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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, 1997
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
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(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
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(Address of principal executive offices) (Zip Code)
(301) 887-6000
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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
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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 27, 1998, was $534,354,851.
The number of shares outstanding of the registrant's common stock, as of
March 18, 1998, was 30,580,288.
DOCUMENT INCORPORATED BY REFERENCE
Portions of Riggs National Corporation's definitive Proxy Statement dated
Merch 18, 1998 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 6
Item 4--Submission of Matters to a Vote of Security Holders 6
PART II
Item 5--Market for Registrant's Common Equity
and Related Stockholder Matters 7
Item 6--Selected Financial Data 7
Item 7--Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 8--Financial Statements and Supplementary Data 29
Item 9--Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 67
PART III
Item 10--Directors and Executive Officers of the Registrant (A), 67
Item 11--Executive Compensation 69
Item 12--Security Ownership of Certain Beneficial Owners
and Management 69
Item 13--Certain Relationships and Related Transactions 69
PART IV
Item 14--Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 69
(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 PART III OF THIS ANNUAL REPORT.
2
PART I
ITEM 1.
BUSINESS
RIGGS NATIONAL CORPORATION
Riggs National Corporation ("the Corporation") is a 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 through its bank and non-bank subsidiaries. The
Corporation currently has banking operations or separate subsidiaries in the
Washington, D.C. metropolitan area; New Haven, Connecticut; Miami, Florida;
London, England; Paris, France; and Nassau, Bahamas. Additionally, the
Corporation provides investment advisory services domestically through
subsidiaries registered under the Investment Advisers Act of 1940. Subsidiaries
located in the Bahamas and France provide trust and corporate services, as well
as traditional banking services. At December 31, 1997, the Corporation and its
subsidiaries had 1,580 full-time equivalent employees.
Key elements of the Corporation's business strategy for its subsidiaries are
to continue to focus on: growth opportunities through the additional
accumulation of assets under management in its financial services
division--Riggs & Co., the orientation of its retail banking branches toward
money management relationships, the development and specialization in
relationship banking of banking products and services in specific growth
industries and the continued preeminence in the embassy banking operations
coupled with growth in selected international business lines. Such growth will
entail internally developed programs as well as possible alliances or
acquisitions in these areas. The Corporation will continue to serve the varied
financial needs of the Washington, D.C. metropolitan area and to meet its
commitments under the Community Reinvestment Act.
RIGGS BANK NATIONAL ASSOCIATION
The Corporation's principal subsidiary is Riggs Bank National Association (the
"Riggs Bank N.A.", formerly The Riggs National Bank of Washington, D.C., and
successor to The Riggs National Bank of Virginia and The Riggs National Bank of
Maryland, which entities merged on March 28, 1996), a national banking
association founded in 1836 and incorporated under the national banking laws of
the United States in 1896. Riggs Bank N.A. had assets of $5.8 billion, deposits
of $4.3 billion, and stockholder's equity of $484.9 million at December 31,
1997.
Riggs Bank N.A. operates 32 branches and an investment advisory subsidiary in
Washington, D.C., 16 branches in Virginia, seven branches in Maryland, a second
investment advisory subsidiary in New Haven, Connecticut, a commercial bank 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.
As a commercial bank, Riggs Bank N.A. provides a wide array of financial
services to customers in the Washington, D.C., metropolitan area, throughout the
United States and internationally.
Riggs Bank N.A.'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 Bank N.A.'s financial services division, Riggs & Co. provides fiduciary
and administrative services, including financial management and tax planning for
individuals, investment and accounting services for governmental, corporate and
non-profit organizations, estate planning and trust administration.
Riggs Bank N.A. provides investment advisory services through Riggs Investment
Management Corporation ("RIMCO") and J. Bush & Co. Incorporated, both of which
are wholly-owned subsidiaries incorporated under the laws of Delaware and
registered under the Investment Advisers Act of 1940.
Riggs Bank N.A.'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 Bank N.A.'s automated teller
machines ("ATMs") as well as national and regional ATM networks.
Riggs Bank N.A.'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.
Additional international operations of Riggs Bank N.A. include:
- - Riggs Bank Europe Limited, located in London, England, providing traditional
corporate banking services, commercial property financing and trade finance;
- - The Riggs Bank and Trust Company (Bahamas) Limited, in Nassau, providing trust
services for international private banking customers;
- - A London branch located in the U.S. Embassy, serving the Embassy, its
employees and official visitors;
3
- - The Riggs National Bank (Europe) S.A., located in the U.S. Embassy in Paris,
serving the Embassy, its employees, official visitors, and assisting the U.S.
Government with disbursement activities for the Department of Defense and the
Department of State.
RIGGS CAPITAL
Riggs Capital, a wholly-owned subsidiary of the Corporation, issued 150,000
shares of 8.625% Trust Preferred Securities, Series A, with a liquidation
preference of $1,000 per share, in December 1996. The Trust Preferred
Securities, Series A qualify as Tier I Capital with certain limitations, see
"Notes to Consolidated Financial Statements-Note 1 and Note 11" on pages 34 and
49, respectively, of this Form 10-K.
Riggs Capital II, a wholly-owned subsidiary of the Corporation, issued
200,000 shares of 8.875% Trust Preferred Securities, Series C, with a
liquidation preference of $1,000 per share, in March 1997. The Trust Preferred
Securities, Series C qualify as Tier I Capital with certain limitations, see
"Notes to Consolidated Financial Statements-Note 1 and Note 11" on pages 34 and
49, respectively, of this Form 10-K.
SUPERVISION AND REGULATION
The Corporation and Riggs Bank N.A. 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
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COMBINED TANGIBLE
TIER I TIER I AND II LEVERAGE EQUITY
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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.
Riggs Bank N.A. exceeds current minimum regulatory capital requirements,
and qualifies 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 Bank N.A., on a historical basis, is
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,
4
1997, the Interstate Act authorized a bank to merge with a bank in another state
as long as neither of the states had opted out of interstate branching between
the date of enactment of the Interstate Act and May 31, 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.
Effective June 1995, coinciding with the mandatory 1.25% funding of the Bank
Insurance Fund ("BIF") reserve, insurance rates were 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.
On September 30, 1996, Congress passed and the President signed an omnibus
funding bill which included legislation for the recapitalization of the Savings
Association Insurance Fund ("SAIF"), which is administered by the FDIC. This
legislation includes a provision requiring the merger of the BIF, which is also
administered by the FDIC, and SAIF in 1999, assuming that bank charters and
thrift charters are combined by that time. The legislation provided for a new
Financing Corporation ("FICO") sharing formula between BIF and SAIF insured
institutions, which imposes a surcharge of 1.3 cents per one-hundred dollars of
BIF-insured deposits. The Corporation is subject to the FICO surcharge and is
required to pay one-fifth of the rate that SAIF institutions pay for three
years, ending in 1999.
There are legal restrictions on the extent to which the Corporation and its
non-bank subsidiaries may borrow or otherwise obtain credit from Riggs Bank N.A.
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.
The Corporation's subsidiaries face substantial competition in their
operations from banking and nonbanking institutions, including savings and loan
associations, credit unions, money market funds and other investment vehicles,
mutual fund advisory companies, brokerage firms, insurance companies, mortgage
banking companies, finance companies and other types of financial services
providers.
ITEM 2.
PROPERTIES
The Corporation owns properties located in Washington, D.C. which house its
executive offices, 15 of its branches, and certain operational units of Riggs
Bank N.A. The Corporation also owns an office building in Maryland, where
additional operational units of Riggs Bank N.A. are located. Further, the
Corporation owns an office building in London, England, and leases various
properties in Washington, D.C.; London, England; Miami, Florida; Northern
Virginia; Maryland; and Paris, France.
5
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.
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 1997.
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.
6
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER 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 65 of this Form 10-K.
As of February 27, 1998, there were 3,178 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 49,
respectively, of this Form 10-K.
ITEM 6.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 1994 1993
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Interest Income $ 330,792 $ 293,198 $ 298,799 $ 266,005 $ 256,951
Interest Expense 151,501 139,891 147,821 112,723 122,130
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 179,291 153,307 150,978 153,282 134,821
Less: Provision for Loan Losses (12,000) -- (55,000) 6,300 69,290
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Net Interest Income after
Provision for Loan Losses 191,291 153,307 205,978 146,982 65,531
Noninterest Income Excluding
Securities Gains, Net 84,424 89,007 73,493 85,298 88,509
Securities Gains, Net 3,500 7,170 511 226 24,141
Noninterest Expense 186,030 176,947 191,834 199,020 266,752
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Income (Loss) before Taxes
and Minority Interest 93,185 72,537 88,148 33,486 (88,571)
Applicable Income Tax Expense (Benefit) 24,690 6,174 346 (533) 5,640
Minority Interest in Income
of Subsidiaries, Net of Taxes 17,616 420 -- -- --
===================================================================================================================================
NET INCOME (LOSS) $ 50,879 $ 65,943 $ 87,802 $ 34,019 $ (94,211)
Less: Dividends on Preferred Stock 10,750 10,750 10,750 12,124 1,434
===================================================================================================================================
Net Income (Loss) Available
for Common Stock $ 40,129 $ 55,193 $ 77,052 $ 21,895 $ (95,645)
EARNINGS (LOSS) PER COMMON SHARE
Basic $ 1.32 $ 1.82 $ 2.55 $ .72 $ (3.65)
Diluted 1.27 1.79 2.54 .72 (3.65)
DIVIDENDS DECLARED AND
PAID PER COMMON SHARE .20 .15 -- -- --
YEAR-END BALANCES
Assets $5,846,426 $5,135,100 $4,732,533 $4,425,665 $4,780,237
Earning Assets 5,347,736 4,621,463 4,196,339 3,979,588 4,302,278
Loans 2,884,373 2,637,834 2,571,959 2,549,924 2,528,133
Deposits 4,297,918 4,050,683 3,885,179 3,602,794 3,773,824
Long-Term Debt 191,525 191,525 217,625 217,625 213,325
Stockholders' Equity 463,182 425,776 376,669 267,663 293,197
7
ITEM 7.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
In 1997, the Corporation achieved consolidated net earnings of $50.9 million. By
comparison, the Corporation had net earnings of $65.9 million in 1996 and $87.8
million in 1995. Earnings per diluted share for 1997, 1996 and 1995, were $1.27,
$1.79 and $2.54, respectively. Net income for 1997 and 1995 benefited from $12.0
million and $55.0 million reductions, respectively, in the reserve for loan
losses, as continued improvement in credit quality resulted in the recording of
these reserve adjustments. Key measurements of profitability include 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 0.97% for 1997, compared with ratios of 1.40% and 1.92% for 1996 and
1995, respectively. Net income to average stockholders' equity was 11.69% in
1997, compared with 16.48% for 1996 and 28.25% for 1995. The net interest
margin for 1997, 1996 and 1995 was 3.81%, 3.72% and 3.74%, respectively.
Net interest income (before the provision for loan losses) was a significant
component of earnings in 1997, totaling $179.3 million, an increase of $26.0
million from 1996's total. The net interest margin increased nine basis points
between the years. This is attributable to an increase of $578.3 million in
average earning assets, partially offset by an increase in average
interest-bearing liabilities of $188.4 million, resulting in an increase of
$389.9 million in net earning assets. The improvement in net earning assets
resulted from increases in earning assets funded by the issuance of trust
preferred securities in 1997, in addition to reductions in nonperforming assets
and increases in stockholders' equity during the year.
Noninterest income for 1997, excluding securities gains, totaled $84.4
million, compared with 1996's total of $89.0 million. The decrease from 1996,
totaling $4.6 million (5.2%), was partially due to $5.1 million in interest on
tax settlements in the 1996 year, and $3.2 million from the sale of a portion of
Riggs's corporate trust business in the fourth quarter of 1996. Noninterest
expense for 1997 rose to $186.0 million, a 5.1% increase totaling $9.1 million
from 1996's total of $176.9 million. The increase in expenses during 1997 was
primarily the result of a $6.0 million increase in salaries and wages, which was
partially offset by a $2.8 million reduction in pension and benefit expenses. In
1997 the Corporation recognized a $2.4 million write-off of prepaid expenses
relating to certain data processing services. Additionally, increases in
technology related enhancements and support services totaling $4.7 million, were
partially offset by decreases in occupancy expense of $1.8 million and legal
fees of $1.5 million. A $3.9 million increase in other noninterest expenses, the
result of consulting and other expenses, was partially offset by a $1.8 million
reduction in other real estate owned expense during the year.
Nonperforming assets, including other real estate owned, decreased $29.1
million, or 76.5%, during the year to $9.0 million at December 31, 1997. At
year-end 1997, the Corporation's reserve for loan losses totaled $52.4 million,
a decrease of $12.1 million from year-end 1996's balance, mainly due to a $12.0
million reduction as a result of increased credit quality in the loan portfolio.
The reserve to total loans ratio stood at 1.82% at December 31, 1997.
Nonperforming loans totaled $3.9 million at year-end 1997, with a reserve to
nonperforming loans (coverage) ratio of 1,345%.
On March 12, 1997, Riggs Capital II, a newly formed, wholly-owned subsidiary
of the Corporation, sold preferred equity capital through the private placement
of redeemable trust preferred securities. Riggs Capital II sold, at par, 200,000
shares of redeemable trust preferred securities, liquidation preference of
$1,000, for a total of $200.0 million, in a private placement. These securities
mature in 2027 and have an annual dividend rate of 8.875 percent, payable
semi-annually on June 30 and December 31 of each year. The net proceeds from
this sale, along with the $150 million of trust preferred securities issued by
Riggs Capital in December 1996, have enhanced certain capital ratios of the
Corporation and will be available for its general corporate purposes (see Note
11, "Common and Preferred Stock").
ACQUISITIONS
In October 1997, the Corporation acquired J. Bush & Co., a privately-held
investment advisor. At acquisition, J. Bush & Co. had approximately $250 million
in assets under management. J. Bush & Co. is a separate subsidiary of the
Corporation's principal banking subsidiary - Riggs Bank N.A. This acquisition
was accounted for as a purchase, the impact of which was not material to the
Corporation.
EARNING ASSETS
MONEY MARKET ASSETS
Short-term instruments such as time deposits with other banks, federal funds
sold and resale agreements represent the Corporation's most liquid investments.
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, 1997, total money market assets
decreased by $30.3 million
8
(3.7%) when compared with year-end 1996. This decrease was a result of fund
outflows deployed for the purchase of securities available for sale and the
funding of new loans. In 1997, the total average of time deposits with other
banks and federal funds sold and resale agreements increased from $549.4 million
in 1996 to $713.6 million in 1997.
SECURITIES
The securities portfolio consists of securities available for sale that are
accounted for in accordance with the Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (See Note 1, "Summary of Significant Accounting Policies" and Note
2, "Securities"). The securities portfolio increased $510.0 million (43.9%) from
a balance of $1.16 billion at year-end 1996 to a balance of $1.67 billion at
year-end 1997. The increase in securities from 1996 was mainly due to fund
inflows from the minority interest-trust preferred securities as well as
increases in the deposit and borrowing portfolios. In 1997, the Corporation had
purchases and maturities totaling $8.18 billion and $7.20 billion, respectively.
This large volume of purchases and maturities was due to the Corporation's
strategy of maintaining a portion of its investment portfolio in short-term
investments in conjunction with its interest-rate risk management. Proceeds
received from the sale of securities totaled $476.0 million in 1997. These sales
were the result of a repositioning of the securities portfolio which resulted in
securities gains of $3.5 million, as the Corporation replaced securities from
its U.S. Treasury portfolio with government agencies securities in the third
quarter of 1997. Securities available for sale are carried at fair value with
unrealized gains and losses, net of tax, included as a separate component of
stockholders' equity. Quoted market prices are used to determine the estimated
fair value. When securities are sold, the adjusted costs of the specific
securities sold are used to compute gains or losses on the sale. The
weighted-average maturity and yield for securities available for sale, adjusted
for anticipated prepayments, were approximately 1.6 years and 6.1%,
respectively, at December 31, 1997. 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, 1997, all U.S. Treasury securities, government
agencies securities, and $24.8 million of the other securities were non-taxable
for state and local tax purposes.
At December 31, 1997, the aggregate securities portfolio was comprised
entirely of securities available for sale (see Table A). Securities available
for sale were primarily 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 "Sensitivity to Market Risk"). At December 31,
1997, the Corporation had approximately $130 million in securities purchased,
but not settled, for which other liabilities were recorded.
LOANS
Loans, net of premiums, discounts and deferred fees, totaled $2.88 billion at
December 31, 1997, an increase of $246.5 million, or 9.3%, from the prior year
(see Tables B through D). 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, real
estate-commercial/construction, home equity and foreign loan portfolios. This
strategy coincided with the continued improvement in the local economy, along
with a strong economy in Europe.
The commercial loan portfolio totaled $529.9 million at year-end 1997, a net
increase of $86.3 million, or 19.5%, over the $443.6 million at year-end 1996,
the result of increased demand due to a strong economy in the Washington, D.C.
metropolitan area. There were no individual borrowers or industries representing
more than a 10% share of the total loan portfolio.
The real estate-commercial/construction loan portfolio totaled $410.0 million
at year-end 1997, a net increase of $58.0 million, or 16.5% over the $352.0
million at year-end 1996. This increase was also related to the improved loan
demand and the strong local economy.
Consumer loans were flat compared to 1996, while residential mortgage loans
declined $69.6 million as a result of paydowns and payoffs in excess of new loan
production.
The home equity portfolio increased $35.8 million, or 12.7% in 1997, to a
total of $317.7 million, the result of new products introduced in 1997.
Originations in 1997 totaled $127.8 million. This growth was mostly offset by
payoffs and paydowns during the year.
Foreign loans increased $137.8 million (54.7%) to $389.6 million at year-end
1997, from the balance at year-end 1996 of $251.8 million. Contributing to the
growth in foreign loans in 1997 was the continued strengthening of the general
economy in the United Kingdom, together with the expansion of the recently
established Embassy Banking division in London and a regional Trade Finance
office in Manchester, England.
CROSS-BORDER OUTSTANDINGS
The Corporation extends credit to borrowers domiciled outside of the United
States through several of its banking subsidiaries.
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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, that are denominated in U.S. dollars or other 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, 1997, the Corporation had no cross-border outstandings
exceeding 1% of its total assets to countries experiencing difficulties in
repaying their external debt. At December 31, 1997, 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 potential
problem loan status. Net cross-border outstandings to the United Kingdom totaled
$154.7 million, compared with $196.3 million at year-end 1996 (see Tables E and
F). Nonaccrual loans in the United Kingdom totaled $1.4 million at December 31,
1997, compared with $287 thousand at December 31, 1996. There were no past-due
or potential problem loans outstanding in the United Kingdom at December 31,
1997 and year-end 1996.
At December 31, 1997, 1996, and 1995, the Corporation did not have any
cross-border outstandings between 0.75% and 1% of its total assets.
ASSET QUALITY
NONPERFORMING ASSETS SUMMARY
Nonperforming assets, which include nonaccrual loans, renegotiated loans, and
other real estate owned (net of reserves), totaled $9.0 million at year-end
1997, a $29.1 million (76.5%) decrease from the year-end 1996 total of $38.1
million (see Tables G and H). This decrease in nonperforming assets during 1997
was attributable to sales and paydowns of $26.8 million, nonaccrual loans
returning to accrual status of $3.2 million, and net charge-offs/writedowns of
$1.8 million, the total of which was partially offset by net additions in 1997
of $2.7 million.
Impaired loans generally are defined as nonaccrual loans 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. Impaired loans are further discussed in Note 3, "Loans and Reserve
for Loan Losses."
NONACCRUAL AND RENEGOTIATED LOANS
At December 31, 1997, nonaccrual loans were $3.8 million, or 0.1% of total
loans, compared with $9.9 million, or 0.4% of total loans, at December 31, 1996.
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 generally are charged off when they become 120 days past due. Nonaccrual
loan activity during 1997 included sales and repayments of $4.4 million,
nonaccrual loans returning to accrual status of $3.2 million, charge-offs of
$395 thousand and transfers of nonaccrual loans to other real estate owned of
$451 thousand. These decreases were partially offset by net additions to
nonaccrual loans totaling $2.4 million.
Renegotiated loans totaled $101 thousand at December 31, 1997, compared with
$125 thousand at year-end 1996. Renegotiated loans generally consist of real
estate-commercial/ construction loans that are 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 decreased $24
thousand in 1997, the result of repayments during the year.
PAST-DUE AND POTENTIAL PROBLEM LOANS
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 increased $3.4 million in 1997
to $7.3 million. These increases were primarily residential, single-family
past-due loans.
At December 31, 1997, the Corporation had identified approximately $10.0
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 consisted
entirely of domestic loans, primarily commercial and financial at year-end 1997.
PROVISION AND RESERVE FOR LOAN LOSSES
The provision for loan losses represents a charge or 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
sources of repayment on individual loans and groups of similar
10
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 assessment of the adequacy of the reserve, risk
characteristics within the loan portfolio, current asset quality, lending
levels, economic developments and other factors, the reserve for loan losses was
reduced by $12.0 million in the fourth quarter of 1997. As a result, the
provision for loan losses amounted to a negative $12.0 million for 1997,
compared to no provision for the prior year. The reserve for loan losses was
$52.4 million, or 1.82% of total loans, at December 31, 1997, compared with
$64.5 million, or 2.44% of total loans, at December 31, 1996 (see Table I). Net
recoveries for 1997 totaled $472 thousand compared with $6.6 million for 1996.
Total net recoveries for 1997 were mostly attributed to $2.3 million in net
recoveries from domestic real estate-commercial/construction, partially offset
by net charge-offs to home equity and consumer loans of $401 thousand and $1.5
million, respectively. In 1996, net recoveries were mostly attributable to $5.3
million in net recoveries from foreign loans and $2.7 million from domestic real
estate-commercial/construction loans. The Corporation's coverage ratio (reserve
for loan losses divided by the sum of nonaccrual and renegotiated loans) was
1,345.2% at year-end 1997, compared with 644.8% at year-end 1996. The increase
in the coverage ratio was caused primarily by the aggregate 61% decrease in
nonaccrual and renegotiated loans in 1997.
The estimated allocation of the reserve for loan losses by loan category
represents management's assessment of existing conditions and risk factors
within these categories (see Table J).
OTHER REAL ESTATE OWNED, NET
Other real estate owned decreased 81.9% to $5.1 million at December 31, 1997,
from $28.1 million at December 31, 1996. The decrease resulted from sales and
repayments of $22.4 million and $1.4 million in writedowns, partially offset by
net additions of $823 thousand 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, 1997, residential and commercial land composed 80.3% of other
real estate owned, with the remainder of the portfolio consisting of office,
industrial, retail and other property types. Except for $83 thousand 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
1997 (see Table K).
DEPOSITS
Total deposits at December 31, 1997, were $4.30 billion, compared with $4.05
billion at year-end 1996, an increase of $247.2 million, or 6.1%. The increase
in balances was concentrated in two categories, demand and time deposits in
foreign offices. The rise in demand deposits of $90.3 million is the result of
increased seasonal fluctuations above the prior year. Foreign time deposits
increased $142.1 million, due in part to increases in the funding of the
Corporation's London operations through inter-bank sources.
As a result of a new program introduced in the third quarter of 1996, the
Corporation has increased average earning assets by approximately $48 million,
resulting in a benefit of approximately $2 million pretax to net interest income
in 1997. Under this program, deposit balances in certain NOW and noninterest
checking accounts are transferred to the money market classification, thereby
reducing the level of deposit reserves required by the Federal Reserve. Based on
certain limitations, funds are periodically transferred back to the checking
accounts to cover checks presented for payment or other forms of withdrawal.
Total accounts transferred equaled $350.6 million at December 31, 1997.
Average domestic deposits were $3.48 billion for 1997, up $45.9 million, or
1.3%, from an average of $3.43 billion for 1996. Average core deposits (total
deposits in domestic offices, excluding negotiable certificates of deposit) were
$3.46 billion, an increase of $41.9 million, or 1.2%, from 1996's average
balance of $3.42 billion. Average foreign deposits increased $121.2 million, to
$492.4 million, primarily the result of increased deposits in the United Kingdom
subsidiary (see Table L).
Since 1994, the Corporation has been conducting a detailed analysis of its
retail banking system, to determine the best use of its locations, branch
facilities, product lines and personnel. The Corporation has sold or
consolidated seven retail branches as part of this analysis. The Corporation is
actively seeking enhancements to existing branches to attract new customers and
to improve service quality and overall profitability of its branches.
Enhancements include improving the computer network system, upgrading the
telephone customer service line, and the redesigning of 20 retail branches to
provide better access to traditional banking services as well as trust and
11
investment advisory services. In April 1997, the Corporation introduced its home
banking and imaging services products and in December 1997 opened its Internet
home pages at http://www.riggsbank.com and http://www.riggsco.com.
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 used to meet certain
asset/liability and daily cash management objectives. Short-term borrowings
increased $97.3 million (38.1%) to $352.5 million at December 31, 1997, compared
with $255.2 million at year-end 1996. Average short-term borrowings for 1997
totaled $284.4 million, up from 1996's average of $241.0 million (see Table L).
The increase in the average balances during 1997 was due primarily to increases
in repurchase agreements, which are a funding vehicle for the Corporation.
Short-term borrowings are used to help the Corporation generate cash and
maintain adequate levels of liquidity (see Note 8, "Borrowings").
LONG-TERM DEBT
Long-term debt totaled $191.5 million at December 31, 1997 and 1996. 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
in 2006 bear a fixed rate of interest of 8.50% per annum. See Note 8,
"Borrowings."
MINORITY INTEREST IN PREFERRED STOCK OF
SUBSIDIARY
On March 12, 1997, Riggs Capital II issued 200,000 shares of 8.875% Trust
Preferred Securities, Series C, with a liquidation preference of $1,000 per
share. Riggs Capital II, a new trust entity formed in order to issue the
preferred securities, is a wholly-owned subsidiary of the Corporation. Dividends
are paid semi-annually on June 30 and December 31 of each year. The Trust
Preferred Securities, Series C, cannot be redeemed until March 15, 2007, and
have a final maturity of March 15, 2027. Riggs Capital II invested all of the
proceeds from its common and preferred stock sales of $200 million in Junior
Subordinated Deferrable Interest Debentures, Series C, issued by the Corporation
on March 12, 1997, at a rate of 8.875%, with comparable dividend payment dates
and maturity as the Trust Preferred Securities. Interest is cumulative and
deferrable on the Junior Subordinated Deferrable Interest Debentures for a
period not to exceed five years and is also cumulative and deferrable for the
same period for the Trust Preferred Securities. The Trust Preferred Securities
qualify as Tier I Capital with certain limitations (see Note 1, "Summary of
Significant Accounting Policies" and Note 11, "Common and Preferred Stock").
LIQUIDITY
SENSITIVITY TO MARKET RISK
The Corporation is exposed to various market risks. It has determined that
interest-rate risk has a material impact on the Corporation's financial
performance, and as such has established the Asset/Liability Committee ("ALCO")
to manage interest-rate risk. The role of this committee is to prudently manage
the asset/liability mix of the Corporation to provide a stable net interest
margin while maintaining liquidity and capital. This entails the management of
the overall risk of the Corporation in conjunction with the acquisition and
deployment of funds based upon the Committee's view of both current and
prospective market and economic conditions.
The Corporation manages its interest-rate risk through the use of an income
simulation model, which forecasts the impact on net interest income of a variety
of different interest rate scenarios. A "most likely" interest rate scenario is
forecasted based upon an analysis of current market conditions and expectations.
The model then evaluates the impact on net interest income of rates moving
significantly higher or lower than the "most likely" scenario. The results are
compared to risk tolerance limits set by corporate policy. The model's results
as of December 31, 1997 are shown in Table M. Current policy establishes limits
for possible changes in net interest income for 12 and 36 month horizons. The
interest rate scenarios monitored by ALCO are based upon a 100 basis point (1%)
gradual increase or decrease in rates (versus the "most likely" scenario) over a
12-month time period and a 300 basis point (3%) gradual increase or decrease in
rates (versus the "most likely" scenario) over a 36-month time period.
At year-end 1997, the forecasted impact of rates rising or falling 100 basis
points versus the "most likely" scenario over a 12-month time period was a
change in net interest income not exceeding 1.0%. For a 300 basis point movement
in rates versus the "most likely" scenario over a 36-month period, the impact on
net interest income did not exceed 6.3%. The results of the simulation for
year-end 1997 indicated that the Corporation maintained an asset sensitive
position, and was well insulated against interest rates moving significantly in
either direction.
In managing the Corporation's interest-rate risk, ALCO uses financial
derivative instruments, such as interest-rate swaps, caps, floors, collars,
futures, and options. Financial derivatives are employed to assist in the
management and/or reduction of the interest-rate risk of the Corporation, and
can effectively alter the sensitivity of segments of the statement of condition
for specified periods of time. All of these instruments are considered
off-balance-sheet, as they do not materially affect the level of assets or
liabilities of the Corporation. Interest-rate risk management strategies are
discussed and approved by ALCO prior to implementation.
12
Management finds that the methodologies discussed above provide a meaningful
representation of the Corporation's interest-rate and market risk sensitivity,
though factors other than changes in the interest rate environment, such as
levels of non-earning assets, and changes in the composition of earning assets,
may affect net interest income. Management believes its current interest-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.
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, and
is one of the highest capitalized banks in the country.
Total stockholders' equity at December 31, 1997 was $463.2 million, or 7.9% of
total assets, up $37.4 million from year-end 1996. The increase was the result
of earnings for the year totaling $50.9 million, partially offset by dividends
on preferred stock of $10.8 million and common stock of $6.1 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 stockholders' equity along
with qualifying trust preferred securities, less goodwill and other adjustments.
Tier II Capital consists of mandatory convertible, subordinated and other
qualifying term debt, preferred stock and trust preferred securities 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 weightings is
assigned to the different on-balance sheet assets. Off-balance-sheet items, such
as loan commitments and derivatives, are also assigned a risk weighting 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 31.52% and 18.45%, respectively, at December 31, 1997,
compared with 28.47% and 20.04%, respectively, at December 31, 1996. The
Corporation's total and core capital ratios have been enhanced by the inclusion
of the proceeds from the trust preferred securities (see Note 11 "Common and
Preferred Stock").
The Federal Reserve Board has established an additional capital adequacy
guideline, the leverage ratio, in keeping with the Prompt Corrective Action
regulations promulgated under the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") which measures the ratio of Tier I Capital to
quarterly average assets. The minimum leverage ratio guideline is 3.00% 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 11.15% at
December 31, 1997, compared with a leverage ratio of 11.84% at the prior
year-end.
The Corporation's policy is to ensure that its bank subsidiary is capitalized
in accordance with regulatory guidelines. The Corporation's national bank
subsidiary is subject to minimum capital ratios as prescribed by the Office of
the Comptroller of the Currency (the "OCC"), which are the same as those
prescribed by the Federal Reserve Board for bank holding companies. Table N
details the actual and required minimum ratios for the Corporation and its
insured bank subsidiary.
RESULTS OF OPERATIONS
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, although interest-bearing liabilities consist of 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 $183.1 million
for 1997, an increase of $26.1 million, or 16.6%, from $157.0 million in 1996.
The Corporation experienced an increase during 1997 in average interest-earning
assets totaling $578.3 million, while the average rate earned decreased six
basis points between the years. Average loans, securities and money market
assets increased $103.5 million, $310.6 million and $164.2 million,
respectively, in 1997. The Corporation also had a $188.4 million increase in
average interest-bearing liabilities that was due mostly to the increase in
average interest-bearing deposits. The average rate paid increased 11 basis
points between the years; thus, the Corporation had a favorable net increase in
average interest-earning assets over interest-bearing liabilities of $389.9
million. The increase in average interest-earning assets for the year 1997 was
favorably impacted by the proceeds from the sale of the trust preferred
securities. On a comparative basis, this amounted to $303.9 million, on average,
year over year (see Tables O and P).
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The net interest margin (net interest income on a tax-equivalent basis divided
by average earning assets) was 3.81% for 1997, an increase of nine basis points
from the 3.72% net interest margin for 1996 due to 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 1997 was 2.80%, down 17 basis
points from 1996's spread.
NONINTEREST INCOME
Noninterest income for 1997 was $87.9 million, down $8.3 million, or 8.6%, from
1996's total of $96.2 million. Excluding securities gains of $3.5 million and
$7.2 million for 1997 and 1996, respectively, noninterest income decreased $4.6
million (5.2%). Trust income of $37.3 million increased $4.0 million, or 12.1%,
in 1997 due to the increase in market value of trust and custodial assets from
$9.73 billion at year-end 1996 to $10.61 billion at year-end 1997. Service
charges and fees for 1997 increased $884 thousand (2.5%) to $36.9million, due
primarily to increases in ATM and debit card fee income totaling $1.1 million in
1997. In the second quarter of 1996, the Corporation recorded $5.1 million in
interest from tax receivables relating to tax returns from the 1970s and 1980s.
Also in the fourth quarter of 1996, the Corporation recorded a $3.2 million
pre-tax gain from the sale of a portion of its corporate trust business (see
Table Q).
NONINTEREST EXPENSE
Noninterest expense for the year ended December 31, 1997 was $186.0 million, an
increase of $9.1 million (5.1%) from $176.9 million for 1996. The increase in
noninterest expense was partly attributable to the increase in other noninterest
expense of $3.6 million, the result of increases in consulting and other
expenses related to the development and implementation of several retail banking
strategies (see "Deposits") along with the write-off of prepaid expenses
relating to certain data processing services. Additionally, increases in
salaries and wages of $6.0 million occurred, due in part to staff additions
during the year. These increases were partially offset by lower benefits costs
($2.8 million) attributable to reductions in medical and life insurance funding,
and a net position for other real estate owned costs resulting in income of $1.4
million versus expense of $431 thousand in the prior year (see Table R).
YEAR 2000
The arrival of the next millennium presents challenges for all companies.
Financial institutions are dependent on information systems and have many
internal and external interdependencies with other financial institutions and
companies. These interdependencies will affect the amount of work needed to be
performed to achieve Year 2000 compliance.
The Corporation began to identify the risks associated with the Year 2000 in
1995. Since then, with the concurrence and involvement of the board of
directors, management has established a corporate oversight structure to ensure
that risk assessments, remediation plans, systems testing and conversions are
accomplished in a timely manner. Additionally, management evaluated the issues
associated with the Year 2000 and determined that an enterprise-wide business
risk assessment approach is most appropriate for addressing and remediating Year
2000 problems.
The enterprise-wide business risk assessment approach includes: identifying
significant business segments within the organization; identifying significant
participants within those segments such as customers, vendors, suppliers, and
systems; and assessing the Year 2000 preparedness of each. Further, for the
systems, both those supported in-house and those provided by vendors, it
involves identifying where the Year 2000 has an impact, remediating those areas
and performing integrated testing of program changes.
The Corporation's progress towards completing the enterprise-wide business
risk assessment is on target. Management plans to complete remediation of all
critical systems by December 31, 1998, in accordance with federal regulatory
agency guidelines. Testing of systems changes will be performed throughout 1999.
Management has assessed the cost of remediating the Corporation's systems and
does not expect these costs to have a material impact on the Corporation's
business, operations, or financial condition.
INCOME TAXES
The Corporation's provision for income taxes includes both federal and state
income taxes. The Corporation's 1997 provision for income tax expense of $24.7
million increased from a provision of $6.2 million in 1996. This represents an
effective tax rate of 26.5% for 1997, compared with an effective tax rate of
8.5% for 1996. The increase in the provision for income taxes in 1997 compared
to 1996 is the result of the depletion of federal income loss carryforwards in
the second quarter of 1996 combined with the recognition of a $2.4 million tax
refund received in 1996 as a result of amended local tax returns from the 1980s.
The Corporation accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which requires primarily the use of the asset and liability
method for computing taxes. Under this method, deferred tax assets and
liabilities are recorded for 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
14
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, 1997, the Corporation had net deferred tax assets totaling $22.5
million, which included a valuation allowance of $6.9 million. Further tax
discussion and a reconciliation of the effective tax rate to the 1997 federal
statutory rate of 35% can be found in Note 13, "Income Taxes."
FOURTH QUARTER 1997 VS.
FOURTH QUARTER 1996
For the fourth quarter of 1997, the Corporation reported net income of $17.0
million, or $0.45 per diluted share, compared with $11.2 million, or $0.27 per
diluted share, for the fourth quarter of 1996 (see Table S). Results for the
fourth quarter of 1997 included a credit of $12.0 million in the provision for
loan losses versus no provision in the fourth quarter of 1996.
Nonperforming assets totaled $9.0 million at December 31, 1997, a decrease of
$8.7 million from the third quarter of 1997, and a decrease of $29.1 million
from $38.1 million at December 31, 1996.
Net interest income on a tax-equivalent basis for the fourth quarter of 1997
was $48.1million, an increase of $7.8 million, or 19.3%, year-to-year,
reflecting the same impact of net increases in average earning assets in 1997
(see Table T). The net interest margin was 3.81% during the fourth quarter of
1997, up seven basis points from the fourth quarter of 1996. The net interest
spread was 2.74% for the quarter ended December 31, 1997, down 19 basis points
from that for the same period in the prior year.
The reserve for loan losses totaled $52.4 million, a decrease of $11.3 million
during the fourth quarter of 1997. This decrease was the result of the
aforementioned $12.0 million reduction along with net recoveries of $443
thousand, compared with no provision and net recoveries of $2.5 million for the
fourth quarter of 1996.
Noninterest income for the fourth quarter of 1997 was $23.0million, a decrease
of $734 thousand, or 3.1%, when compared with the same period in 1996. This
decrease was attributable to the $3.2 million gain from the corporate trust
business sale in the fourth quarter of 1996, mostly offset by an increase in
trust income of $1.3 million and service charges and fees of $381 thousand.
Noninterest expense for the fourth quarter of 1997 totaled $51.6 million,
compared with $46.0 million a year earlier, an increase of $5.6 million, or
12.2%. This increase was primarily the result of an increase in net personnel
expenses of $1.8 million, occupancy of $866 thousand, advertising and public
relations of $931 thousand, and a $2.4 million write-off of prepaid expenses
relating to certain data processing services. These increases were offset
partially by a net other real estate owned income of $577 thousand in the fourth
quarter of 1997, versus net other real estate owned expense of $266 thousand for
the same period in 1996.
1996 VS. 1995
In 1996, the Corporation recorded total net income of $65.9 million. By
comparison, the Corporation achieved record earnings of $87.8 million in 1995.
Earnings per diluted share for 1996 and 1995 were $1.79 and $2.54, respectively.
Net income for 1995 benefited from a $55.0 million reduction in the reserve for
loan losses in the third quarter, as continued improvement in credit quality
resulted in the recording of this reserve adjustment. Net income to average
total assets was 1.40% for 1996 and 1.92% for 1995. Net income to average
stockholders' equity was 16.48% for 1996 and 28.25% for 1995. The net interest
margin for 1996 was 3.72%, down from 3.74% in 1995.
At December 31, 1996, total money market assets increased by $166.8 million
(25.5%) compared with year-end 1995, the result of fund inflows from deposit
accounts and minority interest-trust preferred securities. The total average of
time deposits with other banks and federal funds sold and resale agreements
increased from $462.5 million in 1995 to $549.4 million in 1996.
The aggregate securities portfolio increased $192.5 million (19.8%) from a
balance of $970 million at year-end 1995 to $1.16 billion at year-end 1996. The
increase in securities from 1995 was due mainly to funds from increases in the
deposit and borrowing portfolios, as well as inflows from the minority
interest-trust preferred securities. The weighted-average maturity and yield for
securities available for sale adjusted for anticipated prepayments were
approximately 3 years and 6.10%, respectively, at December 31, 1996. At December
31, 1996, the aggregate securities portfolio was comprised entirely of
securities available for sale, which totaled $1.16 billion. Securities available
for sale were primarily U.S. Treasury and government agencies securities.
Loans, net of premiums, discounts and deferred fees totaled $2.64 billion at
December 31, 1996, an increase of $65.9 million, or 2.6%, from the prior year.
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 businesses. The
commercial loan portfolio totaled $443.6 million at year-end 1996, a net
increase of $43.3 million from the prior year balance. New
15
residential mortgage loans in 1996 totaled $70.3 million, which was offset by
paydowns and payoffs during the year resulting in a decrease of less than 5% in
the portfolio. The home equity portfolio increased $30.1 million, or 12.0%, in
1996, the result of several new products introduced in 1994 and 1995. Activity
within the foreign and real estate-commercial/construction portfolios had a
movement upward in 1996, although the consumer portfolio remained flat. The
Corporation experienced selective limited new lending in these portfolios.
Nonperforming assets totaled $38.1 million at year-end 1996, a $7.8 million
(17.0%) decrease from the year-end 1995 total of $45.9 million. This decrease in
nonperforming assets during 1996 was attributable to sales and paydowns of $15.3
million, nonaccrual loans returning to accrual status of $0.5 million, and net
charge-offs/writedowns of $2.9 million. These reductions were partially offset
by exchange rate fluctuations of $0.2 million, combined with net additions in
1996 of $10.5 million. At December 31, 1996, nonaccrual loans were $9.9 million,
or 0.4% of total loans, compared with $9.3 million, or 0.4% of total loans, at
December 31, 1995. Nonaccrual loan activity during 1996 included sales and
repayments of $6.0 million, nonaccrual loans returning to accrual status of $0.5
million, charge-offs of $1.5 million and transfers of non-accrual loans to other
real estate owned of $1.3 million. These decreases were more than offset by net
additions to nonaccrual loans and an increase in foreign exchange translation
adjustments, totaling $9.7 million and $0.2 million, respectively.
Renegotiated loans totaled $0.1 million at December 31, 1996, compared with
$3.4 million at year-end 1995. Renegotiated loans decreased $3.3 million in
1996, the result of sales and repayments totaling $2.8 million and charge-offs
totaling $0.5 million during the year. Other real estate owned decreased 15.3%
to $28.1 million at December 31, 1996, from $33.2 million at December 31, 1995.
The decrease resulted from sales and repayments of $6.4 million and $0.9 million
in writedowns, partially offset by net additions of $2.2 million during the
period. Past-due loans consisted predominately of residential real estate and
consumer loans that were well-secured and in the process of collection and on
which the Corporation was accruing interest. Past-due loans totaled $3.8 million
at year-end 1996, a decrease of $1.6 million compared to year-end 1995. At
December 31, 1996, the Corporation had identified approximately $1.6 million in
potential problem loans. These loans consisted primarily of $1.2 million in
residential mortgage loans. The Corporation had no other potential problem
assets at December 31, 1996.
In the third quarter of 1995, the reserve for loan losses was reduced by $55.0
million, 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. As a result, the provision for
loan losses amounted to a negative $55.0 million for 1995, compared to no
provision in 1996. 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 $64.5 million, or 2.4%, of total loans, at December 31, 1996,
compared with $56.5 million, or 2.2%, of total loans at December 31, 1995. Net
recoveries for 1996 totaled $6.6 million compared with $14.5 million for 1995.
The Corporation's coverage ratio (reserves for loan losses divided by the sum of
nonaccrual and renegotiated loans) was 644.8% at year-end 1996, compared with
444.0% at year-end 1995. The increase in the coverage ratio was impacted by the
21.5% decrease in nonaccrual and renegotiated loans and the net recoveries
recorded in 1996.
Total deposits at December 31, 1996, were $4.05 billion, compared with $3.89
billion at year-end 1995, an increase of $165.5 million, or 4.3%. Average
domestic deposits were $3.43 billion for 1996, up $29.3 million, or 0.9%, from
an average of $3.41 billion for 1995. Average core deposits (total deposits in
domestic offices, excluding negotiable certificates of deposit) were $3.42
billion, an increase of $26.9 million, or 0.8% from 1995's average balance of
$3.40 billion. Average foreign deposits increased $31.5 million, to $371.2
million, primarily the result of increased deposits in the United Kingdom
subsidiary.
Short-term borrowings increased $53.8 million (26.7%) to $255.2 million at
December 31, 1996, compared with $201.5 million at year-end 1995. Average
short-term borrowings for 1996 totaled $241.0 million, down from 1995's average
of $248.6 million. The decrease in the average balance during 1996 was due
primarily to decreases in treasury, tax and loan balances, which were a
temporary source of funds for the Corporation. Long-term debt totaled $191.5
million at December 31, 1996, a decrease from $217.6 at year-end 1995.
Total stockholders' equity at December 31, 1996 was $425.8 million, or 8.3% of
total assets, up $49.1 million from year-end 1995. The increase from year-end
1995 was the result of earnings totaling $65.9 million, partially offset by
dividends on preferred stock of $10.8 million and common stock of $4.5 million.
Net interest income on a tax-equivalent basis totaled $157.0 million for 1996,
an increase of $2.7 million, or 1.8%, from $154.3 million in 1995. The
Corporation experienced a sizable increase during 1996 in average
interest-earning assets, totaling $100.2 million, whereas the average rate
earned decreased 30 basis points between the years. Average loans remained level
during the period as the majority of the increase in average balances occurred
in the money market asset portfolio, which increased over $86.9 million in 1996.
The Corporation also had
16
a $50.3 million increase in average interest-bearing liabilities that was due
mostly to the increase in average interest bearing deposits, whereas the average
rate paid decreased 30 basis points between the periods. Thus, the Corporation
had a favorable net increase in average interest-earning assets over
interest-bearing liabilities of $49.9 million. The net interest margin was 3.72%
for 1996, a decrease of 2 basis points from the 3.74% net interest margin for
1995 because of the changes in earning assets and interest-bearing liabilities.
Net interest spread for 1996 was 2.97%, unchanged from 1995's spread. Interest
lost on nonaccrual and renegotiated loans totaled $1.0 million for 1996, which
had the effect of reducing the net interest margin by approximately 2 basis
points for the year. In 1995 interest lost totaled $2.0 million and had the
effect of reducing the net interest margin in that year by approximately five
basis points.
Noninterest income for 1996 was $96.2 million, up $22.2 million, or 30.0%,
from 1995's total of $74.0 million. Excluding securities gains of $7.2 million
and $0.5 million for 1996 and 1995, respectively, noninterest income increased
$15.5 million, or 21.1%. In the second quarter of 1996, the Corporation recorded
$5.1 million in interest from tax receivables relating to tax returns from the
1970s and 1980s. Also, in the fourth quarter of 1996, the Corporation recorded a
$3.2 million pre-tax gain from the sale of a portion of its corporate trust
business. Trust income of $33.3 million increased $3.4 million, or 11.3%, in
1996 due to the increase in market value of trust and custodial assets from
$8.99 billion at year-end 1995 to $9.73 billion at year-end 1996. Service
charges for 1996 increased $1.2 million (3.5%) to $34.9 million, and
international fee income increased $0.3 million (44.3%) to $1.1 million. The
increase in service charges for 1996 was due primarily to increases in ATM and
debit card fee income totaling $1.5 million in 1996.
Noninterest expense for the year-ended December 31, 1996 was $176.9 million, a
decrease of $14.9 million from $191.8 million for 1995. The decrease in total
noninterest expense, excluding nonrecurring items, was actually larger, as a
result of $5.6 million of nonrecurring accruals in the third quarter of 1995.
Excluding these nonrecurring items, noninterest expense decreased $9.3 million,
or 5.0%. The decrease in noninterest expense was due primarily to decreases in
personnel related expenses of $4.4 million, and reductions in FDIC insurance of
$4.3 million. Other noninterest expense totaled $46.9 million, down $0.8
million, or 1.6%, from the $47.7 million for 1995.
The Corporation's provision for income taxes includes both federal and state
income taxes. The Corporation's 1996 provision for income tax expense of $6.2
million increased from an expense of $0.3 million in 1995. This represents an
effective tax rate of 8.5% for 1996, compared with an effective tax rate of 0.4%
for 1995. 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 reversal of the previously established valuation
allowance. Additionally, in the second quarter of 1996, the Corporation received
a $2.4 million tax refund, the result of amended local tax returns from the
1980s, which reduced 1996's provision for income tax expense.
------------------------------------------------------
THIS ANNUAL REPORT ON FORM 10-K, INCLUDING THE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS
FORWARD-LOOKING STATEMENTS, AS DEFINED IN SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, THAT INVOLVE RISK AND UNCERTAINTY. IN ORDER TO COMPLY WITH THE
TERMS OF THE SAFE HARBOR, THE CORPORATION NOTES THAT A VARIETY OF FACTORS COULD
CAUSE THE CORPORATION'S ACTUAL RESULTS AND EXPERIENCE TO DIFFER MATERIALLY FROM
THE ANTICIPATED RESULTS OR OTHER EXPECTATIONS EXPRESSED IN THE CORPORATION'S
FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO,
CERTAIN RISKS AND UNCERTAINTIES THAT MAY AFFECT THE OPERATIONS, PERFORMANCE,
DEVELOPMENT, GROWTH PROJECTIONS AND RESULTS OF THE CORPORATION'S BUSINESS SUCH
AS, THE GROWTH OF THE ECONOMY, INTEREST RATE MOVEMENTS, TIMELY DEVELOPMENT BY
THE CORPORATION OF TECHNOLOGY ENHANCEMENTS FOR ITS PRODUCTS AND OPERATING
SYSTEMS, THE IMPACT OF COMPETITIVE PRODUCTS, SERVICES AND PRICING, CUSTOMER
BUSINESS REQUIREMENTS, CONGRESSIONAL LEGISLATION AND SIMILAR MATTERS. READERS OF
THIS REPORT ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING
STATEMENTS WHICH ARE SUBJECT TO INFLUENCE BY THE NAMED RISK FACTORS AND
UNANTICIPATED FUTURE EVENTS. ACTUAL RESULTS, ACCORDINGLY, MAY DIFFER MATERIALLY
FROM MANAGEMENT EXPECTATIONS.
17
TABLE A: MATURITIES OF SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1997
GROSS GROSS BOOK/
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities:
Due within 1 year $ 279,878 $ 376 $259 $ 279,995
Due after 1 year but within 5 years 225,112 1,627 13 226,726
Government Agencies Securities:
Due within 1 year 398,900 1 54 398,847
Due after 1 year but within 5 years 468,442 277 13 468,706
Due after 5 years but within 10 years 49,989 -- 43 49,946
Mature after 10 years 48,946 13 2 48,957
Mortgage Backed Securities:
Mature after 10 years 156,997 126 97 157,026
Other Securities:
Mature within 1 year 12,398 -- -- 12,398
Mature after 10 years 28,752 1,197 -- 29,949
====================================================================================================================================
Total Securities Available for Sale $1,669,414 $3,617 $481 $1,672,550
TABLE B: YEAR-END LOANS
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Domestic:
Commercial and Financial $ 529,894 $ 443,557 $ 400,280 $ 400,660 $ 412,006
Real Estate-Commercial/Construction 410,011 352,015 326,965 323,835 388,442
Residential Mortgage 1,156,493 1,226,110 1,284,193 1,317,169 1,149,363
Home Equity 317,669 281,867 251,798 220,910 234,049
Consumer 78,932 78,617 79,867 75,887 82,819
- ------------------------------------------------------------------------------------------------------------------------------------
Total Domestic 2,492,999 2,382,166 2,343,103 2,338,461 2,266,679
Foreign:
Governments and Official Institutions 50,606 17,131 30,849 26,013 28,113
Banks and Other Financial Institutions 8,506 5,457 6,570 11,517 14,999
Commercial and Industrial 293,609 213,236 171,070 146,153 192,770
Other 36,911 15,958 15,761 20,875 19,514
- ------------------------------------------------------------------------------------------------------------------------------------
Total Foreign 389,632 251,782 224,250 204,558 255,396
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans 2,882,631 2,633,948 2,567,353 2,543,019 2,522,075
Unamortized Premium (Unearned
Discount/Net Deferred Fees) 1,742 3,886 4,606 6,905 6,058
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans, Net of Unamortized Premium
(Unearned Discount/Net Deferred Fees) 2,884,373 2,637,834 2,571,959 2,549,924 2,528,133
Reserve for Loan Losses (52,381) (64,486) (56,546) (97,039) (86,513)
====================================================================================================================================
Total Net Loans $2,831,992 $2,573,348 $2,515,413 $2,452,885 $2,441,620
18
TABLE C: REAL ESTATE-COMMERCIAL/CONSTRUCTION LOANS
GEOGRAPHIC DISTRIBUTION BY TYPE
DECEMBER 31, 1997
GEOGRAPHIC LOCATION
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRICT OF UNITED
(IN THOUSANDS) COLUMBIA VIRGINIA MARYLAND KINGDOM OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Land Acquisition and
Construction Development $ 15,532 $ 9,259 $ 4,886 $ -- $ -- $ 29,677
Multi-family Residential 10,869 13,658 4,076 -- 6,500 35,103
Commercial:
Office Buildings 94,868 39,496 31,513 -- -- 165,877
Shopping Centers 32,573 14,016 17,081 -- -- 63,670
Hotels 1,143 -- -- -- -- 1,143
Industrial/Warehouse 2,232 15,252 4,257 -- -- 21,741
Churches 29,204 1,470 26,252 -- -- 56,926
Other 8,745 20,544 6,073 -- 512 35,874
- ------------------------------------------------------------------------------------------------------------------------------------
Total Commercial 168,765 90,778 85,176 -- 512 345,231
- ------------------------------------------------------------------------------------------------------------------------------------
Total Domestic Real Estate-
Commercial/Construction Loans 195,166 113,695 94,138 -- 7,012 410,011
Foreign -- -- -- 145,511 -- 145,511
====================================================================================================================================
Total Real Estate-
Commercial/Construction Loans $195,166 $113,695 $94,138 $145,511 $7,012 $555,522
TABLE D: YEAR-END MATURITIES AND RATE SENSITIVITY
DECEMBER 31, 1997
LESS THAN OVER
(IN THOUSANDS) 1 YEAR (1) 1-5 YEARS 5 YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Maturities:
Commercial and Financial $101,322 $253,315 $ 175,257 $ 529,894
Real Estate-Commercial/Construction 62,171 246,257 101,583 410,011
Residential Mortgage 18,295 87,066 1,051,132 1,156,493
Home Equity 159,040 -- 158,629 317,669
Consumer 45,577 31,672 1,683 78,932
Foreign 328,477 41,193 19,962 389,632
====================================================================================================================================
Total Loans $714,882 $659,503 $1,508,246 $2,882,631
Rate Sensitivity:
With Fixed Interest Rates $ 78,575 $295,529 $1,011,164 $1,385,268
With Floating and Adjustable Interest Rates 636,307 363,974 497,082 1,497,363
====================================================================================================================================
Total Loans $714,882 $659,503 $1,508,246 $2,882,631
[FN]
(1)--Includes demand loans, loans having no stated schedule of repayments or
maturity, and overdrafts.
19
TABLE E: CROSS-BORDER OUTSTANDINGS THAT EXCEED 1% OF TOTAL ASSETS (1)
GOVERNMENTS BANKS AND COMMERCIAL
AND OFFICIAL OTHER FINANCIAL AND
(IN THOUSANDS) INSTITUTIONS INSTITUTIONS INDUSTRIAL OTHER TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1997
UNITED KINGDOM $472 $(112,033) $264,549 $ 1,724 $154,712
===================================================================================================================================
As of December 31, 1996
United Kingdom 419 727 167,701 27,480 196,327
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1995
United Kingdom 242 22,090 133,336 25,199 180,867
[FN]
(1)--Cross-border outstandings include loans, acceptances, investments, accrued
interest and other monetary assets, net of interest-bearing deposits with other
banks that are denominated in U.S. Dollars or other nonlocal currencies.
TABLE F: 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, 1997
UNITED KINGDOM $ 1,421 $ -- $ 1,421 $ --
===================================================================================================================================
As of December 31, 1996
United Kingdom 287 -- 287 --
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1995
United Kingdom 1,714 -- 1,714 36
20
TABLE G: NONPERFORMING ASSETS AND PAST-DUE LOANS
DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS:
Nonaccrual Loans: (1)
Domestic $ 1,916 $ 9,133 $ 7,542 $ 11,518 $ 85,075
Foreign 1,877 743 1,784 15,865 45,099
- -----------------------------------------------------------------------------------------------------------------------------------
Total Nonaccrual Loans 3,793 9,876 9,326 27,383 130,174
Renegotiated Loans: (2)
Domestic 101 125 3,410 288 29,465
Foreign -- -- -- 267 834
- -----------------------------------------------------------------------------------------------------------------------------------
Total Renegotiated Loans 101 125 3,410 555 30,299
Other Real Estate Owned, Net:
Domestic 4,993 27,722 32,627 44,068 45,049
Foreign 83 399 570 3,695 7,754
- -----------------------------------------------------------------------------------------------------------------------------------
Total Other Real Estate Owned, Net 5,076 28,121 33,197 47,763 52,803
===================================================================================================================================
Total Nonperforming Assets, Net $ 8,970 $ 38,122 $ 45,933 $ 75,701 $ 213,276
PAST-DUE LOANS: (3)
Domestic $ 7,279 $ 3,849 $ 5,423 $ 6,091 $ 3,315
Foreign -- -- 36 30 4
===================================================================================================================================
Total Past-Due Loans $ 7,279 $ 3,849 $ 5,459 $ 6,121 $ 3,319
Total Loans, Net of Unamortized
Premium (Unearned Discount/Net
Deferred Fees) $2,884,373 $2,637,834 $2,571,959 $2,549,924 $2,528,133
Ratio of Nonaccrual Loans to Total Loans .13% .37% .36% 1.07% 5.15%
Ratio of Nonperforming Assets to Total Loans
and Other Real Estate Owned, Net .31% 1.43% 1.76% 2.91% 8.26%
[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 $9.9 Million in loans renegotiated at market terms that have performed
in accordance with their respective renegotiated terms. These performing,
market-rate loans no longer are 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.
21
TABLE H: INTEREST INCOME ON NONACCRUAL AND RENEGOTIATED LOANS
DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Income at Original Terms:
Nonaccrual Loans--
Domestic $ 385 $ 972 $ 1,230 $ 3,571 $ 10,639
Foreign 65 228 1,156 2,476 5,601
Renegotiated Loans 18 68 54 444 1,845
===================================================================================================================================
Total $ 468 $ 1,268 $ 2,440 $ 6,491 $ 18,085
Actual Interest Income Recognized:
Nonaccrual Loans--
Domestic $ 5 $ 254 $ 214 $ 458 $ 1,506
Foreign -- 37 186 1,075 2,128
Renegotiated Loans -- -- -- -- 346
===================================================================================================================================
Total $ 5 $ 291 $ 400 $ 1,533 $ 3,980
TABLE I: RESERVE FOR LOAN LOSSES AND SUMMARY OF CHARGE-OFFS (RECOVERIES)
(IN THOUSANDS) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1 $ 64,486 $ 56,546 $ 97,039 $ 86,513 $ 84,155
Provision (Credit) for Loan Losses (12,000) -- (55,000) 6,300 69,290
Loans Charged Off:
Commercial and Financial 146 764 243 593 4,703
Real Estate-Commercial/Construction -- 1,061 697 6,800 41,170
Residential Mortgage 10 11 -- 409 96
Home Equity 448 67 438 98 201
Consumer 2,047 1,513 906 1,511 1,864
Foreign 593 260 6,106 3,219 31,400
- -----------------------------------------------------------------------------------------------------------------------------------
Total Loans Charged Off 3,244 3,676 8,390 12,630 79,434
- -----------------------------------------------------------------------------------------------------------------------------------
Recoveries on Charged-Off Loans:
Commercial and Financial 220 397 2,084 695 527
Real Estate-Commercial/Construction 2,263 3,802 11,408 8,847 6,699
Residential Mortgage 10 -- 84 136 145
Home Equity 47 27 114 4 --
Consumer 510 512 838 942 938
Foreign 666 5,513 8,400 5,034 4,712
- -----------------------------------------------------------------------------------------------------------------------------------
Total Recoveries on Charged-Off Loans 3,716 10,251 22,928 15,658 13,021
- -----------------------------------------------------------------------------------------------------------------------------------
Net Charge-Offs (Recoveries) (472) (6,575) (14,538) (3,028) 66,413
Foreign Exchange Translation Adjustments (577) 1,365 (31) 1,198 (519)
===================================================================================================================================
Balance, December 31 $ 52,381 $ 64,486 $ 56,546 $ 97,039 $ 86,513
Ratio of Net Charge-Offs (Recoveries) to
Average Loans (.02)% (.26)% (.57)% (.12)% 3.04 %
Ratio of Reserve for Loan Losses to Total Loans 1.82 % 2.44 % 2.20 % 3.81 % 3.42 %
22
TABLE J: RESERVE FOR LOAN LOSSES ALLOCATION AND LOAN DISTRIBUTION
ALLOCATION OF THE RESERVE FOR LOAN LOSSES
(IN THOUSANDS) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial and Financial $ 5,524 $ 6,838 $ 9,334 $11,658 $ 8,836
Real Estate-Residential and Commercial/Construction 9,109 8,191 9,543 11,988 29,544
Home Equity and Consumer 3,593 4,236 2,717 6,178 2,905
Foreign 4,765 4,752 5,030 11,981 19,651
Based on Qualitative Factors 29,390 40,469 29,922 55,234 25,577
===================================================================================================================================
Balance, December 31 $52,381 $64,486 $56,546 $97,039 $86,513
DISTRIBUTION OF YEAR-END LOANS
(IN THOUSANDS) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial and Financial 18.4% 16.8% 15.6% 15.8% 16.3%
Real Estate-Residential and Commercial/Construction 54.3 59.9 62.9 64.5 61.0
Home Equity and Consumer 13.8 13.7 12.8 11.7 12.6
Foreign 13.5 9.6 8.7 8.0 10.1
===================================================================================================================================
Balance, December 31 100.0% 100.0% 100.0% 100.0% 100.0%
TABLE K: OTHER REAL ESTATE OWNED, NET
GEOGRAPHIC DISTRIBUTION BY TYPE
DECEMBER 31, 1997
GEOGRAPHIC LOCATION
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRICT OF UNITED
(IN THOUSANDS) COLUMBIA VIRGINIA MARYLAND KINGDOM TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Land $-- $752 $3,326 $-- $4,078
Single-Family Residential -- -- 511 -- 511
Office Buildings/Retail -- -- 404 -- 404
Hotels -- -- -- 83 83
===================================================================================================================================
Total Other Real Estate Owned, Net $-- $752 $4,241 $83 $5,076
23
TABLE L: AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
(IN THOUSANDS) BALANCES RATES BALANCES RATES BALANCES RATES
- -----------------------------------------------------------------------------------------------------------------------------------
Deposits in Domestic Offices:
Noninterest-Bearing Demand Deposits $ 803,202 $ 802,265 $ 807,295
Savings and NOW Accounts 276,363 2.24% 633,119 2.16% 811,344 2.34%
Money Market Deposits 1,591,976 3.21 1,164,669 3.27 940,501 3.43
Other Core Deposits 792,925 4.32 822,541 4.63 836,530 5.11
- -----------------------------------------------------------------------------------------------------------------------------------
Total Average Core Deposits 3,464,466 3,422,594 3,395,670
Negotiable Certificates of Deposit 16,208 5.29 12,218 5.21 9,819 5.88
- -----------------------------------------------------------------------------------------------------------------------------------
Total Average Deposits in Domestic Offices 3,480,674 3,434,812 3,405,489
Deposits in Foreign Offices: (1)
Noninterest-Bearing Demand Deposits 12,488 10,250 9,468
Interest-Bearing Bank Deposits 111,442 6.82 54,383 6.41 48,903 7.40
Interest-Bearing Non-Bank Deposits 368,463 5.32 306,528 5.21 281,253 5.62
- -----------------------------------------------------------------------------------------------------------------------------------
Total Average Deposits in Foreign Offices 492,393 371,161 339,624
===================================================================================================================================
Total Average Deposits $3,973,067 $3,805,973 $3,745,113
Short-Term Borrowings:
Federal Funds Purchased and
Repurchase Agreements $ 266,828 5.09% $ 212,206 4.73% $ 174,923 5.98%
U.S. Treasury Demand Notes and Other
Short-Term Borrowings 17,563 5.10 28,747 4.41 73,694 5.70
===================================================================================================================================
Total Average Short-Term Borrowings $ 284,391 $ 240,953 $ 248,617
[FN]
(1)--The majority of interest-bearing deposits in foreign offices are
denominated in amounts of $100 thousand or more.
TABLE M: INTEREST-RATE SENSITIVITY ANALYSIS (1)
MOVEMENTS IN INTEREST RATES FROM DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
SIMULATED IMPACT OVER NEXT SIMULATED IMPACT OVER NEXT
TWELVE MONTHS THIRTY-SIX MONTHS
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) +100BP -100BP +300BP -300BP
- -----------------------------------------------------------------------------------------------------------------------------------
Simulated Impact Compared With a
"Most Likely" Scenario:
Net Interest Income Increase/(Decrease) 1.0% 0.1% 6.3% 0.7%
Net Interest Income Increase/(Decrease) $1,945 $156 $36,354 $3,844
[FN]
(1)--Key Assumptions:
Assumptions with respect to the model's projections of the effect of changes
in interest rates on Net Interest Income include:
1. Target balances for various asset and liability classes, which are solicited
from the management of the various units of the Corporation.
2. Interest rate scenarios which are generated by ALCO for the "most likely"
scenario and are dictated by policy for the alternative scenarios.
3. Spread relationships between various interest rate indices, which are
generated by the analysis of historical relationships and ALCO consensus.
4. Assumptions about the effect of embedded options and prepayment
speeds: instruments that are callable are assumed to be called at the first
opportunity if an interest rate scenario makes it advantageous for the owner
of the call to do so. Prepayment assumptions for mortgage products are
derived from accepted industry sources.
5. Reinvestment rates for funds replacing assets or liabilities that are
assumed (through early withdrawal, prepayment, calls, etc.) To run off the
balance sheet, which are generated by the spread relationships.
6. Maturity strategies with respect to assets and liabilities, which are
solicited from the management of the various units of the Corporation.
24
TABLE N: CAPITAL RATIOS
DECEMBER 31, REQUIRED
---------------------------
1997 1996 MINIMUMS
- --------------------------------------------------------------------------------------------------------
Riggs National Corporation
Tier I 18.45% 20.04% 4.00%
Combined Tier I and Tier II 31.52 28.47 8.00
Leverage (1) 11.15 11.84 4.00
Riggs Bank N.A.
Tier I 14.35 18.66 4.00
Combined Tier I and Tier II 15.60 19.92 8.00
Leverage (1) 8.64 10.96 4.00
[FN]
(1)--Most bank holding companies and national banks, including the Corporation
and the Corporation's national bank subsidiary, 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, 1997.
TABLE O: NET INTEREST INCOME CHANGES (1)
1997 VERSUS 1996 1996 VERSUS 1995
- -----------------------------------------------------------------------------------------------------------------------------------
DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL
(IN