UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

For the fiscal year ended December 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.  0-20863

                         CAPITAL FACTORS HOLDING, INC.
              -----------------------------------------------------
             (Exact name of Registrant as Specified in its Charter)

            FLORIDA                                         65-0500757
--------------------------------                    ----------------------------
(State or Other Jurisdiction of                            (IRS Employer
Incorporation or Organization)                         Identification Number)

1799 West Oakland Park Boulevard, Fort Lauderdale, Florida      33311
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)                      (Zip Code)

                                 (954) 730-2900
               --------------------------------------------------
              (Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
       Title of each class:          Name of each exchange on which registered:
              NONE                                      NONE

Securities registered pursuant to section 12(g) of the Act:

                          COMMON STOCK, $0.01 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 (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. 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

As of March 25, 1997, the aggregate market value of the shares of the
registrant's Common Stock held by non-affiliates of the registrant was
$33,820,500. (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, however, does not constitute
an admission of affiliate status for any of these individual shareholders.)

As of March 25, 1997 the registrant had outstanding 12,300,000 shares of Common
Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

The Company intends to file the Registrant's Definitive Proxy Statement for its
1997 Annual Meeting of Shareholders with the Securities and Exchange Commission
not later than 120 days after the end of the fiscal year covered by this Form
10-K pursuant to Rule G(3) of the General Instructions for Form 10-K.
Information from such Definitive Proxy Statement will be incorporated by
reference into Part III, Items 10, 11, 12 and 13 hereof.

<PAGE>

                                     PART I

ITEM 1. BUSINESS

GENERAL

Capital Factors Holding, Inc. and its subsidiaries (the "Company") are a
specialized financial services company principally engaged in providing
receivables-based commercial financing and related fee-based credit, collections
and management information services. The Company's clients are primarily small
to medium size companies in various industries, including textile and apparel
and furniture manufacturing. Beginning in 1994, the Company provided services to
clients involved in the healthcare industry. The Company operates through four
regional offices located in New York City, Los Angeles, Charlotte, and its
headquarters in South Florida, in addition to its recently opened asset-based
lending office in Atlanta, Georgia. In late 1994, the Company began to expand
its asset-based lending business. The Company currently has over 400 clients who
generate annual sales of $500,000 to $100 million, and services over 100,000
customers of those clients.

The Company generally provides financing to its clients through the purchase of
accounts receivable owed to the Company's clients by the clients' customers,
usually on a non-recourse basis, as well as by guaranteeing amounts due under
letters of credit issued to the Company's clients which are collateralized by
accounts receivable and other assets. The purchase of accounts receivable is
usually known as "factoring" and results in the payment by the client of a
factoring fee, generally equal to 0.5% to 2% of the factored sales volume. No
money is paid to the client at the time the Company purchases the client's
receivables. Instead, the Company records a liability to the client on its books
for the purchase price of the receivable. Generally, the Company and the client
notify the client's customers to make all payments on the receivable directly to
the Company. In most cases, a client's customers are other commercial entities,
not individuals. In healthcare financing, the client's customers are
individuals, but the client's receivables are mostly from third-party obligors
(usually insurance companies).

The Company guarantees the collection of each client's pre-approved receivables
or receivables from each client's customers with pre-approved credit lines.
Payment for receivables which are credit-approved by the Company is made to the
client after collection from the client's customer or, if the receivable is not
paid based solely on the customer's financial inability to pay, payment is made
to the client within 120 days after the due date of the receivable. Frequently,
the Company also advances funds to its clients prior to collection of
receivables, charges interest on such advances (in addition to any factoring
fees) and satisfies such advances from receivables collections. All payments to
clients are reduced by amounts outstanding to the Company, such as the factoring
fee charged to the client or any outstanding advances to the client. Interest
charged on such advances is generally equal to 1% to 4% over prime. Management
believes that the generally short-term and floating rate characteristics of its
advances and the floating rate of its financings result in minimal interest rate
exposure. Approximately 30% of the Company's clients use only the credit
protection and management information services offered by the Company in
connection with the purchase of their accounts receivable, and do not obtain
advances against the purchased receivables from the Company.

The Company has grown significantly in size and profitability. For 1996, the
Company's operating revenues, net income and factored sales volume increased by
31.3%, 27.9% and 32.5%, respectively, over 1995. The Company's operating
strategy includes (i) managing credit risk to ensure consistent and stable
growth, (ii) increasing market penetration through offices in key factoring
centers, (iii) recruiting and retaining experienced personnel who use a team
approach to provide quality service and (iv) diversifying by product and
industry, especially in healthcare financing, which management believes has
significant growth potential.

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<PAGE>

BACKGROUND OF THE COMPANY

Capital Factors Holding, Inc. ("Holding") is a majority owned subsidiary of
Capital Bank (the "Bank"), a Florida commercial bank. The Bank is a wholly-owned
subsidiary of Capital Bancorp. Holding has two wholly-owned subsidiaries,
Capital Factors, Inc. ("Factors") and CF One, Inc. ("CF One"). Factors has two
wholly-owned subsidiaries, CF Funding Corp. and Capital TempFunds, Inc.
Throughout this discussion, Holding, Factors and their subsidiaries are
collectively referred to as the "Company".

Factors was acquired by Capital Bank in May 1985, at which time Factors had one
office in South Florida. Factors acquired a Los Angeles regional office in
August 1989 and opened a New York regional office in April 1990. The Company
established a healthcare division in September 1994 and, in late 1994, the
Company also began asset-based lending. The Charlotte regional office was opened
in May 1995 and the Atlanta asset-based lending office in January 1997.

Holding was formed in June 1994 in order to serve as the holding company for
Factors and to accommodate the issuance of asset-backed certificates in
connection with the securitization of factored advances (the "Securitized
Financings") which have been issued pursuant to several private placements.
Additionally in 1994, Holding formed another subsidiary, CF One, and Factors
formed a subsidiary, CF Funding Corp. Both CF One and CF Funding Corp. were
created to accommodate the issuance of the asset-backed certificates. CF One
holds subordinated certificates issued by the trust (the "Trust") created in
connection with the Securitized Financings, which it purchased with funds
contributed to it by Holding. Pursuant to the Securitized Financings, advances
made by Factors that were collateralized by third party accounts receivable and,
in certain cases, by cash, letters of credit, inventory or other collateral
provided to Factors were sold to CF Funding Corp., which subsequently
transferred the advances to the Trust. The Trust issued three series of
asset-backed certificates (the "Certificates"), which were sold to institutional
buyers through several private placements. The aggregate amount of Certificates
presently outstanding is $175 million, of which $100 million was issued in June
1994, $25 million was issued in December 1994 and $50 million was issued in July
1995. Each Certificate evidences an interest in the Trust's assets and the right
to receive the payment of principal on the face amount of the certificate and
interest from the Trust. The Trust's assets consist principally of the advances,
as well as funds collected or to be collected in respect of the advances and the
collateral therefor. Factors is responsible for servicing the advances owned by
the Trust. Subordinated certificates were also issued by the Trust to CF One in
connection with each of the Securitized Financings ($15 million in June 1994,
$3.75 million in December 1994 and $7.50 million in July 1995).

On July 16, 1996, Holding completed an initial public offering of 2,000,000
shares of its Common Stock at a public offering price of $8.50 per share. Prior
to this offering, all of the Common Stock was owned by the Bank. On August 2,
1996, the underwriting syndicate exercised its option to acquire an additional
300,000 shares of Common Stock. The net proceeds from the offering, which
totaled approximately $17.6 million, were used to reduce the Company's
indebtedness to the Bank under an outstanding line of credit. As a result of the
offering, the Bank's ownership of Holding has been reduced to approximately 81%
of the outstanding Common Stock. The Common Stock is listed for trading on the
Nasdaq National Market under the symbol "CAPF."

On August 9, 1996, the Company closed on the acquisition of substantially all of
the assets of TempFunds America, Inc. and its affiliate, TempFunds America
Funding Corporation of South Carolina, Inc. (collectively "TempFunds").
TempFunds is a specialized financial service company principally engaged in
providing receivables-based commercial financing and related fee-based credit,
collection and management information services to temporary employment and home
health care agencies. The acquisition was completed through Capital TempFunds,
Inc., a newly formed subsidiary of Factors. Capital TempFunds provides certain
services, including billing, payroll processing, payroll tax, payroll reporting
and other

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<PAGE>

payroll services and insurance reporting. The purchase price paid by the Company
was approximately $5.9 million (approximately $5.0 million equal to the net book
value of the assets plus an additional $900,000). An additional amount up to
$900,000 is payable over a three year period if certain contingencies are met.
In connection with the acquisition, all rights, title and interest to the
nationally registered service mark of "TempFunds America" were assigned to
Capital TempFunds, Inc. who intends to conduct business in said name. The
purchase was funded under the Company's revolving line of credit with Capital
Bank.

MARKET FOR COMPANY SERVICES

Traditionally, the factoring client base has consisted of members of the textile
and apparel industries, furniture manufacturers, electronics and home
furnishings organizations, wholesalers, distributors and service organizations.
Approximately 71.5% of the Company's clients are in the textile and apparel
industry and 11.2% are manufacturers of furniture and home furnishings. Clients
who, for various reasons, have insufficient or less effective in-house staff,
equipment or procedures to monitor customers, manage accounts receivable or
protect against credit loss, also use factors to provide such services. These
include both mature and younger companies. For example, as the retail industry
becomes more fragmented due to an increased number of specialty stores
challenging department stores, mass merchants and discounters, suppliers are
faced with a larger universe of buyers and may experience higher costs to
maintain their credit and receivables department and increasing paper flow,
requiring more sophisticated systems. As clients experience these rising costs,
credit, collection and management information services such as those provided by
the Company become economically and operationally more attractive. In addition,
manufacturers benefit form factoring because it allows them to turn inventory
more quickly, particularly if they receive cash advances, which may be used to
produce more inventory that could not have been produced if the manufacturer had
waited to be paid by its customer.

The Company, as well as the factoring industry, has historically experienced and
expects to continue to experience seasonal fluctuations in its factored sales
volume and factoring fees, which generally have been highest during the period
from August through November. A principal reason for the fluctuation in the
Company's factored sales volume and factoring fees is the seasonality in the
sales of certain of the Company's clients, especially those in the textile and
apparel industry, who typically ship more goods during such 4-month period in
order to fill increased customer orders in anticipation of "back to school" and
the ensuing holiday season. The Company realized approximately 40.0% of its
annual factored sales volume in each of 1996 (approximately $1.0 billion of 2.6
billion annual factored sales), 1995 (approximately $757 million of $2 billion
annual factored sales) and 1994 (approximately $605 million of $1.5 billion
annual factored sales) during this 4-month period. Historical experience also
indicates that the Company's factored sales volume and factoring fees are at
their lowest during the period from December through February. Such seasonal
fluctuations can be seen by a review of the Company's quarterly factored sales
volume and net income for the three year period ended December 31, 1996, as set
forth below:

<TABLE>
<CAPTION>
                                     FIRST    SECOND     THIRD    FOURTH      FULL
                                    QUARTER   QUARTER   QUARTER   QUARTER     YEAR
                                    -------   -------   -------   -------   ---------
                                                 (DOLLARS IN THOUSANDS)
<S>   <C>                          <C>       <C>       <C>       <C>       <C>
1996  Factored Sales Volume....... $563,989  $614,614  $708,930  $763,909  $2,651,442
      Net Income..................   $1,903    $2,558    $3,271    $3,383     $11,115

1995  Factored Sales Volume....... $441,211  $460,407  $561,222  $538,523  $2,001,364
      Net Income..................   $1,883    $2,069    $2,524    $2,217      $8,693

1994  Factored Sales Volume....... $328,855  $365,176  $423,884  $419,045  $1,536,960
      Net Income..................   $1,128    $1,110    $1,769    $2,085      $6,092
</TABLE>

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<PAGE>

One fast-growing market is healthcare financing, which the Company has entered.
Typical clients include hospitals, nursing homes, doctor groups, home treatment
centers, home healthcare service providers, temporary nursing or staffing
services and providers of durable medical equipment. These entities often have
long waits for receivables to be paid, but steady needs for cash, and,
accordingly, are less subject to seasonal changes. See "-Healthcare Financing."

INDUSTRY OVERVIEW

Financial service companies which compete with the Company are widely known as
factors and typically service retail trade clients with a large number of
customers, requiring intensive customer credit and operational support.
Factoring companies service industries such as apparel, textiles, shoe,
carpeting and furniture, frozen foods, housewares, electronics, toys and other
service-related industries including hospitals, medical companies and employment
services. Such industries benefit from the use of credit, collections and
management information services such as those provided by the Company because
factoring companies can (i) achieve economies of scale in evaluating the credit
quality of various customers and processing receivables and (ii) help clients to
achieve more stable cash flows and additional credit facilities.

Factoring has been a method of working capital financing in the United States
for over 200 years. Traditionally, the industry has focused on the purchase of
receivables in the apparel and furniture industries, but recently, new
industries, including healthcare providers, have begun factoring. The factoring
industry has undergone considerable consolidation over the past several years;
as a result, the industry is characterized by a small number of very large
factors operating nationally, with a multitude of small companies generally
operating on a local or regional basis.

In a recent survey, the largest fourteen factoring companies reported volume in
1996 of $63.8 billion, an increase of 55% over reported volume in 1988. The
Company had a 4.1% share of this reported volume for 1996.

STRATEGY

The Company provides fee-based services to its clients, including credit,
collection and management information services, and also makes advances to its
clients. Each of the Company's regional offices is staffed with a business
development manager, who has the primary responsibility for generating new
business. Potential new clients are often identified from (i) referrals by
previous and existing clients, accountants and lawyers, (ii) direct mail efforts
and (iii) direct telemarketing efforts. The Company also attempts to expand its
network through (i) mailings and magazine and trade journal advertisements to
increase its name recognition, (ii) cultivating its existing referral
relationships and (iii) soliciting additional referral relationships. Since the
Company opened its Charlotte office in 1995, management believes that it has a
network in place to meet the needs of its target client base in the key markets
for factoring services. Additional expansion and growth is contemplated through
product diversification, such as through healthcare financing, as well as
asset-based lending in all regional offices, including the Atlanta office opened
in 1997.

Management believes that the Company's growth has been primarily attributable to
the following operating strategies:

/bullet/  Management of Credit Risks. The Company manages credit risks
          associated with collection of accounts receivable and advances to
          clients primarily by (i) conducting extensive financial and business
          due diligence on both clients and their customers before entering into
          a factoring arrangement with a client or establishing credit limits
          for customers, (ii) adhering to the written guidelines set forth in a
          Loan and Credit

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          Policy Manual distributed to all credit and collection employees, and
          (iii) monitoring outstanding accounts receivable and advances on a
          daily basis in order to alert the Company to potential problems in a
          timely manner.

/bullet/  Increased Market Penetration. The Company believes that it has been
          able to increase market penetration by servicing a wide range of
          clients nationally through its regional offices located in key
          factoring centers. In addition, by providing its clients with
          personalized, flexible, cost-efficient and effective service, the
          Company allows clients to be more responsive to their customers and to
          devote more time to the management of other aspects of their business.

/bullet/  Experienced Personnel Who Use a Team Approach. Management believes
          that the quality of service provided to its clients is a critical
          factor to the Company's growth. In order to provide quality services,
          the Company strives to recruit and retain management and other
          personnel with significant industry experience, as well as a
          commitment to client service. The Company's account executives, credit
          officers and operations officers work together under the supervision
          of management to service the Company's clients. As a result of this
          strategy, the Company's clients and the customers of such clients
          interact with experienced personnel working as a team.

/bullet/  Diversification by Product and Industry. As part of its operating and
          growth strategy, the Company offers different variations and
          combinations of its traditional products and services to clients and
          has recently expanded into healthcare financing and asset-based
          lending. Asset-based lending, in particular, provides the Company a
          vehicle to finance clients who may not need its other services and who
          have different financial needs than general factoring clients.
          Although the Company has a high concentration of clients in the
          textile and apparel industry and furniture manufacturing industry, the
          Company provides services to companies in various industries. In
          addition to traditional factoring clients, the Company now provides
          accounts-receivable financing to various clients in the healthcare
          industry. Diversification provides the Company with a potential client
          base that has significant growth potential, which may be serviced from
          its existing offices.

FACTORING ARRANGEMENTS

Factoring Agreement

After the Company has completed a financial and business analysis on a potential
client and its customers, the Company will enter into a factoring agreement with
approved clients. Many of these factoring agreements provide for advances to be
made by the Company based on a client's receivables. The factoring agreement
typically appoints the Company as the client's sole factor for all accounts
receivable, generally for a term of one year. The Company can usually terminate
the agreement at any time upon 30 days' prior written notice to the client.

Once the factoring agreement has been executed, the Company will purchase the
client's accounts receivables for the face amount of the receivables, less
certain specified discounts, including the Company's factoring fee, and other
deductions. No money is paid to the client upon the purchase of the receivable.
Instead, the Company records a liability on its books for the purchase price of
the receivable. Generally, the Company and the client notify the customer to
make all payments for the receivable directly to the Company. In most areas, a
client's customers are other commercial entities and the client does not deal
directly with individuals. In healthcare financing, the client's customers are
individuals, but the client's receivables are mostly from third-party obligors
(usually insurance companies).

The Company guarantees the collection of each client's pre-approved receivables
or receivables from each client's customers with pre-approved credit lines.
Payment for the receivable is made to the client after collection from the
customer or, in the event the

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collection of the receivable was guaranteed by the Company and the receivable
was not paid based solely on the customer's financial inability to pay, payment
is made to the client within 120 days after the due date of the receivable. If
the customer fails to pay the receivable for any reason other than financial
inability to pay, such as a dispute regarding defective merchandise, the Company
has no obligation to pay the client for the receivable, notwithstanding
guarantee of the receivable by the Company. All payments to clients are reduced
by amounts outstanding to the Company, such as the factoring fee charged to the
client or any outstanding advances to the client.

At the time the Company purchases the client's account receivable, the client
becomes obligated to pay the Company a fee, generally equal to 0.5% to 2.0% of
the gross amount of the receivable (not reduced by any discounts that may have
been provided to the customer for early payment). Typically, the fee is paid
from the proceeds of the accounts receivable collections. The factoring fee paid
by the client is not related to the collectibility or non-collectibility of the
purchased accounts receivable. Accordingly, even if the Company is not obligated
to pay for a guaranteed receivable because of a dispute between the client and
its customer, or if payment of the receivable was not guaranteed by the Company,
the factoring fee is due from the client on such receivable. The factoring fee
charged by the Company depends on various considerations, such as the length of
time the receivables are expected to be outstanding, the monthly volume of
receivables generated by the client, the anticipated administrative costs and
the perceived level of risk. Management believes that its factoring fees remain
competitive with other factoring companies, primarily because of the type of
clients serviced by the Company (generally, clients generating less than $50
million in sales) and the type and quality of services provided to its clients.

Services

The Company offers an interrelated package of financial services which meets a
variety of the business and financing needs of its clients. The Company's
services are designed to allow clients to be more responsive to their customers
and to devote more time to the management of other aspects of their business.
The Company's clients and the range of products and services offered distinguish
it from certain other commercial finance companies and asset-based lenders
because the Company's main focus is to provide fee-based services, as well as
act as a lending source for many of its clients. Management believes that it
generally can provide these fee-based services in a more cost-efficient manner
than its clients because of economies of scale.

Credit, Collection and Management Information Services. The Company provides its
clients with access to credit management, collection and information services,
including certain computerized accounting services, as well as the equivalent of
credit insurance. Each of the Company's regional offices is staffed with a
credit department of between 10 to 30 people. The credit department, at the
direction of the credit officer, conducts the credit checks on client's
customers, analyzes the information and makes a recommendation as to the amount
of credit to be extended, if any. If the Company approves the credit of the
customer, in accordance with written guidelines established by the Company, then
the Company will purchase the receivable for a fee and guarantee the collection
of the receivable based solely on the customer's financial ability to pay the
receivable. If the Company did not approve the credit of the customer, the
Company purchases the receivable for a fee, but will not guarantee collection of
the receivable.

Except with respect to much of the Company's healthcare financing, upon purchase
of the receivable by the Company, the client notifies the customer that all
payments on the receivable should be sent to the Company. The Company also
notifies the customer that it has purchased the receivable and provides payment
instructions to the customer. All payments are sent to the Company's operations
department in Florida. The regional collection departments monitor the
collection of the accounts receivable and make necessary follow-up calls if
payment is not received on a timely basis. Where necessary, the Company

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will press for collections. Company staff is trained to seek collections in a
courteous and professional manner so as not to adversely affect a client's
relationship with its customers. In certain circumstances, the Company will use
the services of independent collection agencies. See "-Monitoring and Oversight
Policies - Receivables Portfolio."

In addition, the Company provides various management information services to its
clients, including (i) a monthly analysis that includes an aging schedule of all
open receivables by customer and (ii) information as to the creditworthiness of
its customers.

Advances. The Company may also make advances to its clients, with interest
charged on such advances generally equal to 1% to 4% over prime. These fees are
generally higher than the fees charged by banks because a factor provides
startup and expanding businesses more financial flexibility, in addition to
credit and other services. This flexibility is primarily due to the fact that a
bank, in making a determination as to the amount that it would advance a
borrower, will customarily be more inclined to review the borrower's net worth,
capital and general financial condition, while a factor will place greater
emphasis on the borrower's collateral, particularly its receivables, and,
correspondingly, the creditworthiness of its customers. Interest accrues on the
advance from the date the advance is made until the date the Company would
otherwise be obligated to pay the client for purchased receivables. Advances are
made on receivables before they are due or collected by the Company based upon a
stipulated percentage of the net face value of aggregate outstanding
receivables, usually ranging from 75% to 90%. Advances are payable upon demand.
All advances must be approved in accordance with the written guidelines
established by the Company. Such guidelines provide that advances shall be (i)
under a duly authorized line approved at the time an arrangement is established,
taking into account the funding needs and financial strength of the client and
other credit factors and the anticipated performance of the collateral and (ii)
within an advance formula applied to eligible accounts receivable taking into
account anticipated dilution. Approximately 70% of the Company's clients obtain
advances from the Company. A number of these clients might not otherwise qualify
for financing of a comparable level from traditional sources. From time to time,
the Company makes advances in excess of a client's receivables to the extent
needed by such client because of the seasonality of its business or otherwise.
These overadvances may be secured by a client's inventory, other assets and/or
personal guarantees or may be unsecured.

Other Financing Services. The Company also provides other fee-based financial
services to its clients, including guarantees of commercial letters of credit
and standby letters of credits. Most, if not all of such letters of credit are
issued by Capital Bank. Capital Bank provided approximately $135.5 million,
$130.1 million and $79.5 million during 1996, 1995 and 1994, respectively, of
letters of credit for clients of the Company. For a fee, the Company guarantees
the payment by its clients under these letters of credit. Fees charged for
issuance of the letters of credit are paid directly to Capital Bank and amounted
to $373,688, $462,013 and $389,571 for the years ended December 31, 1996, 1995
and 1994, respectively.

The Company may also provide financial guarantees for its clients. Commercial
letters of credit are issued to facilitate certain trade transactions for the
clients of the Company, principally the purchase of goods. Standby letters of
credit and financial guarantees are conditional commitments issued to guarantee
the performance of a client to a third party. The Company guarantees letters of
credit and issues financial guarantees only for clients with which the Company
has factoring or other financing arrangements. Generally, the Company requires
collateral to support these commitments and the collateral held varies, but may
include cash, inventory, real estate and the client's reserve balance.

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MONITORING AND OVERSIGHT POLICIES

Receivables Portfolio

The quality of purchased receivables is the Company's primary security against
credit losses. Accordingly, the Company conducts an extensive financial and
business analysis on a client prior to entering into a factoring arrangement
with the client, and on the client's customers, prior to the establishment of
credit lines for a customer. The Company focuses on such items as the age of
receivables, the quality of management and the ethical character of a
prospective client's owners, as well as the diversity of its customer base. The
Company generally seeks to avoid situations where a significant percentage of a
prospective client's receivables are from one customer. Pursuant to Company
policy, all factoring arrangements must conform to the guidelines set forth in
the Company's Loan and Credit Policy Manual, a written manual provided to all
credit and collection employees of the Company. The manual establishes
guidelines governing credit criteria, lending limits and required approvals, as
well as documentation requirements related to such matters as UCC filings,
guarantees, subordinations, shipping documents and financial reporting. There
can be no assurance, however, that adherence to the Company's written guidelines
will result in full collection of the purchased receivables or that such
guidelines will be complied with in every instance. See "-Credit Loss Policy and
Experience."

Each of the Company's regional offices is staffed with one or more field
examiners who visit the office of each potential client for diligence purposes.
In certain situations, the Company will also use the services of independent
certified public accountants to assist the field examiners. In addition to
on-site visits, the Company's field examiners will review current financial
statements and business references of the client and personal financial
statements of the principals of the client and its major shareholders. The
Company's field examiners also conduct periodic field examinations of and visits
with clients to continue to learn about the client's operation. The Company
generally requires business plans for start-up ventures. Additionally, each of
the Company's regional credit departments makes routine random telephone calls
and mails written requests to customers to verify the existence and the terms of
receivables purchased from clients and obtains shipping evidence for all
invoices purchased, as well as remaining in communication with the client.

After the necessary financial and business information has been collected and
reviewed, if the Company intends to enter into a factoring arrangement with the
proposed client, a written proposal of the terms of the proposed factoring
arrangement is prepared. The proposal includes, among other things, (i) the
amount of the factoring fee to be charged, (ii) anticipated accounts receivable
purchases to be generated by the client and (iii) the interest rate to be
charged on advances, if applicable. All new factoring arrangements are approved
by the Company's President and the respective regional manager. If the factoring
arrangement provides for advances to the client against purchased receivables,
additional approvals are required. See "-Client Advances" below.

Each of the Company's clients is serviced by a team of Company personnel.
Clients are assigned to an account executive and credit officer in one of the
Company's four regional offices, and an operations officer in the Florida
executive office. The account executive is the client's primary contact with the
Company. The account executive is responsible for managing the assigned client
relationship, including approval of client advances, and obtaining necessary
documentation prior to an advance to the client. Requests for customer credit
approvals or increases in customer credit lines are directed to the credit
officer. The operations officer is responsible for the processing of all
receivables, including application of payments and invoice handling. In
addition, the Company's senior management team will often meet with clients to
discuss problems, if any, and monitor client satisfaction.

                                       9

<PAGE>

Pursuant to the Company's Loan and Credit Policy Manual, the Company follows
certain credit guidelines. Prior to the establishment of a credit line for a
client's customer, the Company conducts a credit check on the customer and
obtains a credit rating for the customer. The Company takes into consideration
the amount of the requested credit line, the customer's credit rating and
satisfaction of internal written guidelines in determining whether to establish
a credit line for the customer. The Company's internal written guidelines
contain certain formulas used by the Company in determining whether to establish
a credit line, and which take into account ratings scales utilized by various
credit rating agencies, as well as the length of time a customer has been in
business. If these formulas are not satisfied, additional information is
obtained and reviewed by the Company, including bank references, trade surveys
and financial statements of the customer. The Company may also conduct on-site
visits of the customer's business and interview the customer's management team.
All credit lines over $250,000 require either executive officer or combined
executive officer and director approval, depending on the amount of the credit
line. The Company may also assume the credit risk of a single credit transaction
for a client's customer. Generally, the same credit check procedures are
followed in such transactions.

The Company assumes the credit risk only on receivables for which written
approval has been provided by the Company. The Company also reserves the right
to withdraw a credit approval if the Company believes a customer's credit
standing has become impaired before actual delivery of merchandise or rendering
of services by the Company's client. Credit approvals are limited to the
specific terms provided by the client to the Company and can be withdrawn if the
terms of the sale are changed. If a dispute relating to goods or services
rendered by the client to its customer arises, the credit approval on the
receivable is negated. If sales are made by the client to a customer without
credit approval or in excess of any credit approval, any payments made by such
customer on outstanding receivables will be applied first to outstanding
credit-approved receivables on the books of the Company.

The Company monitors whether receivables are paid according to their terms.
Daily aging reports are generated by the Company and reviewed by the regional
credit department staff and the account executive responsible for the account.
If payment is not received on its due date, follow-up contact is made with the
client's customer in accordance with written procedures established by the
Company. During this follow-up contact, the Company seeks to determine the cause
of the delay in order to take appropriate action at an early stage. The status
of overdue accounts and other relevant information is reported to each client
monthly, or sooner, if appropriate. The Company's average accounts receivable
turnover rate was 53 days for 1994 and 1995 and 52 days for 1996. The Company
may receive payments from time to time that it is unable to match against
specific outstanding invoices. The Company generally notifies the payor when
unidentifiable payments or portions thereof are received. If the payor does not
respond within 90 days, the Company generally records the unallocated credits as
income. The Company maintains an allowance for unallocated credits recorded as
income which may be subsequently repaid based upon its historical experience.
This allowance is also available for amounts that may be payable to governmental
authorities for property that is abandoned. There can be no assurance that the
allowance will be sufficient to meet all such future claims.

The Company periodically uses the services of independent collection agencies to
assist it in the collection of accounts receivable more than 90 days past due.
The Company's policy is to charge-off accounts receivable once they have been
placed with a collection agency. Collection agencies charge, on the average, a
20% fee of the delinquent account collected. On occasion, the Company initiates
litigation to recover payment of the receivable.

As security for the accounts receivable purchased, the Company obtains blanket
first liens on a client's receivables, and may also obtain personal guarantees
and liens (which may be subordinate to other liens) on other assets of the
client, including cash, tax refunds, inventory, real estate and equipment. In
addition, the Company arranges for periodic

                                       10

<PAGE>

reviews of public records in order to monitor the filing of any subsequent liens
which could impair the value of receivables in which the Company has an
interest.

Client Advances

Prior to making any advances to a client on accounts receivable, the Company
will conduct additional business and financial analysis on the client. The
typical written credit analysis sets forth (i) the purpose for the advance, (ii)
security to be provided for the advance, such as personal guarantees from
principals of the client and subordination arrangements, (iii) the rate
structure to be charged and projected income to be earned by the Company, (iv)
prior experience with the client if the client has previously had a relationship
with the Company or Capital Bank, (v) the client's history, organization and
operations, (vi) bank and trade information on the client, (vi) financial
information of the client and (viii) future plans and projections of the client.
In addition to the written credit analysis, the account executive assigned to
the account reviews a factoring status report on the client, which sets forth
the client's monthly sales and accounts receivable volume, along with collection
information on the receivables.

Based upon a review of the credit analysis and factoring status report, the
account executive will make a recommendation as to whether or not the advance is
reasonable in relation to the value of the client's outstanding receivables. All
advances against purchased receivables must be approved by no less than four
officers of the Company, two of whom are generally the account executive and
head of client administration from the originating office and two in the
Company's executive offices in Florida, providing another level of control in
the advance process.

Outstanding advances to clients are reviewed on a daily basis and on a monthly
basis at monthly portfolio meetings attended by the President, or his designee,
and the regional managers (or their designees). At the monthly portfolio
meetings, senior management evaluates the Company's outstanding advances and
receivables in order to identify potential problems. The meetings also allow
senior management to evaluate the performance of their account executives, who
have the responsibility for managing their client's outstanding advances and
receivables.

CREDIT LOSS POLICY AND EXPERIENCE

The Company regularly reviews its outstanding accounts receivable and other
extensions of credit, such as advances to clients, to determine the adequacy of
its allowance for credit losses. Factors such as the level of related credit
balances of clients and the impact of economic conditions on the
creditworthiness of the Company's clients and the client's customers are given
significant consideration in determining the adequacy of the Company's allowance
for credit losses. The Company's methodology for calculating its reserve for
doubtful accounts has remained consistent for the period commencing in 1991 and
continuing through 1996, and includes a specific and general component. Specific
reserves are established for receivables and client advances which the Company's
management deems to be wholly or partially uncollectible. The general reserve
represents 0.75% of those receivables (other than healthcare receivables, which
have a lower general reserve) that are not specifically reserved for but for
which the Company has provided credit guarantees.

The provision for credit losses as a percentage of factored sales decreased from
0.30% in 1992 to 0.14% in 1996, reflecting the Company's improved loss
experience over that period and positive economic trends that benefited the
Company's clients and their customers. The provision as a percentage of factored
sales increased to 0.14% in 1996 from 0.11% in 1995, reflecting a higher net
charge-off rate. The provision for credit losses as a percentage of average
receivables decreased from 1.89% in 1992 to 0.85% in 1996, and the provision for
credit losses as a percentage of average funds employed decreased from 2.91% in
1992 to 1.31% in 1996, also reflecting the Company's improved loss experience
over that period. The provision for credit losses as a percentage of average
receivables and the provision for

                                       11

<PAGE>

credit losses as a percentage of average funds employed increased to 0.85% and
1.31%, respectively, in 1996 from 0.72% and 1.06%, respectively, in 1995,
reflecting a higher net charge-off rate. The provision for credit losses during
1996 was higher than during 1995 and was more consistent with the Company's
historical experience.

Net charge-offs as a percentage of factored sales ranged from 0.05% to 0.30% in
the 1991-1996 period, reflecting normal credit losses consistent with historical
experience. Net charge-offs as a percentage of factored sales declined to 0.05%
in 1995 as a result of higher recoveries and fewer bankruptcies that affected
the Company. The net charge-off percentage increased to 0.14% in 1996 as a
result of the charge-off of several large items, including $600,000 related to
the bankruptcy of a large Northeastern regional chain store and $200,000 related
to a single client loan, $93,000 of which was recovered. Consistent with net
charge-offs as a percentage of factored sales, during the period 1991 to 1996,
net charge-offs as a percentage of average receivables and net charge-offs as a
percentage of average funds employed reflected normal credit losses consistent
with historical experience, ranging from 0.33% to 1.90% and 0.49% to 2.92%,
respectively. Net charge-offs as a percentage of average receivables and net
charge-offs as a percentage of average funds employed decreased to 0.33% and
0.49%, respectively, in 1995, primarily as a result of higher receivable
recoveries and fewer bankruptcies affecting the Company in that year. Net
charge-offs as a percentage of average receivables and net charge-offs as a
percentage of average funds employed increased to 0.87% and 1.34%, respectively,
in 1996, as a result of the charge-offs described above.

At the time a receivable is purchased an anticipated payment date is recorded
and is subsequently used to identify past due receivables. Receivables which
have been identified as past due will not be written-off if, in the opinion of
management, collection from the customer, client or realization on the
collateral held, if any, is likely. As of December 31, 1996 and 1995,
approximately $6.4 million and $8.9 million, respectively, of credit-approved
receivables, representing 2.4% and 4.7%, respectively, of outstanding
credit-approved receivables as of such date, were 90 days or more past the
payment date anticipated at the time of purchase and had not been written-off.

Accrual of interest income is discontinued on advances to clients when the loan
balance, including interest, is considered impaired and exceeds the estimated
value of the collateral securing the advance. At December 31, 1996, 1995 and
1994, the Company had discontinued its accrual of interest income on
approximately $660,000, $2.2 million and $739,000, respectively, of client
advances. In addition, at December 31, 1996, 1995 and 1994, approximately
$30,000, $134,000 and $48,000, respectively, of such client advances were deemed
to be uncollectible by the Company.

The credit and market risks associated with guaranteeing commercial letters of
credit and standby letters of credit and issuing financial guarantees are
generally managed in conjunction with the Company's accounts receivable
collection activities and are subject to normal credit policies, financial
controls and risk limiting and monitoring procedures. Commercial letters of
credit are generally for a short commitment period. The risk involved in
guaranteeing standby letters of credit and issuing financial guarantees is
similar to the risk involved in advancing funds to clients. At December 31, 1996
and 1995, the Company had approximately $29.3 million and $22.6 million,
respectively, of letters of credit and financial guarantees outstanding.

HEALTHCARE FINANCING

The Company provides healthcare financing and factoring services to hospitals,
nursing homes, doctor groups, home treatment centers, home healthcare provider
services, temporary nursing or staffing services and providers of durable
medical equipment through its Capital Healthcare Financing division. Healthcare
businesses financed by the Company generally have annual net sales of at least
$1 million or are anticipated to grow to that size shortly.

                                       12

<PAGE>

Financing is provided as to bona fide and medically necessary goods or services
that have been provided to a patient for which a receivable is due with no
contingencies. For transactions to be financeable, fees claimed by the client
are to be reasonable and customary and the patient must be covered by a third
party obligor, although, in limited circumstances, the Company will consider
financing private pay receivables if they represent a small percentage of
overall receivables. The Company does not generally finance workers'
compensation claims or medical/legal (personal injury), dental and chiropractic
claims. At December 31, 1996 and 1995, the Company had approximately $22.7
million and $16.3 million, respectively, in healthcare factored receivables
outstanding, in addition to approximately $9.9 million and $11.0 million of
healthcare asset-based loans outstanding at December 31, 1996 and December 31,
1995, respectively. Approved third party payors include Medicare, Medicaid,
preferred provider organizations, private insurance carriers, Blue Cross/Blue
Shield and corporate employee coverage for self-administered healthcare plans.

The minimum term for a healthcare financing contract is one year. Fees include
origination and due diligence fees of between 1% and 5% of the initial line and
a monthly monitoring fee of .35% to 2%, with the possibility of a guaranteed
minimum monitoring fee. The annual interest rate on advances ranges from 2% over
prime to 4% over prime. Advances may be up to 85% of the net receivable amount
from the financed receivables. The client usually pays for periodic audits and
legal expenses to close the transaction.

In order to obtain healthcare financing from the Company, generally the same
steps must be followed as with the Company's factoring clients. A business plan,
current financial statements, receivables aging, resumes of the principals and
references are generally required. Once accepted, clients must file claims with
third party payors on the appropriate forms and assign such claims to the
Company. The Company posts the claim to its monitoring system and, thereafter,
closely monitors the collection by the client on a daily basis. In the case of
Medicare and Medicaid claims that must be paid directly to the provider of the
service, the Company, the client and the client's bank enter into an agreement
pursuant to which payments on account of such claims are made directly to a
lockbox account to which the Company and the client have access and thereafter,
are immediately swept out of such account into the Company's account. In either
case, the Company provides credit monitoring services as well as periodic
accountings to the client. Advances are based upon claims assigned to the
Company by the client.

The benefits of healthcare financing to the Company's clients are similar to the
benefits obtained by the Company's factoring clients. Healthcare clients
maximize their ability to monitor patient accounts. In addition, they receive
immediate cash for accounts receivable which can be injected into the business
to, among other things, increase purchasing power, improve and increase patient
services or reduce expenses and increase patient revenues.

ASSET-BASED LENDING

The Company began to expand its asset-based lending activities in late 1994. At
December 31, 1996 the Company's asset-based loans ranged from $200,000 to $7.2
million and are primarily secured by accounts receivable and, to some extent,
inventory. Such loans bear interest at annual rates ranging from 1% over prime
to 6% over prime. Most of such loans originate from the Company's California,
Florida, and beginning in 1997, Atlanta, offices. At December 31, 1996 and 1995,
the Company had asset-based loans outstanding aggregating approximately $36.0
million and $38.3 million, respectively, including loans to healthcare clients
of approximately $9.9 million and $11.0, million, respectively, at the end of
such periods.

The Company makes asset-based loans to companies who may not need its other
services and who have different financial circumstances than factored clients.
In underwriting such loans, the Company pays more attention to the borrower's
financial stability and creditworthiness, rather than that of the borrower's
customers. In making such loans the Company competes primarily with financial
institutions and other asset-based lenders, such as commercial finance
companies. See "-Competition."

                                       13

<PAGE>

MANAGEMENT INFORMATION SYSTEMS

Factoring is a systems intensive business because of the high volume of
transactions required to be entered and the matching with such transactions of
cash payments, chargebacks and other adjustments. In 1990, the Company purchased
an IBM AS400 computer and developed software tailored to the requirements of the
Company's accounting, receivables collection, monitoring and oversight
functions. The system permits the Company to generate payment histories and
analyses with respect to its clients' customers, to generate daily aging of
accounts receivable reports, to accumulate accounting information and other data
useful for credit analysis, to produce information used in marketing and to
respond to account and management inquiries. The Company continues to add
enhancement and updates to its management information systems. In 1995, the
Company acquired and installed a software package to administer and process
transactions of the clients of its healthcare division. In March 1996, the
Company installed the latest IBM AS400 model. The Company expects that this new
hardware will provide the Company with additional capacity to handle the
Company's increased transaction volume.

COMPETITION

The Company competes with numerous banks, financial institutions, commercial
finance companies and other factoring companies with greater financial and other
resources than the Company. The four largest factors in the United States, CIT
Group, BNY Financial Corp., NationsBanc Commercial and Heller Financial, control
approximately 61.4% of the factored sales volume in the United States, as
compared to 4.1% of United States factored sales volume for the Company in 1996,
according to a recent survey. The Company competes with the largest national
factors, as well as other national factors and also competes with other regional
factoring companies, all of whom target similar clients as the Company and most
of whom have operated in the markets serviced by the Company for a longer period
of time than the Company. Certain factors compete with the Company for certain
types of accounts. For example, one factor may provide services only to textile
mills, while another may provide services only to furniture manufacturers. The
Company competes primarily on the basis of service, not price, even with respect
to higher volume clients to whom the Company may provide lower fee structures
than to the Company's typical clients. The Company generally does not seek to
compete when price is the sole or primary criterion for potential clients'
selection of a factor. Future competition is expected to be based primarily on
the quality and level of service provided and the ability to respond to the
changing credit environment and demands of many factoring clients. The Company
believes that it is well-positioned to respond to these needs.

REGULATION

As a result of the Company's ownership by Capital Bank, a Florida commercial
bank, which in turn is owned by Bancorp, a bank holding company, the Company is
affected by certain regulations normally applicable only to banking
institutions. The Company is subject to periodic examination by representatives
of the Florida Department of Banking and Finance, the Federal Deposit Insurance
Corporation ("FDIC") and the Federal Reserve Board. Additionally, because the
Company's immediate parent, Capital Bank, is a Florida-chartered, FDIC-insured
bank, the business activities of the Company are generally limited under
applicable FDIC regulations to those activities that are permissible for
national banks. Although factoring and the other businesses in which the Company
currently engages are authorized activities for national banks, there can be no
assurance that business opportunities the Company might wish to pursue in the
future will be authorized activities for Capital Bank and therefore might be
unavailable to the Company because of its regulated status as a subsidiary of
Capital Bank.

                                       14

<PAGE>

Federal bank regulations require the Company's parent, Capital Bank, and its
parent, Bancorp, to meet two capital-to-assets ratios. The first such ratio,
referred to as the "risk-based" capital test, assigns a weight (or percentage)
to assets by categories of risk established by the federal regulators. Under
this test, Capital Bank's and Bancorp's "tier one capital" (consisting
essentially of their common stockholders' equity and minority interests, if
applicable) is required to equal at least 4% of their risk-weighted assets. Also
as part of the "risk-based" capital test, all of Capital Bank's and Bancorp's
capital (tier one or otherwise) must equal or exceed 8% of aggregate
risk-weighted assets.

The second ratio is referred to as the "leverage" test. Under this test, each of
Capital Bank and Bancorp must maintain tier one capital equal to or exceeding 3%
of total assets, or such higher level as may be imposed by federal regulators.
The regulators have publicly indicated that a bank should, in practice, maintain
a leveraged capital-to-assets ratio of at least 1% to 2% above the 3% minimum.

The following table sets forth Capital Bank's and Bancorp's regulatory capital
ratios as of December 31, 1996 and 1995:

                                        BANCORP              CAPITAL BANK
                                  12/31/96   12/31/95    12/31/96   12/31/95
                                  --------   --------    --------   --------
Tier One Capital Ratio              10.84%      9.99%      10.37%      9.58%
Total Capital Ratio                 11.75%     11.24%      11.28%     10.83%
Leverage Ratio                       8.38%      7.25%       8.03%      6.97%

EMPLOYEES

At December 31, 1996, the Company had 275 full-time employees, including 143 in
its Fort Lauderdale office, 56 in its California office, 45 in its New York
office, and 31 in its North Carolina office. None of the Company's employees are
covered by a collective bargaining agreement and the Company considers its
employee relations to be good.

EXECUTIVE OFFICERS

The executive officers of Holding and Factors are as follows:

<TABLE>
<CAPTION>

NAME                            AGE    POSITION WITH THE COMPANY
----                            ---    -------------------------
<S>                             <C>    <C>
John W. Kiefer.................  50    President, Chief Executive Officer and Director
Stephen J. Donohue.............  52    Executive Vice President-New York Regional Manager
James L. Morrison..............  53    Executive Vice President-California Regional Manager
Michael J. Sullivan............  48    Senior Vice President-North Carolina Regional Manager
Dennis A. McDermott............  46    Senior Vice President-Chief Financial Officer
John B. Apgar..................  43    Senior Vice President-Healthcare
Javier J. Holtz................  36    Executive Vice President and Chairman of the Board
</TABLE>

Mr. Kiefer has served as the Company's President and Chief Executive Officer and
as a director since April 1987. Mr. Kiefer has also served as a Senior Vice
President of Bancorp since January 1987 and as director of Capital Bank since
October 1992. From 1984 to 1986, Mr. Kiefer served as Senior Vice
President-Regional Manager of Barclays American/Commercial Inc. and served as
Vice President from 1981 to 1984.

Mr. Donohue has served as the Company's New York Regional Manager since April
1990, and was promoted from a Senior Vice President to an Executive Vice
President in January 1992. From 1970 to April 1990, Mr. Donohue was employed by
Bankers Trust Factors in various positions, including Manager of Client
Portfolio.

                                       15

<PAGE>

Mr. Morrison has served as the Company's California Regional Manager since
August 1989, and was promoted from a Senior Vice President to an Executive Vice
President in January 1992. From 1984 to August 1989, Mr. Morrison served as Vice
President-Regional Manager of the Los Angeles office of NatWest Commercial
Services, Inc.

Mr. McDermott has served as the Company's Senior Vice President-Chief Financial
Officer since July 1991. Prior to joining the Company, Mr. McDermott served as
Chief Accounting Officer from April 1990 to June 1991 at the request of the
Resolution Trust Company with several troubled financial institutions, including
AmeriFirst Bank, American Pioneer Savings Bank, and CenTrust Bank. Mr. McDermott
served as Vice President-Chief Financial Officer of Ambassador Financial Group,
Inc., a savings and loan holding company, from July 1988 to March 1990, and as
Executive Vice President-Chief Financial Officer of Crossland Savings from
September 1983 to June 1988.

Mr. Sullivan has served as the Company's Senior Vice President-North Carolina
Regional Manager since March 1995. From August 1994 to February 1995, Mr.
Sullivan served as the Head of Business Development for the CIT Group, the
successor to Barclays Commercial Corporation. From November 1981 to February
1994, Mr. Sullivan served as Senior Vice President-Regional Executive of
Barclays Commercial Corporation and, from March 1994 to August 1994, Mr.
Sullivan served in the same capacity with the CIT Group. Prior to that and from
June 1975 to December 1980, Mr. Sullivan was International Credit Director of
the B.F. Goodrich Company. Mr. Sullivan performed independent consulting
services from December 1980 to November 1981.

Mr. Apgar has served as the Company's Senior Vice President-Healthcare since
June 1994. From April 1992 to April 1993, Mr. Apgar was the head of the new
business segment of Tower Financial Corporation. In April 1993, Tower Financial
Corporation filed a petition seeking relief under the United States Bankruptcy
Code. In May 1993, Mr. Apgar was appointed Senior Vice President-Client
Relations-Healthcare Division of Tower Financial Corporation by the trustee
appointed to administer Tower Financial's bankruptcy estate and served in such
position until April 1994. From July 1990 to March 1992, Mr. Apgar was Vice
President-New Business of BancBoston Financial Company, a Trust of Bank of
Boston.

Mr. Javier Holtz has served as a director of the Company since August 1987 and
as Executive Vice President since November 1994. Mr. Holtz was appointed
Chairman of the Board of the Company in October 1994. In addition, Mr. Holtz has
been employed by Capital Bank since 1983, most recently as an Executive Vice
President. Mr. Holtz has been a director of Capital Bank since 1988. Mr. Holtz
has also served as Senior Vice President of Bancorp since January 1990. Mr.
Holtz is Chairman of the Board of Capital Bank, N.A., Rockville, Maryland. Mr.
Holtz is the brother of Daniel Holtz, a director of the Company and the Chairman
of the Board, President and Chief Executive Officer of each of Bancorp and
Capital Bank, and the son of Fana Holtz, the Vice Chairman of Bancorp's Board of
Directors and the beneficial owner of approximately 37% of Bancorp Common Stock,
and Abel Holtz, the beneficial owner of approximately 9.1% of Bancorp Common
Stock.

                                       16

<PAGE>

ITEM 2. PROPERTIES

The Company provides services to its clients through offices located in Fort
Lauderdale, Florida; Los Angeles, California; New York City, New York; and
Charlotte, North Carolina. The Company acquired the office building located in
Fort Lauderdale, Florida from an affiliate in December 1990. In October 1996,
the Company entered into a ten-year lease for approximately 14,200 square feet
of office space in Boca Raton. The lease provides for annual base rent of
approximately $312,000 for the first five years and $341,000 for the remaining
term. Commencement of the lease is contingent upon substantial completion of the
tenant build-out, scheduled for May 1997. The Company's corporate headquarters
and the Florida regional office will re-locate to the Boca Raton office and the
Fort Lauderdale office will remain as the Company's operations center. The
Company leases approximately 14,000 square feet of office space in Los Angeles
pursuant to a ten-year lease that terminates in September 2005, and provides for
annual base rental payments of approximately $218,600 through August 2000 and
$257,500 during the remaining term of the lease. The Company leases
approximately 12,300 square feet of office space in New York pursuant to a
five-year sublease that terminates in December 1999 and provides for annual base
rental payments of approximately $337,700 through December 1996 and $368,400
during the remaining term of the lease. The Company leases approximately 9,800
square feet of office space in North Carolina pursuant to a five year lease that
terminates in April 2000 and provides for annual base rental payments of
approximately $196,430. In March 1997, the Company signed a five-year lease for
3,000 square feet of office space in Atlanta, Georgia. The annual base rental
payment for the Atlanta office equals $57,750.

Trademarks, Service Marks and Licenses

In 1991, Bancorp registered the name "Capital Factors" with the United States
Patent and Trademark Office. Since the registration of such service mark,
Bancorp has authorized the Company's uninterrupted and unrestricted use of the
name "Capital Factors." In 1996, Bancorp made application to register the name
"Capital Business Credit" with the United States Patent and Trademark Office.
Bancorp has authorized the Company's uninterrupted and unrestricted use of the
name "Capital Business Credit". No agreement regarding the Company's use of such
service marks exists between Bancorp and the Company and no fee is paid by the
Company in connection with such uses. The "Capital Factors" service mark is
effective until December 2001, unless sooner terminated as provided by law. In
addition, the Company has recently applied for certain other service marks to be
used by it in connection with its business operations. The Company's management
does not believe that its business is dependent upon the use of any particular
service mark, trademark, license or similar property.

                                       17

<PAGE>

ITEM 3. LEGAL PROCEEDINGS

The Company

From time to time, the Company has been a party to lawsuits and claims,
including lender liability claims, which management considers incidental to
normal operations. The Company is currently a party to one lawsuit that was
dismissed after trial. The plaintiff is currently appealing the dismissal.
Management, after review, including consultation with counsel, believes that any
ultimate liability which could arise from this current lawsuit would not
materially affect the financial position of the Company.

Bancorp and Capital Bank Legal Proceedings

Capital Bancorp and the Bank are currently parties to two related litigation
matters, which are described below. Neither the Company nor Capital Factors has
been named as a defendant in such matters.

NATHAN J. ESFORMES, STANLEY I. WORTON, M.D., AND LEONARD WEIN, AS INDIVIDUAL
SHAREHOLDERS AND ON BEHALF OF ALL OTHER SHAREHOLDERS OF CAPITAL BANCORP V. ABEL
HOLTZ, FANA HOLTZ, DANIEL M. HOLTZ, JAVIER J. HOLTZ, CAPITAL BANK AND CAPITAL
BANCORP, Circuit Court for the 11th Judicial District in and for Dade County,
Florida (Case No. 95-02515).

On February 8, 1995, certain shareholders of Capital Bancorp commenced a
derivative action against Capital Bancorp, Daniel M. Holtz, the Chairman of the
Board, President and Chief Executive Officer of Capital Bancorp and a director
of the Company, Fana Holtz, the Vice Chairman of the Board, Javier Holtz, a
director of the Bank and Chairman of the Board of the Company, and Abel Holtz,
the former Chairman of the Board, President and Chief Executive Officer of
Capital Bancorp and Chairman of the Board of the Company (the "Derivative
Action"). The Derivative Action was subsequently amended to add, among other
things, the remaining members of the Board of Directors of Capital Bancorp as
defendants. Through the Derivative Action, the plaintiffs alleged that certain
defendants engaged in a series of illegal activities causing harm to Capital
Bancorp and the Bank, including (i) the settlement of a sexual harassment claim,
(ii) the payment of excessive compensation and separation payments, (iii) the
appointment of unqualified family members as officers, (iv) the withholding of
information and (v) the misappropriation of the Bank funds for personal uses.
The plaintiffs also alleged that such individuals engaged in a series of
activities designed to improperly increase or maintain their interest in, and
control of, Capital Bancorp, including (i) the unlawful use of proxies, (ii) the
prevention of investigations and shareholder meetings, (iii) the unlawful
alteration of the composition of Capital Bancorp's Board of Directors and (iv)
the failure to obtain approval for a change in control.

The Board of Directors of Capital Bancorp established an independent committee
(the "Committee") to investigate the allegations contained in the Derivative
Action and to retain independent legal counsel. The members of the Committee are
Russell Galbut, who serves as Chairman of the Committee, and Hugh Culverhouse,
Jr., both of whom are outside directors of Capital Bancorp. Thereafter, the
plaintiffs alleged that the Committee was not independent because members were
invalidly elected by the Board and because such members knew or should have
known about the alleged illegal proxy solicitation and alleged fraudulent
actions by the other defendants. Upon motion of the defendants, the complaint
was dismissed without prejudice in November 1995 for containing legal argument,
which the court ruled to be improper. The Court allowed for the filing of an
amended complaint, but stayed the proceedings and any required response to an
amended complaint until the Committee had a reasonable period of time to
complete its review. The plaintiff's appeal of the Court's decision to stay the
proceedings was denied. In May 1996, the plaintiffs moved for a rehearing or,
alternatively, for clarification of the Court's denial of such appeal. In June
1996, the plaintiff's motion for rehearing was denied.

                                       18

<PAGE>

An amended complaint was filed in December 1995 containing substantially the
same allegations. The plaintiffs in the Derivative Action are seeking, on behalf
of Capital Bancorp, unspecified monetary damages, including treble damages,
reasonable costs and attorneys' fees, and injunctive relief (i) precluding Fana
Holtz from voting shares for which she has proxies, (ii) setting aside a
February 27, 1995 shareholders' meeting, (iii) reinstating two former directors,
(iv) precluding the current Board from taking any action and (v) returning
certain shares to Capital Bancorp. No motions seeking such relief have been
filed. No monetary relief is sought from Capital Bancorp and no count
specifically seeks relief from Capital Bancorp.

The Committee issued a report dated May 29, 1996 concluding, based on its
investigation and the investigation of its counsel and accounting firm, that the
"derivative litigation is not in the best interest of Capital Bancorp or Capital
Bank and, as such, should be dismissed". In December 1996, Capital Bancorp
entered into an agreed order with the plaintiffs to lift the stay entered by the
Court and, in January 1997, Capital Bancorp filed a motion to dismiss the
Derivative Action. A hearing on such motion is pending.

The Chairman of the Committee, and two companies in which he is a principal and
a director (neither of which are affiliates of Capital Bancorp or the Bank),
were recently named as defendants in a complaint filed in the United States
District Court for the Southern District of Florida by a former female employee
of such companies, alleging sex discrimination, sexual harassment and exposure
to a sexually hostile work environment through the actions of such director as
the managing director of the defendant companies. The complaint also alleges
intentional infliction of emotional distress and violation of the Florida
Whistleblower Statute. In connection with the latter claim, the employee
alleges, among other things, that in 1995, the director requested that she
provide perjured testimony in connection with "private civil litigation and an
investigation by the Federal Deposit Insurance Corporation involving Capital
Bancorp," which testimony would have included, but not been limited to, "the
fact that certain shares of stock of Capital Bancorp were being fraudulently
held in trust for [the director] under the names of certain other third
parties." The former employee also alleges that the director requested that she
assist the law firm hired by Capital Bancorp to conduct a purportedly
"independent investigation." The plaintiff alleges that the director made this
request even though he was named as a defendant in the lawsuit and that he
promised her a large bonus if she became involved and provided him with details
of any findings of wrongdoing before officially reported. Although no answer is
yet due or has been filed, the director has advised Capital Bancorp that in his
judgment, there is no substance to any of the allegations. The director's motion
to dismiss, or in the alternative, for summary judgment is pending. No other
allegations in this complaint relate to Bancorp or the Bank.

The director has filed an action against the former employee in the Circuit
Court for the Eleventh Judicial Circuit in and for Dade County, Florida, seeking
permanent injunctive relief and damages for conspiracy and extortion, as well as
defamation and intentional infliction of emotional distress. The director
alleges that the former employee schemed to extort $1.2 million from the
director by the use of defamation and blackmail.

STANLEY I. WORTON, M.D., NATHAN J. ESFORMES V. ABEL HOLTZ, FANA HOLTZ, DANIEL
HOLTZ, ALEX HALBERSTEIN AND CAPITAL BANCORP, Circuit Court for the 11th Judicial
District in and for Dade County, Florida (Case No. 95-02520).

Also on February 8, 1995, a shareholder of Capital Bancorp commenced an
individual action against Capital Bancorp, Daniel Holtz, Javier Holtz, Fana
Holtz and Abel Holtz (the "Individual Action"). Such action alleged that the
defendants, other than Capital Bancorp, breached fiduciary duties owed to the
plaintiff by, among other things, improperly using proxies to vote shares of
Capital Bancorp owned by the plaintiff and another shareholder to engage in
improper activity and to promote their personal interest to the detriment of the
plaintiff. In support of the complaint, the plaintiff asserted many of the same
allegations contained in the Derivative Action. Thereafter, the plaintiff filed
an amended

                                       19

<PAGE>

complaint pursuant to which an additional plaintiff was added (both plaintiffs
are named plaintiffs in the Derivative Action) and all the existing and certain
former directors of Capital Bancorp were added as defendants. The amended
complaint alleged that certain of the defendants unlawfully solicited proxies
for the February 27, 1995 annual shareholders' meeting and that the actions
taken at such meeting, including the reduction in the size of the Board, were
invalid. The amended complaint also sought a court order directing Capital
Bancorp to hold a shareholders' meeting on or before May 28, 1995 to elect a
board of directors (although the required papers to have a hearing on the matter
have not been filed).

Upon motion of the defendants in the Individual Action, the amended complaint
was dismissed without prejudice for containing legal argument, which the court
ruled to be improper. The Court dismissed with prejudice the plaintiff's request
to terminate the proxies granted by the non-plaintiff shareholder. The Court
allowed for the filing of an amended complaint, but stayed the proceedings as to
certain claims until the Independent Committee had a reasonable period of time
to complete its review. The Court also indicated that certain counts of the
complaint did not properly plead the elements for injunctive relief. An amended
complaint was filed in December 1995 containing substantially the same
allegations. The plaintiffs seek unspecified monetary damages and costs and, in
addition to the injunctive relief requested in the Derivative Action, plaintiffs
seek relief regarding, among other things, the voting and/or termination of
certain proxies, the establishment of a constructive trust for certain shares
and options, the holding of a shareholders meeting, the return to one of the
plaintiffs of his percentage of any shares obtained by members of the Holtz
family because of the control group created by the proxies and the reinstatement
of one of the plaintiffs to the Board of Directors and invalidation of the
actions of the current Board. Plaintiffs also seek declaratory relief
invalidating the proxies and former actions with respect to which the proxies
were voted. The plaintiffs have not indicated that they are seeking any monetary
relief from Capital Bancorp other than costs. Capital Bancorp has filed a motion
to dismiss the two counts of the complaint in the Individual Action in which it
is named and has moved to stay certain other counts of the complaint on the
grounds that those claims are derivative.

Capital Bancorp has advised the Company that it has not determined whether, if
asked, it would indemnify directors and former directors named in this action if
the plaintiffs are successful, although it is currently advancing the legal
expenses of the outside directors who were named as defendants. Such defendants
have agreed to repay Capital Bancorp for all or any portion of such advances
which they are ultimately found not to be entitled to pursuant to applicable
law.

Neither the Company, Factors nor any of their subsidiaries are parties to either
of the current actions and management does not believe that the outcome of such
actions will have a material adverse effect on the Company's financial
condition, results of operations or liquidity.

Regulatory Matters

Fana Holtz, the Vice-Chairman of the Board of Capital Bancorp, Daniel Holtz,
Chairman of the Board, President and Chief Executive Officer of Capital Bancorp
and a director of the Company, and Javier Holtz, Senior Vice President of
Capital Bancorp, a director of the Bank and Chairman of the Board of the
Company, have advised Capital Bancorp that they had discussions with the Florida
Department of Banking and Finance (the "FDBF") as to whether one or more of them
was required under Florida law to file an application to acquire and/or maintain
a controlling interest in the Bank through their ownership and control of
Capital Bancorp. Fana Holtz, Daniel Holtz and Javier Holtz have advised Capital
Bancorp that, as a result of those discussions, they, both individually and as a
group, have voluntarily filed an application to acquire and/or maintain a
controlling interest in Capital Bancorp, although they do not believe such an
application is legally required. Daniel Holtz, Fana

                                       20

<PAGE>

Holtz and Javier Holtz also have had discussions with the Board of Governors of
the Federal Reserve (the "FRB") as to whether a change of control notice is
required under federal law. As of February 14, 1997, Daniel Holtz, Fana Holtz
and Javier Holtz, owned and/or had the power to vote, approximately 6.4%, 36.8%
and 3.8% (47.0% in the aggregate), respectively, of Capital Bancorp's Common
Stock (including shares of Common Stock subject to options exercisable by such
individuals within 60 days).

The plaintiffs and another shareholder in the above-described litigations have
filed a Notice of Intent to Appear and Petition for a Formal Administrative
Hearing with the FDBF in connection with the disposition of the Florida
application opposing the change in control notice and application and raising
many of the same issues raised in the Derivative and Individual Actions. A
hearing commenced in August 1996 and ended in November 1996 but, to the
Company's knowledge, no decision has been reached on the application. It cannot
be presently determined what effect, if any, the discussions with the FRB and
the FDBF's action on the application will have on the Company, although if
control applications ultimately were determined to be required and such
applications were denied, regulatory authorities could take various actions,
including requiring that one or more members of the Holtz family divest
sufficient shares of Capital Bancorp so as not to have legal control of Capital
Bancorp as defined by regulatory authorities.

Abel Holtz, the former Chairman of the Board, President and Chief Executive
Officer of Capital Bancorp and former Chairman of the Board of the Company, and
currently a shareholder of Capital Bancorp, is subject to the restrictions of
Section 19 of the Federal Deposit Insurance Act which preclude him from
controlling or otherwise participating in the affairs of Capital Bancorp or the
Bank without regulatory approval. Federal bank regulatory authorities have been
examining and investigating whether Abel Holtz and some or all of the persons
discussed in the paragraphs above, including the Company and its subsidiaries,
and possibly other persons, are in compliance with applicable change in control
laws and Section 19. In December 1996, the Federal Deposit Insurance Corporation
(the "FDIC") issued a cease and desist order, which prohibits Abel Holtz from,
among other things, (i) assisting, participating or engaging in the solicitation
of proxies from Capital Bancorp shareholders; (ii) influencing or attempting to
influence the voting or disposition of any shares of Common Stock of Capital
Bancorp, excepting only the disposition of those shares owned directly by him;
(iii) requesting or receiving performance reports or other internal data
relating to the activities, operations or financial condition of Capital Bancorp
or the Bank; or (iv) communicating with any officer, director or employee of
Capital Bancorp or the Bank on matters regarding the conduct of the operations
or affairs of Capital Bancorp or the Bank. The cease and desist order also
required, among other things, that Abel Holtz, who as of February 14, 1997 owned
9.1% of Capital Bancorp's Common Stock, enter into an irrevocable proxy (the
"Proxy") with respect to such shares. Capital Bancorp has been advised that on
December 24, 1996, Abel Holtz entered into such proxy, which transferred the
sole right and power to vote the shares of Capital Bancorp he currently owns
(and any shares he may acquire in the future) to a third party. Pursuant to the
Proxy, such third party is required to vote the shares proportionately with all
other outstanding shares of Capital Bancorp on any matter brought before the
shareholders of Capital Bancorp for a vote.

The Company also was advised that, in a January 1997 letter, the FDIC informed
Fana Holtz, Daniel Holtz and Javier Holtz that the FDIC did not anticipate
recommending any enforcement action against any of such individuals as a result
of the FDIC'S investigation. The FDIC'S decision was based on information known
to the FDIC at such time, and the FDIC reserved the right to change its position
in the event that additional facts and circumstances warrant reconsideration.

To date, the Company, Bancorp and Capital Bank are unaware of any other
conclusions related to the above described inquiries.

                                       21

<PAGE>

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of the fiscal year ended December 31, 1996.

                                       22

<PAGE>

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Trading Market

Effective July 11, 1996, Capital Factors Holding, Inc.'s Common Stock was listed
for trading on the Nasdaq National Market under the symbol "CAPF." Prior to that
date, there was no established trading market for the Common Stock. The high and
low sales prices of the Company's Common Stock since the commencement of public
trading are set forth below for the periods indicated:

                           QUARTER ENDED               QUARTER ENDED
                         SEPTEMBER 30, 1996          DECEMBER 31, 1996
                         ------------------          -----------------
High                          $10.375                     $13.25
Low                           $ 8.25                      $ 9.875
Close                         $10.25                      $12.50

As of March 25, 1997, there were approximately 550 holders of record,
including individual participants in security position listings of the
Company's Common Stock and the closing price as quoted on the Nadsaq National
Market was $15.00.

Dividends

The Company has not paid any dividends on the Common Stock as of December 31,
1996. The Company presently intends to retain all future earnings for the
operation and expansion of its business and does not anticipate paying cash
dividends in the foreseeable future. Any future determination as to the payment
of cash dividends will depend on the Company's results of operations, financial
condition and capital requirements, and any regulatory restrictions or
restrictions under credit agreements or other funding sources of the Company
existing from time to time, as well as other matters which the Company's Board
of Directors may consider.

                                       23
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

Summary Consolidated Financial Data
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                          1996         1995         1994             1993            1992
                                      -----------   ----------   ----------      ----------       ----------
<S>                                   <C>           <C>          <C>             <C>              <C>
Income Statement Data:
Factoring fees......................    $  26,066    $  19,519    $  17,371       $  15,376       $   12,482
Interest income.....................       35,835       28,211       17,628          13,511           11,450
Interest expense....................      (20,403)     (16,361)     (10,329)         (7,842)          (7,005)
                                      -----------   ----------   ----------      ----------       ----------
Net interest income.................       15,432       11,850        7,299           5,669            4,445
Letter of credit and other fees.....        3,099        2,040        1,238           1,128              665
Other income........................        1,708        1,849        1,541           1,303              905
                                      -----------   ----------   ----------      ----------       ----------
     Operating revenues.............       46,305       35,258       27,449          23,476           18,497
Provision for credit losses.........        3,750        2,235        2,235           2,645            3,150
Operating expenses..................       23,516       18,457       14,137          13,072           11,316
                                      -----------   ----------   ----------      ----------       ----------
     Total expenses.................       27,266       20,692       16,372          15,717           14,466
Income before income taxes(1).......       19,039       14,566       11,077           7,759            4,031
Net income..........................       11,115        8,693        6,092           4,305            2,304
Primary earnings per share..........  $      1.01   $     0.87   $     0.61       $    0.43       $     0.23
Fully diluted earnings per share....  $      0.99   $     0.87   $     0.61       $    0.43       $     0.23

Operating Ratios and Other Data(2):
Factored sales......................  $ 2,651,442   $2,001,364   $1,536,960      $1,326,802       $1,057,846
Factoring fees to factored sales....         0.98%        0.98%        1.13%           1.16%            1.18%
Net interest income to factored
  sales.............................         0.58%        0.59%        0.47%           0.43%            0.42%
Letter of credit and other fees to
  factored sales....................         0.12%        0.10%        0.08%           0.09%            0.06%
Other income to factored sales......         0.06%        0.09%        0.10%           0.09%            0.09%
                                      -----------   ----------   ----------      ----------       ----------
Operating revenues to factored
  sales.............................         1.74%        1.76%        1.79%           1.77%            1.75%
Provision for credit losses to
  factored sales....................         0.14%        0.11%        0.15%           0.20%            0.30%
Operating expenses to factored
  sales.............................         0.89%        0.92%        0.92%           0.99%            1.07%
                                      -----------   ----------   ----------      ----------       ----------
Total expenses to factored sales....         1.03%        1.03%        1.07%           1.18%            1.37%
Income before income taxes to
  factored sales....................         0.72%        0.73%        0.72%           0.58%            0.38%
Return on equity(3).................        24.01%       30.20%       28.80%          26.57%           17.78%
Return on assets(3).................         2.36%        2.71%        2.35%           1.99%            1.32%
Average funds employed(4)...........  $   286,200   $  210,900   $  153,600      $  131,800       $  108,300
Net interest income to average
  funds employed....................         5.39%        5.62%        4.75%           4.30%            4.10%
Net charge-offs to factored
  sales volume......................         0.14%        0.05%        0.17%           0.20%            0.30%
Accounts receivable turnover
  in days(5)........................           52           53           53              52               54
Average number of employees.........          242          193          162             153              140
Avg. factored sales per employee....  $    10,956   $   10,370   $    9,487      $    8,672       $    7,246
</TABLE>

                                       24
<PAGE>

                                                    DECEMBER 31,
                                            1996                    1995
Balance Sheet Data:                      ---------                ---------
Receivables, net.......................  $ 485,548               $ 354,821
Total assets...........................    530,567                 399,471
Due to factoring clients...............    191,489                 128,578
Borrowings.............................    271,031                 227,260
Due to Affiliates and other liabilities      5,959                  10,293
Shareholders' equity...................     62,088                  33,340

----------------------------

(1) The results of operations of the Company are included in the consolidated
    Federal income tax returns filed by Capital Bancorp, the parent of Capital
    Bank. Capital Bank, the Company's majority shareholder, allocates income
    taxes to the Company calculated on a separate return basis.
(2) For purposes of the ratios and data below for 1994 and 1995, factored sales
    include certain receivables which are pledged as collateral for those
    asset-based loans for which the Company provides factoring-type services.
(3) Computed using average monthly balances
(4) Computed using average monthly balances of funds employed (receivables less
    amounts due to factoring clients).
(5) Computed by dividing 365 by the quotient of (i) factored sales volume for
    the periods indicated and (ii) the average monthly accounts receivable
    balance for the periods indicated.

                                       25

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
        CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES

INTRODUCTION
------------

Capital Factors Holding, Inc. ("Holding") is a majority owned subsidiary of
Capital Bank (the "Bank"), a Florida commercial bank. The Bank is a wholly-owned
subsidiary of Capital Bancorp. Holding has two wholly-owned subsidiaries,
Capital Factors, Inc. ("Factors") and CF One, Inc. Factors has two wholly-owned
subsidiaries, CF Funding Corp. ("Funding") and Capital TempFunds, Inc.
("TempFunds"). Throughout this discussion, Holding, Factors and their
subsidiaries are collectively referred to as the "Company."

The following discussion and analysis presents the significant changes in the
financial condition and results of operations for the periods indicated. In
addition, this Form 10-K contains certain "forward-looking statements" which
represent the Company's expectations or beliefs, including, but not limited to,
statements concerning industry performance and the Company's operations,
performance, financial condition, growth and strategies. For this purpose, any
statements contained in the Form 10-K that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the generality
of the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "intend," "could," "estimate," or "continue" or the negative or
other variation thereof or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, such as credit losses, dependence on availability of
funding sources, dilution of receivables, concentration of client base and
client customer base, dependence on management and key personnel, seasonality
and variability of quarterly results, ability of the Company to continue its
growth strategy, competition, inability to directly collect healthcare
receivables from Medicare and Medicaid, dilution of healthcare receivables,
control by majority shareholder, and regulatory restrictions relating to
potential new activities, Bancorp and Capital Bank litigation (see "Legal
Proceedings"), certain of which are beyond the Company's control, and actual
results may differ materially depending on a variety of important factors which
are noted herein. The discussion should be read in conjunction with the
consolidated financial statements and notes included in this report.

The Company provides fee-based services to its clients, including credit
protection, collection and management information services, and also makes
advances to many of its clients. Clients are generally manufacturers of goods or
providers of services in various industries. At the time the Company purchases
the factored receivables, the Company records a receivable and an offsetting
liability "due to factoring client." Advances, which are interest earning and
secured by the client's factored receivables, are recorded by the Company as
reductions to the amounts due to the factoring client for factored receivables.
Cash collections from the client's customers are used to repay the client's
loans. If, as a result of financial inability to pay, a client's customer fails
to pay a receivable that was credit-approved by the Company, the Company will
ultimately bear any loss with respect to such receivable. In the event of
dilution in excess of the unfinanced portion of receivables, where factored
receivables are not fully collected for a reason other than the customer's
financial inability to pay, such as breach of warranty, the Company will in
practice typically need to look to newer receivables of the client for the
collection of the outstanding obligation to the Company and may not be repaid.

In contrast to the Company's purchase of factored receivables, when the Company
makes an asset-based loan, a client assigns its collateral (usually account
receivable and inventory) to the Company. Upon request of the client, the
Company may advance funds to the client as a loan in an amount based upon the
eligible collateral. When funds are advanced to a client, a loan receivable
balance is created, and cash is disbursed. Although the Company loans funds to
the client based on eligible collateral, the Company provides no credit
protection and, accordingly, does not assume the risk of loss from a client's
customers' inability to pay, although the Company may actually suffer a loss if
all sources of repayment fail, including other collateral and guarantees, if
any. In connection with asset-based loans, instead of a factoring fee, the
Company earns a facility fee. Both factored advances and asset-based loans bear
interest at a rate tied to the prime rate.

                                       26

<PAGE>

The Company operated through four regional offices (including the Florida
office) in 1996, and, in January 1997, it opened an office in Atlanta which will
specialize in asset based loans. The Company currently has over 400 clients who
generate annual sales from $500,000 to over $100 million, and services over
100,000 customers of those clients. The majority of the Company's customers are
large national or regional department store chains or specialty retailers. At
December 31, 1996, the largest amount due from any one customer, a national
department store chain, was approximately $20.7 million.

The Company's factored sales volume can be affected in several ways, including
new clients, client retention or loss inflation and other economic conditions.
Additionally, fluctuations in the sales dollar volume of the Company's clients,
both positive and negative, have a direct impact on the Company's factored sales
volume and factoring fees. In this regard, the Company has historically
experienced seasonal fluctuations in its factored sales volume and factoring
fees as a result of the seasonality of the sales of certain of the Company's
clients, especially those in the apparel industry, who typically ship more goods
during the four-month period of August through November in order to fill
increased customer orders in anticipation of "back to school" and the ensuing
holiday season. The Company realized approximately 40% of its annual factored
sales volume during this 4-month period in 1994, 1995 and 1996.

Management believes that one of the essential tools in maintaining and managing
growth of the Company is the monitoring of certain key financial ratios. The
Company monitors the key components of its income statement data, such as
factoring fees, net interest income, other income, provision for credit losses
and operating expenses, as a percentage of its factored sales volume. These key
ratios allow the Company to monitor its performance in achieving its goals of
(i) obtaining higher gross margins on factoring fee income, (ii) increasing fee
income as a percentage of cash employed, (iii) reducing credit losses, (iv)
controlling costs, and (v) maximizing return to its investors. Management also
monitors both accounts receivable turnover and the aging of customers' accounts
receivable, with particular emphasis on amounts greater than 60 days past due.

MONITORING ASSET QUALITY AND CREDIT LOSSES
------------------------------------------

The monitoring of asset quality is a routine function performed by management to
control credit losses. Monitoring asset quality involves the periodic review,
sometimes daily, of such pertinent financial statistics as the aging of the
accounts receivable portfolio, accounts receivable turnover, dilution and
charge-offs. The Company's allowance for credit losses is determined after
evaluating the receivables portfolio, current market conditions, changes in the
nature and volume of the portfolio, past loss experience and other pertinent
factors.

                                       27

<PAGE>

Set forth below are those ratios and statistics utilized by management in
monitoring asset quality for the twelve months ended December 31, 1996 and
December 31, 1995:

<TABLE>
<CAPTION>
                                                                 AS OF DECEMBER 31,
                                        --------------------------------------------------------------
                                          1996           1995           1994        1993        1992
                                        --------       --------       --------    --------    --------
                                                              (DOLLARS IN THOUSANDS)
<S>                                     <C>            <C>            <C>         <C>         <C>
Provision for credit losses             $  3,750       $  2,235       $  2,235    $  2,645    $  3,150
Charge-offs net of recoveries           $  3,837       $  1,028       $  2,618    $  2,663    $  3,164

Allowance for credit losses-specific    $    531       $  1,203       $    160    $    600    $    967
Allowance for credit losses-general     $  2,462       $  1,778       $  1,614    $  1,557    $  1,208
                                        --------       --------       --------    --------    --------
  Total allowance for credit losses     $  2,993       $  2,981       $  1,774    $  2,157    $  2,175
Accounts receivable turnover in days          52             53             53          52          54
Accounts receivable past due more
  than 60 days as a percentage of
  total factored receivables                7.96%          3.49%          5.17%       4.85%       6.08%
Accounts receivable past due more
  than 90 days as a percentage of
  total factored receivables                4.09%          2.37%          2.35%       1.95%       2.66%
Credit-approved accounts receivable
  past due more than 60 days as a
  percentage of credit approved
  receivables(1)                            2.36%          4.71%           N/A         N/A           N/A
Credit-approved accounts receivable
  past due more than 90 days as a
  percentage of credit approved
  receivables(1)                            0.86%          2.79%           N/A         N/A           N/A
Provision for credit losses as a
  percentage of factored sales              0.14%          0.11%          0.15%       0.20%       0.30%
Net charge-offs to factored sales           0.14%          0.05%          0.17%       0.20%       0.30%
Average receivables                     $438,815       $312,124       $241,815    $204,664    $166,506
Provision for credit losses as a
  percentage of average receivables         0.85%          0.72%          0.92%       1.29%       1.89%
Net charge-offs as a percentage of
  average receivables                       0.87%          0.33%          1.08%       1.30%       1.90%
Non-accruing advances                   $    660       $  2,184       $    739    $    385    $  1,083
Non-accruing advances as a percentage
 of receivables                             0.13%          0.60%          0.28%       0.17%       0.60%
Average funds employed                  $286,200       $210,900       $153,600    $131,800    $108,300
Provision for credit losses as
  a percentage of average funds
  employed(2)(3)                            1.31%          1.06%          1.46%       2.01%       2.91%
Net charge-offs as a percentage
  of average funds employed(2)(4)           1.34%          0.49%          1.70%       2.02%       2.92%
Non-accruing advances as a
  percentage of funds
  employed(2)(5)                            0.22%          0.94%          0.44%       0.28%       1.01%
<FN>
----------------------
(1)  Management considers the aging of credit-approved receivables a more
     meaningful measure of exposure to credit risk than the aging of total
     receivables. Such ratios are not available prior to 1995.
(2)  Funds employed are receivables less amounts due to factoring clients.
(3)  Computed by dividing provision for credit losses by average funds employed
     for each period presented. The provision for credit losses as a percentage
     of average advances for each of the periods presented was lower than the
     provision for credit losses as a percentage of average funds employed.

                                       28

<PAGE>

(4)  Computed by dividing net charge-offs by average funds employed for each
     period presented. Net charge-offs as a percentage of average advances for
     each of the periods presented was lower than net charge-offs as a
     percentage of average funds employed.
(5)  Computed by dividing non-accruing advances by funds employed at the end of
     each respective period indicated. Non-accruing advances as a percentage of
     advances during each period presented was lower than non-accruing advances
     as a percentage of funds employed.
</FN>
</TABLE>

The Company regularly reviews its outstanding accounts receivable and other
extensions of credit, such as advances to clients, to determine the adequacy of
its allowance for credit losses. Factors such as the level of related credit
balances of clients and the impact of economic conditions on the
creditworthiness of the Company's clients and the client's customers are given
significant consideration in determining the adequacy of the Company's allowance
for credit losses. The Company's methodology for calculating its reserve for
doubtful accounts has remained consistent for the periods shown above, and
includes a specific and general component. Specific reserves are established for
receivables and client advances which the Company's management deems to be
wholly or partially uncollectible. The general reserve represents 0.75% of those
receivables (other than healthcare receivables, which have a lower general
reserve) that are not specifically reserved for but for which the Company has
provided credit guarantees.

The provision for credit losses as a percentage of factored sales increased from
0.11% in 1995 to 0.14% in 1996. The provision for credit losses as a percentage
of average receivables and the provision for credit losses as a percentage of
average funds employed increased to 0.85% and 1.31%, respectively, for 1996,
from 0.72% and 1.06%, respectively, in 1995, reflecting a higher net charge-off
rate. Ratios for 1996 are more consistent with the Company's historical
experience.

Net charge-offs as a percentage of factored sales ranged from 0.05% to 0.30% in
the 1992-1996 period reflecting normal credit loss consistent with historical
experience. Net charge-offs as a percentage of factored sales increased from
0.05% in 1995 to 0.14% in 1996. The net charge-offs percentage increased in 1996
due to the charge-off in the first quarter of $600,000 related to the bankruptcy
of a large Northeastern regional chain store and $200,000 related to a single
client loan, $93,000 of which was recovered, but net charge-offs remained well
within the Company's historical experience. Net charge-offs as a percentage of
average receivables and net charge-offs as a percentage of average funds
employed increased 0.54% and 0.85%, respectively, in 1996 as compared to 1995,
due primarily to the charge-offs described above.

Non-accruing advances as a percentage of funds employed have historically
remained below 1.00% and during 1996 and 1995, were at 0.22% and 0.94%,
respectively. Non-accruing advances as a percentage of receivables decreased
from 0.60% for 1995 to 0.13% for 1996. Management believes that non-accruing
advance fluctuations below 1.00% are a normal part of the Company's ongoing
business and are not significant.

Credit-approved accounts receivable past due more than 60 days as a percentage
of credit-approved factored receivables and credit-approved accounts receivable
past due more than 90 days as a percentage of credit-approved factored
receivables equaled 2.36% and 0.86%, respectively, at December 31, 1996 as
compared to 4.71% and 2.79%, respectively, at December 31, 1995. Management
considers these levels acceptable. Accounts receivable past due more than 60
days as a percentage of total factored receivables and accounts receivable past
due more than 90 days as a percentage of total factored receivables equaled
7.96% and 4.09%,

                                       29

<PAGE>

respectively, at 1996 as compared to 3.49% and 2.37%, respectively, at 1995. The
increase in these ratios was primarily due to an increase in healthcare factored
receivables from $16.3 million at December 31, 1995 to $22.7 million at December
31, 1996, that in general are slower paying with higher delinquency ratios.
Healthcare factored receivables are not credit-approved, thus the Company does
not guarantee payment of these receivables.

FINANCIAL CONDITION - DECEMBER 31, 1996 AS COMPARED TO DECEMBER 31, 1995

Total assets increased to $530.6 million at December 31, 1996 from $399.5
million at December 31, 1995. The $131.1 million increase was due primarily to a
$130.7 million increase in net receivables.

Factored accounts receivables increased $130.5 million primarily as a result of
increased factored sales. The increase is due primarily to engagement of larger
factoring clients, increases in volumes experienced by existing clients from
1995 to 1996, and increases in the number of clients serviced by the Company in
1996 as compared to 1995. The Company's factored accounts receivable are due
from clients' customers geographically located throughout the United States,
principally retailers, manufacturers and distributors. Asset based loans, which
represent loans provided to clients principally collateralized by accounts
receivable, decreased slightly by $2.3 million from December 31, 1995 to
December 31, 1996 due primarily to the loss of a large healthcare client with a
loan balance of $9.9 million at December 31, 1995. Restricted cash decreased
primarily as a result of the final draw down of $10.0 million of cash maintained
in a pre-funding account related to the third series of variable rate
asset-backed certificates collateralized by factored advances, but was offset by
an increase in non-restricted cash which is subject to fluctuations in daily
deposit volumes.

The increase in assets was principally funded by an increase in the Company's
debt outstanding under its debt facility with the Bank and two new credit
facilities closed by the Company during the twelve months ended December 31,
1996. Outstanding debt under the Capital Bank facility increased from
approximately $52.3 million at December 31, 1995 to approximately $70.1 million
at December 31, 1996. In April 1996, the Company closed a revolving credit
facility in the amount of $40 million with an unaffiliated bank. At December 31,
1996 the Company had $15.9 million outstanding under this facility, which bears
interest at LIBOR plus 2.15%. In May 1996, the Company, through its wholly-owned
subsidiary, CF One, Inc., raised an additional $10 million through the issuance
of 5 year notes, due and payable in July 2001, which bear interest at a fixed
rate of 7.95%.

Stockholders' equity increased approximately $28.7 million during 1996 as a
result of $17.6 million in net proceeds received from the sale of approximately
19% of the Company's common stock and $11.1 million of net income earned by the
Company. On July 10, 1996, the Company completed an initial public offering of
2,000,000 shares of common stock and on August 5, 1996, sold an additional
300,000 pursuant to the Underwriters' over-allotment option.

RESULTS OF OPERATIONS

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Net income increased 27.9% to approximately $11.1 million for 1996 as compared
to $8.7 million for 1995, due primarily to an increase in operating revenues
offset by an increase in the provision for credit losses and operating expenses.
Operating revenues (total revenues less interest expense) increased 31.3% to
approximately $46.3 million in 1996 from $35.3 million in 1995. These increases
were primarily a result of a 32.5% increase in the Company's factored sales
volume from $2.0 billion for 1995 to $2.7 billion for 1996. This increase in
factored sales was attributable to the opening of the Charlotte office which

                                       30

<PAGE>

increased factored sales volume by $159.6 million in the twelve month period,
combined with continued growth of the Company's New York and California offices.
The Company's healthcare division, which commenced operations in September 1994,
contributed $124.5 million in factored sales, a 41.0% increase over its
contribution over the prior comparable period. The New York office accounted for
43.1% of the Company's factored sales volume in 1996, compared to 48.0% in 1995.

The Company experienced a 33.5% increase in factoring fee income for 1996 as
compared to 1995 as a result of a 32.5% increase in factored sales. Factoring
fee income as a percentage of factored sales for the twelve month periods
remained flat at 0.98% in 1995 and 1996.

Net interest income (interest income less interest expense) increased to
approximately $15.4 million for 1996 from approximately $11.8 million for 1995,
a 30.2% increase, principally as a result of an increase of $75.3 million, or a
35.7% increase, in average outstanding funds employed for 1996 as compared to
1995. Additionally, the $17.6 million of net proceeds raised by the Company's
issuance of common stock in July 1996 which were used to reduce the debt
outstanding under the debt facility with Capital Bank favorably impacted net
interest income. Net interest income for 1996 also benefited from interest
expense reductions achieved through the issuance of $50.0 million of additional
Certificates under the Securitized Financings agreement in July 1995, entering
into a $40.0 million revolving loan agreement with an unaffiliated bank in April
1996, and the issuance of $10.0 million in subordinated notes in May 1996.
Average borrowings from the revolving loan during the year ended December 31,
1996 equaled approximately $17.1 million and had an effective interest rate of
8.2% for the twelve month period. The $10.0 million notes bear interest at a
fixed annual rate of 7.95%.

Letter of credit and other fee income increased to approximately $3.1 million
for 1996 from $2.0 million for 1995, a 51.9% increase. Letter of credit fees
increased approximately 32.7% or $277,000 during the year. Other fee income
includes fees charged for wires and client audits.

The provision for credit losses increased to $3.8 million for 1996 from $2.2
million for 1995. This increase is primarily attributable to an increase in
outstanding accounts receivable. The provisions for credit losses as a
percentage of factored sales for the year ended December 31, 1996 increased to
 .14% as compared to .11% for the comparable period in 1995, reflecting a higher
net charge-off rate (see "Monitoring Asset Quality and Credit Losses").

Operating expenses (total expenses less interest expense) increased from $18.5
million for 1995 to $23.5 million for 1996. This $5.1 million or 27.4% increase
is primarily the result of opening the North Carolina regional office and
expansion of the existing regional offices and the healthcare division.

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

Net income increased from approximately $6.1 million during 1994 to
approximately $8.7 million during 1995, a 42.6% increase primarily as a result
of increased operating revenues generated from increased factored sales.
Operating revenues increased from approximately $27.4 million for 1994 to
approximately $35.3 million for 1995, a 28.5% increase, primarily attributable
to the increase in the Company's factored sales volume, and the resulting
increase in interest income and factoring fees. Factored sales increased from
approximately $1.5 billion for 1994 to approximately $2 billion for 1995, an
increase of 30.2%, with factoring fees increasing by 12.4% from approximately
$17.4 million for 1994 to approximately $19.5 million for 1995. A significant
portion of these increases were attributable to continued growth of the
Company's New York and California offices and the

                                       31

<PAGE>

opening of the Charlotte, North Carolina office, as well as the business
generated by the Company's healthcare division.

Although the Company experienced increased factoring fee income as a result of
increased factored sales, factoring fee income as a percentage of factored sales
has declined from 1.13% for 1994 to 0.98% (1.03% excluding asset-based lending
activities) for 1995. This decline was primarily the result of lower factoring
fees charged to high volume clients in the New York market. The Company
typically receives lower factoring fees from high volume clients 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 the
Company, and because there is increased competition for such clients' business.
The New York office accounted for 48.0% of the Company's factored sales volume
for 1995, compared to 53.0% for 1994.

Net interest income increased from approximately $7.3 million for 1994 to
approximately $11.8 million for 1995, a 62.3% increase, principally as a result
of a $57.3 million increase in average outstanding funds employed for 1995
compared to 1994. Net interest income was also favorably impacted by continued
interest expense reductions achieved through the issuance of additional
certificates under the Securitized Financings initiated by the Company in June
1994. The Company issued an additional $25 million of such certificates in
December 1994, and an additional $50 million in July 1995. This allowed the
Company to reduce the debt outstanding under its line of credit with the Bank,
which bears a higher interest rate (approximately 8.75% at December 31, 1995).
At December 31, 1995, there were $175 million of certificates issued under the
Securitized Financings outstanding bearing interest at LIBOR plus 1.25%
(approximately 7.19% at December 31, 1995, excluding annualized transaction
costs of 0.37%). (See "Liquidity and Capital Resources")

Letter of credit and other fee income increased from approximately $1.2 million
in 1994 to approximately $2.0 million in 1995, a 66.7% increase, primarily as a
result of an increase in letter of credit fees of approximately $305,000 in 1995
as compared to 1994, and an increase in overadvance fees of approximately
$332,000 in 1995 as compared to 1994. In addition, fees related to field
examinations increased by approximately $91,000 in 1995 as compared to 1994.
Overadvances represent loans to clients in excess of the factored accounts
receivable, substantially all of which are collateralized by assets other than
receivables. All of the foregoing increases were principally the result of
increased factoring volume in 1995.

Operating expenses increased as a percentage of operating revenues from
approximately 51.5% in 1994 to approximately 52.3% in 1995. The increase was the
result of the opening of the North Carolina office in May 1995, and increases in
salaries and benefits related principally to increased staff levels in the
healthcare division and the hiring of personnel for the North Carolina office.

The provision for credit losses was approximately $2.2 million in both 1994 and
1995. The provisions for credit losses as a percentage of factored sales
declined from 0.15% in 1994 to 0.11% in 1995. The Company's allowance for credit
losses is determined after evaluating the receivables portfolio, current market
conditions, changes in the nature and the volume of the receivables portfolio
and past loss experience. Management believes that the decline in net
charge-offs over such period reflects the Company's policies and practices of
(i) generally refraining from providing factoring services to certain
industries, (ii) carefully screening and selecting new clients, (iii)
maintaining stringent underwriting criteria and using good credit judgment, (iv)
using diligent monitoring procedures and (v) avoiding a significant
concentration in any one client or clients. Although management attributes this
positive trend primarily to the procedures it employs in monitoring asset
quality, which procedures have kept losses on client advances at negligible
levels and customer credit losses at their lowest level in the past three years,
there can be no assurances that such levels will be sustained by the Company in
the future. Non-accruing advances at December 31, 1995 were approximately $2.2
million compared to approximately

                                       32

<PAGE>

$739,000 at December 31, 1994. This increase was primarily attributable to
advances to a single client, most of which were collected in 1996.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal source of funding is its asset securitization program,
the Securitized Financings. This funding is supplemented by the Company's line
of credit with the Bank and a revolving credit facility with an unaffiliated
bank.

Through December 31, 1996, the trust created in connection with the Securitized
Financings had issued three series of asset-backed certificates (each, a
"Certificate") aggregating $175 million, including $100 million in June 1994,
$25 million in December 1994 and $50 million in July 1995. All of the
Certificates were issued to life insurance companies. Initially, the
Certificates were rated "AA" by Duff & Phelps Credit Rating Company and "A" by
Fitch Investors Services, Inc. Approximately one year after its initial rating,
Fitch Investors Services, Inc. upgraded its rating of the Certificates to "AA".
The scheduled maturity date of the Certificates corresponding to each series is
December 1999 ($100 million), June 2000 ($25 million), and January 2001 ($50
million), respectively. The Certificates issued under each series bear interest
at LIBOR plus 1.25% (6.86% at December 31, 1996, excluding annualized
transaction costs of 0.37%). Interest is payable monthly. However, an early
amortization event will occur if the Company fails to satisfy certain financial
covenants. The principal financial covenants contained in the Securitized
Financing agreements that the Company must satisfy include, (i) consolidated net
worth in excess of $18.5 million, (ii) tangible equity ratio of at least 6%,
(iii) accounts receivable non-payment percentage of no more than 18%, (iv)
60-day accounts receivable percentage of no more than 10% of total accounts
receivable, (v) 90-day accounts receivable percentage of no more than 4.5% of
total accounts receivable, (vi) weighted average factoring fee of at least
0.75%, (vii) weighted average accounts receivable turnover of less than 70 days,
(viii) accounts receivable dilution of no more than 11%, (ix) accounts
receivable payment ratio for three consecutive periods of more than 40%, (x)
aggregate amount of subordnated certificates of no more than 25% of senior
certificates, (xi) subordinated certificates equal to or greater than 7% of
total certificates and (xii) value of accounts receivable transferred to a
trust created to accommodate the Securitized Financings (the "Trust") of no less
than 135% of aggregate certificates. In addition, there are other covenants
relating to the collateral, including required capital levels, maximum dilution
and delinquency ratios and minimum subordination levels. The Company is in
material compliance with these and all other covenants contained in the
Securitized Financing agreements. The Company may continue to use the
Securitized Financings for funding, provided eligible advances are available for
transfer to the Trust. As of December 31, 1996, the Company had transferred to
the Trust client advances aggregating nearly $233.5 million.

The Company intends to increase its usage of Securitized Financings through the
issuance of a fourth series of asset-backed certificates to be issued by the
Trust. The fourth series is expected to be a $100,000,000 Variable Funding
Certificate with a minimum initial draw of $25,000,000. Management expects this
transaction to close during the second quarter of 1997. Unlike the previously
issued Certificates which were fixed as to principal amount, the Variable
Funding Certificate will provide for a monthly settlement of principal, which
may increase or decrease the outstanding amount. Management believes that this
type of Certificate will provide a more efficient means of funding the seasonal
fluctuations in the Company's overall funding requirements. Additionally, in
connection with any additional secured indebtedness to be incurred by the
Company, the Securitized Financings require that all additional secured lenders
enter into an intercreditor agreement with the holders of the Certificates and
the trustee of the Trust. The Securitized Financings permit future purchases to
the extent that the Company generates eligible Advances. Generally, all of the
client advances made by the Company, with the exception of those made by its
healthcare division, as well as certain asset-based loans, are eligible for
transfer to the Trust.

                                       33

<PAGE>

In March 1996, the Company entered into a $40.0 million revolving credit
facility with an unaffiliated bank which was closed in April 1996. The
indebtedness under this facility is secured by advances not transferred to the
Trust or eligible for transfer to the Trust, most of which were made by the
Company's healthcare division or were asset-based loans, as well as all of the
equipment used by the Company in its operations. In order for this facility to
be fully funded, the Company would have to pledge an amount in excess of $57
million in advances. The indebtedness under this facility may not exceed 70% of
the value of the advances pledged by the Company as collateral for such
indebtedness. At December 31, 1996, the Company had outstanding borrowings of
$15.9 million. The indebtedness under this revolving facility bears interest at
a rate of LIBOR plus 2.15% (7.76% at December 31, 1996), payable monthly. The
indebtedness under this facility matures upon termination in March 1999,
although it will be automatically renewed for additional one year periods unless
the Company or the lender terminates it. This facility contains certain
financial covenants and ratios, including those relating to the Company's debt
to net worth (no less than 1 to 1), profitability ($5.2 million of annual
consolidated net income) and positive net cash flows (more than $1 per quarter).
Funds borrowed under this facility were used by the Company to pay down
indebtedness under the Company's line of credit with the Bank and to fund
certain of the Company's healthcare financing activities and asset-based lending
activities.

The Company also has a $125.0 million unsecured revolving line of credit with
Capital Bank, pursuant to which the Company had outstanding borrowings of
approximately $70.1 million at December 31, 1996. This facility was increased to
$150.0 million in January of 1997. Amounts borrowed under this facility are
subject to the Banks overall statutory limitation on investments in and advances
to subsidiaries of 10% of assets. Based on the statutory limitation, the maximum
amount which could be outstanding under this line was approximately $91 million
at December 31, 1996. Indebtedness under this facility bears interest at the
prime rate, as published in The Wall Street Journal (8.25% at December 31,
1996), is subject to annual review by the Bank each June and is due on demand.
The Facility has been in place since 1985 and historically has been renewed for
one-year periods in June of each year. Interest is payable monthly. The Company
generally has used the Facility with the Bank to make advances to its clients.

In May 1996, CF One sold the $10 million of subordinated notes (the "CF One
Notes"), which are collateralized by subordinated certificates that were
issued in connection with the Company's Securitized Financings. The CF One
Notes, which are due and payable in July 2001, bear interest at an annual fixed
rate of 7.95% and are rated "BBB" by both Duff & Phelps Credit Rating Company
and Fitch Investors Services, Inc. The principal purpose for the issuance of the
CF One Notes was to allow CF One to obtain additional financing by taking
advantage of the favorable financing terms resulting from an increase in the
value of the subordinated certificates held by CF One which are collateralized
by assets held by the Trust. The increase in the value of the subordinated
certificates held by CF One was the result of the favorable performance of the
receivables and other assets held in the Trust's portfolio.

In addition to the continued availability of the above financing, the Company's
future liquidity will continue to be dependent upon its ability to collect the
accounts receivable purchased from its clients. Of the Company's approximately
$491.0 million of accounts receivable outstanding at December 31, 1996,
approximately $192.9 million have balances exceeding $1 million. These customers
are primarily large national or regional department store chains or specialty
retailers. At December 31, 1996, the largest amount due from any one customer, a
national chain store, was approximately $20.7 million. In addition, the
Company's accounts receivable turned over in an average of 52 days during 1996
and 53 days during 1995.

The Company had no material commitments for capital expenditures as of December
31, 1996. Management believes that it has the corporate infrastructure in place
to support its earnings growth for the foreseeable future. Management also
believes that funds available under the Company's current credit facilities
(assuming such facilities are renewed or replaced with similar facilities) and
cash flow from operations will be sufficient to satisfy the Company's future
working capital requirements.

                                       34

<PAGE>

EFFECTS OF INFLATION

The Company believes that inflation has not had a material impact on its results
of operations.

                                       35

<PAGE>


ITEM 8.  FINANCIAL STATEMENTS

                 CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                               DECEMBER 31,       DECEMBER 31,
                                                  1996               1995
                                              -------------     -------------
ASSETS
  Cash                                        $  28,101,237     $  20,326,814
  Restricted Cash                                 6,562,500        16,187,500
  Receivables                                   490,977,592       361,205,965
    Unearned discounts                           (2,436,301)       (3,404,016)
    Allowance for credit losses                  (2,993,534)       (2,980,778)
                                              -------------     -------------
  Receivables, net                              485,547,757       354,821,171
  Property and equipment, net                     3,095,157         3,285,049
  Other Assets                                    7,260,672         4,850,831
                                              -------------     -------------
TOTAL                                         $ 530,567,323     $ 399,471,365
                                              =============     =============

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
  Due to affiliates                           $   1,310,304     $   6,452,964
  Capital Factors variable rate asset backed
   certificates                                 175,000,000       175,000,000
  Note payable to affiliate                      70,131,000        52,260,000
  Other borrowings                               25,900,000
  Due to factoring clients                      191,488,668       128,577,577
  Other liabilities                               4,648,892         3,840,425
                                              -------------     -------------
    Total liabilities                           468,478,864       366,130,966
                                              -------------     -------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
  Common stock, $0.01 par value, 25,000,000
   shares authorized; issued and outstanding

   12,300,000 in 1996, 10,000,000 in 1995           123,000           100,000
  Additional paid-in capital                     27,151,932         9,542,096
  Retained earnings                              34,813,527        23,698,303
                                              -------------     -------------
    Total stockholders' equity                   62,088,459        33,340,399
                                              -------------     -------------
TOTAL                                         $ 530,567,323     $ 399,471,365
                                              =============     =============


See accompanying notes to consolidated financial statements.

                                       36

<PAGE>

                     CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
                             CONSOLIDATED STATEMENTS OF INCOME

                                             YEAR ENDED DECEMBER 31,
                                        1996           1995        1994
                                    ------------   -----------  -----------
REVENUES
  Factoring fees                    $ 26,066,382  $ 19,518,541  $ 17,370,626
  Interest income                     35,835,351    28,210,599    17,628,230
  Letter of credit and other fees      3,098,596     2,040,383     1,237,611
  Other                                1,707,995     1,849,466     1,540,712
                                    ------------  ------------  ------------
    Total revenues                    66,708,324    51,618,989    37,777,179
                                    ------------  ------------  ------------
EXPENSES

  Interest expense                    15,137,924    11,629,391     4,238,942
  Interest expense to affiliates       5,265,025     4,731,668     6,090,174
  Salaries and benefits               14,674,483    11,240,046     8,698,858
  Provision for credit losses          3,750,000     2,234,721     2,235,000
  Occupancy and other office
   expenses                            3,628,446     2,588,459     2,135,319
  Depreciation and amortization          656,384       632,739       591,554
  Professional fees                    1,006,441       991,535     1,180,861
  Other                                3,550,441     3,004,570     1,529,925
                                    ------------  ------------  ------------
    Total expenses                    47,669,144    37,053,129    26,700,633
                                    ------------  ------------  ------------

INCOME BEFORE INCOME TAXES            19,039,180    14,565,860    11,076,546

PROVISION FOR INCOME TAXES             7,923,956     5,872,763     4,984,450
                                    ------------  ------------  ------------

NET INCOME                          $ 11,115,224  $  8,693,097 $  6,092,096
                                    ============  ============  ============

Earnings per common and common
  equivalent share:
    Primary                         $       1.01  $       0.87  $       0.61
                                   ============  ============  ============
    Fully diluted                   $        .99  $       0.87  $       0.61
                                    ============  ============  ============


See accompanying notes to consolidated financial statements.

                                       37

<PAGE>

                 CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                   YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
                                  --------------------------------------------
                                                 ADDITIONAL
                                    COMMON         PAID-IN          RETAINED
                                     STOCK         CAPITAL          EARNINGS
                                   ---------     ------------     ------------
BALANCE, DECEMBER 31, 1993         $ 100,000     $  9,542,096     $  8,913,110
   Net Income                                                        6,092,096
                                   ---------     ------------     ------------
BALANCE, DECEMBER 31, 1994           100,000        9,542,096       15,005,206
   Net Income                                                        8,693,097
                                   ---------     ------------     ------------
BALANCE, DECEMBER 31, 1995           100,000        9,542,096       23,698,303
   Net proceeds from the sale
    of common stock                   23,000       17,609,836
   Net Income                                                       11,115,224
                                   ---------     ------------     ------------
BALANCE, DECEMBER 31, 1996         $ 123,000     $ 27,151,932     $ 34,813,527
                                   =========     ============     ============


See accompanying notes to consolidated financial statements.

                                       38

<PAGE>
<TABLE>
<CAPTION>

                 CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOW

                                                                   YEAR ENDED DECEMBER 31,
                                                          1996              1995             1994
                                                          ----              ----             ----
<S>                                                  <C>              <C>               <C>
OPERATING ACTIVITIES:
  Net income                                        $  11,115,224     $   8,693,097     $   6,092,096
  Adjustments to reconcile net income to net
    cash provided by operating activities:
    Depreciation and amortization                         656,384           632,739           591,554
    Deferred income taxes                                 (76,610)         (399,986)          209,383
    Provision for credit losses                         3,750,000         2,234,721         2,235,000
    Increase in restricted cash                          (375,000)       (1,500,000)       (4,687,500)
    Loss on sale of assets                                 14,495             3,873            12,399
    Due to (from) affiliates                           (5,142,660)        1,617,266         3,936,578
    Other assets                                       (2,103,811)         (430,465)          343,208
    Other liabilities                                     808,467           690,179         1,052,788
                                                    -------------     -------------     -------------
      Net cash provided by operating activities         8,646,489        11,541,424         9,785,506
                                                    -------------     -------------     -------------
INVESTING ACTIVITIES:
  Loan to clients, net                                 (1,913,535)       (3,053,589)       (7,448,868)
  Decrease (increase) in asset based loans              2,295,896       (27,841,907)      (10,473,533)
  Net increase in factoring accounts receivable,
    net of due to factoring clients                   (79,560,531)      (32,940,825)       (5,230,704)
  Sales of participations                              11,432,386         1,238,287           334,570
  Payments on participations                           (3,919,712)         (751,947)      (12,180,506)
  Purchase of property and equipment                     (456,749)         (914,342)         (621,391)
  Disposal of property and equipment                       25,033            18,836             2,821
                                                    -------------     -------------     -------------
      Net cash used in investing activities           (72,097,212)      (64,245,487)      (35,617,611)
                                                    -------------     -------------     -------------
FINANCING ACTIVITIES:
  Issuance of senior certificates                                        50,000,000       125,000,000
  Restricted proceeds from senior certificates         10,000,000       (10,000,000)
  Net proceeds from sale of common stock               17,632,836
  Proceeds from borrowings                            127,528,000        53,522,033        51,900,000
  Payments on borrowings                              (83,757,000)      (35,802,033)     (140,360,000)
  Payments of deferred financing costs                   (980,825)         (744,802)       (2,700,761)
  Amortization of deferred costs                          802,135           608,844           228,189
                                                    -------------     -------------     -------------
    Net cash provided by financing activities          71,225,146        57,584,042        34,067,428
                                                    -------------     -------------     -------------
NET INCREASE IN CASH                                    7,774,423         4,879,979         8,235,323
CASH, BEGINNING OF PERIOD                              20,326,814        15,446,835         7,211,512
                                                    -------------     -------------     -------------
CASH, END OF PERIOD                                 $  28,101,237     $  20,326,814     $  15,446,835
                                                    =============     =============     =============
SUPPLEMENTAL CASH FLOW INFORMATION
  Cash payments for interest                        $  18,338,991     $  14,784,541     $   9,375,978
                                                    =============     =============     =============
  Cash payments for income taxes                    $  13,648,128     $   4,929,303     $
                                                    =============     =============     =============
</TABLE>


See accompanying notes to consolidated financial statements.

                                       39

<PAGE>

CAPITAL FACTORS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  ORGANIZATION AND DESCRIPTION OF OPERATIONS

Capital Factors Holding, Inc. ("the Parent Company") is a majority-owned
subsidiary of Capital Bank (the "Bank"). The Bank is a wholly-owned subsidiary
of Capital Bancorp ("Bancorp"). The Parent Company was incorporated in June
1994, in order to accommodate the issuance of Variable Rate Asset Backed
Certificates (as further discussed in Note 5 to the financial statements), and
issued 1000 shares (100%) of its stock to Capital Bank in exchange for 60 shares
(100%) of the outstanding shares of Capital Factors, Inc. ("Factors"). Since
this stock transaction has been between related parties, the results of
operations have been presented as though the companies had been combined as of
the earliest year presented. On July 1, 1996, the Parent Company effected a
10,000-for-1 stock split resulting in 10,000,000 common shares issued. The stock
split is retroactively reflected in the consolidated financial statements.

On July 16, 1996, the Parent Company completed an initial public offering of
2,000,000 shares of common stock at a public offering price of $8.50 per share.
On August 2, 1996, the underwriting syndicate exercised its option to acquire an
additional 300,000 shares of common stock. As a result of the public offering,
the Bank's ownership of the Parent Company has been reduced to approximately 81%
of the outstanding 12,300,000 shares of common stock.

The Parent Company has two wholly-owned subsidiaries, Factors and CF One, Inc.
("CF One"). Factors has two wholly-owned subsidiaries, CF Funding Corp.
("Funding") and Capital TempFunds, Inc. ("TempFunds"), a newly formed North
Carolina corporation. On August 9, 1996, Factors acquired substantially all of
the assets of TempFunds America, Inc. and its affiliate, TempFunds America
Funding Corporation of South Carolina, Inc. The purchase price paid by Factors
was approximately $5.9 million (approximately $5.0 million equal to the net book
value of the assets plus an additional $900,000.) An additional amount up to
$900,000 is payable over a three year period if certain contingencies are met.
Goodwill resulting from the acquisition is being amortized using the
straight-line method over a 10 year period. The effect on operations for 1996
assuming that the acquisition had been consummated as of the beginning of the
year would not be material. TempFunds is a specialized financial services
company principally engaged in providing receivables-based commercial financing
and related fee-based credit, collection and management information services to
temporary employment and home health care agencies.

Factors provides factoring and other services primarily to commercial businesses
and generally purchases trade accounts receivables from clients and assumes all
risks of collectibility for credit approved receivables, except as such risks
result from fraud or invalid receivables, and dilution. Factors generally enters
into advance factoring arrangements which allow clients to obtain cash advances
against a stipulated percentage of the receivables before they are due or
collected.

The Company provides services to its clients through four regional offices
located in Fort Lauderdale, Florida; Los Angeles, California; New York, New York
and Charlotte, North Carolina. The Company's clients primarily include
manufacturers, importers, wholesalers and distributors in apparel and textile
related industries and, to a lesser extent, clients in consumer goods related
industries such as plastics, video game cartridges, paper and healthcare
services.

The Company's factored accounts receivable are due from clients' customers
geographically located throughout the United States, principally retailers,
manufacturers and distributors. As of December 31, 1996 and 1995, the Company
had factored accounts receivable aggregating approximately $192.9 million and
$130.0 million, respectively, due from 38 and 37 customers, respectively, each
with balances

                                       40

<PAGE>

exceeding $1 million. These customers are primarily large national or regional
department store chains or specialty retailers. The largest amount due from any
one customer, a national department store chain, at December 31, 1996 was
approximately $20.7 million.

The Company's asset based loans represent loans provided to clients principally
collateralized by accounts receivables. The Company does not service the
accounts receivable nor does it provide credit protection of the receivables.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

Principles of Consolidation - The consolidated financial statements of Capital
Factors Holding, Inc. and Subsidiaries (the "Company") include the accounts of
the Parent Company, Factors, TempFunds, Funding, and CF One. All significant
intercompany transactions and balances have been eliminated in consolidation.

Unearned and Earned Discounts - The Company deducts trade and cash discounts on
all factoring invoices purchased. Discounts not taken by customers are
recognized as income principally at the time of payment of the invoice.

Allowance for Credit Losses - The allowance for credit losses 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
the 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. It is reasonably possible
that changes in these factors could result in material adjustments to the
allowance in the near term.

Property and Equipment - Property and equipment are carried at cost less
accumulated depreciation. Depreciation is provided over the estimated useful
lives, primarily on the straight-line method. Estimated depreciable lives range
from 3 - 8 years for furniture, equipment, software and leasehold improvements
and 39 years for buildings.

Income Recognition - Interest income on all loans and advances is calculated
using the simple interest method on the daily balances of principal outstanding
and is recorded as earned in accordance with the terms of the related factoring
agreements with clients. Accrual of interest income is discontinued on troubled
loans and advances to factoring clients when the loan balance and interest
receivable exceeds the estimated value of the collateral securing the loan or
advance. Factoring fees are recognized generally at the time of purchase of
factored receivables due to the nature of the relationship with the factoring
client and the relatively short term nature of the factored receivables.
Commitment/closing fees related to asset based loans are amortized over the life
of the loan as an adjustment of yield. The difference between the Company's
income recognition policy and amortization of such fee over the service period
is immaterial.

Unallocated Credits - The Company generally notifies the payor when
unidentifiable payments or portions thereof are received. If the payor does not
respond within 90 days, the Company records the unallocated credits as income.
The Company maintains an allowance for unallocated credits recorded as income
which may be subsequently repaid based upon its +historical experience.

Income Taxes - There are two components of the income tax provision, current and
deferred. Current income tax provisions approximate taxes to be paid or refunded
for the applicable period. 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 results of operations of the
Company are included in the consolidated Federal income tax return filed by
Bancorp. Bancorp allocates income taxes to the Company principally calculated on
a separate return basis.



                                       41

<PAGE>

Earnings per Share - Primary earnings per share amounts are based on the average
number of common shares outstanding for each period. Fully diluted earnings per
share amounts assume that proceeds from the assumed exercise of options 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.

Accounting for Stock Options - In October 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" which is effective
for awards granted in fiscal years beginning after December 15, 1995. This
standard defines a fair value-based method of measuring employee stock options
or similar equity instruments. In lieu of recording the value of such options as
compensation expense, companies may provide pro forma disclosures quantifying
the difference between compensation cost included in net income as prescribed by
current accounting standards and the related cost measured by such fair
value-based method. The Company will measure cost for stock-based compensation
as prescribed by the Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees."

3.  RECEIVABLES

     Receivables consist of the following:

                                                      DECEMBER 31,
                                                1996               1995
                                                ----               ----
     Nonrecourse                          $  269,812,980     $  215,243,095
     Recourse                                157,178,312         81,232,416
                                          --------------     --------------
     Factored accounts receivables           426,991,292        296,475,511
     Loans to factoring client                27,966,757         26,415,014
     Asset based loans                        36,019,543         38,315,440
                                          --------------     --------------
                                          $  490,977,592     $  361,205,965
                                          ==============     ==============

The Company also makes advances to factoring clients. Such advance payments,
which are interest earning, are recorded as reductions to the amounts due to the
factoring clients for the purchase of receivables. Average funds employed
(receivables less amounts due to factoring clients) were $286.2 million and
$210.9 million at December 31, 1996 and 1995, respectively.

Changes in the Company's allowance for credit losses were as follows:
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                              1996             1995             1994
                                              ----             ----             ----
     <S>                                 <C>              <C>              <C>
     Beginning balance                   $ 2,980,778      $ 1,774,101      $ 2,157,333
     Allowance related to acquisition
        of TempFunds America, Inc.           100,000

     Provision for credit losses           3,750,000        2,234,721        2,235,000
     Charge-offs                          (4,402,745)      (1,625,148)      (3,148,281)
     Recoveries                              565,501          597,104          530,049
                                         -----------      -----------      -----------
     Ending balance                      $ 2,993,534      $ 2,980,778      $ 1,774,101
                                         ===========      ===========      ===========
</TABLE>

The Company specifically considered $660,124 and $2,184,046 of its client
advances impaired at December 31, 1996 and 1995, respectively, and has
discontinued the accrual

                                       42

<PAGE>

of interest income. The allowance for credit losses related to these impaired
loans for the same periods was $30,234 and $133,847, respectively.

4.  PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:

                                                 DECEMBER 31,
                                           1996                1995
                                           ----                ----
     Land                             $   479,581         $   479,581
     Building                           1,518,538           1,518,538
     Building improvements                749,568             744,909
     Furniture and equipment            2,752,850           3,007,122
     Computer software                    288,930             267,666
     Leasehold improvements                76,874              59,140
                                      -----------         -----------
                                      $ 5,866,341         $ 6,076,956
     Less accumulated depreciation     (2,771,184)         (2,791,907)
                                      -----------         -----------
                                      $ 3,095,157         $ 3,285,049
                                      ===========         ===========

5.  VARIABLE RATE ASSET-BACKED CERTIFICATES

On June 29, 1994, December 15, 1994 and July 28, 1995 Capital Factors, Inc.,
through its wholly owned subsidiary CF Funding Corp., 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%. The interest rate on December 31, 1996 was 6.86%. Interest is
payable monthly. The senior certificates are collateralized by interest-earning
advances to factoring clients which totaled approximately $233,474,000 at
December 31, 1996. Such advances are made on receivables before they are due or
collected by the Company. Capital Factors, Inc., services and administers these
advances and related receivables under an agreement entered into by Bankers
Trust Company as Trustee, CF Funding Corp. and Capital Factors, Inc. The senior
certificates may not be redeemed prior to their stated maturity and are subject
to acceleration if certain collateral requirements are not maintained. Remaining
deferred issuance costs of $2.3 million are being amortized over the terms of
the related series. Such costs are included in other assets on the balance
sheets.

Restricted Cash - CF Funding Corporation is required to maintain a cash
collateral account at Bankers Trust Company, pursuant to the terms of the
aforementioned agreement. Such restricted cash collateral amounted to $6,562,500
at December 31, 1996.

Of the $50,000,000 of senior certificates issued on July 28, 1995, CF Funding
Corp. utilized $40,000,000 in 1995, and a Pre-Funding account was created at
Bankers Trust Company for the remaining $10,000,000. This remaining amount was
included in restricted cash at December 31, 1995. On March 29, 1996 CF Funding
Corp. utilized these remaining funds which were supported by interest earning
advances to clients.

                                       43

<PAGE>
<TABLE>
<CAPTION>

6.  OTHER BORROWINGS

      Notes payable are summarized as follows:

                                                                DECEMBER 31,
                                                           1996             1995
      AFFILIATE:                                           ----             ----
      <S>                                             <C>              <C>
      A $125 million revolving line-of-credit
      payable to the Bank at prime(8.25% and 8.75%
      at December 31, 1996 and 1995, respectively)
      with interest payable monthly. The loan
      matures on demand.                              $ 70,131,000     $ 52,260,000

      NON-AFFILIATE:

      A $40,000,000 revolving loan payable to an
      unaffiliated bank at LIBOR plus 2.15% (7.76%
      at December 31, 1996) with interest payable
      monthly. The loan matures in March 1999, with
      automatic 1 year renewal periods.               $ 15,900,000

      7.95% subordinated note issued in connection
      with the Company's Securitized Financings.
      Interest is payable monthly.  The loan is due
      in July 2001.                                   $ 10,000,000
                                                      ------------     ------------
      Total Other Borrowings                          $ 96,031,000     $ 52,260,000
                                                      ============     ============
</TABLE>

The Bank facility was increased to $150.0 million in January of 1997. Amounts
borrowed under this facility are subject to the Bank's overall statutory
limitation on investments in and advances to subsidiaries of 10% of
consolidated Bank assets.

Under the revolving loan payable to an unaffiliated bank, the Company has
certain financial covenants and ratios, including those relating to the
Company's debt to net worth, profitability and net cash flows.

Supplemental information for the Company's borrowings, including the Variable
Rate Asset Backed Certificates (Note 5), follows:
<TABLE>
<CAPTION>

                                                          YEAR ENDED DECEMBER 31,

                                                  1996             1995             1994
                                                  ----             ----             ----
<S>                                           <C>              <C>              <C>
      Maximum amount outstanding at
       any month-end                          $295,566,000     $221,871,000     $171,000,000
      Average borrowings                      $258,342,000     $191,264,000     $142,959,000
      Interest expense for the period         $ 18,843,230     $ 15,140,324     $  9,990,305
      Average interest rate                           7.29%            7.92%            6.99%
      Average interest rate, end of period            7.31%            7.57%            7.67%
</TABLE>

7.  INCOME TAXES

The results of operations of the Company are included in the consolidated
Federal income tax return filed by Bancorp. Bancorp allocates income taxes to
the Company principally calculated on a separate return basis. The Company pays
to the Bank the amount of its estimated annual current tax provisions. The
Company paid approximately $13,620,000, $4,929,000, and $0, for income taxes in
the years ended December 31, 1996, 1995 and 1994, respectively, for income taxes
related to its fiscal years ended December 31, 1996 through 1994.

                                       44

<PAGE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.

The tax effects of significant items comprising the Company's net deferred tax
asset, which is included in other assets in the balance sheet, as of December
31, 1996 and 1995 are as follows:

                                                     1996                1995
      Deferred tax assets:                           ----                ----
      Bad debts                                  $ 1,154,756         $ 1,149,834
      Difference between book and tax basis
        of property                                  214,115             126,393
      Deferred compensation                           89,347              92,580
                                                 -----------         -----------
      Deferred asset                               1,458,218           1,368,807
                                                 -----------         -----------
      Deferred tax liability:
      Pension costs                                  (29,750)           (29,750)
      Other                                          (18,900)            (6,099)
                                                 -----------        -----------
        Deferred liability                           (48,650)           (35,849)
                                                 -----------        -----------
      Net deferred asset                         $ 1,409,568        $ 1,332,958
                                                 ===========        ===========


The components of the provision for income taxes are as follows:

                                              YEAR ENDED DECEMBER 31,
                                         1996            1995            1994
                                         ----            ----            ----
      Current taxes:
      Federal                        $ 6,996,887     $ 4,898,648     $ 3,436,645
      State                            1,003,679       1,374,101       1,338,422
                                     -----------     -----------     -----------
                                       8,000,566       6,272,749       4,775,067
                                     -----------     -----------     -----------
      Deferred taxes (benefit):
      Federal and State                  (76,610)      (399,986)        209,383
                                     -----------     -----------     -----------
                                     $ 7,923,956     $ 5,872,763     $ 4,984,450
                                     ===========     ===========     ===========

                                       45

<PAGE>

The following is a reconciliation between the provision for income taxes
included in the accompanying statements of income and the provision computed
using the statutory federal tax rate:
<TABLE>
<CAPTION>

                                               YEAR ENDED DECEMBER 31,
                                   1996                1995                   1994
                            -------------------  -------------------    --------------------
                                         % of                  % of                   % of
                                        PRE-TAX               PRE-TAX                PRE-TAX
                               AMOUNT   INCOME       AMOUNT   INCOME       AMOUNT    INCOME
                            ----------  -------   ----------- -------   -----------  -------
<S>                         <C>         <C>       <C>         <C>       <C>          <C>
Computed provision at
  statutory rate            $ 6,663,713  35.0%    $ 5,098,051  35.0%    $ 3,876,791  35.0%
Benefit of graduated
  tax rate                                                                 (110,765) (1.0%)
State taxes, net of
  Federal benefit               678,883   3.6         774,712   5.3%        889,379   8.0%
Other                           581,360   3.0                               329,045   3.0%
                            -----------  -----    -----------  -----    -----------  -----
                            $7,923,956   41.6%    $ 5,872,763  40.3%    $ 4,984,450  45.0%
                            ===========  =====    ===========  =====    ===========  =====
</TABLE>

8.  COMMITMENTS AND OFF-BALANCE SHEET RISK

The Company is a lessee under operating leases for real estate and equipment.
The real estate leases contain clauses which require additional rent for
increases in operating expenses or a proportionate share of taxes and operating
expenses. There are no options to renew the leases of the leased regional
offices. The approximate future minimum rental payments under noncancellable
leases (exclusive of additional amounts for taxes and operating expenses) as of
December 31, 1996 are as follows:

      Years ending December 31,
      1997.................................................... $   829,049
      1998....................................................     829,049
      1999....................................................     829,049
      2000....................................................     247,883
      2001....................................................     243,653
      Thereafter..............................................   1,040,780
                                                               -----------
                                                               $ 4,019,463
                                                               ===========

Rental expense for the years ended December 31, 1996, 1995 and 1994 was
approximately $745,000, $624,000, and $487,000, respectively.

In the normal course of business, the Company utilizes certain financial
instruments with off-balance sheet risk to meet the financing needs of its
clients. These off-balance sheet activities include amounts available under the
unused portion of approved customer and client credit limits, commercial letters
of credit and standby letters of credit and financial guarantees. Letters of
credit are issued by the Bank for the Company's clients and the Company
guarantees the payment by its clients under these 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.

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 and financial
guarantees. This is the maximum potential loss of principal in the event the
commitment is drawn upon and the counterpart defaults. In addition, the
measurements of the risks associated with these

                                       46

<PAGE>

financial instruments is meaningful only when all related and offsetting
transactions are considered.

Amounts available under the unused portion of approved customer and client
credit limits do not necessarily represent legally binding arrangements to
factored sales or otherwise advance funds to clients. Generally, credit
approvals and limits are modified or withdrawn based upon the Company's
evaluation of the customer or client's credit or if the client violates the
terms of the factoring agreement. Credit limits for clients and customers
continually vary and do not necessarily represent future cash requirements to
fund the factored sales or otherwise advance funds to clients.

Commercial letters of credit are issued to facilitate certain trade
transactions, principally the purchase of goods. The risks associated with these
transactions are somewhat reduced since the contracts are generally for a short
commitment period. Standby letters of credit and financial guarantees are
conditional commitments issued to guarantee the performance of a customer to a
third party. The Company issues standby letters of credit and financial
guarantees to ensure contract performance or assure payment by its clients. The
risk involved in issuing standby letters of credit to clients and financial
guarantees is similar to the risk involved in extending credit to clients and
they are subject to the same credit approvals and monitoring procedures. At
December 31, 1996 and 1995, the Company had approximately $29,294,000 and
$22,645,000, respectively, of letters of credit and financial guarantees
outstanding. The Company usually guarantees letters of credit and financial
guarantees only for clients with which the Company has factoring arrangements.
Generally, the Company requires collateral to support these commitments and the
collateral held varies but may include cash, merchandise, inventory, real estate
and the client's reserve balance.

9. RELATED PARTY TRANSACTIONS

The Company expensed interest payments to the Bank of $5,265,000, $4,732,000 and
$6,090,000 on its $125 million revolving line of credit facility with the Bank
during the periods ended December 31, 1996, 1995 and 1994 respectively.

The Bank obtained group medical, dental and life insurance coverage on behalf of
the Company. Premiums are charged to the Company at the same amount as they are
assessed by the insurance companies to the Bank with respect to the Company.
During 1996, 1995 and 1994, the Company paid insurance premiums of $605,277,
$527,669 and $533,843, respectively, for its actual portion of such insurance
premiums.

Capital Bank provided approximately $135.5 million, $130.1 million and $79.5
million during 1996, 1995 and 1994, respectively, of letters of credit for
clients of the Company. For a fee, the Company guarantees the payment by its
clients under these letters of credit. Fees charged for issuance of the letters
of credit are paid directly to Capital Bank and amounted to $373,688, $462,013
and $389,571 during 1996, 1995 and 1994, respectively.

The Company reimburses the Bank for its portion of commercial insurance
expenses. Payments to the Bank for insurance expenses during 1996, 1995 and 1994
equaled $465,513, $149,302 and $97,384, respectively. In addition, the Company
paid the Bank $224,332, $148,900 and $17,700, during the periods ended December
31, 1996, 1995 and 1994, respectively, for bank service charges. The Bank
charged the Company for services rendered by the Bank's legal department in 1995
and 1994 of approximately $80,000 and $102,500, respectively, based upon
estimates prepared by the Bank.

Due to affiliate represents balances owed to the Bank, principally for income
taxes and unpaid interest on the line of credit with the Bank.

                                       47

<PAGE>

10. CONTINGENCIES

From time to time, the Company has been a party to lawsuits and claims,
including lender liability claims, which management considers incidental to
normal operations. The Company is currently a party to one lawsuit that was
dismissed after trial. The Plaintiff is currently appealing the dismissal.
Management, after review, including consultation with counsel, believes that any
ultimate liability which could arise from this current lawsuit would not
materially affect the financial position of the Company or results of
operations.

11. RETIREMENT PLAN

Bancorp sponsors a noncontributory defined benefit pension plan (the "Plan")
covering employees meeting certain eligibility requirements. The Company's
employees are included in the Plan. 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 over a
25-year period. Full vesting will occur after completion of seven years of
service. Bancorp's funding policy is to contribute annually the maximum amount
that can be deducted for Federal income tax purposes. The Bank charged the
Company pension costs of approximately $283,000, $172,090 and $134,390, for the
years ended December 31, 1996, 1995 and 1994, respectively.

The following items are components of the net periodic pension cost of the Plan:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                1996            1995            1994
                                                ----            ----            ----
<S>                                          <C>             <C>              <C>
Service cost-benefits earned during the year  $ 975,308        $700,348       $704,851
Interest cost-projected benefits obligation     688,910         525,785        370,261
Actual return on plan assets                   (858,454)     (1,403,127)      (102,875)
Net amortization and deferral                   407,263       1,384,221       (300,215)
                                             ----------      ----------       --------
Net periodic pension cost                    $1,213,027      $1,207,227       $672,022
                                             ==========      ==========       ========
</TABLE>

The funded status of the Plan is shown in the table below:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                            1996              1995
                                                            ----              ----
<S>                                                      <C>               <C>
      Actuarial present value of accumulated benefit
        obligation:

          Vested                                         $ 7,746,135       $ 6,454,419
          Nonvested                                          490,009           642,309
                                                         -----------       -----------
          Total                                          $ 8,236,144       $ 7,096,728
                                                         ===========       ===========
      Plan assets at fair value                          $ 8,613,511       $ 7,176,298
      Projected benefit obligation for
        services rendered                                (10,865,116)       (8,635,263)
                                                         -----------       -----------
      Plan assets less than
        projected benefit obligation                      (2,251,605)       (1,458,965)
      Unrecognized prior service cost                        283,962           407,424
      Unrecognized net loss                                  745,427           336,923
                                                         ------------      ------------
      Accrued pension cost (Bancorp)                     $(1,222,216)      $  (714,618)
                                                         ===========       ===========
</TABLE>

                                       48
<PAGE>

At December 31, 1996 and 1995, the Plan's assets consisted primarily of
corporate obligations, mutual funds, U.S. Government securities and other cash
equivalents.

The accumulated benefits obligation at December 31, 1996 and 1995 was
approximately $8,236,000 and $7,097,000, respectively. Included in these amounts
were vested benefits of approximately $7,746,000 and $6,454,000 at December 31,
1996 and 1995, respectively.

The assumed weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.25% and 7.00% in 1996
and 1995, respectively. The assumed expected long-term rate of return on assets
was 8.50% in 1996 and 1995. The assumed rate of salary progression was 5.50% in
1996 and 1995.

12. STOCK OPTION PLAN

In July 1996, the Company adopted a stock option plan under which 800,000 shares
of Common Stock were reserved for issuance upon exercise of stock options. The
Plan provides for the granting of both incentive stock options and nonqualified
stock options. Options granted vest 20% a year over five years and expire at the
end of the tenth year. The plan also provides for the granting of stock
appreciation rights.

Stock option activity in the plan is summarized as follows:

                                    AVAILABLE                   OPTION PRICE
                                    FOR GRANT    OUTSTANDING      PER SHARE
                                    ---------    -----------    ------------
      Balance, January 1, 1996              0              0
      Adoption of Plan                800,000
      Granted                        (572,500)       572,500         $ 8.50
      Canceled                              0              0
                                    ---------    -----------    ------------
      Balance, December 31, 1996      227,500        572,500         $ 8.50
                                    =========    ===========    ============

The weighted-average exercise price and the weighted-average remaining
contractual life for options outstanding at December 31, 1996 is $8.50 and
approximately 9.5 years.

The Company measures compensation cost for stock based compensation as
prescribed by APB 25, "Accounting for Stock Issued to Employees." Options
granted in 1996 included 372,500 options granted with restrictions as to their
exercise as long as Capital Bank owns 80% or more of the Company's outstanding
shares. These options are accompanied by stock appreciation rights. In
accordance with APB 25, the Company has recorded compensation expense of
$149,000, based on the market value of the Company's stock at December 31, 1996.
and the vesting schedule of such options. However, SFAS No. 123, "Accounting for
Stock Based Compensation" requires pro forma disclosures of net income and
earnings per share as if the fair value method of accounting had been applied.
The fair value of the options granted in 1996 is estimated on the date of grant
using the binomial option-pricing model with the following weighted average
assumptions: dividend yield of 00.0%, expected volatility of 30.00%, risk-free
interest rate of 6.66% and expected option life of 5.0 years. The weighted
average fair value of options granted in 1996 was $3.34 per share.

                                       49

<PAGE>

Under the fair value method, compensation cost for stock options granted in 1996
would have been $178,150. The after tax effect would have been to reduce net
income in 1996 by $16,907. The following table presents the pro forma
calculation of earnings per share for the year ended December 31, 1996:

      Pro forma net income                                $11,098,317
                                                          -----------
      Pro forma primary earnings per share                    $  1.00
                                                          -----------
      Pro forma fully diluted earnings per share              $  0.99
                                                          -----------



13. FAIR VALUE OF FINANCIAL INSTRUMENTS

In cases where quoted market prices are not available, fair value estimates are
based on the quoted market price of a financial instrument with similar
characteristics, the present value of expected future cash flows or other
valuation techniques. Fair value estimates determined using other valuation
techniques are significantly affected by the assumptions used and consequently
may not reflect the proceeds that may be realizable from the sale of such
financial instruments.

The estimated fair value disclosures related to the Company's financial
instruments are as follows:

Cash: Since the Company's cash is maintained in demand deposit accounts, the
carrying amount is equal to the fair value.

Accounts Receivable, Asset Based Loans, Due to/from Factoring Clients: The
Company's receivables turn over quickly and interest earning advances made to
clients against such receivables and loans to factoring clients carry variable
interest rates based upon the prime rate and reprice as the prime rate changes.
Therefore, the Company believes the carrying amounts are reasonable estimates of
fair value.

Notes and Certificates Payable: The Company's notes payable are short-term in
nature. All but one of the notes payable carry variable interest rates which
reprice at least every 30 days. The Company holds one $10,000,000 note payable
at a fixed interest rate of 7.95%. The Company believes the interest rates on
the notes and certificates payable approximate rates currently available to the
Company and consequently the carrying amount is a reasonable estimate of fair
value.

Letters of Credit: As indicated in Note 8, the Company utilizes certain
financial instruments with off-balance sheet risk to meet the financing needs of
its clients. At December 31, 1996 and 1995 the Company had approximately
$29,294,000 and $22,645,000 respectively, of letters of credit and financial
guarantees for clients outstanding. The estimated fair value of these
off-balance sheet instruments, based on discounting the fees to be charged on
the unused portion of such facilities until their respective expiration dates is
considered insignificant.

                                       50
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Capital Factors Holding, Inc.:

We have audited the accompanying consolidated balance sheets of Capital Factors
Holding, Inc. (a majority owned subsidiary of Capital Bank) and subsidiaries as
of December 31, 1996 and 1995 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. 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 Factors Holding, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.

Deloitte & Touche, LLP
Ft. Lauderdale, Florida
March 10, 1997

                                       51

<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

None.

                                       52

<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information contained under the caption "Election of Directors" to appear in
the Company's definitive proxy statement relating to the Company's 1997 Annual
Meeting of Shareholders, which definitive proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
Company's fiscal year covered by this Report on Form 10-K (hereinafter referred
to as the "Annual Meeting Proxy Statement"), is incorporated herein by
reference. Information concerning the executive officers of the Company is
included in Part 1 of this Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION.

The information contained under the caption "Executive Compensation" to appear
in the Annual Meeting Proxy Statement is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" to appear in the Annual Meeting Proxy
Statement is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information contained under the caption "Certain Relationships and Related
Transactions" to appear in the Annual Meeting Proxy Statement is incorporated
herein by reference.

                                       53

<PAGE>

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) The following documents are filed as part of this report:

(1) Financial Statements.

The following financial statements of the Company and its subsidiaries and the
independent certified public accountant's report thereon appear in Item 8
hereof.

Report of Independent Certified Public Accountants
Statements of Consolidated Balance Sheet as of December 31, 1996 and 1995
Statements of Consolidated Income for the years ended December 31, 1996, 1995
and 1994
Statements of Consolidated Cash Flows for the years ended December 31,
1996, 1995 and 1994
Statements of Consolidated Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements

(2) Financial Statement Schedules.

Schedules are omitted because the conditions requiring their filing are not
applicable or because the required information is provided in the Consolidated
Financial Statements, including the Notes thereto.

(3)      Exhibits.*

(3.1)    Amended and Restated Articles of Incorporation (Exhibit 3.1 to the
         Company's Registration Statement [Registration No. 333-3419] on Form
         S-1 as filed with the Securities and Exchange Commission on May 9, 1996
         [the "Registration Statement"]).

(3.2)    Amended and Restated Bylaws (Exhibit 3.2 to the Company's Registration
         Statement).

(4.1)    Form of Common Stock Certificate (Exhibit 4.1 to the Company's
         Registration Statement).

(10.1)   Form of Stock Option Plan (Exhibit 10.1 to the Company's Registration
         Statement).**

(10.2)   Capital Bancorp Employees Pension Plan (Exhibit 10.2 to the Company's
         Registration Statement).**

(10.3)   Form of Indemnification Agreement between the Company and each of its
         directors and certain executive officers (Exhibit 10.3 to the Company's
         Registration Statement).

(10.4)   Capital Factors Financing Trust Pooling and Servicing Agreement dated
         June 1, 1994, among CF Funding Corp., the Company and Bankers Trust
         Company (Exhibit 10.4 to the Company's Registration Statement).

(10.5)   Contribution and Sale Agreement related to the Capital Factors
         Financing Trust Pooling and Servicing Agreement (Exhibit 10.5 to the
         Company's Registration Statement).

(10.6)   Series 1994-1 Supplement dated as of June 1, 1994 to Capital Factors
         Financing Trust Pooling and Servicing Agreement (Exhibit 10.6 to the
         Company's Registration Statement).

                                       54

<PAGE>

(10.7)   Series 1994-2 Supplement, dated as of December 1, 1994, to Capital
         Factors Financing Trust Pooling and Servicing Agreement (Exhibit 10.7
         to the Company's Registration Statement).

(10.8)   Series 1995-1 Supplement, dated as of July 1, 1995, to Capital Factors
         Financing Trust Pooling and Servicing Agreement (Exhibit 10.8 to the
         Company's Registration Statement).

(10.9)   Promissory Note evidencing Credit Facility with Capital Bank (Exhibit
         10.9 to the Company's Registration Statement).

(10.10)  Credit Facility with Fleet Capital Corporation (Exhibit 10.10 to the
         Company's Registration Statement).

(10.11)  Lease Agreement dated as of April 30, 1990, between Hachette Filipacchi
         Magazines, Inc. (Formerly Diamandis Communications, Inc.) and Factors,
         as amended (Exhibit 10.11 to the Company's Registration Statement).

(10.12)  Lease Agreement dated April 19, 1995, between Factors and H-C REIT,
         Inc.(Exhibit 10.12 to the Company's Registration Statement).

(10.13)  Lease Agreement dated as of March 1, 1995, between Hope & Flowers B.P.
         Partnership and Factors (Exhibit 10.13 to the Company's Registration
         Statement).

(10.14)  Tax Sharing and Indemnity Agreement (Exhibit 10.14 to the Company's
         Registration Statement).

(10.15)  Employment Agreement dated January 1, 1996 among John W. Kiefer, the
         Registrant and Capital Factors, Inc. (Exhibit 10.15 to the Company's
         Registration Statement).**

(10.16)  Employment Agreement between Stephen J. Donohue and Capital Factors,
         Inc. (Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
         the quarter ended September 30, 1996 [the "September 1996 10-Q"]).**

(10.17)  Employment Agreement between James L. Morrison and Capital Factors,
         Inc. (Exhibit 10.1 to the September 1996 10-Q).**

(10.18)  Note Purchase Agreement, dated as of May 15, 1996, between CF One,
         Inc. And Connecticut General Life Insurance Company (Exhibit 10.18 to
         the Company's Registration Statement).

(10.19)  Collateral Pledge and Account Agreement, dated as of May 15, 1996,
         among CF One, Inc., Bankers Trust Company and Connecticut General Life
         Insurance Company (Exhibit 10.19 to the Company's Registration
         Statement).

(10.20)  Form of Agreement among Capital Bank, the Registrant and Capital
         Factors, Inc.(Exhibit 10.20 to the Company's Registration Statement).

(10.21)  Intercreditor Agreement by and among Capital Factors, Inc., Fleet
         Capital Corporation, CF Funding Corp. and Bankers Trust Company
         (Exhibit 10.21 to Amendment No. 2 to the Company's Registration
         Statement).

(10.22)  Form of Amendment No. 1 to Employment Agreement among John W. Kiefer,
         the Registrant, and Capital Factors, Inc. (Exhibit 10.22 to Amendment
         No. 2 to the Company's Registration Statement).**

(10.23)  Lease Agreement dated as of October 30, 1996 between Parkwood
         Properties Corp. and Capital Factors Holding, Inc.

(10.24)  Purchase Agreement dated July 31, 1996 by and among Capital Factors,
         Inc. and TempFunds America and TempFunds America Funding Corporation
         of South Carolina, Inc.

(10.25)  Amendment dated at September 9, 1996 to Purchase Agreement by and
         among Capital Factors, Inc. and TempFunds America and TempFunds
         America Funding Corporation of South Carolina, Inc.

(10.26)  Second Amendment dated September 30, 1996 to Purchase Agreement by and
         among Capital Factors, Inc. and TempFunds America and TempFunds America
         Funding Corporation of South Carolina, Inc.

(10.27)  Third Amendment dated February 28, 1997 to Purchase Agreement by and
         among Capital Factors, Inc. and TempFunds America and TempFunds America
         Funding Corporation of South Carolina, Inc.

(11.1)   Statement re:computation of per share earnings.

(21.1)   Subsidiaries of the Registrant.

                                       55

<PAGE>

(27.1)   Financial Data Schedule. ***

--------------------

*   Exhibits followed by a parenthetical reference are incorporated herein by
    reference from the document described therein.

**  These Exhibits are management contracts or compensatory plans or
    arrangements.

*** Filed electronically only.

(b) Reports on Form 8-K
    The Company did not file any reports on Form 8-K during the fourth quarter
    of 1996.

                                       56

<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: March 28, 1997            By: /s/ DENNIS A. MCDERMOTT
                                    --------------------------
                                    Dennis A McDermott

                                    Senior Vice President and
                                    Chief Financial Officer
                                    (Principal Financial and Accounting Officer)

                                       57

<PAGE>

                                   SIGNATURES
                                   ----------

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.


/s/ JOHN W. KIEFER
--------------------------      Director,
John W. Kiefer                  President and Principal
                                Executive Officer                 March 28, 1997

/s/ JAVIER J. HOLTZ
---------------------------     Chairman of the Board             March 28, 1997
Javier J. Holtz


/s/ STEPHEN N. ASHMAN
---------------------------     Director                          March 28, 1997
Stephen N. Ashman


/s/ RONALD S. CHASE
---------------------------     Director                          March 28, 1997
Ronald S. Chase


/s/ CYNTHIA COHEN
---------------------------     Director                          March 28, 1997
Cynthia Cohen


/s/ NORMAN G. EINSPRUCH
---------------------------     Director                          March 28, 1997
Norman G. Einspruch


/s/ DANIEL M. HOLTZ
---------------------------     Director                          March 28, 1997
Daniel M. Holtz


/s/ JACK LISTANOWSKY
---------------------------     Director                          March 28, 1997
Jack Listanowsky


/s/ HAROLD L. OSHRY
---------------------------     Director                          March 28, 1997
Harold L. Oshry


/s/ BRUCE RAIFFE
---------------------------     Director                          March 28, 1997
Bruce Raiffe

                                       58

<PAGE>
                          CAPITAL FACTORS HOLDING, INC.
                                   FORM 10-K
                               INDEX TO EXHIBITS
                               -----------------

EXHIBIT
NUMBER              DESCRIPTION
------              -----------


10.23   Lease Agreement dated as of October 30, 1996 between Parkwood
        Properties Corp. and Capital Factors Holding, Inc.

10.24   Purchase Agreement dated July 31, 1996 by and among Capital Factors,
        Inc. and TempFunds America and TempFunds America Funding Corporation
        of South Carolina, Inc.

10.25   Amendment dated at September 9, 1996 to Purchase Agreement by and
        among Capital Factors, Inc. and TempFunds America and TempFunds
        America Funding Corporation of South Carolina, Inc.

10.26   Second Amendment dated September 30, 1996 to Purchase Agreement by and
        among Capital Factors, Inc. and TempFunds America and TempFunds America
        Funding Corporation of South Carolina, Inc.

10.27   Third Amendment dated February 28, 1997 to Purchase Agreement by and
        among Capital Factors, Inc. and TempFunds America and TempFunds America
        Funding Corporation of South Carolina, Inc.

11.1    Statement re:computation of per share earnings.

21.1    Subsidiaries of the Registrant.

27.1    Financial Data Schedule**
----------

*        All other exhibits listed under Item 14 of Part IV of the Form 10-K are
         incorporated be reference to documents previously filed, as indicated
         therein.

**       Filed electronically only.