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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
IBW Financial Corporation
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(Name of Small Business Issuer in its Charter)
District of Columbia 52-1943477
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4812 Georgia Avenue, NW, Washington, DC 20011
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: (202) 722-2000
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Securities to be Registered under Section 12(b) of the Act:
Title of each class Name of each exchange
to be so Registered on which each class
is to be so Registered
None
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Securities to be Registered under Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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(Title of Class)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
IBW Financial Corporation, a District Columbia corporation (the
"Company"), was organized in December 1994 in connection with the reorganization
of Industrial Bank of Washington ("IBW"), a District of Columbia chartered
commercial bank, to act as the one bank holding company for IBW following the
reorganization. On July 1, 1995, the reorganization of IBW was consummated, and
IBW was converted from a District of Columbia chartered bank to a national
banking association, under the name Industrial Bank, National Association (IBW
and Industrial Bank, National Association, generally referred to collectively as
the "Bank"), the main office of the Bank was relocated from the District of
Columbia to Oxon Hill, Maryland, and the Company became the holding company for
the Bank.
The Bank, all of the shares of which are owned by the Company, is the sole
subsidiary of the Company.
Between December 1994 and June 1995, the Bank effected the sale of 69,660
shares of its common stock, par value $5.00 per share (the "Bank Common Stock")
through a private placement to certain directors, executive officers and
principal shareholders of the Bank and a public offering, on a preemptive rights
basis, to all other shareholders and to members of the general public resident
in the District of Columbia, the State of Maryland and the Commonwealth of
Virginia. All shares were sold at a price of $15.00 per share, resulting in net
proceeds to the Bank of approximately $1 million.
The Bank was organized in August 1934 as a District of Columbia chartered
commercial bank by a group of African-American businessmen and educators for the
purpose of providing quality financial services, with an emphasis on home
mortgages and automobile financing, to the underserved minority population of
the District of Columbia. Over the past sixty two years, the Company has
grown from one office in the District of Columbia and $250,000 in assets to six
offices in the District of Columbia, two offices in Prince George's County,
Maryland and over $223 million in total assets and $16.6 million of equity at
December 31, 1995. The Bank is among the largest African-American commercial
banks in the nation, and the only African-American owned commercial bank based
in the Washington D.C. metropolitan area.
The Bank provides a broad range of commercial and consumer lending
services, including auto loans, home equity loans, home improvement loans,
credit cards and personal loans. Over two-thirds of the Bank's loan portfolio
is real estate mortgage related, including residential, commercial and
investment properties. In order to expand the ability of the Bank to offer a
wide variety of competitively priced mortgage products to the residents of the
District of Columbia and surrounding areas, the Bank has arranged to sell
certain of its mortgage loans into the secondary market, enabling the Bank to
make additional loans, and loans with wider repayment and interest rate options,
available to the community. To date, the Bank has not sold any mortgage loans
into the secondary market. Additionally, the Bank offers a wide variety of
loans geared to meet the needs of small businesses in the Bank's market area,
including accounts receivable lines of credit, Small Business Administration
loans and equipment loans.
The Bank also provides a full range of deposit services to its customers,
including personal checking, low activity student checking, interest bearing NOW
accounts, golden age checking accounts for seniors, statement savings accounts,
money market accounts, student accounts, investment certificates, IRA's and
Christmas club accounts. Other deposit services include 24 hour banking through
use of automated teller machines at five convenient locations. As a part of the
Most, Plus and Network Exchange Systems, accountholders can access ATM's across
the United State at any time. Also the Bank provides a convenient bank by mail
service, direct deposit/electronic fund transfers, cash management services,
safe deposit boxes, night depository, tax deposits, wire transfers and telebanc
systems.
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The Bank has benefitted by the recent waves of consolidations and failures
in the local banking market, developing new customer relationships as failures
or mergers with out of area institutions resulted in displaced or disaffected
customers looking to establish local banking relationships. The Bank was able
to assume $12 million of deposits relating to a failed bank from the FDIC in
1992. In June 1994, the Bank assumed approximately $38,000,000 in deposits and
two branches in Maryland as a result of the Bank's successful bid in connection
with the resolution of the John Hanson Federal Savings Bank, Beltsville,
Maryland ("John Hanson") by the Resolution Trust Corporation (the "RTC").
RTC TRANSACTION
On June 10, 1994, the Bank established two branches in the State of
Maryland by virtue of its assumption of approximately $38,000,000 in deposit
liabilities relating to two branches of John Hanson, a failed savings
association under the conservatorship of the RTC, located in Oxon Hill and
Forestville, Maryland. The Bank paid approximately three million dollars for
the right to assume the deposit liabilities and received certain other assets
and rights. As the Bank is a minority owned and operated financial institution,
and as John Hanson was deemed to be a predominately minority institution as a
result of the location of a majority of its branches in areas with majority
minority population, the Bank was entitled to the benefits of the RTC's Minority
Resolutions Assistance Program. That program provided certain advantages to
minority groups or institutions in the competitive bidding process for savings
institutions under conservatorship of the RTC.
As a successful bidder, the Bank was entitled under the Minority
Resolutions Assistance Program to purchase, from the RTC's portfolio, performing
loans having an unpaid principal balance equal to the amount of deposits
assumed, at below market rates. Pursuant to this right, the Bank purchased
$36,567,000 outstanding principal balance of one-to-four family first mortgage
loans at an aggregate purchase price of 93.49% of the outstanding principal
balance. The Bank subsequently sold approximately $21,595,000 principal amount
of loans which related to properties located out of the Bank's market area to an
institutional investor at an aggregate price of 96.28% of the outstanding
principal balance.
Additionally, the Bank was entitled to obtain the use of the branch
facility at 1900 John Hanson Lane, Oxon Hill Maryland, which was owned by John
Hanson, rent-free for a period of five years from the date of the transaction,
and received an option to purchase the facility during the term of the lease at
95% of fair market value.
Finally, as a result of its successful bid, the Company obtained $1,000,000
of interim capital assistance from the RTC. Interim capital assistance is a
loan for a period of up to five years at a below market interest rate equal to
the end of the calendar quarter Monday Auction yield price for 13 week U.S.
Treasury Bills, as reported by the Wall Street Journal, plus 12.5 basis points,
or approximately 5.52% as of December 31, 1995, subject to periodic adjustment.
The Company's interim capital assistance loan is due July 3, 2000. The loan
documentation relating to the interim capital assistance places certain
restrictions on the activities of the Bank and Company, including, but not
limited to, engaging in loan transactions with affiliates of the Bank or
Company, salary increases and bonuses to directors, officers and key employees,
the payment of dividends, and the maintenance of capital levels. These
restrictions are discussed in greater detail elsewhere herein. The stock of the
Bank stands as collateral security for the loan. In the event of a default by
the Company under the terms of the interim capital assistance loan and security
agreements, including but not limited to a failure to make any required payment
on the interim capital assistance loan, the inaccuracy when made of any
representation or warranty in the agreements, the failure of the Company or the
Bank to perform or observe in any material respect any term, covenant or
agreement in the agreements, certain bankruptcy or insolvency related events,
and any event which gives the RTC, in its judgement, reasonable grounds to
believe that the Company or the Bank will not, or will be unable to repay the
interim capital assistance loan as required or to otherwise perform its
obligations in connection therewith, then, subject to the Company's right to
cure the default, the outstanding principal of the loan may be accelerated and
declared due and payable, and the stock of the Bank may be sold. Additionally,
the failure to make any payment of principal or interest when due, if not timely
cured, constitutes grounds for, and the Company's and the Bank's consent to, the
appointment of a receiver or conservator for the Bank.
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MARKET AREA AND COMPETITION
The Bank's primary market area consists of the District of Columbia, and
Prince George's County, Maryland. The Washington Metropolitan Statistical Area,
(the "Washington MSA"), of which the Bank's market area forms a part, is a
highly competitive one, in which a large number of regional and national,
majority owned and managed, multi-bank holding companies operate, in addition to
numerous small and medium sized community banks. Additionally, a large number
of thrift institutions and non-bank financial service providers, including
insurance companies, brokerage firms, credit unions, mortgage companies,
consumer finance companies, mutual funds and other types of financial
institutions compete in the Washington MSA for investment dollars and lending
business.
Notwithstanding the foregoing, Prince George's County has been the subject
of hearings before the House of Representatives Committee on Banking, Finance
and Urban Affairs regarding the relative unavailability of banking services in
that county. Prince George's County, which has a majority minority population,
was found to have approximately half as many traditional banking or thrift
branches per capita as neighboring Montgomery County, which has a majority non-
minority population. Prince George's was also found to have a substantially
higher number of non-traditional banking entities, such as check cashing
outlets. The Company believes that Prince George's County provides substantial
opportunity for growth and expansion.
The Washington MSA had a 1990 population of approximately 1.8 million, and
total employment in 1991 of 954,000. Employment is primarily provided by
federal and local governments, the finance, insurance and real estate
industries, retailing, construction and education. Per capita income in 1991
amounted to approximately $25,000.
EMPLOYEES
As of December 31, 1995, the Bank had 141 full time employees and 3 part
time employee. None of the Bank's employees are represented by any collective
bargaining group, and the Bank believes that its employee relations are good.
The Bank provides a benefit program which includes health and dental insurance,
life and long term disability insurance and an employee stock ownership plan for
substantially all full time employees. Annual contributions to the employee
stock ownership plan are determined by the Board, and amounted to $75,000 in
1995 and $100,000 in 1994. The Company does not have any employees who are not
also employees of the Bank.
Under the terms of the interim capital assistance, the Company may not
increase the compensation of, or pay any bonus to, its directors, officers or
key employees, except that it may make such increases or payments during and
after the second year of operation following the interim capital assistance with
the prior consent of the Federal Deposit Insurance Corporation ("FDIC") as
successor to the RTC.
REGULATION
The following summaries of statutes and regulations affecting bank holding
companies do not purport to be complete discussions of all aspects of such
statutes and regulations and are qualified in their entirety by reference to the
full text thereof.
Holding Company Regulation. The Company is a registered bank holding
company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). As
a registered bank holding company, the Company is required to file with the
Board of Governors of the Federal Reserve (the "Federal Reserve") an annual
report, certain periodic reports and such reports and additional information as
the Federal Reserve may require pursuant to the BHCA, and is subject to
examination and inspection by the Federal Reserve.
BHCA - Activities and Other Limitations. The BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of any
bank, without prior approval of the Federal Reserve.
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The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the Federal Reserve is authorized to approve
the ownership of shares by a bank holding company in any company, the activities
of which the Federal Reserve has determined to be so closely related to banking
or to managing or controlling banks as to be a proper incident thereto. In
making such determinations, the Federal Reserve is required to weigh the
expected benefit to the public, such as greater convenience, increased
competition or gains in efficiency, against the possible adverse effects, such
as undue concentration of resources, decreased or unfair competition, conflicts
on interest or unsound banking practices.
The Federal Reserve has by regulation determined that certain activities
are closely related to banking within the meaning of the BHCA. These activities
include: making or servicing loans such as would be made by a mortgage company,
consumer finance company, credit card company, or factoring company; performing
trust company functions; performing certain data processing operations;
providing limited securities brokerage services; acting as an investment or
financial advisor; ownership or operation of a savings association; acting as an
insurance agent for certain types of credit-related insurance; leasing personal
property on a full-payout, non-operating basis; providing tax planning and
preparation services; operating a collection agency; and providing certain
courier services. The Federal Reserve also has determined that certain other
activities, including real estate brokerage and syndication, land development,
property management and underwriting life insurance not related to credit
transactions, are not closely related to banking and a proper incident thereto.
Commitments to Subsidiary Banks. Under Federal Reserve policy, the Company
is expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances when it might not do so absent
such policy.
Limitations of Acquisitions of Common Stock. The federal Change in Bank
Control Act prohibits a person or group from acquiring "control" of a bank
holding company unless the Federal Reserve has been given 60 days' prior written
notice of such proposed acquisition and within that time period the Federal
Reserve has not issued a notice disapproving the proposed acquisition or
extending for up to another 30 days the period during which such a disapproval
may be issued. An acquisition may be made prior to expiration of the
disapproval period if the Federal Reserve issues written notice of its intent
not to disapprove the action. Under a rebuttable presumption established by the
Federal Reserve, the acquisition of 10% or more of a class of voting stock of a
bank holding company with a class of securities registered under Section 12 of
the Exchange Act would, under the circumstances set forth in the presumption,
constitute the acquisition of control.
In addition, with limited exceptions, any "company" would be required to
obtain the approval of the Federal Reserve under the BHCA before acquiring 25%
(5% in the case of an acquiror that is a bank holding company) or more of the
outstanding Common Stock of, or such lesser number of shares as constitute
control over, the Company. Such approval would be contingent upon, among other
things, the acquiror registering as a bank holding company, divesting all
impermissible holdings and ceasing any activities not permissible for a bank
holding company.
The Federal Reserve has adopted capital adequacy guidelines pursuant to
which it assesses the adequacy of an institution's capital. These guidelines
are substantially identical to those which are applicable to the Bank discussed
below.
Bank Regulation. The Bank is subject to extensive regulation and
examination by the Office of the Comptroller of Currency ("OCC") and by the
FDIC, which insures its deposits to the maximum extent permitted by law. The
federal laws and regulations which are applicable to national banks regulate,
among other things, the scope of their business, their investments, their
reserves against deposits, the timing of the availability of deposited funds and
the nature and amount of collateral for certain loans. The laws and regulations
governing the Bank generally have been promulgated to protect depositors and not
for the purpose of protecting stockholders.
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FDIC Insurance Premiums. Until December 31, 1992, the Bank paid deposit
insurance premiums to the FDIC based on a single, uniform assessment rate
established by the FDIC for all Bank Insurance Fund-member institutions of .23%
of insured deposits per annum. The Federal Deposit Insurance Act (the "FDIA"),
as amended by the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), however, required the FDIC to establish a risk-based assessment
system. The FDIC has issued a final regulation which was fully implemented on
January 1, 1994. Under the regulation, institutions are assigned to one of
three capital groups based solely on the level of the institution's capital -
"well capitalized," "adequately capitalized" and "undercapitalized" - which
would be defined in the same manner as the regulations establishing the prompt
corrective action system under Section 38 of the FDIA, as discussed below.
These three groups are then divided into three subgroups which reflect varying
levels of supervisory concern, from those which are considered to be healthy to
those which are considered to be of substantial supervisory concern. The matrix
so created results in nine assessment risk classifications, with rates ranging
from .06% for well capitalized, healthy institutions to .31% for
undercapitalized institutions with substantial supervisory concerns. The lower
end of that matrix was reduced in the second half of 1995 to .04%, and to 0%
subsequent to year end 1995. With respect to the Bank's deposits which are
insured by the Bank Insurance Fund ("BIF") of the FDIC, the Bank's assessment
for the first half of 1995 was .23% and for the second half of 1995 was .06% and
has since been reduced to 0%. With respect to the approximately $28.6 million
of deposits which are deemed to be insured by the Saving Association Insurance
Fund ("SAIF") of the FDIC, the Bank's assessment was .23% during all of 1995.
See "Management's Discussion and Analysis -- Noninterest Expense."
Deposit Insurance Reform. There are currently being discussed certain
proposals relating to the reform or restructuring of the deposit insurance fund
system. Currently, there are two deposit insurance funds maintained by the
FDIC, the BIF and the SAIF. Deposits of SAIF insured institutions assumed by
BIF insured banks (plus the deemed growth in such deposits) continue to be
treated as SAIF insured deposits, unless "entrance and exit fees" amounting to
approximately 1.79% of the assumed deposits are paid. The designation of
deposits as "BIF insured" or "SAIF insured" determines the level of the deposit
insurance premiums paid by an institution, and the allocation of such premiums
between BIF and SAIF. Although, as indicated above, BIF deposit insurance
premiums have been reduced, SAIF deposit insurance premiums will remain at .23%
until SAIF meets the mandated level of 1.25% of insured deposits. Among the
proposals to recapitalize SAIF and allow the equalization, at the lower BIF
levels, of premiums between, or the merger of, BIF and SAIF, is one which would
impose a one-time assessment of up to .85% to .90% of SAIF insured deposits on
all institutions holding SAIF insured deposits. Based upon the deposits of the
Bank attributable to SAIF at December 31, 1995, management estimates that a one
time-assessment in accordance with such proposal would result in a payment of
approximately $190,000. Management does not believe that this payment would
have a material impact on the Company's liquidity, capital resources or
operations. There can be no assurance as to the enactment of any of the current
proposals, the form of any such proposals, the amount, tax treatment or timing
of any one-time assessment, or the means used to calculate the deposit base
subject to any such assessment.
Capital Adequacy Guidelines. The Federal Reserve, the OCC and the FDIC
have all adopted capital adequacy guidelines pursuant to which they assess the
adequacy of capital in examining and supervising banks and bank holding
companies and in analyzing bank regulatory applications. Risk-based capital
requirements, which became effective on December 31, 1990, establish a new
method for determining the adequacy of capital, based on the risk inherent in
various classes of assets and off-balance sheet items.
Minimum required ratios were phased in between December 31, 1990 and
December 31, 1992. Since December 31, 1992, national banks have been expected
to meet a minimum ratio of total qualifying capital (the sum of core capital
(Tier 1) and supplementary capital (Tier 2)) to risk weighted assets of 8%. At
least half of this amount (4%) should be in the form of core capital. These
requirements apply to the Bank and will apply to the Company (a bank holding
company) so long as its total assets equal $150,000,000 or more.
Tier 1 Capital for national banks generally consists of the sum of common
stockholders' equity and perpetual preferred stock (subject in the case of the
latter to limitations on the kind and amount of such stock which may be included
as Tier 1 Capital), less goodwill. Tier 2 Capital consists of the following:
hybrid capital
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instruments; perpetual preferred stock which is not otherwise eligible to be
included as Tier 1 Capital; term subordinated debt and intermediate-term
preferred stock; and, subject to limitations, general allowances for loan
losses. Assets are adjusted under the risk-based guidelines to take into
account different risk characteristics, with the categories ranging from 0%
(requiring no additional capital) for assets such as cash, to 100% for the bulk
of assets which are typically held by a bank holding company, including certain
multi-family residential and commercial real estate loans, commercial business
loans and consumer loans. Residential first mortgage loans on one to four
family residential real estate and certain seasoned multi-family residential
real estate loans, which are not 90 days or more past-due or non-performing and
which have been made in accordance with prudent underwriting standards are
assigned a 50% level in the risk-weighing system, as are certain privately-
issued mortgage-backed securities representing indirect ownership of such loans.
Off-balance sheet items also are adjusted to take into account certain risk
characteristics.
In addition to the risk based capital requirements, the OCC has established
a minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to total adjusted assets,
less goodwill) requirement for the most highly-rated national banks, with an
additional cushion of at least 100 to 200 basis points for all other national
banks, which effectively increases the minimum Leverage Capital Ratio for such
other banks to 4.0% - 5.0% or more. Under the OCC's regulations, highest-rated
banks are those that the OCC determines are not anticipating or experiencing
significant growth and have well diversified risk, including no undue interest
rate risk exposure, excellent asset quality, high liquidity, good earnings and,
in general, those which are considered a strong banking organization. A
national bank having less than the minimum Leverage Capital Ratio requirement
shall, within 60 days of the date as of which it fails to comply with such
requirement, submit to the applicable OCC district office for review and
approval a reasonable plan describing the means and timing by which the bank
shall achieve its minimum Leverage Capital Ratio requirement. A national bank
which fails to file such plan with the OCC is deemed to be operating in an
unsafe and unsound manner, and could subject the bank to a cease-and-desist
order from the OCC. The OCC's regulations also provide that any insured
depository institution with a Leverage Capital Ratio that is less than 2.0% is
deemed to be operating in an unsafe or unsound condition pursuant to Section
8(a) of the FDIA and is subject to potential termination of deposit insurance.
However, such an institution will not be subject to an enforcement proceeding
thereunder, solely on account of its capital ratios, if it has entered into and
is in compliance with a written agreement with the OCC to increase its Leverage
Capital Ratio to such level as the OCC deems appropriate and to take such other
action as may be necessary for the institution to be operated in a safe and
sound manner. The OCC capital regulations also provide, among other things, for
the issuance by the OCC or its designee(s) of a capital directive, which is a
final order issued to a bank that fails to maintain minimum capital or to
restore its capital to the minimum capital requirement within a specified time
period. Such directive is enforceable in the same manner as a final cease-and-
desist order.
Additionally, the interim capital assistance loan agreement requires the
Bank to maintain a 5.22% "tangible" capital level. This covenant of the interim
capital assistance agreement does not constitute a written capital order or
directive for purposes of prompt corrective action.
At December 31, 1995, the Bank was in compliance with all minimum federal
regulatory capital requirements which are generally applicable to national
banks, as well as the capital requirements of the interim capital assistance.
As of such date, the Bank had a Tier 1 Risk Based Capital Ratio and a Total Risk
Based Capital Ratio equal to 16.02% and 17.22% respectively, and a Leverage
Capital Ratio equal to 7.06%.
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
FDICIA, each federal banking agency is required to implement a system of prompt
corrective action for institutions which it regulates. The federal banking
agencies have promulgated substantially similar regulations to implement the
system of prompt corrective action established by Section 38 of the FDIA, which
became effective on December 19, 1992. Under the regulations, a bank shall be
deemed to be: (i) "well capitalized" if it has a Total Risk Based Capital Ratio
of 10.0% or more, a Tier 1 Risk Based Capital Ratio of 6.0% or more, a Leverage
Capital Ratio of 5.0% or more and is not subject to any written capital order or
directive; (ii) "adequately capitalized" if it has a Total Risk Based Capital
Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0% or more and a
Tier 1 Leverage Capital Ratio of 4.0% or more
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(3.0% under certain circumstances) and does not meet the definition of "well
capitalized;" (iii) "undercapitalized" if it has a Total Risk Based Capital
Ratio that is less than 8.0%, a Tier 1 Risk based Capital Ratio that is less
than 4.0% or a Leverage Capital Ratio that is less than 4.0% (3.0% under certain
circumstances); (iv) "significantly undercapitalized" if it has a Total Risk
Based Capital Ratio that is less than 6.0%, a Tier 1 Risk Based Capital Ratio
that is less than 3.0% or a Leverage Capital Ratio that is less than 3.0%; and
(v) "critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%.
An institution generally must file a written capital restoration plan which
meets specified requirements with an appropriate federal banking agency within
45 days of the date the institution receives notice or is deemed to have notice
that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the institution with
written notice of approval or disapproval within 60 days after receiving a
capital restoration plan, subject to extensions by the applicable agency.
An institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution. Such guaranty shall be limited to the lesser of (i) an amount
equal to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary at such time to restore the relevant capital measures of the
institution to the levels required for the institution to be classified as
adequately capitalized. Such a guaranty shall expire after the federal banking
agency notifies the institution that it has remained adequately capitalized for
each of four consecutive calendar quarters. An institution which fails to
submit a written capital restoration plan within the requisite period, including
any required performance guaranty, or fails in any material respect to implement
a capital restoration plan, shall be subject to the restrictions in Section 38
of the FDIA which are applicable to significantly undercapitalized institutions.
A "critically undercapitalized institution" is to be placed in
conservatorship or receivership within 90 days unless the FDIC formally
determines that forbearance from such action would better protect the deposit
insurance fund. Unless the FDIC or other appropriate federal banking regulatory
agency makes specific further findings and certifies that the institution is
viable and is not expected to fail, an institution that remains critically
undercapitalized on average during the fourth calendar quarter after the date it
becomes critically undercapitalized must be placed in receivership. The general
rule and current position of the OCC is that the FDIC will be appointed as
receiver within 90 days after a bank becomes critically undercapitalized unless
extremely good cause is shown and an extension is agreed to between the OCC and
the FDIC. In general, good cause is defined as capital which has been raised
and is imminently available for infusion into the Bank except for certain
technical requirements which may delay the infusion for a period of time beyond
the 90 day time period.
Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA, which (i) restrict payment
of capital distributions and management fees; (ii) require that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital; (iii) require submission of a capital restoration plan;
(iv) restrict the growth of the institution's assets; and (v) require prior
approval of certain expansion proposals. The appropriate federal banking agency
for an undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible long-
term cost to the deposit insurance fund, subject in certain cases to specified
procedures. These discretionary supervisory actions include: requiring the
institution to raise additional capital; restricting transactions with
affiliates; requiring divestiture of the institution or the sale of the
institution to a willing purchaser; and any other supervisory action that the
agency deems appropriate. These and additional mandatory and permissive
supervisory actions may be taken with respect to significantly undercapitalized
and critically undercapitalized institutions.
Additionally, under Section 11(c)(5) of the FDIA, as amended by FDICIA, a
conservator or receiver may be appointed for an institution where: (i) an
institution's obligations exceed its assets; (ii) there is substantial
dissipation of the institution's assets or earnings as a result of any violation
of law or any unsafe or unsound practice; (iii) the institution is in an unsafe
or unsound condition; (iv) there is a willful violation of a cease-and-desist
order;
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(v) the institution is unable to pay its obligations in the ordinary course of
business; (vi) losses or threatened losses deplete all or substantially all of
an institution's capital, and there is no reasonable prospect of becoming
"adequately capitalized" without assistance; (vii) there is any violation of
law or unsafe or unsound practice or condition that is likely to cause
insolvency or substantial dissipation of assets or earnings, weaken the
institution's condition, or otherwise seriously prejudice the interests of
depositors or the insurance fund; (viii) an institution ceases to be insured;
(ix) the institution is undercapitalized and has no reasonable prospect that it
will become adequately capitalized, fails to become adequately capitalized when
required to do so, or fails to submit or materially implement a capital
restoration plan; or (x) the institution is critically undercapitalized or
otherwise has substantially insufficient capital.
At December 31, 1995, the Bank would be deemed to be a "well capitalized"
institution for purposes of Section 38 of the FDIA.
Regulatory Enforcement Authority. The Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA") included substantial
enhancement to the enforcement powers available to federal banking regulators.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and institution-
affiliated parties, as defined in FIRREA. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with regulatory
authorities. FIRREA significantly increased the amount of and grounds for civil
money penalties and requires, except under certain circumstances, public
disclosure of final enforcement actions by the federal banking agencies.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The following financial review presents a discussion of the results of
operations, an analysis of the asset and liability structure of the Company, and
its sources of liquidity and capital resources and should be read in conjunction
with the consolidated financial statements included herein. All dollar amounts
shown are in thousands, except with respect to per share data.
HOLDING COMPANY BUSINESS
The Company became a unitary bank holding company, and its wholly-owned
subsidiary Industrial Bank converted from a District of Columbia chartered bank
to a national banking association as of the close of business on June 30, 1995.
The business of the Bank and the Company, is providing banking services to the
Washington, DC metropolitan area. The Bank does business through six offices in
the District of Columbia and two offices in Prince George's County, Maryland.
General
The Company's net income depends primarily on net interest income, which is
the difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities. Noninterest income, such as customer
deposit account service charges, late charges on loans and other sources of
income also impact the Company's operations. The Company's principal operating
expenses, other than interest expense, consist principally of compensation and
employee benefits, occupancy, data processing, provision for loan losses and
other operating expenses. The Company's net income is significantly affected by
general economic conditions in the Washington, DC metropolitan area and policies
of regulatory authorities.
-8-
<PAGE>
RESULTS OF OPERATION
YEARS ENDED DECEMBER 31, 1995 AND 1994
Overview
Net income for 1995 was $1,589, or $2.56 per share, compared to $1,127, or
$1.99 per share, for 1994, an increase of 41%. This was primarily attributable
to an increase in net interest income of $650, a decrease in the provision for
loan losses of $455, and an increase in noninterest income of $289, partially
offset by a $701 increase in noninterest expense and a $231 increase in the
provision for income taxes. The return on average assets increased 37% to 0.74%
for 1995 from 0.54% in 1994.
TABLE 1 - FINANCIAL OVERVIEW
The following table summarizes income divided by average shareholders'
equity), dividend payout ratio (dividends declared per share divided by net
income per share) and shareholders' equity to assets ratio (average
shareholders' equity divided by average total assets) for each of the three
years listed below.
<TABLE>
<CAPTION>
1995 1994 1993
-------------------------------------------------------
<S> <C> <C> <C>
Return on assets .74% .54% .96%
Return on equity 10.75% 8.41% 14.45%
Dividend payout 23.44% 30.15% 16.03%
Shareholders' equity to assets 6.81% 6.33% 6.63%
</TABLE>
Net Interest Income
Net interest income is the principal source of earnings for the Company.
It is affected by a number of factors, including the level, pricing and maturity
of interest-earning assets and interest-bearing liabilities, interest rate
fluctuations, and asset quality. Information concerning the Company's interest-
earning assets, interest-bearing liabilities, net interest income, interest rate
spreads, and net yield on interest-earning assets is presented in Table 2.
Changes in the Company's interest income and interest expense resulting from
changes in interest rates and in the volume of interest-earning assets and
interest-bearing liabilities are presented in Table 3.
-9-
<PAGE>
TABLE 2. AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS(1)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------
1995 1994 1993
---------------------------------------------------------------------------------------
Amount Amount Amount
Average Average Paid or Average Average Paid or Average Average Paid or
Balance Rate Earned Balance Rate Earned Balance Rate Earned
----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net $ 90,630 9.90% $ 8,975 $ 72,886 10.69% $ 7,793 $ 68,370 10.70% $ 7,313
Taxable securities 92,147 5.82% 5,363 92,825 5.05% 4,687 89,612 5.53% 4,957
Non-taxable securities 3,934 3.00% 118 2,417 4.47% 108 2,208 4.57% 101
Federal funds sold 11,435 5.82% 665 25,419 4.41% 1,121 12,804 3.01% 386
Interest-bearing deposits held 95 4.21% 4 98 3.06% 3 100 3.00% 3
------ ----- -- --- ----- --- ------ ----- --
Total interest-earning assets 198,241 7.63% 15,125 193,645 7.08% 13,712 173,094 7.37% 12,760
Cash and due from banks 10,882 10,429 7,593
Bank premises and 2,334 2,070 1,404
equipment, net
Other assets 5,619 5,693 2,731
----- ----- -----
Total assets $217,076 $211,837 $184,822
======== ======== ========
Liabilities and
Shareholders' Equity
Interest-bearing demand $ 31,313 2.70% 845 $ 36,219 2.34% 848 $ 27,077 2.40% 652
deposits
Savings deposits 75,839 3.20% 2,428 74,806 3.04% 2,274 62,911 3.43% 2,159
Time deposits 46,363 3.94% 1,827 40,768 3.05% 1,244 39,702 2.98% 1,184
------ ----- ----- ------ ----- ----- ------ ----- -----
Total interest-bearing deposits 153,515 3.32% 5,102 151,793 2.88% 4,366 129,690 3.08% 3,995
Borrowed funds 500 5.40% 27 0 N/A 0 0 N/A 0
------- ------ ----- ------ ----- ---- ----- ----- -----
Total interest-bearing liabilities 154,015 3.33% 5,129 151,793 2.88% 4,366 129,690 3.08% 3,995
----- ----- -----
Noninterest-bearing deposits 46,722 45,354 41,380
Other liabilities 1,557 1,290 1,497
Shareholders' equity 14,782 13,400 12,255
------ ------ ------
Total liabilities and $217,076 $211,837 $184,822
shareholders' equity ======== ======== ========
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING ASSETS
Net interest income $ 9,996 $ 9,346 $ 8,765
======= ======= =======
Interest rate spread 4.30% 4.20% 4.29%
Net yield on average interest- 5.05% 4.83% 5.07%
earning assets
Average interest-earning assets 128.70% 127.60% 133.47%
to average interest-bearing
liabilities
</TABLE>
(1) Yields on securities in the available for sale portfolio have been
computed based upon the historical cost of such securities.
Nonaccruing loans are included in average balances. Yields on non-
taxable securities are not presented on a tax-equivalent basis.
-10-
<PAGE>
TABLE 3. RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
Net interest income is affected by changes in the average interest rate
earned on interest-earning assets and the average interest rate paid on
interest-bearing liabilities. In addition, net interest income is affected by
changes in the volume of interest-earning assets and interest-bearing
liabilities. The following table sets forth the dollar amount of increase
(decrease) in interest income and interest expense resulting from changes in the
volume of interest-earning assets and interest-bearing liabilities and from
changes in yields and rates. The combined effect of changes in both rate and
volume has been allocated proportionately to the change due to volume and the
change due to rate. Interest income on tax-exempt securities is not presented
on a taxable-equivalent basis.
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in Thousands)
--------------------------------------------------------------------
1995 Versus 1994 1994 Versus 1993
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------------------------------------------------
Volume Rate Total Volume Rate Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $1,790 $(608) $1,182 $ 483 $ (3) $ 480
Taxable securities (21) 697 676 173 (443) (270)
Non-taxable securities 53 (43) 10 9 (2) 7
Federal funds sold (741) 285 (456) 712 23 735
Interest-bearing deposits 0 1 1 0 0 0
--------------------------------------------------------------------
Total interest income 1,081 332 1,413 1,377 (425) 952
Deposits
Interest-bearing demand deposits (115) 113 (2) 219 (22) 197
Savings deposits 31 123 154 408 293 115
Time deposits 171 413 584 32 27 59
Total interest-bearing deposits 87 649 738 660 (289) 371
Borrowings 27 0 27 0 0 0
--------------------------------------------------------------------
Total interest bearing liabilities 114 649 763 660 (289) 371
--------------------------------------------------------------------
Net interest income $ 967 $(317) $ 650 $ 717 $(136) $ 581
====================================================================
</TABLE>
Net interest income for 1995 increased $650 or 7.0% over 1994. The growth
in 1995 was primarily attributable to the growth in the loan portfolio,
partially offset by the increased cost of interest-bearing liabilities. Average
loans outstanding for 1995 increased 24.4% over 1994. The increase in average
loans outstanding is primarily attributable to loans acquired in connection with
acquisition of certain assets and the assumption of certain liabilities from the
RTC. The cost of interest-bearing liabilities for 1995 increased 15.6% over
1994. This increase is primarily attributable to a 44 basis point increase in
the average cost of interest-bearing deposits and borrowings from the RTC in
connection with the series of transactions with the RTC. Taxable securities
income was affected primarily by an increase in rates while federal funds sold
was primarily affected by the decline in volume. Interest expense associated
with interest bearing demand deposits was equally affected by changes in rate
and volume, while savings and time deposits were primarily affected by changes
in volume.
The interest rate spread increased 10 basis points to 4.30% for 1995 from
4.20% in 1994. The growth in the interest rate spread was primarily
attributable to a 7.8% increase in the average yield on interest-earning assets,
partially offset by a 15.6% increase in the cost of interest-bearing
liabilities.
-11-
<PAGE>
Provision for Loan Losses
The Company maintains an allowance for loan losses to absorb losses on
existing loans and commitments that may become uncollectible. The provision for
loan losses decreased $455 or 95.0% from $480 in 1994 to $25 in 1995. The
decrease in the provision for loan losses is primarily due to the improved
quality of the Company's loan portfolio, management's risk rating procedures and
aggressive collection efforts. As losses on loans are not statistically
predictable and dependent upon the general economic conditions in the Bank's
marketplace, future provisions for loan losses may be above the amount necessary
in 1995. See Asset Quality for additional information.
Noninterest Income
Noninterest income increased $289, or 14.8%, to $2,237 for 1995 from $1,948
in 1994. The primary component of noninterest income is service charges on
deposit and checking accounts, which increased $138, or 7.6%, to $1,963 for 1995
from $1,825 in 1994. This increase is primarily attributable to the increased
average volume of deposit accounts. Additionally, in 1995, the Company had net
gains on the sale of securities of $62 compared to net losses of $60 in 1994.
Noninterest Expense
Noninterest expense for 1995 and 1994 was $9,844 and $9,143, respectively,
an increase of $701, or 7.7%. The primary component of the increase was
salaries and employee benefits, which increased $748, or 16.1%. This increase
is primarily attributable to the full year of operation of the two branches
acquired from the RTC in 1995, as well as additional loan department personnel.
Occupancy expenses increased $164, or 32.5%, from $505 in 1994 to $669 in 1995.
This increase is also primarily attributable to full year operation of the
branches acquired from the RTC. FDIC deposit insurance premiums decreased $137,
or 33.3%, from $411 in 1994 to $274 in 1995.
Income Taxes
The provision for income taxes for 1995 increased $231, or 42.5%, from
1994, due primarily to a 41.5% increase in income before income taxes. The
effective tax rates of 33% and 32% for 1995 and 1994, respectively, were
slightly lower than the statutory rate of tax of 34% primarily due to tax exempt
interest income.
ASSET/LIABILITY MANAGEMENT
Interest rate sensitivity gap ("gap") analysis measures the difference
between the assets and liabilities repricing or maturing within specified time
periods. An asset-sensitive position indicates that there are more rate-
sensitive assets than rate-sensitive liabilities repricing or maturing within a
specified time period, which would generally imply a favorable impact on net
interest income in periods of rising interest rates and a negative impact in
periods of falling interest rates. A liability-sensitive position would
generally imply a negative impact in net interest income in periods of rising
interest rates and a positive impact in periods of falling rates.
Table 4 presents an analysis of the Company's interest-sensitivity gap
position at December 31, 1995. Asset prepayment and liability decay rates are
estimated based on the Company's historical experience. Due to the relatively
stable nature of the Company's interest-bearing demand deposits, these deposits
were allocated as follows: 15% to the 3 months or less category, 15% to the 4
to 12 months category and the remaining 70% to the over 12 months category.
This allocation is consistent with the Bank's historical experience and is used
by management to manage the Bank's interest rate risk. As summarized in Table
4, the Company's one-year cumulative gap ratio is 113%. This is primarily
attributable to the relatively short-term nature of the Company's loan and
securities portfolios and the stable nature of the Company's demand deposits.
Gap analysis has limitations because it cannot measure the effect of
interest rate movements and competitive pressures on the repricing and maturity
characteristics of interest-earning assets and interest-bearing liabilities.
-12-
<PAGE>
Accordingly, certain assets and liabilities indicated as repricing within a
stated period may in fact reprice at different times at different volumes.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating Table 4.
TABLE 4. RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
Total
3 Months 4 to 12 Within Over
or Less Months 12 Months 12 Months Total
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
EARNING ASSETS
Loans(1) $15,612 $ 10,082 $25,694 $ 67,396 $ 93,090
Investment securities 14,685 11,590 26,275 60,923 87,198
Federal funds sold 20,800 0 20,800 0 20,800
Commercial paper 2,977 0 2,977 0 2,977
Interest-bearing deposits 50 45 95 0 95
in other banks
--------------------------------------------------------
Total earning assets $54,124 $ 21,717 $75,841 $128,319 $204,160
========================================================
Percent of total earning assets 26.51% 10.64% 37.15% 62.85% 100.00%
INTEREST-BEARING LIABILITIES
Time certificates of deposit $ 4,284 $ 7,094 $11,378 $ 917 $ 12,295
of $100M or more
Savings, NOW and money market 18,288 19,329 37,617 87,671 125,288
deposits
Time certificates of deposit 7,918 9,414 17,332 2,443 19,775
less than $100M
Borrowed funds 1,000 0 1,000 0 1,000
--------------------------------------------------------
Total interest-bearing liabilities $31,490 $ 35,837 $67,327 $ 91,031 $158,358
========================================================
Interest sensitivity gap $22,634 $(14,120) $ 8,514 $ 37,288 $ 45,802
Cumulative interest sensitivity gap $22,634 $ 8,514 $ 8,514 $ 45,802 $ 45,802
Ratio of earning assets to 171.88% 60.60% 112.65% 140.96% 128.92%
interest-bearing liabilities
(gap ratio)
Cumulative ratio of earning assets 171.88% 112.65% 112.65% 128.92% 128.92%
to interest-bearing liabilities
(cumulative gap ratio)
Cumulative interest sensitivity gap 10.17% 3.83% 3.83% 20.58% 20.58%
as a percent of total assets
=============================================================================================
</TABLE>
(1) Non-accrual loans are excluded from loan totals.
FINANCIAL CONDITION
Table 5 sets forth information concerning the composition of the Company's
assets, liabilities and shareholders' equity at December 31, 1995, 1994 and
1993.
-13-
<PAGE>
TABLE 5. FINANCIAL CONDITION
<TABLE>
<CAPTION>
1995 Percent 1994 Percent 1993 Percent
-----------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net $ 92,817 41.70% $ 92,751 40.31% $ 66,840 34.89%
Investment securities 87,198 39.18% 101,763 44.23% 93,012 48.54%
Federal funds sold 20,800 9.35% 11,100 4.83% 16,000 8.35%
Interest-bearing deposits 3,072 1.38% 95 0.04% 100 0.05%
in other banks and commercial
paper
-----------------------------------------------------------
Total earnings assets 203,887 91.61% 205,709 89.41% 175,952 91.83%
Cash and due from banks 11,014 4.95% 15,939 6.93% 9,887 5.16%
Bank premises and equipment 2,358 1.06% 2,354 1.02% 1,934 1.01%
Other assets 5,302 2.38% 6,079 2.64% 3,827 2.00%
-----------------------------------------------------------
Total assets 222,561 100.00% 230,081 100.00% 191,600 100.00%
===========================================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 46,341 20.82% 47,804 20.79% 47,956 25.03%
Savings, NOW and MMDA 117,273 52.69% 135,807 59.03% 104,663 54.63%
Time deposits $100,000 or more 12,295 5.52% 7,018 3.05% 9,026 4.71%
Other time deposits 27,790 12.49% 24,205 10.52% 16,046 8.37%
-----------------------------------------------------------
Total deposits 203,699 91.52% 214,834 93.37% 177,691 92.74%
Borrowed funds 1,000 0.45% 0 0.00% 0 0.00%
Accrued expenses and 1,307 0.59% 876 0.38% 824 0.43%
other liabilities
-----------------------------------------------------------
Total liabilities 206,006 92.56% 215,710 93.75% 178,515 93.17%
Shareholders' equity 16,555 7.44% 14,371 6.25% 13,085 6.83%
-----------------------------------------------------------
Total liabilities and 222,561 100.00% 230,081 100.00% 191,600 100.00%
shareholders' equity
===========================================================
</TABLE>
Overview
Total assets decreased $7,520 from December 31, 1994 to December 31, 1995,
mainly due to a decrease in securities, partially offset by an increase in
federal funds sold. Securities decreased $14,565, or 14.3%, from 1994 to 1995.
This is primarily attributable to $11,135, or 5.2% decrease in deposits from
1994 to 1995. Additionally, certain securities were sold near the end of 1995
to restructure the Company's securities portfolio. The funds from the sale of
these securities were invested in federal funds sold at December 31, 1995.
Shareholders' equity increased $2,184, or 15.2% from 1994 to 1995, and
represented 7.4% of total assets at December 31, 1995.
Loans
Total loans outstanding at December 31, 1995 were $92,817, as compared to
$92,751 at December 31, 1994. As summarized at Table 6, the composition of
loans has remained relatively consistent for the past five years with real
estate mortgage loans accounting for approximately 76% of net loans outstanding,
commercial loans approximately 20%, and installment loans approximately 4%. See
Note 3 to the consolidated financial statements for a summary of loan
concentrations. The composition of the Company's loan portfolio is expected to
change slightly as the Company rolls out its credit card and home equity line of
credit products in 1996. Table 6
-14-
<PAGE>
summarizes the composition of the Company's loan portfolio and Table 7
summarizes the scheduled maturity of the loan portfolio.
TABLE 6. LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------------------
1995 Percent 1994 Percent 1993 Percent 1992 Percent 1991 Percent
----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 19,128 20.31% $ 20,166 21.30% $ 14,393 20.86% $ 16,572 22.81% $ 13,992 19.88%
Real estate mortgage 71,348 75.76% 71,090 75.10% 51,408 74.49% 51,734 71.20% 52,593 74.72%
Installment loans to 3,700 3.93% 3,409 3.60% 3,210 4.65% 4,354 5.99% 3,798 5.40%
individuals
---------------------------------------------------------------------------------------------------------
Total $94,176 100.00% $94,665 100.00% $69,011 100.00% $72,660 100.00% $70,383 100.00%
=========================================================================================================
</TABLE>
TABLE 7. MATURITY OF LOAN PORTFOLIO
FIXED RATE AND VARIABLE RATE(1)
<TABLE>
<CAPTION>
After
One Year
One Year Through After
or Less Five Years Five Years Total
--------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed rate $13,234 $39,806 $25,133 $78,173
Variable rate 12,460 2,457 0 14,917
--------------------------------------------
Total $25,694 $42,263 $25,132 $93,090
============================================
(1) Excludes non-accrual loans.
</TABLE>
Securities
The carrying value of the Company's securities portfolio decreased $14,565,
or 14.3%, from $101,763 at December 31, 1994, to $87,198 at December 31, 1995.
The composition of the Company's securities portfolio at December 31, 1995 and
1994 is presented in Note 2 to the consolidated financial statements. During
the latter part of 1995, the Company began restructuring its securities
portfolio. The restructuring was focused on increasing the total return of the
portfolio. Accordingly, the composition of the portfolio has changed
considerably between December 31, 1994 and 1995. U.S. treasury and U.S. agency
securities comprised 68% of the securities portfolio at December 31, 1995, down
from 95% of the portfolio at December 31, 1994. Mortgage-backed securities
comprised 21% of the securities portfolio at December 31, 1995, compared to 2%
at December 31, 1994. Additionally, collateralized mortgage obligations, a type
of mortgage-backed security, represented 19% of the securities portfolio at
December 31, 1995. The average yield on taxable securities increased 77 basis
points in 1995, which is attributable to a general increase in interest rates
and this restructuring. All mortgage backed securities are guaranteed by one of
the "quasi government" agencies, and therefore maintain a risk weight of 20
percent for risk based capital purposes. Management's analysis of mortgage
related securities includes, but is not limited to the average lives,
seasonality, coupon and historic behavior (including prepayment history) of each
particular security over its life, as affected by various interest rate
environments. Stress tests are performed on each security on a quarterly basis
as part of management's ongoing analysis. At year end 1995, the average life of
the total mortgage backed portfolio was 3.29 years. The relatively short
duration of the Company's mortgage backed securities mitigates the risks
associated with interest rates and prepayments. At December 31, 1995, based on
stress tests performed by management, a 300 basis point decrease in interest
rates would result in an estimated decrease in value
-15-
<PAGE>
of asset backed securities no more than $1.2 million. The Company expects to
complete the restructuring in the first half of 1996.
The Company has adopted the Financial Accounting Standards Board Staff's
special report, A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities (the "Guide"). On the date of
the implementation of the Guide, the Company transferred $71,280 of held to
maturity securities to available for sale. Table 8 summarizes the maturity and
average yield of the Company's securities portfolio.
TABLE 8. INVESTMENT PORTFOLIO MATURITY SCHEDULES/(1)/
<TABLE>
<CAPTION>
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years Mortgage Backed Total
--------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
--------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $10,044 5.97% $13,758 6.58% $23,802 6.31%
U.S. Government agencies 15,145 4.86% 20,213 6.07% 35,358 5.55%
State and political 1,086 5.57% 1,614 4.60% 341 4.69% 5,374 5.51% 8,415 5.31%
subdivisions
Other 825 4.28% 846 8.48% 1,671 6.41%
Mortgage-backed securities 17,952 6.99% 17,952 6.99%
--------------------------------------------------------------------------------------------------------
Total $26,275 5.31% $36,410 6.15% $1,187 7.39% $5,374 5.51% $17,952 6.99% $87,198 6.05
========================================================================================================
</TABLE>
(1) Yields on tax exempt obligations have not been computed on a tax equivalent
basis.
The Company's mortgage-backed securities portfolio had a weighted average
remaining maturity of 3.29 years at December 31, 1995. There are no issuers of
securities held by the Company the securities of which have a book value in
excess of ten percent of the Company's shareholder's equity.
Asset Quality
See Note 1 to the consolidated financial statements for a discussion of the
Company's policy for establishing the allowance for loan losses. Table 9 sets
forth the activity in the allowance for loan losses for the last five years.
-16-
<PAGE>
TABLE 9. LOAN LOSS AND RECOVERY EXPERIENCE
<TABLE>
<CAPTION>
3 Months Ended Year Ended December 31,
March 31,
----------------- ----------------------------------------------------
1996 1995 1994 1993 1992 1991
----------------- ----------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total outstanding loans at year end $94,768 $94,176 $94,665 $69,011 $72,660 $70,383
Average amount of loans outstanding 93,373 90,630 72,886 68,370 68,810 65,228
Allowance for loan losses 1,177 1,751 2,168 1,500 2,040 1,897
at beginning of year
Loans charged off:
Commercial 222 766 1,040 759 1,864 240
Real estate mortgage 0 40 28 25 0 0
Installment loans to individuals 25 14 17 76 178 142
------- ------- ------- ------- ------- -------
Total charge-offs 247 820 1,085 860 2,042 382
Recoveries of loans previously charged-off:
Commercial 31 202 172 597 35 55
Real estate mortgage 0 0 2 0 0 0
Installment loans to individuals 8 19 14 31 50 50
------- ------- ------- ------- ------- -------
Total recoveries 39 221 188 628 85 105
------- ------- ------- ------- ------- -------
Net charge-offs 208 599 897 232 1,957 277
Additions to allowance charged to 50 25 480 900 1,417 420
operations ------- ------- ------- ------- ------- -------
Allowance for loan losses at end of year $ 1,019 $ 1,177 $ 1,751 $ 2,168 $ 1,500 $ 2,040
======= ======= ======= ======= ======= =======
Ratios of net charge-offs during year 0.22% 0.66% 1.23% 0.34% 2.84% 0.42%
to average outstanding loans during year
Ratio of allowance for possible loan 1.08% 1.25% 1.85% 3.14% 2.05% 2.90%
losses at year end to total loans
</TABLE>
TABLE 10. ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------
1995 Percent 1994 Percent 1993 Percent 1992 Percent 1991 Percent
----------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 875 72.96% $1,403 80.13% $1,466 67.62% $1,396 93.07% $1,212 59.41%
Real estate 71 6.36% 125 7.14% 124 5.72%
mortgage(1)
Consumer 0 0% 63 3.60% 104 4.80% 81 5.40% 59 2.89%
Unallocated 231 20.68% 160 9.14% 474 21.86% 23 1.53% 769 37.70%
----------------------------------------------------------------------------------------------
Total $1,177 100.00% $1,751 100.00% $2,168 100.00% $1,500 100.00% $2,040 100.00%
==============================================================================================
</TABLE>
(1) Prior to 1993, the Bank did not specifically allocate a portion
of the allowance for loan losses to real estate mortgages.
The allowance for loan losses was $1,177 at December 31, 1995,
as compared to $1,751 at December 31, 1994. The allowance for loan
losses as a percentage of total loans was 1.25% and 1.85%, respectively,
as of December 31, 1995 and 1994. The decrease in the level of the
allowance for loan losses as a percentage of ending loans reflects the
improvement in asset quality. At December 31, 1995, non-performing
assets to total assets was
-17-
<PAGE>
1.17%, down from 1.60% at December 31, 1994. The improvement in asset quality
is primarily due to the decrease in asset backed commercial loans and the
overall decline in non-performing assets. At December 31, 1995, asset backed
commercial loans declined $3.7 million to $10.1 million from December 31, 1994.
Additionally, asset backed loans classified substandard and doubtful at year end
1995 declined to $1.4 million and $20 thousand respectively, compared to $3.5
million and $45 thousand , respectively, at year end 1994. With the decline in
the overall and classified asset backed loans and the historical factor used in
allocating reserves for asset backed commercial loans, the reserve for asset
backed commercial loans was reduced to $379 thousand at year end 1995 from $677
thousand at year end 1994. Improvement was also noted in the overall level of
non-performing assets, which declined to $2.606 million at December 31, 1995
from $3.684 million at December 31, 1994.
The level of the allowance for loan losses is determined by management on
the basis of various assumptions and judgements, including anticipated economic
conditions in the Washington DC metropolitan area, the composition of the loan
portfolio, prior loan loss experience, and the ongoing and periodic reviews of
the loan portfolio by the
Company's internal and external loan review function. For impaired loans, the
Company establishes reserves in accordance with SFAS 114 and SFAS 118, and for
non impaired loans uses an allocation approach which relies on historical loan
loss experience.
Although management believes that it uses the best information available to
make such determinations that the allowance for loan losses is adequate at
December 31, 1995, future adjustments to the allowance may be necessary, and net
income could be significantly affected, if circumstances and/or economic
conditions differ substantially from the assumptions used in making the initial
determinations. Any downturn in the real estate market or general economic
conditions in the Washington, DC metropolitan area could result in the Company
experiencing increased levels of non-performing assets and charge-offs,
significant provisions for loan losses, and significant reductions in net
income. Additionally, various regulatory agencies periodically review the
Company's allowance for loan losses. Such agencies may require the recognition
of additions to the allowance based on their judgments of information available
to them at the time of their examination.
Table 11 sets forth information concerning non-performing assets.
TABLE 11. NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
------------ -------------------------------------------------
1996 1995 1994 1993 1992 1991
------------ -------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans(1) $1,064 $1,086 $1,809 $1,788 $3,492 $ 659
Loans past due 90 days or more 1,198 569 605 866 488 2,662
and still accruing
Foreclosed properties(2) 950 950 1,270 1,370 516 272
------ ------ ------ ------ ------ ------
Total $3,212 $2,605 $3,684 $4,024 $4,496 $3,593
============ =================================================
Non-performing assets to gross loans 3.36% 2.74% 3.84% 5.72% 6.14% 5.09%
and foreclosed properties at period
end
Non-performing assets to total 1.42% 1.17% 1.60% 2.10% 2.42% 2.17%
assets at period end
</TABLE>
(1) Loans are placed on non-accrual status when in the opinion of management
the collection of additional interest is unlikely or a specific loan meets
the criteria for non-accrual status established by regulatory authorities.
No interest is taken into income on non-accrual loans unless received in
cash. A loan remains on non-accrual status until the loan is current as to
both principal and interest and the borrower demonstrates the ability to
pay and remain current, or the loan becomes well secured and is in the
process of collection.
-18-
<PAGE>
As to non-accrual loans at December 31, 1995, the gross interest income
that would have been recorded had the loans been current in accordance with
their original terms was $211,000.
(2) Foreclosed properties include properties that have been substantively
repossessed (for years prior to 1994) or acquired in complete or partial
satisfaction of debt. These properties, which are held for resale, are
carried at the lower of fair value (net of estimated selling expenses) or
the principal balance of the related loans.
Non-performing assets at year-end 1995 were $2,605, down 29.3% from year-
end 1994 due to decreases in non-accrual loans and foreclosed properties. These
decreases are a result of aggressive collection efforts and the sale of certain
delinquent loans.
At December 31, 1995, there were $4,128 of loans not reflected in the table
above, where known information about possible credit problems of borrowers
caused management to have doubts as to the ability of the borrower to comply
with present loan repayment terms and that may result in disclosure of such
loans in the future. Included in the total are four loans totalling $2,030 of
loans fully collateralized by real estate and eleven loans totalling $1,622
secured by government contracts.
Deposits, Other Sources of Funds and Liquidity
Deposits are generally the most important source of the Company's funds for
use in lending, investing and other business purposes. Deposit inflows and
outflows are significantly influenced by general interest rates, market
conditions, and competitive factors. Total deposits decreased $11,135, or 5.2%,
from December 31, 1994 to December 31, 1995. The decrease in deposits is
primarily attributable to run-off of deposits acquired from the RTC and
withdrawal of funds by a large customer. Average total deposits increased
$3,590, or 1.8%, for 1995 over 1994. The increase in average deposits is
primarily attributable to the assumption of certain deposit liabilities from the
RTC. Table 12 presents certain information related to the Company's time
deposits.
TABLE 12. TIME DEPOSIT MATURITY SCHEDULE
<TABLE>
<CAPTION>
3 Months 4 to 6 7 to 12 Over 12
or Less Months Months Months Total
-------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Time certificates of deposit $ 4,284 $ 5,839 $1,255 $ 917 $12,295
of $100M or more
Time certificates of deposit 9,389 5,793 6,367 6,241 27,790
less than $100M
-------------------------------------------------------
Total $13,673 $11,632 $7,622 $7,158 $40,085
=======================================================
</TABLE>
In connection with the series of transactions with the RTC, the Company
borrowed $1,000 from the RTC. These funds were contributed to the capital of
the Bank. For additional information regarding this borrowing refer to Note 6
to the consolidated financial statements.
The Company's principal sources of funds are deposits, repayments and
maturities of loans and securities, proceeds from the sale of securities and
funds provided by operations. The Company's sources and uses of cash for the
years ended December 31, 1995 and 1994 are presented in the consolidated
statement of cash flows. The Company anticipates that it will have sufficient
funds available to meet current and future commitments.
Shareholders' Equity and Capital
Shareholders' equity increased $2,184, or 15.2% from $14,371 at December
31, 1994, to $16,555 at December 31, 1995. The increase is attributable to
retained net income, the change in unrealized gains and losses
-19-
<PAGE>
on available-for-sale securities, net of tax, and proceeds from the issuance of
common stock. At December 31, 1995, approximately $2,015 of the Bank's retained
earnings was available to pay dividends to the Company.
The Bank is subject to certain regulatory capital requirements. Management
believes that the Bank met all the capital requirements to which it is subject
as of December 31, 1995. Refer to Note 8 to the consolidated financial
statements for an analysis of the Bank's regulatory capital.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and results of operations in
terms of historical dollars without considering the relative purchasing power of
money over time because of inflation. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates have a more significant impact
on a financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the price of goods and services. In the current interest
rate environment, liquidity, maturity structure, and quality of the Company's
assets and liabilities are critical to the maintenance of acceptable performance
levels.
ACCOUNTING AND REPORTING DEVELOPMENTS
A discussion of recently issued accounting pronouncements and their impact
on the Company's consolidated financial statements is provided in Note 1 to the
consolidated financial statements.
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
The Company's earnings for the first quarter of 1996 totaled $373 thousand,
an increase of $109 thousand or 41.3% over the first quarter of 1995. This
increase is primarily attributed to an increase in net interest income of $248
thousand, an increase of $127 thousand in noninterest income and a decrease of
$100 thousand in provision for loan losses, offset by an increase in interest
expense of $143 thousand and an increase in noninterest expenses of $167
thousand. Return on average assets (ROAA), and return on average shareholder's
equity (ROAE) during the first quarter of 1996 and 1995 were .62 percent and
10.30 percent and .49 percent and 7.30 percent, respectively.
Net interest income increased by $105 thousand or 4.3 percent over last
year's first quarter. Interest on federal funds sold increased by $181 thousand
or 186.6% reflecting the higher levels of federal funds sold during the first
quarter of 1996 compared to a year ago. Interest expense increased by $143
thousand or 11.8 percent reflecting higher interest rates and deposit growth.
The provision for loan losses was $50 thousand for the first quarter of
1996 compared to $150 thousand for the first quarter of 1995. Net charge-offs
during the first quarter of 1996 were $208 thousand, compared to net charge-offs
of $24 thousand during the first quarter of 1995. The increase in net charge-
offs were primarily attributed to two Small Business Administration (SBA) loans
of $44 thousand and $127 thousand. Substantial recovery on the $127 thousand
SBA loan was received during the third quarter of 1996. Loans past due ninety
days or more and still accruing increased from $569 thousand at December 31,
1995 to $1,198 thousand at March 31, 1996, primarily as a result of one $540
thousand loan which, subsequent to March 31, 1996, was placed on non-accrual
status.
Other operating income increased by $127 thousand or 28.3 percent. This
increase included $41 thousand in security gains for the first quarter of 1996
compared to $11 thousand in security losses for the first quarter of 1995.
Noninterest expense increased by $167 thousand or 7.1 percent to $2.5 million
from $2.4 million in 1995. Salaries and employee expenses increased by $145
thousand or 11.1 percent reflecting primarily the cost of additional
-20-
<PAGE>
loan staff as well as salary increases. Intangibles amortization increased to
$55 thousand, compared to $48 thousand from the first quarter of 1995. Other
expenses increased by $37 thousand or 6.2 percent from a year ago.
As of March 31, 1996, total deposits were $207.3 million reflecting an
increase of $3.6 million or 1.7 percent over December 31, 1995. Noninterest
bearing deposits increased by $1.0 million or 2.2 percent. Savings and time
deposits increased by $2.5 million or 1.6 percent.
The Company continues its growth in the community through business
development and efforts by its directors and officers. Net loans increased by
$738 thousand or .8 percent from December 31, 1995 to March 31, 1996. This
growth was reflected mainly in the commercial and real estate categories.
Shareholders' equity decreased by $391 thousand or 2.4 percent from
December 31, 1995 to $16.2 million at March 31, 1996. This decrease was
attributed primarily to the change in net unrealized holdings on available-for-
sale securities, changing from a gain of $514 thousand at December 31, 1995 to a
loss of $250 thousand at March 31, 1996. The Company's leverage capital ratio
was 7.0 percent as of March 31, 1996. No dividends were paid during the first
quarter of 1996 and dividends of $170 thousand were paid during the first
quarter of 1995.
ITEM 3. DESCRIPTION OF PROPERTY.
The Bank currently operates eight offices, six in the District of Columbia,
and two in Prince George's County, Maryland. The Bank owns its office located
at 4812 Georgia Avenue, N.W. and its branch offices located at 2000 11th Street,
NW and 45th and Blaine Streets, NE. The Georgia Avenue office, which is also
the principal executive office of the Company, consists of a 6,000 square foot
stand alone building with drive-in facilities, and a separate 2,000 square foot
building housing the Bank's operations center next door. The 11th Street office
is housed in a 4,000 square foot building, and an adjacent 2,000 square foot
building houses the loan operations center. The Blaine Street office occupies
an approximately 2,000 square foot stand alone building, with drive-in
facilities, near the Benning Road Metro Station. The Bank leases the remainder
of its offices. The 14th and U Streets office is located in a 1,922 square foot
storefront, under a lease which commenced in 1988, for a ten year term and one
optional ten year renewal term at a fixed rent of $28,830 per year. The Bank's
F Street office is located in a 1,273 square foot storefront under a lease
commencing in 1991, for a ten year term at a current annual rent of $57,285
subject to annual increases. The American University office is located in a 962
square foot storefront under a five year lease, which commenced in 1992, with
one five year renewal option, at a current annual rent of $24,595, subject to
annual increase. The Forestville, Maryland office is located in a 2,696 square
foot storefront with drive-in facilities, and is occupied under a lease which
commenced in 1994 for a five year term at a current annual rental of $44,035,
subject to annual increase. The Oxon Hill office, the main office of the Bank,
is a 10,531 square foot, two story building with drive in facilities, and is
occupied rent free for a term extending until June 10, 1999 and is subject to a
purchase option at 95% of fair market value. The Company is responsible for all
operating and maintenance expenses on the Oxon Hill property.
The Company believes that its existing facilities are adequate to conduct
its business.
-21-
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of February 29, 1996, there were 637,160 shares of the Company's Common
Stock outstanding, held of record by approximately 566 shareholders. The
following table sets forth certain information relating to the beneficial
ownership of Common Stock by directors and executive officers of the Company and
other persons known to beneficially own 5% or more of the Company's Common Stock
as of February 29, 1996.
<TABLE>
<CAPTION>
Name Number of Shares(1) Percent of Class
- ---- --------------------- ----------------
<S> <C> <C>
Clinton W. Chapman, Esquire 10,754/(2)/ 1.69%
George H. Windsor, Esquire 18,340/(3)/ 2.88%
Benjamin L. King, CPA 1,176/(4)/ *
B. Doyle Mitchell, Jr. 76,313/(5)/ 11.98%
4812 Georgia Avenue, NW
Washington, DC 20011
Massie S. Fleming 5,425/(6)/ *
Cynthia Mitchell 98,928/(7)/ 15.53%
2029 Trumbull Terrace, NW
Washington, DC 20011
Estate of B. Doyle Mitchell 1,835 *
Patricia Mitchell 77,407/(8)/ 12.15%
4812 Georgia Avenue, NW
Washington, DC 20011
Marjorie H. Parker, Ph.D 6,354 *
Margaret B. Stewart 19,835 3.11%
Robert L. White 2,317 *
Emerson A. Williams, M.D. 3,646 *
Industrial Bank, National Association 54,720 8.59%
Employee Stock Ownership Plan
4812 Georgia Avenue, NW
Washington, DC 20011
Rick Williams 60 *
David G. Poole 300/(9)/ *
Lester Johnson 0 0%
Thomas A. Wilson 100 *
All directors and executive 377,510/(10)/ 59.25%/(10)/
officers as a group (13 persons)
</TABLE>
___________________________________
* Less than one percent
(Footnotes appear on the following page.)
-22-
<PAGE>
(1) For purposes hereof, a person is deemed to be the beneficial owner of
securities with respect to which he has or shares voting or investment
power. Except as otherwise indicated, the named beneficial owner has sole
voting and investment power with respect to all shares beneficially owned
by such person.
(2) Does not include 54,720 shares held by the Industrial Bank of Washington
Employee Stock Ownership Plan ("ESOP") as to which Mr. Chapman is a co-
trustee.
(3) Includes 9,920 shares held jointly with spouse, and as to which Mr. Windsor
shares voting and investment power. Does not include 6,420 shares held
directly by spouse or 2,000 shares held by Mr. Windsor's daughter, and as
to which Mr. Windsor disclaims beneficial ownership.
(4) Does not include 54,720 shares held by ESOP as to which Mr. King is a co-
trustee.
(5) Includes 61,980 shares held in a revocable trust of which Mr. Mitchell is
the trustee and Ms. Mitchell, and Mr. Mitchell's spouse and son are
beneficiaries. Does not include shares held by Mrs. Mitchell as trustee
for Mr. Mitchell and Ms. Mitchell. Does not include 54,720 shares held by
ESOP as to which Mr. Mitchell is a co-trustee.
(6) Includes 225 shares held jointly with son and as to which Mrs. Fleming
shares voting and investment power.
(7) Represents shares held by two trusts of which Mrs. Mitchell is trustee, and
with respect to one of which Mr. Mitchell and Ms. Mitchell are
beneficiaries. Does not include shares held by estate of B. Doyle
Mitchell, of which Mrs. Mitchell is executrix and beneficiary and as to
which she has voting power.
(8) Represents shares held in a revocable trust of which Ms. Mitchell is the
trustee, and of which Mr. Mitchell is the beneficiary. Does not include
shares held by Mrs. Mitchell as trustee for Mr. Mitchell and Ms. Mitchell.
Ms. Mitchell is an employee of the Bank.
(9) Includes 250 shares held jointly with spouse, and as to which Mr. Poole
shares voting and investment power.
(10) Includes 54,720 shares held by ESOP as to which Messrs. Chapman, King and
Mitchell are trustees. If these shares were not included, the directors
and executive officers as a group beneficially own 322,790 shares, or
50.66% of the outstanding shares of Bank Common Stock.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Directors. Set forth below is certain information concerning the directors
and executive officers of the Company and the Bank. Directors serve for one
year terms. The current term of office for directors expires in April 1996.
Executive officers of the Bank serve at the pleasure of the Board of Directors.
Except as otherwise indicated, the occupation listed has been such person's
principal occupation for at least the last five years. Each of the members of
the Board of Directors of the Company has served since the organization of the
Company. The longevity of service listed below reflects service on the Board of
the Bank, including service prior to the conversion of the Bank to a national
banking association. The Board of Directors of the Bank and Company are
identical.
Clinton W. Chapman, 70, Chairman of the Board of Directors, has served as a
director since 1984. Mr. Chapman, an attorney with Chapman & Chapman, P.C. has
been engaged in the private practice of law for more than thirty years.
George H. Windsor, 77, Vice Chairman of the Board of Directors, has served
as a director since 1969. Mr. Windsor, an attorney with Cobb, Howard, Hayes and
Windsor, has been in private law practice for twenty-six years.
Benjamin L. King, C.P.A., 70 is Secretary of the Company and has served as
a director since 1972. Mr. King is a certified public accountant, and is self-
employed as a management and tax consultant.
B. Doyle Mitchell, Jr., President of the Company, has served as a director
since 1990. Mr. Mitchell has served as President of the Bank since March 1993.
Prior to that date, he served in various executive and administrative positions
at the Bank since 1983, including as Vice President-Commercial Lending from 1991
to 1993 and Assistant Vice President-Commercial Lending from 1989 to 1991. Mr.
Mitchell is the son of Mrs. Cynthia
-23-
<PAGE>
Mitchell, a director of the Bank, and the late B. Doyle Mitchell, a founder of
the Bank. Mr. Mitchell's sister, Patricia Mitchell, is a significant
shareholder and an employee of the Bank.
Massie S. Fleming, 68, Executive Vice President and Chief Executive Officer
of the Company, has served as a director since 1985. Mrs. Fleming has served as
Executive Vice President and Chief Executive Officer of the Bank since 1985.
Prior to that date, she served in various executive and administrative positions
at the Bank since 1959.
Cynthia T. Mitchell, 69, has served as a director since 1993. Mrs.
Mitchell is retired. Until 1982 she was a teacher in the District of Columbia
public schools system. Mrs. Mitchell's late husband was a founder of the Bank.
Mrs. Mitchell's son is B. Doyle Mitchell Jr., the President of the Bank, and her
daughter Patricia Mitchell, is a significant shareholder and an employee of the
Bank.
Marjorie H. Parker, PhD., 78, has served as a director since 1975. Dr.
Parker is a retired educator. Until 1975 she was the Chairman of the Board of
Trustees of the University of the District of Columbia.
Margaret B. Stewart, 76, has served as a director since 1982. Mrs. Stewart
is the owner and President of Stewart Funeral Home, Inc., and is owner and
President of Stanton Road Associates, a real estate development/brokerage
concern.
Robert L. White, 79, has served as a director since 1982. Mr. White is
retired. Until 1989 he served as President of NAPFE, a national labor union
representing postal and federal workers.
Emerson A. Williams, M.D., 78, has served as a director since 1975. Mr.
Williams is retired from the active practice of medicine. For many years he
served as an instructor at Howard University School of Medicine.
Lester Johnson, 50, was promoted to Chief Credit Officer of the Bank in
April 1995, and to Senior Vice President in January 1996. Mr. Johnson joined
the Bank as a Vice President and Commercial Loan Officer in January 1988.
David G. Poole, 60, has served as Senior Vice President-Operations of the
Bank since 1983.
Richard Williams, 36, has served as Senior Vice President-Chief Lending
Officer since July 1995. Mr. Williams joined the Bank as a Vice President and
Commercial Loan Officer in October 1988.
Thomas A. Wilson, 45, has served as Senior Vice President-Controller of the
Bank since January 1992. Prior to serving in this position he served (since
April 1986) at various times as Commercial Loan Manager and Loan Review Officer
of the Bank. Prior to joining the Bank in 1986, he served as a National Bank
Examiner with the OCC from 1974 to 1986.
ITEM 6. EXECUTIVE COMPENSATION.
Director Compensation Each director of the Company, including directors who
are full time employees of the Company or the Bank, receives $600 for each
regular meeting of the Board of Directors attended, with the exception of Mr.
Chapman, Chairman of the Board who receives $1,500 for each regular meeting
which he attends. Additionally, directors who are not employees, serving on
committees of the Board, receive $400 for each meeting attended, except if such
service is as chairman of any committee, in which case such director receives
$500 for each meeting. Total fees paid to directors in 1995 for Board and
committee meeting attendance was $150,000.
-24-
<PAGE>
Summary Executive Compensation Table. The following table sets forth a
summary of certain information relating to the compensation of the President and
the Executive Vice-President and Chief Executive Officer of the Company. All
compensation paid to Mr. Mitchell and Mrs. Fleming was for services rendered in
their capacities as officers of the Company.
ANNUAL COMPENSATION/(1)/
<TABLE>
<CAPTION>
Name and Principal Position Year Ended December 31 Salary Bonus Other
- ----------------------------- ---------------------- --------- ------- -----
Compensation/(2)/
------------------
<S> <C> <C> <C> <C>
B. Doyle Mitchell 1995 $90,000 $2,360 $7,800
President & Director 1994 90,000 8,075 9,600
1993 85,000 1,500 7,600
Massie S. Fleming 1995 $86,000 $2,590 $7,800
Executive Vice President 1994 86,000 9,600 9,600
CEO, Director 1993 83,000 7,600 7,600
</TABLE>
____________________________
(1) The Company does not maintain any long-term or stock-based compensation
plans.
(2) Represents fees paid for attendance at meetings of Board of Directors and
committees thereof. Does not include vehicle allowances of $3,842, $3,475
and $4,000 in 1995, 1994 and 1993 respectively, in the case of Mr.
Mitchell, and of $5,600, $2,306 and $1,540 paid to Mrs. Fleming in 1995,
1994 and 1993, respectively. Also does not include value of contributions
to the Bank's employee stock ownership plan estimated at $1,762, $2,501 and
$2,870 and $1,736, $2,555 and $4,501 for Mr. Mitchell and Mrs. Fleming,
respectively, in 1995, 1994 and 1993. Does not include Bank paid
membership fees of $605 for Mr. Mitchell.
Employment Agreements As of December 31, 1995, neither the Bank nor the
Company had any employment agreements or other compensation contracts or other
arrangements in existence. Under the terms of the interim capital assistance
loan agreement, the Bank may not grant any salary increase, or pay any bonuses
to, its directors, officers or key employees, except that it may do so during
and after the second year of the interim capital assistance with the prior
approval of the RTC.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Bank has had, and expects to have in the future, banking transactions
in the ordinary course of business with some of its and the Company's directors,
officers, and employees and their associates. In the past, substantially all of
such transactions have been on the same terms, including interest rates,
maturities and collateral requirements as those prevailing at the time for
comparable transactions with non-affiliated persons and did not involve more
than the normal risk of collectibility or present other unfavorable features.
Loans to officers, directors and affiliates of the Company represented
2.15% of the Company's total shareholders' equity at December 31, 1995. In the
opinion of the Board of Directors, the terms of these loans are no less
favorable to the Bank than terms of the loans from the Bank to unaffiliated
parties. On December 31, 1995, $356 of loans were outstanding to individuals
who, during 1995, were officers, directors and affiliated parties of the
Company. At the time each loan was made, management believed that the loan
involved no more than the normal risk of collectibility and did not present
other unfavorable features. None of such outstanding loans are classified as
Substandard, Doubtful or Loss. Under the terms of the interim capital
assistance, the Bank may not, during the term of the interim capital assistance
loan, make any loan or advance to the Company or any affiliate of the Bank or
Company, or enter into any transaction (other than arm's length deposit
transactions in the ordinary course of business) with such persons.
-25-
<PAGE>
ITEM 8. DESCRIPTION OF SECURITIES.
The Company is authorized to issue an aggregate of two million (2,000,000)
shares of capital stock, one million (1,000,000) of which are common stock, par
value $1.00 per share and one million (1,000,000) of which are undesignated
preferred stock, par value $1.00 per share. As of December 31, 1995, there were
637,160 shares of Common Stock outstanding, held of record by approximately 566
shareholders, and no shares of preferred outstanding. There are no options or
other rights to purchase additional shares of Common Stock outstanding. Each
share of Common Stock is entitled to one noncumulative vote on all matters to be
submitted to a vote of shareholders. The holders of Common Stock are not
entitled to any preemptive or preferential right to acquire any shares of any
class of capital stock or other securities for the Company, except as the Board
of Directors may expressly provide in connection with any offering of capital
stock or other securities. Holders of Common Stock are entitled to receive
dividends as and when declared by the Board of Directors.
Upon liquidation, dissolution or winding up of the Company, holders of
Common Stock would be entitled to ratably receive all of the assets for the
Company available for distribution after payment of all debts and liabilities of
the Company, subject to the rights, if any, of the holders of any class of
preferred stock which may be issued with a priority in liquidation of
dissolution over the holders of Common Stock.
The Board of Directors has the authority to designate, without shareholder
action, one or more classes or series of preferred stock, and to determine the
voting powers, preferences, participation, redemption, sinking fund, conversion,
dividend and other rights and limitations of such classes or series.
PART II
ITEM 1. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS.
MARKET FOR COMMON STOCK AND DIVIDENDS
There does not currently exist an organized public trading market for
shares of Company's Common Stock. Trading in the Company's Common Stock has
been sporadic, and consists of private trades conducted without brokers. The
Bank is aware of 24 trades of the Common Stock since January 1, 1994, at prices
ranging from $10.00 to $22.00 per share. The last trade known to the Bank was a
trade of 87 shares at $15.00 per share on February 13, 1996. These trades do
not necessarily reflect the intrinsic or market values of the Common Stock. As
of December 31, 1995, there were 637,160 shares of Common Stock outstanding,
held of record by approximately 566 shareholders.
The Company and, during the period prior to July 1, 1995, the Bank, has
paid semi-annual dividends for each of the last ten years, and currently intends
to continue the payment of such dividends. There can be no assurance, however,
that the Bank or the Company will continue to have earnings at a level
sufficient to support the payment of dividends, or that the either entity will
in the future elect to pay dividends. Under the terms of the interim capital
assistance agreement, the Bank may not, during the term of the interim capital
assistance loan, pay any dividends or repurchase any Common Stock, unless (i)
there is no default under the interim capital assistance agreement and related
note; (ii) payment of such dividends would not result in an event of default;
and (iii) the payment of such dividend is not prohibited or objected to by the
OCC. As the Bank is the primary source of funds for payment of dividends by the
Company, the inability of the Bank to pay dividends could adversely affect the
ability of the Company to pay dividends. As of the date hereof, there is no
event of default under the interim capital assistance documents.
-26-
<PAGE>
Set forth below is certain financial information relating to the Company's
and Bank's dividend history for the past five fiscal years (as adjusted to
reflect the 5-for-1 stock split in the form of a stock dividend paid in July
1994.) Information for periods prior to July 1, 1995 reflect Bank information.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income per share $ 2.56 $ 1.99 $ 3.12 $ 1.90 $ 1.97
Dividends paid per share $ .60 $ .60 $ .50 $ .50 $ .40
Ratio of dividends to net income 23.44% 30.15% 16.03% 26.32% 20.30%
- ----------------------------------
</TABLE>
The payment of dividends by the Company depends largely upon the ability of
the Bank to declare and pay dividends to the Company, as the principal source of
the Company's revenue is dividends paid by the Bank. Future dividends will
depend primarily upon the Bank's earnings, financial condition, and need for
funds, as well as governmental policies and regulations applicable to the
Company and the Bank.
Regulations of the Federal Reserve and the OCC place a limit on the amount
of dividends the Bank may pay to the Company without prior approval. Prior
approval of the Federal Reserve and the OCC is required to pay dividends which
exceed the Bank's net profits for the current year plus its retained net profits
for the preceding two calendar years, less required transfers to surplus.
Amounts available for the payment of dividends in 1996 without prior approval
will equal the retained net profits from 1994 and 1995, totaling $2,015 plus the
net profits of 1996. The Federal Reserve and the OCC also have authority to
prohibit a bank from paying dividends if the Federal Reserve or the OCC deems
such payment to be an unsafe or unsound practice.
The Federal Reserve has established guidelines with respect to the
maintenance of appropriate levels of capital by registered bank holding
companies. Compliance with such standards, as presently in effect, or as they
may be amended from time to time, could possibly limit the amount of dividends
that the Company may pay in the future. In 1985, the Federal Reserve issued a
policy statement on the payment of cash dividends by bank holding companies. In
the statement, the Federal Reserve expressed its view that a holding company
experiencing earnings weaknesses should not pay cash dividends exceeding its net
income, or which could only be funded in ways that weakened the holding
company's financial health, such as by borrowing.
As a depository institution, the deposits of which are insured by the FDIC,
the Bank may not pay dividends or distribute any of its capital assets while it
remains in default on any assessment due the FDIC. The Bank currently is not in
default under any of its obligations to the FDIC.
ITEM 2. LEGAL PROCEEDINGS.
The Company is involved in routine legal proceedings in the ordinary
course of its business. In the opinion of management, final disposition of
these proceedings will not have a material adverse effect on the financial
condition or results of operations of the Company.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
-27-
<PAGE>
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
The establishment of the Company as the holding company for the Bank was
effected by the merger of the Bank into an interim national bank subsidiary of
the Company, and as a result thereof, the conversion of each of the outstanding
shares of the common stock of the Bank for one share of the Company's Common
Stock. Such transaction was not required to be registered under the Securities
Act of 1933, as amended, as an exempt security transaction under Section
3(a)(12) thereof. The merger became effective on July 1, 1995, and resulted in
the issuance of 637,160 shares of the Company's Common Stock. No shares of
Common Stock were sold for cash.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation of the Company broadly provide for the
ability of the Company to indemnify, to the fullest extent permitted by the laws
of the District of Columbia, any director, officer, former director or officer,
or any person who served as a director of officer of another corporation in
which the Company owns stock or of which it is a creditor, against expenses
incurred in connection with the defense of any proceeding to which they are made
party by reason of such service. The bylaws of the Company similarly provide for
broad indemnification rights of such persons who are, or are threatened to be,
made a party to any suit or proceeding as a result of such service. Generally, a
District of Columbia corporation has the power to indemnify against expenses
actually and necessarily incurred in connection with such a suit, except in
relation to matters as to which the person seeking indemnification is in the
proceeding adjudged liable for negligence or misconduct in the performance of
duty. Such indemnification is not exclusive of any other right to which a person
may be entitled under any bylaw, vote of shareholders, agreement or otherwise.
The Company's bylaws generally permit indemnification if, other than in an
action by or in the right of the Company, the person acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the best
interests of the Company and in a criminal proceeding had no reasonable cause to
believe his or her conduct was unlawful. In an action by or in the right of the
Company, indemnification is permitted if the person acted in good faith an in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the Company, except that no indemnification is permitted if the
person is adjudged liable to the Company unless a court determines that
indemnification is proper.
-28-
<PAGE>
PART F/S
The following consolidated financial statements are included herein:
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Income for the Years ended December 31,
1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity for the
Years ended December 31, 1995 and 1994
Consolidated Statements of Cash Flows for the Years ended December 31,
1995 and 1994
Notes to Consolidated Financial Statements
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995
Consolidated Statements of Income for the Quarters Ended March 31,
1996 and 1995
Consolidated Statements of Cash Flows for the Quarters Ended March 31,
1996 and 1995
Notes to Consolidated Financial Statements
PART III
ITEM 1. INDEX TO EXHIBITS
Exhibit No. Description of Exhibits
2(a) Certificate of Incorporation of the Company, as amended (1)
2(b) Bylaws of the Company (1)
3 Specimen certificate for the common stock, $1 par value, of the
Company (1)
6(a) Interim Capital Assistance Agreement between the Company and the
RTC (1)
6(b) Stock Pledge Agreement between the Company and the RTC (1)
11 Statement Regarding Computation of Per Share Income
27 Financial Data Schedule
_____________________________
(1) Incorporated by reference to the Company's Registration Statement on Form
10-SB
-29-
<PAGE>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
IBW FINANCIAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENT FOR THE YEARS
ENDED DECEMBER 31, 1995 AND 1994,
AND INDEPENDENT AUDITOR'S REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
of IBW Financial Corporation:
We have audited the accompanying consolidated balance sheets of IBW Financial
Corporation and subsidiary Industrial Bank of Washington (the Bank) as of
December 31, 1995 and 1994, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's Bank'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 IBW Financial Corporation and
subsidiary the Bank at December 31, 1995 and 1994, and the results of theirits
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Washington, D.C.
March 22, 1996
<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 11,014 $ 15,939
Interest-bearing deposits in banks 95 95
Federal funds sold 20,800 11,100
Commercial paper 2,977 -
--------- ---------
Total cash and cash equivalents 34,886 27,134
Securities available-for-sale, at fair value
(amortized cost, $86,416 and $2,447) 87,198 2,435
Securities held-to-maturity, at amortized
cost (fair value, $96,179) - 99,328
Loans receivable, net of allowance for loan losses
of $1,177 and $1,751 92,817 92,751
Other real estate owned, net 950 1,270
Bank premises and equipment, net 2,358 2,354
Other assets 4,169 4,250
Income tax received 183 242
Deferred income taxes - 317
--------- ---------
TOTAL $ 222,561 $ 230,081
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Demand deposits $ 46,314 $ 47,804
Time and savings deposits 157,358 167,030
--------- ---------
Total deposits 203,699 214,834
Other liabilities 1,174 876
Note payable 1,000 -
Deferred income taxes 133 -
--------- ---------
Total liabilities 206,006 215,710
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock - $1 par value; 1,000,000 authorized;
none issued
Common stock - par value $1 and $5, respectively;
1,000,000 shares authorized; 637,160
and 601, 304 shares issued and outstanding 637 3,007
Capital surplus 4,329 1,525
Retained earnings 11,075 9,847
Unrealized gain (loss) on available-for-sale securities, net
of taxes of $265 and ($4) 514 (8)
--------- ---------
Total shareholders' equity 16,555 14,371
--------- ---------
TOTAL $ 222,561 $ 230,081
========= =========
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995 AND 1994
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<S> <C> <C>
1995 1994
INTEREST INCOME:
Interest and fees on loans $ 8,975 $ 7,793
U.S. treasury securities 2,060 1,674
Obligations of U.S. government
agencies and corporations 3,159 2,906
Obligations of states and political subdivisions 118 108
Bank balances and other securities 148 110
Federal funds sold and securities
purchased under agreements to resell 665 1,121
------- -------
Total interest income 15,125 13,712
------- -------
INTEREST EXPENSES:
Time certificates over $100,000 418 249
Other savings and time deposits 4,684 4,117
Note payable 27 -
------- -------
Total interest expense 5,129 4,366
------- -------
NET INTEREST INCOME 9,996 9,346
PROVISION FOR LOAN LOSSES 25 480
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 9,971 8,866
------- -------
NONINTEREST INCOME:
Service charges on deposit and checking accounts 1,963 1,825
Gain (loss) on sale of investment securities 62 (60)
Other operating income 212 183
------- -------
Total noninterest income 2,237 1,948
------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits 5,393 4,645
Occupancy 669 505
Furniture and equipment 479 407
Data processing 503 461
Other 2,800 3,125
------- -------
Total noninterest expense 9,844 9,148
------- -------
</TABLE>
-3-
<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
INCOME BEFORE INCOME TAXES 2,364 1,671
PROVISION FOR INCOME TAXES 775 544
------- -------
NET INCOME $ 1,589 $ 1,127
------- -------
NET INCOME PER COMMON SHARE $ 2.56 $ 1.99
------- -------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. (CONCLUDED)
-4-
<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
NET UNREALIZED
GAIN (LOSS)
COMMON CAPITAL RETAINED ON SECURITIES
STOCK SURPLUS EARNINGS AVAILABLE-FOR-SALE TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 $ 568 $ 1,187 $ 11,330 $- $ 13,085
Adoption of SFAS 115, net of tax - - - 73 73
Cash dividends, $0.60 per share - - (340) - (340)
Transfer of retained earnings to capital surplus - 1,187 (1,187) - -
Stock split in the form of a stock dividend 2,270 (1,187) (1,083) - -
Issuance of common stock at $15 per share 169 338 - - 507
Change in unrealized gains (losses) on
available-for-sale securities, net of tax - - - (81) (81)
Net income, - - 1,127 - 1,127
------- ------- -------- ------- --------
BALANCE, DECEMBER 31, 1994 3,007 1,525 9,847 (8) 14,371
Cash dividends, $0.60 per share - - (361) - (361)
Issuance of common stock at $15 per share,
net of offering costs of $105 179 255 - - 434
Change in the par value from $5 to $1
in connection with the formation of
IBW Financial Corporation (2,549) 2,549 - - -
Change in unrealized gains (losses) on
available-for-sale securities, net of tax - - 522 522
Net income - - 1,589 - 1,589
------- ------- -------- ------- --------
BALANCE, DECEMBER 31, 1995 $ 637 $ 4,329 $ 11,075 $ 514 $ 16,555
======= ======= ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,589 $ 1,127
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 295 239
Amortization of goodwill, intangibiles and rent concessions 202 115
Accretion/amortization of (discount) premium (148) 74
Deferred income taxes 181 181
Loss on sale of other real estate owned 23 222
(Gain) loss on sale of investment securities (62) 60
Provision for loss on other real estate owned 22 66
Provision for loan losses 25 480
Decrease (increase) in income tax receivable 59 (242)
Increase in other assets (121) (512)
Increase in other liabilities 298 79
--------- ---------
Net cash provided by operating
activities 2,363 1,889
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (924) (12,220)
Additions to bank premises and equipment, net (299) (656)
Net proceeds on sale of other real estate owned 1,107 727
Proceeds from sale of securities held-to-maturity - 9,879
Proceeds from maturities of securities held-to-maturity 35,578 36,051
Proceeds from sale of securities available-for-sale 23,868 4,012
Purchase of securities held-to-maturity (6,121) (52,391)
Purchase of securities available-for-sale (37,758) (6,447)
Net proceeds from acquisition of RTC branches - 20,786
--------- ---------
Net cash provided by (used in) investing activities 15,451 (259)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (361) (340)
Net decrease in deposits (11,135) (649)
Proceeds from note payable 1,000 -
Sale of common stock, net 434 507
--------- ---------
Net cash used in financing activities (10,062) (482)
--------- ---------
</TABLE>
-6-
<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
NET INCREASE IN CASH AND CASH
EQUIVALENTS 7,752 1,148
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 27,134 25,986
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 34,886 $ 27,134
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Income taxes $ 518 $ 585
======== ========
Interest $ 4,943 $ 4,357
======== ========
Non cash transfers of loans to other real estate
owned $ 832 $ 915
======== ========
</TABLE>
During the year ended December 31, 1994, the Bank acquired the deposits, certain
assets and received certain rights in a series of transactions with the
Resolution Trust Corporation. In connection with the acquisition, liabilities
were assumed as following:
<TABLE>
<S> <C>
Cash received, net $ 20,786
Intangible assets 1,526
Fair value of assets acquired 15,658
--------
Liabilities assumed $ 37,970
========
</TABLE>
(Concluded)
See notes to consolidated financial statements.
-7-
<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IBW Financial Corporation (Corporation) became a unitary bank holding
company and its wholly-owned subsidiary Industrial Bank of Washington
(Bank) converted from a District of Columbia chartered bank to a national
banking association on July 1, 1995 (see Note 7). This reoganization
resulted in the conversion of each share of the Bank's common stock into
one share of the Corporation's common stock. The accounting and reporting
policies of IBW Financial Corporation and subsidiary (Company)Industrial
Bank of Washington (the Bank) conform to generally accepted accounting
principles and prevailinggeneral practices within the banking industry. The
following summarizes the significant accounting policies.
Consolidation - The consolidated financial statements as of and for the
year ended December 31, 1995, include the accounts of the Bank and the
Corporation. All significant intercompany transactions and balances have
been eliminated. The financial statements as of and for the year ended
December 31, 1994, include the accounts of the Bank.
Use of Estimates - The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Securities - Effective January 1, 1994, the Company Bank adopted Statement
of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS No. 115). and revised its
accounting policy for investment securities. This standard requires debt
and equity securities to be segregated into the following three categories:
trading, held-to-maturity, and available-for-sale. Trading securities are
purchased and held principally for the purpose of reselling them within a
short period of time. Their unrealized gains and losses are included in
earnings. Debt Ssecurities classified as held-to-maturity will be accounted
for at amortized cost, and require the Company to have both the positive
intent and ability to hold these securities to maturity. Securities not
classified as either trading or held-to-maturity are considered to be
available-for-sale. Unrealized gains and losses on available-for-sale
securities are excluded from earnings and reported, net of deferred taxes,
as a separate component of shareholders' equity until realized. Realized
gains or losses on the sale of investment securities are reported in
earnings and determined using the adjusted cost of the specific security
sold.
The adoption of SFAS No. 115, which has not been applied retroactively to
prior years financial statements, resulted in an increase in shareholders'
equity of $73,000 for the unrealized gain, net of income taxes, of $37,000,
on investment securities classified as available-for-sale at January 1,
1994. Additionally, securities with a carrying value of $6,470,000 and a
fair value of $6,580,000 were transferred from held-to-maturity to
available-for-sale. At January 1, 1994 securities with a carrying value of
$6,470,000 and a fair value of $6,580,000 were transferred from held-to-
maturity to available-for-sale.
On November 15, 1995, the Financial Accounting Standards Board Staff issued
a special report, A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities. In accordance with
the provisions in that special report, management chose to reclassify all
securities classified as held-to-maturity to available-for-sale to
reposition its securities portfolio. On the
-8-
<PAGE>
date of transfer, the amortized cost of those securities was $71,280,000
and the unrealized gain on those securities was $325,000.
Loans - For balance sheet presentation, loans are presented net of deferred
fees and costs. Interest on loans is accrued and recorded as income based
upon the principal amount outstanding. Loan fees, and related direct loan
origination costs are deferred and recognized over the life of the loan as
an adjustment to the yield of the loan as part of interest income. Loans
are placed on nonaccrual (cash basis) when it is determined that the
payment of interest and principal is doubtful of collection, or when
interest or principal is 90 or more days past due, except for certain
guaranteed loans and other limited exceptions. Any interest accrued is
reversed and charged against current earnings, interest ultimately
collected is recorded in the period received. When there is doubt regarding
the ultimate collectibililty of principal, all cash receipts are thereafter
applied to reduce the recorded investment in the loan. Collateral dependent
loans where repayment is expected to be provided solely by the underlying
collateral and there are no other sources of repayment, are written down to
the lower of cost or collateral value. Other impaired commercial and non-
residential real estate loans are written down to the extent that the
principal is judged to be uncollectible. Nonaccrual loans are returned to
accrual status when all contractual principal and interest amounts are
reasonably assured of repayment and there is a sustained period of
repayment performance in accordance with the contractual terms. Total
impaired loans are defined to include all nonaccrual loans, loans
classified as doubtful, certain loans classified as substandard, and other
loans specifically identified by management.
Allowance for Loan Losses - The allowance for loan losses is maintained at
a level believed by management to be adequate to absorb potential losses
inherent in the loan portfolio. Management's determination of the adequacy
of the allowance is based on an evaluation of past loan loss experience;
current economic conditions; the volume, growth, and composition of the
loan portfolio; and other relevant factors. The allowance is increased by
provisions for loan losses charged against income and recoveries and
reduced by charge-offs. In accordance with SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, the Company measures impairment for its
larger balance, non-homogenous loans (Commercial Loans and Real Estate
Loans Collateralized by Non-residential Properties) based on the present
value of each loans's expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, the loan's observable
market price or the fair value of the collateral if the loan is collateral-
dependent. Smaller balance, homogenous loans (Installment Loans and Real
Estate Loans Collateralized by Residential Properties) are collectively
evaluated for impairment. The amount of loan losses the Company may
ultimately realize could differ from these estimates.
Premises and Equipment - Bank Ppremises and equipment are stated at cost
less accumulated depreciation. Depreciation is charged to operations over
the estimated useful lives of assets which range from approximately five to
forty years.
Other Real Estate Owned - Other real estate owned represents properties
acquired through foreclosures or other proceedings in satisfaction of
indebtedness. At the date of acquisition, such property is recorded at the
lower of cost or fair value. Subsequent to acquisition, the property is
carried at the lower of the fair value, less estimated costs to sell, or
its new cost basis. Write-downs to fair value, at the date of acquisition
are charged to the allowance for loan losses. Declines in fair value,
operating expenses, and gains or losses on the dispositions of other real
estate are reported reflected in other expense. The amounts the Company
will ultimately realize on disposition of these properties could differ
from management's current estimates.
-9-
<PAGE>
Earnings Net Income Per Share - Earnings per share is Net income per share
computed based on the weighted average number of common shares outstanding
during the year.; The weighted average number of common shares outstanding
during 1995 and 1994 was 621,727 and 567,500, respectively.
Income Taxes - The Company and its wholly-owned subsidiary file a
consolidated federal income tax return. The Company accounts for income
taxes in accordance with SFAS No. 109, Accounting for Income Taxes.
Deferred income tax assets and liabilities are computed annually for
differences between financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future
based on the enacted tax laws and rates applicable to periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or
refundable for the period adjusted for the change during the period in
deferred tax assets and liabilities.
Intangibles - At December 31, 1995 and 1994, other assets included goodwill
of $713,000 and $747,000, net of accumulated amortization of $57,000 and
$23,000 and core deposit intangibles of $609,000 and $703,000, net of
accumulated amortization of $147,000 and $52,000, respectively (see Note
13). Goodwill is being amortized over 15 years and the core deposit
intangibles over 8 years, both on the straight-line basis.
Statement of Cash Flows - For purposes of the consolidated statement of
cash flows, cash equivalents are highly liquid investments with original
maturities of three months or less. Included in cash and due from banks
were required deposits at the Federal Reserve Bank of $4,681,000 and
$5,374,000 at December 31, 1995 and 1994, respectively.
Reclassification - Certain items in the financial statements for 1994 have
been reclassified to conform to the 1995 presentation.
New Accounting Pronouncement - In March 1995, the Financial Accounting
Standard Board issued SFAS No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets To Be Disposed Of. This standard
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
impairment is measured based on the present value of expected future cash
flows from the use of the asset and its eventual disposition. If the
expected cash flows are less than the carrying amount of the asset, an
impairment loss is recognized. The Company plans to adopt this standard on
January 1, 1996. The adoption is not expected to have a material impact on
the Company's financial condition or results of operations.
Regulatory Issues - The Federal Deposit Insurance Corporation administers
two separate deposit insurance funds, the Bank Insurance Fund (BIF) and the
Savings Association Insurance Fund (SAIF). Congress is considering
legislation that would recapitalize the SAIF fund through a special
assessment on FDIC-insured institutions with SAIF deposits. While the
specifics of the legislation have not been finalized, the impact of this
deposit assessment could result in a future expense to the Company of
approximately $190,000. This amount would be recorded as an expense if and
when the legislation is enacted. With this full recapitalization of the
SAIF fund, the Company's future deposit insurance premiums should be
reduced from current levels.
2. SECURITIES
At December 31, 1995, the amortized cost and approximate fair value of
securities available-for-sale were as follows (in thousands):
-10-
<PAGE>
<TABLE>
<CAPTION>
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S treasury notes $ 23,437 $ 373 $ (8) $ 23,802
U.S government agencies 35,109 334 (85) 35,358
Mortgage-back securities:
Pass-through securities:
Guaranteed by GNMA 114 7 - 121
Issued by FNMA and FHLMC 1,406 4 (7) 1,403
Collateralized mortgage obligations:
Collateralized by FNMA
mortgage-backed securities 16,369 64 (5) 16,428
Securities issued by states and
political subdivision:
General obligations 6,482 79 (20) 6,541
Revenue obligations 1,850 25 (1) 1,874
Other 1,652 19 - 1,671
-------- ----- ------- --------
TOTAL $ 86,419 $ 905 $ (126) $ 87,198
======== ===== ======= ========
</TABLE>
The following is a summary of the amortized cost and estimated fair value of
investment securities available-for-sale by contractual maturity. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------
ESTIMATED
AMORTIZED FAIR
COSTS VALUE
<S> <C> <C>
Due in one year or less $ 26,223 $ 26,275
Due after one year through five years 35,823 36,410
Due after five years through ten years 1,157 1,187
Due after ten years 5,327 5,374
Mortgage-back securities 17,889 17,952
-------- --------
Total $ 86,418 $ 87,198
======== ========
</TABLE>
Proceeds from the sale of securities available-for-sale were $23,968,000 and
$4,012,000 for the year ended December 31, 1995 and 1994, respectively, and
results in gross realized gains of $237,000 and $16,000 and gross realized
losses of $100,000 and $-0- for the years ended December 31, 1995 and 1994,
respectively.
On November 15, 1995, the Financial Accounting Standards Board Staff issued a
special report, A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities. In accordance with the
provisions in that special report, management chose to reclassify all
-11-
<PAGE>
securities classified as held-to-maturity to available-for-sale to reposition
its securities portfolio. On the date of transfer, the amortized cost of those
securities was $71,280,000 and the unrealized gain on those securities was
$325,000.
During 1994, the Bank sold $10,000,000 aggregate principal of held-to-maturity
securities in conjunction with the multiple step transaction with the Resolution
Trust Corporation described in Note 13. The sale of $10 million of
held-to-maturity securities was made in order to maintain the Bank's interest
rate risk position. Proceeds form the sale of these securities were $9,879,000
and resulted in gross losses of $76,000.
At December 31, 1994, the amortized cost and approximate fair value of
securities available-for-sale were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------
AMORTIZED UNREALIZED FAIR
COST LOSSES VALUE
<S> <C> <C> <C>
U.S. treasury notes $ 1,947 $ (12) $ 1,935
Equity securities 500 - 500
------- ------ -------
Total $ 2,447 $ (12) $ 2,435
======= ====== =======
</TABLE>
<PAGE>
At December 31, 1994,the amortized cost and approximate fair value of securities
held-to-maturity is as follows(in thousands):
<TABLE>
<CAPTION>
December 31,1994
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. treasures $ 38,193 $ - $ (765) $ 37,428
U.S. government agencies 56,577 - (2,299) 54,278
Securities issued by states and
political subdevision:
General obligations 1,458 10 (20) 1,448
Revenue obligations 380 4 - 384
Mortage backed pass-through
securties:
Guaranteed by GNMA 170 3 (3) 170
Issued by FNMA and FHLMC 1,550 4 (82) 1,472
Other 1,000 - (1) 999
-------- ------ --------- ---------
TOTAL $ 99,328 $ 21 $ (3,170) $ 96,179
======== ====== ========= =========
</TABLE>
Securities of $23,450,000 and $26,150,000 at December 31, 1995 and 1994,
were pledged as collateral for public deposits and for other purposes
required by law.
3. LOANS RECIEVABLE
Loans recieveable consist of the following(in thousands):
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Real estate loans:
Collateralized by residential property:
First mortgages $ 47,287 $ 46,800
Second mortgages 1,836 1,910
Collateralized by non-
residential properties 22,225 22,380
Commercial 19,128 20,166
Installment 3,700 3,409
-------- ---------
Total 94,176 94,665
Less: 182 163
Deferred fees and costs, net
Allowance for loan losses 1,177 1,751
-------- --------
Net loans $ 92,817 $ 92,751
======== ========
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
Major loan concentrations are as follows (in thousands):
1995 1994
<S> <C> <C>
Church loans collateralized by real estate $ 8,641 $ 9,045
Installment loans to churches 512 530
Commercial loans to churches 67 61
------- -------
Total loans churches $ 9,220 $ 9,636
======= =======
</TABLE>
Substantially all of the Bank's loans have been made to borrowers within the
Washington, D.C. metropolitan area. Accordingly,the ability of the Bank's
borrowers to repay their loans is dependent upon the economy in the Washington
D.C. metropolitan area.
<TABLE>
<CAPTION>
A summary of transactions in the allowance for loans losses is as follows (in
thousands):
1995 1994
<S> <C> <C>
Balance, beginning of year $ 1,751 $ 2,168
Add: Provision charged to expense 25 480
Recoveries 221 188
Deduct: Charge-offs (820) (1,085)
------- -------
Balance, end of year $ 1,177 $ 1,751
======= =======
</TABLE>
At December 31, 1995 and 1994, loans that were considered to be impaired under
SFAS No. 114 totaled $4,906,000 and $5,961,000, respectively. At December
31,1995, impaired loans of $1,154,000 were allocated a related allowance for
credit losses of $523,000. At December 31, 1994, impaired loans of $2,513,000
were allocated a related allowance for credit losses of $974,4000. The related
allowances were measured based upon the fair value of impaired loan's
collateral. No related allowance was recorded for impaired loans of $3,752,000
and $3,448,000 at December 31, 1995 and 1994, respectively. The average balance
of impaired loans for the years ended December 31, 1995 and 1994, was $6,929,000
and $6,422,000, respectively. The contractual interest due and the actual
interest recognized on impaired loans for the year ended December 31, 1995 and
1994, was $211,000 and $198,000, respectively.
- 14 -
<PAGE>
4. BANK PREMISES AND EQUIPMENT
The major catergories of bank and euipment are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1995 1994
Bank premises $ 2,258 $ 2,207
Furniture, fixtures, and equioment 2,367 2,130
------- -------
Total 4,625 4,337
Less accumulated depreciation (2,267) (1,983)
------- -------
Bank premises and equipment, net $ 2,358 $ 2,354
======= =======
</TABLE>
5. DEPOSITS
Deposits consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------
DEMAND SAVINGS TIME TOTAL
<S> <C> <C> <C> <C>
Individual, partnerships, and
corporations $ 42,673 $ 117,273 $ 38,021 $ 197,967
U.S. government 89 - 1,486 1,575
States and political subdivisions 1,824 - 578 2,402
Certified and official checks 1,755 - - 1,755
-------- --------- -------- ---------
Total $ 46,341 $ 117,273 $ 40,085 $ 203,699
======== ========= ======== =========
DECEMBER 31, 19946
---------------------------------------------------
DEMAND SAVINGS TIME TOTAL
Individual, partnerships, and
corporations $ 43,323 $ 135,807 $ 30,527 $ 209,657
U.S. government 234 - 95 329
States and political subdivisions 2,034 - 601 2,635
Certified and official checks 2,213 - - 2,213
-------- --------- -------- ---------
Total $ 47,804 $ 135,807 $ 31,223 $ 214,834
======== ========= ======== =========
</TABLE>
Demand deposits represent noninterest- bearing accounts, Individual certificates
of deposit of $100,000 or more at December 31, 1995 and 1994, totaling
$12,295,00 and $7,018,000, respectively, are included in time deposits.
-15-
<PAGE>
6. NOTE PAYABLE
In connection with the acquisition/assumption of certain Resolution Trust
Corporation (RTC) assets and liabilities (see Note 13), the Corporation and
the Bank executed an Interim Capital Assistance Agreement (Agreement) with
the RTC. In accordance with the provisions of the Agreement and the related
Promissory Note, the Corporation borrowed $1,000,000 from the RTC. As
required by the Agreement, the Corporation invested all the proceeds in the
Bank. The Corporation pledged to the RTC all the issued and outstanding
shares of capital stock of the Bank to secure the Promissory Note. The note
payable accrues interest at a variable rate based on the 13-week U.S.
Treasury Bill rate, reset quarterly. The interest rate at December 31, 1995
was 5.52%. The outstanding principal balance matures on July 3, 2000.
The Agreement prevents the Bank from declaring or paying dividends, issuing
any of its capital stock, or options or other rights thereto, repurchasing,
redeeming or retiring any of its outstanding capital stock, or making any
distribution of its assets to the Corporation. However, the Agreement does
provide for the payment of dividends by the Bank if (i) there is no event
of default in existence under the Agreement or the Promissory Note, (ii)
the Bank would not cause an event of default by the declaration or payment
of dividends, and (iii) the declaration or payment of any such dividends
are not prohibited by or objected to by the Bank's primary regulator.
Additionally, the Agreement limits the types of transactions that the Bank
can enter into with the Corporation. Further, the Agreement requires that
the Bank maintain its tangible capital ratio, calculated in accordance with
the regulations prescribed by the Office of the Comptroller of the Currency
in excess of 5.22%. Finally, the Agreement provides for the full repayment
of the note payable prior to the sale or disposition of all or
substantially all of the Bank's assets or a change in control of the Bank.
7. SHAREHOLDERS' EQUITY
The Corporation became a unitary bank holding company and the Bank
converted from a District of Columbia chartered bank to a national banking
association on July 1, 1995. Each outstanding share of the Bank's common
stock was converted into one share of the Corporation's common stock. The
conversion of Bank common stock to Corporation common stock resulted in the
transfer of $2,549,000 from common stock to capital surplus to reflect the
change in the par value per common share from $5 to $1. In addition, the
shareholders approved an amendment to the Company's Certificate of
Incorporation to authorize 1,000,000 shares of preferred stock.
Effective June 21, 1994, the Bank transferred $1,187,000 of retained
earnings to capital surplus in anticipation of the 5-for-1 stock split in
the form of a stock dividend. On July 25, 1994, the Bank issued a 5-for-1
stock split of the Bank's common stock in the form of a stock dividend. A
total of 454,000 shares of common stock were issued in connection with the
split. All references to the number of common shares and per common share
amounts have been restated retroactively to reflect the stock split.
8. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. The
regulations require the Bank to meet specific capital adequacy guidelines
that involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet
-16-
<PAGE>
items as calculated under regulatory accounting principles. The Bank's
capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
The quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain ratios of leverage capital of 4.0
percent, and minimum ratios of Tier I and total capital to risk-weighted
assets of 4.0 percent and 8.0 percent, respectively. Management believes
that, as of December 31, 1995, the Bank has met all capital requirements to
which it is subject.
The Bank's required and actual capital amounts and ratios at December 31,
1995 are set forth in the following table (in thousands).
<TABLE>
<CAPTION>
CAPITAL REQUIREMENTS
----------------------------------
ACTUAL REQUIRED
--------------- -----------------
AMOUNT RATIO CAPITAL RATIO
<S> <C> <C> <C> <C>
Leverage $15,626 7% $ 8,849 4%
Tier I risk-based 15,626 16% 3,902 4%
Total Capital risk-based 16,803 17% 7,804 8%
</TABLE>
-17-
<PAGE>
9. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Current:
Federal $ 577 $ 328
State 17 31
----- -----
594 359
Deferred:
Federal 181 185
State - -
----- -----
Total $ 775 $ 544
===== =====
</TABLE>
The components of the deferred tax expenses resulting from net temporary
differences are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Depreciation $ 36 $ 25
Provisions for losses on loans and Other Real
Estate Owned 136 171
Deferred loan fees (19) (9)
Other 28 (2)
----- -----
Total $ 181 $ 185
===== =====
</TABLE>
The following reconciles the federal statutory income tax rate of 34% to the
effective income tax rate (in thousands).
<TABLE>
<CAPTION>
1995 1994
-------------- ------------
AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C>
Federal tax expense at statutory rate $ 804 34% $ 568 34%
State tax expense, net of federal tax
benefit 12 1 20 1
Tax-exempt interest (26) (1) (34) (2)
Other (15) (1) (10) (1)
------ ----- ----- ----
Total $ 775 33% $ 544 32%
====== ===== ===== ====
</TABLE>
-18-
<PAGE>
The tax effects of items comprising the Company's deferred tax (liability)
asset at December 31, 1995 and 1994, are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Deferred tax assets:
Allowance for losses on loans and other real
estate owned $ 160 $ 296
Deferred loan fees 89 70
Unrealized loss on available-for-sale securities - 4
Other 15 26
------ -----
Total deferred tax assets 264 396
------ -----
Deferred tax liabilities:
Unrealized gain on available-for-sale securities $ (265) -
Depreciation (115) (79)
Other (17) -
------ -----
Total deferred tax liabilities (397) (79)
------ -----
Net deferred tax (liability) assets $ (133) $ 317
====== =====
</TABLE>
10. RETIREMENT PLAN
The Company has a noncontributory, defined benefit pension plan covering
substantially all employees. The Company's funding policy is to contribute
annually the required amount computed in its actuarial valuation.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future.
Benefits are determined based on compensation levels and length of service
as defined by the plan.
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet at December 31, 1995 and 1994 (in
thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Project benefit obligation $ (3,776) $ (3,176)
Plan assets at fair value 2,858 2,216
-------- --------
Benefit obbligation in excess of plan assets (918) (960)
Prior service cost not yet recognized 131 142
Unrecognized net loss 581 629
Unrecognized transition asset (114) (124)
-------- --------
Accrued pension cost $ (320) $ (313)
======== ========
</TABLE>
-19-
<PAGE>
Net pension cost for 1995 and 1994 included the following components (in
thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Benefit cost for service during the period $ 178 $ 160
Prior service cost 12 12
Internal cost on projected benefit obligation 234 212
Loss (return) on plan assets (510) 198
Assets gain (loss) deferral 319 (380)
Net amortization 8 (10)
----- -----
Net pension cost $ 241 $ 192
===== =====
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7% and 7.5%, respectively, as
of December 31, 1995 and 1994. The expected long-term rate of return on
assets was 8% and 8.5% as of December 31, 1995 and 1994.
11. EMPLOYEE STOCK OWNERSHIP PLAN
In 1986, the Bank implemented an Employee Stock Ownership Plan (ESOP) that
covers substantially all full-time employees. Annual contributions to the
plan are determined by the Company's Board of Directors. Contributions of
$75,000 and $100,000 were made to the plan during 1995 and 1994. At
December 31, 1995 and 1994, the ESOP held approximately 8% and 9%,
respectively, of the total outstanding shares of the Company's stock.
12. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various outstanding commitments
and contingent liabilities, such as commitments to extend credit, which are
not shown in the accompanying consolidated financial statements. The
Company does not anticipate any material losses as a result of these
transactions. At December 31, 1995 and 1994, the Bank had outstanding
commitments to fund loans approximating $9,556,000 and $18,280,000,
respectively. The Bank also has outstanding standby letters of credit at
December 31, 1995 and 1994, in the amount of $763,000 and $500,000,
respectively. Such commitments and standby letters of credit are subject to
the Bank's normal underwriting standards. Many of the commitments are
expected to expire without being completely drawn upon; the total
commitment amounts do not necessarily represent future cash requirements.
At December 31, 1995, the Bank was committed for future minimum annual
payments under noncancelable long-term lease agreements for the rental of
office space as follows (in thousands):
<TABLE>
<S> <C>
1996 $ 152
1997 136
1998 125
1999 92
2000 64
-----
Total $ 569
=====
</TABLE>
-20-
<PAGE>
Rent expense for the years ended December 31, 1995 and 1994 was
$217,000 and $158,000, respectively. Rent expense includes the
amortization of the rent concessions received in connection with the
acquisition discussed in Note 13.
13. ACQUISITION/ASSUMPTION OF RTC ASSETS AND LIABILITIES
During the year ended December 31, 1994, the Bank acquired certain assets
and liabilities from the RTC through a series of transactions. The
acquisition is accounted for at fair value at the date of purchase. The
significant assets and liabilities acquired by the Bank include: assumed
deposit liabilities approximating $37,790,000, cash of $34,751,000,
installment loans aggregating approximately $319,000, rent concessions of
approximately $365,000, the right to purchase real estate loans and the
related interest income thereon, and the right to borrow up to two thirds
of the amount required to restore the Bank's capital to preacquisition
levels pursuant to the Interim Capital Assistance Program established by
the RTC. In October 1994, the Bank exercised its right to acquire loans and
received 1-4 family first mortgage loans with aggregate principal balances
of $36,567,000 and subsequently sold $21,596,000 to an unrelated third
party. The excess proceeds from the sale of these loans, aggregating
$320,000 reduced the goodwill recognized in the transaction. Goodwill of
approximately $770,000 and $755,000 in core deposit intangible assets were
recorded as a result of the acquisition.
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has determined the fair value of its financial instruments
using the following assumptions:
. Cash and Cash Equivalents and Accrued Interest Receivable and
Payable - The fair value of cash and cash equivalents and accrued
interest receivable and payable was estimated to equal the carrying
value due to the short-term nature of these financial instruments.
. Securities - The fair value of securities was estimated based on
quoted market prices, dealer quotes and prices obtained from
independent pricing services.
. Loans - The fair value of loans receivable was estimated by
discounting the estimated future cash flows using current rates on
loans with similar credit risks and terms. It was assumed that no
prepayments would occur due to the short-term nature of the portfolio
(five years or less) and based upon the Bank's historical experience.
. Deposits - The fair value of demand and savings deposits was estimated
to equal the carrying value due to the short-term nature of the
financial instruments. The fair value of time deposits was estimated
by discounting the estimated future cash flows using current rates on
time deposits with similar maturities.
. Borrowings -The fair value of borrowings was estimated based on rates
currently available to the Bank for borrowings with similar terms and
remaining maturities.
. Commitments to Fund Loans and Standby Letters of Credit - Due to the
short-term nature and/or the variable rate structure of these off-
balance sheet items, the fair value was estimated to approximate the
carrying value.
The fair value estimates presented are based on pertinent information
available as of December 31, 1995 and 1994. However, considerable judgment
is required to interpret market data to develop the estimates
-21-
<PAGE>
of fair value. Accordingly, the estimates presented are not necessarily
indicative of the amounts that the Company could realize in a current
market transaction. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------------- ----------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 34,886 $ 34,886 $ 27,134 $ 27,134
Investments securities 87,198 87,198 101,763 98,614
Loans 92,817 92,873 92,750 93,409
Accrued interest receivable 1,584 1,584 1,767 1,767
Liabilities:
Deposits 203,699 203,868 214,834 214,806
Borrowings 1,000 938 - -
Accrued interest payable 363 363 177 177
</TABLE>
15. PARENT COMPANY FINANCIAL INFORMATION
The summarized financial statements of IBW Financial Corporation (parent
company only) as of December 31, 1995, and for the period
ending December 31, 1995, follow (in thousands):
<TABLE>
<CAPTION>
Statement of Financial Condition
--------------------------------
<S> <C>
Assets:
Deposits with subsidiary $ 116
Investment in subsidiary - at equity 17,462
--------
Total Assets $ 17,578
========
Liabilities and Shareholders' Equity:
Liabilites:
Borrowings 1,000
Other 23
--------
Total liabilities 1,023
Shareholders' equity: 637
Common stock 4,329
capital surplus 11,075
Retained earnings
Unrealized gain on available for sale
securities, net of taxes of $265 514
--------
Total shareholders' equity 16,555
--------
Total Liabilities and Shareholders' Equity $ 17,578
========
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
Statement of Income
- -------------------
<S> <C>
Dividends from subsidiary $ 311
Expenses 27
-------
Income before undistributed net earnings of subsidiary 284
Equity in undistributed net earnings of subsidiary 1,305
-------
Net income $ 1,589
=======
Statement of Cash Flows
- -----------------------
Cash Flows from Operating Activities:
Net income $ 1,589
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net earnings of subsidiary (1,305)
Other 23
-------
Net cash provided by operations 307
-------
Cash Flows for Investing Activities:
Investment in subsidiary (1,000)
-------
Net cash used in investing activities (1,000)
-------
Cash Flows from Financing Activities:
Proceeds from note payable 1,000
Payment of dividends (191)
-------
Net cash provided by financing activities 809
-------
Increase in deposits with subsidiary $ 116
=======
</TABLE>
* * * * * *
-23-
<PAGE>
Unaudited Consolidated Financial Statements
<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
(dollar in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------
(Unaudited)
March 31, December 31,
1996 1995
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 11,125 $ 11,014
Interest bearing deposits in other banks 95 95
Federal funds sold 23,500 20,800
Commercial paper - 2,977
----------- ------------
Total cash and cash equivalents 34,720 34,817
Securities available-for-sale, at fair value 89,798 87,198
(amortized cost, $90,177 and $86,419)
Loans receivable, net of allowance for loan losses
of $1,019 and $1,177 93,555 92,817
Other real estate owned, net 950 950
Property and equipment, net 2,375 2,358
Other assets 4,412 4,352
----------- ------------
TOTAL $225,810 $222,561
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Demand deposits $ 47,348 $ 46,341
Time and savings deposits 159,897 157,358
----------- ------------
Total deposits 207,245 203,699
Securities sold under repurchase agreements 99 -
Other liabilities 1,302 1,307
Notes payable 1,000 1,000
----------- ------------
Total liabilities 209,646 206,006
=========== ============
SHAREHOLDERS' EQUITY:
Preferred stock - $1 par value; 1,000,000 authorized;
none issued
Common stock - par value $1; 1,000,000 shares authorized;
637,160 shares issued and outstanding 637 637
Capital surplus 4,329 4,329
Retained earnings 11,448 11,075
Unrealized gain(loss) on available-for-sale securities, net
of taxes of ($365) and $265 (250) 514
----------- ------------
Total shareholders' equity 16,164 16,555
----------- ------------
TOTAL $225,810 $222,561
=========== ============
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
March 31, March 31,
1996 1995
------------ ------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $2,240 $2,240
U.S. treasury securities 347 561
Obligations of U.S. government
agencies and corporations 865 707
Obligations of states and political subdivisions 149 26
Bank balances and other securities
purchased under agreements to resell 295 114
-------- --------
Total interest income 3,896 3,648
-------- --------
INTEREST EXPENSE:
Time certificates over $100,000 160 70
Other savings and time deposits 1,178 1,138
Notes payable 13 -
-------- --------
Total interest expense 1,351 1,208
-------- --------
INTEREST INCOME 2,545 2,440
PROVISION FOR LOAN LOSSES 50 150
-------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,495 2,290
-------- --------
NONINTEREST INCOME:
Service charges on deposit and checking accounts 505 437
Gain (loss) on sale of securities 41 (11)
Other operating income 29 22
-------- --------
Total noninterest income 575 448
-------- --------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,454 1,309
Occupancy 171 160
Furniture and equipment 130 102
Data Processing 133 136
Other 633 647
-------- --------
Total noninterest expense 2,521 2,354
-------- --------
INCOME BEFORE INCOME TAXES 549 384
PROVISION FOR INCOME TAXES (176) (120)
-------- --------
NET INCOME $373 $264
======== ========
NET INCOME PER COMMON SHARE $0.59 $0.44
======== ========
WEIGHTED AVERAGE OF COMMON SHARES
OUTSTANDING 637,160 601,304
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
MARCH 31, MARCH 31,
1996 1996
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $373 $264
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 76 78
Amortization of premiums 145 14
Gain on sale of REO - (42)
(Gain)loss on sale of securities (41) 11
Provision for losses on REO - 20
Provision for loan losses 50 150
Decrease (increase) in other assets 201 (190)
Increase in accrued expenses and other liabilities 128 149
-------- --------
Net cash provided by operating activities 932 535
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans (788) 2,250
Additions to bank premises and equipment, net (93) (59)
Net proceeds on sale of other real estate owned - 267
Proceeds from sale of securities available-for-sale 8,040 5,985
Proceeds from maturities of securities available-for-sale 11,632 4,205
Purchase of securities available-for-sale (24,697) (4,002)
Principal collected on securities available-for-sale 1,163 -
-------- --------
Net cash provided by (used in) investing activities (4,743) 8,646
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid - (170)
Net increase (decrease) in deposits 3,546 (13,263)
Net increase in securities sold under repurchase agreements 99 -
-------- --------
Net cash provided by (used in) financing activities 3,645 (13,433)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (166) (4,252)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 34,886 27,134
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $34,720 $22,882
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $1,300 $1,194
======== ========
Taxes $176 $120
======== ========
Non-cash of loans to other real estate owned - $125
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE A BASIS OF PRESENTATION:
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all the information and
footnotes required for complete financial statements. In the opinion
of management, all adjustments and reclassifications considered
necessary for a fair presentation have been included. Operating
results for the three month period ended June 30, 1996, are not
necessarily indicative of the results that may be expected for the
year ending December 31, 1996. The unaudited consolidated financial
statements should be read in conjunction with the consolidated
financial statements and footnotes.
NOTE B ACCOUNTING CHANGES:
-------------------
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," and
SFAS No. 122,"Accounting for Mortgage Servicing Rights - an Amendment
of SFAS 65." The adoption of these new accounting prouncements did
not have a material impact on the financial statements of the Company.
NOTE C TERMINATION OF THE RETIREMENT PLAN:
-----------------------------------
On April 17, 1996, the Board of Directors of the Company resolved to
curtail the accrual of benefits under the Industrial Bank of
Washington Retirement Plan (the "Plan") as of May 2, 1996.
Additionally, the Board resolved to discontinue the Plan's
participation in the Benefit Source Retirement Trust Fund, to withdraw
the assets of the Plan from the Trust Fund, and to terminate the Plan
by the end of 1996. The effect of the curtailment is estimated to be a
$314,000 loss. The effect of the settlement is estimate to be a
$114,000 gain. The Company has paid $280,000 of the $520,000 benefit
obligation in excess of plan assets. The remaining estimated
unfunded balance was paid in June 1996 .
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant caused this registration statement to be executed on its behalf by
the undersigned, thereunto duly authorized.
IBW FINANCIAL CORPORATION
August 15, 1996 By: /s/ B. Doyle Mitchell, Jr.
---------------------------------
B. Doyle Mitchell, Jr.
President
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibits
2(a) Certificate of Incorporation of the Company, as amended (1)
2(b) Bylaws of the Company (1)
3 Specimen certificate for the common stock, $1 par value, of the
Company (1)
6(a) Interim Capital Assistance Agreement between the Company and the
RTC (1)
6(b) Stock Pledge Agreement between the Company and the RTC (1)
11 Statement Regarding Computation of Per Share Income
27 Financial Data Schedule
_____________________________
(1) Incorporated by reference to the Company's Registration Statement on Form
10-SB
<PAGE>
Exhibit 11
Statement of Computation of Per Share Earnings
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994
----------------------- ---- ----
<S> <C> <C>
Earnings per Common Share:
Primary $2.56 $1.99
Average shares outstanding 621,727 567,500
Fully diluted $2.56 $1.99
Average shares outstanding 621,727 567,500
Three Months Ended March 31, 1996 1995
---------------------------- ---- ----
Earnings per Common Share: $0.59 $0.44
Primary
Average shares outstanding 637,160 601,304
Fully diluted $0.59 $0.44
Average shares outstanding 637,160 601,304
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Form
10SB/A and is qualified in its entirety by reference to such financial
statement.
</LEGEND>
<CIK> 0001013274
<NAME> IBW FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 11,125
<INT-BEARING-DEPOSITS> 95
<FED-FUNDS-SOLD> 23,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 89,798
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 95,574
<ALLOWANCE> 1,019
<TOTAL-ASSETS> 225,810
<DEPOSITS> 207,245
<SHORT-TERM> 99
<LIABILITIES-OTHER> 1,302
<LONG-TERM> 1,000
0
0
<COMMON> 637
<OTHER-SE> 15,527
<TOTAL-LIABILITIES-AND-EQUITY> 225,810
<INTEREST-LOAN> 2,240
<INTEREST-INVEST> 1,361
<INTEREST-OTHER> 295
<INTEREST-TOTAL> 3,896
<INTEREST-DEPOSIT> 1,336
<INTEREST-EXPENSE> 1,351
<INTEREST-INCOME-NET> 2,545
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 41
<EXPENSE-OTHER> 2,521
<INCOME-PRETAX> 549
<INCOME-PRE-EXTRAORDINARY> 549
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 373
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.58
<YIELD-ACTUAL> 7.45
<LOANS-NON> 1,064
<LOANS-PAST> 1,198
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,859
<ALLOWANCE-OPEN> 1,117
<CHARGE-OFFS> 247
<RECOVERIES> 39
<ALLOWANCE-CLOSE> 1,019
<ALLOWANCE-DOMESTIC> 784
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 235
</TABLE>
