U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
X Annual report under Section 13 or 15(d) of the Securities Exchange Act
___ of 1934
For the fiscal year ended December 31, 1997
____ Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ________________ to
___________________
Commission file number: 0-28360
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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 registered under Section 12(b) of the Act: None
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Securities registered under Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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(Title of Class)
Check whether the Issuer; (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports; and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
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The issuer's revenues for the fiscal year ended December 31, 1997 were
approximately $20,792,000.
The aggregate market value of the outstanding Common Stock held by nonaffiliates
as of February 28, 1998 was approximately $6,281,200.
As of March 15, 1997, the number of outstanding shares of the Common Stock,
$1.00 par value, of IBW Financial Corporation was 668,360.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Shareholders for the Year Ended
December 31, 1997 are incorporated by reference in part II hereof.
Portions of the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 28, 1998 are incorporated by reference in
part III hereof.
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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.
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 seven
offices in the District of Columbia, two offices in Prince George's County,
Maryland and over $250.7 million in total assets and $20.1 million of
shareholders' equity at December 31, 1997. The Bank's ninth office, located in
the Brookland/Woodridge neighborhood of Washington, DC, opened in 1997. 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. 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.
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.
In 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 Federal Savings Bank, a failed savings
association under the conservatorship of the RTC, located in Oxon Hill and
Forestville, Maryland.
As a minority institution, 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
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the transaction, and received an option to purchase the facility during the term
of the lease at 95% of fair market value. The Company obtained $1,000,000 of
interim capital assistance from the Resolution Trust Company as a result of its
successful bid for the John hanson branches. 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 5.187% as of December 31, 1997, 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.
SALE OF ADDITIONAL SHARES
On September 29, 1997, the Company completed the sale of 31,200 shares of
its common stock and 20,000 shares of its Series A Non-Voting Preferred Stock,
in a private placement transaction, to the Federal National Mortgage Association
("Fannie Mae"), at a price of $25.00 per share of common stock and $25.00 per
share of Series A Non-Voting Preferred Stock (the shares of common stock and
shares of Series A Non-Voting Preferred Stock sold to Fannie Mae referred to
collectively herein as the "Shares"), for a total purchase price of $1,280,000,
pursuant to an agreement dated August 15, 1997. The shares of common stock
issued to Fannie Mae represent approximately 4.67% of the outstanding shares of
the Company's common stock, and the shares of Series A Non-Voting Preferred
Stock represent all of the authorized shares of that series. The Series A
Non-Voting Preferred Stock, which is redeemable at any time by the Company at a
redemption price of $25.00 plus accrued but unpaid dividends to the date of
redemption, is entitled to annual dividends at a rate of five percent.
Under the stock purchase agreement, the Company is restricted from taking
any action, including the repurchase, redemption or other reduction in the
number of outstanding shares of capital stock, but not including the incurrence
of losses, which would result in the value of the Shares representing 10% or
more of the equity of the Company, or the shares of common stock sold to Fannie
Mae representing 5% or more of the outstanding common stock. The Company has
certain rights under the agreement to repurchase the Shares under certain
circumstances.
The sale of shares to Fannie Mae was effected as part of Fannie Mae's
program to make investments in community oriented and minority institutions to
encourage and facilitate housing related lending and affordable housing
initiatives.
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
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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. As a result of changes in federal and state banking legislation,
competitors not already in the Bank's market may seek to enter such market. The
District of Columbia, Maryland and Virginia have each enacted legislation
permitting banks organized or based in other jurisdictions to establish or
acquire banks or branches in such jurisdictions.
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, 1997, the Bank had 155 full time employees and 6 part
time employees. 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 $39,100 in
1997, $37,000 in 1996 and $75,000 in 1995. 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
of 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 the
deposit insurance funds, and not for the purpose of protecting stockholders.
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FDIC Insurance Premiums. The Bank pays deposit insurance premiums as a
member of the Bank Insurance Fund of the FDIC, under the FDIC's risk-based
assessment system. Under the FDIC's regulations, 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 Federal Deposit
Insurance Act (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 currently ranging
from 0% to .31% of insured deposits. During 1996, the Bank incurred a one time
expense of approximately $158,000 relating to the special assessment imposed on
deposits insured by the Savings Association Insurance Fund of the FDIC ("SAIF")
in connection with the recapitalization of the SAIF fund. The Bank is also
required to pay an additional assessment in connection with the repayment of the
"Fico bonds" issued in connection with the resolution of the savings and loan
crisis.
Capital Adequacy Guidelines. The Federal Reserve, the OCC and the FDIC have
all adopted risk based 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, determine the adequacy of capital based on the risk inherent in
various classes of assets and off-balance sheet items.
National banks are required 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, without adjustment for unrealized gain or
loss on securities classified as available for sale in accordance with FAS 115.
Tier 2 Capital consists of the following: hybrid capital 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 risk-based
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) 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
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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, 1997, 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 15% and 17% respectively, and a Leverage Capital
Ratio equal to 8%.
Prompt Corrective Action. Under Section 38 of the FDIA, the federal banking
agencies have promulgated substantially similar regulations to implement a
system of prompt corrective action. 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 (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.
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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, 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; (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, 1997, the Bank was a "well capitalized" institution for
purposes of Section 38 of the FDIA.
Regulatory Enforcement Authority. The enforcement authority of the federal
banking regulators 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. 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.
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ITEM 2. DESCRIPTION OF PROPERTY.
The Bank currently operates nine offices, seven 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 $68,731,
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 $24,756, 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 $29,008,
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
Brookland/Woodridge office, which opened in 1997, is located in 2610 Rhode
Island Avenue, NE and occupied under a lease, commencing in 1997, with one five
year renewal options, for a five year term at a current annual rental of
$27,000, subject to annual increases.
The Company believes that its existing facilities are adequate to conduct
its business.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED 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 Company
is aware of 18 trades of the Common Stock since January 1, 1996, at prices
ranging from $18.00 to $25.00 per share. The last trade known to the Company was
a trade of 666 shares at $20 per share on February 27, 1998. There may be other
trades of which the Company is either not aware, or with respect to which the
Company is not aware of the price. Additionally, as discussed above, the Company
sold 31,200 newly issued shares of Common Stock, and 20,000 shares of Series A
Non-Voting Preferred Stock, to Fannie Mae, at a price of $25.00 per share, on
September 29, 1997 the high sale price for the year). These trades and
transactions do not necessarily reflect the intrinsic or
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<PAGE>
market values of the Common Stock. As of December 31, 1997, there were 668,360
shares of Common Stock outstanding, held of record by approximately 560
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 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.
Dividends on the Common Stock are subject to the prior payment of dividends
on the Series A Preferred Stock.
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,
----------- ---------- ----------- ----------- ----------
1997 1996 1995 1994 1993
----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net income per common share $2.44 $2.06 $2.56 $1.99 $3.12
Dividends paid per common share $ .60 $ .60 $ .60 $ .60 $ .50
Ratio of dividends to net income available
to common shareholders 24.59% 29.13% 23.44% 30.15% 16.03%
- ----------------------------------------------
</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 OCC place a limit on the amount of dividends the Bank
may pay to the Company without prior approval. Prior approval of 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. At December 31, 1997, the amount available for
the payment of dividends without prior approval was approximately $2,108,000.
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
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<PAGE>
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.
RECENT SALES OF UNREGISTERED SHARES.
During the past three years, the Company has not sold any securities
without registration under the Securities Act of 1933, except for the initial
issuance of shares of the Company's Common Stock, par value $1.00 per share, as
of July 1, 1995, in connection with the establishment of the Company as the one
bank holding company for the Bank. The Company relied upon the exemption
provided by Section 3(a)(12) of the Securities Act of 1933. In connection with
that reorganization transaction, each share of outstanding Bank Common Stock was
converted into one share of Company Common Stock, and each shareholder retained
the same percentage ownership interest in the Company as such shareholder had in
the Bank. No shares of Company Common Stock or other authorized class of
securities were sold for cash, and involved no underwriter, broker or dealer was
involved in connection with the reorganization and conversion of shares.
Additionally, On September 29, 1997, the Company completed the sale of 31,200
shares of its Common Stock, and 20,000 shares of its Series A Non-Voting
Preferred Stock in a private placement transaction, to the Fannie Mae, at a
price of $25.00 per share of Common Stock and $25.00 per share of Series A
Non-Voting Preferred Stock, pursuant to an agreement dated August 15, 1997. No
underwriter, broker or dealer was involved in the sale of shares to Fannie Mae.
The Company relied upon the exemption provided by Section 4(2) of the Securities
Act of 1933, as amended. The sale of shares to Fannie Mae was effected as part
of Fannie Mae's program to make investments in community oriented and minority
institutions to encourage and facilitate housing related lending and affordable
housing initiatives. The purchase was privately negotiated, directly by the
parties and no public solicitation was used.
Prior to establishment of the Company as the holding company for the Bank,
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 relied upon the exemption for
bank securities provided by Section 3(a)(2) of the Securities Act of 1933. No
underwriter, broker or dealer was involved in those offerings.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The information required by this item is incorporated by reference to the
material appearing under the caption "Management's Discussion and Analysis"
appearing at pages 26 to 36 of the Company's Annual Report to Shareholders for
the year ended December 31, 1997.
New Accounting Pronouncement - In June 1996, the Financial Accounting
Standards Board issued SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities (SFAS No. 125). SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. The
provisions of SFAS No. 125 relating to repurchase agreements, securities lending
and other similar transactions and pledged collateral have been delayed until
after December 31, 1997, by SFAS No. 127, Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125, an Amendment of FASB No. 125. SFAS
No. 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities based on a consistent
application of a financial components approach that focuses on control. Under
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<PAGE>
this approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls, and derecognizes liabilities
extinguished. SFAS No.125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. This standard supersedes SFAS No. 76, Extinguishment of Debt, and
No. 77, Reporting by Transferors of Transfers of Receivables with Recourse, and
No. 122, Accounting for Mortgage Servicing Rights, and amends SFAS No. 115 and
No. 65, Accounting for Certain Mortgage Banking Activities. The Company adopted
this standard, except for the provisions delayed by SFAS No. 127, effective
January 1, 1997. The adoption of this standard did not have a material impact on
the Company's financial condition or results of operations.
In June 1997, SFAS No. 130, Reporting Comprehensive Income, was issued.
SFAS No. 130 requires comprehensive income to be reported in a financial
statement that is displayed with the same prominence as other financial
statements, thereby permitting companies to display the components of other
comprehensive income below the total for net income in an income statement, in a
separate statement that begins with net income, or in a statement of changes to
equity. Such requirement would apply to all enterprises that provide a full set
of financial statements. This statement is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods for comparative purposes is required.
Additionally, during June 1997, the FASB issued SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected financial information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements beginning after
December 15, 1997.
The implementation of SFAS 130 and SFAS 131 will only impact the reporting
and presentation of certain components of the Company's financial statements and
related footnote disclosures.
ITEM 7. FINANCIAL STATEMENTS.
The information required by this item is incorporated by reference to the
Consolidated Financial Statements appearing at pages 10 to 25 of the Company's
Annual Report to Shareholders for the year ended December 31, 1997.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this Item is incorporated by reference to, the
material appearing at pages 4 to 7 of the Company's definitive proxy statement
for the Annual Meeting of Shareholders to be held on April 28, 1998.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to, the
material appearing at page 6 of the Company's definitive proxy statement for the
Annual Meeting of Shareholders to be held on April 28, 1998.
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<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to, the
material appearing at pages 3 to 4 of the Company's definitive proxy statement
for the Annual Meeting of Shareholders to be held on April 28, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to, the
material appearing at page 7 of the Company's definitive proxy statement for the
Annual Meeting of Shareholders to be held on April 28, 1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(A) EXHIBITS
<S> <C>
Exhibit No. Description of Exhibits
3(a) Certificate of Incorporation of the Company, as amended (1)
3(b) Bylaws of the Company (2)
4 Specimen certificate for the common stock, $1 par value, of the Company (3)
10(a) Interim Capital Assistance Agreement between the Company and the RTC (4)
10(b) Stock Pledge Agreement between the Company and the RTC (5)
11 Statement Regarding Computation of Per Share Income
13 The Company's Annual Report to Shareholders for the Year Ended December 31, 1997
21 Subsidiaries of the Registrant
The sole subsidiary of the Registrant is Industrial Bank, National
Association, a national banking association organized under the laws
of the United States
27 Financial Data Schedule
99 Designation of the Series A Non-Voting Preferred Stock (6)
</TABLE>
- -----------------------------
(1) Incorporated by reference to Exhibit 1 to the Company's Current Report on
Form 8-K, dated September 25, 1997.
(2) Incorporated by reference to Exhibit 2(b) to the Company's Registration
Statement on Form 10-SB
(3) Incorporated by reference to Exhibit 3 to the Company's Registration
Statement on Form 10-SB
(4) Incorporated by reference to Exhibit 6(a) to the Company's Registration
Statement on Form 10-SB
(5) Incorporated by reference to Exhibit 6(b) to the Company's Registration
Statement on Form 10-SB
(6) Incorporated by reference to Exhibit 2 to the Company's Current Report on
Form 8-K, dated September 25, 1997.
(B) REPORTS ON FORM 8-K
None.
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<PAGE>
SIGNATURES
In accordance with Section 13 of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
IBW FINANCIAL CORPORATION
March 27, 1998 By: /s/ B. Doyle Mitchell, Jr.
----------------------------
B. Doyle Mitchell, Jr.
President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
<S> <C> <C>
/s/ Clinton W. Chapman
- -------------------------------- Chairman of the Board of Directors March 30, 1998
Clinton W. Chapman
/s/ George W. Windsor
- -------------------------------- Vice Chairman of the Board of Directors March 30, 1998
George H. Windsor
/s/ B. Doyle Mitchell, Jr.
- -------------------------------- President, Chief Executive Officer March 27, 1998
B. Doyle Mitchell, Jr. and Director
/s/ Massie S. Fleming
- -------------------------------- Director March 30, 1998
Massie S. Fleming
/s/ Benjamin L. King
- -------------------------------- Secretary and Director March 30, 1998
Benjamin L. King
/s/ Cynthia T. Mitchell
- -------------------------------- Director March 30, 1998
Cynthia T. Mitchell
/s/ Marjorie H. Parker
- -------------------------------- Director March 30, 1998
Marjorie H. Parker
<PAGE>
<CAPTION>
<S> <C> <C>
- -------------------------------- Director March __, 1998
Robert L. White
/s/ Emerson A. Williams
- -------------------------------- Director March 30, 1998
Emerson A. Williams
/s/ Thomas A. Wilson
- -------------------------------- Senior Vice President-Controller March 27, 1998
Thomas A. Wilson Principal Financial and
Accounting Officer
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
<S> <C>
Exhibit No. Description of Exhibits
3(a) Certificate of Incorporation of the Company, as amended (1)
3(b) Bylaws of the Company (2)
4 Specimen certificate for the common stock, $1 par value, of the Company (3)
10(a) Interim Capital Assistance Agreement between the Company and the RTC (4)
10(b) Stock Pledge Agreement between the Company and the RTC (5)
11 Statement Regarding Computation of Per Share Income
13 The Company's Annual Report to Shareholders for the Year Ended December 31, 1997
21 Subsidiaries of the Registrant
The sole subsidiary of the Registrant is Industrial Bank, National
Association, a national banking association organized under the laws of
the United States
27 Financial Data Schedule
99 Designation of the Series A Non-Voting Preferred Stock (6)
</TABLE>
- -----------------------------
(1) Incorporated by reference to Exhibit 1 to the Company's Current Report on
Form 8-K dated September 25, 1997
(2) Incorporated by reference to Exhibit 2(b) to the Company's Registration
Statement on Form 10-SB
(3) Incorporated by reference to Exhibit 3 to the Company's Registration
Statement on Form 10-SB
(4) Incorporated by reference to Exhibit 6(a) to the Company's Registration
Statement on Form 10-SB
(5) Incorporated by reference to Exhibit 6(b) to the Company's Registration
Statement on Form 10-SB
(6) Incorporated by reference to Exhibit 2 to the Company's Current Report on
Form 8-K, dated September 25, 1997.
Exhibit 11
Statement of Computation of Per Share Earnings
Set forth below are trhe bases for the computation of earnings per share
for the periods shown. The Company had no options, warrants, convertible
securities or other potentially dilutive securites outstanding during any period
shown.
Year Ended December 31,
Earnings Per Common Share 1997 1996
Basic and Diluted $2.44 $2.06
Average Shares Outstanding 645,195 637,160
Exhibit 13
Annual Report to Shareholders for the Year Ended December 31, 1997
<PAGE>
Where we're GOING has everything to do with where we've BEEN
[Graphics Omitted]
<PAGE>
Annual Message To Shareholders
Throughout 1997, Industrial Bank, N.A. (IBNA) remained true to our mission of
continuously improving long-term profitability, community development and
customer service. In an industry that has become increasingly impersonal, our
focus on personal service has become a competitive advantage. Many steps have
been taken to retain this edge, including conducting the Bank's most
comprehensive market research ever to keep us attuned to existing and potential
customer needs, industry advances and economic trends.
We also restructured Branch Administration into a Retail Banking Division;
strengthened our mortgage department infrastructure; employed new technology to
keep us competitive in loan underwriting; and utilized bond programs, in the
District and Prince George's County, which allowed us to offer first-time
homebuyers below-market rate loans.
IBNA continued to expand in 1997 with the opening of the Brookland/Woodridge
branch. The event received unprecedented community, government and media
participation, and deposits exceeded our year-end projections. Additionally, we
began long-range strategic planning and organizational development with the help
of developmental specialists to reshape the Bank's structure, processes and
operations over the next three to five years.
During 1997, the Bank's financial condition continued to strengthen, with a 20
percent increase in earnings due to improved asset quality, controlled overhead
expense and increased non-interest income. Capital grew to over $20 million, the
highest ever in the Bank's history, and our total capital ratio is 17 percent.
With the start of the new year came the retirement of EVP Massie Fleming after
46 years of service. We are pleased that she will continue to serve on the Board
of Directors. Another board member, Mrs. Margaret Stewart, resigned in February.
Her business acumen was a great resource and we are thankful for her service to
the Bank.
As we move forward into 1998 and the next millennium, we will continue our
diligent efforts in laying a strong foundation for the future. We will take a
more conservative credit posture to protect against unanticipated economic
upheavals. And, we will keep our energies focused on our most prized assets --
our employees and our customers.
/s/ Clinton W. Chapman /s/ B. Doyle Mitchell, Jr.
- --------------------------- ---------------------------
Clinton W. Chapman B. Doyle Mitchell, Jr.
Chairman of the Board President
<PAGE>
IBW Financial Corporation
INDUSTRIAL BANK, N.A.
BOARD OF DIRECTORS
B. Doyle Mitchell, Jr., President
Massie S. Fleming, Executive Vice President
Clinton W. Chapman, Esq., Chairman of the Board, Senior Partner, Chapman and
Chapman, Attorneys
Cynthia T. Mitchell, Educator
Emerson A. Williams, M.D., Physician
Marjorie H. Parker, Ph.D., Educator
George H. Windsor, Esq., Vice Chairman of the Board, Cobb, Howard, Hayes and
Windsor, Attorneys
Margaret B. Stewart, President, Stewart Funeral Home (retired 1998)
Robert L. White, LL.D., Chairman, N.A.P.F.E. Credit Union
Benjamin L. King, CPA, Secretary of the Board, Consultant
IBW FINANCIAL CORPORATION OFFICERS
Clinton W. Chapman, Esq., Chairman of the Board, Senior Partner, Chapman and
Chapman, Attorneys
B. Doyle Mitchell, Jr., President, Chief Executive Officer
Massie S. Fleming, Executive Vice President
Benjamin L. King, CPA, Secretary of the Board, Consultant
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Evelyn Y. Robinson CUSTOMER SERVICE
Assistant Secretary MANAGERS (CONT.)
ASSISTANT VICE-PRESIDENTS Haile M. DeBass
[Graphics Omitted]
Georgia Avenue Office
Nathan W. Evans, CPA
Internal Auditor Veronica Henry
Forestville Office
Reta G. Felder
Commercial Loans Ruth Mathis
Reeves Center Office
Patricia A. Mitchell
Commercial Real Estate Loans Cora B. Stancil
J.H. Mitchell Office
Debra B. Thornton
Director, Human Resources Estee Wells
J.H. Mitchell Office
Vernard J. Tyson
Consumer Loans DC ADVISORY BOARD
Garfield M. Vann Yetta W. Galiber,
Accounting Chairman
ViCurtis Hinton
Sharon B. Zimmerman H. Greig Cummings
Director, Marketing Patricia C. Lightfoot
Community Reinvestment Ronald K. Crockett
INDUSTRIAL BANK, N.A. Dr. Ettyce Moore
OFFICERS RETAIL BANKING OFFICERS William R. Claytor, MD
Executives VICE-PRESIDENTS Jeffrey A. Banks Rev. A. Knighton Stanley
B. Doyle Mitchell, Jr. Claude O. Barrington American University Office Warren Strudwick, MD
President Bank Counsel Reeves Center Office Patricia A. Mitchell
Elizabeth Lisboa-Farrow
Massie S. Fleming Michael S. Betton Herbert C. Harris, Jr. James N. McGuffey
Executive Vice President Information Systems Georgia Avenue Office Maximo Pierola
Wilfred Braveboy Elizabeth Hundley Fay G. Knight
David G. Poole Real Estate Loans J.H. Mitchell Office Secretary
Senior Vice President,
Operations Rodney D. Epps Marilyn L. Jumalon
Communications Oxon Hill Office
Richard Williams, Jr. Forestville Office
Senior Vice President, Effie M. Faucett
Chief Lending Officer Operations Saundra G. Turpin PRINCE GEORGE'S
Brookland/Woodridge Office ADVISORY BOARD
Thomas A. Wilson, Jr. JB Holston F Street Office
Senior Vice President, Retail Banking Division Wayne Clarke
Controller CUSTOMER SERVICE MANAGERS Charles Dukes, Jr.
Vinson T. McCarty
Consumer Loans Elmira Bell Reverend Gloria Miller
Lester W. Johnson Brookland/Woodridge Office
Senior Vice President, Roy Moss, Jr. Duane W. Oates
Chief Credit Officer Commercial Loans Pamela Branch Chuck Royster
Georgia Avenue Office Pastor John A. Cherry
Norma Stewart
Joyce L. Burns
F Street Office Rev. Eugene Weathers
Rovenia Daniels Fay G. Knight,
11th Street Office Secretary
</TABLE>
<PAGE>
1997: Hard Work Pays Off
In 1997, considerable progress was made to position Industrial Bank as the first
choice for individuals seeking a locally-based, autonomous institution that
prides itself on one-on-one customer service. Throughout the year, Industrial
Bank continued to make strides to establish itself as a forward-looking,
community-based bank without straying from its history of long-standing
traditions and values.
A Different Kind Of Structure
Steps were taken to completely restructure Branch Administration. Renamed the
Retail Banking Division, the department is now divided into six groups, each
headed by a Retail Banking Officer (RBO). In addition to managing their
respective branches, the RBO's now have the responsibility of new business
development, community relations and enhancing a friendly and professional
office environment. It is our belief that this reorganization will ensure
effective relationships among the various departments within the bank as well as
foster an environment of quality personal service.
[Graphics Omitted]
<PAGE>
Strong And Growing
Continuing our growth strategy and our commitment to the Washington Metropolitan
community, IBNA opened our ninth local branch office in the Brookland/Woodridge
neighborhood of Northeast Washington, D.C. Community leaders, who played a large
role in bringing Industrial Bank to the Brookland/Woodridge location, strongly
believed that the bank would play a significant role in the revitalization of
the area -- and it has. Additionally, by the end of 1997 the new branch had not
only met, but had surpassed its projections of new business (deposit growth).
A Positive Atmosphere
IBNA recognizes that the key to quality customer service is a satisfied work
force. As a result, we are committed to providing a challenging and equitable
working environment for our employees. This year, branch employees were offered
Service Excellence Training; a new 401(k) retirement plan was established; and a
new short-term disability benefits package was added at no cost to the employee.
IBNA realizes the importance of quality compensation packages and has worked
hard to ensure that the bank remains competitive within the industry.
[Graphics Omitted]
<PAGE>
1998: Making Things Happen
With the approach of the 21st century, IBNA has chosen to respond to a growing
customer desire for an alternative to big name, impersonal banking giants. As
Washington's largest African American-owned commercial bank, IBNA understands
the needs of the various communities and plans to launch an aggressive campaign
to capture a larger share of the local markets.
Staying Competitive
IBNA's number one priority is to continue to explore and launch new products and
services targeted to meet the needs of the Washington Metropolitan community. In
1998, IBNA's focus will be to aggressively market mortgage services; promote the
VISA Check Card; and provide cash management programs and 24-hour telephone and
PC banking. Additionally, IBNA has plans to repackage products for a variety of
target audiences including youth, young professionals, senior citizens and small
businesses.
[Graphics Omitted]
<PAGE>
Spreading The Word
Building awareness of IBNA's products, personal services and benefits is the
means to the expansion of IBNA's unique position in the marketplace. An enhanced
corporate image will be established in 1998 through a new, ongoing advertising
and marketing campaign. This campaign was designed to build on the strength of
the Industrial Bank name and to positively reflect IBNA's longstanding
commitment to meeting the needs of individuals, small businesses and
organizations.
It Takes Teamwork
Growth and professional development of employees continues to be of paramount
importance. An emphasis on training and employee development in 1998 will help
to achieve higher levels of customer retention and personal customer service.
The professional environment will continue to foster, promote and reward
teamwork through employee incentive programs. Additionally, we are initiating a
comprehensive analysis of our facilities to accommodate personnel growth and
technological advances over the next five years.
[Graphics Omitted]
<PAGE>
<TABLE>
<S> <C>
An Ongoing Commitment
Washington
For over 60 years, Industrial Bank has delivered essential banking services to
the Washington Metropolitan Community. Throughout the years, IBNA's commitment Georgia Avenue
can be seen not only in its role as a vital financial institution, but also as ATM - Drive-in
an active participant in a variety of charitable projects. 4812 Georgia Avenue, N.W.
Washington, D.C. 20011
With nine branch offices located throughout communities in the area, Industrial (202) 722-2025
Bank has had the opportunity to participate in many worthwhile programs
including: Frank D. Reeves Municipal Center office
ATM and Metro Green Line
2000 Fourteenth Street, N.W.
Washington, D.C. 20009
ACORN Bank Fair (202) 722-2075
Annual Georgia Avenue Clean-up Day U Street office
ATM and Metro Green Line
Banks-In-School Program 2000 Eleventh Street, N.W.
Washington, D.C. 20001
Black Business Entrepreneur Expo (202) 722-2050
Black History Month F Street office Metro Center
1317 F Street, N.W.
Cardoza High School's Banking and Sports Management Partnership Washington, D.C. 20004
(202) 722-2060
Collective Banking Group Job Fair
J.H. Mitchell office
Community Empowerment Day ATM - Drive-In
Metro Benning Road
Coolidge High School Career Day 45th and Blaine Streets, N.E.
Washington, D.C. 20019
MANNA House-Raising Project on U Street (202) 722-2065
Neighborhood Advisory Boards Brookland Woodridge Office
2012 Rhode Island Ave., N.E.
Prince George's County Housing Fair Washington, D.C. 20018
(202) 722-2038
Small Business/Home Buyer Seminars
American University Office
Ward 5 Community Day ATM
4400 Massachusetts Avenue, N.W.
As well as many others... Washington, D.C. 20016
(202) 722-2053
Maryland Loan Department
2002 Eleventh Street, N.W.
Washington, D.C. 20001
Oxon Hill Office and Forestville office (202) 722-2080
Maryland lending division ATM - Drive-in
ATM - Drive-in 7610 Pennsylvania Avenue ATM AT Providence Hospital
1900 John Hanson Lane Forestville, MD 20747 1150 Varnum Street, N.E.
Oxon Hill, MD 20745 (301) 735-4440 Washington, D.C. 20017
(301) 839-4600
ATM AT WASHINGTON
CONVENTION CENTER
906 Ninth Street, N.W.
Washington, D.C. 20005
ATM At ONE JUDICIARY SQUARE
441 Fourth Street, N.W.
Washington, D.C. 20001
</TABLE>
<PAGE>
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
December 31, 1997
(dollars in thousands, except per-share data)
- --------------------------------------------------------------------------------------------------------
1997 1996 CHANGE
FOR THE YEAR
<S> <C> <C> <C>
Net Income $1,576 $1,313 20.03%
Cash Dividends Declared - Common and Preferred 398 383 3.92%
Earning Per Common Share 2.44 2.06 18.45%
Cash Dividends Paid Per Common Share .60 .60 0.00%
Return on Average Assets .64 .57 12.28%
Average Share Outstanding 645,195 637,160 1.26%
AT YEAR END
Total Assets $250,702 $235,788 6.33%
Loans - Net of Allowance for Loan Losses 115,476 108,611 7.24%
Deposits 208,196 206,084 1.02%
Shareholders' Equity 20,177 17,318 16.51%
Shareholders' Equity to Assets 8.05% 7.34% 9.67%
Risk-Based Capital Ratios (IBNA):
Tier1 15% 15% 0.00%
Total 17% 16% 6.25%
Book Value Per Common Share $29.44 $27.18 8.31%
- --------------------------------------------------------------------------------------------------------
</TABLE>
[GRAPHICS OMITTED]
<PAGE>
INDEPENDENT AUDITOR'S 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 (the Company) as of December 31, 1997 and 1996, 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 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 at December 31, 1997 and 1996, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche, LLP
Washington, D.C.
February 27, 1998
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 and 1996
(dollars in thousands, except share data)
- --------------------------------------------------------------------------------------------------------
ASSETS
1997 1996
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $11,842 $13,692
Federal funds sold 11,500 8,300
------- --------
Total cash and cash equivalents 23,342 21,992
Interest-bearing deposits in banks 3,000 3,000
Securities available-for-sale, at fair value 101,106 94,824
Loans receivable - net of allowance for loan losses
of $1,702 in 1997 and $1,266 in 1996 116,476 108,611
Real Estate owned - net 522 1,310
Bank premises and equipment - net 2,672 2,452
Other Assets 3,500 3,499
Deferred Income Taxes 84 100
------- --------
TOTAL ASSETS 250,702 $235,788
======= ========
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
<S> <C> <C>
LIABILITIES:
Demand deposits $52,922 $50,840
Time and savings deposits 155,274 155,244
------- -------
Total deposits 208,196 206,084
Repurchase agreements 19,496 10,466
Other liabilities 1,833 920
Note payable 1,000 1,000
-------- --------
Total Liabilities $230,525 $218,470
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock - $1 par value: 1,000,000(500,000 voting
and 500,000 nonvoting authorized; 20,000 Series A
nonvoting issued and outstanding, stated at liquidation value 500
Common stock - $1 par value: 1,000,000 shares authorized;
668,360 and 637,160 shares issued and outstanding 668 637
Capital surplus 5,051 4,329
Retained earnings 13,183 12,005
Unrealized gain on available-for-sale securities,
net of taxes of $393 in 1997 and $179 in 1996 775 347
-------- --------
Total shareholders' equity 20,177 17,318
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $250,702 $235,788
======== ========
See notes to consolidated financial statements.
===================================================================================================
</TABLE>
11
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 AND 1996
(dollars in thousands, except share data)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
1997 1996
INTEREST INCOME:
Interest and fees on loans $10,434 $9,401
U.S. Treasury securities 1,261 1,511
Obligations of U.S. Government
agencies and corporations 501 1,069
Collateralized mortgage obligations 3,797 2,597
Obligations of states and political subdivisions 864 699
Bank balances and other securities 229 162
Federal funds sold 372 622
------- -------
Total interest income 17,458 16,061
------- -------
INTEREST EXPENSE:
Interest-bearing deposits 4,329 4,523
Time certificates over $100,000 767 676
Repurchase agreements 767 153
Note payable 53 53
------- -------
Total interest expense 5,916 5,405
------- -------
NET INTEREST INCOME: 11,542 10,656
PROVISION FOR LOAN LOSSES 1,195 510
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,347 10,146
------- -------
NONINTEREST INCOME:
Service charges on deposit and checking accounts 2,540 2,266
Gain on sale of securities 242 109
Other operating income 552 245
------- -------
Total noninterest income 3,334 2,620
------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits 6,213 5,782
Occupancy 716 671
Furniture and equipment 625 562
Data processing 606 572
Other 3,485 3,349
------- -------
Total noninterest expense 11,645 10,936
------- -------
INCOME BEFORE INCOME TAXES 2,036 1,830
PROVISION FOR INCOME TAXES 460 517
------- ------
NET INCOME $1,576 $1,313
======= ======
EARNINGS PER COMMON SHARE - Basic and diluted $2.44 $2.06
======= ======
See notes to consolidated financial statements.
===================================================================================================
</TABLE>
12
<PAGE>
CONSOLIDATED STATEMENTS
CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,1997 AND 1996
(dollars in thousands, except share data)
- -------------------------------------------------------------------------------------------------------------------
Net Unrealized
Gain
Preferred Common Capital Retained on Securities
Stock Stock Surplus Earnings Available-for-Sale Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996 - $637 $4,329 11,075 $514 16,555
Dividends, $0.60 per share - - - (383) - (383)
Change in unrealized gains
on available-for-sale
securities, net of taxes - - - - (167) (167)
Net income - - - 1,313 - 1,313
---- ---- ------ ------ ---- ------
BALANCE, DECEMBER 31, 1996 - 637 4,329 12,005 347 17,318
Issuance of preferred stock 500 - - - - 500
Issuance of common stock - 31 722 - - 753
Dividends, $0.60 per share - - - (398) - (398)
Change in unrealized
gains on available-
for-sale securities,
net of taxes - - - - 428 428
Net Income - - - 1,576 - 1,576
---- ---- ------ ----- ---- ------
BALANCE, DECEMBER 31, 1997 $500 $668 $5,051 13,183 775 20,177
==== ==== ====== ====== ==== ======
See notes to consolidated financial statements.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,1997 AND 1996
(dollars in thousands)
- ---------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,576 $1,313
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation 352 319
Amortization of goodwill and intangibles 149 216
Accretion/amortization of premium 643 396
Deferred income taxes 16 (147)
Loss on sale of real estate owned 22 32
Gain on sale of investment securities
available-for-sale (152) (109)
Gain on sale of securities - trading (90) -
Provision for loan on real estate owned 108 223
Provision for loan losses 1,195 510
Interest capitalized on securities (873) -
(Increase) decrease in other assets (148) 116
Increase (decrease) in other liabilities 913 (254)
Sale of investment securities - trading 3,164 -
----- -----
Net cash provided by operating activities 6,875 2,615
----- -----
- -----------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
DECEMBER 31, 1997 AND 1996
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (12,364) (16,793)
Additions to bank premises and equipment, net (572) (412)
Proceeds from principal payments on securities
available-for-sale 11,432 7,326
Net increase in net interest-bearing deposits in banks -- (3,000)
Proceeds from sale of real estate owned 1,048 194
Proceeds from maturities of securities available-for-sale 8,962 26,695
Proceeds from sale of securities available-for-sale 8,105 20,510
Purchase of investment securities available-for-sale (34,133) (62,497)
------- -------
Net cash used in investing activities (17,522) (27,977)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends (398) (383)
Net increase in deposits 2,112 2,385
Net increase in repurchase agreements 9,030 10,466
Sale of common and preferred stock, net 1,253 --
------- -------
Net cash provided by financing activities 11,997 12,468
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,350 (12,894)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 21,992 34,886
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 23,342 $ 21,992
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
CASH PAID DURING THE YEAR FOR:
Income taxes $ 503 $ 518
========= =========
Interest $ 5,301 $ 5,290
========= =========
NON CASH TRANSACTIONS:
Noncash transfers of loans to real estate owned $ 390 $ 809
========= =========
Securitization of mortgage loans $ 3,103 $ --
========= =========
</TABLE>
See notes to consolidated financial statements.
14
<PAGE>
Notes to Consolidated FINANCIAL Statements
YEARS ENDED DECEMBER 31, 1997 and 1996
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 (the Bank)
converted from a District of Columbia chartered bank to a national banking
association and changed its name to Industrial Bank, National Association (the
Bank) on July 1, 1995. The accounting and reporting policies of IBW Financial
Corporation and subsidiary (the Company) conform to generally accepted
accounting principles and prevailing practices within the banking industry. The
following summarizes the significant accounting policies.
Consolidation - The consolidated financial statements include the accounts of
the Corporation and the Bank. All significant intercompany transactions and
balances have been eliminated.
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. In
addition, there are inherent risks and uncertainties related to the operation of
a financial institution, such as credit and interest rate risk. The possibility
exists that because of changing economic conditions, unforeseen changes could
occur and have an adverse effect on the Company's financial position.
Securities - The Company accounts for securities in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS No. 115). 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.
Securities classified as held-to-maturity are 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.
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
status when management deems the collectibility of interest is doubtful.
Interest ultimately collected is recorded in the period received.
Allowance for Loan Losses - The allowance for loan losses is maintained at a
level believed by management to be adequate to provide for known and inherent
risks in the loan portfolio and commitments to extend credit. Management's
determination of the adequacy of the allowance is based on an evaluation of past
loan loss experience; current economic conditions; 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 on impaired
loans based on the fair value of the collateral. In accordance with SFAS No.
114, the Company considers a loan impaired when, based on current information
and events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Management
considers all current information, including the borrower's ability to repay,
the fair value of the collateral, and other pertinent information in determining
if a loan is impaired. For the purposes of applying SFAS No. 114, the Company
considers residential real estate loans and installment loans to be smaller
balance, homogenous loans, which are aggregated and collectively evaluated for
measurement of impairment. The amount of loan losses the Company may ultimately
realize could differ from these estimates.
Bank Premises and Equipment - Premises 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.
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, less estimated costs to sell, 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 in
other expense. The amounts the Company will ultimately realize on disposition of
these properties could differ from management's current estimates.
15
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Earnings Per Share - Earnings per share is computed based on the weighted
average number of common shares outstanding during the year. The weighted
average number of common shares outstanding during 1997 and 1996 was 645,195 and
637,160, respectively. In March 1997, SFAS No. 128, Earnings Per Share was
issued. SFAS No. 128 supersedes APB No. 15 to conform earnings per share with
international standards as well as to simplify the complexity of the computation
under APB No. 15. In summary, SFAS No. 128 replaces the previous primary
earnings per share (EPS) calculation with a basic EPS calculation. The basic EPS
differs from the primary EPS calculation in that the basic EPS does not include
any potentially dilutive securities. Fully dilutive EPS is replaced with diluted
EPS and should be disclosed regardless of its dilutive impact on EPS. SFAS No.
128 is effective for both interim and annual periods ending after December 15,
1997. Basic and diluted EPS are the same for IBW as the Company had no stock
options or other potentially dilutive securities outstanding as of December 31,
1997.
Income Taxes - The Corporation 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, 1997 and 1996, other assets included goodwill of
$610,000 and $665,000, net of accumulated amortization of $55,000 and $105,000
and core deposit intangibles of $420,000 and $514,000, net of accumulated
amortization of $94,000 and $242,000, respectively. 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 $3,962,000 and $4,070,000 at December
31, 1997 and 1996, respectively.
Reclassification - Certain items in the financial statements for 1996 have been
reclassified to conform to the 1997 presentation.
New Accounting Pronouncement - In June 1996, the Financial Accounting Standards
Board issued SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities (SFAS No. 125). SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. The
provisions of SFAS No. 125 relating to repurchase agreements, securities
lending, and other similar transactions and pledged collateral have been delayed
until after December 31, 1997, by SFAS No. 127, Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125, an Amendment of FASB No. 125.
SFAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities based on
consistent application of a financial components approach that focuses on
control. Under this approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and derecognizes
liabilities extinguished. SFAS No. 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. This standard supersedes SFAS No. 76, Extinguishment of
Debt, and No. 77, Reporting by Transferors for Transfers of Receivables with
Recourse, and No. 122, Accounting for Mortgage Servicing Rights, and amends SFAS
No. 115 and No. 65, Accounting for Certain Mortgage Banking Activities. The
Company adopted this standard, except for the provisions delayed by SFAS No.
127, effective January 1, 1997. The adoption of this standard did not have a
material impact on the Corporation's financial condition or results of
operations.
In June 1997, SFAS No. 130, Reporting Comprehensive Income, was issued. SFAS No.
130 requires comprehensive income to be reported in a financial statement that
is displayed with the same prominence as other financial statements, thereby
permitting companies to display the components of other comprehensive income
below the total for net income in an income statement, in a separate statement
that begins with net income, or in a statement of changes to equity. Such
requirement would apply to all enterprises that provide a full set of financial
statements. This statement is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
for comparative purposes is required.
Additionally, during June of 1997, the FASB issued SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements beginning after
December 15, 1997.
The implementation of SFAS 130 and SFAS 131 will only impact the reporting and
presentation of certain components of the Company's financial statements and
related footnote disclosures.
16
<PAGE>
2. SECURITIES
At December 31, 1997 and 1996, the amortized cost and approximate fair value of
securities available-for-sale were as follows (in thousands):
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Treasury Notes $18,985 $ 30 $ (1) $ 19,014
U.S. Government Agencies 11,480 21 (2) 11,499
Mortgage-Backed Securities:
Pass-through securities:
Guaranteed by GNMA 66 3 -- 69
Issued by FNMA and FHLMC 10 2 -- 12
Collaterized Mortgage Obligations:
Collateralized by FNMA, FHLMC and
GNMA mortgage-backed securities 56,273 531 (114) 56,690
Securities issued by states and
political subdivision:
General obligations 9,849 540 (6) 10,383
Revenue obligations 2,191 152 -- 2,343
Other 1,079 17 -- 1,096
------- ------ ------- --------
TOTAL $99,933 $1,296 $(123) $101,106
======= ====== ======= ========
</TABLE>
================================================================================
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Treasury Notes $20,386 $144 $ (5) $20,525
U.S. Government Agencies 8,002 55 -- 8,057
Mortgage-Backed Securities:
Pass-through securities:
Guaranteed by GNMA 86 3 -- 89
Issued by FNMA and FHLMC 879 3 (3) 879
Collateralized Mortgage Obligations:
Collateralized by FNMA
mortgage-backed securities 50,060 410 (81) 50,389
Securities issued by states and
political subdivision:
General obligations 13,393 258 (235) 13,416
Revenue obligations 1,205 38 (61) 1,182
Other 287 -- -- 287
------- ---- ------- -------
TOTAL $94,298 $911 $(385) $94,824
======= ==== ======= =======
</TABLE>
================================================================================
17
<PAGE>
SECURITIES (CONT.)
To the right 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).
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
ESTIMATED
AMORTIZED COST FAIR VALUE
Due in one year or less $19,980 $ 20,010
Due after one year through five years 11,564 11,599
Due after ten years 12,040 12,726
Mortgage-backed securities 56,349 56,771
------- --------
Total $99,933 $101,106
======= ========
================================================================================
Proceeds from the sale of securities available-for-sale were $8,105,000 and
$20,510,000 for the year ended December 31, 1997 and 1996, respectively, and
resulted in gross realized gains of $152,000 and $138,000 and gross realized
losses of $1,000 and $29,000 for the years ended December 31, 1997 and 1996,
respectively. Proceeds from the sale of trading securities were approximately
$3,164,000 for the year ended December 31, 1997, and resulted in gross realized
gains of approximately $90,000.
Securities of $9,840,000 and $4,870,000 at December 31, 1997 and 1996, were
pledged as collateral for public deposits and for other purposes required by
law. At December 31, 1997 and 1996, the carrying value of securities underlying
repurchase agreements was $19,840,000 and $11,718,000, respectively.
================================================================================
3. LOANS RECEIVABLE
Loans receivable consists of the following (in thousands) at December 31:
- --------------------------------------------------------------------------------
1997 1996
Real estate loans:
Collateralized by residential property:
First mortgages $ 48,247 $ 50,807
Second mortgages 3,830 2,069
Collateralized by non-residential properties 38,499 24,442
Commercial 23,145 28,232
Installment 4,925 4,692
-------- --------
Total 118,646 110,242
Less:
Deferred fees and costs, net 468 365
Allowance for loans losses 1,702 1,266
-------- --------
Net loans $116,476 $108,611
======== ========
================================================================================
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>
Major loan concentrations are A summary of transactions in the allowance for loan
as follows (in thousands): losses is as follows (in thousands) at December 31:
- -------------------------------------------------------- ------------------------------------------------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C> <C>
Church loans collateralized Balance, beginning of year $1,266 $1,177
by real estate $10,904 $ 9,401
Installment loans Add: Provision charged to expense 1,195 510
to churches 36 192 Recoveries 130 337
Commercial loans
to churches 1,733 492 Deduct: Charge-offs (889) (758)
------- ------- ------ ------
Total loans to churches $12,673 $10,085 Balance, end of year $1,702 $1,266
======= ======= ====== ======
=============================================================== ===============================================================
</TABLE>
18
<PAGE>
LOAN RECEIVABLE (CONT.)
At December 31, 1997 and 1996, loans that were considered to be impaired under
SFAS No. 114 totaled $852,000 and $1,960,000, respectively. The related
allowance allocated to impaired loans was $251,000 and $272,000 at December 31,
1997 and 1996, respectively. The average balance of impaired loans for the years
ended December 31, 1997 and 1996, was $1,984,000 and $1,251,000, respectively.
Interest income that was not recorded on impaired loans for the years ended
December 31, 1997 and 1996, was $223,000 and $101,000, respectively.
================================================================================
4. BANK PREMISES AND EQUIPMENT
The major categories of bank premises and equipment are as follows (in
thousands):
- --------------------------------------------------------------------------------
1997 1996
Bank premises $ 2,276 $ 2,276
Furniture, fixtures, and equipment 3,330 2,745
-------- --------
Total 5,606 5,021
Less accumulated depreciation (2,934) (2,569)
-------- --------
Bank premises and equipment, net $ 2,672 $ 2,452
======== ========
- --------------------------------------------------------------------------------
Depreciation expense for the years ended December 31, 1997 and 1996, is $352,000
and $319,000, respectively.
================================================================================
5. DEPOSITS
Deposits consist of the following (in thousands)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEMAND SAVINGS TIME TOTAL
<S> <C> <C> <C> <C>
Individuals, partnerships, and corporations $50,334 $92,462 $57,539 $200,335
U.S. government 37 -- 1,014 1,051
States and political subdivisions 242 -- 4,259 4,501
Certified and official checks 2,309 -- -- 2,309
------- ------- ------- --------
Total $52,922 $92,462 $62,812 $208,196
======= ======= ======= ========
==================================================================================================
</TABLE>
Deposits consist of the following (in thousands)
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEMAND SAVINGS TIME TOTAL
<S> <C> <C> <C> <C>
Individuals, partnerships, and corporations $47,969 $109,020 $41,711 $198,700
U.S. government 341 -- 1,113 1,454
States and political subdivisions 245 -- 3,400 3,645
Certified and official checks 2,285 -- -- 2,285
------- -------- ------- --------
Total $50,840 $109,020 $46,224 $206,084
======= ======== ======= ========
==================================================================================================
</TABLE>
Demand deposits represent noninterest-bearing deposit accounts. Individual
certificates of deposit of $100,000 or more December 31, 1997 and 1996, totaling
$16,807,000 and $14,246,000, respectively, are included in time deposits.
At December 31, 1997, the scheduled maturities of Time
Deposits are as follows (in thousands):
--------------------------------------------------------
1998 $58,456
1999 4,199
2000 157
-------
$62,812
=======
19
<PAGE>
================================================================================
6. REPURCHASE AGREEMENTS
At December 31, 1997, securities sold under agreements to repurchase were
$19,496,000. These are fixed coupon agreements that are treated as financing
transactions, and the obligations to repurchase are reflected as a liability in
the consolidated balance sheet. The amount of the securities underlying the
agreements remains in the asset account. The securities are held in a segregated
account by the Company's custodian. The securities underlying the agreements at
December 31, 1997, had a fair value of $19,840,000. All outstanding agreements
at December 31, 1997, matured on January 1, 1998. The outstanding agreements had
an average interest rate of 4.26% at December 31, 1997. The average balance and
the average interest rate for the year ended December 31, 1997, were $16,820,000
and 4.56%. During 1997, the maximum month-end balance was $19,496,000.
================================================================================
7. NOTE PAYABLE
In connection with the acquisition/assumption of certain Resolution Trust
Corporation (RTC) assets and liabilities in 1994, 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, 1997, was 5.187%. 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.
================================================================================
8. SHAREHOLDERS' EQUITY
On September 29, 1997, the Company completed the sale of 31,200 shares of its
common stock and 20,000 shares of its Series A Non-Voting Preferred Stock, in a
private placement transaction, to the Federal National Mortgage Association
(Fannie Mae), at a price of $25.00 per share of common stock and $25.00 per
share of Series A Non-Voting Preferred Stock for a total purchase price of
$1,280,000. The shares of common stock issued to Fannie Mae represent
approximately 4.67% of the outstanding shares of the Company's common stock, and
the shares of Series A Non-Voting Preferred Stock represent all of the
authorized shares of that series.
The Corporation has contributed $980,000 of the proceeds of the sale to
Industrial Bank, the wholly owned subsidiary of the Corporation, for use in
connection with its mortgage and housing-related lending operations, and the
promotion of affordable housing in its market area. The remaining proceeds will
be retained at the Corporation for general corporate purposes.
Under the stock purchase agreement, the Company is restricted from taking any
action, including the repurchase, redemption, or other reduction in the number
of outstanding shares of capital stock, but not including the incurrence of
losses that would result in the value of the Shares representing 10% or more of
the equity of the Company, or the shares of common stock sold to Fannie Mae
representing 5% or more of the outstanding common stock. The Company has certain
rights under the agreement to repurchase the Shares under certain circumstances.
20
<PAGE>
================================================================================
9. REGULATORY MATTERS
The Corporation and the Bank are 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 Corporation's financial statements. Under
capital adequacy guidelines and regulatory framework for prompt corrective
action, the Corporation and the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities, and certain
off-balance sheet items as calculated under regulated accounting practices. The
Corporation's and the Bank's capital amounts and the Bank's classification under
the regulatory framework for prompt corrective action are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and Bank to maintain minimum amounts and ratios of total
and Tier 1 capital, as defined in the regulations, to risk-weighted assets, as
defined and of Tier 1 Capital, as defined, to average assets, as defined.
Management believes, as of December 31, 1997, that the Corporation and Bank meet
all the capital adequacy requirements to which they are subject.
As of December 31, 1997 and 1996, the most recent notification from Office of
the Comptroller of Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-
based, and Tier 1 leverage ratios. There are no conditions or events since that
notification that management believes have changed the institution's category.
- --------------------------------------------------------------------------------
The Corporation's and the Bank's required and actual capital amounts and ratios
at December 31, 1997 and 1996, are set for in the following table (in
thousands):
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR CAPITAL TO BE CATEGORIZED AS WELL
ADEQUACY CAPITALIZED UNDER PROMPT
ACTUAL PURPOSES CORRECTIVE ACTION PROVISIONS
-------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
- ------------------------------------------
Total capital (to risk weighted assets):
Corporation $19,876 16% $ 9,666 8% N/A N/A
Bank 20,148 17 9,652 8 12,064 10
Tier I capital (to risk weighted assets)
Corporation 18,369 15 4,833 4 N/A N/A
Bank 18,641 15 4,826 4 7,239 6
Tier I capital (to average assets)
Corporation 18,369 8 9,787 4 N/A N/A
Bank 18,641 8 9,782 4 12,227 5
As of December 31, 1996
- ------------------------------------------
Total capital (to risk weighted assets)
Corporation 17,058 16 8,761 8 N/A N/A
Bank 17,799 16 8,751 8 10,939 10
Tier I capital (to risk weighted assets)
Corporation 15,792 14 4,381 4 N/A N/A
Bank 16,533 15 4,376 4 6,564 6
Tier I capital (to average assets)
Corporation 15,792 7 9,379 4 N/A N/A
Bank 16,533 7 9,368 4 11,711 5
</TABLE>
21
<PAGE>
================================================================================
10. INCOME TAXES
The provision for income taxes consists of the following (in thousands) at
December 31:
- --------------------------------------------------------------------------------
1997 1996
Current:
Federal income tax $ 552 $ 587
State and local income tax 51 77
------ ------
603 664
Deferred:
Federal income tax (143) (147)
------ ------
Total $ 460 $ 517
====== ======
================================================================================
The components of the deferred tax (benefit) expense resulting from net
temporary differences are as follows (in thousands) at December 31:
- --------------------------------------------------------------------------------
1997 1996
Depreciation $ 5 $ 9
Provisions for losses on loans and Real
Estate Owned (96) (88)
Deferred loan fees (37) (53)
Other (15) (15)
------ ------
Total $ (143) $ (147)
====== ======
================================================================================
The following reconciles the federal statutory income tax rate of 34% to the
effective income tax rate (in thousands) at December 31:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C>
Federal tax expense at statutory rate $ 692 34% $ 623 34%
State tax expense, net of federal tax
benefit 130 6 52 3
Tax-exempt interest (267) (13) (145) (7)
Other (95) (4) (13) (2)
------ ------ ------ -----
Total $ 460 23% $ 517 28%
====== ===== ====== ====
</TABLE>
================================================================================
The tax effects of items comprising the Company's deferred tax assets
(liabilities) at December 31, 1997 and 1996, are as follows (in thousands):
- --------------------------------------------------------------------------------
1997 1996
Deferred tax assets:
Allowances for losses on loans and
other real estate owned $ 345 $ 249
Deferred loan fees 188 142
Pension costs 45 --
Other 45 29
------ ------
Total deferred tax assets 623 420
------ ------
Deferred tax liabilities:
Unrealized gain on available-for-sale securities $ (393) $ (179)
Depreciation (129) (124)
Other (17) (17)
Total deferred tax liabilities (539) (320)
------ ------
Net deferred tax assets $ 84 $ 100
====== ======
================================================================================
22
<PAGE>
================================================================================
11. RETIREMENT PLAN
The Company has a noncontributory, defined benefit pension plan covering
substantially all employees. In anticipation of terminating the retirement plan
and settling the benefit obligation in 1997, the Company adopted a plan
amendment that curtailed the accrual of benefits for all participants effective
May 5, 1996. The Company recognized a loss on the curtailment of approximately
$46,000. Prior to the curtailment, the Company's funding policy was 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 Company is currently anticipating that the Plan will be terminated
in 1998.
Net pension cost for 1997 and 1996 included the following components (in
thousands) at December 31:
- --------------------------------------------------------------------------------
1997 1996
Benefit cost for service during the period $ -- $ 79
Interest cost on projected benefit obligation 207 196
Return on plan assets (441) (237)
Asset gain deferral 164 --
Net amortization -- (10)
Funding of projected benefit obligation -- 143
------ ------
Net pension cost $ (70) $ 171
====== ======
================================================================================
The following table sets forth the plan's funded status and amounts recognized
in the Company's balance sheet at December 31, 1997 and 1996 (in thousands):
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Projected benefit obligation $ (2,704) $ (3,178)
Plan at fair value 3,066 3,445
-------- --------
Plan assets in excess (less than) benefit obligation 362 267
Unrecognized transition asset (93) (104)
-------- --------
Prepaid pension costs $ 269 $ 163
======== ========
</TABLE>
The weigthed average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation was 7% as of December 31, 1997 and 1996. The expected long-term rate
of return on assets was 8% as of December 31, 1997 and 1996.
================================================================================
12. 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 $39,100 and
$37,000 were made to the plan during 1997 and 1996, respectively. At December
31, 1997 and 1996, the ESOP held approximately 8% and 9%, respectively, of the
total outstanding shares of the Company's stock.
================================================================================
13. 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, 1997 and 1996, the Bank had outstanding commitments to fund loans
approximating $30,837,000 and $24,576,000, respectively.
The Bank also has outstanding standby letters of credit at December 31, 1997 and
1996, in the amount of $1,108,000 and $905,000, 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.
23
<PAGE>
================================================================================
COMMITMENTS AND CONTINGENCIES (cont)
At December 31, 1997, the Bank was committed for
future minimum annual payments under noncancelable long-term lease agreements
for the rental of office space as in the chart below (in thousands):
1998 1999 2000 2001 2002 Total
--------------------------------------------------
$223 157 120 52 25 $577
Rent expense for the years ended December 31, 1997 and 1996, was $188,000 and
$234,000, respectively. Rent expense includes the amortization of the rent
concessions.
================================================================================
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, Interest-Bearing Deposits, Accrued Interest
Receivable and Payable, and Repurchase Agreements - The fair value of cash and
cash equivalents, accrued interest receivable and payable and repurchase
agreements 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.
Note Payable - The fair value of the note payable 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, 1997 and 1996. However, considerable judgment is required to
interpret market data to develop the estimates 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, 1997 DECEMBER 31, 1996
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 23,342 $ 23,342 $ 21,992 $ 21,992
Interest-bearing deposits 3,000 3,000 3,000 3,000
Investment securities 101,106 101,106 94,824 94,824
Loans 116,476 116,312 108,611 108,775
Accrued interest receivable 1,745 1,745 1,651 1,651
LIABILITIES
Deposits 208,196 208,121 206,084 206,228
Repurchase agreements 19,496 19,496 10,466 10,466
Note payable 1,000 1,000 1,000 940
Accrued interest payable 580 580 478 478
====================================================================================================
</TABLE>
24
<PAGE>
================================================================================
15. RELATED PARTY TRANSACTIONS
In the normal course of banking business, loans are made to officers and
directors. At December 31, 1997 and 1996, these loans totaled $727,000 and
$778,000, respectively. New loans to related parties originated during 1997 were
$103,000 and payments are being received on time.
================================================================================
16. PARENT COMPANY FINANCIAL INFORMATION
The summarized financial statements of IBW Financial Corporation (parent company
only) as of December 31, 1997 and 1996, and for the years ended December 31,
1997 and 1996, follow (in thousands):
================================================================================
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Assets
Deposits with subsidiary $ 584 $ 129
Securities available-for-sale 144 125
Other assets 36 18
Investment in subsidiary -- at equity 20,437 18,059
------- -------
Total Assets $21,201 $18,331
======= =======
Liabilities and equity
Liabilities:
Borrowings $ 1,000 $ 1,000
Other 24 13
------- -------
Total Liabilities 1,024 1,013
Shareholders' Equity
Preferred stock 500 --
Common stock 668 637
Capital surplus 5,051 4,329
Retained earnings 13,183 12,005
Unrealized gain on available-for-sale securities -- net of
taxes of $393 in 1998 and $179 in 1996 775 347
------- -------
Total Shareholders' Equity 20,177 17,318
------- -------
Total Liabilities and Shareholders' Equity $21,201 $18,331
======= =======
STATEMENTS OF INCOME
Dividends from subsidiary and other income $ 647 $ 584
Expenses 53 36
------- -------
Income before undistributed net earnings of subsidiary 594 548
Equity in undistributed net earnings of subsidiary 982 765
------- -------
Net income $ 1,576 $ 1,313
======= =======
STATEMENTS OF CASH FLOWS
Cash Flow from Operating Activities:
Net income $ 1,576 $ 1,313
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net earnings of subsidiary (982) (765)
Other (14) (27)
------- -------
Net cash provided by operating activities 580 521
------- -------
Cash Flows for Investing Activities:
Purchase of securities -- (125)
Investment in subsidiary (980) --
------- -------
Net cash used in investing activities (980) (125)
------- -------
Cash Flows from Financing Activities:
Payment of dividends (398) (383)
Sale of stock 1,253 --
------- -------
Net cash used in financing activities 855 (383)
------- -------
Increase in Deposits with Subsidiary 455 13
Deposits with Subsidiary, Beginning of the Year 129 116
------- -------
Deposits with Subsidiary, End of the Year $ 584 $ 129
======= =======
</TABLE>
================================================================================
25
<PAGE>
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. All dollar amounts shown are in
thousands, except with respect to per share data.
Forward-looking statements - This discussion, as well as other portions of this
report, contains forward-looking statements within the meaning of the Securities
Exchange Act of 1934, as amended, including statements of goals, intentions, and
expectations as to future trends, plans, events or results of Company operations
and policies and regarding general economic conditions. These statements are
based upon current and anticipated economic conditions, nationally and in the
Company's market, interest rates and interest rate policy, competitive factors
and other conditions which, by their nature, are not susceptible to accurate
forecast, and are subject to significant uncertainty. Because of these
uncertainties and the assumptions on which this discussion and the
forward-looking statements are based, actual future operations and results in
the future may differ materially from those indicated herein. Readers are
cautioned against placing undue reliance on any such forward-looking statements.
The Company does not undertake to update any forward-looking statements to
reflect occurrences or events which may not have been anticipated as of the date
of such statements.
HOLDING COMPANY BUSINESS
The Company became a unitary bank holding company, and its wholly-owned
subsidiary Industrial Bank, National Association, converted from a District of
Columbia chartered bank to a national banking association as of July 1, 1995.
The business of the Bank and the Company is providing banking services to the
Washington, DC metropolitan area. The Bank does business through seven 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.
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
Overview - Net income was $1,576 for 1997, compared with $1,313 in 1996, an
increase of 20%. Earnings per share increased 18% in 1997 to $2.44, compared
with $2.06 in 1996. The increase of $263, or 20%, in net income was primarily
attributable to an increase in net interest income of $886, an increase in
noninterest income of $714 and a reduction of in the provision for income taxes
of $57, offset by an increase in noninterest expenses of $709 and a increase in
the provision for loan losses of $685. Return on average assets was .64% for
1997, up from .57% for 1996. Return on average equity was 8.74% for 1997,
compared with 8.06% for 1996.
================================================================================
TABLE 1. FINANCIAL OVERVIEW
The following table summarizes net income divided by average assets and 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.
- --------------------------------------------------------------------------------
1997 1996 1995
Return on average assets .64% .57% .74%
Return on average equity 8.74% 8.06% 10.75%
Dividend payout 24.59% 29.13% 23.44%
Average shareholders'
equity to average assets 7.37% 7.06% 6.81%
- --------------------------------------------------------------------------------
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-bearingliabilities,
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.
26
<PAGE>
================================================================================
TABLE 2. AVERAGE BALANCE AND NET INTEREST INCOME ANALYSIS(1)
YEAR ENDED DECEMBER 31,
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------------------- ---------------------------------
AMOUNT AMOUNT
AVERAGE AVERAGE PAID OR AVERAGE AVERAGE PAID OR
BALANCE RATE EARNED BALANCE RATE EARNED
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net $111,856 9.33% $10,434 $ 99,879 9.41% $ 9,401
Taxable securities 88,897 6.31% 5,605 86,305 6.06% 5,232
Non-taxable securities(2) 15,919 8.22% 1,309 12,747 8.31% 1,059
Federal funds sold 6,575 5.66% 372 11,279 5.51% 622
Interest-bearing deposits held 3,000 6.10% 183 1,661 6.44% 107
-------- ------ ------- -------- ------ -------
Total interest-earning assets 226,247 7.91% 17,903 211,871 7.75% 16,421
Cash and due from banks 11,108 10,841
Bank premises and equip-
ment, net 2,515 2,424
Other assets 4,669 5,423
-------- --------
Total assets $244,539 $230,559
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand de-
posits $ 28,326 1.99% 563 $ 30,718 2.10% 644
Savings deposits 66,724 2.75% 1,836 72,856 2.87% 2,087
Time deposits 61,041 4.42% 2,697 55,548 4.44% 2,468
-------- ------ ------- -------- ------ -------
Total interest-bearing depos-
its 156,091 3.26% 5,096 159,122 3.27% 5,199
Borrowed funds 1,000 5.30% 53 1,000 5.30% 53
Repurchase agreements 16,820 4.56% 767 3,376 4.53% 153
-------- ------ ------- -------- ------ -------
Total interest-bearing liabili-
ties 173,911 3.40% 5,916 163,498 3.31% 5,405
Noninterest-bearing deposits 50,362 48,930
Other liabilities 2,235 1,841
Shareholders' equity 18,031 16,290
-------- --------
Total liabilities and
shareholders' equity $244,539 $230,559
======== ========
NET INTEREST INCOME AND
NET YIELD ON INTEREST EARNING ASSETS
Net interest income $11,987 $11,016
======= =======
Interest rate spread 4.51% 4.44%
Net yield on average interest-
earning assets 5.30% 5.20%
Average interest-earning as-
sets to average interest-
bearing liabilities 130.09% 129.59%
</TABLE>
<PAGE>
1995
----------------------------------
AMOUNT
AVERAGE AVERAGE PAID OR
BALANCE RATE EARNED
ASSETS
Loans, net $ 90,630 9.90% $ 8,975
Taxable securities 92,147 5.82% 5,363
Non-taxable securities(2) 3,934 4.55% 179
Federal funds sold 11,435 5.82% 665
Interest-bearing deposits held 95 4.21% 4
-------- ------ -------
Total interest-earning assets 198,241 7.66% 15,186
Cash and due from banks 10,882
Bank premises and equip-
ment, net 2,334
Other assets 5,619
--------
Total assets $217,076
========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing demand de-
posits $ 31,313 2.70% 845
Savings deposits 75,839 3.20% 2,428
Time deposits 46,363 3.94% 1,829
-------- ------ -------
Total interest-bearing depos-
its 153,515 3.32% 5,102
Borrowed funds 500 5.40% 27
Repurchase agreements 0 0.00 0
-------- ------ -------
Total interest-bearing liabili-
ties 154,015 3.33% 5,129
-------
Noninterest-bearing deposits 46,722
Other liabilities 1,557
Shareholders' equity 14,782
--------
Total liabilities and
shareholders' equity $217,076
========
NET INTEREST INCOME AND
NET YIELD ON INTEREST EARNING
ASSETS
Net interest income $10,057
=======
Interest rate spread 4.33%
Net yield on average interest-
earning assets 5.07%
Average interest-earning as-
sets to average interest-
bearing liabilities 128.72%
- --------------------------------------------------------------------------------
(1) Yields on securities have been computed based upon the historical cost of
such securities. Nonaccruing loans are included in average balances.
(2) Yields on non-taxable securities are presented on a tax-equivalent basis
using a 34% tax rate. Interest income and net interest income reported in
the Company's consolidated statements of income were $17,458 and $11,542
for 1997, $16,061 and $10,656 for 1996, and $15,125 and $9,996 for 1995.
================================================================================
27
<PAGE>
TABLE 3. RATE/VOLUME ANALYSIS OF TAX EQUIVALENT 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 presented on a
taxable-equivalent basis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------------- -------------------------------------
1997 VS. 1996 1996 VS. 1995
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
---------------------------------- -------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
<S> <C> <C> <C> <C> <C> <C>
Loans $1,124 $ (91) $1,033 $ 916 $ (490) $ 426
Taxable securities 154 219 373 (339) 208 (131)
Non-taxable securities 264 (14) 250 401 479 880
Federal funds sold (259) 9 (250) (9) (34) (43)
Interest-bearing deposits 86 (10) 76 66 37 103
----- --- ----- ----- --- -----
Total interest income 1,369 113 1,482 1,035 200 1,235
Deposits
Interest-bearing demand deposits (50) (31) (81) (16) (185) (201)
Savings deposits (174) (77) (251) (98) (243) (341)
Time deposits 241 (12) 229 361 278 639
------ ------ ------ ------- ------ ------
Total interest-bearing deposits 17 (120) (103) 247 (150) 97
Borrowings 632 (18) 614 210 (31) 179
------ ------ ------ ------- ------ ------
Total interest-bearing liabilities 649 (138) 511 457 (181) 276
------ ------ ------ ------- ------ ------
Net interest income $ 720 $ 251 $ 971 $ 578 $ 381 $ 959
====== ====== ====== ======= ====== ======
</TABLE>
On a tax equivalent basis, net interest income for 1997 increased $971 or 9%
over 1996. The increase was primarily attributable to an increase in average
interest-earning assets, an increase in the net interest spread, partially
offset by an increase in average interest-bearing liabilities.
Average interest-earning assets increased by $14,376 or 7%, comprised
principally of growth in the loan and non-taxable securities portfolios. Average
loans increased $11,977 or 12%, comprised primarily of an increase in the
commercial real estate loan portfolio. The $3,172 or 25% increase in non-taxable
securities resulted from continuing management of the investment portfolio's
after-tax yield.
The interest rate spread increased 7 basis points or approximately 2%, from
4.44% in 1996 to 4.51% in 1997. The increase is a result of a 16 basis point
increase in the average rate earned on interest-earning assets versus a 9 basis
point increase in the cost of interest-bearing liabilities. The increase in the
average rate earned on assets is primarily attributable to a 25 basis point
increase in yield on taxable securities partially offset by a decrease in the
tax equivalent yield on non-taxable securities and a reduction in the average
rate on loans. The average rate earned on non-taxable securities decreased from
8.31% for 1996 to 8.22% for 1997. This decrease is primarily attributable to the
Company decreasing the weighted average maturity of the non-taxable securities
portfolio. The increase in the yield of the taxable securities portfolio is due
primarily to an increase in the yield and average balances of mortgage-backed
securities. The yield and average balances on mortgage-backed securities were
6.36% and $59,147, and 6.09% and $42,653 for 1997 and 1996, respectively.
Interest-bearing liabilities increased $10,413 or 6%, comprised of an increase
in time deposits and borrowings, partially offset by a decrease in
interest-bearing demand and savings deposits. Time deposits and borrowings
(comprised of repurchase agreements and the interim capital assistance note
payable) increased 10% and 307%, respectively. The increase in borrowings was
attributable to the Company accessing a new funding source, repurchase
agreements, in 1996, and 1997 being the first full year in which the Company
utilized repurchase agreements as a source of funding.
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 increased $685 from $510 for 1996
to $1,195 for 1997. The increase in the provision for loan losses is
attributable to the large level of potential problem loans and the growth of the
loan portfolio, specifically commercial real estate loans. Additionally, during
1997, $2,265 of problem loans were sold, requiring a subsequent $405 charge off
28
<PAGE>
================================================================================
TABLE 3. (CONT).
associated with the sale of these loans. Management believes that the allowance
for loan losses is adequate to absorb potential losses inherent in the loan
portfolio. As losses on loans are not statistically predictable and are
dependent upon economic conditions in the Bank's marketplace, future provisions
for loan losses are uncertain. Therefore, future provisions for loan losses may
decrease from the levels deemed appropriate for 1997. There can be no assurance,
however, that future provisions for loan losses will be lower, or that
additional large provisions will not be necessary. See the Asset Quality section
for additional information related to the Company's allowance for loan losses.
Noninterest Income - Noninterest income increased $714 or 27% to $3,334 for 1997
from $2,620 for 1996. The primary components of noninterest income is other
income, service charges on deposit and checking accounts and gains on sale of
securities. Other income increased $307 or 125% and primarily represented
surcharges on nondepositors utilizing the Bank's ATM services. Service charges
on deposit accounts increased $274 or 12% and is primarily attributable to the
increased assessment of fees on deposit accounts. Additionally, gain on the sale
of securities increased $133 or 122% due in part to the lower interest rate
environment and management's investment strategy.
Noninterest Expense - Noninterest expense for 1997 was $11,645, an increase of
$709 or 6% over 1996. Salaries and employee benefits increased $431 or 7%. The
increase in salaries and employee benefits is primarily attributable to normal
growth, the staffing of a new branch and a full year of salaries associated with
management's continued efforts in staffing the lending operations and building
infrastructure to support increased participation in the secondary mortgage
market that was implemented in 1996. Occupancy, data processing and other
expenses increased 7%, 6% and 4% respectively and represents increased costs
associated with staffing and normal growth. Furniture and equipment increased
$63 or 11% and also represents increased cost associated in the new branch and
additional equipment expenses related to a new data processing servicer.
Provision for Income Taxes - The provision for income taxes for 1997 decreased
$57, or 11%, from 1996, due primarily to an 18% decrease in the effective tax
rate. The effective tax rate was 23% for 1997, compared to 28% for 1996. The
decrease in the effective tax rate was primarily attributable to the increase in
tax-exempt 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.
29
<PAGE>
================================================================================
TABLE 4. RATE SENSITIVITY ANALYSIS
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3 MONTHS 4 TO 12 TOTAL WITHIN 1 TO 5 OVER
OR LESS MONTHS 12 MONTHS YEARS 5 YEARS TOTAL
<S> <C> <C> <C> <C> <C> <C>
EARNINGS ASSETS
Loans(1)(2) $ 22,647 $ 11,307 $ 33,954 $ 58,126 $ 25,714 $117,794
Investment securities(3) 9,582 24,788 34,370 52,723 14,013 101,106
Federal funds sold 11,500 -- 11,500 -- 11,500
Interest-bearing deposits in other
banks -- 1,000 1,000 2,000 -- 3,000
------- -------- ------- -------- -------- ---------
Total earning assets $ 43,729 $ 37,095 $ 80,824 $112,849 $ 39,727 $233,400
======== ======== ======== ======== ========= ========
Percent of total earning assets 18.74% 15.89% 34.63% 48.35% 17.02% 100.00%
Interest-bearing liabilities
Time certificates of deposit of $100M
or more(4) $ 4,612 $ 10,972 $ 15,584 $ 1,223 -- $ 16,807
Savings, NOW, money market deposits
and other time deposits 17,178 19,840 37,018 72,123 -- 109,141
Time certificates of deposit less
than $ 100M 10,006 15,273 25,279 2,976 157 28,412
Borrowed funds 20,496 -- 20,496 -- -- 20,496
-------- -------- -------- --------- --------- ---------
Total interest-bearing liabilities $ 52,292 $ 46,085 $ 98,377 $ 76,322 $ 157 $174,856
======== ======== ======== ========= ========= =========
Interest-sensitivity gap (8,563) (8,990) (17,553) 36,527 39,570 58,544
Cumulative interest-sensitivity gap (8,563) (17,553) (17,553) 18,974 58,544 58,544
Ratio of earning assets to interest-
bearing liabilities (gap ratio) 83.62% 80.49% 82.16% 147.86% 25303.8% 133.48%
Cumulative ratio of earning assets
to interest-bearing liabilities
(cumulative gap ratio) 83.62% 82.16% 82.16% 110.86% 133.48% 133.48%
Cumulative interest-sensitivity gap
as a percent of total assets (3.42)% (7.00)% (7.00)% 7.57% 23.35% 23.35%
======== ======== ======== ========= ========== =========
</TABLE>
- --------------------------------------------------------------------------------
(1) Non-accrual loans are excluded from loan totals.
(2) Loans have been included based on their contractual maturities.
(3) Mortgage-backed securities have been included based on their estimated
remaining maturities, utilizing the most recent quarter paydown experience
and prorated outward. Fourth quarter 1997 paydown experience was $3,590.
(4) Excludes a noninterest-bearing time deposit of $914.
================================================================================
Table 4 presents an analysis of the Company's interest-sensitivity gap position
at December 31, 1997. Asset prepayments and liability decay rates are estimated
based on the Company's experience. Due to the relatively stable nature of the
Company's interest-bearing nonmaturity deposits, these deposits were allocated
as follows: 100% of money market accounts to the 3 months or less category, and
6% per quarter for all other nonmaturity deposits. Approximately 76% of
nonmaturity deposits (other than money market deposits) are allocated in the
over 12 months category. Time deposits are allocated based on their contractual
maturities. As summarized in Table 4, the Company's one-year cumulative gap
ratio is 82%. This position reflects a liability-sensitive position where more
liabilities than assets reprice during the one-year period.
Generally a liability-sensitive position would result in an adverse impact on
net interest income during a period of rising interest rates, and a positive
impact on net interest income in a period of declining interest rates.
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.
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 change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating Table 4.
30
<PAGE>
TABLE 5. FINANCIAL CONDITION
Table 5 sets forth information concerning the composition of the Company's
assets, liabilities and shareholders' equity at December 31, 1997, 1996 and
1995.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(dollars in thousands):
- ----------------------------------------------------------------------------------------------------------------------
1997 PERCENT 1996 PERCENT 1995 PERCENT
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net $116,476 46.46% $108,611 46.06% $ 92,817 41.70%
Investment securities 101,106 40.33% 94,824 40.22% 87,198 39.18%
Federal funds sold 11,500 4.58% 8,300 3.52% 20,800 9.35%
Interest-bearing deposits in
other banks and commercial
paper 3,000 1.20% 3,000 1.27% 3,072 1.38%
-------- ------ -------- ------ --------- ------
Total earnings assets 232,082 92.57% 214,735 91.07% 203,887 91.61%
Cash and due from banks 11,842 4.72% 13,692 5.81% 11,014 4.95%
Bank premises and equipment 2,672 1.07% 2,452 1.04% 2,358 1.06%
Other assets 4,106 1.64% 4,909 2.08% 5,302 2.38%
-------- ------ -------- ------ --------- ------
Total assets $250,702 100.00% $235,788 100.00% $ 222,561 100.00%
======== ====== ======== ====== ========= ======
LIABILITIES AND SHARE-
HOLDERS' EQUITY
Demand deposits $ 52,922 21.11% $ 50,840 21.56% $ 46,341 20.82%
Savings, NOW and MMDA 92,462 36.89% 109,020 46.24% 117,273 52.69%
Time deposits $100,000 or more 16,807 6.70% 14,246 6.04% 12,295 5.52%
Other time deposits 46,005 18.35% 31,978 13.56% 27,790 12.49%
-------- ------ -------- ------ --------- ------
Total deposits 208,196 83.05% 206,084 87.40% 203,699 91.52%
Borrowed funds 20,496 8.17% 11,466 4.86% 1,000 0.45%
Accrued expenses and other li-
abilities 1,833 .73% 920 0.40% 1,307 0.59%
-------- ------ -------- ------ --------- ------
Total liabilities 230,525 91.95% 218,470 92.66% 206,006 92.56%
Shareholders' equity 20,177 8.05% 17,318 7.34% 16,555 7.44%
Total liabilities and
shareholders' equity $250,702 100.00% $235,788 100.00% $ 222,561 100.00%
======== ====== ======== ====== ========= ======
---------------------------------------------------------------------------------------------------------------------
</TABLE>
Overview - Total assets increased $14,914 from December 31, 1996 to December 31,
1997, mainly due to an increase in loans and securities, increasing $7,865 and
$6,282 respectively and totaling $14,147 or 95% of the increase in assets. The
increase in assets was primarily funded by increased borrowings of $9,030,
shareholders' equity of $2,859 and deposits of $2,112.
Loans - Net loans outstanding at December 31, 1997 were $116,476, an increase of
$7,865, or 7%, from year end 1996. The composition of the loan portfolio is
summarized in Table 6. The increase in loans consisted primarily of an increase
in commercial real estate loans of $14,057 offset primarily by a decrease of
$5,087 in commercial loans.
================================================================================
TABLE 6. LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
1997 PERCENT 1996 PERCENT 1995 PERCENT 1994 PERCENT 1993 PERCENT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 23,145 19.51% $ 28,232 25.61% $19,128 20.31% $20,166 21.30% $14,393 20.86%
Residential 1 to
4 family 52,077 43.89% 52,876 47.96% 49,123 52.16% 48,710 51.46% 29,316 42.48%
Commercial real
estate 38,499 32.45% 24,442 22.17% 22,225 23.60% 22,380 23.64% 22,092 32.01%
Installment loans 4,925 4.15% 4,692 4.26% 3,700 3.93% 3,409 3.60% 3,210 4.65%
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total $118,646 100.00% $110,242 100.00% $94,176 100.00% $94,665 100.00% $69,011 100.00%
======== ====== ======== ====== ======= ====== ======= ====== ======= ======
</TABLE>
31
<PAGE>
================================================================================
TABLE 7. MATURITY OF LOAN PORTFOLIO FIXED RATE AND VARIABLE RATE (1)
Securities - The carrying value of the Company's securities portfolio increased
$6,282 or 7% from $94,824 at December 31, 1996, to $101,106 at December 31,
1997. The increase in the investment portfolio was principally in
mortgage-backed securities increasing $5,414 and representing 86% of the growth.
Other securities increased $868 due largely to an investment of $744 in Federal
Home Loan Bank of Atlanta. The yield on taxable securities increased from 6.06%
for 1996 to 6.31% for 1997. The tax equivalent yield for non-taxable securities
decreased from 8.31% for 1996 to 8.22% for 1997. The mortgage-backed securities
portfolio had a weighted average remaining maturity of 2.29 years at December
31, 1997, compared to 2.73 years at December 31, 1996 (utilizing Bloomberg's
street consensus). The collateral underlying all the mortgage-backed securities
is guaranteed by one of the "quasi-governmental" agencies, and therefore
maintain a risk weight of 20% 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 December 31, 1997,
based on stress tests performed by management, a 300 basis point increase and
decrease in interest rates would result in an approximate decrease of 8% and
less than 1% increase, respectively, in the present carrying value of these
securities. There are no issuers of securities, whose securities, held by the
Company, have a book value in excess of 10% of the Company's shareholders'
equity. The Company's securities portfolio is also presented in Note 2 to the
consolidated financial statements.
AT DECEMBER 31, 1997
(dollars in thousands):
- --------------------------------------------------------------------------------
After One Year
One Year Through After
or Less Five Years Five Years Total
Fixed rate $ 16,771 $ 56,624 $ 25,635 $ 99,030
Variable rate 17,184 1,501 79 18,764
------ ----- ------ ------
Total $ 33,955 $ 58,125 $ 25,714 $ 117,794
================================================================================
TABLE 8. INVESTMENT PORTFOLIO MATURITY SCHEDULES(1)
Table 8 summarizes the maturity and average yield of the Company's investment
portfolio.
AT DECEMBER 31, 1997
(dollars in thousands):
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WITHIN AFTER ONE BUT AFTER FIVE BUT
ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS
- ----------------------------------------------------------------------------------------------------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
<S> <C> <C> <C> <C> <C> <C>
U.S.Treasury $ 17,009 6.19% $2,005 5.74% - -
U.S.Government agencies 3,001 6.02% 8,498 6.02% - -
State and political subdivisions - - - - - -
Other - - 1,096 6.77% - -
Mortgage-backed securities - - - - - -
------- ------- -------- ------
Total $ 20,010 6.16% $11,599 6.04% - -
========= ======= ======== ======
</TABLE>
<TABLE>
<CAPTION>
AFTER MORTGAGE
TEN YEARS BACKED TOTAL
- ----------------------------------------------------------------------------------------------------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
<S> <C> <C> <C> <C> <C> <C>
U.S.Treasury - - - - $19,014 6.14%
U.S.Government agencies - - - - 11,499 6.02%
State and political subdivisions 12,726 8.48% - - 12,726 8.48%
Other - - - 1,096 6.40%
Mortgage-backed securities - - 56,771 6.93% 56,771 6.93%
------- ------- -------- ------ ------- -------
Total $ 12,726 8.48% $56,771 6.93% $101,106 6.50%
========= ======= ======== ====== ======= ========
</TABLE>
(1) Yeilds on non-taxable securities have been computed on a tax equivalent
basis using a 34% tax rate.
================================================================================
32
<PAGE>
TABLE 9. LOAN LOSS AND RECOVERY EXPERIENCE
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.
YEAR ENDED DECEMBER 31,
(dollars in thousands):
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Total outstanding loans at year end $ 118,646 $ 110,242 $ 94,176 $ 94,665 $ 69,011
Average amount of loans outstanding 113,511 100,950 90,630 72,886 68,370
Allowance for loan losses at beginning of
year 1,266 1,177 1,751 2,168 1,500
Loans charged off:
Commercial 451 637 766 1,040 759
Real estate mortgage 256 52 40 28 25
Installment loans to individuals 182 69 14 17 76
--------- --------- -------- --------- --------
Total charge-offs 889 758 820 1,085 860
Recoveries of loans previously charged-off:
Commercial 81 286 202 172 597
Real estate mortgage 0 25 0 2 0
Installment loans to individuals 49 26 19 14 31
--------- --------- -------- --------- --------
Total recoveries 130 337 221 188 628
Net charge-offs 759 421 599 897 232
Additions to allowance charged to opera-
tions 1,195 510 25 480 900
========= ========= ======== ========= ========
Allowance for loan losses at end of year $ 1,702 $ 1,266 $ 1,177 $ 1,751 $ 2,168
Ratios of net charge-offs during year to av-
erage outstanding loans during year 0.67% 0.42% 0.66% 1.23% 0.34%
Ratio of allowance for possible loan losses
at year end to total loans 1.43% 1.15% 1.25% 1.85% 3.14%
</TABLE>
================================================================================
TABLE 10. ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
(dollars in thousands):
- --------------------------------------------------------------------------------------------------------------------------------
1997 PERCENT 1996 PERCENT 1995 PERCENT 1994 PERCENT 1993 PERCENT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $1,378 80.96% $1,075 84.91% $ 875 72.96% $1,403 80.13% $1,466 67.62%
Real estate mort-
gage 117 6.88% 89 7.03% 71 6.36% 125 7.14% 124 5.72%
Consumer 182 10.69% 92 7.27% 0 0% 63 3.60% 104 4.80%
Unallocated 25 1.47% 10 0.79% 231 20.68% 160 9.14% 474 21.86%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $1,702 100.00% $1,266 100.00% $1,177 100.00% $1,751 100.00% $2,168 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The allowance for loan losses was $1,702 at December 31, 1997, as compared to
$1,266 at December 31, 1996. The ratio of the allowance for loan losses to total
loans at December 31, 1997 and 1996 was 1.43% and 1.15%, respectively. At
December 31, 1997, non-performing assets to total assets was .85% compared to
1.94% at December 31, 1996. Net charge-offs increased $338 to $759 for 1997 from
$421 for 1996. The provision for loan losses increased to $1,195 for 1997 from
$510 for 1996, reflecting the growth in loans and the large level of loans
($7,931 or 6.68% of total loans) with potential credit problems. Additionally,
the unallocated portion of the allowance increased to $25 from $10 at year-end
1996.
The level of the allowance for loan losses is determined by management on the
basis of various assumptions and judgements. These include levels and trends of
past due and non-accrual loans, trends in volume and changes in terms, effects
of policy changes, experience and depth of management, anticipated economic
conditions in the Washington, DC metropolitan area, concentrations of credit,
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,
adjusted to reflect current conditions and trends.
Although management believes that it uses the best information available to make
such determinations that the allowance for loan losses is adequate at December
31,1997, 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
33
<PAGE>
TABLE 10. (CONT.)
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. In light of the foregoing, there can
be no assurance that management's determinations as to the future adequacy of
the allowance for loan losses will prove accurate, or that additional provisions
or charge-offs will not be required.
================================================================================
TABLE 11. NON-PERFORMING ASSETS
Table 11 sets forth information concerning non-performing assets.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans(1) ................ $ 852 $ 2,006 $ 1,086 $ 1,809 $ 1,788
Loans past due 90 days or more and
still accruing ..................... 753 1,267 569 605 866
Foreclosed properties(2) ............ 522 1,310 950 1,270 1,370
------- ------- ------- ------- -------
Total ............................... $ 2,127 $ 4,583 $ 2,605 $ 3,684 $ 4,024
======= ======= ======= ======= =======
Non-performing assets to gross loans
and foreclosed properties at period
end ................................ 1.78% 4.11% 2.74% 3.84% 5.72%
Non-performing assets to total assets
at period end ...................... .85% 1.94% 1.17% 1.60% 2.10%
</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 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. The gross interest income that would have been recorded in 1997
for non-accrual loans at December 31, 1997 had the loans been current in
accordance with their original terms was $223,062. See Note 1 to the
consolidated financial statements.
(2) Foreclosed properties include properties that have been substantively
repossessed (for years prior to 1995) or acquired in complete or partial
satisfaction of debt. The 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.
(3) The Bank charges loans against the allowance for loan losses when it
determines that principal and interest or portions thereof become
uncollectible. This is determined through an analysis of each individual
credit, including the financial condition and repayment capacity of the
borrower, and of the sufficiency of the collateral, if any.
================================================================================
Non-performing assets at year-end 1997 were $2,127, a decrease of $2,456 or 54%
from year-end 1996. The decrease was primarily attributed to management
disposing of nonperforming assets through the sale of $2,265 in problem loans
and subsequently charging off $405 in loan losses associated with sale of these
loans. Non-accrual loans totaled $852 for year end 1997 and consisted of $285 in
real estate loans, $547 in commercial loans and $20 in installment loans. This
represented a decrease of $1,154 or 58% from year-end 1996. As of December 31,
1997, loans past due 90 days or more and still accruing totaled $753 and
consisted of $545 in real estate loans, $165 in commercial loans, and $43 in
installment loans to individuals. This compares to $749 in real estate loans,
$445 in commercial loans, and $73 in installment loans at December 31, 1996.
This represented an aggregate decrease of $514 from year-end 1996. Loans past
due 90 days or more and still accruing consisted primarily of two real estate
loans of $545 that have ballooned and were not renewed as of year-end 1997 due
to an absence of current financial information. Foreclosed properties decreased
$788 in 1997 to $522, consisting of six properties with two having a net
carrying value of $144 and $138 respectively, while the other properties have a
net carrying value below $100.
At December 31, 1997, there were $7,931 of loans not reflected in the table
above, where known information about
34
<PAGE>
TABLE 11. (CONT.)
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
sixteen loans, totaling $4,328, fully collateralized by real estate, four of
which represent $2,870 of the total. The remaining $3,603 consists of fourteen
commercial loans, none in excess of $1,235, secured primarily by accounts
receivable and various business equipment.
Deposits, Other Sources of Funds and Liquidity - Deposits are generally the most
important source of the Company's funds for lending, investing, and other
business purposes. Deposit inflows and outflows are significantly influenced by
general interest rates, market conditions, and competitive factors.
Total deposits increased by $2,112 or 1%, from December 31, 1996 to December 31,
1997.
Other sources of funds include borrowings, repayment and maturities of loans and
securities, proceeds from the sale of securities, funds from operations, and
cash and cash equivalents. During 1997, the Company began raising funds by
selling securities under agreements to repurchase. These fixed coupon over-night
agreements are accounted for as financing transactions, and the obligations to
repurchase the securities are reflected as a liability in the consolidated
balance sheet. At December 31, 1997, $19,496 of repurchase agreements with an
average rate of 4.26% were outstanding.
================================================================================
TABLE 12. TIME DEPOSIT MATURITY SCHEDULE
Table 12 presents certain information related to the company's time deposits.
AT DECEMBER 31, 1997
(dollars in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
3 MONTHS OR LESS 4 TO 6 MONTHS 7 TO 12 MONTHS OVER 12 MONTHS TOTAL
<S> <C> <C> <C> <C> <C>
Time certificates deposit of
$100M or more $ 4,612 $ 3,586 $ 7,386 $1,223 $16,807
Time certificates of deposit less
than $100M 10,006 8,177 7,096 3,133 28,412
------- ------- ------- ------ -------
Total(1) $14,618 $11,763 $14,482 $4,356 $45,219
======= ======= ======= ====== =======
</TABLE>
================================================================================
(1) Excludes $10,654 in money market demand deposits, $5,919 in individual
retirement account deposits, $914 in open time deposit, and $106 in
Christmas Club deposits.
================================================================================
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 7 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, 1997 and 1996 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 $2,859, or 17%
from $17,318 at December 31, 1996 to $20,177 at December 31, 1997. The increase
is attributable to retained earnings of $1,178, an increase in capital stock of
$31, an increase of capital surplus of $722, preferred stock of $500 and an
increase of $428 in the unrealized gain on available for sale securities, net of
tax. The increase in the capital stock and surplus accounts, and the issuance of
preferred stock occurred when the company sold 31,200 shares of common stock and
20,000 shares of its Series A Non-Voting Preferred Stock, in a private placement
transaction, to the Federal National Mortgage Association (Fannie Mae). See Note
8 to the consolidated financials for additional information regarding this
transaction. At December 31, 1997, approximately $2,108 of the Bank's retained
earnings was available to pay dividends to the Company without prior regulatory
approval.
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.
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net income per share $ 2.44 $ 2.06 $ 2.56 $ 1.99 $ 3.12
Dividends paid per share $ .60 $ .60 $ .60 $ .60 $ .50
Ratio of dividends to net income 24.59% 29.13% 23.44% 30.15% 16.03%
</TABLE>
35
<PAGE>
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.
The Company and the Bank are subject to certain regulatory capital requirements.
Management believes, as of December 31, 1997, that the Company and the Bank meet
all the capital adequacy requirements to which they are subject. As of December
31, 1997, the most recent notification from the Office of the Comptroller of
Currency categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. Refer to Note 9 to the consolidated financial
statements for additional information related to regulatory capital
requirements.
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.
Year 2000 Issue - Many computer programs now in use have not been designed to
properly recognize years after 1999. If not corrected, these programs could fail
or create erroneous results. This year 2000 issue affects the entire banking
industry because of its reliance on computers and other equipment that use
computer chips, and may have significant effects on the banking customers and
regulators. In recognition of the potential adverse effects of the year 2000
issue, management of the Company created a task force and established a plan to
prevent or mitigate adverse effect of the year 2000 issue on the Company and its
customers. The Company's primary supplier of data processing services also has
adopted a year 2000 plan and timetable. Management believes that the cost of
resolving year 2000 issues relating to the Company's computer programs and those
used by its suppliers of significant data processing services will not be
material to the Company's business, operations, liquidity, capital resources, or
financial condition, based on information developed to date and communication
from data processing suppliers. The Company's year 2000 plan requires an
assessment of year 2000 effects on its commercial lending and other customers.
The effects on individual, corporate and government customers of the Company and
on governmental authorities that regulate the Company and its subsidiaries, and
any resulting consequences to the Company, cannot yet be determined. The Company
has committed management resources deemed necessary to identify and timely
resolve all significant year 2000 issues.
36
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27
"FINANCIAL DATA SCHEDULE"
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-KSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0001013274
<NAME> IBW Financial Corporation
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 11,842
<INT-BEARING-DEPOSITS> 3,000
<FED-FUNDS-SOLD> 11,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 101,106
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 116,476
<ALLOWANCE> 1,702
<TOTAL-ASSETS> 250,702
<DEPOSITS> 208,196
<SHORT-TERM> 19,496
<LIABILITIES-OTHER> 1,833
<LONG-TERM> 1,000
668
0
<COMMON> 500
<OTHER-SE> 19,009
<TOTAL-LIABILITIES-AND-EQUITY> 250,702
<INTEREST-LOAN> 10,434
<INTEREST-INVEST> 6,652
<INTEREST-OTHER> 372
<INTEREST-TOTAL> 17,458
<INTEREST-DEPOSIT> 5,096
<INTEREST-EXPENSE> 5,916
<INTEREST-INCOME-NET> 11,542
<LOAN-LOSSES> 1,195
<SECURITIES-GAINS> 242
<EXPENSE-OTHER> 11,645
<INCOME-PRETAX> 2,036
<INCOME-PRE-EXTRAORDINARY> 1,576
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,576
<EPS-PRIMARY> 2.44
<EPS-DILUTED> 2.44
<YIELD-ACTUAL> 5.30
<LOANS-NON> 852
<LOANS-PAST> 753
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 7,931
<ALLOWANCE-OPEN> 1,266
<CHARGE-OFFS> 889
<RECOVERIES> 130
<ALLOWANCE-CLOSE> 1,702
<ALLOWANCE-DOMESTIC> 1,702
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 25
</TABLE>
