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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-9756
RIGGS NATIONAL CORPORATION
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-1217953
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1503 PENNSYLVANIA AVENUE, N.W., WASHINGTON, D.C. 20005
- ------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(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
------------------- -----------------------------------------
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 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 26, 1999, was $341,684,289.
The number of shares outstanding of the registrant's common stock, as of
March 12, 1999, was 28,255,747.
DOCUMENT INCORPORATED BY REFERENCE
Portions of Riggs National Corporation's definitive Proxy Statement
dated March 17, 1999 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 6
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 27
Item 9--Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 71
PART III
Item 10--Directors and Executive Officers of the Registrant 71
Item 11--Executive Compensation 73
Item 12--Security Ownership of Certain Beneficial Owners and Management 73
Item 13--Certain Relationships and Related Transactions 73
PART IV
Item 14--Exhibits, Financial Statement Schedules, and Reports on Form 8-K 73
(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. Founded in 1980, 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; and Nassau, Bahamas. Additionally, the
Corporation provides investment advisory services domestically through
subsidiaries registered under the Investment Advisers Act of 1940. A subsidiary
located in the Bahamas provides trust and corporate services, as well as
traditional banking services. At December 31, 1998, the Corporation and its
subsidiaries had 1,598 full-time equivalent employees.
The Corporation's reportable segments are strategic business units providing
diverse products and services within the financial services industry. The
Corporation's segments include Banking, International Banking, Riggs & Company,
and Treasury. The Banking segment provides traditional banking services such as
lending and deposit taking to retail, corporate and commercial customers. The
International Banking segment includes the Corporation's Washington, D.C. based
embassy-banking business and the London based banking subsidiary, Riggs Bank
Europe Limited. The Riggs & Company segment is a division of the Corporation
providing trust and investment management services to a broad customer base. The
Treasury segment is responsible for asset and liability management throughout
the Corporation. Financial information about foreign and domestic operations is
included in Footnote 15 to the Financial Statements-Foreign Activities and
Footnote 17 to the Financial Statements-Segment Profitability (see Item 8).
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 & Company,
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 $5.0 billion, deposits
of $4.1 billion, and stockholder's equity of $426.5 million at December 31,
1998.
Riggs Bank N.A. operates 32 branches and an investment advisory subsidiary in
Washington, D.C., 15 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 & Company 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 & Company Incorporated, both of
which are wholly-owned subsidiaries incorporated under the laws of Delaware and
registered under the Investment Advisers Act of 1940.
-3-
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 ATMnetworks.
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:
o Riggs Bank Europe Limited, located in London, England, providing traditional
corporate banking services, commercial property financing and trade finance;
o The Riggs Bank and Trust Company (Bahamas)Limited, in Nassau, providing
trust services for international private banking customers;
o A London branch located in the U.S. Embassy, serving the Embassy, its
employees and official visitors.
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 32 and
48, 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 32 and 48,
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 OCCmust take "prompt corrective action" in respect of depository
institutions that do not meet minimum capital requirements. The OCChas
established levels at which an insured institution would be considered "well
capitalized," "adequately capitalized,""undercapitalized,""significantly
undercapitalized," and "critically undercapitalized."
The following table details the minimum capital levels for each category:
CAPITAL CATEGORY
- ----------------
COMBINED TANGIBLE
TIER I TIER I AND II LEVERAGE EQUITY
- ---------------------------------------------------------------------------------------------------------------
RATIOS:
Well
Capitalized 6% or above 10% or above 5% or above N/A
Adequately
Capitalized 4% or above 8% or above 4% or above N/A
Under
Capitalized Less than 4% Less than 8% Less than 4% N/A
Significantly
Under
Capitalized Less than 3% Less than 6% Less than 3% N/A
Critically
Under
Capitalized N/A N/A N/A 2% or less
-4-
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
OCCunder 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 Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Act"), authorizes interstate acquisitions of banks and bank holding
companies without geographic limitation. In addition, beginning June 1, 1997,
the Interstate Act 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.
-5-
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;
New Haven, Connecticut; Northern Virginia and Maryland.
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, 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 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the Corporation 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 69 of this Form 10-K.
As of February 26, 1999, there were 2,457 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 46 and 48,
respectively, of this Form 10-K.
ITEM 6.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Interest Income $ 353,802 $ 330,792 $ 293,198 $ 298,799 $ 266,005
Interest Expense 163,450 151,501 139,891 147,821 112,723
- ---------------------------------------------------------------------------------------------------------------
Net Interest Income 190,352 179,291 153,307 150,978 153,282
Less: Provision for Loan Losses -- (12,000) -- (55,000) 6,300
- ---------------------------------------------------------------------------------------------------------------
Net Interest Income after
Provision for Loan Losses 190,352 191,291 153,307 205,978 146,982
Noninterest Income Excluding
Securities Gains, Net 99,259 84,424 89,007 73,493 85,298
Securities Gains, Net 15,023 3,500 7,170 511 226
Noninterest Expense 193,752 186,030 176,947 191,834 199,020
- ---------------------------------------------------------------------------------------------------------------
Income before Taxes
and Minority Interest 110,882 93,185 72,537 88,148 33,486
Applicable Income Tax Expense (Benefit) 29,088 24,690 6,174 346 (533)
Minority Interest in Income
of Subsidiaries, Net of Taxes 19,947 17,616 420 -- --
===============================================================================================================
NET INCOME $ 61,847 $ 50,879 $ 65,943 $ 87,802 $ 34,019
Less: Dividends on Preferred Stock 9,854 10,750 10,750 10,750 12,124
Less: Excess of Call Price over
Carrying Amount of Preferred Stock 13,808 -- -- -- --
===============================================================================================================
Net Income Available
for Common Stock $ 38,185 $ 40,129 $ 55,193 $ 77,052 $ 21,895
EARNINGS PER COMMON SHARE
Basic $ 1.25 $ 1.32 $ 1.82 $ 2.55 $ .72
Diluted 1.21 1.27 1.79 2.54 .72
DIVIDENDS DECLARED AND
PAID PER COMMON SHARE .20 .20 .15 -- --
(See Note 10 to the Financial Statements)
YEAR-END BALANCES
Assets $5,502,331 $5,846,426 $5,135,100 $4,732,533 $4,425,665
Earning Assets 5,000,044 5,347,736 4,621,463 4,196,339 3,979,588
Loans 3,258,135 2,884,373 2,637,834 2,571,959 2,549,924
Deposits 4,144,848 4,297,918 4,050,683 3,885,179 3,602,794
Long-Term Debt 191,525 191,525 191,525 217,625 217,625
Stockholders' Equity 392,728 463,182 425,776 376,669 267,663
-7-
ITEM 7.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Riggs National Corporation achieved 21% earnings growth in 1998, as net income
for the Corporation was $61.8 million compared to $50.9 million in 1997. Income
before taxes and minority interest for 1998 reached a record $110.9 million,
representing a 19% increase over the 1997 total of $93.2 million.
The growth in earnings was attributable to increases in both of the major
components of the Corporation's revenue. Net interest income for 1998 was $190.4
million, an increase of 6% over $179.3 million for 1997. Noninterest income,
excluding securities gains, totaled $99.3 million in 1998, an 18% increase from
$84.4 in 1997.
Diluted earnings per share for 1998 and 1997 were $1.21 and $1.27, respectively.
1998 diluted earnings per share were reduced by a one-time charge of $.44 from
the redemption of $100 million of 10.75% preferred stock.
The Corporation's success in 1998 is reflected in the key measurements of
profitability, return on average assets, and return on average stockholders'
equity. Return on average assets was 1.11% for 1998, compared to a ratio of
0.97% for 1997, and the return on average stockholders' equity was 13.61% in
1998, compared to 11.69% for 1997.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the difference between interest income on earning assets
and interest expense on deposits and borrowed funds. Net interest income is
affected by changes in the level of interest rates and changes in the amount and
composition of interest-earning assets and interest-bearing liabilities (see
Tables A and B).
Net interest income on a tax-equivalent basis totaled $193.3 million in 1998, an
increase of $10.2 million, or 6%, over 1997 and an increase of $36.3 million, or
23%, over 1996. The net interest margin was 3.78% for 1998, a decrease of 3
basis points from the prior year. Average interest-earning assets increased
during 1998 by $309.7 million, while the average rate earned was relatively
unchanged between the years. This increase in average assets led to a $22.2
million increase in interest income. Average interest-bearing funds increased by
$340.3 million during the year with the average rate paid declining six basis
points, resulting in an $11.9 million increase in interest expense.
The increase in average earning assets during 1998 was generated by loan growth
of $426.9 million and $130.6 million in additions to short-term investments,
offset by a $247.8 million decline in the securities portfolio. Loan growth was
strong in the commercial, residential and commercial real estate, and foreign
loan portfolios and investments were shifted from the available for sale
portfolio to shorter term time-deposit placements. The average rates earned on
loans and investment securities were down modestly in 1998 due to overall
declines in the interest rate environment, while the rate on time deposit
placements increased 33 basis points from 1997. The net impact of these changes
was minimal on the average rate for earning assets which totaled 6.98% for 1998,
relatively unchanged from the prior year.
The increase in average interest-bearing funds during 1998 was due mostly to the
growth of $209.4 million in interest-bearing deposits and $129.6 million in
federal funds purchased and repurchase agreements which were used by the
Corporation to fund loan growth. The average rate paid on interest-bearing funds
decreased six basis points over 1997 with a four basis point decrease in total
interest-bearing deposits and a 19 basis point drop in federal funds purchased
and repurchase agreements.
Noninterest Income
The Corporation's revenue mix shifted in the most recent year, primarily through
increased trust and investment advisory income from Riggs & Company. Noninterest
revenue, excluding securities gains, accounted for 34% of combined revenue in
1998 compared to 32% in the prior year. Total noninterest income for 1998 was up
$26.4 million, or 30%, over 1997 and $18.1 million, or 19%, over 1996. Excluding
securities gains of $15.0 million and $3.5 million for 1998 and 1997,
noninterest income increased 18% in the current year. Trust and investment
advisory income growth was $8.5 million in 1998, an increase of 23% over 1997.
Service charges and fees also contributed to the growth in noninterest income,
with an increase of $2.3 million during the year, primarily from increases in
merchant credit card and debit card fees. The Corporation also recognized a $3.6
million gain in 1998 resulting from the termination of the Riggs Bank Europe
Limited pension plan, which was replaced by a defined contribution plan. This
gain is reported in other operating income on the Consolidated Statements of
Income.
-8-
Noninterest Expense
Noninterest expense for the year ended December 31, 1998 was $193.8 million, an
increase of $7.7 million or 4% over 1997 and an increase of $16.8 million, or
9%, over 1996. This increase is substantially the result of $7.2 million in
added personnel costs during the year, primarily attributable to increased
incentive-based compensation and staff costs associated with new business
initiatives. The number of employees at December 31, 1998 increased 1% from
December 31, 1997, with a year-end total of 1,598.
Income Taxes
The Corporation's provision for income taxes includes federal, state, local and
international tax obligations. Income tax expense increased $4.4 million in 1998
to $29.1 million from $24.7 million in 1997. The increased expense is a direct
result of increased earnings, as the effective tax rate of 26.2% for 1998 was
relatively unchanged from the effective tax rate of 26.5% for 1997. During 1998
and 1997, the Corporation reversed valuation allowances related to deferred tax
assets which reduced income tax expense. As substantially all of the valuation
allowances have been reversed it is likely that the effective tax rate will
increase in 1999.
FINANCIAL POSITION AND LIQUIDITY
Earning Assets
Loans and investments are the primary earning assets of the Corporation. For
1998, earning assets averaged $5.1 billion compared to $4.8 billion for 1997.
Average earning assets were over 90% of average total assets in both years.
Average loans represented 60% of earning assets in 1998 while average securities
and short-term investments were 40% of earning assets. In 1997, the mix was 55%
in average loans and 45% in average investments (see Table A).
Loans
Total loans at December 31, 1998 were $3.3 billion, an increase of 13% from
year-end 1997. About one-half of the loan portfolio consists of residential
mortgage, home equity, and consumer loans which are generated through community
banking. Commercial loans generated through both the relationship banking and
international banking activities represent the balance of the portfolio (see
Tables C, D and E).
Total loan growth was $377.8 million with increases in excess of $100 million in
three primary areas: residential mortgage, commercial and financial, and foreign
loans. The increase in residential mortgage loans was due primarily to the
purchase of $261.7 million of bulk loans offset by prepayments of loans during
the year. Commercial and financial growth was 26% year over year and resulted
from the Corporation's increased focus on new loan production along with
increased demand due to a strong economy in the Washington, D.C. metropolitan
area. Foreign lending increased 34% in 1998 with the primary increases noted in
Riggs Bank Europe Limited. RBEL's loans are commercial in nature and are made
predominantly in the United Kingdom. RBEL experienced growth in 1998 in each of
its three lending areas, property finance, trade finance and general corporate
lending.
Cross-Border Outstandings
The Corporation extends credit to borrowers domiciled outside of the United
States through several of its banking subsidiaries. Cross-border outstandings
include loans, acceptances, interest-bearing deposits with other banks,
investments, 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 non-local third parties and local
currency outstandings to the extent they are not funded by local currency
borrowings. These assets may be impacted by changing economic conditions in the
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.
At December 31, 1998, 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, 1998, the United Kingdom was the only foreign
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 (see Tables F and G).
Short-Term Investments
Short-term investments include time deposits with other banks, federal funds
sold and reverse repurchase agreements. These investments are liquid assets with
original maturities of less than 90 days. Short-term 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. Liquidity
is also available to the Corporation through credit facilities with Federal Home
Loan Banks. The Corporation has secured and unsecured lines of credit that
exceed $1 billion which could be drawn upon to meet potential funding
requirements.
-9-
At December 31, 1998, total short-term investments decreased by $19.6 million,
or 3%, when compared to year-end 1997 due to normal daily fluctuations from the
Corporation's ongoing liquidity management process. On average short-term
investments increased $130.6 million in 1998 partially due to decreases in the
securities portfolio.
Securities
Securities of the Corporation consist of securities available for sale that are
carried on the Statements of Condition at market value. The unrealized gains and
losses on these securities are reported net of tax in stockholders' equity. The
securities portfolio totaled $970.7 million at December 31, 1998, with an
average duration of 3.7 years and an average yield of 5.75%. These securities
consisted primarily of U.S. Treasuries, U.S. government agency and
mortgage-backed securities. At December 31, 1998, securities available for sale
had $1.8 million of unrealized losses before taxes (see Table H).
At December 31, 1997, the portfolio totaled $1.67 billion with an average life
of 2.2 years and an average yield of 6.06%. The securities portfolio decreased
$247.8 million on average in 1998. The decrease in average securities was mainly
due to repositioning of the balance sheet resulting from loan growth and
redemption of preferred stock by the Corporation of $109 million. These
decreases were offset by an increase in average short-term investments in 1998.
As part of the Corporation's asset/liability strategy, securities available for
sale may be sold in response to changes in interest rates, risk characteristics
and other factors. The Corporation realized net gains of $15.0 million in 1998
compared with $3.5 million in 1997. These sales were the result of a
repositioning of the securities portfolio as the Corporation replaced U.S.
Treasuries with mortgage-backed securities and extended the portfolio duration
to 3.7 years. The yield declined approximately 31 basis points due to the
declining interest rate environment in 1998.
ASSET QUALITY
Credit Risk Management
A key objective of management is to maintain the quality of the loan portfolio
through high underwriting standards and regular evaluation of credit risk in the
portfolio. The potential for loss is intrinsic to the lending process and
management attempts to minimize these losses. However, the amount of loss will
fluctuate depending on the risk characteristics of the loan portfolio.
The Corporation has comprehensive policies and procedures that cover both loan
origination and management of risk. The Corporation's Credit Administration
group establishes credit policies including approval of underwriting standards,
lending limit authorities and concentration limits. Business unit managers
throughout the Corporation have primary responsibility to evaluate, monitor and
manage credit risk within policy guidelines for each portfolio. Credit
Administration reports to the Chief Credit Officer and works with business units
to ensure the integrity of the credit process. An independent loan review
function monitors compliance with the Corporation's credit policies and further
ensures the integrity of the credit process.
Provision and Reserve for Loan Losses
The provision for loan losses is a charge to earnings to maintain the reserve
for loan losses at a level adequate to absorb estimated losses inherent in the
loan portfolio. The reserve for loan losses is based on management's assessment
of existing conditions and of potential losses determined to be probable and
subject to reasonable estimation. The Corporation determines the appropriate
balance of the reserve for loan losses based upon an analysis of inherent risk
and other factors that include: primary sources of repayment on individual loans
and groups of similar loans, liquidity and financial condition of the borrowers
and guarantors, historical charge-offs/writedowns within loan categories, loan
trends and general economic conditions. On a quarterly basis, the Loan Loss
Reserve Committee evaluates the adequacy of the reserve for loan losses.
In 1998, no provisions were made to the reserve for loan losses compared to a
negative provision of $12.0 million for 1997. The reserve for loan losses was
$54.5 million, or 1.67% of total loans, at December 31, 1998, compared to $52.4
million, or 1.82% of total loans, at December 31, 1997 (see Table I).
The reserve for loan losses is reduced by loans charged off during the year and
increased by recoveries of loans that were previously charged off. The loan
portfolio remained strong in 1998 as evidenced by net recoveries totaling $2.0
million compared with $472 thousand of net recoveries for 1997. Net recoveries
for 1998 were mostly attributed to $4.4 million recovered from commercial real
estate loans. These recoveries were partially offset by relatively low levels of
charge-offs, including $2.2 million related to consumer loans and $937 thousand
in foreign loans.
The net recoveries experienced during 1998 contributed to the Corporation's
decision to not record a provision for loan losses during the year. Net
recoveries were experienced in 1997 and 1996 as well, which contributed to the
decision to reverse $12.0 million from the reserve for loan losses in the fourth
quarter of 1997.
-10-
Foreign exchange translation adjustments in the reserve for loan losses were $94
thousand and $(577) thousand in 1998 and 1997, respectively. These adjustments
relate to reserves for the Bank's London branch and Riggs Bank Europe Limited,
recorded in British pounds sterling, and are made to account for changes in the
Corporation's reserve for loan losses resulting from fluctuating foreign
exchange rates.
The estimated allocation of the reserve for loan losses by loan category is
detailed in Table J and represents management's assessment of existing
conditions and risk factors within these categories. Changes in the risk
characteristics and commitment amounts within the loan portfolio impact the
overall level of required reserves.
During 1998, the commercial and financial allocation increased substantially
because of the increased lending in this area along with the specific reserve
assigned to a $25.0 million commercial loan which was placed on nonaccrual
status in the fourth quarter. The reserve allocation for real estate-residential
and commercial/construction loans decreased while the combined balances in these
portfolios remained relatively stable during 1998. The decreased allocation for
commercial/construction loans is primarily the result of significant criticized
loan balances in one industry concentration being paid down or upgraded in the
fourth quarter of the most recent year. Also, additions to the residential real
estate portfolio resulted from bulk loan purchases that are well-secured with
relatively low risk characteristics. The reduced allocation for home equity and
consumer loans is a direct result of continued low charge-off levels, as
reserves for this classification are determined based upon the Corporation's
historical charge-off experience. The allocation for foreign loans increased in
1998 in proportion to the overall balance increase in this portfolio.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, renegotiated loans, and other
real estate owned. Nonaccrual loans are loans for which recognition of interest
income has been discontinued. Impaired loans are nonaccrual loans for which it
is probable that all amounts due will not be collected according to the
contractual terms of the loan agreement (see Tables K and L).
Loans are placed on nonaccrual 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. Nonaccrual loans totaled $26.8 million at December
31, 1998, an increase of $23.0 million from December 31, 1997. This increase
during 1998 was primarily attributable to a $25.0 million commercial loan
entering nonaccrual status in the fourth quarter of 1998.
A specific reserve was assigned to the $25.0 million commercial loan that
entered nonaccrual status in the fourth quarter of 1998; however, this specific
reserve did not cause an increase in the total amount of reserve for loan losses
as improvements in other factors offset the need for a provision. These factors
included the removal of certain commercial loans from the Corporation's
criticized loan classification and a reduction in the Corporation's overall
qualitative reserves. The reduction in qualitative reserves resulted from the
analysis of various factors, the most significant of which were a reduction in
industry concentration risk and an improvement in the Corporation's credit
process as determined by a series of independent loan reviews in 1998. The low
level of nonaccrual loans in 1997 contributed to the decision to reverse $12.0
million from the provision for loan losses in the prior year.
Renegotiated loans are those where there have been extensions of the original
repayment period or a reduction of principal or interest because of a
deterioration in the borrower's financial position. At December 31, 1998 and
1997, all renegotiated loans were not accruing interest. Renegotiated loans
remained at a low level during 1998 and ended the year at $2.9 million, compared
with $101 thousand at year-end 1997. The increase of $2.8 million during 1998 is
attributable to two foreign loans.
Loans are transferred to other real estate owned when collateral securing the
loans is acquired through foreclosure. Other real estate owned decreased to $1.7
million at December 31, 1998, from $5.1 million at December 31, 1997. The
remaining balance consists of two tracts of land in the Washington, D.C.
metropolitan area.
Past-Due and Potential Problem Loans
Past-due loans generally consist of residential real estate and consumer loans
that are well-secured and in the process of collection for which the Corporation
is accruing interest. At December 31, 1998 the past-due loan category also
included a foreign government overdraft of $15.8 million, on which the
Corporation is accruing interest. Past-due loan increases at year-end 1998 were
primarily the result of this foreign government loan.
Potential problem loans are defined as loans that are currently performing but
which management believes have certain attributes that may lead to nonaccrual or
past-due status in the foreseeable future. At December 31, 1998, the Corporation
had not identified any such loans compared to $10.0 million in potential problem
loans at December 31, 1997. At year-end 1997, the potential problem loans
consisted primarily of commercial and financial loans.
-11-
DEPOSITS AND FUNDING SOURCES
Deposits, short-term borrowings, long-term debt and trust preferred securities
are the primary funding sources of the Corporation. For 1998, interest-bearing
funds averaged $4.0 billion compared to $3.6 billion for 1997. Average
interest-bearing funds were over 80% of average total liabilities in 1998 and
1997. Noninterest-bearing demand deposits represent an additional 15% of total
liabilities (see Table A).
Deposits
Deposits remained the primary source of funding for the Corporation's activities
during 1998. On average in 1998 deposits totaled $4.09 billion compared with
$3.97 billion in 1997. The average 1998 balance consisted of $3.37 billion in
interest-bearing deposits and $723.1 million of noninterest- bearing demand
deposits. Demand deposits decreased during 1998 partially due to a new program
in which certain noninterest-bearing accounts are transferred to the money
market classification, thereby reducing the level of required reserves. Domestic
and foreign time deposits increased $293.5 million on average in 1998 with the
largest portion of growth occurring in deposits where individual balances are in
excess of $100,000. The increase in time deposits was partially offset by an
average decrease of $43.6 million in money market accounts. The rates paid on
time deposits in domestic offices were 4.55% and 4.34% in 1998 and 1997,
respectively, compared to rates of 2.96% and 2.59%, respectively, for time
deposits with denominations in excess of $100,000. The lower rate on larger
deposits is due primarily to the impact of balances maintained by corporate and
government customers for which interest rates are based on an analysis of all
banking services provided.
Short-Term Borrowings
Short-term borrowings consist primarily of federal funds purchased, repurchase
agreements, and U.S. Treasury demand notes. These short-term obligations are an
additional source of funds used to meet certain asset/liability and daily cash
management objectives. On average, short-term borrowings increased $130.9
million, or 46%, to $415.3 million at December 31, 1998. The increase in the
balances during 1998 was used to fund loan growth during the year (see Table M).
Long-Term Debt
Long-term debt totaled $191.5 million at December 31, 1998 and 1997. 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 debentures due in 2009
have a fixed interest rate of 9.65% and are not callable in advance of maturity.
The notes due in 2006 have a fixed interest rate of 8.50% and are callable
beginning February 1, 1999 at a price 104.25%. The call premium on these Notes
is reduced by .85% annually until the Notes are callable at par beginning
February 1, 2004.
Trust Preferred Securities
(Guaranteed Preferred Beneficial Interests in Junior
Subordinated Deferrable Interest Debentures)
Trust Preferred Securities totaled $350 million at December 31, 1998 and 1997.
Included in these securities are $200 million of 8.875% securities issued in
1997 and $150 million of 8.625% securities issued in 1996. The securities were
issued by wholly owned subsidiaries of the Corporation and are classified on the
Consolidated Statements of Condition as Guaranteed Preferred Beneficial
Interests in Junior Subordinated Deferrable Interest Debentures. The related
expense is classified on the Consolidated Statements of Income as Minority
Interest in Income of Subsidiaries, Net of Taxes. Dividends are paid
semi-annually and the Trust Preferred Securities cannot be redeemed for ten
years from the date of issuance. The securities have a final maturity of 30
years from their issuance date. Dividends are cumulative and deferrable for a
period not to exceed five years. The Trust Preferred Securities qualify as Tier
I Capital, with certain limitations.
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 and liquidity. Asset/liability management is the
process of managing earning assets and funding sources in changing interest rate
environments. The primary goal of asset/liability management is to manage the
asset/liability mix of the Corporation and maximize net interest income within
an acceptable range of risk.
The Corporation manages its interest-rate risk through the use of an income
simulation model that forecasts the impact on net interest income of a variety
of different interest-rate scenarios. The model evaluates the impact on net
interest income of rates moving significantly higher or lower than a "most
likely" scenario. The results are compared to risk-tolerance limits set by
corporate policy 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. The results of the
simulation for year-end 1998 and 1997 indicated that the Corporation was within
the established guidelines (see Table N).
-12-
In managing the Corporation's interest-rate risk, ALCO uses financial derivative
instruments, such as foreign currency and interest-rate swaps. Financial
derivatives are employed to assist in the management and/or reduction of the
interest-rate risk and currency risk of the Corporation. All of these
instruments are considered off-balance sheet, as they do not materially affect
the level of assets or liabilities of the Corporation. At December 31, 1998, the
Corporation's use of derivatives was limited. First, the Corporation had an
interest rate swap for a notional amount of $25 million on a pool of mortgage
loans. This swap diminishes the risk of holding long-term, fixed-rate loans. The
Corporation also had foreign currency exchange contracts for a notional amount
of $87 million to hedge the equity investment at Riggs Bank Europe Limited. The
foreign currency contracts mitigate the risk of changes in exchange rates. In
addition, Riggs Bank Europe Limited used interest-rate swaps to convert fixed
rate loans into floating rate assets. There were 28 such interest-rate swap
agreements outstanding at December 31, 1998 for RBEL totaling $90.3 million in
notional principal balance. Also, the Corporation had approximately $33 million
in commitments to sell foreign exchange contracts for the purpose of hedging
intercompany loans.
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. The Corporation places an emphasis
on capital strength and the ability of the Corporation to withstand unfavorable
economic and/or business losses. The Corporation continues to maintain a strong
capital position at December 31, 1998.
Total stockholders' equity at December 31, 1998 was $392.7 million, down $70.5
million from year-end 1997. The decrease was the result of the Corporation
redeeming all outstanding shares of its $100 million Non-cumulative Perpetual
Series B Preferred Stock. The preferred stock had an annual dividend rate of
10.75% and a redemption price of $27.25 per share, resulting in a reduction to
the Corporation's equity of $109 million. This reduction in equity was offset by
earnings for the year totaling $61.8 million, less dividends paid on preferred
and common stock.
Regulators have issued risk-based capital guidelines for banks and bank holding
companies. These requirements provide minimum Total, Tier I, and Leverage
capital ratios that measure capital adequacy. Total capital measures combined
Tier I and Tier II capital to risk-weighted assets. Tier I capital measures Tier
I capital to risk-weighted assets. The Leverage ratio measures Tier I capital to
quarterly average assets. At December 31, 1998, the Corporation's and the Bank's
capital ratios exceed the "well-capitalized" levels under each of the regulatory
ratios (see Table O).
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, which are the same as those prescribed by the
Federal Reserve Board for bank holding companies.
YEAR 2000 READINESS DISCLOSURE
General
Advances and changes in technology can have a significant impact on the
Corporation's business. Financial institutions are dependent on information
systems and also have many external interdependencies with other companies. Many
computer programs were designed to recognize calendar years by their last two
digits. Calculations performed using these digits may not work properly with
dates beginning in the Year 2000 and beyond. The Year 2000 issue creates risk
for the Corporation from unforeseen problems in its computer systems and from
Year 2000 issues with the Corporation's vendors, service providers and
customers.
-13-
Approach and Risk
The Corporation began to identify the risks associated with the Year 2000 in
1995. Management established a corporate oversight structure to ensure timely
risk assessments, remediation plans, systems testing, conversions, and
centralized management of the project. The structure of the effort entails a
number of groups, each addressing a different aspect of the project, and
reporting to the Year 2000 Program Manager. Oversight of the entire project is
performed by the Year 2000 Advisory Group. This is a management committee
appointed by the Board of Directors that reports to the Board on a quarterly
basis.
Management determined that an enterprise-wide business risk-assessment approach
is most appropriate for addressing and remediating Year 2000 problems. This
included an assessment of the information technology resources of each of the
functional areas in the Corporation, as well as separate assessments of
information technology vendors and suppliers, mainframe applications, third
party suppliers, alternative platforms, and non-information technology and
facilities risks.
In addition to systems-related risks, the Corporation undertook a review of
risks created by potential business interruptions suffered by the Corporation's
major business counterparties, both domestic and foreign. The Corporation
divided its business counterparties into three broad categories: Funds Takers
(primarily borrowers), Funds Providers (depositors and other funding sources),
and Capital Markets Partners (trading counterparties and fiduciary
relationships). For those business partners that would have a significant impact
on the Corporation's liquidity, income or capital markets activities, should
they encounter significant business interruption due to the Year 2000,
management has worked through the functional areas involved to assess readiness
and contingency plans for recovering from an abrupt interruption.
After the assessment phase, Year 2000 efforts have focused on remediation and
verification. The Corporation has developed detailed action plans to address
mainframe systems, third party servicers, embedded technology and facilities and
non-information technology issues. For purchased systems and software and third
party servicers, the Year 2000 efforts have involved contacting the vendors or
suppliers and determining the Year 2000 status of the various systems and of the
plans to bring the systems into compliance. For in-house systems, the Year 2000
efforts include correction of the programs to ensure proper data processing. The
Corporation's action plans also include testing mission-critical systems to
verify the remediation efforts. Riggs records and tracks information to keep
management aware of the status of the Corporation's information technology
systems. The Program Manager is working with the functional areas of the
Corporation to develop contingency plans for a variety of situations, such as
the failure of a vendor to remediate Year 2000 issues by a particular date or a
system not being available for processing.
Inherent in the Year 2000, the failure to correct a material problem could
result in an interruption in or failure of certain business operations. Year
2000 risks and uncertainties include increased credit losses, service delays,
funding delays, counterparty failures, inaccurate information processing, ATM
failures, and problems with international accounts. There can be no assurance
that the Year 2000 issue will not have a material adverse impact on the
Corporation's financial position, results of operations, or relationships with
customers, vendors, or others.
State of Readiness
While there is general uncertainty inherent in the Year 2000 problem, resulting
in part from the uncertainty of the readiness of third party vendors and
customers, the Corporation's progress toward completing the enterprise-wide risk
assessment and remediating Year 2000 problems is on target. Management
substantially completed remediation and verification of all mission-critical
internal systems by December 31, 1998. Management expects to substantially
complete remediation and verification of mission-critical third party servicers
by March 31, 1999. This is in accordance with guidelines established by Bank
regulatory authorities. Verification of non-mission-critical system changes,
including non-information technology issues, will be performed throughout 1999.
The Corporation presently believes that the Year 2000 issue will not cause
significant operational problems.
Costs
The total cost to become Year 2000 compliant is not expected to be material to
the Corporation's financial position. The Corporation estimates the total cost
of the Year 2000 project will be approximately $7.6 million, with funds provided
from operating cash flows. As of December 31, 1998, the total amount expended
was $3.6 million, with $2.8 million of this expense incurred in 1998. The future
cost of completing the Year 2000 project is estimated to be $4.0 million. The
most significant components of the total estimated cost consist of 66% for
personnel related costs, including consultants and special Year 2000 incentives,
and 26% for data processing services. The Corporation does not separately track
all internal costs incurred for the Year 2000 project. Internal costs are
principally the payroll-related costs for the information systems group.
The Year 2000 expense represents approximately 9% of the Corporation's total
actual information technology expenditures for 1998. Other significant or
critical non-Year 2000 information technology efforts have not been materially
delayed or impacted by Year 2000 initiatives.
-14-
Contingency Plans
To prepare for the possibility that certain information systems or third-party
vendors and servicers will not be Year 2000 compliant, the Corporation is
developing detailed contingency plans. The Corporation has two types of
contingency plans, remediation plans and business resumption plans.
The remediation plans address those information systems that the Corporation
determines are not currently, or may not be, Year 2000 compliant through our
testing. These plans describe and schedule alternative provisions, including, if
necessary, the replacement of vendors or third party servicers to ensure
compliance. These remediation plans are complete.
The business-resumption plans address how the Corporation will continue
operations in the event a Year 2000 related interruption occurs. The
business-resumption plans for its mission-critical systems and third-party
servicers are scheduled to be complete by June 30, 1999. While implementation of
the business-resumption plans is not expected to be necessary, it will ensure
the Corporation has the ability to process transactions and serve its customers
under circumstances in which a Year 2000 problem actually occurs.
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from
estimates. Such forward-looking statements include, but are not limited to, (1)
projections on the Corporation's 1999 tax rate and tax expense in Management's
Discussion and Analysis (MD&A), (2) discussions of loans and loan losses in
MD&A, (3) comments related to the redemption of Preferred Stock and buyback of
Common Stock in MD&A, (4) discussions of Asset/Liability Management and related
risk in MD&A, and (5) disclosures related to the Year 2000 in MD&A.
The risks and uncertainties associated with forward-looking statements include,
among other things, significant changes in general economic conditions, both
domestic and international; the impact of market and economic conditions on
debt, equity and assumptions made in the redemption of preferred stock; sharp
changes in credit quality or interest rates; changes in the Corporation's tax
liability and rates; and the Corporation's ability and resources to execute its
business strategies and manage risks associated with potential expansion plans
or the Year 2000 issue.
FOURTH QUARTER 1998 VS.
FOURTH QUARTER 1997
For the fourth quarter of 1998, the Corporation reported net income of $14.4
million, or $(.04) per diluted share, compared with $17.0 million, or $.45 per
diluted share, for the fourth quarter of 1997. Results for the fourth quarter of
1998 included $13.8 million in costs (and $(.44) per share) for redemption of
the Corporation's preferred stock. Results for the fourth quarter of 1997
included a credit of $12.0 million in the provision for loan losses (see the
table on page 69).
Net interest income for the fourth quarter of 1998 was $46.6 million, a decrease
of $500 thousand, or 1%, year-to-year, reflecting the impact of relatively
stable average earning assets combined with a decline in the net interest margin
from the loss of funds related to the preferred stock redemption.
Noninterest income for the fourth quarter of 1998 was $28.0 million, an increase
of $5.0 million, or 22%, when compared with the same period in 1997. This
increase was attributable to a $3.6 million gain from termination of the RBEL
pension plan in the fourth quarter of 1998, combined with an increase in trust
and investment advisory income of $1.2 million.
Noninterest expense for the fourth quarter of 1998 totaled $49.1 million,
compared to $51.6 million a year earlier, a decrease of $2.5 million, or 5%.
This decrease was primarily the result of a decrease in data processing
expenses.
1997 VS. 1996
In 1997, the Corporation achieved consolidated net earnings of $50.9 million
compared with net earnings of $65.9 million in 1996. Earnings per diluted share
for 1997 and 1996 were $1.27 and $1.79, respectively. Net income for 1997
benefited from a $12.0 million reduction in the reserve for loan losses, as
continued improvement in credit quality resulted in the recording of these
reserve adjustments. Return on average assets was 0.97% for 1997 compared with
1.40% for 1996. Return on average stockholders' equity was 11.69% in 1997
compared with 16.48% for 1996.
-15-
Net interest income (before the provision for loan losses) totaled $179.3
million, an increase of $26.0 million from 1996's total. 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. The net
interest margin was 3.81% for 1997, an increase of nine basis points from 3.72%
in 1996.
Noninterest income for 1997, excluding securities gains, totaled $84.4 million,
compared to 1996's total of $89.0 million. The decrease from 1996, totaling $4.6
million, 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 the corporate trust
business in 1996.
Noninterest expense for 1997 rose to $186.0 million, a 5% 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.
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.
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. This acquisition was accounted for as a purchase,
the impact of which was not material to the Corporation.
The securities portfolio consisted of securities available for sale which
increased $510.0 million, or 44%, 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. Sale of securities in 1997 resulted in
securities gains of $3.5 million.
Loans, net of premiums, discounts and deferred fees totaled $2.88 billion at
December 31, 1997, an increase of $246.5 million, or 9%, from the prior year.
The commercial loan portfolio increased $86.3 million at year-end 1997 and the
real estate-commercial/construction portfolio increased $58.0 million over
year-end 1996. These increases were related to improved loan demand and a strong
local economy. Residential mortgage loans declined $69.6 million as a result of
paydowns and payoffs in excess of new loan production while the home-equity
portfolio increased $35.8 million in 1997. Foreign loans increased to $389.6
million at year-end 1997 from the balance at year-end 1996 of $251.8 million due
to strengthening of the 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.
Nonperforming assets decreased $29.1 million, or 77%, during the year to $9.0
million at December 31, 1997. This decrease in nonperforming assets during 1997
was primarily attributable to sales and paydowns of $26.8 million. 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 in loan loss provisions as a result of increased credit
quality in the loan portfolio. Other real estate owned decreased 82% to $5.1
million at December 31, 1997, from sales and repayments totaling $22.4 million.
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%. 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.
Average short-term borrowings for 1997 totaled $284.4 million, up from 1996's
average of $241.0 million, primarily due to increases in repurchase agreements,
which are a funding vehicle for the Corporation. Long-term debt totaled $191.5
million at December 31, 1997 and 1996, respectively. On March 12, 1997, Riggs
Capital II, a newly formed, wholly-owned subsidiary of the Corporation, sold
$200 million of preferred equity capital through the private placement of
redeemable trust preferred securities. These securities mature in 2027 and have
an annual dividend rate of 8.875%. The net proceeds from this sale will be
available for general corporate purposes.
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 and common stock.
The Corporation's Total and Tier I 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 capital ratios were
enhanced by the inclusion of the proceeds from the trust preferred securities.
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.
-16-
Table A:
THREE-YEAR AVERAGE CONSOLIDATED STATEMENTS OF CONDITION AND RATES1
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
(IN THOUSANDS) BALANCES EXPENSE RATES BALANCES EXPENSE RATES BALANCES EXPENSE RATES
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans:
Commercial-Taxable $ 551,179 $ 39,830 7.23% $ 388,865 $ 30,458 7.83% $ 359,303 $ 30,483 8.48%
Commercial-Tax-Exempt 57,232 4,598 8.03 47,768 4,041 8.46 29,180 2,748 9.42
Real Estate-
Commercial/Construction 408,314 35,468 8.69 346,404 30,245 8.73 327,594 28,953 8.84
Residential Mortgage 1,247,988 89,265 7.15 1,196,090 85,727 7.17 1,258,669 89,674 7.12
Home Equity 326,837 25,179 7.70 306,470 24,932 8.14 273,860 22,555 8.24
Consumer 69,199 8,685 12.55 75,383 9,177 12.17 76,006 9,285 12.22
Foreign 427,062 36,705 8.59 299,892 24,606 8.20 232,800 18,689 8.03
- ----------------------------------------------------------------------------------------------------------------------------------
Total Loans, Including Fees 3,087,811 239,730 7.76 2,660,872 209,186 7.86 2,557,412 202,387 7.91
Securities Available for Sale 2 1,178,271 71,331 6.05 1,426,082 86,702 6.08 1,115,466 65,739 5.89
Time Deposits with Other Banks 618,964 33,379 5.39 167,235 8,470 5.06 208,108 10,288 4.94
Federal Funds Sold and
Reverse Repurchase Agreements 225,219 12,351 5.48 546,358 30,283 5.54 341,279 18,487 5.42
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS AND
AVERAGE RATE EARNED 5,110,265 356,791 6.98 4,800,547 334,641 6.97 4,222,265 296,901 7.03
Less: Reserve for Loan Losses 53,625 63,768 59,556
Cash and Due from Banks 144,761 158,531 192,024
Premises and Equipment, Net 179,379 165,710 160,354
Other Assets 185,931 191,094 201,282
==================================================================================================================================
TOTAL ASSETS $5,566,711 $5,252,114 $4,716,369
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-Bearing Deposits:
Savings and NOW Accounts $ 244,604 $ 4,967 2.03% $ 285,068 $ 6,359 2.23% $ 645,258 $ 13,944 2.16%
Money Market Deposit Accounts 1,558,482 41,260 2.65 1,602,131 51,375 3.21 1,173,179 38,363 3.27
Time Deposits in Domestic Offices 989,658 45,029 4.55 809,133 35,091 4.34 834,759 38,738 4.64
Time Deposits in Foreign Offices 574,022 34,873 6.08 461,045 26,738 5.80 340,262 18,931 5.56
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 3,366,766 126,129 3.75 3,157,377 119,563 3.79 2,993,458 109,976 3.67
Short-Term Borrowings:
Federal Funds Purchased and
Repurchase Agreements 396,438 19,442 4.90 266,828 13,569 5.09 212,206 10,036 4.73
U.S. Treasury Demand Notes and
Other Short-Term Borrowings 18,824 406 2.16 17,563 896 5.10 28,747 1,267 4.41
Long-Term Debt 191,525 17,473 9.12 191,525 17,473 9.12 210,494 18,612 8.84
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING FUNDS
AND AVERAGE RATE INCURRED 3,973,553 163,450 4.11 3,633,293 151,501 4.17 3,444,905 139,891 4.06
Demand Deposits 3 723,138 815,690 812,515
Other Liabilities 65,481 56,358 51,095
Minority Interest in Preferred
Stock of Subsidiary 350,000 311,644 7,787
Stockholders' Equity 454,539 435,129 400,067
==================================================================================================================================
TOTAL LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY $5,566,711 $5,252,114 $4,716,369
NET INTEREST INCOME AND SPREAD $193,341 2.87% $183,140 2.80% $157,010 2.97%
==================================================================================================================================
NET INTEREST MARGIN ON
EARNING ASSETS 3.78% 3.81% 3.72%
- ----------------------------------------------------------------------------------------------------------------------------------
1 INCOME AND RATES ARE COMPUTED ON A TAX-EQUIVALENT BASIS USING A FEDERAL
INCOME TAX RATE OF 35% FOR 1998, 1997, AND 1996, IN ADDITION TO LOCAL TAX RATES
AS APPLICABLE. AVERAGE FOREIGN ASSETS AND AVERAGE FOREIGN LIABILITIES ARE FOUND
ON PAGE 70.
2 THE AVERAGES AND RATES FOR THE SECURITIES AVAILABLE FOR SALE PORTFOLIO
ARE BASED ON AMORTIZED COST.
3 1998 DEMAND DEPOSIT BALANCES EXCLUDE CERTAIN ACCOUNTS TRANSFERRED TO THE
MONEY MARKET CLASSIFICATION TO REDUCE THE LEVEL OF DEPOSIT RESERVES REQUIRED.
-17-
Table B: NET INTEREST INCOME CHANGES 1
1998 VERSUS 1997 1997 VERSUS 1996
- ---------------------------------------------------------------------------------------------------------------
DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL
(IN THOUSANDS) RATE VOLUME CHANGE RATE VOLUME CHANGE
- ---------------------------------------------------------------------------------------------------------------
Interest Income:
Loans, Including Fees $(2,916) $ 33,460 $ 30,544 $(2,411) $ 9,210 $ 6,799
Securities Available for Sale (367) (15,004) (15,371) 2,173 18,790 20,963
Time Deposits with Other Banks 584 24,325 24,909 253 (2,071) (1,818)
Federal Funds Sold and Reverse
Repurchase Agreements (318) (17,614) (17,932) 429 11,367 11,796
- ---------------------------------------------------------------------------------------------------------------
Total Interest Income (3,017) 25,167 22,150 444 37,296 37,740
Interest Expense:
Savings and NOWAccounts (539) (853) (1,392) 442 (8,027) (7,585)
Money Market Deposit Accounts (8,748) (1,367) (10,115) (757) 13,769 13,012
Time Deposits in Domestic Offices 1,793 8,145 9,938 (2,481) (1,166) (3,647)
Time Deposits in Foreign Offices 1,322 6,813 8,135 845 6,962 7,807
Federal Funds Purchased and
Repurchase Agreements (499) 6,372 5,873 798 2,735 3,533
U.S. Treasury Demand Notes and
Other Short-Term Borrowings (550) 60 (490) 177 (548) (371)
Long-Term Debt -- -- -- 581 (1,720) (1,139)
- ---------------------------------------------------------------------------------------------------------------
Total Interest Expense (7,221) 19,170 11,949 (395) 12,005 11,610
===============================================================================================================
Net Interest Income $ 4,204 $ 5,997 $ 10,201 $ 839 $25,291 $26,130
- ---------------------------------------------------------------------------------------------------------------
1 THE DOLLAR AMOUNT OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
ATTRIBUTABLE TO CHANGES IN RATE/VOLUME (CHANGE IN RATE MULTIPLIED BY CHANGE IN
VOLUME) HAS BEEN ALLOCATED BETWEEN RATE AND VOLUME VARIANCES BASED ON THE
PERCENTAGE RELATIONSHIP OF SUCH VARIANCES TO EACH OTHER. INCOME AND RATES ARE
COMPUTED ON A TAX-EQUIVALENT BASIS USING A FEDERAL INCOME TAX RATE OF 35% FOR
1998, 1997 AND 1996, IN ADDITION TO LOCAL TAX RATES AS APPLICABLE.
-18-
Table C:
YEAR-END LOANS
DECEMBER 31,
(IN THOUSANDS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Domestic:
Commercial and Financial $ 668,778 $ 529,894 $ 443,557 $ 400,280 $ 400,660
Real Estate-Commercial/Construction 409,586 410,011 352,015 326,965 323,835
Residential Mortgage 1,276,257 1,156,493 1,226,110 1,284,193 1,317,169
Home Equity 314,347 317,669 281,867 251,798 220,910
Consumer 69,419 78,932 78,617 79,867 75,887
- ---------------------------------------------------------------------------------------------------------------
Total Domestic 2,738,387 2,492,999 2,382,166 2,343,103 2,338,461
Foreign:
Governments and Official Institutions 74,676 50,606 17,131 30,849 26,013
Banks and Other Financial Institutions 9,451 8,506 5,457 6,570 11,517
Commercial and Industrial 395,552 293,609 213,236 171,070 146,153
Other 42,353 36,911 15,958 15,761 20,875
- ---------------------------------------------------------------------------------------------------------------
Total Foreign 522,032 389,632 251,782 224,250 204,558
Total Loans 3,260,419 2,882,631 2,633,948 2,567,353 2,543,019
Net Deferred Loan Fees,
Premiums and Discounts (2,284) 1,742 3,886 4,606 6,905
- ---------------------------------------------------------------------------------------------------------------
Loans 3,258,135 2,884,373 2,637,834 2,571,959 2,549,924
Reserve for Loan Losses (54,455) (52,381) (64,486) (56,546) (97,039)
===============================================================================================================
Total Net Loans $3,203,680 $2,831,992 $2,573,348 $2,515,413 $2,452,885
- ---------------------------------------------------------------------------------------------------------------
-19-
Table D:
YEAR-END MATURITIES AND RATE SENSITIVITY
DECEMBER 31, 1998
LESS THAN OVER
(IN THOUSANDS) 1 YEAR 1 1-5 YEARS 5 YEARS TOTAL
- ---------------------------------------------------------------------------------------------------------------
Maturities:
Commercial and Financial $146,068 $256,567 $ 266,143 $ 668,778
Real Estate-Commercial/Construction 50,836 179,505 179,245 409,586
Residential Mortgage 28,758 136,608 1,110,891 1,276,257
Home Equity 135,512 23,193 155,642 314,347
Consumer 47,535 20,764 1,120 69,419
Foreign 418,944 82,964 20,124 522,032
===============================================================================================================
Total Loans $827,653 $699,601 $1,733,165 $3,260,419
Rate Sensitivity:
With Fixed Interest Rates $125,761 $413,342 $1,203,082 $1,742,185
With Floating and Adjustable Interest Rates 701,892 286,259 530,083 1,518,234
- ---------------------------------------------------------------------------------------------------------------
Total Loans $827,653 $699,601 $1,733,165 $3,260,419
===============================================================================================================
1 INCLUDES DEMAND LOANS, LOANS HAVING NO STATED SCHEDULE OF REPAYMENTS OR
MATURITY, AND OVERDRAFTS.
Table E:
REAL ESTATE-COMMERCIAL/CONSTRUCTION LOANS
GEOGRAPHIC DISTRIBUTION BY TYPE
DECEMBER 31, 1998
GEOGRAPHIC LOCATION
- ---------------------------------------------------------------------------------------------------------------
DISTRICT OF UNITED
(IN THOUSANDS) COLUMBIA VIRGINIA MARYLAND KINGDOM TOTAL
- ---------------------------------------------------------------------------------------------------------------
Land Acquisition and
Construction Development $ 13,500 $ 4,120 $ 3,616 $ -- $ 21,236
Multi-Family Residential 15,189 10,169 2,653 -- 28,011
Commercial:
Office Buildings 91,623 38,959 25,514 -- 156,096
Shopping Centers 13,015 10,586 48,232 -- 71,833
Hotels 1,132 -- -- -- 1,132
Industrial/Warehouse 2,202 16,263 3,302 -- 21,767
Churches 22,117 792 39,986 -- 62,895
Other 14,318 17,533 14,765 -- 46,616
- ---------------------------------------------------------------------------------------------------------------
Total Commercial $144,407 $84,133 $131,799 $ -- $360,339
Total Domestic Real Estate-
Commercial/Construction Loans 173,096 98,422 138,068 -- 409,586
Foreign -- -- -- 178,083 178,083
===============================================================================================================
Total Real Estate-
Commercial/Construction Loans $173,096 $98,422 $138,068 $178,083 $587,669
- ---------------------------------------------------------------------------------------------------------------
-20-
Table F:
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, 1998
United Kingdom $313 $ (73,380) $344,081 $ 3,874 $274,888
United States2 -- 378,419 -- 21,262 399,681
===============================================================================================================
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
- ---------------------------------------------------------------------------------------------------------------
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 NON-LOCAL CURRENCIES.
2 UNITED STATES CROSS-BORDER OUTSTANDINGS CONSIST OF DEPOSITS PLACED BY THE
CORPORATION IN FOREIGN BRANCHES OF UNITED STATES BANKS.
Table G:
CROSS-BORDER OUTSTANDINGS THAT EXCEED 1% OF TOTAL ASSETS
WITH NONPERFORMING OR PAST-DUE LOANS
TOTAL
NONACCRUAL NONPERFORMING PAST-DUE
(IN THOUSANDS) LOANS LOANS LOANS
- ---------------------------------------------------------------------------------------------------------------
As of December 31, 1998
United Kingdom $2,843 1 $2,843 $21
===============================================================================================================
As of December 31, 1997
United Kingdom 1,421 1,421 --
- ---------------------------------------------------------------------------------------------------------------
As of December 31, 1996
United Kingdom 287 287 --
- ---------------------------------------------------------------------------------------------------------------
1 AS OF DECEMBER 31, 1998, ALL NONACCRUAL LOANS ARE ALSO CLASSIFIED AS
RENEGOTIATED LOANS.
-21-
Table H:
MATURITIES OF SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1998
GROSS GROSS BOOK/
AMORTIZED UNREALIZED UNREALIZED MARKET
(IN THOUSANDS) COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities:
Mature after 10 years $113,677 $ -- $1,927 $111,750
Government Agencies Securities:
Due within 1 year 299,237 1 2 299,236
Due after 1 year but within 5 years 49,961 56 -- 50,017
Due after 5 years but within 10 years 41,967 124 -- 42,091
Mortgage Backed Securities:
Due after 5 years but within 10 years 13,314 -- 25 13,289
Mature after 10 years 410,838 249 873 410,214
Other Securities:
Mature within 1 year 12,603 -- -- 12,603
Mature after 10 years 30,974 927 373 31,528
===============================================================================================================
Total Securities Available for Sale $972,571 $1,357 $3,200 $970,728
- ---------------------------------------------------------------------------------------------------------------
Table I:
RESERVE FOR LOAN LOSSES AND SUMMARY OF CHARGE-OFFS (RECOVERIES)
DECEMBER 31,
(IN THOUSANDS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Balance, January 1 $ 52,381 $ 64,486 $ 56,546 $ 97,039 $ 86,513
Provision for Loan Losses -- (12,000) -- (55,000) 6,300
Loans Charged Off:
Commercial and Financial 579 146 764 243 593
Real Estate-Commercial/Construction 183 -- 1,061 697 6,800
Residential Mortgage 5 10 11 -- 409
Home Equity 186 448 67 438 98
Consumer 2,232 2,047 1,513 906 1,511
Foreign 937 593 260 6,106 3,219
- ---------------------------------------------------------------------------------------------------------------
Total Loans Charged Off 4,122 3,244 3,676 8,390 12,630
Recoveries on Charged-Off Loans:
Commercial and Financial 72 220 397 2,084 695
Real Estate-Commercial/Construction 4,410 2,263 3,802 11,408 8,847
Residential Mortgage -- 10 -- 84 136
Home Equity 58 47 27 114 4
Consumer 546 510 512 838 942
Foreign 1,016 666 5,513 8,400 5,034
- ---------------------------------------------------------------------------------------------------------------
Total Recoveries on Charged-Off Loans 6,102 3,716 10,251 22,928 15,658
Net Charge-Offs (Recoveries) (1,980) (472) (6,575) (14,538) (3,028)
Foreign Exchange Translation Adjustments 94 (577) 1,365 (31) 1,198
===============================================================================================================
Balance, December 31 $ 54,455 $ 52,381 $ 64,486 $ 56,546 $ 97,039
- ---------------------------------------------------------------------------------------------------------------
Ratio of Net Charge-Offs (Recoveries) to
Average Loans (.06)% (.02)% (.26)% (.57)% (.12)%
Ratio of Reserve for Loan Losses to Total Loans 1.67 % 1.82 % 2.44 % 2.20 % 3.81 %
-22-
Table J:
RESERVE FOR LOAN LOSSES ALLOCATION AND LOAN DISTRIBUTION
DECEMBER 31,
Allocation of the Reserve for Loan Losses
(IN THOUSANDS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Commercial and Financial $20,990 $ 5,524 $ 6,838 $ 9,334 $11,658
Real Estate-Residential and
Commercial/Construction 5,714 9,109 8,191 9,543 11,988
Home Equity and Consumer 2,612 3,593 4,236 2,717 6,178
Foreign 7,845 4,765 4,752 5,030 11,981
Based on Qualitative Factors 17,294 29,390 40,469 29,922 55,234
===============================================================================================================
Balance, December 31 $54,455 $52,381 $64,486 $56,546 $97,039
- ---------------------------------------------------------------------------------------------------------------
Distribution of Year-End Loans
(IN THOUSANDS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Commercial and Financial 20.5 % 18.4 % 16.8 % 15.6 % 15.8 %
Real Estate-Residential and
Commercial/Construction 51.7 54.3 59.9 62.9 64.5
Home Equity and Consumer 11.8 13.8 13.7 12.8 11.7
Foreign 16.0 13.5 9.6 8.7 8.0
===============================================================================================================
Balance, December 31 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
- ---------------------------------------------------------------------------------------------------------------
-23-
Table K:
NONPERFORMING ASSETS AND PAST-DUE LOANS
DECEMBER 31,
(IN THOUSANDS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS:
Nonaccrual Loans:
Domestic $ 26,831 $ 1,916 $ 9,133 $ 7,542 $ 11,518
Foreign -- 1,877 743 1,784 15,865
- ---------------------------------------------------------------------------------------------------------------
Total Nonaccrual Loans 26,831 3,793 9,876 9,326 27,383
Renegotiated Loans:1
Domestic 77 101 125 3,410 288
Foreign 2,843 -- -- -- 267
- ---------------------------------------------------------------------------------------------------------------
Total Renegotiated Loans 2,920 101 125 3,410 555
Other Real Estate Owned, Net:
Domestic 1,638 4,993 27,722 32,627 44,068
Foreign 42 83 399 570 3,695
- ---------------------------------------------------------------------------------------------------------------
Total Other Real Estate Owned, Net 1,680 5,076 28,121 33,197 47,763
===============================================================================================================
Total Nonperforming Assets, Net $ 31,431 $ 8,970 $ 38,122 $ 45,933 $ 75,701
- ---------------------------------------------------------------------------------------------------------------
PAST-DUE LOANS:
Domestic $ 25,254 $ 7,279 $ 3,849 $ 5,423 $ 6,091
Foreign 15 -- -- 36 30
===============================================================================================================
Total Past-Due Loans $ 25,269 $ 7,279 $ 3,849 $ 5,459 $ 6,121
- ---------------------------------------------------------------------------------------------------------------
Total Loans, Net of Deferred
Loan Fees, Premiums
and Discounts $3,258,135 $2,884,373 $2,637,834 $2,571,959 $2,549,924
Ratio of Nonaccrual Loans to Total Loans .82% .13 % .37% .36% 1.07%
Ratio of Nonperforming Assets to Total Loans
and Other Real Estate Owned, Net .96% .31 % 1.43% 1.76% 2.91%
- ---------------------------------------------------------------------------------------------------------------
1 RENEGOTIATED LOANS DO NOT INCLUDE $6.5 MILLION IN LOANS RENEGOTIATED AT MARKET
TERMS THAT HAVE PERFORMED IN ACCORDANCE WITH THEIR RESPECTIVE RENEGOTIATED
TERMS.
-24-
Table L:
INTEREST INCOME ON NONACCRUAL AND RENEGOTIATED LOANS
DECEMBER 31,
(IN THOUSANDS) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Interest Income at Original Terms:
Nonaccrual Loans:
Domestic $ 751 $ 385 $ 972 $ 1,230 $ 3,571
Foreign -- 65 228 1,156 2,476
Renegotiated Loans 586 18 68 54 444
===============================================================================================================
Total $ 1,337 $ 468 $ 1,268 $ 2,440 $ 6,491
- ---------------------------------------------------------------------------------------------------------------
Actual Interest Income Recognized:
Nonaccrual Loans:
Domestic $ -- $ 5 $ 254 $ 214 $ 458
Foreign -- -- 37 186 1,075
Renegotiated Loans -- -- -- -- --
===============================================================================================================
Total $ -- $ 5 $ 291 $ 400 $ 1,533
- ---------------------------------------------------------------------------------------------------------------
Table M:
SHORT-TERM BORROWINGS
FEDERAL FUNDS PURCHASED U.S. TREASURY DEMAND NOTES
AND REPURCHASE AGREEMENTS AND OTHER SHORT-TERM BORROWINGS
(IN THOUSANDS) 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31 $353,303 $327,579 $237,166 $21,077 $24,929 $ 18,068
Average Amount Outstanding1 396,438 266,828 212,206 18,824 17,563 28,747
Weighted-Average Rate Paid1 4.90% 5.09% 4.73% 2.16% 5.10% 4.41%
Maximum Amount Outstanding at any
Month-End 547,934 346,086 347,017 27,014 26,522 125,145
- ---------------------------------------------------------------------------------------------------------------
1 AVERAGE AMOUNTS ARE BASED ON DAILY BALANCES. AVERAGE RATES ARE COMPUTED ON
ACTUAL INTEREST EXPENSE DIVIDED BY AVERAGE AMOUNTS OUTSTANDING.
-25-
Table N:
INTEREST-RATE SENSITIVITY ANALYSIS 1
MOVEMENTS IN INTEREST RATES FROM DECEMBER 31, 1998
(IN THOUSANDS) SIMULATED IMPACT OVER NEXT SIMULATED IMPACT OVER NEXT
TWELVE MONTHS THIRTY-SIX MONTHS
- ---------------------------------------------------------------------------------------------------------------
+100BP -100BP +300BP -300BP
- ---------------------------------------------------------------------------------------------------------------
Simulated Impact Compared with a
Most Likely Scenario:
Net Interest Income Increase/(Decrease) (0.4)% 0.0% 0.6% (4.7)%
Net Interest Income Increase/(Decrease)$ (813) $ 65 $ 3,622 $(28,401)
- ---------------------------------------------------------------------------------------------------------------
MOVEMENTS IN INTEREST RATES FROM DECEMBER 31, 1997
SIMULATED IMPACT OVER NEXT SIMULATED IMPACT OVER NEXT
TWELVE MONTHS THIRTY-SIX MONTHS
- ---------------------------------------------------------------------------------------------------------------
+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
- ---------------------------------------------------------------------------------------------------------------
1 KEY ASSUMPTIONS:
ASSUMPTIONS WITH RESPECT TO THE MODEL'S PROJECTION 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.
Table O:
CAPITAL RATIOS
DECEMBER 31,
REQUIRED WELL
1998 1997 MINIMUMS CAPITALIZED
- ---------------------------------------------------------------------------------------------------------------
Riggs National Corporation
Tier I 14.63 % 18.45 % 4.00 % 6.00 %
Combined Tier I and Tier II 27.51 31.52 8.00 10.00
Leverage 9.33 11.15 4.00 5.00
Riggs Bank N.A.
Tier I 12.17 14.35 4.00 6.00
Combined Tier I and Tier II 13.43 15.60 8.00 10.00
Leverage 8.26 8.64 4.00 5.00
- ---------------------------------------------------------------------------------------------------------------
-26-
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Sensitivity to Market Risk and Table N" on Pages 12 and 26,
respectively, of this Form 10-K.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE(S)
(a) The following consolidated financial statements
and related documents are set forth in this Annual
Report on Form 10-K as follows:
Riggs National Corporation and Subsidiaries:
Consolidated Statements of Income 28
Consolidated Statements of Condition 29
Consolidated Statements of Changes in Stockholders' Equity 30
Consolidated Statements of Cash Flows 31
Notes to Consolidated Financial Statements 32-65
Management's Report on Financial Statements 66
Report of Independent Public Accountants 67
(b) The following supplementary data is set forth
in this Annual Report on Form 10-K as follows:
Quarterly Financial Information 68
Consolidated Financial Ratios and Other Information 68
Quarterly Stock Information 69
-27-
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and Fees on Loans $ 238,564 $208,100 $201,414
Interest and Dividends on Securities Available for Sale 69,508 83,939 63,009
Interest on Money Market Assets:
Time Deposits with Other Banks 33,379 8,470 10,288
Federal Funds Sold and Reverse Repurchase Agreements 12,351 30,283 18,487
- ---------------------------------------------------------------------------------------------------------------
Total Interest on Money Market Assets 45,730 38,753 28,775
TOTAL INTEREST INCOME 353,802 330,792 293,198
INTEREST EXPENSE
Interest on Deposits:
Savings and NOW Accounts 4,967 6,359 13,944
Money Market Deposit Accounts 41,260 51,375 38,363
Time Deposits in Domestic Offices 45,029 35,091 38,738
Time Deposits in Foreign Offices 34,