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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 1993
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number 0-9756
RIGGS NATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 52-1217953
- - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1503 Pennsylvania Avenue, N. W., Washington, D. C. 20005
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(Address of principal executive offices) (Zip Code)
(202) 835-6000
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(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
- - ------------------- -----------------------------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class Name of each exchange on which registered
- - ----------------------- -----------------------------------------
Common Stock, par value OTC, NASDAQ National Market System
$2.50 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
The aggregate market value of the Corporation's voting stock held by non-
affiliates of the registrant as of February 28, 1994, was $184,286,583.
The number of shares outstanding of the registrant's common stock, as of March
31, 1994, was 30,223,214.
DOCUMENT INCORPORATED BY REFERENCE
Portions of Riggs National Corporation's definitive Proxy Statement to
Stockholders are incorporated by reference, except for Items 402(k) and (l) of
Regulation S-K, in Parts I and III of this Annual Report.
FORM 10-K INDEX
PART I Page(s) Sequential Page(s)
Item 1--Business 3 3
Item 2--Properties 6 6
Item 3--Legal Proceedings 6 6
Item 4--Submission of Matters to a Vote of
Security Holders 6 6
PART II
Item 5--Market for Registrant's Common
Equity and Related Stockholder
Matters 7 7
Item 6--Selected Financial Data 7 7
Item 7--Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8 8
Item 8--Financial Statements and
Supplementary Data 33 33
Item 9--Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 69 69
PART III
Item 10--Directors and Executive Officers of
the Registrant (A), 69 69
Item 11--Executive Compensation 71 71
Item 12--Security Ownership of Certain
Beneficial Owners and Management 71 71
Item 13--Certain Relationships and Related
Transactions (A), 71 71
PART IV
Item 14--Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 72 72
(A) Portions of Riggs National Corporation's definitive Proxy Statement to
Stockholders are incorporated by reference, except for Items 402(k) and
(l) of Regulation S-K, in Parts I and III of this Annual Report.
2
PART I
ITEM 1.
BUSINESS
Riggs National Corporation
Riggs National Corporation (the "Corporation") is a multi-bank holding company
registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"),
and incorporated in the State of Delaware. The Corporation engages in a variety
of banking-related activities, either directly or through subsidiaries. The
Corporation currently has banking subsidiaries in Washington, D.C.; Virginia;
Maryland; Miami, Florida; London, England; Paris, France; and Nassau, Bahamas.
Additionally, the Corporation provides investment advisory services domestically
through a subsidiary registered under the Investment Advisers Act of 1940 and
internationally through a subsidiary in Geneva, Switzerland. Subsidiaries of
the Corporation located in Gibraltar provide trust and corporate services.
The Corporation provides a wide range of financial services to a broad
customer base. These include traditional retail banking, corporate and
commercial banking, and trust and investment advisory services. The
Corporation's trust group provides fiduciary and administrative services,
including financial management and tax planning for individuals, investment and
accounting services for corporate and nonprofit organizations, estate planning
and trust administration, as well as bond trusteeship for state and local
governments and public companies.
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The Riggs National Bank of Washington, D.C.
The Corporation's principal subsidiary is The Riggs National Bank of Washington,
D.C. ("Riggs-Washington"), a national banking association founded in 1836 and
incorporated under the national banking laws of the United States in 1896.
Riggs-Washington had assets of $4.21 billion, deposits of $3.29 billion, and
stockholder's equity of $270 million at December 31, 1993.
Riggs-Washington operates 34 branches and an investment advisory subsidiary
in Washington, D.C., commercial banks in London, England and Paris, France, an
Edge Act subsidiary in Miami, Florida, branch offices in London, England and
Nassau, Bahamas, an investment advisory subsidiary in Geneva, Switzerland, and
a Bahamian bank and trust company. At December 31, 1993, Riggs-Washington and
its subsidiaries had 1,494 full-time equivalent employees.
As a commercial bank, Riggs-Washington provides a wide array of financial
services to customers in the Washington metropolitan area, throughout the United
States and internationally.
Riggs-Washington's Corporate and Commercial Banking Groups provide services to
customers ranging from small regional businesses to major multinational
companies. These services include lines of credit, secured and unsecured term
loans, letters of credit, credit support facilities, foreign currency
transactions and cash management.
Riggs-Washington's Trust and Financial Services Group provides fiduciary and
administrative services, including financial management and tax planning for
individuals, investment and accounting services for corporate and non-profit
organizations, estate planning and trust administration, as well as bond
trusteeship for state and local governments and public companies.
Riggs-Washington provides investment advisory services through Riggs
Investment Management Corporation ("RIMCO"), a wholly owned subsidiary
incorporated under the laws of Delaware and registered under the Investment
Advisers Act of 1940.
Riggs-Washington's Retail Banking Group provides a variety of services
including checking, NOW, savings and money market accounts, loans and personal
lines of credit, certificates of deposit and individual retirement accounts.
Additionally, the Retail Banking Group provides 24-hour banking services through
a network of Riggs's automated teller machines ("ATMs") and through national and
regional ATM networks.
Riggs-Washington's International Banking Group furnishes a variety of
financial services including issuing letters of credit in connection with trade
and other transactions, taking deposits, foreign exchange, private banking and
cash management. Customers include embassies and foreign missions in
Washington, D.C., foreign governments, central banks, and over 200 correspondent
banks around the world. These services are provided through both domestic and
international offices. Riggs-Washington owns majority interests in an
investment advisory firm, Riggs Valmet, S.A., headquartered in Geneva,
Switzerland, and a trust and corporate service company, Riggs Valmet Holdings
Limited, headquartered in Gibraltar. Riggs Valmet, S.A. provides portfolio
management services and Riggs Valmet Holdings Limited forms and administers
trusts and private companies in many jurisdictions for a wide variety of
purposes including estate planning and personal and corporate tax planning.
The Riggs Bank and Trust Company (Bahamas) Limited, in Nassau, provides trust
services for international private banking customers. Riggs-Washington operates
a branch in the U.S. Embassy in London which services the Embassy, its employees
and official visitors. In 1991, Riggs-Washington opened a banking subsidiary
under the laws of France. A full service commercial bank, The Riggs National
Bank (Europe) S.A. ("Riggs-Europe") has one branch located in the U.S. Embassy
in Paris. In addition to serving the Embassy, its employees and official
visitors, the Riggs-Europe office also assists the U.S. Government with
disbursement activities for the Department of Defense and Department of State
for all their facilities in Europe.
3
Riggs AP Bank Limited
Riggs AP Bank Limited ("Riggs AP"), a merchant bank located in London, England
is a wholly owned subsidiary of Riggs-Washington. Riggs AP provides traditional
corporate banking services, commercial property financing, investment banking
services and trade finance. At December 31, 1993, Riggs AP had total assets of
$173 million representing 3.6% of the Corporation's total assets and loans of
$93 million or 36.4% of the Corporation's total foreign loans and 3.7% of total
loans.
---------------------------------------------------
The Riggs National Bank of Virginia
The Riggs National Bank of Virginia ("Riggs-Virginia") is a nationally chartered
full-service commercial bank. At December 31, 1993, Riggs-Virginia had assets
of $344 million, deposits of $311 million and stockholder's equity of $31
million. Riggs-Virginia's 17 branches are located in Northern Virginia. At
December 31, 1993, Riggs-Virginia had 102 full-time equivalent employees.
---------------------------------------------------
The Riggs National Bank of Maryland
The Riggs National Bank of Maryland ("Riggs-Maryland") is a nationally chartered
full-service commercial bank. At December 31, 1993, Riggs-Maryland had assets
of $196 million, deposits of $182 million, and stockholder's equity of $13
million. Riggs-Maryland's 11 branches are all located in Montgomery and Prince
Georges counties, Maryland. At December 31, 1993, Riggs-Maryland had 68 full-
time equivalent employees.
---------------------------------------------------
Supervision and Regulation
The Corporation and certain of its subsidiaries are subject to the supervision
of and regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). The Corporation's national banking subsidiaries and
certain of their subsidiaries are subject to the supervision of and regulation
by the Office of the Comptroller of the Currency (the "OCC"). Other federal,
state and foreign laws govern many aspects of the businesses of the Corporation
and its subsidiaries.
Under the BHCA, bank holding companies may not directly or indirectly acquire
the ownership or control of five percent or more of the voting shares or
substantially all of the assets of any company, including a bank, without the
prior approval of the Federal Reserve Board. The BHCA also restricts the types
of businesses and activities in which a bank holding company and its
subsidiaries may engage. Generally, activities are limited to banking and
activities found by the Federal Reserve Board to be so closely related to
banking as to be a proper incident thereto. In addition, the BHCA generally
prohibits the Federal Reserve Board from approving an application from a bank
holding company to acquire a bank or bank holding companies unless such an
acquisition is specifically authorized by statute of the state in which the bank
whose shares to be acquired is located. A majority of states have adopted
statutes permitting out-of-state bank holding companies to acquire in-state
banks and bank holding companies, but usually only if the state in which the
acquiring company is located permits reciprocal acquisitions of its banks and
bank holding companies. The District of Columbia has authorized banks outside a
thirteen-state region to acquire District banks provided they make substantial
financial commitments to the District of Columbia.
Congress is currently considering legislation that would provide for
nationwide interstate banking, subject to certain limitations, including the
ability of states to opt out of coverage. However, the Corporation is unable to
predict whether or not any such legislation will be adopted and, if so, what the
final form of the legislation will be.
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 Pages 22 and 23 and Note 11, Page 51.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), in September 1992, the FDIC issued regulations to implement a risk-
based deposit insurance assessment system under which 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." Based
on its capital category and supervisory subgroup, each insured institution is
assigned an annual FDIC assessment rate, which currently varies between $.23 and
$.31 per $100 of deposits. The new rates were effective for the semi-annual
assessment period beginning January 1, 1993. The Corporation experienced an
increase in its insurance premiums for its three insured banking subsidiaries of
approximately $1.5 million during 1993 as a result of the new assessment
schedule.
FDICIA contains numerous other provisions. Among other things, FDICIA
requires the federal banking agencies to take "prompt corrective action" in
respect of depository institutions that do not meet minimum capital
requirements. FDICIA required each Federal banking agency, including the OCC,
to specify within nine months after the date of enactment of the statute, by
regulation, the levels at which an insured institution would be considered "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." In October 1992, each of
the federal banking agencies including the OCC, issued uniform final regulations
defining such capital levels. Under these regulations, a bank is considered
"well capitalized" if it has (i) a total risk-based capital ratio of 10 percent
or greater, (ii) a Tier 1 risk-based capital ratio of 6 percent or greater,
(iii) a leverage ratio of 5 percent or greater
4
and (iv) is not subject to any order or written directive to meet and maintain
a specific capital level. An "adequately capitalized" bank is defined as one
that has (i) a total risk-based capital ratio of 8 percent or greater, (ii) a
Tier 1 risk-based capital ratio of 4 percent or greater and (iii) a leverage
ratio of 4 percent or greater (or 3 percent or greater in the case of a bank
with the highest composite regulatory examination rating). A bank is
considered (A) "undercapitalized" if it has (i) a total risk-based capital
ratio of less than 8 percent, (ii) a Tier 1 risk-based capital ratio of less
than 4 percent or (iii) a leverage ratio of less than 4 percent (or 3 percent
in the case of a bank with the highest composite regulatory examination
rating); (B) "significantly undercapitalized" if the bank has (i) a total risk-
based capital ratio of less than 6 percent, (ii) a Tier 1 risk-based capital
ratio of less than 3 percent or (iii) a leverage ratio of less than 3 percent;
and (C) "critically undercapitalized" if the bank has a ratio of tangible
equity to total assets of equal to or less than 2 percent. Each of the bank
subsidiaries of the Corporation exceeds current minimum regulatory capital
requirements, and qualifies, at a minimum, as "adequately capitalized." The
applicable federal bank regulator for a depository institution may, under
certain circumstances, reclassify a "well capitalized" institution as
"adequately capitalized" or require an "adequately capitalized" or
"undercapitalized" institution to comply with supervisory actions as if it
were in the next lower category. Such a reclassification may be made if the
regulatory agency determines that the institution is in an unsafe or unsound
condition (which could include unsatisfactory examination ratings). A summary
of applicable regulatory capital ratios and the minimums required by the OCC
under its capital guidelines for Riggs-Washington, Riggs-Virginia and Riggs-
Maryland on a historical basis are shown in Note 11, "Reserve Balances, Funds
Restrictions, Regulatory Matters and Capital Requirements."
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying 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. A depository institution's holding company
must guarantee that capital plan in order for it to be accepted by the
regulators, up to an amount equal to the lesser of 5% of the depository
institution's assets at the time it becomes undercapitalized or the amount
needed to comply with the plan. The federal banking agencies may not accept a
capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository
institution's capital. If a depository institution fails to submit an
acceptable plan, it is treated as if it is significantly undercapitalized.
Significantly or critically undercapitalized institutions and undercapitalized
institutions that do not submit and comply with capital restoration plan
acceptable to the applicable Federal banking agency will be subject to one or
more of the following sanctions: (i) forced sale of shares to raise capital or,
where grounds exist for the appointment of a receiver or conservator, or forced
merger; (ii) restrictions on transactions with affiliates; (iii) limitations on
interest rates paid on deposits; (iv) further restrictions on growth or required
shrinkage; (v) replacement of directors or senior executive officers, subject to
certain grandfather provisions for those elected prior to enactment of FDICIA;
(vi) prohibitions on the receipt of correspondent deposit; (vii) restriction on
capital distributions by the holding companies of such institutions; (viii)
required divestiture of subsidiaries by the institution; or (ix) other
restrictions, as determined by the regulator. In addition, the compensation of
executive officers would be frozen at the level in effect when the institition
failed to meet the capital standards. A forced sale of shares or merger,
restrictions on affiliate transactions and restrictions on rates paid on
deposits would be required to be imposed by the primary federal regulator unless
that regulator determined that they would not further capital improvement.
FDICIA generally requires the appointment of a conservator or receiver within
90 days after a depository institution becomes critically undercapitalized,
unless the FDIC and the institution's primary federal regulator jointly
determine that another course of action would better protect the federal deposit
insurance fund. FDICIA also provides that the board of directors of an insured
depository institution would not be liable to the institution's shareholders or
creditors for consenting in good faith to the appointment of a receiver or
conservator for the institution or to an acquisition or merger of the
institution required by the regulators.
Under the FDIC's final regulations governing the receipt of brokered deposits,
a bank cannot accept brokered deposits unless it is (i) "well capitalized" or
(ii) it is "adequately capitalized" and receives a waiver from the FDIC. In
addition, a bank that is not well capitalized may not offer rates of interest on
deposits that are more than 75 basis points above prevailing rates. Also, "pass
through" deposit insurance is not available for deposits of certain employee
benefit plans in banks that do not meet all minimum capital requirements. As
mentioned above, under the current regulations, each of the bank subsidiaries of
the Corporation exceeds current minimum regulatory capital requirements and
qualifies, at a minimum, as "adequately capitalized." Riggs-Washington does not
solicit brokered deposits and, accordingly, the Corporation does not believe
that the regulations will have an adverse effect on its operations. However,
Riggs-Washington has received a waiver from the FDIC to provide pass-through
deposit insurance to employee benefit plans held in the Trust Department.
Among FDICIA's numerous other provisions are new reporting requirements,
termination of the "too big to fail" doctrine except in special cases,
limitations on the FDIC's ability to pay deposits at foreign branches and
provisions requiring the federal banking agencies to promulgate regulations and
specify standards in numerous areas of bank operations, including interest rate
exposure, asset growth,
5
internal controls, credit underwriting, executive officer and director
compensation, real estate construction financing, additional review of capital
standards, interbank liabilities and other operational and managerial
standards as the agencies determine appropriate. These regulations have
increased and may continue to increase the cost of and the regulatory burden
associated with the banking business.
There are legal restrictions on the extent to which the Corporation and its
non-bank subsidiaries may borrow or otherwise obtain credit from Riggs-
Washington, Riggs-Virginia, and Riggs-Maryland. Subject to certain limited
exceptions, a bank subsidiary may not extend credit to the Corporation or to any
other affiliate (as defined) in an amount which exceeds 10% of its capital stock
and surplus and may not extend credit in the aggregate to such affiliates in an
amount which exceeds 20% of its capital stock and surplus. Further, there are
legal requirements as to the type, amount and quality of collateral which must
secure such extensions of credit by each bank subsidiary to the Corporation or
to other affiliates. Finally, extensions of credit and other transactions
between a bank subsidiary and the Corporation or other affiliates must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to such a bank subsidiary as
those prevailing at the time for comparable transactions with non-affiliated
companies.
Under Federal Reserve Board policy, bank holding companies are expected to act
as a source of financial strength to their subsidiary banks and to commit
resources to support such banks in circumstances where a bank holding company
might not do so absent such policy. In addition, any capital loans by a bank
holding company to any of its subsidiary banks are subordinate in right of
payment to deposits and to certain other indebtedness of such subsidiary bank.
In the event of a bank holding company's bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
---------------------------------------------------
ITEM 2.
PROPERTIES
The Corporation owns properties located in Washington, D.C. which house its
executive offices, twelve of its branches and certain operational units of
Riggs-Washington. The Corporation also owns an office building and a
residential property in London, England, and leases various properties in
Washington, D.C.; London, England; Miami, Florida; Northern Virginia; Maryland;
Paris, France; Geneva and Lugano, Switzerland; and Gibraltar.
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 certain instances, borrowers have asserted or
threatened counterclaims and defenses based on various "lender liability"
theories. In the opinion of management, based on its assesssment and
consultation with outside counsel, litigation which is currently pending against
the Corporation will not have a material impact on the financial condition or
future operations of the Corporation as a whole.
The Corporation is contesting in Tax court the disallowance of Brazilian
Foreign Tax Credits by the Internal Revenue Service. The net tax benefit of
these tax credits have not been recognized for financial reporting purposes,
therefore, there will be no adverse impact on earnings if the Internal Revenue
Service were to prevail.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for vote during the fourth quarter
of 1993.
6
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The common stock of Riggs National Corporation is traded in the Over-the-Counter
Market, NASDAQ National Market System. The NASDAQ symbol for the common stock
is "RIGS."
A history of the Corporation's stock prices and dividends can be found under
Quarterly Stock Information on Page 67 of this Form 10-K.
As of December 31, 1993, there were 4,488 stockholders of record.
Other information required by this item is set forth in Notes 11 and 15 on
Pages 51 and 57, respectively, of this Form 10-K.
ITEM 6.
FINANCIAL REVIEW
Selected Financial Data
(In thousands, except per share amounts) 1993 1992 1991 1990 1989
- - -------------------------------------------------------------------------------------------------------------------
Interest Income $256,951 $327,540 $474,815 $649,010 $621,200
Interest Expense 122,130 189,604 319,719 476,397 442,099
- - -------------------------------------------------------------------------------------------------------------------
Net Interest Income 134,821 137,936 155,096 172,613 179,101
Less: Provision for Loan Losses 69,290 52,067 43,655 106,408 5,588
- - -------------------------------------------------------------------------------------------------------------------
Net Interest Income after Provision for Loan Losses 65,531 85,869 111,441 66,205 173,513
Noninterest Income Excluding Securities Gains 88,509 96,200 92,961 78,179 65,144
Securities Gains, Net 24,141 34,213 13,692 1,263 8,285
Provision for Losses on Accelerated Disposition
of Real Estate Assets -- -- 49,800 -- --
Noninterest Expense 266,752 238,403 240,371 236,277 189,910
- - -------------------------------------------------------------------------------------------------------------------
Income (Loss) before Taxes and Extraordinary Item (88,571) (22,121) (72,077) (90,630) 57,032
Applicable Income Tax (Benefit) Expense 5,640 (1,069) (6,130) (29,413) 17,609
- - -------------------------------------------------------------------------------------------------------------------
Income (Loss) before Extraordinary Item, Net of Taxes (94,211) (21,052) (65,947) (61,217) 39,423
Extraordinary Item - Gain on Purchase of Debt, Net of Taxes -- -- 2,486 4,569 --
- - -------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $(94,211) $(21,052) $(63,461) $(56,648) $ 39,423
Earnings (Loss) Per Share:
Income (Loss) before Extraordinary Item, Net of Taxes $ (3.65) $ (.87) $ (4.79) $ (4.44) $ 2.86
Extraordinary Item - Gain on Purchase of Debt, Net of Taxes -- -- .18 .33 --
- - -------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Share $ (3.65) $ (.87) $ (4.61) $ (4.11) $ 2.86
- - -------------------------------------------------------------------------------------------------------------------
Dividends Declared Per Common Share* $ -- $ -- $ .05 $ 1.087 $ 1.25
- - -------------------------------------------------------------------------------------------------------------------
* A cash dividend of $.15 per share applicable to the fourth quarter of 1990
was declared on January 22, 1991, and paid on February 15, 1991.
7
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Earnings Summary
The Corporation achieved a profitable second half of 1993, earning $6.0 million,
compared with a loss of $18.8 million for the same period in 1992. In addition,
nonperforming assets decreased by $98.5 million during this period to their
lowest level in over three years. The financial results also reflect the impact
of a significant cost reduction and revenue enhancing strategy ("BankStart
'93"), which was initiated in the first quarter of 1993, and financial
restructurings of both domestic and London operations during the second quarter
of 1993. In addition, the Corporation's performance during the last half of
1993 was positively affected by economic improvements in the Washington, D.C.,
and London areas, the Corporation's primary markets.
For the year 1993, the Corporation reported a loss of $94.2 million, compared
with a loss of $21.1 million for 1992. The major factors contributing to the
1993 loss were provisions for loan losses of $69.3 million, other real estate
owned expenses of $13.5 million, and restructuring expenses of $34.6 million,
which were only partially offset by securities gains of $24.1 million. The 1992
loss resulted from provisions for loan losses of $52.1 million and other real
estate owned expenses of $15.7 million, and was partially offset by securities
gains of $34.2 million, as well as $5.9 million of nonrecurring interest income
related to a tax receivable.
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Restructuring and Positioning Riggs for the Future
During 1993 the Corporation undertook and accomplished a significant self-
evaluation and redefinition of its goals and market position. These initiatives
included BankStart '93, financial restructurings (both domestically and in the
London operations), hiring a new Chief Executive Officer for The Riggs National
Bank of Washington, D.C. ("Riggs-Washington") and significantly strengthening
the management team, adopting a supercommunity bank focus for the future and
raising $132 million in new equity capital.
BankStart '93. In January 1993, the Corporation initiated BankStart '93, a
comprehensive, corporation-wide project designed to make it more cost efficient
and operationally effective. Each line of business was reexamined in order to
identify opportunities to improve efficiencies and reduce costs. The goal of
the project was to identify revenue enhancements, productivity advances, expense
reductions and product line modifications needed to facilitate the Corporation's
return to consistent profitability. A significant portion of the expense
reduction came from reduced staffing. When the program began, the authorized
number of full-time positions for the Corporation's domestic subsidiaries was
2,060. By December 31, 1993, the authorized number of full-time equivalent
domestic employees had been reduced to approximately 1,700. Subsequent to
BankStart '93, the Corporation identified market opportunities available and
has decided to pursue a "supercommunity bank" strategy (discussed later in this
section). This strategy will result in staff additions, although such
additions, when netted against the remaining BankStart '93 and other reductions,
will leave the staffing complement at approximately the year-end 1993 level.
In the first quarter of 1993, the Corporation took a restructuring charge of
$13.8 million, representing management's estimate of the cost of implementing
BankStart '93. At December 31, 1993, $4.6 million of these expenses remained in
the accrual and are expected to be paid over the remaining implementation
period. BankStart '93 is expected to be substantially implemented by mid-year
1994. This estimate of the implementation costs is evaluated by management on
an ongoing basis and, as adjustments are known, will be revised accordingly.
Financial Restructurings. At the end of the second quarter of 1993, the
Corporation announced a financial restructuring designed to facilitate its
return to profitability. The steps taken included charging off the doubtful
portions of all loans, exiting unprofitable lines of business in the United
Kingdom, reducing its investments in certain foreign subsidiaries and increasing
reserves against problem assets in order to facilitate their disposition. These
actions led to second-quarter provisions for loan losses of $49.2 million,
restructuring charges of $20.8 million, and expenses for other real estate owned
of $16.9 million. Of the $49.2 million in provisions for loan losses, $24.7
million related to commercial real estate in the Washington, D.C., area, and
$24.5 million related to commercial property loans and corporate loans in the
United Kingdom.
As a part of the financial restructuring, the Corporation adopted a plan for
its London operations (the combination of the London branch of Riggs-Washington
and the subsidiary, Riggs AP Bank). This plan addresses the potential risk in
the loan and other real estate owned portfolios in its London operations, and is
designed to facilitate the disposition of certain troubled assets and to exit
unprofitable lines of business. The London operations have been reorganized on
a basis consistent with the Corporation's domestic strategy to segregate ongoing
banking business from the management of problem assets. In June 1993, Riggs AP
Bank transferred all $152.8 million of its nonperforming and classified loans to
Riggs-Washington. These assets were transferred at book
8
value, net of related reserves, and continue to be serviced by Riggs AP Bank.
Ongoing business lines are now centered on financing income-producing commercial
real estate properties in the United Kingdom, as well as financing international
trade transactions, primarily for mid-sized corporations based in the United
Kingdom. The Corporation has substantially completed its withdrawal from
certain business activities in the United Kingdom, including commercial leasing,
corporate finance and trading activity in foreign exchange and money market
instruments.
New Management Team. In June 1993, Paul M. Homan was appointed President and
Chief Executive Officer of Riggs-Washington and Vice Chairman of the
Corporation. Prior to joining the Corporation and Riggs-Washington, Mr. Homan
was President and Chief Executive Officer of First Florida Banks, Inc. of Tampa,
Florida. Prior to his tenure with First Florida, Mr. Homan held executive
positions with several other large financial institutions as well as with the
Office of the Comptroller of the Currency.
In addition to the appointment of Mr. Homan, the Corporation has significantly
strengthened its senior management team since early 1993 with the appointment of
a new Chief Financial Officer, a new head of its General Banking Group and new
heads of its Retail, Corporate and Commercial Lending, Commercial Real Estate
Lending, Loan Review, Audit and Appraisal Services Divisions and its newly
created Risk Management Division. Each of the new division heads has extensive
banking experience.
Supercommunity Bank Strategy. As the largest commercial bank holding company
headquartered in the nation's capital, the Corporation is uniquely positioned in
the center of an affluent market that combines significant public- and private-
sector customers. The Corporation attained this position by steadily growing
and prospering in the Washington, D.C., area for 157 years, and being the only
Washington, D.C.-based bank of size to survive the economic and industry
travails of the late 1980s and early 1990s. This departure of banks leaves the
Corporation competing with a host of community banks and the "super regionals."
In order to differentiate itself from the competition, the Corporation will
offer its customers a breadth of financial products typical of a regional bank
with the personalized service and local decision-making of a community bank.
The Corporation believes that its size will allow it to offer a broader product
line than its smaller competitors, while its personalized service and local
decision-making will give the Corporation a distinct advantage over its larger
regional competitors. Local decision-making and a commitment to the community
will be the key to retaining its existing customers and building new
relationships.
October Equity Sale. On October 21, 1993, as part of the financial
restructuring plan announced by the Corporation at the end of the second quarter
of 1993, the Corporation issued and sold 4,000,000 shares of Series B Preferred
Stock and 5,000,000 shares of Common Stock to certain investors in transactions
exempt from the registration requirements of the Securities Act. The shares of
Series B Preferred Stock and Common Stock were sold for $25 per share and $7.75
per share, respectively. The net proceeds to the Corporation from the October
equity sale (after deducting placement agent fees and related estimated
expenses) were approximately $132 million.
All of the Series B Preferred Stock and 2,924,000 shares of the Common Stock
sold in the October equity sale have been registered for resale by the investors
referred to above pursuant to a shelf registration statement, which is to be
maintained in effect for three years. The Corporation will not receive the
proceeds from any such resales.
---------------------------------------------------
Regulatory Developments
On May 14, 1993, the Corporation entered into a Memorandum of Understanding with
the Federal Reserve Bank of Richmond ("Reserve Bank") and Riggs-Washington
entered into a Written Agreement with the Office of the Comptroller of the
Currency (the "OCC"). The Memorandum of Understanding and the Written Agreement
were the result of regulatory concern over financial and operational weaknesses
and continued losses related primarily to the Corporation's domestic and United
Kingdom commercial real estate exposure.
Under the terms of the Memorandum of Understanding, the Corporation will
notify the Reserve Bank in advance of dividend declarations, the issuance and/or
redemption of long-term debt and use of cash assets in certain circumstances.
The Corporation is also required to submit plans and reports to the Reserve Bank
relating to capital, asset quality, loan loss reserves and operations, including
contingency measures if projected operational results do not occur. In
addition, the Audit Committee of the Corporation's Board of Directors has
reviewed and submitted a report to the Reserve Bank on the adequacy of data
submitted to it and the Board, and the Corporation has appointed a compliance
committee of Directors to monitor performance under the Memorandum of
Understanding.
In accordance with the terms of the Written Agreement, Riggs-Washington has
appointed a committee of its Board of Directors to monitor and coordinate
compliance with the agreement, implement recommendations previously made by an
independent management consultant, and continue to implement the action plan and
work plan previously adopted by Riggs-Washington. Riggs-Washington has met a
number of the requirements of the Written Agreement, including filing amended
call reports; adopting policies and procedures relating to the preparation of
call reports; adopting a capital plan that has been approved by the OCC (that
requires, among other things, a minimum total risk-based capital ratio of
10.00%, a minimum Tier I risk-based capital ratio of 6.00% and a minimum
leverage ratio of 5.00%); submitting for review by the OCC the results of
BankStart '93; and appointing a new president and chief executive officer.
9
EARNING ASSETS
Money Market Assets
Short-term instruments such as time deposits with other banks, federal funds
sold and resale agreements represent alternatives for the Corporation for the
deployment of excess short-term liquidity. These investments are lower-yielding
and are highly interest-rate sensitive. Funds available for short-term
investments generally are a function of daily movements in the Corporation's
deposit and loan portfolios, combined with the Corporation's overall interest-
rate risk and asset/liability strategy. In 1993, total money market assets
declined by $857.8 million, or 67.9%, as the Corporation shifted to higher-
yielding, longer-term assets, with increases in securities available for sale
and loans during the year. The total average of time deposits with other banks,
federal funds sold and resale agreements fell from $1.12 billion in 1992 to
$862.8 million in 1993.
Securities Available for Sale
Securities available for sale totaled $708.1 million at December 31, 1993,
compared with $159.6 million at year-end 1992. In the first quarter of 1993, in
view of management's intention to use certain securities as part of its
asset/liability strategy and the possibility that securities could be sold in
response to changes in interest rates or for liquidity purposes, $983 million of
securities were classified as held for sale. In the second quarter of 1993,
$696 million in securities held for sale were sold for a pretax gain of $25.9
million. Proceeds from this sale were used to purchase shorter-duration and
variable-rate securities classified as held for sale, in addition to money
market assets.
In May 1993, Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS No. 115) was
issued, effective for fiscal years beginning after December 15, 1993. This
pronouncement requires, among other items, the determination at the acquisition
date of a security whether such security is purchased with the intent and
ability to hold to maturity, whether it is purchased with the intent to trade,
or whether the security is available for sale. Under prior accounting policy,
securities were classified as held for investment if the Corporation had the
ability to hold securities to maturity and the intent to hold such securities
for the foreseeable future, with all other securities classified as held for
sale or trading.
The Corporation adopted SFAS No. 115 on December 31, 1993, which included a
review of the securities portfolio based on management's intent for the
securities at that time. This review resulted in the net transfer of $168.7
million in securities at December 31, 1993, from the available for sale
portfolio to the held-to-maturity portfolio. All unrealized gains and losses
from securities available for sale are excluded from earnings, with unrealized
gains and losses included, net, in stockholders' equity until realized. After
taking into affect the $168.7 million net transfer on December 31, 1993, the new
accounting treatment for the securities available for sale portfolio under SFAS
No. 115 resulted in a $1.28 million net unrealized gain in stockholders' equity.
Securities available for sale pledged to secure deposits and certain
borrowings amounted to $372.8 million at December 31, 1993, and $14.0 million at
December 31, 1992.
Securities Available for Sale
December 31, 1993
---------------------------------------------------
Gross Gross Book/
Amortized Unrealized Unrealized Market
(In thousands) Cost Gains Losses Value
- - -----------------------------------------------------------------------------------------------
U.S. Treasury Securities:
Due within 1 year $ 25,536 $ 337 $ -- $ 25,873
Due after 1 year but within 5 years 119,773 404 139 120,038
Mortgage-Backed Securities:
Due after 1 year but within 5 years 30,441 30 29 30,442
Due after 5 years but within 10 years 482,998 1,362 664 483,696
Due after 10 years 46,199 11 36 46,174
Other Securities:
Due after 1 year but within 5 years 1,216 -- -- 1,216
Due after 5 years but within 10 years 698 -- -- 698
- - -----------------------------------------------------------------------------------------------
Total Securities Available for Sale $706,861 $2,144 $868 $708,137
Total Securities Available for Sale
10
Securities Held-to-Maturity
Securities held-to-maturity totaled $660.1 million at December 31, 1993, down
$135.3 million, or 17.0%, from the level at December 31, 1992. The average
balance in securities held-to-maturity was $709.8 million for 1993, compared
with $686.1 million for 1992. At December 31, 1993, securities held-to-maturity
had gross unrealized gains of $729 thousand and gross unrealized losses of $18
thousand. The decrease in this portfolio was due to the transfer in the first
quarter of 1993 of $983 million in investment securities to the held for sale
portfolio -- see "Securities Available for Sale" discussion on prior page. At
December 31, 1993, this portfolio consisted primarily of U.S. Treasury
Securities with 97.6% of the portfolio maturing in one year or less. Other
securities consist primarily of floating-rate notes, preference shares of United
Kingdom companies and Federal Reserve stock. A portion of the securities held-
to-maturity portfolio is pledged to secure certain borrowings and deposits, with
total securities pledged of $271.2 million at December 31, 1993, and $320.0
million at year-end 1992.
As discussed in "Securities Available for Sale," the Corporation has specific
policies in place, in compliance with SFAS No. 115, that require the
determination at the acquisition date whether a security should be included in
the securities held-to-maturity portfolio; a security is included if it was
purchased with the intent and the ability to hold the security to maturity and
the Corporation does not anticipate disposing of it for liquidity purposes or
for the recognition of unrealized gains and losses. The Corporation has
policies that require, on an ongoing basis, that a determination be made whether
a security should continue to be in the held-to-maturity portfolio or be
transferred to the securities available for sale portfolio.
The table below details the securities held-to-maturity portfolio at December
31, 1993, 1992 and 1991.
Book Value of Securities Held-to-Maturity
December 31,
(In thousands) 1993 1992* 1991*
- - -------------------------------------------------------------------------------
U.S. Treasury Securities $629,282 $579,576 $356,706
Obligations of States and Political
Subdivisions 1,999 1,999 1,999
Mortgage-Backed Securities -- 173,782 51,015
Other Securities 28,781 40,036 73,984
- - -------------------------------------------------------------------------------
Total Securities Held-to-Maturity $660,062 $795,393 $483,704
* Investment Securities for 1992 and 1991 are presented in the Securities
Held-to-Maturity category. See Note 1 - "Summary of Significant Accounting
Policies."
- - --------------------------------------------------------------------------------
Loans
As of December 31, 1993, loans, net of premiums, discounts and unearned fees,
were $2.53 billion, an increase of $347.1 million (15.9%) from the year-end 1992
loan balance. This increase was due to the purchase of $435.9 million in
residential mortgage loans during 1993, which was part of an overall
asset/liability strategy to shift certain shorter-term assets to longer-term
maturities. Substantially all of these loans were recently originated, fixed-
rate residential mortgages with original maturities of 15 or 30 years, have an
average bond equivalent yield of 6.47% and are secured by properties located in
various regions throughout the United States. The purchases combined with local
area originations in 1993 were partially offset by loan curtailments and
payoffs, particularly with respect to residential mortgage loans, as the result
of the high level of mortgage loans refinanced during 1993 and, to a lesser
extent, transfers of loans to other real estate owned.
Domestic commercial and financial loans were $412.0 million at December 31,
1993, an increase of $42.1 million, or 11.4%, when compared with $369.9 million
at December 31, 1992. This increase was attributable to new commercial loan
originations in the fourth quarter of 1993.
Domestic real estate commercial/construction loans were $388.4 million at
December 31, 1993, a decrease of $145.2 million from year-end 1992. This
decrease was the result of loan curtailments and payoffs, transfers to other
real estate owned and limited new lending by the Corporation in this sector.
Domestic real estate commercial/construction loans were 15.4% of total loans and
8.1% of total assets at year-end 1993, compared with 24.4% and 10.5%,
respectively, for year-end 1992. Permanent domestic mortgage loans, which are
primarily to finance owner-occupied commercial buildings, represented one-third
of real estate commercial/construction loans. The remainder of the portfolio
comprised residential
11
and commercial development properties, including office buildings, warehouses,
shopping centers and hotels. The domestic real estate-commercial/construction
portfolio is secured by properties concentrated in the Washington, D.C.,
metropolitan area.
Residential mortgage loans totaled $1.15 billion at December 31, 1993, an
increase of $620.0 million (117.1%) from the year-earlier level. This increase
is the result of the local area originations and purchases in the open market
during 1993. The purchase and origination activity during 1993 was partially
offset by high levels of principal curtailments and payoffs, the result of
increased mortgage loan refinance activity as consumers took advantage of the
lowest mortgage loan interest rate environment since the late 1960s.
Residential mortgage loans represented 45.6% of the Corporation's loan
portfolio at year-end 1993 and generally provide for a higher credit quality
than other loans. The historically lower charge-off levels over the last five
years attest to the quality of this portfolio ( see the "Reserve for Loan Losses
and Summary of Charge-offs and Recoveries" section).
Home equity loans, which are primarily floating-rate loans secured by first or
second trusts on single-family residential properties, decreased $39.5 million
to $234.1 million at December 31, 1993. This decrease was caused largely by
refinancing resulting from the lower interest-rate environment.
Consumer loans were $82.8 million at year-end 1993, decreasing $24.6 million
from $107.4 million at December 31, 1992, as a result of limited originations of
installment loans and student loans in the domestic markets.
Foreign loans totaled $255.4 million at December 31, 1993, a decrease of
$116.1 million from the year-end 1992 total of $371.5 million. Foreign loans in
the Corporation's London operations were $199.8 million at December 31, 1993,
and constituted 78.2% of the Corporation's total foreign loans. Approximately
59.7% of the decline in the foreign loan portfolio was due to repayments, with
4.0% due to exchange rate fluctuation, 9.3% related to transfers to other real
estate owned and 27.0% due to charge-offs during the year. Riggs AP Bank's
lending activities have been significantly reduced because of the weak economic
conditions in the United Kingdom and the previously discussed financial
restructuring. At December 31, 1993, 72.0% of the Riggs AP Bank's loan
portfolio was secured by commercial-leased properties, with the remainder in
corporate loans.
Year-End Loans
December 31,
(In thousands) 1993 1992 1991 1990 1989
- - ----------------------------------------------------------------------------------------------------------------
Domestic:
Commercial and Financial $ 412,006 $ 369,885 $ 532,143 $ 805,319 $ 962,452
Real Estate-Commercial/Construction 388,442 533,685 619,298 808,099 852,376
Residential Mortgage 1,149,363 529,382 725,337 840,403 845,412
Home Equity 234,049 273,586 321,690 341,100 276,220
Consumer 82,819 107,382 158,872 249,124 278,463
- - ----------------------------------------------------------------------------------------------------------------
Total Domestic 2,266,679 1,813,920 2,357,340 3,044,045 3,214,923
Foreign:
Governments and Official Institutions 28,113 29,319 27,377 30,477 46,545
Banks and Other Financial Institutions 14,999 24,734 28,481 65,722 80,438
Commercial and Industrial and
Commercial Property 192,770 291,496 581,499 689,137 500,265
Other 19,514 25,948 23,886 33,228 29,304
- - ----------------------------------------------------------------------------------------------------------------
Total Foreign 255,396 371,497 661,243 818,564 656,552
- - ----------------------------------------------------------------------------------------------------------------
Total Loans 2,522,075 2,185,417 3,018,583 3,862,609 3,871,475
Less: Unearned Discount (Unamortized Premium) and
Net Deferred Fees (6,058) 4,360 12,116 24,228 30,854
- - ----------------------------------------------------------------------------------------------------------------
Total Loans, Net of Unearned Discount
(Unamortized Premium) and Net Deferred Fees 2,528,133 2,181,057 3,006,467 3,838,381 3,840,621
Less: Reserve for Loan Losses 86,513 84,155 103,674 108,887 39,863
- - ----------------------------------------------------------------------------------------------------------------
Total Loans, Net of Reserve for Loan Losses $2,441,620 $2,096,902 $2,902,793 $3,729,494 $3,800,758
12
Year-End Maturities and Rate Sensitivity
December 31, 1993
Less Than Over
(In thousands) 1 Year 1-5 Years 5 Years Total
- - --------------------------------------------------------------------------------
Commercial and Financial $303,809 $ 90,595 $ 17,602 $ 412,006
Real Estate-Commercial/Construction 216,196 112,196 60,050 388,442
Residential Mortgage 15,427 71,370 1,062,566 1,149,363
Foreign 177,437 61,809 16,150 255,396
- - --------------------------------------------------------------------------------
Total $712,869 $335,970 $1,156,368 $2,205,207
With Predetermined Interest Rates $397,026 $204,758 $ 877,908 $1,479,692
With Floating and Adjustable
Interest Rates 315,843 131,212 278,460 725,515
- - --------------------------------------------------------------------------------
Total $712,869 $335,970 $1,156,368 $2,205,207
-------------------------------------------------------
Real Estate-Commercial/Construction
Geographic Distribution by Type
December 31, 1993
(In thousands)
Geographic Location
District
of United
Project Type Columbia Virginia Maryland Kingdom Other Total
- - -----------------------------------------------------------------------------------------------------
Land $ 20,710 $ 43,806 $ 29,784 $ -- $ -- $ 94,300
Construction:
Single-Family Residential 6,690 22,025 15,129 -- 253 44,097
Office Buildings 33,621 24,858 20,420 -- 5,313 84,212
Multifamily Residential 720 3,733 -- -- -- 4,453
Industrial/Warehouse Loans -- 3,227 7,707 -- -- 10,934
Shopping Centers -- 7,074 4,885 -- -- 11,959
Hotels 4,646 5,792 -- -- -- 10,438
Other 2,547 2,332 251 -- -- 5,130
- - -----------------------------------------------------------------------------------------------------
Total Land and Construction 68,934 112,847 78,176 -- 5,566 265,523
- - -----------------------------------------------------------------------------------------------------
Domestic Commercial Mortgages 40,510 48,945 33,044 146,769 2,976 272,244
- - -----------------------------------------------------------------------------------------------------
Total Real Estate-Commercial/Construction $109,444 $161,792 $111,220 $146,769 $8,542 $537,767
-------------------------------------------------------
LOANS TO LESSER DEVELOPED COUNTRIES
The Corporation's exposure to lesser developed countries ("LDC") was $16
million at December 31, 1993, down $5 million from the $21 million of LDC
exposure reported at year-end 1992. This exposure includes all short, medium
and long-term outstandings less amounts previously charged-off.
The Corporation provides reserves for LDC exposure based upon its assessment
of the private sector and sovereign risk inherent in the portfolio. Foreign
reserves available to absorb future losses related to the Corporation's LDC
exposures were $364 thousand at December 31, 1993 or approximately 2% of such
exposures. This compares to reserves at December 31, 1992 of $4 million or
approximately 17% of such exposure.
The ratio of reserves to LDC exposure reflects management's conclusion that a
lower overall level of reserves for LDC exposure was adequate based on an
assessment of individual country economic reports, status of debt negotiations,
sovereign refinancing plans, changes in the composition of the portfolio,
transfer risk reserve considerations, and to a lesser extent, secondary market
quotes for third world debt obligations. In the opinion of management, the
reserve for LDC exposure was adequate at December 31, 1993.
13
CROSS-BORDER OUTSTANDINGS
The Corporation extends credit to borrowers domiciled outside of the United
States. These assets may be impacted by changing economic conditions in their
respective countries. Management routinely reviews these credits and
continuously monitors the international economic climate and assesses the impact
of these changes on its current and proposed foreign-domiciled borrowers.
Cross-border outstandings include loans, acceptances, interest-bearing
deposits with other banks, investments, accrued interest and other monetary
assets, which are denominated in dollars or other non-local 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. Cross-border
outstandings are then reduced by tangible liquid collateral and any legally
enforceable guarantees issued by non-local third parties on behalf of the
respective country.
At December 31, 1993, 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, 1993, the United Kingdom was the only country with cross-
border outstandings in excess of 1% of the Corporation's total assets which had
loans in either a nonperforming or past due status.
Nonaccrual loans in the United Kingdom totaled $37.7 million at December 31,
1993 as compared to $27.7 million at December 31, 1992. In light of current
economic conditions in the United Kingdom, it is possible that nonperforming
assets in the United Kingdom will be higher at year-end 1994.
There were $4 thousand in past due loans in the United Kingdom at December 31,
1993 and no past due loans at year-end 1992.
At December 31, 1993, the Corporation had identified approximately $8.9
million in potential problem loans in the United Kingdom. These loans, which
are primarily commercial property and corporate loans, were performing at
December 31 and therefore not included as nonaccrual or past due at December 31.
Cross-Border Outstandings which Exceed 1%
of Total Assets
Governments Banks and Commerical
and Official Other Financial and
(In thousands) Institutions Institutions Industrial Other Total
- - ---------------------------------------------------------------------------------------------------------
As of December 31, 1993
United Kingdom $ 765 $ 29,235 $154,660 $ 2,170 $186,830
- - ---------------------------------------------------------------------------------------------------------
As of December 31, 1992
United Kingdom $ 8,925 $129,666 $151,873 $36,888 $327,352
Italy -- 103,711 -- 3,274 106,985
France -- 52,583 -- 69 52,652
- - ---------------------------------------------------------------------------------------------------------
As of December 31, 1991
United Kingdom $10,218 $129,744 $317,103 $25,895 $482,960
Japan -- 97,656 -- -- 97,656
- - ---------------------------------------------------------------------------------------------------------
Cross-Border Outstandings
in Excess of 1% of Total Assets with
Nonperforming or Past Due Loans
December 31,
(In thousands) 1993 1992 1991
- - -----------------------------------------------------------
United Kingdom:
Aggregate Outstandings $186,830 $327,352 $482,960
Nonaccrual Loans 37,696 27,715 68,637
Renegotiated Loans 834 -- --
- - -----------------------------------------------------------
Total Nonperforming Loans 38,530 27,715 68,837
- - -----------------------------------------------------------
Past Due Loans $ 4 $ -- $ 555
- - -----------------------------------------------------------
Cross-Border Outstandings
.75% and 1% of Total Assets
December 31,
(In thousands) 1993 1992 1991
- - -----------------------------------------------------------
Australia
Countries None Austria Italy
- - -----------------------------------------------------------
Aggregate Outstandings $-- $ 80,445 $ 53,979
14
ASSET QUALITY
Nonperforming Asset Summary
Nonperforming assets, which include nonaccrual loans, renegotiated loans, and
other real estate owned (net of reserves), totaled $213.3 million at year-end
1993, a $93.3 million (30.4%) decrease from the year-end 1992 total of $306.6
million. This significant decrease in nonperforming assets during 1993 was
attributable to sales of $140.0 million, net charge-offs/writedowns of $90.5
million, combined with exchange rate fluctuations and other reductions of $3.4
million that were partially offset by net additions in 1993 of $140.6 million.
Nonaccrual, Renegotiated and Past Due Loans
At December 31, 1993, nonaccrual loans, including both domestic and foreign
loans, were $130.2 million, or 5.15% of total loans, compared with $205.4
million, or 9.42% of total loans, at December 31, 1992. Loans (other than
consumer) are placed on nonaccrual status when, in management's opinion, there
is doubt as to the ability to collect either interest or principal, or when
interest or principal is 90 days or more past due and the loan is not well-
secured and in the process of collection. Consumer loans are generally charged
off when they become 120 days past due. The decrease in nonaccrual loans during
1993 was due primarily to a decrease in domestic nonaccrual loans from $152.8
million at year-end 1992 to $85.1 million at year-end 1993. This decrease was
attributable to sales, repayments and other reductions of $77.1 million, charge-
offs/writedowns of $39.8 million and transfers of nonaccrual loans to other real
estate owned of $26.7 million. These decreases more than offset net additions
to nonaccrual loans of $75.9 million during the period.
Nonaccrual foreign loans decreased $7.5 million during 1993, to $45.1 million
at December 31, 1993. Of the $45.1 million of foreign nonaccrual loans at
December 31, 1993, $38.9 million were attributable to nonaccrual real estate-
commercial mortgage loans in the United Kingdom. This decrease was the result
of sales, repayments, transfers to other real estate owned, writedowns/charge-
offs and other reductions of $68.2 million, exceeding net additions of $60.7
million during 1993. With 86.4% of foreign nonaccrual loans residing in the
United Kingdom, the foreign nonaccrual loan portfolio continues to be adversely
affected by the United Kingdom economy.
Renegotiated loans totaled $30.3 million at December 31, 1993, compared with
$11.8 million at year-end 1992. The domestic renegotiated loans ($29.5 million)
generally consisted of commercial real estate loans that were renegotiated to
provide a reduction or deferral of interest or principal as a result of a
deterioration in the financial position of the borrower.
Past due loans consist predominantly of residential real estate and consumer
loans that are well-secured and in the process of collection and, on which the
Corporation is accruing interest. Past due loans increased $1.9 million in
1993, to $3.3 million.
At December 31, 1993, the Corporation had identified approximately $14.3
million in potential problem loans that are currently performing but that
management believes have certain attributes that may lead to nonaccrual or past
due status in the foreseeable future. These loans consisted of $2.7 million in
domestic loans (principally real estate-commercial loans) and $11.6 million of
commercial property and corporate loans originated in the United Kingdom.
INTEREST INCOME ON NONACCRUAL AND
RENEGOTIATED LOANS
December 31,
(In thousands) 1993 1992 1991 1990 1989
- - --------------------------------------------------------------------------------
Interest Income at Original Terms:
Nonaccrual Loans--
Domestic $10,639 $15,155 $19,033 $18,097 $451
Foreign 5,601 3,325 7,741 1,538 208
Renegotiated Loans 1,845 296 -- -- --
- - --------------------------------------------------------------------------------
Total $18,085 $18,776 $26,774 $19,635 $659
Actual Interest Income Recognized:
Nonaccrual Loans--
Domestic Loans $ 1,506 $ 5,345 $ 2,823 $10,755 $245
Foreign Loans 2,128 116 1,139 64 --
Renegotiated Loans 346 94 -- -- --
- - --------------------------------------------------------------------------------
Total $ 3,980 $ 5,555 $ 3,962 $10,819 $245
- - --------------------------------------------------------------------------------
15
Nonperforming Assets and Past Due Loans
December 31,
(In thousands) 1993 1992 1991 1990 1989
- - -----------------------------------------------------------------------------------------------------------------------------
Nonaccrual Loans:/1/
Domestic $ 85,075 $ 152,812 $ 151,114 $ 184,669 $ 35,174
Foreign 45,099 52,613 78,855 21,245 1,191
- - -----------------------------------------------------------------------------------------------------------------------------
Total Nonaccrual Loans 130,174 205,425 229,969 205,914 36,365
Renegotiated Loans:/2/
Domestic 29,465 11,806 -- -- --
Foreign 834 -- -- -- --
- - ------------------------------------------------------------------------------------------------------------------------------
Total Renegotiated Loans 30,299 11,806 -- -- --
Real Estate Assets Subject to
Accelerated Disposition, Net -- -- 89,389 -- --
Other Real Estate Owned, Net:
Domestic 45,049 62,810 7,542 73,029 6,058
Foreign 7,754 26,579 4,211 53 44
- - ------------------------------------------------------------------------------------------------------------------------------
Total Other Real Estate Owned, Net 52,803 89,389 11,753 73,082 6,102
- - ------------------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets, Net $ 213,276 $ 306,620 $ 331,111 $ 278,996 $ 42,467
Past Due Loans:/3/
Domestic $ 3,315 $ 1,369 $ 2,743 $ 46,756 $ 12,258
Foreign 4 55 790 8,733 --
- - ------------------------------------------------------------------------------------------------------------------------------
Total Past Due Loans $ 3,319 $ 1,424 $ 3,533 $ 55,489 $ 12,258
Total Loans, Net of Unearned Discount (Unamortized Premium)
and Net Deferred Fees $2,528,133 $2,181,057 $3,006,467 $3,838,381 $3,840,621
Ratio of Nonaccrual Loans to Total Loans 5.15% 9.42% 7.65% 5.37% .95%
Ratio of Nonperforming Assets to Total Loans
and Other Real Estate Owned, Net 8.26% 13.50% 10.97% 7.13% 1.10%
/1/ Loans (other than consumer) that are in default in either principal or
interest for 90 days or more that are not well-secured and in the process
of collection.
/2/ Loans for which terms are being renegotiated to provide a reduction of
interest or principal as a result of a deterioration in the financial
position of the borrower in accordance with Statement of Financial
Accounting Standards No. 15.
/3/ Loans contractually past due 90 days or more in principal or interest that
are well-secured and in the process of collection.
-------------------------------------------------
Nonaccrual and Renegotiated Real Estate-Commercial/Construction
Loans - Geographic Distribution by Type
as of December 31, 1993
(In thousands)
District Geographic Location
of United
Project Type Columbia Virginia Maryland Kingdom Other Total
- - --------------------------------------------------------------------------------------------------------------------------
Land $ -- $18,600 $22,660 $ -- $ -- $ 41,260
Construction:
Single-Family Residential 50 3,666 13,281 -- -- 16,997
Office Buildings 7,108 2,310 13,675 -- 5,313 28,406
Multifamily Residential 621 -- -- -- 253 874
Warehouse Loans 319 1,706 796 -- -- 2,821
Shopping Centers -- -- -- -- -- --
Hotels -- 2,158 -- -- -- 2,158
Other 187 -- 180 -- -- 367
Commercial Mortgages -- -- -- 24,411 1,247 25,658
- - --------------------------------------------------------------------------------------------------------------------------
Total Nonaccrual and Renegotiated
Real Estate - Commercial/Construction $8,285 $28,440 $50,592 $24,411 $6,813 $118,541
16
Implementation of Interagency Guidance on
Reporting of In-Substance Foreclosures
At December 31, 1993, the Corporation implemented the narrower definition of In-
Substance Foreclosure required by the March 10, 1993, Interagency Policy
Statement on Credit Availability and the June 10, 1993, Interagency Guidance on
Reporting of In-Substance Foreclosures. Under previous financial accounting
guidelines, a nonaccrual loan was transferred from loans to other real estate
owned when foreclosure was probable or the loan was considered in-substance
foreclosed, which by definition in the Securities and Exchange Commission's
Financial Reporting Release No. 28 meant that the borrower had little or no
equity in the property, proceeds for repayment of the loan could be expected to
come only from the operation or sale of the collateral, and the debtor had
either abandoned control of the collateral or it was doubtful that the debtor
would be able to rebuild equity in the collateral or otherwise repay the loan in
the foreseeable future. Loans considered in-substance foreclosed must be
recorded at the lower of cost or fair value.
Under the revised regulatory accounting guidelines, a loan is recognized as an
in-substance foreclosure when the Corporation has possession of the underlying
collateral. This change in treatment impacts only the classification of
accounts in the financial statements and does not result in a change in the
accounting policy related to the determination of the assets' carrying value.
The impact of this change in definition of in-substance foreclosures on certain
categories in the Corporation's financial statements for the indicated periods
is presented in the following table.
The Consolidated Statements of Condition, Income and Cash Flows and the Notes
to Consolidated Financial Statements, as well as the disclosures within this
report, reflect these reclassifications.
Adjustments to Implement New Definition of In-Substance Foreclosures
December 31,
(In thousands) 1993 1992 1991 1990 1989
- - ------------------------------------------------------------------------------
Consolidated Statements of
Condition
Increase (Decrease) in:
Loans, Net $ 34,964 $ 43,351 $ 13,774 $ 47,125 $ 31,861
Reserve for Loan Losses 1,221 848 -- -- --
Other Real Estate
Owned, Net (33,743) (42,503) (13,774) (47,125) (31,861)
- - ------------------------------------------------------------------------------
Net Effect on Total Assets $ -- $ -- $ -- $ -- $ --
- - ------------------------------------------------------------------------------
Consolidated Statements of
Income
Increase (Decrease) in:
Provision for Loan
Losses $ 8,049 $ 2,278 $ 130 $ 900 $ --
Other Real Estate Owned
Expense, Net (8,049) (2,278) (130) (900) --
- - ------------------------------------------------------------------------------
Net Effect on Pretax Income $ -- $ -- $ -- $ -- $ --
- - ------------------------------------------------------------------------------
Provision for Loan Losses:
As Reported $69,290 $ 49,789 $ 43,525 $105,508 $ 5,588
As Adjusted 69,290 52,067 43,655 106,408 5,588
Other Real Estate Owned
Expense, Net:
As Reported $13,513 $ 17,981 $ 14,370 $ 13,353 $ 1,208
As Adjusted 13,513 15,703 14,240 12,453 1,208
17
Provision and Reserve For Loan Losses
The provision for loan losses totaled $69.3 million for 1993, compared with a
provision of $52.1 million for the prior year. Approximately $29.7 million of
the provision for 1993 related to loans originated in the United Kingdom, with
the remainder relating to primarily domestic real estate commercial loans. The
United Kingdom provisions reflect the continued deterioration throughout much of
1993 of economic conditions in the United Kingdom.
The Corporation's banking subsidiaries maintain reserves for loan losses that
are available to absorb potential losses in the current loan portfolio. The
reserve for loan losses is increased by loan loss provisions and recoveries of
previously charged-off loans and is reduced by loan charge-offs. The
Corporation's reserve for loan losses is based on management's assessment of
existing conditions and reflects potential losses determined to be probable and
subject to reasonable estimation. The Corporation determines the appropriate
balance of the reserve for loan losses based upon an analysis of risk factors
affecting the entire loan portfolio and specific reviews of individual loans.
The analysis includes the primary source of repayment on individual loans and
groups of similar loans, the liquidity and financial condition of the borrowers
and guarantors, historical charge-offs/writedowns within loan categories and the
general economic conditions and other factors existing at the determination
date.
On a quarterly basis, the Loan Loss Reserve Committee evaluates the adequacy
of the reserve for loan losses. The Audit Committee of the Board of Directors
reviews management's determination of the adequacy of the reserve for loan
losses. The loan portfolios are continually monitored by management to identify
loans requiring particular attention.
Net charge-offs for 1993 totaled $66.4 million, down slightly from 1992's
$68.4 million. Total net charge-offs for 1993 include domestic commercial real
estate loan net charge-offs of $34.5 million (51.9%) and $26.7 million (40.2%)
from foreign loans. Total domestic commercial real estate and foreign net
charge-off totals compare with $28.4 million (41.5%) and $35.3 million (51.6%),
respectively, for 1992. These totals reflect the continued deterioration of
domestic and foreign commercial real estate portfolios during the past two years
(see the "Nonaccrual, Renegotiated and Past Due Loans" section).
The reserve for loan losses was $86.5 million, or 3.42% of total loans, at
December 31, 1993, compared with $84.2 million, or 3.86% of total loans, at
December 31, 1992. The Corporation's coverage ratio was 53.9% at year-end 1993
and 38.7% at year-end 1992. The coverage ratio is derived by dividing the
reserve for loan losses by the sum of nonaccrual and renegotiated loans.
Several factors should be considered when reviewing the Corporation's coverage
ratio, such as: 54.9% of the Corporation's loan portfolio consisted of
residential mortgage and home equity loans at December 31, 1993. These loans
generally require minimal reserves based upon their favorable historical loss
experience. Further, the Corporation has no credit card loans in its portfolio,
which normally carry high levels of reserves and charge-off activity. Finally,
the coverage ratio does not account for the existence of collateral on
nonaccrual and renegotiated loans, which limits the risk of principal loss on
these assets. At December 31, 1993, 78.3% of the Corporation's nonaccrual and
renegotiated loans were partially or fully secured by real estate, and 56.2%
were contractually current based on their respective loan agreements.
18
Reserve for Loan Losses and Summary of Charge-Offs and Recoveries
December 31,
(In thousands) 1993 1992 1991 1990 1989
- - -----------------------------------------------------------------------------------------------------------------
Balance, January 1 $ 84,155 $ 103,674 $ 108,887 $ 39,863 $ 49,038
Provision for Loan Losses 69,290 52,067 43,655 106,408 5,588
Loans Charged-Off:
Commercial and Financial 4,703 3,192 7,457 11,643 4,040
Real Estate-Commercial/Construction 41,170 31,528 27,576 21,329 3,878
Residential Morgtage 96 215 25 -- --
Home Equity 201 453 450 639 320
Consumer 1,864 2,745 3,864 2,430 1,759
Foreign 31,400 35,575 13,172 3,185 5,294
- - -----------------------------------------------------------------------------------------------------------------
Total Charge-Offs 79,434 73,708 52,544 39,226 15,291
- - -----------------------------------------------------------------------------------------------------------------
Recoveries on Charged-Off Loans:
Commercial and Financial 527 616 1,033 220 168
Real Estate-Commercial/Construction 6,699 3,172 -- -- --
Residential Morgtage 145 15 14 14 --
Home Equity -- -- 26 -- --
Consumer 938 1,231 908 547 417
Foreign 4,712 279 1,678 84 454
- - -----------------------------------------------------------------------------------------------------------------
Total Recoveries on Charged-Off Loans 13,021 5,313 3,659 865 1,039
- - -----------------------------------------------------------------------------------------------------------------
Net Charge-Offs 66,413 68,395 48,885 38,361 14,252
Foreign Exchange Translation Adjustments (519) (3,191) 17 977 (511)
- - -----------------------------------------------------------------------------------------------------------------
Balance, December 31 $ 86,513 $ 84,155 $ 103,674 $ 108,887 $ 39,863
- - -----------------------------------------------------------------------------------------------------------------
Ratio of Net Charge-Offs to Average Loans 3.04% 2.66% 1.43% .94% .38%
Ratio of Reserve for Loan Losses to Total Loans 3.42% 3.86% 3.45% 2.84% 1.04%
--------------------------------------------------------------------------
Allocation of the Reserve for Loan Losses
(In thousands) 1993 1992 1991 1990 1989
- - -----------------------------------------------------------------------------------------------------------------
Commercial $ 8,836 $ 7,775 $ 6,459 $ 5,219 $ 3,728
Real Estate 29,544 41,699 46,633 71,686 2,814
Consumer 2,905 3,658 2,323 2,783 1,933
Foreign 19,651 25,266 31,434 21,015 20,298
Based on Qualitative Factors 25,577 5,757 16,825 8,184 11,090
- - -----------------------------------------------------------------------------------------------------------------
Balance, December 31 $ 86,513 $ 84,155 $ 103,674 $ 108,887 $ 39,863
Distribution of Year-End Loans
(In thousands) 1993 1992 1991 1990 1989
- - -----------------------------------------------------------------------------------------------------------------
Commercial 16.3% 17.0% 17.6% 20.8% 24.9%
Real Estate 61.0 48.6 44.6 42.7 43.9
Consumer 12.6 17.4 15.9 15.3 14.2
Foreign 10.1 17.0 21.9 21.2 17.0
- - -----------------------------------------------------------------------------------------------------------------
Balance, December 31 100.0% 100.0% 100.0% 100.0% 100.0%
19
Other Real Estate Owned, Net
Other real estate owned declined to $52.8 million at December 31, 1993, from
$89.4 million at December 31, 1992. The reduction resulted from sales and
repayments of $52.2 million and $18.6 million in charge-offs/writedowns, offset
by net additions of $34.2 million, during the period. Loans are transferred to
other real estate owned when acquired or deemed to be acquired through
foreclosure.
At December 31, 1993, residential and commercial land composed 68.1% of other
real estate owned with office, industrial, retail, and other types of properties
accounting for 31.9%. Approximately 85% of the other real estate owned
properties were located in the Washington, D. C., metropolitan area at year-end
1993, with the remainder located in the United Kingdom.
Loans are transferred to other real estate owned at the lower of cost or fair
value at the date of foreclosure or possession. Other real estate owned is
recorded at the lower of cost or fair value less selling expenses. Any related
charge-offs at acquisition of other real estate owned are charged to the reserve
for loan losses. Subsequent charge-offs and selling expenses are charged to
operations in the period they become known.
Other Real Estate Owned - Geographic Distribution by Type
December 31, 1993
(In thousands)
Geographic Location
District of United
Project Type Columbia Virginia Maryland Kingdom Other Total
- - --------------------------------------------------------------------------------------------------------------
Land $ 703 $28,822 $5,031 $ -- $ -- $34,556
Single-Family Residential 307 1,217 1,456 -- 154 3,134
Office Buildings/Retail 390 971 3,403 1,941 -- 6,705
Multifamily Residential 433 -- -- -- -- 433
Warehouse Loans -- 1,953 -- 3,170 -- 5,123
Shopping Centers -- -- -- 2,643 -- 2,643
Other -- 209 -- -- -- 209
- - --------------------------------------------------------------------------------------------------------------
Total Other Real Estate Owned, Net $1,833 $33,172 $9,890 $7,754 $154 $52,803
20
DEPOSITS
Total deposits at December 31, 1993, were $3.77 billion, as compared with $4.44
billion at year-end 1992, a decrease of $663.8 million, or 15.0%. Foreign
deposits decreased $350.7 million, to $262.7 million, as a result of the
Corporation's decision to phase out the deposit gathering business within its
London operations. Average domestic deposits were $3.74 billion for 1993, down
from $3.91 billion in 1992. The reductions in year-end and average domestic
deposits were due to reductions in demand for certificates of deposit and other
deposit products, the result of the continued lower interest-rate environment.
Average core deposits (total deposits in domestic offices, excluding negotiable
certificates of deposit) were $3.72 billion, down $175.5 million, or 4.5%, from
1992's $3.89 billion.
SHORT-TERM BORROWINGS
Average short-term borrowings, comprising federal funds purchased and repurchase
agreements, U.S. Treasury demand notes and other borrowed funds, totaled $232.6
million during 1993, an increase of $105.1 million from 1992's average balance.
The overall increase in short-term borrowings was attributable to the
Corporation's replacing a portion of the decrease in total deposits during the
year with short-term borrowings. Short-term borrowings are discussed more fully
in Note 9 of "Notes to the Consolidated Financial Statements."
Average Deposits and Short-Term Borrowings
1993 1992 1991
Average Average Average
(In thousands) Balances Rates Balances Rates Balances Rates
- - ------------------------------------------------------------------------------------------------------------------------
Deposits in Domestic Offices:
Noninterest-Bearing Demand Deposits $ 818,142 $ 834,300 $ 902,513
Savings and NOW Accounts 921,801 2.11% 865,608 3.09% 768,866 4.10%
Money Market Deposits 1,157,883 2.47 1,220,784 3.45 1,277,606 5.10
Other Core Deposits 820,235 3.23 972,841 4.21 1,151,432 6.80
- - ------------------------------------------------------------------------------------------------------------------------
Total Average Core Deposits 3,718,061 3,893,533 4,100,417
Negotiable Certificates of Deposit 25,657 6.61 18,290 9.94 30,727 6.41
- - ------------------------------------------------------------------------------------------------------------------------
Total Average Deposits in Domestic Offices 3,743,718 3,911,823 4,131,144
Deposits in Foreign Offices:*
Noninterest-Bearing Demand Deposits 13,337 11,284 8,907
Interest-Bearing Bank Deposits 131,283 10.54 234,490 13.57 377,240 13.59
Negotiable Certificates of Deposit 17,182 6.42 51,640 9.86 94,208 11.85
Interest-Bearing Non-Bank Deposits 318,446 3.13 434,174 4.99 684,529 7.51
- - ------------------------------------------------------------------------------------------------------------------------
Total Average Deposits in Foreign Offices 480,248 731,588 1,164,884
- - ------------------------------------------------------------------------------------------------------------------------
Total Average Deposits $4,223,966 $4,643,411 $5,296,028
- - ------------------------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased and Repurchase
Agreements $ 164,899 2.77% $ 87,339 2.86% $ 99,120 5.10%
U.S. Treasury Demand Notes and Other
Short-Term Borrowings 67,731 2.79 40,235 3.18 91,395 5.39
- - ------------------------------------------------------------------------------------------------------------------------
Total Average Short-Term Borrowings $ 232,630 $ 127,574 $ 190,515
* The majority of interest-bearing deposits in foreign offices are denominated
in amounts of $100 thousand or more.
21
LONG-TERM DEBT
Long-term debt totaled $213.3 million at December 31, 1993, unchanged from its
balance at December 31, 1992. Long-term debt includes two series of floating-
rate subordinated notes maturing in 1996, which totaled $146.8 million at year-
end 1993. These subordinated notes had an aggregate weighted-average interest
rate of 5.25% at December 31, 1993. Long-term debt also includes subordinated
debentures due in 2009, bearing a fixed rate of interest of 9.65% per annum.
The Corporation's long-term debt is discussed more fully in Note 9 of "Notes to
the Consolidated Financial Statements."
On February 2, 1994, the Corporation issued and sold $125 million of 8.5%
Subordinated Notes, due February 1, 2006. The notes were priced at par and are
not callable for five years. The notes were sold under a shelf registration
statement declared effective on January 13, 1994. The Corporation intends to
use the net proceeds from the offering, approximately $120.7 million, to redeem
equal amounts of the subordinated notes due in 1996. The proceeds were placed
in short-term investments prior to the redemption of the floating-rate notes.
-----------------------------------------
CAPITAL RESOURCES
Under the Federal Reserve Board's risk-based capital guidelines, bank holding
companies are required to meet a minimum ratio of qualifying total capital
(combined Tier I and Tier II) to risk-weighted assets of 8.00%, at least half of
which must be composed of core (Tier I) capital elements. The Corporation's
total and core capital ratios were 16.81% and 10.76%, respectively, at December
31, 1993.
The Federal Reserve Board has established an additional capital adequacy
guideline referred to as the leverage ratio, which measures the ratio of Tier I
capital to average quarterly assets. The most highly rated bank holding
companies that are not contemplating or experiencing significant growth are
required to maintain a minimum leverage ratio of 3.00%. However, most bank
holding companies, including the Corporation, are expected to maintain an
additional cushion of at least 100 to 200 basis points above the 3.00% minimum.
The actual required ratio for individual bank holding companies is based on the
Federal Reserve Board's assessment of a corporation's asset quality, earnings
performance, interest-rate risk and liquidity. The Federal Reserve Board has
not advised the Corporation of a specific minimum leverage ratio requirement.
The Corporation's leverage ratio was 6.03% at December 31, 1993.
The Corporation's policy is to ensure that its bank subsidiaries are
capitalized in accordance with regulatory guidelines. The three national bank
subsidiaries of the Corporation are subject to minimum capital ratios prescribed
by the OCC, which are the same as those for the Federal Reserve Board. Pursuant
to the Written Agreement, Riggs-Washington has committed to the OCC to maintain
a leverage ratio of 5.00%, a Tier I to risk-weighted assets ratio of 6.00% and a
total capital to risk-weighted assets ratio of 10.00%. Riggs-Washington's
ratios were 6.13%, 10.69% and 11.97%, respectively, at December 31, 1993. The
following table summarizes the actual and required capital ratios for the
Corporation and each of its banking subsidiaries.
22
CAPITAL RATIOS
December 31, Required
1993 1992 Minimums
- - -------------------------------------------------------------------------------
Riggs National Corporation
Tier I 10.76% 8.31% 4.00%
Combined Tier I and Tier II 16.81 14.70 8.00
Leverage* 6.03 4.60 3.00
The Riggs National Bank of Washington, D. C.
Tier I 10.69 11.29 6.00
Combined Tier I and Tier II 11.97 12.56 10.00
Leverage* 6.13 6.32 5.00
The Riggs National Bank of Virginia
Tier I 17.05 16.80 4.00
Combined Tier I and Tier II 18.31 18.05 8.00
Leverage* 8.94 8.42 3.00
The Riggs National Bank of Maryland
Tier I 11.46 11.73 4.00
Combined Tier I and Tier II 12.71 12.98 8.00
Leverage* 6.69 6.20 3.00
* Most bank holding companies and national banks, including the Corporation and
the Corporation's national bank subsidiaries, are expected to maintain an add-
itional cushion of at least 100 to 200 basis points above the 3.00% minimum.
----------------------------------------------------------
INTEREST-RATE RISK MANAGEMENT
The Corporation manages its risk related to movements in interest rates through
the use of simulation and gap analysis. Interest-rate risk arises from the
potential mismatch in the repricing of assets and liabilities within a given
period. Gap analysis presents a period-end analysis of repricing assets as
compared with repricing liabilities, while simulation analysis incorporates the
Corporation's current gap position in addition to future forecasted changes to
the Corporation's portfolios and compositions, as well as anticipated interest-
rate spreads under varying interest-rate scenarios. Gap analysis provides a
general indicator of the potential effect that changing interest rates and
repricing trends may have on the Corporation's net interest income. Thus, the
Corporation utilizes simulation, gap analysis and other techniques to manage the
sensitivity of net interest income to potential changes in interest rates in
order to maximize the Corporation's net interest income while maintaining
acceptable levels of risk.
Gap analysis is performed using contractual maturities, repricing frequency
and management judgment for items with no stated maturity or for items with
expected lives significantly different from their contractual maturity. The two
most significant assumptions made by the Corporation in the gap analysis relate
to securities available for sale and core deposits. Securities available for
sale are considered interest-sensitive due to management's ability to sell them
in response to changes in interest rates and the Corporation's intent to manage
interest-rate risk. Core deposits (savings and NOW accounts) that have no
stated maturity are distributed based on the Corporation's historical experience
and independent studies regarding retention of such deposits.
At December 31, 1993, the Corporation had earning assets subject to repricing
in less than one year in excess of its interest-bearing liabilities subject to
repricing within the same period. This asset-sensitive position was $201.4
million, or 4.21% of total assets, as compared with an asset-sensitive position
of $195.3 million, or 3.80% of assets, at December 31, 1992. Based on the
Corporation's asset-sensitive position at December 31, 1993, downward movements
in interest rates would tend to moderately decrease net interest income, while
upward movements would tend to moderately increase net interest income.
23
YEAR-END RATE SENSITIVITY
December 31, 1993
Greater
30 Days 31-90 91-180 181-365 1-5 Than Five Total
or Less Days Days Days Years Years Amount
- - ----------------------------------------------------------------------------------------------------------------------------------
Time Deposits with Other Banks $ 125,289 $ 22,280 $ 42,398 $ 10,979 $ -- $ -- $ 200,946
Federal Funds Sold and Resale Agreements 200,000 -- 5,000 -- -- -- 205,000
Securities Available for Sale/1/ 708,137 -- -- -- -- -- 708,137
Securities Held-to-Maturity/2/
Taxable 140,997 331,059 161,581 13,772 -- 10,654 658,063
Tax-Exempt -- -- -- -- -- 1,999 1,999
Loans/3/ 885,429 95,747 68,566 117,399 398,056 962,936 2,528,133
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 2,059,852 449,086 277,545 142,150 398,056 975,589 4,302,278
Cash and Due from Banks 210,639
Less: Reserve for Loan Losses 86,513
Premises and Equipment, Net 161,098
Other Assets 192,735
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,059,852 $449,086 $277,545 $142,150 $398,056 $975,589 $4,780,237
Interest-Bearing Deposits:
Savings & NOW Accounts/4/ $ 8,697 $ 17,776 $ 25,900 $ 53,806 $223,732 $625,800 $ 955,711
Money Market Deposits 1,082,048 -- -- -- -- -- 1,082,048
Other Time Deposits 318,340 159,369 171,019 120,380 102,385 23 871,516
Federal Funds Purchased and Repurchase
Agreements 302,330 -- -- -- -- -- 302,330
U.S. Treasury Demand Notes and
Other Borrowed Funds 151,697 -- -- -- -- -- 151,697
Long-Term Debt -- 146,800 -- -- -- 66,525 213,325
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 1,863,112 323,945 196,919 174,186 326,117 692,348 3,576,627
Demand Deposits 864,549
Other Liabilities 45,864
Stockholders' Equity 293,197
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,863,112 $323,945 $196,919 $174,186 $326,117 $692,348 $4,780,237
Repricing Differential $ 196,740 $125,141 $ 80,626 $(32,036) $ 71,939 $283,241
Effect of Interest Rate Swaps and Futures (186,846) 13,280 14,603 (10,102) 169,065 --
- - ---------------------------------------------------------------------------------------------------------------
Adjusted Repricing Differential 9,894 138,421 95,229 (42,138) 241,004 283,241
- - ---------------------------------------------------------------------------------------------------------------
Cumulative Adjusted Repricing Differential $ 9,894 $148,315 $243,544 $201,406 $442,410 $725,651
/1/ Securities available for sale are presented in maturity categories that
differ from their respective contractual maturities. Securities available
for sale are considered interest-sensitive due to management's ability to
sell them in response to changes in interest rates and the Corporation's
intent to manage interest rate risk.
/2/ Differences between the presentation of securities held-to-maturity based
upon rate sensitivity and presentation based upon contractual maturity exist
as a result of $3.0 million of floating rate securities of Riggs AP Bank.
/3/ Differences between the presentation of loans based upon rate sensitivity
and presentation based upon contractual maturity exist as a result of
certain floating rate loans.
/4/ Savings and NOW accounts have been adjusted for rate sensitivity purposes
based upon the Corporation's historical experience and an independent study
regarding deposit retention over a representative period covering January
through March 1990. It is assumed that historical deposit longevity patterns
are predictive of existing accounts. Although such accounts are subject to
immediate withdrawal, the Corporation's experience indicates that they
provide a stable source of funds.
24
NET INTEREST INCOME
Net interest income on a tax-equivalent basis (net interest income plus an
amount equal to the tax savings on tax-exempt interest) totaled $139.5 million
for 1993, down $4.9 million, or 3.4%, from the $144.4 million earned in 1992.
The positive impact on earnings of a $309.1 million decline in average interest-
bearing liabilities during 1993 with the added benefit of a 139-average-basis-
point reduction in the interest rate incurred for the year, was partially offset
by a $299.2 million decrease in average earning assets and a 117-average-basis-
point reduction in the rate earned for 1993. Loans were 50.5% of average
earning assets during 1993, compared with 55.6% for 1992. The net interest
margin (net interest income on a tax-equivalent basis divided by average earning
assets) was 3.23% during 1993, an increase of 10 basis points from the 3.13% net
interest margin for 1992, because of the aforementioned changes in earning
assets and interest-bearing liabilities. Net interest spread (the difference
between the average tax-equivalent rate earned and the average rate incurred on
interest-bearing liabilities) for 1993 was 2.88%, a 22-basis-point improvement
from 1992's spread of 2.66%.
Interest lost on nonaccrual loans totaled $12.6 million for 1993, which had
the effect of reducing the net interest margin by approximately 29 basis points
for 1993. In 1992, interest lost totaled $13.3 million and had the effect of
reducing the net interest margin in that year by approximately 28 basis points.
The Corporation established the goal in 1993 of increasing its loan-to-deposit
ratio above 70% in 1994. The Corporation moved toward this goal in the latter
part of 1993 by purchasing in the open market $435.9 million of residential
mortgages. Subsequent to year-end, the Corporation purchased an additional $90
million of mortgage loans. The Corporation's loan-to-deposit ratio stood at
67.0% at December 31, 1993. The Corporation believes this strategy will have a
significant positive impact on net interest income.
Net Interest Income Changes*
1993 Versus 1992 1992 Versus 1991
Due to Due to Total Due to Due to Total
Rate Volume Change Rate Volume Change
- - --------------------------------------------------------------------------------------------------------------------------------
Interest Income:
Loans (Including Fees) $(31,005) $(31,486) $(62,491) $(29,783) $(78,347) $(108,130)
Securities Available for Sale (8,577) 14,587 6,010 (275) 14,318 14,043
Securities Held-to-Maturity:
U.S. Treasury Securities (278) (18,249) (18,527) (7,431) (2,695) (10,126)
Obligations of States and Political Subdivisions -- -- -- 112 (843) (731)
Mortgage-Backed Securities (892) 19,025 18,133 (1,810) (2,009) (3,819)
Other Securities 1,379 (2,905) (1,526) (856) (2,659) (3,515)
Time Deposits with Other Banks (463) (7,067) (7,530) (20,775) (5,451) (26,226)
Federal Funds Sold and Resale Agreements (2,732)