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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission file no. 2-26080
CAPITAL BANCORP
- ------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-2160717
- ------------------------------ --------------------------------
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1221 Brickell Avenue, Miami, Florida 33131
- -------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(305) 536-1500
- -------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
X Yes ______ No
As of May 10, 1996, there were 7,466,081 shares of the registrant's
Common Stock outstanding.
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Page 1 of 26 Pages
Exhibit Index on Page 24
<PAGE>
<TABLE>
ITEM 1. PART I. FINANCIAL INFORMATION
CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(In Thousands of Dollars)
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 102,954 $ 138,903
Federal funds sold and securities
purchased under agreement to resell 50,000 75,000
---------- ----------
Cash and cash equivalents 152,954 213,903
---------- ----------
Securities held to maturity
(Market value 3/31/96 -
$29,724, 12/31/95 - $ 24,173) 29,415 23,496
Securities available for sale
(at market value) 196,909 217,008
---------- ----------
Total securities 226,324 240,504
---------- ----------
Loans 716,896 728,679
Less allowance for loan losses (11,632) (11,789)
Less unearned income (2,529) (2,636)
---------- ----------
Loans, net 702,735 714,254
---------- ----------
Accounts receivable -
factoring subsidiary, net 361,445 316,506
Premises and equipment, net 33,150 33,558
Due from customers on acceptances 27,048 32,413
Other real estate 6,562 6,837
Accrued interest and other assets 30,357 31,740
---------- ----------
Total assets $1,540,575 $1,589,715
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing deposits $ 291,818 $ 336,202
Savings and money market deposits 285,523 283,893
Time deposits 407,616 418,660
---------- ----------
Total deposits 984,957 1,038,755
---------- ----------
Funds purchased and securities sold
under agreements to repurchase 80,057 86,133
Bank acceptances outstanding 27,048 32,413
Due to clients - factoring subsidiary 141,578 128,578
Long-term debt 176,650 176,650
Other liabilities 13,898 13,461
---------- ----------
Total liabilities 1,424,188 1,475,990
---------- ----------
Stockholders' equity:
Common stock, $1.00 par value
Authorized - 20,000,000 shares
Issued - 7,462,076 shares - 3/31/96,
7,453,080 shares - 12/31/95 7,462 7,453
Capital surplus 8,225 8,151
Retained earnings 101,899 98,119
Unrealized (loss) gain on securities
available for sale (1,199) 2
---------- ----------
Total stockholders' equity 116,387 113,725
---------- ----------
Total liabilities and
stockholders' equity $1,540,575 $1,589,715
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
Page 2
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<PAGE>
<TABLE>
CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars Except Per Share Data)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1996 1995
---- ----
<S> <C> <C>
INTEREST INCOME:
Loans $17,309 $15,790
Advances-factoring clients 6,032 5,388
Taxable securities 3,574 3,196
Tax-exempt securities 54 63
Federal funds sold and
other short term investments 976 352
------- -------
Total interest income 27,945 24,789
------- -------
INTEREST EXPENSE:
Savings and money market deposits 1,711 1,733
Time deposits 5,619 3,345
Short-term borrowings 905 1,285
Long-term debt 3,132 2,430
------- -------
Total interest expense 11,367 8,793
------- -------
Net interest income 16,578 15,996
Provision for loan losses 600 375
Provision for doubtful accounts-
factoring subsidiary 1,100 450
------- -------
Net interest income
after provisions 14,878 15,171
------- -------
OTHER INCOME:
Factoring revenues 6,480 5,195
Service charges on deposits 2,962 3,361
Fees on letters of credit 1,143 911
Other operating income 1,193 1,362
------- -------
Total other income 11,778 10,829
------- -------
OTHER EXPENSES:
Salaries and employee benefits 10,026 9,290
Occupancy expense, net 2,016 1,819
Other operating expenses, net 7,533 8,985
------- -------
Total other expenses 19,575 20,094
------- -------
Income before income taxes 7,081 5,906
Provision for income taxes 2,679 2,217
------- -------
Net income $ 4,402 $ 3,689
======= =======
Earnings per common and common
equivalent share:
Primary $ .54 $ .50
======= =======
Fully diluted $ .54 $ .50
======= =======
Cash dividends declared per share of
common stock $ .0833 $ .0833
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
Page 3
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<PAGE>
<TABLE>
CAPITAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,402 $ 3,689
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 600 375
Provision for doubtful
accounts-factoring subsidiary 1,100 450
Depreciation and amortization 1,187 944
Net losses on other real estate 212 254
Loss (gain) on disposal of premises
and equipment 5 (32)
Decrease in accrued interest and other assets 2,092 1,455
Increase in other liabilities 436 2,060
-------- --------
Net cash provided by
operating activities 10,034 9,195
-------- --------
Cash flows from investing activities:
Proceeds from maturities of securities
held to maturity 6,034 8,069
Purchase of securities held to maturity (12,000) --
Proceeds from maturities of securities
available for sale 34,168 4,854
Purchase of securities available for sale (15,941) --
Net decrease (increase) in loans 10,322 (24,483)
Proceeds from sale of premises and equipment -- 75
Purchase of premises and equipment (775) (2,567)
Proceeds from sale of other real estate 770 1,835
Improvements to other real estate (110) (264)
Increase in accounts receivable-factoring
subsidiary (net of due to clients) (33,039) (28,691)
-------- --------
Net cash used in investing activities (10,571) (41,172)
-------- --------
Cash flows from financing activities:
Net (decrease) increase in deposits (53,798) 19,501
Net (decrease) increase in Federal
funds purchased and securities sold
under agreements to repurchase (6,076) 15,871
Cash dividends paid (621) (1,189)
Proceeds from exercise of stock options 83 432
-------- --------
Net cash (used in) provided by
financing activities (60,412) 34,615
-------- --------
Net (decrease) increase in
cash and cash equivalents (60,949) 2,638
Cash and cash equivalents at
beginning of period 213,903 106,712
-------- --------
Cash and cash equivalents at end of period $152,954 $109,350
======== ========
Supplemental Disclosures
Cash paid during the period for:
Interest $ 11,491 $ 8,500
======== ========
Income taxes $ 536 $ 2,036
======== ========
Non-cash activities:
Decrease (increase) in the unrealized
loss on securities available for sale,
net of applicable taxes (benefits) in
1996 - $(710) and in 1995 - $711 $ (1,201) $ 1,204
======== ========
Loans transferred to other asset categories $ 597 $ 331
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
Page 4
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<PAGE>
CAPITAL BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
NOTE 1: Basis of Presentation
- ------------------------------
The Consolidated Statements of Condition for Capital Bancorp and
Subsidiaries (the "Company") as of March 31, 1996 and December 31,
1995, the Consolidated Statements of Income for the three-month
periods ended March 31, 1996 and 1995 and the Consolidated
Statements of Cash Flows for the three-month periods ended March
31, 1996 and 1995 included in this Form 10-Q have been prepared by
the Company in conformity with the instructions to Form 10-Q and
Article 10 of Regulation S-X and therefore do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. The
statements are unaudited except for the Consolidated Statement of
Condition as of December 31, 1995. Certain amounts in the December
31, 1995 Consolidated Statement of Condition have been reclassified
to conform with the March 31, 1996 consolidated financial statement
presentation.
The accounting policies followed for interim financial reporting
are consistent with the accounting policies set forth in Note 1 to
the Consolidated Financial Statements appearing in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995 as
filed with the Securities and Exchange Commission.
In October 1995 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock Based Compensation." This statement requires
certain disclosures about stock-based employee compensation
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 method, compensation
cost is the excess, if any, of the quoted market price of the stock
at grant date or other measurement date over the amount an employee
must pay to acquire the stock. The disclosure requirements of SFAS
No. 123 are effective for financial statements for fiscal years
beginning after December 15, 1995. Pro forma disclosures required
for entities that elect to continue to measure compensation cost
using APB No. 25 must include the effects of all awards granted in
fiscal years that begin after December 15, 1994. The Company has
decided to continue to measure compensation cost for stock-based
compensation as prescribed by APB No. 25.
Earnings 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.
The consolidated financial statements include the accounts of
Capital Bancorp (the "Parent Company"), Capital Bank (the "Bank")
and its subsidiaries, and Capital Factors Holding, Inc. and its
subsidiaries ("Capital Factors") and Capital Factors Financing
Trust, a special purpose trust. All significant inter-company
transactions and balances have been eliminated in consolidation.
In the opinion of management, the interim consolidated financial
statements reflect all adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of the
information contained therein. The interim results of operations
are not necessarily indicative of the results which may be expected
for the full year.
NOTE 2: Risk Elements - Loans and Advances
- ------------------------------------------
Foreign Outstandings
- --------------------
Foreign outstandings included in the loan portfolio consisted of
the following (in thousands of dollars):
March 31, December 31,
1996 1995
-------------- ----------------
Performing trade credits $117,164 $124,501
Other performing loans 2,841 1,050
Non-accrual loans 3,495 2,072
-------- --------
$123,500 $127,623
======== ========
Page 5
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<PAGE>
Performing trade credits consist primarily of refinanced letters of
credit, acceptances purchased and pre-export financings principally
to banks that are located in foreign countries. Cash collateral
maintained at the Bank as offsets to outstanding foreign loans
totaled $20.1 million at March 31, 1996 compared to $19.2 million
at year end 1995. In addition to the outstanding foreign loans, at
March 31, 1996 and December 31, 1995 there were $17.9 million and
$29.6 million, respectively, due primarily from foreign customers
on acceptances, offset by $2.3 million and $4.3 million,
respectively, of cash collateral maintained at the Bank.
The following is a list of cross border outstandings at March 31,
1996 and December 31, 1995 for those countries for which the total
amount of outstandings (loans, acceptances, acceptances purchased,
pre-export financing and other interest bearing 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 that may be
netted against the outstandings, exceeds 1% of consolidated total
assets at the respective dates (in thousands of dollars):
March 31, December 31,
1996 1995
----------- -----------
Argentina $17,627 Argentina $16,350
Brazil 22,188 Brazil 23,187
Guatemala 18,114
Peru 18,510
------- -------
$39,815 $76,161
======= =======
At March 31, 1996, the Bank had cross border outstandings to Peru,
El Salvador and Ecuador aggregating $14.9 million, $14.5 million
and $13.4 million, respectively, which exceeded .75%, but were less
than 1% of consolidated total assets. At December 31, 1995, the
Bank had cross border outstandings to Ecuador and El Salvador
aggregating $14.4 million and $13.6 million, respectively, which
exceeded .75%, but were less than 1% of consolidated total assets.
At March 31, 1996 and December 31, 1995 the Bank held other
interest earning assets of $7.0 million and $7.2 million,
respectively, issued by debtors located in foreign countries.
Impaired Loans
- --------------
At March 31, 1996 and December 31, 1995, the recorded investment in
loans that was considered impaired under SFAS No. 114 was $9.7
million and $7.8 million, respectively. Measurement for impairment
of $8.4 million and $6.8 million at March 31, 1996 and December 31,
1995, respectively, of these loans was based on the present value
of projected cash flows, and the remainder was measured based on
the estimated value of collateral. These loans required a SFAS No.
114 reserve for possible credit losses of $3.3 million and $1.8
million which is included within the overall allowance for loan
losses at March 31, 1996 and December 31, 1995, respectively. The
average recorded investment in impaired loans during the three
months ended March 31, 1996 and 1995 was $9.6 million and $2.1
million, respectively. For the three months ended March 31, 1996
and 1995, the Company recognized interest income on these loans of
$157,000 and $4,000, respectively, all of which related to accrual
basis loans.
Non-accrual and Past Due Loans and Advances
- ------------------------------------------
Management evaluates past due and non-accrual loans and advances
regularly in connection with estimating the provisions and the
allowances for loan losses and doubtful accounts, taking into
consideration the value of collateral and the prospects for
repayment of principal and collectibility of interest. Loans and
advances are classified on a non-accrual basis when management
deems that collectibility of interest is doubtful, which is
generally after 90 days of past due status, unless the loan or
advance is well secured and in the process of collection. Charge
offs to the allowances are made when a loss is deemed probable.
At March 31, 1996 there were $827,000 of loans that were over 90
days past due and still accruing interest, as compared to $1.1
million at December 31, 1995. Included in loans 90 days past due
and still accruing interest were real estate, commercial and
consumer loans of $399,000, $314,000 and $114,000, respectively, at
March 31, 1996 as compared to real estate, commercial and consumer
loans of $689,000, $281,000 and $162,000, respectively, at December
31, 1995. Loans which are over 90 days past due and still accruing
interest are in the process of collection and deemed to be well
secured.
Page 6
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<PAGE>
Following is a summary of non-accrual loans and advances (in
thousands of dollars):
March 31, December 31,
1996 1995
----------- ------------
Commercial loans $ 1,248 $ 1,164
Foreign loans 3,495 2,072
Real estate loans 2,743 1,664
Consumer loans 1,891 1,990
------- -------
Total 9,377 6,890
Advances 2,436 2,184
------- -------
Total non-accrual loans
and advances $11,813 $ 9,074
======= =======
The increase in non-accrual loans and advances is primarily the
result of the transfer of several foreign loans with a Panamanian
bank and three real estate mortgage loans from accrual status to
non-accrual status offset by one real estate mortgage loan that was
foreclosed upon and transferred to other real estate. The increase
in non-accrual advances is primarily the result of advances
aggregating $1.5 million from one client which were placed on non-
accrual status in the first quarter of 1996, and subsequently
collected in full in April 1996. This first quarter increase in
non-accrual advances was offset primarily as the result of the
repayment in early 1996 of $1.2 million of advances that were on
non-accrual at year end. Management has instituted collection
procedures in connection with non-accrual loans and advances and
has established allowances for loan losses and doubtful accounts
deemed adequate to absorb potential losses, based on information
currently available. Many of the factors considered in
management's determination as to the adequacy of the allowances
involve a significant degree of estimation and are subject to rapid
changes that may be unforeseen by management. Changes to these
factors could result in future adjustments to the allowance for
loan losses.
NOTE 3: Litigation
- -------------------
The Company and certain of its present and former directors and
officers are defendants in two lawsuits, one of which is a
shareholder derivative suit. Such suits allege that certain of the
defendants engaged in a number of allegedly improper and illegal
activities. No monetary relief is sought from the Company other
than costs in the non-derivative action. The Company does not
believe that the outcome of the foregoing litigation will have a
material adverse effect on the consolidated financial condition,
results of operations or liquidity of the Company.
In addition to these lawsuits, various legal actions and
proceedings are pending or are threatened against the Company, the
Bank and Capital Factors, some of which seek relief or damages in
amounts that are substantial. Unlike the aforementioned matters,
however, these actions or proceedings arose in the ordinary course
of business. Due to the complex nature of some of these matters,
it may be a number of years before they are ultimately resolved.
After consultation with legal counsel, management believes the
aggregate liability, if any, to the Company, the Bank and/or
Capital Factors resulting from such pending or threatened actions
and proceedings will not have a material adverse effect on the
Company's consolidated financial condition, results of operations
or liquidity.
Page 7
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<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL BANCORP AND SUBSIDIARIES
INTRODUCTION
- ------------
Capital Bancorp ("Bancorp") is a bank holding company which
conducts operations principally through Capital Bank (the "Bank"),
a wholly-owned subsidiary, and Capital Factors Holding, Inc., a
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 - MARCH 31, 1996 VS. DECEMBER 31, 1995
- ----------------------------------------------------------
Overview
- --------
Total consolidated assets decreased $49.1 million, or 3%, during
the first three months of 1996. This decrease included decreases
of $21.4 million in interest earning assets and $27.7 million in
non-interest earning assets. The decrease in total consolidated
assets was comprised primarily of decreases of $60.9 million in
cash and cash equivalents, $14.2 million in total securities and
$11.5 million in net loans, and was offset by an increase of $44.9
million in net accounts receivable - factoring subsidiary.
The decrease in total consolidated assets is primarily the result
of deposit outflows. Total deposits decreased $53.8 million, or
5%. Total consolidated liabilities decreased $51.8 million and
included decreases of $15.5 million in interest bearing balances
and $36.3 million in non-interest bearing balances. Total equity
increased $2.7 million, to $116.4 million, primarily as a result of
earnings in excess of dividends declared.
Securities
- ----------
The decrease in total securities primarily consisted of maturities
and paydowns during the first three months of 1996 totaling $40.2
million and an increase in the unrealized loss on securities
available for sale of $1.9 million. Proceeds from these maturities
and paydowns were used to purchase $27.9 million of securities and
to fund other investing and financing activities.
Loans
- -----
During the first three months of 1996, total loans decreased $11.8
million, or nearly 2%, with decreases primarily in commercial and
foreign loans offset by an increase in real estate loans.
At March 31, 1996 commercial loans totaled $197.3 million of which
$33.3 million were asset-based loans at Capital Factors.
Commercial loans decreased $10.0 million, or nearly 5%, reflecting
primarily a decrease of $5.0 million in asset-based loans. Such
loans are collateralized primarily by receivables owned by the
borrowers. The risks associated with asset-based lending are
similar to those involved in Capital Factors' traditional factoring
activities and primarily involve the credit quality of the
receivables accepted as collateral. The experience in monitoring
receivables that Capital Factors has gained through its traditional
factoring activities is expected to be beneficial in managing this
activity.
Foreign loans decreased $4.1 million, or 3%, to $123.5 million,
primarily due to the sale of several international loans to other
banks in connection with risk management strategies. 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 for new
residential developments and short-term (5-7 years) first mortgages
on income producing properties. Real estate construction loans
increased $6.1 million, or 7%, during the first three months of
1996 as a result of new home demand in the Company's South Florida
market area. Real estate construction loans totaled $90.5 million
at March 31, 1996, while real estate mortgage loans aggregated
$145.2 million and $147.1 million at March 31, 1996 and December
31, 1995, respectively.
Page 8
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<PAGE>
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 $123.5 million and $123.4 million
of total consumer loans at March 31, 1996 and December 31, 1995,
respectively. Consumer loans totaled $158.2 million and $159.5
million at March 31, 1996 and December 31, 1995, respectively.
Accounts Receivable - Factoring Subsidiary
- ------------------------------------------
Accounts receivable - factoring subsidiary, net increased $44.9
million, or 14%, to $361.4 million as a result of an overall
increase in factoring volume. 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 $226.6 million at March 31,
1996, compared to $194.3 million at December 31, 1995. Balances
due to factoring clients for receivables purchased amounted to
$141.6 million and $128.6 million at March 31, 1996 and December
31, 1995, respectively. Non-accrual advances amounted to $2.4
million and $2.2 million at March 31, 1996 and December 31, 1995,
respectively, and are considered in the assessment of the allowance
for doubtful accounts for adequacy (see "Provision for Credit
Losses - Factoring Subsidiary" below).
Cash and Cash Equivalents
- -------------------------
The decrease in cash and cash equivalents was composed of decreases
of $35.9 million in cash and due from banks and $25.0 million in
federal funds sold and securities purchased under agreements to
resell. The decrease in cash and due from banks was primarily due
to a net outflow of deposits, including the repayments of $36.0
million in short-term balances which were part of deposits at
December 31, 1995.
Deposits
- --------
Total deposits amounted to $985.0 million at March 31, 1996 and
$1,038.8 million at December 31, 1995. The decrease in total
deposits included decreases of $44.4 million in non-interest
bearing deposits and $11.0 million in time deposits. Domestic
deposits decreased by $58.5 million primarily as a result of the
repayment of $21.0 million in U.S. Treasury demand deposits and
$15.0 million in brokered time deposits in January 1996. Such
deposits were received and repaid in the normal course of business
and this activity is not indicative of any known trends. The
remaining decrease in non-interest bearing deposits is the result
of deposit outflows in the normal course of business.
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 $174.9 million at March
31, 1996 and $170.2 million at December 31, 1995, representing 18%
and 16% of total deposits, respectively. The level of these
deposits is, in part, related to the level of trade finance
activity conducted by the Company, and is also affected by economic
trends in foreign countries.
Short-Term Borrowings
- ---------------------
The Company's short-term borrowings primarily represent securities
sold under agreements to repurchase on an overnight basis involving
retail customers. From time to time, the Company may also access
wholesale repurchase sources for seven to 90 day periods for short-
term liquidity management purposes. Retail repurchase agreements
decreased $6.1 million to $80.1 million during the first three
months of 1996.
CAPITAL RESOURCES
- -----------------
Stockholders' equity increased $2.7 million during the first three
months of 1996 as a result of net income of $4.4 million offset by
an increase in the unrealized loss on securities available for sale
of $1.2 million (net of tax) and dividends declared of $622,000.
Page 9
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<PAGE>
The Florida Department of Banking and Finance (the "FDBF"), 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
FDBF.
At March 31, 1996 and December 31, 1995, the regulatory capital
ratios of the Company and the Bank were as follows:
Minimum
Requirement
Company Bank Of
------------------ ------------------ ---------
3/31/96 12/31/95 3/31/96 12/31/95
------- -------- ------- --------
Leverage ratio 7.64% 7.25% 7.29% 6.97% 3%*
Tier One ratio 10.13% 9.99% 9.65% 9.58% 4%
Total ratio 11.36% 11.24% 10.88% 10.83% 8%
- ------------------
*Banking regulators expect institutions to maintain an excess of 1
to 2% above the minimum.
In the opinion of management, these ratios are sufficient to
protect depositors and facilitate future growth. In March 1996,
pursuant to discussions with its regulatory authorities, the
Company and the Bank began including certain assets of Capital
Factors in its capital ratio calculations which historically had
not been included. The December 31, 1995 capital ratios have been
recalculated to include the Capital Factors' assets. If such
assets were not included, the Company's and the Bank's capital
ratios would have been higher.
The Company's management continuously reviews capital adequacy.
The various alternatives for generating equity from internal and
external sources are constantly under review to ascertain the most
effective approach for the Company. The Company has traditionally
provided most of its capital through retained earnings. For the
first three months of 1996 and 1995, the Company's annualized
internal capital generation ratio was 13.37% and 13.73%,
respectively.
Bancorp currently pays stockholder dividends of 8.33 cents per
share per quarter. This dividend policy is dependent upon the
ability of the Bank and its subsidiaries to continue the payment of
dividends to Bancorp. Unforeseen changes in the financial
condition of the Bank and its subsidiaries, or actions by
regulatory authorities, could result in changes in the dividend
policy.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
- ----------------------------------------
Liquidity
- ---------
Liquidity represents the Company's ability to meet customers'
borrowing needs, take advantage of investment opportunities, fund
deposit withdrawals and maintain reserve requirements. On the
asset side, the primary sources of liquidity are cash and due from
banks, interest bearing deposits with banks, Federal funds sold and
other short-term investments, scheduled maturities and paydowns of
securities held to maturity, securities available for sale and
scheduled repayments on outstanding loans and receivables. The
liquidity available from any of the foregoing sources is reduced to
the extent they are pledged against any liabilities or otherwise
restricted. On the liability side, the principal source of
liquidity is growth in deposits and other borrowings. These
primary sources of liquidity are supplemented by cash flows from
the Company's operating activities.
The liquidity position is monitored daily by management to maintain
a level of liquidity conducive to efficient operations and is
continuously evaluated as part of the asset/liability management
process (as discussed further in the next section) to maintain
liquidity levels conducive to efficient operations. Considerations
in managing the Company's liquidity position include scheduled cash
flows from existing assets and liabilities, as well as projected
liquidity needs arising from commitments to lend.
Cash and cash equivalents totaled $153.0 million and $213.9 million
at March 31, 1996 and December 31, 1995, respectively. During the
first quarter of 1996, the Company utilized $60.4 million and $10.6
million in financing and investing activities, respectively, while
generating $10.0 million from operating activities.
Page 10
- ------------------------------------------------------------------
<PAGE>
During the first three months of 1996, the Company utilized net
cash of $60.4 million in its financing activities, primarily as a
result of $53.8 million from deposit outflows. The deposit
outflows included the repayment of $36.0 million in short-term
balances in early 1996, as discussed above. Deposit outflows
occurred in the normal course of business and are not indicative of
any known trends. Deposits are expected to remain a primary source
of liquidity.
The Company's investing activities utilized $10.6 million of cash
flows during the first quarter of 1996. Net new advances by
Capital Factors amounted to $33.0 million, while loan repayments
and sales generated $10.3 million in excess of originations.
Additionally, maturities and paydowns of securities in excess of
purchases generated $12.3 million of liquidity. Supplementing cash
flows, Capital Factors entered into a revolving credit facility
with an unaffiliated bank for $40.0 million. At March 31, 1996
Capital Factors had not drawn on this line of credit; however, at
April 30, 1996, $21.0 million was outstanding.
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 March 31,
1996, the Company had outstanding commitments to extend credit,
commercial letters of credit and standby letters of credit
amounting to $174.2 million, $87.3 million and $16.9 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 the Bank's ability to continue the payment of
dividends. The ability of the Bank to pay dividends is governed by
Florida statutes. At periodic intervals, state or federal
regulatory agencies routinely examine Bancorp and the Bank as part
of their legally prescribed oversight of the banking industry and
may further restrict the payment of dividends or other activities
by regulatory action. At March 31, 1996 the Bank was not subject
to any restrictions other than statutory.
For the remainder of 1996, Bancorp's estimated debt service and
stockholder dividend requirements total approximately $2.9 million.
At March 31, 1996, Bancorp had available cash balances of $6.5
million. Management believes liquidity at March 31, 1996 was
satisfactory.
Asset/Liability Management and Interest Rate Risk
- -------------------------------------------------
The Company's exposure to interest rate changes is managed by a
review of the maturity and repricing characteristics of assets and
liabilities, as well as the composition of these items. Attention
is directed primarily to assets and liabilities that mature or can
be repriced within a period of 30 to 365 days. The Company matches
the maturities of a significant portion of its assets and
liabilities to minimize variability in net interest income within
a 12 to 18 month period. This practice serves to minimize both
liquidity and interest rate risks. Prudent risks are taken,
however, by leaving certain assets and liabilities unmatched in an
effort to benefit from the interest rate sensitivity created. The
Company currently does not use off balance sheet derivative
instruments to manage interest rate risk.
Maintenance of satisfactory funding levels allows the Company to
position itself so that the risks of interest rate fluctuations are
decreased. This, together with a high percentage of variable rate
assets, provides a more consistent margin between interest earning
assets and interest bearing liabilities. For the first three
months of 1996, the average yield on interest earning assets was
9.16%. For the first three months of 1996, the average rate paid
on interest bearing deposit liabilities was 4.28%, while the
average rate paid for other interest bearing liabilities was 6.33%.
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.
Page 11
- ------------------------------------------------------------------
<PAGE>
Following is a summary analysis of maturity and repricing
characteristics of the Company's interest earning assets and
interest bearing liabilities at March 31, 1996. For purposes of
this analysis, regular passbook savings and NOW and money market
accounts are included as repricing in 90 days or less. The
difference between the maturities and repricing intervals
applicable to interest earning assets and interest bearing
liabilities is commonly referred to as the "gap."
<TABLE>
INTEREST RATE SENSITIVITY BY MATURITY
OR REPRICING DATES
(In Millions of Dollars)
<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 $ 29.9 $ 12.8 $ 35.3 $ 148.3 $ 226.3
Loans(1) 382.9 57.0 36.2 231.4 707.5
Other earning
assets(2) 283.7 -- -- -- 283.7
------ ------ ------ ------- -------
Total interest
earning assets 696.5 69.8 71.5 379.7 1,217.5
------ ------ ------ ------- -------
Interest bearing liabilities:
Interest bearing
deposits 437.4 105.4 92.8 57.5 693.1
Short-term borrowings 80.1 -- -- -- 80.1
Long-term debt 176.7 -- -- -- 176.7
------ ------ ------ ------- -------
Total interest
bearing liabilities 694.2 105.4 92.8 57.5 949.9
------ ------ ------ ------- -------
Gap 2.3 (35.6) (21.3) 322.2 $ 267.6
------ ------ ------ ------- =======
Cumulative Gap $ 2.3 $(33.3) $(54.6) $ 267.6
====== ====== ====== =======
- -------------------------
(1) Excludes non-accrual loans of $9.4 million.
(2) Excludes non-accrual advances of $2.4 million.
</TABLE>
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 March 31, 1996, the Company's
cumulative one-year gap was negative $54.6 million, or
approximately 5% of total earning assets. Management does not
believe the Company's operating results will be significantly
impacted by changes in interest rates over the next year.
Page 12
- ------------------------------------------------------------------
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1996 AND 1995
- ------------------------------------------------------------------
General
- -------
The Company recorded net income of $4.4 million for the three
months ended March 31, 1996 compared to $3.7 million for the three
months ended March 31, 1995. Primary and fully diluted earnings
per share both were $.54 for the three months ended March 31, 1996
compared to $.50 for the same period in 1995 (adjusted for the 3-
for-2 stock split in the form of a 50% stock dividend declared in
June 1995). For the three months ended March 31, 1996, the
Company's annualized return on average assets was 1.15% compared to
1.13% for the same period in 1995. The annualized return on
average stockholders' equity was 15.34% in 1996 compared to 15.87%
in 1995. The increase in income for the three months ended March
31, 1996 compared to the same period in 1995, was primarily a
result of lower other operating expenses, higher factoring revenue
and improved net interest margin offset by higher provisions for
credit losses and higher salaries and employee benefits.
Lines of Business
- --------------------
Set forth below is a summary of operating results for the Company's
domestic and international banking activities, as well as its
factoring activities. Revenues and expenses relating to factoring
activities are generally segregated and are easily identifiable.
Non-interest revenues and expenses associated with banking
activities include allocations of certain items based on
management's assumptions, some of which are subjective in nature.
Furthermore, interest income and expense of banking activities
reflect funds transfer pricing which, while based on the Bank's
actual external costs, may not reflect actual results which may be
achieved on a stand-alone basis.
BUSINESS SEGMENT DATA
(In Thousands of Dollars)
For the Three Months Ended March 31,
-------------------------------------------
1996 1995
---- ----
Interest income and
non-interest income:
Domestic banking activities $ 23,518 $ 22,055
Foreign banking activities 3,545 3,547
---------- ----------
Total banking activities 27,063 25,602
Factoring activities 13,926 11,106
Intercompany (1,266)(1) (1,090)(1)
---------- ----------
Total $ 39,723 $ 35,618
========== ==========
Income before income taxes:
Domestic banking activities $ 5,684 $ 1,917
Foreign banking activities 22 2,426
---------- ----------
Total banking activities 5,706 4,343
Factoring activities 3,129 3,070
Corporate and other (1,754)(2) (1,507)(2)
---------- ----------
Total $ 7,081 $ 5,906
========== ==========
- -------------------------
(1) Inter-company revenues primarily reflects the related interest
income on loan balances payable by Capital Factors to Capital
Bank.
(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.
Page 13
- ------------------------------------------------------------------
<PAGE>
Interest income derived from domestic banking activities amounted
to $19.4 million and $17.4 million for the three months ended March
31, 1996 and 1995, respectively. Net interest income amounted to
$12.2 million and $11.9 million in the respective periods. The
increase in net interest income in 1996 compared to 1995 was due
primarily to higher levels of average earning assets offset by a
decline in the net interest margin due to higher funding costs.
Non-interest income from domestic banking activities amounted to
$4.1 million and $4.6 million in 1996 and 1995, respectively. The
decrease in non-interest income in 1996 compared to 1995 was
primarily due to a decrease of $399,000 in service charges on
deposits. Operating results from domestic activities were higher
primarily as a result of lower operating expenses and lower
provisions for domestic loan losses. Operating expenses were lower
primarily as a result of higher overdraft losses in the first
quarter of 1995 relating to the $1.4 million provision for
potential losses with one customer. Additionally, based on
management's assessment of the allowance for loan losses, a credit
of $600,000 was recorded to the allowance for domestic loan losses
in 1996 compared to a provision of $1.4 million in 1995. The
improved credit quality of the portfolio resulted in a credit to
the allowance in 1996.
The Company does not operate any foreign offices. Foreign banking
operations principally arise from the Company's trade finance
lending to and issuance of letters of credit on behalf of banks and
financial institutions located in Central and South America.
Interest income from foreign banking activities amounted to $2.4
million and $2.5 million in 1996 and 1995, respectively. Net
interest income amounted to $1.4 million and $1.6 million in 1996
and 1995, respectively. Net interest income reflects a decrease in
1996 compared to 1995 primarily as a result of a decrease in the
net interest margin. Non-interest income from foreign banking
activities primarily represents letter of credit fees and amounted
to $1.2 million and $1.0 million in 1996 and 1995, respectively.
Operating results from foreign banking activities were also
affected by provisions for loan losses, which amounted to $1.2
million in 1996 and a credit of $1.1 million to the allowance for
foreign loan losses in 1995. The 1996 provision reflects
approximately $1.1 million for certain exposures to a Panamanian
bank for which the Central Bank suspended operations during the
first quarter. The 1995 credit reflects approximately $1.1 million
in recoveries of 1994 charge offs and the improvement of other
potential problem foreign loans.
The Company's factoring activities continued to grow in 1996, due
primarily to the signing of new clients. Total revenues, which
includes interest income and non-interest income, increased 25%
over the first quarter in 1995 to $13.9 million for the three
months ended March 31, 1996, while operating profits remained
relatively unchanged. Non-interest income, which primarily
represents factoring commissions, amounted to $6.6 million and $5.2
million in 1996 and 1995, respectively, reflecting increased
factored accounts receivable from $441.2 million in 1995 to $564.0
million in 1996. Interest income was $7.4 million and $5.9
million, while net interest income was $3.0 million and $2.5
million in 1996 and 1995, respectively. Growth in average interest
earning assets, primarily in advances due to business development,
gave rise to these increases. The increases in net interest income
and non-interest income were substantially offset by increases in
operating expenses and the provision for doubtful accounts. The
increase in operating expenses was primarily the result of the
expansion of factoring activities. The increase in the provision
in 1996 was the result of greater charge offs.
Net Interest Income
- -------------------
The table on pages 16 and 17 set forth information on yields earned
and rates paid by the Company for the three month periods ended
March 31, 1996 and 1995, and should be reviewed when reading the
following net interest income analysis. Yield and interest on tax-
exempt loans and securities have been adjusted to reflect tax-
equivalent basis using the Federal tax rate of 35%. Loans and
accounts receivable 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.
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
$16.6 million and $16.0 million for the three months ended March
31, 1996 and 1995, respectively. Loan fees included in net
interest income amounted to $451,000 and $396,000 in 1996 and 1995,
respectively. Net interest income on a fully tax-equivalent basis,
including loan fees, totaled $16.9 million in 1996 compared to
$16.3 million in 1995.
Net interest income can be viewed as the product of average earning
assets and the net interest margin. Net interest income in the
first three months of 1996 increased $582,000 over the same period
in 1995, comprised of an increase of $3.2 million in interest
income offset by an increase of $2.6 million in interest expense.
The increase in net interest income was due to an increase in
average interest earning assets to $1.238 billion in 1996 from
$1.069 billion in 1995, offset by a decline in the net interest
margin to 5.47% in 1996 from 6.24% in 1995. Average interest
bearing liabilities increased to $945.5 million in 1996 from $815.4
million in 1995. The increase in average interest bearing
liabilities occurred primarily in time deposits and long-term
borrowings at Capital Factors. While average interest earning
assets and average interest bearing liabilities increased
approximately 16%,
Page 14
- ------------------------------------------------------------------
<PAGE>
the decline in the net interest margin primarily reflects a shift
in the mix of average interest bearing deposits. Average time
deposits increased $127.4 million or 45%, for the first quarter of
1996 to $409.4 million and represented 59% of average total
interest bearing deposits. Average time deposits for the first
quarter of 1995 totaled $282.0 million and represented 48% of
average total interest bearing deposits. Also, contributing to the
decline in the net interest margin was the increase in rates paid
for interest bearing deposits; 87% of the increase in interest
expense was attributable to interest expense on deposits.
See Asset/Liability Management and Interest Rate Risk above for a
discussion of factors that may affect net interest income.
Page 15
- ------------------------------------------------------------------
<PAGE>
<PAGE>
<TABLE>
YIELDS EARNED AND RATES PAID
(All Dollar Amounts in Thousands)
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------
1996 1995
----------------------------- ---------------------------
Average Average
Average Yield Average Yield
Balance Interest Or Rate Balance Interest Or Rate
---------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <S> <C> <C>
ASSETS
Interest earning assets:
Loans, net of unearned income:
U.S. Borrowers $ 576,602 $ 14,458 10.08% $ 515,468 $ 12,735 10.02%
Foreign Borrowers 133,234 2,398 7.24 122,043 2,507 8.33
Tax Exempt 17,305 697 16.20 20,450 844 16.75
---------- --------- ----- ---------- -------- -----
Total loans 727,141 17,553 9.71 657,961 16,086 9.92
Accounts receivable
advances - factoring
subsidiary 204,615 6,032 11.86 171,478 5,388 12.74
Securities:
Securities held to maturity:
Taxable 20,799 411 7.95 82,716 1,282 6.29
Tax-exempt 3,092 83 10.75 3,640 97 10.79
Securities available for sale:
Taxable 211,318 3,163 6.02 128,173 1,914 6.06
Federal funds sold
and other interest earning
assets 71,379 976 5.50 24,960 352 5.72
---------- --------- ----- ---------- -------- -----
Total interest earning
assets 1,238,344 28,218 9.16 1,068,928 25,119 9.53
--------- --------
Less allowance for loan losses
and doubtful accounts (14,623) (11,280)
Cash and due from banks 88,208 83,600
Due from customers on
acceptances 28,565 28,687
Other real estate 6,792 13,663
Other assets 188,207 148,317
---------- ----------
Total $1,535,493 $1,331,915
========== ==========
</TABLE>
Page 16
- ------------------------------------------------------------------
<PAGE>
<TABLE>
YIELDS EARNED AND RATES PAID
(All Dollar Amounts in Thousands)
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------
1996 1995
----------------------------- ---------------------------
Average Average
Average Yield Average Yield
Balance Interest Or Rate Balance Interest Or Rate
---------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Deposits:
Savings and Money Market $ 279,467 $ 1,711 2.46% $ 310,624 $ 1,733 2.26%
Time 409,419 5,619 5.52 282,002 3,345 4.81
---------- --------- ----- ---------- -------- -----
Total interest bearing
deposits 688,886 7,330 4.28 592,626 5,078 3.47
Short-term borrowings 79,931 898 4.52 95,780 1,274 5.39
Long-term borrowings 176,650 3,139 7.15 126,980 2,441 7.80
---------- --------- ----- ---------- -------- -----
Total interest bearing
liabilities 945,467 11,367 4.84 815,386 8,793 4.37
---------- --------- ----- ---------- -------- -----
Non-interest bearing
deposits 305,495 289,069
Bank acceptances outstanding 28,565 28,687
Other liabilities 140,531 104,502
Stockholders' equity 115,435 94,271
---------- ----------
Total liabilities and
stockholders' equity $1,535,493 $1,331,915
========== ==========
Net interest earnings/
yield $ 16,851 5.47% $ 16,326 6.24%
========= ===== ======== =====
Net interest spread 4.32% 5.16%
====== =====
Utilization rate 80.65% 80.25%
====== =====
</TABLE>
Page 17
- ------------------------------------------------------------------
<PAGE>
<PAGE>
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 March 31,
1996, management is unable to predict the amount, if any, of future
provisions to the allowance. For additional information, see
"Allowance for Loan Losses" below.
For the first three months of 1996, the provision for loan losses
was $600,000 compared to $375,000 in 1995. The higher provision in
1996 primarily reflects higher levels of provisions for non-
performing foreign loans. See "Allowance for Loan Losses" for
additional discussion.
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 because 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.
For the first three months in 1996, the provision for doubtful
accounts amounted to $1.1 million compared to $450,000 for the same
period in 1995. This increase is primarily the result of greater
charge offs. See "Allowance for Doubtful Accounts - Factoring
Subsidiary" for additional discussion. For the three months ended
March 31, 1996 and 1995, net charge offs as a percentage of
accounts receivable purchased was .25% and .06%, respectively. For
the same periods, the percentage of provisions for credit losses to
accounts receivable purchased was .20% and .11%, respectively.
Based on these relationships, and a review of the recorded
allowance and accounts receivable at each period end, management
believes the provisions and allowance to be adequate to absorb
known and inherent losses in the accounts receivable portfolio.
Because the assessment of the adequacy of the allowance and
provisions for credit losses 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 increased $949,000, or 9% for the three months ended
March 31, 1996 compared to the same period in 1995. The increase
in other income primarily consisted of an increase of $1.3 million
in factoring revenues offset by a decrease of $399,000 in service
charges on deposits.
The Company, through Capital Factors, operates factoring offices in
Fort Lauderdale, Florida, Los Angeles, California, New York, New
York and Charlotte, North Carolina. Total accounts receivable
factored amounted to $564.0 million and $441.2 million during the
first three months of 1996 and 1995, respectively, representing an
increase of 27.8%. Factoring commissions amounted to $6.5 million
or 55% of total other income for the three months ended March 31,
1996 compared to $5.2 million or 48% of total other income for the
same period in 1995. The growth in factoring commissions is
attributable to overall expansion of factoring activities.
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 1.18% in 1995 to 1.15% in 1996. 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 clients' business.
Page 18
- -------------------------------------------------------------------
<PAGE>
Service charges on deposits amounted to $3.0 million or 25% of
total other income in the 1996 period compared to $3.4 million or
31% of total other income in 1995. Service charges on deposits
decreased mainly due to a decrease of $377,000 in net overdraft
charges.
Other Expenses
- --------------
Other expenses decreased $519,000, or 3%, consisting primarily of
a decrease of $1.5 million in other operating expenses offset by an
increase of $736,000 in salaries and employee benefits. The
decrease in other operating expenses primarily reflects the March
1995 $1.4 million provision to reserve for potential losses
resulting from overdrafts related to one customer (see further
discussion below). The increase in salaries and employee benefits
primarily reflects increases at Capital Factors due to expansion of
factoring activities.
For the first three months of 1996, provisions for losses on
overdrafts totaled $121,000, compared to $1.7 million for the
comparable period of 1995. The increased provision for the first
quarter of 1995 resulted from one customer who created net
overdrafts of approximately $2.7 million in connection with
transactions occurring over a period of approximately two weeks.
To mitigate the risk that similar losses may occur in the future,
internal review and approval procedures were strengthened by
management. At March 31, 1996 and December 31, 1995, total
overdraft balances amounted to $2.4 million and $3.2 million,
respectively, and were included in loans in the consolidated
balance sheet. Management does not anticipate any material losses
associated with overdraft balances at March 31, 1996.
Provision (Benefit) for Income Taxes
- ------------------------------------
The Company's effective tax rate varies with changes primarily in
the derivation of pre-tax income by state, in the proportion of tax
exempt income and in corporate tax rates. The provision for income
taxes aggregated 38% of pre-tax income for the three months ended
March 31, 1996 and 1995.
Impact of Inflation and Changing Prices
- ---------------------------------------
The impact of inflation on the Company is reflected primarily in
the increased costs of operations. These increased costs are
generally passed on to customers in the form of increased service
fees. Since the primary assets and liabilities of the Company are
monetary in nature, the impact of inflation on interest rates has,
and is expected to continue to have, an effect on net income.
In structuring fees, negotiating loan margins and developing
customer relationships, management concentrates its efforts on
maximizing earnings capacity while attempting to contain increases
in operating expenses. In addition, management continually reviews
the feasibility of new and additional fee-generating services to
offset the effects of inflation and changing prices with an
objective of increased earnings.
New Accounting Pronouncements
- -----------------------------
In October 1995 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock Based Compensation." This statement requires
certain disclosures about stock-based employee compensation
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 method, compensation
cost is the excess, if any, of the quoted market price of the stock
at grant date or other measurement date over the amount an employee
must pay to acquire the stock. The disclosure requirements of SFAS
No. 123 are effective for financial statements for fiscal years
beginning after December 15, 1995. Pro forma disclosures required
for entities that elect to continue to measure compensation cost
using APB No. 25 must include the effects of all awards granted in
fiscal years that begin after December 15, 1994. The Company has
decided to continue to measure compensation cost for stock-based
compensation as prescribed by APB No. 25.
Page 19
- ------------------------------------------------------------------
<PAGE>
ASSET QUALITY REVIEW
- --------------------
The following table summarizes the Company's non-accrual loans and
advances, past due loans, other potential problem loans and
restructured loans and assets as of the dates indicated (in
thousands of dollars):
March 31, December 31,
1996 1995
--------- ------------
Non-accrual
loans:
Domestic $ 5,882 $ 4,818
Foreign 3,495 2,072
90 days past due
or more:
Domestic 827 1,132
Foreign -- --
-------- --------
Sub total 10,204 8,022
Non-accrual advances 2,436 2,184
-------- --------
Total $ 12,640 $ 10,206
======== ========
Other potential
problem loans $ 7,347 $ 7,697
======== ========
Restructured
loans (1) $ 8,405 $ 8,433
======== ========
Restructured
assets (2) $ 3,010 $ 3,137
======== ========
- -------------------------
(1) Represents troubled debt restructurings as defined by
Statement
of Financial Accounting Standards No. 15. These loans were in
compliance with terms at March 31, 1996.
(2) Represents securities available for sale (at market value)
received in connection with restructured foreign loans. These
bonds were in compliance with terms at March 31, 1996.
Domestic non-accrual loans aggregated $5.9 million at March 31,
1996, compared to $4.8 million at year end 1995. Domestic non-
accrual loans aggregated 1.0% and .8% of total domestic loans at
March 31, 1996 and December 31, 1995, respectively. The increase
in domestic non-accrual loans resulted primarily from the transfer
of three real estate mortgage loans from accrual status to non-
accrual status offset by one real estate mortgage loan that was
foreclosed upon and transferred to other real estate.
Foreign non-accrual loans aggregated $3.5 million and $2.1 million
at March 31, 1996 and December 31, 1995, respectively. Foreign
non-accrual loans represented 2.8% and 1.6% of total foreign loans
at March 31, 1996 and December 31, 1995, respectively. The
increase in foreign non-accrual loans is primarily the results of
the transfer of several foreign loans with a Panamanian bank from
accrual status to non-accrual status. See "Allowance for Loan
Losses" below for additional discussion.
Impaired loans aggregated $9.7 million and $7.8 million at March
31, 1996 and December 31, 1995, respectively. Included in impaired
loans at March 31, 1996 and December 31, 1995 were $6.0 million and
$5.5 million, respectively, of loans still accruing interest, and
$3.7 million and $2.3 million, respectively of non-accrual loans.
Those impaired loans that are still accruing interest income are
included in other potential problem loans. The increase in
impaired loans is primarily the result of loans with a Panamanian
bank for which operations were suspended in early 1996 by the
National Banking Commission. See "Allowance for Loan Losses" for
additional discussion. Those non-accrual loans that are not
included in impaired loans are deemed to be well secured in order
to fully realize the Bank's investment in these loans.
Page 20
- ------------------------------------------------------------------
<PAGE>
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 $2.4 million at March
31, 1996, compared to $2.2 million at December 31, 1995. See
"Provision for Credit Losses - Factoring Subsidiary" above and
"Allowance for Doubtful Accounts - Factoring Subsidiary" below for
additional information. The increase at March 31, 1996 is due
primarily to advances aggregating $1.5 million from one client
which were placed on non-accrual status in the first quarter of
1996, and subsequently collected in full. This first quarter
increase was offset primarily by the repayment in early 1996 of
$1.2 million of advances that were on non-accrual at year end.
ALLOWANCE FOR LOAN LOSSES
- -------------------------
Following is a summary of activity in the allowance for loan losses
for the periods indicated (dollar amounts in thousands):
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
Allowance for loan
losses at January 1 $ 11,789 $ 9,210
Loans charged off:
Real estate - mortgage -- (17)
Commercial and financial (104) (271)
Consumer (825) (368)
-------- --------
Total loans charged off (929) (656)
-------- --------
Recoveries on loans
previously charged off:
Real estate - mortgage 10 9
Commercial and financial 76 184
Consumer 86 116
Foreign -- 1,118
-------- --------
Total recoveries 172 1,427
-------- --------
Net loans (charged off)
recovered (757) 771
-------- --------
Additions to allowance
charged to operating
expense 600 375
-------- --------
Allowance for loan
losses at March 31 $ 11,632 $ 10,356
======== ========
Average amount of
loans outstanding
for the year $727,141 $657,961
======== ========
Ratio of net loans
charged off (recovered) to average
loans outstanding for
the period (1) (2) .42% (.48)%
======== ========
- ---------------------
(1) Before deduction of allowance for loan losses.
(2) Annualized.
During the first quarter of 1996, domestic loan charge offs
generally increased compared to the same period in 1995 as a result
of increases in consumer loan charge offs. To a lesser extent,
recoveries of previously charged off domestic loans decreased.
Page 21
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<PAGE>
In the first quarter of 1995, the Company received bonds issued by
the government of Ecuador in connection with a restructuring of
that country's foreign debt. These bonds had a face amount of $6.6
million and were received in exchange for $3.9 million in loans
(plus several years past due interest), $3.5 million of which was
previously charged off. In the first quarter of 1995, a portion of
these bonds were sold. Proceeds in excess of the remaining loan
balance were recorded as loan recoveries at the time of receipt.
The Company has not conducted non-trade foreign lending of the type
which gave rise to these loans since the 1980s and currently has no
plans to do so. At March 31, 1996, the Company had no restructured
or non-performing non-trade foreign loans. Due to the foreign
recoveries in 1995, the ratio of net charge offs to average loans
is significantly impacted. Excluding this foreign loan activity,
this ratio would have been .21% in 1995 compared to .42% in 1996.
The allowance for loan losses totaled $11.6 million and $11.8
million at March 31, 1996 and December 31, 1995, respectively,
representing 1.6% of outstanding loans at both dates. The ratio of
the allowance for loan losses to non-accrual loans was 124% at
March 31, 1996 compared to 171% at December 31, 1995. The ratio of
the allowance to total non-performing loans (non-accrual loans and
loans past due 90 days or more) was 114% and 147% at March 31, 1996
and December 31, 1995, respectively. The decrease in these ratios
reflects higher non-accrual loan balances for foreign loans as well
as domestic loans. At March 31, 1996 the total allowance included
$2.6 million allocated for foreign loans, $8.9 million allocated
for domestic exposure and $132,000 unallocated. At December 31,
1995 the foreign allocation was $1.4 million, domestic was $9.9
million and $489,000 was unallocated.
The allowance allocated for foreign loans at March 31, 1996
includes $1.0 million for the estimated loss exposure relating to
$1.9 million in non-accrual loans to one Argentine bank, $1.1
million for the estimated loss exposure relating to $1.4 million in
non-accrual loans to one Panamanian bank and approximately $500,000
for other foreign exposure. These Argentine and Panamanian bank
loans arose from trade-related transactions, as do substantially
all of the Company's foreign loans. The increase in the allocation
in the allowance for foreign loan losses relates to the exposure
with the Panamanian bank mentioned above. During 1996 supervision
of the borrower was taken over by the Panamanian government. 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 Argentine non-accrual loans, discussions with the National
Banking Commission of Panama and overall loss history, management
believes the allowance allocated for foreign loans at March 31,
1996 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 loan losses in amounts not
determinable at this time.
The allowance allocated for domestic loans decreased as a result of
management's evaluation of potential problem loans in the
commercial and real estate mortgage portfolio at March 31, 1996.
Management does not believe the composition of domestic potential
problem loans represents 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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - FACTORING SUBSIDIARY
- ------------------------------------------------------
Following is a summary of the activity in the allowance for
doubtful accounts for the periods indicated (in thousands of
dollars).
Three Months Ended March 31,
---------------------------
1996 1995
---- ----
Allowance for doubtful accounts
at January 1 $ 2,981 $ 1,774
Provision for credit losses 1,100 450
Charge offs (1,488) (406)
Recoveries 91 200
--------- --------
Allowance for doubtful accounts
at March 31 $ 2,684 $ 2,018
========= ========
Page 22
- ------------------------------------------------------------------
<PAGE>
The accounts receivable portfolio turns over approximately seven
times each year. Due to charge off policies and the frequency of
this turnover, actual losses are believed to bear a direct
relationship to accounts receivable purchased volume. Charge offs,
as well as the provision, increased in the first quarter of 1996 as
compared to the same period in 1995 primarily as a result of
increased volume and the bankruptcy of a customer of a factoring
client, which resulted in a $600,000 charge off for the period.
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.
Page 23
- ------------------------------------------------------------------
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
NATHAN J. ESFORMES, STANLEY I. WORTON, M.D., AND LEONARD WIEN, AS
INDIVIDUAL SHAREHOLDERS AND ON BEHALF OF ALL OTHER SHAREHOLDERS OF
CAPITAL BANCORP V. ABEL HOLTZ, FANA HOLTZ, DANIEL M. HOLTZ, JAVIER
J. HOLTZ, CAPITAL BANK AND CAPITAL BANCORP, CIRCUIT COURT FOR THE
11TH JUDICIAL DISTRICT IN AND FOR DADE COUNTY, FLORIDA CASE NO. 95-
02515.
The plaintiffs in this matter appealed the court's decision to stay
the proceedings until the independent committee has a reasonable
time to complete its review of the allegations. The appeal was
denied on April 30, 1996.
In addition to the matter set forth above, various legal actions
and proceedings are pending or are threatened against the Company,
Capital Bank and Capital Factors, some of which seek relief or
damages in amounts that are substantial. Unlike the aforementioned
matter, 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 liabiltiy, if any, to the Company, the Bank
and/or Capital Factors resulting from such pending or threatened
actions and proceedings will not have a material adverse effect on
the Company's consolidated financial condition, results of
operations or liquidity.
Item 5. Other Information
- ---------------------------
On May 9, 1996, Capital Factors Holding, Inc., the wholly owned
subsidiary of the Bank and the holding company for Capital Factors,
Inc., filed a registration statement with the Securities and
Exchange Commission relating to the proposed initial public
offering of 2,000,000 shares of its Common Stock, representing
approximately 17% of the outstanding shares of Capital Factors
Holding, Inc. after giving effect to the offering. Oppenheimer &
Co., Inc. will manage the underwriting group. An over-allotment
option could increase the size of the offering to 2,300,000 shares
of Common Stock. It is anticipated that net proceeds from the
offering will be used to reduce outstanding indebtedness to the
Bank.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibit 11 - Calculation of Earnings Per Share - Page 26
Exhibit 27 - Financial Data Schedule - This exhibit is
incorporated by reference to Exhibit 27 set forth in the
March 31, 1996 Form 10-Q electronically filed on May 15,
1996.
(b) No Current Reports on Form 8-K were filed by the Company
during the quarter ended March 31, 1996.
Page 24
- ------------------------------------------------------------------
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: May 15, 1996 By: /s/ Lucious T. Harris
-------------------------
LUCIOUS T. HARRIS
Senior Vice President and
Treasurer
(Principal Financial and
Accounting Officer)
Page 25
- ------------------------------------------------------------------
EXHIBIT 11
<TABLE>
CAPITAL BANCORP AND SUBSIDIARIES
CALCULATION OF EARNINGS PER SHARE
<CAPTION>
Three Months Ended
March 31
-------
Primary 1996 1995
- ------- ---- ----
<S> <C> <C>
Weighted average number of
common shares outstanding 7,457,883 7,152,773
Common equivalent shares
outstanding - options 661,992 277,242
----------- -----------
Total common and common
equivalent shares outstanding 8,119,875 7,430,015
=========== ===========
Net income $ 4,402,000 $ 3,689,000
=========== ===========
Primary earnings per share $ .54 $ .50
=========== ===========
Fully diluted
- -------------
Weighted average number of
common shares outstanding 7,457,883 7,152,773
Common equivalent shares
outstanding - options 661,992 277,242
----------- -----------
Total common and common
equivalent shares outstanding 8,119,832 7,430,015
=========== ===========
Net income $ 4,402,000 $ 3,689,000
=========== ===========
Fully diluted earnings per share $ .54 $ .50
=========== ===========
</TABLE>
Page 26
- ------------------------------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 102,954
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 50,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 196,909
<INVESTMENTS-CARRYING> 29,415
<INVESTMENTS-MARKET> 29,724
<LOANS> 714,367
<ALLOWANCE> 11,632
<TOTAL-ASSETS> 1,540,575
<DEPOSITS> 984,957
<SHORT-TERM> 80,057
<LIABILITIES-OTHER> 13,898
<LONG-TERM> 176,650
0
0
<COMMON> 7,462
<OTHER-SE> 108,925
<TOTAL-LIABILITIES-AND-EQUITY> 1,540,575
<INTEREST-LOAN> 17,309
<INTEREST-INVEST> 3,628
<INTEREST-OTHER> 7,008
<INTEREST-TOTAL> 27,945
<INTEREST-DEPOSIT> 7,330
<INTEREST-EXPENSE> 11,367
<INTEREST-INCOME-NET> 16,578
<LOAN-LOSSES> 1,700
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 19,575
<INCOME-PRETAX> 7,081
<INCOME-PRE-EXTRAORDINARY> 7,081
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,402
<EPS-PRIMARY> .54
<EPS-DILUTED> .54
<YIELD-ACTUAL> 5.47
<LOANS-NON> 9,377
<LOANS-PAST> 827
<LOANS-TROUBLED> 8,405
<LOANS-PROBLEM> 7,347
<ALLOWANCE-OPEN> 11,789
<CHARGE-OFFS> 929
<RECOVERIES> 172
<ALLOWANCE-CLOSE> 11,632
<ALLOWANCE-DOMESTIC> 8,900
<ALLOWANCE-FOREIGN> 2,600
<ALLOWANCE-UNALLOCATED> 132
</TABLE>
