<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 Exchange
----
Act of 1934 For the Quarterly Period ended March 31,1999.
-------------
____ Transition report under Section 13 or 15(d) of the Securities
Exchange Act For the transition period from ________ to ________.
Commission file number 0-28360. _________
IBW Financial Corporation
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C>
District of Columbia 52-1943477
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
</TABLE>
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 filing s 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 April 30,1999, there were
666,360 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
MARCH 31,1999 AND DECEMBER 31,1998
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
---------------------------------------
(dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 12,197 $ 12,565
Federal funds sold 22,900 13,150
---------------------------------------
Total cash and cash equivalents 35,097 25,715
Interest-bearing deposits in banks 407 405
Investment securities available-for-sale, at
fair value 137,639 131,384
Loans receivable, net of allowance
for loan losses of $4,803 and $4,700 100,503 104,469
Other real estate owned, net 365 525
Bank premises and equipment, net 2,463 2,542
Other assets 3,977 3,687
Deferred income taxes 1,269 1,251
---------------------------------------
TOTAL ASSETS 281,720 269,978
=======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Demand deposits $ 57,776 $ 58,870
Time and savings deposits 170,573 165,257
---------------------------------------
Total deposits $ $228,349 $ 224,127
Repurchase agreements 32,836 25,611
Other liabilities 1,306 1,323
Note payable 1,000 1,000
---------------------------------------
Total liabilities 263,491 252,061
---------------------------------------
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 11,747 11,463
Accumulated other comprehensive income, net of fax 263 235
---------------------------------------
Total shareholders' equity 18,229 17,917
---------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ $281,720 $ 269,978
=======================================
</TABLE>
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<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31,1999 AND MARCH 31,1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31
------------------------------------
1999 1998
------------------------------------
(dollars in thousands)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 2,260 $ 2,667
U.S. treasury securities 29 259
Obligations of U.S. government agencies and 1,603 1,162
corporations
Obligations of states and political subdivisions 112 168
Bank balances and other securities 254 243
------------------------------------
Total interest income 4,258 4,499
------------------------------------
INTEREST EXPENSE:
Time certificates over $100,000 245 215
Other savings and time deposits 974 1,075
Securities sold under repurchase agreements 268 224
Note payable 11 13
------------------------------------
Total interest expense 1,498 1,527
------------------------------------
NET INTEREST INCOME 2,760 2,972
PROVISION FOR LOAN LOSSES 100 1,209
------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,660 1,763
------------------------------------
NONINTEREST INCOME
Service charges on deposit and checking accounts 842 757
Gain on sale of securities -- 121
Other operating income 16 24
------------------------------------
Total noninterest income 858 902
------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,596 1,700
Occupancy 193 193
Furniture and equipment 187 181
Data processing 175 161
Other 980 754
------------------------------------
Total noninterest expense 3,131 2,989
------------------------------------
INCOME BEFORE INCOME TAXES 387 (324)
INCOME TAXES 97 (157)
------------------------------------
NET INCOME $ 290 $ (167)
====================================
</TABLE>
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<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31,1999 AND MARCH 31,1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31
--------------------------------------------------
1999 1998
--------------------------------------------------
(dollars in thousands)
<S> <C> <C>
NET INCOME $ 290 $ (167)
==================================================
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
Unrealized securities gains (losses) 28 (178)
Reclassification adjustment - (80)
--------------------------------------------------
Other Comprehensive Income / (Loss) 28 (258)
--------------------------------------------------
COMPREHENSIVE INCOME/(LOSS) $ 318 $ (425)
==================================================
</TABLE>
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<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------------------------------
1999 1998
---------------------------------------------------
(dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income / (loss) $290 ($167)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 100 150
(Accretion) of discounts/amortization of premiums 407 253
Amortization of loan fees and discounts 62 55
Deferred income tax benefits (33) (88)
Loss (gain) on sale of loans 13 (23)
Loss (gain) on sale of other real estate owned 6 (1)
Gain on sale of securities available-for-sale - (121)
Provision for loan losses 100 1,209
Increase (decrease) in other assets (290) 201
Increase in accrued expenses and other liabilities (17) (155)
---------------------------------------------------
Net cash provided by operating activities 638 1,313
---------------------------------------------------
INVESTING ACTIVITIES
Net loan repayments 2,108 623
Net increase in other short-term investments (2) (25)
Additions to bank premises and equipment (21) (228)
Proceeds from sales of loans 1,683 1,208
Net proceeds on sale of other real estate owned 154 72
Proceeds from sale of securities available-for-sale - 2,059
Proceeds from maturities of securities available-for-sale 10,000 5,428
Purchase of securities available-for-sale (26,400) (12,163)
Principal collected on securities available-for-sale 9,781 4,077
---------------------------------------------------
Net cash (used in) provided by investing activities (2,697) 1,051
---------------------------------------------------
FINANCING ACTIVITIES
Cash Dividends (6) (6)
Net increase in deposits 4,222 2,010
Net increase in securities sold under repurchase agreements 7,225 1,742
---------------------------------------------------
Net cash provided by financing activities 11,441 3,746
---------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 9,382 6,110
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,715 23,342
===================================================
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 35,097 $ 29,452
===================================================
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $1,473 $1,008
Taxes $50 $0
</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 three month period ended March 31,
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 Pronouncement
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.
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 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 15,1999.
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 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.
Reclassifications- Certain reclassifications have been made to the prior year's
reported balances to conform to the current year presentation.
-5-
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
As of and for the Three Months Ended March 31, 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 compliance, 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 first quarter of 1999 totaled
$290, an increase of $457, or 274% from ($167) for March 1998. This increase is
primarily attributed to a decrease in the provision for loan losses of $1,109,
offset by an increase in taxes of $254, a decrease in net interest income of
$212, an increase in noninterest expenses of $142 and a decrease in noninterest
income of $44. Return on average assets (ROAA), and return on average
shareholder's equity (ROAE) through the first quarters of 1999 and 1998 were
.42% and 6.40%, (.27%) and (3.26%), respectively.
Net Interest Income
Net interest income for the three month ended March 31, 1999 decreased $212, or
7% compared to the same period last year. The average balance of
interest-earning assets for the three month period ending March 31, 1999
increased $22 million or 10% to $256 million compared to $234 million for the
three month period ended March 31 1998. The average yield on average
interest-earning assets decreased by 113 basis points to 6.83% for the three
months ended period March 31, 1999 compared to 7.96% 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 loans into
securities and federal funds sold.
Net loans averaged $102 million during the first quarter of 1999 compared to
$114 million of the first quarter of 1998, reflecting a decrease of $12 million.
Interest and fees on loans decreased $407 or 15% to $2.3 million for the three
month ended March 31, 1999 compared to $2.7 million for the same period last
year. Additionally, the average yield on net loans declined 43 basis points to
9.03% for the three month ended March 31, 1999 compared to 9.46% for the same
period last year. The decrease in loans primarily reflects management's efforts
to minimize problem loans instead of focussing on loan growth strategies.
Taxable securities averaged $126 million during the first quarter of 1999
compared to $91 million for the first quarter of 1998, reflecting a increase of
$35 million. Interest income from taxable securities increased $218 or 15% to
$1.6 million for the three month ended March 31, 1999 compared to $1.4 million
for the same period last year. While the average
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<PAGE>
balance and income increased, the average yield on taxable securities decreased
108 basis points to 5.32% for the three month ended March 31, 1999 compared to
6.40% for the same period last year. The decrease taxable securities yields
primarily reflects the decline in market rates.
Non-taxable securities averaged $8 million during the first quarter of 1999
compared to $12 million for the first quarter of 1998, reflecting a decrease of
$4 million. Interest income from non-taxable securities decreased $56 or 33% to
$112 for the three month ended March 31, 1999 compared to $168 for the same
period last year. The yield on non-taxable securities decrease slightly to 8.54%
for the three month ended March 31, 1999 compared to 8.57% for the same period
last year.
Federal funds sold averaged $19 million during the first quarter of 1999
compared to $14 million for the first quarter of 1998, reflecting a increase of
$5 million. Interest income from federal funds sold increased $39 to $221 for
the three months ended March 31, 1999 compared to $182 for the same period last
year. The yield on federal funds sold decreased 82 basis points to 4.62% for the
three month ended March 31, 1999 compared to 5.44% 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 $22 million or 12% to $199
million for the three month ended March 31, 1999 compared to $177 million for
the same period last year. The average cost on interest -bearing liabilities
decreased 44 basis points to 3.05% for the three month ended March 31, 1999
compared to 3.49% for the same period last year. The increase in average
interest-bearing liabilities are centered in repurchase agreements and time
deposits reflecting increase of $11 million and $9 million respectively for the
three month ended 1999. The average cost on repurchase agreements and time
deposits decrease 98 and 38 basis points respectively to 3.5% and 4.15% for the
three month ended March 31, 1999 compared to 4.48% and 4.53% respectively.
The interest rate spread decreased 68 basis points to 3.79% at March 1999 from
4.47% at March 1998, and is attributable to lower market rates and the lower
level of loans and the higher levels of securities and federal funds sold as
noted above.
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 $1,109 to $100 for the three months ended March 31, 1999
compared to$1,209 for the three months ended March 31, 1998. The decrease in the
provision for loan losses is attributable to the decrease in nonperforming
assets and a decrease in loans with potential credit problems. Nonperforming
assets decreased $836 to $6.2 million at March 31, 1999 from $7.0 at year end
1998. Additionally, loans with potential credit problems decreased $843 or 10%
to $7.3 million at month ended March 31, 1999 from $8.1 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 $44, or 5%, to $858 for the three month ended March
31, 1999 compared to $902 for March 31, 1998. The decrease is attributed to
security gains of $121 during the first quarter of 1998 compared to no security
gains the first quarter 1999. Service charges on deposit accounts increased $85
or 11% to $842 for the three month ended March 31, 1999 compared to $757 for the
same period last year.
Noninterest Expense
Noninterest expenses increased $142 to $3.1 million for the three month ended
March 31, 1999 compared to $3.0 million for the same period last year. The
composition of the increase consist of an increase of $226 in other expenses, an
increase of $14 in data processing, an increase of $6 in furniture and equipment
offset by a decrease of $104 in salary and employee benefits.
Other expenses, for the three month ended March 31, 1999 increased $226 or 30%
to $980 compared to $754 for the same period last year. Consulting fees and
testing with our primary data processing servicer related to year 2000 concerns
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<PAGE>
totaled $61 and $25 respectively for the first quarter of 1999 compared to no
direct cost associated to year 2000 concerns for the first quarter of 1998.
Approximately $77 in increased expenses were incurred during the first quarter
of 1999 related to increased board fees, increased assessments for federal
deposit insurance and regulatory examination and increased legal fees, all
associated with the regulatory agreement placed on the company's subsidiary,
Industrial Bank N.A., in August of 1998. Other large expenses that were incurred
during the first quarter of 1999 that were not incurred during the first quarter
of 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 first quarter of 1999 included a
$27 recruiting fee for a senior credit officer.
Salary and benefits for the three month ended March 31, 1999 decreased $104 to
$1.6 million compared to $1.7 for the same period last year. The decrease is
attributed primarily to vacancies to several key employee positions throughout
the company which have not been filled or replaced during the first three months
of 1999. Management does intend to fill those positions during the course of the
year.
Provision for Income Taxes
The provision for income taxes for the first quarter of 1999 was $97, compared
to a benefit of ($157) a year ago. Prior years benefit was due to losses before
income taxes attributed largely to the increased provision for loan losses
during the first quarter of 1998.
Financial Overview
Total assets increased $12 million, or 4%, from December 31, 1998 to March 31,
1999, mainly due to an increase in cash and cash equivalents of $9 million, an
increase of $6 million in securities, offset primarily by a decrease in loans of
$4 million. The increase in assets was primarily funded by repurchase agreement
growth of $7 million and deposit growth of $4 million. Total shareholders'
equity increased $312 due to the increase in retained earnings of $284 and an
increase in the unrealized gain on available-for-sale securities of $28. $6 in
preferred stock dividends were declared during the first quarter of 1999.
The carrying value of the Company's securities portfolio increased $6 million to
$138 million at March 31, 1999 from$132 million at December 31, 1998. This
composition reflected a change as U. S. Government Agency securities increased
approximately $9 million to $66 million while mortgage-backed securities
decreased $3 million to $59 million, from December 31, 1998 to March 31, 1999.
The mortgage-backed securities portfolio had a weighted-average remaining
maturity of 2.6 years at March 31, 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 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 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 $4.8 million or 1.70% of assets at March 31,
1999 compared to $4.7 million 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
the decline in ending loans and a decrease in nonperforming assets.
Nonperforming assets decreased $836 or 12% to $6,166 from $7,002 at year-end
1998. Loans with potential credit problems (excluding nonperforming assets) also
decreased to $7,302 at March 31, 1999 from $8,145 at year-end 1998, representing
a decrease of $843 or 10 %. The ratio of allowance for possible loan losses to
total loans increased to 4.54% at March 31, 1999 from 4.29% at year-end 1998. At
March 31, 1999 and year-end 1998, non-performing assets represented 2.19% and
2.59% respectively of total assets.
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<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Year Ended
March 31, 1999 March 31, 1998 December 31, 1998
-------------------------------------------------------------------------------------------------
Average Average Amount Paid Average Average Amount Paid Average Average Amount Paid
Balance Rate or Earned Balance Rate or Earned Balance Rate or Earned
-----------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans, net $ 101,522 9.03% $ 2,260 $ 114,343 9.46% $ 2,667 $ 113,286 9.28% $ 10,518
Taxable securities 125,972 5.32% 1,652 90,837 6.40% 1,434 103,507 5.66% 5,858
Non-taxable securities(2) 8,077 8.54% 170 12,018 8.57% 254 10,353 8.44% 874
Federal funds sold 19,391 4.62% 221 13,557 5.44% 182 16,493 5.49% 905
Interest-bearing deposits held 1,131 4.66% 13 3,015 6.59% 49 2,238 4.69% 105
-----------------------------------------------------------------------------------------------
Total interest-earning assets 256,093 6.83% 4,316 233,770 7.96% 4,586 245,877 7.43% 18,260
Cash and due from banks 13,261 10,802 11,038
Bank premises and equipment, net 2,509 2,695 2,692
Other assets 4,984 3,931 3,831
========= ========= =========
Total assets $ 276,847 $ 251,198 $ 263,438
========= ========= =========
Liabilities and
Shareholders' Equity
Interest-bearing demand deposits $ 30,008 1.00% $ 74 $ 27,115 1.99% $ 133 $ 27,394 1.76% 481
Savings deposits 63,964 2.50% 394 64,891 2.75% 440 65,474 2.70% 1,770
Time deposits 73,304 4.15% 751 64,227 4.53% 717 68,643 4.52% 3,104
-----------------------------------------------------------------------------------------------
Total interest-bearing deposits 167,276 2.96% 1,219 156,233 3.35% 1,290 161,511 3.32% 5,355
Borrowed funds 1,000 4.46% 11 1,000 5.27% 13 1,000 5.10% 51
Repurchase agreements 31,054 3.50% 268 20,274 4.48% 224 24,011 4.30% 1,032
-----------------------------------------------------------------------------------------------
Total interest-bearing liabilities 199,330 3.05% 1,498 177,507 3.49% 1,527 186,522 3.45% 6,438
Noninterest-bearing liabilities 58,105 51,890 56,031
Other liabilities 1,295 1,318 1,472
Shareholders' equity 18,117 20,483 19,413
--------- --------- ---------
Total liabilities and
shareholders' equity $ 276,847 $ 251,198 $ 263,438
========= ========= =========
Net interest income and net
Yield on interest-earning assets
Net interest income $ 2,818 $ 3,059 $ 11,822
======== ======== ===========
Interest rate spread 3.79% 4.47% 3.98%
Net yield on average interest-
earning assets 4.46% 5.31% 4.81%
Average interest-earning assets
to average interest-bearing
liabilities 128.48% 130.70% 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 $4,258, and $2,760 for
March 31, 1999, $4,499 and $2,972 for March 31, 1998 and $17,963 and
$11,525 for 1998.
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<TABLE>
<CAPTION>
LOAN LOSS AND RECOVERY EXPERIENCE
---------------------------------------
Three Months Ended Year Ended
March 31, 1999 December 31, 1998
---------------------------------------
(dollars in thousands)
<S> <C> <C>
Total outstanding loans at end of period $ 105,742 $ 109,613
Average amount of loans outstanding 101,522 113,286
Allowance for loan losses
at beginning of period 4,700 1,702
Loans charged off:
Commercial 11 1,571
Real estate mortgage 18 -
Installment loans to individuals 69 249
---------------------------------------
Total charge-offs 98 1,820
---------------------------------------
Recoveries of loans previously charged-off:
Commercial 94 151
Real estate mortgage - -
Installment loans to individuals 7 64
---------------------------------------
Total recoveries 101 215
---------------------------------------
Net charge-offs (3) 1,605
Additions to allowance charged to
operations 100 4,603
Allowance for loan losses at end of period
---------------------------------------
Ratio of net charge-offs during period $ 4,803 $ 4,700
=======================================
to average outstanding loans during period 0.00% 1.42%
Ratio of allowance for possible loan
losses at period to total loans 4.54% 4.29%
</TABLE>
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
March 31, 1999 Percent December 31, 1998 Percent
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial $ 2,617 54.48% 3,461 73.64%
Real estate mortgage 517 11.89% 406 8.64%
Consumer 316 6.58% 280 5.96%
Unallocated 1,299 27.05% 553 11.76%
---------------------------------------------------
Total $ 4,803 100.00% 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 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
-10-
<PAGE>
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
-------------------------------------
March 31, 1999 December 31, 1998
-------------------------------------
(dollars in thousands)
<S> <C> <C>
Non-accrual loans(1) $ 4,602 $ 5,003
Loans past due 90 days or more
and still accruing 1,199 1,474
Foreclosed properties 365 525
-------------------------------------
Total $ 6,166 $ 7,002
=====================================
Non-performing assets to gross loans
and foreclosed properties at period end 5.81% 6.36%
Non-performing assets to total
assets at period end 2.19% 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 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 three months ended March 31, 1999 and the year ended
December 31, 1998 for non-accrual loans had the loans been current in
accordance with their original terms was $119 and $230, respectively.
At March 31, 1999, there were $7,302 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 $631 or 8% from year-end 1998.
Included in the total are nineteen loans, totaling $6,153 fully collateralized
by real estate, four of which represent $4,018 or 65% of the total. The
remaining $1,149 consists of thirteen commercial loans, one at $389 or 34% of
the remaining amount, secured primarily by accounts receivable and various
business equipment.
Year 2000 Issue. The year 2000 issue exists because many computer systems and
applications currently use two-digit date fields to designate a year. This
inability to recognize or properly treat the year 2000 may cause systems to
process critical financial and operational information incorrectly. The Company
has received certification from the vendors that supply the Company's accounting
software and other mission critical information systems that such systems and
software are year 2000 compliance. By March 31, 1999, the company had completed
testing of all mission critical systems. Testing is considered an important
phase of the Company's detailed year 2000 plan. It is anticipated that testing
of all applications will be completed by June 30,1999. The Company also utilizes
certain software and related technologies of its service bureau organization.
The Company expects that it will be indirectly affected by the date change in
the year 2000 as it relates to the systems of its service bureau organization.
The Company's service bureau has defined a plan to address and correct its year
2000 deficiencies. The Company is continuing to monitor the activities of its
vendors in respect of year 2000 compliance, remediation and contingency planning
efforts. The Company expects to incur expenses related to year 2000 problems
with its primary information systems. At this time, the Company management
estimates that approximately $450 to $500 will be spent on year 2000 readiness
activities in 1999, including staff time dedicated to this project. Aggregate
expenses of year 2000 efforts are expected to be approximately $450-500 of which
approximately $250 had been incurred as December 31, 1998.
-11-
<PAGE>
The Company's year 2000 plan includes evaluation of risks related to the
potential failure of customers to be prepared for the year 2000. The Company has
assessed its largest lending and deposit relationships for year 2000 related
risks and has developed a contact and follow-up program to educate and assist
its customers in year 2000 matters, and to attempt to mitigate the effects on
the Company. The Company's efforts in this regard have been hampered by staff
turnover, however, the Company believes that it has significantly reduced the
delays in customer related due diligence.
The failure of the Company, its principal data processing provider, its
customers, or other service providers, including utilities and government
agencies, to be year 2000 compliant in a timely manner could have a negative
impact on the Company's business, including but not limited to an inability to
provide accurate and timely processing of customer transactions, and delays in
loan collection practices. The Company's belief that it, and its primary
suppliers of data processing services, will achieve year 2000 compliance, are
based on a number of assumptions and on statements made by third parties,
involve events and actions which may be beyond the control of the Company, and
are subject to uncertainty. The Company also is not able to predict the effects,
if any, on the Company, financial markets or society in general of the public's
reaction to year 2000. In the event that the Company or its principal data
processing providers are unsuccessful in achieving year 2000 compliance, the
Company plans to manually process and post transactions.
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 compliance 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 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 compliance
of the Bank's information and environmental systems, including a testing plan
and, within sixty days, a re-mediation contingency plan in the event any systems
is not compliant by the date set forth in the plan.
Compliance with the Agreement is to be monitored by a committee (the
"Committee") of a 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.
-12-
<PAGE>
As of March 31,1999, the Bank believes that its 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.
As a result of the inability of a year 2000 vendor initially employed by the
Bank to assist it in developing and implementing a testing program to
successfully design and complete that task, staff turnover and other factors,
the Bank had not completed testing of internal and external mission systems by
December 31,1998, and was not in compliance with it's schedule for customer
related due diligence contained in its year 2000 plan. As of March 31,1999, the
Bank has completed testing of its mission critical systems as contemplated by
its plan, within the regulatory time-frame required by the bank regulatory
agencies, and has significantly reduced the delay in customer related due
diligence.
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.
-13-
<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.
-14-
<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
May 14,1999 /s/ B. Doyle Mitchell, Jr.
B. Doyle Mitchell, Jr.
May 14,1999 /s/ Thomas A. Wilson, Jr.
Thomas A. Wilson, Jr., Senior Vice President
and Chief Financial and Accounting Officer
-15-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
11 Statement regarding Computation of Per Share Earnings
27 Financial Data Schedule
-16-
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
Three Months Ended March 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Earnings (Losses) per common share
Basic and diluted $ 0.43 ($0.25)
Average shares outstanding
Basic and diluted 668,360 668,360
</TABLE>
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-QSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 12,197
<INT-BEARING-DEPOSITS> 407
<FED-FUNDS-SOLD> 22,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 137,639
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 105,306
<ALLOWANCE> 4,803
<TOTAL-ASSETS> 281,720
<DEPOSITS> 228,349
<SHORT-TERM> 32,836
<LIABILITIES-OTHER> 1,306
<LONG-TERM> 1,000
0
500
<COMMON> 668
<OTHER-SE> 17,061
<TOTAL-LIABILITIES-AND-EQUITY> 281,720
<INTEREST-LOAN> 2,660
<INTEREST-INVEST> 1,744
<INTEREST-OTHER> 254
<INTEREST-TOTAL> 4,258
<INTEREST-DEPOSIT> 1,219
<INTEREST-EXPENSE> 1,498
<INTEREST-INCOME-NET> 2,760
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,131
<INCOME-PRETAX> 387
<INCOME-PRE-EXTRAORDINARY> 387
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 290
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
<YIELD-ACTUAL> 4.46
<LOANS-NON> 4,602
<LOANS-PAST> 1,199
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 7,302
<ALLOWANCE-OPEN> 4,700
<CHARGE-OFFS> 98
<RECOVERIES> 101
<ALLOWANCE-CLOSE> 4,803
<ALLOWANCE-DOMESTIC> 4,803
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
