<PAGE>
 
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC  20549

                                  FORM 10-KSB

        X   Annual report under Section 13 or 15(d) of the Securities Exchange
      ----- Act of 1934

     For the fiscal year ended December 31, 1998

            Transition report under Section 13 or 15(d) of the Securities
      ----- Exchange Act of 1934
 
     For the transition period from                 to 
                                    ----------------   --------------

Commission file number: 0-28360
                       -----------------------

                           IBW Financial Corporation
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                (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
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             (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
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                               (Title of Class)

Check whether the Issuer; (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports; and (2) has been
subject to such filing requirements for the past 90 days.
Yes   X    No 
    -----     ----- 

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.   X
                               -----

The issuer's revenues for the fiscal year ended December 31, 1998 were
approximately $21,697,000.

The aggregate market value of the outstanding Common Stock held by nonaffiliates
as of March 15, 1999 was approximately $6,616,006 (based on the most recent
trade known to the Company.  See "Market for Common Stock and Dividends")

As of March 15, 1998, the number of outstanding shares of the Common Stock,
$1.00 par value, of IBW Financial Corporation was 668,360.

                      DOCUMENTS INCORPORATED BY REFERENCE

  Portions of the Company's Annual Report to Shareholders for the Year Ended
      December 31, 1998 are incorporated by reference in part II hereof.

     Portions of the Company's definitive Proxy Statement for the Annual 
     Meeting of Shareholders to be held on May 25, 1999 are incorporated 
                       by reference in part III hereof.
<PAGE>
 
                                    PART I

ITEM 1.  Description of Business.

     IBW Financial Corporation, a District Columbia corporation (the "Company"),
was organized in December 1994 in connection with the reorganization of
Industrial Bank of Washington ("IBW"), a District of Columbia chartered
commercial bank, to act as the one bank holding company for IBW following the
reorganization. On July 1, 1995, the reorganization of IBW was consummated, and
IBW was converted from a District of Columbia chartered bank to a national
banking association, under the name Industrial Bank, National Association (IBW
and Industrial Bank, National Association, generally referred to collectively as
the "Bank"), the main office of the Bank was relocated from the District of
Columbia to Oxon Hill, Maryland, and the Company became the holding company for
the Bank.

     The Bank, all of the shares of which are owned by the Company, is the sole
subsidiary of the Company.

     The Bank was organized in August 1934 as a District of Columbia chartered
commercial bank by a group of African-American businessmen and educators for the
purpose of providing quality financial services, with an emphasis on home
mortgages and automobile financing, to the underserved minority population of
the District of Columbia. Over the past sixty five years, the Company has grown
from one office in the District of Columbia and $250,000 in assets to seven
offices in the District of Columbia, two offices in Prince George's County,
Maryland and approximately $270 million in total assets and $17.9 million of
shareholders' equity at December 31, 1998. The Bank is among the largest 
African-American commercial banks in the nation, and the largest African-
American owned commercial bank based in the Washington D.C. metropolitan area.

     The Bank provides a broad range of commercial and consumer lending
services, including auto loans, home equity loans, home improvement loans,
credit cards and personal loans. Over two-thirds of the Bank's loan portfolio is
real estate mortgage related, including residential, commercial and investment
properties. In order to expand the ability of the Bank to offer a wide variety
of competitively priced mortgage products to the residents of the District of
Columbia and surrounding areas, the Bank has arranged to sell certain of its
mortgage loans into the secondary market, enabling the Bank to make additional
loans, and loans with wider repayment and interest rate options, available to
the community. Additionally, the Bank offers a wide variety of loans geared to
meet the needs of small businesses in the Bank's market area, including accounts
receivable lines of credit, Small Business Administration loans and equipment
loans.

     The Bank also provides a full range of deposit services to its customers,
including personal checking, low activity student checking, interest bearing NOW
accounts, golden age checking accounts for seniors, statement savings accounts,
money market accounts, student accounts, investment certificates, IRA's and
Christmas club accounts. Other deposit services include 24 hour banking through
use of automated teller machines at five convenient locations. As a part of the
Most, Plus and Network Exchange Systems, accountholders can access ATM's across
the United States at any time. Also the Bank provides a convenient bank by mail
service, direct deposit/electronic fund transfers, cash management services,
safe deposit boxes, night depository, tax deposits, wire transfers and telebanc
systems.

     The Bank has benefitted by the recent waves of consolidations and failures
in the local banking market, developing new customer relationships as failures
or mergers with out of area institutions resulted in displaced or disaffected
customers looking to establish local banking relationships.

Formal Agreement

     On August 25, 1998, the Bank entered into a Formal Agreement (the
"Agreement") with the Office of the Comptroller of the Currency (the "OCC"). The
Agreement requires the Bank to undertake certain actions within designated
timeframes, and to operate in compliance with the provisions thereof during its
term.
<PAGE>
 
     Among the actions required by the Agreement are the following: (i) Within
thirty days, the Bank shall employ an independent management consultant to
perform a study of the Bank's management structure and staffing requirements,
including a report identifying staffing requirements, job descriptions and
evaluations for senior officers, and evaluating organizational structure. The
Board of Directors (the "Board") is required to adopt within thirty days of the
receipt of the report, a plan to eliminate any deficiencies in management,
staffing, or supervision of management; (ii) The Board is required to take steps
to obtain current and satisfactory credit information on loans without such
information, and to insure that proper collateral documentation is maintained.
Management may not grant, renew, alter, restructure or extend a loan without
proper documentation and analysis of credit, purpose and anticipated source of
repayment. In absence of such information, such loans may be made only upon
certification of a majority of the Board why obtaining such information would be
detrimental to the best interests of the Bank; (iii) Within thirty days the
Board shall adopt a written program to eliminate the basis of criticism for
assets rated "doubtful", "substandard" or "other assets especially mentioned;"
(iv) Within thirty days the Board shall establish a loan review system to assure
timely identification and categorization of problem credits and implement a
process to insure the loan review function is independent; (v) Within sixty days
the Board shall review and revise the Bank's loan policy based upon the guidance
on Loan Portfolio Management in the Comptroller's Manual for National Bank
Examiners. Within thirty days thereafter, the Board shall develop a process to
ensure accountability for lending personnel; (vi) The Board shall notify the
Assistant Deputy Comptroller before all loan sales; (vii) Within sixty days, the
Board shall develop a written program to improve and strengthen collection
efforts; (viii) Within ninety days the Board shall develop a profit plan to
improve and sustain the Bank's earnings; (ix) Within 120 days, the Board shall
adopt and implement a strategic plan for the Bank covering at least three years,
including objectives for earnings performance, balance sheet mix, off-balance
sheet activities, liability structure, capital adequacy, reduction in the volume
of nonperforming assets, product line development and market segments intended
to be developed, together with strategies to achieve those objectives; (x) The
Board shall take all steps necessary to correct any violation of law, rule or
regulation cited in any report of examination; (xi) Within thirty days the Bank
shall submit a revised written project plan with respect to Year 2000 compliance
of the Bank's information and environmental systems, including a testing plan
and, within sixty days, a remediation contingency plan in the event any system
is not compliant by the date set forth in the plan.

     Compliance with the Agreement is to be monitored by a committee (the
"Committee") of at least three directors, none of whom is an employee of the
Bank or a family member of and employee. The Committee, presently composed of
Mr. King (Chairman), Mrs. Fleming, Dr. Parker and Mr. Chapman,is required to
submit written progress reports on a monthly basis. The Agreement requires the
Bank to make periodic reports and filings with the OCC.

     The Agreement does not contain any capital directive or other requirement
that the Bank increase its capital, or maintain a minimum level of capital in
excess of generally applicable capital requirements.

     As of March 31, 1999, the Bank believes that its is in partial compliance
with all of the provisions of the Agreement. The Bank has submitted to the OCC
all of the written plans, policies and other information required by the
Agreement, within the prescribed timeframes or permitted extensions, except for
the loan policy. The Bank is in the process of revising and resubmitting certain
of these plans and policies to provide additional information and procedures,
and is periodically reviewing the plans for any required amendment in light of
changed circumstances and progress to date. In January 1999, the Bank retained a
consulting firm experienced in advising community banks on management,
operations and Y2K matters to assist it in connection with the completion of the
preparation, modification and revision of the plans and in connection with its
Y2K compliance efforts.
 
     As a result of the inability of a Y2K vendor initially employed by the Bank
to assist it in developing and implementing a testing program to successfully
design and complete that task, staff turnover and other factors, the Bank did
not complete testing of internal and external mission critical systems by
December 31, 1998, and was not in compliance with its schedule for customer
related due diligence contained in its Y2K plan. As of March 31, 1999, the Bank
has completed testing of its mission critical systems as contemplated by its
plan, within the regulatory

                                      -2-
<PAGE>
 
timeframe required by the bank regulatory agencies, and has significantly
reduced the delay in customer related due diligence.

     Although the Bank believes that it is in partial compliance with the
provisions of the Agreement, there can be no assurance that its regulators will
agree, or that they will not require additional compliance efforts. Failure to
comply with the provisions of the Formal Agreement could subject the Bank and
its directors to additional enforcement actions, including but not limited to a
cease and desist order, a safety and soundness order or civil money penalties.
If the directors of the bank become subject to civil money penalties or other
actions, the Company or the Bank may be obligated to indemnify such directors.

Market Area and Competition

     The Bank's primary market area consists of the District of Columbia, and
Prince George's County, Maryland. The Washington Metropolitan Statistical Area,
(the "Washington MSA"), of which the Bank's market area forms a part, is a
highly competitive one, in which a large number of regional and national,
majority owned and managed, multi-bank holding companies operate, in addition to
numerous small and medium sized community banks. Additionally, a large number of
thrift institutions and non-bank financial service providers, including
insurance companies, brokerage firms, credit unions, mortgage companies,
consumer finance companies, mutual funds and other types of financial
institutions compete in the Washington MSA for investment dollars and lending
business. As a result of changes in federal and state banking legislation,
competitors not already in the Bank's market may seek to enter such market. The
District of Columbia, Maryland and Virginia have each enacted legislation
permitting banks organized or based in other jurisdictions to establish or
acquire banks or branches in such jurisdictions.

     Notwithstanding the foregoing, Prince George's County has been the subject
of hearings before the House of Representatives Committee on Banking, Finance
and Urban Affairs regarding the relative unavailability of banking services in
that county. Prince George's County, which has a majority minority population,
was found to have approximately half as many traditional banking or thrift
branches per capita as neighboring Montgomery County, which has a majority non-
minority population. Prince George's was also found to have a substantially
higher number of non-traditional banking entities, such as check cashing
outlets. The Company believes that Prince George's County provides substantial
opportunity for growth and expansion.

     The Washington MSA had a 1990 population of approximately 1.8 million, and
total employment in 1991 of 954,000. Employment is primarily provided by federal
and local governments, the finance, insurance and real estate industries,
retailing, construction and education. Per capita income in 1991 amounted to
approximately $25,000.

Employees

     As of December 31, 1998, the Bank had 167 full time equivalent employees.
None of the Bank's employees are represented by any collective bargaining group,
and the Bank believes that its employee relations are good. The Bank provides a
benefit program which includes health and dental insurance, life and long term
disability insurance and an employee stock ownership plan for substantially all
full time employees. Annual contributions to the employee stock ownership plan
are determined by the Board, and amounted to $39,100 in 1997 and $37,000 in
1996. The Company did not make any contribution to the ESOP in 1998. The Company
does not have any employees who are not also employees of the Bank.

     Under the terms of the Company's interim capital assistance agreement,
entered into in connection with the Bank's 1994 acquisition of two branches of a
failed savings association, the Company may not increase the compensation of, or
pay any bonus to, its directors, officers or key employees, except that it may
make such increases or payments during and after the second year of operation
following the interim capital assistance with the prior consent of the Federal
Deposit Insurance Corporation ("FDIC").

                                      -3-
<PAGE>
 
Regulation

     The following summaries of statutes and regulations affecting bank holding
companies do not purport to be complete discussions of all aspects of such
statutes and regulations and are qualified in their entirety by reference to the
full text thereof.

     Holding Company Regulation. The Company is a registered bank holding
company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). As
a registered bank holding company, the Company is required to file with the
Board of Governors of the Federal Reserve (the "Federal Reserve") an annual
report, certain periodic reports and such reports and additional information as
the Federal Reserve may require pursuant to the BHCA, and is subject to
examination and inspection by the Federal Reserve.

     BHCA - Activities and Other Limitations. The BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of any
bank, without prior approval of the Federal Reserve.

     The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the Federal Reserve is authorized to approve
the ownership of shares by a bank holding company in any company, the activities
of which the Federal Reserve has determined to be so closely related to banking
or to managing or controlling banks as to be a proper incident thereto. In
making such determinations, the Federal Reserve is required to weigh the
expected benefit to the public, such as greater convenience, increased
competition or gains in efficiency, against the possible adverse effects, such
as undue concentration of resources, decreased or unfair competition, conflicts
of interest or unsound banking practices.

     The Federal Reserve has by regulation determined that certain activities
are closely related to banking within the meaning of the BHCA. These activities
include: making or servicing loans such as would be made by a mortgage company,
consumer finance company, credit card company, or factoring company; performing
trust company functions; performing certain data processing operations;
providing limited securities brokerage services; acting as an investment or
financial advisor; ownership or operation of a savings association; acting as an
insurance agent for certain types of credit-related insurance; leasing personal
property on a full-payout, non-operating basis; providing tax planning and
preparation services; operating a collection agency; and providing certain
courier services. The Federal Reserve also has determined that certain other
activities, including real estate brokerage and syndication, land development,
property management and underwriting life insurance not related to credit
transactions, are not closely related to banking and a proper incident thereto.

     Commitments to Subsidiary Banks. Under Federal Reserve policy, the Company
is expected to act as a source of financial strength to the Bank and to commit
resources to support the Bank in circumstances when it might not do so absent
such policy.

     Limitations of Acquisitions of Common Stock. The federal Change in Bank
Control Act prohibits a person or group from acquiring "control" of a bank
holding company unless the Federal Reserve has been given 60 days' prior written
notice of such proposed acquisition and within that time period the Federal
Reserve has not issued a notice disapproving the proposed acquisition or
extending for up to another 30 days the period during which such a disapproval
may be issued. An acquisition may be made prior to expiration of the disapproval
period if the Federal Reserve issues written notice of its intent not to
disapprove the action. Under a rebuttable presumption established by the Federal
Reserve, the acquisition of 10% or more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Exchange Act would, under the circumstances set forth in the presumption,
constitute the acquisition of control.

                                      -4-
<PAGE>
 
     In addition, with limited exceptions, any "company" would be required to
obtain the approval of the Federal Reserve under the BHCA before acquiring 25%
(5% in the case of an acquiror that is a bank holding company) or more of the
outstanding Common Stock of, or such lesser number of shares as constitute
control over, the Company. Such approval would be contingent upon, among other
things, the acquiror registering as a bank holding company, divesting all
impermissible holdings and ceasing any activities not permissible for a bank
holding company.

     The Federal Reserve has adopted capital adequacy guidelines pursuant to
which it assesses the adequacy of an institution's capital. These guidelines are
substantially identical to those which are applicable to the Bank discussed
below.

     Bank Regulation. The Bank is subject to extensive regulation and
examination by the Office of the Comptroller of Currency ("OCC") and by the
FDIC, which insures its deposits to the maximum extent permitted by law. The
federal laws and regulations which are applicable to national banks regulate,
among other things, the scope of their business, their investments, their
reserves against deposits, the timing of the availability of deposited funds and
the nature and amount of collateral for certain loans. The laws and regulations
governing the Bank generally have been promulgated to protect depositors and the
deposit insurance funds, and not for the purpose of protecting stockholders.

     FDIC Insurance Premiums. The Bank pays deposit insurance premiums as a
member of the Bank Insurance Fund of the FDIC, under the FDIC's risk-based
assessment system. Under the FDIC's regulations, institutions are assigned to
one of three capital groups based solely on the level of the institution's
capital - "well capitalized," "adequately capitalized" and "undercapitalized" -
which would be defined in the same manner as the regulations establishing the
prompt corrective action system under Section 38 of the Federal Deposit
Insurance Act (the "FDIA"), as discussed below. These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications, with rates currently ranging
from 0% to .31% of insured deposits. During 1996, the Bank incurred a one time
expense of approximately $158,000 relating to the special assessment imposed on
deposits insured by the Savings Association Insurance Fund of the FDIC ("SAIF")
in connection with the recapitalization of the SAIF fund. The Bank is also
required to pay an additional assessment in connection with the repayment of the
"Fico bonds" issued in connection with the resolution of the savings and loan
crisis.

     Capital Adequacy Guidelines. The Federal Reserve, the OCC and the FDIC have
all adopted risk based capital adequacy guidelines pursuant to which they assess
the adequacy of capital in examining and supervising banks and bank holding
companies and in analyzing bank regulatory applications. Risk-based capital
requirements, determine the adequacy of capital based on the risk inherent in
various classes of assets and off-balance sheet items.

     National banks are required to meet a minimum ratio of total qualifying
capital (the sum of core capital (Tier 1) and supplementary capital (Tier 2)) to
risk weighted assets of 8%. At least half of this amount (4%) should be in the
form of core capital. These requirements apply to the Bank and will apply to the
Company (a bank holding company) so long as its total assets equal $150,000,000
or more.

     Tier 1 Capital for national banks generally consists of the sum of common
stockholders' equity and perpetual preferred stock (subject in the case of the
latter to limitations on the kind and amount of such stock which may be included
as Tier 1 Capital), less goodwill, without adjustment for unrealized gain or
loss on securities classified as available for sale in accordance with FAS 115.
Tier 2 Capital consists of the following: hybrid capital instruments; perpetual
preferred stock which is not otherwise eligible to be included as Tier 1
Capital; term subordinated debt and intermediate-term preferred stock; and,
subject to limitations, general allowances for loan losses. Assets are adjusted
under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no risk-based
capital) for assets such as cash, to 100% for the bulk of assets which are
typically held by a bank holding company, including certain multi-family
residential and commercial

                                      -5-
<PAGE>
 
real estate loans, commercial business loans and consumer loans. Residential
first mortgage loans on one to four family residential real estate and certain
seasoned multi-family residential real estate loans, which are not 90 days or
more past-due or non-performing and which have been made in accordance with
prudent underwriting standards are assigned a 50% level in the risk-weighing
system, as are certain privately-issued mortgage-backed securities representing
indirect ownership of such loans. Off-balance sheet items also are adjusted to
take into account certain risk characteristics.

     In addition to the risk based capital requirements, the OCC has established
a minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to total adjusted assets)
requirement for the most highly-rated national banks, with an additional cushion
of at least 100 to 200 basis points for all other national banks, which
effectively increases the minimum Leverage Capital Ratio for such other banks to
4.0% - 5.0% or more. Under the OCC's regulations, highest-rated banks are those
that the OCC determines are not anticipating or experiencing significant growth
and have well diversified risk, including no undue interest rate risk exposure,
excellent asset quality, high liquidity, good earnings and, in general, those
which are considered a strong banking organization. A national bank having less
than the minimum Leverage Capital Ratio requirement shall, within 60 days of the
date as of which it fails to comply with such requirement, submit to the
applicable OCC district office for review and approval a reasonable plan
describing the means and timing by which the bank shall achieve its minimum
Leverage Capital Ratio requirement. A national bank which fails to file such
plan with the OCC is deemed to be operating in an unsafe and unsound manner, and
could subject the bank to a cease-and-desist order from the OCC. The OCC's
regulations also provide that any insured depository institution with a Leverage
Capital Ratio that is less than 2.0% is deemed to be operating in an unsafe or
unsound condition pursuant to Section 8(a) of the FDIA and is subject to
potential termination of deposit insurance. However, such an institution will
not be subject to an enforcement proceeding thereunder, solely on account of its
capital ratios, if it has entered into and is in compliance with a written
agreement with the OCC to increase its Leverage Capital Ratio to such level as
the OCC deems appropriate and to take such other action as may be necessary for
the institution to be operated in a safe and sound manner. The OCC capital
regulations also provide, among other things, for the issuance by the OCC or its
designee(s) of a capital directive, which is a final order issued to a bank that
fails to maintain minimum capital or to restore its capital to the minimum
capital requirement within a specified time period. Such directive is
enforceable in the same manner as a final cease-and-desist order.

     Additionally, the interim capital assistance loan agreement requires the
Bank to maintain a 5.22% "tangible" capital level. This covenant of the interim
capital assistance agreement does not constitute a written capital order or
directive for purposes of prompt corrective action.

     At December 31, 1998, the Bank was in compliance with all minimum federal
regulatory capital requirements which are generally applicable to national
banks, as well as the capital requirements of the interim capital assistance. As
of such date, the Bank had a Tier 1 Risk Based Capital Ratio and a Total Risk
Based Capital Ratio equal to approximately 13% and 15% respectively, and a
Leverage Capital Ratio equal to approximately 6%.

     Prompt Corrective Action. Under Section 38 of the FDIA, the federal banking
agencies have promulgated substantially similar regulations to implement a
system of prompt corrective action. Under the regulations, a bank shall be
deemed to be: (i) "well capitalized" if it has a Total Risk Based Capital Ratio
of 10.0% or more, a Tier 1 Risk Based Capital Ratio of 6.0% or more, a Leverage
Capital Ratio of 5.0% or more and is not subject to any written capital order or
directive; (ii) "adequately capitalized" if it has a Total Risk Based Capital
Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0% or more and a
Tier 1 Leverage Capital Ratio of 4.0% or more (3.0% under certain circumstances)
and does not meet the definition of "well capitalized;" (iii) "undercapitalized"
if it has a Total Risk Based Capital Ratio that is less than 8.0%, a Tier 1 Risk
based Capital Ratio that is less than 4.0% or a Leverage Capital Ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a Total Risk Based Capital Ratio that is less than
6.0%, a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a Leverage
Capital Ratio that is less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.

                                      -6-
<PAGE>
 
     An institution generally must file a written capital restoration plan which
meets specified requirements with an appropriate federal banking agency within
45 days of the date the institution receives notice or is deemed to have notice
that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the institution with
written notice of approval or disapproval within 60 days after receiving a
capital restoration plan, subject to extensions by the applicable agency.

     An institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution. Such guaranty shall be limited to the lesser of (i) an amount equal
to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary at such time to restore the relevant capital measures of the
institution to the levels required for the institution to be classified as
adequately capitalized. Such a guaranty shall expire after the federal banking
agency notifies the institution that it has remained adequately capitalized for
each of four consecutive calendar quarters. An institution which fails to submit
a written capital restoration plan within the requisite period, including any
required performance guaranty, or fails in any material respect to implement a
capital restoration plan, shall be subject to the restrictions in Section 38 of
the FDIA which are applicable to significantly undercapitalized institutions.

     A "critically undercapitalized institution" is to be placed in
conservatorship or receivership within 90 days unless the FDIC formally
determines that forbearance from such action would better protect the deposit
insurance fund. Unless the FDIC or other appropriate federal banking regulatory
agency makes specific further findings and certifies that the institution is
viable and is not expected to fail, an institution that remains critically
undercapitalized on average during the fourth calendar quarter after the date it
becomes critically undercapitalized must be placed in receivership. The general
rule and current position of the OCC is that the FDIC will be appointed as
receiver within 90 days after a bank becomes critically undercapitalized unless
extremely good cause is shown and an extension is agreed to between the OCC and
the FDIC. In general, good cause is defined as capital which has been raised and
is imminently available for infusion into the Bank except for certain technical
requirements which may delay the infusion for a period of time beyond the 90 day
time period.

     Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA, which (i) restrict payment
of capital distributions and management fees; (ii) require that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital; (iii) require submission of a capital restoration plan;
(iv) restrict the growth of the institution's assets; and (v) require prior
approval of certain expansion proposals. The appropriate federal banking agency
for an undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible long-
term cost to the deposit insurance fund, subject in certain cases to specified
procedures. These discretionary supervisory actions include: requiring the
institution to raise additional capital; restricting transactions with
affiliates; requiring divestiture of the institution or the sale of the
institution to a willing purchaser; and any other supervisory action that the
agency deems appropriate. These and additional mandatory and permissive
supervisory actions may be taken with respect to significantly undercapitalized
and critically undercapitalized institutions.

     Additionally, under Section 11(c)(5) of the FDIA, a conservator or receiver
may be appointed for an institution where: (i) an institution's obligations
exceed its assets; (ii) there is substantial dissipation of the institution's
assets or earnings as a result of any violation of law or any unsafe or unsound
practice; (iii) the institution is in an unsafe or unsound condition; (iv) there
is a willful violation of a cease-and-desist order; (v) the institution is
unable to pay its obligations in the ordinary course of business; (vi) losses or
threatened losses deplete all or substantially all of an institution's capital,
and there is no reasonable prospect of becoming "adequately capitalized" without
assistance; (vii) there is any violation of law or unsafe or unsound practice or
condition that is likely to cause insolvency or substantial dissipation of
assets or earnings, weaken the institution's condition, or otherwise seriously
prejudice the interests of depositors or the insurance fund; (viii) an
institution ceases to be insured; (ix) the institution is undercapitalized and
has no reasonable prospect that it will become adequately capitalized, fails to
become adequately capitalized when required to do so, or fails to submit or
materially implement

                                      -7-
<PAGE>
 
a capital restoration plan; or (x) the institution is critically
undercapitalized or otherwise has substantially insufficient capital.

     At December 31, 1998, the Bank was a "well capitalized" institution for
purposes of Section 38 of the FDIA.

     Regulatory Enforcement Authority. The enforcement authority of the federal
banking regulators includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties. In general, these enforcement actions may be initiated for violations
of laws and regulations and unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including misleading or
untimely reports filed with regulatory authorities.

ITEM 2.  Description of Property.

     The Bank currently operates nine offices, seven in the District of
Columbia, and two in Prince George's County, Maryland. The Bank owns its office
located at 4812 Georgia Avenue, N.W. and its branch offices located at 2000 11th
Street, NW and 45th and Blaine Streets, NE. The Georgia Avenue office, which is
also the principal executive office of the Company, consists of a 6,000 square
foot stand alone building with drive-in facilities, and a separate 2,000 square
foot building housing the Bank's operations center next door. The 11th Street
office is housed in a 4,000 square foot building, and an adjacent 2,000 square
foot building houses the loan operations center. The Blaine Street office
occupies an approximately 2,000 square foot stand alone building, with drive-in
facilities, near the Benning Road Metro Station. The Bank leases the remainder
of its offices. The 14th and U Streets office is located in a 1,922 square foot
storefront, under a lease which commenced in 1988, for a ten year term and one
optional ten year renewal term at a fixed rent of $28,830 per year. The Bank's F
Street office is located in a 1,273 square foot storefront under a lease
commencing in 1991, for a ten year term at a current annual rent of $71,739,
subject to annual increases. The American University office is located in a 962
square foot storefront under a five year lease, which commenced in 1992, with
one five year renewal option, at a current annual rent of $25,588, subject to
annual increase. The Forestville, Maryland office is located in a 2,696 square
foot storefront with drive-in facilities, and is occupied under a lease which
commenced in 1994 for a five year term at a current annual rental of $29,008,
subject to annual increase. The Oxon Hill office, the main office of the Bank,
is a 10,531 square foot, two story building with drive in facilities, and is
occupied rent free for a term extending until June 10, 1999 and is subject to a
purchase option at 95% of fair market value. The Bank has requested a lease
extension from the FDIC. The Company is responsible for all operating and
maintenance expenses on the Oxon Hill property. The Brookland/Woodridge office,
which opened in 1997, is located in 2610 Rhode Island Avenue, NE and occupied
under a lease, commencing in 1997, with one five year renewal options, for a
five year term at a current annual rental of $27,000, subject to annual
increases.

     The Company believes that its existing facilities are adequate to conduct
its business.

ITEM 3.  Legal Proceedings.

     The Company is involved in routine legal proceedings in the ordinary course
of its business. In the opinion of management, final disposition of these
proceedings will not have a material adverse effect on the financial condition
or results of operations of the Company.

ITEM 4.  Submission of Matters to a Vote of Security Holders.

     No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.

                                      -8-
<PAGE>
 
                                    PART II

ITEM 5.  Market for Common Equity and Related Shareholder Matters.

Market for Common Stock and Dividends

     There does not currently exist an organized public trading market for
shares of Company's Common Stock. Trading in the Company's Common Stock has been
sporadic, and consists of private trades conducted without brokers. The Company
is aware of approximately 20 trades of the Common Stock since January 1, 1997,
at prices ranging from $15 to $22 per share. The last trade known to the Company
was a trade of 22 shares at $22 per share on February 24, 1999. There may be
other trades of which the Company is either not aware, or with respect to which
the Company is not aware of the price. Additionally, the Company sold 31,200
newly issued shares of Common Stock, and 20,000 shares of Series A Non-Voting
Preferred Stock, to Fannie Mae, at a price of $25.00 per share, on September 29,
1997. These trades and transactions do not necessarily reflect the intrinsic or
market values of the Common Stock. As of December 31, 1998, there were 668,360
shares of Common Stock outstanding, held of record by approximately 568
shareholders.

     The Company and, during the period prior to July 1, 1995, the Bank, has
paid semi-annual dividends on the Common Stock for each of the last ten years,
and currently intends to continue the payment of such dividends. There can be no
assurance, however, that the Bank or the Company will continue to have earnings
at a level sufficient to support the payment of dividends, or that either entity
will in the future elect to pay dividends. Under the terms of the interim
capital assistance agreement, the Bank may not, during the term of the interim
capital assistance loan, pay any dividends or repurchase any Common Stock,
unless (i) there is no default under the interim capital assistance agreement
and related note; (ii) payment of such dividends would not result in an event of
default; and (iii) the payment of such dividend is not prohibited or objected to
by the OCC. As the Bank is the primary source of funds for payment of dividends
by the Company, the inability of the Bank to pay dividends could adversely
affect the ability of the Company to pay dividends. As of the date hereof, there
is no event of default under the interim capital assistance documents.

     Dividends on the Common Stock are subject to the prior payment of dividends
on the Series A Preferred Stock.

     Regulations of the OCC place a limit on the amount of dividends the Bank
may pay to the Company without prior approval. Prior approval of the OCC is
required to pay dividends which exceed the Bank's net profits for the current
year plus its retained net profits for the preceding two calendar years, less
required transfers to surplus. As a result of the significant provision for loan
losses made during the fourth quarter of 1998, the ability of the Bank to pay
dividends to the Company at December 31, 1998 was severely restricted. At
December 31, 1998, the Bank was not able to pay any additional dividends to the
Company without prior approval. The Bank will not be able to pay any dividends
to the Company in 1999 without prior regulatory approval until it has retained
earnings of at least $406,000. The restriction of the Bank's ability to pay
dividends to the Company does not limit the ability of the Company to pay
dividends to shareholders from funds available at the holding company level.
Under District of Columbia law, the Company may generally pay cash dividends at
any time when it is not insolvent and where its net assets exceed its stated
capital (the par value of all outstanding shares), and where payment of the
dividend will not cause the Company to become insolvent or to have its stated
capital exceed its net assets. The Federal Reserve and the OCC also have
authority to prohibit a bank from paying dividends if the Federal Reserve or the
OCC deems such payment to be an unsafe or unsound practice.

     The Federal Reserve has established guidelines with respect to the
maintenance of appropriate levels of capital by registered bank holding
companies. Compliance with such standards, as presently in effect, or as they
may be amended from time to time, could possibly limit the amount of dividends
that the Company may pay in the future. In 1985, the Federal Reserve issued a
policy statement on the payment of cash dividends by bank holding companies. In
the statement, the Federal Reserve expressed its view that a holding company
experiencing earnings weaknesses

                                      -9-
<PAGE>
 
should not pay cash dividends exceeding its net income, or which could only be
funded in ways that weakened the holding company's financial health, such as by
borrowing.

     As a depository institution, the deposits of which are insured by the FDIC,
the Bank may not pay dividends or distribute any of its capital assets while it
remains in default on any assessment due the FDIC. The Bank currently is not in
default under any of its obligations to the FDIC.

     Set forth below is certain financial information relating to the Company's
and Bank's dividend history for the past five fiscal years (as adjusted to
reflect the 5-for-1 stock split in the form of a stock dividend paid in July
1994.) Information for periods prior to July 1, 1995 reflect Bank information.

                                               Year Ended December 31,
                                  ----------------------------------------------
                                      1998     1997     1996     1995     1994
                                  ----------------------------------------------
 
Net income per common share          $(2.03)  $ 2.44   $ 2.06   $ 2.56   $ 1.99

Dividends paid per common share      $  .51   $  .60   $  .60   $  .60   $  .60

Ratio of dividends to net income
 available to common shareholders     N/A      24.59%   29.13%   23.44%   30.15%
 
-----------------------------------


     The payment of dividends by the Company depends largely upon the ability of
the Bank to declare and pay dividends to the Company, as the principal source of
the Company's revenue is dividends paid by the Bank. Future dividends will
depend primarily upon the Bank's earnings, financial condition, and need for
funds, as well as governmental policies and regulations applicable to the
Company and the Bank.

Recent Sales of Unregistered Shares.
                                        
     During the past three years, the Company has not sold any securities
without registration under the Securities Act of 1933, except for the initial
issuance of shares of the Company's Common Stock, par value $1.00 per share, as
of July 1, 1995, in connection with the establishment of the Company as the one
bank holding company for the Bank. The Company relied upon the exemption
provided by Section 3(a)(12) of the Securities Act of 1933. In connection with
that reorganization transaction, each share of outstanding Bank Common Stock was
converted into one share of Company Common Stock, and each shareholder retained
the same percentage ownership interest in the Company as such shareholder had in
the Bank. No shares of Company Common Stock or other authorized class of
securities were sold for cash, and involved no underwriter, broker or dealer was
involved in connection with the reorganization and conversion of shares.
Additionally, on September 29, 1997, the Company completed the sale of 31,200
shares of its Common Stock, and 20,000 shares of its Series A Non-Voting
Preferred Stock in a private placement transaction, to the Fannie Mae, at a
price of $25.00 per share of Common Stock and $25.00 per share of Series A Non-
Voting Preferred Stock, pursuant to an agreement dated August 15, 1997. No
underwriter, broker or dealer was involved in the sale of shares to Fannie Mae.
The Company relied upon the exemption provided by Section 4(2) of the Securities
Act of 1933, as amended. The sale of shares to Fannie Mae was effected as part
of Fannie Mae's program to make investments in community oriented and minority
institutions to encourage and facilitate housing related lending and affordable
housing initiatives. The purchase was privately negotiated, directly by the
parties and no public solicitation was used.

                                     -10-
<PAGE>
 
ITEM 6.  Management's Discussion and Analysis.

     The information required by this item is incorporated by reference to the
material appearing under the caption "Management's Discussion and Analysis"
appearing at pages 23 to 34 of the Company's Annual Report to Shareholders for
the year ended December 31, 1998.

ITEM 7.  Financial Statements.

     The information required by this item is incorporated by reference to the
Consolidated Financial Statements appearing at pages 1 to 22 of the Company's
Annual Report to Shareholders for the year ended December 31, 1998.

ITEM 8.  Changes in and Disagreements with Accountants.

     None.

                                   Part III

ITEM 9.  Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.

     The information required by this Item is incorporated by reference to, the
material appearing at pages 4 to 7 of the Company's definitive proxy statement
for the Annual Meeting of Shareholders to be held on May 25, 1999.

ITEM 10. Executive Compensation.

     The information required by this Item is incorporated by reference to, the
material appearing at page 6 of the Company's definitive proxy statement for the
Annual Meeting of Shareholders to be held on May 25, 1999.

ITEM 11. Security Ownership of Certain Beneficial Owners and Management.

     The information required by this Item is incorporated by reference to, the
material appearing at pages 2 to 3 of the Company's definitive proxy statement
for the Annual Meeting of Shareholders to be held on May 25, 1999.

ITEM 12. Certain Relationships and Related Transactions.

     The information required by this Item is incorporated by reference to, the
material appearing at page 7 of the Company's definitive proxy statement for the
Annual Meeting of Shareholders to be held on May 25, 1999.

ITEM 13. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit No.    Description of Exhibits
-----------    -----------------------

3(a)           Certificate of Incorporation of the Company, as amended (1)
3(b)           Bylaws of the Company (2)
4              Specimen certificate for the common stock, $1 par value, of the 
               Company (3)
10(a)          Interim Capital Assistance Agreement between the Company and the 
               RTC (4)
10(b)          Stock Pledge Agreement between the Company and the RTC (5)
11             Statement Regarding Computation of Per Share Earnings
13             The Company's Annual Report to Shareholders for the Year Ended
               December 31, 1998

                                     -11-
<PAGE>
 
Exhibit No.    Description of Exhibits
-----------    -----------------------

21             Subsidiaries of the Registrant

      The sole subsidiary of the Registrant is Industrial Bank, National
      Association, a national banking association organized under the laws of
      the United States

27             Financial Data Schedule
99             Designation of the Series A Non-Voting Preferred Stock (6)

-----------------------------
(1)   Incorporated by reference to Exhibit 1 to the Company's Current Report on
      Form 8-K, dated September 25, 1997.
(2)   Incorporated by reference to Exhibit 2(b) to the Company's Registration
      Statement on Form 10-SB
(3)   Incorporated by reference to Exhibit 3 to the Company's Registration
      Statement on Form 10-SB
(4)   Incorporated by reference to Exhibit 6(a) to the Company's Registration
      Statement on Form 10-SB
(5)   Incorporated by reference to Exhibit 6(b) to the Company's Registration
      Statement on Form 10-SB
(6)   Incorporated by reference to Exhibit 2 to the Company's Current Report on
      Form 8-K, dated September 25, 1997.

(b) Reports on Form 8-K

      None.

                                     -12-
<PAGE>
 
                                  SIGNATURES

     In accordance with Section 13 of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                       IBW FINANCIAL CORPORATION



April 8, 1999                          By: /s/ B. Doyle Mitchell, Jr.
                                           ------------------------------- 
                                           B. Doyle Mitchell, Jr.
                                                    President

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant  and in the capacities and on
the dates indicated.

         Signature                         Position                    Date
 
 /s/ Clinton W. Chapman       Chairman of the Board of Directors   April 8, 1999
---------------------------   
Clinton W. Chapman
 
 
 /s/ George W. Windsor          Vice Chairman of the Board of      April 8, 1999
---------------------------               Directors
George H. Windsor                        
 
 
 /s/ B. Doyle Mitchell, Jr.   President, Chief Executive Officer   April 8, 1999
---------------------------             and Director
B. Doyle Mitchell, Jr.                  
 
 
 /s/ Massie S. Fleming                     Director                April 8, 1999
---------------------------
Massie S. Fleming
 
 
 /s/ Benjamin L. King               Secretary and Director         April 8, 1999
---------------------------
Benjamin L. King
 
 
 /s/ Cynthia T. Mitchell                   Director                April 8, 1999
---------------------------
Cynthia T. Mitchell
 
 
---------------------------                Director                April  , 1999
Marjorie H. Parker                                                      --

                                     -13-
<PAGE>
 
 /s/ Emerson A. Williams                   Director                April 8, 1999
---------------------------
Emerson A. Williams
 
 
 /s/ Thomas A. Wilson, Jr.     Senior Vice President-Treasurer     April 8, 1999
---------------------------        Principal Financial and
Thomas A. Wilson, Jr.                Accounting Officer

                                     -14-
<PAGE>
 
                               Index to Exhibits

Exhibit No.      Description of Exhibits

3(a)             Certificate of Incorporation of the Company, as amended (1)

3(b)             Bylaws of the Company (2)

4                Specimen certificate for the common stock, $1 par value, of the
                 Company (3)

10(a)            Interim Capital Assistance Agreement between the Company and
                 the RTC (4)

10(b)            Stock Pledge Agreement between the Company and the RTC (5)

11               Statement Regarding Computation of Per Share Earnings

13               The Company's Annual Report to Shareholders for the Year Ended
                 December 31, 1998

21               Subsidiaries of the Registrant

      The sole subsidiary of the Registrant is Industrial Bank, National
      Association, a national banking association organized under the laws of
      the United States

27               Financial Data Schedule

99               Designation of the Series A Non-Voting Preferred Stock (6)

-----------------------------
(1)   Incorporated by reference to Exhibit 1 to the Company's Current Report on
      Form 8-K dated September 25, 1997
(2)   Incorporated by reference to Exhibit 2(b) to the Company's Registration
      Statement on Form 10-SB
(3)   Incorporated by reference to Exhibit 3 to the Company's Registration
      Statement on Form 10-SB
(4)   Incorporated by reference to Exhibit 6(a) to the Company's Registration
      Statement on Form 10-SB
(5)   Incorporated by reference to Exhibit 6(b) to the Company's Registration
      Statement on Form 10-SB
(6)   Incorporated by reference to Exhibit 2 to the Company's Current Report on
      Form 8-K, dated September 25, 1997.