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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
X Annual report under Section 13 or 15(d) of the Securities Exchange
----- Act of 1934
For the fiscal year ended December 31, 1998
Transition report under Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
For the transition period from to
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Commission file number: 0-28360
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IBW Financial Corporation
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(Name of Small Business Issuer in its Charter)
District of Columbia 52-1943477
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4812 Georgia Avenue, NW, Washington, DC 20011
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: (202) 722-2000
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Securities registered under Section 12(b) of the Act: None
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Securities registered under Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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(Title of Class)
Check whether the Issuer; (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports; and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
-----
The issuer's revenues for the fiscal year ended December 31, 1998 were
approximately $21,697,000.
The aggregate market value of the outstanding Common Stock held by nonaffiliates
as of March 15, 1999 was approximately $6,616,006 (based on the most recent
trade known to the Company. See "Market for Common Stock and Dividends")
As of March 15, 1998, the number of outstanding shares of the Common Stock,
$1.00 par value, of IBW Financial Corporation was 668,360.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Shareholders for the Year Ended
December 31, 1998 are incorporated by reference in part II hereof.
Portions of the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 25, 1999 are incorporated
by reference in part III hereof.
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PART I
ITEM 1. Description of Business.
IBW Financial Corporation, a District Columbia corporation (the "Company"),
was organized in December 1994 in connection with the reorganization of
Industrial Bank of Washington ("IBW"), a District of Columbia chartered
commercial bank, to act as the one bank holding company for IBW following the
reorganization. On July 1, 1995, the reorganization of IBW was consummated, and
IBW was converted from a District of Columbia chartered bank to a national
banking association, under the name Industrial Bank, National Association (IBW
and Industrial Bank, National Association, generally referred to collectively as
the "Bank"), the main office of the Bank was relocated from the District of
Columbia to Oxon Hill, Maryland, and the Company became the holding company for
the Bank.
The Bank, all of the shares of which are owned by the Company, is the sole
subsidiary of the Company.
The Bank was organized in August 1934 as a District of Columbia chartered
commercial bank by a group of African-American businessmen and educators for the
purpose of providing quality financial services, with an emphasis on home
mortgages and automobile financing, to the underserved minority population of
the District of Columbia. Over the past sixty five years, the Company has grown
from one office in the District of Columbia and $250,000 in assets to seven
offices in the District of Columbia, two offices in Prince George's County,
Maryland and approximately $270 million in total assets and $17.9 million of
shareholders' equity at December 31, 1998. The Bank is among the largest
African-American commercial banks in the nation, and the largest African-
American owned commercial bank based in the Washington D.C. metropolitan area.
The Bank provides a broad range of commercial and consumer lending
services, including auto loans, home equity loans, home improvement loans,
credit cards and personal loans. Over two-thirds of the Bank's loan portfolio is
real estate mortgage related, including residential, commercial and investment
properties. In order to expand the ability of the Bank to offer a wide variety
of competitively priced mortgage products to the residents of the District of
Columbia and surrounding areas, the Bank has arranged to sell certain of its
mortgage loans into the secondary market, enabling the Bank to make additional
loans, and loans with wider repayment and interest rate options, available to
the community. Additionally, the Bank offers a wide variety of loans geared to
meet the needs of small businesses in the Bank's market area, including accounts
receivable lines of credit, Small Business Administration loans and equipment
loans.
The Bank also provides a full range of deposit services to its customers,
including personal checking, low activity student checking, interest bearing NOW
accounts, golden age checking accounts for seniors, statement savings accounts,
money market accounts, student accounts, investment certificates, IRA's and
Christmas club accounts. Other deposit services include 24 hour banking through
use of automated teller machines at five convenient locations. As a part of the
Most, Plus and Network Exchange Systems, accountholders can access ATM's across
the United States at any time. Also the Bank provides a convenient bank by mail
service, direct deposit/electronic fund transfers, cash management services,
safe deposit boxes, night depository, tax deposits, wire transfers and telebanc
systems.
The Bank has benefitted by the recent waves of consolidations and failures
in the local banking market, developing new customer relationships as failures
or mergers with out of area institutions resulted in displaced or disaffected
customers looking to establish local banking relationships.
Formal Agreement
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, and to operate in compliance with the provisions thereof during its
term.
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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 may be made only upon
certification of a majority of the Board why obtaining such information would be
detrimental to the best interests 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 nonperforming 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 remediation contingency plan in the event any system
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 at least three directors, none of whom is an employee of the
Bank or a family member of and employee. The Committee, presently composed of
Mr. King (Chairman), Mrs. Fleming, Dr. Parker and Mr. Chapman,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.
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.
As of March 31, 1999, the Bank believes that its is in partial compliance
with all 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, within the prescribed timeframes or permitted extensions, except for
the loan policy. The Bank is in the process of revising 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 Y2K matters to assist it in connection with the completion of the
preparation, modification and revision of the plans and in connection with its
Y2K compliance efforts.
As a result of the inability of a Y2K 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 did
not complete testing of internal and external mission critical systems by
December 31, 1998, and was not in compliance with its schedule for customer
related due diligence contained in its Y2K plan. As of March 31, 1999, the Bank
has completed testing of its mission critical systems as contemplated by its
plan, within the regulatory
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timeframe 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 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.
Market Area and Competition
The Bank's primary market area consists of the District of Columbia, and
Prince George's County, Maryland. The Washington Metropolitan Statistical Area,
(the "Washington MSA"), of which the Bank's market area forms a part, is a
highly competitive one, in which a large number of regional and national,
majority owned and managed, multi-bank holding companies operate, in addition to
numerous small and medium sized community banks. Additionally, a large number of
thrift institutions and non-bank financial service providers, including
insurance companies, brokerage firms, credit unions, mortgage companies,
consumer finance companies, mutual funds and other types of financial
institutions compete in the Washington MSA for investment dollars and lending
business. As a result of changes in federal and state banking legislation,
competitors not already in the Bank's market may seek to enter such market. The
District of Columbia, Maryland and Virginia have each enacted legislation
permitting banks organized or based in other jurisdictions to establish or
acquire banks or branches in such jurisdictions.
Notwithstanding the foregoing, Prince George's County has been the subject
of hearings before the House of Representatives Committee on Banking, Finance
and Urban Affairs regarding the relative unavailability of banking services in
that county. Prince George's County, which has a majority minority population,
was found to have approximately half as many traditional banking or thrift
branches per capita as neighboring Montgomery County, which has a majority non-
minority population. Prince George's was also found to have a substantially
higher number of non-traditional banking entities, such as check cashing
outlets. The Company believes that Prince George's County provides substantial
opportunity for growth and expansion.
The Washington MSA had a 1990 population of approximately 1.8 million, and
total employment in 1991 of 954,000. Employment is primarily provided by federal
and local governments, the finance, insurance and real estate industries,
retailing, construction and education. Per capita income in 1991 amounted to
approximately $25,000.
Employees
As of December 31, 1998, the Bank had 167 full time equivalent employees.
None of the Bank's employees are represented by any collective bargaining group,
and the Bank believes that its employee relations are good. The Bank provides a
benefit program which includes health and dental insurance, life and long term
disability insurance and an employee stock ownership plan for substantially all
full time employees. Annual contributions to the employee stock ownership plan
are determined by the Board, and amounted to $39,100 in 1997 and $37,000 in
1996. The Company did not make any contribution to the ESOP in 1998. The Company
does not have any employees who are not also employees of the Bank.
Under the terms of the Company's interim capital assistance agreement,
entered into in connection with the Bank's 1994 acquisition of two branches of a
failed savings association, the Company may not increase the compensation of, or
pay any bonus to, its directors, officers or key employees, except that it may
make such increases or payments during and after the second year of operation
following the interim capital assistance with the prior consent of the Federal
Deposit Insurance Corporation ("FDIC").
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Regulation
The following summaries of statutes and regulations affecting bank holding
companies do not purport to be complete discussions of all aspects of such
statutes and regulations and are qualified in their entirety by reference to the
full text thereof.
Holding Company Regulation. The Company is a registered bank holding
company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). As
a registered bank holding company, the Company is required to file with the
Board of Governors of the Federal Reserve (the "Federal Reserve") an annual
report, certain periodic reports and such reports and additional information as
the Federal Reserve may require pursuant to the BHCA, and is subject to
examination and inspection by the Federal Reserve.
BHCA - Activities and Other Limitations. The BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of any
bank, without prior approval of the Federal Reserve.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the Federal Reserve is authorized to approve
the ownership of shares by a bank holding company in any company, the activities
of which the Federal Reserve has determined to be so closely related to banking
or to managing or controlling banks as to be a proper incident thereto. In
making such determinations, the Federal Reserve is required to weigh the
expected benefit to the public, such as greater convenience, increased
competition or gains in efficiency, against the possible adverse effects, such
as undue concentration of resources, decreased or unfair competition, conflicts
of interest or unsound banking practices.
The Federal Reserve has by regulation determined that certain activities
are closely related to banking within the meaning of the BHCA. These activities
include: making or servicing loans such as would be made by a mortgage company,
consumer finance company, credit card company, or factoring company; performing
trust company functions; performing certain data processing operations;
providing limited securities brokerage services; acting as an investment or
financial advisor; ownership or operation of a savings association; acting as an
insurance agent for certain types of credit-related insurance; leasing personal
property on a full-payout, non-operating basis; providing tax planning and
preparation services; operating a collection agency; and providing certain
courier services. The Federal Reserve also has determined that certain other
activities, including real estate brokerage and syndication, land development,
property management and underwriting life insurance not related to credit
transactions, are not closely related to banking and a proper incident thereto.
Commitments to Subsidiary Banks. Under Federal Reserve policy, the Company
is expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances when it might not do so absent
such policy.
Limitations of Acquisitions of Common Stock. The federal Change in Bank
Control Act prohibits a person or group from acquiring "control" of a bank
holding company unless the Federal Reserve has been given 60 days' prior written
notice of such proposed acquisition and within that time period the Federal
Reserve has not issued a notice disapproving the proposed acquisition or
extending for up to another 30 days the period during which such a disapproval
may be issued. An acquisition may be made prior to expiration of the disapproval
period if the Federal Reserve issues written notice of its intent not to
disapprove the action. Under a rebuttable presumption established by the Federal
Reserve, the acquisition of 10% or more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Exchange Act would, under the circumstances set forth in the presumption,
constitute the acquisition of control.
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In addition, with limited exceptions, any "company" would be required to
obtain the approval of the Federal Reserve under the BHCA before acquiring 25%
(5% in the case of an acquiror that is a bank holding company) or more of the
outstanding Common Stock of, or such lesser number of shares as constitute
control over, the Company. Such approval would be contingent upon, among other
things, the acquiror registering as a bank holding company, divesting all
impermissible holdings and ceasing any activities not permissible for a bank
holding company.
The Federal Reserve has adopted capital adequacy guidelines pursuant to
which it assesses the adequacy of an institution's capital. These guidelines are
substantially identical to those which are applicable to the Bank discussed
below.
Bank Regulation. The Bank is subject to extensive regulation and
examination by the Office of the Comptroller of Currency ("OCC") and by the
FDIC, which insures its deposits to the maximum extent permitted by law. The
federal laws and regulations which are applicable to national banks regulate,
among other things, the scope of their business, their investments, their
reserves against deposits, the timing of the availability of deposited funds and
the nature and amount of collateral for certain loans. The laws and regulations
governing the Bank generally have been promulgated to protect depositors and the
deposit insurance funds, and not for the purpose of protecting stockholders.
FDIC Insurance Premiums. The Bank pays deposit insurance premiums as a
member of the Bank Insurance Fund of the FDIC, under the FDIC's risk-based
assessment system. Under the FDIC's regulations, institutions are assigned to
one of three capital groups based solely on the level of the institution's
capital - "well capitalized," "adequately capitalized" and "undercapitalized" -
which would be defined in the same manner as the regulations establishing the
prompt corrective action system under Section 38 of the Federal Deposit
Insurance Act (the "FDIA"), as discussed below. These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications, with rates currently ranging
from 0% to .31% of insured deposits. During 1996, the Bank incurred a one time
expense of approximately $158,000 relating to the special assessment imposed on
deposits insured by the Savings Association Insurance Fund of the FDIC ("SAIF")
in connection with the recapitalization of the SAIF fund. The Bank is also
required to pay an additional assessment in connection with the repayment of the
"Fico bonds" issued in connection with the resolution of the savings and loan
crisis.
Capital Adequacy Guidelines. The Federal Reserve, the OCC and the FDIC have
all adopted risk based capital adequacy guidelines pursuant to which they assess
the adequacy of capital in examining and supervising banks and bank holding
companies and in analyzing bank regulatory applications. Risk-based capital
requirements, determine the adequacy of capital based on the risk inherent in
various classes of assets and off-balance sheet items.
National banks are required to meet a minimum ratio of total qualifying
capital (the sum of core capital (Tier 1) and supplementary capital (Tier 2)) to
risk weighted assets of 8%. At least half of this amount (4%) should be in the
form of core capital. These requirements apply to the Bank and will apply to the
Company (a bank holding company) so long as its total assets equal $150,000,000
or more.
Tier 1 Capital for national banks generally consists of the sum of common
stockholders' equity and perpetual preferred stock (subject in the case of the
latter to limitations on the kind and amount of such stock which may be included
as Tier 1 Capital), less goodwill, without adjustment for unrealized gain or
loss on securities classified as available for sale in accordance with FAS 115.
Tier 2 Capital consists of the following: hybrid capital instruments; perpetual
preferred stock which is not otherwise eligible to be included as Tier 1
Capital; term subordinated debt and intermediate-term preferred stock; and,
subject to limitations, general allowances for loan losses. Assets are adjusted
under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no risk-based
capital) for assets such as cash, to 100% for the bulk of assets which are
typically held by a bank holding company, including certain multi-family
residential and commercial
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real estate loans, commercial business loans and consumer loans. Residential
first mortgage loans on one to four family residential real estate and certain
seasoned multi-family residential real estate loans, which are not 90 days or
more past-due or non-performing and which have been made in accordance with
prudent underwriting standards are assigned a 50% level in the risk-weighing
system, as are certain privately-issued mortgage-backed securities representing
indirect ownership of such loans. Off-balance sheet items also are adjusted to
take into account certain risk characteristics.
In addition to the risk based capital requirements, the OCC has established
a minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to total adjusted assets)
requirement for the most highly-rated national banks, with an additional cushion
of at least 100 to 200 basis points for all other national banks, which
effectively increases the minimum Leverage Capital Ratio for such other banks to
4.0% - 5.0% or more. Under the OCC's regulations, highest-rated banks are those
that the OCC determines are not anticipating or experiencing significant growth
and have well diversified risk, including no undue interest rate risk exposure,
excellent asset quality, high liquidity, good earnings and, in general, those
which are considered a strong banking organization. A national bank having less
than the minimum Leverage Capital Ratio requirement shall, within 60 days of the
date as of which it fails to comply with such requirement, submit to the
applicable OCC district office for review and approval a reasonable plan
describing the means and timing by which the bank shall achieve its minimum
Leverage Capital Ratio requirement. A national bank which fails to file such
plan with the OCC is deemed to be operating in an unsafe and unsound manner, and
could subject the bank to a cease-and-desist order from the OCC. The OCC's
regulations also provide that any insured depository institution with a Leverage
Capital Ratio that is less than 2.0% is deemed to be operating in an unsafe or
unsound condition pursuant to Section 8(a) of the FDIA and is subject to
potential termination of deposit insurance. However, such an institution will
not be subject to an enforcement proceeding thereunder, solely on account of its
capital ratios, if it has entered into and is in compliance with a written
agreement with the OCC to increase its Leverage Capital Ratio to such level as
the OCC deems appropriate and to take such other action as may be necessary for
the institution to be operated in a safe and sound manner. The OCC capital
regulations also provide, among other things, for the issuance by the OCC or its
designee(s) of a capital directive, which is a final order issued to a bank that
fails to maintain minimum capital or to restore its capital to the minimum
capital requirement within a specified time period. Such directive is
enforceable in the same manner as a final cease-and-desist order.
Additionally, the interim capital assistance loan agreement requires the
Bank to maintain a 5.22% "tangible" capital level. This covenant of the interim
capital assistance agreement does not constitute a written capital order or
directive for purposes of prompt corrective action.
At December 31, 1998, the Bank was in compliance with all minimum federal
regulatory capital requirements which are generally applicable to national
banks, as well as the capital requirements of the interim capital assistance. As
of such date, the Bank had a Tier 1 Risk Based Capital Ratio and a Total Risk
Based Capital Ratio equal to approximately 13% and 15% respectively, and a
Leverage Capital Ratio equal to approximately 6%.
Prompt Corrective Action. Under Section 38 of the FDIA, the federal banking
agencies have promulgated substantially similar regulations to implement a
system of prompt corrective action. Under the regulations, a bank shall be
deemed to be: (i) "well capitalized" if it has a Total Risk Based Capital Ratio
of 10.0% or more, a Tier 1 Risk Based Capital Ratio of 6.0% or more, a Leverage
Capital Ratio of 5.0% or more and is not subject to any written capital order or
directive; (ii) "adequately capitalized" if it has a Total Risk Based Capital
Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0% or more and a
Tier 1 Leverage Capital Ratio of 4.0% or more (3.0% under certain circumstances)
and does not meet the definition of "well capitalized;" (iii) "undercapitalized"
if it has a Total Risk Based Capital Ratio that is less than 8.0%, a Tier 1 Risk
based Capital Ratio that is less than 4.0% or a Leverage Capital Ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a Total Risk Based Capital Ratio that is less than
6.0%, a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a Leverage
Capital Ratio that is less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.
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An institution generally must file a written capital restoration plan which
meets specified requirements with an appropriate federal banking agency within
45 days of the date the institution receives notice or is deemed to have notice
that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the institution with
written notice of approval or disapproval within 60 days after receiving a
capital restoration plan, subject to extensions by the applicable agency.
An institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution. Such guaranty shall be limited to the lesser of (i) an amount equal
to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary at such time to restore the relevant capital measures of the
institution to the levels required for the institution to be classified as
adequately capitalized. Such a guaranty shall expire after the federal banking
agency notifies the institution that it has remained adequately capitalized for
each of four consecutive calendar quarters. An institution which fails to submit
a written capital restoration plan within the requisite period, including any
required performance guaranty, or fails in any material respect to implement a
capital restoration plan, shall be subject to the restrictions in Section 38 of
the FDIA which are applicable to significantly undercapitalized institutions.
A "critically undercapitalized institution" is to be placed in
conservatorship or receivership within 90 days unless the FDIC formally
determines that forbearance from such action would better protect the deposit
insurance fund. Unless the FDIC or other appropriate federal banking regulatory
agency makes specific further findings and certifies that the institution is
viable and is not expected to fail, an institution that remains critically
undercapitalized on average during the fourth calendar quarter after the date it
becomes critically undercapitalized must be placed in receivership. The general
rule and current position of the OCC is that the FDIC will be appointed as
receiver within 90 days after a bank becomes critically undercapitalized unless
extremely good cause is shown and an extension is agreed to between the OCC and
the FDIC. In general, good cause is defined as capital which has been raised and
is imminently available for infusion into the Bank except for certain technical
requirements which may delay the infusion for a period of time beyond the 90 day
time period.
Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA, which (i) restrict payment
of capital distributions and management fees; (ii) require that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital; (iii) require submission of a capital restoration plan;
(iv) restrict the growth of the institution's assets; and (v) require prior
approval of certain expansion proposals. The appropriate federal banking agency
for an undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible long-
term cost to the deposit insurance fund, subject in certain cases to specified
procedures. These discretionary supervisory actions include: requiring the
institution to raise additional capital; restricting transactions with
affiliates; requiring divestiture of the institution or the sale of the
institution to a willing purchaser; and any other supervisory action that the
agency deems appropriate. These and additional mandatory and permissive
supervisory actions may be taken with respect to significantly undercapitalized
and critically undercapitalized institutions.
Additionally, under Section 11(c)(5) of the FDIA, a conservator or receiver
may be appointed for an institution where: (i) an institution's obligations
exceed its assets; (ii) there is substantial dissipation of the institution's
assets or earnings as a result of any violation of law or any unsafe or unsound
practice; (iii) the institution is in an unsafe or unsound condition; (iv) there
is a willful violation of a cease-and-desist order; (v) the institution is
unable to pay its obligations in the ordinary course of business; (vi) losses or
threatened losses deplete all or substantially all of an institution's capital,
and there is no reasonable prospect of becoming "adequately capitalized" without
assistance; (vii) there is any violation of law or unsafe or unsound practice or
condition that is likely to cause insolvency or substantial dissipation of
assets or earnings, weaken the institution's condition, or otherwise seriously
prejudice the interests of depositors or the insurance fund; (viii) an
institution ceases to be insured; (ix) the institution is undercapitalized and
has no reasonable prospect that it will become adequately capitalized, fails to
become adequately capitalized when required to do so, or fails to submit or
materially implement
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a capital restoration plan; or (x) the institution is critically
undercapitalized or otherwise has substantially insufficient capital.
At December 31, 1998, the Bank was a "well capitalized" institution for
purposes of Section 38 of the FDIA.
Regulatory Enforcement Authority. The enforcement authority of the federal
banking regulators includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties. In general, these enforcement actions may be initiated for violations
of laws and regulations and unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including misleading or
untimely reports filed with regulatory authorities.
ITEM 2. Description of Property.
The Bank currently operates nine offices, seven in the District of
Columbia, and two in Prince George's County, Maryland. The Bank owns its office
located at 4812 Georgia Avenue, N.W. and its branch offices located at 2000 11th
Street, NW and 45th and Blaine Streets, NE. The Georgia Avenue office, which is
also the principal executive office of the Company, consists of a 6,000 square
foot stand alone building with drive-in facilities, and a separate 2,000 square
foot building housing the Bank's operations center next door. The 11th Street
office is housed in a 4,000 square foot building, and an adjacent 2,000 square
foot building houses the loan operations center. The Blaine Street office
occupies an approximately 2,000 square foot stand alone building, with drive-in
facilities, near the Benning Road Metro Station. The Bank leases the remainder
of its offices. The 14th and U Streets office is located in a 1,922 square foot
storefront, under a lease which commenced in 1988, for a ten year term and one
optional ten year renewal term at a fixed rent of $28,830 per year. The Bank's F
Street office is located in a 1,273 square foot storefront under a lease
commencing in 1991, for a ten year term at a current annual rent of $71,739,
subject to annual increases. The American University office is located in a 962
square foot storefront under a five year lease, which commenced in 1992, with
one five year renewal option, at a current annual rent of $25,588, subject to
annual increase. The Forestville, Maryland office is located in a 2,696 square
foot storefront with drive-in facilities, and is occupied under a lease which
commenced in 1994 for a five year term at a current annual rental of $29,008,
subject to annual increase. The Oxon Hill office, the main office of the Bank,
is a 10,531 square foot, two story building with drive in facilities, and is
occupied rent free for a term extending until June 10, 1999 and is subject to a
purchase option at 95% of fair market value. The Bank has requested a lease
extension from the FDIC. The Company is responsible for all operating and
maintenance expenses on the Oxon Hill property. The Brookland/Woodridge office,
which opened in 1997, is located in 2610 Rhode Island Avenue, NE and occupied
under a lease, commencing in 1997, with one five year renewal options, for a
five year term at a current annual rental of $27,000, subject to annual
increases.
The Company believes that its existing facilities are adequate to conduct
its business.
ITEM 3. Legal Proceedings.
The Company is involved in routine legal proceedings in the ordinary course
of its business. In the opinion of management, final disposition of these
proceedings will not have a material adverse effect on the financial condition
or results of operations of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
-8-
<PAGE>
PART II
ITEM 5. Market for Common Equity and Related Shareholder Matters.
Market for Common Stock and Dividends
There does not currently exist an organized public trading market for
shares of Company's Common Stock. Trading in the Company's Common Stock has been
sporadic, and consists of private trades conducted without brokers. The Company
is aware of approximately 20 trades of the Common Stock since January 1, 1997,
at prices ranging from $15 to $22 per share. The last trade known to the Company
was a trade of 22 shares at $22 per share on February 24, 1999. There may be
other trades of which the Company is either not aware, or with respect to which
the Company is not aware of the price. Additionally, the Company sold 31,200
newly issued shares of Common Stock, and 20,000 shares of Series A Non-Voting
Preferred Stock, to Fannie Mae, at a price of $25.00 per share, on September 29,
1997. These trades and transactions do not necessarily reflect the intrinsic or
market values of the Common Stock. As of December 31, 1998, there were 668,360
shares of Common Stock outstanding, held of record by approximately 568
shareholders.
The Company and, during the period prior to July 1, 1995, the Bank, has
paid semi-annual dividends on the Common Stock for each of the last ten years,
and currently intends to continue the payment of such dividends. There can be no
assurance, however, that the Bank or the Company will continue to have earnings
at a level sufficient to support the payment of dividends, or that either entity
will in the future elect to pay dividends. Under the terms of the interim
capital assistance agreement, the Bank may not, during the term of the interim
capital assistance loan, pay any dividends or repurchase any Common Stock,
unless (i) there is no default under the interim capital assistance agreement
and related note; (ii) payment of such dividends would not result in an event of
default; and (iii) the payment of such dividend is not prohibited or objected to
by the OCC. As the Bank is the primary source of funds for payment of dividends
by the Company, the inability of the Bank to pay dividends could adversely
affect the ability of the Company to pay dividends. As of the date hereof, there
is no event of default under the interim capital assistance documents.
Dividends on the Common Stock are subject to the prior payment of dividends
on the Series A Preferred Stock.
Regulations of the OCC place a limit on the amount of dividends the Bank
may pay to the Company without prior approval. Prior approval of the OCC is
required to pay dividends which exceed the Bank's net profits for the current
year plus its retained net profits for the preceding two calendar years, less
required transfers to surplus. As a result of the significant provision for loan
losses made during the fourth quarter of 1998, the ability of the Bank to pay
dividends to the Company at December 31, 1998 was severely restricted. At
December 31, 1998, the Bank was not able to pay any additional dividends to the
Company without prior approval. The Bank will not be able to pay any dividends
to the Company in 1999 without prior regulatory approval until it has retained
earnings of at least $406,000. The restriction of the Bank's ability to pay
dividends to the Company does not limit the ability of the Company to pay
dividends to shareholders from funds available at the holding company level.
Under District of Columbia law, the Company may generally pay cash dividends at
any time when it is not insolvent and where its net assets exceed its stated
capital (the par value of all outstanding shares), and where payment of the
dividend will not cause the Company to become insolvent or to have its stated
capital exceed its net assets. The Federal Reserve and the OCC also have
authority to prohibit a bank from paying dividends if the Federal Reserve or the
OCC deems such payment to be an unsafe or unsound practice.
The Federal Reserve has established guidelines with respect to the
maintenance of appropriate levels of capital by registered bank holding
companies. Compliance with such standards, as presently in effect, or as they
may be amended from time to time, could possibly limit the amount of dividends
that the Company may pay in the future. In 1985, the Federal Reserve issued a
policy statement on the payment of cash dividends by bank holding companies. In
the statement, the Federal Reserve expressed its view that a holding company
experiencing earnings weaknesses
-9-
<PAGE>
should not pay cash dividends exceeding its net income, or which could only be
funded in ways that weakened the holding company's financial health, such as by
borrowing.
As a depository institution, the deposits of which are insured by the FDIC,
the Bank may not pay dividends or distribute any of its capital assets while it
remains in default on any assessment due the FDIC. The Bank currently is not in
default under any of its obligations to the FDIC.
Set forth below is certain financial information relating to the Company's
and Bank's dividend history for the past five fiscal years (as adjusted to
reflect the 5-for-1 stock split in the form of a stock dividend paid in July
1994.) Information for periods prior to July 1, 1995 reflect Bank information.
Year Ended December 31,
----------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------
Net income per common share $(2.03) $ 2.44 $ 2.06 $ 2.56 $ 1.99
Dividends paid per common share $ .51 $ .60 $ .60 $ .60 $ .60
Ratio of dividends to net income
available to common shareholders N/A 24.59% 29.13% 23.44% 30.15%
- -----------------------------------
The payment of dividends by the Company depends largely upon the ability of
the Bank to declare and pay dividends to the Company, as the principal source of
the Company's revenue is dividends paid by the Bank. Future dividends will
depend primarily upon the Bank's earnings, financial condition, and need for
funds, as well as governmental policies and regulations applicable to the
Company and the Bank.
Recent Sales of Unregistered Shares.
During the past three years, the Company has not sold any securities
without registration under the Securities Act of 1933, except for the initial
issuance of shares of the Company's Common Stock, par value $1.00 per share, as
of July 1, 1995, in connection with the establishment of the Company as the one
bank holding company for the Bank. The Company relied upon the exemption
provided by Section 3(a)(12) of the Securities Act of 1933. In connection with
that reorganization transaction, each share of outstanding Bank Common Stock was
converted into one share of Company Common Stock, and each shareholder retained
the same percentage ownership interest in the Company as such shareholder had in
the Bank. No shares of Company Common Stock or other authorized class of
securities were sold for cash, and involved no underwriter, broker or dealer was
involved in connection with the reorganization and conversion of shares.
Additionally, on September 29, 1997, the Company completed the sale of 31,200
shares of its Common Stock, and 20,000 shares of its Series A Non-Voting
Preferred Stock in a private placement transaction, to the Fannie Mae, at a
price of $25.00 per share of Common Stock and $25.00 per share of Series A Non-
Voting Preferred Stock, pursuant to an agreement dated August 15, 1997. No
underwriter, broker or dealer was involved in the sale of shares to Fannie Mae.
The Company relied upon the exemption provided by Section 4(2) of the Securities
Act of 1933, as amended. The sale of shares to Fannie Mae was effected as part
of Fannie Mae's program to make investments in community oriented and minority
institutions to encourage and facilitate housing related lending and affordable
housing initiatives. The purchase was privately negotiated, directly by the
parties and no public solicitation was used.
-10-
<PAGE>
ITEM 6. Management's Discussion and Analysis.
The information required by this item is incorporated by reference to the
material appearing under the caption "Management's Discussion and Analysis"
appearing at pages 23 to 34 of the Company's Annual Report to Shareholders for
the year ended December 31, 1998.
ITEM 7. Financial Statements.
The information required by this item is incorporated by reference to the
Consolidated Financial Statements appearing at pages 1 to 22 of the Company's
Annual Report to Shareholders for the year ended December 31, 1998.
ITEM 8. Changes in and Disagreements with Accountants.
None.
Part III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information required by this Item is incorporated by reference to, the
material appearing at pages 4 to 7 of the Company's definitive proxy statement
for the Annual Meeting of Shareholders to be held on May 25, 1999.
ITEM 10. Executive Compensation.
The information required by this Item is incorporated by reference to, the
material appearing at page 6 of the Company's definitive proxy statement for the
Annual Meeting of Shareholders to be held on May 25, 1999.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to, the
material appearing at pages 2 to 3 of the Company's definitive proxy statement
for the Annual Meeting of Shareholders to be held on May 25, 1999.
ITEM 12. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to, the
material appearing at page 7 of the Company's definitive proxy statement for the
Annual Meeting of Shareholders to be held on May 25, 1999.
ITEM 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibits
- ----------- -----------------------
3(a) Certificate of Incorporation of the Company, as amended (1)
3(b) Bylaws of the Company (2)
4 Specimen certificate for the common stock, $1 par value, of the
Company (3)
10(a) Interim Capital Assistance Agreement between the Company and the
RTC (4)
10(b) Stock Pledge Agreement between the Company and the RTC (5)
11 Statement Regarding Computation of Per Share Earnings
13 The Company's Annual Report to Shareholders for the Year Ended
December 31, 1998
-11-
<PAGE>
Exhibit No. Description of Exhibits
- ----------- -----------------------
21 Subsidiaries of the Registrant
The sole subsidiary of the Registrant is Industrial Bank, National
Association, a national banking association organized under the laws of
the United States
27 Financial Data Schedule
99 Designation of the Series A Non-Voting Preferred Stock (6)
- -----------------------------
(1) Incorporated by reference to Exhibit 1 to the Company's Current Report on
Form 8-K, dated September 25, 1997.
(2) Incorporated by reference to Exhibit 2(b) to the Company's Registration
Statement on Form 10-SB
(3) Incorporated by reference to Exhibit 3 to the Company's Registration
Statement on Form 10-SB
(4) Incorporated by reference to Exhibit 6(a) to the Company's Registration
Statement on Form 10-SB
(5) Incorporated by reference to Exhibit 6(b) to the Company's Registration
Statement on Form 10-SB
(6) Incorporated by reference to Exhibit 2 to the Company's Current Report on
Form 8-K, dated September 25, 1997.
(b) Reports on Form 8-K
None.
-12-
<PAGE>
SIGNATURES
In accordance with Section 13 of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
IBW FINANCIAL CORPORATION
April 8, 1999 By: /s/ B. Doyle Mitchell, Jr.
-------------------------------
B. Doyle Mitchell, Jr.
President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Position Date
/s/ Clinton W. Chapman Chairman of the Board of Directors April 8, 1999
- ---------------------------
Clinton W. Chapman
/s/ George W. Windsor Vice Chairman of the Board of April 8, 1999
- --------------------------- Directors
George H. Windsor
/s/ B. Doyle Mitchell, Jr. President, Chief Executive Officer April 8, 1999
- --------------------------- and Director
B. Doyle Mitchell, Jr.
/s/ Massie S. Fleming Director April 8, 1999
- ---------------------------
Massie S. Fleming
/s/ Benjamin L. King Secretary and Director April 8, 1999
- ---------------------------
Benjamin L. King
/s/ Cynthia T. Mitchell Director April 8, 1999
- ---------------------------
Cynthia T. Mitchell
- --------------------------- Director April , 1999
Marjorie H. Parker --
-13-
<PAGE>
/s/ Emerson A. Williams Director April 8, 1999
- ---------------------------
Emerson A. Williams
/s/ Thomas A. Wilson, Jr. Senior Vice President-Treasurer April 8, 1999
- --------------------------- Principal Financial and
Thomas A. Wilson, Jr. Accounting Officer
-14-
<PAGE>
Index to Exhibits
Exhibit No. Description of Exhibits
3(a) Certificate of Incorporation of the Company, as amended (1)
3(b) Bylaws of the Company (2)
4 Specimen certificate for the common stock, $1 par value, of the
Company (3)
10(a) Interim Capital Assistance Agreement between the Company and
the RTC (4)
10(b) Stock Pledge Agreement between the Company and the RTC (5)
11 Statement Regarding Computation of Per Share Earnings
13 The Company's Annual Report to Shareholders for the Year Ended
December 31, 1998
21 Subsidiaries of the Registrant
The sole subsidiary of the Registrant is Industrial Bank, National
Association, a national banking association organized under the laws of
the United States
27 Financial Data Schedule
99 Designation of the Series A Non-Voting Preferred Stock (6)
- -----------------------------
(1) Incorporated by reference to Exhibit 1 to the Company's Current Report on
Form 8-K dated September 25, 1997
(2) Incorporated by reference to Exhibit 2(b) to the Company's Registration
Statement on Form 10-SB
(3) Incorporated by reference to Exhibit 3 to the Company's Registration
Statement on Form 10-SB
(4) Incorporated by reference to Exhibit 6(a) to the Company's Registration
Statement on Form 10-SB
(5) Incorporated by reference to Exhibit 6(b) to the Company's Registration
Statement on Form 10-SB
(6) Incorporated by reference to Exhibit 2 to the Company's Current Report on
Form 8-K, dated September 25, 1997.
<PAGE>
Exhibit 11
Statement of Computation of Per Share Earnings
Set forth below are the bases for the computation of earnings per share for
the periods shown. The Company had no options, warrants, convertible securities
or other potentially dilutive securities outstanding during any period shown.
Year Ended December 31,
---------------------------
Earnings Per Common Share 1998 1997
---- ----
Basic and Diluted $(2.03) $2.44
Average Shares Outstanding 668,360 645,195
<PAGE>
Exhibit 13
Annual Report to Shareholders for the Year Ended December 31, 1998
<PAGE>
IBW Financial Corporation
Consolidated Financial Statements for the
Years Ended December 31, 1998 and 1997,
and Independent Auditors' Report
<PAGE>
[LOGO OF INDUSTRIAL BANK APPEARS HERE]]
- --------------------------------------------------------------------------------
Annual Message To Shareholders
1998 was a very challenging year for the Board and Management of Industrial
Bank, NA (the "Bank") and IBW Financial Corporation. The Bank experienced good
asset growth, enhanced non-interest fee income through electronic banking
services, and launched its largest marketing campaign ever to enhance its
corporate image and build mortgage volume. The campaign was very well received
by the community. In accordance with its strategic plan, the bank also focused
on employee development by conducting a bank-wide employee survey, finalizing
the 401K pension plan, and conducting a comprehensive space and facilities
assessment. However, these achievements were overshadowed by a deterioration of
asset quality relating to the Bank's commercial and commercial real estate
portfolios, resulting in a loss for the year of $1,354,000.
While total assets grew by 7% during 1998, from $250,752,000 in 1997 to $
269,978,000, net income declined substantially from earnings of $1, 576,000 to a
$1,354,000 loss. Declining interest rates and increasing non-accrual loans
impacted the Bank's margins on earning assets during the year. However, the loss
is primarily attributed to a very large provision for loan loss expense of $4.6
million for 1998, reflecting a $3.4 million increase over last year's provision
expense of $1.2 million. In August, management decided to take a very
conservative approach to rating problem loans, determining non-accrual status
and charging off potential loss exposure. These actions caused non-accruals,
classified assets and losses to increase dramatically. This approach was also
used in management's decision to increase the Allowance for Loan Losses at the
end of the year. Management is confident that most potential weaknesses in the
portfolios have been identified and addressed. Additionally, policies and
procedures have been implemented to improve risk identification in the
portfolio, as well as enhance overall credit administration and asset quality.
It should be noted that even with this loss, IBNA remains well capitalized, with
capital ratios still above minimum regulatory guidelines.
The Bank entered into to a Formal Agreement with its primary regulator, the
Office of the Comptroller of the Currency, which addressed weaknesses in asset
quality, credit administration, management and Year 2000 readiness. The Board
and Management of IBNA have responded to this Agreement with utmost urgency, and
began immediately to address the regulatory concerns. It is our desire to
achieve full compliance with each article in the agreement. Additionally, the
Bank has successfully completed testing for all mission critical systems
necessary for Year 2000 compliance.
Clearly, 1999 will be a year of rebuilding, training, strengthening the
management team, improving asset quality and operational efficiency. The
resulting improvement in infrastructure should provide a strong foundation for
enhanced profitability, maximized shareholder value and growth for the next
millennium. We are committed to our mission of providing the highest quality
customer service to our communities, while fostering an environment of
organizational profitability, teamwork, productivity and excellence.
Clinton W. Chapman, Esq. B. Doyle Mitchell, Jr.
Chairman of the Board President and Chief Executive Officer
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
of IBW Financial Corporation and subsidiary
4812 Georgia Avenue, NW
Washington, DC 20011
We have audited the accompanying consolidated balance sheets of IBW Financial
Corporation and subsidiary (the Company) as of December 31, 1998 and 1997, and
the related consolidated statements of income (loss), comprehensive income
(loss), changes in shareholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, at December 31,1998, IBW
Financial Corporation's subsidiary, Industrial Bank National Association, is
operating under a formal agreement with the Office of the Comptroller of the
Currency ("OCC") dated August 25,1998, that requires it to meet certain
prescribed actions in accordance with OCC specified deadlines.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of IBW Financial Corporation and
subsidiary at December 31, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
Deloitte & Touche, LLP
Washington, DC
February 26, 1999
(March 31,1999 as to Note 2)
<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 12,565 $ 11,842
Federal funds sold 13,150 11,500
-------- --------
Total cash and cash equivalents 25,715 23,342
Interest-bearing deposits in banks 405 3,000
Investment securities available-for-sale, at fair value 131,384 101,106
Loans receivable - net of allowance for loan losses
of $4,700 in 1998 and $1,702 in 1997 104,469 116,476
Real estate owned - net 525 522
Bank premises and equipment - net 2,542 2,672
Other assets 3,687 3,500
Deferred income taxes 1,251 84
-------- --------
TOTAL ASSETS $269,978 $250,702
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Demand deposits $ 58,870 $ 52,922
Time and savings deposits 165,257 155,274
-------- --------
Total deposits 224,127 208,196
Repurchase agreements 25,611 19,496
Other liabilities 1,323 1,833
Note payable 1,000 1,000
-------- --------
Total liabilities 252,061 230,525
-------- --------
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Preferred stock - $1 par value; 1,000,000 (500,000 voting and 500,000
nonvoting) authorized; 20,000 Series A nonvoting
issued and outstanding, stated at liquidation value 500 500
Common stock - $1 par value; 1,000,000 shares authorized;
668,360 issued and outstanding 668 668
Capital surplus 5,051 5,051
Retained earnings 11,463 13,183
Accumulated other comprehensive income, net
of taxes of $120 in 1998 and $393 in 1997 235 775
-------- --------
Total shareholders' equity 17,917 20,177
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $269,978 $250,702
======== ========
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 10,518 $ 10,434
U.S. Treasury securities 424 1,261
Obligations of U.S. Government
agencies and corporations 1,753 501
Collateralized mortgage obligations 3,613 3,797
Obligations of states and political subdivisions 577 864
Bank balances and other securities 173 229
Federal funds sold 905 372
--------- ---------
Total interest income 17,963 17,458
--------- ---------
INTEREST EXPENSE:
Interest-bearing deposits 4,378 4,329
Time certificates over $100,000 977 767
Repurchase agreements 1,032 767
Note payable 51 53
--------- ---------
Total interest expense 6,438 5,916
--------- ---------
NET INTEREST INCOME 11,525 11,542
PROVISION FOR LOAN LOSSES 4,603 1,195
--------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,922 10,347
--------- ---------
NONINTEREST INCOME:
Service charges on deposit and checking accounts 2,599 2,540
Gain on sale of investment securities 301 242
Other operating income 834 552
--------- ---------
Total noninterest income 3,734 3,334
--------- ---------
NONINTEREST EXPENSE:
Salaries and employee benefits 6,775 6,213
Occupancy 745 716
Furniture and equipment 759 625
Data processing 671 606
Advertising 514 397
Real Estate owned expenses 327 193
Loan Collection & Reposession expenses 196 132
Other expenses 2,979 2,763
--------- ---------
Total noninterest expense 12,966 11,645
--------- ---------
(CONTINUED)
</TABLE>
-3-
<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
(Dollars in Thousands, Except Share Data)
- --------------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES $ (2,310) $ 2,036
(BENEFIT) PROVISION FOR INCOME TAXES (956) 460
--------- -------
NET (LOSS) INCOME $ (1,354) $ 1,576
========= =======
(LOSSES) EARNINGS PER COMMON SHARE - Basic and diluted $ (2.03) $ 2.44
========= =======
WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING 668,360 645,195
========= =======
(CONCLUDED)
See notes to consolidated financial statements.
-4-
<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
NET (LOSS) INCOME $ (1,354) $ 1,576
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX
Unrealized securities (losses) gains arising during the year (341) 268
Reclassification adjustment for (gains) losses included in net income (199) 160
--------- -------
Other Comprehensive (Loss) Income (540) 428
--------- -------
COMPREHENSIVE (LOSS) INCOME $ (1,894) $ 2,004
========= =======
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Preferred Common Capital Retained Other Comprehensive
Stock Stock Surplus Earnings Income, Net of Tax Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ - $ 637 $ 4,329 $ 12,005 $ 347 $ 17,318
Issuance of preferred stock 500 - - - - 500
Dividends on preferred stock, $0.31 per share - - - (6) - (6)
Issuance of common stock - 31 722 - - 753
Dividends on common stock, $0.60 per share - - - (392) - (392)
Unrealized gain on securities available
for sale, net of tax - - - - 428 428
Net income - - - 1,576 - 1,576
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 500 668 5,051 13,183 775 20,177
-------- -------- -------- -------- -------- --------
Dividends on preferred stock, $1.25 per share - - - (25) - (25)
Dividends on common stock, $0.51 per share - - - (341) - (341)
Unrealized loss on securities available
for sale, net of tax - - - - (540) (540)
Net loss - - - (1,354) - (1,354)
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1998 $ 500 $ 668 $ 5,051 $ 11,463 $ 235 $ 17,917
======== ======== ======== ======== ======== ========
</TABLE>
-6-
<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,354) $ 1,576
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depreciation 409 352
Amortization of goodwill and intangibles 156 149
Accretion/amortization of premium (327) 643
Deferred income taxes (1,167) 16
Loss on sale of real estate owned 140 22
Gain on sale of investment securities available-for-sale (301) (152)
Gain on sale of investment securities - trading - (90)
Provision for loss on real estate owned 114 108
Provision for loan losses 4,603 1,195
Interest capitalized on securities (382) (873)
Increase in other assets (54) (148)
(Decrease) increase in other liabilities (631) 913
Sale of investment securities - trading - 3,164
-------- --------
Net cash provided by operating activities 1,206 6,875
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in loans 7,120 (12,364)
Additions to bank premises and equipment, net (297) (572)
Proceeds from principal payments on securities
available-for-sale 33,165 11,432
Net decrease in interest-bearing deposits in banks 2,595 --
Proceeds from sale of real estate owned 393 1,048
Proceeds from maturities of investment securities available-for-sale 30,213 8,962
Proceeds from sale of investment securities available-for-sale 4,254 8,105
Purchase of investment securities available-for-sale (97,956) (34,133)
-------- --------
Net cash used in investing activities (20,513) (17,522)
-------- --------
(CONTINUED)
</TABLE>
See notes to financial statements
-7-
<PAGE>
IBW FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid $ (366) $ (398)
Net increase in deposits 15,931 2,112
Net increase in repurchase agreements 6,115 9,030
Sale of common and preferred stock, net - 1,253
-------- --------
Net cash provided by financing activities 21,680 11,997
-------- --------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 2,373 1,350
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 23,342 21,992
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 25,715 $ 23,342
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes $ 212 $ 503
======== ========
Interest $ 6,484 $ 5,301
======== ========
NON CASH TRANSACTIONS:
Noncash transfers of loans to other real estate owned $ 651 $ 390
======== ========
Securitization of mortgage loans $ - $ 3,103
======== ========
</TABLE>
See notes to consolidated financial statements.
(CONCLUDED)
-8-
<PAGE>
IBW FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IBW Financial Corporation (the Corporation) became a unitary bank holding
company and its wholly owned subsidiary Industrial Bank of Washington
converted from a District of Columbia chartered bank to a national banking
association and changed its name to Industrial Bank, National Association
(the Bank) on July 1, 1995. The accounting and reporting policies of IBW
Financial Corporation and subsidiary (the Company) conform to generally
accepted accounting principles and prevailing practices within the banking
industry. The following summarizes the significant accounting policies.
Consolidation - The consolidated financial statements include the accounts
of the Corporation and the Bank. All significant inter-company transactions
and balances have been eliminated.
Use of Estimates - The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. In addition, there are inherent risks and uncertainties related
to the operation of a financial institution, such as credit and interest
rate risk. The possibility exists that because of changing economic
conditions, unforeseen changes could occur and have an adverse effect on
the Company's financial position.
Investment Securities - The Company accounts for securities in accordance
with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities (SFAS No. 115). This
standard requires debt and equity securities to be segregated into the
following three categories: trading, held-to-maturity, and available-for-
sale. Trading securities are purchased and held principally for the purpose
of reselling them within a short period of time. Their unrealized gains and
losses are included in earnings. Securities classified as held-to-maturity
are accounted for at amortized cost, and require the Company to have both
the positive intent and ability to hold these securities to maturity.
Securities not classified as either trading or held-to-maturity are
considered to be available-for-sale. Unrealized gains and losses on
available-for-sale securities are excluded from earnings and reported, net
of deferred taxes, as a separate component of shareholders' equity until
realized. Realized gains or losses on the sale of investment securities are
reported in earnings and determined using the adjusted cost of the specific
security sold.
Loans - Loans are reported at the principal amount outstanding net of
deferred fees and costs and the allowance for possible loan losses.
Interest on loans is accrued and recorded as income based upon the
principal amount outstanding. Loan fees, and related direct loan
origination costs are deferred and recognized over the life of the loan as
an adjustment to the yield of the loan as part of interest income. Loans
are placed on non-accrual status when management deems the collectibility
of interest is doubtful. Interest ultimately collected is recorded in the
period received. Accruals are resumed on loans only when they are brought
fully current with respect to interest and principal and when, in the
judgment of management, the loan is estimated to be fully collectible as to
both principal and interest.
Allowance for Loan Losses - The allowance for loan losses is maintained at
a level believed by management to be adequate to provide for known and
inherent risks in the loan portfolio and commitments to extend credit. The
Company's policy for determination of the adequacy of the allowance is
based on an evaluation of past loan loss experience; current economic
conditions; volume, growth, and composition of the loan portfolio; and
other relevant factors. The allowance is increased by provisions for loan
losses charged against income and recoveries and reduced by charge-offs. In
accordance with SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, as amended, the Company's policy measuring impairment on impaired
loans is based on the fair value of the collateral. In accordance with SFAS
No. 114, the Company considers a loan impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due
-9-
<PAGE>
according to the contractual terms of the loan agreement. The Company's
policy considers all current information, including the borrower's ability
to repay, the fair value of the collateral, and other pertinent information
in determining if a loan is impaired. For the purposes of applying SFAS No.
114, the Company considers residential real estate loans and installment
loans to be smaller balance, homogenous loans, which are aggregated and
collectively evaluated for measurement of impairment. The amount of loan
losses the Company may ultimately realize could differ from these
estimates.
Bank Premises and Equipment - Premises and equipment are stated at cost
less accumulated depreciation. Depreciation is charged to operations on a
straight-line basis over the estimated useful lives of assets which range
from approximately three to forty years.
Real Estate Owned - Real estate owned represents properties acquired
through foreclosures or other proceedings in satisfaction of indebtedness.
At the date of acquisition such property is recorded at the lower of cost
or fair value. Subsequent to acquisition, the property is carried at the
lower of the fair value, less estimated costs to sell, or its new cost
basis. Write-downs to fair value, less estimated costs to sell, at the date
of acquisition are charged to the reserve for oreo losses. Declines in fair
value, operating expenses, and gains or losses on the disposition of other
real estate are reported in other expense. The amounts the Company will
ultimately realize on disposition of these properties could differ from
management's current estimates.
Earnings Per Share - Earnings per share is computed based on the weighted
average number of common shares outstanding during the year. In March 1998,
SFAS No. 128, Earnings Per Share was issued. SFAS No. 128 supersedes APB
No. 15 to conform earnings per share with international standards as well
as to simplify the complexity of the computation under APB No. 15. In
summary, SFAS No. 128 replaces the previous primary earnings per share
(EPS) calculation with a basic EPS calculation. The basic EPS differs from
the primary EPS calculation in that the basic EPS does not include any
potentially dilutive securities. Fully dilutive EPS is replaced with
diluted EPS and should be disclosed regardless of its dilutive impact on
EPS. SFAS No. 128 is effective for both interim and annual periods ending
after December 15, 1998. Basic and diluted EPS are the same for IBW as the
Company had no dilutive securities outstanding as of December 31, 1998.
Income Taxes - The Corporation and its wholly owned subsidiary file a
consolidated federal income tax return. The Company accounts for income
taxes in accordance with SFAS No. 109, Accounting for Income Taxes.
Deferred income tax assets and liabilities are computed annually for
differences between financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future
based on the enacted tax laws and rates applicable to periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or
refundable for the period adjusted for the change during the period in
deferred tax assets and liabilities.
Intangibles - At December 31, 1998 and 1997, other assets included goodwill
of $572,000 and $610,000, net of accumulated amortization of $38,000 and
$55,000 and core deposit intangibles of $367,000 and $420,000, net of
accumulated amortization of $53,000 and $94,000, respectively. Goodwill is
being amortized over 15 years and the core deposit intangibles over 8
years, both on the straight-line basis.
Statement of Cash Flows - For purposes of the consolidated statement of
cash flows, cash equivalents are highly liquid investments with original
maturities of three months or less. Included in cash and due from banks
were required deposits at the Federal Reserve Bank of $5,134,000 and
$3,962,000 at December 31, 1998 and 1997, respectively.
New Accounting Pronouncement - Effective January 1,1998, the Bank 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
-10-
<PAGE>
provisions of SFAS No. 130, which are only of a disclosure nature, did not
affect the Bank'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 Bank 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 Bank's financial position, results of operations, or liquidity.
The Bank 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 Bank's reported results of
operations or financial position.
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 Bank's financial
position and results of operations.
Reclassifications - Certain reclassifications have been made to the prior
year's consolidated financial statements to conform to the 1998
presentation.
2. FORMAL AGREEMENT
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
-11-
<PAGE>
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.
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 regulatory capital requirements.
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 revision 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 plans and in connection with its Y2K
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 critical systems by December 31,1998, and was not in compliance
with its 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 certain
provisions, and has the intent to comply with the remaining 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.
-12-
<PAGE>
3. INVESTMENT SECURITIES
At December 31, 1998 and 1997, the amortized cost and approximate fair
value of securities available-for-sale were as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury Notes $ 2,001 $ 12 $ $ 2,013
U.S. Government Agencies 57,540 139 (61) 57,618
Mortgage-Backed Securities:
Pass-through securities:
Guaranteed by GNMA 41 2 - 43
Issued by FNMA and FHLMC 9 1 - 10
Collateralized Mortgage Obligations:
Collateralized by FNMA, FHLMC and
GNMA mortgage-backed securities 62,274 208 (578) 61,904
Securities issued by states and
political subdivision:
General obligations 5,886 419 - 6,305
Revenue obligations 2,192 188 - 2,380
Other 1,086 25 - 1,111
-------- -------- -------- --------
TOTAL $131,029 $ 994 $ (639) $131,384
======== ======== ======== ========
Weighted average interest rate 5.96%
=====
<CAPTION>
December 31, 1997
---------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury Notes $ 18,985 $ 30 $ (1) $ 19,014
U.S. Government Agencies 11,480 21 (2) 11,499
Mortgage-Backed Securities:
Pass-through securities:
Guaranteed by GNMA 66 3 - 69
Issued by FNMA and FHLMC 10 2 - 12
Collateralized Mortgage Obligations:
Collateralized by FNMA
mortgage-backed securities 56,273 531 (114) 56,690
Securities issued by states and
political subdivision:
General obligations 9,849 540 (6) 10,383
Revenue obligations 2,191 152 - 2,343
Other 1,079 17 - 1,096
-------- -------- -------- --------
TOTAL $ 99,933 $ 1,296 $ (123) $101,106
======== ======== ======== ========
Weighted average interest rate 6.50%
=====
</TABLE>
The following is a summary of the amortized cost and estimated fair value
of investment securities available-for-sale by contractual maturity as of
December 31,1998. Expected maturities will differ from
-13-
<PAGE>
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties (in
thousands).
Estimated
Amortized Fair
Cost Value
Due in one year or less $ 28,495 $ 28,569
Due after one year through five years 32,133 32,173
Due five through ten years - -
Due after ten years 8,077 8,685
Pass through securities 50 53
Collateralized mortgage obligations 62,274 61,904
--------- ---------
Total $ 131,029 $ 131,384
========= =========
Proceeds from the sale of securities available-for-sale were $4,254,000
and $8,105,000 for the year ended December 31, 1998 and 1997,
respectively, and resulted in gross realized gains of $301,000 and
$152,000 and gross realized losses of $0 and $1,000 for the years ended
December 31, 1998 and 1997, respectively. Proceeds from the sale of
trading securities were approximately $3,164,000 for the year ended
December 31, 1997, and resulted in gross realized gains of approximately
$90,000. There were no sales of trading securities for the year ended
December 31, 1998.
Securities of $12,040,000 and $9,840,000 at December 31, 1998 and 1997,
were pledged as collateral for public deposits and for other purposes
required by law. At December 31, 1998 and 1997, the carrying value of
securities underlying repurchase agreements was $25,611,000 and
$19,840,000, respectively.
4. LOANS RECEIVABLE
Loans receivable consist of the following (in thousands) at December 31:
1998 1997
Real estate loans:
Collateralized by residential property:
First mortgages $ 48,110 $ 48,247
Second mortgages 2,987 3,830
Collateralized by non-residential properties 33,560 38,499
Commercial 16,568 23,145
Installment 8,388 4,925
-------- --------
Total $109,613 $118,646
Less:
Deferred fees and costs, net 444 468
Allowance for loan losses 4,700 1,702
-------- --------
Net loans $104,469 $116,476
======== ========
-14-
<PAGE>
Major loan concentrations are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Church loans collateralized by real estate $ 11,941 $ 10,904
Installment loans to churches 67 36
Commercial loans to churches 290 1,733
-------- --------
Total loans to churches $ 12,298 $ 12,673
======== ========
</TABLE>
Substantially all of the Bank's loans have been made to borrowers within
the Washington, DC metropolitan area. Accordingly, the ability of the
Bank's borrowers to repay their loans is dependent upon the economy in the
Washington, DC metropolitan area.
A summary of transactions in the allowance for loan losses is as follows
(in thousands) at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Balance, beginning of year $ 1,702 $ 1,266
Add: Provision charged to expense 4,603 1,195
Recoveries 215 130
Deduct: Charge-offs (1,820) (889)
------- -------
Balance, end of year $ 4,700 $ 1,702
======= =======
</TABLE>
At December 31, 1998 and 1997, loans that were considered to be impaired
under SFAS No. 114 totaled $5,003,000 and $852,000, respectively. The
related allowance allocated to impaired loans was $1,520,000 and $251,000
at December 31, 1998 and 1997, respectively. The average balance of
impaired loans for the years ended December 31, 1998 and 1997, was
$2,547,000 and $1,984,000, respectively. Interest income that was not
recorded on impaired loans for the years ended December 31, 1998 and 1997,
was $230,000 and $223,000, respectively.
5. BANK PREMISES AND EQUIPMENT
The major categories of bank premises and equipment are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Bank premises $ 2,389 $ 2,276
Furniture, fixtures, and equipment 3,279 3,330
------- -------
Total $ 5,668 $ 5,606
Less accumulated depreciation (3,126) (2,934)
------- -------
Bank premises and equipment, net $ 2,542 $ 2,672
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1998 and 1997 is
$409 and $352, respectively.
-15-
<PAGE>
6. DEPOSITS
Deposits consist of the following (in thousands):
At December 31, 1998
Demand Savings Time Total
Individuals, partnerships, and
corporations $ 57,959 $ 92,338 $ 65,179 $215,476
U.S. government 627 1 1,860 2,488
States and political subdivisions - - 5,879 5,879
Certified and official checks 284 - - 284
-------- -------- -------- --------
Total $ 58,870 $ 92,339 $ 72,918 $224,127
======== ======== ======== ========
Weighted average interest rate 2.04% 4.17%
===== =====
Deposits consist of the following (in thousands):
At December 31, 1997
Demand Savings Time Total
Individuals, partnerships, and
corporations $ 50,334 $ 92,462 $ 57,539 $200,335
U.S. Government 37 - 1,014 1,051
States and political subdivisions 242 - 4,259 4,501
Certified and official checks 2,309 - - 2,309
-------- -------- -------- --------
Total $ 52,922 $ 92,462 $ 62,812 $208,196
======== ======== ======== ========
Weighted average interest rate 2.53% 4.53%
===== =====
Demand deposits represent non-interest-bearing deposit accounts.
Individual certificates of deposit of $100,000 or more at December 31,
1998 and 1997, totaling $21,226,000 and $16,807,000 respectively, are
included in time deposits. The bank has no brokered deposits.
At December 31, 1998, the scheduled maturities of Time Deposits are as
follows (in thousands):
Average Rate
1999 $ 62,391 4.08%
2000 5,726 5.27%
2001 1,235 4.93%
2002 - 0.00%
2003 3,566 3.75%
--------
$ 72,918
========
7. REPURCHASE AGREEMENTS
At December 31, 1998 and 1997, securities sold under agreements to
repurchase were $25,611,000 and $19,496,000, respectively. These are fixed
coupon agreements that are treated as financing transactions, and the
obligations to repurchase are reflected as a liability in the consolidated
balance sheet. The amount of the securities underlying the agreements
remains in the asset account. The securities are held in a segregated
account by the Company's custodian. The securities underlying the
agreements at December 31, 1998 and 1997 had a fair value of $26,288,000
and $19,840,000, respectively. All outstanding agreements at December 31,
1998 and 1997 matured on January 1, 1999 and 1998, respectively. The
outstanding agreements had an average interest rate of 2.72% and 4.26% at
December 31, 1998 and 1997, respectively. The average balance and the
average interest rate for the year ended December 31, 1998 and 1997 were
$24,011,000 and 4.30% and $16,820,000 and 4.56%, respectively. During 1998
and 1997, the maximum month-end balance was $29,182,000 and $19,496,000,
respectively.
-16-
<PAGE>
8. NOTE PAYABLE
In connection with the acquisition/assumption of certain Resolution Trust
Corporation (RTC) assets and liabilities in 1994, the Corporation and the
Bank executed an Interim Capital Assistance Agreement (Agreement) with the
RTC. In accordance with the provisions of the Agreement and the related
Promissory Note, the Corporation borrowed $1,000,000 from the RTC. As
required by the Agreement, the Corporation invested all the proceeds in
the Bank. The Corporation pledged to the RTC all the issued and
outstanding shares of capital stock of the Bank to secure the Promissory
Note. The note payable accrues interest at a variable rate based on the
13-week U.S. Treasury Bill rate, reset quarterly. The interest rate at
December 31, 1998 and 1997, was 4.49% and 5.187%. The outstanding
principal balance matures on July 3, 2000.
The Agreement prevents the Bank from declaring or paying dividends,
issuing any of its capital stock, or options or other rights thereto,
repurchasing, redeeming or retiring any of its outstanding capital stock,
or making any distribution of its assets to the Corporation. However, the
Agreement does provide for the payment of dividends by the Bank if (i)
there is no event of default in existence under the Agreement or the
Promissory Note, (ii) the Bank would not cause an event of default by the
declaration or payment of dividends, and (iii) the declaration or payment
of any such dividends are not prohibited by or objected to by the Bank's
primary regulator. Additionally, the Agreement limits the types of
transactions that the Bank can enter into with the Corporation. Further,
the Agreement requires that the Bank maintain its tangible capital ratio,
calculated in accordance with the regulations prescribed by the Office of
the Comptroller of the Currency in excess of 5.22%. Finally, the Agreement
provides for the full repayment of the note payable prior to the sale or
disposition of all or substantially all of the Bank's assets or a change
in control of the Bank.
9. SHAREHOLDERS' EQUITY
On September 29, 1997, the Company completed the sale of 31,200 shares of
its common stock and 20,000 shares of its Series A Non-Voting Preferred
Stock, in a private placement transaction, to the Federal National
Mortgage Association (Fannie Mae), at a price of $25 per share of common
stock and $25 per share of Series A Non-Voting Preferred Stock for a total
purchase price of $1,280,000. The shares of common stock issued to Fannie
Mae represent approximately 4.67% of the outstanding shares of the
Company's common stock, and the shares of Series A Non-Voting Preferred
Stock represent all of the authorized shares of that series.
The Corporation has contributed $980,000 of the proceeds of the sale to
Industrial Bank, the wholly owned subsidiary of the Corporation, for use
in connection with its mortgage and housing-related lending operations,
and the promotion of affordable housing in its market area. The remaining
proceeds have been retained at the Corporation for general corporate
purposes.
Under the stock purchase agreement, the Company is restricted from taking
any action, including the repurchase, redemption, or other reduction in
the number of outstanding shares of capital stock, but not including the
incurrence of losses that would result in the value of the Shares
representing 10% or more of the equity of the Company, or the shares of
common stock sold to Fannie Mae representing 5% or more of the outstanding
common stock. The Company has certain rights under the agreement to
repurchase the Shares under certain circumstances.
-17-
<PAGE>
10. REGULATORY MATTERS
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and
possibly additional discretionary -- actions by regulators that, if
undertaken, could have a direct material effect on the Corporation's and
the Bank's financial statements. Under capital adequacy guidelines and
regulatory framework for prompt corrective action, the Corporation and the
Bank must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain off-balance sheets
items as calculated under regulatory accounting practices. The
Corporation's and the Bank's capital amounts and the Bank's classification
under the regulatory framework for prompt corrective action are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier
1 capital, as defined in the regulations, to risk-weighted assets, as
defined and of Tier 1 Capital, as defined, to average assets, as defined.
Management believes, as of December 31, 1998, that the Corporation and
Bank meet all the capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from Office of the
Comptroller of Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
adequately capitalized, the Bank must maintain minimum total risk-based,
Tier 1 risk- based, and Tier 1 leverage ratios, as set forth in the table
below. There are no conditions or events since that notification that
management believes have changed the institution's category.
-18-
<PAGE>
The Corporation's and the Bank's required and actual capital amounts and
ratios at December 31, 1998 and 1997, are set forth in the following table
(in thousands):
<TABLE>
<CAPTION>
To Be Categorized as
Well Capitalized
Under Prompt
For Capital Adequacy Corrective Action
Actual Purposes Provisions
------------------------------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
- -----------------------
Total capital (to risk-
weighted assets):
Corporation $ 17,005 14% $ 9,443 8% N/A N/A
Bank 17,262 15% 9,427 8% $ 11,516 10%
Tier I capital (to risk-
weighted assets)
Corporation $ 15,490 13% $ 4,722 4% N/A N/A
Bank 15,747 13% 4,713 4% 6,910 6%
Tier I capital (to
average assets)
Corporation $ 15,490 6% $ 10,749 4% N/A N/A
Bank 15,747 6% 10,733 4% 13,585 5%
As of December 31, 1997
- -----------------------
Total capital (to risk-
weighted assets)
Corporation $ 19,876 16% $ 9,666 8% N/A N/A
Bank 20,148 17% 9,652 8% $ 12,064 10%
Tier I capital (to risk-
weighted assets)
Corporation 18,369 15% 4,833 4% N/A N/A
Bank 18,641 15% 4,826 4% 7,239 6%
Tier I capital (to
average assets)
Corporation 18,369 8% 9,787 4% N/A N/A
Bank 18,641 8% 9,782 4% 12,227 5%
</TABLE>
On August 25,1998, the Bank entered into a Formal Agreement (the
Agreement) with the Office of the Comptroller of the Currency (OCC). (Note
2)
-19-
<PAGE>
11. INCOME TAXES (BENEFIT)
The (benefit) provision for income taxes consists of the following (in
thousands) at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current:
Federal income tax $ (39) $ 552
State and local income tax (23) 51
----- -----
(62) 603
Deferred:
Federal income tax (894) (143)
----- -----
Total $(956) $ 460
===== =====
</TABLE>
The components of the deferred tax (benefit) expense resulting from net
temporary differences are as follows (in thousands) at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Depreciation $ 16 $ 5
Provisions for losses on loans and other
real estate owned (980) (96)
Deferred loan fees 25 (37)
Other 45 (15)
----- -----
Total $(894) $(143)
===== =====
</TABLE>
The following reconciles the federal statutory income tax rate of 34% to
the effective income tax rate (in thousands) at December 31:
<TABLE>
<CAPTION>
1998 1997
------------- ---------------
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Federal tax expense at statutory rate $(788) -34% $ 692 34%
State tax expense, net of federal tax
benefit (15) -1% 130 6%
Tax-exempt interest (179) -8% (267) -13%
Other 26 2% (95) -4%
----- ---- ----- ----
Total $(956) -41% $ 460 23%
----- ---- ----- ---
</TABLE>
-20-
<PAGE>
The tax effects of items comprising the Company's deferred tax assets
(liabilities) at December 31, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for losses on loans and other real
estate owned $ 1,325 $ 345
Deferred loan fees 163 188
Pension costs - 45
Other 46 45
------- -------
Total deferred tax assets 1,534 623
------- -------
Deferred tax liabilities:
Unrealized gain on available-for-sale securities (121) (393)
Depreciation (145) (129)
Other (17) (17)
------- -------
Total deferred tax liabilities (283) (539)
------- -------
Net deferred tax assets $ 1,251 $ 84
======= =======
</TABLE>
12. RETIREMENT PLAN
The Company terminated its noncontributory, defined benefit pension plan
during 1998. No additional funding was required as a result of its
termination. All plan assets were distributed to plan participants.
13. EMPLOYEE STOCK OWNERSHIP PLAN
In 1986, the Bank implemented an Employee Stock Ownership Plan (ESOP)
that covers substantially all full-time employees. Annual contributions
to the plan are determined by the Company's Board of Directors. No
contributions were made for 1998 while $39,100 were made to the plan
during 1997, respectively. At December 31, 1998 and 1997, the ESOP held
approximately 54,720, of the total outstanding shares of the Company's
common stock.
14. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various outstanding
commitments and contingent liabilities, such as commitments to extend
credit, which are not shown in the accompanying consolidated financial
statements. The Company does not anticipate any material losses as a
result of these transactions. At December 31, 1998 and 1997 the Bank had
outstanding commitments to fund loans for approximately $22,790,000 and
$30,837,000, respectively. The Bank also has outstanding standby letters
of credit at December 31, 1998 and 1997 in the amount of $1,018,000 and
$1,108,000, respectively. Such commitments and standby letters of credit
are subject to the Bank's normal underwriting standards. Many of the
commitments are expected to expire without being completely drawn upon;
the total commitment amounts do not necessarily represent future cash
requirements.
At December 31, 1998, the Bank was committed for future minimum annual
payments under noncancelable long-term lease agreements for the rental of
office space as follows (in thousands):
1999 $ 226
2000 124
2001 53
2002 16
2003 -
-------
Total $ 419
=======
Rent expense for the years ended December 31, 1998 and 1997 was $275,000
and $188,000, respectively. Rent expense includes the amortization of the
rent concessions.
-21-
<PAGE>
15. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has determined the fair value of its financial instruments
using the following assumptions:
Cash and Cash Equivalents, Interest-Bearing Deposits, Accrued Interest
Receivable and Payable, and Repurchase Agreements - The fair value of
cash and cash equivalents, accrued interest receivable and payable and
repurchase agreements was estimated to equal the carrying value due to
the short-term nature of these financial instruments.
Securities - The fair value of securities was estimated based on quoted
market prices, dealer quotes and prices obtained from independent pricing
services.
Loans - The fair value of loans receivable was estimated by discounting
the estimated future cash flows using current rates on loans with similar
credit risks and terms. It was assumed that no prepayments would occur
due to the short-term nature of the portfolio (five years or less) and
based upon the Bank's historical experience.
Deposits - The fair value of demand and savings deposits was estimated to
equal the carrying value due to the short-term nature of the financial
instruments. The fair value of time deposits was estimated by discounting
the estimated future cash flows using current rates on time deposits with
similar maturities.
Note Payable - The fair value of the note payable was estimated based on
rates currently available to the Bank for borrowings with similar terms
and remaining maturities.
Commitments to Fund Loans and Standby Letters of Credit - The majority of
the Bank's commitments to grant loans and standby letters of credit are
generally unassignable by either the Bank or the borrower, they only have
value to the bank and the borrower.
The fair value estimates presented are based on pertinent information
available as of December 31, 1998 and 1997. However, considerable
judgment is required to interpret market data to develop the estimates of
fair value. Accordingly, the estimates presented are not necessarily
indicative of the amounts that the Company could realize in a current
market transaction. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
<TABLE>
<CAPTION>
(In thousands) December 31, 1998 December 31, 1997
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 25,715 $ 25,715 $ 23,342 $ 23,342
Interest-bearing deposits 405 405 3,000 3,000
Investment securities 131,384 131,384 101,106 101,106
Loans 104,469 108,146 116,476 116,312
Accrued interest receivable 1,924 1,924 1,745 1,745
Liabilities:
Deposits $ 224,127 $ 217,993 $ 208,196 $ 208,121
Repurchase agreements 25,611 25,611 19,496 19,496
Note payable 1,000 1,000 1,000 1,000
Accrued interest payable 522 522 580 580
</TABLE>
16. RELATED PARTY TRANSACTIONS
In the normal course of banking business, loans are made to officers and
directors. At December 31, 1998 and 1997 these loans totaled $698,000 and
$727,000, respectively. New loans to related parties originated during
1998 were $146,000 and payments are being received on time.
-22-
<PAGE>
17. PARENT COMPANY FINANCIAL INFORMATION
The summarized financial statements of IBW Financial Corporation (parent
company only) as of December 31, 1998 and 1997, and for the years ended
December 31, 1998 and 1997, follow (in thousands):
<TABLE>
<CAPTION>
Statements of Financial Condition 1998 1997
---------------------------------
<S> <C> <C>
Assets:
Deposits with subsidiary $ 296 $ 584
Interest bearing deposits in banks 285 --
Securities available-for-sale 152 144
Other assets 52 36
Investment in subsidiary - at equity 18,158 20,437
------- -------
Total Assets $18,943 $21,201
======= =======
Liabilities and Equity:
Liabilities:
Borrowings $ 1,000 $ 1,000
Other 26 24
------- -------
Total Liabilities 1,026 1,024
------- -------
Shareholders' Equity
Preferred stock 500 500
Common stock 668 668
Capital surplus 5,051 5,051
Retained earnings 11,463 13,183
Accumulated other comprehensive income - net of
taxes of $393 in 1998 and $179 in 1996 235 775
------- -------
Total Shareholders' Equity 17,917 20,177
------- -------
Total Liabilities and Shareholders' Equity $18,943 $21,201
======= =======
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
Statements of Operations 1998 1997
- ------------------------
<S> <C> <C>
Dividends from subsidiary and other income $ 432 $ 647
Expenses 52 53
------- -------
Income before undistributed net earnings of subsidiary 380 594
(Loss) Equity in undistributed net earnings of subsidiary (1,734) 982
------- -------
Net (loss) income $(1,354) $ 1,576
======= =======
Statements of Comprehension Income (Loss)
- -----------------------------------------
Net (loss) income $(1,354) $ 1,576
Other comprehensive (loss) income, net of tax
Unrealized securities (losses) gains (341) 268
Reclassification adjustment (199) 160
------- -------
Total Other Comprehensive (Loss) Income (540) 428
------- -------
Comprehensive (Loss) Income $(1,894) $ 2,004
======= =======
Statements of Cash Flows
- ------------------------
Cash Flows from Operating Activities:
Net (loss) income $(1,354) $ 1,576
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net loss (earnings) of subsidiary 1,734 (982)
Other (17) (14)
------- -------
Net cash provided by operating activities 363 580
------- -------
Cash Flows for Investing Activities:
Purchase of interest bearing deposits (285) --
Investment in subsidiary -- (980)
------- -------
Net cash used in investing activities (285) (980)
------- -------
Cash Flows from Financing Activities:
Payment of dividends (366) (398)
Sale of stock -- 1,253
------- -------
Net cash (used in) provided by financing activities (366) 855
------- -------
(Increase) Decrease in Deposits with Subsidiary (288) 455
Deposits with Subsidiary, Beginning of the Year 584 129
------- -------
Deposits with Subsidiary, Ending of the Year $ 296 $ 584
======= =======
</TABLE>
-24-
<PAGE>
Management's Discussion and Analysis
The following financial review presents a discussion of the results of
operations, an analysis of the asset and liability structure of the
Company, and its sources of liquidity and capital resources and should be
read in conjunction with the consolidated financial statements. All dollar
amounts shown are in thousands, except with respect to per share data.
Forward-looking statements-This discussion, as well as other portions of
this report, contains forward-looking statements within the meaning of the
Securities Exchange Act of 1934, as amended, including statements of goals,
intentions, and expectations as to future trends, plans events or results
of Company operations and policies and regarding general economic
conditions. These statements are based upon current and anticipated
economic conditions, nationally and in the Company's market, interest rates
and interest rate policy, competitive factors, 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 statements. The Company does not
undertake to update any forward-looking statements to reflect occurrences
or events which may not have been anticipated as of the date of such
statements.
Holding Company Business
The Company became a unitary bank holding company, and its wholly-owned
subsidiary Industrial Bank, National Association, converted from a District
of Columbia chartered bank to a national banking association as of July 1,
1995. The business of the Bank and the Company is providing banking
services to the Washington, DC metropolitan area. The Bank does business
through seven offices in the District of Columbia and two offices in Prince
George's County, Maryland.
General-The Company's net income depends primarily on net interest income,
which is the difference between interest income on interest-earning assets
and interest expense on interest-bearing liabilities. Non-interest income,
such as customer deposit account services charges, late charges on loans
and other sources of income also impact net income. The Company's operating
expenses, other than interest expense, consist principally of compensation
and employee benefits, occupancy, data processing, provision for loan
losses and other operating expenses. The Company's net income is
significantly affected by general economic conditions in the Washington, DC
metropolitan area and policies of regulatory authorities.
Results of Operations
Years Ended December 31, 1998 and 1997
Overview-Net income was ($1,354) for 1998 compared with $1,576 in 1997, a
decrease of 186%. Earnings per common share decreased 184% in 1998 to
($2.03) compared with $2.44 in 1997. The decrease of $2,930, or 186%, in
net income available to common shareholders was primarily attributable to
an increase in the provision for loan losses of $3,408, an increase in
non-interest expenses $1,329 and a decrease in net interest income of $17,
offset by an increase in non-interest income of $400 and tax benefit of
$964. Return on average assets was (.51%) for 1998, down from .64% for
1997. Return on average equity was (6.97%) for 1998, compared with 8.74%
for 1997.
Table 1. Financial Overview
The following table summarizes net income divided by average assets and
average shareholders' equity, dividend pay-out ratio (dividends declared per
share divided by net income per share) and shareholders' equity to assets
ratio (average shareholders' equity divided by average total assets) for
each of the three years listed below.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Return on average assets (0.51%) 0.64% 0.57%
Return on average equity (6.97%) 8.74% 8.06%
Dividend payout N/A 24.59% 29.13%
Average shareholders' equity to average assets 7.37% 7.37% 7.06%
--------------------------------------------------------------------------------
</TABLE>
Net Interest Income- Net interest income is the principal source of earnings
for the Company. It is affected by a number of factors including the level,
pricing and maturity of interest-earning assets and interest-bearing
liabilities, interest rate fluctuations, and asset quality. Information
concerning the Company's interest-earning assets, interest-bearing
liabilities, net interest income, and interest rate spreads, and net yield
on interest-earning assets is presented in Table 2. Changes in the Company's
interest income and interest expense resulting from changes in interest
rates and in the volume of interest-earnings assets and interest-bearing
liabilities are presented in Table 3.
-25-
<PAGE>
Table 2. Average Balance and Net Interest Income Analysis (1)
YEAR ENDED DECEMBER 31
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------------------------------- ---------
Amount
Average Average Paid or Average
Balance Rate Earned Balance
ASSETS
<S> <C> <C> <C> <C>
Loans, net $113,286 9.28% $ 10,518 $111,856
Taxable securities 103,507 5.66% 5,858 88,897
Non-taxable securities (2) 10,353 8.44% 874 15,919
Federal funds sold 16,493 5.49% 905 6,575
Interest-bearing deposits held 2,238 4.69% 105 3,000
-------- ---- -------- --------
Total interest-earning assets 245,877 7.43% 18,260 226,247
Cash and due from banks 11,038 11,108
Bank premises and equipment, net 2,692 2,515
Other assets 3,831 4,669
-------- --------
Total assets $263,438 $244,539
======== ========
Liabilities and Shareholders' Equity
Interest-bearing demand deposits 27,394 1.76% 481 28,326
Savings deposits 65,474 2.70% 1,770 66,724
Time deposits 68,643 4.52% 3,104 61,041
-------- ---- -------- --------
Total interest-bearing deposits 161,511 3.32% 5,355 156,091
Borrowed funds 1,000 5.10% 51 1,000
Repurchase agreements 24,011 4.30% 1,032 16,820
-------- ---- -------- --------
Total interest-bearing liabilities 186,522 3.45% 6,438 173,911
Noninterest-bearing liabilities 56,031 50,362
Other liabilities 1,471 2,235
Shareholder's equity 19,413 18,031
-------- --------
Total liabilities and shareholders' equity $263,438 $244,539
======== ========
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%
<CAPTION>
1996
----------------------------------------
Amount Amount
Average Paid or Average Average Paid or
Rate Earned Balance Rate Earned
ASSETS
<S> <C> <C> <C> <C> <C>
Loans, net 9.33% $ 10,434 $ 99,879 9.41% $ 9,401
Taxable securities 6.31% 5,605 86,305 6.06% 5,232
Non-taxable securities (2) 8.22% 1,309 12,747 8.31% 1,059
Federal funds sold 5.66% 372 11,279 5.51% 622
Interest-bearing deposits held 6.10% 183 1,661 6.44% 107
---- -------- -------- ---- -------
Total interest-earning assets 7.91% 17,903 211,871 7.75% 16,421
Cash and due from banks 10,841
Bank premises and equipment, net 2,424
Other assets 5,423
--------
Total assets $230,559
========
Liabilities and Shareholders' Equity
Interest-bearing demand deposits 1.99% 563 30,718 2.10% 644
Savings deposits 2.75% 1,836 72,856 2.87% 2,087
Time deposits 4.42% 2,697 55,548 4.44% 2,468
---- ----- -------- ---- -------
Total interest-bearing deposits 3.26% 5,096 159,122 3.27% 5,199
Borrowed funds 5.30% 53 1,000 5.30% 53
Repurchase agreements 4.56% 767 3,376 4.53% 153
---- ----- -------- ---- -------
Total interest-bearing liabilities 3.40% 5,916 163,498 3.31% 5,405
Noninterest-bearing liabilities 48,930
Other liabilities 1,841
Shareholder's equity 16,290
--------
Total liabilities and shareholders' equity $230,559
========
Net interest income and net yield on interest-earning assets
Net interest income $11,987 $11,016
------- -------
Interest rate spread 4.51% 4.44%
Net yield on average interest-earning assets 5.30% 5.20%
Average interest-earning assets to
average interest-bearing liabilities 130.09% 129.59%
</TABLE>
1) Yields on securities have been computed based upon the historical cost of
such securities. Non-accruing loans are included in average balances.
2) Yields on non-taxable securities are presented on a tax-equivalent basis
using a 34% tax rate. Interest income and net interest income reported in
the Company's consolidated statements of income were $17,963 and $11,525 for
1998, $17,548 and $11,542 for 1997, and $16,061 and $10,656 for 1996.
-26-
<PAGE>
Table 3. Rate/Volume Analysis of Tax Equivalent Net Interest Income
Net interest income is affected by changes in the average interest rate
earned on interest-earning assets and the average interest rate paid on
interest-bearing liabilities. In addition, net interest income is
affected by changes in the volume of interest-earning assets and
interest-bearing liabilities. The following table sets forth the dollar
amount of increase (decrease) in interest income and interest expense
resulting from changes in the volume of interest-earning assets and
interest-bearing liabilities and from changes in yields and rates. The
combined effect of changes in both rate and volume has been allocated
proportionately to the change due to volume and the change due to rate.
Interest income on tax-exempt securities is presented on a
taxable-equivalent basis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 VS. 1997 1997 VS. 1996
Increase (Decrease) Due to Increase (Decrease) Due to
- ------------------------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Loans $ 138 $ (54) $ 84 $ 1,124 $ (91) $ 1,033
Taxable securities 922 (669) 253 154 219 373
Non-taxable securities (457) 22 (435) 264 (14) 250
Federal funds sold 561 (28) 533 (259) 9 (250)
Interest-bearing deposits (46) (32) (78) 86 (10) 76
------- ------- ------- ------- ------- -------
Total interest income $ 1,118 $ (761) $ 357 $ 1,369 $ 113 $ 1,482
Deposits
Interest-bearing demand deposits $ (20) $ (62) $ (82) $ (50) $ (31) $ (81)
Savings deposits (33) (33) (66) (174) (77) (251)
Time deposits 338 69 407 241 (12) 229
------- ------- ------- ------- ------- -------
Total interest-bearing deposits $ 285 $ (26) $ 259 $ 17 $ (120) $ (103)
Borrowings 331 (68) 263 632 (18) 614
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 616 (94) 522 649 (138) 511
------- ------- ------- ------- ------- -------
Net interest income $ 502 $ (667) $ (165) $ 720 $ 251 $ 971
======= ======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
On a tax equivalent basis, net interest income for 1998 decreased $169
or 1% over 1997. The decrease was primarily attributable to an increase
in average interest-bearing liabilities, a decrease in the net interest
spread, partially offset by an increase in average interest-earning
assets.
Average interest-earning assets increased by $19,630 or 9%, comprised
principally of growth in taxable securities and federal funds sold.
Average taxable securities increased $14,610 or 16%, average federal
funds sold increased $9,918 or 151%. The increase in taxable securities
and federal funds resulted primarily from an increase in deposits and
borrowings coupled with a decrease in loans.
The interest rate spread decreased 54 basis points or approximately
12%, from 4.51% in 1997 to 3.97% in 1998. The decrease is a result of a
48 basis point decrease in the average rate earned on interest-earning
assets versus a 5 basis point increase in average interest bearing
liabilities. The yield on taxable securities in 1998 decreased 65 basis
points from 1997 due primarily to the lower interest rate environment
causing an accelerated amortization on the premiums associated with the
mortgage-backed securities. The yield and average balances on
mortgage-backed securities were 5.74% and $63,177 for 1998 and 6.36%
and $59,147 for 1997, respectively.
Interest-bearing liabilities increased $12,611 or 7%, comprised of an
increase in time deposits and borrowings, partially offset by a
decrease in interest-bearing demand and savings deposits. Time deposits
and borrowings (comprised of repurchase agreements and the interim
capital assistance note payable) increased 12% and 40%, respectively.
Provision for Loan Losses-The Company maintains an allowance for loan
losses to absorb losses on existing loans and commitments that may
become uncollectible. The provision for loan losses increased $3,408
from $1,195 for 1997 to $4,603 for 1998. The increase in the provision
for loan losses is attributable to the increase in non-performing
assets and the large level of potential problem loans, specifically
those in the commercial and commercial real estate loan portfolio.
Management believes that the allowance for loan losses is adequate to
absorb potential losses inherent in the loan portfolio. As losses on
loans
-27-
<PAGE>
are not statistically predictable and are dependent upon economic
conditions in the Bank's marketplace, future provisions for loan losses
may decrease or increase from the levels deemed appropriate for 1998.
There can be no assurance, however, that future provisions for loan
losses will not be required.
Non-interest Income- Non-interest income increased $400 or 12% to
$3,734 for 1998 from $3,334 for 1997. The primary components of
non-interest income is other income, service charges on deposit and
checking accounts and gains on sale of securities. Other income
increased $282 or 51% and primarily represented surcharges on
non-depositors utilizing the Bank's ATM services. Service charges on
deposit accounts increased $59 or 2% and is primarily attributable to
the increased volume of deposit accounts. Additionally, gain on the
sale of securities increased $59 or 25% due in part to the lower
interest rate environment and management's investment strategy.
Non-interest Expense- Non-interest expense for 1998 was $12,974 an
increase of $1,329 or 11% over 1997. This increase is attributable
primarily to an increase of $562 or 9% in salaries and employee
benefits, $134 increase or 21% in furniture and equipment expenses, $65
in data processing cost, $117 in advertising expenses, $327 in other
real estate owned expenses, $64 in loan collections expenses, and an
increase of $216 in other expenses . The increase in salaries and
employee benefits was attributed largely to $127 in increased salary
and benefits to the staff at the Rhode Island Avenue Branch which
opened in May of 1997, $102 in increased salaries associated with the
retail banking incentive plan for branch personnel. These two
components represented 41% of the total increase for salaries benefits.
The remaining $333 includes $96 in executive salary increases and $237
in non-executive salary increases. The furniture and equipment expenses
increased due primarily to increased depreciation cost of $57 thousand,
and the leasing of new computers, $46 thousand. In 1998, management
began depreciating computer related equipment over 3 years as opposed
to 5 years. Additionally, in March 1998, the bank began leasing
computers at a monthly rate of $4.6. Advertising cost increased due to
several mortgage loan related campaigns implemented during 1998. Other
real estate owned expenses and loan collection expenses increased due
primarily to the increase in non-accrual loans and the large level of
problem loans.
Provision for Income Taxes- The provision for income taxes for 1998
decreased $1,424, or 310%, from 1997 due primarily to the increase in
the loan loss provision. The effective tax rate was 41% for 1998,
compared to 23% for 1997. The increase in the effective tax rate was
primarily attributable to the decrease in the loan loss provision.
Asset/Liability Management
Interest rate sensitivity gap ("gap") analysis measures the difference
between the assets and liabilities repricing or maturing within
specified time periods. An asset-sensitive position indicated that
there are more rate-sensitive assets than rate-sensitive liabilities
repricing or maturing within a specified time period, which would
generally imply a favorable impact on net interest income in periods of
rising interest rates and a negative impact in periods of falling
interest rates. A liability-sensitive position would generally imply a
negative impact in net interest income in periods of rising interest
rates and a positive impact in periods of falling rates.
-28-
<PAGE>
Table 4. Rate Sensitivity Analysis
<TABLE>
<CAPTION>
(dollars in thousands):
4 TO 12 WITHIN 12
EARNING ASSETS 0-90 days MONTH MO. 1-5 Years Over 5 years TOTALS
<S> <C> <C> <C> <C> <C> <C>
Loans (1) (2) $ 12,018 $ 12,133 $ 24,151 $ 47,416 $ 33,043 $ 104,610
Investment Securities (3) 19,509 47,100 66,609 56,091 8,684 131,384
FF Sold, 13,150 -- 13,150 -- -- 13,150
Interest Bearing Bank Balances: 25 380 405 -- -- 405
--------- --------- --------- --------- --------- ---------
Total earning assets $ 44,702 $ 59,613 $ 104,315 $ 103,507 $ 41,727 $ 249,549
========= ========= ========= ========= ========= =========
% OF TOTAL EARNING ASSETS 17.91% 23.89% 41.80% 41.48% 16.72% 100.00%
Interest-bearing liabilities
Time COD's of $100M or more (4) $ 5,399 $ 12,003 $ 17,402 $ 3,915 $ -- $ 21,317
Savings, Now, MMDA'S and
other time deposit 19,658 19,850 39,508 72,066 -- 111,574
Time COD'S less than $100M 10,980 16,181 27,161 4,588 -- 31,749
Borrowed funds 26,611 -- 26,611 -- -- 26,611
--------- --------- --------- --------- --------- ---------
Total interest bearing liabilities $ 62,648 $ 48,034 $ 110,682 $ 80,569 $ -- $ 191,251
========= ========= ========= ========= ========= =========
Interest-sensitivity gap $ (17,946) $ 11,579 $ (6,367) $ 22,938 $ 41,727 $ 58,298
Cumulative interest-sensitivity gap $ (17,946) $ (6,367) $ (6,367) $ 16,571 $ 58,298 $ 58,298
Ratio of earning assets to interest-bearing
liabilities (gap ratio) 71.35% 124.11% 94.25% 128.47% 0.00% 130.48%
Cumulative ratio of earnings assets to interest-
bearing liabilities (cumulative gap ratio) 71.35% 94.25% 94.25% 108.66% 130.48% 130.48%
Cumulative interest-sensitivity gap as a
percent of total assets (6.65%) (2.36%) (2.36%) 6.14% 21.59% 21.59%
========= ========= ========= ========= ========= =========
</TABLE>
1) Non-accruing loans are excluded from loan totals.
2) Loans have been included based on their contractual maturities.
3) Mortgage-backed securities have been included based on their estimated
remaining maturities, utilizing the most recent quarter pay-down experience
and prorated outward. Fourth quarter 1998 pay-down experience was $9,510.
4) Excludes a non-interest-bearing time deposit of $309.
Tables 4 presents an analysis of the Company's interest-sensitivity gap position
at December 31, 1998. Asset prepayments and liability decay rates are estimated
based on the Company's experience. Due to the relatively stable nature of the
Company's interest-bearing non-maturity deposits, these deposits were allocated
as follows: 100% of money market accounts to the 3 months or less category, and
9% per quarter for all other non-maturity deposits. Approximately 65% of non-
maturity deposits (other than money market deposits) are allocated in the over
12 months category. Time deposits are allocated their contractual maturities. As
summarized in Table 4, the Company's one-year cumulative gap ratio is 94%. This
portion reflects a liability-sensitive position where more liabilities than
assets re-price during the one-year period.
Generally, a liability-sensitive position would result in an adverse impact on
net income during a period of rising interest rates, and a positive impact on
net interest income in a period of declining interest rates.
Gap analysis has limitations because it cannot measure the effect of interest
rate movements and competitive pressures on the repricing and maturity
characteristics of interest-earning assets and liabilities indicated as
repricing within a stated period may in fact reprice at different times at
different volumes. Further, in the event of change in interest rates, prepayment
and early withdrawal levels would likely deviate significantly from those
assumed in calculating Table 4.
-29-
<PAGE>
Table 5. Financial Condition
Table 5 sets forth information concerning the composition of the Company's
assets, liabilities and shareholders' equity at December 31, 1998, 1997, and
1996.
<TABLE>
<CAPTION>
(dollars in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS 1998 Percent 1997 Percent 1996 Percent
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans, net $104,469 38.70% $116,476 46.46% $108,611 46.06%
Investment securities 131,384 48.66% 101,106 40.33% 94,824 40.22%
Federal funds sold 13,150 4.87% 11,500 4.58% 8,300 3.52%
Interest-bearing deposits
in other banks and commercial paper 405 0.15% 3,000 1.20% 3,000 1.27%
-------- ------- -------- ------- -------- -------
Total earnings assets 249,408 92.38% 232,082 92.57% 214,735 91.07%
Cash and due from banks 12,565 4.66% 11,842 4.72% 13,692 5.81%
Bank premises and equipment 2,542 0.94% 2,672 1.07% 2,452 1.04%
Other assets 5,463 2.02% 4,106 1.64% 4,909 2.08%
-------- ------- -------- ------- -------- -------
Total assets $269,978 100.00% $250,702 100.00% $235,788 100.00%
======== ====== ======== ====== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 58,869 21.81% $ 52,922 21.11% $ 50,840 21.56%
Savings, NOW and MMDA 105,995 39.25% 92,462 36.89% 109,020 46.24%
Time deposits $100,000 or more 21,317 7.90% 16,807 6.70% 14,246 6.04%
Other time deposits 37,946 14.06% 46,005 18.35% 31,978 13.56%
-------- ------- -------- ------- -------- -------
Total deposits 224,127 83.02% 208,196 83.05% 206,084 87.40%
Borrowed funds 26,611 9.85% 20,496 8.17% 11,466 4.86%
Accrued expenses and other liabilities 1,323 0.49% 1,833 0.73% 920 0.40%
-------- ------- -------- ------- -------- -------
Total liabilities 252,061 93.36% 230,525 91.95% 218,470 92.66%
Shareholders' equity 17,917 6.64% 20,177 8.05% 17,318 7.34%
-------- ------- -------- ------- -------- -------
Total liabilities and shareholders' equity $269,978 100.00% $250,702 100.00% $235,788 100.00%
======== ====== ======== ====== ======== =======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Overview- Total assets increased $19,276 from December 31,1997 to December
31,1998, mainly due to an increase in securities and cash and cash equivalents,
increasing $30,278 and $2,373 respectively, offset primarily by decreases in
loans and interest-bearing deposits of $12,007 and $2,595. The increase in
assets was primarily funded by increased deposits and borrowings of $15,931 and
$6,115 respectively, coupled with a decrease in shareholders' equity of $2,260.
Loans- Net loans outstanding at December 31,1998 were $104,469, a decrease of
$12,007, or 10%, from year end 1997. The composition of the loan portfolio is
summarized in Table 6. The decrease in loans consisted primarily of a decrease
in commercial real estate loans of $4,939 and a decrease of $6,577 in commercial
loans.
Table 6. Loan Portfolio Composition
<TABLE>
<CAPTION>
DECEMBER 31
(dollars in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
1998 Percent 1997 Percent 1996 Percent 1995 Percent 1994 Percent
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 16,568 15.11% $ 23,145 19.51% $ 28,232 25.61% $19,128 20.31% $20,166 21.30%
Residential 1 to 4 family 51,097 46.62% 52,077 43.89% 52,876 47.96% 49,123 52.16% 48,710 51.46%
Commercial real estate 33,560 30.62% 38,499 32.45% 24,442 22.17% 22,225 23.60% 22,380 23.64%
Installment loans 8,388 7.65% 4,925 4.15% 4,692 4.26% 3,700 3.93% 3,409 3.60%
-------- ------- -------- ------- -------- ------- ------- ------- ------- -------
Total $109,613 100.00% $118,646 100.00% $110,242 100.00% $94,176 100.00% $94,665 100.00%
======== ======= ======== ======= ======== ======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-30-
<PAGE>
Table 7. Maturity of Loan Portfolio Fixed Rate and Variable Rate (1)
AT DECEMBER 31,1998
(dollars in thousands):
After One Year
One Year or Through Five After Five
Less Years Years Total
Fixed rate $ 14,992 $ 47,416 $ 32,822 $ 95,230
Variable rate 9,159 -- 221 9,380
-------- -------- -------- --------
Total $ 24,151 $ 47,416 $ 33,043 $104,610
(1) Excludes non-accrual loans.
Table 8. Investment Portfolio Maturity Schedules (1)
Table 8 summarizes the maturity and average yield of the Company's investment
portfolio.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(dollars in thousands):
- ------------------------------------------------------------------------------------------------------------
After Five But
After One But Within Ten
Within One Year Within Five Years Years
- ------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 2,014 5.74% $ - $ -
U.S. Government agencies 26,555 5.61% 31,063 5.41% -
State and political subdivisions - - -
Other - 1,112 6.77% -
Mortgage-backed securities - - -
------- ---- -------- ---- ------ -----
Total $28,569 5.90% $ 32,175 6.05% $ - 0.00%
======= ==== ======== ==== ====== =====
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
After Ten Years Mortgage Backed Total
- ------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ - $ - $ 2,014 5.74%
U.S. Government agencies - - 57,618 5.34%
State and political subdivisions 8,684 5.56% - 8,684 5.56%
Other - - 1,112 6.77%
Mortgage-backed securities - 61,956 6.58% 61,956 6.58%
------- ---- -------- ---- -------- ----
Total $ 8,684 5.56% $ 61,956 6.58% $131,384 5.96%
======= ==== ======== ==== ======== ====
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Yields on non-taxable securities have been computed on a tax equivalent
basis using a 34% tax rate.
Securities- The carrying value of the Company's securities portfolio increased
$30,278 or 30% from $101,106 at December 31, 1997, to $131,384 at December
31, 1998. The increase in the investment portfolio was principally in U.S.
Treasury and Government Agencies securities increasing $29,118 and representing
97% of the growth. Non-taxable securities declined $4,041 or 32% while
mortgage-backed securities increased $5,214 or 10%. The yield on taxable
securities decreased from 6.31% for 1997 to 5.66% for 1998. The tax equivalent
yield for non-taxable securities increased from 8.22% for 1997 to 8.44% for
1998. The mortgage-backed securities portfolio had a weighted average remaining
maturity of 2.27 years at December 31, 1998, compared to 2.29 years at December
31, 1997 (utilizing Bloomberg's street consensus). The collateral underlying all
the mortgage-backed securities is guaranteed by one of the "quasi-governmental"
agencies, and therefore maintain a risk weight of 20% for risk based capital
purposes. Management's analysis of mortgage-related securities includes, but is
not limited to, the average lives, seasonality, coupon and historic behavior
(including prepayment history) of each particular security over its life, as
affected by various interest rate environments. Stress tests are performed on
each security on a quarterly basis as part of management's ongoing analysis. At
December 31, 1998, based on stress tests performed by management, a 300 basis
point increase and decrease in interest rates would result in an approximate
decrease of 5% and 3% increase, respectively, in the present carrying value of
these securities. There are no issuers of securities other than governmental
-----------------------
agencies, whose securities held by the Company, have a book value in excess of
- --------
10% of the Company shareholders' equity. The Company's securities portfolio is
also presented in Note 3 to the consolidated financial statements.
-31-
<PAGE>
Table 9. Loan Loss and Recovery Experience
Asset Quality -See Note 1 to the consolidated financial statements for a
discussion of the Company's policy for establishing the allowance for loan
losses. Table 9. Sets forth the activity in the allowance for loan losses for
the last five years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(dollars in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total outstanding loans at year end $109,613 $118,646 $110,242 $ 94,176 $ 94,665
Average amount of loans outstanding 113,286 113,511 100,950 90,630 72,886
Allowance for loan losses at beginning of year 1,702 1,266 1,177 1,751 2,168
Loans charged off:
Commercial 1,571 451 637 766 1,040
Real estate mortgage 0 256 52 40 28
Installment loans to individuals 249 182 69 14 17
--- --- -- -- --
Total charge-offs 1,820 889 758 820 1,085
Recoveries of loans previously charged-off
Commercial 151 81 286 202 172
Real estate mortgage 0 0 25 0 2
Installment loans to individuals 64 49 26 19 14
-- -- -- -- --
Total recoveries 215 130 337 211 188
Net charge-offs 1,605 759 421 599 897
Additions to allowance charged to operations 4,603 1,195 510 25 480
===== ===== === == ==
Allowance for loan losses at end of period $ 4,700 $ 1,702 $ 1,266 $ 1,177 $ 1,751
Ratios of net charge-offs during year to average outstanding
loans during year 1.42% 0.67% 0.42% 0.66% 1.23%
Ratio of allowance for possible loan losses to total loans 4.29% 1.43% 1.15% 1.25% 1.85%
</TABLE>
Table 10. Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(dollars in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
1998 Percent 1997 Percent 1996 Percent 1995 Percent 1994 Percent
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial (1) $ 3,461 73.64% $ 1,378 80.96% $ 1,075 84.91% $ 875 72.96% $ 1,403 80.13%
Real estate mortgage 406 8.64% 117 6.87% 89 7.03% 71 6.36% 125 7.14%
Consumer 280 5.96% 182 10.69% 92 7.27% - 0.00% 63 3.60%
Unallocated 553 11.76% 25 1.47% 10 7.90% 231 20.68% 160 9.14%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ 4,700 100.00% $ 1,702 100.00% $ 1,266 100.00% $ 1,177 100.00% $ 1,751 100.00%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(1) Includes commercial real estate loans.
The allowance for loan losses was $4,700 at December 31, 1998, as compared to
$1,702 December 31, 1997. The ratio of the allowance for loan losses to total
loans at December 31, 1998 and 1997 was 4.29% and 1.43%, respectively. At
December 31, 1998, non-performing assets to total assets was 2.59% compared to
.85% at December 31,1997. Net charge-offs increased $846 to $1,605 for 1998 from
$759 for 1997. The provision for loan losses increased to $4,603 for 1998 from
$1,195 for 1997, reflecting the significant increase in non-performing loans and
the large level of loans ($8,145 or 7.43% of total loans) with potential credit
problems. Additionally, the unallocated portion of the allowance increased to
$553 from $25 at year-end 1997. The increase in the unallocated portion is due
primarily to the increase of $4,875 in non-performing assets, which includes
several large loans that exceed $500, and the overall level of loans with
potential credit problems. Included in the unallocated portion for 1998 is a
specific allocation associated for Y2K risk of $140. (Also see comment referring
to non-performing assets.)
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
-32-
<PAGE>
Washington, DC metropolitan area, concentrations of credit, the composition of
the loan portfolio, prior loan loss experience, and the ongoing and periodic
reviews of the loan portfolio by the Company's internal and external loan review
function. For impaired loans the Company establishes reserves in accordance with
SFAS 114 and SFAS 118, and for non-impaired loans uses an allocation approach
which relies on historical loan loss experience, adjusted to reflect current
conditions and trends. Although management believes that it uses the best
information available to make such determinations that the allowance for loan
losses is adequate at December 31, 1998, 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 determination. 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 my require the recognition of
additions to the allowance based on their judgments of information available to
them at the time of their examination. In light of the foregoing, there can be
no assurance that management's determination as to the future adequacy of the
allowance for loan losses will prove accurate, or that additional provision of
charge-offs will not be required.
Table 11. Non-Performing Assets
Table 11. Sets forth information concerning non-performing assets.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(dollars in thousands):
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans (1) $5,003 $ 852 $2,006 $1,086 $1,809
Loans past due 90 days or more and still accruing 1,474 753 1,267 569 605
Foreclosed properties (2) 525 522 1,310 950 1,270
------ ------ ------ ------ ------
Total $7,002 $2,127 $4,583 $2,605 $3,684
====== ====== ====== ====== ======
Non-performing assets to gross loans and foreclosed
properties at period end 6.36% 1.78% 4.11% 2.74% 3.84%
Non-performing assets to total assets at period end 2.59% 0.85% 1.94% 1.17% 1.60%
- ----------------------------------------------------------------------------------------------------------------------------
</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 take 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 1998 for non-accrual loans at December 31, 1998 had the loans
been current in accordance with their original terms was $230,000. See Note
1 to the consolidated financial statements.
2) Foreclosed properties include properties that have been substantively
repossessed (for years prior to 1995) or acquired in complete or partial
satisfaction of debt. The properties, which are held for resale, are
carried at the lower of fair value (net of estimated selling expenses) or
the principal balance of the related loans.
3) The Bank charges loans against the allowance for loan losses when it
determines that principal and interest or portions thereof become
un-collectible. This is determined through an analysis of each individual
credit, including the financial condition and repayment capacity of the
borrower, and of the sufficiency of the collateral, if any.
Non-performing assets at year-end 1998 were $7,002, an increase of $4,875 or
229% from year-end 1997. The increase was primarily attributable to management's
review of the loan portfolio in light of developments in individual loans since
December 31, 1997, and continued deterioration in individual loans. Non-accrual
loans totaled $5,003 for year-end 1998 and consisted of $2,396 in real estate
loans and $2,607 in commercial loans. This represented a increase of $4,151 or
487% from year-end 1997. As of December 31,1998, loans past due 90 days or more
and still accruing totaled $1,474 and consisted of $558 in real estate loans,
$839, in commercial loans, and $77 in installment loans to individuals. This
compares to $753 in real estate, $165 in commercial loans, and $43 installment
loans at December 31,1997. This represented an aggregate increase of $721 from
year-end 1997. At year-end 1998, non-performing assets represented 39% of total
capital compared to 11% at year-end 1997. Additionally, at year-end 1998, non-
performing assets and loans with possible credit problems totaled $15,147 or 89%
of total capital compared to $10,058 and 51% at year-end 1997. The increases are
due primarily to an increases in the commercial and commercial real estate
portfolios and the decrease in net income that was attributed to the large
increase in the provision for loan losses.
At December 31,1998, there were $8,145 of loans not reflected in the table
above, where known information
-33-
<PAGE>
about possible credit problems of borrower caused management to have doubts as
to the ability of the borrower to comply with present loan repayment terms and
that may result in disclosure of such loans in the future. Included in the total
are twenty one loans, totaling $6,989, fully collateralized by real estate, four
of which represent $3,925 of the total. The remaining $1,156 consists of fifteen
commercial loans, none in excess of $195, secured primarily by accounts
receivable and various business equipment.
Deposits, Other Sources of Funds and Liquidity- Deposits are generally the most
important source of the Company's funds for lending, investing, and other
business purposes. Deposit inflows and outflows are significantly influenced by
general interest rates, market conditions, and competitive factors. Total
deposits increased by $15,931 or 8%, from December 31, 1997 to December 31,
1998.
Other sources of funds include borrowings, repayment and maturities of loans and
securities, proceeds from the sale of securities, funds from operations, and
cash and cash equivalents. During 1997, the Company began raising funds by
selling securities under agreements to repurchase. These fixed coupon overnight
agreements are accounted for as financing transactions, and the obligations to
repurchase the securities are reflected as a liability in the consolidated
balance sheet. At December 31, 1998, $25,611 of repurchase agreements with an
average rate of 2.72% were outstanding.
Table 12. Time Deposit Maturity Schedule
Table 12 presents certain information related to the Company's time deposits.
<TABLE>
<CAPTION>
AT DECEMBER 31,1998
(dollars in thousands):
3 Months or Less 4 to 6 Months 7 to 12 Months Over 12 Months Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Time certificates of deposit of $100M or more $ 5,399 $ 4,567 $ 7,436 $ 3,915 $21,317
Time certificates of deposit less than $100M 10,980 8,898 7,283 4,588 31,749
------- ------- ------- ------- -------
Total (1) $16,379 $13,465 $14,719 $ 8,503 $53,066
- ------------------------------------------------------------------------------------------------------------------------------------
1) Excludes $13,656 in money market demand deposits, $5,772 in individual retirement account deposits, $309 in an open time
deposit, and $109 in Christmas Club deposits.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In connection with the series of transaction with the RTC, the Company borrowed
$1,000 from the RTC. These funds were contributed to the capital of the Bank.
For additional information regarding this borrowing refer to Note 7 to the
consolidated financial statements.
The Company's principal sources of funds are deposits, repayments and maturities
of loans and securities, proceeds from the sale of securities and funds provided
by operations. The Company's sources and uses of cash for the years ended
December 31, 1998 and 1997 are presented in the consolidated statement of cash
flows. The Company anticipates that it will have sufficient funds available to
meet current and future commitments.
Shareholders' Equity and Capital Shareholders' equity decreased $2,260 or 11%
from $20,177 at December 31,1997 to $17,917 at December 31,1998. The decrease is
attributable to a decrease in retained earnings of $1,720, an decrease of $540
in the unrealized gain on available for sale securities, net of tax. At December
31,1998, the Bank was unable to pay any additional dividends to the Company
without prior regulatory approval, as a result of losses during 1998 which,
together with dividends declared, exceeded the Bank's retained earnings for 1997
and 1998.
Set forth below is certain financial information relating to the Company's and
Bank's dividend history for the past five fiscal years (as adjusted to reflect
the 5-for-1 stock split in the form of a stock dividend paid in July 1994.)
Information for periods prior to July 1, 1995 reflect Bank information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income per share $ (2.03) $ 2.44 $ 2.06 $ 2.56 $ 1.99
Dividends paid per share $ 0.51 $ 0.60 $ 0.60 $ 0.60 $ 0.60
Ratio of dividends to net income N/A 24.59% 29.13% 23.44% 30.15%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
-34-
<PAGE>
The payment of dividends by the Company depends largely upon the ability of the
Bank to declare and pay dividends to the Company, as the principal source of the
Company's revenue is dividends paid by the Bank. Future dividends will depend
primarily upon the Bank's earnings, financial condition, and need for funds, as
well as governmental policies and regulations applicable to the Company and the
Bank.
The Company and the Bank are subject to certain regulatory capital requirements.
Management believes, as of December 31,1998, that the Company and the Bank meet
all the capital adequacy requirements to which they are subject. As of December
31,1998, the most recent notification from the Office of the Comptroller of
Currency categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. Refer to Note 10 to the consolidated financial
statements for additional related to regulatory capital requirements.
Effect of Inflation - The consolidated financial statements and related data
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
results of operations in terms of historical dollars without considering the
relative purchasing power of money over time because of inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services. In the
current interest rate environment, liquidity, maturity structure, and quality of
the Company's assets and liabilities are critical to the maintenance of
acceptable performance levels.
Year 2000 Issue- 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 $150 to $200 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.
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 data processing services, will achieve
year 2000 compliance, are abased 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.
-35-
<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 time frames 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.
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 revision 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 Y2K 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.
*******
-36-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001013274
<NAME> IBW FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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