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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
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of 1934
For the fiscal year ended December 31, 1999
___ Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ______________
Commission file number: 0-28360
IBW Financial Corporation
(Name of Small Business Issuer in its Charter)
District of Columbia 52-1943477
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4812 Georgia Avenue, NW, Washington, DC 20011
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: (202) 722-2000
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Check whether the Issuer; (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports; and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No _____
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. ______
The issuer's revenues for the fiscal year ended December 31, 1999 were
approximately $21,199,000.
The aggregate market value of the outstanding Common Stock held by nonaffiliates
as of March 15, 2000 was approximately $4,846,065 (based on the most recent
trade known to the Company). See "Market for Common Stock and Dividends")
As of March 15, 1999, 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, 1999
are incorporated by reference in part II hereof.
Portions of the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on April 25, 2000
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 $265 million in total assets and $18 million of
shareholders' equity at December 31, 1999. 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 twelve (12) convenient locations.
Account holders can access their accounts both domestically and internationally
with either the Visa Check Card or the Bank's standard issue debit card. The
Bank is a member of the Star and Plus systems. 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 benefited 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.
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
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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, Mr. Williams 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 February 29, 2000, the Bank has submitted to the OCC all of the
written plans, policies and other information required by the Agreement, and all
revisions requested by the OCC, although certain submissions were made outside
of the time required by the Agreement.
There can be no assurances that the Bank's regulators will deem the Bank to
be compliant under the Agreement, 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
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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, 1999, the Bank had 157 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 $52,500 in 1999, $0 in 1998 and
$39,100 in 1997. 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").
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,
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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.
Effective on March 11, 2000, the Gramm Leach-Bliley Act of 1999 (the "GLB
Act") allows a bank holding company or other company to certify status as a
financial holding company, which allows such company to engage in activities
that are financial in nature, that are incidental to such activities, or are
complementary to such activities. The GLB Act enumerates certain activities that
are deemed financial in nature, such as underwriting insurance or acting as an
insurance principal, agent or broker, underwriting, dealing in or making markets
in securities, and engaging in merchant banking under certain restrictions. It
also authorizes the Federal Reserve Board to determine by regulation what other
activities are financial in nature, or incidental or complementary thereto. The
GLB Act allows a wider array of companies to own banks, which could result in
companies with resources substantially in excess of the Company's entering into
competition with the Company and the Bank.
Commitments to Subsidiary Banks. Under Federal Reserve policy, the Company
is expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances when it might not do so absent
such policy.
Limitations of Acquisitions of Common Stock. The federal Change in Bank
Control Act prohibits a person or group from acquiring "control" of a bank
holding company unless the Federal Reserve has been given 60 days' prior written
notice of such proposed acquisition and within that time period the Federal
Reserve has not issued a notice disapproving the proposed acquisition or
extending for up to another 30 days the period during which such a disapproval
may be issued. An acquisition may be made prior to expiration of the
disapproval period if the Federal Reserve issues written notice of its intent
not to disapprove the action. Under a rebuttable presumption established by the
Federal Reserve, the acquisition of 10% or more of a class of voting stock of a
bank holding company with a class of securities registered under Section 12 of
the Exchange Act would, under the circumstances set forth in the presumption,
constitute the acquisition of control.
In addition, with limited exceptions, any "company" would be required to
obtain the approval of the Federal Reserve under the BHCA before acquiring 25%
(5% in the case of an acquiror that is a bank holding company) or more of the
outstanding Common Stock of, or such lesser number of shares as constitute
control over, the Company. Such approval would be contingent upon, among other
things, the acquiror registering as a bank holding company, divesting all
impermissible holdings and ceasing any activities not permissible for a bank
holding company.
The Federal Reserve has adopted capital adequacy guidelines pursuant to
which it assesses the adequacy of an institution's capital. These guidelines are
substantially identical to those which are applicable to the Bank discussed
below.
Bank Regulation. The Bank is subject to extensive regulation and
examination by the Office of the Comptroller of Currency ("OCC") and by the
FDIC, which insures its deposits to the maximum extent permitted by law. The
federal laws and regulations which are applicable to national banks regulate,
among other things, the scope of their business, their investments, their
reserves against deposits, the timing of the availability of deposited funds and
the nature and amount of collateral for certain loans. The laws and regulations
governing the Bank generally have been promulgated to protect depositors and the
deposit insurance funds, and not for the purpose of protecting stockholders.
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The GLB Act made substantial changes in the historic restrictions on non-bank
activities of bank holding companies, and allows affiliations between types of
companies that were previously prohibited. The GLB Act also allows national
banks to engage in a wider array of non banking activities through "financial
subsidiaries."
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. The Bank is also required to pay an
additional assessment in connection with the repayment of the "Fico bonds"
issued in connection with the resolution of the savings and loan crisis.
Capital Adequacy Guidelines. The Federal Reserve, the OCC and the FDIC have
all adopted risk based capital adequacy guidelines pursuant to which they assess
the adequacy of capital in examining and supervising banks and bank holding
companies and in analyzing bank regulatory applications. Risk-based capital
requirements, determine the adequacy of capital based on the risk inherent in
various classes of assets and off-balance sheet items.
National banks are required to meet a minimum ratio of total qualifying
capital (the sum of core capital (Tier 1) and supplementary capital (Tier 2)) to
risk weighted assets of 8%. At least half of this amount (4%) should be in the
form of core capital. These requirements apply to the Bank and will apply to
the Company (a bank holding company) so long as its total assets equal
$150,000,000 or more.
Tier 1 Capital for national banks generally consists of the sum of common
stockholders' equity and perpetual preferred stock (subject in the case of the
latter to limitations on the kind and amount of such stock which may be included
as Tier 1 Capital), less goodwill, without adjustment for unrealized gain or
loss on securities classified as available for sale in accordance with FAS 115.
Tier 2 Capital consists of the following: hybrid capital instruments; perpetual
preferred stock which is not otherwise eligible to be included as Tier 1
Capital; term subordinated debt and intermediate-term preferred stock; and,
subject to limitations, general allowances for loan losses. Assets are adjusted
under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no risk-based
capital) for assets such as cash, to 100% for the bulk of assets which are
typically held by a bank holding company, including certain multi-family
residential and commercial real estate loans, commercial business loans and
consumer loans. Residential first mortgage loans on one to four family
residential real estate and certain seasoned multi-family residential real
estate loans, which are not 90 days or more past-due or non-performing and which
have been made in accordance with prudent underwriting standards are assigned a
50% level in the risk-weighing system, as are certain privately-issued mortgage-
backed securities representing indirect ownership of such loans. Off-balance
sheet items also are adjusted to take into account certain risk characteristics.
In addition to the risk based capital requirements, the OCC has established
a minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to total adjusted assets)
requirement for the most highly-rated national banks, with an additional cushion
of at least 100 to 200 basis points for all other national banks, which
effectively increases the minimum Leverage Capital Ratio for such other banks to
4.0% - 5.0% or more. Under the OCC's regulations, highest-rated banks are those
that the OCC determines are not anticipating or experiencing significant growth
and have well diversified risk, including no undue interest rate risk exposure,
excellent asset quality, high liquidity, good earnings and, in general, those
which are considered a strong banking organization. A national bank having less
than the minimum Leverage Capital Ratio requirement shall, within 60 days of the
date as of which it fails to comply with such requirement, submit to the
applicable OCC district office for review and approval a reasonable plan
describing the means and timing by which the bank shall achieve its minimum
Leverage Capital Ratio requirement. A national bank which fails to file such
plan with the OCC is deemed to be operating in an unsafe and unsound manner, and
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
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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, 1999, 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 15.53% and 16.81% respectively, and a
Leverage Capital Ratio equal to approximately 6.70%.
Prompt Corrective Action. Under Section 38 of the FDIA, the federal banking
agencies have promulgated substantially similar regulations to implement a
system of prompt corrective action. Under the regulations, a bank shall be
deemed to be: (i) "well capitalized" if it has a Total Risk Based Capital Ratio
of 10.0% or more, a Tier 1 Risk Based Capital Ratio of 6.0% or more, a Leverage
Capital Ratio of 5.0% or more and is not subject to any written capital order or
directive; (ii) "adequately capitalized" if it has a Total Risk Based Capital
Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0% or more and a
Tier 1 Leverage Capital Ratio of 4.0% or more (3.0% under certain circumstances)
and does not meet the definition of "well capitalized;" (iii) "undercapitalized"
if it has a Total Risk Based Capital Ratio that is less than 8.0%, a Tier 1 Risk
based Capital Ratio that is less than 4.0% or a Leverage Capital Ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a Total Risk Based Capital Ratio that is less than
6.0%, a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a Leverage
Capital Ratio that is less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.
An institution generally must file a written capital restoration plan which
meets specified requirements with an appropriate federal banking agency within
45 days of the date the institution receives notice or is deemed to have notice
that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the institution with
written notice of approval or disapproval within 60 days after receiving a
capital restoration plan, subject to extensions by the applicable agency.
An institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution. Such guaranty shall be limited to the lesser of (i) an amount
equal to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary at such time to restore the relevant capital measures of the
institution to the levels required for the institution to be classified as
adequately capitalized. Such a guaranty shall expire after the federal banking
agency notifies the institution that it has remained adequately capitalized for
each of four consecutive calendar quarters. An institution which fails to
submit a written capital restoration plan within the requisite period, including
any required performance guaranty, or fails in any material respect to implement
a capital restoration plan, shall be subject to the restrictions in Section 38
of the FDIA which are applicable to significantly undercapitalized institutions.
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
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the OCC and the FDIC. In general, good cause is defined as capital which has
been raised and is imminently available for infusion into the Bank except for
certain technical requirements which may delay the infusion for a period of time
beyond the 90 day time period.
Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA, which (i) restrict payment
of capital distributions and management fees; (ii) require that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital; (iii) require submission of a capital restoration plan;
(iv) restrict the growth of the institution's assets; and (v) require prior
approval of certain expansion proposals. The appropriate federal banking agency
for an undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible long-
term cost to the deposit insurance fund, subject in certain cases to specified
procedures. These discretionary supervisory actions include: requiring the
institution to raise additional capital; restricting transactions with
affiliates; requiring divestiture of the institution or the sale of the
institution to a willing purchaser; and any other supervisory action that the
agency deems appropriate. These and additional mandatory and permissive
supervisory actions may be taken with respect to significantly undercapitalized
and critically undercapitalized institutions.
Additionally, under Section 11(c)(5) of the FDIA, a conservator or receiver
may be appointed for an institution where: (i) an institution's obligations
exceed its assets; (ii) there is substantial dissipation of the institution's
assets or earnings as a result of any violation of law or any unsafe or unsound
practice; (iii) the institution is in an unsafe or unsound condition; (iv)
there is a willful violation of a cease-and-desist order; (v) the institution
is unable to pay its obligations in the ordinary course of business; (vi)
losses or threatened losses deplete all or substantially all of an institution's
capital, and there is no reasonable prospect of becoming "adequately
capitalized" without assistance; (vii) there is any violation of law or unsafe
or unsound practice or condition that is likely to cause insolvency or
substantial dissipation of assets or earnings, weaken the institution's
condition, or otherwise seriously prejudice the interests of depositors or the
insurance fund; (viii) an institution ceases to be insured; (ix) the
institution is undercapitalized and has no reasonable prospect that it will
become adequately capitalized, fails to become adequately capitalized when
required to do so, or fails to submit or materially implement a capital
restoration plan; or (x) the institution is critically undercapitalized or
otherwise has substantially insufficient capital.
At December 31, 1999, 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
-8-
<PAGE>
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 $27,430, 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, under a lease commencing June
10, 1999 for a term extending until June 10, 1999, which was renewed and
extended to 12/31/2001 for a two an one half year term, and an annual rental of
$78,984. 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, 1999.
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 2 trades of the Common Stock since January 1, 1998, at
prices ranging from $15 to $18 per share. The last trade known to the Company
was a trade of 70 shares at $15 per share on 2/25/2000. 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. These trades and transactions do not
necessarily reflect the intrinsic or market values of the Common Stock. As of
December 31, 1999, there were 668,360 shares of Common Stock outstanding, held
of record by approximately 568 shareholders.
Set forth below is certain financial information relating to the Company's
and Bank's dividend history for the past five fiscal years Information for
periods prior to July 1, 1995 reflect Bank information.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income per common share $2.50 $(2.06) $ 2.44 $ 2.06 $ 2.56
Dividends paid per common share $ .15 $ .51 $ .60 $ .60 $ .60
Ratio of dividends to net income
available to common shareholders 5.98% N/A 24.59% 29.13% 23.44%
- -------------------------------------------
</TABLE>
In 1998 and 1999, the Company reduced the level of dividends which it paid
in respect of the common stock, as a result of the additional expenses incurred
in respect of provisions for possible loan losses and the increased level of
non-Ended December 31, performing and problem assets. The Company currently
anticipates that in 2000 it will seek to increase the dividend to the levels
paid in 1997, although there can be no assurance that the Company will have
sufficient earnings and resources available to increase the amount of the
dividend in 2000 or thereafter, or as to the level of dividend which
-9-
<PAGE>
may actually be approved by the Board of Directors. There can be no assurance,
that the Bank or the Company will 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. The term of the interim capital assistance loan
expires on July 3, 2000.
Dividends on the Common Stock are subject to the prior payment of dividends
on the Series A Preferred Stock. As of the date hereof, there is no default in
the 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. 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 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.
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 sale, on
September 29, 1997, 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 19 to 28 of the Company's Annual Report to Shareholders for
the year ended December 31, 1999.
ITEM 7. Financial Statements.
The information required by this item is incorporated by reference to the
Consolidated Financial Statements appearing at pages 4 to 18 of the Company's
Annual Report to Shareholders for the year ended December 31, 1999. The
reissued report of Deloitte and Touche, LLP, the Company's predecessor auditor,
on the financial statements of the Company for the year ended December 31, 1998,
is provided on the following page in accordance with the provisions of Rule 14a-
3(b)(1) Note 1.
-11-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
of IBW Financial Corporation and subsidiary
Washington, DC
We have audited the accompanying consolidated balance sheet of IBW Financial
Corporation and subsidiary (the "Company") as of December 31, 1998, and the
related consolidated statement of loss, comprehensive loss, changes in
shareholders' equity, and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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 consolidated financial position of IBW Financial
Corporation and subsidiary at December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Washington, D.C.
February 26, 1999
(March 31, 1999 as to Note 2)
<PAGE>
ITEM 8. Changes in and Disagreements with Accountants.
On November 15, 1999, the Company dismissed Deloitte & Touche LLP ("D&T")
as its certifying accountant. D&T performed the audit of the Company's financial
statements for the years ended December 31, 1997 and 1998. During these periods
and for the period from January 1, 1999 to November 15, 1999, there were no
disagreements between the Company and D&T on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which would have caused D&T to make reference to such matter in connection with
its audit reports on the Company's financial statements. For each of the years
ended December 31, 1997 and 1998, D&T issued unqualified audit reports on the
Company's financial statements. Neither audit report contained an adverse
opinion or disclaimer of opinion, or was modified as to uncertainty, audit scope
or accounting practice. However, at the completion of the audit for the year
ended December 31, 1998, D&T advised the Company in its judgement that a
material weakness existed in the systems of internal controls related to credit
card receivables.
On November 15, 1999, the Company engaged of Stegman and Company to audit
the Company's financial statements for fiscal year 1999 as its certifying
accountant. The Company solicited bids for audit services from a number of
firms. The appointment of Stegman was recommended by the Audit Committee of the
Board of Directors and approved by the Oversight Committee of the Board of
Directors on November 15, 1999. There were no consultations between the Company
and Stegman regarding the application of accounting principles to any matter, or
as to any type of opinion that might be issued on the Company's financial
statements.
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 page 6 of the Company's definitive proxy statement for the
Annual Meeting of Shareholders to be held on April 25, 2000.
ITEM 10. Executive Compensation.
The information required by this Item is incorporated by reference to, the
material appearing at page 5 of the Company's definitive proxy statement for the
Annual Meeting of Shareholders to be held on April 25, 2000.
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 April 25, 2000.
ITEM 12. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to, the
material appearing at page 6 of the Company's definitive proxy statement for the
Annual Meeting of Shareholders to be held on April 25, 2000.
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)
-13-
<PAGE>
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, 1999
16 Letter of Deloitte & Touche, LLP Regarding Change in Certifying
Accountant (6)
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 (7)
_____________________________
(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 16 to the Company's Current Report on
Form 8-K/A, dated November 16, 1999, filed on November 23, 1999
(7) 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
During the fourth quarter of 1999, the Company filed a Form 8-K Current
Report (and one amendment thereto) dated November 15, 2000 relating to the
change of the Company's certifying accountants discussed at Item 8 of this
report.
-14-
<PAGE>
SIGNATURES
In accordance with Section 13 of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
IBW FINANCIAL CORPORATION
March 28, 2000 By: /s/ B.Doyle Mitchell, Jr
-------------------------
B. Doyle Mitchell, Jr.
President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Position Date
<S> <C> <C>
/s/ Clinton W. Chapman Chairman of the Board of Directors March 28, 2000
- ----------------------
Clinton W. Chapman
/s/ George S. Windsor Vice Chairman of the Board of Directors March 28, 2000
- ----------------------
George S. Windsor
/s/ B. Doyle Mitchell, Jr. President, Chief Executive Officer March 28, 2000
- -------------------------- and Director (Principal Executive Officer)
B. Doyle Mitchell, Jr.
/s/ Massie S. Fleming Director March 28, 2000
- ------------------
Massie S. Fleming
/s/ Benjamin L. King Secretary and Director March 28, 2000
- ---------------------
Benjamin L. King
/s/ Cynthia T. Mitchell Director March 28, 2000
- -----------------------
Cynthia T. Mitchell
/s/ Emerson A. Williams Director March 28, 2000
- ------------------------
Emerson A. Williams
/s/ Thomas A. Wilson, Jr. Senior Vice President, Treasurer March 28, 2000
- ------------------------- (Principal Financial and
Thomas A. Wilson, Jr. Accounting Officer)
</TABLE>
-15-
<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 1999 1998
---------------- -----------------
Basic and Diluted $ 2.50 $ (2.06)
Average Shares Outstanding 668,360 668,360
<PAGE>
Exhibit 13
Annual Report to Shareholders for the Year Ended December 31, 1999
<PAGE>
IBW FINANCIAL CORPORATION
ANNUAL REPORT TO SHAREHOLDERS
DECEMBER 31, 1999
[GRAPHIC OMITTED] Annual Message To Shareholders
Getting Things Done . . . The Board of
Directors and Management of IBW Financial
IBW Financial Corporation (the Company) and Industrial
Corporation Officers Bank, N.A. (the Bank) are pleased to
announce that 1999 was a year of significant
improvement and profitability for banking
operations. As promised, we have improved
asset quality and credit administration,
reinforced training, strengthened the
Clinton W. Chapman, Esq. management team, and enhanced operations,
Chairman of the Board, efficiency. The Bank also celebrated its
Senior Partner, 65th Anniversary, successfully prepared for
Chapman and Chapman, Attorneys Year 2000 compliance, added three new ATMs,
rolled out a new Web page and continued
B. Doyle Mitchell Jr., President efforts to enhance employee development and
Chief Executive Officer teamwork. The Board recently approved Robert
R. Hagans, Jr. as the first new director in
Thomas A. Wilson, Jr. seven years.
Treasurer
During 1999, the Company's financial
Benjamin L. King, CPA position strengthened considerably. Net
Secretary of the Board, income improved dramatically from a loss of
Consultant $1.3 million at year-end 1998, to earnings
of almost $1.7 million in 1999, exceeding
Debra B. Thornton our projections. This was attributed to
Assistant Secretary of the Board enhanced asset quality, reduced provisions
for loan losses and contained overhead
IBW Financial Corporation expenses. The Bank took considerable
and Industrial Bank, N.A. measures to address the weaknesses in asset
Board of Directors quality and credit administration, hiring
experienced personnel and reducing non-
Clinton W. Chapman, Esq. performing loans and credit exceptions. Non-
Chairman of the Board, performing loans declined over 52% during
Senior Partner, 1999, from $7 million at year-end 1998 to
Chapman and Chapman, Attorneys $3.4 million. Additionally, the conservative
actions taken to increase the Allowance for
George H. Windsor, Esq. Loan Losses in 1998, combined with the
Vice Chairman of the Board, decline in non-performing and problem
Cobb, Howard, Hayes and Windsor, assets, enabled the Company to make no
Attorneys additional provisions in 1999. Always
categorized as well capitalized, the Bank's
Benjamin L. King, CPA leverage capital ratio also improved,
Secretary of the Board, increasing 83 basis points.
Consultant
In preparation for 2000 and beyond, the Bank
B. Doyle Mitchell, Jr. continued its long-range strategic planning
President and organizational development that will
guide expansion and improve the quality and
Massie S. Fleming delivery of services to our customers.
Retired Banker Automating the branch platforms and
connecting the remaining branches to the
Cynthia T. Mitchell Bank's wide area network will greatly
Educator enhance efficiency and productivity in the
branch delivery system. The rapidly
Emerson A. Williams, M.D. expanding debit card base and the proposed
Physician introduction of other electronic banking
products all help to increase fee income,
Marjorie H. Parker, Ph.D. while serving our customers more quickly and
Educator comprehensively at a reduced cost. For over
65 years, Industrial Bank has been an
essential provider of quality financial
services to the community we serve, and we
will continue to reinforce, strengthen and
build on the foundation that has been laid.
/s/ Clinton W. Chapman /s/ Doyle Mitchell
Clinton W. Chapman, Esq.
Chairman of the Board
<PAGE>
Industrial Bank, N.A. OFFICERS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
EXECUTIVES Vice-Presidents (cont.) Assistant Vice-Presidents (cont.) Retail Banking Officers
(cont.)
<S> <C> <C> <C>
B. Doyle Mitchell, Jr. JB Holston Herbert C. Harris, Jr. Felicia Hardaway
President, Chief Executive Officer Retail Banking Division Commercial Loans Oxon Hill Office
Forestville Office
David G. Poole Vinson T. McCarty Patricia A. Mitchell
Senior Vice President, Consumer Loans Commercial Real Estate Loans Danielle Logan
Chief Operations Officer U Street Office
Douglas E. Metz Raymond L. Sleater
John S. Mazzocchi, Jr. Commercial Real Estate Loans Special Assets, Commercial Loans
Saundra G. Turpin
Senior Vice President, Roy Moss, Jr. Debra B. Thornton Saunsra G. Turpin
Chief Credit Officer Commercial Loans Director, Human Resources Georgia Avenue Office
F Street Office
Thomas A. Wilson, Jr. Thomas E. McLaurin, Jr. Vernard J. Tyson
Senior Vice President, Corporate Affairs Consumer Loans LOAN OPERATIONS OFFICERS
Chief Financial Officer Stacy Warrick
John N. Gamble Garfield M. Vann
VICE-PRESIDENTS Special Assets, Commercial Loans Accounting Roydell Stephens
Claude O. Barrington, Esq. Linwood White Sharon B. Zimmerman COMPLIANCE OFFICER
Bank Counsel Commercial Loans Director, Marketing Charles W. Hall, Jr.
Community Reinvestment
Michael S. Betton Lewis T. Williams DC ADVISORY BOARD
Information Systems Commercial Real Estate Loans RETAIL BANKING OFFICERS ViCurtis Hinton
H. Greig Cummings
Edson B. Dayton ASSISTANT VICE-PRESIDENTS Jeffrey A. Banks Patricia C. Lightfoot
Manager, Credit Department American University Office Ronald K. Crockett,
Reeves Center Office Acting Chairman
Rodney D. Epps Nathan W. Evans, CPA Dr. Ettyce Moore
Electronic Banking Internal Auditor William R. Claytor, MD
Elizabeth Hundley Rev. A. Knighton Stanley
Effie M. Faucett Reta Glover J.H. Mitchell Office Warren Strudwick, MD
Operations Loan Accounting Brookland/Woodridge Office Patricia A. Mitchell
James N. McGuffey
Maximo Pierola
Fay G. Knight, Secretary
</TABLE>
Branch LOCATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MARYLAND Washington (cont.) Washington (cont.) Washington (cont.)
<S> <C> <C> <C>
FORESTVILLE OFFICE FRANK D. REEVES BROOKLAND/WOODRIDGE OFFICE ATM AT WISCONSIN AVENUE
ATM - Drive-in MUNICIPAL CENTER OFFICE 2012 Rhode Island Avenue, N.E. 4200 Wisconsin Avenue,
7610 Pennsylvania Avenue ATM and Metro Green Line Washington, D.C. 20018 N.W.
Forestville, MD 20747 2000 Fourteenth Street, N.W. (202) 722-2038 Washington, D.C.
(301) 735-4440 Washington, D.C. 20009
(202) 722-2075 AMERICAN UNIVERSITY OFFICE
OXON HILL OFFICE ATM
ATM - Drive-in U STREET OFFICE 4400 Massachusetts Avenue, N.W.
1900 John Hanson Lane ATM and Metro Green Line Washington, D.C. 20016
Oxon Hill, MD 20745 2000 Eleventh Street, N.W. (202) 722-2053
(301) 839-4600 Washington, D.C. 20001
(202) 722-2050 COMMERCIAL AND COMMERCIAL
CONSUMER AND MORTGAGE REAL ESTATE LOANS
LOAN OPERATIONS F STREET OFFICE 2002 Eleventh Street, N.W.
1900 John Hanson Lane Metro Center Washington, D.C. 20001
Oxon Hill, MD 20745 1317 F Street, N.W. (202) 722-2080
(301) 839-4600 Washington, D.C. 20004
(202) 722-2060
WASHINGTON ATM AT WASHINGTON
CONVENTION CENTER
GEORGIA AVENUE J.H. MITCHELL OFFICE 906 Ninth Street, N.W.
ATM - Drive-in ATM - Drive-in Washington, D.C.
4812 Georgia Avenue, N.W. Metro Benning Road
Washington, D.C. 20011 45th and Blaine Streets, N.E. ATM AT ONE JUDICIARY SQUARE
(202) 722-2025 Washington, D.C. 20019 441 Fourth Street, N.W.
(202) 722-2065 Washington, D.C.
</TABLE>
<PAGE>
[LOGO OF STEGMAN & COMPANY]
Independent Auditors' REPORT
To the Shareholders and Board of Directors of IBW Financial Corporation and
subsidiary Washington, DC.
We have audited the accompanying consolidated balance sheet of IBW Financial
Corporation and subsidiary (the Company) as of December 31, 1999 and the related
consolidated statements of income (loss), changes in shareholders' equity, and
cash flows for the year 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 audit. The financial
statements of the Company as of December 31, 1998 were audited by other auditors
whose report dated February 26, 1999 (March 31, 1999 as to Note 2) expressed an
unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, at December 31,1999, the
Company's subsidiary, the 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of IBW Financial
Corporation and subsidiary at December 31, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principals.
/s/ Stegman & Company
Baltimore, Maryland
February 1, 2000
<PAGE>
IBW Financial Corporation
Consolidated BALANCE Sheets
<TABLE>
<CAPTION>
DECEMBER 31, 1999 and 1998
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------
ASSETS
1999 1998
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 13,733 $ 12,565
Federal funds sold 1,700 13,150
-------- --------
Total cash and cash equivalents 15,433 25,715
-------- --------
Interest-bearing deposits in banks 988 405
Investment securities available-for-sale, at fair value 137,970 131,384
Loans receivable - net of allowance for loan losses
of $4,272 in 1999 and $4,700 in 1998 102,998 104,469
Real estate owned - net 265 525
Bank premises and equipment - net 2,389 2,542
Accrued interest receivable 1,665 1,924
Deferred income taxes 2,235 1,251
Other assets 1,251 1,763
-------- --------
TOTAL ASSETS $265,194 $269,978
======== ========
============================================================================================================
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
1999 1998
<S> <C> <C>
Liabilities:
Noninterest-bearing deposits $ 60,739 $ 58,870
Interest-bearing deposits 151,735 165,257
-------- --------
Total deposits 212,474 224,127
Short-term borrowings 33,733 25,611
Accrued expenses and other liabilities 1,496 1,323
Long-term debt - 1,000
-------- --------
Total liabilities 247,703 252,061
-------- --------
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 13,034 11,463
Accumulated other comprehensive income (1,762) 235
-------- --------
Total shareholders' equity 17,491 17,917
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $265,194 $269,978
======== ========
See notes to consolidated financial statements.
============================================================================================================
</TABLE>
<PAGE>
1999 Annual Report
Consolidated Statements of INCOME (loss)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 AND 1998
(dollars in thousands, except share data)
- ---------------------------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 9,115 $10,518
U.S. Treasury securities 90 424
Obligations of U.S. Government
agencies and corporations 2,886 1,753
Collateralized mortgage obligations 4,283 3,613
Obligations of states and political subdivisions 694 577
Bank balances and other securities 99 173
Federal funds sold 613 905
------- -------
Total interest income 17,780 17,963
------- -------
INTEREST EXPENSE:
Interest-bearing deposits 3,656 4,378
Time certificates over $100,000 844 977
Short term borrowings 1,361 1,032
Long term debt 48 51
------- -------
Total interest expense 5,909 6,438
------- -------
NET INTEREST INCOME 11,871 11,525
------- -------
PROVISION FOR LOAN LOSSES - 4,603
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 11,871 6,922
------- -------
NONINTEREST INCOME:
Service charges on deposit accounts 2,620 2,599
Other fee income 852 683
(Loss) Gain on sales of investment securities (221) 301
Other operating income 168 151
------- -------
Total noninterest income 3,419 3,734
------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits 6,979 6,775
Occupancy 755 745
Furniture and equipment 788 759
Data processing 703 671
Advertising 164 514
Other expenses 3,662 3,502
------- -------
Total noninterest expense 13,051 12,966
------- -------
INCOME (LOSS) BEFORE INCOME TAXES $ 2,239 $ (2,310)
-------- --------
PROVISION FOR INCOME TAXES (BENEFIT) 543 (956)
-------- --------
NET INCOME (LOSS) $ 1,696 $ (1,354)
======== ========
EARNINGS (LOSS) PER COMMON SHARE - Basic and diluted $ 2.50 $ (2.06)
======== ========
WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING 668,360 668,360
======== ========
See notes to consolidated financial statements.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
IBW FinanciaL Corporation
Consolidated Statements of
Changes in Shareholders' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 AND 1998
(dollars in thousands, except share data)
- -----------------------------------------------------------------------------------------------------------------------------------
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, 1998 $500 $668 $5,051 $13,183 $ 775 $20,177
Net income (loss) - - - (1,354) - (1,354)
Other comprehensive income, net of tax
(unrealized losses on securities
available-for-sale of $341, net of
reclassification adjustment for gains
of $199 included in net income) - - - - (540) (540)
-------
Total comprehensive income (loss) - - - - - (1,894)
Cash dividends paid:
Preferred stock $1.25 per share - - - (25) - (25)
Common stock $0.51 per share - - - (341) - (341)
-------- ---- ------ --------- ------------- -------
BALANCE, DECEMBER 31, 1998 500 668 5,051 11,463 235 17,917
Net income (loss) - - - 1,696 - 1,696
Other comprehensive income, net of tax
(unrealized losses on securities
available-for-sale of $2,008, net of
reclassification adjustment for losses
of $91 included in net income) - - - - (1,997) (1,997)
-------
Total comprehensive income (loss) - - - - - (301)
Cash dividends paid:
Preferred stock $1.25 per share - - - (25) - (25)
Common stock $0.15 per share - - - (100) - (100)
-------- ---- ------ --------- ------------- -------
BALANCE, DECEMBER 31, 1999 $500 $668 $5,051 $13,034 $ 1,762 $17,491
======== ==== ====== ========= ============= =======
See notes to consolidated financial statements.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
1999 Annual Report
Consolidated Statements of CASH Flows
DECEMBER 31, 1999 and 1998
(dollars in thousands)
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,696 $ (1,354)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 404 409
Amortization of goodwill and intangibles 162 156
Provision for loan losses - 4,603
Deferred income taxes 48 (1,167)
Accretion/amortization of premium 1,151 (327)
Loss on sale of real estate owned 8 140
Loss (gain) on sale of investment securities 221 (301)
Provision for loss on real estate owned 108 114
Interest capitalized on securities (390) (382)
Decrease (increase) in accrued interest receivable 259 (179)
Increase in other assets 350 125
(Decrease) increase in accrued expenses and other liabilities 173 (631)
-------- --------
Net cash provided by operating activities 4,190 1,206
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from principal payments on securities available-for-sale 25,453 33,165
Proceeds from maturities of investment securities available-for-sale 26,008 30,213
Proceeds from sale of investment securities available-for-sale 33,483 4,254
Purchase of investment securities available-for-sale (95,541) (97,956)
Net (increase) decrease in interest-bearing deposits in banks (583) 2,595
Net decrease in loans 1,471 7,120
Additions to bank premises and equipment, net (251) (297)
Proceeds from sale of real estate owned 144 393
-------- --------
Net cash provided by investing activities (9,816) (20,513)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits $(11,653) $ 15,931
Net increase in short-term borrowings 7,122 6,115
Dividends paid (125) (366)
-------- --------
Net cash provided by financing activities (4,656) 21,680
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (10,282) 2,373
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 25,715 23,342
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 15,433 $ 25,715
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes $ 125 $ 212
======== ========
Interest $ 5,995 $ 6,484
======== ========
NONCASH TRANSACTIONS:
Transfers of loans to other real estate owned $ 40 $ 651
======== ========
</TABLE>
See notes to consolidated financial statements.
===========================================================================
<PAGE>
IBW Financial Corporation
Notes To Consolidated FINANCIAL Statements
YEARS ENDED DECEMBER 31, 1999 and 1998
---------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IBW Financial Corporation (the Corporation) became a one 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 accumulated other comprehensive income, a separate
component of shareholders' equity. 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 at the contractual rate 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.
The Company's policy measuring impairment on impaired loans is based on the
fair value of the collateral. The Company considers a loan impaired when,
based on current information and events, it is probable that the Company
will be unable to collect all amounts due according to the contractual
terms of the loan agreement. 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. 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 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 - Net income (loss) available to common shareholders is
adjusted to give effect for dividends on preferred stock. Net income
(loss) available to common
<PAGE>
1999 Annual Report
---------------------------------------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
shareholders for basic and diluted EPS purposes is $1,671 and $(1,379) for
the years ended December 31, 1999 and 1998 respectively. Earnings per share
is computed based on the weighted average number of common shares
outstanding during the year (668,360 for both 1999 and 1998). 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, as the
Corporation had no dilutive securities outstanding as of December 31, 1999
or 1998.
Income Taxes - The Corporation and its wholly owned subsidiary file a
consolidated federal income tax return. 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, 1999 and 1998, other assets included goodwill
of $517,000 and $572,000, net of accumulated amortization of $304,000 and
$249,000 and core deposit intangibles of $260,000 and $367,000, net of
accumulated amortization of $590,000 and $483,000, respectively. Goodwill
is being amortized over fifteen years and the core deposit intangibles over
eight 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 $6,564,000 and
$5,134,000 at December 31, 1999 and 1998, respectively.
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133, requires derivative
instruments be carried at fair value on the balance sheet. The statement
continues to allow derivative instruments to be used to hedge various risks
and sets forth specific criteria to be used to determine when hedge
accounting can be used. The statement also provides for offsetting changes
in fair value or cash flows of both the derivative and the hedged asset or
liability to be recognized in earnings in the same period; however, any
changes in fair value or cash flow that represent the ineffective portion
of a hedge are required to be recognized in earnings and cannot be
deferred. For derivative instruments not accounted for as hedges, changes
in fair value are required to be recognized in earnings.
The Company plans to adopt the provisions of this statement, as amended,
for its quarterly and annual reporting beginning January 1, 2001, the
statement's effective date. The impact of adopting the provisions of this
statement on the Company's financial position, results of operations and
cash flow subsequent to the effective date is not currently estimable and
will depend on the financial position of the Company and the nature and
purpose of any derivative instruments in use at that time.
Reclassifications - Certain reclassifications have been made to the prior
year's consolidated financial statements to conform to the 1999
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 may 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
<PAGE>
IBW Financial Corporation
-------------------------------------------------------------------------
FORMAL AGREEMENT (cont.)
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 remediation contingency plan in the event any systems
are 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 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 February 29, 2000, the Bank has submitted to the OCC all of the written
plans, policies and other information required by the Agreement, and all
revisions requested by the OCC, although certain submissions were made
outside of the time limits required by the Agreement.
There can be no assurance that the Bank's regulators will deem the Bank to be
compliant under the Agreement, or that they will not require additional
compliance efforts. Failure to comply with the provisions of the 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.
----------------------------------------------------------------------------
3. INVESTMENT SECURITIES
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
At December 31, 1999 and 1998, the amortized cost and approximate fair value of
securities available-for-sale were as follows (in thousands):
DECEMBER 31, 1999
-------------------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury Notes $ 1,000 $ - $ (6) $ 994
U.S. Government Agencies 40,761 1 (585) 40,177
Mortgage-Backed Securities:
Pass-through securities:
Guaranteed by GNMA 28 1 - 29
Issued by FNMA and FHLMC 6 1 - 7
Collateralized Mortgage Obligations:
Collateralized by FNMA, FHLMC and
GNMA mortgage-backed securities 79,666 187 (1,480) 78,373
Securities issued by states and
political subdivision:
General obligations 12,962 35 (654) 12,343
Revenue obligations 5,065 28 (207) 4,886
Equity Securities 1,144 17 - 1,161
-------- ---- -------- --------
TOTAL $140,632 $270 $ (2,932) $137,970
======== ==== ======== ========
Weighted average interest rate 6.47%
========
</TABLE>
============================================================================
10
<PAGE>
1999 Annual Report
============================================================================
INVESTMENT SECURITIES (cont.)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated 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
Equity Securities 1,086 25 - 1,111
-------- ---- ------- --------
TOTAL $131,029 $994 $ (639) $131,384
======== ==== ======= ========
Weighted average interest rate 5.96%
========
</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 31,1999. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------------------------------------------------------
Estimated
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 12,920 $ 12,851
Due after one year through five years 22,171 21,667
Due five through ten years 7,814 7,815
Due after ten years 18,027 17,228
Pass through securities 35 36
Collateralized mortgage obligations 79,665 78,373
-------- --------
TOTAL $140,632 $137,970
======== ========
</TABLE>
================================================================================
Proceeds from the sale of securities available-for-sale were $33,483,000 and
$4,254,000 for the year ended December 31, 1999 and 1998, respectively, and
resulted in realized losses of $221,000 for 1999 and realized gains of
$301,000 for 1998.
Securities of $4,757,000 and $12,040,000 at December 31, 1999 and 1998, were
pledged as collateral for public deposits and for other purposes required by
law. At December 31, 1999 and 1998, the carrying value of securities
underlying repurchase agreements was $33,940,000 and $25,611,000,
respectively.
================================================================================
4. LOANS RECEIVABLE
Loans receivable consist of the following (in thousands) at December 31:
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
REAL ESTATE LOANS:
Collateralized by residential property:
First mortgages $ 50,748 $ 48,110
Second mortgages 2,078 2,987
Collateralized by non-residential properties 40,125 33,560
Commercial 10,046 16,568
Installment 4,803 8,388
-------- --------
TOTAL $107,800 $109,613
-------- --------
LESS:
Deferred fees and costs, net 530 444
Allowance for loan losses 4,272 4,700
-------- --------
NET lOANS $102,998 $104,469
======== ========
</TABLE>
================================================================================
11
<PAGE>
LOANS RECEIVABLE (Cont)
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.
At December 31, 1999 and 1998, loans that were considered to be impaired totaled
$2,819,000 and $5,003,000, respectively. The related allowance allocated to
impaired loans was $318,000 and $1,520,000 at December 31, 1999 and 1998,
respectively. The average balance of impaired loans for the years ended December
31, 1999 and 1998 was $3,934,000 and $2,547,000, respectively. Interest income
that was not recorded on impaired loans for the years ended December 31, 1999
and 1998, was $274,000 and $230,000, respectively.
<TABLE>
<CAPTION>
Major loan concentrations are as follows (in thousands):
-----------------------------------------------------------------------------
1999 1998
<S> <C> <C>
Church loans collateralized by real estate $ 12,786 $11,941
Installment loans to churches 36 67
Commercial loans to churches 240 290
------- -------
Total loans to churches $13,062 $12,298
======= =======
-----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
A summary of transactions in the allowance for loan
losses is as follows (in thousands) at December 31:
- -------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
Balance, beginning of year $4,700 $ 1,702
Add: Provision charged to expense - 4,603
Recoveries 386 215
Deduct: Charge-offs (814) (1,820)
------ -------
Balance, end of year $4,272 $ 4,700
====== =======
-----------------------------------------------------------------------------
</TABLE>
5. BANK PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
The major categories of bank premises and equipment
are as follows (in thousands):
-----------------------------------------------------------------------------
1999 1998
<S> <C> <C>
Bank premises $ 2,389 $ 2,389
Furniture, fixtures, and equipment 3,530 3,279
------- -------
TOTAL $ 5,919 $ 5,668
Less accumulated depreciation (3,530) (3,126)
------- -------
Bank premises and equipment, net $ 2,389 $ 2,542
======= =======
-----------------------------------------------------------------------------
</TABLE>
Depreciation expense for the years ended December 31, 1999 and 1998 is $404 and
$409, respectively.
6. DEPOSITS
<TABLE>
<CAPTION>
Deposits consist of the following (in thousands):
At DECEMBER 31, 1999
- -------------------------------------------------------------------------------------------------
Demand Savings Time Total
<S> <C> <C> <C> <C>
Individuals, partnerships, and
corporations $57,537 $90,567 $58,744 $206,848
U.S. government 62 - 2,095 2,157
States and political subdivisions - - 329 329
Certified and official checks 3,140 - - 3,140
------- ------- ------- --------
TOTAL $60,739 $90,567 $61,168 $212,474
======= ======= ======= ========
Weighted average interest rate 2.04% 3.76%
======= =======
-------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Deposits consist of the following (in thousands):
At DECEMBER 31, 1998
-------------------------------------------------------------------------------------------------
Demand Savings Time Total
<S> <C> <C> <C> <C>
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%
======= =======
-------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
DEPOSITS (cont) 1999 Annual Reports
Demand deposits represent non-interest-bearing deposit accounts. Individual
certificates of deposit of $100,000 or more at December 31, 1999 and 1998,
totaling $16,329,000 and $21,226,000 respectively, are included in time
deposits. The bank has no brokered deposits.
<TABLE>
<CAPTION>
At December 31, 1999, the scheduled maturities of
Time Deposits are as follows (in thousands):
- -----------------------------------------------------------------------
Average Rate
<S> <C> <C>
2000 $53,671 3.72%
2001 2,704 4.31%
2002 1,092 4.33%
2003 3,701 3.88%
-------
$61,168
=======
- -----------------------------------------------------------------------
</TABLE>
7. SHORT-TERM BORROWINGS
At December 31, 1999 and 1998, securities sold under agreements to repurchase
were $32,733,000 and $25,611,000, 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 repurchase agreements at December 31, 1999 and 1998
had a fair value of $33,940,000 and $26,288,000, respectively. All outstanding
repurchase agreements at December 31, 1999 and 1998 matured on January 1, 2000
and 1999, respectively. The outstanding repurchase agreements had an average
interest rate of 2.45% and 2.72% at December 31, 1999 and 1998, respectively.
The average balance and the average interest rate for the year ended December
31, 1999 and 1998 were $34,787,000 and 3.91% and $24,011,000 and 4.30%,
respectively. For 1999, short-term borrowings include the $1,000,000 note
payable due July 3, 2000.
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 (RTC 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 RTC
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 accrues interest at a
variable rate based on the 13-week U.S. Treasury Bill rate, reset quarterly. The
interest rate at December 31, 1999 and 1998, was 5.14% and 4.49%. The
outstanding principal balance matures on July 3, 2000.
The RTC 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 RTC Agreement does
provide for the payment of dividends by the Bank if (i) there is no event of
default in existence under the RTC 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
RTC Agreement limits the types of transactions that the Bank can enter into with
the Corporation. Further, the RTC 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 RTC Agreement provides for the full repayment of the note 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
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 of December 31, 1999 the bank would not need prior
approval from OCC unless a declaration of dividends exceeded $383,000.
13
<PAGE>
IBW Financial Corporation
- -------------------------------------------------------------------------------
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 the 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 Bank's capital amounts and its
classification under the regulatory framework for prompt corrective action
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and 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, 1999, that the
Corporation and Bank meet all the capital adequacy requirements to which
they are subject.
As of December 31, 1999, the most recent notification from the OCC
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.
The Corporation's and the Bank's required and actual capital amounts and
ratios at December 31, 1999 and 1998, are set forth in the following table
(in thousands):
<TABLE>
<CAPTION>
To Be Categorized As Well
For Capital Captialized Under Prompt
Actual Adequacy Purposes Corrective Action Provisions
- ------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total capital (to risk-
weighted assets):
Corporation $19,408 16.80% $ 9,243 8.00% N/A N/A
Bank 19,457 16.81 9,339 8.00 $11,674 10.00%
Tier I capital (to risk-
weighted assets)
Corporation 17,929 15.52 4,622 4.00 N/A N/A
Bank 18,135 15.53 4,670 4.00 7,004 6.00
Tier I capital (to average assets)
Corporation 17,922 6.61 10,852 4.00 N/A N/A
Bank 18,135 6.70 10,835 4.00 13,543 5.00
As of December 31, 1998
Total capital (to risk-
weighted assets)
Corporation 17,005 14.41 9,443 8.00 N/A N/A
Bank 17,262 14.65 9,427 8.00 11,516 10.00
Tier I capital (to risk-
weighted assets)
Corporation 15,490 13.12 4,722 4.00 N/A N/A
Bank 15,747 13.36 4,713 4.00 6,910 6.00
Tier I capital (to average assets)
Corporation 15,490 5.76 10,749 4.00 N/A N/A
Bank 15,747 5.87 10,733 4.00 13,585 5.00
</TABLE>
- -------------------------------------------------------------------------------
On August 25, 1998, the Bank entered into a Formal Agreement with the Office of
the Comptroller of the Currency. (Note 2)
- -------------------------------------------------------------------------------
14
<PAGE>
1999 Annual Report
---------------------------------------------------------------------------
11. INCOME TAXES (BENEFIT)
The provision (benefit) for income taxes consists of
the following (in thousands) for the years
ended December 31:
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Current:
Federal income tax $ 495 $ (39)
State and local income tax - (23)
----- -----
495 (62)
Deferred:
Federal income tax 48 (894)
----- -----
Total $ 543 $(956)
===== =====
</TABLE>
---------------------------------------------------------------------------
The components of the deferred tax (benefit) expense
resulting from net temporary differences are
as follows (in thousands) for the years ended
December 31:
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Depreciation $ (29) $ 16
Provisions for losses on loans and other
real estate owned 111 (980)
Deferred loan fees (34) 25
Other - 45
----- -----
Total $ 48 $(894)
===== =====
</TABLE>
--------------------------------------------------------------------------
The following reconciles the federal statutory income
tax rate of 34% to the effective income tax
rate (in thousands) for the years ended
December 31:
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Federal tax expense at statutory rate $ 761 34 % $(788) (34)%
State tax expense, net of federal tax
benefit - 0 % (15) (1)%
Tax-exempt interest (217) (10)% (179) (8)%
Other (1) 0 % 26 2%
----- ---- ----- ----
Total $ 543 24% $(956) (41)%
===== ==== ===== ====
</TABLE>
--------------------------------------------------------------------------
The tax effects of items comprising the Company's
deferred tax assets (liabilities) at December 31,
1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
Allowance for losses on loans and
other real estate owned $1,214 $1,325
Deferred loan fees 197 163
Other 65 46
Unrealized loss available-for-sale securities 911 -
------ ------
Total deferred tax assets 2,387 1,534
------ ------
Deferred tax liabilities:
Unrealized gain on available-for-sale securities - (121)
Depreciation (135) (145)
Other (17) (17)
------ ------
Total deferred tax liabilities (152) (283)
------ ------
Net deferred tax assets $2,235 $1,251
====== ======
</TABLE>
---------------------------------------------------------------------------
15
<PAGE>
IBW Financial Corporation
--------------------------------------------------------------------------
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. Contributions of
$52,500 and $0 were made for 1999 and 1998, respectively. At December 31,
1999 and 1998, the ESOP held approximately 54,720, or 8.2% of the
outstanding shares of the Company's common stock.
--------------------------------------------------------------------------
14. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding various 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, 1999 and 1998 the Bank had outstanding
commitments to fund loans for approximately $16,731,000 and $22,790,000,
respectively. The Bank also has outstanding standby letters of credit at
December 31, 1999 and 1998 in the amount of $882,000 and $1,018,000,
respectively. Such commitments and standby letters of credit are subject to
the Bank's normal underwriting standards. Since 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, 1999, 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):
2000 2001 2002 2003 2004 Total
-------------------------------------------------- ---------
$264 162 48 36 38 $538
Rent expense for the years ended December 31, 1999 and 1998 was $303,000
and $275,000, respectively. Rent expense includes the amortization of rent
concessions.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 was
estimated to equal the carrying value due to the short-term nature of these
financial instruments.
Securities - The fair value was estimated based on quoted market prices,
dealer quotes and prices obtained from independent pricing services.
Loans - The fair value 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 Company'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 was estimated based on rates currently
available to the Bank for borrowings with similar terms and remaining
maturities.
16
<PAGE>
1999 Annual Report
---------------------------------------------------------------------------
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (cont)
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, 1999 and 1998. 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, 1999 December 31, 1998
Carrying Value Fair Value Carrying Value Fair Value
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 15,433 $ 15,433 $ 25,715 $ 25,715
Interest-bearing deposits 988 988 405 405
Investment securities 137,970 137,970 131,384 131,384
Loans 102,998 102,093 104,469 108,146
Accrued interest receivable 1,665 1,665 1,924 1,924
LIABILITIES
Deposits 212,474 212,477 224,127 217,993
Short term borrowings 33,733 32,733 25,611 25,611
Long term debt - - 1,000 1,000
Accrued interest payable 449 449 522 522
========================================================================================================
</TABLE>
===========================================================================
16. RELATED PARTY TRANSACTIONS
In the normal course of banking business, loans are made to officers and
directors. At December 31, 1999 and 1998, these loans totaled $508,000 and
$698,000, respectively.
---------------------------------------------------------------------------
17. OTHER EXPENSES
Other expenses in the Consolidated Statements of Income (loss) include the
following:
<TABLE>
<CAPTION>
Years ended December 31 (in thousands):
---------------------------------------------------------------------------------------------------
1999 1998
<S> <C> <C>
Director fees $ 286 $ 210
Real estate owned expenses 147 327
Loan collection and repossession expenses 216 196
Bank security 319 267
Other 2,694 2,502
TOTAL OTHER EXPENSES $3,662 $3,502
===================================================================================================
</TABLE>
17
<PAGE>
IBW Financial Corporation
18 PARENT COMPANY FINANCIAL INFORMATION
The summarized financial statements of IBW Financial Corporation (parent
company only) as of December 31, 1999 and 1998, and for the years ended
December 31, 1999 and 1998, follow (in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
BALANCE SHEETS
1999 1998
<S> <C> <C>
Assets:
Deposits with subsidiary $ 325 $ 296
Interest-bearing deposits in banks 296 285
Securities available-for-sale 144 152
Other assets 61 52
Investment in subsidiary - at equity 17,688 18,158
------- -------
TOTAL ASSETS $18,514 $18,943
======= =======
Liabilities and shareholders' equity:
Liabilities:
Borrowings $ 1,000 $ 1,000
Other 30 26
------- -------
Total Liabilities 1,030 1,026
------- -------
Shareholders' Equity
Preferred stock 500 500
Common stock 668 668
Capital surplus 5,051 5,051
Retained earnings 13,027 11,463
Accumulated other comprehensive income (1,762) 235
------- -------
Total Shareholders' Equity 17,484 17,917
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $18,514 $18,943
======= =======
STATEMENTS OF INCOME
Dividends from subsidiary and other income $ 218 $ 432
Expenses 38 52
------- -------
Income before undistributed net earnings of subsidiary 180 380
Equity (Loss) in undistributed net earnings of subsidiary 1,516 (1,734)
------- -------
Net income (loss) $ 1,696 $(1,354)
======= =======
STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Net income (loss) $ 1,696 $(1,354)
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net earnings (loss) of subsidiary (1,516) 1,734
Other (15) (17)
------- -------
Net cash provided by operating activities 165 363
------- -------
Cash Flows for Investing Activities:
Purchase of interest-bearing deposits (11) (285)
------- -------
Net cash (used in) investing activities (11) (285)
------- -------
Cash Flows from Financing Activities:
Payment of dividends (125) (366)
------- -------
Net cash (used in) financing activities (125) (366)
------- -------
Increase (Decrease) in Deposits with Subsidiary 29 (288)
Deposits with Subsidiary, Beginning of the Year 296 584
------- -------
Deposits with Subsidiary, Ending of the Year $ 325 $ 296
======= =======
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
1999 Annual Report
MANAGEMENT'S Discussion and Analysis
---------------------------------------------------------------------------
The following financial review presents a discussion of the results of
operations, an analysis of the asset and liability structure of the
Company, and its sources of liquidity and capital resources and should be
read in conjunction with the consolidated financial statements. All dollar
amounts shown are in thousands, except with respect to per share data.
Forward-looking statements - This discussion, as well as other portions of
this report, contains forward-looking statements within the meaning of the
Securities Exchange Act of 1934, as amended, including statements of goals,
intentions, and expectations as to future trends, plans, events or results
of Company operations and policies and regarding general economic
conditions. These statements are based upon current and anticipated
economic conditions, nationally and in the Company's market, interest rates
and interest rate policy, competitive factors, and other conditions which
by their nature, are not susceptible to accurate forecast, and are subject
to significant uncertainty. Because of these uncertainties and the
assumptions on which this discussion and the forward-looking statements are
based, actual future operations and results in the future may differ
materially from those indicated herein. Readers are cautioned against
placing undue reliance on any such forward-looking statements. The Company
does not undertake to update any forward-looking statements to reflect
occurrences or events which may not have been anticipated as of the date of
such statements.
HOLDING COMPANY BUSINESS
The Company became a one 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 31,1999 and 1998
Overview - Net income was $1,696 for 1999 compared with ($1,354) in 1998,
an increase of 225%. Earnings per common share were $2.50 in 1999 compared
with ($2.06) in 1998. The increase of $3,050, or 225%, in net income was
primarily attributable to a decrease in the provision for loan losses of
$4,603, an increase of $346 in net interest income, offset by an increase
in taxes of $1,499, an increase of non-interest expenses of $85, and a loss
on the sale of securities of $221 (compared to a gain on the sale of
securities of $301). Return on average assets was .61% for 1999, up from
(.51%) for 1998. Return on average equity was 9.48% for 1999, compared with
(6.97%) for 1998.
===========================================================================
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>
---------------------------------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Return on average assets .61% (.51%) .64%
Return on average equity 9.49 (6.97) 8.74
Dividend payout per common share 5.98 N/A 24.59
Average shareholders' equity to average assets 6.46 7.37 7.37
</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-earning assets and
interest-bearing liabilities are presented in Table 3.
19
<PAGE>
- --------------------------------------------------------------------------------
Table 2. Average Balance and Net Interest Income Analysis /(1)/
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
(dollars in thousands):
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------------
Amount Amount Amount
Average Average Paid or Average Average Paid or Average Average Paid or
Balance Rate Earned Balance Rate Earned Balance Rate Earned
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net $ 99,863 9.13% $ 9,115 $113,286 9.28% $10,518 $111,856 9.33% $10,434
Taxable securities 130,684 5.61 7,336 103,507 5.66 5,858 88,897 6.31 5,605
Non-taxable securities /(2)/ 13,016 8.08 1,052 10,353 8.44 874 15,919 8.22 1,309
Federal funds sold 12,657 4.70 595 16,493 5.49 905 6,575 5.66 372
Interest-bearing deposits held 914 4.38 40 2,238 4.69 105 3,000 6.10 183
-------- ------ ------- -------- ------ ------- -------- ------ -------
Total interest-earning assets 257,134 7.05% $18,138 245,877 7.43% $18,260 226,247 7.91% $17,903
Cash and due from banks 12,169 11,038 11,108
Bank premises and equipment, net 2,441 2,692 2,515
Other assets 5,427 3,831 4,669
-------- -------- --------
Total assets $277,171 $263,438 $244,539
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing demand deposits $ 29,853 1.60% $ 479 $ 27,394 1.76% $ 481 $ 28,326 1.99% $ 563
Savings deposits 63,417 2.47 1,566 65,474 2.70 1,770 66,724 2.75 1,836
Time deposits 69,477 3.53 2,455 68,643 4.52 3,104 61,041 4.42 2,697
-------- ------ ------- -------- ------ ------- -------- ------ -------
Total interest-bearing deposits 162,747 2.77 4,500 161,511 3.32 5,355 156,091 3.26 5,096
Borrowed funds 1,000 4.80 48 1,000 5.10 51 1,000 5.30 53
Repurchase agreements 34,787 3.91 1,361 24,011 4.30 1,032 16,820 4.56 767
-------- ------ ------- -------- ------ ------- -------- ------ -------
Total interest-bearing liabilities 198,534 2.98% $ 5,909 186,522 3.45% $ 6,438 173,911 3.40% $5,916
Noninterest-bearing liabilities 59,178 56,031 50,362
Other liabilities 1,564 1,471 2,235
Shareholder's equity 17,895 19,413 18,031
-------- -------- --------
Total liabilities and shareholders'
equity $277,171 $263,438 $244,539
======== ======== ========
NET INTEREST INCOME AND NET YIELD ON
INTEREST-EARNING ASSETS
Net interest income $12,229 $11,822 $11,987
======= ======= =======
Interest rate spread 4.07% 3.98% 4.51%
Net yield on average 4.76% 4.81% 5.30%
interest-earning assets
Average interest-earning assets to 129.52% 131.82% 130.09%
average interest-bearing liabilities
- ----------------------------------------------------------------------------------------------------------------------------------
</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 $17,780 and $11,871
for 1999, $17,963 and $11,525 for 1998, and $17,458 and $11,542 for 1997.
20
<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,
---------------------------------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
Increase (Decrease) Due to; Increase (Decrease) Due to;
---------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Loans $(1,250) $ (153) $(1,403) $ 138 $ (54) $ 84
Taxable securities 1,540 (62) 1,478 922 (669) 253
Non-taxable securities 225 (47) 178 (457) 22 (435)
Federal funds sold (210) (100) (310) 561 (28) 533
Interest-bearing deposits (62) (3) (65) (46) (32) (78)
------- ------- ------- ------ ----- -----
Total interest income 243 (365) (122) 1,118 (761) 357
Deposits
Interest-bearing demand 46 (48) (2) (20) (62) (82)
deposits
Savings deposits (57) (147) (204) (33) (33) (66)
Time deposits 38 (687) (649) 338 69 407
------- ------- ------- ------ ----- -----
Total interest-bearing
deposits 27 (882) (855) 285 (26) 259
Borrowings 467 (141) 326 331 (68) 263
------- ------- ------- ------ ----- -----
Total interest expense 494 (1,023) (529) 616 (94) 522
------- ------- ------- ------ ----- -----
Net interest income $ (251) $ 658 $ 407 $ 502 $(667) $(165)
======= ======= ======= ====== ===== =====
--------------------------------------------------------------------------------------------------------------
</TABLE>
On a tax equivalent basis, net interest income for 1999 increased $407 or 3%
over 1998. The increase was primarily attributable to an increase in average
interest-earning assets and an increase in the net interest spread, partially
offset by an increase in average interest-earning liabilities.
Average interest - earning assets increased by $11,257 or 5%, comprised
principally of growth in taxable securities and non-taxable securities, offset
by a decrease in average loans, federal funds sold and interest bearing
deposits. Average taxable securities increased $27,177 or 26% while average non-
taxable securities increased $2,663 or 26%. Average loans decreased $13,423 or
12%, average federal funds sold decreased $3,836 or 23% and interest-bearing
deposits decreased $1,324 or 59%.
The interest rate spread increased 9 basis points or approximately 2%, from
3.98% in 1998 to 4.07% in 1999. The increase is a result of a 38 basis point
decrease in the average rate earned on interest-earning assets versus a 47 basis
point decrease in average interest bearing liabilities. The yield on loans in
1999 decreased 15 basis points from 1998. The yield and average balances on
mortgage-backed securities were 5.74% and $63,177 for 1999 and 6.36% and $59,147
for 1998, respectively.
Interest-bearing liabilities increased $12,012 or 6%, comprised of an increase
in borrowings, interest bearing demand deposits and time deposits, partially
offset by a decrease in savings deposits. Borrowings (comprised of repurchase
agreements and the interim capital assistance note), which represents 90% of the
increase in interest-bearing liabilities, increased $10,776 or 43%.
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 was $0 for 1999 compared $4,603 for
1998. The decrease in the provision for loan losses is primarily attributable to
the decrease in non-performing assets and the lower level of potential problem
loans. Management believes that the allowance for loan losses is adequate to
absorb potential losses inherent in the loan portfolio. As losses on loans are
not statistically predictable and are dependent upon economic conditions in the
Bank's marketplace, future provisions for loan losses may decrease or increase
from the levels deemed appropriate for 1999. There can be no assurance, however,
that future provisions for loan losses will not be required.
Non-interest Income - Non-interest income decreased $315 or 8% to $3,419 for
1999 from $3,734 for 1998. The primary components of non-interest income is
service charges on deposit and checking accounts, and gains or losses on sale of
securities. Other income increased $186 or 22% and primarily represented
surcharges on non-depositors utilizing the Bank's ATM services. Service charges
on deposit accounts increased $21 or 1% and is primarily attributable to the
increased volume of deposit accounts. Additionally, $221 of realized loss on the
sale of securities was taken in 1999 compared to a gain on the sale of
securities of $301 in 1998.
21
<PAGE>
IBW FINANCIAL CORPORATION
===============================================================================
Table 3. (cont.)
Non-interest Expense - Non-interest expense for 1999 was $13,051 an increase of
$85 or 1% over 1998. The composition of the increase consists of an increase of
$160 in other expenses, an increase of $204 in salary and employee benefits, an
increase in data processing of $32, and an increase in occupancy of $10, offset
by a decrease in advertising expenses of $350 and a decrease in real estate
owned expenses of $181. The increase in other expenses was largely associated to
the regulatory agreement. These expenses increased $208 which included increased
expenses for audit, examination, FDIC assessments and Directors fees.
Additionally, 1999 expenses included $54 in recruiting fees for two loan
officers and $40 to employ a key individual to assist in the daily management of
computer related issues.
Provision for Income Taxes - The provision for income taxes for 1999 increased
$1,499 or 157%, from a tax benefit of $956 in 1998 to an income tax provision of
$543 for 1999. The effective tax rate was 24% for 1999, compared to (41)% for
1998. The increase in the effective tax rate was primarily attributable to the
increase in net income.
ASSET/LIABILITY MANAGEMENT
Interest rate sensitivity gap ("gap") analysis measures the difference between
the assets and liabilities repricing or maturing within specified time periods.
An asset-sensitive position indicates that there are more rate-sensitive assets
than rate-sensitive liabilities repricing or maturing within a specified time
period, which would generally imply a favorable impact on net interest income in
periods of rising interest rates and a negative impact in periods of falling
interest rates. A liability-sensitive position would generally imply a negative
impact in net interest income in periods of rising interest rates and a positive
impact in periods of falling rates.
==============================================================================
Table 4. Rate Sensitivity Analysis
(dollars in thousands):
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION> 4 TO 12 Within 1 - 5 Over
0-90 Days Months 12 Months Years 5 Years Total
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans /(1)/ /(2)/ $ 13,293 $ 7,120 $ 20,413 $ 37,321 $47,247 $104,981
Investment Securities /(3)/ 8,279 17,795 26,074 86,853 25,043 137,970
Federal funds Sold 1,700 - 1,700 - - 1,700
Interest-Bearing Bank Balances: 90 398 488 500 - 988
-------- -------- -------- -------- ------- --------
Total earning assets $ 23,362 $ 25,313 $ 48,675 $124,674 $72,290 $245,639
======== ======== ======== ======== ======= ========
Percent of total earning assets 9.51% 10.30% 19.82% 50.75% 29.43% 100.00%
Interest-bearing liabilities
Time COD's of $100M or more $ 4,450 $ 7,821 $ 12,271 $ 4,058 $ - $ 16,329
Savings,NOW, MMDA'S and
other time deposits 11,314 3,750 15,064 85,568 - 100,632
Time COD'S less than $100M 12,524 19,021 31,545 3,229 - 34,774
Borrowed funds 32,733 1,000 33,733 - - 33,733
-------- -------- -------- -------- ------- --------
Total interest-bearing liabilities $ 61,021 $ 31,592 $ 92,613 $ 92,855 $ - $185,468
======== ======== ======== ======== ======= ========
Interest-sensitivity gap (37,659) (6,279) (43,938) 31,819 $72,290 60,171
Cumulative interest-sensitivity gap (37,659) (43,938) (43,938) (12,119) 60,171 60,171
Ratio of earning assets to
interest-bearing liabilities (gap ratio) 38.29% 80.12% 52.56% 134.27% - 132.44%
Cumulative ratio of earning assets to
interest-bearing liabilities
(cumulative gap ratio) 38.29% 52.56% 52.56% 93.47% 132.44% 132.44%
Cumulative interest-sensitivity gap as a
percent of total assets (13.95)% (16.27)% (16.27)% (4.49)% 22.29% 22.29%
========= ========= ========= ========= ======== =========
- ----------------------------------------------------------------------------------------------------------------------------------
</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 1999 pay-down
experience was $3,306. However, $50,029 in mortgage back securities
have an expected average life of three years or less and $28,345 have
an expected average life of more than three years
<PAGE>
1999 Annual Report
===============================================================================
Table 4. (cont'd)
Tables 4 presents an analysis of the Company's interest-sensitivity gap position
at December 31, 1999. 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
$1,250 per quarter for all other non-maturity deposits, as approximately $5
million of these core deposits reflected the largest decrease during the most
recent twelve month period. The remaining amount of these core deposits are
reflected in the 1 to 5 year time frame. Time deposits are allocated according
to their contractual maturities. As summarized in Table 4, the Company's one-
year cumulative gap ratio is 53%. 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.
==============================================================================
Table 5. Financial Condition
Table 5 sets forth information concerning the composition of the Company's
assets, liabilities and shareholders' equity at December 31, 1999, 1998, and
1997.
(dollars in thousands):
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 Percent 1998 Percent 1997 Percent
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net $102,998 38.84% $104,469 38.70% $116,476 46.46%
Investment securities 137,970 52.03% 131,384 48.66% 101,106 40.33%
Federal funds sold 1,700 0.64% 13,150 4.87% 11,500 4.58%
Interest-bearing deposits
in other banks 988 0.37% 405 0.15% 3,000 1.20%
-------- ------ -------- ------ -------- ------
TOTAL EARNINGS ASSETS 243,659 91.88% 249,408 92.38% 232,082 92.57
Cash and due from banks 13,733 5.18% 12,565 4.66% 11,842 4.72%
Bank premises and equipment 2,389 0.90% 2,542 0.94% 2,672 1.07%
Other assets 5,416 2.04% 5,463 2.02% 4,106 1.64%
-------- ------ -------- ------ -------- ------
TOTAL ASSETS $265,194 100.00% $269,978 100.00% $250,702 100.00%
======== ====== ======== ====== ======== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits $ 60,739 22.90% $ 58,870 21.81% $ 52,922 21.11%
Savings, NOW and MMDA 100,632 37.95% 105,995 39.25% 92,462 36.89%
Time deposits $100,000 or more 16,329 6.16% 21,317 7.90% 16,807 6.70%
Other time deposits 34,774 13.11% 37,946 14.06% 46,005 18.35%
-------- ------ -------- ------ -------- ------
TOTAL DEPOSITS 212,474 80.12% 224,127 83.02% 208,196 83.05%
Borrowed funds 33,733 12.72% 26,611 9.85% 20,496 8.17%
Accrued expenses and other
a liabilities 1,496 0.57% 1,323 0.49% 1,833 0.73%
-------- ------ -------- ------ -------- ------
TOTAL LIABILITIES 247,703 93.41% 252,061 93.36% 230,525 91.95%
Shareholders' equity 17,484 6.59% 17,917 6.64% 20,177 8.05%
-------- ------ -------- ------ -------- ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $265,194 100.00% $269,978 100.00% $250,702 100.00%
======== ====== ======== ====== ======== ======
- ------------------------------------------------------------------------------
</TABLE>
Overview - Total assets decreased $4,784 from December 31,1998 to December
31,1999, mainly due to a decrease of $11,653 deposits, a decrease of $11,450 in
federal funds sold, a decrease in net loans of $1,471 and a decrease in
shareholder's equity of $433. The decrease in assets was offset primarily by an
increase in borrowings of $7,122, an increase in investments of $6,586 and cash
and due from banks of $1,168.
Loans - Net loans outstanding at December 31,1999 were $102,998, a decrease of
$1,471 or 1%, from year end 1998. The composition of the loan portfolio is
summarized in Table 6. The decrease in loans consisted primarily of a decrease
in commercial loans of $6,522 and a decrease of $3,585 in installment loans,
offset by an increase in commercial real estate loans of $6,565 and residential
1 to 4 family loans of $1,729.
<PAGE>
IBW Financial Corporation
---------------------------------------------------------------------------
Table 6. Loan Portfolio Composition
<TABLE>
<CAPTION>
DECEMBER 31 (dollars in thousands):
-------------------------------------------------------------------------------------------------------------------------
1999 Percent 1998 Percent 1997 Percent 1996 Percent 1995 Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 10,046 9.32% $ 16,568 15.37% $ 23,145 19.51% $ 28,232 25.61% $19,128 20.31%
Residential 1 to 4 family 52,826 49.00% 51,097 47.40% 52,077 43.89% 52,876 47.96% 49,123 52.16%
Commercial real estate 40,125 37.22% 33,560 31.13% 38,499 32.45% 24,442 22.17% 22,225 23.60%
Installment loans 4,803 4.46% 8,388 7.78% 4,925 4.15% 4,692 4.26% 3,700 3.93%
-------- ------ -------- ------ -------- ------ -------- ------ ------- ------
TOTAL $107,800 100.00% $109,613 101.68% $118,646 100.00% $110,242 100.00% $94,176 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======= ======
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
---------------------------------------------------------------------------
Table 7. Maturity of Loan Portfolio Fixed Rate and Variable Rate /(1)/
<TABLE>
<CAPTION>
AT DECEMBER 31,1999 (dollars in thousands):
--------------------------------------------------------------------------------------------------------------------------
One Year or Less After One Year Through Five Years After Five Years Total
<S> <C> <C> <C> <C>
Fixed rate $13,006 $37,244 $46,686 $ 96,936
Variable rate 7,407 77 561 8,045
------- ------- ------- --------
TOTAL $20,413 $37,321 $47,247 $104,981
======= ======= ======= ========
</TABLE>
/(1)/ Excludes non-accruing loans.
===========================================================================
===========================================================================
Table 8. Investment Portfolio Maturity Schedules /(1)/
Table 8 summarizes the maturity and average yield of the Company's
Investment portfolio.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999 (dollars in thousands):
-------------------------------------------------------------------------------------------------------------------------------
Within After One But After Five But
One Year Within Five Years Within Ten Years After Ten Years Mortgage Backed
--------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 994 5.16% - - - - - - - -
U.S. Government agencies 11,857 5.30 $20,506 5.04% $7,814 7.28% - - - -
State and political subdivisions - - - - - - $17,229 8.00% - -
Other - - 1,161 6.66 - - - - - -
Mortgage-backed securities - - - - - - - - 78,409 6.62%
------- ---- ------- ---- ------ ---- ------- ----- ------ ----
TOTAL $12,851 5.29% $21,667 6.13% $7,814 7.28% $17,229 8.00% 78,409 6.62%
======= ==== ======= ==== ====== ==== ======= ===== ====== ====
<CAPTION>
Total
--------------------------------------------------------------
Amount Yield
<S> <C> <C>
U.S. Treasury $ 994 5.16%
U.S. Government agencies 40,177 5.54
State and political subdivisions 17,229 8.00
Other 1,161 6.66
Mortgage-backed securities 78,409 6.62
-------- ----
TOTAL $137,970 6.47%
======== ====
</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 $6,586 or 5% from $131,384 at December 31, 1998, to $137,970 at
December 31, 1999. The increase in the investment portfolio was in mortgage
backed securities increasing $16,469 or 27%, and non-taxable securities
increasing $8,544 or 98% from year-end 1998. U.S. Government and Agency
securities declined $18,460 or 31% from year-end 1998. The yield on taxable
securities decreased from 6.31% for 1998 to 5.66% for 1999. The tax
equivalent yield for non-taxable securities decreased from 8.44% for 1998
to 8.00% for 1999. The mortgage-backed securities portfolio had a weighted
average remaining maturity of 3.56 years at December 31, 1999, compared to
2.27 years at December 31, 1998 (utilizing Bloomberg's street consensus).
The collateral underlying all the mortgage-backed securities is guaranteed
by one of the "quasi-governmental" agencies, and therefore maintains a risk
weight of 20% for risk based capital purposes. Management's analysis of
mortgage-related securities includes, but is not limited to, the average
lives, seasonality, coupon and historic behavior (including prepayment
history) of each particular security over its life, as affected by various
interest rate environments. Stress tests are performed on each security on
a quarterly basis as part of Management's ongoing analysis. At December
31, 1999, based on stress tests performed by Management, a 300 basis point
increase and decrease in interest rates would result in an approximate
decrease of 8% and 4% 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.
24
<PAGE>
1999 Annual Report
===========================================================================
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):
----------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Total outstanding loans at year end $107,800 $109,613 $118,646 $110,242 $94,176
Average amount of loans outstanding 99,863 113,286 111,856 100,950 90,630
Allowance for loan losses at beginning of year 4,700 1,702 1,266 1,177 1,751
Loans charged off:
Commercial 466 1,571 451 637 766
Real estate mortgage 198 0 256 52 40
Installment loans to individuals 150 249 182 69 14
-------- -------- -------- -------- -------
Total charge-offs 814 1,820 889 758 820
Recoveries of loans previously charged-off:
Commercial 332 151 81 286 202
Real estate mortgage 20 0 0 25 0
Installment loans to individuals 34 64 49 26 19
-------- -------- -------- -------- -------
Total recoveries 386 215 130 337 221
Net charge-offs 428 1,605 759 421 599
Additions to allowance charged to operations 0 4,603 1,195 510 25
======== ======== ======== ======== =======
Allowance for loan losses at end of period $ 4,272 $ 4,700 $ 1,702 $ 1,266 $ 1,177
Ratios of net charge-offs during year to average
outstanding loans during year 0.43% 1.42% 0.68% 0.42% 0.66%
Ratio of allowance for possible loan
losses to total loans 3.96% 4.29% 1.43% 1.15% 1.25%
</TABLE>
===========================================================================
===========================================================================
Table 10. Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(dollars in thousands):
-------------------------------------------------------------------------------------------------------------------------
1999 Percent 1998 Percent 1997 Percent 1996 Percent 1995 Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial /(1)/ $1,927 45.11% $3,461 73.64% $1,378 80.96% $1,075 84.91% $ 875 72.96%
Real estate mortgage 543 12.71% 406 8.64% 117 6.88% 89 7.03% 71 6.36%
Consumer 173 4.05% 280 5.96% 182 10.69% 92 7.27% - 0.00%
Unallocated 1,629 38.13% 553 11.76% 25 1.47% 10 .79% 231 20.68%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL $4,272 100.00% $4,700 100.00% $1,702 100.00% $1,266 100.00% $1,177 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
/(1)/ Includes commercial real estate loans.
===========================================================================
The allowance for loan losses was $4,272 at December 31, 1999, as compared
to $4,700 December 31, 1998. The ratio of the allowance for loan losses to
total loans at December 31, 1999 and 1998 was 3.96% and 4.29%,
respectively. At December 31, 1999, non-performing assets to total assets
was 1.27% compared to 2.59% at December 31,1998. Net charge-offs decreased
$1,177 to $428 for 1999 from $1,605 for 1998. The provision for loan losses
decreased to $0 (zero) for 1999 from $4,603 for 1998, reflecting the
substantial decrease in non-performing loans and the level of loans with
potential credit problems. Additionally, the unallocated portion of the
allowance increased to $1,629 from $553 at year-end 1998. (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 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, 1999, future adjustments
25
<PAGE>
IBW Financial Corporation
===========================================================================
Table 10. (Cont.)
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 may require the recognition of additions to the
allowance based on their judgments of information available to them at the
time of their examination. In light of the foregoing, there can be no
assurance that management's 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):
------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Non-accrual loans /(1)/ $2,819 $5,003 $ 852 $2,006 $1,086
Loans past due 90 days or more and still accruing 275 1,474 753 1,267 569
Foreclosed properties 265 525 522 1,310 950
------ ------ ------ ------ ------
TOTAL $3,359 $7,002 $2,127 $4,583 $2,605
====== ====== ====== ====== ======
Non-performing assets to gross loans and foreclosed
properties at period end 3.11% 6.36% 1.78% 4.11% 2.74%
Non-performing loans to total loans 2.87% 5.91% 1.35% 2.97% 1.76%
Non-performing assets to total assets at period end 1.27% 2.59% 0.85% 1.94% 1.17%
</TABLE>
/(1)/ Loans are placed on non-accrual status when in the opinion of
management the collection of additional interest is unlikely or a
specific loan meets the criteria for non-accrual status established
by regulatory authorities. No interest is taken into income on non-
accrual loans unless received in cash. A loan remains on non-accrual
status until the loan is current to both principal and interest and
the borrower demonstrates the ability to pay and remain current, or
the loan becomes well secured and is in the process of collection.
The gross interest income that would have been recorded in 1999 for
non-accrual loans at December 31,1999 had the loans been current in
accordance with their original terms was $274,000. See Note 1 to the
consolidated financial statements. The Bank charges loans against the
allowance for loan losses when it determines that principal and
interest or portions thereof become uncollectible. This is determined
through an analysis of each individual credit, including the
financial condition and repayment capacity of the borrower, and of
the sufficiency of the collateral, if any.
===========================================================================
Non-performing assets at year-end 1999 were $3,359, a decrease of $3,643 or
52% from year-end 1998. The decrease was primarily attributable to
Management's review of the loan portfolio in light of developments in
individual loans since December 31, 1998, and continued improvement in
individual loans. Non-accrual loans totaled $2,819 for year-end 1999 and
consisted of $2,396 in real estate loans and $423 in commercial loans. This
represented a decrease of $2,184 or 44% from year-end 1998. As of December
31,1999, loans past due 90 days or more and still accruing totaled $275 a
decrease of $1,199 or 81%. At year-end 1999, non-performing assets
represented 19% of total capital compared to 39% at year-end 1998.
Additionally, at year-end 1999, non-performing assets and loans with
possible credit problems totaled $9,946 or 57% of total capital compared to
$15,147 and 85% at year-end 1998. This represents a decrease of $5,201 or
34% from year-end 1998.
At December 31, 1999, there were $6,587 of loans not reflected in the table
above, where known information 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 $5,769, fully collateralized by real estate, four of which
represent $3,197 of the total. The remaining $818 consists of eight
commercial loans, two in excess of $298, 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 decreased by $11,653 or 5%, from December 31,1998
to December 31,1999.
During 1997, the Company began raising funds by selling securities under
agreements to repurchase. These fixed coupon overnight
26
<PAGE>
1999 Annual Report
===========================================================================
Table 11. (Cont.)
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 31,1999, $32,733 of repurchase
agreements with an average rate of 2.45% were outstanding.
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 8 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, 1999 and 1998 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.
===========================================================================
Table 12. Time Deposit Maturity Schedule
Table 12 presents certain information related to the Company's time
deposits.
<TABLE>
<CAPTION>
AT DECEMBER 31,1999
(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 $ 4,450 $ 5,597 $ 2,224 $4,058 $16,329
Time certificates of deposit less than $100M 12,524 9,603 9,418 3,229 34,774
------- ------- ------- ------ -------
TOTAL /(1)/ $16,974 $15,200 $11,642 $7,287 $51,103
======= ======= ======= ====== =======
</TABLE>
/(1) Excludes $10,065 in money market demand deposits
===========================================================================
Shareholders' equity decreased $426 or 2% from $17,917 at December 31, 1998
to $17,491 at December 31, 1999. The decrease is attributable to a decrease
of $1,997 in the unrealized gain on available-for-sale securities, net of
tax, offset by an increase in retained earnings of $1,564.
Set forth below is certain financial information relating to the Company'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 1995).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net income per share $2.50 $(2.06) $ 2.44 $ 2.06 $ 2.56
Dividends paid per common share $0.15 $ 0.51 $ 0.60 $ 0.60 $ 0.60
Ratio of dividends to net income 5.98% N/A 24.59% 29.13% 23.44%
==========================================================================================================================
</TABLE>
===========================================================================
Shareholder's Equity and Other Matters
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. Refer to Note 9 to the
consolidated financial statements for additional information related to the
Company's dividend paying authority.
The Company and the Bank are subject to certain regulatory capital
requirements. Management believes, as of December 31, 1999, that the
Company and the Bank meet all the capital adequacy requirements to which
they are subject. As of December 31, 1999, 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 (except
investment securities) 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
27
<PAGE>
IBW Financial Corporation
===========================================================================
Shareholders' Equity and Other Matters (Cont.)
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 - During 1999, management completed the process of
preparing for the Year 2000 date change. This process involved identifying
and remediating date recognition problems in computer systems, software and
other operating equipment, working with third parties to address their Year
2000 issues, and developing contingency plans to address potential risks in
the event of Year 2000 failures. To date, the Company has successfully
managed the transition.
Although considered unlikely, unanticipated problems in core business
processes, including problems associated with non-complaint third parties
and disruptions to the economy in general, could still occur despite
efforts to date to remediate affected systems and develop contingency
plans. Management will continue to monitor all business processes,
including interaction with the Company customers, vendors and other third
parties, throughout 2000 to address any issues and ensure all processes
continue to function properly.
Through 1999, the cost of the Year 2000 project totaled $450 and included
$80 in capitalized costs incurred to replace non-compliant hardware and
software and $110 in costs primarily related to internal and external
personnel who worked on the project.
Formal Agreement with the OCC. On August 25, 1998, the Bank entered into a
Formal Agreement (the "Agreement") with the Office of the Comptroller of
the Currency (the "OCC"). The Agreement requires the Bank to undertake
certain actions within designated timeframes from the date the agreement
was entered into, and to operate in compliance with the provisions thereof
during its term.
Among the actions required by the Agreement are the following: (i) Within
thirty days, the Bank shall employ an independent management consultant to
perform a study of the Bank's management structure and staffing
requirements, including a report identifying staffing requirements, job
descriptions and evaluations for senior officers, and evaluating
organizational structure. The Board of Directors (the "Board") is required
to adopt within thirty days of the receipt of the report, a plan to
eliminate any deficiencies in management, staffing, or supervision of
management; (ii) The Board is required to take steps to obtain current and
satisfactory credit information on loans without such information, and to
insure that proper collateral documentation is maintained. Management may
not grant, renew, alter, restructure or extend a loan without proper
documentation and analysis of credit, purpose and anticipated source of
repayment. In absence of such information, such loans my be made only upon
certification of a majority of the Board why obtaining such information
would be detrimental to the best interest of the Bank; (iii) Within thirty
days the Board shall adopt a written program to eliminate the basis of
criticism for assets rated "doubtful", "substandard" or "other assets
especially mentioned;" (iv) Within thirty days the Board shall establish a
loan review system to assure timely identification and categorization of
problem credits and implement a process to insure the loan review function
is independent; (v) Within sixty days the Board shall review and revise the
Bank's loan policy based upon the guidance on Loan Portfolio Management in
the Comptroller's Manual for National Bank Examiners. Within thirty days
thereafter, the Board shall develop a process to ensure accountability for
lending personnel; (vi) The Board shall notify the Assistant Deputy
Comptroller before all loan sales; (vii) Within sixty days, the Board shall
develop a written program to improve and strengthen collection efforts;
(viii) Within ninety days the Board shall develop a profit plan to improve
and sustain the Bank's earnings; (ix) Within 120 days, the Board shall
adopt and implement a strategic plan for the Bank covering at least three
years, including objectives for earnings performance, balance sheet mix,
off-balance sheet activities, liability structure, capital adequacy,
reduction in the volume of non-performing assets, product line development
and market segments intended to be developed, together with strategies to
achieve those objectives; (x) The Board shall take all steps necessary to
correct any violation of law, rule or regulation cited in any report of
examination; (xi) Within thirty days the Bank shall submit a revised
written project plan with respect to Year 2000 compliance of the Bank's
information and environmental systems, including a testing plan and, within
sixty days, a remediation 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 February 29, 2000, the Bank has submitted to the OCC all of the
written plans, policies, and other information required by the Agreement,
and all revisions requested by the OCC, although certain submissions were
made outside of the time limits required by the Agreement.
There can be no assurance that its regulators will deem the Bank to be
compliant under the Agreement, 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.
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.
28
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,733
<INT-BEARING-DEPOSITS> 988
<FED-FUNDS-SOLD> 1,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 137,970
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 107,270
<ALLOWANCE> 4,272
<TOTAL-ASSETS> 265,194
<DEPOSITS> 212,474
<SHORT-TERM> 33,733
<LIABILITIES-OTHER> 1,496
<LONG-TERM> 0
0
500
<COMMON> 668
<OTHER-SE> 16,323
<TOTAL-LIABILITIES-AND-EQUITY> 265,194
<INTEREST-LOAN> 9,115
<INTEREST-INVEST> 7,953
<INTEREST-OTHER> 712
<INTEREST-TOTAL> 17,780
<INTEREST-DEPOSIT> 4,500
<INTEREST-EXPENSE> 1,409
<INTEREST-INCOME-NET> 11,871
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (221)
<EXPENSE-OTHER> 13,051
<INCOME-PRETAX> 2,239
<INCOME-PRE-EXTRAORDINARY> 2,239
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,696
<EPS-BASIC> 2.50
<EPS-DILUTED> 2.50
<YIELD-ACTUAL> 7.05
<LOANS-NON> 2,819
<LOANS-PAST> 275
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,587
<ALLOWANCE-OPEN> 4,700
<CHARGE-OFFS> 814
<RECOVERIES> 386
<ALLOWANCE-CLOSE> 4,272
<ALLOWANCE-DOMESTIC> 4,272
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,629
</TABLE>
