credit issuance volume offset by lower pricing due to increased
competition. The decrease in letter of credit fees in 1994 as compared to 1993
resulted from pricing pressure derived from increased competition, as well as
lower letter of credit issuance volume.
Net securities gains amounted to $12,000 in 1995 compared to $1,213,000 in 1994
and $632,000 in 1993. Included in securities gains in 1994 are realized gains
of $1.1 million on the sale of certain floating rate Argentine bonds, received
in connection with a prior Brady Plan restructuring. Included in securities
gains in 1993 are realized gains of $447,000 on the sale of limited life and
perpetual life equity securities and $185,000 on the early call of certain
municipal securities. During 1993, the Company liquidated substantially all of
its equity holdings primarily due to the greater capital requirements of these
securities, as well as to take advantage of certain income tax benefits. Since
the adoption of SFAS No. 115, the Company has not sold any securities
classified as held to maturity.
Other Expenses
Other expense totaled $80.3 million, $74.5 million and $67.7 million for the
years ended December 31, 1995, 1994 and 1993, respectively.
Salaries and employee benefits amounted to $38.0 million in 1995 compared to
$36.6 million in 1994 and $31.7 million in 1993, respectively. Salaries and
employee benefits increased $1.3 million in 1995, $4.9 million in 1994 and $4.3
million in 1993, primarily due to merit increases, workforce growth and
increased benefit costs. In addition, salaries and employee benefits in 1994
included $1.7 million for deferred compensation and other benefits related to
the retirement of the Company's former Chairman.
Other operating expenses amounted to $34.9 million, $30.3 million and $28.9
million in 1995, 1994 and 1993, respectively. During 1995, these expenses
increased $4.6 million primarily due to a $2.7 million provision to fully
reserve for potential losses resulting from overdrafts related to one customer
(see further discussion below) and increases in provisions for legal
settlements and advertising expenses offset by a decrease in insurance expense
resulting from reduction in the FDIC assessment rate for the second half of
1995. During 1994, other operating expenses increased $1.4 million primarily
due to increases in overdraft charge offs, consulting fees, communications,
data processing and advertising offset by lower other losses, legal fees,
operating costs of other real estate and insurance.
Total overdraft losses amounted to $3.5 million, $996,000 and $167,000 for the
years ended December 31, 1995, 1994 and 1993, respectively. During the first
quarter of 1995, through several related accounts, one customer created net
overdrafts of approximately $2.7 million in connection with transactions
occurring over a period of approximately two weeks. The overdrafts resulted
when checks drawn on another institution were returned to the Bank for
insufficient funds, after the customer had made withdrawals from Capital Bank.
The customer was placed in involuntary bankruptcy as a result of claims
asserted by the Bank and other creditors, and the entire overdraft was charged
to expense. The Bank has a judgement against the customer, which it has been
unable to collect, and a criminal investigation against the customer is
ongoing. To mitigate the risk that similar losses may occur in the future,
internal review and approval procedures were strengthened by management. At
December 31, 1995 and 1994, total overdraft balances were $3.2 million and $3.9
million, respectively, and are included in loans in the consolidated statements
of condition. Management does not anticipate any material losses associated
with overdraft balances at December 31, 1995.
Expenses relating to the writedown and maintenance of other real estate totaled
$2.9 million, $2.9 million and $3.2 million in 1995, 1994 and 1993,
respectively, and are included in other operating expenses discussed above.
These expenses are net of gains of $46,000, $41,000 and $1.7 million in 1995,
1994 and 1993, respectively. Other real estate amounted to $6.8 million at
December 31, 1995 compared to $14.7 million at
23
<PAGE> 24
December 31, 1994 and $18.2 million at December 31, 1993. The Company is
aggressively pursuing disposal of these properties.
Provision (Benefit) for Income Taxes
The Company's effective tax rate varies with changes primarily in the
derivation of pre-tax income by state, in the proportion of tax exempt income
and in corporate tax rates. The provision for income taxes for 1995 aggregated
38% of pre-tax income compared with 38% in 1994 and 31% in 1993. The higher
effective tax rates in 1995 and 1994 as compared to 1993 resulted primarily
from a greater percentage of pre-tax income being derived from Capital Factors
which operates in two other state jurisdictions (New York and California) which
have higher tax rates than Florida and from a lesser percentage of pre-tax
income being derived from tax-exempt income.
Impact of Inflation and Changing Prices
The impact of inflation on the Company is reflected primarily in the increased
costs of operations. These increased costs are generally passed on to
customers in the form of increased service fees. Since the primary assets and
liabilities of the Company are monetary in nature, the impact of inflation on
interest rates has, and is expected to continue to have, an effect on net
income.
In structuring fees, negotiating loan margins and developing customer
relationships, management concentrates its efforts on maximizing earnings
capacity while attempting to contain increases in operating expenses. In
addition, management continually reviews the feasibility of new and additional
fee-generating services to offset the effects of inflation and changing prices
with an objective of increased earnings.
New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure," as of January 1, 1995. This Statement requires that impairment of
loans be measured by comparing the recorded amount of the loan to the present
value of expected future cash flows discounted at the loan's effective interest
rate, or at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. Small balance, homogenous
loans, comprised primarily of the Company's consumer loans, are collectively
evaluated for impairment. In determining when a loan is impaired, management
primarily considers current events and conditions, including the borrower's or
guarantor's (if applicable) operating performance and capacity to repay the
loan and realizable collateral values. The determination of impairment is done
on a loan by loan basis and involves significant judgement and estimation, and
final outcomes may differ from such estimates. Impaired loans may be accruing
or nonaccruing based on current and projected performance in relation to the
specific terms of the loan. Adoption of SFAS No. 114, as amended by SFAS No.
118, did not affect the Company's policies on non-accrual loans or income
recognition, charge offs or recoveries, and did not impact the level of the
overall allowance.
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of," which is effective for fiscal years that begin after
December 15, 1995. This Statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. This Statement requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The unrecoverable amount should be recognized as an impairment
loss. This Statement also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. Adoption of this Statement is not
expected to have a significant impact on the Company's consolidated financial
position or results of operations, based on management's current intentions
regarding long-lived assets held at December 31, 1995.
In October 1995 the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." This statement requires certain disclosures about stock-based
employee compensation arrangements regardless of the method used to account for
them, defines a fair value based method of accounting for an employee stock
option or similar equity instrument and encourages all entities to adopt that
method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
stock based compensation plans using the intrinsic value method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Entities electing to remain with the
accounting in APB Opinion No. 25 must make pro forma disclosures of net income
and, if presented, earnings per share as if the fair value method of accounting
defined in SFAS No. 123 had been applied. Under the fair value method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
Under the intrinsic value based method, compensation cost is the excess, if
any, of the quoted market price of the stock at grant date or other measurement
date over the amount an employee must pay to acquire the stock. The disclosure
requirements of SFAS No. 123 are effective for financial statements for fiscal
years beginning after December 15, 1995. Pro forma disclosures required for
entities that elect to continue to measure compensation cost using APB No. 25
must include the effects of all awards granted in fiscal years that begin after
December 15, 1994. Management is in the process of evaluating the impact of
SFAS No. 123.
25
<PAGE> 25
ASSET QUALITY REVIEW
General
The Bank and Capital Factors manage the risk characteristics of their lending
activities in several ways. Together with credit evaluations of borrowers,
risk is monitored and controlled by procedures which include periodic reviews
by management and industry specialists, industry diversification, geographic
diversification and established lending limits on certain segments of the
portfolio. Risk is further minimized by established lending procedures such as
retaining collateral deemed adequate at the time of the loan and
requiring guarantees and commitments of principal parties along with the
maintenance of compensating balances. Management attempts to adhere to these
procedures to minimize the adverse impact from any one event or set of
conditions. Notwithstanding the procedures established to manage risk
characteristics of the portfolios, in certain instances, loans and receivables
are charged off as uncollectible. Management maintains the allowances for loan
and receivable losses at levels it believes to be sufficient to meet the
present and potential risk characteristics inherent in the loan and receivables
portfolios, based on information currently available.
Risk Elements - Non-accruing and Past Due Loans and Advances
Past due and non-accruing loans are reviewed regularly in connection with
management's review of the allowance for loan losses as it relates to the
evaluation of collateral and the prospects for repayment of principal and
interest. Loans are placed on non-accrual status when management deems that
collectibility of interest is doubtful. Generally, loans that are 90 days or
more past due are placed on non-accrual status unless they are well secured and
in the process of collection. When a loan is placed on non-accrual status, any
uncollected interest is reversed and charged against current income. Interest
subsequently collected on loans which have been placed on non-accrual status is
generally applied against principal but may be recognized as income on the cash
basis if full collection of principal is reasonably assured based on the value
of underlying collateral or other factors. Charge offs to the allowance are
made when a loss is deemed probable. See Table 11 below for a
five-year summary of non-accrual, past due and other potential problem loans.
Domestic non-accrual loans aggregated $4.8 million at December 31, 1995,
compared to $6.0 million at year end 1994. Domestic non-accrual loans
aggregated .8% and 1.1% of total domestic loans at December 31, 1995 and 1994,
respectively. The decrease in domestic non-accrual loans during 1995 resulted
primarily from collection of a $1.5 million commercial loan, offset by net new
additions of approximately $300,000. Charge offs and additions since December
31, 1994 do not reflect any discernible trends.
Foreign non-accrual loans aggregated $2.1 million and $334,000 at December 31,
1995 and 1994, respectively. Foreign non-accrual loans represented 1.6% and
.3% of total foreign loans at December 31, 1995 and 1994, respectively. The
increase in foreign non-accrual loans is due primarily to the placement on
non-accrual status during 1995 of several loans to two Argentine banks
aggregating $2.7 million. In the fourth quarter of 1995, $695,000 of these
loans, representing the entire balance owed by one of these banks, was charged
off, resulting in a net addition to non-accrual loans of $2.0 million for the
year. Following the devaluation of the Mexican peso in 1994, some banks in
Argentina, as well as other Central and South American countries, experienced
liquidity problems due to a shift in deposits out of the country and from
smaller banks to larger banks within the country. As a result, these two banks
ceased operations in 1995. One bank has been liquidated, leading to the
$695,000 charge off referred to above. Management is continuing discussions
with the Central Bank of Argentina and third parties regarding collection of
the remaining $2.0 million of foreign non-accrual loans. The Company has
significant additional foreign loans to Argentina as well as other Latin
American countries (see Foreign Outstandings below). These loans are primarily
short-term trade-related credits and are in compliance with terms at December
31, 1995. It is possible, however, that further liquidity pressures or other
deterioration in borrowers' ability to repay may result in additional foreign
non-accrual loans and charge offs in amounts not currently estimable. See
also Allowance for Loan Losses for additional discussion.
Domestic loans 90 days or more past due at December 31, 1995 and still accruing
interest aggregated $1.1 million or approximately .2% of domestic loans
outstanding, compared with $410,000 or .1% of domestic loans outstanding in
1994. Included in domestic loans 90 days or more past due were real estate,
commercial and consumer loans of $689,000, $281,000 and $162,000, respectively,
at December 31, 1995, as compared to $279,000 and $131,000 for commercial and
consumer loans, respectively, at December 31, 1994.
26
<PAGE> 26
There were no foreign loans 90 days or more past due and still accruing
interest at December 31, 1995. Foreign loans 90 days or more past due at
December 31, 1994 and still accruing interest aggregated $1.5 million and
related to one loan. This loan was collected in full in 1995.
Advances made by Capital Factors are placed on non-accrual status when the loan
balance, including interest, is considered impaired and exceeds the estimated
value of the underlying receivables or collateral. Non-accrual advances
amounted to $2.2 million at December 31, 1995, compared to $739,000 at December
31, 1994. Non-accrual advances are considered in the assessment of the
allowance for doubtful accounts, for adequacy (see Provision for Credit Losses
- - Factoring Subsidiary above and Allowance for Credit Losses - Capital
Factors above. The increase at year end 1995 is due primarily to
advances aggregating approximately $1.4 million from one customer which were
placed on non-accrual status in December 1995. These advances were
substantially repaid in early 1996 from collections of underlying accounts
receivable.
Risk Elements - Restructured Loans and Restructured Assets
See Table 11 for a five year history of restructured loans and restructured
assets at each year end.
Restructured loans at December 31, 1995 represent two real estate loans which
were restructured, as to interest rates, in 1991 and 1992. At December 31,
1995, these loans were in compliance with terms.
Restructured assets at December 31, 1995 represent Mexican and Argentine debt
securities received in exchange for loans in connection with restructurings in
1989 and 1993. These securities are included in the available for sale
portfolio (at market value) and were in compliance with terms at December 31,
1995. The face amount of these securities aggregate $5.1 million.
Risk Elements - Other Potential Problem Loans
In addition to non-accruing loans and loans 90 days or more past due,
management has identified other potential problem loans where known information
about possible credit problems causes management to have doubts as to the
ability of borrowers to comply with present loan repayment terms. In placing
loans in this category, management considers the current status of the loan and
previous payment history, the nature and quality of collateral, current
economic conditions which may affect the borrower, and other information deemed
pertinent in the circumstances. At December 31, 1995, other potential problem
loans to domestic borrowers aggregated $6.5 million and included one real
estate loan of $4.2 million, commercial loans of $2.1 million and consumer
loans of $209,000. Other potential problem loans to domestic borrowers at
December 31, 1994 amounted to $2.0 million. The increase during 1995 was
primarily due to one non-recourse real estate mortgage loan where the property
temporarily did not generate adequate cash flow to service the loan. At year
end 1995, this loan was in compliance with its terms.
Potential problem loans to foreign borrowers amounted to $1.2 million at
December 31, 1995, representing trade-related loans to a Panamanian bank. The
loans were in compliance with terms at December 31, 1995, however, in early
1996, supervision of the borrower was taken over by the Panamanian government.
Management is closely monitoring this matter and, at the current time, is
unable to predict losses, if any, which may result from this matter.
27
<PAGE> 27
TABLE 11
NON-ACCRUAL, PAST DUE, OTHER POTENTIAL
PROBLEM LOANS AND RESTRUCTURED LOANS
AND RESTRUCTURED ASSETS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accrual
loans:
Domestic $ 4,818(1) $6,025 $ 4,989 $17,445 $29,624
Foreign 2,072(1) 334 7,312 8,134 8,297
90 days past due
or more:
Domestic 1,132 410 477 2,984 5,839
Foreign -- 1,500 -- -- --
------- ------ ------- ------- -------
Sub Total 8,022 8,269 12,778 28,563 $43,760
Non-accrual advances 2,184 739 385 1,082 965
------- ------ ------- ------- -------
Total $10,206 $9,008 $13,163 $29,645 $44,725
======= ====== ======= ======= =======
Other Potential
Problem loans $ 7,697 $2,006 $15,100 $11,100 $ 8,000
======= ====== ======= ======= =======
Restructured
loans (2) $ 8,433 $8,559 $ 8,663 $15,301 $ 3,871
======= ====== ======= ======= =======
Restructured
assets (3) $ 3,137 $2,544 $ 4,985 $ 1,975 $ 1,975
======= ====== ======= ======= =======
</TABLE>
- -------------------------
(1) During 1995, interest income of $299 and $73 on domestic and foreign
loans, respectively, would have been recorded if these loans had been current
in accordance with their original terms and had been outstanding throughout the
period or since origination, if held for part of the period. Interest income
that was recorded on these loans during 1995, was $230 and $18 on domestic and
foreign loans, respectively.
(2) Represent troubled debt restructurings as defined by Statement of
Financial Accounting Standards No. 15. These loans were in compliance with
terms at December 31, 1995.
(3) Represents securities available for sale (at market value) received in
connection with restructured foreign loans. See Foreign Outstandings below for
discussion on foreign debt securities.
28
<PAGE> 28
FOREIGN OUTSTANDINGS
Set forth on Table 12 is a summary of foreign outstandings by type and
geographic distribution.
Performing trade credits consist primarily of refinanced letters of credit,
acceptances purchased and pre-export financings principally to banks that are
located in foreign countries. Cash collateral maintained at Capital Bank as
offsets to outstanding foreign loans totaled $19.2 million at December 31, 1995
compared to $14.6 million and $19.1 million at December 31, 1994 and 1993,
respectively.
Foreign debt securities include $3.1 million, $2.5 million and $5.0 million at
December 31, 1995, 1994 and 1993, respectively, of securities available for
sale (at market value) received in connection with loan restructurings in
1993 and 1989. Foreign debt securities also include $4.0 million at the three
respective dates in securities held to maturity which were acquired for
investment purposes. All foreign debt securities were in compliance with terms
at December 31, 1995.
Customers liability on acceptances represent drafts accepted under trade
finance letters of credit issued primarily on behalf of foreign banks. Cash
collateral maintained at Capital Bank as offsets to acceptances aggregated $4.3
million, $2.2 million and $4.9 million at December 31, 1995, 1994 and 1993,
respectively.
Set forth on Table 13 is a list of cross border outstandings at December 31,
1995, 1994 and 1993 of those countries for which the total amount of
outstandings (loans, acceptances, acceptances purchased, pre-export financings
and other interest earning assets), net of (a) any written guarantees of
principal or interest by domestic or other non-local third parties (other than
the foreign government) and (b) the value of any tangible liquid collateral
which may be netted against the outstandings, exceeds 1% of consolidated total
assets. See Table 14 for analyses of 1995 activity for those countries where
total net outstandings exceeded 1% of consolidated total assets at December 31,
1995.
At December 31, 1995, net cross border outstandings to Ecuador and El Salvador,
aggregating $14.4 million and $13.6 million, respectively, exceeded .75% but
were less than 1% of consolidated total assets. At December 31, 1994, the
cross border outstandings to Peru, Ecuador and Bolivia, aggregating $13.2
million, $12.9 million and $11.0 million, respectively, exceeded .75% but were
less than 1% of consolidated total assets. At December 31, 1993, the cross
border outstandings to Brazil, aggregating $11.1 million, exceeded .75% but
were less than 1% of consolidated total assets.
In December 1994, the Mexican government devalued the peso, resulting in
substantial economic uncertainty and volatility which continued into 1995. The
Company's outstandings to Mexico-domiciled parties at December 31, 1995 include
$12.2 million in short-term trade credits and $1.8 million in securities
available for sale all of which are denominated in U.S. dollars and were in
compliance with terms. Management of the Company believes these assets will
continue to perform in accordance with terms, however no assurance can be
provided that the current economic environment will not deteriorate further and
adversely affect the Company's outstandings to Mexican borrowers.
The devaluation of the Mexican peso also created or added to economic
uncertainties in other Latin American countries. Declining confidence in local
banking systems led to a shift in deposits out of some of these countries and
from smaller banks to larger banks within these countries. The impact was
especially significant in Argentina, where total bank deposits declined during
the first half of 1995, leading to the cessation of operations by some banks.
These events have affected banks which were or continue to be customers of the
Bank, resulting in an increase in charge offs and non-accrual loans related to
Argentine borrowers. Further deterioration in the repayment capacity of
Argentine borrowers or borrowers located in other Latin American countries
could result in additional non-accrual loans, charge offs or additions to the
allowance for loan losses in amounts not determinable at this time. See
Allowance for Loan Losses below for additional discussion regarding the
adequacy of the allowance.
Restructured Foreign Assets
In the first quarter of 1995, in exchange for loans which had an aggregate face
amount of $3.9 million ($3.5 million of which was charged off in 1994) plus
several years accrued interest, the Company received bonds issued by the
government of Ecuador in connection with a restructuring of that country's
foreign debt. The bonds had a face
29
<PAGE> 29
value amount of $6.6 million, mature in 30 years and had below market interest
rates. In the first and second quarters of 1995, these bonds were sold for net
proceeds aggregating $1.8 million, representing the then current market price.
Proceeds in excess of the remaining book balance of the loans were recorded as
loan recoveries at the time of receipt. See Allowance for Loan Losses
below.
The Company did not enter into any restructuring arrangements involving foreign
loans in 1995, except as discussed above. At December 31, 1995, the Company
was not involved in any discussions regarding the restructuring of foreign
loans and had no commitments to extend additional credit under restructuring
arrangements completed in prior years. See Table 11 for the remaining balance
of restructured assets.
Allocated Transfer Risk Reserve (ATRR)
The Comptroller of the Currency, Board of Governors of the Federal Reserve
System and Federal Deposit Insurance Corporation have jointly issued rules
requiring banking institutions to establish special reserves (the Allocated
Transfer Risk Reserves, or "ATRR") against the risks presented in certain
international assets when the Federal banking agencies determine that such
reserves are necessary. The rules provide that, for regulatory purposes, the
ATRR is to be accounted for separately from the general allowances for loan
losses and shall not be included in the banking institution's capital or
surplus. The rules also provide that no ATRR provisions are required if the
banking institution writes down the assets to the requisite amount, or if there
exists tangible, liquid collateral located outside of the debtor country. At
December 31, 1995 the Company had no asset which required ATRR.
Notwithstanding regulatory requirements to record ATRR, management assesses the
ultimate collectibility of foreign assets and, when deemed appropriately, may
record additional reserves or charge off assets in excess of ATRR requirements.
30
<PAGE> 30
TABLE 12
FOREIGN OUTSTANDINGS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
December 31,
----------------------------------------
By type: 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Performing trade credits $124,501 $111,150 $ 70,328
Other performing loans 1,050 3,832 6,524
Non-accrual loans 2,072 334 7,311
-------- -------- --------
Total Loans 127,623 115,316 84,163
Debt securities 7,162 6,569 9,010
Customers liability on
acceptances 29,643 28,082 30,170
Other assets 1,991 1,677 875
-------- -------- --------
Total(3) $166,419 $151,644 $124,218
======== ======== ========
Geographic distribution:
Latin America and
Caribbean $160,717 $146,767 $120,083
Middle East 4,152 4,164 4,041
Other regions 1,550 713 94
-------- -------- --------
Total(3) $166,419 $151,644 $124,218
======== ======== ========
</TABLE>
- ----------
(1) All amounts are prior to any reduction for written guarantees by domestic
or non-local third parties, or tangible liquid collateral which may be netted
against the outstandings.
(2) All foreign outstandings are denominated in U.S. dollars, except for
certain other assets amounting to $92.7 thousand, $92.1 thousand and $87.3
thousand at December 31, 1995, 1994 and 1993, respectively.
(3) Amounts exclude $1.4 million, $300,000 and $8.0 million of allowance for
foreign loan losses.
31
<PAGE> 31
TABLE 13
FOREIGN OUTSTANDINGS IN EXCESS OF 1% OF ASSETS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Debt Aggregate Cash Net
Loans(1) Securities Acceptances(1) Other Outstandings Collateral Outstandings
--------- ------------- -------------- -------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1995:
Argentina $11,762 $1,866 $ 3,192 $201 $17,021 $ (671) $16,350
Brazil 17,422 -- 5,860 276 23,558 (371) 23,187
Guatemala 18,827 -- 2,211 251 21,289 (3,175) 18,114
Peru 18,242 -- 1,474 82 19,798 (1,288) 18,510
At December 31, 1994:
Argentina 10,301 1,477 5,243 147 17,168 (1,039) 16,129
Brazil 16,910 -- 2,312 205 19,427 (628) 18,799
Mexico 12,865 1,067 950 143 15,025 (883) 14,142
At December 31, 1993:
Argentina 8,100 3,358 10,888 99 22,445 (1,719) 20,726
Ecuador 13,949 -- 4,582 81 18,612 (6,161) 12,451
Mexico 12,154 1,627 1,561 55 15,397 (713) 14,684
</TABLE>
- ----------
(1) Loans and Acceptances are primarily composed of short-term trade related
balances outstanding to banks and other financial institutions.
32
<PAGE> 32
TABLE 14
CHANGES IN OUTSTANDINGS OF SELECTED
FOREIGN COUNTRIES
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Argentina Brazil Guatemala Peru
--------- ------ --------- ----
<S> <C> <C> <C> <C>
Aggregate outstandings,
January 1, 1995 $17,168 $19,427 $10,051 $16,429
Net change in short-term
outstandings (557) 4,131 11,238 5,102
Changes in other outstandings:
Additional outstandings 20 -- -- 26
Interest income accrued 1 -- -- 44
Collections of principal -- -- -- (1,639)
Collections of interest -- -- -- (164)
Other changes 389 -- -- --
------- ------- ------- -------
Aggregate outstandings,
December 31, 1995 $17,021 $23,558 $21,289 $19,798
======= ======= ======= =======
Short-term outstandings,
December 31, 1995 $15,135 $23,558 $21,289 $19,532
======= ======= ======= =======
</TABLE>
33
<PAGE> 33
ALLOWANCE FOR LOAN LOSSES
Management assesses the adequacy of the allowance for loan losses not less
frequently than quarterly and causes appropriate action to maintain the
allowance at a level deemed adequate to absorb potential loan losses in the
portfolio. In completing its assessment, management considers a variety of
factors, including specific assessment of certain identified problem loans,
loss history of classified (as to credit risk) loans, loss history of loans not
classified (by portfolio type), economic trends and other factors which may be
relevant. The Company maintains a loan review staff, independent of the credit
granting function, which conducts continuous reviews of the various loan
portfolios to arrive at credit risk classifications. Loans are charged off
when a loss is deemed probable. Additions to the allowance are made by
provisions charged against current operations. Recoveries of loans previously
charged off are also added to the allowance.
Set forth on Table 15 is a five year history of activity in the allowance for
loan losses. Also set forth on Table 16 is a five year history of activity of
the portion of the allowance allocated for foreign loan exposure. Table 17
presents a five year summary of management's allocation of the allowance at
each year end. Except for specific reserves which may be required from time to
time by banking regulations (the Company had no such requirement at December
31, 1995), management views the entire allowance for loan losses as being
available to absorb losses inherent in any component of the portfolio. The
allocation of the allowance is completed by management for analytical purposes
and is not necessarily indicative of future charge offs.
During 1995, domestic loan charge offs generally decreased compared to 1994 as
a result of overall improvement in the credit quality of borrowers. To a
lesser extent, recoveries of previously charged off domestic loans increased
for similar reasons. The $3.5 million in real estate-mortgage loan charge offs
in 1994 was primarily related to a single loan which was subsequently
foreclosed and transferred to other real estate.
During the first quarter of 1994, the Company charged off approximately $6.3
million in non-trade loans to several borrowers located in Ecuador and Peru.
These loans were on non-accrual status and fully reserved for as of December
31, 1993 and certain of them had been previously restructured. At the time of
charge off, they were on non-accrual status. In the third quarter of 1994, the
Company sold its interest in a $2.5 million loan to a Peruvian borrower,
included in the charge offs above, for net proceeds of $1.5 million. These
proceeds were recorded as loan recoveries at the time of receipt. In the first
quarter of 1995, the Company received bonds issued by the government of Ecuador
in connection with a restructuring of that country's foreign debt. These bonds
had a face amount of $6.6 million and were received in exchange for $3.9
million in loans (plus several years past due interest), $3.5 million of which
was included in the charge offs referred to above. In the first and second
quarters of 1995, these bonds were sold for net proceeds aggregating $1.8
million representing the then current market price. Proceeds in excess of the
remaining loan balance, aggregating $1.6 million, were recorded as loan
recoveries at the time of receipt. The Company has not conducted non- trade
foreign lending of the type which gave rise to these loans since the 1980s and
currently has no plans to do so. At December 31, 1995, the Company had no
restructured or non-performing non-trade foreign loans. Due to the foreign
charge offs and recoveries in 1994 and 1995, the ratio of net charge offs to
average loans is significantly impacted. Excluding this foreign loan activity,
this ratio would have been .4% in 1995 and 1.3% in 1994.
The allowance for loan losses totaled $11.8 million and $9.2 million at
December 31, 1995 and 1994, respectively, representing 1.7% and 1.4% of
outstanding loans at the respective dates. The ratio of the allowance for loan
losses to non-accrual loans was 176% at December 31, 1995 compared to 145% at
December 31, 1994. The ratio of the allowance to total non-performing loans
(non-accrual loans and loans past due 90 days or more) was 151% and 111% at
December 31, 1995 and 1994, respectively. The increase in these ratios
reflects higher allowance balances allocated for foreign loans as well as
potential problem domestic loans. At December 31, 1995 the total allowance
included $1.4 million allocated for foreign loans, $9.9 million allocated for
domestic exposure and $489,000 unallocated. At December 31, 1994 the foreign
allocation was $300,000, domestic was $7.9 million and $1.0 million was
unallocated.
The allowance allocated for foreign loans at December 31, 1995 includes $1.0
million for the estimated loss exposure relating to $1.9 million in non-accrual
loans to one Argentine bank and approximately $400,000 for other foreign
exposure. These Argentine bank loans arose from trade-related transactions, as
does substantially all of the Company's foreign loans. Following the
devaluation of the Mexican peso in 1994, some banks in Argentina (as well as in
other Central and South American countries) experienced
34
<PAGE> 34
liquidity problems due to a shift in deposits out of the country and from
smaller banks to larger banks. As a result, two banks which had loans from the
Company ceased operations in 1995 and have been or are in the process of
liquidation. During the fourth quarter of 1995, loans to one of these banks,
aggregating $695,000, were charged off. In addition to these two banks, at
December 31, 1995 the Company had loans outstanding to Argentine borrowers
aggregating $8.5 million, all of which was trade-related and performing.
Through the five years ended December 31, 1994, losses associated with the
Company's trade-related lending averaged less than one-half of 1% of foreign
loans outstanding. Based on an assessment of all information currently
available, including discussions with the Central Bank of Argentina,
discussions with third parties regarding the purchase of the Company's interest
in the non-accrual loans, overall loss history and cash collateral held by the
Company, management believes the allowance allocated for foreign loans at
December 31, 1995 to be adequate. It is possible, however, that future
deterioration in the repayment capacity of Argentine or other foreign borrowers
could result in additional non-performing loans and additions to the allowance
for losses in amounts not determinable at this time.
The allowance allocated for domestic loans increased as a result of
management's evaluation of the higher level of potential problem loans in the
commercial and real estate mortgage portfolio at December 31, 1995. Management
does not believe these circumstances represent deteriorating trends, but are
isolated to specific borrowers.
Based on information currently available, management believes the allowance for
loan losses to be adequate to absorb losses, if any, which might occur on these
loans or are otherwise inherent in the loan portfolio. Factors involved in
determining the level of the allowance are subject to estimates and assumptions
regarding future events. At this time, management is unable to predict the
amount of future adjustments to the allowance for loan losses if its estimates
and assumptions are determined to be incorrect.
35
<PAGE> 35
TABLE 15
SUMMARY OF LOAN LOSS EXPERIENCE
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Allowance for loan
losses at beginning
of period $ 9,210 $ 18,423 $ 15,243 $ 17,239 $ 17,306
--------- -------- -------- -------- --------
Loans charged off:
Real estate - construction -- -- (796) (4,571) (4,093)
Real estate - mortgage (17) (3,470) (439) (272) --
Commercial and financial (1,227) (2,949) (2,938) (4,839) (8,339)
Consumer (2,177) (2,135) (1,673) (1,801) (870)
Foreign (743) (6,893) (1,389) -- (451)
--------- -------- -------- -------- --------
Total loans charged off (4,164) (15,447) (7,235) (11,483) (13,753)
--------- -------- -------- -------- --------
Recoveries on loans
previously charged off:
Real estate - mortgage 27 138 6 33 4
Commercial and financial 1,081 334 669 426 322
Consumer 403 714 212 126 108
Foreign 1,632 1,523 28 2 37
--------- -------- -------- -------- --------
Total recoveries 3,143 2,709 915 587 471
--------- -------- -------- -------- --------
Net loans charged off (1,021) (12,738) (6,320) (10,896) (13,282)
--------- -------- -------- -------- --------
Additions to allowance
charged to operating
expense 3,600 3,525 9,500 8,900 13,215
--------- -------- -------- -------- --------
Allowance for loan
losses at end of period $ 11,789 $ 9,210 $ 18,423 $ 15,243 $ 17,239
========= ======== ======== ======== ========
Average amount of
loans outstanding
for the year $ 682,252 $592,371 $583,744 $570,950 $616,094
========= ======== ======== ======== ========
Ratio of net loans
charged off to average
loans outstanding for
the period (1) .15% 2.15% 1.08% 1.91% 2.16%
========= ======== ======== ======== ========
</TABLE>
- ----------
(1) Before deduction of allowance for loan losses.
36
<PAGE> 36
TABLE 16
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
ALLOCATED TO FOREIGN LOANS
(All Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance, beginning
of year $ 300 $ 8,000 $ 7,000 $ 6,300 $ 7,500
Provision (credit)
for loan losses 211 (2,330) 2,361 700 (786)
Charge offs (743) (6,893) (1,389) -- (451)
Recoveries 1,632 1,523 28 -- 37
------- ------- ------- ------- -------
Balance, end of year $ 1,400 $ 300 $ 8,000 $ 7,000 $ 6,300
======= ======= ======= ======= =======
</TABLE>
37
<PAGE> 37
TABLE 17
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Amount Percentage of loans to total loans
December 31, December 31,
----------------------------------------- ---------------------------------
1995 1994 1993 1992 1991 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Applicable to:
Domestic:
Commercial and
industrial $ 4,700 $3,500 $ 5,700 $ 2,700 $ 4,400 28% 25% 28% 26% 32%
Real estate
construction 400 300 400 2,600 3,100 12% 11% 12% 15% 15%
Real estate mortgage 2,100 1,500 1,600 1,500 1,700 20% 22% 24% 20% 22%
Consumer 2,700 2,600 1,900 1,060 700 22% 24% 21% 15% 12%
Foreign 1,400 300 8,000 7,000 6,300 18% 18% 15% 24% 19%
Unallocated 489 1,010 823 383 1,039 N/A N/A N/A N/A N/A
------- ------ ------- ------- ----- --- --- --- --- ---
$11,789 $9,210 $18,423 $15,243 17,239 100% 100% 100% 100% 100%
======= ====== ======= ======= ====== === === === === ===
</TABLE>
38
<PAGE> 38
ALLOWANCE FOR CREDIT LOSSES - CAPITAL FACTORS
The allowance for credit losses at Capital Factors is maintained at a level
deemed adequate by management to absorb losses in the portfolio after
evaluating the portfolio, current economic conditions, changes in the nature
and volume of the portfolio, past loss experience and other pertinent factors.
Many of these factors involve a significant degree of estimation and are
subject to rapid change which may be unforeseen by management. Changes in
these factors could result in material adjustments to the allowance in the near
term.
The nature and composition of the accounts receivable portfolio lends itself to
statistical analysis by management in assessing the adequacy of the allowance
and provision for credit losses. Such statistical analysis is supplemented by
specific assessment of identified problem or potential problem risks and
consideration of known trends which may affect collectibility of receivables.
The accounts receivable portfolio turns over approximately seven times each
year. Due to stringent charge off policies, and the frequency of this
turnover, actual losses are believed to bear a direct relationship to accounts
receivable purchased volume.
Set forth on Table 18 is a five year summary of key statistics used by
management in evaluating the adequacy of the allowance and provision for credit
losses. Set forth on Table 19 is a five year history of activity in the
allowance for credit losses.
39
<PAGE> 39
TABLE 18
SUMMARY OF SELECTED ASSET QUALITY
STATISTICS OF CAPITAL FACTORS
(Dollar Amounts in Thousands, except as indicated)
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Accounts receivable past due
more than 60 days 4.85% 4.69% 4.85% 6.08% 6.72%
Accounts receivable turnover
in days 53 53 52 55 56
Provision for credit
losses $ 2,235 $ 2,235 $ 2,645 $ 3,150 $ 2,550
Charge offs $ 1,625 $ 3,148 $ 3,385 $ 3,476 $ 1,515
Allowance as a % of
accounts receivable .92% .71% .97% 1.21% 1.81%
Accounts receivable purchased
(for the year ended in
millions of dollars)(1) $ 2,001 $ 1,537 $ 1,327 $ 1,058 $ 825
Charge offs as a % of accounts
receivable purchased(1) 0.09% 0.21% 0.26% 0.33% 0.18%
Provision for credit losses as
a % of accounts receivable
purchased(1) 0.12% 0.15% 0.20% 0.30% 0.31%
</TABLE>
- ----------------
(1) Accounts receivable purchased for 1995 and 1994 include certain
receivables which are collateral for those asset-based loans for which
Capital Factors provides factoring-type services.
TABLE 19
ANALYSIS OF ALLOWANCE FOR CREDIT
LOSSES - CAPITAL FACTORS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Beginning balance $ 1,774 $ 2,157 $ 2,175 $ 2,189 $ 987
Provision for credit losses 2,235 2,235 2,645 3,150 2,550
Charge offs (1,625) (3,148) (3,385) (3,476) (1,515)
Recoveries 597 530 722 312 167
-------- -------- -------- -------- --------
Ending balance $ 2,981 $ 1,774 $ 2,157 $ 2,175 $ 2,189
======== ======== ======== ======== ========
</TABLE>
40
<PAGE> 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1994
------------------------------
(In Thousands of Dollars)
<S> <C> <C>
Assets:
Cash and due from banks $ 138,903 $ 91,712
Federal funds sold 75,000 15,000
------------ ------------
Cash and cash equivalents 213,903 106,712
------------ ------------
Securities held to maturity
(Market value 1995 - $24,173
1994 - $89,122; 23,496 91,031
Securities available for sale, at market value 217,008 130,018
------------ ------------
Total securities 240,504 221,049
------------ ------------
Loans 728,679 648,618
Allowance for loan losses (11,789) (9,210)
Deferred fees and unearned income (2,636) (2,771)
------------ ------------
Loans, net 714,254 636,637
------------ ------------
Accounts receivable-factoring subsidiary, net 319,910 248,142
Premises and equipment, net 33,558 32,358
Due from customers on acceptances 32,413 30,575
Other real estate 6,837 14,710
Accrued interest and other assets 31,740 29,679
------------ ------------
Total assets $ 1,593,119 $ 1,319,862
============ ============
Liabilities and stockholders' equity:
Deposits:
Non-interest bearing deposits $ 336,202 $ 296,599
Savings and money market deposits 283,893 315,323
Time deposits 418,660 264,871
------------ ------------
Total deposits 1,038,755 876,793
------------ ------------
Funds purchased and securities
sold under agreements to repurchase 86,133 87,236
Bank acceptances outstanding 32,413 30,575
Due to clients-factoring subsidiary 128,578 90,706
Long-term debt 176,650 126,980
Other liabilities 16,865 16,209
------------ ------------
Total liabilities 1,479,394 1,228,499
------------ ------------
Stockholders' equity:
Common stock, $1 par value
Authorized - 20,000,000 shares
Issued - 7,453,080 in 1995;
4,821,475 in 1994 7,453 4,821
Capital surplus 8,151 8,216
Retained earnings 98,119 83,445
Treasury stock - 80,000 shares -- (1,440)
Unrealized gain (loss) on
securities available for sale 2 (3,679)
------------ ------------
Total stockholders' equity 113,725 91,363
------------ ------------
Total liabilities and
stockholders' equity $ 1,593,119 $ 1,319,862
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 41
Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1994 1993
-----------------------------------
(In Thousands of Dollars Except
Per Share Data)
<S> <C> <C> <C>
Interest income:
Loans $ 68,360 $ 52,634 $ 49,882
Advances-factoring clients 23,803 16,747 13,332
Taxable securities 13,095 11,687 10,541
Tax-exempt securities 232 293 719
Federal funds sold and other
short-term investments 2,924 3,046 2,653
Dividends and other 917 156 143
-------- -------- --------
Total interest income 109,331 84,563 77,270
-------- -------- --------
Interest expense:
Savings and money market deposits 7,046 6,845 7,433
Time deposits 19,026 10,656 9,560
Short-term borrowings 4,504 3,980 3,198
Long-term debt 11,176 3,633 283
-------- -------- --------
Total interest expense 41,752 25,114 20,474
-------- -------- --------
Net interest income 67,579 59,449 56,796
Provision for loan losses 3,600 3,525 9,500
Provision for doubtful
accounts-factoring subsidiary 2,235 2,235 2,645
-------- -------- --------
Net interest income after
provisions 61,744 53,689 44,651
-------- -------- --------
Other income:
Factoring revenues 23,114 19,977 17,635
Service charges on deposits 12,609 11,757 9,436
Fees on letters of credit 4,237 3,961 6,420
Securities gains, net 12 1,213 632
Other operating income 6,134 5,040 6,076
-------- -------- --------
Total other income 46,106 41,948 40,199
-------- -------- --------
Other expenses:
Salaries and employee benefits 37,964 36,641 31,709
Occupancy expense, net 7,424 7,548 7,059
Other operating expenses, net 34,900 30,270 28,945
-------- -------- --------
Total other expenses 80,288 74,459 67,713
-------- -------- --------
Income before income taxes 27,562 21,178 17,137
Provision for income taxes 10,461 7,974 5,368
-------- -------- --------
Net Income $ 17,101 $ 13,204 $ 11,769
======== ======== ========
Earnings per common and common
equivalent share:
Primary $ 2.25 $ 1.83 $ 1.64
======== ======== ========
Fully diluted $ 2.20 $ 1.80 $ 1.61
======== ======== ========
Cash dividends declared
per share of common stock $ .33 $ .33 $ .33
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE> 42
Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Securities
Common Capital Retained Treasury Available for
Stock Surplus Earnings Stock Sale
------------------------------------------------------------
(In Thousands of Dollars)
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance,
January 1, 1993 $ 4,677 $ 6,729 $ 63,143 $ -- $ --
Net income -- -- 11,769 -- --
Cash dividends declared
($.33 per share) -- -- (2,340) -- --
Proceeds from exercise of
common stock options 10 89 -- -- --
Acquisition of treasury stock -- -- -- (1,440) --
Unrealized gain on securities
available for sale -- -- -- -- 2,036
------------------------------------------------------------
Balance,
December 31, 1993 4,687 6,818 72,572 (1,440) 2,036
Net income -- -- 13,204 -- --
Cash dividends
declared ($.33 per share) -- -- (2,331) -- --
Proceeds from exercise of
common stock options 134 1,398 -- -- --
Decrease in market value
of securities available
for sale -- -- -- -- (5,715)
------------------------------------------------------------
Balance,
December 31, 1994 4,821 8,216 83,445 (1,440) (3,679)
Net income -- -- 17,101 -- --
Cash dividends declared
($.33 per share) -- -- (2,427) -- --
Effect of 3 for 2 stock
split 2,429 (2,429) -- -- --
Redemption of fractional
shares -- (2) -- -- --
Proceeds from exercise
of common stock options 203 1,694 -- -- --
Proceeds for sale of
treasury stock -- 672 -- 1,440 --
Increase in market value of
securities available for sale -- -- -- -- 3,681
------------------------------------------------------------
Balance, December 31, 1995 $ 7,453 $ 8,151 $ 98,119 $ -- $ 2
======= ======= ======== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE> 43
Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1995 1994 1993
----------------------------------------
(In Thousands of Dollars)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 17,101 $ 13,204 $ 11,769
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 3,600 3,525 9,500
Provision for doubtful
accounts-factoring subsidiary 2,235 2,235 2,645
Net losses on other real estate 2,046 1,848 162
Securities gains (12) (1,213) (632)
Depreciation and amortization 4,173 3,756 4,583
(Gain) Loss on sale of premises and
equipment, net (66) 123 1,266
(Increase) decrease in accrued
interest and other assets (4,236) (6,296) 3,868
Increase (decrease) in other
liabilities 629 2,451 (3,205)
---------- ---------- ---------
Net cash provided by operating
activities 25,470 19,633 29,956
---------- ---------- ---------
Cash flows from investing activities:
Proceeds from maturities of securities -- -- 46,006
Proceeds from sales of securities -- -- 5,966
Purchase of securities -- -- (49,374)
Proceeds from maturities of securities
held to maturity 28,127 38,355 --
Purchase of securities held to maturity (13,074) (79,834) --
Proceeds from maturities of securities
available for sale 47,577 19,687 --
Proceeds from sale of securities
available for sale -- 6,159 --
Purchase of securities available
for sale (76,083) (33,140) --
Net increase in loans (81,725) (95,929) (364)
Increase in accounts receivable-
factoring subsidiary (net of
due to clients) (36,131) (27,137) (30,916)
Proceeds from sales of premises
and equipment 171 48 2,613
Purchase of premises and equipment (5,612) (12,068) (3,281)
Proceeds from sales of other
real estate 7,334 4,957 24,684
Improvements to other real estate (999) (451) (8,114)
---------- ---------- ---------
Net cash used in
investing activities (130,415) (179,353) (12,780)
---------- ---------- ---------
</TABLE>
(Continued)
44
<PAGE> 44
Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1995 1994 1993
----------------------------------------
(In Thousands of Dollars)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $ 161,962 $ (39,055) $ (18,508)
Net increase (decrease) in
funds purchased and securities
sold under agreements to
repurchase (1,103) 42,670 (57,029)
Repayment of debt-factoring
subsidiary -- (15,000) --
Proceeds from issuance of
long-term debt 50,000 122,434 --
Repayment of long-term debt (330) (625) (1,250)
Cash dividends (2,400) (2,313) (2,222)
Proceeds from stock
options exercised 1,897 1,532 99
Proceeds from sale of
treasury stock 2,112 -- --
Redemption of fractional shares (2) -- --
---------- --------- ---------
Net cash provided by (used in)
financing activities 212,136 109,643 (78,910)
---------- --------- ---------
Net increase (decrease) in cash
and cash equivalents 107,191 (50,077) (61,734)
Cash and cash equivalents at
beginning of year 106,712 156,789 218,523
---------- --------- ---------
Cash and cash equivalents
at end of year $ 213,903 $ 106,712 $ 156,789
========== ========= =========
Supplemental disclosures:
Cash paid during the year for:
Interest $ 40,584 $ 24,798 $ 20,921
========== ========= =========
Income taxes $ 10,821 $ 11,000 $ 1,726
========== ========= =========
Non-cash activities:
Securities transferred
from held to maturity to available
for sale $ 52,841 $ -- $ --
========== ========= =========
Increase (decrease) in market
value of securities available
for sale, net of applicable
taxes (credit) in 1995 -
$2,175, 1994 - ($3,377),
1993 - $1,203 $ 3,681 $ (5,715) $ 2,036
========== ========= =========
Loans transferred to other
asset categories $ 1,104 $ 3,040 $ 8,856
========== ========= =========
Loans recorded in connection
with sales of other assets $ 596 $ 197 $ 19,452
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE> 45
Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Significant Accounting Policies:
Capital Bancorp (the "Parent Company") is a bank holding company which conducts
operations principally through Capital Bank (the "Bank"), a wholly-owned
subsidiary, and Capital Factors Holding, Inc., a wholly-owned subsidiary of the
Bank. The Bank operates a commercial banking franchise through 28 offices
located in the South Florida area. Capital Factors Holding, Inc. and its
subsidiaries ("Capital Factors") provides accounts receivable factoring and
asset based lending services through offices located in Ft. Lauderdale,
Florida, New York, New York, Los Angeles, California and Charlotte, North
Carolina.
The consolidated financial statements of Capital Bancorp and subsidiaries (the
"Company") are prepared in conformity with generally accepted accounting
principles and prevailing practices within the banking industry. The following
is a summary of the significant accounting and reporting policies used in
preparing the financial statements:
Principles of Consolidation:
The consolidated financial statements include the accounts of the Parent
Company, the Bank and its subsidiaries, Capital Factors and Capital Factors
Financing Trust, a special purpose trust. All significant intercompany
transactions and balances have been eliminated in consolidation.
Investment Securities:
The Company's securities holdings are segregated into three separate
portfolios; held to maturity, available for sale and trading. At December 31,
1995 and 1994, the Company held no trading securities.
Securities held to maturity include securities purchased with the ability and
positive intent to hold to maturity. These securities are stated at historical
cost adjusted for amortization of premiums and accretion of discounts. Any
investment security for which there has been a value impairment deemed by
management to be other than temporary is written down to its estimated market
value with a charge to current operations. Gains and losses on sales of
securities held to maturity are recognized using the specific identification
method.
Securities which are neither classified as held to maturity nor trading
securities are included in securities available for sale and are reported at
market value. Any unrealized gain or loss, net of applicable income taxes, is
reported as a separate addition to or reduction from stockholders' equity.
Gains and losses arising from the sale of securities available for sale are
recognized based on the specific identification method and included in results
of operations.
Loans:
Interest on loans is generally recognized based upon the principal amount
outstanding. Loans are placed on non-accrual status when management deems that
collectibility of interest is doubtful. Generally, loans that are more than 90
days past due are placed on non-accrual status unless they are well secured and
in the process of collection. Interest subsequently collected on loans which
have been placed on non-accrual status is generally applied against principal.
Loans are charged off when a loss is deemed probable.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure," as of January 1, 1995. This Statement requires that impairment of
loans be measured by comparing the recorded amount of the loan to the present
value of expected future cash flows discounted at the loan's effective interest
rate, or at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. Small balance, homogenous
loans, comprised primarily of the Company's consumer loans, are collectively
evaluated for impairment. In determining when a loan is impaired, management
primarily considers current events and conditions, including the borrower's or
guarantor's (if applicable) operating performance and capacity to repay the
loan and realizable collateral values. The determination of impairment is done
on a loan by loan basis and involves significant judgement and estimation, and
final outcomes may differ from such estimates. Impaired loans may be accruing
or nonaccruing based on current and
46
<PAGE> 46
projected performance in relation to the specific terms of the loan. Adoption
of SFAS No. 114, as amended by SFAS No. 118, did not affect the Company's
policies on non-accrual loans or income recognition.
Allowance for Loan Losses:
The allowance for loan losses is maintained at a level deemed adequate by
management to absorb potential loan losses in the portfolio after evaluating
the loan portfolio, current economic conditions, changes in the nature and the
volume of the portfolio, past loan loss experience and other pertinent factors.
Many of these factors involve a significant degree of estimation and are
subject to rapid change which may be unforeseen by management. Changes in
these factors could result in material adjustments to the allowance.
The allowance is increased by provisions charged to current operations and
recoveries of amounts previously charged off, and is reduced by current charge
offs. Included in the allowance are amounts for impaired loans required by
SFAS No. 114 as discussed above. The adoption of SFAS No. 114 as of January
1, 1995 did not impact the level of the overall allowance or the Company's
policies regarding charge offs or recoveries.
Accounts Receivable-Factoring Subsidiary:
The allowance for doubtful accounts is maintained at a level deemed adequate by
management to absorb losses on receivables and advances after evaluating the
portfolio, current economic conditions, changes in the nature and volume of the
portfolio, past loss experience and other pertinent factors. Many of these
factors involve a significant degree of estimation and are subject to rapid
change which may be unforeseen by management. Changes in these factors could
result in material changes to the allowance in the near term. Accounts
receivable which are past due are charged off unless, in the opinion of
management, collection is likely from the customer, client or collateral
realization, if any.
Interest income on advances to factoring clients is generally recorded as
earned in accordance with the related agreements with clients. Advances are
placed on non-accrual status when the advance balance and interest receivable
exceed the estimated value of the underlying collateral or receivables.
Factoring fees are recognized generally at the time of purchase of accounts
receivable due to the nature of the relationship with the factoring client and
the relatively short term nature of accounts receivable purchased.
Premises and Equipment:
Premises and equipment are carried at cost less accumulated depreciation and
amortization computed generally on a straight-line basis over the estimated
useful lives of the assets or lease terms.
Other Real Estate:
Other real estate owned is carried at the lower of cost or fair value less
estimated costs to sell the asset and includes property acquired through
foreclosure. Any writedowns deemed necessary to adjust the asset to fair value
less estimated costs to sell the asset are charged to the allowance for loan
losses at the date of acquisition. Expenses incurred in connection with the
maintenance and operation of such assets, writedowns subsequent to acquisition
and gains and losses upon sale are included in current operations as a
component of other operating expenses. Costs incurred for major improvements
or costs which increase the value of these assets are capitalized.
Determination of fair value of other real estate involves a significant degree
of estimation and is subject to changes that may be unforeseen by management.
Retirement Plans and Other Postemployment Benefits:
Costs of the retirement plans are actually determined by the projected unit
credit cost method. The plans provide for no past service credits.
The Company has no material postemployment obligations.
Income Taxes:
There are two components of income tax provision, current and deferred.
Current income tax provisions approximate taxes to be paid or refunded for the
applicable period.
47
<PAGE> 47
Balance sheet amounts of deferred taxes are recognized on the temporary
differences between the bases of assets and liabilities as measured by tax laws
and their bases as reported in the financial statements. Deferred tax expense
or benefit is then recognized for the change in deferred tax liabilities or
assets between periods.
Recognition of deferred tax balance sheet amounts is based on management's
belief that it is more likely than not that the tax benefit associated with
certain temporary differences, tax operating loss carryforwards, and tax
credits will be realized. A valuation allowance is recorded for those deferred
tax items for which it is more likely than not that realization will not occur.
The Company files consolidated income tax returns. The subsidiaries provide
for income taxes on a separate return basis and remit to the Parent Company
amounts determined to be currently payable.
Per Share Data:
Primary per share amounts are computed based upon the average number of common
and common equivalent shares outstanding, assuming proceeds from the assumed
exercise of options were used to purchase common shares outstanding at the
average market value during each period, unless such exercise is anti-dilutive.
Fully diluted earnings per share assumes that the proceeds were used to
purchase common shares outstanding at the higher of market value per share as
of the end of each period or the average market value during each period,
unless such exercise is anti-dilutive. Prior to the listing of the Company's
common stock on the Nasdaq National Market in July 1995, market value was
estimated based on factors including the Company's financial condition and
operating results, and price/earnings and price to book value multiples of
selected publicly traded banking companies. Per share and average share
information for prior periods have been retroactively restated for the 3-for-2
stock split in the form of a 50% stock dividend which was effective June 22,
1995.
Statements of Cash Flows:
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, interest bearing deposits with banks, Federal
funds sold and other short-term investments with maturities of 90 days or less.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassification:
Certain amounts in prior periods have been reclassified to conform with 1995
presentations.
New Accounting Pronouncements:
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of," which is effective for fiscal years that begin after
December 15, 1995. This Statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. This Statement requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The unrecoverable amount should be recognized as an impairment
loss. This Statement also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. Adoption of this Statement is not
expected to have a significant impact on the Company's consolidated financial
position or results of operations.
In October 1995 the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." This statement requires certain disclosures about stock-based
employee compensation arrangements regardless of the method used to account for
them, defines a fair value based method of accounting for an employee stock
option or similar equity instrument and
48
<PAGE> 48
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for stock based compensation plans using
the intrinsic value method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and, if presented, earnings per share as if
the fair value method of accounting defined in SFAS No. 123 had been applied.
Under the fair value method, compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period,
which is usually the vesting period. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of the
stock at grant date or other measurement date over the amount an employee must
pay to acquire the stock. The disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after December
15, 1995. Pro forma disclosures required for entities that elect to continue
to measure compensation cost using APB No. 25 must include the effects of all
awards granted in fiscal years that begin after December 15, 1994. Management
is in the process of evaluating the impact of SFAS No. 123.
(2) Restrictions on Cash and Due from Bank Accounts:
The Bank is required to maintain average balances in the form of vault cash or
deposits with the Federal Reserve Bank of Atlanta pursuant to Federal Reserve
Bank regulations. The average amount of these reserves for the years ended
December 31, 1995 and December 31, 1994 was $37.7 million and $34.1 million,
respectively.
CF Funding Corp., a wholly-owned subsidiary of Capital Factors, is required to
maintain cash collateral accounts at Bankers Trust Company, the trustee,
pursuant to the terms of certain debt instruments. Such cash collateral
amounted to $16.2 million and $4.7 million at December 31, 1995 and December
31, 1994. See Note 10.
(3) Securities:
On October 18, 1995, the Financial Accounting Standards Board announced that it
was suspending the transfer provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," during the period of November 15,
1995 through December 31, 1995. During this period companies were allowed to
redesignate their Held to Maturity or Available for Sale securities without
tainting the other holdings in the portfolio. On December 29, 1995 $52.8
million of securities held to maturity with aggregate unrealized gains of
$906,000 were transferred to securities available for sale.
49
<PAGE> 49
The following tables present the amortized cost, gross unrealized gains, gross
unrealized losses and estimated market value for each category of securities
(000s omitted) in the held to maturity and available for sale portfolios:
Securities Held to Maturity:
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Treasury and
government
agency securities $ 16,016 $ 223 $ -- $ 16,239
Securities of states
and political
subdivisions 3,090 454 -- 3,544
Obligations of foreign
government 4,025 -- -- 4,025
Other debt securities 315 -- -- 315
-------- ------- ------- --------
Total debt securities 23,446 677 -- 24,123
Equity securities 50 -- -- 50
-------- ------- ------- --------
Total securities
- held to
maturity $ 23,496 $ 677 $ -- $ 24,173
======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Treasury and
government
agency securities $ 82,649 $ 58 $ 2,270 $ 80,437
Securities of states
and political
subdivisions 3,771 315 12 4,074
Obligations of foreign
government 4,025 -- -- 4,025
Other debt securities 536 -- -- 536
-------- ------- ------- --------
Total debt securities 90,981 373 2,282 89,072
Equity securities 50 -- -- 50
-------- ------- ------- --------
Total securities
- held to
maturity $ 91,031 $ 373 $ 2,282 $ 89,122
======== ======= ======= ========
</TABLE>
50
<PAGE> 50
Securities Available for Sale:
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Treasury and
government
agency securities $210,887 $ 2,095 $ 128 $ 212,854
Obligations of U.S.
corporations 1,000 17 -- 1,017
Obligations of
foreign
governments 5,118 17 1,998 3,137
-------- -------- -------- ---------
Total securities -
available
for sale $217,005 $ 2,129 $ 2,126 $ 217,008
======== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Treasury and
government
agency securities $124,753 $ 79 $ 3,417 $ 121,415
Obligations of U.S.
corporations 6,000 59 -- 6,059
Obligations of
foreign
governments 5,118 13 2,587 2,544
-------- ------- -------- ---------
Total securities -
available
for sale $135,871 $ 151 $ 6,004 $ 130,018
======== ======= ======== =========
</TABLE>
The following table presents the amortized cost and market value for debt
securities in each maturity category (000's omitted) in the held to maturity
and available for sale portfolios. For purposes of this disclosure, debt
securities which do not have a single maturity date have been included
according to their final maturity date.
<TABLE>
<CAPTION>
December 31, 1995
----------------------------
Amortized Cost Market Value
-------------- ------------
<S> <C> <C>
Debt securities held to maturity:
One year or less $ 250 $ 259
One to five years 15,415 15,663
Five to ten years 7,781 8,201
-------- --------
Total debt securities
held to maturity $ 23,446 $ 24,123
======== ========
</TABLE>
51
<PAGE> 51
<TABLE>
<CAPTION>
December 31, 1995
----------------------------
Amortized Cost Market Value
-------------- ------------
<S> <C> <C>
Debt securities available
for sale:
One year or less $ 68,313 $ 68,558
One to five years 102,995 104,189
Five to ten years 17,327 17,529
More than ten years 28,370 26,732
-------- --------
Total debt securities
available for sale $217,005 $217,008
======== ========
</TABLE>
Sales of debt securities resulted in proceeds, gross realized gains and gross
realized losses as follows (000's omitted):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Proceeds from sales
of debt securities $ -- $6,159 $2,580
====== ====== ======
Gross realized gains $ -- $1,213 $ 51
====== ====== ======
Gross realized losses $ -- $ -- $ --
====== ====== ======
</TABLE>
The Company did not own investment securities of any issuer, except U.S.
Treasury and government agency obligations, for which the aggregate book value
exceeded 10% of stockholders' equity at December 31, 1995 or 1994. Securities
pledged to secure public funds on deposit or sold under agreements to
repurchase amounted to approximately $134.7 million and $127.1 million at
December 31, 1995 and 1994, respectively.
52
<PAGE> 52
4) Loans:
Major classifications of loans are as follows (000s omitted):
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
-----------------------
<S> <C> <C>
Commercial and industrial $207,357 $163,893
Foreign 127,623 115,316
Consumer 159,461 150,682
Real estate:
Construction 84,402 70,049
Mortgage 147,082 145,119
Other 2,754 3,559
-------- --------
Total $728,679 $648,618
======== ========
</TABLE>
At December 31, 1995 and 1994 there were approximately $6.9 million and $6.4
million, respectively, in loans categorized as non-accrual. Interest income
that would have been recorded under the original terms of these loans had they
not been on non-accrual status was $372,000 and $454,000 for 1995 and 1994,
respectively. Interest income that was recorded on these loans during 1995 and
1994 amounted to $248,000 and $453,000, respectively.
At December 31, 1995, the recorded investment in loans that was considered
impaired under SFAS No. 114 was $7.8 million. Measurement for impairment of
$6.8 million of these loans was based on the present value of projected cash
flows, and the remainder was measured based on the estimated value of
collateral. These loans required a SFAS No. 114 reserve for possible credit
losses of $1.8 million which is included within the overall allowance for loan
losses. The average recorded investment in impaired loans during the year
ended December 31, 1995 was $5.8 million. For the year ended December 31,
1995, the Company recognized interest income on these loans of $523,000, all of
which related to accrual basis loans.
Included in real estate construction loans at December 31, 1995 and 1994 are
$17.4 million and $20.4 million, respectively, of tax-exempt loans, which are
also considered industrial development bonds and are subject to the provisions
of SFAS No. 115. Based upon the guidelines of SFAS No. 115 and management's
analysis, these loans are classified as held to maturity and reported at
historical cost. Included in interest income on loans are amounts exempt from
Federal income taxes totaling, $2,062,000, $2,747,000 and $2,806,000 for years
ended December 31, 1995, 1994 and 1993, respectively.
The majority of the Bank's domestic lending activities are conducted with
customers located in the South Florida region. Commercial loans are primarily
extended to small and mid-sized corporate borrowers in service and
manufacturing related industries. Mortgage loans are primarily non-residential
and are generally made for terms not exceeding five to seven years. In
addition to the real estate construction and mortgage loans above, the Bank had
outstanding consumer loans secured by real estate amounting to $9.3 million at
December 31, 1995 and 1994.
(5) Allowance for Loan Losses:
Changes in the allowance for loan losses are as follows (000's omitted):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 9,210 $18,423 $15,243
Provision for loan losses 3,600 3,525 9,500
Loans charged off (4,164) (15,447) (7,235)
Recoveries 3,143 2,709 915
------- ------- -------
Balance, end of year $11,789 $ 9,210 $18,423
======= ======= =======
</TABLE>
53
<PAGE> 53
(6) Accounts Receivable-Factoring Subsidiary:
Accounts receivable-factoring subsidiary are summarized as follows (000s
omitted):
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1994
-----------------------------
<S> <C> <C>
Accounts receivable $322,891 $249,916
Allowance for doubtful accounts (2,981) (1,774)
-------- --------
Accounts receivable, net $319,910 $248,142
======== ========
</TABLE>
Capital Factors purchases receivables primarily from clients which include
manufacturers, importers, wholesalers and distributors in apparel and
textile-related industries and, to a lesser extent, clients in consumer
goods-related industries such as plastics, video game cartridges, paper and
services. Receivables purchased are due from clients' customers geographically
located throughout the United States, principally retailers, manufacturers and
distributors.
Included in accounts receivable at December 31, 1995 and 1994, respectively,
were $69.6 million and $37.8 million purchased with recourse to the clients.
Advances made to clients prior to the contractual payment date for accounts
receivable purchased, net of client interest bearing credit balances,
amounted to $194.3 million and $159.2 million at December 31, 1995 and 1994,
respectively. Advances categorized as non-accrual amounted to $2.2 million
at December 31, 1995 and $739,000 at December 31, 1994.
Changes in the allowance for doubtful accounts relating to accounts
receivable-factoring subsidiary are as follows (000s omitted):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 1,774 $ 2,157 $ 2,175
Provision for doubtful accounts 2,235 2,235 2,645
Accounts receivable charged off (1,625) (3,148) (3,385)
Recoveries 597 530 722
------- ------- -------
Balance, end of year $ 2,981 $ 1,774 $ 2,157
======= ======= =======
</TABLE>
(7) Premises and Equipment:
Premises and equipment are as follows (000s omitted):
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994
----------------------------
<S> <C> <C>
Land and buildings $24,675 $24,461
Furniture and equipment 24,123 22,590
Leasehold improvements 11,982 11,163
------- -------
60,780 58,214
Less accumulated depreciation
and amortization (27,222) (25,856)
------- -------
Premises and equipment, net $33,558 $32,358
======= =======
</TABLE>
(8) Deposits:
Time certificates of deposit in denominations of $100,000 or more totaled
approximately $168 million or 16% of total deposits at December 31, 1995
compared to $114 million or 13% of total deposits at December 31, 1994.
54
<PAGE> 54
(9) Income Taxes:
The components of income tax expense are as follows (000s omitted):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 10,929 $ 5,420 $ 5,654
State and foreign 1,525 1,759 1,584
------- ------- -------
Total current 12,454 7,179 7,238
------- ------- -------
Deferred expense (credit):
Federal (1,751) 697 (1,597)
State (242) 98 (273)
------- ------- -------
Total deferred (1,993) 795 (1,870)
------- ------- -------
Total income tax expense $10,461 $ 7,974 $ 5,368
======= ======= =======
</TABLE>
The tax effects of temporary differences that result in deferred tax assets and
deferred tax liabilities, which are included in accrued interest and other
assets in the Company's consolidated statement of condition, are as follows
(000s omitted):
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
-----------------------------
<S> <C> <C>
Deferred tax assets:
Excess of book allowance
for loan losses over tax $ 5,697 $ 4,237
Unrealized loss on sale of securities
available for sale -- 2,174
Other real estate loss provisions 1,710 1,954
Depreciation 991 992
Loan fee income 866 807
Capital losses 339 598
Pension costs 233 203
Other 823 480
------- -------
Gross deferred tax assets 10,659 11,445
------- -------
Deferred tax liabilities:
Accretion of municipal securities 70 128
Other 199 486
------- ------
Gross deferred tax liabilities 269 614
------- -------
Valuation allowance 1,286 1,545
------- -------
Net deferred tax assets $ 9,104 $ 9,286
======= =======
</TABLE>
The valuation allowance decreased by $259,000 primarily due to the utilization
of capital loss carry forwards.
55
<PAGE> 55
The following is a reconciliation of the expected tax rate (statutory) to the
actual tax rate (000s omitted):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1995 1994 1993
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tax at statutory rate $ 9,647 35.0% $7,412 35.0% $5,998 35.0%
State taxes 868 3.2 1,206 5.7 766 4.5
Tax exempt interest (761) (2.8) (1,021) (4.8) (1,163) (6.8)
Other 707 2.6 377 1.8 (233) (1.4)
--------------------------------------------------
Total $10,461 38.0% $7,974 37.7% $5,368 31.3%
==================================================
</TABLE>
Income tax returns filed by the Company or its subsidiaries are subject to
review by federal or state tax authorities, as applicable. Currently, the
Internal Revenue service is reviewing the consolidated federal income tax
returns for the years 1989 through 1992. Although such reviews may result in
increases in the Company's income tax provisions and related liabilities,
management does not believe the results of these reviews will have a material
impact on the consolidated financial statements.
(10) Long-Term Debt:
Components of long-term debt are as follows (000s omitted):
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
---- ----
<S> <C> <C>
Variable Rate Asset Backed
Certificates Series 1994-1 $100,000 $100,000
Variable Rate Asset Backed
Certificates Series 1994-2 25,000 25,000
Variable Rate Asset Backed
Certificate Series 1995 50,000 --
Other long-term debt 1,650 1,980
-------- --------
$176,650 $126,980
======== ========
</TABLE>
In June, 1994, December, 1994 and July, 1995, Capital Factors Financing
Trust issued $100,000,000, $25,000,000 and $50,000,000, respectively, of
Variable Rate Asset Backed Certificates ("senior certificates") with maturity
dates of December 1999, June 2000 and January 2001. The senior certificates
bear an interest rate of LIBOR plus 1.25% before transaction costs
(approximately 7.19% at December 31, 1995, excluding transaction costs of
0.37%). Interest is payable monthly. The senior certificates are secured by
interest earning advances which totaled $199.0 million at December 31, 1995.
Capital Factors, Inc. services and administers these advances and related
receivables under an agreement entered into by and among Bankers Trust Company
as Trustee, CF Funding Corp. and Capital Factors, Inc. The senior certificates
may not be redeemed prior to maturity, and are subject to acceleration if
certain collateral requirements are not maintained. Deferred issuance costs of
$2.6 million are being amortized over the terms of the related series. In
addition, in March 1996, Capital Factors, Inc. entered into a revolving credit
facility with an unaffiliated bank for $40 million, the funding of which is
subject to certain conditions which have not yet been fulfilled.
Other long-term debt includes an unsecured term loan amounting to $1,650,000
and $1,980,000 at December 31, 1995 and 1994, payable to an affiliate of a
principal shareholder.
56
<PAGE> 56
(11) Stock Option Plan:
In 1992, the Company adopted a stock option plan to replace the previous plan
which was adopted in 1982. No additional shares may be granted under the 1982
plan. Under the 1992 plan, options for the purchase of a maximum of 2,203,503
shares, as adjusted for stock splits, may be granted to certain key employees
and directors at not less than the fair market value of such shares on the date
of grant. Options granted are immediately exercisable and generally terminate
five years from date of grant. The plan also provides for the granting of
stock appreciation rights, none of which is outstanding.
Stock option activity (adjusted for stock split) in the plans is summarized as
follows:
<TABLE>
<CAPTION>
Stock Options
- -----------------------------------------------------------------------------------
Available Option Price
For Grant Outstanding Per Share
--------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 2,071,128 747,123 $ 6.17 - $ 9.72
Granted (652,125) 652,125 9.67 - 13.20
Exercised -- (15,333) 6.17 - 7.17
Cancelled 37,200 (139,708) 6.17 - 9.67
- --------------------------------------------------------------
Balance, December 31, 1993 1,456,203 1,244,207 $ 6.17 - $13.20
Granted (486,225) 486,225 14.67 - 16.13
Exercised -- (201,285) 6.17 - 12.00
Cancelled -- (77,378) 6.17 - 12.00
- -------------------------------------------------------------
Balance, December 31, 1994 969,978 1,451,769 $ 6.17 - $16.13
Granted (7,500) 7,500 14.67
Exercised -- (220,976) 6.17 - 14.67
Cancelled 119,704 (139,093) 6.17 - 16.13
- -------------------------------------------------------------
Balance, December 31, 1995 1,082,182 1,099,200 $ 6.40 - $16.13
</TABLE>
=============================================================
(12) Retirement Plans:
The Company sponsors a non-contributory defined benefit pension plan (the
"Plan") covering all employees meeting certain eligibility requirements. The
benefits are based on years of service and the employee's compensation for the
five consecutive years during the last ten years of service that produce the
highest average salary. The Plan provides for accumulation of full benefits
equal to 1.2% of eligible compensation for each year of service up to 25 years.
Full vesting will occur after completion of seven years of service. The
Company's funding policy is to contribute annually the maximum amount that can
be deducted for Federal income tax purposes.
The following items are components of the net periodic pension cost:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1995 1994 1993
-------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned
during the year $ 700,348 $704,851 $554,156
Interest cost-projected benefit
obligation 525,785 370,261 307,955
Actual return on plan assets (1,403,127) (102,875) (390,959)
Net amortization and deferral 1,384,221 (300,215) 91
---------- -------- --------
Net periodic pension cost $1,207,227 $672,022 $471,243
========== ======== ========
</TABLE>
57
<PAGE> 57
The funded status of the plan is shown in the table below:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1994
-----------------------------
<S> <C> <C>
Plan assets at fair value $7,176,298 $5,464,072
Projected benefit obligation for
services rendered (8,635,263) (6,271,120)
---------- ----------
Plan assets less than projected
benefit obligation (1,458,965) (807,048)
Unrecognized prior service cost 407,424 112,193
Unrecognized net loss 336,923 642,231
Adjustment to recognize minimum
required liability -- (522,530)
---------- ----------
Accrued pension cost $ (714,618) $ (575,154)
========== ==========
</TABLE>
At December 31, 1995 and 1994, the Plan's assets consisted primarily of
corporate obligations, equity securities, mutual funds, U.S. Government
securities and other cash equivalents.
The accumulated benefit obligation at December 31, 1995 and 1994 was
approximately $7,097,000 and $6,039,000, respectively. Included in these
amounts were vested benefits of approximately $6,454,000 and $5,422,000 at
December 31, 1995 and 1994, respectively.
The assumed weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.00% in 1995 and 1994.
The assumed expected long-term rate of return on assets was 8.50% in 1995 and
1994. The assumed rate of salary progression was 5.50% in 1995 and 1994.
The Company sponsored a supplemental retirement plan ("supplemental plan") for
key executive officers from 1985 until 1994. The supplemental plan covered
three participants, including the former chairman and chief executive officer
and two individuals who were also executive officers and directors. In 1993,
one participant resigned from the Company and received a lump sum payout of
approximately $106,000. In 1994, the remaining two participants, including the
former chairman and chief executive officer, resigned from the Company and
received lump sum payouts of approximately $2,066,000 and $259,000,
respectively. The net periodic cost associated with the supplemental plan
amounted to $1.4 million and $140,000 in 1994 and 1993, respectively, and is
included in salaries and employee benefits in the accompanying statements of
income.
58
<PAGE> 58
(13) Related Party Transactions:
The Bank has granted loans to executive officers and directors of the Parent
Company, the Bank and their affiliated entities. Related party loans are made
on substantially the same terms as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal
risk of collectibility. The aggregate dollar amount of these loans was
$8,951,000 and $4,221,000 at December 31, 1995 and 1994, respectively. During
1995, $14,021,000 of new loans were made and repayments totaled $9,291,000.
Included in long-term debt is a term loan with an aggregate outstanding
principal balance of $1,650,000 and $1,980,000 at December 31, 1995 and 1994,
respectively, payable to a lender affiliated with a stockholder of the Company.
The Bank leases real estate for several of its branches from the Chairman of
the Board, members of his immediate family or lessors affiliated with these
individuals. Rentals paid on these leases aggregated approximately $199,000,
$406,000 and $722,000 for 1995, 1994 and 1993, respectively.
During 1994, the Bank purchased the building housing its operations center, a
branch and other Bank offices from the former chairman and chief executive
officer of the Company and a business associate. The purchase price of $4.5
million approximated the appraised value of the building.
(14) Lines of Business:
The Company conducts commercial banking and factoring activities through its
subsidiaries. See Table 8 in Item 7 hereof for certain information regarding
these business segments. Also, set forth below is certain information
regarding the Company's domestic and foreign activities.
The Company provides banking services in various parts of the world through the
International Division of the Bank. The Company considers assets and revenues
as associated with foreign banking operations on the basis of the country of
domicile of the customer.
The Company treats foreign activities as separate lending and deposit placement
activities to which most revenues, costs and expenses can be directly
attributed. Rates used to determine charges or credits for funds used or
generated by domestic and foreign operations are based on actual external costs
during the period for selected interest bearing sources of funds. Indirect
expenses are allocated through the use of internal estimates, certain direct
costs and other pertinent factors.
A summary of the Company's domestic and foreign assets and liabilities at
December 31, 1995 and 1994, and selected income data for the last three years
follows (000s omitted):
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
------------------------
<S> <C> <C>
Domestic assets $1,428,100 $1,168,518
Foreign assets 165,019 151,344
---------- ----------
Total $1,593,119 $1,319,862
========== ==========
Domestic liabilities $1,279,518 $1,064,966
Foreign liabilities 199,876 163,533
---------- ----------
Total $1,479,394 $1,228,499
========== ==========
</TABLE>
59
<PAGE> 59
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1995 1994 1993
-----------------------------------
<S> <C> <C> <C>
Total foreign operating income $14,396 $11,692 $15,031
======= ======= =======
Foreign income before income taxes $ 4,303 $ 4,852 $ 5,187
======= ======= =======
Net foreign income $ 2,709 $ 3,105 $ 3,320
======= ======= =======
</TABLE>
The Company's foreign activities primarily involve customers throughout Central
and South America but do not include any individual country or geographic area
that is significant in relation to consolidated activities.
60
<PAGE> 60
(15) Restrictions on Subsidiary Dividends, Loans or Advances:
Certain restrictions exist regarding the ability of the Bank to transfer funds
to the Parent Company in the form of cash dividends. Restrictions on the
payment of dividends are established by Florida statutes. At periodic
intervals, State or Federal regulatory agencies routinely examine the Parent
Company and the Bank as part of their legally prescribed oversight of the
banking industry and may establish dividend restrictions at levels more
stringent than statutory guidelines. At December 31, 1995, approximately $23.5
million of the Bank's retained earnings (included in consolidated retained
earnings) were available for payment of dividends to the Parent Company without
prior regulatory approval.
Restrictions also exist regarding the ability of the Bank to transfer funds to
the Parent Company in the form of loans or advances. At December 31, 1995 the
maximum amount available for loans from the Bank to the Parent Company
approximated 10% of consolidated stockholders' equity. The Bank did not have
any loans outstanding to the Parent Company as of December 31, 1995.
(16) Lease Commitments:
The Company leases certain land, premises and other equipment under
non-cancelable operating leases that expire at various dates through 2076.
Certain of these leases are renewable and contain provisions for periodic
increases in rent.
Rental expense was approximately $3,972,000, $3,935,000 and $4,209,000, for
1995, 1994 and 1993, respectively. Future minimum lease payments under these
leases are as follows (000s omitted):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1996 $ 4,440
1997 3,777
1998 2,149
1999 1,840
2000 1,249
Thereafter 8,989
-------
Total $22,444
=======
</TABLE>
(17) Legal Matters:
The Company and certain of its present and former directors and executive
officers are defendants in two lawsuits, one of which is a derivative suit.
Such suits allege that certain of the defendants engaged in a number of
allegedly improper and illegal activities. No monetary relief is sought from
the Company other than costs in the derivative action. The Company does not
believe that the outcome of the foregoing litigation will have a material
adverse impact on the consolidated financial condition, results of operations
or liquidity of the Company.
Various other legal actions and proceedings are pending or are threatened
against the Company and its subsidiaries, some of which seek relief or damages
in amounts that are substantial. Unlike the aforementioned matters, however,
these actions or proceedings arose in the ordinary course of business. Due to
the complex nature of some of these matters, it may be a number of years before
they are ultimately resolved. After consultation with legal counsel,
management believes the aggregate liability, if any, resulting from such
pending or threatened actions and proceedings will not have a material adverse
effect on the Company's consolidated financial condition, results of operations
or liquidity.
61
<PAGE> 61
(18) Off-Balance Sheet Risk:
In the normal course of business, the Company utilizes various financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These off-balance sheet activities include commitments to extend
credit, commercial letters of credit and standby letters of credit. The credit
and market risks associated with these financial instruments are generally
managed in conjunction with the Company's balance sheet activities and are
subject to normal credit policies, financial controls and risk limiting and
monitoring procedures. The maximum risk may exceed the amounts recognized in
the consolidated statements of condition because these amounts vary depending
on the nature of the underlying instrument and the related accounting policy.
Credit losses may be incurred when one of the parties fails to perform in
accordance with the terms of the contract. The Company's exposure to credit
loss is represented by the contractual amount of the commitments to extend
credit, commercial letters of credit and standby letters of credit. This is
the maximum potential loss of principal in the event the commitment is drawn
upon and the counterparty defaults. In addition, the measurement of the risks
associated with these financial instruments is meaningful only when all related
and offsetting transactions are considered.
Commitments to extend credit are legally binding agreements to lend money at
predetermined interest rates for a specific period of time. The exposure to
loss is minimized by maintaining specific credit standards and by requiring the
borrower to comply with certain terms and conditions prior to the disbursement
of funds. Collateral is obtained when deemed necessary and may include, but is
not limited to cash, accounts receivable, inventory, equipment, real estate, or
other property. Since commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent the total amount of
future outlays. The Company had commitments to fund loans of approximately
$146.1 million at December 31, 1995.
Commercial letters of credit are issued to facilitate certain trade
transactions. The risks associated with these transactions are reduced since
the contracts are generally for a short commitment period. Collateral is
obtained when deemed necessary and may include, but is not limited to, cash,
merchandise or other property. The Company had outstanding commercial letters
of credit of $79.0 million at December 31, 1995.
Standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. The Company issues standby letters
of credit to ensure contract performance or assure payment by its customers.
The risk involved in issuing standby letters of credit is the same as the
credit risk involved in extending loan facilities to customers and they are
subject to the same credit approvals and monitoring procedures. Collateral is
obtained when deemed necessary and generally consists of time deposits with the
Bank. The Company had $13.8 million of outstanding standby letters of credit
at December 31, 1995.
62
<PAGE> 62
(19) Supplemental Information - Consolidated Statements of Operations:
Included in other operating income for each of the three years ended December
31, 1995 were the following components, which individually amounted to more
than 1% of gross revenues (000s omitted) during any one of the respective
years:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Real estate participations $ 549 $1,159 $2,577
Other-less than 1% of
gross revenues 5,585 3,881 3,499
------ ------ ------
Total other operating income $6,134 $5,040 $6,076
====== ====== ======
</TABLE>
Included in net other operating expenses for each of the three years ended
December 31, 1995 were the following components, which individually amounted to
more than 1% of gross revenues (000s omitted) during any one of the respective
years:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1995 1994 1993
------------------------------
<S> <C> <C> <C>
Furniture and equipment expense $3,712 $3,486 $3,361
Overdraft charge offs 3,480 996 167
Data processing 3,132 3,352 2,996
Legal expense 2,980 2,622 3,019
Operating costs and writedowns of
other real estate, net 2,929 2,954 3,208
Advertising and marketing 2,306 1,496 1,191
Other losses 2,021 1,201 1,816
Insurance 1,665 2,789 2,977
Stationery and supplies 1,590 1,162 1,117
Telecommunications 1,510 1,406 975
Other-less than 1% of gross revenues 9,575 8,806 8,118
------- ------- -------
Total other operating expenses, net $34,900 $30,270 $28,945
======= ======= =======
</TABLE>
63
<PAGE> 63
(20) Parent Company Financial Information:
Condensed financial information for Capital Bancorp (Parent Company only) is as
follows (000s omitted):
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1994
-------------------------------
<S> <C> <C>
Assets:
Cash and short-term investments $ 6,285 $ 3,669
Investment in Capital Bank 109,520 90,148
Other assets 498 277
-------- --------
Total assets $116,303 $ 94,094
======== ========
Liabilities and Stockholders' equity:
Long-term debt $ 1,650 $ 1,980
Other liabilities 928 751
-------- --------
Total liabilities 2,578 2,731
Stockholders' equity 113,725 91,363
-------- --------
Total liabilities and
stockholders' equity $116,303 $ 94,094
======== ========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1995 1994 1993
----------------------------------
<S> <C> <C> <C>
Income:
Dividends from Bank subsidiary $ 4,400 $ 4,400 $ 3,200
Management fees from Bank
subsidiary 266 456 456
Other 216 61 30
-------- -------- --------
Total income 4,882 4,917 3,686
-------- -------- --------
Expenses:
Salaries and employee benefits 166 420 405
Interest expense 159 194 284
Other expenses 1,518 533 786
-------- -------- --------
Total expenses 1,843 1,147 1,475
-------- -------- --------
Income before income taxes and
equity in undistributed income
of subsidiary 3,039 3,770 2,211
Credit for income taxes 493 228 205
-------- -------- --------
Income before equity in
undistributed income
of subsidiary 3,532 3,998 2,416
Equity in undistributed income of
subsidiary Bank: 13,569 9,206 9,353
-------- -------- --------
Net income $ 17,101 $ 13,204 $ 11,769
======== ======== ========
</TABLE>
64
<PAGE> 64
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1994 1993
-----------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $17,101 $13,204 $11,769
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 9 9 9
Undistributed income of subsidiary (13,569) (9,206) (9,353)
(Increase) decrease in other assets (220) (43) 219
Increase (decrease) in other
liabilities 159 (184) 125
------- ------- -------
Net cash provided by operating
activities 3,480 3,780 2,769
------- ------- -------
Cash flows from financing activities:
Cash dividends paid (2,429) (2,313) (2,340)
Repayment of long-term debt (330) (625) (1,250)
Proceeds from stock options exercised 1,897 1,532 99
Redemption of fractional shares (2) -- --
------- ------- -------
Net cash used in financing
activities (864) (1,406) (3,491)
------- ------- -------
Net increase (decrease) in cash and
cash equivalents 2,616 2,374 (722)
Cash and cash equivalents at beginning
of year 3,669 1,295 2,017
------- ------- -------
Cash and cash equivalents at end
of year $ 6,285 3,669 $ 1,295
======= ======= =======
Supplemental Disclosure:
Interest paid during the period $ 158 $ 223 $ 300
======= ======= =======
</TABLE>
NOTES TO PARENT COMPANY INFORMATION
Long-term debt at December 31, 1995, includes a term loan payable to an
affiliate of a principal stockholder with an outstanding principal balance of
$1,650,000. Interest is charged at the prime rate, payable monthly. Principal
payments in the amount of $330,000 are due annually until May 31, 2000.
65
<PAGE> 65
(21) Fair Value of Financial Instruments:
The following disclosures of estimated fair value amounts of financial
instruments have been determined by the Company using available market
information and other valuation methodologies. Considerable judgment is
necessarily required to interpret market data and develop the estimates of fair
value. The estimated fair value amounts presented are not necessarily
indicative of amounts the Company could realize in a current market exchange.
The use of different assumptions and/or valuation methodologies could have a
material effect on the estimated fair value amounts.
The information presented herein is based on pertinent information available to
the Company as of December 31, 1995. The estimated fair value amounts have not
been comprehensively revalued since that time, and the current estimated fair
value of these financial instruments may have changed significantly since that
point in time.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
Cash, short-term investments, funds purchased and other short-term borrowings,
and due to clients:
For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.
Securities:
For securities held to maturity or available for sale, fair values are primarily
based on quoted market prices or dealer quotes. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar
securities.
Loans:
The fair value of loans generally is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Accounts receivable - factoring subsidiary:
Accounts receivable held by Capital Factors turn over quickly. Interest
earning advances made to clients against such receivables carry variable
interest rates based upon the prime rate and reprice as the prime rate changes.
The carrying amount is believed to be a reasonable approximation of fair value.
Acceptances:
Amounts due from customers on acceptances and payable for acceptances
outstanding are non-interest bearing items which turn over quickly. The
carrying amount is believed to be a reasonable approximation of fair value.
Deposit Liabilities:
The fair value of demand deposits, savings accounts and money market deposits
is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using estimated current
rates for deposits of similar remaining maturities.
Long-term debt:
All long-term debt is subject to variable rates of interest based upon either
the prime rate or the London interbank offering rate. The carrying amount is
believed to be a reasonable approximation of fair values.
66
<PAGE> 66
Commitments to extend credit, standby letters of credit and commercial letters
of credit:
The fair value of loan commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
value of letters of credit is based on fees currently charged for similar
agreements.
The estimated fair values of the Company's financial instruments are as follows
(000s omitted):
<TABLE>
<CAPTION>
1995 1994
----------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- -------- --------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term
investments $ 213,903 $ 213,903 $106,712 $106,712
Securities 240,504 241,181 221,049 219,140
Loans, net 714,254 727,401 636,637 627,527
Accounts receivable -
factoring subsidiary, net 319,910 319,910 248,142 248,142
Due from customers
on acceptances 32,413 32,413 30,575 30,575
Financial liabilities:
Deposits 1,038,755 1,041,050 876,793 871,792
Funds purchased and other
short-term borrowings 86,133 86,133 87,236 87,236
Long-term debt 176,650 176,650 126,980 126,980
Due to clients 128,578 128,578 90,706 90,706
Acceptances outstanding 32,413 32,413 30,575 30,575
Unrecognized financial
instruments:*
Commitments to extend
credit 313 313 418 418
Standby letters of credit 121 121 144 144
Commercial letters of credit -- -- 2 2
</TABLE>
*The amounts shown under "carrying amount" represent accruals of deferred
income (fees) arising from those unrecognized financial instruments.
(22) Treasury Stock:
During 1993, the Bank commenced foreclosure action on certain loans aggregating
approximately $1.7 million secured by common stock of the Company and other
property. Subsequent to December 31, 1993, the Bank entered into an agreement
with the borrowers whereby the Bank received 120,000 shares (reflects 3-for-2
stock split in the form of a 50% stock dividend) of the Company's common stock
and other property in full repayment of the subject loans. Based upon price
ranges of actively traded shares of other financial institutions, as well as
other factors, the Bank assigned a fair value of $12.00 per share (restated for
stock split) to the stock received, for an aggregate of $1,440,000. The excess
of the loan over the assigned fair value of all property received was charged
off, and the stock of the Company received was reported as treasury shares in
the consolidated statement of condition as of December 31, 1994. During 1995
and prior to trading on the Nasdaq National Market, all of the shares of
treasury stock were sold by the Bank for $2.1 million.
67
<PAGE> 67
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Capital Bancorp and Subsidiaries
We have audited the accompanying consolidated statements of condition of
Capital Bancorp and subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the management of Capital
Bancorp and subsidiaries. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Capital Bancorp and subsidiaries
at December 31, 1995 and 1994, the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Miami, Florida
February 23, 1996
68
<PAGE> 68
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CAPITAL BANCORP
DATE: May 17, 1996 BY: /s/LUCIOUS T. HARRIS
---------------------------
LUCIOUS T. HARRIS, Treasurer
(Principal Financial and
Accounting Officer)
69
