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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 0-9756
RIGGS NATIONAL CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1217953
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1503 PENNSYLVANIA AVENUE, N. W., WASHINGTON, D. C. 20005
-------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(202) 835-6000
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(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
Common Stock, par value OTC, NASDAQ National Market System
$2.50 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for 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 ____.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendments to this Form 10-K. [ ]
The aggregate market value of the Corporation's voting stock held by
non-affiliates of the registrant as of February 29, 1996, was $237,496,018.
The number of shares outstanding of the registrant's common stock, as of
March 27, 1996, was 30,293,464.
DOCUMENT INCORPORATED BY REFERENCE
Portions of Riggs National Corporation's definitive Proxy Statement to
Stockholders are incorporated by reference, except for Items 402 (k) and
(l) of Regulation S-K, in Parts I and III of this Annual Report.
FORM 10-K INDEX
PART I Page(s)
Item 1--Business 3
Item 2--Properties 5
Item 3--Legal Proceedings 5
Item 4--Submission of Matters to a Vote of Security Holders 5
PART II
Item 5--Market for Registrant's Common Equity and
and Related Stockholder Matters 6
Item 6--Selected Financial Data 6
Item 7--Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 8--Financial Statements and Supplementary Data 27
Item 9--Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 63
PART III
Item 10--Directors and Executive Officers of the Registrant (A),63
Item 11--Executive Compensation 65
Item 12--Security Ownership of Certain Beneficial Owners and Management 65
Item 13--Certain Relationships and Related Transactions 65
PART IV
Item 14--Exhibits, Financial Statement Schedules, and Reports on Form 8-K 66
(A) Portions of Riggs National Corporation's definitive Proxy Statement to
Stockholders are incorporated by reference, except for Items 402
(k) and (l) of Regulation S-K, in Parts I and III of this Annual Report.
-2-
PART I
ITEM 1.
BUSINESS
RIGGS NATIONAL CORPORATION
Riggs National Corporation ("the Corporation") is a multi-bank holding company
registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"),
and incorporated in the State of Delaware. The Corporation engages in a variety
of banking-related activities, either directly or through subsidiaries. The
Corporation currently has banking subsidiaries in Washington, D.C.; Virginia;
Maryland; Miami, Florida; London, England; Paris, France; and Nassau, Bahamas.
Additionally, the Corporation provides investment advisory services domestically
through a subsidiary registered under the Investment Advisers Act of 1940.
Subsidiaries of the Corporation located in the Bahamas and France provide trust
and corporate services, as well as traditional banking services.
The Corporation provides a wide range of financial services to a broad
customer base. These include traditional retail banking, corporate and
commercial banking, and trust and investment advisory services. The
Corporation's trust group provides fiduciary and administrative services,
including financial management and tax planning for individuals, investment and
accounting services for corporate and nonprofit organizations, estate planning
and trust administration, as well as bond trusteeship for state and local
governments and public companies.
THE RIGGS NATIONAL BANK OF WASHINGTON, D.C.
The Corporation's principal subsidiary is The Riggs National Bank of Washington,
D.C. ("Riggs-Washington"), a national banking association founded in 1836 and
incorporated under the national banking laws of the United States in 1896.
Riggs-Washington had assets of $4.1 billion, deposits of $3.4 billion, and
stockholder's equity of $399.1 million at December 31, 1995.
Riggs-Washington operates 32 branches and an investment advisory
subsidiary in Washington, D.C., commercial banks in London, England, an Edge Act
subsidiary in Miami, Florida, branch offices in London, England and Nassau,
Bahamas, and a Bahamian bank and trust company. At December 31, 1995,
Riggs-Washington and its subsidiaries had 1,428 full-time equivalent employees.
As part of an additional efficiency enhancement, The Riggs National Bank of
Virginia and The Riggs National Bank of Maryland will be merged with Riggs-
Washington during 1996.
As a commercial bank, Riggs-Washington provides a wide array of
financial services to customers in the Washington, D.C., Metropolitan area,
throughout the United States and internationally.
Riggs-Washington's Corporate and Commercial Banking Groups provide
services to customers ranging from small regional businesses to major
multinational companies. These services include lines of credit, secured and
unsecured term loans, letters of credit, credit support facilities, foreign
currency transactions and cash management.
Riggs-Washington's Trust and Financial Services Group provides fiduciary
and administrative services, including financial management and tax planning for
individuals, investment and accounting services for corporate and non-profit
organizations, estate planning and trust administration, as well as bond
trusteeship for state and local governments and public companies.
Riggs-Washington provides investment advisory services through Riggs
Investment Management Corporation ("RIMCO"), a wholly owned subsidiary
incorporated under the laws of Delaware and registered under the Investment
Advisers Act of 1940.
Riggs-Washington's Retail Banking Group provides a variety of services
including checking, NOW, savings and money market accounts, loans and personal
lines of credit, certificates of deposit and individual retirement accounts.
Additionally, the Retail Banking Group provides 24-hour banking services through
its telebanking operations and a network of Riggs' automated teller machines
("ATMs") as well as national and regional ATM networks.
Riggs-Washington's International Banking Group furnishes a variety of
financial services including issuing letters of credit in connection with trade
and other transactions, taking deposits, foreign exchange, private banking and
cash management. Customers include embassies and foreign missions in Washington,
D.C., foreign governments, central banks, and over 200 correspondent banks
around the world. These services are provided through both domestic and
international offices.
The Riggs Bank and Trust Company (Bahamas) Limited, in Nassau, provides
trust services for international private banking customers. Riggs-Washington
operates a branch in the U.S. Embassy in London which services the Embassy, its
employees and official visitors. In 1991, Riggs-Washington opened a banking
subsidiary under the laws of France. A full service commercial bank, The Riggs
National Bank (Europe) S.A. ("Riggs-Europe") has one branch located in the U.S.
Embassy in Paris. In addition to serving the Embassy, its employees and official
visitors, the Riggs-Europe office also assists the U.S. Government with
disbursement activities for the Department of Defense and Department of State
for all their facilities in Europe.
RIGGS AP BANK LIMITED
Riggs AP Bank Limited ("Riggs AP"), a merchant bank located in London, England
is a wholly owned subsidiary of Riggs-Washington. Riggs AP provides traditional
corporate banking services, commercial property financing, investment banking
services and trade finance. At December 31, 1995, Riggs AP had total assets of
$202.3 million representing 4.3% of the Corporation's total assets and had loans
of $124.6 million, or 67.8% of the Corporation's total foreign loans and 4.9% of
total loans.
-3-
THE RIGGS NATIONAL BANK OF VIRGINIA
The Riggs National Bank of Virginia ("Riggs-Virginia") is a nationally chartered
full-service commercial bank. At December 31, 1995, Riggs-Virginia had assets of
$382.1 million, deposits of $338.9 million and stockholder's equity of $36.9
million. Riggs-Virginia's 16 branches are located in Northern Virginia. At
December 31, 1995, Riggs-Virginia had 98 full-time equivalent employees.
As part of an additional efficiency enhancement, Riggs-Virginia will be
merged with Riggs-Washington during 1996.
THE RIGGS NATIONAL BANK OF MARYLAND
The Riggs National Bank of Maryland ("Riggs-Maryland") is a nationally chartered
full-service commercial bank. At December 31, 1995, Riggs-Maryland had assets of
$224.4 million, deposits of $199.0 million, and stockholder's equity of $16.1
million. Riggs-Maryland's nine branches are all located in Montgomery and Prince
Georges counties, Maryland. At December 31, 1995, Riggs-Maryland had 48
full-time equivalent employees. As part of an additional efficiency
enhancement, Riggs-Maryland will be merged with Riggs-Washington during 1996.
SUPERVISION AND REGULATION
The Corporation and certain of its subsidiaries are subject to the supervision
of and regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). The Corporation's national banking subsidiaries and
certain of their subsidiaries are subject to the supervision of and regulation
by the Office of the Comptroller of the Currency (the "OCC"). Other federal,
state and foreign laws govern many aspects of the businesses of the Corporation
and its subsidiaries.
Under the BHCA, bank holding companies may not directly or indirectly
acquire the ownership or control of five percent or more of the voting shares or
substantially all of the assets of any company, including a bank, without the
prior approval of the Federal Reserve Board. The BHCA also restricts the types
of businesses and activities in which a bank holding company and its
subsidiaries may engage. Generally, activities are limited to banking and
activities found by the Federal Reserve Board to be so closely related to
banking as to be a proper incident thereto.
The Corporation is required to maintain minimum levels of qualifying
capital under Federal Reserve Board risk-based capital guidelines. For full
discussion of these guidelines, see "Management's Discussion and
Analysis--Capital Resources" and "Notes to Consolidated Financial
Statements-Note 10."
Under Federal Deposit Insurance Corporation ("FDIC")regulations,
the assessment rate for an insured depository institution varies according
to the level of risk incurred in its activities. An institution's risk category
is based partly upon whether the institution is assigned to one of the following
"supervisory subgroups": "healthy"; "supervisory concern"; or "substantial
supervisory concern."
The OCC must take "prompt corrective action" in respect of
depository institutions that do not meet minimum capital requirements. The OCC
has established levels at which an insured institution would be considered
"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." The
following table details the minimum capital levels for each category:
CAPITAL CATEGORY
Combined Tangible
Tier I Tier I and II Leverage Equity
==============================================================================================
Ratios:
Well
Capitalized 6% or above 10% or above 5% or above N/A
Adequately
Capitalized 4% or above 8% or above 4% or above N/A
Under-
Capitalized Less than 4% Less than 8% Less than 4% N/A
Significantly
Undercapitalized Less than 3% Less than 6% Less than 3% N/A
Critically
Undercapitalized N/A N/A N/A 2% or less
Beyond the minimum capital levels, well capitalized institutions may not
be subject to any order or written directive to meet and maintain a specific
capital level.
Each of the bank subsidiaries of the Corporation exceeds current minimum
regulatory capital requirements, and qualifies, at a minimum, as "well
capitalized." The applicable federal bank regulator for a depository institution
may, under certain circumstances, reclassify a "well capitalized" institution as
"adequately capitalized" or require an "adequately capitalized" or
"undercapitalized" institution to comply with supervisory actions as if it were
in the next lower category. Such a reclassification may be made if the
regulatory agency determines that the institution is in an unsafe or unsound
condition (which could include unsatisfactory examination ratings). A summary of
applicable regulatory capital ratios and the minimums required by the OCC under
its capital guidelines for Riggs-Washington, Riggs-Virginia and Riggs-Maryland,
on a historical basis, are shown in the "Notes to Consolidated Financial
Statements--Note 10."
A depository institution may not make any capital distribution
(including payment of a dividend) or pay any management fee to its
holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
increased regulatory monitoring and growth limitations and are required to
submit capital restoration plans.
The Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Act"), authorizes interstate acquisitions of banks and bank
holding companies without geographic limitation. In addition, beginning June 1,
1997, the Interstate Act authorizes a bank to merge with a bank in another state
as long as neither of the states has opted out of interstate branching between
the date of enactment of the
-4-
Interstate Act and May 31, 1997. The Interstate Act further provides
that states may enact laws permitting interstate bank merger
transactions prior to June 1, 1997. A bank may establish and operate a de novo
branch in a state in which the bank does not maintain a branch if that state
expressly permits de novo branching. Once a bank has established branches in a
state through an interstate merger transaction, the bank may establish and
acquire additional branches at any location in the state where any bank involved
in the interstate merger transaction could have established or acquired branches
under applicable federal or state law. A bank that has established a branch in a
state through de novo branching may establish and acquire additional branches in
such state in the same manner and to the same extent as a bank having a branch
in such state as a result of an interstate merger. If a state opts out of
interstate branching within the specified time period, no bank in any other
state may establish a branch in the opting out state, whether through an
acquisition or de novo.
In August 1995, the FDIC revised its regulations on insurance
assessments to establish a revised assessment rate schedule of 4 to 31 cents per
$100 of deposits in replacement of the then existing schedule of 23 to 31 cents
per $100 of deposits for institutions whose deposits are subject to assessment
by the Bank Insurance Fund ("BIF"). The revised BIF schedule became effective on
June 1, 1995. Assessments collected at the previous assessment schedule that
exceeded the amount due under the revised schedule were refunded, including
interest, from the effective date of the revised schedule. As a result, the
Corporation received a $2.1 million refund in the third quarter of 1995. In
November 1995, the FDIC further reduced the rate structure for BIF by 4 cents
per $100 of deposits, effective January 1996. As a result, the highest-rated
institutions will pay only the statutory annual minimum rate of $2,000 for FDIC
insurance. The deposits of institutions insured by the Savings Association
Insurance Fund ("SAIF") will continue paying premiums on a risk-related basis of
23 to 31 cents per $100 of deposits. Various legislative proposals regarding the
future of the BIF and the SAIF have been reported recently, including a one-time
special assessment for SAIF deposits. The Corporation does not know when and if
any such proposal or any other related proposal may be adopted. See
"Management's Discussion and Analysis--Noninterest Expense" for further details
on FDIC premiums.
There are legal restrictions on the extent to which the Corporation and
its non-bank subsidiaries may borrow or otherwise obtain credit from
Riggs-Washington, Riggs-Virginia, and Riggs-Maryland. Subject to certain limited
exceptions, a bank subsidiary may not extend credit to the Corporation or to any
other affiliate (as defined) in an amount which exceeds 10% of its capital stock
and surplus and may not extend credit in the aggregate to such affiliates in an
amount which exceeds 20% of its capital stock and surplus. Further, there are
legal requirements as to the type, amount and quality of collateral which must
secure such extensions of credit by each bank subsidiary to the Corporation or
to other affiliates. Finally, extensions of credit and other transactions
between a bank subsidiary and the Corporation or other affiliates must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to such a bank subsidiary as
those prevailing at the time for comparable transactions with non-affiliated
companies.
Under Federal Reserve Board policy, bank holding companies are expected
to act as a source of financial strength to their subsidiary banks and to commit
resources to support such banks in circumstances where a bank holding company
might not do so absent such policy. In addition, any capital loans by a bank
holding company to any of its subsidiary banks are subordinate in right of
payment to deposits and to certain other indebtedness of such subsidiary bank.
In the event of a bank holding company's bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
ITEM 2.
PROPERTIES
The Corporation owns properties located in Washington, D.C. which house its
executive offices, 13 of its branches and certain operational units of
Riggs-Washington. The Corporation also owns an office building and a residential
property in London, England, and leases various properties in Washington, D.C.;
London, England; Miami, Florida; Northern Virginia; Maryland; and Paris, France.
ITEM 3.
LEGAL PROCEEDINGS
In the normal course of business, the Corporation is involved in various types
of litigation, including litigation with borrowers who are in default under
their loan agreements. In the opinion of management, based on its assessment
and consultation with outside counsel, litigation which is currently pending
against the Corporation will not have a material impact on the financial
condition or future operations of the Corporation as a whole.
The Corporation is contesting in Tax court the disallowance of Brazilian
Foreign Tax Credits by the Internal Revenue Service. The net tax benefit of
these tax credits have not been recognized for financial reporting purposes,
therefore, there will be no adverse impact on earnings if the Internal Revenue
Service were to prevail.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
No matters were submitted to security holders for vote during the fourth quarter
of 1995.
Information required by this Item for Executive Officers of the Registrant
is included in Item 10--"Directors and Executive Officers of the Registrant"
which is incorporated herein by reference.
-5-
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The common stock of Riggs National Corporation is traded on the NASDAQ National
Market tier of The NASDAQ Stock Market under the symbol: "RIGS."
A history of the Corporation's stock prices and dividends can be found
under "Quarterly Stock Information" on Page 61 of this Form 10-K.
As of December 31, 1995, there were 3,236 stockholders of record.
Other information required by this item is set forth in the "Notes
to Consolidated Financial Statements--Notes 10 and 11" on Pages 47 and 48,
respectively, of this Form 10-K.
ITEM 6.
FINANCIAL REVIEW
SELECTED FINANCIAL DATA
(In thousands, except per share amounts) 1995 1994 1993 1992 1991
==============================================================================================
Interest Income $298,799 $266,005 $256,951 $327,540 $474,815
Interest Expense 147,821 112,723 122,130 189,604 319,719
==============================================================================================
Net Interest Income 150,978 153,282 134,821 137,936 155,096
Less: Provision for Loan Losses (55,000) 6,300 69,290 52,067 43,655
==============================================================================================
Net Interest Income after
Provision for Loan Losses 205,978 146,982 65,531 85,869 111,441
Noninterest Income Excluding
Securities Gains, Net 73,493 85,298 88,509 96,200 92,961
Securities Gains, Net 511 226 24,141 34,213 13,692
Provision for Losses on
Accelerated Disposition of Real
Estate Assets -- -- -- -- 49,800
Noninterest Expense 191,834 199,020 266,752 238,403 240,371
==============================================================================================
Income (Loss) before Taxes and
Extraordinary Item 88,148 33,486 (88,571) (22,121) (72,077)
Applicable Income Tax Expense
(Benefit) 346 (533) 5,640 (1,069) (6,130)
==============================================================================================
Income (Loss) before Extraordinary
Item, Net of Taxes 87,802 34,019 (94,211) (21,052) (65,947)
Extraordinary Item - Gain on
Purchase of Debt, Net of Taxes -- -- -- -- 2,486
- ----------------------------------------------------------------------------------------------
Net Income (Loss) $ 87,802 $ 34,019 $ (94,211) $ (21,052) $ (63,461)
Less: Dividends on Preferred Stock 10,750 12,124 1,434 358 --
==============================================================================================
Net Income (Loss) Available for
Common Stock $ 77,052 $ 21,895 $ (95,645) (21,410) $ (63,461)
EARNINGS (LOSS) PER COMMON SHARE:
Income (Loss) before Extraordinary
Item, Net of Taxes $ 2.54 $ .72 $ (3.65) $ (.87) $ (4.79)
Extraordinary Item - Gain on
Purchase of Debt, Net of Taxes -- -- -- -- .18
==============================================================================================
Earnings (Loss) Per Common Share $ 2.54 $ .72 $ (3.65) $ (.87)$ (4.61)
==============================================================================================
Dividends Declared Per Common Share /1/ $ -- $ -- $ -- $ -- $ .05
[FN]
/1/ In addition, a cash dividend of $.15 per common share applicable to the
fourth quarter of 1990 was declared on January 22, 1991, and paid
on February 15, 1991.
-6-
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
In 1995, Riggs National Corporation ("the Corporation") achieved record earnings
with total net income of $87.8 million. By comparison, the Corporation had net
earnings of $34.0 million in 1994 and a net loss of $94.2 million in 1993.
Earnings per common share for 1995 and 1994 were $2.54 and $.72, respectively,
compared with a loss per common share of $3.65 in 1993. Earnings for 1995
reflect a $55.0 million reduction in the reserve for loan losses in the third
quarter of 1995, as continued improvement in credit quality resulted in the
recording of this reserve reversal. Net interest income was a significant
component of earnings in 1995, totaling $151.0 million, a slight decrease of
$2.3 million from the prior year's total.
Generally, the Corporation's assets will reprice faster than its
liabilities. With the seven consecutive interest rate increases by the Federal
Reserve in 1994, the Corporation initially experienced an increase in its net
interest margin. As the interest rate increases abated in 1995, combined with
the upward repricing of the liabilities portfolio, the net interest margin
leveled in the first half of 1995 and then declined in the second half of 1995.
During the year, the Corporation had a 102 basis point increase in the cost of
funds, with the net interest margin decreasing from 3.89% at December 31, 1994
to 3.74% at December 31, 1995. Offsetting the increase in the cost of funds
during 1995 was a $69.7 million increase in net earning assets over
interest-bearing liabilities, an improvement from continued reductions in
nonperforming and other noninterest-earning assets.
Key measurements of profitability included the Corporation's net income to
average total assets, net income to average stockholders' equity and the net
interest margin. Net income to average total assets was 1.92% for 1995, compared
with ratios of 0.76% and negative 1.91% for 1994 and 1993, respectively. Net
income to average stockholders' equity was 28.25% for 1995 and 12.01% for 1994,
compared with a negative ratio for 1993. The net interest margin for 1995 was
3.74%, down from a high of 3.89% in 1994, but an increase of 51 basis points
from 3.23% in 1993.
Also affecting 1995 results was a decrease in noninterest expense of $7.2
million (3.6%) along with a decline of $11.5 million (13.5%) in noninterest
income. Noninterest expense totals for 1995 included nonrecurring expenses of
$4.4 million related to occupancy initiatives and $1.2 million for
reorganization and severance-related costs. Noninterest expense totals for 1994
included a $2.1 million restructuring expense reversal. Adjusting for these
items, noninterest expense actually decreased by $14.8 million (7.4%) between
the years.
The reorganization and severance-related expenses recorded in 1995 were
related to several efficiency initiatives implemented in the third quarter. The
Corporation had identified certain areas within its organizational structure to
consolidate functions and/or reduce staff positions. The reorganization
initiatives were completed in the fourth quarter of 1995 and are expected to
generate approximately $8 million in compensation-based savings in 1996.
The occupancy expenses were the result of several initiatives currently
undertaken, including the new technology center to be completed in mid-year
1996, as well as the marketing of office space to third parties that is
currently vacant or that may become available from the previously discussed
reorganization initiatives. Management expects the occupancy initiatives to
generate approximately $6 million in savings in 1996, with greater improvements
expected in 1997 and thereafter.
The decline in noninterest income was partially attributed to the lost
noninterest income from certain foreign subsidiaries sold in 1994 and a $4.7
million gain recorded in 1994 from the settlement of mortgage insurance claims
in the United Kingdom.
On September 28, 1995, the Corporation was notified by the Federal Reserve
Bank of Richmond that the Memorandum of Understanding dated May 14, 1993, was
terminated effective immediately. The now terminated Memorandum of Understanding
was the result of regulatory concern over financial and operational weaknesses
and continued losses related primarily to the Corporation's domestic and United
Kingdom commercial real estate exposure. This termination ended all operating
agreements between the Corporation and its banking regulators.
-7-
EARNING ASSETS
MONEY MARKET ASSETS
Short-term instruments, such as time deposits with other banks, federal funds
sold and resale agreements, represent alternatives for the Corporation for the
deployment of excess funds. These investments are lower-yielding assets that are
highly interest-rate sensitive. Funds available for short-term investments
generally are a function of daily movements in the Corporation's securities,
loans and deposit portfolios, combined with the Corporation's overall
interest-rate risk and asset/liability strategy. At December 31, 1995, total
money market assets increased by $266.2 million (68.6%) when compared with
year-end 1994, the result of fund inflows from the deposit portfolio. The total
average of time deposits with other banks and federal funds sold and resale
agreements increased from $377.4 million in 1994 to $462.5 million in 1995.
SECURITIES
The securities portfolio consists of securities held-to-maturity and securities
available for sale that are accounted for in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (see Note 1, "Summary of Significant
Accounting Polices" and Note 2, "Securities"). The aggregate securities
portfolio declined $71.4 million (6.9%) from a balance of $1.04 billion at
year-end 1994 to $970.0 million at year-end 1995. The decrease in securities
from 1994 was mainly due to aggregate maturities during 1995 of $632.7 million,
the majority of which were reinvested into securities during the year. The
weighted-average maturity and yield for securities available for sale adjusted
for anticipated prepayments were approximately three years and 6.10%,
respectively, at December 31, 1995. The securities portfolio is part of
management's asset/liability strategy and is a function of short and long-term
investments by the Corporation relative to its interest-bearing liabilities
outstanding.
At December 31, 1995, the aggregate securities portfolio was comprised
entirely of securities available for sale, which totaled $970.0 million. The
increase in this portfolio and the offsetting decrease in the held-to-maturity
portfolio was primarily the result of transferring $446.1 million (book value)
in securities held-to-maturity to the available for sale portfolio in December
1995. This transfer was made in accordance with accounting guidance provided by
the Financial Accounting Standards Board, allowing a reassessment of securities
classifications and transfers between portfolios without the prescribed
accounting for transfers under SFAS No. 115 (see Note 1, "Summary of Significant
Accounting Policies"). Securities available for sale were primarily
mortgage-backed, U.S. Treasury and government agencies securities. Securities
available for sale may be sold in response to changes in interest rates, risk
characteristics and other factors as part of the Corporation's asset/liability
strategy (see "Interest-Rate Risk Management").
MATURITIES OF SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1995
Gross Gross Book/
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
===============================================================================
U.S. Treasury Securities:
Due within 1 year $ 90,470 $ 168 $ 111 $ 90,527
Due after 1 year but
within 5 years 201,044 2,207 -- 203,251
Government Agencies Securities:
Due after 1 year but
within 5 years 252,687 2,143 -- 254,830
Obligations of States and
Political Subdivisions:/1/
Due within 1 year 3,800 900 -- 4,700
Mortgage-Backed Securities:
Due after 1 year but
within 5 years 303,076 629 22 303,683
Due after 5 years but
within 10 years 59,133 -- 216 58,917
Due after 10 years 25,692 25 -- 25,717
Other Securities:
Due within 1 year 8,707 -- -- 8,707
Due after 1 years but
within 5 years 19,674 -- -- 19,674
============================================================================
Total Securities Available
for Sale $ 964,283 $ 6,072 $ 349 $970,006
[FN]
/1/ The securities within the category of "Obligations of States and
Political Subdivisions" are on a nonaccrual basis as of December 31, 1995.
All contractual payments to date have been received. See "Past Due and
Potential Problem Loans/Assets."
-8-
LOANS
Loans, net of premiums, discounts and deferred fees totaled $2.57 billion at
December 31, 1995, an increase of $22.0 million, or 0.9%, from the prior year.
Over the past few years, the quality and overall risk level of the portfolio has
improved as a result of adjustments to its composition, combined with the
Corporation's comprehensive underwriting and review policies. During the year,
the Corporation focused its efforts on new loan production in the commercial and
financial, residential mortgage and home equity portfolios. This strategy
coincided with the improvement in the local economy, particularly in the areas
of employment and small to mid-sized commercial business.
YEAR-END LOANS
December 31,
==========================================================
(In thousands) 1995 1994 1993 1992 1991
=======================================================================================================
Domestic:
Commercial and Financial $ 400,379 $ 400,660 $ 412,006 $ 369,885 $ 532,143
Real Estate-Commercial/
Construction 326,965 323,835 388,442 533,685 619,298
Residential Mortgage 1,286,256 1,317,169 1,149,363 529,382 725,337
Home Equity 251,798 220,910 234,049 273,586 321,690
Consumer 77,804 75,887 82,819 107,382 158,872
===================================================================================================
Total Domestic 2,343,202 2,338,461 2,266,679 1,813,920 2,357,340
Foreign:
Governments and Official
Institutions 30,849 26,013 28,113 29,319 27,377
Banks and Other Financial
Institutions 6,570 11,517 14,999 24,734 28,481
Commercial and Industrial
and Commercial Property 170,971 146,153 192,770 291,496 581,499
Other 15,761 20,875 19,514 25,948 23,886
===================================================================================================
Total Foreign 224,151 204,558 255,396 371,497 661,243
===================================================================================================
Total Loans 2,567,353 2,543,019 2,522,075 2,185,417 3,018,583
Less: Unearned Discount
(Unamortized Premium) and
Net Deferred Fees (4,606) (6,905) (6,058) 4,360 12,116
===================================================================================================
Total Loans, Net of Unearned
Discount (Unamortized
Premium) and Net
Deferred Fees 2,571,959 2,549,924 2,528,133 2,181,057 3,006,467
Less: Reserve for
Loan Losses 56,546 97,039 86,513 84,155 103,674
- ---------------------------------------------------------------------------------------------------
Total Net Loans $2,515,413 $2,452,885 $2,441,620 $2,096,902 $2,902,793
The commercial loan portfolio totaled $400.4 million at year-end 1995, level
with the prior year balance, with originations totaling $213.8 million, or 53.4%
of the 1994 year-end portfolio balance. There were no individual borrowers or
industries representing more than a 10% share of the total loan portfolio.
New residential mortgage loans in 1995 totaled $77.1 million, which was
offset by paydowns and payoffs during the year resulting in a decrease of less
than 3% in the portfolio. Of the $77.1 million residential loans originated in
1995, $53.9 million (70%) were fixed-rate loans, with the remainder being
adjustable-rate loans. The majority of these loans were originated in the
Washington, D.C., Metropolitan area. This contrasts to the loans added in late
1993 and early 1994, which were predominately purchases of loans originated by
others, with properties located throughout the United States. The combination of
these factors has resulted in a residential loan portfolio that is
geographically disbursed, yet has approximately 70% of the residential
portfolio, or 35% of the total loan portfolio, in the Washington, D.C.,
Metropolitan area, with no other region having larger than a 10% concentration
of the total loan portfolio.
The home equity portfolio increased $30.9 million, or 14% in 1995, the
result of several new products introduced in 1994 and 1995. Originations in 1995
totaled $82.9 million. This growth was partially offset by payoffs and paydowns
during the year.
Activity within the foreign, consumer and real estate-commercial/
construction portfolios has either remained flat or had a movement upward, as
the Corporation had limited new lending in these portfolios. Future new loans
within these portfolios will be selective, as the Corporation
anticipates limited investment opportunities within the markets in
the quarters ahead.
-9-
REAL ESTATE-COMMERCIAL/CONSTRUCTION LOANS
GEOGRAPHIC DISTRIBUTION BY TYPE
DECEMBER 31, 1995
Geographic Location
===============================================================
District of United
(In thousands) Columbia Virginia Maryland Kingdom Other Total
=========================================================================================================
Land Acquisition and
Construction
Development $ 31,913 $ 14,253 $ 8,289 $ -- $ -- $ 54,455
Multifamily
Residential 19,166 7,113 5,382 -- -- 31,661
Commercial:
Office Buildings 49,097 40,085 25,471 -- 2,284 116,937
Shopping Centers 11,828 35,421 16,631 -- -- 63,880
Hotels 4,545 5,405 -- -- -- 9,950
Industrial/Warehouse 2,283 11,566 7,743 -- -- 21,592
Churches 10,342 1,614 7,076 -- -- 19,032
Other 3,582 4,612 1,194 -- 70 9,458
=====================================================================================================
Total Commercial 81,677 98,703 58,115 -- 2,354 240,849
=====================================================================================================
Total Domestic Real
Estate-Commercial/
Construction Loans 132,756 120,069 71,786 -- 2,354 326,965
Foreign -- -- -- 101,645 -- 101,645
- -----------------------------------------------------------------------------------------------------
Total Real Estate-
Commercial/
Construction Loans $132,756 $120,069 $ 71,786 $101,645 $ 2,354 $428,610
YEAR-END MATURITIES AND RATE SENSITIVITY
December 31, 1995
================================================
Less Than Over
(In thousands) 1 Year/1/ 1-5 Years 5 Years Total
=========================================================================================================
Maturities:
Commercial and Financial $ 159,667 $ 145,189 $ 95,523 $ 400,379
Real Estate-Commercial/
Construction 101,185 182,084 43,696 326,965
Residential Mortgage 19,373 63,201 1,203,682 1,286,256
Home Equity 156,609 -- 95,189 251,798
Consumer 40,182 31,283 6,338 77,804
Foreign 187,368 22,969 13,814 224,151
- -----------------------------------------------------------------------------------------------------
Total $ 664,384 $ 444,726 $1,458,242 $2,567,353
Rate Sensitivity:
With Fixed Interest Rates $ 183,820 $ 334,946 $1,093,974 $1,612,740
With Floating and
Adjustable Interest Rates 480,564 109,780 364,268 954,613
- -----------------------------------------------------------------------------------------------------
Total $ 664,384 $ 444,726 $1,458,242 $2,567,353
[FN]
/1/ Includes demand loans, loans having no stated schedule of repayments or
maturity, and overdrafts.
-10-
CROSS-BORDER OUTSTANDINGS
The Corporation extends credit to borrowers domiciled outside of the United
States through several of its banking subsidiaries. These assets may be impacted
by changing economic conditions in their respective countries. Management
routinely reviews these credits and continually monitors the international
economic climate and assesses the impact of these changes on foreign domiciled
borrowers.
Cross-border outstandings include loans, acceptances, interest-bearing
deposits with other banks, investments, accrued interest and other monetary
assets, which are denominated in U.S. dollars or other nonlocal currencies. In
addition, cross-border outstandings include legally enforceable guarantees
issued on behalf of nonlocal third parties and local currency outstandings to
the extent they are not funded by local currency borrowings. Cross-border
outstandings are then reduced by tangible liquid collateral and any legally
enforceable guarantees issued by nonlocal third parties on behalf of the
respective country.
At December 31, 1995, the Corporation had no cross-border outstandings
exceeding 1% of total assets to countries experiencing difficulties in repaying
their external debt.
At December 31, 1995, the United Kingdom was the only country with
cross-border outstandings in excess of 1% of the Corporation's total assets that
had loans in either a nonperforming, past-due or problem loan status. Nonaccrual
loans in the United Kingdom totaled $1.7 million at December 31, 1995, compared
with $10.6 million at December 31, 1994. Past-due loans in the United Kingdom
totaled $36 thousand at December 31, 1995, with no potential problems loans
outstanding. In 1994, the United Kingdom did not have any past-due loans and had
$4.3 million in potential problem loans outstanding.
At December 31, 1995, 1994, and 1993, the Corporation did not have any
cross-border outstandings between .75% and 1% of its total assets.
CROSS-BORDER OUTSTANDINGS THAT EXCEED 1%
OF TOTAL ASSETS
Governments Banks and Commercial
and Official Other Financial and
(In thousands) Institutions Institutions Industrial Other Total
=====================================================================================================
As of December 31, 1995
United Kingdom $ 242 $ 22,090 $133,336 $ 25,199 $180,867
=================================================================================================
As of December 31, 1994
United Kingdom 257 57,715 84,725 6,704 149,401
France 36,105 25,011 3 -- 61,119
=================================================================================================
As of December 31, 1993
United Kingdom 765 29,235 154,660 2,170 186,830
=================================================================================================
CROSS-BORDER OUTSTANDINGS THAT EXCEED 1%
OF TOTAL ASSETS WITH NONPERFORMING OR PAST-DUE LOANS
Total
Nonaccrual Renegotiated Nonperforming Past-Due
(In thousands) Loans Loans Loans Loans
=======================================================================================================
As of December 31, 1995
United Kingdom $ 1,714 $ -- $ 1,714 $ 36
===================================================================================================
As of December 31, 1994
United Kingdom 10,634 267 10,901 --
France -- -- -- --
===================================================================================================
As of December 31, 1993
United Kingdom 37,696 834 38,530 4
===================================================================================================
-11-
ASSET QUALITY
NONPERFORMING ASSET SUMMARY
Nonperforming assets, which include nonaccrual loans, renegotiated loans, and
other real estate owned (net of reserves), totaled $45.9 million at year-end
1995, a $29.8 million (39.3%) decrease from the year-end 1994 total of $75.7
million. This significant decrease in nonperforming assets during 1995 was
attributable to sales and paydowns of $30.0 million, nonaccrual and renegotiated
loans returning to accrual status of $3.7 million, and net
charge-offs/writedowns of $10.4 million, which were partially offset by exchange
rate fluctuations of $111 thousand, combined with net additions in 1995 of $14.2
million.
Effective January 1, 1995, the Corporation adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." Impaired loans are generally
defined as nonaccrual loans, excluding large groups of smaller-balance loans
(with similar collateral characteristics), which are collectively evaluated for
impairment. Specific reserves are required to the extent that the fair value of
the impaired loans is less than the recorded investment. The adoption of SFAS
No. 114 was not material to the Corporation's consolidated financial statements
or results from operations. All impaired loans are included in the table below
and are further discussed in Note 3, "Loans and Reserve for Loan Losses."
NONPERFORMING ASSETS AND PAST-DUE LOANS
December 31,
=========================================================
(In thousands) 1995 1994 1993 1992 1991
======================================================================================================
Nonperforming Assets:
Nonaccrual Loans:/1/
Domestic $ 7,542 $ 11,518 $ 85,075 $152,812 $151,114
Foreign 1,784 15,865 45,099 52,613 78,855
==================================================================================================
Total Nonaccrual Loans 9,326 27,383 130,174 205,425 229,969
Renegotiated Loans:/2/
Domestic 3,410 288 29,465 11,806 --
Foreign -- 267 834 -- --
==================================================================================================
Total Renegotiated Loans 3,410 555 30,299 11,806 --
Real Estate Assets Subject to
Accelerated Disposition, Net -- -- -- -- 89,389
Other Real Estate Owned, Net:
Domestic 32,627 44,068 45,049 62,810 7,542
Foreign 570 3,695 7,754 26,579 4,211
==================================================================================================
Total Other Real Estate Owned, Net 33,197 47,763 52,803 89,389 11,753
==================================================================================================
Total Nonperforming Assets, Net $ 45,933 $ 75,701 $213,276 $306,620 $331,111
Past-Due Loans:/3/
Domestic $ 5,423 $ 6,091 $ 3,315 $ 1,369 $ 2,743
Foreign 36 30 4 55 790
==================================================================================================
Total Past-Due Loans $ 5,459 $ 6,121 $ 3,319 $ 1,424 $ 3,533
Total Loans, Net of Unearned Discount
(Unamortized Premium) and
Net Deferred Fees $2,571,959 $2,549,924 $2,528,133 $2,181,057 $3,006,467
Ratio of Nonaccrual Loans to
Total Loans .36% 1.07% 5.15% 9.42% 7.65%
Ratio of Nonperforming Assets to
Total Loans and Other Real Estate
Owned, Net 1.76% 2.91% 8.26% 13.50% 10.97%
[FN]
/1/ Loans (other than consumer) that are contractually past due 90 days or more
in either principal or interest that are not well-secured and in the process
of collection, or that are, in management's opinion, doubtful as to the
collectibility of either interest or principal.
/2/ Loans for which terms have been renegotiated to provide a reduction of
interest or principal as a result of a deterioration in the financial
position of the borrower in accordance with SFAS No. 15. Renegotiated loans
do not include $11.2 million in loans renegotiated at market terms that have
performed in accordance with their respective renegotiated terms. These
performing, market-rate loans are no longer included in nonperforming asset
totals.
/3/ Loans contractually past due 90 days or more in principal or interest that
are well-secured and in the process of collection.
-12-
NONACCRUAL AND RENEGOTIATED LOANS
At December 31, 1995, nonaccrual loans were $9.3 million, or 0.4% of total
loans, compared with $27.4 million, or 1.1% of total loans, at December 31,
1994. Loans (other than consumer) are placed on nonaccrual status when, in
management's opinion, there is doubt as to the ability to collect either
interest or principal, or when interest or principal is 90 days or more past due
and the loan is not well-secured and in the process of collection. Consumer
loans are generally charged off when they become 120 days past due. The $18.1
million reduction in nonaccrual loans during 1995 was due primarily to sales and
repayments of $17.5 million, nonaccrual loans returning to accrual status of
$3.6 million, charge-offs of $6.8 million and transfers of nonaccrual loans to
other real estate owned of $.7 million. These decreases were partially offset by
net additions to nonaccrual loans and an increase in foreign exchange
translation adjustments, totaling $10.4 million and $.1 million, respectively.
Renegotiated loans totaled $3.4 million at December 31, 1995, compared
with $555 thousand at year-end 1994. Renegotiated loans generally consisted of
real estate-commercial/construction loans that were renegotiated to provide a
reduction or deferral of interest or principal as a result of a deterioration in
the financial position of the borrower. Renegotiated loans increased $2.9
million in 1995, the result of two residential development loans totaling $3.3
million that were restructured in the fourth quarter.
PAST-DUE AND POTENTIAL PROBLEM LOANS/ASSETS
Past-due loans consist predominantly of residential real estate and consumer
loans that are well-secured and in the process of collection and on which the
Corporation is accruing interest. Past-due loans decreased $662 thousand in 1995
to $5.5 million.
At December 31, 1995, the Corporation had identified approximately $8.1
million in potential problem loans. These loans are currently performing, but
management believes that they have certain attributes that may lead to
nonaccrual or past-due status in the foreseeable future. These loans primarily
consist of $5.0 million in real estate-commercial/construction loans and $2.5
million in residential mortgage loans.
In addition, the Corporation had $4.7 million in other potential problem
assets at December 31, 1995. In December 1994, the Corporation purchased $10
million, par value, of Orange County, California, variable-rate one-year notes
due in July and August 1995 (the "Notes"), from the Corporation's proprietary
RIMCO Monument Money Market Fund. Due to Orange County's bankruptcy declaration
on December 6, 1994, the Notes are on a nonaccrual basis and are carried at
their estimated fair value. Interest on the Notes is current, but due to the
uncertainty of the outcome of the bankruptcy proceedings, there is no assurance
that future payments will be received. In August 1995, $5 million of the Notes,
which were not part of the bankruptcy proceedings, matured and were paid off. On
July 7, 1995, the Corporation accepted Orange County's offer to extend the
maturity date of the remaining Notes, under similar terms and conditions, to
June 30, 1996. These securities are classified in the securities available for
sale portfolio at December 31, 1995.
INTEREST INCOME ON NONACCRUAL AND
RENEGOTIATED LOANS
December 31,
=======================================================
(In thousands) 1995 1994 1993 1992 1991
=======================================================================================================
Interest Income at Original Terms:
Nonaccrual Loans--
Domestic $ 1,230 $ 3,571 $10,639 $15,155 $19,033
Foreign 1,156 2,476 5,601 3,325 7,741
Renegotiated Loans 54 444 1,845 296 --
- ---------------------------------------------------------------------------------------------------
Total $ 2,440 $ 6,491 $18,085 $18,776 $26,774
Actual Interest Income Recognized:
Nonaccrual Loans--
Domestic Loans $ 214 $ 458 $ 1,506 $ 5,345 $ 2,823
Foreign Loans 186 1,075 2,128 116 1,139
Renegotiated Loans -- -- 346 94 --
- ---------------------------------------------------------------------------------------------------
Total $ 400 $ 1,533 $ 3,980 $ 5,555 $ 3,962
-13-
PROVISION AND RESERVE FOR LOAN LOSSES
The provision for loan losses represents a charge (credit) to earnings
necessary, after loan charge-offs and recoveries, to maintain the reserve for
loan losses at a level adequate to absorb estimated losses inherent in the loan
portfolio. The Corporation determines the appropriate balance of the reserve for
loan losses based upon an analysis of risk factors that includes: primary source
of repayment on individual loans and groups of similar loans, liquidity and
financial condition of the borrowers and guarantors, historical
charge-offs/writedowns within loan categories, general economic conditions and
other factors existing at the determination date. The loan portfolio is
continually monitored by management to identify loans requiring particular
attention. On a quarterly basis, the Loan Loss Reserve Committee evaluates the
adequacy of the reserve for loan losses and the Board of Directors reviews
management's determination of the reserves. The reserve for loan losses is based
on management's assessment of existing conditions and reflects potential losses
determined to be probable and subject to reasonable estimation.
Based on management's review of the adequacy of the reserve, risk
characteristics within the loan portfolio, current asset quality, lending
levels, economic development and other factors, the reserve for loan losses was
reduced by $55.0 million in the third quarter of 1995. As a result, the
provision for loan losses amounted to a negative $55.0 million for 1995,
compared to a positive provision of $6.3 million for the prior year.
Approximately $41.8 million of the reversal in 1995 related to domestic loans
and $13.2 million related to foreign loans.
The reserve for loan losses was $56.5 million, or 2.20% of total loans, at
December 31, 1995, compared with $97.0 million or 3.81% of total loans, at
December 31, 1994. Net recoveries for 1995 totaled $14.5 million compared with
$3.0 million for 1994. Total net recoveries for 1995 consisted of $10.7 million
from domestic real estate-commercial/construction and $2.3 million from foreign
loans compared with $2.0 million and $1.8 million, respectively, for 1994. The
Corporation's coverage ratio (reserves for loan losses divided by the sum of
nonaccrual and renegotiated loans) was 444% at year-end 1995, compared with 347%
at year-end 1994. The increase in the coverage ratio was impacted by the 66%
decrease in nonaccrual loans, partially offset by the $55.0 million loan loss
reserve reversal in 1995.
The estimated allocation of the reserve for loan losses is shown on the
following page. Reserve for loan loss allocations represent management's
assessment of existing conditions and risk factors within these categories.
RESERVE FOR LOAN LOSSES AND SUMMARY OF CHARGE-OFFS (RECOVERIES)
(In thousands) 1995 1994 1993 1992 1991
=======================================================================================================
Balance, January 1 $ 97,039 $ 86,513 $ 84,155 $103,674 $108,887
Provision for Loan Losses (55,000) 6,300 69,290 52,067 43,655
Loans Charged Off:
Commercial and Financial 243 593 4,703 3,192 7,457
Real Estate-Commercial/Construction 697 6,800 41,170 31,528 27,576
Residential Mortgage -- 409 96 215 25
Home Equity 438 98 201 453 450
Consumer 906 1,511 1,864 2,745 3,864
Foreign 6,106 3,219 31,400 35,575 13,172
===================================================================================================
Total Loans Charged Off 8,390 12,630 79,434 73,708 52,544
===================================================================================================
Recoveries on Charged-Off Loans:
Commercial and Financial 2,084 695 527 616 1,033
Real Estate-Commercial/Construction 11,408 8,847 6,699 3,172 --
Residential Mortgage 84 136 145 15 14
Home Equity 114 4 -- -- 26
Consumer 838 942 938 1,231 908
Foreign 8,400 5,034 4,712 279 1,678
===================================================================================================
Total Recoveries on Charged-Off Loans 22,928 15,658 13,021 5,313 3,659
===================================================================================================
Net Charge-Offs (Recoveries) (14,538) (3,028) 66,413 68,395 48,885
Foreign Exchange Translation Adjustments (31) 1,198 (519) (3,191) 17
- ---------------------------------------------------------------------------------------------------
Balance, December 31 $ 56,546 $ 97,039 $ 86,513 $ 84,155 $103,674
Ratio of Net Charge-Offs (Recoveries) to
Average Loans (.57)% (.12)% 3.04 % 2.66 % 1.43 %
Ratio of Reserve for Loan Losses
to Total Loans 2.20 % 3.81 % 3.42 % 3.86 % 3.45 %
-14-
ALLOCATION OF THE RESERVE FOR LOAN LOSSES
(In thousands) 1995 1994 1993 1992 1991
=======================================================================================================
Commercial and Financial $ 9,334 $ 11,658 $ 8,836 $ 7,775 $ 6,459
Real Estate-Residential and Commercial/
Construction 9,543 11,988 29,544 41,699 46,633
Home Equity and Consumer 2,717 6,178 2,905 3,658 2,323
Foreign 5,030 11,981 19,651 25,266 31,434
Based on Qualitative Factors 29,922 55,234 25,577 5,757 16,825
- ---------------------------------------------------------------------------------------------------
Balance, December 31 $ 56,546 $ 97,039 $ 86,513 $ 84,155 $103,674
DISTRIBUTION OF YEAR-END LOANS
(In thousands) 1995 1994 1993 1992 1991
====================================================================================================
Commercial and Financial 15.6% 15.8% 16.3% 17.0% 17.6%
Real Estate-Residential and Commercial/
Construction 62.9 64.5 61.0 48.6 44.6
Home Equity and Consumer 12.8 11.7 12.6 17.4 15.9
Foreign 8.7 8.0 10.1 17.0 21.9
- ----------------------------------------------------------------------------------------------------
Balance, December 31 100.0% 100.0% 100.0% 100.0% 100.0%
OTHER REAL ESTATE OWNED, NET
Other real estate owned decreased 30.5% to $33.2 million at December 31, 1995,
from $47.8 million at December 31, 1994. The decrease resulted from sales and
repayments of $12.3 million and $3.0 million in writedowns offset by net
additions of $.7 million during the period. Loans are transferred to other real
estate owned when collateral securing the loans is acquired, or deemed to be
acquired, through foreclosure.
At December 31, 1995, residential and commercial land composed 87% of other
real estate owned, with the remainder of the portfolio consisting of office,
industrial, retail and other types of properties. Except for $.6 million of
properties located in the United Kingdom, the remaining other real estate owned
properties were located in the Washington, D.C., Metropolitan area at year-end
1995.
OTHER REAL ESTATE OWNED, NET
GEOGRAPHIC DISTRIBUTION BY TYPE
DECEMBER 31, 1995
Geographic Location
================================================
District of United
(In thousands) Columbia Virginia Maryland Kingdom Total
=======================================================================================================
Land $ -- $20,777 $ 8,009 $ -- $28,786
Single-Family Residential 143 123 25 -- 291
Multifamily Residential -- 156 -- -- 156
Office Buildings/Retail -- 206 2,972 501 3,679
Industrial/Warehouse 215 -- -- 70 285
- -------------------------------------------------------------------------------------------------------
Total Other Real Estate Owned, Net $ 358 $21,262 $11,006 $ 571 $33,197
-15-
DEPOSITS
Total deposits at December 31, 1995, were $3.89 billion, compared with $3.60
billion at year-end 1994, an increase of $282.4 million, or 7.8%. In addition to
this growth, the composition of the portfolio significantly changed. Domestic
and foreign time deposits increased by $265.7 million, or 29.2%, as the
Corporation's customers took advantage of increases in short-term interest rates
experienced over the past 18 months. The increase in domestic time deposits was
due, in part, to a $108.9 million increase in the balance of time deposits with
the U.S. Treasury. Total noninterest-bearing deposits increased $83.9 million,
or 10.1% in 1995. These increases were contrasted by comparable decreases in
money-market, savings and NOW accounts totaling $67.2 million, or 3.6% in 1995.
Average domestic deposits were $3.41 billion for 1995, down $64.2 million,
or 1.9%, from an average of $3.47 billion for 1994. Average core deposits (total
deposits in domestic offices, excluding negotiable certificates of deposit) were
$3.40 billion, a decline of $58.4 million, or 1.7% from 1994's average balance
of $3.45 billion. Average foreign deposits increased $82.2 million, to $339.6
million, primarily the result of increased deposits in the Nassau, Bahamas
subsidiary.
Since 1994 the Corporation has been conducting a detailed analysis of its
retail banking system, determining the best use of its locations, branch
facilities, product lines and personnel. The Corporation has sold or
consolidated five retail branches as part of this analysis and does not
anticipate any significant future branch sales or consolidations. The
Corporation is actively seeking enhancements to existing branches to attract new
customers and to improve service quality and overall profitability of its
branches. The Corporation is also searching for opportunities to establish new
retail banking branches in strategic locations.
In 1995, the retail banking group formed a marketing team to explore the
current and future prospects of electronic banking for retail banking customers.
Retail banking advertising and product information have been established on a
local-area, on-line service and completion of the Internet Home Page is
anticipated by mid-year 1996. This development group is also analyzing
opportunities for home banking within the Corporation's market and the numerous
delivery configurations available. This research is ongoing, and management
expects to complete this project and to formalize delivery methodologies for
home banking within the next 12 to 18 months.
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS
1995 1994 1993
================== ================== ==================
Average Average Average
(In thousands) Balances Rates Balances Rates Balances Rates
==============================================================================================================
Deposits in Domestic Offices:
Noninterest-Bearing Demand Deposits $ 807,295 $ 786,153 $ 818,142
Savings and NOW Accounts 811,344 2.34% 903,756 2.15% 921,801 2.11%
Money Market Deposits 940,501 3.43 1,029,548 2.59 1,157,883 2.47
Other Core Deposits 836,530 5.11 734,592 3.35 820,235 3.23
==========================================================================================================
Total Average Core Deposits 3,395,670 3,454,049 3,718,061
Negotiable Certificates of Deposit 9,819 5.88 15,669 3.83 25,657 6.61
==========================================================================================================
Total Average Deposits in Domestic Offices 3,405,489 3,469,718 3,743,718
Deposits in Foreign Offices:/1/
Noninterest-Bearing Demand Deposits 9,468 11,496 13,337
Interest-Bearing Bank Deposits 48,903 7.40 47,039 9.85 131,283 10.54
Negotiable Certificates of Deposit -- -- -- 17,182 6.42
Interest-Bearing Non-Bank Deposits 281,253 5.62 198,844 3.83 318,446 3.13
==========================================================================================================
Total Average Deposits in Foreign Offices 339,624 257,379 480,248
- ----------------------------------------------------------------------------------------------------------
Total Average Deposits $3,745,113 $3,727,097 $4,223,966
Short-Term Borrowings:
Federal Funds Purchased and
Repurchase Agreements $ 174,923 5.98% $ 150,678 4.56% $ 164,899 2.77%
U.S. Treasury Demand Notes and Other
Short-Term Borrowings 73,694 5.70 61,058 3.71 67,731 2.79
- ----------------------------------------------------------------------------------------------------------
Total Average Short-Term Borrowings $ 248,617 $ 211,736 $ 232,630
[FN]
/1/ The majority of interest-bearing deposits in foreign offices are
denominated in amounts of $100 thousand or more.
-16-
SHORT-TERM BORROWINGS
Short-term borrowings consist of federal funds purchased and repurchase
agreements, U.S. Treasury demand notes and other borrowed funds. These
short-term obligations are an additional source of funds the Corporation
established to meet certain asset/liability and daily cash management
objectives. Short-term borrowings decreased $92.0 million (31.3%) to $201.5
million at December 31, 1995 compared with $293.4 million at year-end 1994.
Average short-term borrowings for 1995 totaled $248.6 million, up from 1994's
average of $211.7 million. The increase in the average balance during 1995 was
primarily due to average increases in treasury, tax and loan balances in 1995,
which were a temporary source of funds for the Corporation. See Note 8,
"Borrowings," for additional information.
LONG-TERM DEBT
Long-term debt totaled $217.6 million at December 31, 1995 and 1994. Included in
these long-term obligations were floating-rate subordinated notes maturing in
1996, which totaled $26.1 million at year-end 1995. These subordinated notes had
an interest rate of 5.88% at December 31, 1995, a decrease of 68 basis points
from year-end 1994.
Also included in long-term debt were subordinated debentures of $66.5
million due in 2009 and subordinated notes of $125.0 million due in 2006. The
subordinated debentures due in 2009 bear a fixed rate of interest of 9.65% per
annum, and the notes due 2006 bear a fixed rate of interest of 8.50% per annum.
The Corporation's long-term debt is discussed more fully in Note 8,
"Borrowings."
INTEREST-RATE RISK MANAGEMENT
The Corporation's asset/liability management function is controlled by the
Asset/Liability Committee ("ALCO"), which is comprised of representatives who
lead the major divisions within the Corporation. The objective of the group is
to prudently manage the assets and liabilities of the Corporation to provide
both an optimum and stable net interest margin while maintaining adequate levels
of liquidity and capital. This approach entails the management of overall risk
of the organization, in conjunction with the acquisition and deployment of
funds. ALCO monitors and modifies exposure to changes in interest rates based
upon its view of current and prospective market and economic conditions. The
traditional measurement of an organization's exposure to interest-rate
fluctuations, such as interest sensitivity, entails a "static gap" measurement,
which portrays a snapshot of the statement of condition at one point in time.
However, this methodology does not adequately measure the Corporation's exposure
to interest-rate risk. The statement of condition must be viewed within a
dynamic framework in which relationships may vary over time in virtually every
segment of the financial statement.
The Corporation manages interest-rate risk through the use of a simulation
model, allowing for various interest-rate scenarios to be portrayed. The model
forecasts the impact on earnings of these rate scenarios over a 36-month time
horizon, assuming selected changes in the mix of assets and liabilities, spread
relationships, and management actions. A "most likely" scenario is forecasted
based upon a consensus view of the marketplace. Alternatives, which reflect
interest rates moving significantly higher or lower than this view, are also
evaluated, with the results compared against risk tolerance limits established
by corporate policy. The Corporation's current policy establishes limits for
possible fluctuations in net interest income for an ensuing 12-month period
under the "most likely" scenario described above. While the Corporation
maintained a relatively balanced interest-rate risk position at year-end 1994,
the position became more liability sensitive as of December 31, 1995. In both
instances the Corporation was well-insulated against interest rates moving
significantly in either direction. At December 31, 1995, the forecasted impact
of interest rates either steadily rising or falling 300 basis points versus a
"most likely" scenario would reflect a change in net interest income of less
than 2% over an initial 12-month period, and only 3% over the entire 36-month
horizon -- well below the established tolerance levels set by the Corporation.
In managing the Corporation's interest-rate risk, ALCO also utilizes
financial derivatives in the normal course of business. These products might
include interest-rate swaps, caps, collars, floors, futures, and options.
Financial derivatives are employed to assist in the management and/or reduction
of interest-rate risk for the Corporation and can effectively alter the interest
sensitivity of segments of the statement of condition for specified periods of
time. All of these vehicles are considered "off-balance sheet" as they do not
impact the actual level of assets or liabilities of the Corporation.
Management finds that all of the methodologies discussed above provide a
meaningful representation of the Corporation's interest-rate sensitivity, though
factors other than changes in the interest-rate environment, such as levels of
nonearning assets and changes in the composition of earning assets, may impact
net interest income. Management believes its current rate sensitivity level is
appropriate, considering the Corporation's economic outlook and conservative
approach taken in the review and monitoring of the Corporation's sensitivity
position.
-17-
CAPITAL RESOURCES
A fundamental objective of management is to maintain a level of capitalization
that is sufficient to take advantage of favorable investment opportunities and
to promote depositor and investor confidence. In addition, the current economic
and regulatory climate places an increased emphasis on capital strength and the
ability of the Corporation to withstand unfavorable economic and/or business
losses. The Corporation's management monitors its capital levels monthly in
relation to financial forecasts for the year, as well as, internal and external
policies. The Corporation continues to maintain a strong capital position with
one of the highest capital levels relative to other banks in the country.
Total stockholders' equity at December 31, 1995 was $376.7 million, or 7.96%
of total assets, up $109.0 million from year-end 1994. The increase from
year-end 1994 was the result of earnings totaling $87.8 million combined with a
change in net unrealized gains/losses in the securities available for sale
portfolio from a $28.1 million loss at December 31, 1994, to a gain of $3.8
million at year-end 1995. These increases were offset by dividends on preferred
stock of $10.8 million.
The Federal Reserve Board has issued risk-based capital guidelines for bank
holding companies. The guidelines define a two-tier capital framework. Tier I
Capital consists of common and qualifying preferred shareholders' equity less
goodwill and other adjustments. Tier II Capital consists of mandatory
convertible, subordinated and other qualifying term debt, preferred stock not
qualifying as Tier I Capital and the reserve for loan losses up to 1.25 percent
of risk-weighted assets. Under these guidelines, one of four risk weights is
applied to the different on-balance sheet assets. Off-balance sheet items such
as loan commitments and derivatives, are also applied a risk weight after
conversion to balance sheet equivalent amounts. Bank holding companies are
required to meet a minimum ratio of qualifying total (combined Tier I and Tier
II) capital to risk-weighted assets of 8.00%, at least half of which must be
composed of core (Tier I) capital elements. The Corporation's total and core
capital ratios were 21.62% and 13.57%, respectively, at December 31, 1995,
compared with 18.50% and 11.48%, respectively, at December 31, 1994.
The Federal Reserve Board has established an additional capital adequacy
guideline, the leverage ratio, as amended by the Prompt Corrective Action
regulations promulgated under FDICIA, which measures the ratio of Tier I Capital
to quarterly average assets. The minimum leverage ratio guideline is three
percent for the most highly rated bank holding companies. Those that are not in
the most highly rated category, including the Corporation, must maintain at
least a minimum ratio of 4.00% or higher, if determined necessary by the Federal
Reserve Board through its assessment of the Corporation's asset quality,
earnings performance, interest-rate risk and liquidity. The Corporation's
leverage ratio was 8.03% at December 31, 1995, compared with a leverage ratio of
6.42% at the prior year-end.
The Corporation's policy is to ensure that its bank subsidiaries are
capitalized in accordance with regulatory guidelines. The three national bank
subsidiaries of the Corporation are subject to minimum capital ratios prescribed
by the Office of the Comptroller of the Currency ("OCC"), which are the same as
those for the Federal Reserve Board. The following table details the actual and
required minimum ratios for the Corporation and its insured bank subsidiaries.
CAPITAL RATIOS
December 31,
============= Required
1995 1994 Minimums
========================================================================================================
Riggs National Corporation
Tier I 13.57% 11.48% 4.00%
Combined Tier I and Tier II 21.62 18.50 8.00
Leverage/1/ 8.03 6.42 4.00
The Riggs National Bank of Washington, D. C.
Tier I 16.34 13.35 4.00
Combined Tier I and Tier II 17.61 14.64 8.00
Leverage/1/ 9.71 7.39 4.00
The Riggs National Bank of Virginia
Tier I 18.72 18.18 4.00
Combined Tier I and Tier II 19.75 19.43 8.00
Leverage/1/ 9.66 9.74 4.00
The Riggs National Bank of Maryland
Tier I 12.55 13.21 4.00
Combined Tier I and Tier II 13.79 14.46 8.00
Leverage/1/ 7.30 7.33 4.00
[FN]
/1/ Most bank holding companies and national banks, including the Corporation
and the Corporation's national bank subsidiaries, are expected to maintain
at least a 4.00% minimum leverage ratio, or higher, if determined
appropriate by the Federal Reserve Board. The Federal Reserve has not
indicated a requirement higher than 4.00% at December 31, 1995.
-18-
NET INTEREST INCOME
Net interest income is derived by subtracting the cost of funds from the income
received on earning assets. Earning assets are mainly comprised of loans and
securities, while interest-bearing liabilities are deposits and borrowed funds.
Net interest income is impacted by variations in the volume and mix of these
assets and liabilities, as well as fluctuations in interest rates. Net interest
income on a tax-equivalent basis (net interest income plus an amount equal to
the tax savings on tax-exempt interest), totaled $154.3 million for 1995, a
decrease of $2.4 million, or 1.52% from $156.7 million in 1994. The Corporation
experienced a sizable increase during 1995 in average interest-earnings assets,
totaling $90.3 million and an increase of 65 basis points in the average rate
earned. Average loans remained level during the period as the majority of the
increase in average balances occurred in the securities portfolio, which
increased over $63.6 million in 1995. The Corporation also had a $20.6 million
increase in average interest-bearing liabilities that was mostly due to the
increase in average borrowed funds. Thus, the Corporation had a favorable net
increase in average interest-earning assets over interest-bearing liabilities of
$69.7 million. This positive movement, however, was overshadowed by a 102 basis
point increase in the average rate paid on interest-bearing liabilities between
1995 and the prior year. Generally, the Corporation's assets will reprice faster
than its liabilities. With the seven consecutive interest rate increases by the
Federal Reserve in 1994, the Corporation initially experienced an increase in
its net interest margin. As the interest rate increases abated in 1995, combined
with the upward repricing of the liabilities portfolio, the net interest margin
leveled in the first half of 1995 and then declined in the second half of 1995.
The net interest margin (net interest income on a tax-equivalent basis
divided by average earning assets) was 3.74% for 1995, a decrease of 15 basis
points from the 3.89% net interest margin for 1994 because of the aforementioned
changes in earning assets and interest-bearing liabilities. Net interest spread
(the difference between the average tax-equivalent rate earned and the average
rate incurred on interest-bearing liabilities) for 1995 was 2.97%, a 37
basis-point decline from 1994's spread of 3.34%. Interest lost on nonaccrual and
renegotiated loans totaled $2.0 million for 1995, which had the effect of
reducing the net interest margin by approximately five basis points for the
year. In 1994, interest lost totaled $5.0 million and had the effect of reducing
the net interest margin in that year by approximately 12 basis points.
NET INTEREST INCOME CHANGES/1/
1995 Versus 1994 1994 Versus 1993
========================= =========================
Due to Due to Total Due to Due to Total
(In thousands) Rate Volume Change Rate Volume Change
=======================================================================================================
Interest Income:
Loans (Including Fees) $ 15,285 $ (6,504)$ 8,781 $ 7,786 $ 26,275 $ 34,061
Securities Available for Sale 4,681 2,950 7,631 8,461 663 9,124
Securities Held-to-Maturity 5,435 589 6,024 (6,054) (13,713) (19,767)
Time Deposits with Other Banks 2,305 1,728 4,033 1,075 (9,792) (8,717)
Federal Funds Sold and
Reverse Repurchase Agreements 3,502 2,748 6,250 4,477 (11,382) (6,905)
=======================================================================================================
Total Interest Income 31,208 1,511 32,719 15,745 (7,949) 7,796
Interest Expense:
Savings and NOW Accounts 1,702 (1,921) (219) 340 (406) (66)
Money Market Deposit Accounts 8,154 (2,583) 5,571 1,283 (3,346) (2,063)
Time Deposits in Domestic Offices 13,897 3,640 17,537 907 (3,265) (2,358)
Time Deposits in Foreign Offices 2,921 4,619 7,540 (2,197) (10,853) (13,050)
Federal Funds Purchased and
Repurchase Agreements 2,362 1,223 3,585 2,729 (424) 2,305
U.S. Treasury Demand Notes and
Other Borrowings 1,397 538 1,935 580 (199) 381
Long-Term Debt 481 (1,332) (851) 4,019 1,425 5,444
=======================================================================================================
Total Interest Expense 30,914 4,184 35,098 7,661 (17,068) (9,407)
- -------------------------------------------------------------------------------------------------------
Net Interest Income $ 294 $ (2,673)$ (2,379) $ 8,084 $ 9,119 $ 17,203
[FN]
/1/ The dollar amount of changes in interest income and interest expense
attributable to changes in rate/volume (change in rate multiplied by change
in volume) has been allocated between rate and volume variances based on
the percentage relationship of such variances to each other. Income and
rates are computed on a tax-equivalent basis using a Federal income tax
rate of 35% for 1995, 34% for 1994 and 1993, and local tax rates
as applicable.
-19-
THREE-YEAR AVERAGE CONSOLIDATED STATEMENTS OF CONDITION AND RATES/1/
1995 1994 1993
========================== =========================== ===========================
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
(In thousands) Balances Expense Rates Balances Expense Rates Balances Expense Rates
=============================================================================================================================
ASSETS
Loans:
Commercial-Taxable $ 399,098 $ 32,126 8.05% $ 381,721 $ 24,734 6.48% $ 279,484 $ 18,921 6.77%
Commercial-Tax-Exempt 33,601 3,797 11.30 61,233 6,547 10.69 83,773 7,686 9.17
Real Estate-Commercial/
Construction 325,987 31,375 9.62 353,006 30,575 8.66 454,657 30,544 6.72
Residential Mortgage 1,310,249 93,179 7.11 1,303,327 92,164 7.07 692,707 53,353 7.70
Home Equity 237,438 21,457 9.04 225,117 17,037 7.57 261,870 18,079 6.90
Consumer 75,874 9,135 12.04 75,663 8,957 11.84 90,255 10,938 12.12
Foreign 160,907 14,610 9.08 201,457 16,884 8.38 319,070 23,316 7.31
========================================================================================================================
Total Loans (Including Fees) 2,543,154 205,679 8.09 2,601,524 196,898 7.57 2,181,816 162,837 7.46
Securities Available for Sale/2/ 634,198 38,750 6.11 582,076 31,119 5.35 565,447 21,995 3.89
Securities Held-to-Maturity 482,164 29,461 6.10 470,690 23,437 4.98 709,845 43,204 6.09
Time Deposits with Other Banks 219,967 13,819 6.28 189,425 9,786 5.17 379,755 18,503 4.87
Federal Funds Sold and
Reverse Repurchase Agreements 242,534 14,389 5.93 187,955 8,139 4.33 483,044 15,044 3.11
========================================================================================================================
Total Earning Assets and
Average Rate Earned 4,122,017 302,098 7.33 4,031,670 269,379 6.68 4,319,907 261,583 6.06
Less: Reserve for Loan Losses 87,894 92,258 85,450
Cash and Due from Banks 203,327 219,609 287,912
Premises and Equipment, Net 151,372 156,525 168,227
Other Assets 184,329 185,031 244,453
========================================================================================================================
Total Assets $4,573,151 $4,500,577 $4,935,049
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Deposits:
Savings and NOW Accounts $ 822,666 $ 19,293 2.35% $ 908,582 $ 19,512 2.15% $ 926,363 $ 19,578 2.11%
Money Market Deposit Accounts 949,501 32,518 3.42 1,042,664 26,947 2.58 1,176,873 29,010 2.47
Time Deposits in Domestic Offices 846,356 43,353 5.12 750,258 25,816 3.44 845,892 28,174 3.33
Time Deposits in Foreign Offices 309,832 18,822 6.07 227,943 11,282 4.95 443,359 24,332 5.49
========================================================================================================================
Total Interest-Bearing Deposits 2,928,355 113,986 3.89 2,929,447 83,557 2.85 3,392,487 101,094 2.98
Short-Term Borrowings:
Federal Funds Purchased and
Repurchase Agreements 174,923 10,456 5.98 150,678 6,871 4.56 164,899 4,566 2.77
U.S. Treasury Demand Notes and
Other Short-Term Borrowings 73,694 4,203 5.70 61,058 2,268 3.71 67,731 1,887 2.79
Long-Term Debt 217,625 19,176 8.81 232,790 20,027 8.60 213,325 14,583 6.84
========================================================================================================================
Total Interest-Bearing Funds
and Average Rate Incurred 3,394,597 147,821 4.36 3,373,973 112,723 3.34 3,838,442 122,130 3.18
Demand Deposits 816,758 797,650 831,479
Other Liabilities 50,952 45,699 45,215
Stockholders' Equity 310,844 283,255 219,913
========================================================================================================================
Total Liabilities and
Stockholders' Equity $4,573,151 $4,500,577 $4,935,049
Net Interest Income and Spread $154,277 2.97% $156,656 3.34% $139,453 2.88%
========================================================================================================================
Net Interest Margin on
Earning Assets 3.74% 3.89% 3.23%
[FN]
/1/ Income and rates are computed on a tax-equivalent basis using a Federal
income tax rate of 35% for 1995, 34% for 1994 and 1993, and local tax
rates as applicable. Loan amounts include nonaccrual and renegotiated
loans. Average foreign assets, excluding net pool funds provided, details
of which can be found on page 62 of this report, were 8.4%, 9.1% and 14.6%
of average total assets for the periods presented, respectively. Average
foreign liabilities were 17.6%, 14.7% and 18.1% of average total
liabilities for the periods presented, respectively.
/2/ The averages and rates for the securities available for sale portfolio
are based on amortized cost.
-20-
NONINTEREST INCOME
Noninterest income for 1995 was $74.0 million, down $11.5 million, or 13.5% from
1994's total of $85.5 million. Excluding securities gains of $511 thousand and
$226 thousand for 1995 and 1994, respectively, and $4.7 million of nonrecurring
noninterest income related to a mortgage insurance settlement recognized in
1994, noninterest income decreased $7.1 million, or 8.8%. Trust income of $29.9
million increased $1.3 million, or 4.7% in 1995 from the Corporation's personal
trust and mutual fund operations. Service charges for 1995 decreased $3.2
million (8.6%) to $33.7 million and international fee income decreased $4.6
million (85.4%) to $786 thousand. The decrease in service charges for 1995 was
primarily due to decreases in transaction-based deposit accounts between the
periods, while the decrease in international commissions and fees was attributed
to the loss of $5.6 million in fee income from the three foreign subsidiaries
sold in the third quarter of 1994. The gain on settlement of mortgage insurance
resulted from the settlement of claims stemming from other real estate owned
properties in the United Kingdom. Foreign exchange income decreased $102
thousand, or 4.5%, in 1995 due primarily to limited foreign exchange
trading-related activities.
NONINTEREST INCOME
Change
====================
(In thousands) 1995 1994 Amount Percent
======================================================================================================
Service Charges $ 33,678 $ 36,836 $ (3,158) (8.6)%
Trust Income 29,934 28,587 1,347 4.7
Foreign Exchange Income 2,169 2,271 (102) (4.5)
International Noncredit Commissions and Fees 786 5,391 (4,605) (85.4)
Gain on Settlement of Mortgage Insurance Claims -- 4,739 (4,739) n/a
Other Noninterest Income 6,926 7,474 (548) (7.3)
=====================================================================================================
Noninterest Income Excluding Securities Gains, Net 73,493 85,298 (11,805) (13.8)
Securities Gains, Net 511 226 285 126.1
- -----------------------------------------------------------------------------------------------------
Total Noninterest Income $ 74,004 $ 85,524 $(11,520) (13.5)%
NONINTEREST EXPENSE
Noninterest expense for the year ended December 31, 1995 was $191.8 million, a
decrease of $7.2 million from $199.0 million for 1994. The decrease in total
noninterest expense, excluding nonrecurring items, was actually larger, the
result of $5.6 million of nonrecurring accruals in the third quarter of 1995 and
a $2.1 million restructuring expense reversal in 1994. Excluding these
nonrecurring items, noninterest expense decreased $14.8 million, or 7.4%.
Of the $5.6 million of nonrecurring expenses in 1995, $4.4 million was for
occupancy related expenses and $1.2 million was for reorganization and
severance-related expenses. The reorganization and severance-related expenses
were related to several efficiency initiatives implemented in the third quarter
and completed in the fourth quarter of 1995. Management expects the
reorganization initiatives to generate approximately $8 million in
compensation-based savings in 1996. The occupancy expenses were the result of
initiatives currently undertaken, including the new technology center to be
completed in mid-year 1996, as well as the marketing of office space to third
parties that is currently vacant or that may become available from the
reorganization initiatives. Management expects the occupancy initiatives to
generate approximately $6 million in occupancy-related expense savings in 1996,
with greater improvements expected in 1997 and thereafter.
Excluding these nonrecurring items, the decrease in noninterest expense
of $14.8 million was primarily due to decreases in Federal Deposit Insurance
Corporation ("FDIC") insurance, legal, furniture and equipment and other
noninterest expenses. Deposit insurance premiums decreased $5.3 million during
1995. Effective June 1995, coinciding with the mandatory 1.25% funding of the
Bank Insurance Fund (BIF) reserve, insurance rates reduced from a range of $.23
to $.26 per $100 in deposits insured to a range of $.04 to $.07 per $100 in
deposits insured. Further, in November 1995, based on the continuing increase in
reserves with BIF, the FDIC announced an additional reduction of insurance rates
to zero percent, however, banks must pay a mandatory minimum of $2 thousand per
year. This reduction is expected to generate approximately $6 million in annual
deposit insurance savings, when compared with the previous insurance rates paid,
subject to additional regulation that may be issued relating to the FDIC's
management of mandatory reserve levels and the Financing Corporation's bond
interest
-21-
for the thrift industry that may ultimately be funded in part or in whole by
BIF. Furniture and equipment expense of $8.0 million decreased $1.3 million, or
13.7%, the result of decreases in depreciation expense between the periods.
Other noninterest expense totaled $47.7 million, down $4.0 million, or 8.3%,
from the $52.0 million for 1994. This decrease was primarily the result of $2.5
million in other noninterest expenses related to the three foreign subsidiaries
sold in 1994.
NONINTEREST EXPENSE
Change
=================
(In thousands) 1995 1994 Amount Percent
=====================================================================================================
Salaries and Wages $ 66,184 $ 64,892 $ 1,292 2.0 %
Pensions and Other Employee Benefits 14,319 16,605 (2,286) (13.8)
=====================================================================================================
Total Staff Expense 80,503 81,497 (994) (1.2)
=====================================================================================================
Occupancy, Net 26,415 23,637 2,778 11.8
Data Processing Services 17,043 16,935 108 0.6
Furniture and Equipment 7,960 9,224 (1,264) (13.7)
Advertising and Public Relations 5,576 6,006 (430) (7.2)
FDIC Insurance 4,303 9,601 (5,298) (55.2)
Legal Fees 2,157 3,581 (1,424) (39.8)
Other Real Estate Owned Expense (Income), Net 178 (1,403) 1,581 n/a
Restructuring Expense -- (2,059) 2,059 n/a
Other Noninterest Expense 47,699 52,001 (4,302) (8.3)
- -----------------------------------------------------------------------------------------------------
Total Noninterest Expense $191,834 $199,020 $ (7,186) (3.6)%
INCOME TAXES
The Corporation's provision or benefit for income taxes includes both federal
and state income taxes. The Corporation's 1995 provision for income tax expense
of $.3 million increased from a benefit of $.5 million in 1994. This represents
an effective tax rate of 0.4% for 1995, compared with negative effective tax
rates of 1.6% and 6.4% for 1994 and 1993, respectively. The provision for income
taxes in 1995 was less than the amount determined by application of the federal
statutory income tax rate, principally because of the Corporation's ability to
carry forward previous net operating losses and the reversal of the previously
established valuation allowance.
The Corporation accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes," which primarily requires the use of the asset and
liability method for providing taxes. Under this method, deferred tax assets and
liabilities are recorded from differences between financial statements and tax
based assets and liabilities. The tax effects of these differences are recorded
using anticipated tax rates in the years these differences will reverse.
Additionally, a valuation allowance is established for deferred tax assets in
the event that these assets may not be fully realized. At December 31, 1995, the
Corporation had a net deferred tax asset of $12.1 million, which included a
valuation allowance of $33.7 million. Further tax discussion and a
reconciliation of the effective tax rate to the 1995 federal statutory rate of
35% can be found in Note 13, "Income Taxes."
-22-
FOURTH QUARTER 1995 VS. FOURTH QUARTER 1994
For the fourth quarter of 1995, the Corporation reported net income of $13.0
million, or $.34 per common share, compared with $8.0 million, or $.17 per
common share, for the fourth quarter of 1994. Results for the fourth quarters of
1995 and 1994 reflected no provisions for loan losses. Nonperforming assets
totaled $45.9 million at December 31, 1995, a decrease of $4.2 million for the
fourth quarter of 1995 and a decrease of $29.8 million from $75.7 million at
December 31, 1994.
FOURTH QUARTER CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
December 31,
================== Change
(In thousands, except per share amounts) 1995 1994 Amount
===============================================================================================
Interest Income $74,236 $70,265 $ 3,971
Interest Expense 36,652 31,659 4,993
===============================================================================================
Net Interest Income 37,584 38,606 (1,022)
Less: Provision for Loan Losses -- -- --
===============================================================================================
Net Interest Income after Provision for Loan Losses 37,584 38,606 (1,022)
Noninterest Income 19,323 17,398 1,925
Noninterest Expense 43,819 48,102 (4,283)
===============================================================================================
Income before Income Taxes 13,088 7,902 5,186
Applicable Income Tax Expense (Benefit) 91 (141) 232
- -----------------------------------------------------------------------------------------------
Net Income $12,997 $ 8,043 $ 4,954
Earnings Per Common Share $ .34 $ .17 $ .17
Net interest income on a tax-equivalent basis for the fourth quarter of 1995 was
$38.3 million, a decrease of $1.1 million, or 2.9%, year-to-year, reflecting the
same impact of repricing deposits as experienced throughout 1995. The net
interest margin was 3.70% during the fourth quarter of 1995, down 22 basis
points from fourth quarter of 1994. Interest lost on nonaccrual loans had the
effect of negatively impacting the net interest margin by approximately two
basis points during the fourth quarter of 1995, compared with seven basis points
for the same period in the prior year. The net interest spread was 2.90% for the
quarter ended December 31, 1995, down 41 basis points from that for the same
period in the prior year.
The reserve for loan losses totaled $56.5 million, an increase of $1.2
million during the fourth quarter of 1995. This increase was the result of net
recoveries recorded of $1.4 million, level with net recoveries recorded for the
fourth quarter of 1994.
Noninterest income for the fourth quarter of 1995 was $19.3 million, an
increase of $1.9 million, or 11.1%, when compared with the like period in 1994.
Trust income of $8.4 million increased $1.4 million between the quarters,
stemming primarily from increased revenue from the Corporation's personal trust
operations. Service charges of $8.1 million for 1995's fourth quarter were down
$641 thousand, primarily due to decreases in transaction-based deposit accounts
between the periods. Securities gains/losses increased $1.5 million, the result
of losses realized in 1994 from the Corporation's purchase of $10 million (par
value) of Orange County, California, variable-rate, one-year bonds (see Note 2,
"Securities").
Noninterest expense for the fourth quarter of 1995 totaled $43.8
million, compared with $48.1 million a year earlier, a decrease of $4.3 million,
or 8.9%. Salaries and related benefits of $18.4 million were down $1.2 million
as a result of reduced staff levels. Net occupancy expense was down $526
thousand, to $5.1 million, in the fourth quarter of 1995 because of the
previously mentioned occupancy efficiency programs. FDIC insurance premiums
decreased $2.1 million, totaling $291 thousand for the fourth quarter of 1995,
the result of reduced deposit insurance premiums. Furniture and equipment
expense decreased $73 thousand. Other real estate owned income, net of expense,
was $352 thousand, an increase in revenues of $103 thousand when compared with
1994's fourth-quarter net other real estate owned income, the result of reduced
expense activity within this portfolio. Other noninterest expense totaled $11.6
million for the fourth quarter of 1995, a slight increase of $253 thousand.
-23-
FOURTH QUARTER NET INTEREST INCOME CHANGES/1/
THREE MONTHS ENDED
DECEMBER 31, DUE TO
================= =================
(IN THOUSANDS) 1995 1994 CHANGE RATE VOLUME
===========================================================================================================
Interest Income:
Loans (Including Fees) $51,729 $50,605 $ 1,124 $ 1,383 $ (259)
Securities Available for Sale 10,463 9,302 1,161 (307) 1,468
Securities Held-to-Maturity 5,151 6,225 (1,074) 882 (1,956)
Time Deposits with Other Banks 2,681 2,724 (43) 123 (166)
Federal Funds Sold and Reverse Repurchase Agreements 4,926 2,230 2,696 214 2,482
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Total Interest Income 74,950 71,086 3,864 2,295 1,569
Interest Expense:
Savings and NOW Accounts 4,820 5,048 (228) 60 (288)
Money Market Deposit Accounts 8,246 7,392 854 1,402 (548)
Time Deposits in Domestic Offices 11,337 7,703 3,634 1,836 1,798
Time Deposits in Foreign Offices 4,741 3,019 1,722 935 787
Federal Funds Purchased and Repurchase Agreements 2,171 3,401 (1,230) 220 (1,450)
U.S. Treasury Demand Notes and Other
Short-Term Borrowings 560 354 206 25 181
Long-Term Debt 4,777 4,742 35 35 --
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Total Interest Expense 36,652 31,659 4,993 4,513 480
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Net Interest Income $38,298 $39,427 $ (1,129)$ (2,218) $ 1,089
[FN]
/1/ The dollar amount of changes in interest income and interest ex