<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
X Quarterly Report under Section 13 or 15(d) of the Securities
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Exchange Act of 1934 for the Quarterly Period ended September 30, 1999
_____Transition report under Section 13 or 15(d) of the Securities Exchange
Act For the transition period from to .
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Commission file number 0-28360.
IBW Financial Corporation
(Name of Small Business Issuer in its Charter)
District of Columbia 52-1943477
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
4812 Georgia Avenue, NW, Washington, DC 20011
(Address of Principal Executive Offices) (Zip Code)
(202)722-2000
(Issuer's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address, and Former Fiscal Year, If Changed Since Last
Report)
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 reports), and (2) has
been subject to such filings requirements for the past 90 days. X Yes No
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date: As of October 31, there were
668,360 shares of the common stock $1.00 par value of IBW Financial Corporation
outstanding.
Transitional Small Business Disclosure Format (check one) Yes X No
--- ---
<PAGE>
Part I Financial Information
---------------------
Item 1. Financial Statements
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,1999 AND DECEMBER 31,1998
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
--------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 14,898 $ 12,565
Federal funds sold 7,700 13,150
--------------------------------------------------------
Total cash and cash equivalents 22,598 25,715
Interest-bearing deposits in banks 469 405
Investment securities available-for-sale, at
fair value 145,846 131,384
Loans receivable, net of allowance
for loan losses of $5,320 and $4,700 97,932 104,469
Real estate owned, net 397 525
Bank premises and equipment, net 2,378 2,542
Other assets 3,481 3,687
Deferred income taxes 2,027 1,251
--------------------------------------------------------
TOTAL ASSETS 275,128 269,978
========================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Demand deposits $ 58,408 $ 58,870
Time and savings deposits 158,248 165,257
--------------------------------------------------------
Total deposits $ 216,656 $ 224,127
Repurchase agreements 38,817 25,611
Other liabilities 1,355 1,323
Note payable 1,000 1,000
--------------------------------------------------------
Total liabilities 257,828 252,061
--------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock - $1 par value; 1,000,000 authorized
(500,000 voting and 500,000 nonvoting);
20,000 series A nonvoting issued and outstanding,
stated at liquidation value 500 500
Common stock - $1 par value; 1,000,000 authorized;
668,360 shares issued and outstanding 668 668
Capital surplus 5,051 5,051
Retained earnings 12,300 11,463
Accumulated other comprehensive (loss) income, net of tax (1,219) 235
--------------------------------------------------------
Total shareholders' equity 17,300 17,917
========================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 275,128 $ 269,978
========================================================
</TABLE>
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<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE LOSS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended Sept 30
---------------------------
1999 1998
---------------------------
(dollars in thousands)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 6,826 $ 7,916
U.S. treasury securities 77 395
Obligations of U.S. government agencies and corporations 5,335 3,805
Obligations of states and political subdivisions 465 448
Bank balances and other securities 598 846
---------------------------
Total interest income 13,301 13,410
---------------------------
INTEREST EXPENSE:
Time certificates over $100,000 677 722
Other savings and time deposits 2,818 3,328
Securities sold under repurchase agreements 958 774
Note payable 35 40
---------------------------
Total interest expense 4,488 4,864
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NET INTEREST INCOME 8,813 8,546
PROVISION FOR LOAN LOSSES 775 2,419
---------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 8,038 6,127
---------------------------
NON INTEREST INCOME
Service charges on deposit and checking accounts 2,632 2,476
Gain on sale of securities (35) 201
Other operating income 39 20
---------------------------
Total noninterest income 2,636 2,697
---------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 5,033 5,134
Occupancy 573 571
Furniture and equipment 574 572
Data processing 508 494
Other 2,873 2,551
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Total noninterest expense 9,561 9,322
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INCOME (loss) BEFORE INCOME TAXES 1,113 (498)
INCOME TAXES (benefits) 251 (203)
---------------------------
NET INCOME (loss) $ 862 $ (295)
===========================
OTHER COMPREHENSIVE LOSS NET OF TAX
Unrealized securities losses (1,489) (556)
Reclassification adjustment (35) 201
---------------------------
Other Comprehensive Loss (1,454) (355)
---------------------------
COMPREHENSIVE LOSS ($592) ($650)
===========================
BASIC AND DILUTED EARNINGS (loss) per COMMON SHARE $1.29 ($0.44)
---------------------------
</TABLE>
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<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE LOSS
QUARTERS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Quarters Ended Sept 30
--------------------------
1999 1998
--------------------------
(dollars in thousands)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 2,378 $ 2,581
U.S. treasury securities 18 28
Obligations of U.S. government agencies and corporations 1,899 1,314
Obligations of states and political subdivisions 220 140
Bank balances and other securities 132 286
--------------------------
Total interest income 4,647 4,349
--------------------------
INTEREST EXPENSE:
Time certificates over $100,000 184 259
Other savings and time deposits 905 1,133
Securities sold under repurchase agreements 377 302
Note payable 12 13
--------------------------
Total interest expense 1,478 1,707
--------------------------
NET INTEREST INCOME 3,169 2,642
PROVISION FOR LOAN LOSSES 175 575
--------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,994 2,067
--------------------------
NONINTEREST INCOME
Service charges on deposit and checking accounts 875 828
Other operating income 3 17
Gain on sale of available for sale securities (35) 80
--------------------------
Total noninterest income 843 925
--------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,755 1,863
Occupancy 166 188
Furniture and equipment 190 186
Data processing 184 164
Other 894 881
--------------------------
Total noninterest expense 3,189 3,282
--------------------------
INCOME BEFORE INCOME TAXES 648 (290)
INCOME TAXES (Benefits) Expense 159 (47)
--------------------------
NET INCOME $ 489 $ (243)
==========================
OTHER COMPREHENSIVE LOSS, NET OF TAX
Unrealized securities losses (506) (174)
Reclassification adjustment (3) 80
--------------------------
Other Comprehensive Loss (509) (94)
--------------------------
COMPREHENSIVE LOSS ($20) ($337)
==========================
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE $0.73 ($0.36)
--------------------------
</TABLE>
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<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Sept 30
---------------------------------------------------
1999 1998
---------------------------------------------------
(dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $862 ($295)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 306 309
Amortization (accretion) of premium/discounts 949 (511)
Amortization of loan fees and discounts (150) -
Deferred income tax benefits (404) -
Gain on sale of loans (40) (29)
Loss on sale of other real estate owned 6 -
Loss (Gain) on sale of securities available-for-sale 35 (201)
Interest on capitalized securities (402)
Provision for loan losses 775 2,419
Provision for loan losses on REO 8 (50)
Decrease (Increase) in other assets 206 199
Increase (decrease) in accrued expenses and other liabilities 32 924
---------------------------------------------------
Net cash provided by operating activities 2,585 2,363
---------------------------------------------------
INVESTING ACTIVITIES
Net Loan Origination and principal payments 1,534 -
Net (increase) decrease in other short-term investments (64) 3,000
Additions to bank premises and equipment (142) (281)
Proceeds from sales of loans 4,308 4,164
Net proceeds on sale of other real estate owned 154 204
Proceeds from sale and maturities of securities available-for-sale 39,507 27,247
Purchase of securities available-for-sale (79,126) (69,877)
Principal collected on securities available-for-sale 22,417 23,657
---------------------------------------------------
Net cash used in investing activities (11,412) (11,886)
---------------------------------------------------
FINANCING ACTIVITIES
Cash Dividends (25) (213)
Net increase in deposits (7,471) 11,660
Net increase in securities sold under repurchase agreements 13,206 9,120
---------------------------------------------------
Net cash provided by financing activities 5,710 20,567
---------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,117) 8,680
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,715 23,342
---------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,598 $ 32,022
===================================================
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $4,484 $4,861
Taxes $125 $200
</TABLE>
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<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note A Basis of Presentation
The accompanying unaudited consolidated financial statements of IBW Financial
Corporation and Subsidiary (the Company) have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB. Accordingly, they do not include all the
information and footnotes required for complete financial statements. In the
opinion of management, all adjustments and reclassifications consistently, of a
normal and recurring nature, considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999. The unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements and
footnotes for the year-ended December 31, 1998.
Note B New Accounting Pronouncements
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income.
This statement requires disclosure of the components of comprehensive income and
accumulated balance of other comprehensive income within consolidated total
shareholders' equity. The adoption of the provisions of SFAS No. 130, which are
only of a disclosure nature, did not affect the Company's financial position,
results of operations, or liquidity. Reclassification of financial statements
for earlier periods for comparative purposes is required.
Effective January 1,1998, the Company adopted the provisions SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". This
statement establishes the criteria for determining an operating segment and the
related financial information disclosure required. It also establishes standards
for disclosing related information regarding products and services, geographic
areas and major customers. The adoption of the provisions of SFAS No. 131, which
are only of a disclosure nature, did not affect the Company's financial
position, results of operations, or liquidity. The Company is a single
reportable segment.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post-retirement Benefits". It requires additional information
on changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain disclosures that are no
longer as useful. This statement is effective for fiscal years beginning after
December 15, 1997. The provisions of this standard did not have an effect on the
Company's reported results of operations or financial position.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise". This Statement further amends Statement 65 to
require that after the securitization of mortgage loans held for sale, an entity
engaged in mortgage banking activities classify the resulting mortgage-backed
securities or other retained interests based on its ability and intent to sell
or hold those investments. This Statement conforms the subsequent accounting for
securities retained after the securitization of mortgage loans by a mortgage
banking enterprise with the subsequent accounting for securities retained after
the securitization of other types of assets by a non-mortgage banking
enterprise. This Statement is effective for the first fiscal quarter beginning
after December 15, 1998. Adoption of this standard is not expected to have a
material effect on the Company's reported results of operations or financial
position.
Prospective Pronouncement
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
a company to recognize
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<PAGE>
all derivatives as either assets or liabilities in the statement of financial
position and to measure those instruments at fair value. This statement is
effective for fiscal years beginning after June 15, 2000. Management is in the
process of evaluating the potential impact of this standard on the Company's
financial position and results of operations.
Note C Formal Agreement with the Office of the Comptroller of the Currency
(OCC).
On August 25, 1998, the Company's subsidiary bank, "The Bank" Industrial Bank,
N.A., entered into a Formal Agreement with the OCC. The Agreement requires the
Bank to undertake certain actions within designated time frames from the date
the agreement was entered into, and to operate in compliance with the provisions
thereof during its term. The Agreement does not contain any capital directive or
other requirement that the Bank increase its capital, or maintain a minimum
level of capital in excess of generally applicable capital requirements. See
also the section referred to as "Formal Agreement and Year 2000 Issues" in the
latter part of Management's Discussion and Analysis.
Item 2. Management's Discussion and Analysis
As of and for the Nine Months Ended September 30, 1999 (dollars in thousands)
Forward looking statements. This discussion 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 statements by suppliers of data
processing equipment and services, government agencies and other third parties,
as to year 2000 readiness, 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 statement.
The Company does not undertake to update any forward looking statement to
reflect occurrences or events, which may not have been anticipated as of the
date of such statements.
Overview
Formal Agreement with the Office of the Comptroller of the Currency (OCC).
On August 25, 1998, the Bank, Industrial Bank, N.A., entered into a Formal
Agreement with OCC. The Agreement requires the Bank to undertake certain actions
within designated time frames from the date the agreement was entered into, and
to operate in compliance with the provisions thereof during its term. The
Agreement does not contain any capital directive or other requirement that the
Bank increase its capital, or maintain a minimum level of capital in excess of
generally applicable capital requirements. See also the section referred to as
"Formal Agreement and Year 2000 Issues" in the latter part of Management's
Discussion and Analysis.
Financial
IBW Financial Corporation's net income for the nine months ended September 30,
1999 totaled $862, an increase of $1,157 from ($295) for the nine months ended
September 1998. This increase is primarily attributed to a decrease in the
provision for loan losses of $1,644, offset by an increase in taxes of $454, a
decrease in net interest income of $267, an increase in noninterest expenses of
$239 and a decrease in noninterest income of $61. Return on average assets
(ROAA), and return on average shareholder's equity (ROAE) through the nine
months ended September 30, 1999 were .41% and (.15%) as compared to ROA of
6.58%and ROAE of (20.3%)for the nine months ended September 30, 1998.
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<PAGE>
Net Interest Income
Net interest income for the nine months ended September 30, 1999 increased $267,
or 3.1%, compared to the same period in 1998. The average balance of
interest-earning assets for the nine month period ended September 30, 1999
increased $16,027 or 7%, to $258,742 compared to $242,715 for the nine month
period ended September 30, 1998. The average yield on average interest-earning
assets decreased by 51 basis points to 7.00% for the nine month period ended
September 30, 1999 compared to 7.51% for the same period last year. The decrease
in the average yield on average interest-earning assets reflects the decline in
market rates and the reinvestment of funds from repaid loans into securities and
federal funds sold.
Net loans averaged $99,691 during the nine months ended September 30, 1999
compared to $14,951 of the nine months ended September 30, 1998, reflecting a
decrease of $1,300. As a result of the decrease in the volume of loans, interest
and fees on loans decreased $1,090 or 14% to $6,826 for the nine months ended
September 30, 1999 compared to $7,916 for the same period last year.
Additionally, the average yield on net loans declined 6 basis points to 9.15%
for the nine months ended September 30, 1999 compared to 9.21% for the same
period last year. The decrease in loan volume primarily reflects management's
determination to restrict loan growth and minimize problem loans prior to
refocusing on loan growth strategies.
Taxable securities averaged $132,193 during the nine months ended September 30,
1999 compared to $98,093 for the nine months ended September 30, 1998,
reflecting an increase of $34,100. Interest income from taxable securities
increased $1,211 or 28% to $5,468 for the nine months ended September 30, 1999
compared to $4,257 for the same period last year. While the average balance and
income increased, the average yield on taxable securities decreased 27 basis
points to 5.53% for the nine months ended September 30, 1999 compared to 5.80%
for the same period last year. The decrease in taxable securities yields
primarily reflects the decline in market rates.
Non-taxable securities averaged $11,555 during the nine months ended September
30, 1999 compared to $10,649 for the nine months ended September 30, 1998,
reflecting an increase of $906. Interest income from non-taxable securities
decreased $26 or 4% to $705 for the nine months ended September 30, 1999
compared to $679 for the same period last year. The yield on non-taxable
securities decreased to 8.15% for the nine months ended September 30, 1999
compared to 8.52% for the same period last year.
Federal funds sold averaged $14,366 during the nine months ended September 30,
1999 compared to $16,442 for the nine months ended September 30, 1998,
reflecting a decrease of $2,076. Interest income from federal funds sold
decreased $172 to $508 for the nine months ended September 30, 1999 compared to
$680 for the same period last year. The yield on federal funds sold decreased 80
basis points to 4.73% for the nine months ended September 30, 1999 compared to
5.53% for the same period last year. The decrease in the yield on federal funds
sold reflects the decline in market rates.
Average interest-bearing liabilities increased $16,356 or 9% to $200,769 for the
nine months ended September 30, 1999 compared to $184,413 for the same period
last year. The average cost on interest -bearing liabilities decreased 54 basis
points to 2.99% for the nine months ended September 30, 1999 compared to 3.53%
for the same period last year. The increase in average interest-bearing
liabilities are centered in repurchase agreements and time deposits reflecting
increases of $11,021 and $4,082 respectively for the nine months ended September
1999. The average cost on repurchase agreements and time deposits decreased 74
and 57 basis points respectively to 3.76% and 3.97% for the nine months ended
September 30, 1999 compared to 4.50% and 4.54% respectively during the same
period in 1998. The interest rate spread increased 2 basis points to 4.01% at
September 1999 from 3.99% at September 1998.
Provision for Loan Losses
The Company maintains an allowance for loan losses to absorb losses on existing
loans and commitments that may become uncollectible. The provision for loan
losses decreased $1,644 to $775 for the nine months ended September 30, 1999
compared to $2,419 for the nine months ended September 30, 1998. The decrease in
the provision for loan losses is attributable primarily to the decrease in
non-performing assets. Non-performing assets decreased $2,957 to $4,045 at
September 30, 1999 from $7,002 at year end 1998. Additionally, loans with
potential credit problems decreased $408 or
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<PAGE>
5% to $7,737 at September 30, 1999 from $8,142 at year end 1998. See the
Non-Performing Assets section for additional information related to the
Company's allowance for loan losses.
Noninterest Income
Noninterest income decreased $61, or 2%, to $2,636 for the nine months ended
September 30, 1999 compared to $2,697 for September 30, 1998. The decrease is
attributed primarily to the loss on sale of available for sale securities of $35
through nine months of 1999 compared to a gain of $201 during the nine months
ended September 30, 1998.
Noninterest Expense
Noninterest expenses increased $239 to $9,561 for the nine months ended
September 30, 1999 compared to $9,322 for the same period last year. The
composition of the increase consists of an increase of $322 in other expenses,
an increase of $2 in occupancy expenses, an increase of $14 in data processing,
an increase of $2 in furniture and equipment, offset by a decrease in salary and
benefits of $101.
Other expenses for the nine months ended September 30, 1999 increased $322 or
13% to $2,873 compared to $2,551 for the same period last year. Consulting fees
and testing with our primary data processing servicer related to year 2000
concerns totaled $149 and $25 respectively for the nine months ended September
30, 1999 compared to $50 cost associated to year 2000 concerns for the nine
months ended September 30, 1998. Additionally, $918 in expenses were incurred
for consulting fees, legal fees, federal deposit insurance, audit and regulatory
fees and director board fees compared to $592 through nine months of 1998. Other
large expenses that were incurred during the nine months ended September 30,
1999 that were not incurred during the nine months ended September 30, 1998
included a contract buy out and related expenses of $40 to employ a key
individual to assist in the daily management of computer related issues
including year 2000 concerns. Additionally, the nine months ended September 30,
1999 included $54 in recruiting fees for two loan officers. The increase in the
aforementioned fees along with the Y2K related fees were offset primarily by a
decrease in advertising and loan expenses of $216 and $85 respectively.
Provision for Income Taxes
The provision for income taxes for the nine months ended September 30, 1999 was
$251, compared to ($203) a year ago due to losses before income taxes attributed
largely to the increased provision for loan losses during the nine months ended
September 30, 1998.
Financial Overview
Total assets increased $5,150, or 2%, from December 31, 1998 to September 30,
1999, mainly due to an increase of $14,462 in securities, offset primarily by a
decrease in loans of $6,537. The increase in assets was primarily funded by
repurchase agreement growth of $13,206 and offset by deposit decline of $7,471.
Total shareholders' equity decreased $617 due to a decrease in the unrealized
gains on available-for-sale securities of $1,454 offset by an increase in
retained earnings of $837. $25 in preferred stock dividends was declared during
the nine months ended September 30, 1999.
The carrying value of the Company's securities portfolio increased $14,462 to
$145,846 at September 30, 1999 from $131,384 at December 31, 1998. This
composition reflected a change as U. S. Government Agency securities decreased
approximately $13,242 to $44,376 while mortgage-backed securities increased
$20,376 to $82,333, from December 31, 1998 to September 30, 1999. The
mortgage-backed securities portfolio had a weighted-average remaining maturity
of 3.59 years at September 30, 1999 compared to 2.27 years at December 31, 1998.
The collateral underlying all the mortgage-backed securities is guaranteed by
one of the "Quasi-Governmental" agencies, and therefore maintains a risk weight
of 20% for risk-based regulatory 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. There are no issuers of securities
other than
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<PAGE>
governmental securities, whose securities held by the Company, have a book value
in excess of 10% of shareholders' equity.
The allowance for loan losses was $5,320 or 5.13% of total loans at September
30, 1999 compared to $4,700 or 4.29% at December 31, 1998. The increase in the
level of the allowance for loan losses as a percentage of ending loans reflects
management's conservative posture as the level of non-performing assets and
loans with potential credit problems remains high, the decline in the volume of
loans. Management continues to assess the valuation of the loan portfolio and
adjust the allowance accordingly. Non-performing assets decreased $2,957 or 42%
to $4,045 from $7,002 at year-end 1998. Loans with potential credit problems
(excluding non-performing assets) decreased to $7,737 at September 30, 1999 from
$8,145 at year-end 1998, representing a decrease of $408 or 5%. At September 30,
1999 and year-end 1998, non-performing assets represented 1.47% and 2.59%
respectively of total assets.
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<PAGE>
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS(1)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
----------------------------------------------------------------------
Amount Amount
Average Paid or Average Average Paid or
Balance Average Rate Earned Balance Rate Earned
----------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans, net $ 99,691 9.15% $ 6,826 $ 114,951 9.21% $ 7,916
Taxable securities 132,193 5.53% 5,468 98,093 5.80% 4,257
Non-taxable securities(2) 11,555 8.15% 705 10,649 8.52% 679
Federal funds sold 14,366 4.73% 508 16,442 5.53% 680
Interest-bearing deposits held 937 4.85% 34 2,580 5.65% 109
----------------------------------------------------------------------
Total interest-earning assets 258,742 7.00% 13,541 242,715 7.51% 13,641
Cash and due from banks 12,462 11,490
Bank premises and
equipment, net 2,459 2,724
Other assets 5,410 3,967
------------ -----------
Total assets $ 279,073 $ 260,896
============ ===========
Liabilities and
Shareholders' equity
Interest-bearing demand deposits $ 30,459 0.79% $ 181 $ 27,346 2.01% $ 412
Savings deposits 63,853 2.50% 1,193 65,713 2.74% 1,349
Time deposits 71,437 3.97% 2,121 67,355 4.54% 2,289
----------------------------------------------------------------------
Total interest-bearing deposits 165,749 2.82% 3,495 160,414 3.38% 4,050
Borrowed funds 1,000 4.68% 35 1,000 5.35% 40
Repurchase agreements 34,020 3.76% 958 22,999 4.50% 774
----------------------------------------------------------------------
Total interest-bearing liabilities 200,769 2.99% 4,488 184,413 3.53% 4,864
Noninterest-bearing liabilities 58,789 54,740
Other liabilities 2,045 2,333
Shareholders' equity 17,470 19,411
------------ -----------
Total liabilities and
shareholders' equity $ 279,073 $ 260,897
============ ===========
Net interest income and net
yield on interest-earning assets
Net interest income $ 9,053 $ 8,777
========== =========
Interest rate spread 4.01% 3.99%
Net yield on average interest-
earning assets 4.68% 4.83%
Average interest-earning assets
to average interest-bearing
liabilities 128.88% 131.62%
<CAPTION>
Year Ended
December 31, 1998
------------------------------------
Amount
Average Paid or
Balance Average Rate Earned
------------------------------------
Assets
Loans, net $ 113,286 9.28% $10,518
Taxable securities 103,507 5.66% 5,858
Non-taxable securities(2) 10,353 8.44% 874
Federal funds sold 16,493 5.49% 905
Interest-bearing deposits held 2,238 4.69% 105
------------------------------------
Total interest-earning assets 245,877 7.43% 18,260
Cash and due from banks 11,038
Bank premises and
equipment, net 2,692
Other assets 3,831
------------
Total assets $ 263,438
============
Liabilities and
Shareholders' equity
Interest-bearing demand deposits $ 27,394 1.76% 481
Savings deposits 65,474 2.70% 1,770
Time deposits 68,643 4.52% 3,104
------------------------------------
Total interest-bearing deposits 161,511 3.32% 5,355
Borrowed funds 1,000 5.10% 51
Repurchase agreements 24,011 4.30% 1,032
------------------------------------
Total interest-bearing liabilities 186,522 3.45% 6,438
Noninterest-bearing liabilities 56,031
Other liabilities 1,472
Shareholders' equity 19,413
-------------
Total liabilities and
shareholders' equity $ 263,438
============
Net interest income and net
yield on interest-earning assets
Net interest income $11,822
==========
Interest rate spread 3.98%
Net yield on average interest-
earning assets 4.81%
Average interest-earning assets
to average interest-bearing
liabilities 131.82%
</TABLE>
(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 $13,301, and $8,813
for September 30, 1999, $13,410 and $8,546 for September 30, 1998 and
$17,963 and $11,525 for 1998
-11-
<PAGE>
LOAN LOSS AND RECOVERY EXPERIENCE
<TABLE>
<CAPTION>
-------------------------------------------
Nine Months Ended Year Ended
September 30, 1999 December 31, 1998
-------------------------------------------
(dollars in thousands)
<S> <C> <C>
Total outstanding loans at end of period $ 103,768 $ 109,613
Average amount of loans outstanding 99,691 113,286
Allowance for loan losses
at beginning of period 4,700 1,702
Loans charged off:
Commercial 208 1,571
Real estate mortgage 158 -
Installment loans to individuals 101 249
-------------------------------------------
Total charge-offs 467 1,820
-------------------------------------------
Recoveries of loans previously charged-off:
Commercial 283 151
Real estate mortgage 3 -
Installment loans to individuals 26 64
-------------------------------------------
Total recoveries 312 215
-------------------------------------------
Net charge-offs 155 1,605
Additions to allowance charged to
operations 775 4,603
-------------------------------------------
Allowance for loan losses at end of period $ 5,320 $ 4,700
===========================================
Ratio of net charge-offs during the period
to average outstanding loans during the period 0.16% 1.42%
Ratio of allowance for possible loan
losses at the end of the period to total loans 5.13% 4.29%
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
September 30, 1999 December 31, 1998
Percent Percent
<S> <C> <C> <C> <C>
Commercial $ 1,753 32.96% $ 3,461 73.64%
Real estate mortgage 395 7.42% 406 8.64%
Consumer 173 3.25% 280 5.96%
Unallocated 2,999 56.37% 553 11.76%
-----------------------------------------------------------------------------------
Total $ 5,320 100.00% $ 4,700 100.00%
===================================================================================
</TABLE>
The level of the allowance for loan losses is determined by management on the
basis of various assumptions and judgments. 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
-12-
<PAGE>
establishes reserves in accordance with SFAS 114 as amended by 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 as of the
dates shown, future adjustments to the allowance may be necessary, and net
income could be significantly affected, if circumstances and/or economic
conditions differ substantially from the assumptions used in making the initial
determinations. Any downturn in the real estate market or general economic
conditions in the Washington, DC metropolitan area could result in the Company
experiencing increased levels of non-performing assets and charge-offs,
significant provisions for loan losses, and significant reductions in net
income. Additionally, various regulatory agencies periodically review the
Company's allowance for loan losses. Such agencies may require the recognition
of additions to the allowance based on their judgments or 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.
The following table sets forth information concerning non-performing
assets.
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
-------------------------------------------------
September 30, 1999 December 31, 1998
-------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Non-accrual loans(1) $ 3,177 $ 5,003
Loans past due 90 days or more
and still accruing 471 1,474
Foreclosed properties 397 525
-------------------------------------------------
Total $4,045 $7,002
=================================================
Non-performing assets to gross loans
and foreclosed properties at period
end 3.88% 6.36%
Non-performing assets to total
assets at period end 1.47% 2.59%
</TABLE>
1. Loans are placed on non-accrual status when in the opinion of management
the collection of additional interest is unlikely or a specific loan meets
the criteria for non-accrual status established by regulatory authorities.
No interest is taken into income on non-accrual loans unless received in
cash. A loan remains on non-accrual status until the loan is current as to
both principal and interest and the borrower demonstrates the ability to
pay and remain current, or the loan becomes well secured and is in the
process of collection. The gross interest income that would have been
recorded in the nine months ended September 30, 1999 and the year ended
December 31, 1998 for non-accrual loans had the loans been current in
accordance with their original terms was $206 and $230, respectively.
At September 30, 1999, there were $7,737 of loans not reflected in the table
above, where known information about possible credit problems of borrowers
caused management to have doubts as to the ability of the borrower to comply
with present loan repayment terms and that may result in disclosure of such
loans in the future. This represents a decrease of $408 or 5% from year-end
1998. Included in the total are fourteen loans, totaling $4,846 fully
collateralized by commercial real estate, three of which represent $2,531 or 52%
of the total. The remaining amount consists of seven residential mortgage loans
totaling $1,839, one at $1,266, and six commercial loans totaling $1,052.
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 ("Y2K") issue affects the entire banking
industry because of its reliance on computers and other equipment that use
computer chips. This problem is not limited to computer systems. Y2K issues may
affect every system that has an embedded microchip, such as automated teller
machines, elevators, vaults, heating, air conditioning, and security systems.
Y2K issues may also affect the operation of third parties with whom the Company
does business such as vendors, suppliers, utility companies, and customers.
Risk Related to Year 2000
The Y2K issue poses certain risks to the Company and its operations. Some
of these risks are present because the Company purchases technology and
information system applications from other parties who also face Y2K
challenges. Other risks are specific to the banking industry. Commercial banks
may experience a deposit base reduction if customers withdraw significant
amounts of cash in anticipation of Y2K. Such a deposit contracting could cause
an increase in interest rates, require the Company to locate alternative sources
of funding or sell investment securities or other liquid assets to meet
liquidity needs, and may reduce future earnings. To reduce customer concerns
regarding Y2K noncompliance, a customer awareness plan has been implemented
which is directed towards making deposit customers knowledgeable about the
Company's Y2K compliance efforts.
The Company lends significant amounts to businesses and individuals in its
marketing areas. If these borrowers are adversely affected by Y2K problems, they
may not be able to repay their loans in a timely manner. This increased credit
risk could adversely affect the Company's financial performance. In an effort to
identify any potential loan risk because of borrower Y2K noncompliance, all loan
customers with loans or commitments exceeding $100,000 were surveyed using a Y2K
questionnaire. The Company analyzed the results and any risks were
identified.The Company has also modified its loan underwriting controls to
ensure that potential borrowers are carefully evaluated for Y2K compliance
before any new loan is approved.
The Company's operations, like those of many other companies, can be
adversely affected by Y2K triggered failures which may be experienced by third
parties upon whom the Company relies for processing transactions. The Company
has identified all critical third-party service providers and vendors and is
monitoring their Y2K compliance programs. The Company's primary supplier of data
processing services has adopted a Y2K compliance plan that includes a timetable
for making changes necessary to be able to provide services in the year 2000.
That supplier has provided assurances to the Company regarding its progress
toward Y2K compliance and has been examined for Y2K readiness by federal bank
examiners. The Company's operations may also be adversely affected by Y2K
related failures of third party providers of electricity, telecommunications
services and other utility services. Failures in these areas could impact the
Company's ability to conduct business. The Y2K compliance of these providers is
largely beyond the control of the Company.
The Company's State of Readiness
The Company has created a task force to establish a Y2K plan to prevent or
mitigate the adverse effects of Y2K issue on the Company and its customers.
Goals of the Y2K plan include identifying Y2K risks of information systems and
equipment used by the Company, informing customers of Y2K issues and risks,
establishing a contingency plan for operating if Y2K issues cause important
systems or equipment to fail, implementing changes necessary to achieve Y2K
compliance, and verifying that these changes are effective. The Comptroller of
the Currency has examined the Company's Y2K compliance plan and the Company's
progress in implementation. In addition, the Board of Directors is carefully
monitoring progress under the plan on a monthly basis.
The Company's plan to address the Y2K issues involves several phases,
described below:
Awareness-In this phase, the Company's Y2K plan and project team were
established, the overall Y2K approach was identified, compliance standards were
defined, and responsibility for corrective action was assigned. This phase has
been completed.
Assessment-During this phase, the Company gathered and analyzed information
to determine the size and the impact of the Y2K problem and then made decisions
to modify, reengineer, or replace existing systems and programs. This phase has
been completed.
Renovation-This phase involved obtaining and implementing upgraded software
applications provided by the Company's vendors, modifying system codes,
reengineering Y2K vulnerable systems and programs, developing bridges for
systems which cannot be reengineered, and changing files and databases as
necessary. This phase has been completed.
Validation-During the validation phase, the Company tested systems and
software for Y2K compliance in an effort to identify and correct any errors
identified in the renovation phase. This phase has been completed.
Implementation-In this phase all new and revised systems will be
implemented, data exchange issues will be resolved and back up and recovery
plans will be developed. This phase has been completed.
Based on information developed to date, Company management believes that
the cost of remediation will not be material to the Company's business,
operations, liquidity, capital resources, or financial condition. The Company
expects that its total cash outlay for Y2K readiness in 1998, 1999 and future
years will be less than $500,000. This amount includes approximately $250,000 in
cost of software and equipment upgrades or replacements and other costs. The
Company expects that the total effect on net income, after tax deductions,of
these Y2K expenditures in 1998, 1999 and future years will be less than
$330,000. The Company is funding Y2K expenditures through continuing operations.
In the event that some or all systems experience failure, the Company has
developed a detailed contingency plan. This plan calls for manual processing of
bank transactions. Delays in processing transactions would result in the event
that the Company is forced to process transactions manually. These delays could
disrupt normal business activities of the Company and its customers.
-13-
<PAGE>
Formal Agreement with the OCC. On August 25, 1998, the Bank entered into a
Formal Agreement (the "Agreement") with the Office of the Comptroller of the
Currency (the "OCC"). The Agreement requires the Bank to undertake certain
actions within designated timeframes from the date the agreement was entered
into, and to operate in readiness with the provisions thereof during its term.
Among the actions required by the Agreement are the following: (i) Within thirty
days, the Bank shall employ an independent management consultant to perform a
study of the Bank's management structure and staffing requirements, including a
report identifying staffing requirements, job descriptions and evaluations for
senior officers, and evaluating organizational structure. The Board of Directors
(the "Board") is required to adopt within thirty days of the receipt of the
report, a plan to eliminate any deficiencies in management, staffing, or
supervision of management; (ii) The Board is required to take steps to obtain
current and satisfactory credit information on loans without such information,
and to insure that proper collateral documentation is maintained. Management may
not grant, renew, alter, restructure or extend a loan without proper
documentation and analysis of credit, purpose and anticipated source of
repayment. In absence of such information, such loans my be made only upon
certification of a majority of the Board why obtaining such information would be
detrimental to the best interest of the Bank; (iii) Within thirty days the Board
shall adopt a written program to eliminate the basis of criticism for assets
rated "doubtful", "substandard" or "other assets especially mentioned;" (iv)
Within thirty days the Board shall establish a loan review system to assure
timely identification and categorization of problem credits and implement a
process to insure the loan review function is independent; (v) Within sixty days
the Board shall review and revise the Bank's loan policy based upon the guidance
on Loan Portfolio Management in the Comptroller's Manual for National Bank
Examiners. Within thirty days thereafter, the Board shall develop a process to
ensure accountability for lending personnel; (vi) The Board shall notify the
Assistant Deputy Comptroller before all loan sales; (vii) Within sixty days, the
Board shall develop a written program to improve and strengthen collection
efforts; (viii) Within ninety days the Board shall develop a profit plan to
improve and sustain the Bank's earnings; (ix) Within 120 days, the Board shall
adopt and implement a strategic plan for the Bank covering at least
-14-
<PAGE>
three years, including objectives for earnings performance, balance sheet mix,
off-balance sheet activities, liability structure, capital adequacy, reduction
in the volume of non-performing assets, product line development and market
segments intended to be developed, together with strategies to achieve those
objectives; (x) The Board shall take all steps necessary to correct any
violation of law, rule or regulation cited in any report of examination; (xi)
Within thirty days the Bank shall submit a revised written project plan with
respect to Year 2000 readiness of the Bank's information and environmental
systems, including a testing plan and, within sixty days, a remediation
contingency plan in the event any systems is not ready by the date set forth in
the plan.
Compliance with the Agreement is to be monitored by a committee (the
"Committee") of at least three directors, none of whom is an employee of the
Bank or a family member of an employee. The Committee, presently composed of
four directors, is required to submit written progress reports on a monthly
basis. The Agreement requires the Bank to make periodic reports and filings with
the OCC.
As of September 30,1999, the Bank believes that it is in partial compliance with
most of the provisions of the Agreement. The Bank has submitted to the OCC all
of the written plans, policies and other information required by the Agreement,
except the loan policy and the problem loan procedures, which are being
finalized. The Bank is in the process of renewing and resubmitting certain of
these plans and policies to provide additional information and procedures, and
is periodically reviewing the plans for any required amendment in light of
changed circumstances and progress to date. In January 1999, the Bank retained a
consulting firm experienced in advising community banks on management,
operations and year 2000 matters to assist it in connection with the completion
of the preparation, modification and revision of the plan and in connection with
its year 2000 compliance efforts.
Although the Bank believes that it is in partial compliance with most of the
provisions of the Agreement, there can be no assurance that its regulators will
agree, or that they will not require additional compliance efforts. Failure to
comply with the provisions of the Formal Agreement could subject the Bank and
its directors to additional enforcement actions, including but not limited to a
cease and desist order, a safety and soundness order or civil money penalties.
If the directors of the bank become subject to civil money penalties or other
actions, the Company or the Bank may be obligated to indemnify such directors.
See also "Year 2000 Issues".
The Agreement does not contain any capital directive or other requirement that
the Bank increase its capital, or maintain a minimum level of capital in excess
of generally applicable capital requirements.
-15-
<PAGE>
Part II Other Information
-----------------
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement Regarding Computation of Per Share Earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
-16-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
IBW FINANCIAL CORPORATION
November 12, 1999 /s/ B. Doyle Mitchell, Jr.
B. Doyle Mitchell, Jr.
November 12, 1999 /s/ Thomas A. Wilson, Jr.
Thomas A. Wilson, Jr., Senior Vice President
and Chief Financial and Accounting Officer
-17-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11 Statement regarding Computation of Per Share Earnings
27 Financial Data Schedule
-18-
<PAGE>
Exhibit 11
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
Nine Months Ended September 30
---------------------------------
1999 1998
---------------------------------
Earnings (Losses) per common share
Basic and diluted $1.29 ($0.44)
Average shares outstanding
Basic and diluted 668,360 668,360
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted form the Form
10-QSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0001013274
<NAME> IBW FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 14,898
<INT-BEARING-DEPOSITS> 469
<FED-FUNDS-SOLD> 7,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 145,846
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 103,252
<ALLOWANCE> 5,320
<TOTAL-ASSETS> 275,128
<DEPOSITS> 216,656
<SHORT-TERM> 39,817
<LIABILITIES-OTHER> 1,355
<LONG-TERM> 0
0
500
<COMMON> 668
<OTHER-SE> 16,132
<TOTAL-LIABILITIES-AND-EQUITY> 275,128
<INTEREST-LOAN> 6,826
<INTEREST-INVEST> 5,877
<INTEREST-OTHER> 465
<INTEREST-TOTAL> 13,301
<INTEREST-DEPOSIT> 3,495
<INTEREST-EXPENSE> 4,488
<INTEREST-INCOME-NET> 8,813
<LOAN-LOSSES> 775
<SECURITIES-GAINS> (35)
<EXPENSE-OTHER> 9,561
<INCOME-PRETAX> 1,113
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 862
<EPS-BASIC> 1.29
<EPS-DILUTED> 1.29
<YIELD-ACTUAL> 4.68
<LOANS-NON> 3,177
<LOANS-PAST> 471
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 7,737
<ALLOWANCE-OPEN> 4,700
<CHARGE-OFFS> 467
<RECOVERIES> 312
<ALLOWANCE-CLOSE> 5,320
<ALLOWANCE-DOMESTIC> 5,320
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,999
</TABLE>
